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As filed with the Securities and Exchange Commission on July 20, 1999
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NCO GROUP, INC.
---------------------
(Exact Name of Registrant as Specified in Its Charter)
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Pennsylvania 7322 23-2858652
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<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
</TABLE>
515 Pennsylvania Avenue
Fort Washington, Pennsylvania 19034
(215) 793-9300
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
Michael J. Barrist
Chairman of the Board, President and Chief Executive Officer
NCO Group, Inc.
515 Pennsylvania Avenue
Fort Washington, Pennsylvania 19034
(215) 793-9300
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
COPIES TO:
Francis E. Dehel Howard S. Lanznar
James S. Mackey Marguerite M. Elias
Blank Rome Comisky & McCauley LLP Katten, Muchin & Zavis
One Logan Square 525 West Monroe Street - Suite 1600
Philadelphia, Pennsylvania 19103-6998 Chicago, IL 60661-3693
(215) 569-5500 (312) 902-5200
Facsimile (215) 569-5555 Facsimile (312) 902-1061
---------------------
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the Registration Statement becomes
effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box, and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
<PAGE>
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CALCULATION OF REGISTRATION FEE
=================================================================================================================
Title Of Each Class Of Amount To Be Proposed Maximum Proposed Maximum Amount of
Securities To Be Registered Registered Offering Price Per Unit Offering Price Registration Fee
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value 3,525,000 (1) See footnote 2 $113,086,888 (2) $31,478 (3)
=================================================================================================================
</TABLE>
(1) This Registration Statement covers the estimated number of shares of the
common stock, no par value, of the Registrant ("NCO's Common Stock") to be
issued by the Registrant in connection with a proposed merger transaction
assuming all options to purchase shares of capital stock of Compass
International Services Corporation ("Compass"), the company to be acquired
in such transaction, have been exercised prior to consummation of the
proposed merger transaction.
(2) Pursuant to Rule 457(f)(1) under the Securities Act of 1933, as amended, the
proposed maximum offering price is based upon the market value of Compass'
shares being acquired in the proposed merger determined using the average of
the high and low sale prices per Compass share on July 13, 1999 as reported
on the Nasdaq National Market.
(3) Pursuant to Rule 0-11 under the Securities Exchange Act of 1934, as amended,
$16,000 of such fee was paid on June 16, 1999 with the filing of the
Registrant's preliminary proxy statement/prospectus on Schedule 14A in
connection with the proposed merger transaction.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until this Registration Statement
shall become effective on such date as the Commission, acting pursuant to
Section 8(a), may determine.
<PAGE>
The information in this proxy statement/prospectus is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This proxy
statement/prospectus is not an offer to sell these securities and is not
soliciting an offer to buy these securities in any state where the offer or sale
is not permitted.
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Merger Proposed -- Your Vote Is Very Important
The boards of directors of NCO Group, Inc. and Compass International Services
Corporation have agreed on a merger designed to create one of the leading
providers of accounts receivable management and other related services. The
merger is structured so that NCO will be the surviving publicly-traded company
and Compass will become a wholly-owned subsidiary of NCO.
In the merger, Compass stockholders will receive 0.23739 of a share of
NCO common stock in exchange for each share of Compass common stock.
NCO shareholders will continue to own their existing shares. NCO will
issue approximately 3.3 million shares of its common stock to Compass
stockholders, which will represent approximately 13.3% of the outstanding common
stock of NCO after the merger. Likewise, the shares of NCO common stock held by
NCO shareholders prior to the merger will represent approximately 86.7% of the
outstanding common stock of NCO after the merger.
The merger cannot be completed unless the stockholders of Compass approve
it. Compass has scheduled a special meeting for Compass stockholders to vote on
the merger. YOUR VOTE IS VERY IMPORTANT.
Whether or not you plan to attend the special meeting, please take the time to
vote by completing and mailing the enclosed proxy card to Compass. If you sign,
date and mail your proxy card without indicating how you want to vote, your
proxy will be counted as a vote in favor of the merger. If you do not vote by
proxy or in person at the special meeting, it will count as a vote against the
merger agreement.
Only stockholders of record of Compass common stock as of June 25, 1999,
are entitled to attend and vote at the meeting. The Compass special meeting will
take place on August 18, 1999. The time and place of the Compass special meeting
is as follows:
10:00 a.m.
Southgate Tower Suite Hotel
371 Seventh Avenue
New York, NY 10001-3984
This proxy statement/prospectus provides you with detailed information
about the proposed merger. We encourage you to read this entire document
carefully. In addition, you may obtain information about NCO and Compass from
documents that we have filed with the SEC. See "Where You Can Find More
Information" on page 19.
For a more complete description of the merger, the terms and conditions of the
merger and risk factors associated with the merger, see "The Merger" beginning
on page 23 and "Risk Factors" beginning on page 13.
The NCO common stock trades on the Nasdaq National Market under the symbol
"NCOG."
---------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
proxy statement/prospectus is accurate or inadequate. Any representation to the
contrary is a criminal offense.
---------------------
Proxy statement/prospectus dated July 20, 1999 and first mailed to
stockholders of Compass on or about July 21, 1999.
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 18, 1999
To the Stockholders of Compass International
Services Corporation:
We will hold a special meeting of the stockholders of Compass International
Services Corporation on August 18, 1999, at 10:00 a.m., local time, at Southgate
Tower Suite Hotel, 371 Seventh Avenue, New York, New York 10001-3984. At the
special meeting you will be asked to consider and vote on the following
proposals:
1. approval and adoption of a proposal to adopt the merger agreement among
NCO Group, Inc., Cardinal Acquisition Corporation, a wholly-owned
subsidiary of NCO, and Compass. Under the merger agreement, Compass will
become a wholly-owned subsidiary of NCO and each outstanding share of
Compass common stock will be converted into the right to receive 0.23739 of
a share of NCO common stock; and
2. to act upon any other business which may properly be brought before the
meeting or any adjournments or postponements thereof.
NCO common stock trades on the Nasdaq National Market under the trading
symbol "NCOG" and on July 19, 1999, NCO common stock closed at $39.81 per share.
You will receive cash for any fractional shares of NCO common stock which you
would otherwise receive in the merger.
Only holders of record of shares of Compass common stock at the close of
business on June 25, 1999, the record date for the special meeting, are entitled
to notice of, and to vote at, the special meeting and any adjournments or
postponements of it.
We cannot complete the merger unless the holders of a majority of the
outstanding shares of Compass common stock vote to adopt the merger agreement.
Twenty-three stockholders of Compass, who collectively hold approximately 42% of
the outstanding Compass common stock, have entered into voting agreements with
NCO and have agreed to vote in favor of the merger. Holders of Compass common
stock have no appraisal rights under Delaware law in connection with the merger.
You should consider the matters discussed under "Risk Factors" relating to
the merger commencing on page 13 of the enclosed proxy statement/prospectus
before voting. Please review carefully the entire proxy statement/prospectus.
After careful consideration, Compass' board of directors has approved the
merger agreement and determined that the merger is fair to you and in your best
interests and recommends that you vote for the adoption of the merger agreement.
<PAGE>
Whether or not you plan to attend the special meeting, please complete,
sign and date the enclosed proxy and return it promptly in the enclosed
postage-paid envelope. If you sign, date and mail your proxy card without
indicating how you want to vote, your proxy will be counted as a vote in favor
of the merger. If you do not vote by proxy or in person at the special meeting,
it will count as a vote against the merger agreement.
Please do not send any stock certificates at this time. Thank you for your
cooperation.
By Order of the Board of Directors,
Mahmud U. Haq
President and Chief Executive Officer
Your vote is very important.
Please complete, sign, date and return your proxy.
New York, New York
<PAGE>
This proxy statement/prospectus incorporates by reference documents
containing important business and financial information about NCO that is not
included in or delivered with this proxy statement/prospectus. Copies of any of
these documents are available without charge, except for exhibits, to any person
to whom this proxy statement/prospectus is delivered, upon written or oral
request. Written requests for these documents should be directed to Steven L.
Winokur, Executive Vice President, Finance, Chief Financial Officer and
Treasurer, NCO Group, Inc., 515 Pennsylvania Avenue, Fort Washington,
Pennsylvania, 19034, and telephone requests may be directed to Mr. Winokur at
(215) 793-9300. In order to ensure timely delivery of the documents, any request
should be made by August 11, 1999.
Table of Contents
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Page
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Questions and Answers About the NCO/Compass Merger ........................... 1
Summary ...................................................................... 2
The Companies ............................................................. 2
Our Reasons for the Merger ................................................ 2
Approval of the Merger .................................................... 2
Compass Recommendation to Stockholders .................................... 2
The Merger ................................................................ 2
Selected Financial Data of NCO Group Inc ..................................... 6
Selected Financial Data of Compass ........................................... 8
Market Price Information ..................................................... 10
Dividend Policies ............................................................ 11
Comparative Per Share Data ................................................... 12
Risk Factors ................................................................. 13
Where You Can Find More Information .......................................... 19
Forward-Looking Statements ................................................... 20
Compass Special Meeting of Stockholders ...................................... 21
Compass Special Meeting ................................................... 21
The Merger ................................................................... 23
Material Terms of the Merger Agreement .................................... 23
Conversion of Shares; No Fractional Amounts .............................. 23
Treatment of Compass Stock Options ....................................... 23
Representations and Warranties ........................................... 23
Conduct of Business Pending the Merger ................................... 24
Non-Solicitation ......................................................... 26
Indemnification and Insurance ............................................ 27
Conditions to the Merger ................................................. 27
Closing Date and Effective Date .......................................... 28
Termination of the Merger Agreement ...................................... 28
Termination Fees ......................................................... 29
Exchange Procedures for Compass Stock ..................................... 29
Opinion of Financial Advisor to Compass ................................... 29
Compass Projections ....................................................... 34
Opinion of Financial Advisor to NCO ....................................... 38
Background of the Merger .................................................. 42
NCO's Reasons for the Merger .............................................. 46
Compass' Reasons for the Merger; Recommendations of the Compass Board ..... 47
Interests of Compass' Management and Stockholders in the Merger ........... 48
Voting Agreements ......................................................... 49
Ownership of NCO Following the Merger ..................................... 50
Management of NCO Upon Completion of the Merger ........................... 50
</TABLE>
i
<PAGE>
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Page
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Regulatory Approvals .......................................................... 50
Resale of NCO Common Stock .................................................... 50
No Dissenters' Rights for Compass Stockholders ................................ 50
Material Federal Income Tax Consequences ...................................... 50
Potential Tax Consequences of Settlement of Class Action Litigation and the
Voting Agreements........................................................... 51
Accounting Treatment .......................................................... 52
Nasdaq Listing ................................................................ 52
Information Concerning Compass ................................................ 53
Business ................................................................... 53
Legal Proceedings .......................................................... 57
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Compass ....................................................... 58
Results of Operations ......................................................... 58
Liquidity and Capital Resources ............................................... 61
Seasonality ................................................................... 62
Year 2000 ..................................................................... 62
Quantitative and Qualitative Disclosures about Market Risk .................... 62
Principal Stockholders of Compass ............................................. 63
Comparison of Shareholders' Rights ............................................ 64
Preferences ................................................................ 64
Size and Classification of the Board of Directors .......................... 64
Removal of Directors ....................................................... 65
Meeting of Shareholders; Action by Written Consent ......................... 65
Shareholder Inspection Rights; Shareholder Lists ........................... 65
Amendment of Governing Documents ........................................... 65
Power of Board to Oppose Tender Offer and Other Take-Over Transactions ..... 66
Required Vote for Authorization of Mergers and Consolidations .............. 66
Legal Matters ................................................................. 66
Experts ....................................................................... 66
Pro Forma Consolidated Financial Statements ................................... 68
Index to Consolidated Financial Statements .................................... F-1
</TABLE>
Annex A Agreement and Plan of Merger
Annex B Opinion of Lehman Brothers, Inc.
Annex C Opinion of The Robinson-Humphrey Company, LLC
Annex D Letter Agreement Amending Agreement and Plan of Merger
ii
<PAGE>
Questions and Answers About the NCO/Compass Merger
Q: What do I need to do now?
A: Just complete and sign your proxy card and mail it to Compass in the enclosed
return envelope as soon as possible, so that your shares may be represented
at the Compass special meeting. The Compass special meeting will take place
on August 18, 1999.
Q. What if I want to change my vote?
A. Just send in a later-dated, signed proxy card before the Compass special
meeting or attend the Compass special meeting in person and vote.
Q. Will I have dissenters' rights?
A. Compass stockholders will not be entitled to dissenters' rights in connection
with the merger.
Q: When do you expect the merger to be completed?
A: We are working towards completing the merger as quickly as possible. In
addition to Compass stockholder approval, Compass must complete the sale of
its print and mail division. We expect the merger to be completed in the
third quarter of 1999.
Q: Should I send in my stock certificates now?
A: No. After the merger is completed, we will send Compass stockholders written
instructions for exchanging their stock certificates.
Q. What will I receive in the merger?
A: As a result of the merger, for each share of Compass stock, Compass
stockholders will receive 0.23739 of a share of NCO common stock. No
fractional shares of NCO common stock will be issued. Cash will be paid in
lieu of fractional shares. Compass stock options will be converted into NCO
stock options at the share exchange ratio for Compass common stock with an
adjusted exercise price. Please refer to page 23 for more information
regarding the treatment of Compass stock options.
Q: When will I receive shares of NCO common stock in the merger?
A: If the merger is completed, NCO will issue common stock to Compass
stockholders who have returned their Compass stock certificates together with
a completed letter of transmittal supplied by NCO or NCO's exchange agent,
ChaseMellon Shareholder Services, LLC.
Q: What are the tax consequences of the merger to me?
A: We have structured the merger so that, as a general matter, you should not
recognize any gain or loss for federal income tax purposes in the merger; but
see the discussion relating to the federal tax impact of the proposed
settlement of the class action litigation. We have conditioned the merger on
our receipt of legal opinions that this is the case. Tax matters are very
complicated and the tax consequences of the merger to you will depend on the
facts of your own situation. You should consult your tax advisors for a full
understanding of the tax consequences of the merger to you.
<PAGE>
Summary
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
merger fully, and for more complete descriptions of the legal terms of the
merger, you should read carefully this entire document and the documents to
which we have referred you. See "Where You Can Find More Information" on
page 19.
The Companies
NCO Group, Inc.
515 Pennsylvania Avenue
Fort Washington, PA 19034
(215) 793-9300
NCO is a leading provider of accounts receivable management and other
related services principally to clients in the financial services, healthcare,
commercial and retail, education, utilities, government and telecommunications
sectors.
Compass International Services Corporation
One Penn Plaza, Suite 4430
New York, NY 10119
(212) 967-7770
Compass is one of the leading providers of accounts receivable management
services and other complementary outsourced services.
Our Reasons for the Merger
The accounts receivable management industry is highly competitive. Both
NCO and Compass provide accounts receivable management services and other
outsourced services to businesses in various sectors. We believe that the
shareholders of NCO and Compass will benefit from the greater strength of the
combined enterprise.
To review the reasons for the merger in greater detail, as well as some
of the risks associated with the merger, see pages 46-48 and 13-18.
Approval of the Merger
The affirmative vote of a majority of the outstanding shares of Compass
common stock is required to approve the merger. On June 25, 1999, the record
date, there were 14,405,973 shares of Compass common stock outstanding, each of
which will be entitled to one vote. Twenty-three stockholders of Compass, who
collectively hold approximately 42% of the outstanding Compass common stock,
have agreed to vote in favor of the proposed merger.
Compass Recommendation
to Stockholders
The Compass board believes that the merger is in your best interest and
recommends that you vote FOR the proposal to approve the merger agreement.
The Merger
The merger agreement is attached as Annex A to this proxy
statement/prospectus. We encourage you to read the merger agreement because it
is the legal document that governs the merger.
As a result of the merger, Compass will become a wholly-owned subsidiary
of NCO and Compass common stock will be exchanged for NCO common stock as
described below.
<PAGE>
Voting Agreements (page 49)
In connection with the merger, Compass stockholders who own 6,067,931
shares of Compass common stock, constituting approximately 42% of the Compass
common stock outstanding on the record date, have entered into voting agreements
with NCO in which these stockholders have agreed to vote their Compass shares in
favor of the merger. In addition, these stockholders have agreed to contribute
to Compass shares of Compass common stock with an aggregate value of $5.0
million immediately prior to the completion of the merger. The effect of this
contribution will be to reduce the number of shares which would otherwise be
issued by NCO in the merger.
Ownership of NCO Following the Merger
(see page 50)
We anticipate that NCO will issue approximately 3.3 million shares of NCO
common stock to Compass stockholders in the merger. We also anticipate that NCO
will issue up to approximately 215,000 additional shares of NCO common stock
upon the exercise of options to purchase Compass common stock to be assumed by
NCO. Based on the number of shares of NCO common stock to be issued in the
merger, excluding shares subject to stock options to be assumed by NCO,
following the merger existing NCO shareholders will own approximately 86.7% and
former Compass stockholders will own approximately 13.3% of the outstanding
common stock of NCO.
Board of Directors and Management of NCO
Following the Merger (see page 50)
When the merger is complete, NCO will continue to be managed by its
current directors and officers.
Interests of Compass' Management and
Stockholders in the Merger (see page 48)
In considering the recommendation of the Compass board of directors with
respect to the
2
<PAGE>
proposed merger, Compass stockholders should note that stockholders, officers,
directors and/or affiliates of Compass have interests in the merger that are
different from or in addition to the interests of Compass stockholders
generally. Compass' executive officers and directors beneficially own 24.6% of
the Compass voting common stock prior to the contribution of shares to Compass
under the voting agreements. Compass' executive officers also currently hold
options to purchase shares of Compass common stock. The merger will accelerate
the vesting of those options that are not currently exercisable. Upon completion
of the merger, holders of Compass options will be entitled to receive NCO stock
options and, upon the exercise of their NCO stock options, a number of shares of
NCO common stock determined based on the merger share exchange ratio. In
addition, pursuant to their employment agreements, Messrs. Cunningham and Haq
and Ms. Schechter will be entitled to receive severance payments upon the
completion of the merger and Mr. Noble will be entitled to receive severance
payments if his employment is terminated. Mr. Clark, a member of the board of
directors of Compass, is Vice-Chairman of Lehman Brothers, an investment banking
firm which will receive fees for acting as financial advisor to Compass in the
merger. Compass also has agreed to sell its print and mail division to a
corporation controlled by a member of the board of directors of Compass. All of
the directors and officers of Compass will receive indemnification and insurance
under the merger agreement. The Compass board of directors was aware of these
interests at the time the merger was approved.
Sale of Print and Mail Division (see page 49)
On May 12, 1999, Compass entered into a sale agreement with Swiss-Irish
Enterprises, Inc. to sell its print and mail division for $35.1 million in cash.
The sale of the print and mail division to Swiss-Irish is conditioned upon the
completion of the merger, unless waived by Swiss-Irish, and is subject to other
customary closing conditions. The sale of the print and mail division to
Swiss-Irish is not conditioned upon Swiss-Irish obtaining any financing.
Affiliates of Swiss-Irish have deposited into escrow $2.0 million in cash and
1,849,863 shares of Compass common stock to secure the obligations of
Swiss-Irish. Swiss-Irish is a Texas corporation controlled by Mr. Kenneth W.
Murphy, a member of the board of directors of Compass and the president of the
print and mail division of Compass.
Conditions to the Merger (see pages 27 to 28)
The completion of the merger depends upon the satisfaction or waiver of a
number of conditions. These conditions include, among others, the following:
o the merger shall have been approved by the Compass stockholders;
o NCO and Compass shall have received an opinion from their respective
counsel that the merger will be treated as a tax-free reorganization
for U.S. federal income tax purposes;
o NCO and Compass shall have filed a pre-merger notification and report
form under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
with the FTC and the antitrust division of the Justice Department and
the applicable waiting period shall have expired or terminated; and
o the sale of the print and mail division shall have been completed in
accordance with the terms of the print and mail division sale
agreement.
Termination of the Merger Agreement;
Termination Fees (see pages 28-29)
NCO and Compass can agree to terminate the merger agreement without
completing the merger, and either of NCO or Compass can terminate the merger
agreement under various circumstances, including if Compass stockholder approval
is not obtained or if the merger is not completed by October 31, 1999.
Compass can terminate the merger agreement if the average closing price
of NCO common stock during the five trading days ending on the trading day one
day before the Compass special meeting is less than $27.50 per share.
NCO can terminate the merger if:
o the Compass board of directors does not recommend or shall have
withdrawn or adversely modified its recommendation to the Compass
stockholders in favor of the approval of the merger;
o Compass enters into another acquisition agreement concerning any sale
of assets or stock, or merger, consolidation or similar transaction,
with a party other than NCO; or
o a tender or exchange offer is commenced and Compass does not send a
statement to its stockholders disclosing that Compass recommends
rejection of the tender or exchange offer.
3
<PAGE>
If NCO terminates the merger agreement for any of the reasons listed
immediately above, Compass is required to pay to NCO within ten business days of
termination a non-refundable termination fee of $3.5 million plus out-of-pocket
costs and expenses of up to $1.2 million.
Compass is also required to pay the same termination fee and
reimbursement of costs and expenses if:
o NCO or Compass terminates the merger agreement because Compass
stockholders do not approve the merger; and
o within one year of that termination, Compass completes a sale of more
than a majority of the outstanding Compass shares of common stock or
all or substantially all of the assets of Compass for consideration
more favorable from a financial point of view to Compass stockholders
than the merger with NCO.
Regulatory Approvals (see page 50)
The Hart-Scott-Rodino Antitrust Improvements Act of 1976 prohibits us
from completing the merger until after NCO and Compass furnish information and
materials to the Antitrust Division of the Department of Justice and to the
Federal Trade Commission and a required waiting period has ended. NCO and
Compass filed the required information and the waiting period has ended.
However, the Antitrust Division of the Department of Justice and the Federal
Trade Commission continue to have the authority to challenge the merger on
antitrust grounds before or after the merger is completed.
Accounting Treatment (see page 52)
The merger, for accounting and financial reporting purposes, will be
accounted for using the purchase method of accounting which means that the
companies will be treated as if the combination occurs on the closing date.
Following the completion of the merger, NCO will include the fair value of the
assets and liabilities of Compass in NCO's consolidated balance sheet and will
include income of Compass after the closing date in NCO's consolidated statement
of income.
Opinion of Financial Advisor to Compass
(see pages 29 to 34)
In deciding to approve the merger, Compass' board considered the opinion
from its financial advisor, Lehman Brothers, Inc., that the merger share
exchange ratio is fair, from a financial point of view, to the stockholders of
Compass. This opinion is attached as Annex B to this proxy statement/prospectus.
We encourage you to read this opinion.
Compass Projections (see pages 34-37)
NCO and each of the other potential Compass merger partners contacted by
Lehman Brothers that signed confidentiality agreements were provided with some
non-public information regarding Compass, including the projections set forth
in this proxy statement/prospectus. These projections currently do not reflect
estimates by the management of Compass or NCO regarding future performance,
particularly in light of Compass' recent publicly reported operating results.
Accordingly, Compass strongly advises its stockholders not to rely on the
projections in considering the proposed merger.
Opinion of Financial Advisor to NCO
(see pages 38 to 42)
In deciding to approve the merger, NCO's board considered the opinion
from its financial advisor, The Robinson-Humphrey Company, LLC, that the
consideration to be paid by NCO in the merger is fair, from a financial point of
view, to NCO. This opinion is attached as Annex C to this proxy
statement/prospectus. The fairness opinion of Robinson- Humphrey does not
address whether the consideration to be paid by NCO to Compass stockholders in
the merger is fair to the Compass stockholders.
Listing of NCO Common Stock (see page 52)
The shares of NCO common stock issued in connection with the Merger will
be listed on the Nasdaq National Market under the symbol "NCOG."
No Dividends After the Merger (see page 11)
Historically, neither NCO nor Compass has paid dividends. NCO does not
anticipate paying cash dividends on its common stock in the foreseeable future.
In addition, NCO's credit agreement prohibits NCO from paying cash dividends
without the lender's prior consent. NCO currently intends to retain future
earnings to finance its operations and fund the growth of its business. Any
payment of future dividends will be at the discretion of the NCO board and will
depend upon, among other things, NCO's earnings, financial condition, capital
requirements, level of indebtedness, contractual restrictions with respect to
the payment of dividends and other factors that the NCO board deems relevant.
4
<PAGE>
NCO's Acquisition History
The following chart lists the acquisitions completed by NCO during 1997,
1998 and 1999:
<TABLE>
<CAPTION>
Date
Acquisition Acquired Purchase Price
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<S> <C> <C>
o Goodyear & Associates, Inc. 1/22/97 $4.5 million in cash and $0.9 million convertible
note
o Tele-Research Center, Inc. 1/30/97 $2.2 million in cash
o CMS A/R Services 1/31/97 $5.1 million in cash
o Collections Division of CRW Financial, Inc. 2/2/97 $3.8 million in cash, 518,000 shares of common
stock and warrants to purchase 375,000 shares of
common stock
o Credit Acceptance Corporation 10/1/97 $1.8 million in cash
o ADVANTAGE Financial Services, Inc. 10/1/97 $2.9 million in cash, 46,000 shares of common
stock and $1.0 million in promissory notes
o Collection Division of American Financial 1/1/98 $1.7 million in cash
Enterprises, Inc.
o The Response Center 2/6/98 $15.0 million in cash plus additional purchase
price if performance goals are met
o FCA International Ltd. 5/5/98 $69.9 million in cash, valued in U.S. dollars
o MedSource, Inc. 7/1/98 $18.4 million in cash and $17.3 million debt
repaid
o Medaphis Services Corporation 11/30/98 $107.5 million in cash plus up to an additional
$10.0 million if performance goals are met
o JDR Holdings, Inc. 3/31/99 Approximately 3.4 million shares of NCO com-
mon stock
o Co-Source Corporation 5/21/99 $122.7 million in cash and warrants to purchase
250,000 shares of NCO common stock
</TABLE>
Recent Developments
Class Action Litigation
On May 14, 1999, a purported stockholder class action suit was filed in the
Delaware Court of Chancery against Compass, the members of the board of
directors of Compass and NCO. This complaint alleges, among other things, that
the Compass board of directors breached their fiduciary duties to Compass
stockholders by failing to maximize stockholder value and by agreeing to an
unfair and inadequate merger and that NCO aided and abetted the breach of
fiduciary duty. The complaint seeks, among other things, an order enjoining
completion of the merger and monetary damages.
On July 19, 1999, the lawyers for the parties to the litigation entered
into a memorandum of understanding containing an agreement in principle for the
settlement of the litigation. The principle terms of the settlement, which is
subject to court approval, include the following:
o the $5.0 million reduction in the number of NCO common stock to be issued
in the merger will be borne entirely by the stockholders signing voting
agreements, and not by other public shareholders of Compass;
o in the event that the average closing price of NCO common stock during
the five trading days ending one day before the Compass stockholder
meeting to approve the merger is less than $29.50 per share, NCO will pay
an additional 43,684 shares of NCO common stock, to be distributed pro
rata to holders of shares of Compass common stock, other than with respect
to shares beneficially owned by the individual defendants, which payment
will result in an additional payment of approximately .00393
5
<PAGE>
shares of NCO common stock per share of Compass common stock, so that each
stockholder of Compass, other than the shares beneficially owned by the
individual defendants, will receive total payment in the merger of 0.24138
shares of NCO common stock for each share of Compass common stock;
o the litigation will be certified as a class action on behalf of all
persons who owned Compass common stock on or after May 13, 1999, and all
claims that were or could have been asserted in the litigation on behalf
of the class, or that otherwise relate to the merger, will be released and
forever barred; and
o plaintiff's counsel will apply for an award of attorneys' fees and
expenses in an amount not to exceed $250,000 which, if awarded by the
court, shall be paid by the individual defendants. The individual
defendants' insurer has agreed to pay the plaintiff's attorneys' fees and
expenses, if awarded by the court.
SELECTED FINANCIAL DATA OF NCO GROUP, INC.
The historical selected financial data of NCO for each of the five years in
the period ended December 31, 1998 are derived from the audited financial
statements of NCO. The historical selected financial data as of March 31, 1999
and for the three months ended March 31, 1998 and 1999 are derived from the
unaudited financial statements of NCO and, in the opinion of the management of
NCO, include all adjustments, consisting only of normal recurring adjustments,
which are necessary to present fairly the results of operations and financial
position for those periods. The results for the three months ended March 31,
1999 for NCO are not necessarily indicative of the results to be expected for
the full year. The selected pro forma financial data does not purport to
represent what NCO's actual results of operations or financial position would
have been had the acquisitions occurred as of such dates, or to project NCO's
results of operations or financial position for any period or date, nor does it
give effect to any matters other than those described in the accompanying notes.
The pro forma selected financial data of NCO for the year ended December
31, 1998 has been prepared assuming the acquisitions of FCA International Ltd.,
MedSource, Inc., Medaphis Services Corporation, and Co-Source Corporation and
the pending acquisition of Compass International Services Corporation occurred
on January 1, 1998.
The pro forma selected balance sheet data of NCO as of March 31, 1999 has
been prepared assuming the acquisition of Co-Source Corporation and the pending
acquisition of Compass International Services Corporation occurred on March 31,
1999. The pro forma selected financial data of NCO for the three months ended
March 31, 1999 has been prepared assuming NCO's acquisition of Co-Source
Corporation and the pending acquisition of Compass International Services
Corporation occurred on January 1, 1999.
The following data should be read in conjunction with NCO's consolidated
financial statements and the accompanying notes; the historical financial
statements of FCA International Ltd., MedSource, Inc., Medaphis Services
Corporation, Co-Source Corporation and Compass International Services
Corporation; NCO's pro forma consolidated financial statements and the
accompanying notes; and NCO's and Compass' "Management's Discussion and Analysis
of Financial Condition and Results of Operations," all of which are either
incorporated into this proxy statement/prospectus by reference or included
elsewhere in this proxy statement/prospectus.
6
<PAGE>
SELECTED FINANCIAL DATA OF NCO GROUP, INC.
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------------------------------------
Historical
--------------------------------------------------------------------------
1994 1995 1996 1997 (1) 1998 (1)
---------- ---------------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenue ............................. $ 8,578 $ 12,733 $ 30,760 $ 108,073 $ 229,952
Operating costs and expenses:
Payroll and related expenses ....... 4,558 6,797 14,651 56,949 119,314
Selling, general and
administrative expenses ........... 2,674 4,042 10,032 36,372 66,588
Depreciation and amortization
expenses .......................... 215 348 1,254 4,564 9,851
Non-recurring acquisition costs -- -- -- -- --
------- --------- --------- --------- ---------
Income from operations .............. 1,131 1,546 4,823 10,188 34,199
Other income (expense) .............. (45) (180) (576) (797) (2,723)
------- --------- --------- --------- ---------
Income before provision for
income taxes ....................... 1,086 1,366 4,247 9,391 31,476
Income tax expense (2) .............. -- -- 613 4,800 13,131
------- --------- --------- --------- ---------
Net income .......................... 1,086 1,366 3,634 4,591 18,345
Accretion of preferred stock to
redemption value ................... -- -- -- (1,617) (1,604)
------- --------- --------- --------- ---------
Net income applicable to
common shareholders ................ $ 1,086 $ 1,366 $ 3,634 $ 2,974 $ 16,741
======= ========= ========= ========= =========
Pro forma income tax
expense (2) ........................ 434 546 1,093
------- --------- ---------
Pro forma net income (2) ............ $ 652 $ 820 $ 2,541
======= ========= =========
Net income per share: ...............
Basic .............................. $ 0.19 $ 0.48 $ 0.22 $ 0.91
========= ========= ========= =========
Diluted ............................ $ 0.19 $ 0.48 $ 0.20 $ 0.85
========= ========= ========= =========
Pro forma net income per share:
Basic (2) .......................... $ 0.12 $ 0.34
========= =========
Diluted (2) ........................ $ 0.12 $ 0.34
========= =========
Weighted average shares
outstanding:
Basic .............................. 7,093 (3) 7,630 (3) 13,736 18,234
========= ========= ========= =========
Diluted ............................ 7,093 (3) 7,658 (3) 14,808 19,758
========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the Years
Ended
December 31, For the Three Months Ended March 31,
------------- ------------------------------------------
Pro Forma Historical Pro Forma
(Unaudited) (Unaudited) (Unaudited)
------------- -------------------------- ------------
1998 1998 (1) 1999 (1) 1999
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Statement of Income Data:
Revenue ............................. $ 519,874 $ 40,606 $ 95,864 $ 138,316
Operating costs and expenses:
Payroll and related expenses ....... 287,232 20,788 51,060 73,870
Selling, general and
administrative expenses ........... 159,020 12,189 26,915 39,855
Depreciation and amortization
expenses .......................... 24,812 1,642 4,419 6,808
Non-recurring acquisition costs -- -- 4,601 4,601
--------- -------- -------- ---------
Income from operations .............. 48,810 5,987 8,869 13,182
Other income (expense) .............. (21,491) (208) (2,780) (5,576)
--------- -------- -------- ---------
Income before provision for
income taxes ....................... 27,319 5,779 6,089 7,606
Income tax expense (2) .............. 14,066 2,059 3,583 4,695
--------- -------- -------- ---------
Net income .......................... 13,253 3,720 2,506 2,911
Accretion of preferred stock to
redemption value ................... (1,604) (301) (377) (377)
--------- -------- -------- ---------
Net income applicable to
common shareholders ................ $ 11,649 $ 3,419 $ 2,129 $ 2,534
========= ======== ======== =========
Pro forma income tax
expense (2) ........................
Pro forma net income (2) ............
Net income per share: ...............
Basic .............................. $ 0.48 $ 0.22 $ 0.10 $ 0.10
========= ======== ======== =========
Diluted ............................ $ 0.45 $ 0.20 $ 0.10 $ 0.10
========= ======== ======== =========
Pro forma net income per share:
Basic (2) ..........................
Diluted (2) ........................
Weighted average shares
outstanding:
Basic .............................. 24,186 15,625 21,440 24,732
========= ======== ======== =========
Diluted ............................ 25,690 17,025 22,476 25,838
========= ======== ======== =========
March 31, 1999
----------------------------
December 31,
---------------------------------------------------------- Historical Pro Forma
1994 1995 1996 1997 (1) 1998 (1) (Unaudited) (Unaudited)
-------- -------- ---------- ---------- ---------- ------------- ------------
Balance Sheet Data:
Cash and cash equivalents ....... $ 526 $ 805 $12,059 $ 30,379 $ 23,560 $ 23,890 $ 29,615
Working capital ................. 473 812 13,629 38,223 35,515 46,134 32,462
Total assets .................... 3,359 6,644 35,826 131,492 414,809 425,774 724,285
Long-term obligations, net of
current portion ................ 732 2,593 1,478 15,211 143,910 154,368 308,116
Redeemable preferred stock ...... -- -- -- 6,522 11,882 -- --
Shareholders' equity ............ 1,423 2,051 30,648 94,336 199,465 214,886 318,571
</TABLE>
- ------------
(1) Reflects the restatement of NCO's historical financial information for the
March 31, 1999 acquisition of JDR Holdings, Inc. using the
pooling-of-interests method of accounting.
(2) NCO was taxed as an S corporation prior to September 3, 1996. Accordingly,
income tax expense and net income have been provided on a pro forma basis as
if NCO had been subject to income taxes in all periods presented.
(3) Assumes that NCO issued 374,637 shares of its common stock at $8.67 per
share to fund the distribution of undistributed S corporation earnings of
$3.2 million through September 3, 1996, the termination date of NCO's S
corporation status, to existing shareholders of NCO.
7
<PAGE>
SELECTED FINANCIAL DATA OF
COMPASS INTERNATIONAL SERVICES CORPORATION
Although Compass was formed in April 1997, there were no operating
activities prior to the initial public offering and the closing of the founding
companies acquisitions on March 4, 1998. The following historical selected
financial data of Compass as of and for the years ended December 31, 1997 and
1998 have been derived from the audited financial statements included elsewhere
in this proxy statement/prospectus. The historical selected financial data as of
and for the three months ended March 31, 1998 and 1999 are derived from the
unaudited financial statements of Compass and, in the opinion of Compass'
management, include all adjustments, consisting only of normal recurring
adjustments, which are necessary to present fairly the results of operations and
financial position for those periods. The results of operations for the three
months ended March 31, 1999 for Compass are not necessarily indicative of the
results to be expected for the full year.
The selected unaudited pro forma financial data for the year ended December
31, 1998 presents data assuming that each of Compass' acquisitions and the sale
of the print and mail division had occurred on January 1, 1998.
The selected unaudited pro forma financial data for the three month period
ended March 31, 1999 presents data assuming the sale of the print and mail
division had occurred on January 1, 1999.
The selected unaudited pro forma financial data does not purport to
represent what Compass actual results of operations or financial position would
have been had the acquisitions or the sale of the print and mail division
occurred as of such dates, or to project Compass' results of operations or
financial position for any period or date, nor does it give effect to any
matters other than those described above.
8
<PAGE>
SELECTED FINANCIAL DATA OF COMPASS INTERNATIONAL SERVICES CORPORATION
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
For the Years Ended December 31, For the Three Months Ended March 31,
-------------------------------- --------------------------------------------
Pro Forma Historical Pro Forma
Historical (Unaudited) (Unaudited) (Unaudited)
-------------- ------------- ----------------------------- ------------
<S> <C> <C> <C> <C> <C>
1998 1998 1998 1999 1999
---- ---- ---- ---- ----
Statement of Income Data:
Net revenues ....................... $ 127,140 $ 105,750 $ 8,552 $ 41,720 $ 26,893
Cost of revenues ................... 85,919 65,824 5,164 28,640 17,152
---------- ---------- ------- --------- ---------
Gross profit ....................... 41,221 39,926 3,388 13,080 9,741
Selling, general and administrative
expenses .......................... 26,250 22,953 2,348 9,469 6,147
Goodwill amortization .............. 2,129 2,580 130 888 751
---------- ---------- ------- --------- ---------
Operating income ................... 12,842 14,393 910 2,723 2,843
Interest expense, net .............. 1,966 2,180 (4) 1,174 758
---------- ---------- ------- --------- ---------
Income before provision for
income taxes ...................... 10,876 12,213 914 1,549 2,085
Provision for income taxes ......... 4,869 5,687 416 692 814
---------- ---------- ------- --------- ---------
Net income ......................... $ 6,007 $ 6,526 $ 498 $ 857 $ 1,271
========== ========== ======= ========= =========
Net income per share:
Basic ............................. $ 0.54 $ 0.45 $ 0.10 $ 0.06 $ 0.09
========== ========== ======= ========= =========
Diluted ........................... $ 0.53 $ 0.45 $ 0.10 $ 0.06 $ 0.09
========== ========== ======= ========= =========
Weighted average shares
outstanding:
Basic ............................. 11,169 14,406 5,114 14,406 14,406
========== ========== ======== ========= =========
Diluted ........................... 11,314 14,439 5,150 14,406 14,406
========== ========== ======== ========= =========
December 31, March 31, 1999
--------------------- ----------------------------
Historical Pro Forma
1997 1998 (Unaudited) (Unaudited)
-------- ---------- ------------- ------------
Balance Sheet Data:
Cash and cash equivalents ......... $ -- $ 8,606 $ 9,075 $ 5,725
Working capital ................... -- 7,922 7,868 356
Total assets ...................... 3,942 187,338 189,712 47,427
Long-term obligations, net of
current portion .................. -- 58,404 57,693 27,548
Stockholders' equity .............. 150 96,882 97,739 92,885
</TABLE>
9
<PAGE>
Market Price Information
NCO common stock has been traded on the Nasdaq National Market under the
symbol "NCOG" since NCO's initial public offering on November 6, 1996. Compass
common stock has been traded on the Nasdaq National Market under the symbol
"CMPS" since Compass' initial public offering on February 27, 1998.
The following tables set forth, for the periods indicated, the reported
high and low sale prices of NCO common stock as reported on the Nasdaq Stock
Market since January 1, 1997 and the high and low sale prices of Compass common
stock as reported on the Nasdaq Stock Market since February 27, 1998.
High Low
---- ---
NCO
Fiscal Year Ended December 31, 1997:
First Quarter ................................ $ 19.83 $ 10.88
Second Quarter ............................... 22.58 12.17
Third Quarter ................................ 26.50 19.33
Fourth Quarter ............................... 29.25 20.00
Fiscal Year Ended December 31, 1998:
First Quarter ................................ 30.50 21.25
Second Quarter ............................... 28.13 19.50
Third Quarter ................................ 29.75 16.94
Fourth Quarter ............................... 45.00 22.13
Fiscal Year Ending December 31, 1999:
First Quarter ................................ 45.25 28.75
Second Quarter ............................... 38.38 24.38
Third Quarter (through July 16, 1999) ........ 40.13 35.38
Compass
Fiscal Year Ended December 31, 1998:
First Quarter ................................ $ 14.88 $ 10.75
Second Quarter ............................... 17.00 9.25
Third Quarter ................................ 13.00 7.00
Fourth Quarter ............................... 10.75 7.00
Fiscal Year Ending December 31, 1999:
First Quarter ................................ 11.25 3.50
Second Quarter ............................... 7.88 5.13
Third Quarter (through July 16, 1999) ........ 8.50 6.81
On May 12, 1999, the last full trading day prior to the execution of the
agreement, the reported high sale price on the Nasdaq Stock Market of NCO common
stock was $33.13 and the reported low sale price on the Nasdaq Stock Market of
NCO common stock was $32.00. On May 12, 1999, the high sale price of the Compass
common stock on the Nasdaq Stock Market was $7.38 and the low sale price of
Compass common stock on the Nasdaq Stock Market was $7.13. The last reported
sale price on the Nasdaq Stock Market on May 12, 1999 of NCO common stock was
$32.88 and of Compass common stock was $7.38.
10
<PAGE>
The following table sets forth the closing sale price per share of NCO
common stock and Compass common stock as reported on the Nasdaq Stock Market and
the pro forma equivalent per share price of one share of Compass common stock on
May 12, 1999, the last trading day preceding the execution of the agreement, and
on July 16, 1999, the most recent date for which prices were available prior to
printing this document:
Pro Forma
NCO Compass Equivalent
Common Common Compass Per
Stock Stock Share Price
----------- --------- ------------
May 12, 1999 ........... $ 32.88 $ 7.38 $ 7.81
July 16, 1999 .......... $ 39.63 $ 8.44 $ 9.41
The pro forma equivalent per share price of each share of Compass common
stock, which is the value of the NCO common stock which Compass stockholders
would receive for each share of Compass common stock exchanged in the merger,
was calculated by multiplying the closing sale price per share of NCO common
stock reflected in the table by 0.23739, the merger share exchange ratio.
Because the market price of NCO common stock may fluctuate, the market
price per share of the shares of NCO common stock that holders of Compass common
stock will receive in the merger may increase or decrease prior to the merger.
See "Risk Factors" on page 13.
Compass stockholders are urged to obtain a current market quotation for NCO
common stock. No assurance can be given as to the future prices of, or markets
for, NCO common stock.
Dividend Policies
NCO does not anticipate paying cash dividends on its common stock in the
foreseeable future. In addition, NCO's credit agreement with its lenders
prohibits NCO from paying cash dividends without the lender's prior consent. NCO
currently intends to retain future earnings to finance its operations and fund
the growth of its business. Any payment of future dividends will be at the
discretion of the NCO board and will depend upon, among other things, NCO's
earnings, financial condition, capital requirements, level of indebtedness,
contractual restrictions with respect to the payment of dividends and other
factors that the NCO board deems relevant.
Since Compass' initial public offering in February 1998, Compass has not
declared any cash dividends or distributions on its capital stock. The merger
agreement restricts Compass from paying any dividends without the consent of NCO
prior to the completion or termination of the merger.
11
<PAGE>
Comparative Per Share Data
(Unaudited)
The following table presents historical and the pro forma per share data
for NCO and historical and equivalent pro forma per share data for Compass. The
pro forma information is provided for illustrative purposes only and assumes
that the merger had occurred at the beginning of each of the periods presented.
The pro forma information should not be relied upon as necessarily indicative of
the historical results that would have been obtained if the companies had
combined during those periods or the results that will be obtained in the
future. The equivalent pro forma per share amounts for Compass were calculated
by multiplying the relevant NCO pro forma amounts by 0.23739, the merger share
exchange ratio for Compass common stock. The historical book value per common
share is computed by dividing total shareholders' equity by the number of shares
of common stock outstanding at the end of the period. The pro forma book value
per common share is computed by dividing pro forma shareholders' equity by the
pro forma number of shares of common stock as of the end of each of the periods
presented.
The following tables should be read in conjunction with the historical
consolidated financial statements of NCO, the historical financial statements of
Compass and the unaudited pro forma financial data included under the caption
"Pro Forma Consolidated Financial Statements," all of which are included
elsewhere in this proxy statement/prospectus or are contained in the annual
reports and other information NCO has filed with the SEC. See "Where You Can
Find More Information."
<TABLE>
<CAPTION>
As of or for the As of or for the
Year Three Months
Ended Ended
December 31, 1998 March 31, 1999
------------------- -----------------
<S> <C> <C>
Historical - NCO:
Diluted net income per common share ......... $ 0.85 $ 0.10
Book value per common share ................. 10.10 10.01
Historical - Compass:
Diluted net income per common share ......... 0.53 0.06
Book value per common share ................. 7.02 6.78
Pro Forma per NCO Share:
Diluted net income per common share ......... 0.44 0.10
Book value per common share ................. -- 13.00
Pro Forma per Compass Share Equivalent:
Diluted net income per common share ......... 0.10 0.02
Book value per common share ................. -- 3.09
</TABLE>
12
<PAGE>
Risk Factors
In considering whether to approve the merger, you should consider carefully
the risks associated with the merger and with ownership of NCO common stock
following the merger. These risks are described in detail below.
The businesses acquired by NCO in the fourth quarter of 1998 and in 1999
and to be acquired in the Compass acquisition had combined pro forma revenues of
$307.0 million in 1998 which was 171.5% of NCO's revenue of $179.0 million in
1998, prior to the restatement to reflect the JDR acquisition. If NCO is unable
to successfully integrate these new businesses into NCO's operations, NCO may
not be able to realize expected operating efficiencies, eliminate redundant
costs or operate the businesses profitably.
The businesses acquired by NCO in the fourth quarter of 1998 and in 1999
and to be acquired in the Compass acquisition had combined pro forma revenues of
$307.0 million in 1998 which was 171.5% of NCO's revenue of $179.0 million in
1998, prior to the restatement to reflect the JDR acquisition. If NCO is unable
to successfully integrate these new businesses into NCO's operations, NCO may
not be able to realize expected operating efficiencies, eliminate redundant
costs or operate the businesses profitably. The integration of these businesses
is subject to a number of risks, including risks that:
o These acquisitions could divert management's attention from the daily
operations of NCO and otherwise require additional management,
operational and financial resources;
o the conversion of the acquired companies computer and operating systems
into NCO's systems may take longer or cost more than expected;
o NCO may be unable to retain clients or key employees of the acquired
companies; and
o the acquired companies might have additional liabilities and problems
that NCO did not anticipate at the time of the acquisitions.
Historically, NCO's growth strategy has included acquisitions. NCO recently
announced that it would not make any acquisitions during the balance of 1999 and
the first half of 2000 to allow it to complete the integration of companies
which have been acquired. After that period, NCO intends to consider
acquisitions on an opportunistic basis. As a result of this change in growth
strategy, NCO's future growth may be limited and the price of its stock may be
adversely affected.
Historically, NCO's growth strategy has included acquisitions. NCO recently
announced that it would not make any acquisitions during the balance of 1999 and
the first half of 2000 to allow it to complete the integration of companies
which have been acquired. Because of the change in its acquisition strategy, if
NCO is unable to maintain its internal growth, it may not be able to meet or
exceed historical levels of growth and earnings. As a result, NCO's stock price
may be adversely affected.
NCO's significant internal growth may be difficult to manage and continue.
If NCO is not able to manage or continue that growth, it could have a materially
adverse effect on NCO's business, results of operations and financial condition.
NCO has experienced significant internal growth over the past several years
and intends to continue its internal growth. Future internal growth is subject
to a number of risks, including the risks that:
o NCO may not be able to develop and maintain new clients;
o by focusing on new clients, NCO may lose existing clients through
inattention or because it fails to maintain the quality of services it
provides to its clients; and
o NCO may have difficulty hiring, training and retaining new employees to
handle the increased workload.
13
<PAGE>
NCO's internal growth has placed significant demands on NCO's
administrative, operational and financial resources. To continue its future
growth, NCO will be required to improve its operational and financial systems
and obtain additional management, operational and financial resources. These
additional costs may outweigh the benefits NCO expects to obtain from internal
growth.
After the merger, goodwill will represent 76.9% of NCO's pro forma total
assets at March 31, 1999. If management has incorrectly overestimated the length
of the amortization period for goodwill, earnings reported in periods
immediately following the acquisition would be overstated. In later years, NCO
would be burdened by a continuing charge against earnings.
The NCO and Compass balance sheets include amounts designated as
"goodwill." Goodwill represents the excess of purchase price over the fair
market value of the net assets of the acquired businesses based on their
respective fair values at the date of acquisition. GAAP requires that this and
all other intangible assets be amortized over the period benefitted. Management
has determined that period to range from 15 to 40 years based on the attributes
of each acquisition.
As of March 31, 1999, the pro forma balance sheet of NCO included goodwill
that represented 76.9% of total assets and 173.3% of total shareholders' equity.
If management has incorrectly overestimated the length of the amortization
period for goodwill, earnings reported in periods immediately following the
acquisition would be overstated. In later years, NCO would be burdened by a
continuing charge against earnings without the associated benefit to income
valued by management in arriving at the consideration paid for the business.
Earnings in later years also could be significantly affected if management
determined then that the remaining balance of goodwill was impaired.
Management has concluded that the anticipated future cash flows associated
with intangible assets recognized in the acquisitions will continue
indefinitely, and there is no persuasive evidence that any material portion will
dissipate over a period shorter than the respective amortization period.
The share exchange ratio in the merger is fixed and if the market price of
NCO common stock decreases before the merger is completed, the dollar value of
what Compass stockholders will receive in the merger also will decrease.
The share exchange ratio in the merger is fixed. This means that if the
market price of NCO common stock decreases before the merger is completed, the
dollar value of what Compass stockholders will receive in the merger also will
decrease. Some of the reasons why the market price of NCO common stock may be
volatile are discussed in the next paragraph. Compass stockholders are advised
to obtain recent market quotations for NCO common stock. Neither NCO or Compass
can assure you as to the market price of NCO common stock at any time. See
"Comparative Per Share Market Price Information."
The number of shares of NCO's common stock that is traded daily on the
Nasdaq National Market averages less than 1.0% of the outstanding common stock.
As a result, the market price of NCO common stock may be volatile.
As a result of NCO's low trading volume, the market price for NCO common
stock may be volatile and may be affected by many factors, including the
following:
o announcements of fluctuations in NCO's or its competitors' operating
results;
o the timing and announcement of acquisitions by NCO or its competitors;
and
o government regulatory action.
In addition, the stock market in recent years has experienced significant
price and volume fluctuations that often have been unrelated or disproportionate
to the operating performance of companies. These broad fluctuations may
materially adversely affect the market price of NCO common stock.
After the merger, approximately 79.8% of NCO's outstanding shares will be
available for resale in the public market without restriction, except for any
shares held by affiliates of Compass or JDR which
14
<PAGE>
may be sold in compliance with Rule 145 adopted by the SEC. The sale of a large
number of these shares could adversely affect NCO's stock price and could impair
NCO's ability to raise capital through the sale of equity securities or make
acquisitions for stock.
Sales of NCO's common stock could adversely affect the market price of
NCO's common stock and could impair NCO's future ability to raise capital
through the sale of equity securities or make acquisitions for stock. NCO
anticipates that it will issue approximately 3.3 million shares in the merger.
Upon completion of the merger, there will be approximately 24.8 million shares
of NCO common stock outstanding. Of these shares, approximately 19.8 million
shares, or 79.8% of the total outstanding shares, will be available for resale
in the public market without restriction, except for any shares held by
affiliates of Compass or JDR, which may be sold in compliance with Rule 145
adopted by the SEC.
Approximately 5.0 million shares of NCO common stock, or 20.2% of the total
outstanding shares after the merger, are held by affiliates of NCO. Generally,
NCO affiliates may either sell their shares under a registration statement or in
compliance with the volume limitations and other requirements imposed by Rule
144 adopted by the SEC.
In addition, upon completion of the merger, NCO will continue to have the
authority to issue up to approximately 3.4 million shares of its common stock
under its stock option plans. This includes approximately 215,000 shares which
may be issued upon the exercise of Compass stock options to be assumed in the
merger. NCO also will have outstanding warrants to purchase 625,000 shares of
its common stock.
NCO may experience variations from quarter to quarter in operating results
and net income which could adversely affect the price of NCO common stock.
Factors which could cause quarterly fluctuations include the following:
o the timing of NCO's clients' accounts receivable management programs and
the commencement of new contracts;
o customer contracts may require NCO to incur costs in periods prior to
recognizing revenue under those contracts;
o the effect of the change of business mix on profit margins;
o the timing of additional selling, general and administrative expenses to
support new business;
o the costs and timing of completion and integration of acquisitions; and
o NCO's business tends to be slower in the third and fourth quarters of the
year due to the summer and holiday seasons.
NCO's business is dependent on clients in the healthcare, commercial and
retail, and financial services sectors. If either of these sectors performs
poorly or if there are any trends in these sectors to reduce or eliminate the
use of third-party accounts receivable management services provided by companies
like NCO, it could have a materially adverse effect on NCO's business, financial
condition and results of operations.
For the year ended December 31, 1998, after giving pro forma effect to the
acquisitions completed in 1998 and 1999, not including the pending acquisition
of Compass, as if they had occurred on January 1, 1998, NCO derived
approximately 38.2% of its revenues from clients in the healthcare sector,
approximately 21.6% of its revenues from clients in the commercial and retail
sector and approximately 21.4% of its revenues from clients in the financial
services sector. If any of these sectors performs poorly, clients in these
sectors may have fewer or smaller accounts to refer to NCO or they may elect to
perform accounts receivable management services in-house. If there are any
trends in either of these sectors to reduce or eliminate the use of third-party
accounts receivable management services, the volume of referrals to NCO would
decrease.
Most of NCO's contracts do not require clients to place accounts with NCO,
may be terminated on 30 or 60 days notice and are on a contingent fee basis.
Accordingly, NCO can not predict whether existing clients will continue to use
NCO's services at historical levels, if at all.
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Under the terms of most of NCO's contracts, clients are not required to
give accounts to NCO for collection and usually have the right to terminate
NCO's services on 30 or 60 days notice. In addition, most of these contracts
provide that NCO is entitled to be paid only when it collects accounts.
Accordingly, NCO can not predict whether existing clients will continue to use
NCO's services at historical levels, if at all.
NCO competes with approximately 6,500 providers in the accounts receivable
management industry. This competition could have a materially adverse effect on
NCO's future financial results.
NCO competes with approximately 6,500 providers in providing accounts
receivable management services. NCO is a national provider of accounts
receivable management services. NCO competes with other large national
corporations such as Outsourcing Solutions, Inc., GC Services, Inc., and
IntelliRisk Inc., as well as many regional and local firms. NCO may also lose
business to regional or local firms who are able to use their proximity to or
contacts at local clients as a marketing advantage. Because of the large numbers
of providers, in the future NCO may have to reduce its collection fees to remain
competitive. Many larger clients retain multiple accounts receivable management
providers which exposes NCO to continuous competition in order to remain a
preferred vendor.
If NCO is not able to respond to technological changes in
telecommunications and computer systems in a timely manner, it may not be able
to remain competitive.
NCO's success depends in large part on its sophisticated telecommunications
and computer systems. NCO uses these systems to identify and contact large
numbers of account debtors and to record the results of the collection effort.
If NCO is not able to respond to technological changes in telecommunications and
computer systems in a timely manner, it may not be able to remain competitive.
NCO has made a significant investment in technology to remain competitive and
anticipates that it will be necessary to continue to do so in the future.
Computer and telecommunication technologies are changing rapidly and are
characterized by short product life cycles, so that NCO must anticipate
technological developments. If NCO is not successful in anticipating, managing
or adopting any technological changes on a timely basis or if NCO does not have
the capital resources available to invest in new technologies, its business
would be materially adversely affected.
If NCO's telecommunications and computer systems fail or become
unavailable, it could have a materially adverse effect on NCO's business.
As noted above, NCO's business is highly dependent on its
telecommunications and computer systems. These systems could be interrupted by
natural disasters, power losses, or similar events. NCO's business also is
materially dependent on service provided by various local and long distance
telephone companies. If NCO's equipment or systems cease to work or become
unavailable, or if there is any significant interruption in telephone services,
NCO may be prevented from providing services. Because NCO generally recognizes
income only as accounts are collected, any failure or interruption of services
would mean that NCO would continue to incur payroll and other expenses without
any corresponding income.
Our systems or those of our clients or suppliers may not be Year 2000
compliant. This means that we might be unable to provide accounts receivable
management services or engage in similar normal business activities for a period
of time after January 1, 2000 which could have a material adverse effect on our
business, operating results and financial position.
We rely on our telephone and computer systems, software and other systems
in operating and monitoring all aspects of our business. We also rely heavily on
the systems of our clients and suppliers. If our present efforts to address the
Year 2000 compliance issues are not successful, or if the systems of our clients
and suppliers and other organizations with which we do business are not Year
2000 compliant, we may be unable to provide accounts receivable management
services or engage in similar normal business activities for a period of time
after January 1, 2000. As a result, we would be unable to recognize income. We
also may lose existing or potential clients and our reputation in the industry
might be damaged.
NCO's success depends on its senior management team and if it is not able
to retain them, it could have a materially adverse effect on NCO.
NCO is highly dependent upon the continued services and experience of its
senior management team, including Michael J. Barrist, Chairman of the Board,
President and Chief Executive Officer. NCO depends on the services of Mr.
Barrist and the other members of NCO's senior management team to, among other
things:
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o successfully integrate the operations of Medaphis, JDR, Co-Source and
Compass;
o continue NCO's growth strategy; and
o maintain and develop NCO's and Compass' client relationships.
NCO is dependent on its employees and a higher turnover rate would
materially adversely affect NCO.
The accounts receivable management industry is very dependent upon
employees and experiences high turnover rate. Many of NCO's employees receive
modest hourly wages and a portion of these employees are employed on a part-time
basis. A higher turnover rate among NCO's employees would increase NCO's
recruiting and training costs and could materially adversely impact the quality
of services NCO provides to its clients. If NCO were unable to recruit and
retain a sufficient number of employees, it would be forced to limit its growth
or possibly curtail its operations. Growth in NCO's business will require it to
recruit and train qualified personnel at an accelerated rate from time to time.
We cannot assure you that NCO will be able to continue to hire, train and retain
a sufficient number of qualified employees. Additionally, an increase in hourly
wages, costs of employee benefits or employment taxes also could materially
adversely affect NCO.
As a result of the merger, Compass stockholders will become NCO
shareholders and some of their rights as shareholders will be adversely
affected.
