<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 9, 1997
REGISTRATION NO. 333-37461
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT
NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CREDENTIALS SERVICES INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 7320 13-3784792
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
</TABLE>
333 CITY BOULEVARD WEST, 10TH FLOOR
ORANGE, CALIFORNIA 92868
(714) 704-6400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MR. DAVID C. THOMPSON
President and Chief Executive Officer
CREDENTIALS SERVICES INTERNATIONAL, INC.
333 CITY BOULEVARD WEST, 10TH FLOOR
ORANGE, CALIFORNIA 92868
(714) 704-6400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
Copies to:
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<S> <C> <C>
JAMES M. MCLAUGHLIN, JR., ESQ. MELVIN KATZ, ESQ. WILLIAM H. HINMAN, JR., ESQ.
PATRICIA F. YOUNG, ESQ. MALONEY, MEHLMAN & KATZ SHEARMAN & STERLING
PILLSBURY MADISON & SUTRO LLP 405 LEXINGTON AVENUE 555 CALIFORNIA STREET
520 MADISON AVENUE, 40TH FLOOR NEW YORK, NEW YORK 10174 SAN FRANCISCO, CALIFORNIA 94104
NEW YORK, NEW YORK 10022
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, 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(c)
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. [ ]
- ---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE
IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED DECEMBER 9, 1997
5,500,000 SHARES
LOGO
COMMON STOCK
------------------------
Of the 5,500,000 shares of Common Stock offered hereby, 1,050,000 shares are
being offered by Credentials Services International, Inc. (the "Company") and
4,450,000 shares are being offered by certain stockholders of the Company (the
"Selling Stockholders"). See "Principal and Selling Stockholders." The Company
will not receive any proceeds from the sale of shares by the Selling
Stockholders. After giving effect to the offering of the Common Stock hereby,
CSI Investment Partners II, L.P., one of the Selling Stockholders, will own
approximately 35.4% of the Company's outstanding Common Stock, assuming no
exercise of the Underwriter's over-allotment option described below. See "Risk
Factors -- Control by Affiliates."
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently anticipated that the initial public offering
price per share of the Common Stock will be between $14.00 and $16.00 per share.
See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. The Company has applied for
quotation of the Common Stock on the Nasdaq National Market under the trading
symbol "CRSR."
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 5 OF THIS PROSPECTUS FOR INFORMATION THAT SHOULD BE CONSIDERED
BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================================================
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Stockholders
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share....................... $ $ $ $
- ----------------------------------------------------------------------------------------------------------------
Total........................... $ $ $ $
- ----------------------------------------------------------------------------------------------------------------
Total Assuming Full Exercise of
Over-Allotment Option(3)...... $ $ $ $
================================================================================================================
</TABLE>
(1) See "Underwriting."
(2) Before deducting expenses estimated at $1.3 million, which are payable by
the Company.
(3) Assuming exercise in full of the 30-day option granted by the Selling
Stockholders to the Underwriters to purchase up to 825,000 additional
shares, on the same terms, solely to cover over-allotments. See
"Underwriting."
------------------------
The shares of Common Stock are offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters, and subject
to their right to reject orders in whole or in part. It is expected that
delivery of the Common Stock will be made in New York City on or about
, 1997.
------------------------
PAINEWEBBER INCORPORATED HAMBRECHT & QUIST
------------------------
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE> 3
Inside front cover:
Credential Services International's
Value-Added Business Model
[Graphic depiction of Credentials Services International's Value-Added Business
Model: Membership fees flow from members to the Company; superior credit
information and monitoring programs flow from the Company to members; fee-based
revenue flows from the Company to the credit bureau; integration of information
systems flows from the credit bureau to the Company; commission revenue and
customer loyalty flow from the Company to the co-marketer; and brand name
endorsement and customer lists flow from the co-marketer to the Company.]
[Logo of Credentials Services International, Inc.]
Credentials(R) is a trademark of Credentials Services International, Inc.
This prospectus includes trademarks and tradenames of other companies.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE THE PURCHASE OF THE COMMON STOCK TO STABILIZE ITS
MARKET PRICE, THE PURCHASE OF THE COMMON STOCK TO COVER SYNDICATE SHORT
POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and related notes appearing elsewhere in
this Prospectus. Except as set forth in the Financial Statements and notes
thereto or as otherwise specified herein, all information in this Prospectus (i)
assumes no exercise of the Underwriters' over-allotment option, and (ii)
reflects a 214.4517-for-1 split of the Common Stock to be effected prior to the
commencement of this offering. See "Description of Capital Stock" and
"Underwriting." Investors should carefully consider the information set forth
under the heading "Risk Factors."
This Prospectus contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed under the heading "Risk Factors" below, as
well as those discussed elsewhere in this Prospectus.
THE COMPANY
Credentials Services International, Inc. is a leading direct marketer of
credit information and monitoring membership programs to consumers. The Company
believes that it provides value-added programs that enable consumers to monitor
the accuracy of their personal credit data that is collected and held by credit
reporting bureaus. This information allows consumers to respond on an informed
basis to credit decisions made by providers of credit such as mortgage lenders,
consumer finance companies, auto loan providers, credit card providers, banks
and other lending institutions. Through its relationship with Experian Inc., one
of the three major credit reporting bureaus, the Company provides this
information to its members in a readily understandable, readable format and
offers members notification of significant events, such as credit inquiries and
the entry of negative credit data in the member's credit file, which might
affect their ability to obtain credit.
The Company markets its membership programs to consumers using direct
marketing techniques, consisting of direct mail and telemarketing campaigns
conducted through endorsed co-marketing relationships with major credit card
issuers that have a large customer base, such as banks, retailers and oil
companies. Through its co-marketing relationships, the Company markets its
programs to the credit card customer bases of nationally-known organizations
such as The Chase Manhattan Bank USA, N.A., Bank One, N.A. and its affiliates
(including the recently merged First USA Bank credit card customer base), PNC
National Bank, N.A., Service Merchandise and Sun Company, Inc. (Sunoco). During
the fiscal year ended September 26, 1997, the Company increased the number of
its co-marketers to 29 from 13 at September 27, 1996. During this period, the
Company's membership base increased to approximately 1.4 million members from
approximately 828,000 members. The Company entered into a new co-marketing
agreement with the credit card division of Citibank, N.A. in October 1997 and
commenced initial direct marketing activities to Citibank's credit card holders
in November 1997. See "Risk Factors -- Dependence on Co-Marketers; Co-Marketer
Concentration."
The consumer credit information and monitoring business conducted by the
Company was started in 1986 by a division of TRW, Inc. In October 1994, the
Company purchased certain assets of the business from TRW, Inc. In September
1996, TRW, Inc., sold its credit bureau and credit reporting business, and that
business was subsequently renamed Experian Inc. At the time of the Company's
asset acquisition in 1994, it entered into a ten-year contract with TRW, Inc.
pursuant to which the Company has access to Experian Inc.'s credit reports and
daily access to the national Experian Inc. credit file. The Company's
information systems are integrated with Experian Inc.'s database and systems,
enabling the Company to automatically notify a member when an inquiry is made
into the member's personal credit file. The Company believes that it is the only
company which currently offers this unique feature to consumers and that this
feature constitutes a substantial competitive advantage with respect to
developing co-marketing relationships and building its membership base.
1
<PAGE> 5
The Company seeks to become the leading provider of credit information and
monitoring programs to consumers and to continue to build its membership base
with its core programs and the introduction of new programs. The key elements of
the Company's strategy are as follows:
Grow and Maintain Membership Base By Offering Premium Quality
Programs. The Company's objective is to build and maintain its membership base
by continuing to provide its core value-added consumer credit programs which the
Company believes are superior to the programs offered by its competitors.
Expand Distribution Channels. The Company intends to expand its network of
co-marketing relationships to include additional major banks, retailers and oil
companies, as well as to aggressively develop innovative new distribution
channels. Potential co-marketing partners may include mortgage servicing
companies, insurance companies and utility companies, such as regional telephone
companies. The Company also believes the World Wide Web may become a viable
distribution channel for its membership programs and is exploring that potential
distribution opportunity.
Develop New Programs. The Company intends to continue to develop and
market new programs to current and new members. The Company has test marketed
and is continuing to develop a program targeted to small businesses which would
provide those businesses with credit information and monitoring services to
enable them to better evaluate and monitor their own credit as well as the
credit of other businesses, particularly their vendors, suppliers and customers.
In addition, the Company is presently test marketing a number of other
consumer-oriented membership programs.
Provide Superior Levels of Customer Service. The Company is committed to
maintaining what it believes is a superior level of customer service, as
reflected by membership renewal rates and satisfaction among members and
co-marketers.
Develop and Use State-of-the-Art Technical Solutions. The Company intends
to continue developing and using advanced technological methods to solicit new
members, collect and market credit data and provide membership services.
The Company was incorporated in Delaware in 1993 and commenced operations
in October 1994. The Company's executive offices are located at 333 City
Boulevard West, 10th Floor, Orange, California 92868, and its telephone number
is (714) 704-6400. The Company also maintains a World Wide Web site on the
Internet at http://www.credentials-net.com.
2
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company.......... 1,050,000 shares
Common Stock Offered by the Selling
Stockholders............................... 4,450,000 shares
Common Stock to be Outstanding after the
Offering................................... 10,666,667 shares(1)
Use of Proceeds.............................. The net proceeds to the Company from the
offering are estimated to be approximately
$13.3 million. The Company intends to apply
the net proceeds of the offering to repay
certain outstanding indebtedness in the
aggregate principal amount of approximately
$12.9 million, plus accrued interest. The
balance of the net proceeds of the offering,
if any, will be used for general corporate
purposes. The Company will not receive any
proceeds from the sale of shares by the
Selling Stockholders. See "Use of Proceeds."
Proposed Nasdaq National Market Symbol....... CRSR
</TABLE>
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(1) Based upon the number of shares of Common Stock outstanding at November 21,
1997. See "Capitalization" and "Principal and Selling Stockholders."
Excludes 655,000 shares of Common Stock issuable upon exercise of options
that the Company intends to grant under the Company's 1997 Stock Option Plan
immediately prior to the commencement of this offering at an exercise price
equal to the initial public offering price per share of the Common Stock
being offered hereby. See "Management -- Stock Option Plan."
3
<PAGE> 7
SUMMARY FINANCIAL INFORMATION
The following summary financial information for each of the three fiscal
years in the period ended September 26, 1997 and at September 26, 1997 has been
derived from the financial statements of the Company that have been audited by
Coopers & Lybrand L.L.P., independent auditors, and included herein. The summary
financial information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
FISCAL YEARS
ENDED SEPTEMBER(1)
--------------------------------------
1995 1996 1997
---------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS AND NUMBER OF MEMBERS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................... $ 12,540 $ 24,556 $ 38,039
Operating income (loss).................................... (4,544) (21,262) 2,855
Interest expense........................................... 1,239 1,185 1,455
Income (loss) before provision for income taxes and
extraordinary item....................................... (5,783) (22,447) 1,400
Income (loss) before extraordinary item.................... $ (5,783) $ (22,447) $ 1,339
Income (loss) per share before extraordinary item.......... $ (0.60) $ (2.33) $ 0.14
Weighted average common and common equivalent shares
outstanding.............................................. 9,616,667 9,616,667 9,616,667
OTHER DATA:
Total members at end of period............................. 613,000 828,000 1,385,000
</TABLE>
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<CAPTION>
SEPTEMBER 26, 1997
------------------------------
ACTUAL AS ADJUSTED(2)
----------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................................... $ 413 $ 562
Total assets....................................................... 41,412 40,608
Total liabilities.................................................. 61,194 48,168
Total stockholders' deficit........................................ (19,782) (7,560)
</TABLE>
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(1) The Company's fiscal year ends on the last Friday of September of each year.
The Company's quarterly periods are each comprised of 13 weeks and end on
the last Friday of each quarterly period. The first month of each quarter is
comprised of five weeks, and each of the two remaining months of the quarter
is comprised of four weeks.
(2) Adjusted to reflect (i) the sale by the Company of the 1,050,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$15.00 per share; and (ii) the application of the estimated net proceeds
from the sale of the shares of Common Stock by the Company. See "Use of
Proceeds" and "Capitalization."
4
<PAGE> 8
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company, its current
business and its future prospects before purchasing shares of the Company's
Common Stock offered hereby.
LIMITED OPERATING HISTORY
The Company commenced operations in October 1994. It has a limited
operating history and is at an early stage of development. While the Company's
business of direct marketing credit information and monitoring programs was
started by a division of TRW, Inc. ("TRW") in 1986, the Company has operated as
an independent business organization for approximately three years and,
therefore, its future results of operations are subject to the uncertainties,
including those pertaining to continuity of management and business
relationships, customarily encountered by new businesses.
HISTORY OF OPERATING LOSSES
For the fiscal year ended September 26, 1997, the Company generated net
income of approximately $1.3 million; however, as of September 26, 1997, the
Company had an accumulated deficit of approximately $27.0 million. For fiscal
years 1996 and 1995, the Company incurred net losses of approximately $22.4
million and $5.8 million, respectively. Management believes that the net loss
for the year ended September 27, 1996 was a result primarily of failed direct
marketing and telemarketing campaigns that were conducted on an unendorsed basis
(i.e., without the benefit of co-marketer endorsements). The fiscal year 1996
losses resulted in a severe liquidity shortfall which impaired the Company's
ability to undertake new marketing programs. Management of the Company has since
taken a variety of actions, including the investment of additional capital in
the Company, the replacement of certain key executive officers and the
implementation of new operational and financial control procedures, in an effort
to remedy the problems that led to the Company's financial difficulties in
fiscal year 1996. There can be no assurance, however, that these or any other
steps taken by management in the future will be sufficient to allow the Company
to maintain profitability or avoid liquidity problems and operating losses such
as those recently experienced by the Company.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's quarterly revenues, expenses and operating results have
varied significantly in the past and are likely to vary significantly from
quarter to quarter in the future. Factors which may affect the Company's
financial results include: response to membership solicitations; cancellations
and renewals of memberships; market acceptance of the Company's and the
co-marketers' existing and new programs; the demand for credit monitoring
services such as those offered by the Company; the timing of the Company's
investments in program development; unanticipated customer service
interruptions; unanticipated increased costs associated with maintenance and
expansion of operations; and competitive pressures on the Company's business
generally. Many of these factors (including postage and telephone rates for
direct mail and telemarketing campaigns) are beyond the Company's control. For
example, the U.S. Postal Service has proposed a postage rate increase to become
effective in mid-1998. In addition, any delay in the offering of a new program
by the Company, its co-marketers or otherwise, or slower than anticipated
consumer acceptance of such program, could adversely affect the Company's
margins in a given period. Due to the foregoing factors, the Company believes
that its quarterly operating results are likely to vary significantly in the
future, that period-to-period comparisons of its operating results are not
necessarily meaningful and that such comparisons cannot be relied upon as
indicators of future performance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DEPENDENCE ON CO-MARKETERS; CO-MARKETER CONCENTRATION
The Company obtains substantially all of the information necessary for
conducting the Company's endorsed marketing efforts from customer lists supplied
by its co-marketers. Co-marketers provide the lists to the Company solely for
use in marketing specified products. As a result, the Company's ability to
market an
5
<PAGE> 9
existing program to potential new members or a new program to its existing
members is dependent on its ability to develop and maintain relationships with
co-marketers and to obtain approval for its marketing efforts from the relevant
co-marketer.
Approximately 30.4% of the Company's revenues for the fiscal year ended
September 26, 1997 were attributable to members solicited from customer lists
provided by its two largest co-marketers. The number of new members attributable
to any individual co-marketer fluctuates from period to period depending on
whether the Company has initiated a product marketing cycle for that co-marketer
during the relevant period. Accordingly, the percentage of the Company's total
revenue generated by each individual co-marketer has varied over time, although
memberships and the associated revenue derived from endorsed marketing campaigns
conducted with The Chase Manhattan Bank USA, N.A. ("Chase") and Bank One, N.A.
and its affiliates, including the recently merged First USA Bank credit card
customer base ("Bank One"), have historically constituted a significant portion
of the Company's total revenues and membership base. For the fiscal year ended
September 26, 1997, approximately 21.1% of the Company's revenues were generated
from members who were originally solicited with the co-marketer endorsement of
Bank One (the "Bank One Endorsement"), and approximately 9.3% of the Company's
revenues were generated from members who were originally solicited with the
co-marketer endorsement of Chase (the "Chase Endorsement"). At September 26,
1997, approximately 27% of the Company's members consisted of members who were
originally solicited with the Chase Endorsement and approximately 25% of the
Company's members consisted of members who were originally solicited with the
Bank One Endorsement. The Company is currently engaged in expanding the number
of its co-marketing partners which has grown to 29 at September 26, 1997 from 13
at September 27, 1996 and anticipates that, as a result, it will, over time,
become less dependent on individual co-marketers. There can be no assurance,
however, that such expansion efforts will succeed or that the Company will,
accordingly, be able to lessen its dependence on individual co-marketers. As
part of its strategy to increase the number of its co-marketing relationships,
the Company entered into a co-marketing agreement with the credit card division
of Citibank, N.A. ("Citibank") in October 1997. Pursuant to that agreement, the
Company is obligated to pay Citibank minimum compensation of $9.0 million for
the period from October 29, 1997 through December 31, 1998, based upon net
membership revenues generated from an agreed-upon number of Citibank credit card
customer leads. While management believes that the Company will generate
sufficient net membership revenues from the Citibank credit card customer base
to satisfy this $9.0 million obligation, there can be no assurance in that
regard.
Certain of these co-marketer relationships are governed by agreements which
may be terminated without cause by either party upon 60 to 90 days' notice
without penalty and upon 30 days' notice in the event of an uncorrected material
breach. Upon such termination, the Company has the right to continue its
relationship with the co-marketer's customers that have become members prior to
the termination. There can be no assurance that one or more of the Company's
significant co-marketers will not terminate its relationship with the Company or
that co-marketers will continue to provide additional customer lists to the
Company for use in future marketing of new or existing membership programs. The
loss of any significant co-marketer could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business."
DEPENDENCE ON MEMBERSHIP RENEWALS
Fees generated by renewals of memberships are a significant contributor to
the Company's net income. The initial year of a membership is less profitable to
the Company than renewal years due primarily to the marketing costs associated
with acquiring new members. In addition, during the initial year of a
membership, a member may cancel his or her membership in the program for a
complete refund of the membership fee for that year. Historically, between 45%
and 60% of new members cancel their memberships within their initial membership
term (including cancellations during the 30-day trial period). Of the remaining
40% to 55% of the new members who do not cancel during the initial membership
term, approximately 70% renew their membership for an additional membership
term. For periods subsequent to the first membership term, the Company's
membership renewal rate has remained relatively constant at approximately 70%.
6
<PAGE> 10
The profitability of the Company is substantially dependent upon its
membership renewals. Cancellation rates and renewal rates are uncertain and are
subject to several factors, many of which are beyond the Company's control,
including changing member preferences, competitive price pressures, general
economic conditions, customer satisfaction and credit card holder turnover. In
addition, due to the rapid growth of the Company's membership base during fiscal
year 1997, the membership renewal rates historically experienced by the Company
are not necessarily indicative of future renewal rates. There can be no
assurance that the Company will continue to generate sufficient membership
renewals to maintain profitability or that memberships, if renewed, will not be
cancelled. Failure of the Company to generate a high rate of membership renewals
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business -- Sales and
Marketing."
COMPETITION
The Company's principal competitor is CUC International Inc. ("CUC") which
offers credit reporting membership programs with certain features similar to
those provided by the Company's programs. In addition to this direct
competition, the Company also encounters competition for co-marketer
endorsements from other direct marketing businesses. Because agreements between
co-marketers and program providers are often exclusive with respect to a
particular service, potential co-marketers may be prohibited from entering into
agreements with the Company to promote a program if the features provided by the
Company's program are similar to, or overlap with, the features offered by an
existing program of a competitor. There can be no assurance that the Company's
competitors will not increase their emphasis on programs similar to those
offered by the Company and more directly compete with the Company, that new
competitors will not enter the market, that competitors will not increase the
compensation they provide to co-marketers to induce such co-marketers to enter
into agreements, or that other businesses will not themselves introduce
competing programs. (See the description of the Company's recent agreement with
Citibank "-- Dependence on Co-Marketers; Co-Marketer Concentration" under this
caption). Such potential competitors include major credit card issuers,
including the Company's co-marketers. Potential competitors also include major
credit reporting bureaus, including Experian Inc. ("Experian"), which would have
significant competitive advantages such as access to credit data at minimal
cost. There can be no assurance that the Company's current or potential
competitors will not provide programs comparable or superior to those provided
by the Company at lower membership prices or adapt more quickly than the Company
to evolving industry trends or changing market requirements. In addition,
alliances among competitors may emerge and rapidly acquire significant market
share. Many of the Company's current and prospective competitors, including CUC,
have substantially larger customer bases and greater financial and other
resources than those available to the Company. Increased competition may result
in price reductions, increased fees payable to co-marketers, reduced
profitability and loss of market share, any of which could materially adversely
affect the Company's business, financial condition and results of operations.
There can be no assurance that the Company will be able to compete effectively
against future and current competitors. See "Business -- Competition."
Experian provides substantially all of the credit information which the
Company furnishes to its members. Although neither Experian nor the other credit
reporting bureaus provide the credit monitoring services currently offered by
the Company, Experian and the other credit bureaus currently provide a credit
report directly to any consumer at the consumer's request at the rate of
approximately $8.00 per report (except in states where local legislation
provides that consumers are entitled to a free credit report upon their written
request). See "-- Government Regulation; Adverse Publicity -- State Fair Credit
Reporting Acts." There can be no assurance that Experian or the other credit
bureaus will not begin to more aggressively market their services to consumers
by initiating price reductions or advertising campaigns targeted to consumers
and that such actions will not adversely affect the Company's business,
financial condition and results of operations or require the Company to reduce
prices for certain of its programs in order to remain competitive. On August 13,
1997, Experian launched a program to offer consumers the opportunity to receive
their credit reports directly over the Internet. Although two days later
Experian announced that it was suspending this program due to certain
operational and security problems, there can be no assurance that this, or
similar programs, will not be implemented by Experian or other credit reporting
bureaus or that competition from
7
<PAGE> 11
such programs will not adversely affect the Company's business, financial
condition and result of operations. Experian and the other credit reporting
bureaus would have significant competitive advantages over the Company in
providing such reports or services, such as access to credit data at minimal
cost. See "-- Dependence on Third Parties -- Relationship with Experian."
Providers of membership programs also compete for the limited access
provided by co-marketers to their customers against other businesses engaged in
direct marketing activities, such as telemarketing and direct mail. In recent
years, there have been significant advances in new forms of direct marketing,
such as the development of interactive shopping and data collection through
television, the Internet and other media. Many industry experts predict that
electronic interactive commerce, such as shopping and information exchange
through the World Wide Web, will proliferate significantly in the foreseeable
future. To the extent it occurs, such proliferation could materially change the
economics of acquiring members for membership service programs of the type
offered by the Company. Although the Company is exploring the potential of what
it believes are the most promising new forms of direct marketing, there can be
no assurance that the Company would be able to adapt to a material change in the
economics of its business or that such change would not have a material adverse
effect on the Company's business, financial condition or results of operations.
See "Business -- Competition."
INTRODUCTION OF NEW COMPETITIVE PROGRAMS
The introduction or announcement by current and future competitors of the
Company of new programs similar to those offered by the Company could render the
Company's existing programs uncompetitive or obsolete, or result in a delay or
decrease in orders for the Company's existing programs as co-marketers or
customers evaluate new programs or select new programs as an alternative to the
Company's existing programs. Therefore, the announcement or introduction of new
programs by competitors of the Company could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- Competition."
DEPENDENCE ON CREDIT CARD INDUSTRY
Programs marketed through the Company's credit card issuer co-marketers
(together with the memberships acquired from TRW) accounted for substantially
all of the Company's revenues in fiscal years 1995, 1996 and 1997. A significant
downturn in the credit card industry or a trend in that industry to reduce or
eliminate its use of direct marketing programs would have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the Company is obligated under the terms of its agreement with
credit card issuers and merchant processors under rules promulgated by credit
card associations such as Visa International and MasterCard to maintain certain
standards of commercial conduct relating generally to the protection of credit
card holders and consumers. While the Company believes it has been in compliance
with such standards to date, violations of such standards could jeopardize the
Company's ability to utilize such associations to collect payment of membership
fees, which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Credit Card
Enhancement Industry Background" and "-- Sales and Marketing."
DEPENDENCE ON THIRD PARTIES
Relationship with Experian. The Company receives substantially all of its
credit reports and credit information from Experian. In connection with the
acquisition of the Company's business in October 1994, the Company entered into
a ten-year contract with TRW (the predecessor to Experian) pursuant to which the
Company has access to Experian's credit reports and daily access to the national
Experian credit file. The Company is dependent upon access to Experian's data
base, which enables the Company to offer the credit monitoring feature of its
programs to its members. The Company's information systems are integrated with
and dependant upon Experian's database and systems. The Company's agreement with
Experian provides that either party may request a modification of the pricing
terms after October 1999, the fifth anniversary of the agreement. In the event
such a request is made and the Company and Experian are unable to agree upon new
pricing terms within a specified period, either party may terminate the
contract. In addition, if the Company
8
<PAGE> 12
fails to comply with various regulations applicable to the Company, Experian may
terminate the contract. There can be no assurance that, in the event Experian
ceases operations, or terminates, breaches or chooses not to renew its agreement
with the Company, a replacement source for credit reports and information could
be retained on a timely basis, if at all. Any such termination, breach or
nonrenewal could have a material adverse effect on the Company's business,
financial condition and results of operations. See "-- Government Regulation;
Adverse Publicity" and "Business -- Overview" and "-- Credit Information and
Monitoring Programs."