As a result of the merger, Compass stockholders will become NCO
shareholders and some of their rights as shareholders will be adversely
affected. These differences include the following:
o NCO's charter provides that the NCO board of directors may oppose a
tender offer or other offer for NCO's securities. In considering whether
to oppose an offer, the NCO board of directors may consider any pertinent
issues, including the effects of any proposed transaction upon
shareholders, employees, suppliers, customers and creditors of NCO and
its subsidiaries and on the communities served by NCO. The Compass
charter does not contain a similar provision and Delaware law does not
permit the Compass board to consider the effects of a tender offer on any
groups other than stockholders.
o If the NCO board of directors determines to sell NCO or any subsidiary to
a third party, or to merge or consolidate NCO or any subsidiary with a
third party, the NCO board of directors will not be legally obligated to
create an auction and may negotiate with only one acquiror. Delaware law
requires that Compass create an auction if the board determines to sell
Compass.
See "Comparison of Shareholders' Rights."
"Anti-takeover" provisions may make it more difficult for a third party to
acquire control of NCO, even if the change in control would be beneficial to
shareholders.
NCO is a Pennsylvania corporation. Anti-takeover provisions in Pennsylvania
law and NCO's charter and bylaws could make it more difficult for a third party
to acquire control of NCO. These provisions could adversely affect the market
price of NCO common stock and could reduce the amount that shareholders might
receive if NCO is sold. For example, NCO's charter provides that NCO's board of
directors may issue preferred stock without shareholder approval. In addition,
NCO's bylaws provide for a classified board, with each board member serving a
staggered three year term. Directors may be removed only for cause and only with
the approval of the holders of at least 65% of NCO's common stock. See
"Comparison of Shareholders' Rights."
If NCO fails to comply with government regulation of accounts receivable
management and telemarketing industries, it could result in the suspension or
termination of NCO's ability to conduct business which would have a materially
adverse effect on NCO.
The accounts receivable management and telemarketing industries are
regulated under various United States federal and state, Canadian and United
Kingdom laws and regulations. Many states, as well as the Canada and the United
Kingdom, require that NCO be licensed as a debt collection company. If NCO fails
to comply with applicable laws and regulations, it could result in the
suspension or termination of NCO's ability
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to conduct accounts receivable management or telemarketing services which would
have a materially adverse effect on NCO. In addition, new federal, state or
foreign laws or regulations, or changes in the ways these rules or laws are
interpreted or enforced, could limit the activities of NCO in the future or
significantly increase the cost of regulatory compliance. If NCO expands its
international operations, it may become subject to additional government
controls and regulations in other countries, which may be stricter or more
burdensome than those in the United States.
Several of the industries served by NCO are also subject to varying degrees
of government regulation. Although NCO's clients are generally responsible for
complying with these regulations, NCO could be subject to a variety of
enforcement or private actions for its failure or the failure of its clients to
comply with these regulations.
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Where You Can Find More Information
NCO and Compass file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements and other information NCO and Compass file with the SEC at
the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. You may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC filings of NCO and Compass are
also available on the SEC's Internet site (http://www.sec.gov).
NCO filed a registration statement on Form S-4 to register the shares of
NCO common stock to be issued in the merger under the Securities Act. This proxy
statement/prospectus is a part of the registration statement on Form S-4 and
constitutes a prospectus of NCO in addition to being a proxy statement of
Compass for its special meeting. As allowed by SEC rules, this proxy
statement/prospectus does not contain all the information you can find in the
registration statement on Form S-4 or the exhibits to the registration statement
on Form S-4.
The SEC also allows NCO to "incorporate by reference" the information it
files with the SEC, which means NCO can disclose information to you by referring
you to another document filed separately with the SEC. Information incorporated
by reference is deemed to be part of this proxy statement/prospectus. Later
information filed by NCO with the SEC updates and supersedes this proxy
statement/prospectus.
The following documents previously filed by NCO with the SEC under the
Exchange Act are incorporated in this proxy statement/prospectus by this
reference:
SEC Filings Period
- ------------------------------------------- ------------------------------
Annual Report on Form 10-K, including Year ended December 31, 1998
those portions of NCO's proxy statement
for its 1999 special meeting of shareholders
incorporated by reference in the
Annual Report on Form 10-K.
Quarterly Reports on Form 10-Q Quarters ended March 31, 1999
Current Reports on Form 8-K Filed on February 16, 1999,
April 15, 1999, May 28, 1999,
June 4, 1999 and June 11, 1999
Registration Statement on Form 8-A filed under Filed on October 29, 1996
Section 12(g) of the Exchange Act
All documents filed by NCO under Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act subsequent to the date of this proxy statement/prospectus and prior
to the special meeting of Compass will be deemed to be incorporated by reference
in this proxy statement/prospectus and to be a part of this proxy statement/
prospectus from the date that document is filed.
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You should rely only on the information contained or incorporated by
reference in this proxy statement/prospectus to vote on the proposed merger.
Neither Compass nor NCO has authorized anyone to provide you with information
that is different from what is contained in this proxy statement/prospectus.
This proxy statement/prospectus is dated July 20, 1999. You should not assume
that the information contained in the proxy statement/prospectus is accurate as
of any date other than that date, and neither the mailing of this proxy
statement/prospectus nor the issuance of NCO common stock in the merger will
create any implication to the contrary.
Forward-Looking Statements
We have each made forward-looking statements in this document (and in NCO
documents that are incorporated by reference) that are subject to risks and
uncertainties. Forward-looking statements include the information concerning
possible or assumed future results of operations of NCO or Compass including
those set forth or referenced in "The Merger -- Background of the Merger," "--
NCO's Reasons for the Merger," "-- Compass' Reasons for the Merger;
Recommendations of the Compass Board," "-- Opinion of Financial Advisor to
Compass," "-- Compass Projections" and "-- Opinion of Financial Advisor to
Compass." Also, when we use words such as "believes," "expects," "anticipates"
or similar expressions, we are making forward-looking statements. You should
note that many factors, some of which are discussed in this document and in the
documents which we incorporate by reference, could affect the future financial
results of NCO and Compass and could cause those results to differ materially
from those expressed or implied in our forward-looking statements contained or
incorporated by reference in this document.
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Compass Special Meeting of Stockholders
We are sending you this proxy statement/prospectus in order to provide you
with important information regarding the merger and to solicit your proxy for
use at the special meeting and at any adjournments or postponements of the
special meeting. The special meeting is scheduled to be held at the time and
place described below.
Compass Special Meeting
General. The special meeting of stockholders of Compass International
Services Corporation will be held at Southgate Tower Suite Hotel, 371 Seventh
Avenue, New York, New York on August 18, 1999 at 10:00 a.m., local time. At the
special meeting, the holders of Compass common stock will consider and vote upon
the approval and adoption of the merger agreement, dated as of May 12, 1999, by
and among NCO Group, Inc., Cardinal Acquisition Corporation, a wholly-owned
subsidiary of NCO, and Compass.
The Compass board of directors has approved the proposed merger and
recommends that Compass stockholders vote "for" the proposed merger.
Record Date. The close of business on June 25, 1999 has been fixed by the
Compass board of directors as the Compass record date for the determination of
holders of shares of Compass stock entitled to notice of and to vote at the
Compass special meeting. Only holders of record of Compass common stock as of
June 25, 1999, are entitled to notice of, and to vote at, the Compass special
meeting.
Stock Entitled to Vote. As of the close of business on June 25, 1999, there
were 14,405,973 shares of Compass common stock outstanding. Holders of Compass
common stock will be entitled to one vote for each share of Compass common stock
that they held on June 25, 1999.
Quorum; Required Vote. The presence in person or by proxy of a majority of
the outstanding shares of Compass common stock will constitute a quorum for
purposes of conducting business at the Compass special meeting. Under Delaware
law, the affirmative vote of a majority of the outstanding shares of Compass
common stock is necessary to approve the proposed merger.
Stock Ownership and Voting Agreements. Twenty-three stockholders of
Compass, who collectively held approximately 42% of the outstanding shares of
Compass common stock as of June 25, 1999, have entered into voting agreements
with NCO and have agreed to vote all their shares in favor of the proposed
merger. Accordingly, the affirmative vote of less than a majority of other
holders of shares of Compass common stock is required to approve the proposed
merger. The following directors and officers hold shares of Compass stock that
are entitled to vote at the meeting and have agreed with NCO to vote their
shares in favor of the merger: Kenneth W. Murphy, Les J. Kirschbaum, Leeds
Hackett, Michael J. Cunningham, Scott H. Lang, Mahmud U. Haq, Edward A. DuCoin,
Billy Ray Pitcher and Howard L. Clark, Jr.
Voting and Revocation of Proxies. Shares of Compass common stock
represented by a proxy properly signed and received at or prior to the Compass
special meeting, unless subsequently revoked, will be voted in accordance with
the instructions on the proxy. If you sign and return your proxy without
indicating any voting instructions, the shares of Compass common stock
represented by the proxy will be voted "for" the proposed merger. You may revoke
your proxy and reclaim your right to vote at any time by giving written notice
of revocation to the Secretary of Compass at any time before it is voted, by
submitting to Compass a duly executed, later-dated proxy or by voting the shares
subject to the proxy by written ballot at the Compass special meeting. You
should send all written notices of revocation and other communications with
respect to revocation of Compass proxies to: Compass International Services
Corporation, One Penn Plaza, Suite 4430, New York, New York 10119, Attention:
Julie S. Schechter, Secretary. Attendance at the Compass special meeting will
not, in and of itself, constitute a revocation of a proxy. The failure to either
return your proxy card or attend the Compass special meeting in person and vote
in favor of the proposed merger will have the same effect as a vote against the
proposed merger.
Abstentions will be counted as shares present for purposes of determining
whether a quorum is present but effectively will be a vote against the proposed
merger. Similarly, the failure to either return your proxy card or attend the
Compass special meeting in person and vote in favor of the proposed merger
effectively will count as a vote against the proposed merger.
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Solicitation of Proxies. The proxies are being solicited on behalf of the
Compass board of directors. The solicitation of proxies may be made by
directors, officers and regular employees of Compass in person or by mail,
telephone, facsimile or telegraph without additional compensation payable for
that solicitation. Compass will also make arrangements with brokerage firms and
other custodians, nominees and fiduciaries to forward proxy solicitation
materials to the beneficial owners of Compass common stock held of record by
such persons, and Compass will reimburse such brokerage firms, custodians,
nominees and fiduciaries for reasonable out-of-pocket expenses incurred by them
in connection with their solicitation efforts. Compass has retained Georgeson &
Company, Inc. to assist in the solicitation of proxies at an estimated cost of
$6,000, plus out-of-pocket expenses. The cost of the solicitation will be borne
by Compass.
No Dissenters Rights for Compass Stockholders. Under Delaware law, holders
of Compass common stock are not entitled to dissenters rights in connection with
the merger.
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The Merger
Material Terms of the Merger Agreement
The following is a brief summary of the material terms of the merger
agreement. This summary is qualified in its entirety by reference to the merger
agreement, which is incorporated by reference and attached to this proxy
statement/prospectus as Annex A. You are urged to read the merger agreement
carefully.
Conversion of Shares; No Fractional Amounts
As a result of the merger, Compass will become a wholly-owned subsidiary of
NCO. Each share of Compass common stock will be converted into 0.23739 of a
share of NCO common stock. The merger share exchange ratio is fixed.
No fractional shares of NCO common stock will be issued. Instead, Compass
stockholders who would otherwise have been entitled to receive a fraction of a
share of NCO common stock will receive cash (without interest) in an amount
determined by multiplying the fractional share of NCO common stock by the
average closing price of NCO common stock as reported on the Nasdaq National
Market during the five trading days ending on and including the trading day one
day before the Compass special stockholder meeting. NCO will cause the shares of
NCO common stock issuable to the Compass stockholders to be listed on the Nasdaq
National Market.
Treatment of Compass Stock Options
Under the merger agreement, Compass's stock option plan will continue in
effect after the merger as an option plan of NCO. All outstanding options to
acquire shares of Compass common stock under Compass's stock option plan
immediately before the completion of the merger will continue in effect after
the merger as options to purchase NCO common stock, subject to the adjustments
stated in the next sentence. Upon the completion of the merger, each Compass
stock option will be automatically adjusted to provide that:
o the number of shares of NCO common stock which will be issued upon the
exercise of the Compass option will be that number of shares, rounded off
to the nearest whole number of shares, equal to the number of shares of
Compass common stock which would have been issued upon exercise of the
Compass option immediately before the completion of the merger,
multiplied by the merger share exchange ratio of 0.23739; and
o the exercise price per share of NCO common stock under the option shall
be the amount, rounded up to the nearest whole cent, equal to the
exercise price per share under the Compass stock option divided by the
merger share exchange ratio.
Representations and Warranties
The merger agreement contains statements and promises, called
representations and warranties, made by Compass and NCO. Compass'
representations and warranties relate to the following:
o organization;
o capitalization;
o authorization of the merger agreement;
o consents and approvals; no violation;
o financial statements and reports;
o absence of material adverse change;
o information in proxy statement/prospectus, registration statement and HSR
filing;
o undisclosed liabilities;
o taxes;
o litigation;
o compliance with law;
o real property; assets;
o employment agreements and benefits;
o opinions of financial advisors;
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o finders or brokers;
o contracts and arrangements;
o employee relations;
o intellectual property; software;
o environmental matters;
o related party and affiliate transactions;
o insurance;
o questionable payments;
o print and mail division; and
o disclosure.
NCO's representations and warranties relate to the following:
o organization;
o capitalization;
o authorization of the merger agreement;
o consents and approvals; no violation;
o financial statements and reports;
o absence of material adverse change;
o information in proxy statement/prospectus, registration statement and HSR
filing;
o finders or investment bankers; and
o disclosure.
To review all of the representations and warranties contained in the merger
agreement, you should read the merger agreement which is attached as Annex A.
The merger agreement provides that the respective representations and
warranties of NCO and Compass will not survive after the completion of the
merger or the termination of the merger agreement.
Conduct of Business Pending the Merger
The merger agreement contains various covenants and agreements that govern
our actions until the merger is completed or the merger agreement is terminated.
Some of Compass' covenants and agreements require that Compass and its
subsidiaries will:
o conduct their respective operations in accordance with their ordinary and
usual course of business;
o use commercially reasonable efforts to preserve intact its business
organization;
o use commercially reasonable efforts to keep available the services of
their officers and employees;
o use commercially reasonable efforts to maintain satisfactory
relationships with customers, suppliers and others having business
relationships with them;
o take no action which could reasonably be deemed to have a material
adverse effect on the ability of Compass to consummate the transactions
contemplated by the merger agreement or the timing thereof;
o consult with NCO on the management and business affairs of Compass and
its subsidiaries; and
o promptly advise NCO in writing of any change in Compass' or its
subsidiaries business or financial condition which is materially adverse
to Compass and its subsidiaries taken as a whole.
In addition, Compass agreed that neither Compass nor its subsidiaries,
without NCO's prior written consent, will:
o amend its certificate of incorporation or by-laws;
o authorize for issuance, issue, sell, deliver or agree or commit to issue,
sell or deliver (whether through the issuance or granting of additional
options, warrants, commitments, subscriptions, rights to purchase
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or otherwise) any shares of capital stock of any class or any securities
convertible into or exercisable for shares of capital stock of any class,
except as required by any employee benefit plan or stock option plan or
agreement existing on the date of the merger agreement;
o split, combine or reclassify any shares of its capital stock, declare, set
aside or pay any dividend or other distribution (whether in cash, stock or
property or any combination thereof) in respect of its capital stock or
partnership interest or redeem or otherwise acquire any shares of its own
capital stock or of any of its subsidiaries (other than the print and mail
division subsidiaries);
o create, incur, assume, maintain or permit to exist any debt (including
obligations in respect of capital leases) other than as in existence on the
date of the merger agreement (or which, in the ordinary course of business,
replaces any such debt) in an aggregate amount for Compass and its
subsidiaries taken as a whole exceeding $500,000;
o other than in the ordinary course of business and consistent with past
practices assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, contingently or otherwise) for the
obligations of any other person, other than Compass subsidiaries (other
than the print and mail division subsidiaries);
o make any loans, advances or capital contributions to, or investments in,
any person other than any of the Compass subsidiaries (other than the print
and mail division subsidiaries), except for notes taken by Compass pursuant
to the terms of the print and mail division sale agreement, and customary
loans or advances to employees or trade credit in the ordinary course of
business and consistent with past practices, which in any event will not
exceed $25,000 in the aggregate;
o except in the ordinary course of business or as otherwise contemplated by
or described or referred to in any filings made by Compass under the
Securities Act filed on or before the date of the merger agreement, or as
provided by the print and mail division sale agreement, sell, transfer,
mortgage, lease, license or otherwise dispose of or encumber any assets, or
cancel any indebtedness, of the Compass or its subsidiaries which have a
value on Compass' books, either individually or in the aggregate, in excess
of $50,000;
o increase in any manner the compensation of any of its directors, officers
or employees except in the ordinary course of business, consistent with
past practice as part of their regularly scheduled review;
o pay or agree to pay any pension, retirement allowance or other employee
benefit not required, or enter into or amend or agree to enter into or
amend any agreement or arrangement with any of its directors, officers or
employees, whether past or present, relating to any such pension,
retirement allowance or other employee benefit, except as required under
currently existing agreements, plans or arrangements;
o grant (other than as required pursuant to existing agreements or plans) any
severance or termination pay to, or enter into or amend any employment,
severance or change in control agreement with, any of its directors,
officers or employees;
o except as may be required to comply with applicable law, enter into or
become obligated under any collective bargaining agreement or any agreement
with, any labor union or association representing employees, pension plan,
welfare plan, multiemployer plan, employee benefit plan, benefit
arrangement, or similar plan or arrangement, which was not in existence on
the date of the merger agreement, including any bonus, incentive, deferred
compensation, stock purchase, stock option, stock appreciation right, group
insurance, severance pay, retirement or other benefit plan, agreement or
arrangement, or employment or consulting agreement with or for the benefit
of any person, or amend any of such plans or any of such agreements in
existence on the date of the merger agreement;
o authorize or commit to make any material capital expenditures in excess
of $100,000 per expenditure;
o make any material change in the accounting methods or accounting practices
followed by Compass, except as required by generally accepted accounting
principles;
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o settle any action, suit, claim, investigation or proceeding (legal,
administrative or arbitrative) in excess of $100,000;
o make any election under the Internal Revenue Code;
o enter into any contracts that if entered into prior to the date of the
merger agreement would be required to be disclosed under the merger
agreement;
o merge with or into or consolidate with any other person or entity (other
than between Compass' subsidiaries (other than the print and mail
division subsidiaries)) or make any acquisition of all or any part of the
assets or capital stock or business of any other person or entity except
for tangible property acquired in the ordinary course of business; or
o agree to do any of the foregoing.
Some of NCO's covenants and agreements require that NCO and its
subsidiaries will take no action which could reasonably be deemed to have a
material adverse affect on the ability of the companies to consummate the
transactions contemplated by the merger agreement, or the timing thereof.
In addition, NCO agreed that neither NCO nor its subsidiaries, without the
prior written consent of Compass, will:
o amend the certificate of incorporation or by-laws of NCO in a manner
which would materially adversely change the rights of holders of NCO
common stock;
o during the five trading days ending on and including the trading day one
day before the Compass special meeting, pay any dividend or other
distribution (whether in cash, stock or property or any combination
thereof) in respect of its capital stock, except any distribution made by
any of the NCO's subsidiaries to NCO or any of NCO's subsidiaries; or
o agree to do any of the foregoing.
Both NCO and Compass agreed that they will use their commercially
reasonable efforts to cause the merger to qualify as a tax-free reorganization
under the Internal Revenue Code and that they will not take, or permit any of
their affiliates to take, any action that could reasonably be expected to
jeopardize qualification of the merger as a tax-free reorganization.
To review all of the various covenants and agreements contained in the
merger agreement, you should read the merger agreement which is attached to this
document as Annex A.
Non-Solicitation
In the merger agreement, Compass has agreed that neither it nor its
subsidiaries will solicit, initiate, knowingly encourage or participate in any
discussions or negotiations with any third parties with respect to proposals
concerning any sale or issuance of shares of capital stock, sale, lease,
exchange, transfer or license of assets, tender offer or exchange offer, merger,
consolidation, business combination, recapitalization, liquidation, dissolution
or similar transaction involving Compass or its subsidiaries. The
non-solicitation restrictions are subject to exceptions which would permit
Compass to take the following actions upon receipt of an acquisition proposal if
the Compass board of directors determines in good faith that (a) the acquisition
proposal is more favorable from a financial point of view to Compass and its
stockholders and (b) the failure to take the actions will violate the board's
fiduciary duties under applicable law:
o furnish information to the potential acquiror,
o participate in discussions with the potential acquiror,
o withdraw or modify, in a manner adverse to NCO, the Compass board
approval or recommendation of the proposed merger with NCO, and
o approve or recommend the potential acquiror's offer.
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The merger agreement provides that Compass must submit the merger agreement
for approval to the Compass stockholders whether or not the Compass board of
directors determines that the merger agreement is no longer advisable or
recommends that the Compass stockholders reject it.
You should read the merger agreement which is attached as Annex A for a
more complete discussion of the non-solicitation provisions.
Indemnification and Insurance
The merger agreement provides that for a period of six years after the
effective time of the merger, NCO will indemnify, defend and hold harmless the
present and former officers, directors, employees and agents of Compass and its
subsidiaries (other than the print and mail division subsidiaries) from all
losses, to the full extent permitted or required under applicable law as of the
effective time of the merger or the governing documents of Compass as of the
date of the merger agreement. In addition, NCO has agreed to maintain for not
less than six years from the effective time of the merger the directors' and
officers' liability insurance policies covering the present and former officers,
directors, employees, and agents of Compass on terms no less favorable than
those policies currently maintained by Compass. The right to indemnification and
insurance described above is subject to exceptions. You should read the merger
agreement which is attached as Annex A for a more complete discussion of the
indemnification and insurance provisions.
Conditions to the Merger
The completion of the merger depends upon the satisfaction or waiver of a
number of conditions, including, among other things, that:
o the merger shall have been approved by the Compass stockholders;
o no law or regulation shall be in effect that makes completion of the
merger illegal and no court order or other legal restraint or prohibition
shall be in effect that prevents the completion of the merger;
o NCO and Compass shall have received an opinion from their respective
counsel that the merger will be treated as a tax-free reorganization for
U.S. federal income tax purposes;
o NCO and Compass shall have filed a pre-merger notification and report
form under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 with
the FTC and the antitrust division of the Justice Department and the
applicable waiting period shall have expired or terminated;
o the representations and warranties of the parties must have been true and
correct as of the date of the merger agreement and must be true and
correct as of the closing date of the merger agreement as though made on
and as of the closing date except where the failure of the
representations and warranties to be so true and correct is not,
individually or in the aggregate, reasonably likely to have a material
adverse effect on the party making the representations and warranties;
o each party shall have, in all material respects, performed all covenants
and agreements and complied with all conditions required by the merger
agreement to be performed or complied with by that party prior to or on
the closing date; and
o the proxy statement/prospectus shall have become effective under the
Securities Act and shall not be the subject of any stop order or
proceeding seeking a stop order and no stop order or similar restraining
order shall be threatened or entered by the SEC or any state securities
administration preventing the merger.
With respect to the obligation of NCO to complete the merger, the following
conditions also apply:
o there shall not be pending any action, suit or proceeding by a
governmental entity (a) challenging or seeking to restrain or prohibit
the consummation of the merger; (b) relating to the merger and seeking
material monetary damages from NCO, Compass or any of their subsidiaries;
(c) seeking to prohibit or limit in any material respect NCO's ability to
vote, receive dividends with respect to or otherwise
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exercise ownership rights with respect to the capital stock of Compass;
or (d) which would materially and adversely affect the right of NCO,
Compass or any of their subsidiaries to own the assets or operate the
business of the Compass after the effective time of the merger;
o there shall not be pending any actions, suits or proceeding which
individually or in the aggregate, taking into account the totality of the
facts and circumstances and the probability of an adverse judgement, are
reasonably likely to have material adverse effect on Compass and its
subsidiaries taken as a whole and which (a) challenges or seeks to
restrain or prohibit the completion of the merger; (b) relates to the
merger and seeks to obtain from NCO or any of its subsidiaries damages;
(c) seeks to prohibit or limit in any material respect NCO's ability to
vote, receive dividends with respect to or otherwise exercise ownership
rights with respect to the capital stock of Compass; or (d) affects
adversely the right of NCO, Compass or any subsidiary of NCO to own the
assets or operate the business of Compass; provided, however, that to the
extent that any damages payable in connection with any such claim,
action, suit or proceeding will be fully reimbursed by insurance coverage
pursuant to insurance policies held by Compass or NCO, such damages will
be disregarded in determining the material adverse effect of such claim,
action, suit or proceeding on the policy holder;
o Compass must have received and cancelled Compass common stock with a
value of $5.0 million from the Compass stockholders who are parties to
the voting agreements;
o since the date of the merger agreement, there shall not have been any
material adverse change in the business or financial condition of Compass
and its subsidiaries taken as a whole, except as provided in the merger
agreement and except that Compass' preliminary operating results for
April and May 1999 previously disclosed to NCO will not be deemed to be a
material adverse change under the merger agreement and additional results
will be adjusted by agreed upon pro forma charges and expense reductions
in determining whether a material adverse change has occurred; and
o the sale of the print and mail division shall have been completed in
accordance with the terms of the print and mail sale agreement.
To review all of the conditions contained in the merger agreement, you should
read the merger agreement which is attached to this document as Annex A.
Closing Date and Effective Date
The closing of the merger will take place as soon as practicable after the
satisfaction or waiver of the conditions to closing stated in the merger
agreement. At the closing of the merger, the parties will file a certificate of
merger with the Secretary of State of the State of Delaware. The merger will
take effect at the time the certificate of merger is filed with the Secretary of
State of the State of Delaware.
Termination of the Merger Agreement
At any time before the completion of the merger, whether before or after
approval of the merger by the stockholders of Compass, the merger agreement may
be terminated and the merger abandoned:
o by the mutual written consent of the boards of directors of NCO and
Compass;
o by NCO or Compass if the merger is not completed on or before October 31,
1999, for any reason other than a breach of the merger agreement by the
party giving the notice;
o by NCO or Compass if any court or other government agency shall issue an
order or ruling restraining or prohibiting the proposed merger and the
order or ruling becomes final and non-appealable;
o by NCO or Compass if the Compass stockholders do not approve the proposed
merger by the required vote at a Compass stockholder meeting;
o by NCO or Compass upon any breach of the merger agreement by the other
party or if the other party's representations and warranties become
inaccurate and the breaching party fails to cure the breach within
fifteen days after receiving notice of the breach;
o by Compass if the average closing price of the NCO common stock as
reported on the Nasdaq National Market during the five trading days
ending on and including the trading day one day before the Compass
stockholder meeting is less than $27.50 per share; or
o by NCO if:
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o the Compass board of directors does not recommend or shall have withdrawn
or adversely modified its recommendation to the Compass stockholders in
favor of approval of the merger;
o Compass enters into another acquisition agreement concerning any sale of
assets or stock, or merger, consolidation or similar transaction, with a
party other than NCO; or
o a tender or exchange offer is commenced and Compass does not send a
statement to its stockholders disclosing that Compass recommends
rejection of the tender or exchange offer.
Termination Fees
The merger agreement requires Compass to pay to NCO a non-refundable
termination fee of $3.5 million plus the costs incurred by NCO in connection
with the proposed merger up to an amount not to exceed $1.2 million in the event
that the merger agreement is terminated as follows:
o NCO terminates the merger agreement because:
o the Compass board of directors does not recommend or shall have withdrawn
or adversely modified its recommendation to the Compass stockholders in
favor of approval of the merger;
o Compass enters into another acquisition agreement concerning any sale of
assets or stock, or merger, consolidation or similar transaction, with a
party other than NCO; or
o a tender or exchange offer is commenced and Compass does not send a
statement to its stockholders disclosing that Compass recommends
rejection of the tender or exchange offer.
o NCO or Compass terminates the merger agreement because Compass
stockholders do not approve the merger by the required vote at a Compass
stockholder meeting and within one year of the date of the merger
agreement, Compass completes a sale of more than a majority of the
outstanding Compass shares of common stock or all or substantially all of
the assets of Compass for consideration more favorable from a financial
point of view to Compass stockholders than the merger with NCO.
Exchange Procedures for Compass Stock
NCO will designate its transfer agent, ChaseMellon Shareholder Services,
LLC, to act as the "exchange agent" under the merger agreement. Promptly after
the merger is completed, the exchange agent will mail to each Compass
stockholder a letter of transmittal and instructions for use in surrendering his
or her Compass stock certificates to the exchange agent. Upon the surrender of a
Compass stock certificate to the exchange agent in accordance with the
instructions and a completed and signed letter of transmittal, the exchange
agent will exchange the Compass stock certificate for new certificates
representing the whole number of shares of NCO common stock into which the
shares of Compass common stock represented by the Compass stock certificate have
been converted in accordance with the merger agreement. No fractional shares
will be issued. If applicable, the NCO stock certificate will be accompanied by
cash in lieu of fractional shares of NCO common stock.
Opinion of Financial Advisor to Compass
In connection with serving as the financial advisor to Compass, Lehman
Brothers delivered an oral opinion to the Compass board on May 12, 1999 to the
effect that as of such date, and based upon assumptions made, matters
considered, and limitations as set forth therein, from a financial point of
view, the merger share exchange ratio to be offered to the Compass stockholders
in the merger is fair to the Compass stockholders. Lehman Brothers subsequently
confirmed its oral opinion by delivery of its written opinion dated May 12,
1999.
The full text of the Lehman Brothers opinion is attached as Annex B to this
document and is incorporated herein by reference. Compass stockholders may read
the Lehman Brothers opinion for a discussion of assumptions made, matters
considered and limitations on the review undertaken by Lehman Brothers in
rendering its opinion. The summary of the Lehman Brothers opinion set forth in
this document is qualified in its entirety by reference to the full text of the
Lehman Brothers opinion.
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No limitations were imposed by Compass on the scope of Lehman Brothers'
investigation or the procedures to be followed by Lehman Brothers in rendering
its opinion. The form and amount of the consideration to be paid by NCO in the
transaction was determined through arm's-length negotiations between the
parties. In arriving at its opinion, Lehman Brothers did not ascribe a specific
range of value to Compass or NCO, but rather made its determination as to the
fairness, from a financial point of view, of the merger share exchange ratio to
be offered to the Compass stockholders in the transaction on the basis of the
financial and comparative analyses described below. The Lehman Brothers opinion
is for the use and benefit of the Compass board and was rendered to the Compass
board in connection with its consideration of the merger. The Lehman Brothers
opinion is not intended to be and does not constitute a recommendation to any
Compass stockholder as to how a Compass stockholder should vote with respect to
the transaction. Lehman Brothers was not requested to opine as to, and its
opinion does not address, (1) Compass' underlying business decision to proceed
with or effect the transaction or (2) the likelihood of the consummation of
either the sale of the print and mail division or the proposed transaction.
In arriving at its opinion, Lehman Brothers reviewed and analyzed:
o the merger agreement and the specific terms of the merger,
o publicly available information concerning Compass and NCO that Lehman
Brothers believed to be relevant to its analysis, including their
respective annual reports on Form 10- K for the fiscal year ended
December 31, 1998,
o financial and operating information with respect to the businesses,
operations and prospects of Compass and NCO furnished to Lehman Brothers
by Compass and NCO, including without limitation, the financial results
of Compass for the quarter ended March 31, 1999 as set forth in Compass'
proposed press release announcing its first quarter results of
operations, which was disclosed concurrently with the announcement of the
merger, referred to as the earnings announcement,
o a trading history of Compass' common stock from the initial public
offering date of February 27, 1998 to the present and a comparison of
that trading history with those of other companies that Lehman Brothers
deemed relevant, including the potential impact of the earnings
announcement on the market price of Compass' common stock in the absence
of a concurrent announcement of the merger,
o a trading history of NCO's common stock from May 5, 1998 to the present
and a comparison of that trading history with those of other companies
that Lehman Brothers deemed relevant,
o a comparison of the historical financial results and present financial
condition of Compass with those of other companies that Lehman Brothers
deemed relevant,
o a comparison of the historical financial results and present financial
condition of NCO with those of other companies that Lehman Brothers
deemed relevant,
o published estimates of third-party research analysts with respect to the
future financial performance of NCO and Compass, including, with respect
to Compass, a comparison of these estimates with the earnings
announcement and with the current projections of management of Compass
for the second quarter of 1999 and subsequent quarters,
o the results of Lehman Brothers' efforts to solicit indications of
interest from third parties with respect to the purchase of all or a part
of Compass' business,
o a comparison of the financial terms of the merger with the financial
terms of certain other recent transactions that Lehman Brothers deemed
relevant, and
o the ability of Compass to fund the execution of its business plan on an
on-going basis.
In addition, Lehman Brothers had discussions with the managements of
Compass and NCO concerning their respective businesses, operations, assets,
financial conditions and prospects (including, without limitation, with respect
to the cost savings and operating synergies expected by the management of NCO to
result from a combination of the businesses of Compass and NCO), and undertook
such other studies, analyses and investigations as deemed appropriate. For
purposes of Lehman Brothers' analyses and in arriving at its
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opinion, Lehman Brothers assumed that the sale of the print and mail division
would occur in the time frame and pursuant to the terms contemplated by Compass
as of the date of the Lehman Brothers opinion. Further, the Lehman Brothers'
opinion does not address the sale of the print and mail division on a stand
alone basis.
In arriving at its opinion, Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial and other information used by Lehman
Brothers without assuming any responsibility for independent verification of
such information and further relied upon the assurances of managements of
Compass and NCO that they were not aware of any facts or circumstances that
would make such information inaccurate or misleading. Upon the advice of
Compass, Lehman Brothers assumed that the financial projections of Compass were
reasonably prepared on a basis reflecting the best currently available estimates
and judgments of the management of Compass as to the future financial
performance of Compass and that Compass will perform substantially in accordance
with such projections. However, Lehman Brothers was not provided with, and did
not have access to, any financial projections prepared by management of NCO.
Accordingly, after discussion with the management of NCO, Lehman Brothers
assumed that the published estimates of third-party research analysts were a
reasonable basis upon which to evaluate the future financial performance of NCO
and that NCO would perform substantially in accordance with such estimates. In
arriving at its opinion, Lehman Brothers did not conduct a physical inspection
of the properties and facilities of Compass or NCO and did not make or obtain
any evaluations or appraisals of the assets or liabilities of Compass or NCO. In
addition, upon advice of Compass and its legal advisors, Lehman Brothers assumed
that the merger would qualify as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended, and therefore as a
tax-free transaction to the Compass stockholders. The Lehman Brothers opinion is
based upon market, economic and other conditions as they existed on, and could
be evaluated as of, the date of its opinion.
In connection with the preparation and delivery of its opinion to the
Compass board of directors, Lehman Brothers performed a variety of financial and
comparative analyses, as described below. The preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant methods
of financial and comparative analysis and the application of those methods to
the particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Furthermore, in arriving at its opinion,
Lehman Brothers did not attribute any particular weight to any analysis or
factor considered by it, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Lehman
Brothers believes that its analyses must be considered as a whole and that
considering any portion of such analyses and factors, without considering all
analyses and factors, could create a misleading or incomplete view of the
process underlying its opinion. In its analyses, Lehman Brothers made numerous
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the control of Compass
and NCO. Any estimates contained in these analyses are not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable than as set forth therein. In addition,
analyses relating to the value of businesses do not purport to be appraisals or
to reflect the prices at which businesses actually may be sold. Certain of the
analyses include information presented in tabular format. In order to fully
understand the financial analyses used by Lehman Brothers, the tables must be
read together with the text of each summary. The tables alone do not constitute
a complete description of the financial analyses.
Peer Group Analysis of Compass. Using publicly available information,
including estimates published in third-party research reports, Lehman Brothers
analyzed the financial performance and stock market valuation of Compass with
the following selected accounts receivable management and industry consolidators
as deemed relevant by Lehman Brothers: Acsys, Inc., Cotelligent, Inc., Dispatch
Management Services Corp., Staffmark, Inc., and Telespectrum Worldwide, Inc.
Indications of such financial performance and stock market valuations included
median firm value (equity market value plus total debt minus cash, referred to
as net debt) as a multiple of latest twelve month, referred to as LTM, revenues
(as of December 31, 1998) of 0.6x, median firm value as a multiple of latest
twelve month earnings before interest, taxes, depreciation and amortization,
referred to as EBITDA, of 6.3x, and median equity market value to calendar year
1999 and calendar year 2000, referred to as CY1999 and CY2000, respectively,
earnings of 8.1x and 6.2x, respectively. Adjusted to reflect an acquisition
premium of 50%, this analysis implied the following exchange ratios with respect
to Compass:
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Multiple Peer Group Median
- ---------------------------------------------- -------------------
Firm Value / LTM Revenues 0.08341
Firm Value / LTM EBITDA 0.23698
Equity Market Value / CY1999 Earnings 0.12403
Equity Market Value / CY2000 Earnings 0.13919
This methodology implied a range of exchange ratios of 0.08341 to 0.23698
of a share of NCO common stock for each share of Compass common stock. The
merger share exchange ratio of 0.23739 is above the range indicated by the peer
group analysis.
However, because of the inherent differences in the businesses, operations,
financial conditions and prospects of Compass and the companies included in the
peer group, Lehman Brothers believed that it was inappropriate to, and therefore
did not, rely solely on the quantitative results of the peer group analysis and
accordingly also made qualitative judgments concerning differences between the
characteristics of the peer group and Compass that would affect the trading
values of Compass and such companies.
Selected Transactions Analysis. Using publicly available information on
selected transactions, including published estimates in third-party research
reports, which were announced or took place from March 1997 to the present,
Lehman Brothers reviewed certain terms and financial characteristics, including
the firm value as a multiple of latest twelve month revenues and firm value as a
multiple of latest twelve month EBITDA of 15 acquisition transactions which
Lehman Brothers deemed relevant. The transactions considered by Lehman Brothers
in its analysis consisted of the following transactions:
Acquiror Target
- ------------------------------------- -----------------------------------
NCO Group, Inc. Co-Source Corporation
NCO Group, Inc. JDR Holdings, Inc.
NCO Group, Inc. Medaphis Services Corp.
NCO Group, Inc. MedSource
NCO Group, Inc. FCA International
Great Universal Stores Metromail Corp.
Investor Group Altos Direct
NCO Group, Inc. The Response Center
Caribiner International Inc. Right Source, Inc.
NCO Group, Inc. ADVANTAGE Financial Services, Inc.
Big Flower Holdings Inc. Colorgraphic Direct Response
CRA Managed Care First Notice Systems
Reynolds & Reynolds Crain-Drummond
South Straffordshire Merchandised Industries Ltd.
Transaction Inc. EIL Instruments-Sales & Services
For these transactions, the median firm value as a multiple of latest
twelve month revenues and firm value as a multiple of latest twelve month EBITDA
were 1.2x and 7.9x, respectively, implying the following exchange ratios when
applied to Compass:
Multiple Median
- ------------------------------------- ------------
Firm Value / LTM Revenues 0.19601
Firm Value / LTM EBITDA 0.21349
This methodology implied a range of exchange ratios of 0.19601 to 0.21349
of a share of NCO common stock for each share of Compass common stock. The
merger share exchange ratio of 0.23739 is above the range indicated by the
transactions analysis.
However, because the reasons for and the circumstances surrounding each of
the transactions analyzed were specific to each transaction and because of the
inherent differences between the businesses, operations and prospects of Compass
and the businesses, operations and prospects of the acquired companies included
in
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the transactions, Lehman Brothers believed that it was inappropriate to, and
therefore did not, rely solely on the quantitative results of the transactions
analysis, and accordingly, also made qualitative judgments concerning
differences between the characteristics of those transactions and the proposed
merger that would affect the acquisition values of Compass and such acquired
companies.
Discounted Cash Flow Analysis. Lehman Brothers discounted projected cash
flows of Compass, which were based on the current projections of Compass
management, through the end of 2003 and estimated the terminal value of Compass
to calculate firm value, using a range of discount rates from 10% to 12%. The
discount rates were selected based on the weighted average cost of capital of
the Compass peer group as described above. Lehman Brothers used a range of
terminal values by applying multiples ranging from 6.0x to 8.0x to estimated
calendar year 2003, referred to as CY2003, EBITDA. The terminal multiples were
selected based on current trading multiples of the Compass peer group and the
multiples from recent completed acquisition transactions which Lehman Brothers
deemed relevant as described above. This analysis, and its underlying
assumptions, yielded a range of exchange ratios, as follows:
Discount Rate
------------------------------------------
CY 2003 EBITDA
Multiple 10.0% 11.0% 12.0%
- --------------------- ------------ ------------ ------------
6.0x .............. 0.18920 0.18531 0.18155
7.0x .............. 0.21663 0.21250 0.20849
8.0x .............. 0.24407 0.23969 0.23544
This methodology implied a range of exchange ratios of 0.18155 to 0.24407
of a share of NCO common stock for each share of Compass common stock. The
merger share exchange ratio of 0.23739 falls within this range.
Contribution Analysis. Lehman Brothers analyzed the relative income
statement contributions of Compass and NCO based on calendar year 1999 and
calendar year 2000 projected financial data. Projected financial data was
provided by Compass management with respect to Compass and based upon
third-party research estimates with respect to NCO (which did not include its
recent acquisition of Co-Source Corporation). This analysis indicated that
Compass would contribute 21.8%, 18.7% and 15.2% of the proforma combined
company's revenue, EBITDA and net income, respectively in calendar year 1999 and
21.1%, 18.6% and 16.3% of the pro forma combined company's revenue, EBITDA and
net income, respectively in calendar year 2000. In the merger, Compass will
receive approximately 13.7% of the proforma combined company's equity.
Peer Group Analysis of NCO. Using publicly available information, including
estimates published in third-party research reports, Lehman Brothers analyzed
the financial performance and stock market valuation of NCO with the following
selected accounts receivable management and industry consolidators as deemed
relevant by Lehman Brothers: F.Y.I. Incorporated, Lason, Inc., Provant, Inc. and
Pierce Leahy Corp. Indications of such financial performance and stock market
valuations included median multiples of firm value to latest twelve month (as of
December 31, 1998) revenues and latest twelve month EBITDA of 2.1x and 11.8x,
respectively, and median equity market value to calendar year 1999 and calendar
year 2000 earnings of 20.9x and 18.4x, respectively. These multiples compare to
firm value to latest twelve month (as of December 31, 1998) revenues and latest
twelve month EBITDA for NCO of 2.7x and 16.6x, respectively, and NCO's equity
market value to calendar year 1999 and calendar year 2000 earnings of 25.9x and
19.7x, respectively.
However, because of the inherent differences in the businesses, operations,
financial conditions and prospects of NCO and the companies included in the peer
group, Lehman Brothers believed that it was inappropriate to, and therefore did
not, rely solely on the quantitative results of the peer group analysis, and
accordingly also made qualitative judgments concerning differences between the
characteristics of the peer group and NCO that would affect the trading values
of NCO and such companies.
Pro Forma Merger Analysis. Lehman Brothers analyzed the impact of the
transaction on NCO's estimated calendar year 1999 and calendar year 2000
earnings per share (based on I/B/E/S). I/B/E/S is a data service that monitors
and publishes a compilation of earnings estimates produced by selected research
analysts regarding companies of interest to institutional investors. Estimates
for earnings of Compass were provided by
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the current projections of management of Compass. Based on such estimates,
Lehman Brothers concluded that the transaction would result in nominal pro forma
accretion to NCO's earnings per share in calendar year 1999 and calendar year
2000. NCO management estimates for cost savings and operating synergies from the
merger were not incorporated in Lehman Brothers' analysis.
Lehman Brothers is an internationally recognized investment banking firm
and, as part of its investment banking activities, is regularly engaged in the
evaluation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. The Compass board selected Lehman
Brothers because of its expertise, reputation and familiarity with Compass in
particular and the business services industry in general and because its
investment banking professionals have substantial experience in transactions
similar to the merger.
As compensation for its services as financial advisor in connection with
the transaction, Compass has agreed to pay Lehman Brothers a retainer of
$150,000, a fee of $500,000 in connection with the delivery of its fairness
opinion and a fee upon consummation of the transaction equal to 1% of the
transaction value, against which the retainer and opinion fee would be credited.
Furthermore, the Compass board of directors may pay Lehman Brothers a
discretionary bonus of up to $500,000. In addition, Compass has agreed to
reimburse Lehman Brothers for reasonable out-of-pocket expenses incurred in
connection with the transaction and to indemnify Lehman Brothers for certain
liabilities that may arise out of its engagement by Compass and the rendering of
its opinion.
Lehman Brothers is acting as financial advisor to Compass in connection
with the transaction. Lehman Brothers has also performed various investment
banking services for Compass in the past and has received customary fees for
such services. Howard Clark, a Vice-Chairman of Lehman Brothers, is a member of
the Compass board of directors. In the ordinary course of its business, Lehman
Brothers may actively trade in the equity securities of Compass for its own
account and for the accounts of its customers and, accordingly, may at any time
hold a long or short position in such securities.
Compass Projections
NCO and each of the other potential Compass merger partners contacted by
Lehman Brothers that signed a confidentiality agreement were provided with some
non-public information regarding Compass, including the projections set forth
below. The projections were excerpted from information provided by Compass
management. The projections do not reflect the effect of the merger or the sale
of the print and mail division. Compass advised NCO and each of the other
recipients of the projections that it does not as a matter of course publicly
disclose projections as to future revenues or earnings. The projections are
included in this proxy statement/prospectus only because the information was
made available to NCO and other potential acquirors. The projections were
prepared in January 1999 based on management's estimates and assumptions
regarding Compass' business at that time. These projections do not reflect
current estimates by the management of Compass or NCO regarding future
performance, particularly in light of Compass' recent publicly reported
operating results. Accordingly, Compass strongly advises its stockholders not to
rely on the projections in considering the proposed merger.
The projections set forth below were not prepared with a view to public
disclosure or compliance with the published guidelines of the SEC or the
guidelines established by the American Institute of Certified Public Accountants
regarding projections. The projections do not purport to present operations in
accordance with generally accepted accounting principles. Neither Compass nor
NCO or any of their financial advisors (including Lehman Brothers and Robinson
Humphrey or any of their respective directors or officers has verified or
provides any assurances with respect to the accuracy of the projections.
Compass' independent accountants have not examined or compiled the projections
presented herein and, accordingly, assume no responsibility for them and do not
express an opinion or any other form of assurance with respect thereto. In
addition, because the estimates and assumptions, many of which are not set forth
herein, underlying the projections are inherently subject to significant
economic and competitive uncertainties and contingencies which are difficult or
impossible to predict accurately and are beyond
34
<PAGE>
Compass' and NCO's control, there can be no assurance that the projections will
be realized at the times or in the amounts indicated. Actual results for the
first quarter of 1999 were materially lower than projected results, and it is
expected that there will continue to be differences between actual and projected
results, which differences may be material.
The projections and information set forth below are not based on historical
facts and, as such, constitute "forward looking statements" that involve
uncertainties and risk. There can be no assurance that actual results will not
differ materially from Compass' projections. Some of the factors that could
cause differences between projected and actual results include the potential
disruption in customer relationships and personnel related to the pending
merger, Compass' ability to achieve expected growth in revenues, earnings and
operating efficiencies, year 2000 uncertainties and the other factors discussed
under "Risk Factors" on page 11.
The following table sets forth the projections provided by Compass as of
January 29, 1999 for the years ending December 31, 1999 and 2000. Totals may not
add because of rounding.
Projected Annual Income Statement
($ in millions)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------------
% of % of
1999P Revenues 2000P Revenues
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Accounts Receivable Management ......... $ 105.2 52.4% $ 125.0 54.3%
Print and Mail Services ................ 75.1 37.4 82.0 35.7
Teleservices ........................... 20.4 10.2 23.0 10.0
-------- ----- -------- -----
Total Revenues ........................ $ 200.6 100.0% $ 230.0 100.0%
% of % of
Operating Operating
Income Income
----------- ----------
Operating Income:
Accounts Receivable Management ......... $ 22.2 66.2% $ 26.5 68.1%
Print and Mail Services ................ 9.6 28.8 10.5 27.0
Teleservices ........................... 1.7 5.0 1.9 4.9
-------- ----- ------ -----
Total Operating Income ................ $ 33.4 100.0% $ 38.9 100.0%
Corporate Expenses ..................... $ 4.2(1) $ 4.7
Goodwill Amortization .................. $ 3.1 $ 3.1
---------- ------
EBIT ................................... $ 26.1 $ 31.1
EBIT Margin ........................... 13.0% 13.5%
Depreciation/Amortization .............. $ 8.5 $ 8.9
---------- -------
EBITDA ................................. $ 34.6 $ 40.0
========== =======
EBITDA Margin ......................... 17.3% 17.4%
Capital Expenditures ................... $ 6.7 $ 6.5
</TABLE>
- ------------
(1) Excludes approximately $0.4 million in one-time legal and advisory
costs/fees pursuant to Compass' reorganization efforts and other one-time
corporate expenses.
35
<PAGE>
The following table sets forth the projections provided by Compass as of
January 29, 1999 for each calendar quarter during 1999. Totals may not add
because of rounding.
Projected Quarterly Income Statement
($ in millions)
<TABLE>
<CAPTION>
For the Quarters Ended
------------------------------------------------------
3/31/99P 6/30/99P 9/30/99P 12/31/99P
--------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Accounts Receivable Management ......... $ 22.0 $ 26.3 $ 27.7 $ 29.2
Print and Mail Services ................ 17.8 18.2 19.2 19.9
Teleservices ........................... 5.1 5.2 4.9 5.2
------ ------ ------ ------
Total Revenues ....................... 44.9 49.7 51.8 54.3
Operating Income:
Accounts Receivable Management ......... 4.7 5.6 5.9 6.0
Print and Mail Services ................ 2.2 2.3 2.5 2.7
Teleservices ........................... 0.4 0.5 0.4 0.5
------ ------ ------ ------
Total Operating Income ............... 7.2 8.3 8.8 9.2
Corporate Expenses ...................... 1.1 (1) 1.1 1.0 1.0
Goodwill Amortization ................... 0.8 0.8 0.8 0.8
--------- ------ ------ ------
EBIT .................................... 5.3 6.4 7.0 7.4
EBIT Margin ............................ 11.7% 13.0% 13.5% 13.6%
Depreciation/Amortization ............... 2.1 2.1 2.2 2.2
---------- ------- ------- -------
EBITDA .................................. $ 7.3 $ 8.6 $ 9.2 $ 9.6
========== ======= ======= =======
EBITDA Margin .......................... 16.4% 17.2% 17.7% 17.6%
Capital Expenditures .................... $ 1.5 $ 2.6 $ 1.3 $ 1.3
</TABLE>
- ------------
(1) Excludes approximately $0.4 million in one-time legal and advisory
costs/fees pursuant to Compass' reorganization efforts and other one-time
corporate expenses.
Certain Assumptions Underlying the Projected 1999 Income Statement
Presented below is a discussion of the Projected 1999 Income Statement
compared to the Compass' unaudited pro forma results of operations for the year
ended December 31, 1998. The unaudited pro forma results of operations assume
that the initial public offering, acquisitions of the founding companies and the
subsequent acquisitions had all occurred on January 1, 1998. The unaudited pro
forma results of operations do not purport to represent what Compass actual
results of operations would have been had the initial public offering and the
acquisitions occurred as of January 1, 1998.
Accounts Receivable Management. Revenues were projected to increase 21% to
$105.2 million in 1999 over 1998 levels, representing 52% of projected 1999
consolidated revenues. The increase reflected assumptions concerning: (1)
further penetration of Compass' existing customer base; and (2) the addition of
new, larger regional, multi-regional and national clients, resulting from
Compass' ongoing market efforts and promotion of the Compass brand name.
Operating margins were expected to decline slightly, from 21.6% in 1998 to
21.1% in 1999, in large part due to projected lower margins associated with
larger national accounts, offset by projected improved operating leverage.
Print and Mail. Revenues were projected to increase over 5% to $75.1
million in 1999, representing 37% of projected 1999 consolidated revenues. The
increase reflected assumptions concerning further penetration of existing
clients and the addition of new clients, offset by a slight contraction of sales
to Compass' largest customer in this division.
Operating margins were projected to increase over 70 basis points, from
12.1% in 1998 to 12.8% in 1999, as a result of anticipated efficiencies
resulting from the consolidation of Compass' mailing operations in Texas, offset
by projected margin declines associated with assumed lower sales volume from its
largest customer.
Teleservices. Revenues were projected to increase approximately 10% to
$20.4 million in 1999, representing 10% of projected 1999 consolidated revenues.
The increase reflected assumptions concerning further penetration of Compass'
existing client base and the addition of new client accounts.
36
<PAGE>
Operating margins were projected to increase over 230 basis points, from
5.8% in 1998 to 8.1% in 1999, reflecting Compass' anticipated ongoing shift
toward higher margin business.
Corporate Expenses. Corporate expenses as a percentage of projected
consolidated revenues in 1999 were expected to decline from 2.2% in 1998 to 2.1%
in 1999, based on the assumption that Compass will leverage its existing
corporate infrastructure over a larger revenue base. These figures excluded
approximately $0.4 million in one-time legal and advisory costs/fees pursuant to
Compass' reorganization efforts and other one-time corporate expenses.
Discussion of the Projected 2000 Income Statement
Accounts Receivable Management. Revenues were projected to increase 19% to
$125.0 million in 2000, representing 54% of projected 2000 consolidated
revenues. The increase reflected assumptions concerning the expected addition of
new larger regional, multi-regional and national clients, resulting from
Compass' ongoing marketing efforts and promotion of the Compass brand name.
Operating margins were projected to improve slightly from 21.1% in 1999 to
21.2% in 2000, due to projected higher revenues and the improved operating
leverage, more than offsetting projected lower margins associated with the
addition of larger, national clients.
Print and Mail. Revenues were projected to increase over 9% to $82.0
million in 2000, representing 36% of projected 2000 consolidated revenues. The
increase reflected assumptions concerning continued penetration of existing
accounts and the addition of new clients.
Operating margins were expected to remain relatively flat as a result of
anticipated operating efficiency achieved with projected increased print and
mail volumes from a broader number of clients, offset by assumed margin declines
associated with lower sales volume from its largest customer.
Teleservices. Revenues were expected to increase approximately 13% to $23.0
million in 2000, representing approximately 10% of projected 2000 consolidated
revenues. The increase reflected assumptions concerning the penetration of
existing accounts and the addition of new clients.
Operating margins were expected to increase from 8.1% in 1999 to 8.3% in
2000, reflecting a projected continued shift in business toward higher margin
accounts.
Corporate Expenses. Corporate expenses as a percent of projected total
revenues in 2000 were expected to decline based on the assumption that Compass
will benefit from the restructuring undertaken in the fourth quarter of 1998 and
the first quarter of 1999. In addition, Compass anticipated leveraging its
corporate infrastructure over a larger revenue base.
Based on actual results for January and February of 1999, on April 19, 1999
Compass provided NCO with the following revised projections for the first
quarter of 1999. These projections have been superceded by Compass' actual
results for the first quarter of 1999. See Compass' consolidated financial
statements beginning on page F-1.
Revised Projected Quarterly Income Statement
($ in millions)
Quarter
Ended
-------------
3/31/99P
-------------
Revenues:
Accounts Receivable Management ......... $ 21.462
Print and Mail Services ................ 15.384
Teleservices ........................... 4.205
---------
Total Revenues .................... $ 41.051
Operating Income:
Accounts Receivable Management ......... $ 3.972
Print and Mail Services ................ .852
Teleservices ........................... .366
---------
Total Operating Income. ........... $ 5.190
Corporate Expenses ....................... $ (1.067)
Goodwill Amortization .................... $ (0.885)
---------
EBIT ..................................... $ 3.238
37
<PAGE>
Opinion of Financial Advisor to NCO
The Robinson-Humphrey Company, LLC was retained by NCO to deliver its
opinion as to the fairness, from a financial point of view, of the consideration
to be paid by NCO in the merger. On May 12, 1999, at a telephonic meeting of the
NCO board held to evaluate and adopt the merger agreement, Robinson-Humphrey
rendered an opinion to the NCO board to the effect that, as of the date of such
opinion and based upon and subject to the matters stated in the opinion, the
consideration to be paid by NCO in the merger was fair, from a financial point
of view, to NCO.
The full text of the opinion of Robinson-Humphrey which sets forth the
assumptions made, matters considered and limitations on the review undertaken,
is attached to this proxy statement/prospectus as Annex C and is incorporated in
this document by this reference. The description of the Robinson-Humphrey
opinion set forth in this document is qualified in its entirety by reference to
the full text of the Robinson-Humphrey opinion. You are urged to read the
opinion in its entirety.
The fairness opinion of Robinson-Humphrey does not address whether the
consideration to be paid by NCO to Compass stockholders in the merger is fair to
the Compass stockholders. The opinion of Robinson-Humphrey is directed to the
NCO board and relates only to the fairness of the consideration to be paid by
NCO in the merger from a financial point of view to NCO, does not address any
other aspect of the merger and does not constitute a recommendation to any
shareholder of NCO or to the Compass board or any stockholder of Compass. The
consideration to be paid by NCO in the merger was determined on the basis of
negotiations between NCO and Compass and was approved by the NCO board.
In arriving at its opinion, Robinson-Humphrey reviewed a draft of the
merger agreement; publicly available information concerning NCO and Compass
which Robinson-Humphrey believed to be relevant to its inquiry; financial and
operating information with respect to the business, operations and prospects of
NCO and Compass furnished to Robinson-Humphrey by NCO or Compass; a comparison
of the historical financial results and present financial condition of each of
NCO and Compass with those of other companies which Robinson-Humphrey deemed
relevant; recent trading histories of NCO's common stock and of Compass' common
stock; a comparison of the financial terms of the merger with the financial
terms of certain other transactions which Robinson-Humphrey deemed relevant; and
the pro forma effects of the merger on NCO. In addition Robinson-Humphrey had
discussions with the management and/or employees of NCO and Compass concerning
their respective businesses, operations, assets, present conditions and future
prospects and undertook such other studies, analyses and investigations as it
deemed appropriate.
In rendering its opinion, Robinson-Humphrey assumed and relied on the
accuracy and completeness of all information supplied or otherwise made
available to it, discussed with or reviewed by or for it, or publicly available,
and did not assume any responsibility for independently verifying such
information. Robinson-Humphrey did not undertake an independent evaluation or
appraisal of any of the assets or liabilities of NCO or Compass and was not
furnished with any such evaluation or appraisal. In addition, Robinson-Humphrey
did not assume any obligation to conduct any physical inspection of the
properties or facilities of NCO or Compass. With respect to the financial
forecast information furnished to or discussed with Robinson-Humphrey by NCO or
Compass and cost savings and/or synergies anticipated from the merger,
Robinson-Humphrey assumed that they were reasonably prepared and reflected the
best currently available estimates and judgment of NCO's or Compass' management
as to the expected future financial performance of NCO or Compass, as the case
may be. Robinson-Humphrey also assumed that the final form of the merger
agreement would be substantially similar to the last draft reviewed by it.