Direct Marketing. The Company solicits substantially all of the members
for its programs through direct mail and telemarketing. The Company outsources
its direct mail and telemarketing activities to third party contractors. The
third party contractors operate pursuant to agreements with the Company that may
be terminated with limited prior notice. There can be no assurance that, in the
event any such third party contractor ceases operations, or terminates, breaches
or elects not to renew its agreement with the Company, a replacement direct
mailer or telemarketer could be retained on a timely basis, if at all. In
addition, as third party contractors, the level and quality of services provided
by direct mailers and telemarketers is beyond the control of the Company. Any
service interruptions or quality problems could result in negative publicity,
customer dissatisfaction and membership cancellations which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Sales and Marketing."
Printing and Fulfillment Outsourcing. The Company outsources its printing
and membership fulfillment processes, and is dependent on printers and mailing
houses for prompt and accurate production of mailing inserts and initial
customer fulfillment packages. In the event that one of the printing or mailing
houses is unable or unwilling to provide materials on a timely basis or
terminates its relationship with the Company, there can be no assurance that the
Company would be able to replace such services without an interruption in its
marketing and customer service operations. Any such interruption could
materially and adversely affect the Company's business, financial condition and
results of operations. See "Business -- Fulfillment."
MANAGEMENT OF GROWTH
The Company has recently experienced a period of rapid growth that has
placed significant demands on its management and other resources. Continued
growth, if any, could continue to place significant demands on such resources.
For example, the Company's membership base increased to approximately 1.4
million members at September 26, 1997 from approximately 828,000 members at
September 27, 1996. Revenues have also increased significantly since the
inception of the Company. The Company's ability to compete effectively and to
manage future growth, if any, will depend on its ability to continue to
implement and improve operational, financial and management information systems
on a timely basis and to expand, train, motivate and manage its employees. There
can be no assurance that the Company's personnel, systems, procedures and
controls will be adequate to support the Company's operations, and the failure
to effectively support the Company's operations could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
POTENTIAL NEGATIVE IMPACT OF COMPETING DISTRIBUTION CHANNELS; RESISTANCE TO
TELEMARKETING
In recent years, there have been significant advances in new forms of
direct marketing, such as the development of interactive shopping and data
collection through television, the Internet and other media. Electronic
interactive commerce, such as shopping and information exchange via the World
Wide Web, may proliferate significantly in the foreseeable future. To the extent
it occurs, such proliferation could materially change the economics of acquiring
members for membership service programs of the type offered by the Company. Such
change could have a materially adverse effect on the Company's business,
financial condition and results of operations. Furthermore, as the telemarketing
industry continues to grow, the effectiveness of telemarketing, which is one of
the two principal means by which the Company markets its programs, as a direct
marketing method may decrease as a result of increased consumer resistance to
telemarketing in general. See "Business -- Credit Card Enhancement Industry
Background," "-- Sales and Marketing" and "-- Competition."
9
<PAGE> 13
RELIANCE ON COMMUNICATIONS AND INFORMATION SYSTEMS; TECHNOLOGY RISKS
The Company's business is highly dependent on its computer and
telecommunications systems and any temporary or permanent loss of either system,
for whatever reason, could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
technologies on which the Company is dependent to effectively compete and meet
its co-marketers' needs are rapidly evolving and in many instances are
characterized by short product life cycles or innovation. There can be no
assurance that the Company will be successful in anticipating or adapting to
technological changes or in selecting and developing new and enhanced technology
on a timely basis. See "Business -- Management Information Systems."
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on the members of its management and
marketing staff, the loss of one or more of whom could have a material adverse
effect on the Company. In addition, the Company believes that its future success
will depend in large part upon its ability to attract and retain highly skilled
managerial and marketing personnel, particularly as the Company expands its
activities. The Company faces significant competition for such personnel, and
there can be no assurance that the Company will be successful in hiring or
retaining the personnel it requires for continued growth. The failure to hire
and retain such personnel could materially and adversely affect the Company's
business, financial condition and results of operations. See "Management" and
"Certain Transactions."
GOVERNMENT REGULATION; ADVERSE PUBLICITY
Federal Telephone Consumer Protection Act; Federal Telemarketing and
Consumer Fraud and Abuse Prevention Act. One of the principal methods the
Company uses to market its programs is telemarketing. The telemarketing industry
has become subject to an increasing amount of Federal and state regulation as
well as general public scrutiny in the past several years. The Federal Telephone
Consumer Protection Act of 1991 limits the hours during which telemarketers may
call consumers and prohibits the use of automated telephone dialing equipment to
call certain telephone numbers. The Federal Telemarketing and Consumer Fraud and
Abuse Prevention Act of 1994, and Federal Trade Commission ("FTC") regulations
promulgated thereunder, prohibit deceptive, unfair or abusive practices in
telemarketing sales. Both the FTC and state attorneys general have authority to
prevent telemarketing activities that constitute "unfair or deceptive acts or
practices." In addition, some states have enacted laws and others are
considering enacting laws targeted directly at telemarketing practices, and
there can be no assurance that any such laws, if enacted, will not adversely
affect or limit the Company's current or future telemarketing activities.
Although the Company does not control the telemarketing firms which it engages
to market the Company's programs, compliance with these regulations is generally
the responsibility of the Company, and the Company could be subject to a variety
of enforcement or private actions for any failure to comply with such
regulations. The risk of noncompliance by the Company with any rules and
regulations enforced by a Federal or state consumer protection authority may
subject the Company or its management to fines or various forms of civil or
criminal prosecution, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
Federal Fair Credit Reporting Act. The Fair Credit Reporting Act ("FCRA")
became effective in 1971. Extensive amendments to the FCRA became effective
October 1, 1997. The FCRA establishes a set of requirements that "consumer
reporting agencies" must follow in the conduct of their business. A "consumer
reporting agency" means any person who regularly engages in assembling consumer
credit information for the purpose of furnishing consumer reports to third
parties. The FCRA imposes numerous requirements on consumer reporting agencies
including restrictions on the permissible uses of consumer reports and the
contents of consumer reports, as well as requirements relating to disclosures of
reports to consumers, the form of and charges for such disclosures, and the
reinvestigation procedure that must be followed when a consumer disputes an item
contained in his or her report. While the Company is not a "consumer reporting
agency" within the meaning of the FCRA and therefore is not subject to the FCRA,
the Company is required by its contract with Experian to comply with the FCRA
and the interpretations rendered by the FTC. Should the Company become subject
to the FCRA and fail to comply with its provisions, the Company could be subject
to various civil and administrative sanctions, the imposition of which could
have a material adverse effect on
10
<PAGE> 14
the Company. The Company could also be subject to administrative enforcement
actions initiated by the FTC. Violations of the FCRA may constitute unfair or
deceptive acts or practices in commerce in violation of the Federal Trade
Commission Act and the Company could be subject to penalties thereunder. In
addition, if the Company were found to have committed a knowing violation of the
FCRA which constitutes a pattern or practice of violations, the FTC may
institute an action to recover a civil penalty of up to $2,500 per violation.
Finally, actions for injunctions or for damages may also be initiated under the
FCRA by the state attorneys general.
State Fair Credit Reporting Acts. Slightly over half of the states have
enacted statutes governing the operations of consumer credit reporting agencies,
and some of the state statutes contain provisions that are different from the
FCRA. An example of such a state statute was enacted in Colorado through the
adoption of the Colorado Fair Credit Reporting Act (the "Colorado Act") which
went into effect August 1, 1997. The Colorado Act increases the notification
requirements for credit reporting agencies and lenders upon the addition of
adverse items to, or three inquiries into, an individual's credit report. The
law provides that Colorado consumers are entitled to a free credit report upon
their written request and mandates an annual mailing from each of the national
systems and Colorado reporting agencies alerting consumers to that fact. The
Company is not in a position to know the number of Colorado consumers who will
request a free copy of their credit report, or if consumers will regard such
reports as substitutes for the Company's services. There are five other states
(Vermont, Maryland, Georgia, Massachusetts and New Jersey) that have also
enacted legislation requiring the issuance of free credit reports to consumers
upon request. The Company derives approximately 15% of its members from states
with such legislation. Other states (including California) are currently
considering the enactment of such legislation. There can be no assurance that
other states in which more of the Company's members reside will not adopt
similar legislation. In the event that other states enact legislation requiring
issuance of free credit reports, the value to consumers of the programs the
Company provides could be materially reduced. Legislation requiring free
issuance of credit reports could materially and adversely affect the Company's
business, financial condition and results of operation. See "Business --
Government Regulation."
Adverse Publicity. The media often publicizes perceived non-compliance
with consumer protection regulations and violations of notions of fair dealing
with consumers, and the membership programs industry is susceptible to widely
publicized charges by the media of regulatory noncompliance and unfair dealing.
Any such publicity is potentially damaging to the Company's reputation, its
co-marketer relationships and consumer acceptance and loyalty.
NO PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market will
develop or be sustained after this offering or that the market price of the
Common Stock will not decline below the initial public offering price. The
initial public offering price will be determined by negotiations among the
Company, the Selling Stockholders and the Representatives of the Underwriters.
Factors such as fluctuations in the Company's operating results, announcements
of product or service innovations or new agreements with co-marketers by the
Company or its competitors, and market conditions for stocks of companies
similar to the Company and the condition of the capital markets generally could
have a significant impact on the market price of the Common Stock. See
"Underwriting" for information relating to the method of determining the initial
public offering price.
MANAGEMENT DISCRETION CONCERNING USE OF PROCEEDS; ABILITY TO RAISE ADDITIONAL
CAPITAL
To the extent that the net proceeds derived by the Company from this
offering are not applied to repay its indebtedness and such proceeds are
allocated to working capital for general corporate purposes, as described under
"Use of Proceeds," management of the Company will have broad discretion to use
such proceeds in whatever manner that management believes is appropriate for the
Company.
Barring unforeseen changes in the Company's business, the Company believes
that the net proceeds to be derived by the Company from this offering, funds
generated from operations and borrowings available under
11
<PAGE> 15
the Company's revolving bank line of credit will be sufficient to meet its
capital and liquidity requirements for at least the forthcoming 36-month period.
The Company intends to grant options to purchase an aggregate of 655,000 shares
of Common Stock under the Company's 1997 Stock Option Plan immediately prior to
the consummation of this offering. In the event that the Company were to seek
additional financing, its ability to raise equity capital on terms that would be
acceptable to the Company may be adversely affected by the grant of such
options.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of substantial amounts of shares of Common Stock in the public market
following this offering could adversely affect the market price of the Common
Stock. Upon closing of this offering, based upon the number of shares
outstanding at November 21, 1997 and assuming no exercise after November 21,
1997 of outstanding stock options, there will be 10,666,667 shares of Common
Stock of the Company outstanding. Of these shares, the 5,500,000 shares offered
hereby will be freely tradable without restriction or further registration under
the Securities Act of 1933, as amended (the "Securities Act"), unless purchased
by "affiliates" of the Company, as that term is defined in Rule 144 ("Rule 144")
under the Securities Act ("Affiliates"). The remaining 5,166,667 shares of
Common Stock are deemed "restricted securities" as that term is defined in Rule
144. All of the shares of Common Stock deemed "restricted securities" are
subject to certain lock-up agreements (the "Lock-Up Agreements"). See
"Underwriting." Upon expiration of the Lock-Up Agreements 180 days after the
date of this Prospectus, approximately 4,596,225 shares of Common Stock will be
available for sale in the public market, subject to the volume limitations and
other provisions of Rule 144. Of the remaining shares, 285,221 shares will be
available for sale in each of April 1999 and April 2000, upon vesting of the
restricted stock held by management (the foregoing numbers of shares do not give
effect to the sale of additional shares issuable upon exercise of options to be
granted to officers, directors and employees of the Company as described under
"Management -- Stock Option Plan"). See "Shares Eligible for Future Sale" and
"Description of Capital Stock -- Registration Rights."
CONTROL BY AFFILIATES
Upon completion of this offering (assuming no exercise of the Underwriters'
over-allotment option), CSI Investment Partners II, L.P., a Delaware limited
partnership ("CSI Partners II"), will own approximately 35.4% of the Company's
outstanding Common Stock. CSI Partners II may, therefore, have the ability to
control the election of the Company's directors and also may have the ability to
determine the outcome of corporate actions requiring stockholder approval. This
concentration of ownership also may have the effect of delaying or preventing a
change in control of the Company. See "Management" and "Principal and Selling
Stockholders."
ANTI-TAKEOVER PROVISIONS
The Company's Amended and Restated Bylaws (the "Bylaws") provide that any
action required or permitted to be taken by stockholders of the Company must be
effected at a duly called annual or special meeting of stockholders and may not
be effected by any consent in writing, and requires reasonable advance notice by
a stockholder of a proposal or director nomination which such stockholder
desires to present at any annual or special meeting of stockholders. Special
meetings of the stockholders may be called only by the Chairman of the Board,
the Chief Executive Officer or, if none, the President of the Company or by the
Board of Directors. The Company's Amended and Restated Certificate of
Incorporation (the "Charter") provides for a classified Board of Directors. The
Board of Directors is divided into three classes, with two to three directors in
each class. The terms of the Class I directors expire in 1998, the terms of the
Class II directors expire in 1999, and the terms of the Class III directors
expire in 2000. In addition, shares of the Company's Preferred Stock may be
issued in the future without stockholder approval and upon such terms and
conditions, and having such rights, privileges and preferences, as the Board of
Directors may determine. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of any holders of
Preferred Stock that may be issued in the future. The Company has no present
plans to issue any shares of Preferred Stock.
12
<PAGE> 16
In addition, the Company is subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law which prohibit the Company
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner or meets other criteria. These provisions, and other
provisions of the Charter, may have the effect of deterring hostile takeovers or
delaying or preventing changes in control or management of the Company,
including transactions in which stockholders might otherwise receive a premium
for their shares over then current market prices. In addition, these provisions
may limit the ability of stockholders to approve transactions that they may deem
to be in their best interests. See "Description of Capital Stock -- Delaware
Anti-Takeover Law and Certain Charter and Bylaw Provisions."
DILUTION
Purchasers of shares of Common Stock in this offering will suffer an
immediate and substantial dilution in the net tangible book value per share of
the Common Stock of $18.82 from the initial public offering price. To the extent
that options to purchase shares of Common Stock granted under the Company's 1997
Stock Option Plan are exercised, there will be further dilution. See "Dilution."
LACK OF DIVIDENDS
The Company does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future. See "Dividend Policy."
13
<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,050,000 shares of
Common Stock being offered by the Company hereby are estimated to be $13.3
million, assuming an initial public offering price of $15.00 per share and after
deducting estimated underwriting discounts and commissions and offering
expenses. The Company intends to apply the net proceeds of the offering to be
received by the Company to: (i) repay approximately $6.9 million principal
amount of outstanding term indebtedness, which bears interest at an average rate
of 8.43%, together with interest accrued thereon, arising under a Credit
Agreement, dated January 14, 1997, between the Company and LaSalle National
Bank, and having a maturity date of September 30, 1999; (ii) repay approximately
$3.0 million principal amount of indebtedness, which bears interest at an
average interest rate of 9.31%, together with interest accrued thereon, pursuant
to a Subordinated Promissory Note due December 1999 issued by the Company, and
payable to TRW and issued in connection with the Acquisition; and (iii) repay
approximately $3.0 million principal amount of indebtedness, which bears
interest at an average interest rate of 12.00%, together with interest accrued
thereon, arising under a Subordinated Loan Agreement, dated as of March 10,
1997, as amended, between the Company and Canterbury Mezzanine Capital, L.P.
("Canterbury Capital") incurred in connection with Canterbury Capital's
investment in the Company. Canterbury Capital is a selling stockholder in the
offering being made hereby. See "Certain Transactions" and "Principal and
Selling Stockholders." The balance of the net proceeds to the Company of the
offering will be utilized for working capital and general corporate purposes.
See "Risk Factors -- Management Discretion Concerning Use of Proceeds; Ability
to Raise Additional Capital." Pending application for the foregoing uses, the
net proceeds will be invested in short-term U.S. Treasury securities,
certificates of deposit, commercial paper, investment grade, interest-bearing
securities and/or other short-term investments.
The Company will not receive any proceeds from the sale of the shares of
Common Stock by the Selling Stockholders. See "Principal and Selling
Stockholders."
DIVIDEND POLICY
The Company has never declared or paid dividends on its capital stock and
currently intends to retain all future earnings, if any, for use in the
operations of its business and does not anticipate paying any cash dividends in
the foreseeable future. The Company's future dividend policy will be determined
by its Board of Directors on the basis of various factors, including the
Company's results of operations, financial condition, capital requirements and
investment opportunities. The Company's existing senior and subordinated loan
agreements prohibit the payment of cash dividends, but, as noted under "Use of
Proceeds", except for the Company's revolving facility, all outstanding
indebtedness under such existing senior and subordinated loan agreements is to
be repaid upon consummation of this offering.
14
<PAGE> 18
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company as of September 26, 1997, adjusted to reflect (i) the sale by the
Company of 1,050,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $15.00 per share; (ii) the application of the estimated
net proceeds to be received by the Company from the sale of the Common Stock
offered by the Company hereby; (iii) repayment of a part of the current portion
of certain long-term debt subsequent to September 26, 1997 but prior to
consummation of this offering; and (iv) the increase in the authorized and
outstanding capital stock of the Company effected subsequent to September 26,
1997. See "Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 26, 1997
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
LaSalle Credit Agreement -- revolving facility...................... $ 1,920 --
Current portion of long-term debt(1)................................ 2,500 --
-------- --------
Total short-term debt....................................... $ 4,420 --
======== ========
Long-term debt:
TRW Subordinated Promissory Note.................................... $ 3,000 --
Canterbury Junior Subordinated Note Payable(2)...................... 2,826 --
LaSalle Credit Agreement............................................ 4,900 --
-------- --------
Total long-term debt........................................ 10,726 --
Stockholders' deficit:
Preferred Stock, $.10 par value; 5,000,000 shares authorized, as
adjusted; no shares issued and outstanding....................... -- --
Common Stock, $.01 par value; 20,000,000 shares authorized, as
adjusted; 9,616,667 shares issued and outstanding, actual;
10,666,667 shares issued and outstanding, as adjusted(3)......... 96 107
Additional paid-in capital.......................................... 7,104 20,441
Accumulated deficit(4).............................................. (26,982) (28,108)
Total stockholders' deficit................................. (19,782) (7,560)
-------- --------
Total capitalization........................................ $ (9,056) $ (7,560)
======== ========
</TABLE>
- ---------------
(1) See Note 6 of the Notes to Financial Statements.
(2) Includes unamortized discount of $173,750.
(3) Excludes 655,000 shares of Common Stock issuable upon exercise of options
that the Company intends to grant under the Company's 1997 Stock Option Plan
immediately prior to the commencement of this offering at an exercise price
equal to the initial public offering price per share of the Common Stock
being offered hereby. See "Management -- Stock Option Plan."
(4) In connection with the repayment of long-term debt, unamortized discount
(including the unamortized discount described in note (2) above) and
unamortized debt issuance costs aggregating approximately $1.1 million at
September 26, 1997 will be written off in the quarter in which the offering
is completed as an extraordinary item -- loss on early extinguishment of
debt.
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<PAGE> 19
DILUTION
The net tangible book value of the Company as of September 26, 1997 was
$(53,958,000), or $(5.61) per share. Net tangible book value per share
represents the amount of total tangible assets less total liabilities of the
Company, divided by the number of shares of Common Stock outstanding after
giving effect to the sale of the 1,050,000 shares of Common Stock offered by the
Company hereby (at an assumed initial public offering price of $15.00 per share
and after deduction of estimated underwriting discounts and commissions and
offering expenses payable by the Company). After giving effect to the
application of the estimated net proceeds to the Company from the initial public
offering, the pro forma net tangible book value of the Company at September 26,
1997 would have been $(40,783,000), or $(3.82) per share. This represents an
immediate increase in such net tangible book value of $1.79 per share to
existing stockholders and an immediate dilution of $18.82 per share to new
investors purchasing shares in this offering. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $15.00
------
Net tangible book value per share before offering......... $(5.61)
Increase attributable to new investors.................... 1.79
------
Pro forma net tangible book value per share after the
offering(1)............................................... (3.82)
------
Dilution per share to new investors......................... $18.82
======
</TABLE>
- ---------------
(1) Excludes 655,000 shares of Common Stock issuable upon exercise of options
that the Company intends to grant under the Company's 1997 Stock Option Plan
immediately prior to the commencement of this offering at an exercise price
equal to the initial public offering price per share of the Common Stock
being offered hereby. See "Management -- Stock Option Plan."
The following table summarizes, on a pro forma basis as of September 26,
1997, the differences between existing stockholders and new investors with
respect to the number of shares of Common Stock purchased from the Company, the
total consideration paid to the Company, and the average consideration paid per
share (based upon an assumed initial public offering price of $15.00 per share
and before deduction of the estimated underwriting discounts and commissions and
the expenses of the offering payable by the Company).
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION
----------------------- -------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- ------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............. 9,616,667 90.2% $ 7,200 31.4% $ 0.75
New investors..................... 1,050,000 9.8 15,750 68.6 $ 15.00
---------- ---------- ------- ----------
Total................... 10,666,667 100.0% $22,950 100.0%
========= ======== ======= ========
</TABLE>
- ---------------
(1) Sales by the Selling Stockholders in this offering will reduce the number of
shares of Common Stock held by existing stockholders to 5,166,667 , or
approximately 48.4% (4,341,667, or approximately 40.7%, if the Underwriters'
over-allotment option is exercised in full), of the total number of shares
of Common Stock outstanding, and will increase the number of shares of
Common Stock held by new investors to 5,500,000, or approximately 51.6%
(6,325,000, or approximately 59.3%, if the Underwriters' over-allotment
option is exercised in full), of the total number of shares of Common Stock
outstanding after this offering.
16
<PAGE> 20
SELECTED FINANCIAL DATA
The following selected financial information at September 30, 1995,
September 27, 1996 and September 26, 1997 and for each of the three fiscal years
in the period ended September 26, 1997 has been derived from the financial
statements of the Company that have been audited by Coopers & Lybrand L.L.P.,
independent auditors, included herein. The Predecessor Company revenue
information for each of the two fiscal years in the period ended December 31,
1993 and the revenue information for the six-month period ended June 30, 1994
(collectively, the "Predecessor Financial Information") was provided to the
Company by TRW at the time that the Company purchased certain of the assets of
TRW's credit reporting and monitoring business in October 1994 (the
"Acquisition"). The Predecessor Financial Information is unaudited, was not
prepared on the same basis as the post-Acquisition financial information for the
Company and, in the opinion of management, may not include all adjustments
necessary under generally accepted accounting principles ("GAAP") for a fair
presentation of the Company's operating results for the periods covered thereby.
The selected financial information set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
COMPANY
PREDECESSOR COMPANY ------------------------------------
----------------------------------------
FISCAL YEARS ENDED SIX-MONTH FISCAL YEARS
DECEMBER 31,(1)(2)(3) PERIOD ENDED ENDED SEPTEMBER(1)
------------------------- JUNE 30, ------------------------------------
1992 1993 1994(2)(3) 1995 1996 1997
----------- ----------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND NUMBER OF MEMBERS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
Membership fees............... $27,759 $24,976 $ 11,022 $ 12,540 $ 24,556 $ 38,039
Operating expenses
Marketing..................... * * * 4,854 22,605 14,197
Membership servicing.......... * * * 4,128 12,999 10,852
General and administrative.... * * * 8,102 10,214 10,135
------- ------- ------- ------- ---------- ----------
Total operating
expenses............. * * * 17,084 45,818 35,184
------- ------- ------- ------- ---------- ----------
Operating income (loss)......... * * * (4,544) (21,262) 2,855
Interest expense................ * * * 1,239 1,185 1,455
------- ------- ------- ------- ---------- ----------
Income (loss) before provision
for income taxes and
extraordinary item............ * * * (5,783) (22,447) 1,400
------- ------- ------- ------- ---------- ----------
Provision for income taxes...... * * * -- -- 61
Income (loss) before
extraordinary item............ * * * (5,783) (22,447) 1,339
------- ------- ------- ------- ---------- ----------
Extraordinary item: Loss on
early extinguishment of debt,
net of income tax benefit..... * * * -- -- 91
------- ------- ------- ------- ---------- ----------
Net income (loss)............... * * * $ (5,783) $ (22,447) $ 1,248
======= ======= ======= ======= ========== ==========
Net income (loss) per share..... * * * $ (0.60) $ (2.33) $ 0.13
Weighted average common and
common equivalent shares
outstanding................... * * * 9,616,667 9,616,667 9,616,667
OTHER DATA:
Total members at end of
period........................ (4) (4) (4) 613,000 828,000 1,385,000
</TABLE>
17
<PAGE> 21
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
---------------------------------------- COMPANY
---------------------------------------------
DECEMBER 31,(1)(2)(3) JUNE 30, SEPTEMBER 30, SEPTEMBER 27, SEPTEMBER 26,
1992 1993 1994(2)(3) 1995(1) 1996(1) 1997(1)
----------- ----------- ------------ ------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:(2)
Cash and cash
equivalents............. * * * $ 7,970 $ 1,613 $ 413
Total assets.............. * * * 33,093 27,552 41,412
Total liabilities......... * * * 34,876 51,782 61,194
Stockholders' deficit..... * * * (1,783) (24,230) (19,782)
</TABLE>
- ---------------
(1) The Company's fiscal year ends on the last Friday of September of each year.
The Company's quarterly periods are each comprised of 13 weeks and end on
the last Friday of each fiscal quarter. The first month of each quarter is
comprised of five weeks, and each of the two remaining months of the quarter
is comprised of four weeks. In 1993 and 1994, TRW's fiscal year ended on
December 31 of each such year.
(2) In October 1994, the Company purchased certain assets of its credit
reporting and monitoring business from TRW, which had conducted the business
under the name Consumer Information Services (the "CIS Business").