Robinson-Humphrey also assumed (1) that a condition to NCO's obligation to close
the merger would be the consummation of the sale of the print and mail division
of Compass and (2) that NCO would assume $30 million in net debt of Compass as a
result of the consummation of the merger.
The Robinson-Humphrey opinion is necessarily based upon market, economic
and other conditions as they existed and could be evaluated on, and on the
information made available to Robinson-Humphrey as of the date of its opinion.
Robinson-Humphrey assumed that in the course of obtaining the necessary consents
or
38
<PAGE>
approvals (contractual or otherwise) for the merger, no restrictions, including
any divestiture requirements or amendments or modifications, would be imposed
that would have a material adverse effect on the contemplated benefits of the
merger. Robinson-Humphrey did not express any opinion as to what the value of
the shares of NCO common stock actually would be when issued pursuant to the
merger or the price at which the shares of NCO common stock would trade
subsequent to the merger.
At the meeting of the NCO board held on May 12, 1999, Robinson-Humphrey
presented certain financial analyses in connection with the delivery of its
fairness opinion. In preparing its opinion, Robinson-Humphrey performed a
variety of financial and comparative analyses, including those described below.
The summary of such analyses does not purport to be a complete description of
the analyses underlying Robinson-Humphrey's opinion. The preparation of a
fairness opinion is a complex analytic process involving various determinations
as to the most appropriate and relevant methods of financial analysis and the
application of those methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to summary description. Accordingly,
Robinson-Humphrey believes that its analyses must be considered as a whole and
that selecting portions of its analyses and factors, without considering all
analyses and factors, could create a misleading or incomplete view of the
processes underlying such analyses and opinion. In its analyses,
Robinson-Humphrey made numerous assumptions with respect to NCO, Compass,
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of NCO and
Compass. The estimates contained in such analyses and the valuation ranges
resulting from any particular analysis are not necessarily indicative of actual
values or predictive of future results or values, which may be significantly
more or less favorable than those suggested by such analyses. In addition,
analyses relating to the value of businesses or securities do not purport to be
appraisals or to reflect the prices at which businesses or securities actually
may be sold. Accordingly, such analyses and estimates are inherently subject to
substantial uncertainty. Robinson-Humphrey's opinion and analyses were only one
of several factors considered by the NCO board in its evaluation of the merger
and should not be viewed as determinative of the views of the NCO board or
management of NCO with respect to the consideration to be paid by NCO in the
merger or the proposed merger. The following is a summary of the material
financial and comparative analyses performed by Robinson-Humphrey in arriving at
the Robinson-Humphrey opinion.
Comparable Company Analysis. Using publicly available information
concerning historical and projected financial performance, including published
historical financial information, earnings estimates reported by First Call
Corporation, a data service that monitors and publishes compilations of earnings
estimates by selected research analysts regarding companies of interest to
institutional investors, and projected financial information published by
investment banks providing research coverage of comparable companies,
Robinson-Humphrey analyzed, among other things, the market values and trading
multiples of Compass and the following selected publicly-traded companies in the
collections industry: NCO, Compass, Credittrust Corporation, and Profit Recovery
Group. Robinson-Humphrey compared, among other things, firm values as a multiple
of projected 1999 and 2000 revenues; projected 1999 and 2000 earnings before
interest, taxes, depreciation and amortization, or EBITDA; and projected 1999
and 2000 earnings before interest and taxes, or EBIT, for the comparable
companies. All multiples were based on closing stock prices as of May 12, 1999.
Revenue, EBITDA and EBIT estimates for the comparable companies were based on
projected financial information published by investment banks providing research
coverage of the comparable companies. Base case revenue, EBITDA and EBIT
estimates for Compass were based on internal estimates of NCO's management, and
upside case revenue, EBITDA and EBIT estimates for Compass were based on
internal estimates of Compass' management. Based on the weighted average and the
mean market multiples for the comparable companies, the analyses using base case
projections indicated an implied equity value for Compass of $199.11 million and
$195.93 million, respectively. Based on the weighted average and the mean market
multiples for the comparable companies, the analyses using upside case
projections indicated an implied equity value for Compass of $233.28 million and
$230.85 million, respectively. These implied equity values compare to total
consideration to be paid by NCO for all of the outstanding shares of Compass
common stock in the merger of $112.43 million, determined by multiplying the
merger share exchange ratio of 0.23739 by the NCO common stock closing price on
May 12, 1999. An analysis of the results of the
39
<PAGE>
foregoing is not entirely mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics and other factors that could affect the acquisition, public
trading or other values of the comparable companies or the business segment or
company to which they are being compared.
Discounted Cash Flow Analysis. Robinson-Humphrey performed a discounted
cash flow analysis of Compass. This is an analysis of the present value of the
projected cash flows of Compass for the periods considered using the discount
rates indicated. This analysis was based upon both base case and upside case
projections of Compass' free cash flow, which is defined as earnings before
interest and after taxes plus depreciation and amortization expense minus
capital expenditures and increases in working capital, for the years 1999
through 2003, inclusive, using discount rates ranging from 10% to 20% and
terminal value multiples of calendar year 2003 EBITDA ranging from 6.0x to
10.0x. Based upon these projections of free cash flow, the range of discounted
present values of Compass' equity was from $88.62 million to $236.09 million
using base case projections and from $94.63 to $250.44 million using upside case
projections. These implied equity values compare to total consideration to be
paid by NCO for all of the outstanding shares of Compass common stock in the
merger of approximately $112.43 million, determined by multiplying the exchange
ratio of 0.23739 by the NCO common stock closing price on May 12, 1999.
Comparable Transaction Analysis. Robinson-Humphrey reviewed the financial
terms, to the extent publicly available, of 35 proposed, pending or completed
merger and acquisition transactions since January 1994 involving companies in
the collections industry. Robinson-Humphrey calculated various financial
multiples based on certain publicly available information for each of the
selected acquisition transactions and compared them to corresponding financial
multiples for the merger, based on the consideration to be paid by NCO. The
transactions reviewed and the announcement dates were:
<TABLE>
<CAPTION>
Acquiror Target Date of Announcement
- -------- ------ --------------------
<S> <C> <C>
NCO Group, Inc. B. Richard Miller April 1994
NCO Group, Inc. Trans Union Corporation January 1995
Medaphis Corp. Healthcare Recoveries Inc. June 1995
NCO Group, Inc. Eastern Business Services August 1995
OSI Holdings Corp. Account Portfolios, Inc. September 1995
Norwest Corp. Aman Collection Service May 1996
Branch Banking and Trust Co. Customer Access Resources May 1996
Southern National Customer Access Resources May 1996
Sitel Corp. National Action Financial Services Inc. June 1996
OSI Holdings Corp. Payco American Corp. August 1996
NCO Group, Inc. Management Adjustment Bureau September 1996
NCO Group, Inc. Goodyear and Associates January 1997
NCO Group, Inc. Tele-Research Center, Inc. January 1997
NCO Group, Inc. CMS A/R Services January 1997
NCO Group, Inc. CRW Financial, Inc. February 1997
Southern National Phillips Factors Corp. February 1997
Advanta Partners JDR Holdings Inc. June 1997
NCO Group, Inc. Credit Acceptance Corp. October 1997
NCO Group, Inc. Advantage Financial Services, Inc. October 1997
Outsourcing Solutions, Inc. Union Corp. December 1997
NCO Group, Inc. American Financial Enterprises, Inc. December 1997
NCI Acquisition Corp. Nationwide Credit, Inc. December 1997
NCO Group, Inc. The Response Center February 1998
Envoy Corp. Automated Revenue Management February 1998
NCO Group, Inc. FCA International May 1998
NCO Group, Inc. MedSource, Inc. June 1998
TeleSpectrum Worldwide Inc. CRW Financial Inc. June 1998
Asset Management Outsourcing, Inc. Bonded Credit Company August 1998
Asset Management Outsourcing, Inc. Costal Adjustment Bureau August 1998
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Acquiror Target Date of Announcement
- -------- ------ --------------------
<S> <C> <C>
Intellirisk Management Corp. Allied Interstate Inc. and Credit Systems, Inc. September 1998
Asset Management Outsourcing, Inc. Credit Bureau Services, Inc. October 1998
NCO Group, Inc. Medaphis Services Corp. October 1998
NCO Group, Inc. JDR Holdings, Inc. November 1998
Asset Management Outsourcing, Inc. Nationwide Recovery Service, Inc. February 1999
NCO Group, Inc. Co-Source Corporation April 1999
</TABLE>
Robinson-Humphrey compared, among other things, firm values as a multiple
of 1999 projected revenues, 1999 EBITDA and 1999 EBIT. Based on weighted average
and mean multiples derived from the selected acquisition transactions, these
analyses using base case projections indicated an implied equity value for
Compass of $151.74 million and $159.71 million, respectively. Based on weighted
average and mean multiples derived from the selected acquisition transactions,
these analyses using upside case projections indicated an implied equity value
for Compass of $169.91 million and $183.28 million, respectively. These implied
equity values compare to total consideration to be paid by NCO for all of the
outstanding shares of Compass common stock in the merger of $112.43 million,
determined by multiplying the merger share exchange ratio of 0.23739 by the NCO
common stock closing price on May 12, 1999. All multiples for the selected
acquisition transactions were based on public information available at the time
of announcement of such transaction, without taking into account differing
market and other conditions during the period during which the selected
acquisition transactions occurred. The implied value of Compass, based upon the
analysis of the selected acquisition transactions, compares favorably to the
consideration to be paid by NCO in the merger.
Pro Forma Merger Analysis. Robinson-Humphrey analyzed certain pro forma
effects resulting from the merger, including, among other things, the impact of
the merger on the estimated earnings per share of NCO common stock in fiscal
years 1999, 2000 and 2001 based on base case and upside case projections. The
results of the pro forma merger analysis suggested that the merger could be
accretive to earnings per share of NCO Common Stock without giving effect to any
synergies which may result from the merger. The actual results achieved by the
combined entity may vary from projected results and the variations may be
material.
Other Factors and Comparative Analyses. In rendering its opinion,
Robinson-Humphrey considered certain other factors and conducted certain other
comparative analyses, including, among other things, a review of (i) the
historical and projected financial results of NCO and Compass and (ii) the
history of trading prices and volume of shares of NCO common stock and shares of
Compass common stock and the relationship of movements of such common stock and
movements of the common stock of various other collections companies.
Miscellaneous. The NCO board selected Robinson-Humphrey to render a
fairness opinion because Robinson-Humphrey is a nationally recognized investment
banking firm with substantial experience in transactions similar to the merger
and because it is familiar with NCO and its business. Robinson-Humphrey has from
time to time rendered, and may in the future render, investment banking,
financial advisory and other services to NCO for which it has received, or will
receive, customary compensation. Robinson-Humphrey is continually engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, leveraged buyouts, negotiated underwritings, secondary
distributions of listed and unlisted securities and private placements.
Pursuant to a letter agreement dated February 17, 1999, NCO has agreed to
pay Robinson-Humphrey a transaction fee equal to $600,000, $350,000 of which is
payable upon delivery of the fairness opinion and the remainder of which will be
payable upon consummation of the merger. The fees paid or payable to
Robinson-Humphrey are not contingent upon the contents of the opinion delivered.
In addition, NCO has agreed to reimburse Robinson-Humphrey for its reasonable
out-of-pocket expenses, subject to certain limitations, and to indemnify
Robinson-Humphrey and certain related persons against certain liabilities
arising out of or in conjunction with its rendering of services under its
engagement, including certain liabilities under the federal securities laws.
In the ordinary course of its business, Robinson-Humphrey may actively
trade in the securities of NCO and Compass for its own account and the accounts
of its customers and, accordingly, may at any time hold a
41
<PAGE>
long or short position in such securities. Robinson-Humphrey has in the past
provided other investment banking services to NCO unrelated to the merger, for
which services it has received compensation. Such investment banking services
include serving as a managing underwriter in two follow-on public equity
offerings by NCO on July 1, 1997 and June 2, 1998 and serving as financial
advisor to NCO in its acquisition of Medaphis Services Corporation and its
subsidiary AssetCare, Inc. in the fourth quarter of 1998.
Background of the Merger
A key element of NCO's corporate growth strategy has been the pursuit of
business acquisitions that would complement or expand NCO's existing business
services. Both NCO and Compass provide accounts receivable management services
and other outsourcing services.
During December 1998, members of Compass management held a variety of
discussions with members of Compass' board of directors, other operating company
officers, legal counsel and investment bankers regarding strategic alternatives
for Compass. These alternatives included, among others, continuing to operate
the business as an independent company and a strategic merger. On January 7,
1999, during a telephonic meeting, the Compass board of directors met to review
and discuss the various strategic alternatives for Compass, as well as to review
Compass' current operations, business and prospects. Following extensive
discussion, the board determined that the most appropriate alternative to
explore at that time was a strategic business combination. The Compass board of
directors did not at that time decide to pursue a transaction. Rather, the
Compass board directed management to explore the feasibility of a transaction
that would maximize the value to Compass stockholders. The Compass board also
authorized the retention of a financial advisor to assist in the process. Based
upon the recommendation of management of Compass and following discussion of the
board of directors of Compass, with Mr. Clark abstaining from discussion and
vote because of his position as Vice Chairman of Lehman Brothers, the Compass
board approved the retention of Lehman Brothers as financial advisor.
During January and February of 1999, Compass management and Lehman Brothers
began to identify and contact potential merger partners. Compass assembled an
information package for prospective acquirors, and, through Lehman Brothers,
solicited interest from such potential acquirors. The solicitation materials
advised potential acquirors that while the Compass board was interested in
considering a transaction involving Compass in its entirety, it would also
consider potential transactions involving one or more of Compass' business
units. A total of 47 potential merger partners were contacted. Thirty-seven
companies entered into confidentiality agreements and received an information
package including management projections and other confidential information. Of
these, 12 firms submitted non-binding indications of interest.
In January 1999, a representative of Lehman Brothers contacted Paul E.
Weitzel Jr., Executive Vice President, Corporate Development of NCO, to
determine if NCO had any interest in acquiring Compass. Subsequent to the
telephone conversation, a Lehman Brothers representative and Mr. Weitzel
negotiated a confidentiality agreement, which was signed on January 25, 1999. On
January 29, 1999, Lehman Brothers furnished NCO with an information package,
describing Compass, which was to be used by NCO in the analysis and evaluation
of Compass' business.
In February 1999, Michael J. Barrist, Chairman, President and Chief
Executive Officer of NCO, informed the members of NCO's board of directors of
the preliminary discussions between NCO and Compass. Thereafter, from time to
time, the members of NCO's board of directors were informally advised of the
progress of the discussions with Compass.
On February 17, 1999, NCO forwarded a preliminary proposal to Lehman
Brothers for the purpose of acquiring Compass. Subsequent to the submission of
the preliminary proposal, a Lehman Brothers representative called Mr. Weitzel to
inform him that NCO was being considered as a finalist for Compass and outlined
the next steps of the bid process.
On February 17, 1999, NCO engaged The Robinson-Humphrey Company, LLC as its
financial advisor with respect to the potential acquisition of Compass.
At a meeting of the Compass board of directors on February 22, 1999,
Compass management and Lehman Brothers updated the Compass board on the status
of the process. Compass management advised that,
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of the 12 indications of interest received, five were viewed as the most likely
to result in an acceptable transaction. The Compass board discussed each of the
indications of interest, and directed Compass management to pursue discussions
with the five identified finalists. At the meeting, Compass management and
Lehman Brothers also advised that Compass' print and mail division was a
significant concern raised by a number of the potential strategic partners.
Compass management and Lehman Brothers advised that the print and mail
division's recent financial performance, as well as issues regarding its
customer concentration and integration with the collections division, were
raised by potential acquirors as significant negatives.
Discussions by Compass management with prospective acquirors continued and
due diligence was conducted by the five finalists. On March 3, 1999, the Compass
board of directors replaced one of the five finalists with a new finalist who
submitted a more attractive offer.
On March 3, 1999, Messrs. Barrist and Weitzel of NCO met with Michael
Cunningham, Chairman of Compass, and Mahmud Haq, President and Chief Executive
Officer of Compass, in Chicago to discuss the following:
o possible synergies that could be achieved from a merger between NCO and
Compass; and
o possible benefits that a merger would have for the companies' respective
shareholders, customers and employees.
On March 4, 1999, Messrs. Barrist and Weitzel, of NCO along with Steven
Winokur, Executive Vice President -- Finance and Chief Financial Officer of NCO,
Joshua Gindin, Executive Vice President and General Counsel of NCO, and Cooper
Mills, Managing Director of The Robinson-Humphrey Company, attended a management
meeting and presentation by Compass in Chicago.
On March 18, 1999, NCO submitted a formal proposal to acquire all the
issued and outstanding shares of Compass. On March 22, 1999, based on further
due diligence, NCO revised its offer and resubmitted a formal proposal to
acquire all the issued and outstanding shares of Compass, subject to the sale of
the print and mail division.
At a meeting of the Compass board of directors on March 22, 1999, outside
legal counsel advised the Compass board of the board's fiduciary duties when
considering a sale of Compass. Compass management advised the Compass board
that, following further due diligence and discussions, the most attractive
acquisition proposal received was the proposal by NCO. The material terms of the
NCO proposal were reviewed. In particular, the Compass board discussed the
requirement, in the NCO proposal, that the print and mail division be sold prior
to the consummation of the transaction with NCO. Further, the Compass board was
advised that the consideration to be provided to Compass stockholders in an NCO
transaction would be adjusted based upon the net after-tax proceeds to be
received by Compass from the sale of the print and mail division. Compass
management advised that these provisions were essential to the NCO bid. After
discussion, the Compass board directed management and Lehman Brothers to enter
into exclusive negotiations with NCO for the sale of Compass. Lehman Brothers
then reviewed the status of discussions regarding the sale of the print and mail
division, advising the Compass board that it had received three indications of
interest, each of which were subject to significant due diligence and other
issues. At that time, Mr. Murphy advised that a group led by him, which was
subsequently designated as Swiss-Irish, might be interested in making an
acquisition proposal for the print and mail division. After discussion, the
board noted Mr. Murphy's interest, but directed management and Lehman Brothers
to pursue the three indications of interest received.
On March 29, 1999, a representative of Lehman Brothers called Mr. Weitzel
and informed him that Compass would be entering into exclusive negotiations for
the sale of Compass with NCO. Between March 29, 1999, and May 12, 1999, the
parties negotiated the terms of the merger agreement and related documents and
NCO completed its legal, financial and accounting due diligence review of
Compass.
As negotiations with NCO continued, representatives of NCO reiterated their
requirement that a divestiture of the print and mail division was a condition to
a business combination of NCO with Compass. Representatives of Compass also
continued discussions with the three potential purchasers of the print and mail
division, including interviews with division management, financial and operating
reviews and facility tours.
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At a meeting of the Compass board of directors held on April 16, 1999,
management provided an update on discussions with NCO. The Compass board was
advised that several major issues were not yet agreed to, including the effect
on the transaction of indemnity or similar obligations assumed by Compass in a
print and mail division transaction. Lehman Brothers also reviewed the
indications of interest received by the potential purchasers of the print and
mail division, including the indicated purchase price ranges, material
conditions, and financial capability of each party. Following discussions, the
Compass board authorized management to pursue discussions with the two potential
purchasers of the print and mail division whose indications of interest were
determined to be the most attractive.
Compass management continued discussions with representatives of NCO, who
reiterated NCO's requirement that the print and mail transaction not impose
material indemnity and related obligations on Compass. In addition, NCO insisted
that a condition to signing a definitive combination agreement was Compass'
execution of a definitive agreement for the sale of the print and mail division.
Representatives of Compass also conducted further negotiations with the
potential purchasers of the print and mail division. In addition, members of
management discussed generally with Mr. Murphy the terms (including price) and
conditions under which a group led by him might agree to purchase the print and
mail division.
On April 28, 1999, Messrs. Barrist, Weitzel, and Gindin of NCO and its
outside legal counsel met with Messrs. Cunningham and Haq and Ms. Julie
Schechter, General Counsel of Compass, and its outside legal counsel to discuss
and negotiate the terms of the merger agreement. Among other things, the parties
agreed that the merger share exchange ratio would be fixed based on estimated
after tax proceeds from the sale of the print and mail division.
At a telephonic meeting of the Compass board of directors held on May 3,
1999 (in which Mr. Murphy did not participate), Compass management and Lehman
Brothers advised that, despite their efforts, both proposals for the print and
mail division remained subject to substantial additional due diligence and other
conditions. Compass management and Lehman Brothers indicated that it was
unlikely that either party would be in a position to consummate a transaction
within the time frame anticipated by the discussions with NCO. In addition, they
advised that both parties would require indemnity obligations and other
obligations to be retained by Compass, and that they could require that a
portion of the proceeds from the sale be retained or held in escrow to secure
these obligations. Compass management and Lehman Brothers also indicated that,
because of the recent financial performance of the print and mail division,
there could be no assurance that negotiations with either potential purchaser
would ever result in a definitive agreement at the price reflected in its
indication of interest. Compass management then discussed with the Compass board
the terms of the transaction that Mr. Murphy indicated his group was prepared to
propose. These included a purchase price of approximately $35.1 million, limited
representations, warranties and covenants required by Compass, no post-closing
indemnification obligations, and no due diligence or financing conditions.
Following this presentation, the Compass board extensively discussed all of
the options available to Compass. The Compass board concluded that a business
combination with NCO, generally along the lines that had been negotiated,
represented the best available strategic alternative for Compass at the present
time. The Compass board further concluded, based upon input from management and
Lehman Brothers, that the likelihood of concluding an acceptable sale of the
print and mail division with the parties who had submitted initial indications
of interest was low and that the uncertainty of whether a transaction could be
concluded with any of these parties could jeopardize a strategic merger with
NCO. In addition, the Compass board concluded that the Swiss-Irish proposal was
at least equivalent to the other potential transactions involving the print and
mail division, considering the uncertainties inherent in these transactions.
Although two of the other proposals received for the print and mail division
were at a slightly higher gross purchase price than the Swiss-Irish proposal,
the Compass board believed the structures proposed by these offers would have
yielded a lower net price. In addition, these other offers were subject to: (1)
significant additional due diligence; (2) significant contingencies; (3) escrows
and/or holdbacks; and (4) significant representations and warranties by Compass.
The Compass board further determined that it was unclear whether or not the
other proposals would actually close. For these reasons, the Compass board
authorized Compass management to pursue negotiations with Swiss-Irish and seek a
definitive agreement as promptly as practicable. The Compass board further
directed Compass management to seek a definitive agreement with NCO based upon
Swiss-Irish's proposal to purchase the print and mail division.
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From May 4 through May 11, 1999, representatives of Compass met with
representatives of both NCO and Swiss-Irish to negotiate the terms of the
definitive NCO merger agreement and the print and mail sale agreement. The print
and mail sale agreement was reviewed and found acceptable to NCO's
representatives, and the NCO merger agreement was approved by Swiss-Irish
representatives.
On May 10, 1999, the NCO board of directors held a meeting to consider,
among other matters, the proposal to enter a merger transaction with Compass. At
the meeting, representatives of The Robinson-Humphrey Company made a
presentation concerning their proposed fairness opinion to the NCO board. At the
conclusion of that meeting, the NCO board of directors approved the proposed
transaction subject to the following:
o sale of the print and mail division for cash prior to the completion of
the merger;
o completion of final due diligence;
o the successful negotiation of a definitive agreement; and
o receipt of a fairness opinion from The Robinson-Humphrey Company.
On May 12, 1999, the Compass board of directors met to consider both the
NCO merger agreement and the print and mail sale agreement. At this time,
outside legal counsel again reviewed with the Compass board the fiduciary duties
of the board when considering a sale of Compass. The Compass board reviewed in
detail the process of evaluating strategic alternatives that had commenced in
December 1998. The Compass board also reviewed Compass' recent financial
performance and projections, as well as operating issues facing Compass in the
near future. The Compass board also considered the prospects for Compass as an
independent entity under these circumstances. Lehman Brothers reviewed the terms
of the merger agreement, as well as financial and other background information
on NCO, with the Compass board. Following this presentation, Lehman Brothers
rendered its opinion that the merger share exchange ratio payable to Compass'
stockholders was fair to such stockholders from a financial point of view.
Compass management and counsel for Compass reviewed the terms and conditions of
the merger agreement, including certain matters that remained to be negotiated.
Compass management and counsel also reviewed the terms and conditions of the
print and mail sale agreement, which had been substantially negotiated.
Following these presentations, the Compass board reviewed the proposed
transactions with management, counsel and Lehman Brothers. After such
deliberations, the Compass board resolved to:
o approve the print and mail sale agreement, with Mr. Murphy abstaining;
o approve the merger agreement; and
o recommend that the Compass stockholders approve the merger agreement and
the print and mail sale agreement.
On May 12, 1999, Messrs. Barrist, Weitzel, Winokur and Gindin met with
Messrs. Cunningham, Haq, and Richard Noble, the acting Chief Financial Officer
of Compass, and Ms. Schechter to discuss and agree upon the final terms of the
merger agreement, including the final merger share exchange ratio.
On May 12, 1999, the NCO board of directors held a special meeting to
review the terms of the proposed merger and the merger agreements. At this
meeting, Robinson-Humphrey gave its opinion to the NCO board that the
consideration to be paid by NCO in the merger was fair from a financial point of
view to NCO. After a review and discussions of the terms in the merger
agreement, and discussions regarding the financial and other effects that the
proposed merger would have on NCO shareholders, employees and customers, the NCO
board of directors unanimously approved the merger and authorized the officers
of NCO to finalize and execute the merger agreement.
Following the meetings of the Compass and NCO boards of directors and for
the remainder of May 12, representatives of Compass negotiated the final terms
of both agreements with representatives of NCO and Swiss-Irish. In addition,
representatives of Compass obtained executed voting agreements from directors,
officers and principal stockholders of Compass. The definitive merger agreement
was executed on behalf of NCO and Compass on May 12, 1999 and delivered on May
13, 1999. On the morning of May 13, the parties issued a press release
announcing the transactions.
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From May 4 through May 11, 1999, representatives of Compass met with
representatives of both NCO and Swiss-Irish to negotiate the terms of the
definitive NCO merger agreement and the print and mail sale agreement. The
print and mail sale agreement was reviewed and found acceptable to NCO's
representatives, and the NCO merger agreement was approved by Swiss-Irish
representatives.
On May 10, 1999, the NCO board of directors held a meeting to consider,
among other matters, the proposal to enter a merger transaction with Compass.
At the meeting, representatives of The Robinson-Humphrey Company made a
presentation concerning their proposed fairness opinion to the NCO board. At
the conclusion of that meeting, the NCO board of directors approved the
proposed transaction subject to the following:
o sale of the print and mail division for cash prior to the completion of
the merger;
o completion of final due diligence;
o the successful negotiation of a definitive agreement; and
o receipt of a fairness opinion from The Robinson-Humphrey Company.
On May 12, 1999, the Compass board of directors met to consider both the
NCO merger agreement and the print and mail sale agreement. At this time,
outside legal counsel again reviewed with the Compass board the fiduciary
duties of the board when considering a sale of Compass. The Compass board
reviewed in detail the process of evaluating strategic alternatives that had
commenced in December 1998. The Compass board also reviewed Compass' recent
financial performance and projections, as well as operating issues facing
Compass in the near future. The Compass board also considered the prospects for
Compass as an independent entity under these circumstances. Lehman Brothers
reviewed the terms of the merger agreement, as well as financial and other
background information on NCO, with the Compass board. Following this
presentation, Lehman Brothers rendered its opinion that the merger share
exchange ratio payable to Compass' stockholders was fair to such stockholders
from a financial point of view. Compass management and counsel for Compass
reviewed the terms and conditions of the merger agreement, including certain
matters that remained to be negotiated. Compass management and counsel also
reviewed the terms and conditions of the print and mail sale agreement, which
had been substantially negotiated. Following these presentations, the Compass
board reviewed the proposed transactions with management, counsel and Lehman
Brothers. After such deliberations, the Compass board resolved to:
o approve the print and mail sale agreement, with Mr. Murphy abstaining;
o approve the merger agreement; and
o recommend that the Compass stockholders approve the merger agreement and
the print and mail sale agreement.
On May 12, 1999, Messrs. Barrist, Weitzel, Winokur and Gindin met with
Messrs. Cunningham, Haq, and Richard Noble, the acting Chief Financial Officer
of Compass, and Ms. Schechter to discuss and agree upon the final terms of the
merger agreement, including the final merger share exchange ratio.
On May 12, 1999, the NCO board of directors held a special meeting to
review the terms of the proposed merger and the merger agreements. At this
meeting, Robinson-Humphrey gave its opinion to the NCO board that the
consideration to be paid by NCO in the merger was fair from a financial point
of view to NCO. After a review and discussions of the terms in the merger
agreement, and discussions regarding the financial and other effects that the
proposed merger would have on NCO shareholders, employees and customers, the
NCO board of directors unanimously approved the merger and authorized the
officers of NCO to finalize and execute the merger agreement.
Following the meetings of the Compass and NCO boards of directors and for
the remainder of May 12, representatives of Compass negotiated the final terms
of both agreements with representatives of NCO and Swiss-Irish. In addition,
representatives of Compass obtained executed voting agreements from directors,
officers and principal stockholders of Compass. The definitive merger agreement
was executed on behalf of NCO and Compass on May 12, 1999 and delivered on May
13, 1999. On the morning of May 13, the parties issued a press release
announcing the transactions.
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During July 1999, the parties had various discussions concerning Compass'
preliminary April and May operating results. As a result of these discussions,
on July 16, 1999, the voting agreements were amended to provide that the
stockholders who were party to these agreements would contribute to Compass
shares of Compass common stock with an aggregate value of $5.0 million
immediately prior to the completion of the merger. The value of the Compass
shares will be calculated by multiplying the exchange ratio by the average
closing prices of NCO common stock during the five trading days ending on the
trading day immediately prior to the completion of the merger. The effect of
this contribution will be to reduce the number of shares which would otherwise
be issued by NCO in the merger by approximately 128,000 shares, assuming that
the average closing price of NCO common stock during the five day measurement
period is $39.00 per share. In addition, Compass and NCO entered into a letter
agreement which provides that:
o as a condition to NCO's obligation under the merger agreement, Compass must
have received and cancelled Compass common stock with a value of $5.0
million from the Compass stockholders who are parties to the voting
agreements;
o Compass' preliminary operating results for April and May 1999 previously
disclosed to NCO will not be deemed to be a material adverse change under
the merger agreement and additional results will be adjusted by agreed
upon pro forma charges and expense reductions in determining whether a
material adverse change has occurred;
o Compass will cooperate with accountants to be designated by NCO to
perform analyses of selected financial information relating to Compass'
operating results in the second quarter of 1999.
A copy of this letter agreement is attached as Annex D.
NCO's Reasons for the Merger
The NCO board of directors has unanimously determined that the terms of
the merger agreement and the merger are fair to, and in the best interests of,
NCO and its shareholders. In reaching its determination, the NCO board of
directors consulted with NCO's management, as well its legal counsel,
accountants and financial advisors and gave significant consideration to a
number of factors bearing on its decision. The following are the reasons the
NCO board of directors believes the merger will be beneficial to NCO and its
shareholders:
o NCO seeks to grow both internally and through acquisition of
complementary businesses. Compass, which provides customers with accounts
receivable management and other outsourced services, will complement and
broaden NCO's existing service offerings.
o NCO is a leading provider of accounts receivable management and other
outsourced services and believes that Compass' services will enhance NCO's
ability to service its various industry sectors. The demand for
outsourcing services has grown significantly over the past several years.
NCO believes that Compass' services should position NCO to take advantage
of this trend and reinforce NCO's position as a leading provider of
accounts receivable management and other outsourced services.
o Compass' business strategy is consistent with NCO's goal to provide
clients with access to a continuum of value-added accounts receivable
outsourcing services.
o NCO believes that there is a significant potential enhancement of the
strategic and market position of the combined entity beyond that
achievable by NCO alone.
In addition to the reasons stated above, in the course of its
deliberations concerning the merger, the NCO board of directors consulted with
NCO's management, legal counsel, accountants and financial advisors and
reviewed a number of other factors relevant to the merger, including:
o Information concerning the business, assets, operations, management,
financial condition, operating results, competitive position and prospects
of NCO and Compass;
o The expected tax and accounting treatment of the merger; and
o Reports on specific terms of the merger agreement.
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The NCO board of directors also considered a number of potentially
negative factors in its deliberations concerning the merger, including:
o The possibility of management disruption associated with the merger and
the risk that key technical and management personnel of NCO or Compass
might not continue with NCO or Compass;
o The possibility that the merger might adversely affect NCO's or Compass'
relationship with their respective customers; and
o The risk that the potential benefits of the merger might not be
realized.
The NCO board of directors concluded, however, that the benefits of the
transaction to NCO and its shareholders outweighed the risk associated with
these negative factors.
Compass' Reasons for the Merger; Recommendations of the Compass Board
At its meeting of May 12, 1999, the Compass board unanimously (other than
Mr. Murphy, who did not participate): (1) determined that the merger is
advisable and fair and in the best interests of Compass and the Compass
stockholders; (2) directed that the proposed transaction be submitted for
consideration by the Compass stockholders; and (3) recommended that the Compass
stockholders approve and adopt the merger agreement and the merger.
In the process of reaching its decisions, the Compass board consulted with
Compass management, outside legal counsel and its financial advisors, and
conducted its own independent deliberations. The Compass board considered the
following material factors in reaching its decisions:
o the fact that combining with NCO will allow Compass to expand its core
accounts receivable management business through the combined companies'
greater scale and scope of services, expanded client base and improved
market presence;
o the complementary nature of the companies' service offerings and the
potential synergies from combining the two businesses;
o the fact that, based upon the trading price of the NCO common stock at
the time of its decisions, the merger consideration represents a premium
over the market price of Compass stock generally prevailing prior to the
announcement of the merger agreement and that this price did not reflect
Compass' announcement of financial results for the first quarter of 1999
that were below analysts' expectations and represented a decline from pro
forma results for the first quarter of 1998;
o the ability of Compass to terminate the merger agreement if the average
reported trading price for NCO common stock is below an average of $27.50
during the five trading days ending on the trading day before the special
meeting of Compass stockholders;
o the expected qualification of the NCO merger as a reorganization for
Federal income tax purposes;
o the fact that the NCO common stock to be received by Compass stockholders
has historically enjoyed greater liquidity than Compass common stock and
NCO is the subject of greater published investment research and analysis
than Compass;
o the terms and conditions of the merger agreement, including the
representations and warranties, pre-closing covenants, closing conditions
and termination fees, all of which were determined by the Compass board to
be reasonable;
o the requirement that, as a condition to closing of the merger agreement,
the print and mail sale agreement be consummated, along with the terms and
conditions of the print and mail sale agreement and the determination of
the Compass board (other than Mr. Murphy), that the terms of the print and
mail sale agreement are fair and reasonable to Compass and its
stockholders;
o the likelihood of consummation of the print and mail division sale,
including the absence of any financing condition and the existence of a
substantial escrow to guarantee performance by Swiss-Irish;
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o the risks and potential rewards associated with, as an alternative to the
merger, Compass remaining an independent company and continuing to pursue
its operating and acquisition strategies; in particular, the risks related
to the ability of Compass to effect acquisitions and generate internal
growth in light of the recent trading prices of Compass common stock and
the limited availability of financing under its credit agreement;
o the low possibility of superior strategic alternatives to the merger, in
light of the extensive explorations conducted by Lehman Brothers on behalf
of Compass;
o the fact that the interests in the transactions of Mr. Murphy and other
print and mail division officers who are members of Swiss-Irish may differ
from the interests of Compass stockholders generally as a result of their
roles in the print and mail division sale;
o the fact that the interests in the transactions of executive officers and
directors of Compass may differ from the interests of Compass stockholders
generally as a result of their employment relationships and potential
severance benefits which would be triggered by the merger;
o current industry, market and economic conditions;
o analyses of the valuations of Compass and NCO and of the pro forma
financial results of the combined entity, in comparison with similar
companies and with similar transactions;
o the analyses and presentations prepared by Lehman Brothers and Lehman
Brothers' written opinion to the effect that, as of May 12, 1999, and
subject to various considerations, the merger share exchange ratio to be
offered to the Compass stockholders in the merger is fair, from a
financial point of view, to such stockholders.
In view of the number and variety of factors considered in connection with
its evaluation of the merger agreement and the merger, the Compass board did
not find it practicable to, and did not, quantify or otherwise assign relative
weight to the factors considered in reaching its determination. In addition,
individual members of the Compass board may have assigned different weight to
different factors.
Interests of Compass' Management and Stockholders in the Merger
In considering the recommendation of the Compass board of directors with
respect to the proposed merger, Compass stockholders should note that the
stockholders, officers, directors and/or affiliates of Compass noted below have
interests in the merger that are different from or in addition to the interests
of Compass stockholders generally. The board of directors of Compass was aware
of these interests and took these interests into account in approving the
proposed merger and the transactions contemplated by the merger agreement.
Compass Stock Ownership. Compass' executive officers and directors
beneficially own approximately 24.6% of the Compass voting common stock prior
to the contribution of shares to Compass under the voting agreements. See
"Principal Stockholders of Compass."
Compass Stock Options. Upon completion of the merger, holders of Compass
options will be entitled to receive NCO stock options and, upon the exercise of
their NCO stock options, a number of shares of NCO common stock determined as
described under "The Merger -- Material Terms of the Merger Agreement --
Treatment of Compass Stock Options."
Relationship with Lehman Brothers. Lehman Brothers is acting as financial
advisor to Compass in connection with the transaction. Howard Clark, a
Vice-Chairman of Lehman Brothers, is a member of the Compass board of
directors. As compensation for its services as financial advisor in connection
with the transaction, Compass has agreed to pay Lehman Brothers a retainer of
$150,000, a fee of $500,000 in connection with the delivery of its fairness
opinion and a fee upon completion of the transaction equal to 1% of the
transaction value, against which the retainer and opinion fee would be
credited. Furthermore, the Compass board of directors may pay Lehman Brothers a
discretionary bonus of up to $500,000. In addition,
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Compass has agreed to reimburse Lehman Brothers for reasonable out-of-pocket
expenses incurred in connection with the transaction and to indemnify Lehman
Brothers for certain liabilities that may arise out of its engagement by
Compass and the rendering of its opinion.
Severance Payments. Compass has entered into employment agreements with
Messrs. Cunningham, Haq and Noble and Ms. Schechter which provide for severance
payments upon the completion of the merger. For a period of three years
following the merger, each of Messrs. Cunningham and Haq will receive an annual
salary of $225,000 and an annual bonus of $225,000 plus an annual prorated 1999
bonus to be determined by the Compass compensation committee. For a period of
one year following the merger, Ms. Schechter will receive an annual salary of
$200,000 plus a prorated annual 1999 bonus. For a period of one year following
the termination of his employment, Mr. Noble will receive an annual salary in
the amount of $150,000.
Sale of Print and Mail Division. On May 12, 1999, Compass entered into a
sale agreement with Swiss-Irish Enterprises, Inc. to sell its print and mail
division for $35.1 million in cash. The sale of the print and mail division to
Swiss-Irish is conditioned upon the completion of the merger and is subject to
other customary closing conditions. The sale of the print and mail division to
Swiss-Irish is not conditioned upon Swiss-Irish obtaining any financing.
Affiliates of Swiss-Irish have deposited into escrow $2.0 million and
1,849,863 shares of Compass common stock to secure the obligations of
Swiss-Irish. This $2.0 million and 1,849,863 shares of Compass common stock are
being held by Harris Trust and Saving Bank, as escrow agent. Compass and
Swiss-Irish have agreed that the $2.0 million (including any interest earned
thereon) and shares shall be immediately released and paid to Compass as
liquidated damages in the event that the sale agreement is terminated prior to
the closing solely as a result of a breach or default by Swiss-Irish. Compass
and Swiss-Irish have also agreed that the $2.0 million in cash (including any
interest earned thereon) and shares shall be immediately released to the
affiliates of Swiss-Irish if the sale agreement is terminated prior to the
closing for any other reason. Each of Compass and Swiss-Irish must execute and
deliver to the escrow agent joint written instructions in connection with any
release from escrow of the cash or shares.
Swiss-Irish is a Texas corporation controlled by Mr. Kenneth W. Murphy, a
member of the board Compass and the head of the print and mail division of
Compass.
Indemnification; Insurance. The merger agreement provides that for a
period of six years after the effective time of the merger, NCO will indemnify,
defend and hold harmless the present and former officers, directors, employees
and agents of Compass and its subsidiaries (other than of the print and mail
division) from all losses, to the full extent permitted or required under
applicable law as of the effective time of the merger or the governing
documents of Compass as of the date of the merger agreement. In addition, NCO
agreed to maintain for not less than six years from the effective time of the
merger the directors' and officers' liability insurance policies currently
maintained by Compass. The right to indemnification and insurance described
above is subject to exceptions.
Voting Agreements
In connection with the merger, Compass stockholders who own 6,067,931
shares of Compass common stock constituting approximately 42% of the Compass
common stock outstanding on the record date have entered into voting agreements
with NCO in which these stockholders have agreed to vote their Compass shares
in favor of the merger.
Each Compass stockholder who executed a voting agreement also delivered to
NCO an irrevocable proxy to vote their shares in favor of the merger. In
addition, each Compass stockholder who executed the voting agreement with
respect to shares owned beneficially, but not of record, agreed to use their
reasonable best efforts to cause the record owner of the shares they
beneficially owned to execute and deliver to NCO an irrevocable proxy to vote
their shares in favor of the merger.
In addition, these stockholders have agreed to contribute to Compass
shares of Compass common stock with an aggregate value of $5.0 million
immediately prior to the completion of the merger. The effect of this
contribution will be to reduce the number of shares which would otherwise be
issued by NCO in the merger.
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Ownership of NCO Following the Merger
As a result of the merger, the holders of Compass common stock will become
shareholders of NCO. Upon completion of the merger, each outstanding share of
Compass stock will be converted into the right to receive NCO common stock. NCO
will cause the shares of NCO common stock to be issued in the merger to be
listed on the Nasdaq National Market. See "-- Nasdaq Listing."
We anticipate that NCO will issue approximately 3.3 million shares of NCO
common stock to Compass stockholders. We also anticipate that NCO will issue up
to approximately 215,000 additional shares of NCO common stock upon the
exercise of options to purchase Compass common stock to be assumed by NCO.
Based upon the number of shares of NCO common stock issued and outstanding on
the NCO record date and the number of shares of NCO common stock anticipated to
be issued in the merger, the shares of NCO common stock issued to Compass
stockholders in the merger will constitute approximately 13.3% of the
outstanding common stock of NCO after the merger. As previously noted, holders
of Compass options will receive options to purchase up to approximately 215,000
additional shares of NCO common stock. Assuming the exercise of all of these
NCO stock options after the merger, Compass stockholders will own approximately
14.0% of the common stock of NCO.
Management of NCO Upon Completion of the Merger
When the merger is complete, NCO will continue to be managed by its
current directors and officers.
Regulatory Approvals
Other than filings which have been made under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, there are no federal or state regulatory
requirements that must be complied with in connection with the merger.
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the
rules promulgated under that Act by the Federal Trade Commission, the merger
may not be consummated until:
o the required notifications have been given and information has been
furnished to the Antitrust Division of the Department of Justice and the
Federal Trade Commission; and
o specified waiting period requirements have been satisfied or early
termination of the waiting period is granted.
NCO and Compass filed notification and report forms under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 with the Antitrust
Division of the Department of Justice and with the Federal Trade Commission and
the waiting period has ended. However, the Antitrust Division of the Department
of Justice and the Federal Trade Commission continue to have the authority to
challenge the merger on antitrust grounds before or after the merger is
completed.
Resale of NCO Common Stock
The NCO common stock issued in connection with the merger will be freely
transferable, except that shares issued to any Compass stockholder who is an
affiliate of Compass or who becomes an affiliate of NCO are subject to
restrictions on resale under Rule 145 adopted by the SEC.
No Dissenters' Rights for Compass Stockholders
Under Delaware law, holders of Compass common stock are not entitled to
dissenters' rights in connection with the merger.
Material Federal Income Tax Consequences
The following is a summary description of the material United States
federal income tax consequences of the merger to Compass and the Compass
stockholders who receive NCO common stock in the merger. This summary does not
address tax considerations which may affect the treatment of special status
taxpayers such
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as financial institutions, broker-dealers, life insurance companies, tax-exempt
organizations, investment companies and foreign taxpayers or of Compass
stockholders who do not hold their Compass stock as a capital asset at the date
the merger is completed. In addition, no information is provided in this
summary with respect to the tax consequences of the merger either under
applicable foreign, state or local laws or to persons who acquired Compass
common stock under employee stock options or otherwise as compensation.
The following discussion is based on the Internal Revenue Code of 1986, as
in effect on the date of this proxy statement/prospectus, without consideration
of the particular facts or circumstances of any particular holder of Compass
stock. Compass and NCO have not sought and will not seek any rulings from the
Internal Revenue Service, with respect to any of the matters discussed in this
summary. It is a condition to the closing that the respective counsel of each
of Compass and NCO render an opinion that the merger will qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986. Accordingly, the anticipated material federal income tax
consequences of the merger are as follows:
o the merger will constitute a reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986;
o no gain or loss will be recognized by NCO upon the exchange of Compass
common stock for NCO common stock;
o no gain or loss will be recognized by Compass stockholders upon the
exchange of their Compass common stock solely for NCO common stock;
o the tax basis of NCO common stock received by Compass stockholders in the
merger will be the same as the tax basis of their Compass common stock
surrendered in exchange therefor; and
o the holding period of NCO common stock received by Compass stockholders
in the merger will include the period during which the Compass common
stock surrendered in exchange therefor was held, provided that the Compass
common stock is held as a capital asset at the date the merger is
completed.
Potential Tax Consequences of Settlement of Class Action Litigation and the
Voting Agreements
Under the terms of the memorandum of understanding of July 19, 1999 to
settle the class action litigation and the voting agreements, the following
actions will occur:
o Compass stockholders who are parties to the voting agreements have agreed
to contribute to Compass shares of Compass common stock with an aggregate
value of $5.0 million immediately before the merger.
o In the event that the average closing price of NCO common stock during
the five trading days ending one day before the Compass stockholder
meeting to approve the merger is less than $29.50 per share, NCO will pay
an additional 43,684 shares of NCO common stock, to be distributed pro
rata to holders of shares of Compass common stock, other than with respect
to shares beneficially owned by the individual defendants.
Under these terms, those stockholders who are not a party to the voting
agreements and who are not defendants in the class action litigation, referred
to as the public stockholders, could be deemed by the IRS to have received more
than their pro rata share of the NCO common stock issued in the merger, based
upon the total amount of Compass stock outstanding prior to the time these
actions occur. In this case, the IRS could take the position that the
additional consideration is taxable to the public stockholders as ordinary
income. Compass believes that such an assertion would be incorrect and that the
better view is that all of the NCO common stock received in the merger should
be received tax-free. However, there can be no assurance that the IRS would not
be successful in their contention. In any event, assuming that the average NCO
closing price is $27.50 per share, the total additional consideration
potentially subject to being taxable as ordinary income should not exceed seven
percent of the total NCO common stock received by each public stockholder in
the merger.
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The foregoing is a general discussion of the material federal income tax
consequences of the merger for Compass and Compass stockholders and is included
for general information only. The foregoing discussion does not take into
account the particular facts and circumstances of each Compass stockholder's
tax status and attributes. Accordingly, each Compass stockholder should consult
his or her own tax advisor regarding the specific tax consequences of the
merger, including the application and effect of federal, state, local and other
tax laws and the possible effects of changes in these tax laws.
Accounting Treatment
For accounting and financial reporting purposes, NCO and Compass will
account for the merger using the purchase method of accounting which means that
the companies will be treated as if the combination occurs on the closing date.
Following the completion of the merger, NCO will include the fair value of the
assets and liabilities of Compass in NCO's consolidated balance sheet and will
include income of Compass after the closing date in NCO's consolidated
statement of income. See "Pro Forma Consolidated Financial Statements."
Nasdaq Listing
NCO will cause the shares of NCO common stock to be issued in connection
with the merger to be listed for trading on the Nasdaq National Market under
the symbol "NCOG."
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Information Concerning Compass
Business
Company Overview
Compass International Services Corporation is a leading provider of
accounts receivable management services and other complementary outsourced
services. Compass' accounts receivable management division provides a suite of
accounts receivable management solutions to clients, including traditional
third-party collection services, pre-collection customer contact programs,
innovative payment options, credit report-related services, an attorney network
for severely delinquent accounts, and bankruptcy and probate collection
strategies. Compass' print and mail division offers printing, mailing and
related services which complement the accounts receivable management services,
including expertise and efficiency in direct mail and billing, presorting,
freight and drop shipping, data processing, laser printing, mailing list rental
and order fulfillment. Compass' teleservices division provides state-of-the-art
call management and reporting.
Compass' clients operate in a broad range of industries, including
telecommunications, financial services, insurance, healthcare, education,
government and utilities. Compass serves its clients from fifteen call centers
across the country and four mail processing centers.
Compass completed its initial public offering and commenced operations in
March 1998 when it acquired five founding companies, three of which provide
accounts receivable management services, and two of which provide complementary
outsourced services, including mailing services and inbound and outbound
teleservices. Nine subsequent acquisitions have strengthened the depth and
breadth of Compass' service offerings. See "Acquisition History" below.
Compass was incorporated in Delaware in 1997. Its principal offices are
located at One Penn Plaza, Suite 4430, New York, NY 10119, and its telephone
number is (212) 967-7770.
Acquisition History
Compass commenced operations on March 4, 1998 when it acquired five
founding companies. Compass has subsequently completed nine additional strategic
acquisitions which have added to its client base and geographic presence,
increased its presence in key client industries and expanded the depth and
breadth of its service offerings. The following chart summarizes Compass'
acquisition history:
Acquisition Date Company/Summary Description
- ------------------ ------------------------------------------
March 4, 1998 The Mail Box, Inc.
Mailing services
March 4, 1998 National Credit Management Corporation Accounts
receivable management services, telephonic check drafting
services
March 4, 1998 B.R.M.C. of Delaware, Inc.
Accounts receivable management services
March 4, 1998 Mid-Continent Agencies, Inc.
Accounts receivable management services
March 4, 1998 Impact Telemarketing Group, Inc.
Telemarketing services
April 8, 1998 Bender Direct Mail Service, Inc.
Mailing services
May 1, 1998 Delivery Verification Service, Inc.
Letter-based collection services
May 1, 1998 Maher & Associates Mailing Services, Inc.
Mailing services
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May 21, 1998 MetroWebb
Direct mail printing and mailing services
May 21, 1998 MWI Laser Group, Inc.
Direct mail printing and mailing services
June 16, 1998 Nationwide Debt Recovery, Ltd.
Accounts receivable management services
June 23, 1998 Midwest Collection Service, Inc.
Accounts receivable management services
July 28, 1998 R.C. Wilson Company
Accounts receivable management services
August 13, 1998 Rosenfeld Attorney Network
Legal, bankruptcy and probate collection services
September 30, 1998 Professional American Collections, Inc.
Mortgage credit reporting and collection services
Compass' Services
Compass provides a full suite of accounts receivable management services as
well as other complementary outsourced services. The following is a brief
description of the services that Compass provides:
Accounts Receivable Management Services
Compass' accounts receivable management service operations, which are
provided from fifteen call centers across the United States, include full
service credit and receivables solutions for consumer and commercial account
portfolios across every stage of collection. Accounts receivable management
services revenues are earned primarily on a contingency fee basis and, to a
lesser extent, on a fixed fee per account basis.
More specifically, accounts receivable management services include the
following:
o Contingency Collections--Compass provides collection services, for a
contingency fee, for delinquent consumer and commercial accounts on a
"primary" basis, which is first placement with an outside collection
agency--usually at 90 to 360 days past due, on a "secondary" basis, which
is placed with a second agency, generally between 12 and 18 months past
due, and a "tertiary" basis, which is placed with more than two previous
agencies, generally more than 18 months past due.
o "Early Out" Programs--Compass provides accounts receivable servicing and
recovery services for early stage receivables, generally 90 days or less
past due, sometimes on a "first-party" outsourced basis. Fees billed are
on a per account, contingency or blended basis.
o Legal Network Management Services--Compass provides litigation
management, bankruptcy and probate collection services through its legal
network division in Washington, D.C. This division maintains
relationships with attorneys throughout the U.S. and provides case
assignment, management, tracking, follow-up and reporting services to
clients with accounts warranting litigation.
o Credit Reporting Related Services--Compass provides credit report access
and verification services, primarily to mortgage lenders.
o Innovative Payment Options--Compass offers clients the opportunity to
provide check-by-phone services to their customers. This
capability--which facilitates a checking account draft upon the
customer's providing bank account information--is a valuable payment and
collection tool in on-line and telephone environments.
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Teleservices
Compass' Teleservices division uses state-of-the-art call management and
predictive dialing technology to make approximately 65,000 hours per month of
calls on behalf of clients. More specifically, this division provides the
following services:
o Outbound Calling Programs--Compass provides outbound telemarketing
services on behalf of many clients, receiving and updating customer data
files and then calling the customers on the list to offer goods and
services. Scripts are developed and agreed upon in advance by Compass and
its client. Calling is controlled by sophisticated call management
systems using a predictive dialer into which the target telephone numbers
are loaded. Information regarding sales and other aspects of the program
is captured, processed and verified systematically and provided to
clients in customized report formats. Compass charges its outbound
teleservices clients on a commission basis, an hourly rate or a
combination of both.
o Inbound Calling Programs--Compass receives and processes inbound calls,
primarily involving catalog sales, customer service, lead generation,
order fulfillment or product information. Some inbound programs assist
clients in responding to customer inquiries, offering technical and
product support services and assessing customer satisfaction. Inbound
services are normally billed by the hour or minute.
Printing and Mailing Services
Compass provides direct mailing and billing services, mail presorting,
freight and drop shipping, data processing, laser printing, mailing list rental
and other services relating to mail handling. Using Compass' inserting machines
and related mail-handling systems, Compass' print and mail division processed
approximately one billion pieces of mail during 1998. Compass has agreed to sell
its print and mail division. See "Sale of Print and Mail Division" on page 49.
Printing and mailing services include the following:
o Mailing Services. Compass provides high speed inserting, pre-sorting,
which is combining volumes of like mail and sorting and bar coding it to
United States Postal Service specifications, address cleansing, freight
and drop shipping which generate significant postal discounts for
customers.
o List Processing. Compass obtains and manages mailing lists for clients
and provides personalization services in connection with printing and
mailing projects.
o Data Processing and Printing Services. Compass converts data sent by
clients and processes it to produce letters or bills. It also offers
state-of-the-art predictive modeling and analysis for market segmentation
to enhance response rates for direct marketing campaigns.
o Fulfillment Services. Compass provides order fulfillment services whereby
it stores client inventory, receives and compiles orders and mails the
item or information package ordered. Compass is expanding this service
into Internet commerce and is starting to manage order-taking web sites
for clients.
Client Relationships
Compass provides its services to clients in a broad range of sectors
including telecommunications, financial services, insurance, healthcare,
education, government and utilities. VarTec Telecom, Inc., a client of Compass'
print and mail division, accounted for approximately 19% of Compass' 1998
consolidated net revenues. Other than VarTec, no client accounted for more than
10% of Compass' revenues in 1998.
Compass enters into contracts with most of its clients which define, among
other things, fee arrangements, scope of services and termination provisions.
Clients may usually terminate such contracts on short notice.
Competition
The markets in which Compass competes are highly competitive and Compass
expects competition to persist and intensify in the future. As a result, Compass
faces aggressive price competition in most of its
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businesses and expects price competition to continue. Compass' competitors
include small firms offering specific applications, divisions of large entities,
large independent firms and, most significantly, the in-house operations of
clients or potential clients. Some of Compass' competitors have substantially
greater financial, marketing and other resources, offer more diversified
services and operate in broader geographic areas than Compass. There can be no
assurance that additional competitors with greater resources than Compass will
not enter Compass' market. All of the services offered by Compass may be
performed in-house. Many larger clients retain multiple accounts receivable
management providers which exposes Compass to continuous competition in order to
remain a preferred vendor. There can be no assurance that outsourcing of the
services performed by Compass will continue or that existing Compass clients
will not bring some or all of such services in-house.
Government Regulation
The accounts receivable management and telemarketing industries are
regulated under various federal and state statutes. Compass Receivables is
subject to the Fair Debt Collection Practices Act and various state debt
collection laws, which, among other things, establish specific guidelines and
procedures that debt collectors must follow in communicating with consumer
debtors, including the time and manner of such communications. The accounts
receivable management business is also subject to state regulation, and some
states require that Compass be licensed as a debt collector. In cases where
Compass reports to consumer reporting agencies, Compass is also subject to the
Fair Credit Reporting Act, which imposes liability on companies that furnish
information to consumer reporting agencies.
With respect to the teleservices offered by Compass, including
telemarketing, the Telemarketing and Consumer Fraud and Abuse Prevention Act of
1994 broadly authorizes the Federal Trade Commission to issue regulations
prohibiting misrepresentations in telemarketing sales. The FTC's Telemarketing
Sales Rule, among other things, limits the hours during which telemarketers may
call, prohibits misrepresentations of the cost, terms, restrictions, performance
or duration of products or services offered by telephone solicitation and
specifically addresses other perceived telemarketing abuses in the offering of
prizes and the sale of business opportunities or investments. In addition, the
Telemarketing and Consumer Fraud and Abuse Prevention Act restricts the use of
automated telephone equipment for telemarketing purposes, including limiting the
hours during which telemarketers may call consumers and prohibiting the use of
automated telephone dialing equipment to call certain telephone numbers. A
number of states also regulate telemarketing and some states have enacted
restrictions similar to the Telemarketing and Consumer Fraud and Abuse
Prevention Act. However, there can be no assurance that additional federal or
state legislation, or changes in regulatory implementation, would not limit the
activities of Compass in the future or significantly increase the cost of
regulatory compliance.
Several of the industries served by Compass are also subject to varying
degrees of government regulation. Although compliance with these regulations is
generally the responsibility of Compass' clients, Compass could be subject to a
variety of enforcement or private actions for its failure or the failure of its
clients to comply with such regulations.
Compass devotes significant and continuous efforts, through training of
personnel and monitoring of compliance, to ensure that it is in compliance with
all federal and state regulatory requirements. Compass believes that it is in
material compliance with all such regulatory requirements. The failure to comply
with applicable statutes and regulations could have a materially adverse effect
on Compass' business, results of operations and financial condition.
Employees
As of December 31, 1998, Compass employed a total of approximately 2,250
employees, of whom approximately 900 were employed in connection with accounts
receivable management services, approximately 700 were employed in connection
with teleservices and approximately 650 were employed in connection with
printing and mailing services. In addition, Compass uses independent contractors
and hires temporary employees as needed. None of Compass' employees is
represented by a labor union. Compass believes that its relations with its
employees are good.
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Legal Proceedings
In October 1997, Mid-Continent Agencies, Inc., one of the founding
companies of Compass, and its New York subsidiary filed a lawsuit in the State
of New York, Supreme Court, County of Erie against Vincent S. Burgio, Eric R.
Main and Michael Luksch (all of whom are former employees of Mid- Continent's
subsidiary), as well as Continental Commercial Group of New York, Inc. and L.A.
Commercial Group, Inc. The complaint alleges (1) breach of employment agreement;
(2) breach of the duty of loyalty; (3) interference with business relationships;
(4) conversion of confidential information and (5) misappropriation of trade
secrets, and seeks injunctive relief and unspecified damages. This case remains
in the discovery stage.
In February 1998, the defendants in the above-described lawsuit filed two
lawsuits in the New York Supreme Court. The first lawsuit, filed by Mr. Burgio,
names as defendants Mid-Continent, its New York subsidiary, and William
Vallecorse, an employee of the subsidiary, and alleges (1) breach of contract;
(2) breach of contract and constructive discharge; (3) fraud; (4) tortious
interference with employment contract; and (5) unjust enrichment. The complaint
seeks aggregate damages in excess of $1.3 million. The second lawsuit, filed by
Messrs. Burgio, Main and Luksch, names as defendants Mid-Continent, its New York
subsidiary, Les J. Kirschbaum, Mr. Vallecourse and Michelle Helmer (an employee
of the New York subsidiary), alleges defamation of Messrs. Burgio, Main and
Luksch and seeks aggregate compensatory damages of $1.5 million in addition to
punitive damages. A third lawsuit was filed in 1999 against Compass based on
alleged vicarious liability in connection with the previously filed actions.
Compass believes that the allegations against it and its co-defendants are
without merit; however, because this litigation is still at an early state, its
outcome cannot be predicted. The cases remain in the discovery stage. The former
stockholders of Mid-Continent Agencies, Inc. agreed, in the purchase agreement
whereby Compass agreed to purchase Mid-Continent, to indemnify Compass for
losses and damages, if any, arising from these lawsuits.
In October 1998, a subsidiary of one of the founding companies of Compass,
Bomar Credit Corporation, and Compass Receivable Management Corporation, a
subsidiary of Compass, received a Civil Investigative Demand from the Federal
Trade Commission's Chicago Regional Office requesting various categories of
information relating to compliance with the Fair Debt Collection Practices Act.
Compass is cooperating fully with the FTC's request. Compass, along with
counsel, has reviewed the requests and provided the FTC with responsive
documents but since the matter is still in the very early state, an assessment
of its duration and outcome, and associated liability and expense, if any,
cannot reasonably be made at this time. However, there can be no assurances that
future developments relating to this matter will not have a material adverse
impact on Compass' business, financial condition or results of operations.
On May 14, 1999, a purported stockholder class action suit was filed in the
Delaware Court of Chancery against NCO, Compass and the members of the board of
directors of Compass. Please see "Recent Developments -- Class Action
Litigation" on page 5.
On June 7, 1999, Richard Alston, former Executive Vice President of
Corporate Development, sued Compass for breach of contract relating to
termination of his employment. The complaint seeks $800,000 in damages.
Compass is not involved in any other legal proceedings material to its
business, financial condition or results of operations.
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Management's Discussion and Analysis of Financial
Condition and Results of Operations of Compass
Presented below are discussions of Compass' results of operations on both a
historical and pro forma basis. Although Compass was formed in April, 1997,
there were no operating activities prior to the IPO and the closing of the
acquisitions of the founding companies. Furthermore, since the founding
companies acquisitions did not occur until March 4, 1998, the historical
operating results for the quarter ended March 31, 1998 include only one month of
results from the founding companies. Compass did not make any additional
acquisitions in the month of March 1998.
Results of Operations
Three Months Ended March 31, 1999 Compared To The Three Months Ended March 31,
1998-Historical
Net Revenues. Net revenues for the three months ended March 31, 1999
amounted to $41.7 million. Among the segments, accounts receivable management
contributed $22.6 million, or 54.2%, print and mail contributed $14.8 million,
or 35.5%, and teleservices contributed $4.3 million, or 10.3%.
Net revenues for the three months ended March 31, 1998 amounted to $8.5
million. Among the segments, accounts receivable management contributed $3.8
million, or 45.0%, print and mail contributed $3.2 million, or 37.1%, and
teleservices contributed $1.5 million, or 17.9%.
Cost of Revenues. Cost of revenues for the three months ended March 31,
1999 were $28.6 million, or 68.6% of net revenues. By segment, cost of revenues
for accounts receivable management amounted to $13.9 million, or 61.5% of
segment net revenues. Cost of revenues for print and mail amounted to $11.5
million, or 77.3% of segment net revenues. Cost of revenues for teleservices
amounted to $3.2 million, or 74.4% of net revenues.
Cost of revenues for the three months ended March 31, 1998 amounted to $5.2
million or 60.4% of net revenues. Among the segments, cost of revenues for
accounts receivable management amounted to $2.0 million, or 52.6% of net
revenues. Cost of revenues for print and mail amounted to $2.1 million, or 65.6%
of net revenues. Cost of revenues for teleservices amounted to $1.1 million, or
73.3% of net revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expense for the three months ended March 31, 1999 were $10.3
million, or 24.7% of net revenues. Selling, general and administrative expenses
in the accounts receivable management segment amounted to $4.9 million, or 21.7%
of segment net revenues. Selling, general and administrative expenses in the
print and mail segment amounted to $2.8 million, or 18.9% of segment net
revenues. Selling, general and administrative expenses for the teleservices
segment amounted to $0.8 million, or 18.7% of segment net revenues.
Corporate expenses amounted to $1.8 million and included $0.3 million
relating to the evaluation of Compass' strategic alternatives.
Selling, general and administrative expenses for the three months ended
March 31, 1998 were $2.5 million or 29% of net revenues.
Interest Expense. Interest expense amounted to $1.2 million in the three
months ended March 31, 1999. The interest primarily related to borrowings under
Compass' credit facility, which were used to make acquisitions and loans from
selling shareholders in connection with the acquisition of their companies, and
to interest imputed on capital leases.
Interest income, net for the three months ended March 31, 1998 period was
negligible as Compass had not completed its credit facility and had made no
acquisitions other than the founding companies.
Income Taxes. The effective income tax rates used for the 1999 and 1998
periods were 44.7% and 45.5%, respectively, as compared to the statutory rate of
35%. The difference primarily relates to the effects of state income taxes and
the non-deductibility of goodwill arising primarily from the stock acquisitions.
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Year ended December 31, 1998--Historical
Historical results of operations reflect the activities of Compass and the
founding companies since February 28, 1998 and the subsequent purchases since
their respective dates of acquisition.
Net revenues. Net revenues for the period amounted to $127.1 million. Among
the segments, accounts receivable management services contributed $55.7 million,
or 43.8%, print and mail services contributed $56.2 million, or 44.2% and
teleservices added $15.2 million or 12%.
Cost of revenues. Cost of revenues for the period amounted to $85.9 million
or 67.6% of net revenues. By segment, cost of revenues for accounts receivable
management services amounted to $33.4 million, or 60% of segment net revenues,
print and mail services amounted to $40.9 million, or 72.8% of segment net
revenues and telemarketing services amounted to $11.6 million, or 76.3% of
segment net revenues.
Selling, general and administrative expenses. Selling general and
administrative expenses for the period amounted to $26.3 million, or 20.6% of
net revenues. Selling, general and administrative expenses in dollars and as a
percentage of segment net revenues for accounts receivable management services
amounted to $11.8 million, or 21.2%, print and mail services amounted to $8.8 or
15.7% and teleservices amounted to $2.5 million or 16.4%. Corporate expenses
amounted to $3.2 million.
Interest expense. Interest expense amounted to $2.0 million in the year
ended December 31, 1998. The interest primarily relates to borrowing under
Compass' credit facility, which was used to make acquisitions, loans from
selling shareholders in connection with the acquisition of their companies and
interest imputed on capital leases.
Income taxes. The effective income tax rate was 44.8% as compared to the
statutory rate of 35%. The difference primarily relates to the effects of state
income taxes and the non-deductibility of goodwill arising primarily from the
stock acquisitions.
Three Months Ended March 31, 1999 Compared To Three Months Ended March 31,
1998-Pro Forma
Pro forma results of operations presented below assume that Compass'
initial public offering, the acquisitions of the founding companies and the
subsequent acquisitions occurred on January 1, 1998 and reflect certain pro
forma adjustments. See Note 3 of Notes to the Consolidated Financial Statements.
Three Months
-----------------------
Ended
-----------------------
1999 1998
---------- ----------
(Dollars in thousands)
Net revenues ......................................... $41,720 $45,472
Cost of revenues ..................................... 28,640 30,151
------- -------
Gross profit ........................................ 13,080 15,321
Selling, general and administrative expenses ......... 10,357 9,113
------- -------
Operating income .................................... $ 2,723 $ 6,208
======= =======
Net Revenues. Net revenues decreased $3.8 million, or 8.4%, from $45.5
million for the three months ended March 31, 1998 to $41.7 million for the three
months ended March 31, 1999.
Net revenues for the accounts receivable management segment increased $0.3
million, or 1.3%, from $22.3 million to $22.6 million.
Net revenues for the print and mail segment decreased $3.6 million, or
19.6%, from $18.4 million to $14.8 million. $3.2 million of the decrease
resulted from the segment's largest customer, who, as a result of competitive
pressures, changed direct mail advertising campaigns from long-run print and
mail roll-outs to short-run test packages. Net revenues for the segment included
a one-time large order in the first quarter of 1998. New customers and volume
increases with existing customers resulted in $1.1 million of new net revenues.
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Net revenues for the teleservices segment decreased $0.5 million, or 10%,
from $4.8 million to $4.3 million. This decrease was expected as the segment
implemented a strategy designed to replace high volume but low margin business
with more profitable client relationships.
Cost of Revenues. Cost of revenues decreased $1.5 million, or 5.0%, from
$30.1 million for the prior year three month period to $28.6 million for the
current year three month period. Cost of revenues as a percentage of net
revenues amounted to 68.6% for the 1999 period as compared to 66.3% for the 1998
period.
Cost of revenues for the accounts receivable management segment increased
by $0.4 million, or 3%, from $13.5 million to $13.9 million. This increase is
reflective of a shift in the mix of service offerings in the segment.
Cost of revenues for the print and mail segment decreased $1.6 million, or
12.2%, from $13.1 million to $11.5 million. As a percentage of net revenues,
these costs increased from 71.2% to 77.3%. The increase reflected the excess
capacity that resulted from the reduced level of business during the current
quarter as compared to the same period of 1998.
Cost of revenues for the teleservices segment decreased $0.4 million, or
11.1%, from $3.6 million to $3.2 million. As a percentage of net revenues, these
costs amounted to 73.5% for the 1999 period as compared to 75.2% for the same
period of 1998. The decrease in cost of revenues as a percentage of net revenues
reflected management's efforts to focus on higher margin business as well as a
reduction in telecommunications expenses.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the 1999 period increased $1.3 million, or 14.3%,
from $9.1 million to $10.4 million. As a percentage of net revenues, such
expenses increased to 24.8% in 1999 from 20.0% in 1998.
Selling, general and administrative expenses in the accounts receivable
management segment increased $0.1 million, or 2.1%, from $4.8 million to $4.9
million. This increase is reflective of the continued cost of integration of the
separate business units within the segment.
Selling, general and administrative expenses in the print and mail segment
increased $0.4 million, or 16.0%, from $2.5 million to $2.9 million. This
increase is reflective of the cost of additional administrative personnel.
Selling, general and administrative expenses for the teleservices segment
decreased $0.2 million, or 20%, from $1.0 million to $0.8 million. The decrease
reflects efficiencies gained from improved systems in the areas of
administration and client services.
Corporate expenses increased $1.0 million, or 125.0%, from $0.8 million to
$1.8 million. This increase reflects the addition of personnel, legal,
consulting and other professional fees and costs associated with evaluating the
strategic alternatives available to Compass.
Unaudited Pro Forma Year Ended December 31, 1998 Compared to the Unaudited Pro
Forma Year Ended December 31, 1997
Unaudited pro forma results of operations presented below assume that
Compass' initial public offering, the founding companies acquisitions and the
subsequent acquisitions occurred on January 1, 1998 and 1997 and reflect certain
pro forma adjustments. See Note 3 of Notes to the Consolidated Financial
Statements.
Year ended December 31,
------------------------
1998 1997
---------- -----------
(Dollars in thousands)
Net revenues ......................................... $177,105 $151,088
Cost of revenues ..................................... 119,408 103,748
Gross Profit ........................................ 57,697 47,340
Selling, general and administrative expenses ......... 36,922 34,393
Operating income .................................... $ 20,775 $ 12,947
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Net revenues. Net revenues increased $26.0 million, or 17.2%, from $151.1
million for the year ended December 31, 1997 to $177.1 million for the year
ended December 31, 1998. Accounts receivable management services increased $12.1
million or 16.1%, print and mail services increased $8.3 million or 13.1% and
teleservices increased $5.6 million or 43.7%.
Cost of revenues. Cost of revenues increased $15.7 million, or 15.1% from
$103.7 million for the year ended December 31, 1997 to $119.4 million for the
year ended December 31, 1998. Cost of revenues as a percentage of net revenues
amounted to 67.4% for 1998 as compared to 68.7% for 1997. As a percentage of
segment net revenues, accounts receivable management services cost of revenues
decreased to 61.4% from 63.7% and cost of revenues for teleservices decreased to
76.1% from 76.7% as both segments benefitted from greater revenue over an
existing cost base. The print and mail segment cost of revenues as a percentage
of net revenues remained consistent between periods as revenue increases were
offset by similar increases in costs.
Selling, general and administrative expenses. Selling, general and
administrative expenses for 1998 increased $2.5 million to $36.9 million from
$34.4 million in 1997. As a percentage of net revenues, such expenses decreased
to 20.8% in 1998 from 22.8% in 1997. On a segment basis, as a percentage of net
revenues, selling, general and administrative expenses in accounts receivable
management services decreased to 17.6% in 1998 from 21% in 1997 and teleservices
decreased to 17.8% in 1998 from 20.6% in 1997. Both of these segments benefitted
from increased volumes without similar increases in selling general and
administrative expenses. For the print and mail segment, selling general and
administrative expenses as a percentage of net revenues increased to 15% in 1998
from 14.5% in 1997 as these expenses increased at a greater rate then did net
revenues for the segment.
Liquidity and Capital Resources
During the quarter ended March 31, 1999, net cash provided by operating
activities amounted to $4.0 million. Operating activities included $2.8 million
of earnings before depreciation and amortization. Changes in operating assets
and liabilities added an additional $1.2 million in net cash.
Cash used in investing activities for the first quarter of 1999 included
net cash paid for acquisitions completed in 1998, primarily related to earn-out
agreements, in the amount of $6.4 million, and $0.7 million in capital
expenditures which were primarily comprised of purchases of equipment for print
and mail services.
Financing activities for the quarter ended March 31, 1999 generated net
cash in the amount of $3.6 million. Of this amount, proceeds in the amount of
$5.0 million were borrowed under Compass' revolving credit facility (which is
further discussed in the following paragraphs). Financing activities that
required cash included the repayment of acquired debt in the amount of $0.9
million and repayments of capital lease obligations of $0.5 million.
On March 30, 1999, Compass' $55 million credit facility was amended to: (1)
establish termination fees should the facility be terminated prior to December
31, 1999, (2) prohibit additional acquisitions until the leverage ratio, as
defined, is less than 2-to-1 for two consecutive fiscal quarters, but at least
until January 1, 2000, (3) increase the maximum leverage ratio, as defined, from
2.0 to a quarterly scale ranging from 3.0-to-1 to 2.25-to-1, (4) establish a
maximum senior leverage ratio and (5) redefine the debt-to-capitalization ratio.
In addition, the interest rate under the credit facility was increased from
150 basis points to 225 basis points over the interbank offered rate or a base
rate as defined in the credit facility agreement. Compass was in compliance with
all of the covenants under the credit facility for the period ended March 31,
1999.
At March 31, 1999, borrowings under the credit facility totaled $53
million, there were $0.8 million in outstanding letters of credit and $1.2
million remained available for borrowing. An additional $0.7 million was
borrowed in April 1999.
On June 15, 1999, the credit agreement was amended to waive a default under
the fixed charge coverage ratio and to relax the requirements for the period
through August 31, 1999 for certain covenants. Specifically, the amendment
modifies the leverage ratios, defined as debt to earnings before interest,
taxes, depreciation and amortization, referred to as EBITDA, for the last four
calendar quarters, to 3.35 to 1, and modifies the minimum fixed charge coverage
ratio, defined as EBITDA plus operating lease payments to the sum of interest,
operating lease payments and capital lease payments, to 2 to 1. These covenants
will revert to their
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prior levels after August 31, 1999. The amendment also changes the termination
fee to $137,500 if the agreement is terminated on or before July 31, 1999 or
$125,000 if the agreement is terminated after July 31, 1999 but before March 17,
2001. The amendment also provides for an additional $55,000 amendment fee. If
the merger is not completed on or before August 31, 1999, Compass would not be
in compliance with the prior covenants in the credit facility and the lenders
could declare the credit facility in default and could demand immediate
repayment of the loan. Compass could also be prevented from borrowing under the
credit facility to finance working capital and other needs. A default under the
credit facility would have a material adverse effect on Compass' business,
financial condition and results of operations and could give NCO the right to
terminate the merger agreement.
Based upon its current projections, management believes that cash flows
from operations combined with the $500,000 of remaining availability under the
credit facility will be sufficient to meet Compass' working capital needs in
1999.
Seasonality
The operations of Compass are not subject to seasonal factors that have a
material impact on the results of operations.
Year 2000
Compass has assembled a year 2000 task force which continues identifying
and assessing potential operating and software problems related to the "year
2000" issue, both internally and externally. Compass' year 2000 program is
addressing both information technology and non-information technology. Compass'
year 2000 task force has completed an inventory of the hardware and software
used in its operations, has prioritized the hardware and software into "mission
critical" and "non-mission critical" and has assessed the year 2000 readiness of
all of the "mission-critical" and the majority of the "non-mission critical"
hardware and software inventoried. Based on this effort, Compass has identified
only non-material year 2000 issues, all of which are being remediated and will
also be tested on or before September 30, 1999. Two of Compass' acquisitions
have non-compliant hardware and software, but the hardware and software used by
those acquisitions are in the process of being replaced in the course of a
broader upgrade which will bring them into compliance. Additionally, Compass has
communicated with landlords, significant vendors and other critical service
providers to determine if such parties are year 2000 compliant or have effective
plans in place to address the year 2000 issue and to determine the extent of
Compass' vulnerability to the failure of such parties to remediate such issues.
It has received responses from many of these third parties and is awaiting
responses and/or re-contacting the non-responding third parties. None of the
responses received to date have identified any year 2000 issues which are not
on-track to be remediated well in advance of the requisite date(s). Compass will
continue to assess its risks and develop appropriate contingency plans as needed
if responses from landlords, significant vendors and other critical service
providers so warrant. Compass does not believe that the costs of modifications,
upgrades or replacements which would not have been incurred but for the Year
2000 issue will be material.
Compass does not expect the impact of the year 2000 to have a material
adverse impact on Compass' business or results of operations. However, any
failure to effectively complete the necessary changes to Compass' financial and
operating systems on a timely basis, or, the occurrence of unanticipated or
undiscovered year 2000 compliance problems could have a material adverse effect
on Compass' business and results of operations. In addition, there can be no
assurance that year 2000 non-compliance by any of Compass' clients or
significant suppliers or vendors will not have a material adverse effect on
Compass' business or results of operations.
Quantitative and Qualitative Disclosures about Market Risk
The principal market risk (i.e., the risk of loss arising from adverse
changes in market rates and prices) to which Compass is exposed is interest
rates on debt.
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At March 31, 1999, Compass had $13 million of debt subject to variable
interest rates. A one percent change in interest rates would impact interest
expense by $0.13 million with respect to the amount of debt that is subject to
variable interest rates.
Compass has entered into interest rate swap arrangements to reduce the risk
of increases in interest rates on $40 million of outstanding credit facility
debt through October 15, 2000. A one percent change in interest rates would have
affected interest expense by $0.4 million with respect to the amount of debt
covered by the interest rate swaps.
Compass does not hold or issue derivative financial instruments for
speculation or trading purposes.
Principal Stockholders of Compass
The following table sets forth information as of June 1, 1999 with respect
to the beneficial ownership of Compass' common stock by each person known by
Compass to own beneficially more than 5% of the outstanding shares of common
stock and each director, the chief executive officer of Compass and the two
other executive officers of Compass who received the highest compensation in
1998, individually and as a group. This table does not give effect to the
shares of Compass common stock to be contributed to Compass immediately prior
to the completion of the merger by the stockholders who are party to the voting
agreements.
<TABLE>
<CAPTION>
Name and Address(1) Number Percent
- ------------------- ------------ --------
<S> <C> <C>
Kenneth W. Murphy(2) ...................................................... 1,586,911 11.0
Wanger Asset Management, L.P.(3) .......................................... 1,409,000 9.8
SAFECO Asset Management Company(4) ........................................ 855,200 5.9
Les J. Kirschbaum ......................................................... 467,127 3.2
Leeds Hackett ............................................................. 393,329 2.7
Michael J. Cunningham(5) .................................................. 312,415 2.2
Scott H. Lang(6)(7) ....................................................... 288,919 2.0
Mahmud U. Haq(8) .......................................................... 229,656 1.6
Edward A. DuCoin .......................................................... 194,562 1.4
Billy Ray Pitcher(7) ...................................................... 47,296 *
Howard L. Clark, Jr.(7) ................................................... 11,000 *
Tommaso Zanzotto(7) ....................................................... 10,000 *
Julie Schechter ........................................................... -0- *
All directors and executive officers as a group (12 Persons)(6)(9) ........ 3,541,215 24.6
</TABLE>
- ------------
(1) Unless otherwise indicated, the address of the beneficial owners is c/o
Compass, One Penn Plaza, Suite 4430, New York, New York 10119.
(2) Certain of these shares are owned by the Kenneth W. Murphy Children's Trust
of which Mr. Murphy is the trustee.
(3) As reported on a Schedule 13G filed with the SEC on January 11, 1999 and
amended on February 24, 1999. According to the Schedule, this stockholder
and its affiliates have shared voting and dispositive power with respect to
these shares. The address of this stockholder is 227 West Monroe Street,
Suite 3000, Chicago, Illinois 60606.
(4) As reported on a Schedule 13G filed with the SEC on February 12, 1999.
According to the Schedule, this stockholder and an affiliate have shared
voting and dispositive power with respect to these shares as a result of
serving as investment adviser to registered investment companies. The
address of this stockholder is 601 Union Street, Suite 2500, Seattle,
Washington 98101.
(5) Includes 50,000 shares issuable upon the exercise of options that are
currently exercisable.
(6) Includes 126,499 shares held by Brown Gibbons Lang & Company, L.P. As a
minority owner of this partnership, Mr. Lang has shared voting and
dispositive power with respect to these shares. Mr. Lang disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest.
(7) Includes 10,000 shares issuable upon the exercise of options that are
currently exercisable.
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(8) Includes 33,333 shares issuable upon the exercise of options that are
currently exercisable.
(9) Includes 123,333 shares issuable upon the exercise of options that are
currently exercisable.
*Less than 1%.
Comparison of Shareholders' Rights
The rights of NCO shareholders are governed by NCO's charter, bylaws and
the Pennsylvania Business Corporation Law of 1988, referred to as the PBCL. The
rights of Compass stockholders are governed by Compass' charter, bylaws and the
Delaware General Corporation Law, referred to as the DGCL. After the date the
merger is completed, the rights of Compass stockholders who become NCO
shareholders will be governed by NCO's charter, bylaws and the PBCL.
The following is a summary of the material differences between the rights
of NCO shareholders and the rights of Compass stockholders. This summary is not
intended to be complete and is qualified in its entirety by reference to
applicable provisions of the PBCL, the DGCL, NCO's charter, bylaws and Compass'
charter and bylaws.
Preferences
NCO Preferred Stock
NCO's board of directors can issue up to 5,000,000 shares of NCO preferred
stock without further action by shareholders. No shares of NCO preferred stock
are issued or outstanding and NCO has no current plans to issue any shares of
NCO preferred stock. NCO's board of directors may, without shareholder approval,
issue NCO preferred stock with dividend rates, redemption prices, preferences on
liquidation or dissolution, conversion rights, voting rights and any other
preferences. These rights and preferences could be senior to the rights of the
holders of NCO common stock. One of the effects of undesignated preferred stock
may be to enable the board of directors to render more difficult or to
discourage an attempt by a third party to attempt to acquire NCO or obtain
control of NCO by means of a tender offer, proxy contest, merger or other
transaction. This would also protect NCO's current management. Accordingly, the
issuance of shares of NCO preferred stock may discourage bids for NCO common
stock or may otherwise adversely affect the market price of NCO common stock.
Compass Preferred Stock
Compass' board of directors can issue up to 10,000,000 shares of Compass
preferred stock without further action by stockholders. No shares of Compass
preferred stock are outstanding. Compass' board of directors may, without
stockholder approval, issue Compass preferred stock with dividend rates,
redemption prices, preferences on liquidation or dissolution, conversion rights,
voting rights and any other preferences. These rights and preferences could be
senior to the rights of the holders of Compass common stock. Compass has no
current plans to issue any shares of Compass preferred stock.
Size and Classification of the Board of Directors
NCO. NCO's bylaws provide that the board of directors will consist of not
less than three and not more than seven directors as determined by the NCO board
of directors from time to time. NCO currently has seven directors. The NCO board
is divided into three classes as nearly equal in number as possible. Each
director will serve for a term of three years and until his or her successor has
been elected and qualified, even though his or her term of office has otherwise
expired, except in the event of his or her earlier resignation, removal or
disqualification.
Compass. The board of directors of Compass consists of ten directors
divided into three classes with each class serving for a term of three years and
until his or her successor is elected and qualified, even though his or her term
of office has otherwise expired, except in the event of his or her earlier
death, resignation, retirement or removal from office. At each annual meeting of
stockholders, directors to succeed those directors whose terms are expiring are
to be elected by the stockholders.
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Removal of Directors
NCO. NCO's charter provides that the entire NCO board of directors, or a
class of the board, or any individual director may be removed from office only
for cause, as defined in NCO's charter, and only by the affirmative vote of
shareholders entitled to cast at least 65% of the votes entitled to be cast by
all shareholders at any annual or regular election of directors or of any class
of directors. In addition, the NCO board of directors will have the right,
without shareholder approval, to declare vacant the office of any director for
any proper cause.
Compass. Compass' charter provides that directors may be removed only for
cause. Vacancies created by these removals may be filled by the board of
directors.
Meeting of Shareholders; Action by Written Consent
NCO. Under NCO's bylaws, a special meeting of the shareholders may be
called at any time by the NCO board of directors, the chairman of the NCO board
of directors or the chief executive officer.
NCO's charter provides that no action may be authorized by the shareholders
of NCO without a meeting by less than unanimous written consent.
Compass. Under Compass' bylaws, a special meeting of the stockholders may
be called at any time by the board of directors of Compass.
Compass' charter provides that no action may be authorized by the
stockholders of Compass without a meeting.
Shareholder Inspection Rights; Shareholder Lists
NCO. Under the PBCL, any shareholder has the right to inspect the
shareholder list for a purpose reasonably related to the person's interest as a
shareholder. A corporation with 5,000 or more shareholders may, in lieu of
making a voting list, provide the required information by alternative means.
Compass. Under the DGCL, any stockholder has the right to inspect the
stockholder list for a purpose reasonably related to the person's interest as a
stockholder.
Amendment of Governing Documents
NCO. Under NCO's charter the shareholders of NCO will not be entitled to
propose an amendment to NCO's charter. Any amendment to, or repeal of, any
provision of NCO's charter which has not previously received the approval of at
least a majority of the incumbent directors on the board of directors will
require for adoption the affirmative vote of the shareholders entitled to cast
at least 65% of the votes entitled to be cast by all shareholders at any duly
convened annual or special meeting of the shareholders, in addition to any other
approval which is required by law, NCO's charter, NCO's bylaws or otherwise.
In addition, NCO's charter and NCO's bylaws provide that NCO's bylaws may
be amended or repealed without shareholder approval by a majority of the
incumbent directors, subject to any other approval which is required by law,
NCO's charter, NCO's bylaws, or otherwise. Any amendment to, or repeal of, any
provision of NCO's bylaws which has not previously received the approval of at
least a majority of the incumbent directors on the board of directors will
require for adoption the affirmative vote of the shareholders entitled to cast
at least 65% of the votes entitled to be cast by all shareholders at any duly
convened annual or special meeting of the shareholders, in addition to any other
approval which is required by law, NCO's charter, NCO's bylaws, or otherwise.
Compass. The DGCL provides that in order to effect any amendment to
Compass' charter, Compass' board of directors must first adopt a resolution
setting forth the proposed amendment, declaring its advisability, and directing
that the proposed amendment be considered at a meeting of the Compass
stockholders. A vote of a majority of the shares of each class of the Compass
stock entitled to vote thereon as a class is required for the proposed amendment
to be approved by the Compass stockholders.
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Compass' charter provides that Compass' bylaws may be altered, amended or
repealed by either the Compass board of directors or at a special meeting of the
Compass stockholders by the vote of the holders of two-thirds of the outstanding
Compass common stock. In order for the Compass bylaws to be altered, amended or
repealed by the stockholders at a special meeting, the notice to the
stockholders of the special meeting must contain notice of the alteration,
amendment, or repeal of the bylaws.
Power of Board to Oppose Tender Offer and Other Take-Over Transactions
NCO. NCO's charter provides that the NCO board of directors may oppose a
tender offer or other offer for NCO's securities, whether the offer is in cash
or in securities of a corporation or otherwise. In considering whether to oppose
an offer, the NCO board of directors may, but it is not legally obligated to,
consider any pertinent issues. By way of illustration, but not of limitation,
the NCO board of directors may, but will not be legally obligated to, consider
any and all of the following:
o whether the offer price is acceptable based on the historical and present
operating results or financial conditions of NCO;
o whether a more favorable price could be obtained for NCO's securities in
the future;
o the effects of any proposed transaction upon any or all groups affected
by the action, including among others, shareholders, employees,
suppliers, customers and creditors of NCO and its subsidiaries and on the
communities served by NCO and its subsidiaries;
o the reputation and business practices of the offeror and its management
and affiliates as they would affect the employees, suppliers and
customers of NCO and its subsidiaries and the future value of NCO's
stock;
o the value of the securities, if any, which the offeror is offering in
exchange for NCO's securities, based on an analysis of the worth of NCO
as compared to the corporation or other entity whose securities are being
offered; and
o any anti-trust or other legal and regulatory issues that are raised by
the offer.
If the NCO board of directors determines to sell NCO or any subsidiary to a
third party, or to merge or consolidate NCO or any subsidiary with a third
party, the NCO board of directors will not be legally obligated to create an
auction and may negotiate with only one acquiror.
Compass. The Compass board of directors has full discretion, subject to its
fiduciary duties, to accept or oppose any tender offer or other offer for
Compass' securities.
Required Vote for Authorization of Mergers and Consolidations
NCO. Under the PBCL, a merger or consolidation generally must be approved
by a majority of the votes cast by all shareholders entitled to vote on a merger
or consolidation transaction and, if any class or series of shares is entitled
to vote on a merger or consolidation transaction as a class, the affirmative
vote of a majority of the votes cast in each class vote.
Compass. Under the DGCL, a merger or consolidation generally must be
approved by the holders of a majority of the shares of Compass stock entitled
to vote on a merger or consolidation transaction.
Legal Matters
The validity of the shares of NCO common stock offered hereby will be
passed upon for NCO by Blank Rome Comisky & McCauley LLP.
Experts
The audited financial statements of NCO Group, Inc. incorporated in this
proxy statement/prospectus by reference to the Current Report on Form 8-K dated
June 11, 1999, except as they relate to JDR Holdings Inc., have been audited by
Pricewaterhouse Coopers LLP, independent accountants, and insofar as they relate
to
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<PAGE>
JDR Holdings Inc., by other independent accountants, whose reports thereon are
also incorporated in this proxy statement/prospectus by reference. Such
financial statements have been so included in reliance on the reports of such
independent accountants given on the authority of such firms as experts in
auditing and accounting.
The consolidated financial statements of Compass International Services
Corporation and its subsidiaries at December 31, 1998 and 1997 and the results
of their operations and their cash flows for the year ended December 31, 1998
included in this proxy statement/prospectus have been so included in reliance on
the report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The financial statements of JDR Holdings, Inc. and Subsidiaries as of
December 31, 1998 and for the year ended December 31, 1998, incorporated by
reference in this proxy statement/prospectus have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report with
respect to those financial statements, and are incorporated by reference in this
document in reliance upon the authority of Arthur Andersen LLP as experts in
giving said report.
The consolidated balance sheets of Medaphis Services Corporation as of
December 31, 1997 and 1996 and their consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997 incorporated by reference in this proxy
statement/prospectus, have been incorporated in this document in reliance on the
report of PricewaterhouseCoopers LLP, independent public accountants, given on
the authority of that firm as experts in accounting and auditing.
The financial statements of MedSource, Inc. and Subsidiaries as of December
31, 1997 and for the year ended December 31, 1997, incorporated by reference in
this proxy statement/prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect to
those financial statements and are incorporated by reference in this document in
reliance upon the authority of Arthur Andersen LLP as experts in giving said
report.
The consolidated financial statements of FCA International Ltd. at June 30,
1996 and 1997 and FCA International Ltd.'s consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended June 30, 1997 incorporated by reference in this proxy statement/prospectus
have been audited by Arthur Andersen & Co., independent public accountants, as
stated in their report, and are incorporated by reference in this document in
reliance upon their report given upon the authority of Arthur Andersen & Co. as
experts in accounting and auditing.
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Pro Forma Consolidated Financial Statements
Basis of Presentation
The Pro Forma Consolidated Balance Sheet as of March 31, 1999 and the Pro
Forma Consolidated Statements of Income for the three months ended March 31,
1999 and the year ended December 31, 1998 are based on the historical financial
statements of NCO Group, Inc. ("NCO"); FCA International Ltd. ("FCA");
MedSource, Inc. ("MedSource"); and Medaphis Services Corporation ("MSC")
(collectively the "1998 Acquisitions"); Co-Source Corporation ("Co-Source"); and
Compass International Services Corporation ("Compass"). All of NCO's
acquisitions listed above have been accounted for assuming the use of the
purchase method of accounting with the results of the acquired companies
included in NCO's historical statements of income beginning on the date of
acquisition.
The Pro Forma Consolidated Balance Sheet as of March 31, 1999 has been
prepared assuming the Co-Source and Compass acquisitions were completed on March
31, 1999. The Compass acquisition gives effect to the pending sale of its print
and mail division prior to the acquisition of Compass by NCO.
The Pro Forma Consolidated Statement of Income for the three months ended
March 31, 1999 has been prepared assuming the Co-Source and Compass acquisitions
were completed on January 1, 1999. The Compass acquisition gives effect to the
pending sale of its print and mail division prior to the acquisition of Compass
by NCO.
The Pro Forma Consolidated Statement of Income for the year ended December
31, 1998 has been prepared assuming the FCA, MedSource, MSC, Co-Source and
Compass acquisitions were completed on January 1, 1998. The Compass acquisition
gives effect to the pending sale of its print and mail division prior to the
acquisition of Compass by NCO.
The Pro Forma Consolidated Balance Sheet and Statements of Income do not
purport to represent what NCO's actual financial position or results of
operations would have been had the acquisitions occurred as of such dates, or to
project NCO's financial position or results of operations for any period or
date, nor does it give effect to any matters other than those described in the
notes thereto. In addition, the allocations of purchase price to the assets and
liabilities of MSC, Co-Source and Compass are preliminary and the final
allocations may differ from the amounts reflected herein. The unaudited Pro
Forma Consolidated Balance Sheet and Statements of Income should be read in
conjunction with NCO's consolidated financial statements and notes thereto, and
the historical financial statements of FCA, MedSource, MSC, Co-Source and
Compass, all of which are either incorporated into this proxy
statement/prospectus by reference or included elsewhere in this proxy
statement/prospectus.
68
<PAGE>
NCO GROUP, INC.
Pro Forma Consolidated Balance Sheet
March 31, 1999
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
NCO Co-Source Compass Acquisition
Historical Historical Pro-Forma (1) Adjustments (2) Pro Forma
------------ ------------ --------------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets: ......................
Cash and cash equivalents ........... $ 23,890 $ 4,640 $ 5,725 $ (4,640) $ 29,615
Accounts receivable, trade, net ..... 61,397 3,213 13,611 -- 78,221
Purchased accounts receivable ....... 1,359 12 -- -- 1,371
Deferred taxes ...................... 1,107 231 877 -- 2,215
Other current assets ................ 4,306 314 1,174 -- 5,794
--------- -------- --------- --------- ---------
Total current assets .............. 92,059 8,410 21,387 (4,640) 117,216
Property and equipment, net .......... 29,523 2,558 7,018 -- 39,099
Other assets:
Intangibles, net of accumulated
amortization ...................... 299,020 43,233 112,990 107,156 562,399
Other assets ........................ 5,172 57 342 -- 5,571
--------- -------- --------- --------- ---------
Total other assets ................ 304,192 43,290 113,332 107,156 567,970
--------- -------- --------- --------- ---------
Total assets ......................... $ 425,774 $ 54,258 $ 141,737 $ 102,516 $ 724,285
========= ======== ========= ========= =========
LIABILITIES AND SHARE-
HOLDERS' EQUITY
Current liabilities:
Long-term debt, current portion . $ 10,236 $ 2,446 $ 7,318 $ (2,446) $ 17,554
Corporate taxes payable ............. 3,711 204 169 -- 4,084
Accounts payable .................... 7,435 1,054 4,186 -- 12,675
Accrued expenses .................... 12,530 1,854 7,400 12,700 34,484
Accrued compensation and
related expenses .................. 12,013 1,986 1,958 -- 15,957
--------- -------- --------- --------- ---------
Total current liabilities ......... 45,925 7,544 21,031 10,254 84,754
Long-term liabilities:
Long term debt, net of current
portion ........................... 154,368 31,664 27,548 94,536 308,116
Deferred taxes ...................... 6,379 1,225 273 751 8,628
Other long-term liabilities ......... 4,216 2,200 -- (2,200) 4,216
Shareholders' equity .................
Common stock ........................ 193,384 5,500 87,680 6,900 293,464
Unexercised warrants ................ 875 -- -- 1,925 2,800
Stock options issued for business
combination ....................... -- -- -- 1,680 1,680
Foreign currency translation
adjustment ........................ (2,106) -- -- -- (2,106)
Retained earnings ................... 22,733 6,125 5,205 (11,330) 22,733
--------- -------- --------- --------- ---------
Shareholders' equity ................. 214,886 11,625 92,885 (825) 318,571
--------- -------- --------- --------- ---------
Total liabilities and shareholders'
equity .............................. $ 425,774 $ 54,258 $ 141,737 $ 102,516 $ 724,285
========= ======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these pro forma
consolidated financial statements.
69
<PAGE>
NCO GROUP, INC.
Pro Forma Consolidated Statement of Income
For the Three Months Ended March 31, 1999
(Unaudited)
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Co-Source
NCO (3) Historical (4)
----------- ----------------
<S> <C> <C>
Revenue ................................... $ 95,864 $ 15,559
Operating costs and expenses:
Payroll and related expenses ............. 51,060 9,421
Selling, general and administrative
expenses ............................... 26,915 3,495
Depreciation and amortization expense 4,419 437
Non-recurring acquisiton costs ........... 4,601 --
-------- --------
Total operating costs and expenses ..... 86,995 13,353
-------- --------
Income (loss) from operations ............. 8,869 2,206
Other income (expense):
Interest and investment income ........... 219 202
Interest expense ......................... (2,999) (706)
-------- --------
(2,780) (504)
-------- --------
Income (loss) before provision for
income taxes ............................. 6,089 1,702
Income tax expense (benefit) .............. 3,583 658
-------- --------
Net income (loss) ......................... 2,506 1,044
Accretion of preferred stock to to
redemption value ......................... (377) --
-------- --------
Net income (loss) applicable to common
shareholders ............................. $ 2,129 $ 1,044
======== ========
Net income per share:
Basic .................................... $ 0.10
Diluted .................................. $ 0.10
Weighted average shares outstanding:
Basic .................................... 21,440
Diluted .................................. 22,476
Compass Acquisition
Pro Forma (5) Adjustments Pro Forma
--------------- ----------------- -----------------
<S> <C> <C> <C>
Revenue ................................... $ 26,893 $ -- $ 138,316
Operating costs and expenses:
Payroll and related expenses ............. 13,389 -- 73,870
Selling, general and administrative
expenses ............................... 9,445 -- 39,855
Depreciation and amortization expense 1,216 736(6) 6,808
Non-recurring acquisiton costs ........... -- -- 4,601
-------- ------------ ----------
Total operating costs and expenses ..... 24,050 736 125,134
-------- ------------ ----------
Income (loss) from operations ............. 2,843 (736) 13,182
Other income (expense):
Interest and investment income ........... -- -- 421
Interest expense ......................... (758) (1,534)(7) (5,997)
-------- ------------ ----------
(758) (1,534) (5,576)
-------- ------------ ----------
Income (loss) before provision for
income taxes ............................. 2,085 (2,270) 7,606
Income tax expense (benefit) .............. 814 (360)(8) 4,695
-------- ------------ ----------
Net income (loss) ......................... 1,271 (1,910) 2,911
Accretion of preferred stock to to
redemption value ......................... -- -- (377)
-------- ------------ ----------
Net income (loss) applicable to common
shareholders ............................. $ 1,271 $ (1,910) $ 2,534
======== ============ ==========
Net income per share:
Basic .................................... $ 0.10(9)
Diluted .................................. $ 0.10(9)
Weighted average shares outstanding:
Basic .................................... 24,732(10)
Diluted .................................. 25,838(11)
</TABLE>
The accompanying notes are an integral part of these pro forma
consolidated financial statements.
70
<PAGE>
NCO GROUP, INC.
Pro Forma Consolidated Statement of Income
For the Year Ended December 31, 1998
(Unaudited)
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 Co-Source Compass
NCO (3) Acquisitions (12) Pro Forma (13) Pro Forma (14)
------------ ------------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenue .............................. $ 229,952 $ 127,570 $ 61,123 $ 105,750
Operating costs and expenses:
Payroll and related expenses ........ 119,314 80,824 37,640 49,454
Selling, general and administrative
expenses ........................... 66,588 40,850 13,833 37,749
Depreciation and amortization expense 9,851 10,074 1,675 4,154
--------- --------- -------- ---------
Total operating costs and expenses . 195,753 131,748 53,148 91,357
--------- --------- -------- ---------
Income (loss) from operations ........ 34,199 (4,178) 7,975 14,393
Other income (expense):
Interest and investment income ...... 1,135 147 503 --
Interest expense .................... (3,858) (1,223) (3,536) (2,180)
--------- --------- -------- ---------
(2,723) (1,076) (3,033) (2,180)
--------- --------- -------- ---------
Income (loss) before provision for
income taxes ........................ 31,476 (5,254) 4,942 12,213
Income tax expense (benefit) ......... 13,131 881 2,023 5,687
--------- --------- -------- ---------
Net income (loss) .................... 18,345 (6,135) 2,919 6,526
Accretion of preferred stock to to
redemption value .................... (1,604) -- -- --
--------- --------- -------- ---------
Net income (loss) applicable to common
shareholders ........................ $ 16,741 $ (6,135) $ 2,919 $ 6,526
========= ========= ======== =========
Net income per share:
Basic ............................... $ 0.91
Diluted ............................. $ 0.85
Weighted average shares outstanding: .
Basic ............................... 18,324
Diluted ............................. 19,758
Acquisition Offering Pro Forma
Adjustments Pro Forma Adjustments (19) As Adjusted
---------------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Revenue .............................. $ (4,521) (15) $ 519,874 $ -- $ 519,874
Operating costs and expenses:
Payroll and related expenses ........ -- 287,232 -- 287,232
Selling, general and administrative
expenses ........................... -- 159,020 -- 159,020
Depreciation and amortization expense (942) (16) 24,812 -- 24,812
----------- ---------- ------- ---------
Total operating costs and expenses . (942) 471,064 -- 471,064
----------- ---------- ------- ---------
Income (loss) from operations ........ (3,579) 48,810 -- 48,810
Other income (expense):
Interest and investment income ...... -- 1,785 -- 1,785
Interest expense .................... (14,914) (17) (25,711) 2,435 (23,276)
----------- ---------- ------- ---------
(14,914) (23,926) 2,435 (21,491)
----------- ---------- ------- ---------
Income (loss) before provision for
income taxes ........................ (18,493) 24,884 2,435 27,319
Income tax expense (benefit) ......... (8,630) (18) 13,092 974 14,066
----------- ---------- ------- ---------
Net income (loss) .................... (9,863) 11,792 1,461 13,253
Accretion of preferred stock to to
redemption value .................... -- (1,604) -- (1,604)
----------- ---------- ------- ---------
Net income (loss) applicable to common
shareholders ........................ $ (9,863) $ 10,188 $ 1,461 $ 11,649
=========== ========== ======= =========
Net income per share:
Basic ............................... $ 0.47 $ 0.48(20)
Diluted ............................. $ 0.44 $ 0.45(20)
Weighted average shares outstanding: .
Basic ............................... 21,616(10) 24,186(21)
Diluted ............................. 23,120(11) 25,690(21)
</TABLE>
The accompanying notes are an integral part of these pro forma
consolidated financial statements.
71
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
(1) Gives effect to Compass' pending sale of its print and mail division for
approximately $35.1 million in cash, including adjustments to: (i) repay
approximately $27.6 million of Compass' outstanding debt; and (ii) pay taxes
of approximately $7.5 million resulting from the gain on the sale of the
print and mail division. NCO's acquisition of Compass is contingent upon the
sale of its print and mail division.
(2) Gives effect to the following acquisition related adjustments: (i) the
elimination of cash, deferred taxes, debt and other obligations not acquired
from Co-Source; (ii) the recognition of goodwill; (iii) the debt borrowed
against NCO's credit facility to finance the acquisition of Co-Source; (iv)
the warrants and stock issued to finance the acquisitions; (v) the
additional deferred financing fees that resulted from the increase in the
credit facility to fund the acquisition of Co-Source; and (vi) the accrual
of acquisition related expenses. The accrual of acquisition related expenses
includes: (i) professional fees related to the acquisitions; (ii)
termination costs relating to certain redundant personnel immediately
eliminated at the time of the Co-Source acquisition and scheduled to be
eliminated upon the completion of the Compass acquisition; and (iii) certain
future rental obligations attributable to facilities which are scheduled to
be closed upon the completion of the Compass acquisition. The Co-Source and
Compass goodwill will be amortized on a straight-line basis over 40 years. A
portion of the Co-Source and Compass goodwill is deductible for income tax
purposes. The allocation of the purchase price paid for Co-Source and
Compass is as follows (dollars in thousands):
<TABLE>
<CAPTION>
Deferred
Co-Source Compass Financing Fees Combined
-------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C>
Net tangible assets acquired .................. $ (31,608) $ (20,105) $ -- $ (51,713)
Acquisition related adjustments:
Cash and cash equivalents .................... (4,640) -- -- (4,640)
Accrued acquisition expenses ................. (2,700) (10,000) -- (12,700)
Deferred taxes ............................... (751) -- -- (751)
Debt repaid prior to acquisition ............. 34,110 -- -- 34,110
Obligations repaid prior to acquisition 2,200 -- -- 2,200
Goodwill and other intangible assets ......... 128,014 131,865 3,500 263,379
---------- ---------- ------- ----------
Consideration paid* .......................... $ 124,625 $ 101,760 $ 3,500 $ 229,885
========== ========== ======= ==========
</TABLE>
* The consideration paid for Co-Source includes cash of $122.7 million and a
warrant to purchase 250,000 shares of NCO common stock valued at approximately
$1.9 million. The consideration paid for Compass includes approximately 3.3
million shares of NCO common stock valued at approximately $100.1 million and
stock options to purchase approximately 215,000 shares of NCO common stock
valued at approximately $1.7 million.
(3) Reflects the restatement of NCO's historical financial information for the
March 31, 1999 acquisition of JDR Holdings, Inc. using the
pooling-of-interests method of accounting.
(4) Represents the historical results of operations of Co-Source from January 1,
1999 to March 31, 1999.
72
<PAGE>
(5) Represents the historical results of operations of Compass from January 1,
1999 to March 31, 1999 with pro forma adjustments to present the pending
sale of Compass' print and mail division as if it occurred on January 1,
1999, as follows (dollars in thousands):
<TABLE>
<CAPTION>
Income (Loss)
From Net
Compass Pro Forma Revenue Operations Income (Loss)
----------------- ----------- -------------- --------------
<S> <C> <C> <C>
Compass historical ............................ $ 41,720 $ 2,723 $ 857
Less:
Sale of the print and mail division* ......... 14,827 (120) (414)
-------- ------- -------
$ 26,893 $ 2,843 $ 1,271
======== ======= =======
</TABLE>
* The print and mail division's results of operations from January 1, 1999 to
March 31, 1999 reflects approximately $649,000 of selling, general and
administrative expenses and $333,000 of interest expense that was allocated to
the division by Compass. The allocation of these expenses was based on the
percentage of the print and mail division's revenues to Compass' consolidated
revenues and Compass' cash investment in the print and mail division. An
income tax benefit in the amount $121,000 was allocated based upon the
percentage of the print and mail division's loss before income taxes to
Compass' consolidated income before income taxes. These allocations are
considered by Compass' management to be reasonable.
(6) Gives effect to the adjustment to amortization expense assuming the
Co-Source and Compass acquisitions had occurred on January 1, 1999, as
follows (dollars in thousands):
Adjustment to
Acquisition Amortization
----------- --------------
Co-Source ......... $663
Compass ........... 73
----
$736
====
(7) Reflects interest expense on borrowings related to the Co-Source
acquisition as if it occurred on January 1, 1999. The interest expense was
calculated using an estimated interest rate of approximately 7.0% and
outstanding debt of $126.2 million.
(8) Adjusts the estimated income tax expense, after giving consideration to
non-deductible goodwill expense, as if the Co-Source and Compass
acquisitions occurred on January 1, 1999.
(9) Includes: (i) payroll and related expenses of $599,000 attributable to
certain redundant personnel costs scheduled to be eliminated upon the
completion of the Compass acquisition; and (ii) rental and related
operating costs of $680,000 attributable to facilities which are scheduled
to be closed upon the completion of the Compass acquisition. Net income per
share-basic and net income per share-diluted would have been $0.13 and
$0.13, respectively, on a pro forma basis assuming the acquisition occurred
on January 1, 1999 and those costs had not been incurred.
(10) Gives effect to the issuance of approximately 3.3 million shares of common
stock to finance the Compass acquisition.
(11) Gives effect to: (i) the dilution resulting from warrants to purchase
250,000 shares of NCO common stock issued to finance a portion of the
Co-Source acquisition; and (ii) the issuance of approximately 3.3 million
shares of common stock to finance the Compass acquisition.
73
<PAGE>
(12) Represents the combined historical results of operations of the 1998
Acquisitions for the periods prior to their acquisition by NCO, as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Income (Loss)
Date of From Net
1998 Acquisitions Acquisition Revenue Operations Income (Loss)
- ------------------- ------------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
FCA* .............. 5/5/98 $ 19,340 $ (6,895) $ (7,055)
MedSource ......... 7/1/98 11,028 537 (366)
MSC ............... 11/30/98 97,202 2,180 1,286
--------- --------- ---------
$ 127,570 $ (4,178) $ (6,135)
========= ========= =========
</TABLE>
* Includes adjustments required to convert FCA's historical results of
operations from January 1, 1998 to May 4, 1998, the period prior to the
acquisition, to U.S. GAAP and gives effect to the conversion from Canadian
dollars to U.S. dollars, based on the applicable exchange rate.
(13) Represents the pro forma results of operations of Co-Source from January 1,
1998 to December 31, 1998 including adjustments to present the acquisition
of International Accounting Systems, Inc. ("IAS") completed by Co-Source on
August 5, 1998, as follows (dollars in thousands):
<TABLE>
<CAPTION>
Income From Net
Co-Source Pro Forma Revenue Operations Income (Loss)
------------------- ----------- ------------- --------------
<S> <C> <C> <C>
Co-Source historical ............. $ 57,559 $ 7,854 $ 3,168
Plus:
IAS acquisition* ................ 3,564 87 103
Pro forma adjustments** ......... -- 34 (352)
-------- ------- -------
$ 61,123 $ 7,975 $ 2,919
======== ======= =======
</TABLE>
* The acquisition of IAS was accounted for under the purchase method of
accounting with the results of the acquired companies included in Co-Source's
historical statements of income beginning on the date of acquisition. These
adjustments give effect to the acquisition of IAS as if it occurred on
January 1, 1998.
** Reflects: (i) elimination of expenses for professional fees incurred in
connection with the acquisition; (ii) additional amortization expense
assuming the IAS acquisition occurred on January 1, 1998; and (ii) additional
interest expense on acquisition-related borrowings as if the IAS acquisition
had occurred on January 1, 1998.
74
<PAGE>
(14) Represents the pro forma results of operations of Compass from January 1,
1998 to December 31, 1998 including adjustments to present the acquisitions
completed by Compass in 1998 and the pending sale of Compass' print and
mail division as if they occurred on January 1, 1998, as follows (dollars
in thousands):
<TABLE>
<CAPTION>
Income (Loss)
From Net
Compass Pro Forma Revenue Operations Income (Loss)
----------------- ------------ -------------- --------------
<S> <C> <C> <C>
Compass historical .............................. $ 127,140 $ 12,842 $ 6,007
Plus:
Compass acquisitions* .......................... 49,965 8,827 7,648
Pro forma adjustments** ........................ -- (896) (4,310)
Less:
Sale of the print and mail division*** ......... 71,355 6,380 2,819
--------- -------- --------
$ 105,750 $ 14,393 $ 6,526
========= ======== ========
</TABLE>
* During 1998, Compass completed fourteen acquisitions. All of these
acquisitions were accounted for under the purchase method of accounting with
the results of the acquired companies included in Compass' historical
statements of income beginning on the date of acquisition. These adjustments
give effect to the Compass acquisitions as if they occurred on January 1,
1998.
** Reflects: (i) additional amortization expense assuming the Compass
acquisitions occurred on January 1, 1998; and (ii) additional interest
expense on acquisition-related borrowings as if the Compass acquisitions had
occurred on January 1, 1998.
*** The print and mail division's pro forma results of operations for the year
ended December 31, 1998 reflects approximately $1.9 million of selling,
general and administrative expenses and $1.0 million of interest expense
that were allocated to the division by Compass. The allocation of these
expenses was based on the percentage of the print and mail division's
revenues to Compass' consolidated revenues and Compass' cash investment in
the print and mail division. Income tax expense in the amount $2.2 million
was allocated based upon the percentage of the print and mail division's
income before income taxes to Compass' consolidated income before income
taxes. These allocations are considered by Compass' management to be
reasonable.
(15) Gives effect to the reduction of revenue to conform MSC's revenue
recognition policy to that of NCO.
(16) Gives effect to: (i) the adjustment to amortization expense assuming the
1998 Acquisitions, the Co-Source acquisition and the Compass acquisition
had occurred on January 1, 1998; and (ii) the elimination of depreciation
and amortization expense related to assets revalued or not acquired, as
follows (dollars in thousands):
Adjustment to Adjustment to Net
Acquisition Amortization Depreciation Adjustment
------------ --------------- --------------- -----------
FCA ............... $ 684 $ (2,785) $ (2,101)
MedSource ......... 304 (129) 175
MSC ............... (1,582) (772) (2,354)
Co-Source ......... 2,618 -- 2,618
Compass ........... 720 -- 720
-------- --------- --------
$ 2,744 $ (3,686) $ (942)
======== ========= ========
75
<PAGE>
(17) Reflects interest expense on borrowings related to the 1998 Acquisitions
and the Co-Source acquisition as if they occurred on January 1, 1998. The
interest expense was calculated using an estimated interest rate of
approximately 7.7% and 7.0%, respectively, and outstanding debt of $211.5
million and $126.2 million, respectively.
(18) Adjusts the estimated income tax expense, after giving consideration to
non-deductible goodwill expense, as if the 1998 Acquisitions, the Co-Source
acquisition and the Compass acquisition occurred on January 1, 1998.
(19) Reflects the elimination of interest expense on debt assumed to be repaid
with a portion of the proceeds from the NCO's June 1998 public offering of
4,469,366 shares of common stock, including the 469,366 shares of common
stock sold in July 1998 in connection with the underwriters' exercise of
the over-allotment option, at a price to the public of $21.50 (the "1998
Offering") as if it occurred on January 1, 1998.
(20) Includes: (i) payroll and related expenses of $8.7 million attributable to
certain redundant personnel costs immediately eliminated at the time of the
1998 Acquisitions and scheduled to be eliminated upon the completion of the
Compass acquisition; and (ii) rental and related operating costs of $4.7
million attributable to facilities which were closed at the time of the
1998 Acquisitions and are scheduled to be closed upon the completion of the
Compass acquisition. Net income per share-basic and net income per
share-diluted would have been $0.81 and $0.77, respectively, on a pro forma
basis assuming the acquisitions occurred on January 1, 1998 and those costs
had not been incurred.
(21) Gives effect to the issuance of 4,469,366 shares of common stock, including
the 469,366 shares of common stock sold in July 1998 in connection with the
underwriters' exercise of the over-allotment option, in connection with the
1998 Offering as if it occurred on January 1, 1998.
76
<PAGE>
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Unaudited Quarterly Financial Information for Compass International Services Corporation:
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998 ................ F-2
Consolidated Statements of Operations for the three-month periods ended
March 31, 1999 and 1998 .............................................................. F-3
Consolidated Statements of Stockholders' Equity for the three-month period ended
March 31, 1999 ....................................................................... F-4
Consolidated Statements of Cash Flows for the three-month periods ended
March 31, 1999 and 1998 .............................................................. F-5
Notes to Consolidated Financial Statements ............................................ F-6
Compass International Services Corporation:
Report of Independent Accountants ..................................................... F-10
Consolidated Balance Sheet as of December 31, 1998 and 1997 ........................... F-11
Consolidated Statement of Operations for the year ended December 31, 1998 ............. F-12
Consolidated Statement of Stockholders' Equity for the year ended December 31, 1998 ... F-13
Consolidated Statement of Cash Flows for the year ended December 31, 1998 ............. F-14
Notes to Consolidated Financial Statements ............................................ F-15
</TABLE>
F-1
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 9,075 $ 8,606
Cash held in trust for clients .............................................. 5,690 4,346
Trade receivables, less allowance of $737 at March 31, 1999
and $725 at December 31, 1998 ............................................. 21,783 20,704
Inventory ................................................................... 1,352 1,282
Postage on hand ............................................................. 1,790 2,067
Prepaid expenses and other current assets ................................... 1,308 1,819
Deferred income taxes ....................................................... 877 877
-------- --------
Total current assets ..................................................... 41,875 39,701
Property and equipment, net .................................................. 18,804 18,285
Goodwill, net ................................................................ 127,977 127,857
Other assets ................................................................. 1,056 1,495
-------- --------
Total assets ............................................................. $189,712 $187,338
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade payables .............................................................. $ 6,709 $ 6,783
Accrued expenses ............................................................ 6,741 5,540
Accrued earn-outs payable ................................................... 3,500 8,904
Collections due to clients .................................................. 5,690 4,346
Customer postage advances and deposits ...................................... 2,485 2,484
Notes payable ............................................................... 7,180 1,924
Capital lease obligations ................................................... 1,702 1,798
-------- --------
Total current liabilities ................................................ 34,007 31,779
Long-term debt ............................................................... 53,000 48,000
Notes payable ................................................................ 1,569 7,760
Capital lease obligations .................................................... 3,124 2,644
Deferred income taxes ........................................................ 273 273
-------- --------
Total liabilities ........................................................ 91,973 90,456
-------- --------
Stockholders' equity:
Preferred stock, 10,000,000 shares authorized $.01 par value, no shares issued
or outstanding .............................................................. -- --
Common stock, 50,000,000 shares authorized $.01 par value, 14,405,973 and
13,804,846 shares issued and outstanding at March 31, 1999 and December
31, 1998, respectively ...................................................... 144 138
Additional paid-in capital ................................................... 87,536 85,041
Value of shares to be issued ................................................. -- 2,501
Retained earnings ............................................................ 10,059 9,202
-------- --------
Total stockholders' equity ............................................... 97,739 96,882
-------- --------
Total liabilities and stockholders' equity ............................... $189,712 $187,338
======== ========
</TABLE>
See notes to Consolidated Financial Statements.