Accordingly, the Company does not have its own accounting records pertaining
to the CIS Business for periods prior to October 1994. The Company does
have, and has provided, revenue data for certain periods prior to the
Acquisition as set forth in the table above under Statement of Operations
Data; however, revenue and other data for the period from June 30, 1994 to
the date of the Acquisition is unavailable to the Company. Furthermore, for
the reasons discussed below, the Company believes that the revenue data
presented above does not provide a basis for evaluating any trend material
to the Company's financial condition or results of operations, is not
comparable to the revenue data presented for the periods after the
Acquisition and may not be indicative of the Company's future financial
condition or results of operations. GAAP requires the Company to defer
revenue received from members upon their becoming members or renewing their
memberships and to recognize revenue over the term of the memberships. The
Company's understanding, based upon the information obtained by the Company
from TRW at the time of the Acquisition, is that TRW did not produce
separate balance sheets in conducting the CIS Business. For this reason, the
Company is not in a position to furnish balance sheet data reflecting the
financial condition of the CIS Business for periods prior to October 1994.
The Company believes, based upon its own experience in conducting its
business, that regular periodic analysis of balance sheet data, including
deferred revenue and cash balances, is essential to assuring that revenues
are accurately calculated in accordance with GAAP. Furthermore, since the
Company does not have deferred revenue amounts available for the beginning
and ending balance sheet dates corresponding to the periods prior to the
Acquisition, the Company is unable to assess the comparability of the
revenue data for those periods. Moreover, the Company has no information
regarding and is unable to determine the manner in which TRW treated
important revenue recognition matters such as amortization of multi-year
memberships, treatment of membership cancellation allowances and recognition
of revenue for memberships that commence mid-month. Finally, it is the
Company's understanding that, for the pre-Acquisition periods shown above,
TRW operated the business in a manner that was intended to maximize cash
flow by focusing on revenues from membership renewals, while reducing
marketing costs by not actively seeking to acquire new members. The Company
believes that, because its strategy is to increase its membership base, the
revenue data for the pre-Acquisition period is not indicative of any trend
material to its business and is not comparable to the revenue data presented
above for post-Acquisition periods.
(3) Based upon information obtained by the Company from TRW at the time of the
Acquisition, the Company believes that: the CIS Business was operated as a
relatively small part of a division of TRW; the CIS Business was not treated
as a separate accounting entity by TRW; TRW did report, for internal TRW
management purposes, data concerning direct revenues, direct expenses,
certain allocated expenses and numbers of members; however, a number of
material expenses were not charged to the CIS Business and such omitted
expenses included interest expenses, the expenses of the credit reports
provided to members, pre-screening marketing expenses, executive office
expenses, finance and accounting function
18
<PAGE> 22
expenses, bonuses, benefits administration expenses, insurance expenses and
legal expenses, and may include other omitted expenses of which the Company
is unaware; and the foregoing omitted expenses could not at the time of the
Acquisition be separately compiled. Based upon the foregoing, the Company
believes that it cannot provide data regarding pre-Acquisition income or
expenses that is meaningful to investors.
(4) The Company has no membership data for 1992. The membership data provided to
the Company by TRW at the time of the Acquisition indicated membership
levels of 968,000, 798,000 and 648,000 at January 1993, July 1993 and July
1994, respectively. In connection with the Acquisition, TRW represented to
the Company that there were no fewer than 620,000 members as of August 8,
1994. The Company is unable to determine the methodology used by TRW to
generate this data and therefore is unable to verify the accuracy of this
data. As discussed above, it is the Company's understanding that TRW
operated the business in a manner that was intended to maximize cash flow by
focusing on revenues from membership renewals while reducing marketing costs
by not actively seeking to acquire new members. The Company's strategy is to
increase its membership base and therefore the Company believes that the
membership data presented in this footnote does not reflect any trends
material to the Company's business, is not comparable to post-Acquisition
membership data and is not indicative of the Company's future financial
condition or results of operations.
19
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BACKGROUND
The consumer credit information and monitoring business conducted by the
Company was started in 1986 by a division of TRW. In October 1994, the Company
commenced operations when it purchased certain assets of that business from TRW.
During the course of the fiscal year ended September 30, 1995, the Company
focused its efforts on establishing the Company's infrastructure, including
rental and relocation of the Company's headquarters, the establishment of
management systems and procedures and the hiring of additional customer service
representatives and related expenditures to expand the customer service center.
During such period, the Company did not actively pursue new membership
acquisitions to the extent necessary to offset the loss of non-renewing members.
As a result, its membership base remained flat at approximately 600,000 members.
During the fiscal year ended September 27, 1996, the Company engaged in a
strategy of unendorsed marketing, which entailed soliciting new members without
the benefit of a co-marketer endorsement. Management believes this strategy was
not successful and yielded poor consumer response rates because it lacked the
benefit of a co-marketer's brand name and endorsement and the associated credit
card billing and collection mechanism.
In October 1996, the Company hired a new management team which redirected
the Company's efforts toward an endorsed marketing strategy. Implementation of
this new strategy has resulted in more effective marketing campaigns, a
significant increase in the number of the Company's co-marketing relationships
and in its membership base. At September 26, 1997, the Company had 29
co-marketers, as compared to 13 at September 27, 1996. During this same period,
the Company's membership base increased to approximately 1.4 million members
from approximately 828,000 members. As a result, during the fiscal year ended
September 26, 1997, the Company generated net income of $1.2 million as compared
to a net loss of $22.4 million generated during the fiscal year ended September
27, 1996. See "-- Results of Operations".
The low consumer response rate resulting from the unendorsed marketing
campaigns conducted by the Company during fiscal year 1996 resulted in
significant losses for the Company. Under GAAP, the direct cost of a successful
marketing program is generally amortized over the initial membership term of the
members solicited in that campaign. However, because the costs of these
unendorsed marketing campaigns exceeded the revenues generated by such
campaigns, the Company was required by GAAP to write off the excess costs during
fiscal year 1996. Further contributing to the Company's losses for that fiscal
year were increased operating expenditures incurred in anticipation that the
unendorsed marketing campaigns would increase the Company's membership base and
revenues to levels significantly higher than those actually achieved.
OVERVIEW
The Company's revenues are principally derived from the sale of new
memberships and the renewal of existing memberships. New memberships are
typically offered with a free 30-day trial period. The Company's programs are
offered at prices ranging from $29 to $99 per year, depending upon the features
offered. As of the date of this prospectus, for each program, the fee charged
for renewal of a membership is the same as the fee charged for the initial
membership. The Company receives payment of the membership fees following
expiration of the 30-day trial membership period, but only recognizes revenue
with respect to the payment ratably over the membership period beginning at the
end of the free 30-day trial period.
If the membership is not cancelled during the trial period, the member is
charged the annual membership fee. During the course of the first year of
membership, a member is free to cancel his or her membership in the program for
a complete refund of the membership fee. Subsequently, the member may cancel his
or her renewed membership at any time for a pro rata refund of the membership
fee. If members elect to cancel multi-year memberships, they receive a full
refund during the first year of their membership, a 50% refund during the second
year of their membership and no refund if they cancel during the third year of
membership. The Company provides allowances for membership cancellations and
recognizes revenue net of such allowances. The Company's allowance policies are
based on historical results and are reviewed periodically. Historically, between
45% and 60% of new members cancel their memberships within their initial
membership
20
<PAGE> 24
term (including cancellations during the 30-day trial period). Of the remaining
40% to 55% of the new members who do not cancel during the initial membership
term, approximately 70% renew their membership for an additional membership
term. There can be no assurance that these cancellation rates will not increase
in the future. Membership fees refunded as a percentage of membership fees
collected during the year increased from 8.4% in 1995 to 21.4% in 1996 and
35.17% in 1997 (see Note 7 to the Financial Statements). This increase resulted
from the reduction of renewal revenues as a percentage of total revenues as the
Company increased its marketing activities which resulted in an increase in new
memberships as a percentage of total memberships. Cancellation rates with
respect to renewal memberships tend to be lower than those associated with
initial memberships, and, therefore, during periods when the Company increases
its membership base, membership fees refunded as a percentage of total
membership fees collected tends to increase. Furthermore, there was a change in
the mix of the Company's new business activity, with an increase in
telemarketing sales relative to direct mail which has comparatively lower
cancellation rates.
A substantial portion of the Company's total operating expenses consist of
costs incurred in connection with the acquisition of new members. These costs,
including the cost of commissions payable to co-marketers, the costs of printing
and mailing membership solicitation materials for each program and the costs of
providing new member fulfillment kits, are amortized ratably over the program's
initial one- or three-year membership period, respectively. Accordingly, since
the majority of the Company's costs associated with a membership are generally
recognized during the initial membership period, the Company generates higher
gross margins on revenue generated by renewal memberships. The Company
calculates its membership renewal rate for any period by dividing the number of
members who renew their membership during that period (and who remain members 90
days after such renewal) by the total number of members whose memberships are
due for renewal in that period and such calculation excludes all membership
cancellations prior thereto. As discussed above, since the Company's inception
in 1994, its membership renewal rate has remained relatively constant at
approximately 70%. There can be no assurance that this renewal rate will
continue in the future.
The Company's membership base has grown significantly in the last year. At
September 26, 1997, the Company had approximately 1.4 million members, as
compared to approximately 828,000 members at September 27, 1996. The size of the
Company's membership base is a significant factor in determining anticipated
membership renewal income.
In addition to overall economic and industry factors which can affect the
Company, the profitability of the Company's business depends in large part upon
(i) the net response rate for direct mail solicitations of new memberships, (ii)
the net sales per hour for telemarketing solicitations of new memberships, (iii)
the costs associated with direct mail and telemarketing solicitations, (iv) the
costs associated with the fulfillment of new memberships, (v) the adequacy of
reserves against membership cancellations, (vi) the continued renewal rate of
memberships in accordance with historical experience, and (vii) the maintenance
of selling, general and administrative expenses at acceptable levels relative to
the Company's revenues and income.
21
<PAGE> 25
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items on
the Company's Statement of Operations as a percentage of revenues:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
SEPTEMBER
----------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues
Membership fees............................................... 100% 100% 100%
Operating expenses
Marketing..................................................... 39 92 37
Membership servicing.......................................... 33 53 29
General and administrative.................................... 65 42 27
--- --- ---
Total operating expenses........................................ 137 187 93
--- --- ---
Operating income (loss)......................................... (37) (87) 7
Interest expense................................................ 10 5 4
--- --- ---
Income (loss) before provision for taxes........................ (47) (92) 3
Provision for income taxes...................................... -- -- --
--- --- ---
Income (loss) before extraordinary item......................... (47)% (92)% 3 %
=== === ===
</TABLE>
FISCAL YEARS ENDED SEPTEMBER 1997 AND 1996
Revenue. Revenue increased by 55% to $38.0 million in fiscal year 1997
from $24.6 million in fiscal year 1996 due to a net increase in the Company's
membership base and, to a lesser extent, an increase in the price charged by the
Company for its Credentials program. The Company's membership base increased to
approximately 1.4 million members at September 26, 1997 from approximately
828,000 members at September 27, 1996. The increase in members resulted from an
increase in the number of solicitations made by the Company through existing
co-marketers and the addition of new co-marketers, principally Chase and PNC
National Bank, N.A. ("PNC"). Approximately 85.5% of the increase in the
Company's membership base resulted from solicitations made to credit card
holders of Chase and Bank One. During this period, the Company mailed
approximately 42.2 million pieces of mail solicitations (excluding inserts and
envelope attachments mailed along with a co-marketer's correspondence) compared
to approximately 20.2 million pieces mailed during fiscal year 1996. Revenue
derived from membership renewals increased to an estimated $24.7 million in
fiscal year 1997 from an estimated $18.8 million in fiscal year 1996. As a
percentage of revenues, however, revenues derived from renewals decreased to
approximately 65% in fiscal year 1997 from approximately 76% in fiscal year
1996.
Marketing Expenses. Marketing expenses consist of membership solicitation
costs, including direct mail expenses such as printing and postage,
telemarketing expenses and commissions paid to co-marketers. Marketing expenses
decreased by 37% to $14.2 million in fiscal year 1997 from $22.6 million in
fiscal year 1996. As a percentage of revenues, marketing expenses decreased to
37% in fiscal year 1997 from 92% in fiscal year 1996. This decrease was due to
the fact that, in accordance with GAAP, certain marketing expenses associated
with unprofitable, unendorsed marketing campaigns were written off during fiscal
year 1996 rather than amortized over the initial membership term. Also written
off were expenses that could not be associated with specific marketing
campaigns. In addition, the decrease was caused by operating costs and severance
costs incurred in fiscal year 1996 related to an in-house telemarketing
department which the Company began during early fiscal year 1996 and
subsequently discontinued in late fiscal year 1996. This decrease was also due
to lower per member solicitation costs resulting from reductions achieved in per
unit mailing and printing costs and more favorable response rates.
Membership Servicing Expenses. Membership servicing expenses consist of
the costs of providing customer service, data processing costs, and the costs of
providing members with inquiry notices, newsletters,
22
<PAGE> 26
additional credit reports and new member fulfillment kits. Membership servicing
expenses decreased by 17% to $10.9 million in fiscal year 1997 from $13.0
million in fiscal year 1996. As a percentage of revenues, membership servicing
expenses decreased to 29% in fiscal year 1997 from 53% in fiscal year 1996. This
decrease was due to the fact that certain expenses associated with the provision
of new member fulfillment kits related to the unprofitable unendorsed marketing
campaigns were written off during fiscal year 1996 rather than amortized over
the initial membership term.
General and Administrative Expenses. General and administrative expenses
consist of personnel and facilities expenses associated with the Company's
executive, sales, marketing, finance, program and co-marketing account
functions, costs associated with new product development, as well as
depreciation of fixed assets and amortization of intangibles, including
memberships purchased from TRW. General and administrative expenses decreased by
1% to $10.1 million in fiscal year 1997 from $10.2 million in fiscal year 1996.
In fiscal year 1996, expenses included a one-time write off of fees related to
an aborted refinancing. The absence of a similar write off in fiscal year 1997
was offset in fiscal year 1997 by higher costs associated with new product
development, depreciation of the Company's new computer system, and hiring of
additional personnel to implement the Company's endorsed marketing strategy. As
a percentage of revenue, general and administrative expenses decreased to 27% in
fiscal year 1997 from 42% in fiscal year 1996. This decrease is largely
attributable to the increase in revenues in fiscal year 1997 relative to fiscal
year 1996.
Interest Expense. Interest expense consists of financing charges related
to notes payable, the Company's revolving bank loan facility, subordinated loan
facility and equipment leases. Interest expense increased by 23% to $1.5 million
for fiscal year 1997 from $1.2 million during fiscal year 1996. The increase
reflects higher levels of borrowing to finance increased marketing activity and
prior year operating losses.
Provision for Income Taxes. For the fiscal year ended September 26, 1997,
the Company reported a provision for income taxes of $61,000 (the amount
equivalent to the income tax benefit of the extraordinary loss on early
extinguishment of debt). No additional income tax provision was made during this
period due to the utilization of net operating loss carryforwards. The Company
did not record a provision for income taxes in fiscal year 1996 due to the
incurrence of a net loss. The Company did not record a benefit for income taxes
during this period since the Company provided a full valuation allowance on the
related deferred income tax asset.
FISCAL YEARS ENDED SEPTEMBER 1996 AND 1995
Revenue. Revenues increased by 96% to $24.6 million in fiscal year 1996
from $12.5 million in fiscal year 1995 due primarily to the effect of accounting
for the Company's purchase of the membership base from TRW. In fiscal year 1995,
the Company was not able to recognize any portion of the membership fees
collected by TRW prior to the Acquisition relating to memberships that continued
after the Acquisition. Ordinarily, the Company would have recognized the revenue
generated by those memberships over the full membership period. This increase in
the Company's revenue was also due to an increase in the Company's membership
base primarily resulting from an increase in new marketing programs. The
Company's membership base increased to approximately 828,000 members at
September 27, 1996 from approximately 613,000 members at September 30, 1995.
During fiscal year 1996, the Company mailed approximately 20.2 million pieces of
mail solicitations compared to approximately 7.0 million pieces mailed during
fiscal year 1995. Revenue derived from membership renewals increased to an
estimated $18.8 million in fiscal year 1996 from an estimated $10.5 million in
fiscal year 1995. As a percentage of revenues, revenues derived from renewals
decreased to approximately 76% in fiscal year 1996 from approximately 84% in
fiscal year 1995.
Marketing Expenses. Marketing expenses increased by 366% to $22.6 million
in fiscal year 1996 from $4.9 million in fiscal year 1995. As a percentage of
revenues, marketing expenses increased to 92% in fiscal year 1996 from 39% in
fiscal year 1995. This increase was due to the fact that, in accordance with
GAAP, certain expenses related to the unprofitable unendorsed marketing programs
were written off during fiscal year 1996 rather than amortized over the initial
membership term. The increase is also attributable to operating costs and
severance costs incurred in fiscal year 1996 related to an in-house
telemarketing department which the Company began during early fiscal year 1996
and subsequently discontinued in late fiscal year 1996. In
23
<PAGE> 27
addition, this increase was due to an increase in both costs associated with the
solicitation of new members through direct mail and telemarketing channels as
well as commissions paid to co-marketers.
Membership Servicing Expenses. Membership servicing expenses increased by
215% to $13.0 million in fiscal year 1996 from $4.1 million in fiscal year 1995.
In fiscal year 1995, these expenses did not reflect the full cost of servicing
the membership base as a result of an accounting provision related to the
purchase of the membership base from TRW. Since the Company was obligated to
service these members for the remaining portions of their respective membership
terms, a provision relating to these costs was established and $4.2 million of
related expenses were charged to this provision. As a percentage of revenues,
membership servicing expenses increased to 53% in fiscal year 1996 from 33% in
fiscal year 1995. This increase resulted from the fact that certain expenses
associated with the provision of new member fulfillment kits related to the
unendorsed marketing campaigns were written off during fiscal year 1996 rather
than amortized over the initial membership term. In addition, this increase was
due to an increase in the Company's membership base during fiscal year 1996.
General and Administrative Expenses. General and administrative expenses
increased by 26% to $10.2 million in fiscal year 1996 from $8.1 million in
fiscal year 1995. The increase was due to the write off of fees and other
expenses related to an aborted refinancing, hiring of additional personnel in
the unendorsed marketing area and consulting fees incurred during fiscal year
1996. As a percentage of revenues, general and administrative expenses decreased
to 42% in fiscal year 1996 from 65% in fiscal year 1995. This decrease was
substantially attributable to the increase in revenue in fiscal year 1996
relative to fiscal year 1995.
Interest Expense. Interest expense decreased by 4% to $1 million in fiscal
year 1996 from $1.2 million in fiscal year 1995 due to the repayment of a
portion of the outstanding principal due under the Company's term loan.
Provision for Income Taxes. The Company made no provision for income taxes
for fiscal years 1996 and 1995, respectively, due to its incurrence of net
losses in such fiscal years. The Company did not record a benefit for income
taxes in either year since it provided a full valuation allowance for the
related deferred income tax asset.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly statements of
operations data for each of the eight quarters in the period ended September 26,
1997 and the percentage of the Company's revenues represented by each item in
the respective quarter. In the opinion of the Company's management, this
unaudited information has been prepared on a basis consistent with the audited
Financial Statements appearing elsewhere in the Prospectus and includes all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the information set forth therein when read in conjunction with
the Financial Statements and related Notes thereto. The operating results for
any quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------
FISCAL YEAR 1996 FISCAL YEAR 1997
------------------------------------- -------------------------------------
DEC. 29 MAR. 29 JUNE 28 SEP. 27 DEC. 27 MAR. 29 JUNE 27 SEP. 26
1995 1996 1996 1996 1996 1997 1997 1997
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues............................. $4,630 $5,528 $6,933 $ 7,465 $8,357 $9,463 $9,774 $10,445
Operating income (loss).............. (4,353) (5,458) (4,681) (6,770) 930 1,005 187 733
Net income (loss).................... (4,653) (5,730) (5,002) (7,062) 461 627 (171) 331
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
FISCAL YEAR 1996 FISCAL YEAR 1997
-------------------------------------- -------------------------------------
DEC. 29 MAR. 29 JUNE 28 SEP. 27 DEC. 27 MAR. 29 JUNE 27 SEP. 26
1995 1996 1996 1996 1996 1997 1997 1997
------- ------- ------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues........................... 100% 100% 100% 100% 100% 100% 100% 100%
Operating income (loss)............ (94) (99) (68) (91) 11 11 2 7
Net income (loss).................. (100) (104) (72) (95) 6 7 (2) 3
</TABLE>
24
<PAGE> 28
The Company's quarterly revenues, expenses and operating results have
varied significantly in the past and are likely to vary significantly from
quarter to quarter in the future. Factors which may affect the Company's
financial results include responses to membership solicitations, cancellations
and renewals of memberships, market acceptance of the Company's and its
co-marketers' existing and new programs, the demand for credit monitoring
services such as those offered by the Company, the timing of the Company's
investments in program development, increased costs associated with maintenance
and expansion of operations, and competitive pressures on the Company's business
generally.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $4.5 million and $4.4 million in
fiscal years 1997 and 1996, respectively. In fiscal year 1997, the use of cash
reflected increases in member solicitations and in receivables. In fiscal year
1996, the use of cash reflected the results of unprofitable unendorsed marketing
programs. The Company's capital expenditures in fiscal year 1997 and fiscal year
1996 were $1.7 million and $1.4 million, respectively. These expenditures, for
both periods, primarily resulted from the implementation of the Company's new
computer system. The Company has budgeted approximately $0.8 million in capital
expenditures for fiscal year 1998 to expand its telecommunications and computer
capabilities to service an expanding membership base.
The Company had cash and cash equivalents of approximately $0.4 million at
September 26, 1997. The Company is currently negotiating the terms of and an
increase in its revolving bank line of credit from $2.5 million to $10.0 million
to be effective upon completion of the offering made hereby. The existing line
of credit bears interest based upon LIBOR/prime rate and expires on September
30, 1999. At September 26, 1997, $1.9 million was outstanding under the then
existing line of credit. In October 1997, such outstanding amounts were repaid
in full. Borrowings on the Company's revolving line of credit are based upon the
level of eligible accounts receivable.
In connection with the repayment of long-term debt, unamortized discount
and unamortized debt issuance cost aggregating approximately $1.1 million at
September 26, 1997 will be written off in the quarter in which the offering is
completed as an extraordinary item -- loss on early extinguishment of debt.
The Company intends to use its existing cash balances, funds generated from
operations and borrowings available under the Company's revolving bank line of
credit to address its cash requirements, and to fund the development of new
membership programs and new marketing channels. The Company intends to use the
net proceeds to the Company from this offering to repay certain outstanding
indebtedness. The Company believes that, as the volume of revenues attributable
to renewal members increases, such increase will help to generate net cash from
operating activities, and thereby minimize its need for financing from outside
sources. The Company believes that the net proceeds to the Company from this
offering, together with its cash balances following completion of the offering,
funds generated from operations, and borrowing available under the Company's
revolving bank line of credit, will be sufficient to meet its capital and
liquidity requirements for the next 36 months, barring unforeseen changes in the
Company's business.
NET OPERATING LOSS CARRYFORWARDS
As of September 26, 1997, the Company had net operating loss carryforwards
for Federal and state purposes of approximately $23,199,312 and $21,057,969,
respectively. The net operating loss carryforwards begin to expire after the
years ended 2010 and 2003, respectively. Because of the "change in ownership"
provisions of the Tax Reform Act of 1986, the loss carryforwards will be subject
to an annual limitation regarding their utilization against future taxable
income.
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BUSINESS
OVERVIEW
Credentials Services International, Inc. is a leading direct marketer of
credit information and monitoring membership programs to consumers. The Company
believes that it provides value-added programs that enable consumers to monitor
the accuracy of their personal credit data that is collected and held by credit
reporting bureaus. This information allows consumers to respond on an informed
basis to credit decisions made by providers of credit such as mortgage lenders,
consumer finance companies, auto loan providers, credit card providers, banks
and other lending institutions. Through its relationship with Experian Inc., one
of the three major credit reporting bureaus, the Company provides this
information to its members in a readily understandable, readable format and
offers members notification of significant events, such as credit inquiries and
the entry of negative credit data in the member's credit file, which might
affect their ability to obtain credit.
The Company markets its membership programs to consumers using direct
marketing techniques, consisting of direct mail and telemarketing campaigns
conducted through endorsed co-marketing relationships with major credit card
issuers that have a large customer base, such as banks, retailers and oil
companies. Through its co-marketing relationships, the Company markets its
programs to the credit card customer bases of nationally-known organizations
such as The Chase Manhattan Bank USA, N.A., Bank One, N.A. and its affiliates
(including the recently merged First USA Bank credit card customer base), PNC
National Bank, N.A., Service Merchandise and Sun Company, Inc. (Sunoco). During
the fiscal year ended September 26, 1997, the Company increased the number of
its co-marketers to 29 from 13 at September 27, 1996. During this period, the
Company's membership base increased to approximately 1.4 million members from
approximately 828,000 members. In addition, the Company entered into a new
co-marketing agreement with the credit card division of Citibank, N.A. in
October 1997 and commenced initial direct marketing activities to Citibank's
credit card holders in November 1997.
The consumer credit information and monitoring business conducted by the
Company was started in 1986 by a division of TRW. In October 1994, the Company
purchased certain assets of the business from TRW. In September 1996, TRW sold
its credit bureau and credit reporting business, and that business was
subsequently renamed Experian Inc. At the time of the Acquisition in 1994, the
Company entered into a ten-year contract with TRW pursuant to which the Company
has access to Experian's credit reports and daily access to the national
Experian credit file. The Company's information systems are integrated with
Experian's database and systems, enabling the Company to automatically notify a
member when an inquiry is made into the member's personal credit file. The
Company believes that this feature constitutes a substantial competitive
advantage with respect to developing co-marketing relationships and building its
membership base.
CREDIT CARD ENHANCEMENT INDUSTRY BACKGROUND
The Company believes that membership service programs can be of substantial
value to members who purchase the programs, to credit card issuer businesses
which co-market these programs and to the vendors whose services are offered
through the program. Benefits to co-marketers include the ability to build
consumer loyalty with existing customers, as well as to generate additional,
predictable revenues such as commission and fee income. For product and service
vendors, membership service programs represent an opportunity to generate
additional revenue with minimal incremental marketing costs for products and
services.
Historically, a substantial number of the businesses which utilized
membership service programs have been issuers of credit cards. More recently,
however, other businesses, including banks, retailers, insurance companies,
mortgage servicing companies, utility companies, regional telephone companies,
cable operators and non-profit organizations have also begun to offer service
programs as a means of offering value-added products and services to their
customers. In many cases, these businesses lack the core competency to
successfully design, market and manage membership programs. As a result, these
businesses seek to outsource such functions to companies which specialize in
such membership programs and can apply advanced database
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systems to capture, process and store consumer and market information, and that
can provide effective programs.
Based upon industry statistics, the Company estimates that in the United
States in 1996 there are over 1.4 billion credit cards issued, over 147 million
credit card holders, and the Company estimates that there are approximately 88
million credit card enhancement memberships outstanding. In addition to
membership programs such as those provided by the Company, credit card
enhancement products and services include various types of insurance sold to
credit card holders, memberships in discount purchasing clubs and organizations,
credit card registration services, travel clubs, dining clubs, shopping clubs
and auto clubs. The Company also estimates, based upon its own membership data
and industry statistics, that as of the end of fiscal year 1996 there were over
3.3 million credit information and monitoring memberships, such as those offered
by the Company and its competitors. The Company believes that the size of the
credit card holder population represents a potential opportunity for continued
growth of its membership base because less than 3.0% of credit card holders have
purchased a credit information membership program. Moreover, the Company
believes that long-term growth in consumer credit potentially should cause
growth in the Company's core business in two distinct ways, first by providing
additional channels by which the Company's products may be marketed to
consumers, and second by increasing consumer demand for credit-related
information.
BUSINESS STRATEGY
The Company seeks to become the leading provider of credit information and
monitoring programs to consumers and to continue to build its membership base
with its core programs and the introduction of new programs. The key elements of
the Company's strategy are as follows:
Grow and Maintain Membership Base By Offering Premium Quality
Programs. The Company's objective is to build and maintain its membership base
by continuing to provide its core value-added consumer credit programs. The
Company believes that its programs are superior to the programs offered by its
competitors because it provides its members with: (i) immediate notification of
inquiries into the member's credit file; (ii) free unlimited credit reports; and
(iii) additional credit reports in a manner that avoids a credit inquiry being
reported in a consumer's credit file which may adversely affect the consumer's
creditworthiness.
Expand Distribution Channels. The Company intends to expand its network of
co-marketing relationships to include additional major banks, retailers and oil
companies, as well as to aggressively develop innovative new distribution
channels. The Company believes that its strategy of focusing its marketing
efforts on endorsed co-marketing channels enables the Company to achieve higher
rates of consumer response to its new membership solicitations by leveraging the
considerable brand equity and goodwill enjoyed by major co-marketers.
Furthermore, the Company believes that there are additional distribution
channels that offer the opportunity to expand the base of potential members
beyond the scope of consumer credit card holders. Potential co-marketing
partners may include mortgage servicing companies, insurance companies and
utility companies, such as regional telephone companies. The Company also
believes the World Wide Web may become a viable distribution channel for its
membership programs and is exploring that potential distribution opportunity. In
addition, the Company currently monitors the international expansion efforts of
its vendor partners to seek opportunities to expand its membership base
internationally.
Develop New Programs. The Company intends to continue to develop and
market new programs to current and new members. The Company has test marketed
and is continuing to develop a program targeted to small businesses which would
provide those businesses with credit information and monitoring services to
enable them to better evaluate and monitor their own credit as well as the
credit of other businesses, particularly their vendors, suppliers and customers.
This program, named Business Credentials, was tested by the Company in July and
August 1997 using in-market testing techniques targeted at certain types of
businesses selected by the Company. Preliminary response rates received and
evaluated by the Company have been favorable. The Company anticipates that it
will continue to invest in further development, refinement and preliminary
marketing of this program in fiscal year 1998. In addition, the Company is
presently test marketing a number of consumer-oriented membership programs.
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Provide Superior Levels of Customer Service. The Company is committed to
maintaining what it believes is a superior level of customer service, as
reflected by membership renewal rates and satisfaction among members and
co-marketers. The Company believes that its high level of customer satisfaction
is driven primarily by three principal factors: (i) convenience, consisting of
the timeliness and frequency of communications from the Company and
accessibility of its customer service representatives ("CSRs"); (ii) the
professionalism of its CSRs, consisting of their courtesy, expertise and
helpfulness; and (iii) report functionality, consisting of the usability of the
reports, enhanced by clean, jargon-free plain English. The Company believes that
this customer satisfaction is also evidenced by the Company's relatively high
renewal rates as compared to its competitors and that this level of customer
satisfaction reinforces its relationships with its co-marketers. The Company's
highly-trained CSRs are available to customers via toll-free telephone service
during extended business hours, and members may order additional credit reports
via an interactive voice response unit seven days a week and 24 hours a day. The
Company carefully monitors customer service benchmarks such as call response
time and length of telephone calls.
Develop and Use State-of-the-Art Technical Solutions. The Company intends
to continue developing and using advanced technological methods to solicit new
members, collect and market credit data and provide membership services.
Currently, the Company, through its membership database management system, can
model and analyze co-marketer lists to identify likely members. The Company
utilizes proprietary software which integrates the information collected from
Experian, its co-marketers and its membership data base. In addition, the
Company's strategy includes investing in state-of-the-art technology in other
key areas of its business, such as data base modeling and image processing for
the Company's membership service center.
CREDIT INFORMATION AND MONITORING PROGRAMS
The Company's program portfolio currently includes Credentials(R), Monitor,
VIP, Business Credentials and other related products. The Company's programs had
approximately 1.4 million members at September 26, 1997.
The Company's principal program, a one-year Credentials membership, is sold
for $49.00. The Company also offers certain variations of its core Credentials
program at prices ranging from $29.00 to $99.00 per membership and a three-year
Credentials membership for $98.00. For each program, the fee charged for renewal
of a membership is the same as the fee charged for the initial membership.
The Company's principal program, Credentials, provides subscribing members
with:
- personalized, easy-to-read Experian credit reports, presented in a plain
English format;
- automatic notification of credit inquiries directed to Experian;
- quarterly notice of any negative information submitted to the customer's
Experian credit file;
- a quarterly newsletter covering credit related and personal finance
issues;
- ongoing informational assistance from the Company's trained service
representatives;
- unlimited additional copies of the member's Experian credit report via
mail or facsimile; and
- upon request, a personal financial profile.
The Company believes that this information is useful to a significant
segment of the consumer population, including those who are interested in the
status of their personal creditworthiness as well as those concerned about the
accuracy of their credit reports. For example, consumers seeking a home mortgage
may want to review their credit history before applying for a mortgage loan. In
addition, the credit monitoring feature of the Credentials program is an
effective tool for detecting certain types of credit fraud.
The Company also offers certain variations to its core Credentials program.
The Monitor program offers personalized credit reports as well as the daily
automatic notification of credit inquiries, and quarterly notice of any negative
information submitted to a customer's Experian credit file. The Company
encourages the sale of Monitor memberships to spouses of current Credentials
members. The Company also offers an enhanced
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program entitled VIP for consumers interested in receiving a credit report which
includes credit data from all three of the major credit reporting bureaus.
The Company believes that its core programs are superior to the programs
offered by its competitors for the following reasons: (i) inquiry notification
service -- the integration of the Company's information systems with Experian's
systems enables the Company to automatically notify members when inquiries into
their credit file are made. The Company believes that its competitors are not
currently able to provide consumers with this feature and that this feature
represents a substantial competitive advantage to the Company; (ii) free
unlimited additional credit report requests -- unlike its competitors, the
Company does not limit the number of credit reports a member may receive; (iii)
classification of credit report requests -- the initial credit report request
and subsequent requests for additional copies of a member's credit reports are
not recorded as credit inquiries which may otherwise adversely affect a
consumer's creditworthiness. The Company believes that such requests made
through services offered by competitors of the Company are recorded in other
areas of the credit report and may be counted as credit inquiries in the
evaluation of a consumer's creditworthiness; and (iv) superior customer
service -- members have access to trained Company representatives through a
toll-free telephone service to discuss information that appears in their
personal credit file. The Company's customer service representatives have the
ability to transfer a member directly to the Experian Premier Service group for
immediate assistance, and in the event that a member suspects fraudulent
activity, the Company's customer service representatives notify Experian's fraud
group, which initiates an investigation. The Company's competitors do not have
this direct transfer capability.
Members generally subscribe for renewable one- or three-year memberships in
the Company's programs. The multi-year memberships are sold on a discounted
basis. When consumers agree to enroll in a program, in most instances they
receive a 30-day trial membership. During this time, the member may use the
program's services without obligation, as outlined in a membership brochure
received by mail along with a membership card and membership identification
number. The brochure outlines in detail the benefits which the service offers
and contains toll-free numbers which may be called to access service benefits
and information. In the event that a consumer elects not to participate in the
service, he or she can call a toll-free number during the trial period to cancel
the service without charge. If the membership is not cancelled during the trial
period, the consumer's credit card is charged the annual membership fee. During
the course of the first year of membership, a member is free to cancel a
membership in the program for a complete refund. In subsequent years, the member
may cancel his or her membership and receive a pro rata refund of his or her
annual membership fees. Multi-year members receive a full refund in year one, a
50% refund in year two and no refund if they cancel their membership in year
three.
CO-MARKETING RELATIONSHIPS
The Company's strategy is to establish and maintain long-term relationships
with co-marketers that have a large customer base. The Company seeks to
understand co-marketer business objectives and to determine how those objectives
can be addressed by the membership service programs which the Company offers.
The Company arranges with co-marketer financial institutions, retailers and
other credit card issuers to market membership programs to such co-marketers'
individual customers. Co-marketers generally receive commissions on initial and
renewal memberships. The Company's agreements with these co-marketers typically
grant the Company the right to continue providing membership services directly
to such co-marketers' individual account holders even if the co-marketer
terminates the contract, provided that the co-marketer is still entitled to
receive its commission. The Company generally may not re-solicit those members
who cancel or fail to renew their membership. At September 26, 1997, the Company
had 29 credit card issuer co-marketers, comprised of 20 banks, 6 retailers and 3
oil companies.
Approximately 30.4% of the Company's revenues for the fiscal year ended
September 26, 1997 were attributable to members solicited from the customer
lists provided by its two largest co-marketers: approximately 21.1% from
customer lists provided by Bank One (including the recently merged First USA
customer base) and approximately 9.3% from customer lists provided by Chase. No
other co-marketer represented more than 5% of the Company's revenues. At
September 26, 1997, approximately 27% of the Company's members consisted of
members who were originally solicited with the co-marketer endorsement of Chase
and approximately 25% of the Company's members consisted of members who were
originally solicited with the
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co-marketer endorsement of Bank One. For the fiscal year ended September 26,
1997, no other co-marketer with whom the Company conducted membership
solicitation campaigns accounted for more than 5% of the Company's members.
Certain of these and other co-marketer relationships are governed by agreements
which generally may be terminated without cause by either party upon 60 to 90
days' notice without penalty and upon 30 days' notice in the event of an
uncorrected material breach.
SALES AND MARKETING
The Company solicits substantially all of the members for its programs
through direct marketing methods, including direct mail and telemarketing. The
Company outsources its direct marketing and telemarketing activities to third
party vendors. During the fiscal year ended September 26, 1997, approximately
42.2 million pieces of direct mail (excluding inserts and envelope attachments
mailed along with a co-marketer's correspondence) were mailed and approximately
3.5 million telemarketing calls were completed.
The Company's membership base is predominantly comprised of members
acquired through endorsed marketing channels, such as credit card issuers. The
Company believes this marketing methodology represents the most effective way of
increasing the Company's membership base for two reasons. First, the
co-marketers' endorsement helps sell the Company's programs by leveraging the
co-marketers' brand equity with its pre-existing customers. Endorsed direct mail
solicitations are conducted using stationery that bears the co-marketer's name
and logo and include an introductory letter signed by the co-marketer offering
the product, which are mailed either with the co-marketer's billings to its
credit card holders or by separate mailings that bear the co-marketer's name and
endorsement. Endorsed telemarketing solicitations are conducted by using the
co-marketer's name to offer the program. Second, billing membership fees to a
member's credit card issued by the co-marketer is an efficient billing and
collection mechanism.
The Company obtains substantially all of the information necessary to its
marketing efforts from customer lists provided by its co-marketers. The Company
inputs these customer lists into its management system database to model,
analyze and identify likely members. Co-marketers provide the lists to the
Company for use in marketing a specific program that has been pre-approved by
the co-marketer. As a result, the Company's ability to market a new program to
an existing customer base or an existing program to a new customer base is
dependent on obtaining approval from the co-marketer.
FULFILLMENT
The Company receives consumer responses to its program solicitations from
its telemarketers and, for direct mail, from consumers. The data provided by the
consumer is entered into the Company's data systems and a membership file is
established. This data, consisting of the member's name, address, social
security number and date of birth, is used to access the member's credit file
contained in Experian's consumer database and to generate the member's credit
report. This credit report data then is converted into a readable format by
Experian and transmitted back to the Company. The Company provides its data in a
tape format to its print vendor who prints the consumer credit reports, prepares
the new member fulfillment kit and mails it to the member via first-class mail.
Typically, this process takes between four and seven business days.
MEMBER SERVICES
The Company believes that providing high quality service to its members is
an important component in encouraging membership renewals, creating goodwill
with the public sufficient to generate increased new members and strengthening
the member's affinity for the relevant co-marketer. This customer satisfaction
enhances the Company's relationship with key co-marketers. Accordingly, the
Company maintains state-of-the-art customer service systems designed to maximize
customer satisfaction through rapid and efficient provision of member services.
The Company maintains a membership service facility in Plano, Texas, with a
total of approximately 90 customer service representatives at September 26, 1997
who are available to answer members' inquiries. For the convenience of its
members, the Company maintains toll-free telephone service during extended
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business hours and provides an interactive voice response system so members may
order additional credit reports 24 hours a day, seven days a week. The Company
has implemented procedures to ensure that an inquiring member will be able to
speak with a customer service representative within approximately 20 seconds of
having made a request to do so. Furthermore, customer service representatives
have the ability to transfer a member directly to the Experian Premier Service
group for immediate assistance and, in the event that a member suspects
fraudulent activity, the Company's customer service representatives notify
Experian's fraud group, which initiates an investigation. Management believes
that the Company's competitors do not have the ability to directly transfer
their members to any of the major credit reporting bureaus. Prior to working
with members, all customer service representatives are required to complete a
classroom training course covering topics on the credit industry, related
regulation, credit reporting, the Company's programs and services and its
systems and techniques for working with members. Upon successful completion of
this classroom work, each new customer service representative begins to work
with members while an experienced customer service representative monitors his
or her performance, offering guidance and advice. The performance of customer
service representatives is regularly monitored by management.
Through its training programs, its telecommunications systems and its
software, the Company seeks to provide members with friendly, prompt and
effective answers to questions relating to its products. The Company also works
closely with the customer service staffs of its co-marketers to ensure that
their representatives are knowledgeable in matters relating to the programs
offered by the Company.
MANAGEMENT INFORMATION SYSTEMS
The Company has made substantial investments in its management information
systems to allow it to operate its business more efficiently and productively.
The Company utilizes an IBM AS/400 computer system to process and manage its
membership data. The Company has also developed proprietary software that is
designed to accept its co-marketers' customer databases for review, analysis and
modeling in order to identify potential members and implement effective
marketing programs. The Company's data processing and order fulfillment
processes, as well as its links with vendors, enables the Company to mail member
fulfillment kits to new members within seven business days of a customer
request. The system also receives confirmation of billing data from the
Company's merchant processors on a regular basis, permitting the Company to
update the status of each member.
The Company has recently installed software which has been designed to deal
with potential problems arising as a result of the Year 2000 issue. In addition,
management believes that the business organizations upon which it relies for the
rendering of its services either have resolved or will resolve the Year 2000
issue prior to or during 1999. The Company does not currently anticipate that it
will incur significant expense or business interruptions as a result of the Year
2000 issue, but there can be no assurance in that regard.
COMPETITION
The Company's principal competitor is CUC which offers credit reporting
membership programs with certain features similar to those provided by the
Company's programs. CUC is a direct marketing company primarily engaged in
providing shopping, travel, discount and related types of benefits to its
customers. Based on industry data from 1996, credit programs accounted for
approximately 3.0% of CUC's membership base. Additionally, CUC competes with
many potential co-marketers in its various business lines, such as travel-
related services.
In addition to this direct competition, the Company also encounters
competition for co-marketer endorsements from other direct marketing businesses.
Because agreements between co-marketers and program providers are often
exclusive with respect to a particular service, potential co-marketers may be
prohibited from entering into agreements with the Company to promote a program
if the features provided by the Company's program are similar to, or overlap
with, the features offered by an existing program of a competitor. There can be
no assurance that the Company's competitors will not increase their emphasis on
programs similar to those offered by the Company and more directly compete with
the Company, that new competitors will not enter the market, that competitors
will not increase the compensation they provide to co-marketers to induce such
co-marketers to enter into agreements, or that other businesses will not
themselves introduce competing programs. Such potential competitors include
major credit card issuers,
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including the Company's co-marketers. Potential competitors also include major
credit bureau reporting services, including Experian, which would have
significant competitive advantages such as access to credit data at minimal
cost. There can be no assurance that the Company's current or potential
competitors will not provide programs comparable or superior to those provided
by the Company at lower membership prices or adapt more quickly than the Company
to evolving industry trends or changing market requirements. In addition,
alliances among competitors may emerge and rapidly acquire significant market
share. Many of the Company's current and prospective competitors, including CUC,
have substantially larger customer bases and greater financial and other
resources than those available to the Company. Increased competition may result
in price reductions, increased fees payable to co-marketers, reduced
profitability and loss of market share, any of which could materially adversely
affect the Company's business, financial condition and results of operations.
There can be no assurance that the Company will be able to compete effectively
against future and current competitors.
Experian provides substantially all of the credit information which the
Company furnishes to its members. Although neither Experian nor the other credit
reporting bureaus provide the credit monitoring services currently offered by
the Company, Experian and the other credit bureaus currently provide a credit
report directly to any consumer at the consumer's request at the rate of
approximately $8.00 per report (except in states where local legislation
provides the consumers are entitled to a free credit report upon their written
request). See "-- Government Regulation; Adverse Publicity -- State Fair Credit
Reporting Acts." There can be no assurance that Experian or the other credit
bureaus will not begin to more aggressively market their services to consumers
by initiating price reductions or advertising campaigns targeted to consumers
and that such actions will not adversely affect the Company's business,
financial condition and results of operations or require the Company to reduce
prices for certain of its programs in order to remain competitive. On August 13,
1997, Experian launched a program to offer consumers the opportunity to receive
their credit reports directly over the Internet. Although two days later
Experian announced that it was suspending this program due to certain
operational and security problems, there can be no assurance that this, or
similar programs, will not be implemented by Experian or other credit reporting
bureaus or that competition from such programs will not adversely affect the
Company's business, financial condition and result of operations. Experian and
the other credit reporting bureaus would have significant competitive advantages
over the Company in providing such reports or services, such as access to credit
data at minimal cost.
Currently, management believes that the Company enjoys several competitive
advantages, including (i) the high entry costs associated with starting a
competing business; (ii) the fact that none of the Company's competitors offers
daily monitoring of a member's credit file; and (iii) the Company's unique
contractual relationship with Experian.
The Company believes that the principal competitive factors in the
membership service industry include the ability to identify, develop and offer
innovative service programs, the quality of service programs offered, price and
marketing expertise. The Company believes that its ability to compete also
depends in part on a number of competitive factors outside its control,
including the ability to hire and retain employees, the development by others of
service programs that are competitive with the Company's service programs, the
price at which such competitors offer comparable service programs and the extent
to which such competitors are responsive to customer needs. In addition, the
introduction or announcement by competitors of the Company of new programs
similar to those offered by the Company could render the Company's existing
programs uncompetitive or obsolete, or result in a delay or decrease in orders
for the Company's existing programs as co-marketers or customers evaluate new
programs or select new programs as an alternative to the Company's existing
programs. Therefore, the announcement or introduction of new programs by
competitors of the Company could have a material adverse affect on the Company's
business, financial condition and results of operations.
Providers of membership programs also compete for the limited access
provided by co-marketers to their customers against other businesses engaged in
direct marketing activities, such as telemarketing and direct mail. In recent
years, there have been significant advances in new forms of direct marketing,
such as the development of interactive shopping and data collection through
television, the Internet and other media. Many industry experts predict that
electronic interactive commerce, such as shopping and information
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exchange through the World Wide Web, will proliferate significantly in the
foreseeable future. To the extent it occurs, such proliferation could materially
change the economics of acquiring members for membership programs. Although the
Company is exploring the potential of what it believes are the most promising
forms of direct marketing, there can be no assurance that the Company would be
able to adapt to a material change in the economics of its business or that such
change would not have a material adverse effect on the Company's business,
financial condition or results of operations. See "Risk Factors -- Competition"
and "-- Reliance on Communications and Information Systems; Technology Risks."
GOVERNMENT REGULATION
Federal Telephone Consumer Protection Act; Federal Telemarketing and
Consumer Fraud and Abuse Prevention Act. One of the principal methods the
Company uses to market its programs is telemarketing. The telemarketing industry
has become subject to an increasing amount of Federal and state regulation as
well as general public scrutiny in the past several years. The Federal Telephone
Consumer Protection Act of 1991 limits the hours during which telemarketers may
call consumers and prohibits the use of automated telephone dialing equipment to
call certain telephone numbers. The Federal Telemarketing and Consumer Fraud and
Abuse Prevention Act of 1994, and Federal Trade Commission ("FTC") regulations
promulgated thereunder, prohibit deceptive, unfair or abusive practices in
telemarketing sales. Both the FTC and state attorneys general have authority to
prevent telemarketing activities that constitute "unfair or deceptive acts or
practices." In addition, some states have enacted laws and others are
considering enacting laws targeted directly at telemarketing practices, and
there can be no assurance that any such laws, if enacted, will not adversely
affect or limit the Company's current or future telemarketing activities.
Although the Company does not control the telemarketing firms which it engages
to market the Company's programs, compliance with these regulations is generally
the responsibility of the Company, and the Company could be subject to a variety
of enforcement or private actions for any failure to comply with such
regulations. The risk of noncompliance by the Company with any rules and
regulations enforced by a Federal or state consumer protection authority may
subject the Company or its management to fines or various forms of civil or
criminal prosecution, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors -- Government Regulation; Adverse Publicity."
Federal Fair Credit Reporting Act. The Fair Credit Reporting Act ("FCRA")
became effective in 1971. Extensive amendments to the FCRA became effective
October 1, 1997. The FCRA establishes a set of requirements that "consumer
reporting agencies" must follow in the conduct of their business. A "consumer
reporting agency" means any person who regularly engages in assembling consumer
credit information for the purpose of furnishing consumer reports to third
parties. The FCRA imposes numerous requirements on consumer reporting agencies
including restrictions on the permissible uses of consumer reports and the
contents of consumer reports, as well as requirements relating to disclosures of
reports to consumers, the form of and charges for such disclosures, and the
reinvestigation procedure that must be followed when a consumer disputes an item
contained in his or her report. While the Company is not a "consumer reporting
agency" within the meaning of the FCRA and therefore is not subject to the FCRA,
the Company is required by its contract with Experian to comply with the FCRA
and the interpretations rendered by the FTC. Should the Company become subject
to the FCRA and fail to comply with its provisions, the Company could be subject
to various civil and administrative sanctions, the imposition of which could
have a material adverse effect on the Company. The Company could also be subject
to administrative enforcement actions initiated by the FTC. Violations of the
FCRA may constitute unfair or deceptive acts or practices in commerce in
violation of the Federal Trade Commission Act and the Company could be subject
to penalties thereunder. In addition, if the Company were found to have
committed a knowing violation of the FCRA which constitutes a pattern or
practice of violations, the FTC may institute an action to recover a civil
penalty of up to $2,500 per violation. Finally, actions for injunctions or for
damages may also be initiated under the FCRA by the state attorneys general.
State Fair Credit Reporting Acts. Slightly over half of the states have
enacted statutes governing the operations of consumer credit reporting agencies,
and some of the state statutes contain provisions that are different from the
FCRA. An example of such a state statute was enacted in Colorado through the
adoption of
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<PAGE> 37
the Colorado Fair Credit Reporting Act (the "Colorado Act") which went into
effect August 1, 1997. The Colorado Act increases the notification requirements
for credit reporting agencies and lenders upon the addition of adverse items to,
or three inquiries into, an individual's credit report. The law provides that
Colorado consumers are entitled to a free credit report upon their written
request and mandates an annual mailing from each of the national systems and
Colorado reporting agencies alerting consumers to that fact. The Company is not
in a position to know the number of Colorado consumers who will request a free
copy of their credit report, or if consumers will regard such reports as
substitutes for the Company's services. There are five other states (Vermont,
Maryland, Georgia, Massachusetts and New Jersey) that have also enacted
legislation requiring the issuance of free credit reports to consumers upon
request. The Company derives approximately 15% of its members from states with
such legislation. Other states (including California) are currently considering
the enactment of such legislation. There can be no assurance that other states
in which more of the Company's members reside will not adopt similar
legislation. In the event that other states enact legislation requiring issuance
of free credit reports, the value to consumers of the programs the Company
provides could be materially reduced. Legislation requiring free issuance of
credit reports could materially and adversely affect the Company's business,
financial condition and results of operation.