F-2
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
1999 1998
-------------- ---------------
<S> <C> <C>
Net revenues ......................................... $ 41,720 $ 8,552
Cost of revenues ..................................... 28,640 5,164
----------- ---------
Gross profit ...................................... 13,080 3,388
Selling, general and administrative expenses ......... 9,469 2,348
Goodwill amortization ................................ 888 130
----------- ---------
Operating income ................................... 2,723 910
Interest expense (income), net ....................... 1,174 (4)
----------- ---------
Income before provision for income taxes ............. 1,549 914
Provision for income taxes ........................... 692 416
----------- ---------
Net income ........................................ $ 857 $ 498
=========== =========
Net income per share:
Basic and diluted .................................... $ 0.06 $ 0.10
=========== =========
Weighted average number of shares outstanding:
Basic .............................................. 14,405,973 5,114,237
=========== =========
Diluted ............................................ 14,405,973 5,150,450
=========== =========
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(In thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
----------------------- Paid-In Retained
Shares Amount Capital Earnings Total
------------ -------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 .......... 13,804,846 $138 $87,542 $ 9,202 $96,882
Shares issued for earn-outs ......... 601,127 6 (6) -- --
Net Income .......................... -- -- -- 857 857
---------- ---- -------- ------- -------
Balance, March 31, 1999 ............. 14,405,973 $144 $87,536 $10,059 $97,739
========== ==== ======== ======= =======
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
----------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income .......................................................... $ 857 $ 498
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation ........................................................ 1,074 205
Amortization ........................................................ 888 130
CHANGES IN OPERATING ASSETS AND LIABILITIES, NET OF
EFFECT FROM ACQUISITIONS:
Cash held in trust for clients ...................................... (1,344) --
Trade receivables ................................................... (1,079) 105
Inventory ........................................................... (70) 32
Postage on hand ..................................................... 277 (377)
Prepaid expenses and other current assets ........................... 916 (2)
Other liabilities ................................................... -- 51
Accounts payable and accrued expenses ............................... 1,127 388
Collections due to clients .......................................... 1,344 461
Customer postage advances and deposits .............................. 1 474
Income taxes payable ................................................ -- 357
-------- --------
Net cash provided by operating activities ........................ 3,991 2,322
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property & equipment ................................... (699) (498)
Business acquisitions, net of cash acquired ......................... (6,378) (16,203)
-------- --------
Net cash used in investing activities ............................ (7,077) (16,701)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital lease obligations ............................. (510) (70)
Net proceeds from initial public offering ........................... -- 41,926
Proceeds from credit facility ....................................... 5,000 --
Repayment of debt ................................................... (935) (13,011)
-------- --------
Net cash provided by financing activities ........................ 3,555 28,845
-------- --------
Net increase in cash and cash equivalents ............................ 469 14,466
Cash and cash equivalents, beginning of period ....................... 8,606 --
-------- --------
Cash and cash equivalents at end of period ........................... $ 9,075 $ 14,466
======== ========
Supplemental disclosures of cash flow information:
Cash paid for interest .............................................. $ 986 $ 88
======== ========
Cash paid for income taxes .......................................... $ 534 $ 2
======== ========
Non cash investing activities:
Fair value of net assets acquired ................................... $ 64,001
Value of common stock issued ........................................ (45,660)
Value of warrants issued ............................................ (50)
--------
Net cash paid ....................................................... 18,291
Cash acquired in acquisitions ....................................... (2,088)
--------
Net cash paid for acquisitions ................................... $ 16,203
========
</TABLE>
In 1999, non-cash financing activities included $841 of
capital lease obligations incurred for equipment.
See Notes to Consolidated Financial Statements
F-5
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
NOTE 1 -- BUSINESS AND ORGANIZATION
Compass International Services Corporation, a Delaware corporation
("Compass" or the "Company") is a leading provider of accounts receivable
management services and other complementary outsourced services. Compass'
Accounts Receivable Management segment provides a suite of accounts receivable
management solutions to clients, including traditional third party collection
services, pre-collection customer contact programs, innovative payment options,
credit report-related services, an attorney network for severely delinquent
accounts, and bankruptcy and probate collection strategies. Compass' Print and
Mail segment offers printing, mailing and related services which complement the
accounts receivable management services, including expertise and efficiency in
direct mail and billing, presorting, freight and drop shipping, data processing,
laser printing, mailing list rental and order fulfillment. The Company's
Teleservices segment provides state-of-the-art call management and reporting.
On March 4, 1998, simultaneously with the closing of the Company's initial
public offering ("IPO" or the "Offering") of its common stock, Compass acquired
in separate purchase transactions, all of the outstanding capital stock of five
companies providing accounts receivable management services, print and mail
services and teleservices (the "Founding Companies"). Prior to the Offering,
Compass had no operating activities. Since the Offering, Compass has completed
nine additional acquisitions and has reorganized certain of its operating
entities. These consolidated financial statements reflect the results of
operations of Compass and its subsidiaries subsequent to the IPO and initial
acquisitions.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions for Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of only
normal recurring items) considered necessary for a fair presentation have been
included. Operating results for the three month period ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999 or for any other interim period. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K, as amended, filed
with the Securities and Exchange Commission.
Principles of Consolidation
The consolidated financial statements include the accounts of Compass and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. While management believes that the estimates and related
assumptions used in the preparation of these financial statements are
appropriate, actual results could differ from those estimates.
F-6
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except share data)
(unaudited)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Earnings Per Share
Basic and diluted earnings per share have been calculated based upon the
provisions of FASB Statement No. 128, Earnings per Share. Basic earnings per
share ("Basic EPS") for the three months ended March 31, 1999 reflect the number
of shares of Common Stock outstanding for the entire period. The average market
price for the quarter was below the exercise price of all outstanding options
and warrants. Therefore, all outstanding options and warrants would have had an
anti-dilutive effect on earnings per share and have been excluded from the
calculation.
The computation of Basic EPS for the three months ended March 31, 1998
reflects the number of shares of Common Stock outstanding (1,682,769)
attributable to BGL Capital Partners, LLC and Compass management from January 1,
1998 until February 27, 1998, the number of shares following the Acquisitions
and Offering (11,218,460) from February 27, 1998 until the underwriters'
overallotment option was exercised on March 25, 1998 and 11,833,460 shares
thereafter until March 31, 1998. Diluted earnings per share ("Diluted EPS") for
the 1998 period includes the effect of options and warrants outstanding during
such period.
Shares used in the calculation of EPS for the three months ended March 31,
1998 are as follow:
Basic (weighted average shares outstanding) ......... 5,114,237
Effect of dilutive potential securities ............. 36,213
---------
Shares used in calculation of Diluted EPS ........... 5,150,450
=========
NOTE 3 -- ACQUISITIONS
Founding Companies
On March 4, 1998, Compass acquired the Founding Companies for consideration
consisting of common stock, cash and debt. The closing of the Founding Companies
Acquisitions and the Offering occurred on that date. The Founding Companies
include providers of accounts receivable management services: National Credit
Management Corporation, B.R.M.C. of Delaware, Inc., Mid-Continent Agencies,
Inc.; print and mail services: The Mail Box, Inc. ("Mail Box"); and
telemarketing services: Impact Telemarketing Group, Inc. Mail Box has been
identified as the accounting acquirer. Accordingly, in recording the Founding
Companies Acquisitions, the accounts of Mail Box continue to be reflected on its
historic basis of accounting, while the aggregate purchase price for the other
Founding Companies was allocated based on the fair value of assets acquired and
liabilities assumed.
Acquired Companies
Subsequent to the IPO, the Company made additional acquisitions in the
accounts receivable management services and the print and mail services
industries. These acquisitions included the following accounts receivable
management services companies: Professional American Collections, Inc.
Nationwide Debt Recovery, Ltd., Delivery Verification Service, Inc., Midwest
Collection Service, Inc., R.C. Wilson Company, and Rosenfeld Attorney Network.
The print and mail services companies acquired included: Metrowebb, Inc. and MWI
Laser Group, Inc., Maher & Associates Mailing Services, Inc. and Bender Direct
Mail Service, Inc. The businesses acquired by Compass subsequent to the IPO are
collectively referred to as the "Acquired Companies." The aggregate purchase
price for each acquisition has been assigned to their respective assets based
upon the fair value of the assets acquired and liabilities assumed. As each of
these acquisitions has been accounted for as a purchase, the Company's
consolidated financial statements reflect the operations of the acquired
companies subsequent to the respective date of the acquisition.
F-7
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except share data)
(unaudited)
NOTE 3 -- ACQUISITIONS -- (Continued)
Pursuant to the acquisitions, the Company undertook a program to
consolidate and streamline the operations of the accounts receivable management
services operations and to eliminate certain other redundant positions. A total
charge amounting to $1,433 was recorded as part of the goodwill recorded in the
acquisition transactions. Of this amount, $1,333 related to the severance of
approximately 20 employees and $100 related to the close-down and consolidation
of operations. As of March 31, 1999, $409 was included in accrued expenses
relating to severance.
The following unaudited pro forma summary presents the combined results of
operations of the Company, the Founding Companies and the Acquired Companies, as
if the acquisitions and Compass' IPO occurred at January 1, 1998. The pro forma
amounts give effect to certain adjustments including: adjustments to salaries,
bonuses and benefits to former owners and key management of the Founding
Companies and the Acquired Companies, repayment of long-term debt acquired,
amortization of goodwill and other intangible assets resulting from the
acquisitions and the Founding Companies and the Acquired Companies, interest
expense on additional debt for the Acquired Companies and provision for income
taxes as if income were subject to corporate federal and state income taxes
during the period. The pro forma summary does not purport to represent what
Compass' operations would actually have been if such transactions had occurred
on January 1, 1998, and are not necessarily representative of Compass' results
of operations for any future period.
Since the Founding Companies and the Acquired Companies were not under
common control or management prior to their acquisition by Compass, historical
combined results may not be comparable to, or indicative of, future performance.
March 31, 1998
---------------
(Unaudited)
Net revenues ....................... $ 45,472
Operating income ................... $ 6,208
Net income ......................... $ 2,975
Net income per share-basic ......... $ 0.21
NOTE 4 -- CREDIT FACILITY
On March 30, 1999, the Company's $55 million credit facility was amended
to: a) revise certain definitions, b) establish termination fees should the
facility be terminated prior to December 31, 1999, c) prohibit additional
acquisitions until the Leverage Ratio, as defined, is less than 2-to-1 for two
consecutive fiscal quarters, but at least until January 1, 2000, d) increase the
Maximum Leverage Ratio, as defined, from 2.0 to a quarterly scale ranging from
3.0-to-1 to 2.25-to-1, e) establish a Maximum Senior Leverage Ratio and f)
redefine the Debt-to-Capitalization Ratio. The Company was in compliance with
all of the covenants contained in the credit agreement for the period ended
March 31, 1999 and through the date of filing on Form 10-Q.
In addition, pursuant to the amendment, the interest rate under the credit
agreement was increased from 150 basis points to 225 basis points over the
Interbank Offered Rate or a Base Rate as defined in the Agreement.
NOTE 5 -- BUSINESS SEGMENTS
The Company's operations are principally in three industry segments:
accounts receivable management services, print and mail services and
teleservices. The Company's operations are principally within the United States.
F-8
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except share data)
(unaudited)
NOTE 5 -- BUSINESS SEGMENTS -- (Continued)
It should be noted that industry segment information might be of limited
usefulness in comparing an industry segment of the Company with a similar
industry segment of another enterprise.
Selected information by industry segment is summarized below for the
quarters ended March 31, 1999 and 1998, respectively. The consolidated financial
statements reflect the results of operations of Compass and its subsidiaries
subsequent to the IPO. Therefore, the results of operations for the three months
ended March 31, 1998 reflect one month of operating activity.
<TABLE>
<CAPTION>
Accounts
Receivables Print &
Management Mail Teleservices Corporate Consolidated
------------- ---------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Three months ended March 31, 1999
- ----------------------------------
Net revenues .................... $ 22,607 $14,827 $ 4,286 $ 41,720
======== ======= ======= ========
Operating income ................ $ 3,651 $ 529 $ 367 $ (1,824) $ 2,723
======== ======= ======= ======== ========
Total assets .................... $122,747 $42,284 $ 7,473 $ 17,208 $189,712
======== ======= ======= ======== ========
Depreciation .................... $ 400 $ 570 $ 51 $ 53 $ 1,074
======== ======= ======= ======== ========
Capital expendtures ............. $ 85 $ 1,118 $ 25 $ 312 $ 1,540
======== ======= ======= ======== ========
Three months ended March 31, 1998
- ----------------------------------
Net revenues .................... $ 3,849 $ 3,176 $ 1,527 $ 8,552
======== ======= ======= ========
Operating income ................ $ 522 $ 572 $ 116 $ (300) $ 910
======== ======= ======= ======== ========
Total assets .................... $ 54,703 $12,324 $ 8,090 $ 19,916 $ 95,033
======== ======= ======= ======== ========
Depreciation .................... $ 96 $ 88 $ 21 $ -- $ 205
======== ======= ======= ======== ========
Capital expenditures ............ $ 123 $ 354 $ -- $ 21 $ 498
======== ======= ======= ======== ========
</TABLE>
NOTE 6 -- RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and for Hedging Activities. The statement is effective for fiscal
years beginning after June 15, 2000 and defines a derivative and establishes
common accounting principles for all types of instruments. The Company plans to
adopt Statement No. 133 for the fiscal year ending December 31, 2001, however,
management does not expect its adoption to have a significant impact on the
Company's financial position, results of operations or cash flows.
NOTE 7 -- SUBSEQUENT EVENTS
On May 12, 1999, the Company signed a definitive agreement with NCO Group,
Inc. ("NCO"), a provider of accounts receivable management services, under which
NCO will acquire all outstanding shares of Compass in a stock-for-stock
transaction. Under the terms of the transaction, it is anticipated that NCO will
issue 0.23739 shares of NCO common stock in exchange for each common share of
Compass.
In conjunction with the above transaction, Compass will divest its print
and mail division to a company formed by the division's current management team
for total cash consideration of approximately $35.1 million plus the assumption
of certain obligations.
The NCO transaction is subject to customary closing conditions, including
Hart-Scott-Rodino approval, approval by Compass' shareholders and completion of
the management buyout of the print and mail division. Both transactions are
currently expected to close in the third quarter of 1999.
F-9
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Compass International Services Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity and cash
flows present fairly, in all material respects, the financial position of
Compass International Services Corporation and its subsidiaries at December 31,
1998 and 1997, and the results of their operations and their cash flows for the
year ended December 31, 1998, 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/ PricewaterhouseCoopers LLP
New York, New York
March 3, 1999
F-10
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ---------
(In thousands, except
share data)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ........................................................ $ 8,606 $ --
Cash held in trust for clients ................................................... 4,346 --
Trade receivables, less allowance of $725 at December 31, 1998 ................... 20,704 --
Inventory ........................................................................ 1,282 --
Postage on hand .................................................................. 2,067 --
Prepaid expenses and other current assets ........................................ 1,819 --
Deferred income taxes ............................................................ 877 --
-------- ------
Total current assets .......................................................... 39,701 --
Property and equipment, net ......................................................... 18,285 --
Deferred offering costs ............................................................. -- 3,942
Goodwill, net ....................................................................... 127,857 --
Other assets ........................................................................ 1,495 --
-------- ------
Total assets .................................................................. $187,338 $3,942
======== ======
Liabilities and Stockholders' Equity
Current liabilities:
Trade payables ................................................................... $ 6,783 $ --
Accrued expenses ................................................................. 5,540 2,747
Accrued earn-outs payable ........................................................ 8,904 --
Collections due to clients ....................................................... 4,346 --
Customer postage advances and deposits ........................................... 2,484 --
Notes payable .................................................................... 1,924 1,045
Capital lease obligations ........................................................ 1,798 --
-------- ------
Total current liabilities ..................................................... 31,779 3,792
Long-term debt ...................................................................... 48,000 --
Notes payable ....................................................................... 7,760 --
Capital lease obligations ........................................................... 2,644 --
Deferred income taxes ............................................................... 273 --
-------- ------
Total liabilities ............................................................. 90,456 3,792
-------- ------
Commitments and contingencies
Stockholders' equity:
Preferred stock, 10,000,000 shares authorized $.01 par value, no shares issued or
outstanding ........................................................................ -- --
Common stock, 50,000,000 shares authorized $.01 par value, 13,804,846 and
1,682,769 shares issued and outstanding at December 31, 1998 and 1997,
respectively ....................................................................... 138 17
Additional paid-in capital .......................................................... 85,041 133
Value of shares to be issued (note 3) ............................................... 2,501 --
Retained earnings ................................................................... 9,202 --
-------- ------
Total stockholders' equity .................................................... 96,882 150
-------- ------
Total liabilities and stockholders' equity .................................... $187,338 $3,942
======== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(In thousands, except share data)
Net revenues ......................................... $ 127,140
Cost of revenues ..................................... 85,919
-----------
Gross profit ....................................... 41,221
Selling, general and administrative expenses ......... 26,250
Goodwill amortization ................................ 2,129
-----------
Operating income ................................... 12,842
Interest expense, net ................................ 1,966
-----------
Income before provision for income taxes ........... 10,876
Provision for income taxes ........................... 4,869
-----------
Net income ......................................... $ 6,007
===========
Net income per share:
Basic .............................................. $ 0.54
===========
Diluted ............................................ $ 0.53
===========
Weighted average number of shares:
Basic .............................................. 11,168,799
===========
Diluted ............................................ 11,313,525
===========
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Common Stock Additional
----------------------- Paid-in Retained
Shares Amount Capital Earnings Total
------------ -------- ----------- ---------- -----------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 ............... 1,682,769 $ 17 $ 133 $ -- $ 150
Shares issued in Offering ................ 4,715,000 47 46,045 -- 46,092
Offering costs ........................... -- -- (5,945) -- (5,945)
Shares issued for acquisitions ........... 7,407,077 74 30,823 -- 30,897
Value of shares to be issued (note 3)..... -- -- 2,501 -- 2,501
Retained earnings of The Mail Box,
Inc., accounting acquirer ............... -- -- -- 3,195 3,195
Increase in value of shares exchanged
for Compass pre-offering shares ......... -- -- 13,985 -- 13,985
Net income ............................... -- -- -- 6,007 6,007
--------- ---- -------- ------ --------
Balance, December 31, 1998 ............... 13,804,846 $138 $ 87,542 $9,202 $ 96,882
========== ==== ======== ====== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
(In thousands)
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net income ...................................................................... $ 6,007
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation ................................................................. 2,957
Amortization ................................................................. 2,204
Deferred income taxes ........................................................ 273
Change in operating assets and liabilities, net of effect of acquisitions:
Cash held in trust for clients ............................................... 74
Trade receivables ............................................................ (413)
Inventory .................................................................... 42
Postage on hand .............................................................. (553)
Prepaid expenses and other current assets .................................... (1,692)
Other assets ................................................................. (374)
Trade payables ............................................................... (978)
Accrued expenses ............................................................. (5,874)
Collections due to clients ................................................... 15
Customer postage advances and deposits ....................................... 765
Other non-current liabilities ................................................ (55)
---------
Net cash provided by operating activities ....................................... 2,398
---------
Cash flows from investing activities:
Purchases of property & equipment ............................................ (3,336)
Business acquisitions, net of cash acquired .................................. (60,059)
---------
Net cash used in investing activities ........................................... (63,395)
---------
Cash flows from financing activities:
Loan acquisition costs ....................................................... (352)
Repayments of capital lease obligations ...................................... (1,471)
Net proceeds from initial public offering .................................... 40,248
Proceeds from revolving credit facility borrowings ........................... 48,000
Repayment of acquired debt ................................................... (16,822)
---------
Net cash flows provided by financing activities ................................. 69,603
---------
Net increase in cash and cash equivalents ....................................... 8,606
Cash and cash equivalents, beginning of period .................................. --
---------
Cash and cash equivalents, end of period ........................................ $ 8,606
=========
Supplemental Disclosures of cash flow information:
Cash paid for interest ....................................................... $ 1,687
=========
Cash paid for income taxes ................................................... $ 5,659
=========
Non cash investing activities:
Fair value of net assets acquired ............................................ $ 145,728
Value of common stock issued ................................................. (60,190)
Notes issued ................................................................. (8,650)
Amounts payable pursuant to earn-outs ........................................ (11,405)
---------
Net cash paid ................................................................ 65,483
Cash acquired ................................................................ (5,424)
---------
Net cash paid for acquisitions ............................................... $ 60,059
=========
</TABLE>
Non cash financing activities include $2,413 of capital lease
obligations incurred for equipment.
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 1 -- BUSINESS AND ORGANIZATION
Compass International Services Corporation, a Delaware corporation,
("Compass" or the "Company") was founded in April 1997 to create a leading
provider of outsourced business services to public and private entities
throughout the United States. These services include: management of accounts
receivables, including the recovery of traditional delinquent accounts from both
consumer and commercial debtors and the management of early stage delinquencies;
mailing services, including the mailing of direct marketing materials, billing
services, mail presorting and other services related to mail handling; and
telemarketing services for outbound telemarketing, inbound customer service and
inbound sales.
On March 4, 1998, simultaneously with the closing of the Company's initial
public offering ("IPO" or the "Offering") of its common stock, Compass acquired
all of the outstanding capital stock of five companies providing accounts
receivable management services, mailing services and teleservices in separate
purchase transactions (the "Founding Companies"). (See Note 3 -- Acquisitions).
Prior to the Offering, Compass had no operating activities. These consolidated
financial statements reflect the results of operations of Compass and its
subsidiaries subsequent to the IPO and initial acquisitions.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Compass and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. While management believes that the estimates and related
assumptions used in the preparation of these financial statements are
appropriate, actual results could differ from those estimates.
Cash Equivalents
Cash equivalents are liquid unrestricted investments with original
maturities of three months or less.
Revenue Recognition
The Company generally recognizes revenues in its accounts receivable
management business at the time a payment is received on an account directly
from the debtor, or when reported as paid by the client. Revenue is typically
based upon contractual percentages of amounts collected. Revenues for certain
other accounts receivable management services are recognized based upon
completion of services performed for the client.
The Company provides a variety of print and mail services to its customers.
Revenue for the print and mail services is recognized upon delivery to the
United States Post Office or to the customer. Postage expenses are passed
directly through to the Company's clients and are not recognized as revenues or
expenses in the Company's consolidated financial statements.
Revenues for outbound and inbound teleservices consist of hourly rate
charges and incentive based commissions that are recognized as these services
are provided.
F-15
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except share data)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Inventory
Inventory consists of raw materials and work in process recorded at cost
(FIFO) not to exceed market. The cost of work in process includes the costs of
completed but unmailed production.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation
and amortization. Depreciation and amortization of assets recorded under capital
leases and leasehold improvements, are provided using the straight-line method
over estimated useful lives of each class of assets, or, if shorter, the term of
lease. Useful lives range from 3 to 8 years. Expenditures for repairs and
maintenance are charged to expense as incurred.
Goodwill and Other Intangibles
Goodwill is the excess of the purchase price over the fair value of net
assets acquired in business combinations and certain amounts ascribed to the
issuance of pre-IPO shares of the Company's common stock. Goodwill is amortized
on a straight-line basis over periods ranging from 15 to 40 years. Accumulated
amortization at December 31, 1998 amounted to $2,129.
Other intangibles are comprised of non-compete agreements totaling $450
with certain selling shareholders. The agreements are for periods ranging from
two to six years. Accumulated amortization at December 31, 1998 amounted to $75.
Long-lived Assets
Long-lived assets, including goodwill, are reviewed for permanent
impairment annually or whenever events or changes in circumstances indicate that
the carrying amount may be impaired. A loss would be recognized for the
difference between the fair value and carrying value of the asset.
Financial Instruments
Interest rate swap agreements have been used to effectively modify the
interest rate on $40 million of the Company's revolving line of credit from a
variable rate to a fixed rate. Amounts paid or received by the Company under
these agreements are recorded as adjustments to interest expense as realized.
Financial instruments, which potentially expose the Company to a
concentration of credit risk principally, consist of accounts receivable. The
Company provides its services to a large number of clients in many domestic
geographic areas. To minimize credit concentration risk, the Company performs
ongoing credit evaluations of its customers' financial conditions.
Income Taxes
The Company records income taxes using the liability method, under which
deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets or liabilities and their
respective tax basis, using enacted tax rates.
Cash Held in Trust for Clients/Collections Due to Clients
Cash held in trust for clients and collections due to clients consist of
amounts collected on behalf of the Company's clients, net of the Company's
commission.
F-16
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except share data)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Earnings Per Share
The computation of basic earnings per share ("Basic EPS") for the year
ended December 31, 1998 reflects the number of shares of Common Stock
outstanding (1,682,769) attributable to BGL Capital Partners, LLC and Compass
management from January 1, 1998 until February 27, 1998, the number of shares
following the Founding Companies Acquisitions and Offering (11,218,460) from
February 27, 1998 until March 25, 1998, and the number of shares following the
exercise of the underwriters' overallotment option (11,833,460) from March 25,
1998 until the respective dates of acquisitions made using the Company's common
stock that occurred through September 30, 1998. The weighted average number of
shares outstanding for the year was 11,168,799.
Diluted earnings per share ("Diluted EPS") for the year ended December
31,1998 includes the effect of 111,270 shares earned as of December 31, 1998
pursuant to earn-out agreements (see note 3) and 33,456 shares issuable for
dilutive options outstanding, net of treasury shares that could be purchased in
the open market based on the average closing per share price for the period. At
December 31, 1998, options amounting to 122,700 weighted shares were not
considered dilutive potential shares as their exercise prices were greater than
the average market price.
A decrease in the price of a share of the Company's common stock subsequent
to the calculation of the estimated number of shares to be issued pursuant to
the earn-out agreements would result in more shares being issued than have been
used in the diluted earnings per share calculation. The actual number of shares
to be issued will be based on the closing common stock price at March 30, 1999.
New Accounting Pronouncements
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and for Hedging Activities. The statement is effective for fiscal
years beginning after June 15, 2000 and defines a derivative and establishes
common accounting principles for all types of instruments. The statement
requires the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives are either offset against the change in
fair value of assets, liabilities, or firm commitments through earnings or
recognized in comprehensive income until the hedged item is recognized in
earnings. The non-hedge portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company plans to adopt Statement No. 133
in 2001, however, management does not expect its adoption to have a significant
impact on the Company's financial position, results of operations or cash flows.
NOTE 3 -- ACQUISITIONS
Founding Companies
On March 4, 1998, Compass acquired the Founding Companies for
consideration consisting of common stock, cash and debt. The closing of the
Founding Companies Acquisitions and the Offering occurred on that date. The
Founding Companies include providers of accounts receivable management
services: National Credit Management Corporation ("NCMC"), B.R.M.C. of
Delaware, Inc. ("BRMC"), Mid-Continent Agencies, Inc. ("MCA"); print and mail
services: The Mail Box, Inc. ("Mail Box"); and telemarketing services: Impact
Telemarketing Group, Inc. ("Impact"). Mail Box has been identified as the
accounting acquirer. Accordingly, in recording the Founding Companies
Acquisitions the accounts of Mail Box continue to be reflected on its historic
basis of accounting, while the aggregate purchase price for the other Founding
Companies was allocated based on the fair value of assets acquired and
liabilities assumed.
F-17
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except share data)
NOTE 3 -- ACQUISITIONS -- (Continued)
Acquired Companies
Subsequent to the IPO, the Company made several additional acquisitions in
the accounts receivable management services and the print and mail service
industries. These acquisitions included the following accounts receivable
management services companies: Professional American Collections, Inc. ("PAC")
Nationwide Debt Recovery, Ltd. ("NDR"), Delivery Verification Service, Inc.
("DVS"), Midwest Collection Service, Inc.( "MCS"), R.C. Wilson Company
("Wilson"), and Rosenfeld Attorney Network ("Rosenfeld"). The print and mail
service companies acquired included: Metrowebb, Inc. and MWI Laser Group, Inc.
("Metrowebb"), Maher & Associates Mailing Services, Inc. ("Ameritex") and
Bender Direct Mail Service, Inc. ("Bender") (the "Acquired Companies"). The
aggregate purchase price for each acquisition has been assigned to their
respective assets based upon the fair value of the assets acquired and
liabilities assumed. As each of these acquisitions has been accounted for as a
purchase the Company's consolidated financial statements reflect the operations
of the acquired companies subsequent to the date of the acquisitions.
The following table sets forth the consideration paid (a) in shares of the
Company's common stock, (b) in cash and (c) in other consideration, principally
debt incurred and amounts payable pursuant to earn-out agreements as of December
31, 1998; the fair value of the net assets acquired and the resulting goodwill.
<TABLE>
<CAPTION>
Consideration Paid
------------------------
Shares
of Value Net
Common of Assets
Stock Shares Cash Other Total Acquired Goodwill
------------ ---------- ---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
NCMC .............. 965,801 $ 8,163 $ 3,169 $ 88 $ 11,420 $ 2,689 $ 8,731
BRMC .............. 1,151,787 9,675 3,894 1,538 15,107 (4,036) 19,143
MCA ............... 490,467 4,120 1,635 5,296 11,051 598 10,453
Impact ............ 389,124 3,269 322 113 3,704 456 3,248
PAC ............... 659,154 3,803 10,425 7,617 21,845 56 21,789
NDR ............... 205,556 1,503 6,937 6,516 14,956 458 14,498
DVS ............... -- -- 1,500 365 1,865 (374) 2,239
MCS ............... -- -- 3,225 922 4,147 (411) 4,558
Wilson ............ 14,285 97 3,000 584 3,681 149 3,532
Rosenfeld ......... -- -- 8,100 4,635 12,735 537 12,198
Metrowebb ......... 550,000 4,156 6,000 596 10,752 3,476 7,276
Ameritex .......... 284,112 2,850 3,500 55 6,405 1,559 4,846
Bender ............ 234,939 1,875 2,152 78 4,105 632 3,473
--------- ------- ------- ------- -------- -------- --------
4,945,225 $39,511 $53,859 $28,403 $121,773 $ 5,789 $115,984
========= ======= ======= ======= ======== ======== ========
</TABLE>
Consideration issued pursuant to the acquisition of Mail Box, the
accounting acquirer, amounted to 2,461,852 shares of common stock with a value
of $20,679 and $8,614 in cash. At the acquisition date, additional paid-in
capital relating to the acquisition has been reduced by $29,293 for the value of
the consideration paid for Mail Box which is accounted for at historical cost.
Shares issued to the Founding Companies were valued at $8.40 per share,
representing a 20% discount from the IPO price due to a one-year restriction on
transferability. For shares issued in conjunction with other acquisitions during
the year, having an aggregate recorded share value of $14,284, discounts from
the market price ranged from 20% for one year restrictions on transferability to
a maximum of 35% for two-year restrictions on transferability.
The purchase agreements with certain of the Acquired Companies provide for
the payment of earn-out amounts based upon 1998 performance, as defined in the
specific agreements. At December 31, 1998, $11,405
F-18
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except share data)
NOTE 3 -- ACQUISITIONS -- (Continued)
has been provided in the accompanying consolidated balance sheet for estimated
payments earned pursuant to these agreements, which are in the process of being
finalized. The earn-outs are payable in cash of $8,904 and common stock valued
at $2,501. The shares to be issued pursuant to the earn-out agreements are
subject to the same restrictions on transferability as those issued in the
acquisitions and, therefore, the market value of such shares have been
discounted on a consistent basis. In addition, the purchase agreement with one
of the Acquired Companies provides for the payment, in shares of the Company's
common stock, of an earn-out based upon that company's 1999 earnings before
interest, income taxes, depreciation and amortization, as defined, to a maximum
amount of $3,745.
Pursuant to the acquisitions, the Company undertook a program to
consolidate and streamline the operations of the accounts receivable management
services operations and to eliminate certain other redundant positions. A total
charge amounting to $1,433 has been recorded as part of the goodwill recorded in
the acquisition transactions. Of this amount, $1,333 relates to the severance of
approximately 20 employees and $100 relates to the close-down and consolidation
of operations. At of December 31, 1998, $712 was included in accrued expenses
relating to severance.
The following unaudited pro forma summary presents the combined results of
operations of the Company, the Founding Companies and the Acquired Companies, as
if the acquisitions and Compass' IPO occurred at the beginning of 1998 and 1997.
The pro forma amounts give effect to certain adjustments including: adjustments
to salaries, bonuses and benefits to former owners and key management of the
Founding Companies and the Acquired Companies, repayment of long-term debt
acquired, amortization of goodwill and other intangible assets resulting from
the Founding Company acquisitions and the Acquired Companies, interest expense
on additional debt for the Acquired Companies and provision for income taxes as
if income were subject to corporate federal and state income taxes during the
period. The pro forma summary does not purport to represent what Compass'
operations would actually have been if such transactions had occurred on January
1, 1998 and 1997, and is not necessarily representative of Compass' results of
operations for any future period. Since the Founding Companies were not under
common control or management, historical combined results may not be comparable
to, or indicative of, future performance.
Year ended Year ended
December 31, 1998 December 31, 1997
------------------- ------------------
(Unaudited) (Unaudited)
Net revenues ....................... $ 177,105 $ 151,088
Operating income ................... 20,775 12,947
Net income ......................... 9,345 4,634
Net income per share-basic ......... $ 0.68 $ 0.34
NOTE 4 -- PROPERTY AND EQUIPMENT
At December 31, 1998, property and equipment consist of the following:
Facilities ....................................... $ 1,098
Equipment ........................................ 12,159
Furniture, fixtures and office equipment ......... 13,808
Other ............................................ 398
--------
Total .......................................... 27,463
Less accumulated depreciation .................... (9,178)
--------
Net property and equipment ..................... $ 18,285
========
F-19
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except share data)
NOTE 5 -- LONG-TERM DEBT
Credit Facility
On April 23, 1998, Compass entered into an agreement (the "Revolver") with
Bank of America, NT & SA together with a group of other financial institutions,
with respect to a $35 million revolving credit facility. On August 7, 1998, the
Revolver was amended to increase the total amount available to $50 million and
on November 16, 1998 it was further amended to increase the total available
credit to $55 million. The Revolver has a three-year term and has been used for
acquisitions, capital expenditures, refinancing debt, and for general corporate
purposes. The Revolver also provides that a maximum of $2 million of the total
$55 million available may be used for letters of credit. At December 31, 1998,
borrowings under the Revolver totaled $48 million, there were $.8 million in
outstanding letters of credit and $6.2 million of availability.
The Revolver requires Compass to comply with various covenants which
include maintenance of certain financial ratios, restrictions on additional
indebtedness and restrictions on liens, guarantees, investments, capital
expenditures, sales of assets, mergers and acquisitions, and dividends.
Indebtedness under the Revolver bears interest at an initial increment, based on
the Company maintaining a specified leverage ratio of 125 basis points over the
Interbank Offered Rate or a Base Rate, as defined therein. The Revolver is
secured by the common stock of Compass' current and future subsidiaries. In
addition, if the Company fails to maintain a leverage ratio, as defined, of
1.5-to-1, lenders may collateralize the Revolver with substantially all of the
assets of the Company and its subsidiaries. At December 31, 1998, the leverage
ratio, as defined, exceeded 1.5-to-1 and the lenders have perfected their lien
on the collateral. At December 31, 1998 the Company was in compliance with the
debt covenants.
The borrowing rate under the Revolver on December 31, 1998 was 6.75%. On
October 13, 1998, the Company entered into interest rate swap arrangements to
effectively lock in a fixed rate covering $40 million of the Company's total
outstanding borrowings. The rate under the swap agreements at December 31, 1998
was 6.34%, which is comprised of a fixed rate of 4.84% plus an increment, based
on the Company maintaining a specified leverage ratio, of 150 basis points. The
swap arrangements were entered into with two of the lenders that are parties to
the Revolver and terminate on October 15, 2000.
Due to a change in the Company's leverage ratio, the Revolver and swap
arrangements are being amended to provide a change in the margin increment to
225 basis points, or interest rates of 7.50% and 7.09%, respectively. This
margin change is effective with the signing of the amendment.
Notes Payable
The Company issued notes in connection with acquisitions and has other
notes outstanding with respect to equipment financing and general working
capital. Such notes are summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Notes issued in connection with acquisitions, due between January 1999 and May 2001, with
interest rates ranging from 7.16% to 10% ............................................... $8,650
Secured equipment financing facilities, due between 1999 and 2001, with interest rates
between 8.98% and 10.15% ............................................................... 584
Other notes due between 1999 to 2015, with interest rates between 8% and 9.5% ........... 450
------
Total ................................................................................. $9,684
======
</TABLE>
Aggregate maturities of long-term borrowings over the next five fiscal
years are as follows: 1999 - $1,924; 2000 - $7,214; 2001 - $48,497; 2002 - $6;
2003 - $6; Thereafter $37.
F-20
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except share data)
NOTE 6 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts
receivable/payable, accrued expenses and short-term debt approximate fair value
because of the short-term nature of these instruments. The estimated fair value
of notes payable and long-term debt approximates the carrying value due to its
stated interest rates approximating market rates for debt with similar terms and
average maturities.
The Company uses interest rate swap arrangements to reduce interest rate
fluctuation risk. Amounts paid or received by the Company under these agreements
are recorded as an adjustment to interest expense as realized. Fair value of
these instruments is determined based on estimated settlement costs using
current interest rates. At December 31, 1998, the fair value of these
instruments approximates an asset of $122, which is not reflected in the
accompanying consolidated balance sheet. The counterparties to the Company's
interest rate swap agreements are substantial and creditworthy commercial banks
which are recognized as market makers. Neither the risks of counterparty
nonperformance nor the economic consequences of counterparty nonperformance
associated with these contracts were considered by the Company to be material.
NOTE 7 -- INCOME TAXES
The provision for income taxes consists of:
Current:
Federal ....................................................... $3,865
State ......................................................... 731
------
4,596
======
Deferred:
Federal ....................................................... 231
State ......................................................... 42
------
273
------
$4,869
======
Actual income tax expense differs from the "expected" income tax expense
(computed by applying the U.S. Federal corporate tax rate of 35% to income
before income taxes) as follows:
Computed "expected" income tax expense ............. $3,807
Non-deductible goodwill ............................ 686
State income taxes, net of Federal benefit ......... 502
Other .............................................. (126)
------
Effective income tax expense ....................... $4,869
======
F-21
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except share data)
NOTE 7 -- INCOME TAXES -- (Continued)
Deferred tax assets and deferred tax liabilities were comprised of the
following:
Deferred tax assets:
Allowance for doubtful accounts ........... $ 251
Net operating loss carryforwards .......... 337
Accrued expenses .......................... 282
Other ..................................... 7
-----
Total deferred tax assets .............. 877
Deferred tax liabilities:
Amortizable goodwill ...................... 136
Depreciation expense ...................... 137
-----
Total deferred tax liabilities ......... 273
-----
Net deferred tax assets ................ $ 604
=====
There was no valuation allowance for deferred tax assets as of December 31,
1998. Based upon the scheduled reversal of deferred tax liabilities, projected
future taxable income and tax planning strategies, management believes it is
more likely than not the Company will realize the benefits of deferred tax
assets as of December 31, 1998. The Company's net operating loss carryforwards,
which may be used to offset future taxable income of certain purchased
subsidiaries, expire through 2012.
NOTE 8 -- STOCK OWNERSHIP AND COMPENSATION PLANS
Employee Incentive Compensation Plan
In 1998, the Company adopted the Employee Incentive Compensation Plan (the
"Incentive Plan") pursuant to which 2,000,000 shares of common stock have been
reserved for option grants to directors, officers, employees, consultants and
independent contractors. Individual awards under the Incentive Plan may take the
form of one or more of: (a) either incentive stock options ("ISOs") or
non-qualified stock options ("NQSOs"); (b) stock appreciation rights ("SARs");
(c) restricted or deferred stock; (d) dividend equivalents and (e) cash awards
or other awards not otherwise provided for, the value of which is based in whole
or part upon the value of the common stock.
It is the policy of the Company that the number of shares of common stock
subject to options granted under the Incentive Plan will not exceed 10% of the
number of shares of common stock then outstanding. Shares of common stock which
are attributable to awards which have expired, terminated or been canceled or
forfeited, are available for issuance or use in connection with future awards.
The Board of Directors may amend the Incentive Plan without the consent of the
stockholders of the Company except to the extent such consent is required by law
or agreement.
Employee Stock Purchase Plan
During 1998 the Company has also adopted an Employee Stock Purchase Plan
(the "Purchase Plan") pursuant to which a total of 500,000 shares of common
stock have been reserved for issuance. The Purchase Plan, which qualifies under
Section 423 of the Internal Revenue Code of 1986, as amended, permits eligible
employees of the Company to purchase common stock through payroll deductions.
Payroll deductions may not exceed $25,000 for all purchase periods ending with
any Plan Year, as defined. As of December 31, 1998, 500,000 shares are reserved
pursuant to the Purchase Plan.
F-22
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except share data)
NOTE 8 -- STOCK OWNERSHIP AND COMPENSATION PLANS -- (Continued)
Information as to shares subject to stock option plans is as follows:
<TABLE>
<CAPTION>
Weighted
Average Total
Options Exercise Price Consideration
------------- ---------------- --------------
<S> <C> <C> <C>
Granted .......................................... 1,118,695 $ 10.70 $ 11,972
Forfeited ........................................ (187,370) $ 10.95 (2,053)
--------- ------- --------
Shares under option at December 31, 1998 ......... 931,325 $ 10.65 $ 9,919
========= ======= ========
Shares exercisable at December 31, 1998 .......... -- $ -- $ --
========= ======= ========
</TABLE>
Shares outstanding under the Incentive Stock Plan vest over periods ranging
from one to three years. At December 31, 1998, the weighted average remaining
life of the options was 9.32 years.
Accounting for Stock-Based Compensation
The Company applies APB Opinion No. 25 Accounting for Stock Issued to
Employees, and related Interpretations in accounting for its plans and the
exercise price of all options issued have equaled or exceeded the market value
of the stock on the date of grant. Accordingly, no compensation cost has been
recognized for the stock compensation plans. Had compensation cost for the
Company's stock compensation plans been determined consistent with FASB
Statement No. 123, Accounting for Stock Based Compensation, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below.
Net income:
As reported ............................................ $ 6,007
=======
Pro forma .............................................. $ 5,249
=======
Basic net income per share:
As reported ............................................ $ 0.54
=======
Pro forma .............................................. $ 0.47
=======
Diluted net income per share:
As reported ............................................ $ 0.53
=======
Pro forma .............................................. $ 0.46
=======
The estimated fair value of options granted amounted to $5.34 using the
Black-Scholes option-pricing model. The principal assumptions used were:
Risk-free interest rate ......... 5.46%
Expected dividend yield ......... 0%
Expected volatility ............. 60%
Expected life in years .......... 4
NOTE 9 -- BUSINESS SEGMENTS
The Company's operations are principally in three industry segments:
accounts receivable management, including the recovery of traditional delinquent
accounts from both consumer and commercial debtors; print and mail services
including the mailing of direct marketing materials, billing services, mail
presorting and other services related to mail handling; and teleservices for
outbound telemarketing, inbound customer service and inbound sales. The
Company's operations are principally within the United States.
F-23
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except share data)
NOTE 9 -- BUSINESS SEGMENTS -- (Continued)
For the year ended December 31, 1998, revenues from one customer in the
print and mail segment represented approximately 19% of consolidated net
revenues.
It should be noted that industry segment information might be of limited
usefulness in comparing an industry segment of the Company with a similar
industry segment of another enterprise.
Selected information by industry segment is summarized below for the year
ended December 31, 1998:
<TABLE>
<CAPTION>
Accounts
Receivables Print & Tele-
Management Mail services Corporate Consolidated
------------- --------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Net revenues ................. $ 55,708 $56,165 $15,267 $127,140
======== ======= ======= ======== ========
Operating profit ............. $ 9,319 $ 6,164 $ 921 $ (3,562) $ 12,842
======== ======= ======= ======== ========
Total assets ................. $119,290 $43,342 $ 6,842 $ 18,007 $187,481
======== ======= ======= ======== ========
Depreciation ................. $ 1,047 $ 1,681 $ 155 $ 74 $ 2,957
======== ======= ======= ======== ========
Capital expenditures ......... $ 1,951 $ 3,072 $ 80 $ 646 $ 5,749
======== ======= ======= ======== ========
</TABLE>
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company is involved in various legal matters in the normal course of
business. In the opinion of the Company's management, these matters are not
anticipated to have a material adverse effect on the financial position, results
of operations or cash flows of the Company.
Lease Commitments and Related Parties
The Company leases office and manufacturing space and certain plant and
office equipment pursuant to long-term non-cancelable lease agreements. As of
December 31, 1998, future minimum payments under lease arrangements amount to:
<TABLE>
<CAPTION>
Capital Operating
Year ending December 31, Leases Leases
- ------------------------ ----------- ----------
<S> <C> <C>
1999 ..................................................................... $ 2,077 $ 5,429
2000 ..................................................................... 1,294 4,902
2001 ..................................................................... 909 4,173
2002 ..................................................................... 527 2,832
2003 ..................................................................... 163 2,104
Thereafter ............................................................... -- 9,357
-------- -------
Total minimum lease payments ............................................. $ 4,970 $28,797
=======
Less amount representing interest ........................................ (528)
--------
Present value of minimum lease payments .................................. 4,442
Less current maturities of lease obligations ............................. (1,798)
--------
Obligations under capital leases, excluding current installments ......... $ 2,644
========
</TABLE>
Rent expense for the year ended December 31, 1998 amounted to approximately
$5,200. The Company has real property leases either with certain former owners
of the Founding and Acquired Companies or entities with which such former owners
have an equity or partnership interest. Included in rent expense for the year
ended December 31, 1998 is $707 for payments under leases with these related
parties.
F-24
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except share data)
NOTE 10 -- COMMITMENTS AND CONTINGENCIES -- (Continued)
At December 31, 1998, property and equipment included cost of $7,761 and
accumulated amortization of $2,168 with respect to equipment leased under
capital leases.
* * * * * *
F-25
<PAGE>
ANNEX A
================================================================================
AGREEMENT AND PLAN OF MERGER
AMONG
NCO GROUP, INC.,
CARDINAL ACQUISITION CORPORATION
AND
COMPASS INTERNATIONAL SERVICES CORPORATION
Dated as of May 12, 1999
================================================================================
<PAGE>
AGREEMENT AND PLAN OF MERGER
Table of Contents
<TABLE>
<CAPTION>
Page
-----
<S> <C> <C>
ARTICLE I
THE MERGER
Section 1.1. The Merger ....................................................................... 1
Section 1.2. Certificate of Incorporation ..................................................... 1
Section 1.3. By-Laws .......................................................................... 1
Section 1.4. Directors and Officers ........................................................... 1
Section 1.5. Effective Time ................................................................... 1
ARTICLE II
CONVERSION OF SHARES
Section 2.1. Company Common Stock ............................................................. 1
Section 2.2. Fractional Interests ............................................................. 2
Section 2.3. Anti-Dilution Provisions ......................................................... 2
Section 2.4. Purchaser Common Stock ........................................................... 2
Section 2.5. Exchange of Shares ............................................................... 2
Section 2.6. Employee Stock Options ........................................................... 3
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 3.1. Organization ..................................................................... 4
Section 3.2. Capitalization ................................................................... 4
Section 3.3. Authorization of this Agreement .................................................. 5
Section 3.4. Consents and Approvals; No Violation ............................................. 5
Section 3.5. Financial Statements and Reports ................................................. 6
Section 3.6. Absence of Material Adverse Change ............................................... 6
Section 3.7. Information in Proxy Statement/Prospectus, Registration Statement and HSR Filings 6
Section 3.8. Undisclosed Liabilities .......................................................... 7
Section 3.9. Taxes ............................................................................ 7
Section 3.10. Litigation ....................................................................... 7
Section 3.11. Compliance with Laws ............................................................. 8
Section 3.12. Real Property; Assets ............................................................ 8
Section 3.13. Employment Agreements and Benefits, etc. ......................................... 9
Section 3.14. Opinion of Financial Advisor ..................................................... 9
Section 3.15. Finders and Brokers .............................................................. 9
Section 3.16. Certain Contracts and Arrangements ............................................... 9
Section 3.17. Employee Relations ............................................................... 10
Section 3.18. Intellectual Property; Software .................................................. 10
Section 3.19. Environmental Matters ............................................................ 11
Section 3.20. Related Party and Affiliate Transactions ......................................... 11
Section 3.21. Insurance ........................................................................ 11
Section 3.22. Questionable Payments ............................................................ 11
Section 3.23. Print and Mail Business .......................................................... 11
Section 3.24. Disclosure ....................................................................... 12
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PARENT AND THE PURCHASER
Section 4.1. Organization ....................................................................... 12
Section 4.2. Capitalization ..................................................................... 12
Section 4.3. Authorization of this Agreement .................................................... 12
Section 4.4. Consents and Approvals; No Violation ............................................... 12
Section 4.5. Financial Statements and Reports ................................................... 13
Section 4.6. Absence of Material Adverse Change ................................................. 14
Section 4.7. Information in Proxy Statement/Prospectus, Registration Statement and HSR Filings .. 14
Section 4.8. Finders and Investment Bankers ..................................................... 14
Section 4.9. Disclosure ......................................................................... 14
ARTICLE V
CONDUCT OF BUSINESS PENDING THE MERGER
Section 5.1. Conduct of the Business of the Company ............................................. 14
Section 5.2. Conduct of the Business of Parent and the Purchaser ................................ 16
ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.1. Proxy Statement/Prospectus; S-4 Registration Statement ............................. 16
Section 6.2. Access to Information .............................................................. 17
Section 6.3. Consents ........................................................................... 17
Section 6.4. Board Actions; Company Stockholder Meeting ......................................... 18
Section 6.5. Commercially Reasonable Efforts .................................................... 18
Section 6.6. Public Announcements ............................................................... 18
Section 6.7. Consent of the Parent .............................................................. 19
Section 6.8. No Solicitation .................................................................... 19
Section 6.9. Indemnification .................................................................... 20
Section 6.10. Employee Benefits .................................................................. 21
Section 6.11. Tax Covenants ...................................................................... 21
Section 6.12. Print and Mail Sale Agreement ...................................................... 21
ARTICLE VII
CLOSING CONDITIONS
Section 7.1. Conditions to the Obligations of the Parent, the Purchaser and the Company ......... 21
Section 7.2. Conditions to the Obligations of the Parent and the Purchaser ...................... 22
Section 7.3. Conditions to the Obligations of the Company ....................................... 23
ARTICLE VIII
CLOSING
Section 8.1. Time and Place ..................................................................... 24
Section 8.2. Filings at the Closing ............................................................. 24
ARTICLE IX
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TERMINATION AND ABANDONMENT
Section 9.1. Termination ...................................................................... 24
Section 9.2. Procedure and Effect of Termination .............................................. 25
ARTICLE X
MISCELLANEOUS
Section 10.1. Amendment and Modification ....................................................... 26
Section 10.2. Waiver of Compliance; Consents ................................................... 26
Section 10.3. Survival of Warranties ........................................................... 26
Section 10.4. Notices .......................................................................... 26
Section 10.5. Assignment; Parties in Interest .................................................. 27
Section 10.6. Expenses ......................................................................... 27
Section 10.7. Specific Performance ............................................................. 27
Section 10.8. Governing Law .................................................................... 27
Section 10.9. Counterparts ..................................................................... 27
Section 10.10. Interpretation ................................................................... 27
Section 10.11. Entire Agreement ................................................................. 27
Section 10.12. Severability ..................................................................... 27
Section 10.13. Jurisdiction and Process ......................................................... 28
Section 10.14. Interpretation of Representations ................................................ 28
Section 10.15. Reliance by Parent and Purchaser ................................................. 28
ANNEX I: Defined Terms
*ANNEX II: Form of Voting Agreement
*ANNEX IIA: List of Stockholders signing Voting Agreement
*ANNEX III: Form of Parent Tax Certificate
*ANNEX IV: Form of Company Tax Certificate
*ANNEX V: Form of Tax Opinion from Parent's Counsel
*ANNEX VI: Form of Tax Opinion from Company's Counsel
*Intentionally Omitted
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of May 12, 1999, among NCO Group,
Inc., a Pennsylvania corporation (the "Parent"), Cardinal Acquisition
Corporation, a Delaware corporation and a wholly-owned subsidiary of the Parent
(the "Purchaser"), and Compass International Services Corporation, a Delaware
corporation (the "Company").
WHEREAS, the Boards of Directors of the Parent, the Purchaser and the
Company have approved the merger of the Purchaser with and into the Company (the
"Merger"), upon the terms and subject to the conditions set forth herein;
WHEREAS, this Agreement is intended to be and is adopted as plan of
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code"); and
WHEREAS, concurrently with the execution of this Agreement, and as a
condition and inducement to Parent's willingness to enter into this Agreement
each stockholder of the Company listed on Annex IIA, is entering into a Voting
Agreement in the form attached hereto as Annex II.
NOW, THEREFORE, in consideration of the representations, warranties and
agreements herein contained, the parties hereto agree as follows:
ARTICLE I
THE MERGER
1.1. The Merger. (a) Upon the terms and subject to the satisfaction or
waiver, if permissible, of the conditions set forth in Article VII hereof, and
in accordance with the provisions of this Agreement and the General Corporation
Law of the State of Delaware (the "DGCL"), the parties hereto shall cause the
Purchaser to be merged with and into the Company, and the Company shall be the
surviving corporation (hereinafter sometimes called the "Surviving Corporation")
and shall continue its corporate existence under the laws of the State of
Delaware. At the Effective Time, the separate existence of the Purchaser shall
cease.
(b) The Surviving Corporation shall retain the name of the Company and
shall possess all the rights, privileges, immunities, powers and franchises of
the Purchaser and the Company and shall by operation of law become liable for
all the debts, liabilities and duties of the Company and the Purchaser.
1.2. Certificate of Incorporation. Subject to Section 6.9(a) hereof, the
Certificate of Incorporation of the Purchaser in effect immediately prior to the
Effective Time shall be the Cer tificate of Incorporation of the Surviving
Corporation until thereafter amended in accordance with provisions thereof and
as provided by law.
1.3. By-Laws. Subject to Section 6.9(a) hereof, the By-Laws of the
Purchaser in effect immediately prior to the Effective Time shall be the By-Laws
of the Surviving Corporation until thereafter amended, altered or repealed as
provided therein and by law.
1.4. Directors and Officers. The directors and officers of the Purchaser
immediately prior to the Effective Time shall be the directors and officers,
respectively, of the Surviving Corporation, each to hold office in accordance
with the Certificate of Incorporation and By-Laws of the Surviving Corporation.
1.5. Effective Time. The Merger shall become effective at the time when a
properly executed certificate of merger (the "Certificate of Merger"), together
with any other docu ments required by law to effectuate the Merger, shall be
filed and recorded with the Secretary of State of the State of Delaware in
accordance with Sections 103 and 251 or 253 of the DGCL. The Certificate of
Merger shall be filed in accordance with Section 103 of the DGCL as soon as
practicable after the Closing. The date and time when the Merger shall become
effective is herein referred to as the "Effective Time."
ARTICLE II
CONVERSION OF SHARES
2.1. Company Common Stock. (a) Each share (a "Share") of common stock, par
value $0.01 per share (the "Common Stock"), of the Company issued and
outstanding immediately prior to the Effective Time
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(except for Shares then owned beneficially or of record by the Company, the
Parent, the Purchaser or any of the other Parent Subsidiaries or the Company
Subsidiaries, shall, by virtue of the Merger and without any action on the part
of the holder thereof, be converted into the right to receive 0.23739 (the
"Exchange Ratio") of a share of common stock, no par value, of the Parent
("Parent Common Stock") (such fractional share, the "Merger Consideration").
(b) Each Share issued and outstanding immediately prior to the Effective
Time which is then owned beneficially or of record by the Company, the Parent,
the Purchaser or any of the other Parent Subsidiaries or the Company
Subsidiaries, shall, by virtue of the Merger and without any action on the part
of the holder thereof, be canceled and retired and cease to exist, without any
conversion thereof.
(c) Each Share issued and held in the Company's treasury immediately prior
to the Effective Time shall, by virtue of the Merger, be canceled and retired
and cease to exist, without any conversion thereof.
(d) At the Effective Time the holders of certificates representing Shares
shall cease to have any rights as stockholders of the Company, except for the
right to receive the Merger Consideration and for such rights, if any, as they
may have pursuant to the DGCL.
2.2. Fractional Interests. No certificates or scrip representing fractional
shares of Parent Common Stock shall be issued in connection with the Merger, and
such fractional interests will not entitle the owner thereof to any rights as a
shareholder of the Parent. In lieu of a fractional interest in a share of Parent
Common Stock, each holder of Shares exchanged pursuant to Section 2.1 who would
otherwise have been entitled to receive a fraction of a share of Parent Common
Stock shall receive cash (without interest) in an amount equal to the product of
such fractional interest multiplied by the Parent Common Stock Value.
2.3. Anti-Dilution Provisions. The Exchange Ratio shall be adjusted
appropriately to reflect any stock dividends, splits, recapitalizations or other
similar transactions with respect to the Shares and the shares of Parent Common
Stock where the record date occurs prior to the Effective Time.
2.4. Purchaser Common Stock. Each share of common stock, par value $0.01
per share ("Purchaser Common Stock"), of the Purchaser issued and outstanding
immediately prior to the Effective Time shall, by virtue of the Merger and
without any action on the part of the holder thereof, be converted into and
exchangeable for one fully paid and non-assessable share of common stock, par
value $0.01 per share ("Surviving Corporation Common Stock"), of the Surviving
Corporation. From and after the Effective Time, each outstanding certificate
theretofore repre senting shares of Purchaser Common Stock shall be deemed for
all purposes to evidence ownership of and to represent the same number of shares
of Surviving Corporation Common Stock.