Credit Repair Organization Regulations. Both Federal and state laws
regulate the activities of "credit repair organizations." While the Company is
not currently a credit repair organization and has no present plans to become a
credit repair organization, it is possible that credit repair laws may be
amended at some time in the future to include organizations such as the Company.
Under the Federal Credit Repair Organizations Act (the "Credit Repair Act"), a
credit repair organization is generally defined as any person who uses any
instrumentality of interstate commerce or the mails to sell, provide, or perform
any service, in return for money for the express or implied purpose of improving
any consumer's credit record, credit history, or credit rating, or providing
advice or assistance to any consumer with regard to any such activity or
service.
The Credit Repair Act imposes certain restrictions on the activities and
contracts of credit repair organizations and requires that specific disclosures
be made to consumers. Any credit repair organization that fails to comply with
the Credit Repair Act can be subject to civil liability for both actual and
punitive damages and attorney's fees and can be subject to an enforcement action
by the FTC. Additionally, state attorneys general have the authority to bring
actions against credit repair organizations who violate the Credit Repair Act.
In addition to the Credit Repair Act, at least 36 states and the District
of Columbia have their own statutes regulating "credit services organizations."
Most of the state statutes define credit services organizations similarly. For
example, the Delaware statute, which is representative of most of the other
state statutes, generally defines a credit services organization as any person
who, with respect to the extension of credit by others and in return for the
payment of money, provides any of the services, advice or assistance with
respect to improving a buyer's credit record, history or rating or obtaining an
extension of credit for a buyer. The requirements imposed by the state statutes
generally include a prohibition against charging the buyer a service fee until
the credit services organization has performed all of the services it agreed to
perform, unless it posted a surety bond with the state; certain disclosure and
contractual requirements; and, in some states, a mandatory surety bond and
registration.
In general, a credit services organization that violates a state statute
can be subject to an injunction, civil actions for damages and civil and
criminal penalties. For example, in Delaware, a credit services organization
that violates that state's statute can be subject to an action for damages by an
injured buyer and can be prosecuted for a Class B misdemeanor. Additionally, a
buyer or the attorney general may bring an action to enjoin the credit services
organization's activities. In the District of Columbia, a "consumer credit
service organization" that violates the District's law may be fined not more
than $500 per violation and/or imprisoned for not more than a year. In addition,
civil fines, penalties and fees may be imposed. A consumer injured by a
violation may also bring an action for actual damages, including reasonable
attorney's fees and costs, against the consumer credit service organization.
Awards may also be entered for punitive damages. In addition, at least one
state, Georgia, makes merely operating a "credit repair services organization" a
misdemeanor.
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<PAGE> 38
EMPLOYEES
As of September 26, 1997, the Company employed 157 persons on a full-time
basis and six persons on a part-time basis. None of the Company's employees are
represented by a labor union. The Company believes that its employee relations
are good.
FACILITIES
The Company leases its 20,740 square foot headquarters facility in Orange,
California. The Company also leases its 15,452 square foot membership service
facility in Plano, Texas, which is primarily a call center for customer service
representatives and operations. These leases expire in December 1998 and
September 2001, respectively. The Company recently exercised an option to expand
its membership service facility in Plano, Texas, by 5,000 additional square feet
and is currently contemplating an extension of the lease for its headquarters
facility which may include an expansion of the Company's leased space, depending
upon the Company's anticipated needs after 1999. The Company believes that these
facilities will be adequate for its anticipated future business requirements.
LEGAL PROCEEDINGS
From time to time, the Company may be involved in litigation or in
settlement proceedings relating to claims arising out of its operations in the
normal course of business. The Company is not currently a party to, nor is any
of its property the subject of, any legal proceedings, the adverse outcome of
which, individually or in the aggregate, could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company is a party to a lawsuit pending in the United States District
Court for the Central District of California, Southern Division, entitled
Credentials Services International, Inc., et. al. v. John P. Ferry, et. al.,
USDC Case No. SACV 96-960 AHS (EEX) (the "Federal Action"). The lawsuit arose
out of the August 15, 1996 dismissal for cause of the Company's then President
and Chief Executive Officer, John P. Ferry, and its then Chief Financial
Officer, John N. Rees. In September 1996, Messrs. Ferry and Rees filed an
arbitration demand against the Company with the American Arbitration Association
(the "AAA") under the AAA Employment Dispute Arbitration Rules, each asserting a
breach of their respective employment agreements (the "Arbitration"). On or
about October 11, 1996, the Company filed a complaint against Messrs. Ferry and
Rees initiating the Federal Action. A first amended complaint was filed on
November 20, 1996, asserting claims for relief for breach of fiduciary duty,
constructive fraud, violation of California Corporations Code Section 309,
negligence, conversion, injunctive relief and interference with prospective
economic advantage. In February 1997, the court denied a motion by Messrs. Ferry
and Rees seeking to compel arbitration, and the Arbitration was stayed. On or
about April 7, 1997, Messrs. Ferry and Rees filed a cross-complaint in the
Federal Action alleging 22 causes of action against the Company, as well as
eight other cross-defendants. The Company subsequently filed a motion to dismiss
Messrs. Ferry and Rees' cross-complaint, and on or about July 22, 1997, the
court dismissed Messrs. Ferry and Rees' entire cross-complaint, giving them 30
days to file an amended complaint. On or about August 14, 1997, Messrs. Ferry
and Rees filed a first amended counter-complaint asserting 21 causes of action
against the Company and the other cross-defendants, including breach of
employment agreement, breach of the covenant of good faith and fair dealing,
breach of statutory obligation, fraud, constructive fraud, negligent
misrepresentation, wrongful termination in violation of public policy,
defamation, conversion, abuse of process, breach of fiduciary duty and
negligence, seeking unspecified damages, an accounting, declaratory relief and
certain injunctive relief. The causes of action arise out of alleged breaches of
the respective employment agreements of Messrs. Ferry and Rees, alleged
defamatory statements made by certain executive officers and directors of the
Company about Messrs. Ferry and Rees, an alleged breach of fiduciary duty
arising out of their status as limited partners in CIS Acquisition Partners,
L.P. and the 1996 refinancing of the Company and alleged breaches of good faith
and other duties owed to Messrs. Ferry and Rees by the Board of Directors of the
Company in connection with the termination of their employment and the conduct
of the business prior thereto. On or about August 29, 1997, the Company filed a
motion to dismiss the first amended counter-complaint. This motion is currently
pending before the Court. Discovery is continuing in the matter. The Company
believes that it has valid defenses to all
35
<PAGE> 39
of the causes of action alleged in the first amended counter-complaint of
Messrs. Ferry and Rees, and it intends to vigorously prosecute and defend this
action. On or about September 22, 1997, Mr. Ferry filed an ex parte application
for a temporary restraining order (the "Application") seeking an order
prohibiting the Company and Lincolnshire Equity Fund, L.P. ("LEF"), from
transferring, assigning, selling, pledging, encumbering, or hypothecating Mr.
Ferry's Class B limited partnership interest in CIS Acquisition Partners, L.P.
(the "Class B Interest") and from declaring that Mr. Ferry owes any payment or
is in default under the terms of the $200,000 promissory note made by Mr. Ferry
in favor of LEF. In 1994, Mr. Ferry borrowed $200,000 from LEF for the purpose
of funding his purchase of his Class B Interest, and the note evidences that
borrowing. The maturity date of the note was September 30, 1997 and, as of the
date of this Prospectus, Mr. Ferry has not made payment to LEF. The note was
secured by a pledge of Mr. Ferry's Class B Interest. On or about October 6,
1997, the Company and LEF filed their opposition to the Application. The court
has not yet ruled on the Application. On November 21, 1997, Messrs. Ferry and
Rees filed a motion for a preliminary injunction seeking to enjoin the offering
being made hereby on the grounds, among others, that CIS Acquisition Partners,
L.P., in which they claim to have an aggregate 18% limited partnership interest,
breached fiduciary duties to them in connection with the refinancings described
in the Prospectus under the heading "Certain Transactions," which resulted in
the issuance of common stock to CSI Investment Partners II, L.P., and that these
transactions constituted fraudulent conveyances. The Company believes that these
allegations lack merit and that Messrs. Ferry and Rees are not entitled to
injunctive relief. The Company has filed a motion with the court to oppose the
requested injunction and a request for an expedited hearing. The Federal Action
is at an early stage of proceedings; however, the Company presently believes
that this action will not have a material adverse effect upon the Company or its
financial condition or results of operations.
The Company, among others, is a party to a lawsuit in the Superior Court
for the State of California, County of Orange, against Steven Richards, James O.
Saloma and Joyce Richards entitled Lincolnshire Equity Fund, L.P., et. al. v.
Steven Richards, et. al., Case No. 781247 (the "State Court Action") which was
instituted by the Company, Lincolnshire Equity Fund, L.P., a privately held
Delaware limited partnership, and Lincolnshire Management, Inc. on or about July
2, 1997. The complaint in the State Court Action alleges causes of action for
libel, slander of title, trade libel, intentional interference with contract,
indemnity, breach of fiduciary duty, breach of contract and unjust enrichment.
Messrs. Richards and Saloma were employees and officers of the Company whose
employment was terminated for cause in September 1996. The complaint also
alleges that Joyce Richards, Mr. Richards' wife, was an executive search
consultant retained by the Company without disclosure of the conflict of
interest (her relationship to an officer of the Company) to the Company's Board
of Directors. On or about August 4, 1997, Messrs. Richards and Saloma filed a
cross-complaint in the State Court Action asserting causes of action for breach
of contract, breach of statutory obligations, indemnity, conversion and
declaratory relief, all directed to issues concerning their compensation by the
Company. The Company believes that it has valid defenses to all of the causes of
action alleged in the cross-complaint, and it intends to vigorously prosecute
and defend this action. The State Court Action is at an early stage of
proceedings; however, the Company presently believes that this action will not
have a material adverse effect upon the Company or its financial condition or
results of operations.
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<PAGE> 40
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Thomas J. Maloney.................... 44 Chairman and Director(1)
Charles Caudle....................... 68 Honorary Vice Chairman
David C. Thompson.................... 42 President, Chief Executive Officer and Director
John Adams........................... 52 Executive Vice President, Member Services
Michael Cossel....................... 56 Executive Vice President, Operations
M. Gerard Keehan..................... 58 Executive Vice President, Marketing and Director
Vineet Pruthi........................ 52 Executive Vice President and Chief Financial Officer
James M. Rothe....................... 55 Executive Vice President, Sales
Donald J. Shea, Jr. ................. 39 Senior Vice President, New Products
C. Kenneth Clay...................... 33 Director(2)
Nicholas Dunphy...................... 49 Director(2)
William A. Hall...................... 65 Director(1)
</TABLE>
- ---------------
(1) Member of Compensation Committee of the Board of Directors.
(2) Member of Audit Committee of the Board of Directors.
Thomas J. Maloney has served as a director of the Company since July 1995.
In August 1996, Mr. Maloney was elected Chairman, President and Chief Executive
Officer of the Company. He served as President and Chief Executive Officer of
the Company until July 1997 and continues as Chairman of the Company. Mr.
Maloney has been a Managing Director of Lincolnshire Management, Inc., since
April 1993. Mr. Maloney is a founding partner of the law firm of Maloney,
Mehlman & Katz, counsel to the Company and to CSI Partners II. See "Certain
Transactions." From October 1994 to November 1994, Mr. Maloney was Vice
President and Treasurer of Cybergenics Corporation, a Delaware corporation
("Cybergenics") engaged in the business of marketing nutritional supplements. In
November 1994, Mr. Maloney was appointed Assistant Secretary and elected to the
Board of Directors of Cybergenics. In August 1996, a petition under the Federal
bankruptcy laws was filed by Cybergenics. Mr. Maloney holds a B.A. degree from
Boston College and a J.D. from Fordham University.
Charles Caudle has been Honorary Vice Chairman of the Company since July
1997. Prior to his appointment as Honorary Vice Chairman, Mr. Caudle served as
Chief Operating Officer of the Company from August 1996 to December 1996 and as
Executive Vice President and National Sales Manager of the Company from July
1995 to August 1996. From 1994 to 1996, Mr. Caudle served as Executive Vice
President of MBNA in special sales. From 1984 to 1994, Mr. Caudle served in
various operational and marketing management capacities at Visa, USA.
Previously, he was Chief Executive Officer of Barnett Credit Services
Corporation, the revolving credit arm of Barnett Banks of Florida. Mr. Caudle
has served as a director of several industry groups. Mr. Caudle attended West
Virginia University.
David C. Thompson joined the Company in October 1996 as Chief Financial
Officer. From November 1996 to July 1997, Mr. Thompson served as the Company's
Chief Operating Officer. In July 1997, he was elected President and Chief
Executive Officer of the Company. Mr. Thompson was elected a member of the Board
of Directors in December 1996. Prior to joining the Company, Mr. Thompson served
in various senior financial management positions, most recently as Senior Vice
President and Chief Financial Officer of SafeCard Services, Inc., a subsidiary
of the Ideon Group, from 1994 to 1996. From 1992 to 1994, Mr. Thompson was Vice
President and Chief Financial Officer of the bank card division of Fidelity
Investments. From 1983 to 1992, Mr. Thompson served in various senior financial
management positions at American Express. Mr. Thompson began his career as a
C.P.A. with Price Waterhouse from 1977 to 1983.
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<PAGE> 41
Mr. Thompson holds a B.S. degree in Accounting from Florida State University and
an M.B.A. from New York University.
John Adams joined the Company as Executive Vice President, Member Services,
in October 1996. Prior to joining the Company, Mr. Adams worked in various
senior operating positions in the credit industry, including for 16 years at TRW
where he assisted in establishing the CIS Business with responsibility for
developing systems, customer service and fulfillment capabilities, and two years
at Equifax. From 1992 to 1996, Mr. Adams founded and operated a direct mail
servicing company. Mr. Adams attended Claremont College.
Michael Cossel has been Executive Vice President, Operations, of the
Company since September 1996. Prior to joining the Company, from 1993 to 1994,
he served as a management consultant with Coopers & Lybrand's Financial Advisory
Services Group in the Washington, D.C. area. From 1988 to 1993, Mr. Cossel
served as the Chief Financial Officer and Administrative Officer of Beverage
Capital Corporation, a major Baltimore-based producer of private label and
national brand beverages. Previously, Mr. Cossel performed the dual roles of
Chief Financial Officer and Chief Operating Officer at Credit Card Services
Corporation. Mr. Cossel has a B.S. degree in Economics from Villanova University
and an M.B.A. from American University.
M. Gerard Keehan has been Executive Vice President, Marketing, of the
Company since January 1997, and a member of the Board of Directors of the
Company since July 1997. Prior to that time, Mr. Keehan was Director of
Marketing at TRW from 1985 to 1994, where he assisted in establishing the CIS
Business. Prior to joining TRW, Mr. Keehan was Senior Vice President and Chief
Administrative Officer for Transamerica Assurance in Southern California.
Vineet Pruthi joined the Company in November 1996 as Chief Financial
Officer. Prior to joining the Company, from 1991 to 1996, Mr. Pruthi was an
independent consultant in financial, due diligence and international business
matters. From 1982 to 1991, Mr. Pruthi served in various senior financial
management positions, including as Chief Financial Officer at Murjani, a
privately owned international group of companies. Mr. Pruthi is a Chartered
Accountant and has an M.B.A. from Rutgers Graduate School of Management.
James M. Rothe has been Executive Vice President, Sales, of the Company
since 1995. From 1991 to 1995, Mr. Rothe was President of Membership Development
Inc., which developed and sold the CreditWatch credit reporting service in
partnership with Trans-Union Corporation. From 1986 to 1991, Mr. Rothe was Vice
President of Sales for the CIS Business of TRW. Previously, Mr. Rothe was
Regional Manager for Dun & Bradstreet in Southern California. Mr. Rothe attended
the University of Nebraska.
Donald J. Shea, Jr., has been Senior Vice President, New Products, of the
Company since December 1996. From 1994 to 1996, Mr. Shea was Vice President,
Client Services, of Eire Partners, Inc. From 1990 to 1994, while he was an
Account Supervisor at DDB Needham Worldwide, Mr. Shea worked with many national
consumer goods companies, such as Frito-Lay and S.C. Johnson Wax, advertising a
variety of established products and services and launching new products. Mr.
Shea holds a B.A. degree from Georgetown University and an M.B.A. from
Northwestern University (Kellogg Graduate School of Management).
C. Kenneth Clay has served as a director of the Company since September
1997. Mr. Clay is a Director of Lincolnshire Management, Inc., and has been
employed at Lincolnshire since 1995. From 1992 to 1995, Mr. Clay was the Chief
Financial Officer of LINQ Industrial Fabrics, Inc., a manufacturer and marketer
of polypropylene-based industrial fabrics. Prior to that time, he was an officer
of the Bank of New York Commercial Corporation. Mr. Clay is also an officer and
director of Peripheral Computer Support, Inc., a company in which Lincolnshire
Equity Fund, L.P., is indirectly the controlling shareholder. Mr. Clay holds a
B.S. degree from Brigham Young University and an M.B.A. from The University of
Texas at Austin.
Nicholas Dunphy has served as a director of the Company since March 1997.
Mr. Dunphy is the co-founder and managing partner of Canterbury Capital, LLC,
which is the general partner of Canterbury Mezzanine Capital, L.P. Mr. Dunphy
was employed by Barclays Bank from 1980 to 1995. Prior to founding the Barclays
Mezzanine Group in 1989, Mr. Dunphy held a number of senior executive positions
in Barclays
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<PAGE> 42
Project Finance, Utility and Leveraged Finance groups. Before joining Barclays,
Mr. Dunphy qualified as a Chartered Accountant in Canada and subsequently spent
five years with Toronto Dominion Bank. Mr. Dunphy received a B.Sc. degree from
Manchester University in England and an M.B.A. from York University in Canada.
William A. Hall has served as a director of the Company since July 1997.
Mr. Hall is the President and Chief Executive Officer of Sight & Sound
Distributing Company, an audio and video software distributor, having founded
this company in 1984. Since 1988, Mr. Hall has also been the owner of W.A.H.
Management/Consulting, consultants in strategic management to companies in the
home entertainment industry. Since April 1993, Mr. Hall has also been Vice
Chairman of, and a majority stockholder in, U.S. Animation, Inc., which provides
digital colorization and composition of animation for feature films, television,
commercials and interactive video games. Mr. Hall is a shareholder of
Lincolnshire Management, Inc. Mr. Hall is also a director of 3DO, an
international computer software company, Northward Press, a manufacturer of
music software, and Chromium Graphics, a specialty printing company.
The Company's Board of Directors currently consists of six directors. Each
of the Company's directors serve three-year terms which are staggered to provide
for the election of approximately one-third of the board members each year.
The Board of Directors is divided into three classes, with two to three
directors in each class. The Class I directors are Messrs. Clay and Hall, the
Class II directors are Messrs. Thompson and Keehan, and the Class III directors
are Messrs. Maloney and Dunphy. The terms of the Class I directors expire in
1998, the terms of the Class II directors expire in 1999, and the terms of the
Class III directors expire in 2000. Directors hold office until their terms
expire and their successors have been elected and qualified. Executive officers
of the Company are appointed by, and serve at the discretion of, the Board of
Directors. There are no family relationships among any of the directors or
executive officers of the Company.
Following completion of the offering, the Company's Board of Directors
intends to appoint at least one additional director who will not be an officer
or an employee of the Company or its affiliates and will be included among the
Class II directors.
Directors do not currently receive any fees for service on the Board of
Directors, but are reimbursed for their expenses for each meeting attended.
EXECUTIVE COMPENSATION
The following table summarizes all compensation paid to the Company's Chief
Executive Officer and to the Company's five other most highly compensated
executive officers other than the Chief Executive Officer whose total annual
salary and bonus exceeded $100,000, for services rendered in all capacities to
the Company during the fiscal year ended September 26, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------- ------------
OTHER RESTRICTED
NAME AND ANNUAL STOCK ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION AWARDS COMPENSATION
- ------------------------------------------- -------- ------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
David C. Thompson.......................... $164,400 -- -- (2) $ 63,952(3)
President and Chief Executive Officer(1)
Charles Caudle............................. 250,000 -- -- (2) 33,478(3)
Honorary Vice Chairman
Thomas J. Maloney.......................... 240,000 -- -- -- 3,000(5)
Chairman(4)
Michael Cossel............................. 152,470 -- -- (2) 11,098
Executive Vice President, Operations
James M. Rothe............................. 126,540 $32,225 -- (2) 1,807
Executive Vice President, Sales
Vineet Pruthi.............................. 124,808 -- -- (2) 18,284(5)
Executive Vice President and Chief
Financial Officer
</TABLE>
39
<PAGE> 43
- ---------------
(1) Mr. Thompson served as Chief Financial Officer of the Company from October
1996 to November 1996 and as Chief Operating Officer from November 1996 to
July 1997.
(2) The officers named in the table above (other than Mr. Maloney) hold shares
of restricted stock of the Company in the following amounts: Mr. Thompson,
278,090 shares; Mr. Caudle, 8,557 shares; Mr. Cossel, 64,175 shares; Mr.
Rothe, 81,288 shares; and Mr. Pruthi, 124,071 shares. The shares are subject
to the vesting provisions of Common Stock Agreements which provide that each
of the above-named officer's shares vest in accordance with a schedule which
provides that one-third of such interest vests in April 1998, an additional
one-third vests in April 1999 and the remaining one-third vests in April
2000, contingent upon each individual's continued employment with the
Company. The Company does not believe that these shares of restricted stock
had any value in excess of the consideration payable by the named executive
officers for such shares at the date of grant in October 1996. Based upon
the assumed initial public offering price of $15.00 per share, the value of
the restricted stock held by Messrs. Thompson, Caudle, Cossel, Rothe and
Pruthi was $4,171,350, $128,355, $962,625, $1,219,320 and $1,861,065,
respectively, at September 26, 1997. See "Certain Transactions."
(3) Includes relocation expenses consisting of selling expenses relating to the
sale of their prior residences and temporary living costs for Mr. Thompson
and Mr. Caudle in the amounts of $63,410 and $25,000, respectively, paid by
the Company.
(4) Mr. Maloney served as Chief Executive Officer of the Company from August
1996 to July 1997.
(5) Includes temporary living expenses for Mr. Maloney and Mr. Pruthi in the
amounts of $3,000 and $12,000, respectively, paid by the Company.
The Company anticipates that it may increase the base salary of certain of
the above-named executives during the 1998 fiscal year; however, the Company
does not expect that in the aggregate such increases will materially increase
the Company's general and administrative expenses in fiscal year 1998. Mr.
Maloney's annual salary will be reduced to $150,000 per year following
completion of this offering.
EMPLOYMENT AGREEMENTS
The following summary descriptions of the material provisions of the
employment agreements between the Company and the named executive officers are
qualified in their entirety by reference to such agreements, a copy of each of
which is filed as an exhibit to the Registration Statement of which this
Prospectus forms a part.
David C. Thompson, President and Chief Executive Officer, and the Company
entered into an Employment Agreement dated as of May 9, 1997. Under this
agreement, the Company has agreed to pay Mr. Thompson an annual base salary of
$180,000, plus an annual bonus of $25,000. This agreement expires May 9, 2000.
The Company may terminate the agreement earlier for cause without penalty or,
without cause, upon payment of an amount equal to Mr. Thompson's base salary for
the lesser of twelve months or the remainder of the employment term. Mr.
Thompson has agreed not to compete with the Company during the employment term
and for 18 months thereafter.
Charles Caudle, Honorary Vice Chairman, and the Company entered into an
Employment Agreement dated as of August 15, 1996. Under this agreement, the
Company has agreed to pay Mr. Caudle an annual base salary of $250,000. This
agreement expires August 15, 1999 and is automatically renewed for a one-year
period unless either party provides the other with 60 days' written notice. The
Company may terminate the agreement earlier for cause without penalty or,
without cause, upon payment of an amount equal to Mr. Caudle's base salary for
the lesser of twelve months or the remainder of the employment term. Mr. Caudle
has agreed not to compete with the Company during the employment term and for
two years thereafter.
Michael Cossel, Executive Vice President, Operations, and the Company
entered into a Letter Agreement dated August 16, 1995. Under this agreement, the
Company has agreed to pay Mr. Cossel an annual salary of $140,000, plus an
annual bonus of up to $45,000 based on the performance of the Company. The
Company has agreed to pay to Mr. Cossel a severance package of up to one year's
salary if he is terminated without cause, which severance may be extended
another six months at the Company's discretion. Mr. Cossel has agreed not to
compete with the Company in any manner for twelve months after any payment is
made to him by the Company.
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<PAGE> 44
James M. Rothe, Executive Vice President, Sales, and the Company entered
into a Letter Agreement dated September 5, 1995 which was amended by memorandum
on January 6, 1997. Under this agreement, as amended, the Company has agreed to
pay Mr. Rothe an annual base salary of $140,000. In the event of termination
without cause, twelve months salary and benefits will be paid.
Vineet Pruthi, Executive Vice President and Chief Financial Officer, and
the Company entered into an Employment Agreement dated as of December 3, 1996.
Under this agreement, the Company has agreed to pay Mr. Pruthi an annual base
salary of $155,000, plus an annual bonus of $25,000. The agreement expires
December 2, 1999. The Company may terminate the agreement earlier for cause
without penalty or, without cause, upon payment of an amount equal to Mr.
Pruthi's base salary for the lesser of twelve months or the remainder of the
employment term. Mr. Pruthi has agreed not to compete with the Company during
the employment term and for two years thereafter.
Each of the Employment Agreements with Messrs. Thompson, Caudle, Rothe and
Pruthi contain provisions relating to bonuses in addition to those described
above. Such bonuses are payable if, in the discretion of the Board of Directors,
a bonus pool is established. The amount of the bonus pool, if any, and the
amount to which each of the above-named officers may become entitled, if any, is
to be determined annually in the sole discretion of the Board of Directors.
In making such bonus determinations, the Board may consider various
factors, such as the attainment of certain financial goals by the Company,
including attainment of specified levels of operating cash flow, EBITDA, and
number of memberships and other criteria such as improvement in management and
administrative procedures and training of Company personnel that are related to
each employee's respective employment responsibilities. As of the date of this
Prospectus, no bonus pool for the Company's executive officers has been
established by the Board of Directors and by reason of that fact and the
contingencies to which these bonuses are subject, the Company cannot now
determine the possible amount of any such bonus that the Board of Directors may
award in the future.
STOCK OPTION PLAN
The Company's 1997 Stock Option Plan (the "Stock Option Plan") was adopted
by the Board of Directors and approved by the Company's stockholders in November
1997. Under the Stock Option Plan, a total of 800,000 shares of Common Stock
have been reserved for issuance upon the exercise of stock options and related
stock appreciation rights ("SARs"). The Company intends to grant options to
purchase shares of Common Stock under the Stock Option Plan to Messrs. Maloney
and Thompson (100,000 shares each), Rothe (75,000 shares), Pruthi (50,000
shares), and Caudle and Cossel (10,000 shares each) at an exercise price equal
to the initial public offering price of the shares of Common Stock offered
hereby. See "-- Executive Compensation." The following description of the
material provisions of the Stock Option Plan is qualified in its entirety by
reference to the Stock Option Plan, a copy of which is filed as an exhibit to
the Registration Statement of which this Prospectus forms a part.
The Stock Option Plan provides that the number of shares of Common Stock
subject thereto and the number of outstanding stock options and their exercise
prices are to be appropriately adjusted in the event of a reorganization,
consolidation, reclassification, recapitalization, combination or exchange of
shares of Common Stock, stock split, reverse split, stock dividend or rights
offering. Shares of Common Stock allocated to options and/or SARs which have
expired or been terminated may be reallocated to other options and/or SARs under
such plan.
Pursuant to the Stock Option Plan, the Company may grant (i) incentive
stock options ("ISOs"), as that term is defined in the Internal Revenue Code of
1986, as amended (the "Code"), (ii) nonqualified stock options ("NSOs"), and
(iii) SARs to officers, directors and key employees of the Company. The Stock
Option Plan provides for administration by the Board of Directors of the Company
or by a Committee of the Board of Directors which selects the optionees,
authorizes the grant of options and determines the exercise price and other
terms of the options, including the vesting schedule thereof, if any, provided,
however, that the vesting schedule will be no less than three years from the
date of grant. Currently, the Stock Option Plan is administered by the Board of
Directors, but the Stock Option Plan provides that it may be administered by a
41
<PAGE> 45
Compensation Committee or another committee established in the future by the
Board of Directors for that purpose.
The per share exercise price of each ISO granted under the Stock Option
Plan must be at least 100% of the fair market value of a share of Common Stock
(and not less than 110% of the fair market value in the case of any optionee of
an ISO who beneficially owns more than 10% of the total combined voting power of
the Company) on the date such option is granted. The Stock Option Plan provides
that the per share exercise price of an NSO must be at least 85% of the fair
market value of a share of Common Stock on the date such option is granted. Each
option granted under the Stock Option Plan may be exercisable for a period
determined by the Board of Directors or the Committee administering the Stock
Option Plan, not to exceed ten years (or five years in the case of any optionee
of an ISO who beneficially owns more than 10% of the total combined voting power
of the Company) from the date of grant. Options issued under the Stock Option
Plan will be exercisable as the Committee administering such plan may determine,
but in no event shall an option be exercisable after the tenth anniversary of
the date of grant.
ISOs granted under the Stock Option Plan are non-transferable, except upon
death, by will or by operation of the laws of descent and distribution, and may
be exercised during the employee's lifetime only by the optionee. The aggregate
fair market value of the stock with respect to which ISOs are exercisable for
the first time by an employee during any calendar year (under all such plans of
the Company and any parent and subsidiary companies of the Company) may not
exceed $100,000.
Options granted under the Stock Option Plan may be exercised within twelve
months after the date of an optionee's termination of employment by reason of
his death or disability, or within 90 days after the date of termination by
reason of retirement, voluntary termination approved by the Board of Directors
or involuntary termination by the Company other than for Cause (as defined in
the Stock Option Plan), but, in any such case, not later than the expiration
date of such option and only to the extent the option was otherwise exercisable
at the date of termination. In the event an optionee's employment is terminated
by the Company for Cause or voluntarily terminated by the optionee without the
approval of the Board of Directors, such optionee's option shall terminate
immediately upon the date of such termination.
The Stock Option Plan also provides for the grant of SARs, which may be
granted on a stand-alone basis or in tandem with stock options, which may be
surrendered to the Company in exchange for cash, shares of Common Stock or a
combination thereof, as determined by the Committee administering the Stock
Option Plan, having a value equal to the dollar amount obtained by multiplying
(x) the number of shares subject to the surrendered SAR or option by (y) the
amount by which the fair market value per share of Common Stock exceeds the
exercise price per share specified in the agreement governing the surrendered
SAR or option.
The Stock Option Plan expires on November 21, 2007 unless terminated
earlier by the Board of Directors. The Stock Option Plan is subject to amendment
by the Board of Directors without stockholder approval, except that no amendment
which increases the maximum aggregate number of shares which may be issued under
the Stock Option Plan or changes the class of eligible participants in the Stock
Option Plan will be effective without the approval of the stockholders of the
Company. The Board of Directors may terminate the Stock Option Plan at any time.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company has adopted provisions in its Amended and Restated Certificate
of Incorporation that limit the liability of its directors for monetary damages
for breach of their fiduciary duty as directors, except for liability that
cannot be eliminated under the Delaware General Corporation Law ("Delaware
Law"). Delaware Law provides that directors of a company will not be personally
liable for monetary damages for breach of their fiduciary duty as directors,
except for liability (i) for any breach of their duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) for unlawful
payment of dividend or unlawful stock repurchase or redemption, as provided in
Section 174 of the Delaware Law, or (iv) for any transaction from which the
director derived an improper personal benefit.
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<PAGE> 46
The Company's Amended and Restated Certificate of Incorporation and ByLaws
also provide that the Company shall indemnify its directors and officers to the
fullest extent permitted by the Delaware Law. The Company has entered into
separate indemnification agreements with its directors and officers that could
require the Company, among other things, to indemnify them against certain
liabilities that may arise by reason of their status or service as directors and
to advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified. The Company believes that the limitation of
liability provision in its Certificate of Incorporation and the indemnification
agreements will facilitate the Company's ability to continue to attract and
retain qualified individuals to serve as directors and officers of the Company.
CERTAIN TRANSACTIONS
The Company believes that all of the transactions described under this
caption were entered into or effected upon terms no less favorable to the
Company than could have been obtained from unaffiliated third parties in similar
circumstances. In addition, the Company has adopted the policy that future
transactions between the Company and its directors, officers, principal
stockholders and affiliates or entities with which they are affiliated will
require approval by a majority of the disinterested members of the Company's
Board of Directors.
In October 1994, CIS Acquisitions Partners, L.P., a Delaware limited
partnership ("CIS Acquisition Partners"), invested $4.0 million in the Company
in connection with the acquisition by the Company of its credit information and
monitoring direct marketing business from TRW. In consideration of that
investment, the Company issued 21,445 shares of Common Stock to CIS Acquisition
Partners. At the time of the Acquisition, certain former members of management
purchased minority limited partnership interests in CIS Acquisition Partners.
See "Business -- Legal Proceedings."
Pursuant to the terms of agreements reached in October 1996, a group of
eleven officers and key employees of the Company were granted indirect
contingent equity interests in the Company aggregating a 10% interest in the
Company. In November 1997, these indirect contingent equity interests were
restructured so that shares of restricted stock in the Company were granted in
exchange for the indirect equity interests previously granted. The shares remain
subject to vesting conditions of Common Stock Agreements which provide that each
of such officer's shares vest in accordance with a schedule which provides that
one-third of such shares vest in April 1998, an additional one-third vest in
April 1999, and the remaining one-third vest in April 2000, contingent upon such
individual's continued employment with the Company. Assuming full vesting of all
such shares for all of the eleven individuals, the number of restricted shares
that would be distributed would be 855,662. In addition, each of the eleven
officers and key employees will execute a recourse promissory note in
consideration of his respective equity interest. The promissory notes are
payable to CSI Partners II and aggregate $660,000 in principal amount ($214,500
for Mr. Thompson, $6,600 for Mr. Caudle, $49,500 for Mr. Cossel, $62,700 for Mr.
Rothe, and $95,700 for Mr. Pruthi). The promissory notes bear interest at 6.64%
per annum and are payable annually. The notes mature on May 1, 2000. See
"Management -- Executive Compensation."
From November 1996 through January 1997, CSI Partners II invested a total
of $3.0 million in the Company in consideration of the issuance by the Company
of 3,000 shares of Series A Cumulative Preferred Stock (the "Series A Preferred
Stock") and warrants to acquire 2,123,072 shares of its Common Stock. In March
1997, as a condition of a $3.0 million subordinated loan to the Company made by
Canterbury Mezzanine Capital, L.P., a Delaware limited partnership ("Canterbury
Capital"), CSI Partners II exchanged its 3,000 outstanding shares of Series A
Preferred Stock for 6,433,550 shares of the Company's Common Stock and exercised
its warrants (at a nominal exercise price aggregating $1,000) for 2,123,072
shares of Common Stock.
In January 1997, in connection with the refinancing of the Company's then
outstanding senior secured indebtedness, Lincolnshire Equity Fund, L.P., a
privately held Delaware limited partnership ("LEF"), agreed, subject to certain
conditions, to make available to the Company up to $4.25 million in additional
capital through the purchase of additional debt or equity securities of the
Company by not later than April 30, 1998. The Company's right to require such
additional investment by LEF was assigned by the Company to its senior secured
bank lender. The Company's senior lender will relinquish its right to cause LEF
to make that
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<PAGE> 47
additional investment, and the corresponding securities purchase agreement
between the Company and LEF pertaining to such investment will be cancelled,
upon the repayment of the outstanding term debt owed by the Company to that
senior lender from the proceeds of this offering. See "Use of Proceeds."
In March 1997, as a condition to the subordinated loan made by Canterbury
Capital to the Company, LEF also agreed that, subject to certain triggering
events, it would purchase additional shares of Common Stock for up to $1.5
million. That commitment on the part of LEF was assigned by the Company to
Canterbury Capital, but Canterbury Capital will relinquish the right to cause
LEF to purchase such additional shares upon the repayment by the Company of the
outstanding subordinated loan owing to Canterbury Capital at the time of
completion of this offering, and the corresponding agreement between the Company
and LEF to purchase these additional shares of Common Stock will thereupon be
cancelled. See "Use of Proceeds."
In connection with its $3.0 million subordinated loan to the Company in
March 1997, Canterbury Capital acquired warrants to purchase a total of
1,038,600 shares of Common Stock of the Company. The warrants were subject to
customary anti-dilution provisions and were exercisable at a nominal price. In
September 1997, Canterbury Capital exercised all of those warrants and thereby
purchased 1,038,600 shares of Common Stock, of which 527,770 shares are being
sold by Canterbury Capital in the offering being made hereby. Canterbury Capital
has agreed that Lincolnshire Management, Inc. ("LMI"), an affiliate of LEF which
renders management consulting services to business entities in which LEF
invests, including the Company, shall receive 25% of any cash proceeds exceeding
$3.0 million derived by Canterbury Capital from the sale of its shares of Common
Stock in this offering, and that it shall assign and transfer to LMI 25% of the
510,830 shares of Common Stock of the Company (or 127,708 shares assuming no
exercise of the Underwriters' over-allotment option) which will be retained by
Canterbury Capital after consummation of the offering made hereby. See
"Principal and Selling Stockholders."
Eighty-five percent of the total outstanding limited partnership interests
of CIS Acquisition Partners, and 100% of the total outstanding limited
partnership interests of CSI Partners II, are held by LEF which invests in
various business entities through investment partnerships or other entities. LEF
also indirectly holds the equity interests in the general partners of both of
these partnerships. Thomas J. Maloney, Chairman of the Board of the Company, C.
Kenneth Clay, a director of the Company, and William A. Hall, a director of the
Company, are all limited partners of LEF. Mr. Maloney is an officer and director
of (i) the corporate general partner of LEF, (ii) Credentials G.P. (which is the
corporate general partner of Credentials G.P., L.P., which is in turn the
general partner of CIS Acquisition Partners), and (iii) Credentials II G.P.,
Inc. (which is the corporate general partner of Credentials II G.P., L.P., which
is in turn the general partner of CSI Partners II), and holds direct and
indirect equity interests in each of these partnerships and corporations. Mr.
Maloney is an officer and director and a stockholder in LMI. Mr. Hall is a
stockholder in LMI, and Mr. Clay is an employee of LMI. Messrs. Hall and
Maloney's stock holdings in LMI each constitute less than 10% of the total
issued and outstanding capital stock of LMI.
In October 1994, LMI was paid $1.25 million by the Company for professional
services related primarily to the negotiations of the acquisition from TRW, the
negotiation of senior bank debt agreements and the negotiation of the
subordinated debt agreement. Since October 1994, the Company has been a party to
a consulting agreement with LMI, an affiliate of the limited partnerships which
own the outstanding Common Stock of the Company (the "Consulting Agreement").
Pursuant to this agreement, as amended in December 1996, LMI has rendered and is
rendering management and financial consulting services to the Company. These
services have included assisting the Company in refinancing and reorganizing its
operations during the past year. For its services, the Company paid LMI annual
consulting fees and expenses of $259,000 in fiscal year 1995, $368,000 in fiscal
year 1996 and $300,000 in fiscal year 1997. During the first quarter of the
Company's 1998 fiscal year, the Company has paid fees and reimbursed expenses in
the aggregate amount of $136,000 to LMI under the Consulting Agreement. The
Company and LMI have agreed that the Consulting Agreement will terminate upon
consummation of the offering made hereby. In addition to the fees it received
under the Consulting Agreement, in March 1997 LMI was paid $300,000 by the
Company for professional services relating primarily to the negotiation of the
senior bank debt and subordinated loan agreements.
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<PAGE> 48
Mr. Maloney is a partner of the law firm of Maloney, Mehlman & Katz, which
has rendered legal services to the Company. Fees accrued and paid by the Company
to Maloney, Mehlman & Katz for legal services during the Company's 1997 fiscal
year aggregated approximately $261,000. It is anticipated that Maloney, Mehlman
& Katz will continue to render legal services to the Company in the future. Mr.
Maloney holds indirect limited partnership interests in CSI Partners II, the
principal stockholder in the Company. See "Principal and Selling Stockholders."
For information concerning indemnification of directors and officers, see
"Management -- Limitation of Liability and Indemnification Matters."
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<PAGE> 49
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of November 21, 1997, and as adjusted
to reflect the sale by the Company and the Selling Stockholders of the shares
offered hereby (assuming no exercise of the Underwriters' over-allotment
option), by: (i) each person who is known by the Company to own beneficially
more than 5% of the Company's Common Stock, (ii) each of the Company's directors
and officers named in the Summary Compensation Table set forth under
"Management" and (iii) all directors and executive officers of the Company, as a
group.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO OFFERING NUMBER OF OFFERING
---------------------- SHARES ----------------------
NUMBER PERCENTAGE BEING OFFERED NUMBER PERCENTAGE
--------- ---------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C>
CSI Investment Partners II,
L.P.(1)(2)......................... 7,700,960 80.1% 3,922,230 3,778,730 35.4%
Canterbury Mezzanine Capital,
L.P.(3)............................ 1,038,600 10.8 527,770 510,830 4.8
David C. Thompson(4)................. 278,090 2.9 -- 278,090 2.6
Charles Caudle(4).................... 8,557 * -- 8,557 *
Thomas J. Maloney(2)................. 7,700,960 80.1 3,922,230 3,778,730 35.4
Michael Cossel(4).................... 64,175 * -- 64,175 *
James M. Rothe(4).................... 81,288 * -- 81,288 *
Vineet Pruthi(4)..................... 124,071 1.3 -- 124,071 1.2
All executive officers and directors
as a group (11 persons)(4)......... 855,662 8.9 -- 855,662 8.0
------ -----
</TABLE>
- ---------------
* Indicates less than one percent.
(1) Consists of 7,700,960 shares of Common Stock held by CSI Investment Partners
II, L.P. Credentials II G.P., L.P. is the managing general partner of CSI
Investment Partners II, L.P. For a description of the relationship between
CSI Investment Partners II, L.P. and the Company, see "Certain
Transactions." The sole limited partner of Credentials II G.P., L.P. is
Lincolnshire Equity Fund, L.P. ("LEF"). The general partner of Credentials
II G.P., L.P. is Credentials II G.P., Inc., a corporation which is
wholly-owned by LEF. The general partner of LEF is Lincolnshire Equity
Partners, L.P., a limited partnership, the general partner of which is
Lincolnshire Equity, Inc., a corporation the officers and directors of which
are Steven J. Kumble (Chairman, President and Director), William F. Wolffer,
Jr. (Senior Vice President, Treasurer and Director), Thomas J. Maloney (Vice
President, Secretary and Director) and Peter B. Van Raalte (Vice President,
Assistant Secretary and Director). The address for CSI Investment Partners
II, L.P. is c/o Lincolnshire Management, Inc., 780 Third Avenue, 45th Floor,
New York, N.Y. 10017.
(2) By reason of the fact that Mr. Maloney is an officer and director of
Credentials II G.P., Inc., the general partner of Credentials II G.P., L.P.,
which is the general partner of CSI Investment Partners II, L.P., he may be
deemed to be a beneficial owner (by reason of having shared voting and
dispositive power) of the number of shares of Common Stock of the Company
held by CSI Investment Partners II, L.P. In addition, Mr. Maloney has
indirect limited partnership interests in CSI Investment Partners II, L.P.
(3) Includes 1,038,600 shares of Common Stock issued upon the exercise in
September 1997 of warrants held by Canterbury Mezzanine Capital, L.P.
Canterbury Capital has agreed that LMI shall receive 25% of any cash
proceeds exceeding $3.0 million derived by Canterbury Capital from the sale
of its shares of Common Stock in this offering, and that it shall assign and
transfer to LMI 25% of the 510,830 shares of Common Stock of the Company (or
127,708 shares) which will be retained by Canterbury Capital after
consummation of the offering made hereby. Canterbury Capital LLC, is the
managing general partner of Canterbury Mezzanine Capital, L.P. For a
description of the relationship between Canterbury Mezzanine Capital, L.P.
and the Company, see "Certain Transactions." The address for Canterbury
Mezzanine Capital, L.P. is 600 Fifth Avenue, 23rd Floor, New York, N.Y.
10020.
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<PAGE> 50
(4) The officers named in the table above (other than Mr. Maloney) hold shares
of restricted stock in the amounts reflected in the table. The shares are
subject to the vesting provisions of Restricted Stock Agreements which
provide that each of the officer's shares vest in accordance with a schedule
which provides that one-third of such shares vest in April 1998, an
additional one-third vest in April 1999, and the remaining one-third vest in
April 2000, contingent upon such individual's continued employment with the
Company. See "Certain Transactions."
47
<PAGE> 51
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of the
Company will consist of 20,000,000 shares of Common Stock, $.01 par value, and
5,000,000 shares of Preferred Stock, $.10 par value. The following summary
description of the capital stock of the Company is qualified in its entirety by
reference to the Amended and Restated Certificate of Incorporation of the
Company and the Bylaws of the Company, a copy of each of which is filed as an
exhibit to the Registration Statement of which this Prospectus forms a part.
COMMON STOCK
As of November 21, 1997, there were 9,616,667 shares of Common Stock
outstanding held by 14 stockholders of record.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders, including the
election of directors, and do not have cumulative voting rights. Accordingly,
the holders of a majority of the shares of Common Stock entitled to vote in any
election of directors can elect all of the directors standing for election, if
they so choose. Subject to preferences that may be applicable to any then
outstanding Preferred Stock and applicable law, holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available therefor. See "Dividend
Policy." In the event of any liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, the holders of Common Stock will be
entitled to share ratably in the net assets legally available for distribution
to such stockholders after the payment or the provision for payment of all debts
and other liabilities of the Company and the preferential amounts to which the
holders of any outstanding shares of Preferred Stock shall be entitled. Holders
of Common Stock have no preemptive or conversion rights or other subscription
rights and there are no redemption or sinking fund provisions applicable to the
Common Stock. All outstanding shares of Common Stock are, and the Common Stock
to be outstanding upon completion of this offering will be, fully paid and
nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue from time to time additional Preferred Stock in one or
more series and to fix the number of shares, designations, preferences, powers,
and relative, participating, optional or other special rights and the
qualifications or restrictions thereof. The preferences, powers, rights and
restrictions of different series of such Preferred Stock may differ with respect
to dividend rates, amounts payable on liquidation, voting rights, conversion
rights, redemption provisions, sinking fund provisions, purchase funds and other
matters. The issuance of additional Preferred Stock could decrease the amount of
earnings and assets available for distribution to holders of Common Stock or
adversely affect the rights and powers, including voting rights, of the holders
of Common Stock, and may have the effect of delaying, deferring or preventing a
change in control of the Company. The Company has no present plan to issue
additional shares of Preferred Stock.
REGISTRATION RIGHTS
The outstanding shares of Common Stock owned by CSI Partners II and
Canterbury Capital (other than the shares being offered by such parties pursuant
to this Prospectus) are not registered under the Securities Act, and,
accordingly, may not be re-offered or re-sold in the United States absent
registration under the Securities Act or an applicable exemption from the
registration requirements under the Securities Act. Under a Registration Rights
Agreement among the Company, CSI Partners II and Canterbury Capital (the
"Registration Rights Agreement"), any Holder (as defined below) of the Common
Stock has the right to request that the Company register their restricted shares
of Common Stock and any Common Stock which may be issued or distributed in
respect thereof by way of recapitalization, reclassification, stock dividend,
stock split or other distribution ("Registrable Securities"). Any stockholder or
group of stockholders owning, in the aggregate, at least 33% of the number of
Registrable Securities then outstanding has the right, after June , 1998, to
require the Company to use its best efforts to register these securities for
resale under the Securities
48
<PAGE> 52
Act by filing up to two registration statements with the Securities and Exchange
Commission; provided, however, that the Company shall not be required to file
such a registration statement if the number of shares for which such a demand is
made does not equal or exceed 500,000 shares. In addition, the Company has
agreed to include in unlimited incidental ("piggyback") registrations shares of
Common Stock held by CSI Partners II and Canterbury Capital or by any transferee
of the registration rights as permitted under the Registration Rights Agreement
(any of which is a "Holder"), provided that the number of shares of Common Stock
that such Holder requests to be included is not less than 100,000. If the
Company qualifies for the use of Form S-3 as promulgated by the Securities and
Exchange Commission, then at any time after , 199 any Holder has the
right to cause the Company to use its best efforts to effect a registration of
at least 250,000 shares of the Registrable Securities on behalf of such Holder
and other Holders. The registration rights are assignable by any Holder to any
transferee acquiring at least 50% of such assigning Holder's Registrable
Securities. The Company will pay all registration expenses in connection with
each registration of Registrable Securities pursuant to the Registration Rights
Agreement. See "Risk Factors -- Shares Eligible for Future Sale; Registration
Rights" and "Shares Available for Future Sale."
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
The Company's Amended and Restated Bylaws (the "Bylaws") provide that any
action required or permitted to be taken by stockholders of the Company must be
effected at a duly called annual or special meeting of stockholders and may not
be effected by any consent in writing, and requires reasonable advance notice by
a stockholder of a proposal or director nomination which such stockholder
desires to present at any annual or special meeting of stockholders. Special
meetings of the stockholders may be called only by the Chairman of the Board,
the Chief Executive Officer or, if none, the President of the Company or by the
Board of Directors. The Company's Amended and Restated Certificate of
Incorporation (the "Charter") provides for a classified Board of Directors, and
that members of the Board of Directors may be removed only for cause upon the
affirmative vote of holders of at least two-thirds of the shares of capital
stock of the Company entitled to vote. In addition, shares of the Company's
Preferred Stock may be issued in the future without stockholder approval and
upon such terms and conditions, and having such rights, privileges and
preferences, as the Board of Directors may determine. The rights of the holders
of Common Stock will be subject to, and may be adversely affected by, the rights
of any holders of Preferred Stock that may be issued in the future. The Company
has no present plans to issue any shares of Preferred Stock.
Furthermore, the Company is subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law which prohibit the Company
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner or meets other criteria. These provisions, and other
provisions of the Charter, may have the effect of deterring hostile takeovers or
delaying or preventing changes in control or management of the Company,
including transactions in which stockholders might otherwise receive a premium
for their shares over then current market prices. In addition, these provisions
may limit the ability of stockholders to approve transactions that they may deem
to be in their best interests. See "Risk Factors -- Anti-Takeover Provisions."
TRANSFER AGENT AND REGISTRAR
The Company has appointed LaSalle National Bank, Chicago, Illinois, as the
Transfer Agent and Registrar for the Common Stock.
49
<PAGE> 53
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common
Stock of the Company, and no predictions can be made regarding the effect, if
any, that market sales of shares or the availability of shares for sale will
have on the market price prevailing from time to time. As described below, only
a limited number of shares will be available for sale shortly after this
offering due to certain contractual and legal restrictions on resale.
Nevertheless, sales of substantial amounts of Common Stock of the Company in the
public market after the restrictions lapse could adversely affect the prevailing
market price.