2.5. Exchange of Shares. (a) Prior to the Effective Time, the Parent shall
deposit in trust with Chase Mellon Shareholder Services or another exchange
agent designated by the Purchaser and reasonably satisfactory to the Company
(the "Exchange Agent"), shares of Parent Common Stock in an amount sufficient to
pay the Merger Consideration payable pursuant to Section 2.1(a) plus sufficient
cash to make the payments required under Section 2.2 (such amount being
hereinafter referred to as the "Exchange Fund"). The Exchange Agent shall,
pursuant to irrevocable instructions, issue the shares of Parent Common Stock
out of the stock portion of the Exchange Fund and make the payments provided for
in Section 2.2 of this Agreement out of the cash portion of the Exchange Fund.
The Exchange Agent shall invest the cash portion of the Exchange Fund as the
Parent directs, in direct obligations of the United States of America,
obligations for which the full faith and credit of the United States of America
is pledged to provide for the payment of all principal and interest, commercial
paper obligations receiving the highest rating from either Moody's Investors
Services, Inc. or Standard & Poor's Corporation, or certificates of deposit,
bank repurchase agreements or banker's acceptances of commercial banks with
capital exceeding $10,000,000,000. The Exchange Fund shall not be used for any
other purpose except as provided in this Agreement.
(b) Promptly after the Effective Time, the Surviving Corporation shall
cause the Exchange Agent to mail to each record holder (other than the Company,
the Parent, the Purchaser or any of the other Parent Subsidiaries or the Company
Subsidiaries) as of the Effective Time of an outstanding certificate or
certificates which immediately prior to the Effective Time represented Shares
(the "Certificates") a form letter of
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transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon proper delivery of the
Certificates to the Exchange Agent) and instructions for use in effecting the
surrender of the Certificates for payment therefor. Upon surrender to the
Exchange Agent of a Certificate, together with such letter of transmittal duly
executed, the holder of such Certificate shall be entitled to receive in
exchange therefor the number of shares of Parent Common Stock equal to the
product of the number of Shares represented by such Certificate and the Exchange
Ratio plus cash in lieu of fractional shares, less any applicable withholding
tax, and such Certificate shall forthwith be canceled. No interest shall be paid
or accrued on the shares of Parent Common Stock or the cash payable upon the
surrender of the Certificates. If payment is to be made to a Person other than
the Person in whose name the Certificate surrendered is registered, it shall be
a condition of payment that the Certificate so surrendered shall be properly
endorsed or otherwise in proper form for transfer and that the Person requesting
such payment shall pay any transfer or other taxes required by reason of the
payment to a Person other than the registered holder of the Certificate
surrendered or establish to the satisfaction of the Exchange Agent and the
Surviving Corporation that such tax has been paid or is not applicable. Until
surrendered in accordance with the provisions of this Section 2.5, each
Certificate (other than Certificates representing Shares owned beneficially or
of record by the Company, the Parent, the Purchaser or any of the other Parent
Subsidiaries or Company Subsidiaries) shall represent for all purposes the right
to receive the number of shares of Parent Common Stock equal to the product of
the number of Shares evidenced by such Certificate and the Exchange Ratio plus
cash in lieu of fractional shares, without any interest thereon.
(c) If any Certificate is lost, stolen or destroyed, upon the making of an
affidavit of that fact by the person claiming such Certificate to be lost,
stolen or destroyed and, if required by the Exchange Agent, the Surviving
Corporation or the Parent, the posting by such person of a bond in such
reasonable amount as such entity may direct as indemnity against any claim that
may be made against it with respect to such Certificate, the Exchange Agent
shall issue, in exchange for such lost, stolen or destroyed Certificate, the
applicable portion of the Merger Consideration pursuant to this Agreement.
(d) After the Effective Time there shall be no transfers on the stock
transfer books of the Surviving Corporation of the Shares which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation, they shall be canceled
and exchanged for the applicable portion of the Merger Consideration pursuant to
this Agreement.
(e) Any portion of the Exchange Fund which remains unclaimed by the
stockholders of the Company for one year after the Effective Time (including any
interest received with respect thereto) shall be repaid to the Surviving
Corporation, upon demand. Any stockholders of the Company who have not
theretofore complied with Section 2.5(b) shall thereafter look only to the
Surviving Corporation (subject to abandoned property, escheat or other similar
laws) for payment of their proportionate claim for the Merger Consideration plus
cash in lieu of fractional shares, without any interest thereon, but shall have
no greater rights against the Surviving Corporation than may be accorded to
general creditors of the Surviving Corporation under Delaware law.
2.6. Employee Stock Options. The Company's Employee Incentive Compensation
Plan (the "Company Option Plan") and all options to acquire Shares granted
pursuant to the Company Option Plan that are issued and outstanding immediately
before the Effective Time (collectively, the "Options"), shall be assumed by the
Parent on the Effective Time and shall continue in effect, as an option plan of
Parent and as options issued by Parent, respectively, in accordance with the
terms and conditions by which they are governed immediately before the Effective
Time (and each Option that becomes fully vested and exercisable as a result of
the Merger shall continue as a fully vested and exercisable option of Parent),
subject to the adjustments set forth in the next sentence. On the Effective
Time, each Option shall, by virtue of the Merger and without any action on the
part of the holder thereof, be automatically adjusted to provide that (a) the
number and type of shares issuable upon exercise of such Option shall be that
number of shares of Parent Common Stock (rounded off to the nearest whole number
of shares) equal to the number of Shares issuable upon exercise of such Option
immediately before the Effective Time, multiplied by the Exchange Ratio, and (b)
the exercise price per share of Parent Common Stock under such Option shall be
that amount (rounded up to the nearest whole cent) equal to the exercise price
per Share under such Option immediately before the Effective Time, divided by
the Exchange Ratio.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Parent and the Purchaser as
follows:
3.1. Organization. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. Each of
the Company Subsidiaries which is a corporation is duly organized, and each of
the Company Subsidiaries which is a limited partnership is duly formed, and each
of the Company Subsidiaries is validly existing and in good standing, in each
case under the laws of the jurisdictions of its incorporation or formation, as
the case may be. Each of the Company and the Company Subsidiaries has all
requisite power and authority to own, lease and operate its properties and to
conduct its business as now being con ducted. Except as set forth in Section 3.1
of the disclosure letter delivered by the Company to the Parent and Purchaser
prior to the execution of this Agreement (the "Company Disclosure Letter"), each
of the Company and the Company Subsidiaries is duly qualified or licensed and in
good standing to do business in each jurisdiction in which the property owned,
leased or operated by it or the nature of the business conducted by it makes
such qualification necessary, except where the failure to be so qualified or
licensed and in good standing would not have a material adverse effect on the
business or financial condition of the Company and the Company's A/R and
Teleservices Subsidiaries taken as a whole. Each of the Company Subsidiaries is
listed in Section 3.1 of the Company Disclosure Letter, and except as and to the
extent set forth therein, the Company owns beneficially and of record directly
or indirectly all of the issued and outstanding capital stock or limited
partnership interests, as the case may be, of each of the Company Subsidiaries,
free and clear of any liens, claims, charges, mortgages or other encumbrances
(collectively, "Liens"). Except as set forth in Section 3.1 of the Company
Disclosure Letter, neither the Company nor any of the Company Subsidiaries owns,
controls or holds with the power to vote, directly or indirectly, of record,
beneficially or otherwise, any capital stock or any equity or ownership interest
in any Person. The Company has heretofore delivered to the Parent accurate and
complete copies of the Certificate of Incorporation and By-Laws of the Company
and each of the Company Subsidiaries, as currently in effect.
3.2. Capitalization. (a) The authorized capital stock of the Company
consists of (a) 50,000,000 shares of Common Stock of which, as of the date
hereof, there are 14,405,973 shares issued and outstanding, 2,000,000 shares
reserved for issuance under the Company Option Plan, and no shares held in the
Company's treasury, and (b) 10,000,000 shares of Preferred Stock, par value
$0.01 per share ("Company Preferred Stock"), of which as of the date hereof,
none were issued or outstanding. No other capital stock or other security of the
Company is authorized, issued or outstanding. All issued and outstanding Shares
and capital stock of the Company Subsidiaries are duly authorized, validly
issued, fully paid and nonassessable. Except for outstanding options to acquire
not more than 1,234,945 shares issued pursuant to the Company Option Plan and
except as set forth in Section 3.2 of the Company Disclosure Letter, there are
not now, and at the Effective Time there will not be, any securities, options,
warrants, calls, subscriptions, preemptive rights, earn- outs or other rights or
other agreements or commitments whatsoever obligating the Company or any of the
Company Subsidiaries to issue, transfer, deliver or sell or cause to be issued,
transferred, de livered or sold any additional shares of capital stock or other
securities of the Company or any of the Company Subsidiaries, or obligating the
Company or any of the Company Subsidiaries to grant, extend or enter into any
such agreement or commitment. There are no outstanding contractual obligations
of the Company or any of the Company Subsidiaries to repurchase, redeem or
otherwise acquire any shares of capital stock of the Company or any of the
Company Subsidiaries. There are no outstanding contractual obligations of the
Company or any of the Company Subsidiaries to repurchase, redeem or otherwise
acquire any shares of capital stock of the Company or any of the Company
Subsidiaries. There are no outstanding contractual obligations of the Company or
any of the Company Subsidiaries to vote or to dispose of any shares of the
capital stock of any of the Company Subsidiaries.
(b) All issuances and grants of all outstanding Options, and all offerings,
sales and issuances by the Company and each of the Company Subsidiaries of any
shares of capital stock, including the Shares, were conducted in compliance with
all applicable laws and all requirements set forth in all applicable agreements
or plans, except where the failure to comply with such applicable laws,
agreements or plans would not, individually or in the aggregate, have a material
adverse effect on the business or financial condition of the Company and the
Company's A/R and Teleservices Subsidiaries taken as a whole.
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(c) There is no stockholder rights plan (or similar plan commonly referred
to as a "poison pill") or similar existing agreement or plan under which the
Company or any of the Company Subsidiaries is or may become obligated to sell or
otherwise issue any shares of its capital stock or any other securities.
3.3. Authorization of this Agreement. The Company has all requisite
corporate power and authority to execute and deliver this Agreement and the
Print and Mail Sale Agreement and, subject to approval by the stockholders of
the Company, to consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement and the Print and Mail Sale Agreement
and the consummation of the transactions contemplated hereby and thereby have
been duly and validly authorized and approved by the Company's Board of
Directors, the Board of Directors has declared the advisability of this
Agreement and the consummation of the transactions contemplated hereby and
thereby, and, except for the adoption of this Agreement by the stockholders of
the Company, no other corporate proceedings on the part of the Company are
necessary to authorize this Agreement or the Print and Mail Sale Agreement or
consummate the transactions contemplated hereby and thereby. Each of this
Agreement and the Print and Mail Sale Agreement has been duly and validly
executed and delivered by the Company, and each of this Agreement and the Print
and Mail Sale Agreement constitutes a valid and binding agreement of the
Company, except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium and similar laws of general application
relating to or affecting the rights and remedies of creditors, and the
application of general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law). Assuming that
none of the Parent, the Purchaser or any affiliate or associate of the Parent or
Purchaser is an Interested Stockholder (as defined by Section 203 of the DGCL)
at the time of execution of this Agreement or the Voting Agreements, this
Agreement, the Merger and the Voting Agreements have been approved by the Board
of Directors of the Company so that Section 203 of the DGCL will not apply to
this Agreement, the Merger, the Voting Agreements or the transactions
contemplated hereby and thereby.
3.4. Consents and Approvals; No Violation. Except for (i) filings required
under the Securities Act of 1933, as amended (the "Securities Act"), the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"), (ii) the
filing of a Pre-Merger Notification and Report Form by the Company under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), (iii) the
filing and recordation of appropriate merger documents as required by the DGCL
and, if applicable, the laws of other states in which the Company is qualified
to do business, and (iv) filings under securities or blue sky laws or takeover
statutes of the various states, no filing with, and no permit, authorization,
consent or approval of, any public body or authority is necessary for the
consummation by the Company of the transactions contemplated by this Agreement,
the failure to make or obtain which is reasonably likely to have a material
adverse effect on the ability of the Company to consummate the transactions
contemplated hereby or on the business or financial condition of the Company and
the Company Subsidiaries taken as a whole. Neither the execution and delivery of
this Agreement nor the consummation of the transactions contemplated hereby nor
compliance by the Company with any of the provisions hereof will (i) conflict
with or result in any violation of any provision of the Certificate of
Incorporation or By-Laws of the Company, (ii) result in a violation or breach
of, or constitute a default or give rise to any right of termination, cancel
lation, loss of material benefits or acceleration or give to any Person any
interest in or result in the creation of any Lien upon any of the properties or
assets of the Company or any of the Company Subsidiaries, with or without notice
or lapse of time, or both, under the Certificate of Incorporation or By-Laws of
the Company or any note, bond, mortgage, indenture, license, benefit plan,
agreement or other instrument or obligation to which the Company or any of the
Company Subsidiaries is a party or by which any of them or any of their
properties or assets is bound or (iii) assuming the truth of the representations
and warranties of the Parent and the Purchaser contained herein and their
compliance with all agreements contained herein and assuming the due making or
obtaining of all filings, permits, authorizations, consents and approvals
referred to in the preceding sentence, violate any statute, rule, regulation,
order, injunction, writ or decree of any public body or authority by which the
Company or any of the Company Subsidiaries or any of their respective assets or
properties is bound, excluding from the foregoing clauses (ii) and (iii)
mortgages, leases and other agreements listed on Section 3.4 of the Company
Disclosure Letter, and other conflicts, violations, breaches, defaults or rights
which, either
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individually or in the aggregate, are not reasonably likely to have a material
adverse effect on the business or financial condition of the Company and the
Company's A/R and Teleservices Subsidiaries taken as a whole or to materially
impair the ability of the Company to perform its obligations hereunder or
consummate the transactions contemplated hereby.
3.5. Financial Statements and Reports. (a) The Company has filed all forms,
reports and documents with the Securities and Exchange Commission (the "SEC")
required to be filed by it pursuant to the Securities Act and the Exchange Act
(collectively, the "Company SEC Filings"), all of which have complied in all
material respects with all applicable requirements of the Securities Act and the
Exchange Act. None of such Company SEC Filings, at the time filed, contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
Company SEC Filings filed after the date of this Agreement and prior to the
Effective Time (i) will comply in all material respects with all applicable
requirements of the Securities Act and the Exchange Act and (ii) will not at the
time they will be filed, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading; provided, however, that, except as set forth in
Section 3.7 hereof, no representation is made by the Company with respect to the
S-4 Registration Statement or the Proxy Statement/Prospectus.
(b) The consolidated balance sheets and the related consolidated statements
of income, cash flow and changes in stockholder equity of the Company and the
Company Subsidiaries (i) contained in the Company's Quarterly Reports on Form
10-Q for the quarters ended March 31, 1998, June 30, 1998 and September 30, 1998
and the Company's Annual Report on Form 10-K for the year ended December 31,
1998 (collectively, the "1998 Financial Statements"), and (ii) to be contained
in Company SEC Filings filed after the date hereof (collectively with the 1998
Financial Statements, the "Financial Statements"), when filed (i) complied or
will comply in all material respects as to form with the published rules and
regulations of the SEC and (ii) presented or will present fairly the
consolidated financial position of the Company and the Company Subsidiaries as
of such date, and the consolidated results of their operations and their cash
flows for the periods presented therein, in conformity with GAAP applied on a
consistent basis, except as otherwise noted therein, and subject in the case of
quarterly financial statements to normal year-end audit adjustments and except
that the quarterly financial statements do not or will not contain all of the
footnote disclosures required by GAAP.
(c) All funds collected on behalf of customers of the Company or any
Company Subsidiary have in all material respects been properly remitted to the
customer or are in all material respects properly reflected on the Financial
Statements of the Company and the Company Subsidiaries.
(d) The books and records of the Company and its Subsidiaries have been
prepared and maintained in form and substance adequate in all material respects
for preparing the Company's financial statements in accordance with GAAP.
3.6. Absence of Material Adverse Change. Since December 31, 1998, except as
reflected in the Company's 1998 Financial Statements or on Section 3.6 of the
Company Disclosure Letter, (i) there has not been any material adverse change in
the business or financial condition of the Company and the Company Subsidiaries
taken as a whole, other than changes in general economic or business conditions,
changes that may result from the public announcement of this Agreement, changes
generally affecting companies operating in the industries in which the Company
and the Company Subsidiaries operate or changes solely affecting the Print and
Mail Business (as hereinafter defined), (ii) the Company and the Company
Subsidiaries have conducted their businesses in the ordinary course of business
and in a manner consistent with past practice in all material respects, and
(iii) neither the Company nor any of the Company Subsidiaries has taken any of
the actions or done any of the things described in clauses (a) through (m) of
Section 5.1.
3.7. Information in Proxy Statement/Prospectus, Registration Statement and
HSR Filings. The Proxy Statement/Prospectus (or any amendment thereof or
supplement thereto), at the date mailed to Company stockholders and at the time
of the Company Stockholders Meeting, will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the
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statements therein, in light of the circumstances under which they are made, not
misleading, except that no representation is made by the Company with respect to
statements made therein based on information supplied by Parent or Purchaser for
inclusion in the Proxy Statement/Prospectus. None of the information supplied by
the Company for inclusion or incorporation by reference in the S-4 Registration
Statement will, at the date it becomes effective and at the time of the Company
Stockholders Meeting, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading. The Proxy Statement/Prospectus will comply in all material
respects with the provisions of the Securities Act and the Exchange Act and the
rules and regulations thereunder. To the knowledge of the Company, none of the
information supplied or to be supplied by or on behalf of the Company or any of
the Company Subsidiaries for inclusion or incorporation by reference in the
filing or filings required under the HSR Act, at the date filed, will contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. No representation is made hereby with respect to statements made in
such filing or filings based on information supplied by Parent for inclusion
therein.
3.8. Undisclosed Liabilities. Except for liabilities or obligations
reflected or reserved against in the 1998 Financial Statements, incurred in the
ordinary course of business after December 31, 1998, or set forth in Section 3.8
of the Company Disclosure Letter, none of the Company or any of the Company
Subsidiaries has any liabilities or obligations (whether absolute, accrued,
contingent or otherwise) which are required by GAAP to be so reflected or
reserved against.
3.9. Taxes. Except as set forth in Section 3.9 of the Company Disclosure
Letter: (i) the Company and the Company Subsidiaries have filed with the
appropriate governmental agencies all material Tax Returns required to be filed,
taking into account any extension of time to file granted to or obtained on
behalf of the Company and the Company Subsidiaries; (ii) all material taxes of
the Company and the Company Subsidiaries required to be paid have been paid to
the proper authorities, other than such Taxes that are being contested in good
faith by appropriate proceedings and that are adequately reserved for in
accordance with GAAP; (iii) no deficiency has been asserted or assessed against
the Company or any of the Company Subsidiaries, and no examination of the
Company or any of the Company Subsidiaries is pending or, to the knowledge of
the Company, is threatened for any material amount of Tax by any taxing
authority; (iv) no extension of the period for assessment or collection of any
material Tax is currently in effect and none has been requested; (v) no material
Tax Liens have been filed with respect to any Taxes except Liens which are
disclosed in the balance sheet contained in the 1998 Financial Statements, Liens
for Taxes not yet due and payable and Liens for Taxes that are being contested
in good faith; (vi) since January 1, 1999, the Company and each of the Company
Subsidiaries have not made any voluntary adjustments by reason of a change in
their accounting methods for any taxable period on or before the Effective Time;
and (vii) the Company and the Company Subsidiaries are not parties to any Tax
sharing or Tax allocation agreement except as set forth in the Print and Mail
Sale Agreement. Except as set forth in Section 3.9 of the Company Disclosure
Letter, neither the Company nor any of the Company Subsidiaries has made any
material payments, is obligated to make any material payments, or is a party to
any agreement that under certain circumstances could obligate it to make any
material payments that will not be deductible under Code ss. 280G. Neither the
Company nor any of the Company Subsidiaries has any liability for the Taxes of
any Person (other than any of the Company or any of the Company Subsidiaries)
under Reg. ss.1.1502-6 (or any similar provision of state, local, or foreign
law), as a transferee or successor, by contract, or otherwise. For purposes of
this Agreement, "Tax" or "Taxes" shall mean all United States federal, state or
local or foreign taxes and any other applicable taxes, duties, levies, charges
and assessments of any nature, including social security payments and
deductibles relating to wages, salaries and benefits and payments to
subcontractors (to the extent required under applicable tax law), and also
including all interest, penalties and additions imposed with respect to such
amounts; and "Tax Return" shall mean any report, return, document, declaration
or other information or filing required to be supplied to any taxing authority
or jurisdiction (foreign or domestic) with respect to Taxes.
3.10. Litigation. Except as set forth in Section 3.10 of the Company
Disclosure Letter and except for such matters as are not reasonably likely to
result in liability to the Company or any of the Company Subsidiaries in excess
of $100,000, individually or in the aggregate for all related claims, there are
no (i)
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actions, suits or proceedings or investigations pending or, to the knowledge of
the Company, threatened, or (ii) outstanding awards, judgments, orders, writs,
injunctions or decrees, or, to the knowledge of the Company, applications,
requests or motions therefor, against or affecting the assets, business,
operations or financial condition of the Company or the Company Subsidiaries at
law or in equity in any court or any federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality.
3.11. Compliance with Laws. Except as set forth in Section 3.11 of the
Company Disclosure Letter, there are no violations or defaults by the Company or
any of the Company Subsidiaries under any statute, law, ordinance, rule,
regulation, judgment, order, decree, permit, concession, grant, franchise,
license or other governmental authorization or approval applicable to them or
any of their properties or their operations which are reasonably likely to have
a material adverse effect on the business or financial condition of the Company
and the Company's A/R and Teleservices Subsidiaries taken as a whole.
3.12. Real Property; Assets. (a) Section 3.12 of the Company Disclosure
Letter lists all material items of real property either owned by the Company or
the Company Subsidiaries (the "Company Owned Real Property") or leased by the
Company or the Company Subsidiaries (the "Company Leased Real Property"). Except
as set forth in Section 3.12 of the Company Disclosure Letter, the Company and
the Company Subsidiaries have good and marketable title to the Company Owned
Real Property listed on Section 3.12 of the Company Disclosure Letter and valid
leasehold interests in the Company Leased Real Property listed on Section 3.12
of the Company Disclosure Letter, in each case, free and clear of all Liens,
except as set forth on Section 3.12 of the Company Disclosure Letter and except
for (i) Liens for taxes and other governmental charges and assessments which are
not yet due and payable or which are being contested in good faith by
appropriate proceedings, (ii) Liens of carriers, warehousemen, mechanics and
materialmen and other like Liens arising in the ordinary course of business,
(iii) easements, rights of way, title imperfections and restrictions, zoning
ordinances and other similar encumbrances affecting the real property which do
not have a material adverse effect on the use of the properties or assets
subject thereto or affected thereby, (iv) statutory Liens in favor of lessors
arising in connection with any property leased to the Company or the Company
Subsidiaries, excluding Liens arising from any default or breach by the Company
or any of the Company Subsidiaries, (v) Liens reflected in the Financial
Statements and (vi) any other Liens which are not material ("Permitted Company
Liens").
(b) Each lease (including any option to purchase contained therein)
pursuant to which the Company or any of the Company Subsidiaries leases any
Company Leased Real Property listed on Section 3.12 of the Company Disclosure
Letter (the "Company Leases") is in full force and effect and, to the knowledge
of the Company, is enforceable against the landlord which is party thereto in
accordance with its terms. There exists no material default or event of default
(or any event with notice or lapse of time or both would become a material
default) on the part of the Company or any of the Company Subsidiaries under any
Company Leases. The Company has delivered to the Parent and the Purchaser
complete and correct copies of all Company Leases including all amendments
thereto. Except as set forth in Section 3.12 of the Company Disclosure Letter,
neither the Company nor any of the Company Subsidiaries has received any notice
of any default under any lease by which the Company leases the Company Leased
Real Property nor any other termination notice with respect thereto.
(c) Except as set forth in Section 3.12 of the Company Disclosure Letter,
the Company and the Company Subsidiaries have legal and beneficial ownership of
all of their respective material tangible personal property and assets reflected
in the balance sheet forming part of the Financial Statements, except for
properties and assets disposed of in the ordinary course of business since the
date of such balance sheet, in each case, free and clear of all Liens, except as
set forth on Section 3.12 of the Company Disclosure Letter and except for
Permitted Company Liens. The Company and each of the Company Subsidiaries
possess all of their respective material assets and property that are leased
from other Persons under valid and enforceable contracts.
(d) The Company and the Company Subsidiaries have all of the assets which
are necessary and material to the operation of its respective businesses. The
material assets of the Company and the Company Subsidiaries, wherever located,
are generally in operating condition, ordinary wear and tear excepted, other
than assets that are no longer used in the conduct of their businesses.
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3.13. Employment Agreements and Benefits, etc. (a) Section 3.13 of the
Company Disclosure Letter lists each employee benefit plan, program, policy or
form of contract of the Company or any of the Company Subsidiaries, or to which
there is an obligation to contribute by the Company or any of the Company
Subsidiaries, other than any such plans, programs, policies, contracts or
obligations, that, in the aggregate, are not material to the Company and the
Company Subsidiaries taken as a whole. Section 3.13 of the Company Disclosure
Letter sets forth, as of the date hereof, the number of options issued and
outstanding under the Company Option Plan, the vesting and exercisability of
which, pursuant to the terms of such plan, would be accelerated by reason of or
in connection with the execution of or consummation of the transactions
contemplated by this Agreement.
(b) ERISA. All employee benefit plans subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") and/or the Code, currently
maintained or contributed to, or to which there is an obligation to contribute,
by the Company or any of the Company Subsidiaries (the "Company Plans") comply
in all respects with the requirements of ERISA and the Code as applicable,
except for any failures to comply which, individually or in the aggregate, are
not reasonably likely to have a material adverse effect on the Company and the
Company Subsidiaries taken as a whole. Neither the Company nor any of the
Company's A/R and Teleservices Subsidiaries is a party to, or have an obligation
to contribute to, any employee benefit plan, program or policy or contract by
maintained by any of the Print and Mail Subsidiaries. No em ployee benefit plan
(other than a multiemployer plan as defined in section 3(37) of ERISA) to which
the Company or any member of the same controlled group of corporations as the
Company within the meaning of section 4001 of ERISA contributes and which is
subject to Part 3 of Subtitle B of Title I of ERISA has incurred any
"accumulated funding deficiency" within the meaning of sec tion 302 of ERISA or
section 412 of the Code and no material liability (other than for annual
premiums) to the Pension Benefit Guaranty Corporation has been incurred by the
Company or any of the Company Subsidiaries with respect to any such plan. None
of the Company or any of the Company Subsidiaries has incurred any material
liability for any tax or penalty imposed by sec tion 4975 of the Code or section
502(i) of ERISA. None of the Company or any of the Company Subsidiaries has
withdrawn at any time within the preceding six years from any multiemployer
plan, as defined in section 3(37) of ERISA. There are no material pending or, to
the Company's knowledge, threatened claims by or on behalf of any of the Plans
or by any employee involving any such Company Plan (other than routine claims
for benefits).
3.14. Opinion of Financial Advisor. The Board of Directors of the Company
has received an opinion of Lehman Brothers, Inc., dated as of the date hereof,
that the Exchange Ratio is fair, from a financial point of view, to the holders
of the Shares.
3.15. Finders and Brokers. Except for Lehman Brothers, Inc., whose fees are
set forth in the engagement letters attached to Section 3.15 of the Company
Disclosure Letter, no agent, investment banker, broker, finder, intermediary or
other Person acting on behalf of the Company or any of the Company Subsidiaries,
is or shall be entitled to any brokerage, or finder's or other similar fee or
commission in connection with the Merger, the sale of the Print and Mail
Business and the other transactions contemplated by this Agreement. The Company
has made available to Parent a copy of all commitments, agreements or other
documentation in respect of which fees, commissions or other amounts may become
payable to, and all indemnification and other contracts related to the
engagement of, Lehman Brothers, Inc.
3.16. Certain Contracts and Arrangements. Except as set forth in Section
3.16 of the Company Disclosure Letter and except for agreements, arrangements or
contracts which are exhibits to the Company SEC Filings, neither the Company nor
any of the Company Subsidiaries is a party to or bound by any, is bound by, owns
properties subject to, or receives benefits under: (a) any agreement,
arrangement or contract not made in the ordinary course of business that (x) has
been or would currently be required to be filed as an exhibit to any Company SEC
Filing under the Exchange Act or (y) is or may reasonably be expected to be
material to the financial condition, business or results of operations of the
Company and the Company Subsidiaries, taken as a whole; (b) any agreement,
indenture or other contract relating to the borrowing of money by the Company or
any of the Company Subsidiaries or the guarantee by the Company or any of the
Company Subsidiaries of any such obligation in each case, in an amount in excess
of $500,000 currently outstanding or guaranteed or relating to future amounts
which could reasonably be expected to exceed $500,000 (other than agreements and
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instruments relating to transactions between the Company and any of the Company
Subsidiaries or between the Company Subsidiaries); (c) any agreement,
arrangement or commitment (with respect to which there exist pending or future
obligations) relating to the employment, election or retention of any present or
former director, officer or any key employee with a base salary in excess of
$100,000 of the Company or any of the Company Subsidiaries or providing for
severance, termination or similar payments (other than amounts required by
applicable law) to any such persons; and (d) any agreement containing covenants
that limit, in any respect material to the Company and the Company Subsidiaries,
the ability of the Company or any of the Company Subsidiaries to compete in any
line of business or with any person, or that involve any restriction on the
geographic area in which, or method by which, the Company or any of the Company
Subsidiaries may carry on its business, other than standard agency or
distribution agreements that provide for exclusive geographic territories.
Except as set forth in Section 3.16 of the Company Disclosure Letter, neither
the Company nor any of the Company Subsidiaries, nor, to the knowledge of the
Company, any other party thereto, is in violation of or default under any note,
bond, mortgage, indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which the Company or any of the Company Subsidiaries
is a party or to which the Company or any of the Company Subsidiaries or any of
their respective properties, assets or business may be subject, except for such
violations or defaults which would not, individually or in the aggregate, have
had or would reasonably be expected to have a material adverse effect on the
Company and the Company's A/R and Teleservices Subsidiaries taken as a whole.
Except as set forth in Section 3.16 of the Company Disclosure Letter, neither
the Company nor any of the Company Subsidiaries has given or received written
notice of a material default or notice of termination with respect to any
contract listed in Section 3.16 of the Company Disclosure Letter or any contract
which is an exhibit to any Company SEC Filing.
3.17. Employee Relations. Except as set forth in Section 3.17 of the
Company Disclosure Letter, neither the Company nor any of the Company
Subsidiaries is a party to or bound by any union or collective bargaining
contract, nor is any such contract currently being negotiated by or on behalf of
Company or any of the Company Subsidiaries. There are no pending, nor, to the
knowledge of the Company, threatened walkouts, strikes, union organizing efforts
or labor disturbances or any pending arbitration, unfair labor practice,
grievance, or other proceeding of any kind with respect to the Company's or any
of the Company Subsidiaries' employees. Upon termination of the employment of
any of its employees, neither the Company nor any of the Company Subsidiaries
will by reason of any action taken or agreement, contract, arrangement or plan
be liable to any of its employees for severance pay or any other payments,
except as set forth in Section 3.17 of the Company Disclosure Letter. Except as
set forth in Section 3.17 of the Company Disclosure Letter, since December 31,
1998, no senior operations site manager of the Company or any Company Subsidiary
has, on or prior to the date hereof, indicated to Mahmud U. Haq or Les J.
Kirschbaum an intention to terminate employment with the Company or the Company
Subsidiaries. Since December 31, 1994, Company and the Company Subsidiaries have
not had an "employment loss" within the meaning of the Workers' Adjustment and
Retraining Notification Act ("WARN Act") and the regulations thereunder.
3.18. Intellectual Property; Software. (a) Except as, individually or in
the aggregate, would not reasonably be likely to have a material adverse effect
on the business or financial condition of the Company and the Company's A/R and
Teleservices Subsidiaries taken as a whole, and except as set forth in Section
3.18 of the Company Disclosure Letter, the conduct of the business of the
Company and the Company Subsidiaries does not, to the knowledge of the Company,
infringe upon any Intellectual Property (as defined below) right of any Person;
and except as set forth in Section 3.18 of the Company Disclosure Letter and
except for such matters as are not reasonably likely to result in liability to
the Company or any of the Company Subsidiaries in excess of $100,000
individually or in the aggregate for all related claims, there are no pending
or, to the knowledge of Company, threatened proceedings or litigation by any
person against the use by the Company or the Company Subsidiaries of any name,
corporate name, fictitious name, software, trademarks, trade names, service
marks, service names, logos, assumed names, copyrights, trade secrets, patents
and all registrations, and applications therefor, and all good will with respect
to the foregoing, which are owned by the Company or any of the Company
Subsidiaries or used in the operation of the Company's or any of the Company
Subsidiaries' business as currently conducted (collectively, the "Intellectual
Property").
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(b) Except as set forth in Section 3.18 of the Company Disclosure Letter,
the Company owns or has valid licenses or other rights to use the Intellectual
Property which are necessary to permit the Company to conduct its operations as
currently conducted and which are material to its operations.
(c) The Company and the Company Subsidiaries have conducted an analysis of,
and developed a compliance program (the "Compliance Program") with respect to,
the effect of Year 2000 (including the correct processing and calculation of
dates prior to, during and after the Year 2000) upon the software,
telecommunications and automated processes of the Company and the Company
Subsidiaries. The Company believes that the costs of implementing the Compliance
Program and completing the modifications necessary to become Year 2000
compliant, if any, will not be material.
3.19. Environmental Matters. To the knowledge of the Company, the Company
and the Company Subsidiaries are in compliance with all applicable health,
safety and environmental laws, except to the extent that non-compliance is not
reasonably likely to have a material adverse effect on the business or financial
condition of the Company and the Company's A/R and Teleservices Subsidiaries
taken as a whole. To the knowledge of the Company, except as set forth in
Section 3.19 of the Company Disclosure Letter, there is no matter which is
reasonably likely to expose the Company or any of the Company Subsidiaries to a
material liability pursuant to environmental laws to clean-up or remedy any
release of hazardous substances at any of the real property of the Company and
the Company Subsidiaries.
3.20. Related Party and Affiliate Transactions. Except as set forth in
Section 3.20 of the Company Disclosure Letter or in the Company SEC Filings, no
event has occurred that would be required to be reported by Company pursuant to
Item 404 of Regulation S-K promulgated by the SEC. Section 3.20 of the Company
Disclosure Letter identifies each person who is an "affiliate" (as that term is
used in Rule 145 under the Securities Act) of Company as of the date of this
Agreement.
3.21. Insurance. The Company and the Company Subsidiaries are covered by
valid and currently effective insurance policies issued in favor of the Company
or the Company Subsidiaries that are customary for companies of similar size and
financial condition. All such policies are in full force and effect, all
premiums due thereon have been paid and the Company has complied in all material
respects with the provisions of such policies. The Company has not been advised
in writing within the year prior to the date of this Agreement of any defense to
coverage in connection with any pending claim to coverage asserted or noticed by
the Company under or in connection with any of its existing insurance policies,
other than customary reservations of right. The Company has not within the
twelve months prior to the date of this Agreement received any written notice
from or on behalf of any insurance carrier issuing policies or binders relating
to or covering the Company and the Company Subsidiaries that there will be a
cancellation or non-renewal of existing policies or binders.
3.22. Questionable Payments. To the knowledge of the Company, within the
last year no current or former director, executive, officer, representative,
agent or employee of the Company or any of the Company Subsidiaries (when acting
in such capacity or otherwise on behalf of the Company or any of the Company
Subsidiaries or any of their predecessors) (a) has made any bribe, rebate,
payoff, influence payment, kickback or other unlawful payment of any nature
using corporate funds or otherwise on behalf of the Company or any of the
Company Subsidiaries; or (b) made any material gift that is not deductible for
federal income tax purposes using corporate funds or otherwise on behalf of the
Company or any of the Company Subsidiaries.
3.23. Print and Mail Business. None of the Print and Mail Subsidiaries
provide accounts receivable management services or teleservices. None of the
assets of any of the Print and Mail Subsidiaries are used in the operations of
the accounts receivable management or teleservices businesses of the Company and
the Company's A/R and Teleservices Subsidiaries and none of the assets of the
Company or the Company's A/R and Teleservices Subsidiaries are used in the Print
and Mail Business. Except as described in Section 3.23 of the Company Disclosure
Letter, there are no (i) outstanding contracts, liabilities, obligations, loans,
advances or guarantees between or among, or for the benefit of, any of the Print
and Mail Subsidiaries, on the one hand, and the Company or any Company A/R and
Teleservices Subsidiary on the other hand, or by which the Company or any
Company's A/R and Teleservices Subsidiary is bound, or (ii) outstanding
guarantees given to any third party by the Company or any Company A/R and
Teleservices Subsidiary with respect to any contracts, liabilities, obligations,
loans, advances of any Print and Mail Subsidiary.
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3.24. Disclosure. No representation or warranty by the Company in this
Agreement (including the Company Disclosure Letter) contains or will contain any
untrue statement of a material fact or omits or will omit to state any material
fact necessary, in light of the circumstances under which it was made, to make
the statements herein or therein not misleading. There is no fact known to the
Company which would reasonably be expected to have a material adverse effect on
the business or financial condition of the Company and the Company Subsidiaries
taken as a whole which has not been set forth in the Company SEC Filings or in
this Agreement (including the Company Disclosure Letter).
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF THE PARENT AND THE PURCHASER
The Parent and the Purchaser jointly and severally represent and warrant to
the Company as follows:
4.1. Organization. The Parent is a corporation duly organized, validly
existing and in good standing under the laws of the State of Pennsylvania. The
Purchaser and each of the other Parent Subsidiaries is a corporation, duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation. Each of the Parent, the Purchaser and the
other Parent Subsidiaries has all requisite power and authority to own, lease
and operate its properties and to conduct its business as now being conducted.
Each of the Parent, the Purchaser and the other Parent Subsidiaries is duly
qualified or licensed and in good standing to do business in each jurisdiction
in which the property owned, leased or operated by it or the nature of the
business conducted by it makes such qualification necessary, except where the
failure to be so qualified or licensed and in good standing would not have a
material adverse effect on the business or financial condition of the Parent,
the Purchaser and the other Parent Subsidiaries taken as a whole. Except as and
to the extent set forth in the disclosure letter delivered by the Parent and the
Purchaser to the Company prior to the execution of this Agreement (the "Parent
Disclosure Letter") or in the Parent SEC Filings, the Parent owns beneficially
and of record directly or indirectly all of the issued and outstanding capital
stock of each of the Parent Subsidiaries, free and clear of any Liens.
4.2. Capitalization. The authorized capital stock of the Parent consists of
(a) 37,500,000 shares of Parent Common Stock of which, as of May 4, 1999, there
are 21,473,897 shares issued and outstanding, 3,266,235 reserved for issuance
under Parent's stock option plans, warrants and convertible notes, and no shares
held in the Parent's treasury, and (b) 5,000,000 shares of preferred stock, of
which as of the date hereof, no shares were issued or outstanding. No other
capital stock of the Parent is authorized, issued or outstanding. All issued and
outstanding Shares and capital stock of the Company Subsidiaries are duly
authorized, validly issued, fully paid and nonassessable.
4.3. Authorization of this Agreement. Each of the Parent and the Purchaser
has all requisite corporate power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the con summation of the transactions
contemplated hereby have been duly and validly authorized and approved by the
Parent's and the Purchaser's respective Board of Directors, each of the Board of
Directors of the Parent and the Purchaser has declared the advisability of this
Agreement and the consummation of the transactions contemplated hereby, and, no
other corporate proceedings on the part of the Parent and the Purchaser are
necessary to authorize this Agreement or consummate the transactions
contemplated hereby. This Agreement has been duly and validly executed and
delivered by the Parent and the Purchaser, and this Agreement constitutes a
valid and binding agreement of the Parent and the Purchaser, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws of general application relating to
or affecting the rights and remedies of creditors, and the application of
general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
4.4. Consents and Approvals; No Violation. Except for (i) filings required
under the Securities Act and the Exchange Act, (ii) the filing of a Pre-Merger
Notification and Report Form by the Company under the HSR Act, (iii) the filing
and recordation of appropriate merger documents as required by the DGCL and, if
applicable, the laws of other states in which the Parent or the Purchaser is
qualified to do business, and (iv)
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filings under securities or blue sky laws or takeover statutes of the various
states, no filing with, and no permit, authorization, consent or approval of,
any public body or authority is necessary for the consummation by the Parent and
the Purchaser of the transactions contemplated by this Agreement, the failure to
make or obtain which is reasonably likely to have a material adverse effect on
the ability of the Parent or the Purchaser to consummate the transactions
contemplated hereby or on the business or financial condition of the Parent, the
Purchaser and the other Parent Subsidiaries taken as a whole. Neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby nor compliance by either the Parent or the
Purchaser with any of the provisions hereof will (i) conflict with or result in
any violation of any provision of the Certificate of Incorporation or By-Laws of
the Parent or the Purchaser, (ii) result in a violation or breach of, or
constitute a default or give rise to any right of termination, cancellation,
loss of material benefits or acceleration or give to any Person any interest in
or result in the creation of any Lien upon any of the properties or assets of
the Parent, the Purchaser or any of the other Parent Subsidiaries, with or
without notice or lapse of time, or both, under the Certificate of Incorporation
or the By-Laws of the Parent or the Purchaser or any note, bond, mortgage,
indenture, license, benefit plan, agreement or other instrument or obligation to
which the Parent, the Purchaser or any of the other Parent Subsidiaries is a
party or by which any of them or any of their properties or assets is bound or
(iii) assuming the truth of the representations and warranties of the Company
contained herein and their compliance with all agreements contained herein and
assuming the due making or obtaining of all filings, permits, authorizations,
consents and approvals referred to in the preceding sentence, violate any
statute, rule, regulation, order, injunction, writ or decree of any public body
or authority by which the Parent, the Purchaser or any of the other Parent
Subsidiaries or any of their respective assets or properties is bound, excluding
from the foregoing clauses (ii) and (iii) mortgages, leases and other agreements
listed on Section 4.4 of the Parent Disclosure Letter, and other conflicts,
violations, breaches or defaults which, either individually or in the aggregate,
are not reasonably likely to have a material adverse effect on the business or
financial condition of the Parent, the Purchaser and the other Parent
Subsidiaries taken as a whole or to materially impair the ability of the Parent
or the Purchaser to perform their respective obligations hereunder or consummate
the transactions contemplated hereby.
4.5. Financial Statements and Reports. (a) The Parent has filed all forms,
reports and documents with the SEC required to be filed by it pursuant to the
Securities Act and the Exchange Act (collectively, the "Parent SEC Filings"),
all of which have complied in all material respects with all applicable
requirements of the Securities Act and the Exchange Act. None of such Parent SEC
Filings, at the time filed, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The Parent SEC Filings filed after the date of
this Agreement and prior to the Effective Time, (i) will comply in all material
respects with all applicable requirements of the Securities Act and the Exchange
Act and (ii) will not at the time they will be filed, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading; provided, however,
that, except as set forth in Section 4.7 hereof, no representation is made by
the Parent or the Purchaser with respect to the S-4 Registration Statement or
the Proxy Statement/Prospectus.
(b) The consolidated balance sheets and the related consolidated statements
of income, cash flow and changes in shareholder equity of the Parent and the
Parent Subsidiaries (i) contained in the Parent's Quarterly Reports on Form 10-Q
for the quarters ended March 31, 1998, June 30, 1998 and September 30, 1998 and
the Parent's Annual Report on Form 10-K for the year ended December 31, 1998
(collectively, the"Parent 1998 Financial Statements"), and (ii) to be contained
in Parent SEC Filings filed after the date hereof (collectively with the 1998
Parent Financial Statements, the "Parent Financial Statements"), when filed (i)
complied or will comply in all material respects as to form with the published
rules and regulations of the SEC and (ii) presented or will present fairly the
consolidated financial position of the Parent and the Parent Subsidiaries as of
such date, and the consolidated results of their operations and their cash flows
for the periods presented therein, in conformity with GAAP applied on a
consistent basis, except as otherwise noted therein, and subject in the case of
quarterly financial statements to normal year-end audit adjustments and except
that the quarterly financial statements do not contain all of the footnote
disclosures required by GAAP.
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4.6. Absence of Material Adverse Change. Since December 31, 1998, except as
reflected in the Parent 1998 Financial Statements or on Section 4.6 of the
Parent Disclosure Letter, there has not been any material adverse change in the
business or financial condition of the Parent and the Parent Subsidiaries taken
as a whole, other than changes in general economic or business conditions,
changes that may result from the public announcement of this Agreement, or
changes generally affecting companies operating in the industries in which the
Parent and the Parent Subsidiaries operate.
4.7. Information in Proxy Statement/Prospectus, Registration Statement and
HSR Filings. The S-4 Registration Statement (or any amendment thereof or
supplement thereto), at the date it becomes effective and at the time of the
Company Stockholders Meeting, will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading, except that no
representation is made by Parent or Purchaser with respect to statements made
therein based on information supplied by the Company for inclusion in the S-4
Registration Statement. None of the information supplied by Parent or Purchaser
for inclusion or incorporation by reference in the Proxy Statement/Prospectus
will, at the date mailed to shareholders and at the time of the Company
Stockholders Meeting, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading. The S-4 Registration Statement will comply in all material
respects with the provisions of the Securities Act and the rules and regulations
thereunder. To the knowledge of the Parent, none of the information supplied or
to be supplied by or on behalf of any of the Parent and the Parent Subsidiaries
for inclusion or incorporation by reference in the filing or filings required
under the HSR Act, at the date filed, will contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. No representation is
made hereby with respect to statements made in such filing or filings based on
information supplied by Company for inclusion therein.
4.8. Finders and Investment Bankers. Except for Robinson-Humphrey & Co., no
agent, investment banker, broker, finder, intermediary, or other Person acting
on behalf of the Parent or any of the Parent Subsidiaries is or shall be
entitled to any brokerage, or finder's or other similar fee or commission in
connection with the Merger and the other transactions contemplated by this
Agreement.
4.9. Disclosure. No representation or warranty by the Parent or the
Purchaser in this Agreement (including the Parent Disclosure Letter) contains or
will contain any untrue statement of a material fact or omits or will omit to
state any material fact necessary, in light of the circumstances under which it
was made, to make the statements herein or therein not misleading. There is no
fact known to the Parent or the Purchaser which would reasonably be expected to
have a material adverse effect on the business or financial condition of the
Parent and the Parent Subsidiaries taken as a whole which has not been set forth
in the Parent SEC Filings or in this Agreement (including the Parent Disclosure
Letter).
ARTICLE V
CONDUCT OF BUSINESS PENDING THE MERGER
5.1. Conduct of the Business of the Company. Except as contemplated by this
Agreement (including, without limitation, Section 7.2(f)) or as otherwise set
forth on Section 5.1 of the Company Disclosure Letter, during the period from
the date of this Agreement to the Effective Time, the Company and the Company
Subsidiaries will each conduct its operations in all material respects according
to its ordinary and usual course of business, and will use commercially
reasonable efforts to preserve intact its business organization, to keep
available the services of its officers and employees and to maintain
satisfactory relationships with customers, suppliers and others having business
relationships with it and will take no action that could reasonably be deemed to
have a material adverse effect on the ability of the Company to consummate the
transactions contemplated by this Agreement, or the timing thereof. The Company
shall consult regularly with Parent on the management and business affairs of
the Company and the Company Subsidiaries. The Company will promptly advise the
Parent in writing of any change in the Company's or any of the Company
Subsidiaries' business or financial condition which is materially adverse to it
and the Company Subsidiaries taken as a whole. Without limiting the generality
of the foregoing, except as set forth on Section 5.1 of the Company
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Disclosure Letter, and except as otherwise expressly contemplated by this
Agreement (including, without limitation, Section 7.2(f)), prior to the
Effective Time, neither the Company nor any of the Company Subsidiaries will,
without the prior written consent of the Parent:
(a) amend its Certificate of Incorporation or By-Laws;
(b) authorize for issuance, issue, sell, deliver or agree or commit to
issue, sell or deliver (whether through the issuance or granting of
additional options, warrants, commitments, subscriptions, rights to purchase
or otherwise) any shares of capital stock of any class or any securities
convertible into or exercisable for shares of capital stock of any class,
except as required by any employee benefit or stock option plan or agreement
existing as of the date hereof and listed in Section 5.1 of the Company
Disclosure Letter;
(c) split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its capital
stock or partnership interest, or redeem or otherwise acquire any shares of
its capital stock, except any distribution made by any of the Company
Subsidiaries to the Company or any of the other Company Subsidiaries (other
than the Print and Mail Subsidiaries);
(d) (i) create, incur, assume, maintain or permit to exist any debt
(including obligations in respect of capital leases) other than as in
existence on the date hereof (or which, in the ordinary course of business,
replaces any such debt) in an aggregate amount for the Company and the
Company Subsidiaries taken as a whole exceeding $500,000; (ii) except in the
ordinary course of business and consistent with past practices assume,
guarantee, endorse or otherwise become liable or responsible (whether
directly, contingently or otherwise) for the obligations of any Person other
than any of the Company Subsidiaries (other than the Print and Mail
Subsidiaries); or (iii) make any loans, advances or capital contributions to,
or investments in, any Person other than any of the Company Subsidiaries
(other than the Print and Mail Subsidiaries), except for notes taken by the
Company pursuant to the terms of the Print and Mail Sale Agreement, and
customary loans or advances to employees or trade credit in the ordinary
course of business and consistent with past practices, which in any event
will not exceed $25,000 in the aggregate;
(e) ;
(f) (i) increase in any manner the compensation of any of its directors,
officers or employees except in the ordinary course of business, consistent
with past practice as part of their regularly scheduled review; (ii) pay or
agree to pay any pension, retirement allowance or other employee benefit not
required, or enter into or amend or agree to enter into or amend any
agreement or arrangement with any of its directors, officers or employees,
whether past or present, relating to any such pension, retirement allowance
or other employee benefit, except as required under currently existing
agreements, plans or arrangements; (iii) grant (other than as required
pursuant to existing agreements or plans) any severance or termination pay
to, or enter into or amend any employment, severance or change in control
agreement with, any of its directors, officers or employees; or (iv) except
as may be required to comply with applicable law, enter into or become
obligated under any collective bargaining agreement or any agreement with,
any labor union or association representing employees, pension plan, welfare
plan, multiemployer plan, employee benefit plan, benefit arrangement, or
similar plan or arrangement, which was not in existence on the date hereof,
including any bonus, incentive, deferred compensation, stock purchase, stock
option, stock appreciation right, group insurance, severance pay, retirement
or other benefit plan, agreement or arrangement, or employment or consulting
agreement with or for the benefit of any Person, or amend any of such plans
or any of such agreements in existence on the date hereof;
(g) authorize or commit to make any material capital expenditures in
excess of $100,000 per expenditure;
(h) make any material change in the accounting methods or accounting
practices followed by the Company, except as required by GAAP;
(i) settle any action, suit, claim, investigation or proceeding (legal,
administrative or arbitrative) for an amount in excess of $100,000;
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(j) make any election under the Code;
(k) enter into any contract that if entered into on or prior to the date
hereof would be required to be disclosed on Section 3.16 or Section 3.23 of
the Company Disclosure Letter;
(l) merge with or into or consolidate with any other Person (other than
between the Company Subsidiaries (other than the Print and Mail
Subsidiaries)) or make any acquisition of all or any part of the assets or
capital stock or business of any other Person except for tangible property
acquired in the ordinary course of business; or
(m) agree to do any of the foregoing.
5.2. Conduct of the Business of Parent and the Purchaser. Except as
contemplated by this Agreement or as otherwise set forth on Section 5.2 of the
Parent Disclosure Letter, during the period from the date of this Agreement to
the Effective Time, the Parent and the Parent Subsidiaries will take no action
that could reasonably be deemed to have a material adverse effect on the ability
of the parties to consummate the transactions contemplated by this Agreement, or
the timing thereof. Without limiting the generality of the foregoing, and except
as otherwise expressly contemplated by this Agreement, prior to the Effective
Time, neither the Parent nor any of the Parent Subsidiaries will, without the
prior written consent of the Company:
(a) amend the Certificate of Incorporation or By-Laws of Parent in a
manner which would materially adversely change the rights of holders of
Parent Common Stock;
(b) during the Averaging Period (as hereinafter defined), pay any
dividend or other distribution (whether in cash, stock or property or any
combination thereof) in respect of its capital stock, except any distribution
made by any of the Parent Subsidiaries to the Parent or any of the other
Parent Subsidiaries; or
(c) agree to do any of the foregoing.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1. Proxy Statement/Prospectus; S-4 Registration Statement. In connection
with the solicitation of approval of the principal terms of this Agreement and
the Merger by the Company's stockholders, the Company, the Parent and the
Purchaser shall as promptly as practicable prepare and file with the SEC, on a
confidential basis (if practicable), a preliminary proxy statement relating to
the Merger and this Agreement and use commercially reasonable efforts to obtain
and furnish the information required to be included by the SEC in the Proxy
Statement/ Prospectus (as hereinafter defined). The Company, after consultation
with the Parent, shall respond as promptly as practicable to any comments made
by the SEC with respect to the preliminary proxy statement and shall cause a
definitive proxy statement to be mailed to its shareholders at the earliest
practicable date after the S-4 Registration Statement (as hereinafter defined)
has been declared effective. Such definitive proxy statement shall also
constitute a prospectus of Parent with respect to the Parent Common Stock to be
issued in the Merger (such proxy statement and prospectus are referred to herein
as the "Proxy Statement/Prospectus"), which prospectus is to be filed with the
SEC as part of a registration statement on Form S-4 (the "S-4 Registration
Statement") for the purpose of registering under the Securities Act the
Purchaser Common Stock to be issued pursuant to Section 2.1(a). The Parent shall
as promptly as practicable prepare and file with the SEC the S-4 Registration
Statement after the SEC has advised that it will not review, or has no further
comments on, the Proxy Statement/Prospectus. The Parent, after consultation with
the Company, shall respond as promptly as practicable to any comments made by
the SEC with respect to the S-4 Registration Statement, and shall use all
commercially reasonable efforts to have the S-4 Registration Statement declared
effective by the SEC. The Parent shall also take any action required to be taken
under applicable state securities laws in connection with the issuance of Parent
Common Stock in the Merger to stockholders of the Company; provided, however,
that Parent shall not be required (i) to qualify to do business as a foreign
corporation in any jurisdiction in which it is now qualified or (ii) to file a
general consent to service of process in any jurisdiction. The Company shall
furnish all information concerning the
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Company and the holders of the Shares as may be reasonably requested by Parent
in connection with such action. If at any time prior to the Effective Time any
information relating to the Company or Parent, or any of their respective
affiliates, officer or directors, should be discovered by the Company or Parent
which should be set forth in an amendment or supplement either the S-4
Registration Statement or the Proxy Statement/Prospectus, so that any of such
documents would not include any misstatement of a material fact or omit to state
any material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, the party which
discovers such information shall promptly notify the other parties hereto and an
appropriate amendment or supplement describing such information shall be
promptly filed with the SEC and, to the extent required by law, disseminated to
the stockholders of the Company.
6.2. Access to Information. (a) The Company will (i) give Parent and its
authorized representatives reasonable access during normal business hours to all
offices and other facilities and to all books and records of the Company and the
Company Subsidiaries, in order to permit Parent to make such inspections as it
may reasonably require and (ii) will furnish Parent with a copy of each report,
schedule and other document filed or received by it, during the period between
the date hereof and the Effective Date, pursuant to the requirements of federal
and state securities laws and such financial and operating data and other
information with respect to the business and properties of the Company and the
Company Subsidiaries as Parent may from time to time reasonably request.
(b) Parent will furnish the Company with a copy of each publicly available
report, schedule and other document filed or received by it, during the period
between the date hereof and the Effective Date, pursuant to the requirements of
federal and state securities laws.
(c) Parent and the Company and their respective authorized representatives
shall continue to abide by the provisions of the Confidentiality Agreement,
dated January 25, 1999 (the "Confidentiality Agreement"), by and between the
Parent and the Company.
6.3. Consents. (a) The Parent and the Company each shall use their
commercially reasonable efforts to obtain all consents of third parties under
the agreements set forth in Section 6.3 of the Company Disclosure Letter or the
Parent Disclosure Letter, as the case may be, obtain all material consents of
governmental authorities, and to make all governmental filings, necessary to the
consummation of the transactions contemplated by this Agreement. The Company,
the Parent and the Purchaser shall as soon as practicable file Pre-Merger
Notification and Report Forms under the HSR Act with the Federal Trade
Commission (the "FTC") and the Antitrust Division of the Department of Justice
(the "Antitrust Division") and shall use their commercially reasonable efforts
to respond as promptly as practicable to all inquiries received from the FTC or
the Antitrust Division for additional information or documentation.
(b) Each of the parties hereto agrees to furnish to each other party hereto
such necessary information and commercially reasonable assistance as such other
party may request in connection with its preparation of necessary filings or
submissions to any regulatory or governmental agency or authority, including,
without limitation, any filing necessary under the provisions of the HSR Act, or
any other federal, state, local or foreign statute or regulations. Each of the
parties shall respond as promptly as practicable to (i) any inquiries or
requests from the FTC or the Antitrust Division for additional information or
documentation and (ii) any inquiries or requests received from any state
attorney general or other governmental entity in connection with antitrust or
related matters. Each of the parties shall (1) give the other party prompt
notice of the commencement of any claim, action, suit or proceeding by or before
any governmental entity with respect to the Merger or any of the transactions
contemplated by this Agreement, (2) keep the other party informed as to the
status of any such claim, action, suit or pending or proceeding, and (3)
promptly inform the other party of any communication to or from the FTC or the
Antitrust Division or any other governmental entity regarding the Merger or the
transactions contemplated by this Agreement. Each of the parties will consult
and cooperate with one another, and will consider in good faith the views of one
another, in connection with any analysis, appearance, presentation, memorandum,
brief, argument, opinion or proposal made or submitted in connection with any
claim, action, suit or proceeding under or relating to the HSR or any other
federal or state antitrust or fair trade law. In addition, except as may be
prohibited by any governmental entity or by any applicable federal, state, local
or foreign laws, ordinances or regulations, in connection with any claim,
action, suit or
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proceeding under or relating to the HSR Act or any other federal or state
antitrust or fair trade law or any other similar claim, action, suit or
proceeding, each of the parties will permit authorized representatives of the
other party to be present, to the extent reasonably practicable, at each meeting
or conference relating to any such claim, action, suit or proceeding and to have
access to and be consulted in connection with any document, opinion or proposal
made or submitted to any governmental entity in connection with any such claim,
action, suit or proceeding
(c) Notwithstanding anything to the contrary contained in this Agreement,
Parent shall not have any obligation under this Agreement: (i) to dispose or
cause any of the Parent Subsidiaries to dispose of any assets, or to commit to
cause the Company or any of the Company Subsidiaries to dispose of any assets;
(ii) to discontinue or cause any of the Parent Subsidiaries to discontinue
offering any product, or to commit to cause the Company or any of the Company
Subsidiaries to discontinue offering any product; (iii) to license or otherwise
make available, or cause any of the Parent Subsidiaries to license or otherwise
make available, to any persons, any technology, intellectual property, software
or other intangible assets, or to commit to cause the Company or any of the
Company Subsidiaries to license or otherwise make available to any person any
technology, intellectual property, software or other intangible assets to the
extent reasonably practicable; (iv) to hold separate or cause any of the Parent
Subsidiaries to hold separate any assets or operations, or to commit to cause
the Company or any of the Company Subsidiaries to hold separate any assets or
operations; or (v) to make or cause any of the Parent Subsidiaries to make any
commitment (to any governmental entity or otherwise) regarding its future
operations or the future operations of the Company or any of the Parent
Subsidiaries or Company Subsidiaries, if any of the actions described in (i)-(v)
above would materially interfere with Parent's anticipated benefits from the
transactions contemplated hereby or have a material adverse effect on Parent.
6.4. Board Actions; Company Stockholder Meeting. (a) The Board of Directors
of the Company has determined that the Merger is advisable and in the best
interests of its stockholders and, subject to Section 6.8 hereof, (i) the Board
of Directors of the Company will recommend to the Company's stockholders the
adoption and approval of this Agreement and the transactions contemplated hereby
and the other matters to be submitted to the Company's stock holders in
connection herewith and use its commercially reasonable efforts to obtain the
necessary approvals by the Company's stockholders of this Agreement and the
transactions contemplated hereby; (ii) the Proxy Statement/Prospectus shall
include a statement to the effect that the Board of Directors of the Company has
recommended that the Company's stockholders vote in favor of adopt and approve
the Merger at the Company's Stockholders Meeting; and (iii) neither the Board of
Directors of the Company nor any committee thereof shall withdraw, amend or
modify, or propose or resolve to withdraw, amend or modify, in a manner adverse
to Parent, the recommendation of the Board of Directors of the Company that
Company's stockholders vote in favor of and adopt and approve the Merger.
(b) As soon as reasonably practicable after the date of the Agreement,
Company shall duly call, give notice of, convene and hold the Company
Stockholder Meeting for the purpose of approving this Agreement and the
transactions contemplated by this Agreement. The Company will convene the
Company Stockholder Meeting, as promptly as practicable and in any event use its
reasonable best efforts to convene such meetings within 45 days after the Form
S-4 is declared effective by the SEC.
6.5. Commercially Reasonable Efforts. Subject to the terms and conditions
hereof, each of the parties hereto agrees to use its commercially reasonable
efforts consistent with applicable legal requirements to take, or cause to be
taken, all action, and to do, or cause to be done, all things necessary or
proper and advisable under applicable laws and regulations to ensure that the
conditions set forth in Article VII hereof are satisfied and to consummate and
make effective, in the most expeditious manner practicable, the transactions
contemplated by this Agreement.
6.6. Public Announcements. The Parent and the Company will obtain the prior
written consent of the other before issuing any press release or otherwise
making any public statements with respect to the Merger, except as may be
required by law or by obligations pursuant to any listing agreement with any
securities exchange.
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6.7. Consent of the Parent. The Parent, as the sole stockholder of the
Purchaser, by executing this Agreement consents to the execution and delivery of
this Agreement by the Purchaser and the consummation of the Merger and the other
transactions contemplated hereby, and such consent shall be treated for all
purposes as a vote duly cast at a meeting of the stockholders of the Purchaser
held for such purpose.
6.8. No Solicitation. (a) The Company shall not, nor shall it authorize or
permit any of the Company Subsidiaries to, nor shall it authorize or permit any
of its, or the Company Subsidiaries', directors, officers or employees or any
investment banker, financial advisor, attorney, accountant or other
representative retained by or acting on behalf of it or any of the Company
Subsidiaries to, directly or indirectly through another Person, (i) solicit,
initiate or knowingly encourage (including by way of furnishing non-public
information), or take any other action designed to facilitate, any inquiries or
the making of any proposal which constitutes a Company Takeover Proposal (as
hereinafter defined), (ii) participate in any discussions or negotiations
regarding any Company Takeover Proposal or (iii) enter into any letter of
intent, agreement in principle, acquisition agreement or similar agreement (each
a "Company Acquisition Agreement") with respect to a Company Takeover Proposal,
or (iv) approve, endorse or recommend a Company Takeover Proposal; provided,
however, that if and to the extent that, at any time prior to the time of the
adoption of this Agreement by the Company's stockholders, the Board of Directors
of the Company determines in good faith, after consultation with outside
counsel, that failing to do so would violate its fiduciary duties to the
Company's stockholders under applicable law, the Company may, in response to any
Company Takeover Proposal which is a Company Superior Proposal (as hereinafter
defined) and which was not solicited by it and which did not otherwise result
from a breach of this Section 6.8(a); (x) furnish information with respect to
the Company and the Company Subsidiaries to any Person inquiring about or making
a Company Takeover Proposal pursuant to a customary confidentiality agreement
(as determined by the Company based on the advice of its outside counsel
containing limitations no less restrictive than the limitations imposed on
Parent pursuant to the Confidentiality Agreement); and (y) participate in
discussions or negotiations regarding such Company Takeover Proposal; provided
that prior to or at the time of furnishing any such information or entering into
such discussions or negotiations, the Company shall: (1) inform Parent in
writing as to the fact such information is to be provided, (2) furnish to Parent
the identity of the recipient of such information and/or the potential acquirer
and the terms of such Company Takeover Proposal and (3) furnish to or notify
Parent of the availability of such written information to Parent (to the extent
such information has not been previously furnished by the Company to Parent).
Without limiting the generality of the foregoing, the Company acknowledges and
agrees that any violation of the restrictions set forth in the preceding
sentence by any director, officer, employee, investment banker, financial
advisor, attorney, accountant or other representative of the Company or any of
the Company Subsidiaries shall be deemed to constitute a breach of this Section
6.8(a) by the Company. The Company agrees that it will immediately cease and
cause to be terminated any existing discussions with any person that relate to
any Company Takeover Proposal. For purposes of this Agreement, "Company Takeover
Proposal" means any inquiry, proposal or offer from any Person relating to any
Company Takeover Event. For purposes of this Agreement, "Company Takeover Event"
means any direct or indirect acquisition or purchase of a business that
constitutes 10% or more of the net revenues, net income or assets of the Company
and the Company Subsidiaries (other than the Print and Mail Subsidiaries (as
hereinafter defined)), taken as a whole, or 10% or more of any class of equity
securities of the Company, any tender offer or exchange offer that if
consummated would result in any Person beneficially owning 10% or more of any
class of any equity securities of the Company, or any sale, lease, exchange,
transfer or license of assets, or any merger, consolidation, business
combination, recapitalization, liquidation, dissolution or similar transaction
involving the Company (or any Company Subsidiary (other than the Print and Mail
Subsidiaries)) whose business constitutes 10% or more of the net revenues, net
income or assets of the Company and the Company Subsidiaries taken as a whole,
other than the transactions contemplated by the Print and Mail Sale Agreement.
(b) Except as expressly permitted by this Section 6.8(b), the Board of
Directors of the Company shall not (i) withdraw or modify or propose publicly to
withdraw or modify, in a manner adverse to the Parent and the Purchaser, its
approval or recommendation of this Agreement, or (ii) approve or recommend, or
propose publicly to approve or recommend any Company Takeover Proposal, unless
(x) such Company Takeover Proposal is a Company Superior Proposal, (y) the Board
of Directors of the Company determines in good faith, after consultation with
outside counsel, that in light of a Company Superior Proposal it is necessary to
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do so in order to comply with its fiduciary duties under applicable law, and (z)
neither the Company nor any Company Subsidiary nor any representative of the
Company or a Company Subsidiary shall have caused the Company Superior Proposal
to be made in violation of Section 6.8(a). For purposes of this Agreement, the
term "Company Superior Proposal" means any bona fide written proposal to
acquire, directly or indirectly, for consideration consisting of cash and/or
securities, more than a majority of the Shares then outstanding or all or
substantially all the assets of the Company, that the Board of Directors of the
Company determines in good faith, after taking into account advice from its
financial advisor, to be more favorable from a financial point of view to the
Company and its stockholders than the Merger.
(c) Nothing contained in this Section 6.8(c) shall prohibit the Company
from taking and disclosing to its stockholders a position contemplated by Rule
14e-2(a) promulgated under the Exchange Act or from making any disclosure to the
Company's stockholders if, in the good faith judgment of the Board of Directors
of the Company, after consultation with outside counsel, such disclosure is
required under applicable law; provided that the Company does not amend,
withdraw or modify, or propose to amend, withdraw or modify, its position with
respect to the Merger, or approve, recommend or propose publicly to approve or
recommend a Company Takeover Proposal, unless the Company and the Board of
Directors has complied with the provisions of Section 6.8(b).
(d) Anything in this Agreement to the contrary notwithstanding, the Company
shall submit this Agreement for approval to the stockholders of the Company at
the Company Stockholder Meeting whether or not the Board of Directors determines
at any time subsequent to the date hereof that the Agreement is no longer
advisable and recommends that the stockholders reject it.
6.9. Indemnification. (a) For a period of six years after the Effective
Time, the Parent shall, and shall cause the Surviving Corporation to, indemnify,
defend and hold harmless the present and former officers, directors, employees
and agents of the Company and the Company Subsidiaries (other then the Print and
Mail Subsidiaries) (collectively, the "Indemnified Parties") from and against,
and pay or reimburse the Indemnified Parties for, all losses, obligations,
expenses, claims, damages or liabilities (whether or not resulting from
third-party claims and including interest, penalties, out-of-pocket expenses and
attorneys' fees incurred in the investigation or defense of any of the same or
in asserting any of their rights hereunder) resulting from or arising out of
actions or omissions occurring on or prior to the Effective Time (including,
without limitation, the transactions contemplated by this Agreement) to the full
extent permitted or required under applicable law as of the Effective Time and,
in the case of indemnification by the Surviving Corporation, to the extent
permitted under the provisions of the Certificate of Incorporation and the
By-Laws of the Company in effect at the date hereof (which provisions shall not
be amended in any manner which adversely affects any Indemnified Party, for a
period of six years), including provisions relating to payment and advances of
expenses incurred in the defense of any action or suit; provided that in the
event any claim or claims are asserted or made within such six-year period, all
rights to indemnification in respect of each such claim shall continue until
final disposition of such claim. In the event of any dispute as to
indemnification provided for herein which cannot be resolved within 30 days, the
parties agree that the resolution of such dispute shall be made by independent
counsel jointly selected by the Indemnified Party and the Parent.
(b) For not less than six years after the Effective Time, the Parent and
the Purchaser shall maintain in effect directors' and officers' liability
insurance covering the Indemnified Parties who are currently covered by the
Company's existing directors' and officers' liability insurance, on terms and
conditions no less favorable to such directors and officers than those in effect
on the date hereof; provided that the deductible thereunder (which shall be paid
by the Parent) may be increased to no more than $25,000; and, provided, further,
that in no event shall the Parent be required to expend in any one year an
amount in excess of $250,000; and, provided, further, that if the annual
premiums of such insurance coverage exceed such amount, the Parent shall be
obligated to obtain a policy with the greatest coverage available for a cost not
exceeding such amount.
(c) Any Indemnified Party wishing to claim indemnification under Section
6.9(a) shall provide notice to the Parent promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and (i)
the Parent shall retain counsel satisfactory to the Parent, the Indemnified
Party and the insurer under any applicable directors' and officers' liability
insurance, (ii) the Parent shall pay all reasonable
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fees and expenses of such counsel for the Indemnified Party promptly as
statements therefor are received, and (iii) the Parent will use all reasonable
efforts to assist in the vigorous defense of any such matter, provided that
neither Parent nor the Company shall be liable for any settlement of any claims
effected without its written consent, which consent, however, shall not be
unreasonably withheld; and provided, further, that neither Parent nor Company
shall be obligated to pay the fees and expenses of more than one counsel for all
Indemnified Parties in any single action unless in the reasonable judgment of
counsel to such Indemnified Party a conflict of interest exists between such
Indemnified Party and any other Indemnified Parties with respect to any claims
as determined by Rule 1.7(b) of the ABA Model Rules of Professional conduct. The
omission by any Indemnified Party to give notice as provided herein shall not
relieve the Parent of its indemnification obligation under this Agreement except
to the extent that such omission results in a failure of actual notice to the
Parent and the Parent is damaged as a result of such failure to give notice. The
Parent and the Indemnified Party shall cooperate in the defense of any action or
claim subject to this Section 6.9, including but not limited to furnishing all
available documentary or other evidence as is reasonably requested by the other.
(d) This Section 6.9 is intended for the benefit of the Indemnified Parties
whether or not parties to this Agreement and each of the Indemnified Parties
shall be entitled to enforce the covenants contained herein.
(e) If the Parent or the Surviving Corporation or any of their respective
successors or assigns (i) reorganizes or consolidates with or merges into any
other Person and is not the resulting, continuing or surviving corporation or
entity of such reorganization, consolidation or merger, or (ii) liquidates,
dissolves or transfers all or substantially all of its properties and assets to
any Person or Persons, then, and in such case, proper provision will be made so
that the successors and assigns of the Surviving Corporation assumes all of the
obligations of the Parent or the Surviving Corporation, as the case may be, set
forth in this Section 6.9.
6.10. Employee Benefits. Until the first anniversary of the Closing, Parent
shall maintain or caused to be maintained for the benefit of each employee of
the Parent or any of its Subsidiaries who was an employee of the Company or any
of its Subsidiaries immediately prior to the Closing employee benefit plans and
programs that provide such employee with benefits, rights and entitlements which
are comparable to similarly situated employees of the Parent. Following the
Effective Time, Parent shall cause the Surviving Company to honor in accordance
with their terms all employment, severance and other compensation agreements and
arrangements existing on or prior to the execution of this Agreement which are
between the Company and any of the Company Subsidiaries and any officer,
director or employee thereof.
6.11. Tax Covenants. Whether before or after the Effective Time, neither
the Parent nor the Company shall take (or permit any of their Affiliates to)
take any action that could reasonably be expected to jeopardize qualification of
the Merger as a reorganization within the meaning of Section 368(a) of the Code.
Each of the Parent and the Company shall use its respective commercially
reasonable efforts (i) to cause the Merger to qualify as a reorganization under
the provisions of Section 368(a) of the Code and (ii) to cause its respective
officers to furnish such representations to Blank Rome Comisky & McCauley LLP
("Parent's Counsel") and Katten Muchin & Zavis ("Company's Counsel") as may be
reasonably requested to enable such counsel to deliver the opinions described in
Sections 7.2(d) and 7.3(c).
6.12. Print and Mail Sale Agreement. The Company shall use its commercially
reasonable efforts to consummate the transactions contemplated by the Print and
Mail Sale Agreement in accordance with its terms. The Company shall advise
Parent of, and consult with Parent with respect to, material developments in
connection with such sale. Neither the Company nor any Company Subsidiary shall
agree or consent to any amendment, waiver, consent, modification or other change
to, or the termination of, the Print and Mail Sale Agreement unless it shall
have first received the approval of Parent (which shall not unreasonably be
withheld).
ARTICLE VII
CLOSING CONDITIONS
7.1. Conditions to the Obligations of the Parent, the Purchaser and the
Company. The respective obligations of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Effective Time of the following
conditions:
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(a) There shall not be in effect any statute, rule or regulation enacted,
promulgated or deemed applicable by any governmental authority of competent
jurisdiction that makes consummation of the Merger illegal and no temporary
restraining order, prelimi nary or permanent injunction or other order issued
by any court of competent jurisdiction or other legal restraint or
prohibition preventing the consummation of the Merger shall be in effect;
provided, however, that each of the parties shall use their commercially
reasonable efforts to prevent the entry of any such injunction or other order
and to appeal as promptly as possible any injunction or other order that may
be entered.
(b) This Agreement shall have been approved and adopted by the
affirmative vote of the holders of the requisite number of shares of Common
Stock in accordance with the Certificate of Incorporation and By-Laws of the
Company and the DGCL.
(c) Each of the Parent, the Company and any other person (as defined in
the HSR Act and the rules and regulations thereunder) required in connection
with the Merger to file a Pre-Merger Notification and Report Form under the
HSR Act with the FTC and the Antitrust Division shall have made such filing
and the applicable waiting period with respect to each such filing (including
any extension thereof by reason of a request for additional information)
shall have expired or been terminated.
(d) The S-4 Registration Statement shall have become effective under the
Securities Act and shall not be the subject of any stop order or proceedings
seeking a stop order and no stop order or similar restraining order shall be
threatened or entered by the SEC or any state securities administration
preventing the Merger.
7.2. Conditions to the Obligations of the Parent and the Purchaser. The
obligations of Parent and Purchaser to effect the Merger shall be subject to the
fulfillment at or prior to the Effective Time of the following conditions.
(a) The representations and warranties of the Company contained in this
Agreement that are qualified by materiality or contained in Section 3.2 shall
be true and correct as of the date of this Agreement and as of the Closing
Date as though made on and as of the Closing Date and the representations and
warranties of the Company contained in this Agreement that are not so
qualified shall be true and correct in all material respects as of the date
of this Agreement and as of the Closing Date as though made on and as of the
Closing Date (except in each case to the extent any such representation or
warranty expressly speaks as of an earlier specified date, in which case, as
of such date), except (i) in each case where the failure of the
representations and warranties (other than the representations and warranties
set forth in Section 3.2) to be so true and correct (without giving effect to
any qualification as to "material," "materiality,""material adverse effect"
or similar qualifications) are not, individually or in the aggregate,
reasonably likely to have a material adverse effect on the Parent and the
Parent Subsidiaries taken as a whole or on the Company and the Company
Subsidiaries (excluding the Print and Mail Subsidiaries) taken as a whole, or
(ii) in the case of Section 3.2, so long as the number of shares of Company
Common Stock outstanding or subject to options on the Effective Date does not
exceed that amount set forth in Section 3.2 by more than 10,000 shares or by
more than 10,000 option shares in the aggregate, and provided that the
exercise prices of such additional options equal or exceed $10.50 per share.
(b) The Company shall have, in all material respects, performed all
covenants and agreements and complied with all conditions required by this
Agreement to be performed or complied with by the Company prior to or on the
Closing Date. The Company shall deliver to Parent a certificate of its Chief
Executive Officer, solely in his capacity as such, as to the satisfaction of
the conditions in paragraphs (a) and (b) of this Section 7.2.
(c) There shall not be pending any action, suit or proceeding by a
governmental entity (a) challenging or seeking to restrain or prohibit the
consummation of the Merger; (b) relating to the Merger and seeking material
monetary damages from the Parent, the Company or any of the Parent or Company
Subsidiary; (c) seeking to prohibit or limit in any material respect Parent's
ability to vote, receive dividends with respect to or otherwise exercise
ownership rights with respect to the capital stock of the
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Company; or (d) which would materially and adversely affect the right of
Parent, the Company or any Parent or Company Subsidiary to own the assets or
operate the business of the Company after the Effective Time; provided that
Parent shall use reasonable efforts to resolve such matters.
(d) There shall not be pending any actions, suits or proceeding: (i)
which individually or in the aggregate, taking into account the totality of
the facts and circumstance and the probability of an adverse judgement, are
reasonably likely to have material adverse effect on the Company and the
Company A/R and Teleservices Subsidiaries taken as a whole or on the Parent
and the Parent Subsidiaries taken as a whole and (ii) which (A) challenges or
seeks to restrain or prohibit the consummation of the Merger; (B) relates to
the Merger and seeks to obtain from Parent or any of its subsidiaries
damages; (C) seeks to prohibit or limit in any material respect Parent's
ability to vote, receive dividends with respect to or otherwise exercise
ownership rights with respect to the capital stock of the Company; or (D)
affects adversely the right of Parent, the Company or any subsidiary of
Parent to own the assets or operate the business of Company; provided,
however, that to the extent that any damages payable in connection with any
such claim, action, suit or proceeding will be fully reimbursed by insurance
coverage pursuant to insurance policies held by Company or Parent, such
damages shall be disregarded in determining the material adverse effect of
such claim, action, suit or proceeding on the policy holder.
(e) Parent shall have received from Parent's Counsel an opinion in
substantially the form attached hereto as Annex V, dated on or about the date
of mailing of the Proxy Statement/Prospectus, which opinion shall be
reconfirmed at the Effective Time, substantially to the effect that the
Merger will be treated for U.S. federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code. In rendering
such opinion, Parent's Counsel shall be entitled to request and rely upon
representations contained in certificates of officers of Parent and Company,
which certificates are in substantially the form attached hereto as Annex III
and Annex IV, as the case may be.
(f) Since the date hereof, there shall not have been any material adverse
change in the business or financial condition of the Company and the Company
Subsidiaries taken as a whole, other than changes in general economic or
business conditions, changes that may result from the public announcement of
this Agreement, changes generally affecting companies operating in the
industries in which the Company and the Company Subsidiaries operate or
changes solely affecting the Print and Mail Subsidiaries.
(g) The sale of the Print and Mail Subsidiaries shall have been
consummated in accordance with the terms of the Print and Mail Sale
Agreement.
(h) Neither the Parent nor the Purchaser may rely on the failure of any
condition set forth in this Article VII to be satisfied if such failure was
caused by the Parent's or the Purchaser's failure to use commercially
reasonable efforts to consummate the transactions contemplated by this
Agreement.
7.3. Conditions to the Obligations of the Company. The obligations of the
Company to effect the Merger shall be subject to the fulfillment, at or prior to
the Effective Time, of the following conditions:
(a) The representations and warranties of the Parent and the Purchaser
contained in this Agreement that are qualified by materiality shall be true
and correct in all respects as of the date of this Agreement and as of the
Closing Date and the representations and warranties of the Parent contained
in this Agreement that are not so qualified shall be true and correct in all
material respects as of the date of this Agreement and as of the Closing Date
as though made on and as of the Closing Date (except in each case to the
extent any such representation or warranty expressly speaks as of an earlier
specified date, in which case, as of such date), except in each case where
the failure of the representations and warranties to be so true and correct
(without giving effect to any qualification as to "material," "materiality,"
"material adverse effect" or similar qualifications) are not, individually or
in the aggregate, reasonably likely to have a material adverse effect on the
Parent and the Parent Subsidiaries taken as a whole.
(b) The Parent and the Purchaser shall have, in all material respects,
performed all covenants and agreements and complied with all conditions
required by this Agreement to be performed or complied
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with by the Parent and the Purchaser prior to or on the Closing Date. The
Parent shall deliver to Company a certificate of its Chief Executive Officer,
solely in his capacity as such, as to the satisfaction of the conditions in
paragraphs (a) and (b) of this Section 7.3.
(c) Company shall have received from Company's Counsel an opinion in
substantially the form attached hereto as Annex VI, dated on or about the
date of mailing of the Proxy Statement/Prospectus, which opinion shall be
reconfirmed at the Effective Time, substantially to the effect that the
Merger will be treated for U.S. federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code. In rendering
such opinion, Company's Counsel shall be entitled to request and rely upon
representations contained in certificates of officers of Parent and Company,
which certificates are in substantially the form attached hereto as Annex III
and Annex IV, as the case may be.
(d) The Company may not rely on the failure of any condition set forth in
this Article VII to be satisfied if such failure was caused by the Company's
failure to use commercially reasonable efforts to consummate the transactions
contemplated by this Agreement.
ARTICLE VIII
CLOSING
8.1. Time and Place. The closing of the Merger (the "Closing") shall take
place at the offices of Katten Muchin & Zavis, 525 West Monroe Street, Suite
1600, Chicago, Illinois, as soon as practicable following satisfaction or
waiver, if permissible, of the conditions set forth in Article VII. The date on
which the Closing actually occurs is herein referred to as the "Closing Date."
8.2. Filings at the Closing. At the Closing, the Parent, the Purchaser and
the Company shall cause the Certificate of Merger, together with any other
documents required by law to effectuate the Merger, to be filed and recorded
with the Secretary of State of the State of Delaware in accordance with the
provisions of Sections 103 and 251 or 253 of the DGCL and shall take any and all
other lawful actions and do any and all other lawful things necessary to cause
the Merger to become effective.
ARTICLE IX
TERMINATION AND ABANDONMENT
9.1. Termination. This Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval by the stockholders of the
Company:
(a) by mutual consent of the Board of Directors of the Parent and the
Board of Directors of the Company;
(b) by either the Parent or the Company if the Merger shall not have been
consummated on or before October 31, 1999; provided, however, that the right
to terminate this Agreement shall not be available to any party whose failure
to fulfill any obligation under or breach of this Agreement has been the
cause of, or resulted in, the failure of the Merger to have occurred on or
before the aforesaid date;
(c) by either the Parent or the Company, if any court of competent
jurisdiction in the United States or other governmental agency of competent
jurisdiction shall have issued an order, decree or ruling or taken any other
action restraining, permanently enjoining or otherwise prohibiting the
Merger, and such order, decree, ruling or other action shall have become
final and non-appealable;
(d) by either the Parent or the Company, if the approval of the Merger by
the stockholders of the Company shall not have been obtained by reason of the
failure to obtain the required vote upon a vote held at a duly held meeting
of such stockholders or at any adjournment or postponement thereof;
(e) by the Company:
(i) upon the breach of any representation, warranty, covenant or other
agreement of Parent contained in this Agreement, or if any representation or
warranty of Parent shall be or shall have become
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inaccurate, in either case such that Parent fails to cure such breach within
fifteen (15) business days after receiving notice of such breach (but only if
such breach is capable of being cured) and such breach would cause any of the
conditions set forth in Section 7.3(a) or (b) not to be satisfied at the time
of such breach or at the time such representation or warranty was or shall
have become inaccurate or, if capable of being cured, at the end of such cure
period;
(ii) if the arithmetic per share average of the last reported sales
prices of one share of Parent Common Stock, as reported on the NASDAQ
National Market during the five (5) trading days ending on and including the
trading day one day before the Company Stockholder Meeting (such 5-day
period, the "Averaging Period"), is less than $27.50 (such amount to be
proportionately adjusted in the event the Parent Common Stock is subdivided,
whether by stock split, stock dividend or otherwise, into a greater number or
combined, whether by reverse stock split or otherwise, into a lesser number).
(f) By Parent:
(i) upon the breach of any representation, wa ranty, covenant or other
agreement of the Company contained in this Agreement, or if any
representation or warranty of the Company shall be or shall become
inaccurate, in either case such that the Company fails to cure such breach
within fifteen (15) business days after receiving notice of such breach (but
only if such breach is capable of being cured) and such breach would cause
any of the conditions set forth in Section 7.2(a) or (b) not to be satisfied
at the time of such breach or at the time such representation or warranty was
or shall have become inaccurate, or, if capable of being cured, at the end of
such cure period;
(ii) if (a) the Board of Directors of the Company shall have failed to
recommend, or shall for any reason have withdrawn or shall have amended or
modified in a manner adverse to Parent its recommendation in favor of, the
adoption and approval of the Merger; (b) the Company shall have failed to
include in the Proxy Statement/Prospectus the recommendation of the Board of
Directors of the Company in favor of the adoption and approval of the Merger;
(c) the Company shall have entered into any Company Acquisition Agreement; or
(d) a tender or exchange offer relating to securities of the Company shall
have been commenced and the Company shall not have sent to its stockholders
and, if applicable, optionholder, within ten (10) business days after the
commencement of such tender or exchange offer, a statement disclosing that
the Company recommends rejection of such tender or exchange offer.
9.2. Procedure and Effect of Termination. (a) In the event of termination
and abandonment of the Merger by the Parent, the Purchaser or the Company
pursuant to Section 9.1, written notice thereof shall forthwith be given to the
others, and this Agreement shall terminate and the Merger shall be abandoned,
without further action by any of the parties hereto. The Purchaser agrees that
any termination by the Parent shall be conclusively binding upon it, whether
given expressly on its behalf or not, and the Company shall have no further
obligation with respect to it. If this Agreement is terminated as provided
herein, no party hereto shall have any liability or further obligation to any
other party to this Agreement; provided that any termination shall be without
prejudice to the rights of any party hereto arising out of any intentional
breach by any other party of any covenant or agreement contained in this
Agreement, and provided, further, that the obligations set forth in Sections
3.15, 4.8, 6.2 (last sentence), 9.2, 10.6 and 10.8 shall in any event survive
any termination.
(b) (i) If this Agreement is terminated by Parent or the Company pursuant
to Section 9.1(d) and a Company Superior Proposal is consummated at any time
prior to the first anniversary date of this Agreement, then, contemporaneously
with the consummation of such transaction, the Company shall pay to Parent by
wire transfer of immediately available funds to an account specified by Parent,
a nonrefundable fee in an amount equal to $3,500,000 plus an amount equal to the
documented out-of-pocket costs and expenses incurred by Parent in connection
with the transactions contemplated by this Agreement, not to exceed $1,200,000.
(ii) In the event of a termination of this Agreement by Parent pursuant
to Section 9.1(f)(ii), then the Company shall within ten business days of such
termination pay Parent by wire transfer of immediately available funds to an
account specified by Parent a non-refundable termination fee of $3,500,000 plus
an amount equal to the documented out-of-pocket costs and expenses incurred by
Parent in connection with the transactions contemplated by this Agreement, not
to exceed $1,200,000.
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ARTICLE X
MISCELLANEOUS
10.1. Amendment and Modification. Subject to applicable law, this Agreement
may be amended, modified or supplemented only by written agreement of the
Parent, the Purchaser and the Company at any time prior to the Effective Time
with respect to any of the terms contained herein; provided that after this
Agreement is adopted by the Company's stockholders, no such amendment or
modification shall be made that reduces the amount or changes the form of the
Merger Consideration or otherwise materially and adversely affects the rights of
the Company's stockholders hereunder, without the further approval of such
stockholders.
10.2. Waiver of Compliance; Consents. Any failure of the Parent or the
Purchaser, on the one hand, or the Company, on the other hand, to comply with
any obligation, covenant, agreement or condition herein may be waived by the
Company or the Parent, respectively, only by a written instrument signed by the
party granting such waiver, but such waiver or failure to insist upon strict
compliance with such obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure. Whenever this Agreement requires or permits consent by or on behalf of
any party hereto, such consent shall be given in writing in a manner consistent
with the requirements for a waiver of compliance as set forth in this Section
10.2. The Purchaser hereby agrees that any consent or waiver of compliance given
by the Parent hereunder shall be conclusively binding upon it, whether given
expressly on its behalf or not.
10.3. Survival of Warranties. Each and every representation and warranty
made in this Agreement shall survive the date of this Agreement but shall expire
with, and be terminated and extinguished by, the Merger, or the termination of
this Agreement pursuant to Section 9.1. This Section 10.3 shall have no effect
upon any other obligation of the parties hereto, whether to be performed before
or after the Closing.
10.4. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if (a) delivered personally or by overnight
courier, (b) mailed by registered or certified mail, return receipt requested,
postage prepaid, or (c) transmitted by telecopy, and in each case, addressed to
the parties at the following addresses (or at such other address for a party as
shall be specified by like notice; provided that notices of a change of address
shall be effective only upon receipt thereof):
(a) if to the Parent or the Purchaser, to
NCO Group, Inc.
515 Pennsylvania Avenue
Fort Washington, Pennsylvania 19034
Telecopy:(215) 793-2908
Attention: President
with copies to
NCO Group, Inc.
515 Pennsylvania Avenue
Fort Washington, Pennsylvania 19034
Telecopy: (215) 793-2908
Attention: General Counsel
Blank Rome Comisky & McCauley LLP
One Logan Square
Philadelphia, PA 19103
Telecopy: (215) 793-2929
Attention: Francis E. Dehel, Esq.
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(b) if to the Company, to
Compass International Service Corporation
One Penn Plaza, Suite 4430
New York, NY 10119
Attention: Julie Schechter
Facsimile No.: (212) 967-0650
with a copy to
Katten Muchin & Zavis
525 West Monroe Street, Suite 1600
Chicago, Illinois 60661
Telecopy: (312) 902-1061
Attention: Howard S. Lanznar, Esq.
Any notice so addressed shall be deemed to be given (x) three business days
after being mailed by first-class, registered or certified mail, return receipt
requested, postage prepaid and (y) upon delivery, if transmitted by hand
delivery, overnight courier or telecopy.
10.5. Assignment; Parties in Interest. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns, but neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any of the parties hereto without the prior written consent of the
other parties. Except for Section 6.9, which is intended for the benefit of the
Company's directors, officers, employees and agents, and Section 6.11, which is
intended for the benefit of the Company's stockholders, this Agreement is not
intended to confer upon any other Person except the parties any rights or
remedies under or by reason of this Agreement.
10.6. Expenses. Except as provided in Section 9.2(b), whether or not the
Merger is consummated, all costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such expenses.
10.7. Specific Performance. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any court of the United States
or any state having jurisdiction, as provided in Section 10.13, this being in
addition to any other remedy to which they are entitled at law or in equity.
10.8. Governing Law. This Agreement shall be governed in all respects,
including as to validity, interpretation and effect, by the internal laws of the
State of Delaware, without giving effect to the conflict of laws rules thereof
to the extent such rules would permit the application of the laws of another
jurisdiction.
10.9. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10.10. Interpretation. The article and section headings contained in this
Agreement are solely for the purpose of reference, are not part of the agreement
of the parties and shall not in any way affect the meaning or interpretation of
this Agreement.
10.11. Entire Agreement. This Agreement, including the Company Disclosure
Letter and the Parent Disclosure Letter, the Annexes hereto, the Voting
Agreement, and the Con fidentiality Agreement, embody the entire agreement and
understanding of the parties hereto in respect of the subject matter contained
herein and supersedes all prior agreements and the understandings between the
parties with respect to such subject matter.
10.12. Severability. If any provision, including any phrase, sentence,
clause, section or subsection, of this Agreement is invalid, inoperative or
unenforceable for any reason, such circumstances shall not have the effect of
rendering such provision in question invalid, inoperative or unenforceable in
any other case or circumstance, or of rendering any other provision herein
contained invalid, inoperative, or unenforceable to any extent whatsoever.
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10.13. Jurisdiction and Process. In any action between or among any of the
parties, whether arising out of this Agreement or otherwise, (a) each of the
parties irrevocably consents to the exclusive jurisdiction and venue of the
federal and state courts located in the State of Delaware, (b) if any such
action is commenced in a state court, then, subject to applicable law, no party
shall object to the removal of such action to any federal court located in the
State of Delaware, (c) each of the parties irrevocably waives the right to trial
by jury, (d) each of the parties irrevocably consents to service of process by
first class certified mail, return receipt requested, postage prepaid, to the
address at which such party is to receive notice in accordance with Section 10.4
and (e) the prevailing parties shall be entitled to recover their reasonable
attorneys' fees and court costs from the other parties.
10.14. Interpretation of Representations; Disclosure Letters. Each
representation and warranty made in this Agreement or pursuant hereto is
independent of all other representations and warranties made by the same
parties, whether or not covering related or similar matters, and must be
independently and separately satisfied. Except as set forth herein, exceptions
or qualifications to any such representation or warranty shall not be construed
as exceptions or qualifications to any other representation or warranty. The
parties acknowledge that the Company Disclosure Letter and the Parent Disclosure
Letter (i) relate to certain matters concerning the disclosures required and
transactions contemplated by this Agreement, (ii) are qualified in their
entirety by reference to specific provisions of this Agreement, (iii) are not
intended to constitute and shall not be construed as indicating that such matter
is required to be disclosed, nor shall such disclosure be construed as an
admission that such information is material with respect to the Company or
Parent, as the case may be, except to the extent required by this Agreement,
(iv) disclosure of the information contained in one section or part of the
Company Disclosure Letter or the Parent Disclosure Letter shall be deemed as
proper disclosure for all sections or parts of the Company Disclosure Letter or
the Parent Disclosure Letter, as the case may be, only if appropriately
cross-referenced or if the relevance thereof is reasonably manifest on its face
to be relevant and responsive to the other section or sections where such
disclosure is required; and (v) disclosure of the information contained in one
section of the Company Disclosure Letter or the Parent Disclosure Letter shall
be deemed as proper disclosure for each provision in that section of the
Agreement for which such disclosure is required, even if such provision is not
qualified by a reference to the Company Disclosure Letter or the Parent
Disclosure Letter, as the case may be, provided that the relevance thereof is
reasonably manifest on its face to be relevant and responsive to the provisions
in that section which are not qualified by a reference to the Company Disclosure
Letter or Parent Disclosure Letter, as the case may be.
10.15. Reliance by Parent and Purchaser. Notwithstanding the right of
Parent and Purchaser to investigate the business, assets and financial condition
of the Company and the Company Subsidiaries, and notwithstanding any knowledge
obtained or obtainable by Parent and Purchaser as a result of such
investigation, Parent and Purchaser have the unqualified right to rely upon, and
have relied upon, each of the representations and warranties made by the Company
in this Agreement or pursuant hereto.
[remainder of page intentionally left blank - signature page to follow]
28
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IN WITNESS WHEREOF, the Parent, the Purchaser and the Company have caused
this Agreement to be signed by their respective duly authorized officers as of
the date first above written.
PARENT: NCO GROUP, INC.
By: /s/ Paul E. Weitzel, Jr.
--------------------------------
Name: Paul E. Weitzel, Jr.
------------------------------
Title: Executive Vice President
-----------------------------
PURCHASER: CARDINAL ACQUISITION
CORPORATION
By: /s/ Joshua Gindin
--------------------------------
Name: Joshua Gindin
------------------------------
Title: Executive Vice President
-----------------------------
THE COMPANY COMPASS INTERNATIONAL
SERVICES CORPORATION
By: /s/ Michael J. Cunningham
--------------------------------
Name: Michael J. Cunningham
------------------------------
Title: Chairman
-----------------------------
29
<PAGE>
ANNEX I
DEFINED TERMS
Antitrust Division: as defined in Section 6.3(a).
A/R and Teleservices Subsidiaries: the Company Subsidiaries other than the
Print and Mail Subsidiaries.
Averaging Period: as defined in Section 9.1(e).
Certificate of Merger: as defined in Section 1.5.
Certificates: as defined in Section 2.5(b).
Closing: as defined in Section 8.1.
Closing Date: as defined in Section 8.1.
Code: as defined in the second recital of this Agreement.
Common Stock: as defined in Section 2.1(a).
Company: as defined in the first paragraph of this Agreement.
Company Acquisition Agreement: as defined in Section 6.8(a).
Company Disclosure Letter: as defined in Section 3.1.
Company Leases: as defined in Section 3.12(b).
Company Leased Real Property: as defined in Section 3.12(a).
Company Option Plan: as defined in Section 2.6.
Company Owned Real Property: as defined in Section 3.12(a).
Company Plans: as defined in Section 3.13(b).
Company Preferred Stock: as defined in Section 3.2(a).
Company SEC Filings: as defined in Section 3.5(a).
Company Stockholder Meeting: the annual or special meeting of the
stockholders of the Company to be held to vote on the approval of this
Agreement and the transactions contemplated hereby.
Company Subsidiary: means any corporation of which the outstanding
securities having ordinary voting power to elect a majority of the board of
directors are directly or indirectly owned by the Company or any limited
partnership of which the Company or any Company Subsidiary is the general
partner or the ownership of 50% or more of a limited partnership interest.
Company Superior Proposal: as defined in Section 6.8(a).
Company Takeover Event: as defined in Section 6.8(a).
Company Takeover Proposal: as defined in Section 6.8(a).
Compliance Program: as defined in Section 3.18(c).
Confidentiality Agreement: as defined in Section 6.2(b)
DGCL: as defined in Section 1.1(a).
Effective Time: as defined in Section 1.5.
ERISA: as defined in Section 3.13(b).
Exchange Act: as defined in Section 3.4.
Exchange Agent: as defined in Section 2.6(a).
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Exchange Fund: as defined in Section 2.6(a).
Exchange Ratio: as defined in Section 2.1(a)
Financial Statements: as defined in Section 3.5(b).
FTC: the Federal Trade Commission.
GAAP: generally accepted accounting principles as in effect in the United
States, consistently applied.
HSR Act: as defined in Section 3.4.
Indemnified Parties: as defined in Section 6.8(a).
Interested Stockholder: as defined in Section 3.3 (and Section 203 of the
DGCL).
Intellectual Property: as defined in Section 3.18(a).
Lien: as defined in Section 3.1.
Merger: as defined in the first recital of this Agreement.
Merger Consideration: as defined in Section 2.1(a).
Options: as defined in Section 2.6.
Parent: as defined in the first paragraph of this Agreement.
Parent Common Stock: as defined in Section 2.1(a).
Parent Common Stock Value:
Parent Disclosure Letter: as defined in the first paragraph of Article IV
of this Agreement.
Parent Financial Statements: as defined in Section 4.5(b).
Parent 1998 Financial Statements: as defined in Section 4.5(b).
Parent SEC Filings: as defined in Section 4.5(a).
Parent Subsidiary: means any corporation of which the outstanding
securities having ordinary voting power to elect a majority of the board of
directors are directly or indirectly owned by Parent.
Per Share Value: as defined in Section 2.2(b).
Person: any natural person, firm, partnership, association, corporation,
company, trust, business trust, governmental authority or other entity.
Print and Mail Business: the business currently conducted through the
Print and Mail Subsidiaries.
Print and Mail Sale Agreement: that certain Stock Purchase Agreement,
dated as of the date hereof by and between the Company and Swiss-Irish
Enterprises, Inc..
Print and Mail Subsidiaries: Bender Direct Mail Service, Inc., Compass Mail
Services Holding Corporation, Compass Mail Services, Inc., Compass Mail
Services, L.P., Compass Print & Mail Services, Inc., Compass Print Services
Holding Corporation, Compass Print Services, L.P., MB Strategic Services, Ltd.,
MetroWebb, Inc., MWI Laser Group, Inc. and The Mail Box, Inc.
Proxy Statement/Prospectus: as defined in Section 6.1.
Purchaser: as defined in the first paragraph of this Agreement.
Purchaser Common Stock: as defined in Section 2.4.
S-4 Registration Statement: as defined in Section 6.1.
Securities Act: as defined in Section 3.4.
SEC: as defined in Section 3.5(a).
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Shares: as defined in Section 2.1(a).
Surviving Corporation: as defined in Section 1.1(a).
Surviving Corporation Common Stock: as defined in Section 2.4.
Tax or Taxes: as defined in Section 3.9.
3
<PAGE>
ANNEX B
May 12, 1999
Board of Directors
Compass International Services Corporation
One Penn Plaza, Suite 4430
New York, NY 10119
Members of the Board:
We understand that Compass International Services Corporation ("Compass" or
the "Company") and NCO Group, Inc. ("NCO") are proposing to enter into a Stock
Purchase Agreement, to be dated as of May 12, 1999 (the "Agreement"), pursuant
to which Acquisition Corporation, a wholly-owned subsidiary of NCO, will be
merged with and into the Company (the "Merger") and, upon effectiveness of the
Merger, each share of common stock of the Company shall be converted into the
right to receive 0.23739 (the "Exchange Ratio") of a share of common stock of
NCO (the "Proposed Transaction"). We further understand that the Agreement may
be terminated by the Company if the average of the last reported sales prices of
one share of NCO's common stock during the five trading days ending on the day
one day before the Company's stockholder meeting with respect to the Proposed
Transaction is less than $27.50. In addition, we understand that the Company
will concurrently sell its Print & Mail Division ("Print & Mail") to a group of
investors led by management of Print & Mail and that the closing of such sale
will be a condition to NCO's obligation to consummate the Proposed Transaction.
The terms and conditions of the Proposed Transaction are set forth in more
detail in the Agreement.
We have been requested by the Board of Directors of the Company to render
our opinion with respect to the fairness, from a financial point of view, to the
Company's stockholders of the Exchange Ratio to be offered to such stockholders
in the Proposed Transaction. We have not been requested to opine as to, and our
opinion does not in any manner address, (i) the Company's underlying business
decision to proceed with or effect the Proposed Transaction, or (ii) the
likelihood of the consummation of either the sale of Print & Mail or the
Proposed Transaction.
In arriving at our opinion, we reviewed and analyzed: (1) the Agreement and
the specific terms of the Proposed Transaction, (2) publicly available
information concerning the Company and NCO that we believe to be relevant to our
analysis, including their respective Annual Reports on Form 10-K for the fiscal
year ended December 31, 1998, (3) financial and operating information with
respect to the businesses, operations and prospects of the Company and NCO
furnished to us by the Company and NCO, respectively, including without
limitation, the financial results of the Company for the quarter ended March 31,
1999 as set forth in
1
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the Company's proposed press release announcing its first quarter results of
operations, which will be disclosed concurrently with the announcement of the
Proposed Transaction (the "Earnings Announcement"), (4) a trading history of the
Company's common stock from February 27, 1998 to the present and a comparison of
that trading history with those of other companies that we deemed relevant,
including the potential impact of the Earnings Announcement on the market price
of the Company's common stock in the absence of a concurrent announcement of the
Proposed Transaction, (5) a trading history of NCO's common stock from May 5,
1998 to the present and a comparison of that trading history with those of other
companies that we deemed relevant, (6) a comparison of the historical financial
results and present financial condition of the Company with those of other
companies that we deemed relevant, (7) a comparison of the historical financial
results and present financial condition of NCO with those of other companies
that we deemed relevant, (8) published estimates of third-party research
analysts with respect to the future financial performance of NCO and the
Company, including, with respect to the Company, a comparison of such estimates
with the Earnings Announcement and with the current projections of management of
the Company for the second quarter of 1999 and subsequent quarters, (9) the
results of our efforts to solicit indications of interest from third parties
with respect to the purchase of all or a part of the Company's business, (10) a
comparison of the financial terms of the Proposed Transaction with the financial
terms of certain other recent transactions that we deemed relevant, and (11) the
ability of the Company to fund the execution of its business plan on an on-going
basis. In addition, we have had discussions with the managements of the Company
and NCO concerning their respective businesses, operations, assets, financial
conditions and prospects (including, without limitation, with respect to the
cost savings and operating synergies expected by the management of NCO to result
from a combination of the businesses of the Company and NCO), and have
undertaken such other studies, analyses and investigations as we deemed
appropriate. For purposes of our analyses and in arriving at our opinion, we
have necessarily assumed that the sale of Print & Mail will occur in the
timeframe and pursuant to the terms currently contemplated by the Company, and
our opinion does not address the sale of Print & Mail on a stand alone basis.
In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information used by us without
assuming any responsibility for independent verification of such information and
have further relied upon the assurances of managements of the Company and NCO
that they are not aware of any facts or circumstances that would make such
information inaccurate or misleading. With respect to the financial projections
of the Company, upon advice of the Company we have assumed that such projections
have been reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the management of the Company as to the future
financial performance of the Company and that the Company will perform
substantially in accordance with such projections. However, we were not provided
with, and did not have access to, any financial projections prepared by
management of NCO. Accordingly, upon advice of the management of NCO, we have
assumed that the published estimates of third party research analysts are a
reasonable basis upon which to evaluate the future financial performance of NCO
and that NCO will perform substantially in accordance with such estimates. In
arriving at our opinion, we have not conducted a physical inspection of the
properties and facilities of the Company or NCO and have not made or obtained
any evaluations or appraisals of the assets or liabilities of the Company or
NCO. In addition, upon advice of the Company and its legal advisors, we have
assumed that the Proposed Transaction will qualify as a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended,
and therefore as a tax-free transaction to the stockholders of the Company. Our
opinion necessarily is based upon market, economic and other conditions as they
exist on, and can be evaluated as of, the date of this letter.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the Exchange Ratio to be
offered to the stockholders of the Company in the Proposed Transaction is fair
to such stockholders.
We have acted as financial advisor to the Company in connection with the
Proposed Transaction and will receive a fee for our services which is contingent
upon the consummation of the Proposed Transaction. In addition, the Company has
agreed to indemnify us for certain liabilities that may arise out of the
rendering of this opinion. We also have performed various investment banking
services for the Company in the past (including acting as co-manager on the
Company's initial public offering effective in February 1998) and have received
customary fees for such services. Howard Clark, a Vice-Chairman of Lehman
Brothers, is a member
2
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of the Board of Directors of the Company. In the ordinary course of our
business, we actively trade in the equity securities of the Company for our own
account and for the accounts of our customers and, accordingly, may at any time
hold a long or short position in such securities.
This opinion is for the use and benefit of the Board of Directors of the
Company and is rendered to the Board of Directors in connection with its
consideration of the Proposed Transaction. This opinion is not intended to be
and does not constitute a recommendation to any stockholder of the Company as to
how such stockholder should vote with respect to the Proposed Transaction.
Very truly yours,
LEHMAN BROTHERS
3
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ANNEX C
May 12, 1999
Board of Directors
NCO Group, Inc.
515 Pennsylvania Avenue
Fort Washington, PA 19034
Members of the Board:
We understand that NCO Group, Inc. ("NCO" or the "Company") intends to
enter into an Agreement and Plan of Merger dated May 12, 1999 (the "Agreement")
between NCO, a wholly owned subsidiary of NCO ("Acquisition Sub") and Compass
International Services, Inc. ("Compass") pursuant to which Acquisition Sub will
be merged with and into Compass (the "Merger"). Pursuant to the terms of the
Agreement, each share of outstanding common stock of Compass will be exchanged
for .23739 shares of NCO's common stock. We also understand (1) that a condition
to NCO's obligation to close the Merger is the consummation of the sale of all
of the outstanding capital stock of the subsidiaries of Compass comprising the
Print and Mail division of Compass and (2) that NCO will assume $30 million in
net debt of Compass as a result of the consummation of the Merger. The terms and
conditions pertaining to the Merger are more fully described in the Agreement.
We have been requested by the Company to render our opinion with respect to
the fairness, from a financial point of view, to the Company of the
consideration to be paid by the Company in the Merger.
In arriving at our opinion, we reviewed and analyzed: (1) a draft of the
Agreement, (2) publicly available information concerning the Company and Compass
which we believe to be relevant to our inquiry, (3) financial and operating
information with respect to the business, operations and prospects of the
Company and Compass furnished to us by the Company or Compass, (4) a comparison
of the historical financial results and present financial condition of each of
the Company and Compass with those of other companies which we deemed relevant,
(5) a trading history of the Company's common stock and of Compass' common stock
since the respective initial public offerings of each company, (6) a comparison
of the financial terms of the Merger with the financial terms of certain other
transactions which we deemed relevant, and (7) certain potential pro forma
effects of the Merger on the Company. In addition, we had discussions with the
management and/or employees of the Company and Compass concerning their
respective businesses, operations, assets, present conditions and future
prospects and undertook such other studies, analyses and investigations as we
deemed appropriate.
In arriving our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have not
assumed any responsibility for independently verifying such information. We have
not undertaken an independent evaluation or appraisal of any of the assets or
liabilities of NCO or Compass or been furnished with any such evaluation or
appraisal. In addition, we have not assumed any obligation to conduct any
physical inspection of the properties or facilities of NCO or Compass. With
respect to the financial forecast information furnished to or discussed with us
by NCO and Compass and cost savings and/or synergies anticipated from the
Merger, we have assumed that they have been reasonably prepared and reflect the
best currently available estimates and judgment of NCO's or Compass' management
as to the expected future financial performance of NCO or Compass, as the case
may be. We have also assumed that the final form of the Agreement will be
substantially similar to the last draft thereof reviewed by us.
Our opinion is necessarily based upon market, economic and other conditions
as they exist and can be evaluated on, and on the information made available to
us as of, the date hereof. We have assumed that in the course of obtaining the
necessary consents or approvals (contractual or otherwise) for the Merger, no
restrictions, including any divestiture requirements or amendments or
modifications, will be imposed that will have a material adverse effect on the
contemplated benefits of the Merger.
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We are acting as financial advisor to NCO in connection with the Merger and
will receive a fee from NCO for our services, a significant portion of which is
contingent upon the consummation of the Merger. In addition, NCO has agreed to
indemnify us for certain liabilities arising out of our engagement. We have, in
the past, provided financial advisory services to NCO (including serving as a
managing underwriter in two follow-on public equity offerings by the Company on
July 1, 1997 and June 2, 1998 and serving as financial advisor to the Company in
its acquisition of Medaphis Services Corporation and its subsidiary AssetCare,
Inc.) and may continue to do so and have received, and may receive, fees for the
rendering of such services. In addition, in the ordinary course of our business,
we may actively trade the securities of NCO or Compass, for our own account and
for the accounts of customers and, accordingly, may at any time hold a long or
short position in such securities.
This opinion is for the use and benefit of the Board of Directors of NCO.
Our opinion does not address the merits of the underlying decision by NCO to
engage in the Merger and does not constitute a recommendation to any shareholder
of NCO as to how such shareholder should vote on the proposed merger.
We are not expressing any opinion herein as to the prices at which the
shares of NCO common stock or Compass common stock will trade following the
announcement or consummation of the Merger.
On the basis of and subject to the foregoing, we are of the opinion that,
as of the date hereof, the consideration to be paid by NCO in the Merger is fair
from a financial point of view to NCO.
Very truly yours,
THE ROBINSON-HUMPHREY COMPANY, LLC
2
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ANNEX D
July 16, 1999
Michael J. Cunningham
Chairman
Compass International Services Corporation
One Penn Plaza, Suite 4430
New York, NY 10119
RE: MERGER AGREEMENT
Dear Michael:
Reference is made to the Agreement and Plan of Merger dated as of May 12, 1999
among NCO Group, Inc., Cardinal Acquisition Corporation and Compass
International Services Corporation (the "Merger Agreement").
In consideration of certain amendments being made to Voting Agreements signed
by specified shareholders, we agree as follows:
/ / It shall be a condition precedent to NCO's obligation under the Merger
Agreement that Compass shall have received and canceled Compass Common Stock
with a value (as determined pursuant to the Amendments to the Voting
Agreements) of $5.0 million from the stockholders who are parties to the
Amendments to the Voting Agreements.
/ / The results reflected in schedules previously agreed to between NCO and
Compass covering April and May, 1999 will not be deemed to constitute a
material adverse change under Section 7.2(f) of the Merger Agreement.
Additionally, in determining whether a material adverse change has occurred
under Section 7.2(f) for any period, actual results will be adjusted to
reflect pro-forma adjustments and identified expense reductions and revenue
enhancements to date plus any additional such items identified hereafter by
Compass management, and will then be compared to the May 1999 results
previously discussed with NCO. As before, changes in general economic or
business conditions, changes that may result from the public announcement of
the Merger Agreement, changes generally affecting companies operating in the
industries in which Compass operates or changes affecting the Print and Mail
business will not be considered in determining whether a material adverse
change has occurred.
/ / The Amendments to Voting Agreements will be held in escrow until the filing
of the S-4.
/ / NCO and Compass will cause the S-4/Proxy to be filed as promptly as
practicable, or if the Voting Agreements and the Memorandum of Understanding
with the plaintiff's counsel in the Wolfson matter have not been finalized
before that date, immediately upon finalization of such documents, and will
take all steps necessary on its behalf to ensure that proxy statements are
promptly mailed once the SEC declares the S-4/Proxy effective. NCO and
Compass also agree that the Closing will take place immediately after the
Compass shareholders meeting, provided that all of the conditions to closing
are satisfied or waived as provided in the Merger Agreement.
/ / Compass will cooperate with accountants designated by NCO to perform
requested analyses of selected financial information relating to the 2nd
quarter.
<PAGE>
Except as provided in this letter, the Merger Agreement will remain in full
force and effect.
I am pleased that we were able to agree upon these changes and the changes in
the Voting Agreements and look forward to proceeding to close our deal.
Sincerely,
/s/ Michael J. Barrist
- ------------------------------------
Michael J. Barrist
Chairman and Chief Executive Officer
CC: Josh Gindin
Frank Dehel
Steven Winokur
Mahmud Haq
Julie Schechter
Howard Lanznar
Accepted and Agreed:
COMPASS INTERNATIONAL SERVICES CORPORATION
/s/ Michael J. Cunningahm
By: ----------------------------------
Michael J. Cunningham, President
<PAGE>
PART II.
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 1741 through 1750 of Subchapter D, Chapter 17, of the
Pennsylvania Business Corporation Law of 1988, as amended (the "BCL"), contain
provisions for mandatory and discretionary indemnification of a corporation's
directors, officers and other personnel and related matters.
Under Section 1741, subject to certain limitations, a corporation has
the power to indemnify directors and officers under certain prescribed
circumstances against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred in connection with
an action or proceeding, whether civil, criminal, administrative or
investigative, to which any of them is a party by reason of such person being a
representative, director or officer of the corporation or serving at the request
of the corporation as a representative of another corporation, partnership,
joint venture, trust or other enterprise, if such person acted in good faith and
in a manner such person reasonably believed to be in, or not opposed to, the
best interests of the corporation and, with respect to any criminal proceeding,
had no reasonable cause to believe such person's conduct was unlawful. Under
Section 1743, indemnification is mandatory to the extent that the officer or
director has been successful on the merits or otherwise in defense of any action
or proceeding if the appropriate standards of conduct are met.
Section 1742 provides for indemnification in derivative actions except
in respect of any claim, issue or matter as to which the person has been
adjudged to be liable to the corporation unless and only to the extent that the
proper court determines upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, the person is fairly
and reasonably entitled to indemnity for the expenses that the court deems
proper. Section 1744 provides that, unless ordered by a court, any
indemnification under Section 1741 or 1742 shall be made by the corporation only
as authorized in the specific case upon a determination that the representative
met the applicable standard of conduct, and such determination will be made by
the board of directors (i) by a majority vote of a quorum of directors not
parties to the action or proceeding; (ii) if a quorum is not obtainable, or if
obtainable and a majority of disinterested directors so directs, by independent
legal counsel; or (iii) by the shareholders.
Section 1745 provides that expenses (including attorneys' fees)
incurred in defending a civil or criminal action or proceeding referred to in
Subchapter 17D of the BCL may be paid by the corporation in advance of the final
disposition of such action or proceeding upon receipt of an undertaking by or on
behalf of such person to repay such amount if it shall ultimately be determined
that he or she is not entitled to be indemnified by the corporation.
Section 1746 provides generally that, except in any case where the act
or failure to act giving rise to the claim for indemnification is determined by
a court to have constituted willful misconduct or recklessness, the
indemnification and advancement of expenses provided by Subchapter 17D of the
BCL shall not be deemed exclusive of any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement, vote of shareholders or disinterested directors or otherwise, both as
to action in such person's official capacity and as to action in another
capacity while holding that office.
II-1
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Section 1747 grants to a corporation the power to purchase and maintain
insurance on behalf of any person who is or was a representative of the
corporation against any liability incurred by such person in such person's
capacity as a representative of the corporation, director, whether or not the
corporation would have the power to Subchapter 17D of the BCL. Sections 1748 and
1749 extend the indemnification and advancement of expenses provisions contained
in Subchapter 17D of the BCL to successor corporations in fundamental change
transactions and to representatives serving as fiduciaries of employee benefit
plans.
Section 1750 provides that the indemnification and advancement of
expenses provided by, or granted pursuant to, Subchapter 17D of the BCL, shall,
unless otherwise provided when authorized or ratified, continue as to a person
who has ceased to be a representative of the corporation and shall inure to the
benefit of the heirs and personal representative of such person.