Upon completion of this offering, the Company will have outstanding
10,666,667 shares of Common Stock. The 5,500,000 shares of Common Stock being
sold hereby will be freely tradable (other than by an "affiliate" of the Company
as such term is defined in the Securities Act) without restriction or
registration under the Securities Act. All remaining shares were issued and sold
by the Company in private transactions ("Restricted Shares") and are eligible
for public sale if registered under the Securities Act or sold in accordance
with Rule 144.
The Company's directors, executive officers and certain stockholders, who
after completion of the offering made hereby (and assuming no exercise of the
Underwriters' over-allotment option) will collectively hold an aggregate of
5,166,667 shares of Common Stock, have agreed pursuant to certain agreements
that they will not sell any Common Stock owned by them without the prior written
consent of PaineWebber Incorporated for a period of 180 days from the date of
this Prospectus (the "Lock-Up Period"). Following the expiration of the Lock-Up
Period, approximately 4,596,225 shares of Common Stock will be available for
sale in the public market subject to the volume limitations and other provisions
of Rule 144. Of the remaining shares, 285,221 shares will be available for sale
in each of April 1999 and April 2000, upon vesting of the restricted stock held
by management. See "Certain Transactions" and "Underwriting."
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, an affiliate of the Company, or a holder of
Restricted Shares who beneficially owns shares that were not acquired from the
Company or an affiliate of the Company within the previous one year, would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of 1% of the then outstanding shares of Common Stock
(approximately 106,667 shares immediately after this offering), or the average
weekly trading volume of the Common Stock during the four calendar weeks
preceding the date on which notice of the sale is filed with the Securities and
Exchange Commission (the "Commission"). Sales under Rule 144 are subject to
certain requirements relating to manner of sale, notice and availability of
current public information about the Company. However, a person (or persons
whose shares are aggregated) who is not deemed to have been an affiliate of the
Company at any time during the 90 days immediately preceding the sale and who
beneficially owns Restricted Shares is entitled to sell such shares under Rule
144(k) without regard to the limitations described above; provided that at least
two years have elapsed since the later of the date the shares were acquired from
the Company or from an affiliate of the Company. The foregoing is a summary of
Rule 144 and is not intended to be a complete description of it.
The Company intends to file a registration statement on Form S-8 covering
the shares underlying the options available for grant under the Company's 1997
Stock Option Plan. See "Management -- Stock Option Plan."
50
<PAGE> 54
UNDERWRITING
The Underwriters named below, acting through PaineWebber Incorporated and
Hambrecht & Quist LLC (the "Representatives"), have severally agreed, subject to
the terms and conditions set forth in the Underwriting Agreement by and among
the Company, the Selling Stockholders and the Representatives (the "Underwriting
Agreement"), to purchase from the Company and the Selling Stockholders, and the
Company and the Selling Stockholders have agreed to sell to the Underwriters
1,050,000 shares and 4,450,000 shares, respectively, of the Company's Common
Stock, which in the aggregate equals the number of shares of Common Stock set
forth opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
------------------------------------------------------------------ ---------
<S> <C>
PaineWebber Incorporated..........................................
Hambrecht & Quist LLC.............................................
Total................................................... 5,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligation of the Underwriters
to purchase all of the shares of Common Stock is subject to certain conditions.
The Underwriters are committed to purchase, and the Company and the Selling
Stockholders are obligated to sell, all of the shares of Common Stock offered by
this Prospectus, if any of the shares of Common Stock being sold pursuant to the
Underwriting Agreement are purchased.
The Company and the Selling Stockholders have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock to the public at the public offering price set forth on the cover page of
this Prospectus, and to certain securities dealers at such price less a
concession not in excess of $ per share. The Underwriters may allow, and
such dealers may re-allow, a discount not in excess of $ per share. After
the initial public offering, the public offering price and the concessions and
discounts may be changed by the Representatives.
The Selling Stockholders have granted an option to the Underwriters,
exercisable during the 30-day period after the date of this Prospectus, to
purchase up to 825,000 additional shares of Common Stock at the public offering
price less the underwriting discount and commissions set forth on the cover page
of this Prospectus. The Underwriters may exercise such option only to cover
over-allotments in the sale of the shares that the Underwriters have agreed to
purchase. To the extent that the Underwriters exercise such option, each of the
Underwriters will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the percentage of
shares of Common Stock that each such Underwriter is obligated to purchase
pursuant to the Underwriting Agreement and as shown in the table set forth
above.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
The Company, its directors and executive officers and certain stockholders
have agreed not to offer, sell, contract to sell or grant any option to purchase
or otherwise dispose of any shares of Common Stock owned by them prior to the
expiration of 180 days from the date of this Prospectus, except (i) for shares
of Common Stock offered hereby, (ii) with the prior written consent of
PaineWebber Incorporated; and (iii) in the case of the Company, for the issuance
of shares of Common Stock upon the exercise of options or the grant of options
to purchase shares of Common Stock.
Prior to the offering, there has been no established trading market for the
shares of Common Stock. The initial public offering price for the Common Stock
offered hereby has been determined by negotiation among the Company, the Selling
Stockholders and the Underwriters. Among the factors considered in making such
determination were the history of and the prospects for the industry in which
the Company competes, an assessment of the Company's management, the past and
present operations of the Company, the historical
51
<PAGE> 55
results of operations of the Company and the trend of its revenues and earnings,
the prospects for future earnings of the Company, the general condition of the
securities markets at the time of the offering, the prices of similar securities
of generally comparable companies and other relevant factors. There can be no
assurance that an active trading market will develop for the Common Stock or
that the Common Stock will trade in the public market subsequent to the
offerings at or above the initial public offering price.
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over-allot in
connection with this offering, creating a short position in the Common Stock for
their own account. In addition, to cover overallotments or to stabilize the
price of the Common Stock, the Underwriters may bid for, and purchase, shares of
the Common Stock in the open market. The Underwriters may also reclaim selling
concessions allowed to an underwriter or a dealer for distributing the Common
Stock in transactions to cover their short positions, in stabilization
transactions or otherwise. Finally, the Underwriters may bid for, and purchase,
shares of the Common Stock in market making transactions and impose penalty
bids. These activities may stabilize or maintain the market price of the Common
Stock above market levels that might otherwise prevail. The Underwriters are not
required to engage in these activities, and may end any of these activities at
any time.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Maloney, Mehlman & Katz,
New York, New York, counsel to the Company and to CSI Partners II. Certain other
legal matters will be passed upon for the Company by Pillsbury Madison & Sutro
LLP, New York, New York, special securities counsel to the Company, and for the
Underwriters by Shearman & Sterling, San Francisco, California. Thomas J.
Maloney, Chairman of the Board of the Company, is a partner of Maloney, Mehlman
& Katz, and Mr. Maloney holds indirect beneficial equity interests in the
Company's Common Stock.
EXPERTS
The financial statements of Credentials Services International, Inc. at
September 27, 1996 and September 26, 1997 and for each of the three years in the
period ended September 26, 1997 included in this Prospectus have been audited by
Coopers & Lybrand L.L.P., independent public accountants, as stated in their
report appearing herein, and have been so included in reliance upon the report
of such firm given upon its authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act with respect to
the Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock offered hereby, reference is hereby made to such Registration
Statement, exhibits and schedules. Statements contained in this Prospectus
regarding the contents of any contract or other document are not necessarily
complete; with respect to each such contract or document filed as an exhibit to
the Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. A copy of the Registration
Statement, including the exhibits and schedules thereto, may be inspected
without charge at the principal office of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, and copies of such material may be obtained from
such office upon payment of the fees prescribed by the Commission.
In addition, the Commission maintains a World Wide Web site on the Internet
at http://www.sec.gov that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission.
52
<PAGE> 56
CREDENTIALS SERVICES INTERNATIONAL, INC.
INDEX TO THE FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants...................................................... F-2
Balance Sheets as of September 27, 1996 and September 26, 1997......................... F-3
Statements of Operations for the fiscal years ended September 30, 1995, September 27,
1996, and September 26, 1997......................................................... F-4
Statements of Stockholders' Equity for the fiscal years ended September 30, 1995,
September 27, 1996, and September 26, 1997........................................... F-5
Statements of Cash Flows for the fiscal years ended September 30, 1995, September 27,
1996 and September 26, 1997.......................................................... F-6
Notes to Financial Statements.......................................................... F-7
</TABLE>
F-1
<PAGE> 57
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Credentials Services International, Inc.
We have audited the accompanying balance sheets of Credentials Services
International, Inc. (the "Company") as of September 27, 1996 and September 26,
1997, and the related statements of operations, accumulated deficit, and cash
flows for the years ended September 30, 1995, September 27, 1996 and September
26, 1997. 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 in accordance with generally accepted auditing
standards. Those standards 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 these financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Credentials Services
International, Inc. as of September 27, 1996 and September 26, 1997, and the
results of its operations and its cash flows for the years ended September 30,
1995, September 27, 1996 and September 26, 1997 in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
--------------------------------------
Los Angeles, California
November 4, 1997
(except for Note 15
as to which the date
is November 21, 1997)
F-2
<PAGE> 58
CREDENTIALS SERVICES INTERNATIONAL, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 27, SEPTEMBER 26,
1996 1997
------------- -------------
<S> <C> <C>
Current assets
Cash and cash equivalents........................................... $ 1,613 $ 413
Accounts receivable, net of allowance for uncollectible accounts of
$147 (1996) and $459 (1997)...................................... 707 2,070
Current portion of deferred member solicitation costs and related
commissions...................................................... 5,826 10,512
Prepaid member solicitation costs................................... 766 5,627
Other............................................................... 184 174
------- --------
Total current assets........................................ 9,096 18,796
------- --------
Deferred member solicitation costs and related commissions, net of
current portion..................................................... 5,278
Property and equipment, net of accumulated depreciation of $381 (1996)
and $1,092 (1997)................................................... 3,265 4,579
Purchased memberships, net of accumulated amortization of $4,265
(1996) and $6,418 (1997)............................................ 7,581 5,428
Goodwill, net of accumulated amortization of $1,063 (1996) and $1,594
(1997).............................................................. 6,909 6,378
Deferred financing costs, net of accumulated amortization of $467
(1996) and $708 (1997).............................................. 701 953
------- --------
Total assets................................................ $27,552 $ 41,412
======= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable.................................................... $ 5,671 $ 7,674
Accrued expenses.................................................... 3,295 5,805
Current portion of note payable to bank............................. 2,200 4,420
Current portion of deferred revenue................................. 21,074 22,791
Current portion of capital lease obligations........................ 222 367
------- --------
Total current liabilities................................... 32,462 41,057
------- --------
Deferred revenue, net of current portion.............................. 9,205 9,266
Capital lease obligations, net of current portion..................... 265 145
Note payable to bank, net of current portion.......................... 6,850 4,900
Subordinated notes payable............................................ 3,000 5,826
------- --------
Total liabilities........................................... 51,782 61,194
======= ========
Stockholders' deficit
Series A Cumulative Preferred Stock, par value $0.10 per share;
5,000,000 shares authorized; no shares issued or outstanding..... -- --
Common stock, par value $.01 per share; 20,000,000 (1997) shares
authorized; 21,445 (1996), 9,616,667 (1997) shares issued and
outstanding...................................................... 1 96
Additional paid-in capital.......................................... 3,999 7,104
Accumulated deficit................................................. (28,230) (26,982)
------- --------
Total stockholders' deficit................................. (24,230) (19,782)
------- --------
Total liabilities and stockholders' deficit................. $27,552 $ 41,412
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 59
CREDENTIALS SERVICES INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------------------------------------
SEPTEMBER 30, SEPTEMBER 27, SEPTEMBER 26,
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES
Membership fees................................... $ 12,540 $ 24,556 $ 38,039
OPERATING EXPENSES
Marketing......................................... 4,854 22,605 14,197
Membership servicing.............................. 4,128 12,999 10,852
General and administrative........................ 8,102 10,214 10,135
------- -------- --------
Total operating expenses.................. 17,084 45,818 35,184
------- -------- --------
Operating income (loss)............................. (4,544) (21,262) 2,855
Interest expense.................................. 1,239 1,185 1,455
------- -------- --------
Income (loss) before provision for income taxes and
extraordinary item................................ (5,783) (22,447) 1,400
Provision for income taxes.......................... -- -- 61
------- -------- --------
Income (loss) before extraordinary item............. (5,783) (22,447) 1,339
Extraordinary item: Loss on early extinguishment of
debt, net of income tax benefit of $61............ -- -- 91
------- -------- --------
Net income (loss)................................... $ (5,783) $ (22,447) $ 1,248
======= ======== ========
Earnings per common and common equivalent share:
Income (loss) before extraordinary item........... (0.60) (2.33) 0.14
------- -------- --------
Extraordinary item................................ -- -- (0.01)
------- -------- --------
Net income (loss)................................. $ (0.60) $ (2.33) $ 0.13
======= ======== ========
Weighted average common and common equivalent
shares............................................ 9,616,667 9,616,667 9,616,667
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 60
CREDENTIALS SERVICES INTERNATIONAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SERIES A COMMON
COMMON STOCK PREFERRED STOCK STOCK ADDITIONAL
------------------- --------------- PURCHASE PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT WARRANTS CAPITAL DEFICIT TOTAL
----------- ------ ------ ------ -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the years ended September 30,
1995 and September 27, 1996:
- -------------------------------------
Issuance of common stock........... 21,445 $ 1 $ 3,999 $ 4,000
Net loss........................... $ (5,783) (5,783)
--------- -------- --------
Balances at September 30, 1995..... 21,445 1 3,999 (5,783) (1,783)
Net loss........................... (22,447) (22,447)
-------- --------
Balances at September 27, 1996..... 21,445 1 3,999 (28,230) (24,230)
--------- ------ -------- --------
For the year ended September 26,
1997:
- -------------------------------------
Issuance of preferred stock and
common stock purchase warrant.... 3,000 $ 1 $ 1 2,998 3,000
Exercise of common stock purchase
warrant.......................... 2,123,072 21 (1) (20)
Issuance of common stock in
exchange for preferred stock..... 6,433,550 64 (3,000) (1) (63)
Issuance of common stock purchase
warrant in connection with
subordinated note payable........ 200 200
Exercise of common stock purchase
warrant.......................... 1,038,600 10 (200) 190
Net income......................... 1,248 1,248
--------- --- ------ --- ----- ------ -------- --------
Balances at September 26, 1997....... 9,616,667 $ 96 -- -- $ -- $ 7,104 $ (26,982) $(19,782)
========= === ====== === ===== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 61
CREDENTIALS SERVICES INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
-------------------------------------------------
SEPTEMBER 30, SEPTEMBER 27, SEPTEMBER 26,
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................................ $ (5,783) $ (22,447) $ 1,248
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Membership solicitation and other deferred costs............... (10,181) (22,889) (22,731)
Amortization of membership solicitation and other deferred
costs........................................................ 5,474 21,770 12,767
Deferred membership fees....................................... 18,467 11,812 1,778
Decrease in membership servicing liability..................... (4,173) --
Depreciation and amortization.................................. 3,095 3,062 4,180
Changes in assets and liabilities affecting operating cash flows:
Accounts receivable............................................ 57 (431) (1,363)
Prepaid membership materials................................... -- (766) (4,861)
Other assets................................................... (169) (15) 10
Accounts payable and accrued liabilities....................... 2,730 5,494 4,513
-------- -------- --------
Net cash provided by (used in) operating activities.............. 9,517 (4,410) (4,459)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment.......................................... (837) (1,430) (1,730)
Purchase of assets from TRW.................................... (12,822) -- --
-------- -------- --------
Net cash used in investing activities............................ (13,659) (1,430) (1,730)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable to bank............................ 11,000 1,350 12,200
Capital lease payments......................................... (69) (217) (270)
Proceeds from sale of common stock............................. 4,000 --
Proceeds from junior subordinated note payable................. -- -- 2,800
Proceeds from common stock purchase warrant.................... -- -- 200
Proceeds from sale of preferred stock.......................... -- -- 3,000
Repayment of note payable -- bank.............................. (1,650) (1,650) (11,932)
Financing costs paid........................................... (1,169) -- (1,009)
-------- -------- --------
Net cash provided by (used in) financing activities.............. 12,112 (517) 4,989
-------- -------- --------
Net increase (decrease) in cash and cash equivalents............. 7,970 (6,357) (1,200)
Cash and cash equivalents at beginning of period................. -- 7,970 1,613
-------- -------- --------
Cash and cash equivalents at end of period....................... $ 7,970 $ 1,613 $ 413
======== ======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest........................................... $ 1,166 $ 1,026 $ 1,117
Leased asset additions and related obligations................... $ 656 $ 117 $ 295
Subordinated note payable to TRW................................. $ 3,000 -- --
Preferred stock exchanged for common stock....................... -- -- 3,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 62
CREDENTIALS SERVICES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Credentials Services International, Inc. (the "Company"), is a Delaware
corporation which provides credit report monitoring services to consumers. The
services include provision of Experian credit reports to members, prompt
notification of inquiries made into a member's Experian credit record, a
quarterly newsletter about significant credit related issues, and various other
notifications to members principally related to activity within their Experian
credit record. The Company sells primarily one- and three-year memberships to
the Credentials(R) Monitoring Service which automatically renew unless canceled
by the subscriber. New members are generally provided with one month of free
service as a trial period. The Company markets its membership programs to
consumers using direct marketing techniques, primarily by direct mail and
telemarketing campaigns conducted through endorsed co-marketing relationships
with credit card issuers and other businesses that have a large customer base,
such as banks, retailers and oil companies. The Company's headquarters are
located in Orange, California and it maintains a customer service facility in
Plano, Texas.
Prior to November 1996, the Company was wholly-owned by CIS Acquisition
Partners, L.P., a Delaware limited partnership. As discussed more fully in Note
11, through a series of equity transactions in November 1996 through March 1997,
CSI Investment Partners II, L.P., a Delaware limited partnership ("CSI Partners
II"), acquired ownership of approximately 99.75% of the Company and became the
Company's parent. The general partners of CIS Acquisition Partners, L.P. and CSI
Partners II are affiliates. The principal limited partner of CIS Acquisition
Partners, L.P. is Lincolnshire Equity Fund, L.P. The sole limited partner of CSI
Partners II is Lincolnshire Equity Fund, L.P.
2. MANAGEMENT'S PLAN
The Company incurred substantial net losses for the years ended September
30, 1995 and September 27, 1996. In addition, as of September 26, 1997, the
Company had a significant stockholders' deficit and a large working capital
deficit. Management believes that the prior year losses were primarily
attributable to the startup of the Company's operations (1995) and failed
marketing programs (1996). In 1996, the losses caused a severe liquidity
shortfall, thereby affecting the Company's ability to undertake new programs and
enter into new co-marketer relationships. In August 1996, the Company's Board of
Directors appointed a new management team.
In November 1996 and January 1997, the Company received equity infusions
aggregating $3,000,000 and, in January 1997, the bank loan was refinanced to
provide additional liquidity to the Company. The Company also received a
$3,000,000 subordinated term loan in March of 1997.
The Company's marketing strategy since September 27, 1996, has been to
rebuild the Company's core distribution channel, i.e., marketing through
financial institutions followed by expansion to other card issuing organizations
(such as oil companies and retailers) and then to other membership type
organizations. Management believes that this strategy will enable the Company to
build a larger membership base that should yield consistent and high margin
renewal income.
Management believes that its existing cash balances, funds generated from
operations and borrowing available under the Company's bank revolving line of
credit are sufficient to provide for the Company's future cash needs.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year -- The Company has a 52-week fiscal year, which ends on the
last Friday of September.
Basis of Presentation and Use of Estimates -- The accompanying financial
statements have been prepared in accordance with generally accepted accounting
principles. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
F-7
<PAGE> 63
CREDENTIALS SERVICES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassifications -- Certain reclassifications have been made in prior
period financial statements to conform to the current presentation.
Cash and Cash Equivalents -- Cash and cash equivalents include
cash-on-hand, demand deposits and short term investments with original
maturities of three months or less.
Revenue Recognition -- Initial and renewal membership fees are generally
billed to members credit cards. An allowance for cancellation is established
based on the Company's historical cancellation experience. Deferred membership
fees are recorded, net of estimated cancellations, when the free one-month trial
period has elapsed and are amortized as membership fees on a straight-line basis
over the membership period, generally 12 to 36 months. During an initial
membership period, a member may cancel his or her membership generally for a
complete refund of the membership fee. At September 27, 1996 and September 26,
1997, the Company had memberships in the amount of $2,142,000 and $23,573,382,
respectively (before consideration of cancellations and refunds which have
generally ranged from 45% to 60%), which were in their 30-day trial period.
These amounts are not reflected in the accompanying financial statements since
revenue is not recognized during the respective 30-day trial periods.
Commission Expense -- The Company has co-marketing agreements with credit
card issuers and pays commissions under the terms of these agreements based
principally on a percentage of billings. Such commissions are deferred,
consistent with the associated revenue, and amortized to expense ratably over
the subscription period of the membership.
Deferred Member Solicitation Costs -- Member solicitation costs relate
primarily to the acquisition of new members through direct response type
marketing promotions and include payments for postage, printing, the purchase of
contact lists, telemarketing, and other direct costs incurred to acquire or
obtain members. These costs are deferred and amortized to expense on a
straight-line basis over the term of the initial membership period. However,
costs to service and retain existing memberships are expensed as incurred.
Prepaid member solicitation costs include new member acquisition costs
pertaining to solicitation promotions that were in process at the end of the
fiscal year. Accordingly, no membership fees have been received or recognized.
These costs are generally accumulated over a three- to four-month promotional
period and begin to amortize when related revenues are recognized.
The Company periodically compares deferred member solicitation costs to
related membership fees (net of related estimated direct membership servicing
costs for the membership period) generated by each marketing effort and, when
necessary, records an adjustment to recognize any impairment.
Property and Equipment -- Property and equipment are stated at cost less
accumulated depreciation. Depreciation and amortization is provided using the
straight-line method over the estimated useful lives of the related assets,
which vary from four to ten years. Expenditures for major renewals and
betterment are capitalized, while minor replacements, maintenance and repairs
which do not extend the asset lives are expensed as incurred. When assets are
sold or otherwise disposed of, the cost and related accumulated depreciation or
amortization is removed from the respective accounts, and any resulting gain or
loss is recognized.
The Company capitalizes various costs of computer software developed and
obtained for internal use including external direct costs of materials and
services and certain direct, payroll and related costs.
Purchased Memberships -- Purchased memberships represents the cost of the
purchased membership base at October 1, 1994, the date the business was
purchased by the Company from TRW, Inc. The amount
F-8
<PAGE> 64
CREDENTIALS SERVICES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
was determined based upon the discounted estimated future net cash flows to be
generated from the purchased memberships assuming renewal rates based upon
historical experience. Purchased memberships are amortized on a straight-line
basis over a period of five years. Periodically, the Company compares actual
member renewal rates to the estimated renewal rates used in establishing the
initial cost of the purchased membership base to determine if any provision for
impairment is necessary.
Goodwill -- Goodwill represents the difference between the purchase price
of the assets acquired from TRW, Inc. and the value of the net assets acquired.
Such goodwill is being amortized on a straight-line basis over 15 years.
Periodically, the Company evaluates the actual and projected future undiscounted
cash flows of the Company to determine if any provision for impairment is
necessary.
Deferred Financing Costs -- Costs associated with obtaining long-term debt
financing have been capitalized and are amortized over the repayment term of the
related debt using a method that approximates the effective interest method.
Income Taxes -- The Company uses the liability method of accounting for
income taxes, which requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. The provision for
income taxes represents the tax payable for the period and the change during the
year in deferred tax assets and liabilities.
Net Income (loss) Per Common Share -- Net income (loss) per share has been
computed in accordance with Securities and Exchange Commission Staff Accounting
Bulletin (SAB) No. 83. The SAB requires that common shares issued by the Company
in the twelve months immediately preceding a proposed public offering plus the
number of common equivalent shares which became issuable during the same period
pursuant to the grant of warrants and stock options (using the treasury stock
method) at prices substantially less than the initial public offering price be
included in the calculation of common stock and common stock equivalent shares
as if they were outstanding for all periods presented.
Recently Issued Accounting Pronouncements -- In February 1997, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("FAS 128"). FAS 128 will change the
computation, presentation and disclosure requirements for earnings per share.
FAS 128 requires presentation of "basic" and "diluted" earnings per share, as
defined, on the face of the income statement for all entities with complex
capital structures. FAS 128 is effective for financial statements issued for
periods ending after December 15, 1997 and requires restatement of all prior
period earnings per share accounts. Management does not believe that this
restatement will have a material impact on its earnings per share statements
when adopted in fiscal 1998.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Nos. 130, "Comprehensive Income" ("FAS 130") and
131, "Disclosures About Segments of an Enterprise and Related Information" ("FAS
131"). FAS 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
FAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers.
F-9
<PAGE> 65
CREDENTIALS SERVICES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. ACCOUNTS RECEIVABLE
The Company's accounts receivable represent in process credit card billings
for new members that were submitted upon the expiration of the free trial
period, in process credit card billings for renewal members, and amounts owed to
the company by certain co-marketers who billed and collected membership fees on
behalf of the Company.
5. DEFERRED MEMBER SOLICITATION COSTS AND RELATED COMMISSIONS
Activity in deferred member solicitation costs and related commissions
consists of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-----------------------------
SEPTEMBER 27, SEPTEMBER 26,
1996 1997
------------- -------------
<S> <C> <C>
Deferred member solicitation costs at beginning of year..... $ 4,707 $ 5,826
Member solicitation costs incurred during the year.......... 22,889 22,731
Member solicitation costs amortized to expense during the
year...................................................... (14,719) (12,171)
Member solicitation costs written-off....................... (7,051) (596)
-------- --------
Deferred members solicitation costs at end of year.......... $ 5,826 $ 15,790
======== ========
</TABLE>
Member solicitation costs written-off consists of solicitation costs
incurred which the Company could not directly relate to specific members
acquired and costs which the Company determined to be impaired based on
comparing the carrying values of the unamortized member solicitation costs for
specific marketing efforts to the unamortized membership fees (net of related
estimated direct membership servicing costs) pertaining to the members acquired
through these efforts.