For information regarding provisions under which a director or officer
of the NCO may be insured or indemnified in any manner against any liability
which such person may incur in such person's capacity as such, reference is made
to the NCO's Articles of Incorporation and Bylaws, copies of which are
incorporated herein by reference, which provide in general that the NCO shall
indemnify its officers and directors to the fullest extent authorized by law.
The merger agreement provides that for a period of six years after the
effective time of the merger, NCO will indemnify, defend and hold harmless the
present and former officers, directors, employees and agents of Compass and its
subsidiaries (other than the print and mail division subsidiaries) from all
losses, to the full extent permitted or required under applicable law as of the
effective time of the merger or the governing documents of Compass as of the
date of the merger agreement. In addition, NCO has agreed to maintain for not
less than six years from the effective time of the merger the directors' and
officers' liability insurance policies covering the present and former officers,
directors, employees, and agents of Compass on terms no less favorable than
those policies currently maintained by Compass.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
Exhibit No. Description
2.1 Agreement and Plan of Merger dated May 12, 1999 among Compass
International Services Corporation, NCO Group, Inc. and
Cardinal Acquisition Corporation, filed as Annex A to the
Proxy Statement/Prospectus.
5.1 Opinion of Blank Rome Comisky & McCauley LLP.
8.1 Opinion of Blank Rome Comisky & McCauley LLP concerning tax
matters.
8.2 Opinion of Katten Muchin & Zavis concerning tax matters.
II-2
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23.1(1) Consent of PricewaterhouseCoopers LLP. (NCO Group, Inc.)
23.1(2) Consent of PricewaterhouseCoopers LLP. (Compass International
Services Corporation)
23.1(3) Consent of PricewaterhouseCoopers LLP. (Medaphis Services
Corporation)
23.2(1) Consent of Arthur Andersen LLP. (JDR Holdings, Inc.)
23.2(2) Consent of Arthur Andersen LLP. (MedSource, Inc.)
23.2(3) Consent of Arthur Andersen LLP. (FCA International Ltd.)
23.3 Consent of Blank Rome Comisky & McCauley LLP (included in
Exhibit 5.1).
23.4 Consent of Lehman Brothers Inc.
23.5 Consent of The Robinson-Humphrey Company LLC.
24.1 Powers of Attorney (included on signature page).
99.1 Form of Voting Agreement.
99.2 Form of Amendment to Voting Agreement.
99.3 Compass Proxy Card.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which any offers or sales are being
made, a post-effective amendment to the registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933, as amended;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in aggregate, represent
a fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any other material change to such information in the registration statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply of the registration statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
section 13 or section 15(d) of the Securities Exchange Act of 1934, as amended,
that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as
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<PAGE>
amended, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the registrant's annual report pursuant to section 13(a) or section
15(d) of the Securities Exchange Act of 1934, as amended, that is incorporated
by reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934, as amended; and where interim financial information required to be
presented by Article 3 of Regulation S-X are not set forth in the prospectus, to
deliver, or cause to be delivered to each person to whom the prospectus is sent
or given, the latest quarterly report that is specifically incorporated by
reference in the prospectus to provide such interim financial information.
(d) (1) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(2) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (d)(1) immediately preceding or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act of 1933, as amended,
and is used in connection with an offering of securities subject to Rule 415,
will be filed as part of an amendment to the registration statement and will not
be used until such amendment is effective, and that, for purposes of determining
any liability under the Securities Act of 1933, as amended, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(e) Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933, as amended, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the
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<PAGE>
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933, as amended, and will be governed by the
final adjudication of such issue.
(f) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one (1) business day of receipt
of such request, and to send the incorporated documents by first-class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(g) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
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<PAGE>
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Fort Washington,
Pennsylvania, as of __________________, 1999.
NCO GROUP, INC.
By: ________________________________
Michael J. Barrist
Chairman of the Board, President
and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Michael J. Barrist and Steven L. Winokur,
and each of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including,
without limitation, post-effective amendments) to this Registration Statement
and any registration statement filed under Rule 462 under the Securities Act of
1933, as amended, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons as of
_______________, 1999 in the capacities indicated:
Signatures Title
__________________________________ Chairman of the Board, President and
Michael J. Barrist Chief Executive Officer
(principal executive officer)
__________________________________ Executive Vice President and
Charles C. Piola Director
__________________________________ Executive Vice President Finance,
Steven L. Winokur Chief Financial Officer and
Treasurer (principal financial
officer and principal accounting
officer)
__________________________________ Executive Vice President,
Bernard R. Miller Development and Director
__________________________________ Director
Eric S. Siegel
__________________________________ Director
Allen F. Wise
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<PAGE>
EXHIBIT INDEX
Exhibit Description
2.1 Agreement and Plan of Merger dated May 12, 1999 among Compass
International Services Corporation, NCO Group, Inc. and
Cardinal Acquisition Corporation, filed as Annex A to the
Proxy Statement/Prospectus.
5.1 Opinion of Blank Rome Comisky & McCauley LLP.
8.1 Opinion of Blank Rome Comisky & McCauley LLP concerning tax
matters.
8.2 Opinion of Katten Muchin & Zavis concerning tax matters.
23.1(1) Consent of PricewaterhouseCoopers LLP. (NCO Group, Inc.)
23.1(2) Consent of PricewaterhouseCoopers LLP. (Compass International
Services Corporation)
23.1(3) Consent of PricewaterhouseCoopers LLP. (Medaphis Services
Corporation)
23.2(1) Consent of Arthur Andersen LLP. (JDR Holdings, Inc.)
23.2(2) Consent of Arthur Andersen LLP. (MedSource, Inc.)
23.2(3) Consent of Arthur Andersen LLP. (FCA International Ltd.)
23.3 Consent of Blank Rome Comisky & McCauley LLP (included in
Exhibit 5.1).
23.4 Consent of Lehman Brothers Inc.
23.5 Consent of The Robinson-Humphrey Company LLC.
24.1 Powers of Attorney (included on signature page).
99.1 Form of Voting Agreement.
99.2 Form of Amendment to Voting Agreement.
99.3 Compass Proxy Card.
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<PAGE>
EXHIBIT 5.1
Opinion of Blank Rome Comisky & McCauley LLP
[ ], 1999
NCO Group, Inc.
515 Pennsylvania Avenue
Fort Washington, PA 19034
Re: NCO Group, Inc.
Registration Statement on Form S-4
----------------------------------
Gentlemen:
We have acted as counsel to NCO Group, Inc. ("NCO") in connection with
the Registration Statement on Form S-4 (the "Registration Statement") to be
filed on [ ], 1999 by NCO pursuant to the Securities Act of 1933, as
amended, relating to the issuance of approximately 3.7 million shares of common
stock, no par value, of NCO Group, Inc. (the "Shares") in connection with the
proposed merger ("Merger") of Cardinal Acquisition Corporation, a Delaware
corporation and a wholly owned subsidiary of NCO, with and into Compass
International Services Corporation. This opinion is furnished pursuant to the
requirements of Item 601(b)(5) of Regulation S-K.
In rendering this opinion, we have examined only the documents listed
on Exhibit "A" attached hereto and such other documents as we deemed necessary
to render this opinion. We have not performed any independent investigation
other than the document examination described above. We have assumed and relied
on the truth, completeness and authenticity of all documents and records
examined and the genuineness of all signatures. This opinion is limited to the
laws of the Commonwealth of Pennsylvania.
Based upon and subject to the foregoing, we are of the opinion that the
Shares, when issued in the manner contemplated by the Registration Statement,
will be legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Proxy Statement/Prospectus, which is part of the Registration
Statement.
Very truly yours,
BLANK ROME COMISKY & McCAULEY LLP
<PAGE>
EXHIBIT "A"
1. NCO's Amended and Restated Articles of Incorporation and all amendments
thereto.
2. NCO's Amended and Restated Bylaws and all amendments thereto.
3. Good Standing Certificate issued by the Secretary of the Commonwealth of
Pennsylvania.
4. Resolutions adopted by the Board of Directors relating to transactions
contemplated by the Registration Statement.
5. NCO's Registration Statement on Form S-4.
<PAGE>
Exhibit 8.1
Opinion of Blank Rome Comisky & McCauley Concerning Tax Matters
(215) 569-5500
(215) 569-5555
@blankrome.com
July 20, 1999
NCO Group, Inc.
515 Pennsylvania Avenue
Fort Washington, PA 19034
Re: Acquisition of Compass International Services Corporation
---------------------------------------------------------
Gentlemen:
You have requested our opinion concerning certain Federal income tax
consequences of the merger of Cardinal Acquisition Corporation, an entity
incorporated under the Delaware Corporation Law, as amended ("Sub"), and a
wholly-owned subsidiary of NCO Group, Inc., a Pennsylvania business corporation,
("Parent"), with and into Compass International Services Corporation, an entity
incorporated under the Delaware Corporation Law ("Compass"). The terms of the
merger are described in the Proxy Statement/ Prospectus of Parent dated July 20,
1999 (the "Prospectus"). Our opinion is based upon our understanding of the
facts of and incident to the transaction, as are set forth in the Prospectus,
and upon the condition that those facts are true, correct and complete. Further,
our opinion is issued in reliance upon the Officer's Certificates of Parent and
Sub and the Officer's Certificate of Compass (attached as exhibits hereto)
relating to the truth, correctness and completeness of those facts and the facts
in the Prospectus, including the financial statements and exhibits that are a
part thereof. Those exhibits include the Agreement and Plan of Merger dated as
of May 12, 1999 by and between Parent, Sub and Compass (together, the "Plan of
Merger"). This opinion is being furnished pursuant to the Plan of Merger, and
all capitalized terms herein, unless otherwise specified, have the meanings
assigned thereto in the Plan of Merger.
In connection with our opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction, of
the Plan of
<PAGE>
NCO Group, Inc.
July 20, 1999
Page 2
Merger, the Prospectus and such other documents as we have deemed necessary or
appropriate as a basis for the opinions set forth below. In our examination we
have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such latter documents. As to any facts material
to this opinion which we did not independently establish or verify, we have
relied upon statements and representations of officers and other representatives
of Parent, Sub, Compass and others. In particular, we have relied upon certain
representations of the managements of Parent, Sub and Compass in the Officer's
Certificates which are attached hereto.
In rendering our opinion, we have considered the applicable provisions
of the Internal Revenue Code of 1986 as amended (the "Code")1, Treasury
Regulations and the pertinent judicial authorities and interpretive rulings of
the Internal Revenue Service (the "Service").
Based solely upon the foregoing and provided that the Merger and the
other transactions contemplated by the Plan of Merger are consummated in the
manner described in the Prospectus, we are of the opinion that under present
law, for federal income tax purposes:
1. The Merger of Sub into Compass will constitute a
reorganization within the meaning of Section 368(a) of the Code. Parent, Sub and
Compass each will be "a party to a reorganization" within the meaning of Section
368(b) of the Code.
2. Compass shareholders should recognize no gain or loss upon
their exchange of Compass stock for shares of Parent Common Stock. Code Section
354(a).
3. The basis of the Parent Common Stock received by the
shareholders of Compass (including fractional shares) will be the same as the
basis of the Compass stock surrendered in exchange. Code Section 358(a)(1).
- -------------------
1 Unless otherwise indicated, all section references are to sections of the
Code.
<PAGE>
NCO Group, Inc.
July 20, 1999
Page 3
4. The holding period of the Parent Common Stock received by a
Compass shareholder (including any fractional shares) will include the period
during which the Compass stock surrendered in exchange therefor was held by such
Compass shareholder, provided that the Compass stock surrendered was a capital
asset in the hands of such Compass shareholder on the date of the exchange. Code
Section 1223(a).
5. Cash received by shareholders of Compass in lieu of
fractional shares of Parent will be treated as a distribution in redemption of
their fractional share interests subject to the provisions and limitations of
Section 302 of the Code. Rev.
Rul. 66-365, 1966-2 C.B. 116.
This letter expresses our views only as to the specific issues
addressed above. No opinion is expressed concerning the Federal income tax
treatment of the transaction under any provision of the Code not specifically
referenced herein, including the tax treatment of the substitution by Parent of
any options to purchase Compass Common Stock. No opinion is expressed with
respect to state and local taxes, Federal or state securities law, or any other
Federal, state or local law not expressly referenced herein.
In rendering our opinions in 2 and 4 above, we note that under the
terms of the memorandum of understanding of July 19, 1999 to settle certain
class action litigation relating to Compass and the Voting Agreements, the
following actions will occur:
1. Compass stockholders who are parties to the Voting
Agreements have agreed to contribute to Compass shares of Compass common stock
with an aggregate value of $5.0 million immediately before the merger.
2. In the event that the average closing price of NCO common
stock during the five trading days ending one day before the Compass stockholder
meeting to approve the merger is less than $29.50 per share, NCO will pay an
additional 43,684 shares of NCO common stock, to be distributed pro rata to
holders of shares of Compass common stock, other than with respect to shares
beneficially owned by the individual defendants.
Under these terms, those stockholders who are not a party to the
voting agreements and who are not defendants in the class action litigation,
referred to as the public stockholders, could be deemed by the Service to have
received more than their pro rata share of the NCO common stock issued in the
merger, based upon the total amount of Compass stock outstanding prior to the
time these actions occur. In this case, the Service could take the position
that the additional consideration is taxable to the public stockholders as
ordinary income. We believe that such an assertion would be incorrect and that
the better view is that all of the NCO common stock received in the merger
should be received tax-free. However, there can be no assurance that the Service
would not be successful in their contention.
Our opinions set forth our legal judgement, and are not binding on the
Service or any other person. Therefore, there can be no assurance that the
conclusions set forth herein would be sustained by a court if challenged.
Further, the opinions set forth represent our conclusions based upon
the documents reviewed by us and the facts presented to us. Any material
amendments to such documents or changes in any significant fact could affect the
opinions expressed herein.
We are pleased to offer this opinion based upon the Federal income tax
laws as of this date. No assurances can be provided as to future changes in or
administrative or judicial interpretations of these laws.
<PAGE>
NCO Group, Inc.
July 20, 1999
Page 4
We hereby consent to the use of this Opinion as an exhibit to the
Registration Statement to be filed by NCO Group, Inc. with the Securities and
Exchange Commission and to the use of our name in the Registration Statement.
This letter is solely for your use in connection with the transaction
referenced herein. It may not be reproduced, quoted in whole or in part,
referred to in any other context or filed with any governmental agency without
the prior written consent of this firm.
Very truly yours,
BLANK ROME COMISKY & McCAULEY LLP
cms
<PAGE>
Exhibit 8.2
Opinion of Katten Muchin & Zavis Concerning Tax Matters
July 20, 1999
Compass International Services Corporation
Attention: Board of Directors
Ladies and Gentlemen:
We have been requested to render this opinion concerning certain
matters of federal income tax law in connection with the proposed merger of
Cardinal Acquisition Corporation, a newly formed corporation, organized and
existing under the laws of the State of Delaware ("Merger Sub") which is wholly
owned by NCO Group, Inc., a corporation organized and existing under the laws of
the Commonwealth of Pennsylvania ("Parent"), with and into Compass International
Services Corporation, a corporation organized and existing under the laws of the
State of Delaware (the "Company"), with the Company surviving the merger and
becoming a wholly owned subsidiary of Parent, pursuant to the applicable
corporate law of the State of Delaware (the "Merger"), and in accordance with
that certain Agreement and Plan of Merger dated as of May 12, 1999, among the
Company, Parent and Merger Sub (the "Agreement") and related documents and
agreements referenced in the Agreement (together with the Agreement, the "Merger
Agreement"). Our opinion is being delivered to you pursuant to Section 7.3(c) of
the Agreement.
Except as otherwise provided, capitalized terms referred to herein have
the meanings set forth in the Merger Agreement. All section references, unless
otherwise indicated, are to the Internal Revenue Code of 1986, as amended (the
"Code").
We have acted as special legal counsel to the Company in connection
with the Merger. As such, and for the purpose of rendering this opinion, we have
examined (or will examine on or prior to the Effective Time of the Merger) and
are relying (or will rely) upon (without any independent investigation or review
thereof) the truth and accuracy, at all relevant times, of the statements,
covenants, representations and warranties contained in the following documents
(including all schedules and exhibits thereto):
1. The Merger Agreement.
2. The Stock Purchase Agreement between Compass International
Services Corporation and Swiss-Irish Enterprises, dated May
12, 1999 (the "Stock Purchase Agreement").
3. Representations made to us by Parent and Merger Sub, including
those representations contained in that certain Parent Tax
Certificate dated July 20, 1999.
<PAGE>
July 20, 1999
Page 2
4. Representations made to us by the Company, including those
representations contained in that certain Company Tax
Certificate dated July 20, 1999.
5. Parent's Registration Statement on Form S-4, filed July 20,
1999.
6. Such other instruments and documents related to the formation,
organization and operation of the Company, Parent and Merger
Sub or the consummation of the Merger and the transactions
contemplated by the Merger Agreement as we have deemed
necessary or appropriate.
Opinion
In connection with rendering this opinion, we have assumed or obtained
representations (and are relying thereon, without any independent investigation
or review thereof) that:
1. Original documents (including signatures) are authentic;
documents submitted to us as copies conform to the original
documents, and there has been (or will be by the Effective
Time of the Merger) due execution and delivery of all
documents where due execution and delivery are prerequisites
to the effectiveness thereof.
2. Any representation or statement referred to above made "to the
knowledge of" or otherwise similarly qualified is correct
without such qualification.
3. The Merger will be consummated pursuant to the Merger
Agreement and will be effective under the applicable state
law.
4. After the Merger, the Company will hold "substantially all" of
its and Merger Sub's properties within the meaning of Section
368(a)(2)(E)(i) of the Code and the regulations promulgated
thereunder.
5. Following the Merger, the Company will continue its historic
business or use a significant portion of its historic business
assets in a business.
6. No outstanding indebtedness of the Company, Parent or Merger
Sub has represented or will represent equity for tax purposes
(including, without limitation, any loans from Parent to the
Company); no outstanding equity of the Company, Parent or
Merger Sub has represented or will represent indebtedness for
tax purposes; no outstanding security (other than the Company
Option Plan), instrument, agreement or arrangement that
provides for, contains, or represents
<PAGE>
July 20, 1999
Page 3
either a right to acquire the Company stock or to share in the
appreciation thereof constitutes or will constitute "stock"
for purposes of Section 368(c) of the Code.
7. Each of Company, Parent and Merger Sub has paid and will pay
only its respective expenses, if any, incurred in connection
with the Merger, and neither Parent, Merger Sub nor Company
has agreed to assume, nor will it directly or indirectly
assume, any expense or other liability, whether fixed or
contingent, of any holder of Common Stock.
8. Neither Parent, the Company nor Merger Sub is, or will be at
the time of the Merger: (a) an "investment company" within the
meaning of Section 368(a)(2)(F) of the Code; or (b) under the
jurisdiction of a court in a Title 11 or similar case within
the meaning of Section 368(a)(3)(A) of the Code.
Based on our examination of the foregoing items and subject to the
assumptions, exceptions, limitations and qualifications set forth herein, it is
our opinion, as special counsel for Company, that for federal income tax
purposes:
(i) the Merger will constitute a "reorganization" within
the meaning of Section 368(a) of the Code, and the
Company, Merger Sub and Parent will each be a party
to such reorganization within the meaning of Section
368(b) of the Code;
(ii) no gain or loss will be recognized by Company,
Parent, or Merger Sub as a result of the Merger;
(iii) no gain or loss should be recognized by the
stockholders of the Company upon the exchange of
their Common Stock solely for shares of Parent Common
Stock pursuant to the Merger, except with respect to
cash, if any, received in lieu of fractional shares
of Parent Common Stock;
(iv) the aggregate tax basis of the shares of Parent
Common Stock received solely in exchange for Common
Stock pursuant to the Merger (including fractional
shares of Parent Common Stock for which cash is
received) will be the same as the aggregate tax basis
of the Common Stock exchanged therefor;
(v) the holding period for shares of Parent Common Stock
received solely in exchange for Common Stock pursuant
to the Merger will include the
<PAGE>
July 20, 1999
Page 4
holding period of the Common Stock exchanged
therefor, provided such Common Stock was held as a
capital asset by the stockholder at the Effective
Time; and
(vi) a stockholder of the Company who receives cash in
lieu of a fractional share of Parent Common Stock
will recognize gain or loss equal to the difference,
if any, between such stockholder's tax basis in such
fractional share (as described in clause (iv) above)
and the amount of cash received.
Potential Tax Consequences of Settlement of Class Action Litigation and Voting
Agreement
On May 14, 1999, a purported stockholder class action suit was filed in
the Delaware Court of Chancery against the Company, members of the Company's
board of directors, and Parent. This complaint alleged, among other things, that
the Company's board of directors breached their fiduciary duties to the
Company's stockholders by failing to maximize stockholder value and by agreeing
to an unfair and inadequate merger and that Parent aided and abetted the breach
of fiduciary duty.
In addition, a group of Company stockholders that own 6,067,931 shares
of Company common stock consisting of approximately 42% of the Company common
stock outstanding on the record date entered into voting agreements with Parent.
On July 19, 1999, the lawyers for the parties to the litigation entered
into a memorandum of understanding to settle the class action litigation.
Pursuant to the terms of the memorandum of understanding and the voting
agreements the following actions will occur:
1. in the event that the average closing price of Parent common
stock during the five trading days ending one day before the
Company stockholder meeting to approve the Merger is less than
$29.50 per share, Parent will pay to all of the Company
stockholders other than with respect to Company stock
beneficially owned by the individual defendants, additional
payments aggregating 43,684 shares of Parent common stock; and
2. the defendants in the class action litigation suit will agree
to contribute to Company shares of Company common stock with
an aggregate value of five million dollars immediately before
the Merger.
Those stockholders who are not a party to the voting agreement and who
are not defendants in the class action litigation could be deemed by the IRS to
have received more than their pro rata share of the Parent common stock issued
in the Merger (based upon the total amount of Company common stock outstanding
prior to the adjustment and contribution described above). In such a case, the
IRS may take the position that such additional consideration is taxable to these
stockholders as ordinary income. We believe that the IRS should not prevail in
this position. However, there is no direct authority dealing with this specific
situation. Therefore, there can be no assurance that the IRS would not be
successful if the IRS took this position.
<PAGE>
Qualifications
In addition to the assumptions set forth above, this opinion is subject
to the exceptions, limitations and qualifications set forth below:
1. This opinion represents and is based upon our best judgment
regarding the application of federal income tax laws arising
under the Code, existing judicial decisions, administrative
regulations and published rulings and procedures. Our opinion
is not binding upon the Internal Revenue Service or the
courts, and the Internal Revenue Service is not precluded from
asserting a contrary position. Furthermore, no assurance can
be given that future legislative, judicial or administrative
changes, on either a prospective or retroactive basis, would
not adversely affect the accuracy of the opinion expressed
herein. Nevertheless, we undertake no responsibility to advise
you of any new developments in the application or
interpretation of the federal income tax laws.
2. Our opinion concerning certain of the federal tax consequences
of the Merger is limited to the specific federal tax
consequences presented above. No opinion is expressed as to
any transaction other than the Merger, including any
transaction undertaken in connection with the Merger. In
addition, this opinion does not address any other federal,
estate, gift, state, local or foreign tax consequences that
may result from the Merger.
3. No opinion is expressed if all the transactions described in
the Merger Agreement are not consummated in accordance with
the terms of such Merger Agreement and without waiver or
breach of any material provision thereof or if all of the
representations, warranties, statements and assumptions upon
which we relied are not true and accurate at all relevant
times. In the event any one of the statements,
representations, warranties or assumptions upon which we have
relied to issue this opinion is incorrect, our opinion might
be adversely affected and may not be relied upon.
<PAGE>
July 20, 1999
Page 5
4. No ruling has been or will be requested from the Internal
Revenue Service concerning the federal income tax consequences
of the Merger. In reviewing this opinion, you should be aware
that the opinion set forth above represents our conclusions
regarding the application of existing federal income tax law
to the instant transaction. If the facts vary from those
relied upon (including if any representation, covenant,
warranty or assumption upon which we have relied is
inaccurate, incomplete, breached or ineffective), our opinion
contained herein could be inapplicable. You should be aware
that an opinion of counsel represents only counsel's best
legal judgment, and has no binding effect or official status
of any kind, and that no assurance can be given that contrary
positions will not be taken by the Internal Revenue Service or
that a court considering the issues would not hold otherwise.
5. This opinion is being delivered solely for the purpose of
satisfying the condition set forth in Section 7.3(c) of the
Merger Agreement. This opinion may not be relied upon or
utilized for any other purpose or by any other person or
entity, including the Company and its stockholders, and may
not be made available to any other person or entity, without
our prior written consent. We do, however, consent to the use
of our name in the Registration Statement wherever it appears.
Very truly yours,
KATTEN MUCHIN & ZAVIS
<PAGE>
EXHIBIT 23.1(1)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-4 of our report dated February 18, 1999 relating to the
consolidated financial statements and financial statement schedules, which
appears in NCO Group, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1998. We also consent to the incorporation by reference of our
report dated February 18, 1999, except as to the information presented in Note 3
related to the pooling of interests with JDR Holdings, Inc., for which the date
is March 31, 1999 relating to the consolidated financial statements as restated
for the pooling of interests with JDR Holdings Inc., which appears in the
Current Report on Form 8-K dated June 11, 1999. We also consent to the reference
to us under the heading "Experts" in such registration statement.
PRICEWATERHOUSECOOPERS LLP
Philadelphia, PA
July 14, 1999
<PAGE>
EXHIBIT 23.1(2)
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the use in this Registration Statement on Form S-4 of NCO
Group, Inc. of our report dated March 3, 1999 relating to the consolidated
financial statements of Compass International Services Corporation, which appear
in such Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
New York, New York
July 16, 1999
<PAGE>
Exhibit 23.1(3)
Consent of Independent Accountants
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-4 of NCO Group, Inc. of our report dated October 28, 1998 on
our audits of the financial statements of Medaphis Services Corporation as of
December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996 and
1995. We also consent to the references to our firm under the heading "Experts"
in such Registration Statement.
PRICEWATERHOUSECOOPERS LLP
Atlanta, Georgia
July 14, 1999
<PAGE>
EXHIBIT 23.2(1)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Registration Statement on Form S-4 of our report dated January
29, 1999 on the financial statements of JDR Holdings, Inc. and Subsidiaries for
the year ended December 31, 1998 included in NCO Group, Inc.'s Form 8-K filed on
May 28, 1999 and to all references to our Firm included in this Registration
Statement.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
July 14, 1999
<PAGE>
EXHIBIT 23.2(2)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Registration Statement on Form S-4 of our report dated May 5,
1998 on the December 31, 1997 MedSource, Inc. financial statements included in
NCO Group, Inc.'s Form 8-K filed on May 4, 1998 and to all references to our
Firm included in this Registration Statement on Form S-4.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
July 14, 1999
<PAGE>
EXHIBIT 23.2(3)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Registration Statement on
Form S-4 of NCO Group, Inc. of our report dated September 2, 1997, on our audits
of the consolidated financial statements of FCA International Ltd. as of June
30, 1997 and 1996, and for each of the three years in the period ended June 30,
1997, which report is included in the NCO Group, Inc.'s Form 8-K dated May 1,
1998. We also consent to the reference to our firm under the caption "Experts".
ARTHUR ANDERSEN & CO.
Montreal, Quebec
July 14, 1999
<PAGE>
EXHIBIT 23.4
CONSENT OF LEHMAN BROTHERS
We hereby consent to the use of our opinion letter dated May 12, 1999
to the Board of Directors of Compass International Services Corporation
("Compass" or the "Company") attached as Annex B to the Company's Proxy
Statement/Prospectus on Form S-4 (the "Prospectus") and to the references to our
firm in the Prospectus under the headings "Summary - Opinion of Financial
Advisor to Compass," "Opinion of Financial Advisor to Compass," "Background of
the Merger," and "Interests of Compass' Management and Stockholders in the
Merger - Relationship with Lehman Brothers." In giving such consent, we do not
admit that we come within the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder and we do not
thereby admit that we are experts with respect to any part of the Registration
Statement under the meaning of the term "expert" as used in the Securities Act.
LEHMAN BROTHERS INC.
New York, New York
July 7, 1999
<PAGE>
CONSENT OF THE ROBINSON-HUMPHREY COMPANY, LLC
We hereby consent to the inclusion of our opinion letter dated May 12, 1999 to
the Board of Directors of NCO Group, Inc. ("NCO") with respect to the
acquisition of Compass International Services Inc. by NCO as an annex to this
Registration Statement on Form S-4 (the "Registration Statement") and to the
references to our firm in the Registration Statement under the headings "Summary
- - The Merger - Opinion of Financial Advisor to NCO," "The Merger - Opinion of
Financial Advisor to NCO," and "The Merger - Background of the Merger." In
giving such consent, we do not admit that we come within the category of persons
whose consent is required under Section 7 of the Securities Act of 1933, as
amended or the rules and regulations of the Securities and Exchange Commission
thereunder and we do not thereby admit that we are experts with respect to any
part of the Registration Statement under the meaning of the term "expert" as
used in the Securities Act.
The Robinson-Humphrey Company, LLC
Atlanta, Georgia
July 7, 1999
<PAGE>
VOTING AGREEMENT
PARTIES: THE STOCKHOLDERS LISTED ON THE
SIGNATURE PAGES HERETO
NCO GROUP, INC.
a Pennsylvania corporation ("Acquiror")
615 Pennsylvania Avenue
Fort Washington, Pennsylvania 19034
DATE: May 12, 1999
BACKGROUND: Acquiror, Cardinal Acquisition Corporation, a Delaware corporation
and a wholly owned subsidiary of Acquiror ("Newco"), and Compass International
Services Corporation, a Delaware corporation (the "Company"), are entering into
an Agreement and Plan of Merger dated as of the date hereof (the "Merger
Agreement"), which provides (subject to the conditions set forth therein) for
the merger, as amended and supplemented from time-to-time hereafter, of Newco
with and into the Company (the "Merger"). The persons listed on the signature
page under "Stockholders" (individually, a "Stockholder" and collectively, the
"Stockholders") are stockholders of the Company. As a condition to the
willingness of Acquiror and Newco to enter into the Merger Agreement, Acquiror
and Newco have required that the Stockholders enter into, and in order to induce
Acquiror and Newco to enter into the Merger Agreement, the Stockholders have
agreed to enter into, this Agreement. The parties agree and acknowledge that
this Agreement and the Proxy referred to in Section 3(b) hereof shall terminate
and become null and void with respect to any Stockholder at the option of such
Stockholder if after the date hereof the Exchange Ratio (as defined in the
Merger Agreement) shall be amended without the consent of such Stockholder in
any manner which is material and adverse to such Stockholder.
INTENDING TO BE LEGALLY BOUND, in consideration of the foregoing and
the mutual agreements contained herein and in the Merger Agreement, the parties
hereto agree as follows:
1. Certain Definitions
(a) All capitalized terms used but not otherwise defined in
this Agreement have the meanings ascribed to such terms in the Merger
Agreement.
(b) "Expiration Date" shall mean the earlier of (i) the date
upon which the Merger Agreement is validly terminated pursuant to
Section 9.1 thereof, and (ii) the date upon which the Merger becomes
effective in accordance with the terms and conditions of the Merger
Agreement.
(c) A Stockholder shall be deemed to "Own" or to have acquired
"Ownership" of a security if the Stockholder: (i) is a record owner of
such security; or (ii) is a "beneficial owner" (within the meaning of
Rule 13d-3 under the Exchange Act) of such security.
<PAGE>
(d) The "Record Date" for a particular matter shall be the
date fixed for persons entitled: (i) to receive notice of, and to vote
at, a meeting of the stockholders of the Company called for the purpose
of voting on such matter; or (ii) to take action by written consent of
the stockholders of the Company with respect to such matter.
(e) "Subject Securities" shall mean with respect to each
Stockholder: (i) all securities of the Company (including shares of
Company Common Stock and all options, warrants and other rights to
acquire shares of Company Common Stock) Owned by the Stockholder
(individually or jointly) as of the date of this Agreement; and (ii)
all additional securities of the Company (including all additional
shares of Company Common Stock and all additional options, warrants and
other rights to acquire shares of Company Common Stock) of which the
Stockholder (individually or jointly) acquires Ownership during the
period from the date of this Agreement through the Expiration Date.
(f) A Person shall be deemed to have effected a "Transfer" of
a security if such Person directly or indirectly: (i) sells, pledges,
encumbers, grants an option with respect to, transfers or disposes of
such security or any interest in such security including, without
limitation, transfers of such security to the shareholders, partners or
equity holders of such person as a dividend or other distribution; or
(ii) enters into an agreement or commitment contemplating the possible
sale of, pledge of, encumbrance of, grant of an option with respect to,
transfer of or disposition of such security or any interest therein
including, without limitation, an agreement or commitment contemplating
the possible transfer of such security to the shareholders, partners,
or equity holders of such person as a dividend or distribution.
2. Transfer of Subject Securities
(a) Transferee of Subject Securities to be Bound by this
Agreement. Each of the Stockholders agrees that, during the period from
the date of this Agreement through the Expiration Date, such
Stockholder shall not cause or permit any Transfer of any of the
Subject Securities Owned by such Stockholder to be effected unless each
Person to which any of such Subject Securities, or any interest in any
of such Subject Securities, is or may be transferred shall have
executed a counterpart of this Agreement as a Stockholder and a proxy
in the form attached hereto as Exhibit A (with such modifications as
Acquiror may reasonably request) as a result of the Transfer.
(b) Transfer of Voting Rights. Each of the Stockholders agrees
that, during the period from the date of this Agreement through the
Expiration Date, such Stockholder shall ensure that: (a) none of the
Subject Securities Owned by such Stockholder is deposited into a voting
trust; and (b) no proxy is granted, and no voting agreement or similar
agreement (other than this Agreement) is entered into, with respect to
any of the Subject Securities Owned by such Stockholder.
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<PAGE>
3. Voting of Shares.
(a) Agreement. Each of the Stockholders covenants and agrees
that, during the period from the date of this Agreement through the
Expiration Date, at any meeting of the stockholders of the Company,
however called, and at every adjournment or postponement thereof, and
in any written action by consent of the stockholders of the Company
unless otherwise directed in writing by Acquiror, such Stockholder
shall (i) appear in person or by proxy, or cause the holder of record
as of the Record Date to appear in person or by proxy, at any annual or
special meeting of stockholders of the Company (including the Company
Stockholder Meeting) for the purpose of establishing a quorum, and (ii)
vote or cause to be voted all issued and outstanding shares of Company
Common Stock that are Owned by such Stockholder (individually or
jointly) as of the Record Date in favor of the Merger, the execution
and delivery by the Company of the Merger Agreement and the adoption
and approval of the terms thereof and in favor of the other
transactions contemplated by the Merger Agreement and each of the
actions contemplated by the Merger Agreement and any action required in
furtherance thereof.
(b) Proxy. Contemporaneously with the execution of this
Agreement: (i) each of the Stockholders shall deliver to Acquiror a
proxy in the form attached hereto as Exhibit A, which shall be
irrevocable to the fullest extent permitted by law, with respect to the
shares referred to therein (the "Proxy"); and (ii) each of the
Stockholders shall cause to be delivered to Acquiror an additional
proxy (in the form attached hereto as Exhibit A) executed on behalf of
the record owner of any issued and outstanding shares of Company Common
Stock that are Owned (but are not owned of record) by such Stockholder.
4. No Solicitation.
(a) Each Stockholder covenants and agrees that, during the
period commencing on the date of this Agreement and ending on the
Expiration Date, such Stockholder shall not, directly or indirectly
through another Person, do any of the things described in clauses (i)
through (iv) of Section 6.8(a) of the Merger Agreement.
(b) Each Stockholder shall immediately cease any existing
discussions with any Person that relate to any Company Takeover
Proposal.
(c) Notwithstanding the restrictions set forth in this Section
4, each of the Company and any person who is an officer or director of
the Company may take any action consistent with the terms of the Merger
Agreement.
5. Representations and Warranties of Stockholders, Each Stockholder,
severally and not jointly, represents and warrants to Acquiror as follows:
(a) Authorization. Such Stockholder has the absolute and
unrestricted right, power, authority and capacity to execute and
deliver this Agreement and the Proxy and to perform such Stockholder's
obligations hereunder and thereunder. This Agreement and the Proxy have
been duly executed and delivered by such Stockholder and constitute the
legal, valid and binding obligations of such Stockholder, enforceable
against such Stockholder in accordance with its terms.
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<PAGE>
(b) No Conflicts, Required Filings and Consents.
(i) The execution and delivery of this Agreement and
the Proxy by such Stockholder does not, and the performance of
this Agreement and the Proxy by such Stockholder will not: (A)
conflict with or violate any law, order, decree or judgment
applicable to such Stockholder or by which such Stockholder or
any of such Stockholder's properties are bound or affected; or
(B) result in any breach of or constitute a default or breach
(immediately or after the giving of notice, passage of time,
or both) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, or result in the
creation of a Lien on any of the Subject Securities pursuant
to, any contract to which such Stockholder is a party or by
which such Stockholder or any of such Stockholder's properties
is bound or affected.
(ii) The execution and delivery of this Agreement
and the Proxy by such Stockholder does not, and the
performance of this Agreement and the Proxy by such
Stockholder will not, require any Consent of any Person.
(c) Title to Subject Securities. As of the date hereof, such
Stockholder Owns in the aggregate (including shares owned of record and
shares owned beneficially) the number of issued and outstanding shares
of Company Common Stock set forth below such Stockholder's name on the
signature page hereof, and the number of options, warrants and other
rights to acquire shares of Company Common Stock set forth below such
Stockholder's name on the signature page hereof, and does not directly
or indirectly Own, any shares of capital stock of the Company, or any
option, warrant or other right to acquire any shares of capital stock
of the Company, other than the shares and options, warrants and other
rights set forth below such Stockholder's name on the signature page
hereof.
(d) Accuracy of Representations. The representations and
warranties of such Stockholder contained in this Agreement are accurate
in all respects as of the date of this Agreement, will be accurate in
all respects at all times through the Expiration Date and will be
accurate in all respects as of the date of the consummation of the
Merger as if made on that date.
6. Other Covenants of the Stockholders.
(a) Stockholders' Meeting and Pre-Closing Cooperation. Each of
the Stockholders covenants and agrees that upon the request of
Acquiror, such Stockholder shall promptly take any and all actions
within his or her power that are necessary or desirable to cause the
Company Stockholder Meeting to be held pursuant to Section 251 of the
Delaware General Corporation Law, as amended, or any other applicable
law.
(b) Further Assurances. At any time and from time-to-time
after the date hereof through the Closing Date, and without additional
consideration, each of the Stockholders will take such action and
execute and deliver, or cause to be executed and delivered, such
additional or further transfers, assignments, endorsements, proxies,
consents and other instruments as Acquiror may reasonably request for
the purpose of effectively carrying out this Agreement.
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<PAGE>
(c) Legend. Immediately after the execution of this Agreement
(and from time-to-time prior to the Expiration Date upon the
acquisition by any of the Stockholders (individually or jointly) of
Ownership of any shares of Company Common Stock), each of the
Stockholders shall instruct the Company to cause each certificate of
such Stockholder evidencing any issued and outstanding shares of
Company Common Stock Owned by such Stockholder (individually or
jointly) to bear a legend in the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, EXCHANGED
OR OTHERWISE TRANSFERRED OR DISPOSED OF EXCEPT IN COMPLIANCE WITH THE
TERMS AND CONDITIONS OF THE AGREEMENT DATED AS OF MAY 12, 1999, AS IT
MAY BE AMENDED, BY AND AMONG NCO GROUP, INC. AND THE RECORD AND/OR
BENEFICIAL OWNER OF THIS CERTIFICATE AND OTHER PERSONS, A COPY OF WHICH
IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICES OF THE ISSUER.
7. Rule 145
(a) Stockholder understands that the common stock of Acquiror
being issued in the Merger ("Acquiror Shares") will be issued pursuant
to a registration statement on Form S-4, and that Stockholder may be
deemed an "affiliate" of the Company as such term is defined for
purposes of paragraphs (c) and (d) of Rule 145 under the Securities Act
of 1933, as amended (the " Securities Act"). Stockholder agrees that
Stockholder shall not effect any sale, transfer or other disposition of
any Acquiror Shares unless:
(i) such sale, transfer or other disposition is
effected pursuant to an effective registration statement under
the Securities Act;
(ii) such sale, transfer or other disposition is made
in conformity with the requirements of Rule 145 under the Act,
as evidenced by a broker's letter and a representation letter
executed by Stockholder (satisfactory in form and content to
Acquiror) stating that such requirements have been met;
(iii) counsel reasonably satisfactory to Acquiror
shall have advised Acquiror in a written opinion letter
(satisfactory in form and content to Acquiror), upon which
Acquiror may rely, that such sale, transfer or other
disposition will be exempt from registration under the Act; or
(iv) an authorized representative of the SEC shall
have rendered written advice to Stockholder to the effect that
the SEC would take no action, or that the staff of the SEC
would not recommend that the SEC take action, with respect to
such sale, transfer or other disposition, and a copy of such
written advice and all other related communications with the
SEC shall have been delivered to Acquiror.
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<PAGE>
(b) Stockholder acknowledges and agrees that (a) stop transfer
instructions will be given to Acquiror's transfer agent with respect to
the Acquiror Shares, and (b) each certificate representing any of such
shares shall bear a legend identical or similar in effect to the
following legend (together with any other legend or legends required by
applicable state securities laws or otherwise):
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A
TRANSACTION TO WHICH RULE 145(d) OF THE SECURITIES ACT OF 1933 APPLIES
AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED,
PLEDGED OR HYPOTHECATED EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF
SUCH RULE OR AS OTHERWISE PROVIDED IN SECTION 7 OF A VOTING AGREEMENT
DATED AS OF MAY 12, 1999, BETWEEN THE REGISTERED HOLDER HEREOF AND THE
ISSUER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICES OF THE
ISSUER."
8. Miscellaneous.
(a) Non-Survival of Representations, Warranties and
Agreements. All representations, warranties and agreements made by the
Stockholders in this Agreement shall terminate upon the Expiration Date
except Section 7 which shall survive the Effective Time and remain in
full force and effect with respect to each Stockholder with the earlier
of (i) such time as that Stockholder has disposed of all of his
Acquiror Shares in compliance with Section 7(a), or (ii) such time as
that Stockholder shall have satisfied the requirements of Rule
145(d)(2) or (d)(3); provided, however, nothing in this Section 8(a)
shall relieve any Stockholder from liability after the Expiration Date
for any breach on or prior to the Expiration Date of any
representation, warranty, or agreement made by such Stockholder in this
Agreement.
(b) Notices. All notices, consents or other communications
required or permitted to be given under this Agreement shall be in
writing and shall be deemed to have been duly given when delivered
personally or one (1) business day after being sent by a nationally
recognized overnight delivery service, postage or delivery charges
prepaid or five (5) business days after being sent by registered or
certified mail, return receipt requested, postage charges prepaid.
Notices also may be given by prepaid facsimile and shall be effective
on the date transmitted if confirmed within 48 hours thereafter by a
signed original sent in one of the manners provided in the preceding
sentence. Notices to Acquiror shall be sent to its address stated on
page one of this Agreement to the attention of Acquiror's General
Counsel, with a copy sent simultaneously to the same address to the
attention of Blank Rome Comisky & McCauley LLP, One Logan Square,
Philadelphia, Pennsylvania, 19105, Attention: Francis E. Dehel,
Esquire. Notices to the Stockholders shall be sent to their respective
addresses stated on the signature page of this Agreement, with a copy
sent simultaneously to Katten Muchin & Zavis, 525 West Monroe Avenue -
Suite 1600, Chicago, Illinois 60661-3693, Attention: Howard Lanznar.
Any party may change its address for notice and the address to which
copies must be sent by giving notice of the new addresses to the other
parties in accordance with this Section 8(b), provided that any such
change of address notice shall not be effective unless and until
received.
-6-
<PAGE>
(c) Entire Understanding. This Agreement and the other
agreements referred to herein, state the entire understanding among the
parties with respect to the subject matter hereof, and supersede all
prior oral and written communications and agreements, and all
contemporaneous oral communications and agreements, with respect to the
subject matter hereof. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
(d) Waivers. Except as otherwise expressly provided herein, no
waiver with respect to this Agreement shall be enforceable unless in
writing and signed by the party against whom enforcement is sought.
Except as otherwise expressly provided herein, no failure to exercise,
delay in exercising, or single or partial exercise of any right, power
or remedy by any party, and no course of dealing between or among any
of the parties, shall constitute a waiver of or shall preclude any
other for further exercise of, any right, power or remedy.
(e) Severability. If any provision of this Agreement or any
part of any such provision is held under any circumstances to be
invalid or unenforceable in any jurisdiction, then (i) such provision
or part thereof shall, with respect to such circumstances and in such
jurisdiction, be deemed amended to conform to applicable laws so as to
be valid and enforceable to the fullest possible extent, (ii) the
invalidity or unenforceability of such provision or part thereof under
such circumstances and in such jurisdiction shall not affect the
validity or enforceability of such provision or part thereof under any
other circumstances or in any other jurisdiction, and (iii) the
invalidity or unenforceability of such provision or part thereof shall
not affect the validity or enforceability of the remainder of such
provision or the validity or enforceability of any other provision of
this Agreement. Each provision of this Agreement is separable from
every other provision of this Agreement, and each part of each
provision of this Agreement is separable from every other part of such
provision.
(f) Counterparts. This Agreement may be executed in any number
of counterparts, each of which when so executed and delivered shall be
an original hereof, and it shall not be necessary in making proof of
this Agreement to produce or account for more than one counterpart
hereof.
(g) Section Headings. Section and subsection headings in this
Agreement are for convenience of reference only, do not constitute a
part of this Agreement, and shall not affect its interpretation.
(h) References. All words used in this Agreement shall be
construed to be of such number and gender as the context requires or
permits.
(i) CONTROLLING LAW. THIS AGREEMENT IS MADE UNDER, AND SHALL
BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
DELAWARE APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED SOLELY
THEREIN, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
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<PAGE>
(j) Jurisdiction and Process. In any action between or among
any of the parties, whether arising out of this Agreement or otherwise,
(i) each of the parties irrevocably consents to the exclusive
jurisdiction and venue of the federal and state courts located in the
State of Delaware, (ii) if any such action is commenced in a state
court, then, subject to applicable law, no party shall object to the
removal of such action to any federal court located in the State of
Delaware, (iii) each of the parties irrevocably waives the right to
trial by jury, (iv) each of the parties irrevocably consents to service
of process by first class certified mail, return receipt requested,
postage prepaid, to the address at which such party is to receive
notice in accordance with Section 8(b), and (v) the prevailing parties
shall be entitled to recover their reasonable attorneys' fees and court
costs from the other parties.
(k) Non-exclusivity. The rights and remedies of Acquiror
hereunder are not exclusive of or limited by any other rights or
remedies which Acquiror may have, whether at law, in equity, by
contract or otherwise, all of which shall be cumulative (and not
alternative).
(l) Bankruptcy Qualification. Each representation or warranty
made in or pursuant to this Agreement regarding the enforceability of
any contract shall be qualified to the extent that such enforceability
may be effected by bankruptcy, insolvency and other similar laws or
equitable principles (but not those concerning fraudulent conveyance)
generally affecting creditors' rights and remedies.
(m) Construction. The parties hereto agree that any rule of
construction to the effect that ambiguities are to be resolved against
the drafting party shall not be applied in the construction or
interpretation of this Agreement. As used in this Agreement, the words
"include" and "including" and variations thereof, shall not be deemed
to be terms of limitation, but rather shall be deemed to be followed by
the words "without limitation".
(n) Assignment; Binding Effect. Except as provided herein,
neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by either of the parties hereto (whether by
operation of law or otherwise) without the prior written consent of the
other party. Subject to the preceding sentence, this Agreement shall be
binding upon each of the Stockholders and his, her or its heirs,
successors and assigns, and shall inure to the benefit of Acquiror and
its successors and assigns. Without limiting any of the restrictions
set forth in Section 2 or elsewhere in this Agreement, this Agreement
shall be binding upon any Person to whom any Subject Securities are
transferred. Notwithstanding anything contained in this Agreement to
the contrary, nothing in this Agreement, expressed or implied, is
intended to confer on any Person other than the parties hereto or their
respective heirs, successors and assigns any rights, remedies,
obligations or liabilities under or by reason of this Agreement.
(o) Specific Performance. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions
of this Agreement was not performed in accordance with its specific
terms or was otherwise breached. It is accordingly agreed that Acquiror
shall be entitled to an injunction or injunctions to prevent breaches
of this Agreement and to enforce specifically the terms and provisions
hereof in any court of proper jurisdiction, this being in addition to
any other remedy to which Acquiror is entitled at law or in equity.
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<PAGE>
(p) Other Agreements and Independence of Obligations. Nothing
in this Agreement shall limit any of the rights or remedies of Acquiror
or any of the obligations of the Stockholders under any other
agreement. The covenants and obligations of the Stockholders set forth
in this Agreement shall be construed as independent of any other
agreement or arrangement between any or all of the Stockholders, on the
one hand, and the Company or Acquiror, on the other. The existence of
any claim or cause of action by any or all of the Stockholders against
the Acquiror or the Company shall not constitute a defense to the
enforcement of any of such covenants or obligations against any or all
of the Stockholders.
(q) Obligations of Stockholders; Signatures of All
Stockholders Not Required. The obligations of the Stockholders under
this Agreement shall be several and not joint. Each Stockholder agrees
that the failure of any other Stockholder listed on the signature page
to execute and deliver this Agreement shall not affect in any way the
validity or enforceability of this Agreement with respect to those
Stockholders who have executed this Agreement or the rights of Acquiror
under this Agreement.
[BALANCE OF PAGE INTENTIONALLY BLANK)
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<PAGE>
IN WITNESS WHEREOF, each of the undersigned has caused this Voting
Agreement to be executed as of the date first stated above.
NCO GROUP, INC.
By:
-----------------------------------------------
Paul E. Weitzel, Jr., Executive Vice President
- Corporate Development
STOCKHOLDERS:
---------------------------------------------------
Name:
Address:
-------------------------------------------
-------------------------------------------
Facsimile:
----------------------------------------
Number of issued and outstanding shares of Company
Common Stock Owned of record as of the date of this
Agreement:
----------
Number of additional issued and outstanding shares of
Company Common Stock Owned (but not of record) as of
the date of this Agreement:
----------
Number of options, warrants and other rights to
acquire shares of Company Common Stock owned of
record as of the date of this Agreement:
----------
Number of additional options, warrants and other
rights to acquire shares of Company Common Stock
Owned (but not of record) as of the date of this
Agreement:
----------
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EXHIBIT A
FORM OF IRREVOCABLE PROXY
IRREVOCABLE PROXY
The undersigned Stockholder of Compass International Services
Corporation, a Delaware corporation (the "Company"), hereby irrevocably (to the
fullest extent permitted by law) appoint and constitutes Paul E. Weitzel, Jr,,
Steven L. Winokur and NCO Group, Inc., a Pennsylvania corporation ("Acquiror"),
and each of them, the attorneys and proxies of the undersigned with full power
of substitution and resubstitution, to the full extent of the undersigned's
rights with respect to (i) the issued and outstanding shares of capital stock of
the Company owned of record by the undersigned as of the date of this proxy,
which shares are specified on the final page of this proxy and (ii) any and all
other shares of capital stock of the Company which the undersigned (individually
or jointly) may acquire after the date hereof. (The shares of the capital stock
of the Company referred to in clauses (i) and (ii) of the immediately preceding
sentence are collectively referred to as the "Shares.") Upon the execution
hereof, all prior proxies given by the undersigned with respect to any of the
Shares are hereby revoked, and no subsequent proxies will be given with respect
to any of the Shares.
This proxy is irrevocable, is coupled with an interest and is granted
in connection with the Voting Agreement, dated as of May 12, 1999, between
Acquiror, the undersigned and other stockholders of the Company (the
"Agreement"), and is granted in consideration of Acquiror entering into the
Agreement and Plan of Merger, dated as of the date hereof, among Acquiror,
[Newco)., a Delaware corporation and wholly owned subsidiary of Acquiror, and
the Company (the "Merger Agreement"). Capitalized terms used but not otherwise
defined in this proxy have the meanings ascribed to such terms in the Agreement.
The attorneys and proxies named above will be empowered, and may
exercise this proxy, at any time during the period from the date hereof through
the Expiration Date at any meeting of the stockholders of the Company, however
called, and at every adjournment or postponement thereof, or in any written
action by consent of stockholders of the Company, to (i) appear, or cause the
holder of record as of the Record Date to appear, at any annual or special
meeting of stockholders of the Company (including the [Company's Stockholder
Meeting]) for the purpose of establishing a quorum, and (ii) vote or cause to be
voted the shares (A) in favor of the Merger and the other transactions
contemplated by the Merger Agreement, the execution and delivery by the Company
of the Merger Agreement and the adoption and approval of the terms thereof and
in favor of the Merger and each of the other actions contemplated by the Merger
Agreement and any action required in furtherance hereof and thereof; (B) against
any other action, agreement or transaction that would, directly or indirectly,
result in a Company Takeover Event; and (C) against any action, agreement or
transaction that is intended or could reasonably be expected (x) to facilitate a
person other than the Acquiror in acquiring the Company or (y) to impede,
interfere with, delay, postpone, discourage or materially adversely affect the
consummation of the Merger.
The undersigned Stockholder(s) may vote the Shares on all other
matters.
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This proxy shall be binding upon the heirs, successors and assigns of
the undersigned (including any transferee of any of the Shares).
Any term or provision of this proxy which is invalid or unenforceable
in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent
of such invalidity or unenforceability without rendering invalid or
unenforceable the remaining terms and provisions of this proxy or affecting the
validity or enforceability of any of the terms or provisions of this proxy in
any other jurisdiction. If any provision of this proxy is so broad as to be
unenforceable, the provision shall be interpreted to be only so broad as is
enforceable,
This proxy shall terminate upon the Expiration Date.
Dated: May 12, 1999
STOCKHOLDER:
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Name:
Number of shares of Company Common Stock owned of
record as of the date of this proxy:
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EXHIBIT 99.2
AMENDMENT TO VOTING AGREEMENT
Reference is made to that Voting Agreement dated May __, 1999 among the
parties hereto and Compass International Services Corporation (the "Company").
Each of the parties hereto agrees, in consideration of the mutual agreements
contained herein, in the Voting Agreement, and in the Merger Agreement, as
follows:
1. The Voting Agreement shall be amended by adding the following as Section 9
thereof:
2. "9. Contribution of certain shares of Company Common Stock.
(a) Each Stockholder agrees that, immediately prior to the
effectiveness of the Merger, it will transfer and contribute to the
Company, without any rights to further consideration therefor, that
number of shares of Company Common Stock held by it equal to the Share
Adjustment Amount.
(b) The "Share Adjustment Amount" for each Stockholder shall
mean that number of shares of Company Common Stock derived by (i)
multiplying (x) the number of shares of Company Common Stock owned by
such Stockholder by (y) $.824, (ii) dividing that product by the
average of the reported closing prices of common stock of Acquiror on
the five business days immediately prior to the effectiveness of the
Merger, and (iii) dividing the resulting number by 0.23739. Any
fractional shares of Company Common Stock resulting from this
calculation shall be rounded to the nearest whole number of shares.
(c) The Company agrees that, prior to the effectiveness of the
Merger, it will immediately accept all shares contributed to the
Company, and cancel such shares, such that they shall not be
outstanding at the effectiveness of the Merger.
(d) Each Stockholder and the Company agree to take all further
actions as are appropriate and requested by Acquiror to give effect to
the transfer, contribution and cancellation provided for herein."
3. Each Stockholder acknowledges and agrees that, except as amended hereby, the
Voting Agreement remains in full force and effect and binding on such
Stockholder.
4. Each Stockholder reaffirms that the Irrevocable Proxy, delivered pursuant to
the Voting Agreement, remains in full force and effect.
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IN WITNESS WHEREOF, each of the undersigned has caused this
Amendment to Voting Agreement to be executed as of the 16th day of July, 1999.
NCO GROUP, INC.
By:
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Paul E. Weitzel Jr., Executive
President Corporate Development
COMPASS INTERNATIONAL SERVICES
CORPORATION
By:
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Michael J. Cunningham
Chairman
STOCKHOLDERS:
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Name
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Address
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Facsimile
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P COMPASS INTERNATIONAL SERVICES CORPORATION
R
O PROXY FOR SPECIAL MEETING OF STOCKHOLDERS, AUGUST 18, 1999
X
Y This proxy is solicited on behalf of the board of directors. The
undersigned stockholder of Compass International Services Corporation hereby
appoints Michael J. Cunningham and Mahmud U. Haq, or either of them, as
proxies, each with power to act without the other and with full power of
substitution, for the undersigned to vote the number of shares of common
stock of Compass that the undersigned would be entitled to vote if
personally present at the special meeting to be held on Wednesday, August
18, 1999, at 10:00 a.m., local time, at Southgate Tower Suite Hotel, 371
Seventh Avenue, New York, NY 10001-9984 and at any adjournment or
postponement thereof, on the following matters that are more particularly
described in the proxy statement/prospectus dated July 21, 1999.
This proxy, when properly executed, will be voted in the manner
directed herein by the undersigned stockholder. If no direction is made,
this proxy will be voted "for" Proposals 1 and 2. Receipt of the proxy
statement/prospectus dated July 21, 1999 is hereby acknowledged.
You are encouraged to specify your choices by marking the appropriate
boxes, SEE REVERSE SIDE, but you need not mark any boxes if you wish to vote
in accordance with the board of directors' recommendations. The proxy
agents cannot vote your shares unless you sign and return this card.
(Continued on reverse side)
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|-----|Please mark your 2638
| X |votes as in this
|-----|example.
THIS PROXY WILL BE VOTED AS DIRECTED. IF NO DIRECTIONS TO THE CONTRARY ARE
INDICATED, THE PROXY AGENTS INTEND TO VOTE FOR APPROVAL OF THE PROPOSALS.
1. Proposal to consider and vote upon a
proposal to approve and adopt the
merger agreement among NCO Group, Inc.,
Cardinal Acquisition Corporation, a wholly
owned subsidiary of NCO, and Compass FOR AGAINST ABSTAIN
International Services Corporation. Under the [ ] [ ] [ ]
merger agreement, Compass will become a wholly
owned subsidiary of NCO and each outstanding
share of Compass common stock will be converted
into the right to receive 0.23739 of a share of
NCO common stock, subject to the terms and
conditions contained in the merger agreement.
2. To consider and take action upon any other
matter which may properly come before FOR AGAINST ABSTAIN
the meeting or any adjournment or postponement [ ] [ ] [ ]
thereof.
The undersigned hereby acknowledges receipt of Compass' Notice of Special
Meeting to Stockholders and the proxy statement prospectus relating thereto.
DATE:______________________________, 1999
(Please date this proxy)
__________________________________________
__________________________________________
Signature
It would be helpful if you signed your name exactly as it appears on your
stock certificate(s) indicating any official position or representative
capacity. If shares are registered in more than one name, all owners should
sign.
PLEASE DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED
POSTAGE PAID ENVELOPE
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