6. PROPERTY AND EQUIPMENT
The Company's property and equipment as of September 27, 1996 and September
26, 1997 was as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 27, SEPTEMBER 26,
1996 1997
------------- -------------
<S> <C> <C>
Office furniture................................ $ 63 $ 191
Office equipment................................ 458 381
Computer equipment.............................. 1,454 1,857
Leasehold improvements.......................... 156 220
Capitalized software............................ 1,515 3,022
------ ------
Total................................. 3,646 5,671
Less, accumulated depreciation.................. (381) (1,092)
------ ------
Net property and equipment...................... $ 3,265 $ 4,579
====== ======
</TABLE>
The Company's depreciation expense for the periods ended September 30,
1995, September 27, 1996 and September 26, 1997, was $217,000, $164,000 and
$711,000, respectively.
F-10
<PAGE> 66
CREDENTIALS SERVICES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. MEMBERSHIP FEES
An analysis of membership fees earned is summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
---------------------------------------------
SEPTEMBER 30, SEPTEMBER 27, SEPTEMBER 26,
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Membership fees collected during the year............... $ 33,846 $ 46,274 $ 61,360
Membership fees refunded................................ (2,839) (9,906) (21,543)
Recognition of prior year deferred revenue earned in the
current year.......................................... -0- 12,829 21,074
Deferral of membership fees collected in the current
year to be earned in future periods................... (18,467) (24,641) (22,852)
-------- -------- --------
Membership fees recognized during the year.............. $ 12,540 $ 24,556 $ 38,039
======== ======== ========
</TABLE>
8. NOTES PAYABLE
Principal balances of notes payable at September 27, 1996 and September 26,
1997 consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 27, SEPTEMBER 26,
1996 1997
------------- -------------
<S> <C> <C>
Term note payable to bank....................... $ 9,050 $ 7,400
Revolving line of credit........................ -- 1,920
------- -------
9,050 9,320
Less: Current maturities........................ (2,200) (4,420)
------- -------
$ 6,850 $ 4,900
======= =======
</TABLE>
The principal balance on the note payable to bank at September 27, 1996 was
$9,050,000. The loan agreement required that the Company make quarterly interest
payments at a variable interest rate based, at the Company's option, on Prime,
the Federal Funds rate, or LIBOR. The interest rate in effect at September 27,
1996 was approximately 9.75%.
Substantially all of the Company's assets and a pledge of all of the
Company's outstanding common stock collateralized the note. The note payable
agreement contained various restrictive covenants, including provisions for
minimum debt service, cash flow, and deferred revenue to deferred costs ratios.
Additionally, such provisions prohibited the incurrence of additional
indebtedness without lender approval.
In January 1997, the note payable to bank was re-financed with another bank
which provided an $11,000,000 line of credit consisting of an $8,500,000 Term
Note and a $2,500,000 maximum amount revolving line of credit. Principal on the
Term Note is payable in eleven quarterly installments commencing March 31, 1997.
Interest is payable monthly at a variable rate based, at the Company's option,
on Prime, the Federal Funds rate or LIBOR. The interest rate in effect at
September 26, 1997 was approximately 8.41%. Substantially all of the Company's
assets and a pledge of all outstanding common stock collateralize the note. The
note payable agreement contains various restrictive covenants, including
provisions for minimum EBITDA requirements, the maintenance of minimum
subscriber levels, and debt to cash flow coverage ratios. Additionally, such
provisions prohibit the incurrence of additional indebtedness without lender
approval and restrict the Company's ability to pay dividends.
Borrowings on the Company's revolving line of credit are formula-based. The
formula is based upon the level of eligible accounts receivable, as defined in
the credit agreement, with a maximum borrowing limit of $2,500,000. The balance
borrowed on the revolving line of credit is due on September 30, 1999. Interest
is payable monthly at a variable rate based, at the Company's option, on Prime,
the Federal Funds rate or
F-11
<PAGE> 67
CREDENTIALS SERVICES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. NOTES PAYABLE (CONTINUED)
LIBOR. The interest rate in effect at September 26, 1997 was approximately
9.50%. The revolving line of credit is collateralized by current assets,
therefore the Company classifies the obligation due under the line as a current
liability.
Future minimum principal payments due on notes payable as of September 26,
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS TO END SEPTEMBER
----------------------
<S> <C>
1998.............................................. $4,420
1999.............................................. 3,150
2000.............................................. 1,750
-------
$9,320
=======
</TABLE>
In January 1997, the Company refinanced its prior note payable to a bank
and wrote-off the remaining unamortized debt issuance costs related to that note
payable ($91,054, net of related income tax benefit of $60,702) as an
extraordinary item in the accompanying statement of operations.
9. SUBORDINATED NOTES PAYABLE
Subordinated notes payable at September 27, 1996 and September 26, 1997
consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 27, SEPTEMBER 26,
1996 1997
------------- -------------
<S> <C> <C>
Subordinated note payable to TRW, Inc............... $ 3,000 $ 3,000
Junior subordinated note payable to Canterbury, net
of unamortized discount of $173,750............... -- 2,826
------ ------
$ 3,000 $ 5,826
====== ======
</TABLE>
In conjunction with the acquisition of "TRW Credentials", the Company
entered into a subordinated debt agreement with TRW, Inc. The principal amount
of the note is $3,000,000 due in full on December 31, 1999, with interest, based
on LIBOR, payable quarterly. As of September 27, 1996 and September 26, 1997,
the interest rates that were in effect were 9.0625% and 9.16%, respectively. The
agreement includes a mandatory prepayment based on a percentage of excess cash
as defined in the agreement.
In March 1997, Canterbury Mezzanine Capital L.P. ("Canterbury") loaned to
the Company $3,000,000 represented by a junior subordinated note payable.
Principal on the note is payable in two equal installments on March 10, 2001 and
March 10, 2002. Interest is payable semi-annually in arrears at a fixed rate per
annum equal to 12% per annum. The note payable agreement contains several
restrictive covenants, including provisions for minimum debt to cash flow
coverage ratios, limitations on number of mailings and telemarketing activity
and restrictions on the incurrence of additional indebtedness, subject to the
terms of the loan agreement.
In accordance with the provisions of the note payable to Canterbury, the
Company granted a warrant to Canterbury to purchase 1,038,600 shares of the
Company's Common Stock. The warrant is exercisable at a nominal price per share
and has a term of ten years expiring in March 2007. The number of shares and
exercise price per share subject to the warrant are subject to anti-dilution
provisions. All of the warrants were exercised by Canterbury as of September 26,
1997.
The Company allocated a portion of the proceeds received from the
Canterbury subordinated note payable to the warrant and recorded the amount
($200,000) as a discount on the Canterbury note payable.
F-12
<PAGE> 68
CREDENTIALS SERVICES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. SUBORDINATED NOTES PAYABLE (CONTINUED)
The discount is being amortized on a straight line basis (which approximates the
effective interest method) over the term of the Canterbury note payable. The
amount allocated to the warrant was based on management's estimate of the
relative fair values of the warrants and the subordinated note payable
(exclusive of the warrant feature) at the date of issuance.
Future minimum principal payments due on subordinated notes payable as of
September 26, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS TO END SEPTEMBER
----------------------
<S> <C>
1998.............................................. --
1999.............................................. --
2000.............................................. $ 3,000
2001.............................................. 1,500
2002.............................................. 1,500
------
$ 6,000
======
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
Operating Leases -- The Company leases office space in Plano, Texas for its
customer service facility. The lease agreement requires monthly rent payments of
$16,000 that expire on September 2001. The Company also leases office facilities
in Orange, California, which house its corporate offices. The leases require
monthly payments of $2,927 and $23,334, respectively, which expire in July 14,
1997 and December 31, 1998, respectively. Rent expenses plus taxes, insurance,
maintenance and utilities for these leases was $381,000, $516,000 and $520,000
for the years ended September 30, 1995, September 27, 1996 and September 26,
1997, respectively. The Company also leases equipment under operating leases
expiring through 2001. Rent expenses, including taxes, repair and maintenance
cost associated with these leases for the years ended September 30, 1995 and
September 27, 1996 and September 26, 1997, was approximately $73,000, $85,000
and $196,000, respectively. Future minimum rent and lease payments for each of
the five succeeding years are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS TO END SEPTEMBER
----------------------
<S> <C>
1998.............................................. $ 570
1999.............................................. 318
2000.............................................. 230
2001.............................................. 227
2002.............................................. 73
</TABLE>
F-13
<PAGE> 69
CREDENTIALS SERVICES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company leases computer equipment under several agreements that expire
in June and November 1998. Future minimum lease payments (net of interest) under
the Company's capitalized leases on computer equipment are as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS TO END SEPTEMBER
----------------------
<S> <C>
1998....................................................... $ 316
1999....................................................... 255
2000....................................................... 27
2001....................................................... 0
2002....................................................... 0
-----
Total minimum payments....................................... 598
Less amount representing interest............................ (86)
-----
$ 512
Less Current Portion......................................... (367)
-----
$ 145
=====
</TABLE>
Concentration of Credit Risk -- The Company maintains its cash accounts in
commercial banks. At September 27, 1996 and September 26, 1997, cash on deposit
exceeded the federally insured limit of $100,000 by $910,000 and $426,653,
respectively.
Litigation -- Various legal proceedings have arisen in the course of the
Company's business. While it is not possible to predict the outcome of any
litigation, management believes, based in part on advice from outside legal
counsel, that the resolution of these matters will not have a material adverse
effect on the Company's financial position or results of operations.
11. 401K RETIREMENT PLAN
The Company has a 401K salary reduction plan for the benefit of its
employees. Employees are eligible to participate after 30 days of employment.
The Company will make a matching contribution equal to 50% on the first 6% that
the employee contributes to the plan. The employer's matching portions for the
years ended September 30, 1995, September 30, 1996 and September 26, 1997 were
$35,000, $88,000 and $71,000, respectively.
12. RELATED PARTY TRANSACTIONS
In October 1994, the Company entered into a consulting agreement with
Lincolnshire Management, Inc. ("LMI"), an affiliate of CSI Partners II and CIS
Acquisition Partners, L.P. Pursuant to the agreement, LMI renders management and
financial consulting services to the Company. During fiscal year 1996, these
services included assisting the Company in refinancing and reorganizing its
operations. For the services provided, the Company paid LMI annual management
and consulting fees and expenses of $259,000 in fiscal year 1995, $368,000 in
fiscal year 1996 and $390,000 in fiscal year 1997.
During the year ended September 30, 1995, Lincolnshire Management, Inc.,
was paid $1,250,000 for professional services relating primarily to the
negotiations of the acquisition from TRW, Inc., the negotiation of bank debt
agreements and the negotiation of the Subordinated Debt Agreement.
The Warrant Agreement, as discussed in Note 7, contains a provision such
that if, prior to a period of time specified in the Warrant Agreement, the note
payable and all other amounts due under the note payable agreement have been
repaid in full, and Canterbury has received in excess of $3,000,000 in cash by
reason of the sale or any other disposition of all or any portion of the Warrant
and Warrant shares, Canterbury is
F-14
<PAGE> 70
CREDENTIALS SERVICES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. RELATED PARTY TRANSACTIONS (CONTINUED)
required to pay to Lincolnshire Management, Inc., an affiliate of CSI Partners
II, an amount equal to 25% of the amount it receives in excess of $3,000,000.
In March 1997, Lincolnshire Management, Inc., was paid $300,000 for
professional services relating primarily to the negotiation of the bank debt and
subordinated debt agreements.
A law firm in which the Chairman of the Company's Board of Directors is a
partner performed legal services on behalf of the Company during 1997. Fees
incurred by the Company in connection with these services aggregated
approximately $261,000 for the year ended September 26, 1997.
13. INCOME TAXES
The provision for income taxes for the years ended September 30, 1995,
September 27, 1996 and September 26, 1997 consists of:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 27, SEPTEMBER 26,
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Current:
Federal............................... $ 0 $ 0 $44
State................................. 0 0 17
-- -
--- ---
$ 0 $ 0 $61
Deferred:
Federal............................... $ 0 $ 0 $ 0
State................................. 0 0 0
-- -
--- ---
$ 0 $ 0 $ 0
-- -
--- ---
Provision for income taxes............ $ 0 $ 0 $61
=== === ===
</TABLE>
The provision (benefit) for income taxes differs from the amount that would
result from applying the Federal statutory rate as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 27, SEPTEMBER 26,
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Tax provision (benefit) at the
statutory rate.................... (34.00%) (34.00%) 34.00%
Change in valuation allowance....... 33.98 34.00 (30.74%)
Other............................... 0.02 0.00 1.10%
------- ------- -------
0.00% 0.00% 4.36%
======= ======= =======
</TABLE>
The components of the deferred tax asset and (liability) as of September
27, 1996 and September 26, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 27, SEPTEMBER 26,
1996 1997
------------- -------------
<S> <C> <C>
Allowance for doubtful accounts........... $ 64 $ 485
Property and equipment.................... (307) (205)
Purchased membership amortization......... 1,163 1,753
Capitalized marketing costs and
commissions............................. (2,505) (3,391)
Deferred revenue.......................... 3,942 8,611
Other..................................... 84 392
Goodwill.................................. (918) (1,446)
Net operating losses...................... 10,311 5,441
-------- --------
11,834 11,640
Valuation allowance....................... (11,834) (11,640)
-------- --------
Net deferred income taxes................. $ 0 $ 0
======== ========
</TABLE>
F-15
<PAGE> 71
CREDENTIALS SERVICES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES (CONTINUED)
The Company has established a valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of such assets.
Management periodically evaluates the recoverability of the deferred tax assets.
At such time as it is determined that it is more likely than not that deferred
tax assets are realizable, the valuation allowance will be reduced.
As of September 26, 1997, the Company had net operating loss carryforwards
for Federal and state purposes of approximately $23,199,312 and $21,057,969,
respectively. The net operating loss carryforwards begin expiring after the
years ending 2010 and 2003, respectively. In the event of a "Change in
Ownership" the utilization against future taxable income of the loss
carryforwards will be subject to an annual limitation pursuant to the provisions
of the Tax Reform Act of 1988.
14. STOCKHOLDERS' DEFICIT
Preferred Stock
Each share of Series A Stock entitles its holder to receive, when and as
declared by the Board of Directors, preferential dividends which accrue
cumulatively at a compound rate of 12% per annum from the date of issuance of
each share of Series A Stock. Dividends payable with respect to each share of
Series A Stock shall be payable in cash or in shares of Series A Stock of the
Company at the issue value, at the option of the Company. In the event of
liquidation, the holders of shares of Series A Stock shall be entitled to an
amount equal to the sum of $1,000 per share of Series A Stock. The Series A
Stock is redeemable at the option of the Company at a price equal to or above
the Series A Redemption Price as outlined in the Company's Certificate of
Incorporation.
In November 1996, the Company issued 2,000 shares of Series A preferred
stock and a warrant for 2,123,072 shares of common stock in exchange for a
$2,000,000 contribution by CSI Partners II to the capital of the Company. At the
date of this transaction, all of the Company's issued and outstanding common
stock was owned by CIS Acquisition Partners, L.P. ("CIS Acquisition Partners").
As discussed in Note 1, CIS Acquisition Partners and CSI Partners II are
affiliated entities whose general partners are under common control and which
have the same principal limited partner, Lincolnshire Equity Fund, LP.
The proceeds of the $2,000,000 capital contribution from CSI Partners II
were allocated as follows: $1,999,000 to the Series A preferred stock and $1,000
to the warrant. The amount allocated to the warrant was based on the exercise
price of the warrant. Management determined that the exercise price of the
warrant was generally equivalent to its fair value since the holders of the
common stock and the warrant are affiliated entities under common control and,
accordingly, the warrant did not have a substantial effect on the underlying
beneficial ownership of the Company's common stock.
In January 1997, the Company issued 1,000 shares of Series A preferred
stock in exchange for an additional $1,000,000 contribution by CSI Partners II
to the capital of the Company required in connection with the refinancing of the
Company's then outstanding senior secured debt. In March 1997, CSI Partners II
exchanged the 3,000 shares of Series A preferred stock for 6,433,550 shares of
common stock and exercised its warrant for 2,123,072 shares of common stock.
Management Equity
Under the terms of the CSI II Partnership Agreement, a group of eleven
officers and key employees of the Company hold Class B limited partnership
interests in CSI Investment Partners II, L.P. ("CSI Partners II"), a Delaware
limited partnership, representing indirect interests in the Company Common Stock
held by that partnership. The interests held by those eleven officers and key
employees aggregate a 10% interest in CSI Partners II. The foregoing interests
were granted pursuant to agreements reached with each
F-16
<PAGE> 72
CREDENTIALS SERVICES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. STOCKHOLDERS' DEFICIT (CONTINUED)
such officer in October 1996. Under the terms of the CSI II Partnership
Agreement, the interests of each of the eleven individuals vest in accordance
with a schedule which provides that one-third of such interest vests in April
1998, an additional one-third vest in April 1999, and the remaining one-third
vest in April 2000, contingent upon such individual's continued employment with
the Company. Upon vesting of an individual's interest, the Company Common Stock
underlying that interest will be distributed to such individual. Based on the
capital structure of the Company at September 26, 1997, assuming full vesting of
all such restricted shares for all of the eleven individuals, the number of
restricted shares that would be distributed would be 855,662 shares. The CSI II
Partnership Agreement required that the eleven individuals make a capital
contribution to the partnership in the aggregate amount of $660,000 in the year
2000.
The Company applied APB Opinion 25 and related Interpretations in
accounting for the management equity interests. Accordingly, no compensation
cost was recognized since the amount which management is obligated to pay for
the interests ($660,000) exceeds the estimated value of the interest ($445,000)
at the date of grant, October 1996. Had compensation cost for the management
equity interests been determined based on the fair value of the interests
consistent with the method prescribed in Statement of Financial Accounting
Standards No. 123, the Company's net income and earnings per share would not
have been affected since the discounted value of the amount which management is
obligated to pay for the interests (approximately $532,000 based on an assumed
discount rate of 6.17% per annum) also exceeds the value of the interests at the
date of grant.
15. SUBSEQUENT EVENTS
In November 1997, pursuant to a transaction between CSI Partners II and
certain officers and key employees of the Company, the Class B limited
partnership interests in CSI Partners II owned by those officers and key
employees (see Note 13) were exchanged for 855,662 restricted shares of the
Company's common stock. The shares are being held in trust and are subject to
the same vesting provisions that previously applied to the Class B limited
partnership interests. In addition, in lieu of the $660,000 capital contribution
due May 1, 2000 that had been required under the CSI II Partnership Agreement,
the officers and key employees executed recourse promissory notes payable to CSI
Partners II aggregating $660,000 which mature on May 1, 2000 in consideration
for the restricted shares. Since the exchange of the Class B limited partnership
interests for the 855,662 restricted shares of common stock did not alter any of
the significant terms or provisions affecting management's equity in the
Company, no compensation cost was recorded in connection with the transaction.
In October 1997, the Company entered into a comarketing agreement with a
bank. Pursuant to the agreement, contingent upon the joint execution of
agreed-upon marketing plans, the Company has guaranteed to the bank $9 million
in commissions for the period from October 29, 1997 through December 31, 1998.
The Company is in the process of filing a registration statement for an
initial public offering ("IPO") of shares of equity securities. The net proceeds
of the offering will be used to repay outstanding short term and long term
indebtedness, including accrued interest thereon. At the time of the proposed
repayments of existing debt, unamortized debt issuance costs and discounts will
be written off as an extraordinary charge. The Extraordinary charge is expected
to approximate $1.1 million.
F-17
<PAGE> 73
CREDENTIALS SERVICES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Had the proposed IPO been consummated as of September 28, 1996 (the first
day of the Company's 1997 fiscal year) and the proceeds used to repay
outstanding short-term and long-term indebtedness, the Company's pro forma net
income per share for the year ended September 26, 1997 would have been as
follows:
<TABLE>
<S> <C>
Actual net income....................................................... $ 1,248,000
Pro forma adjustments to eliminate interest expense and recognize the
write-off of unamortized debt issuance costs............................ 355,000
-----------
Pro forma net income.................................................... $ 1,603,000
==========
Actual weighted average common and common equivalent shares............. 9,616,667
Pro forma adjustment to reflect additional shares....................... 1,050,000
-----------
Pro forma weighted average common and common equivalent shares.......... 10,666,667
==========
Pro forma net income per common and common equivalent share before
extraordinary item.................................................... $ 0.19
Extraordinary item...................................................... (0.04)
-----------
Pro forma net income per common and common equivalent share............. $ 0.15
==========
</TABLE>
On November 21, 1997, the Board of Directors authorized a 214.4517-for-1
stock split of the Company's common stock. Additionally, common stock authorized
was increased to 20,000,000 shares and preferred stock authorized was increased
to 5,000,000 shares. All share and per share amounts have been retroactively
restated to reflect these events.
In November 1997, the Company adopted a Stock Option Plan providing for the
grant, from time to time, of options to purchase up to 800,000 shares of Common
Stock to employees and officers of the Company.
F-18
<PAGE> 74
Inside back cover:
[Logo of Credentials Services International, Inc.]
Credentials(R) Credit Report Monitoring Service
[Graphic depiction of a credit report, form of inquiry notification and
quarterly recap. Benefits of the Credentials(R) Credit Report Monitoring Service
are described as: unlimited Experian credit reports at no additional charge;
plain English easy-to-read narrative summary of data; automatic notification of
inquiries to a member's credit file; and quarterly recap of any new negative
information that has been posted to a member's credit file.]
<PAGE> 75
======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT INFORMATION CONTAINED HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 5
Use of Proceeds....................... 14
Dividend Policy....................... 14
Capitalization........................ 15
Dilution.............................. 16
Selected Financial Data............... 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 26
Management............................ 37
Certain Transactions.................. 43
Principal and Selling Stockholders.... 46
Description of Capital Stock.......... 48
Shares Eligible for Future Sale....... 50
Underwriting.......................... 51
Legal Matters......................... 52
Experts............................... 52
Additional Information................ 52
Index to Financial Statements......... F-1
</TABLE>
------------------------
UNTIL , 199 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================================
======================================================
5,500,000 SHARES
LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
PAINEWEBBER INCORPORATED
HAMBRECHT & QUIST
------------------------
, 1997
======================================================
<PAGE> 76
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses expected to be incurred
by the Registrant and the Selling Stockholders in connection with the sale and
distribution of the securities being registered hereby, other than underwriting
discounts and commissions. All amounts are estimated except the Securities and
Exchange Commission registration fee and the Nasdaq National Market filing fee.
<TABLE>
<CAPTION>
PAYABLE BY
REGISTRANT
----------
<S> <C>
SEC registration fee............................................. $ 30,667
Nasdaq National Market filing fee................................ 47,500
Blue Sky fees and expenses....................................... 7,500
Accounting fees and expenses..................................... 350,000
Legal fees and expenses.......................................... 625,000
Printing and engraving expenses.................................. 225,000
Registrar and Transfer Agent's fees.............................. 8,000
Miscellaneous fees and expenses.................................. 6,333
----------
Total.................................................. $1,300,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides for the
indemnification of officers, directors, and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended (the "Securities Act"). Article Tenth of the
Registrant's Amended and Restated Certificate of Incorporation (Exhibit 3.1(ii)
hereto) and Article VI of the Registrant's Amended and Restated Bylaws (Exhibit
3.2 hereto) provide for indemnification of the Registrant's directors, officers,
employees and other agents to the extent and under the circumstances permitted
by the Delaware General Corporation Law. The Registrant has also entered into
agreements with its directors and officers that will require the Registrant,
among other things, to indemnify them against certain liabilities that may arise
by reason of their status or service as directors or officers to the fullest
extent not prohibited by law.
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by
the Underwriters of the Registrant, its directors and officers, and by the
Registrant of the Underwriters, for certain liabilities, including liabilities
arising under the Securities Act, and affords certain rights of contribution
with respect thereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) In October 1994, the Registrant issued 21,445 shares of its Common
Stock to CIS Acquisition Partners, L.P., for aggregate cash
consideration of $4.0 million. The Registrant relied on the exemption
provided by Section 4(2) of the Securities Act.
(b) Pursuant to the terms of agreements reached in October 1996, a group of
eleven officers and key employees of the Company were granted indirect
contingent equity interests in the Registrant aggregating a 10% equity
interest in the Registrant. In November 1997, these indirect contingent
equity interests were restructured so that shares of restricted stock
in the Registrant were granted in exchange for the indirect contingent
equity interests previously granted. The shares remain subject to
vesting conditions of Common Stock Agreements which provide that each
of such officer's shares vest in accordance with a schedule which
provides that one-third of such shares vest in April 1998, an
additional one-third vest in April 1999, and the remaining one-third
vest in April 2000, contingent upon such individual's continued
employment with the Registrant. Assuming full vesting of all such
shares for all of the eleven individuals, the number of restricted
shares that would be distributed would be 855,662 shares. In addition,
each of the eleven officers and key employees will execute a recourse
promissory note in consideration of his respective equity interest. The
promissory notes are
II-1
<PAGE> 77
payable to CSI Partners II and aggregate $660,000 in principal amount ($214,500
for Mr. Thompson, $6,600 for Mr. Caudle, $49,500 for Mr. Cossel, $62,700 for Mr.
Rothe, and $95,700 for Mr. Pruthi). The promissory notes bear interest at 6.64%
per annum, are payable annually and mature on May 1, 2000.
(c) In November 1996, the Registrant issued 2,000 shares of Series A
Cumulative Preferred Stock (the "Series A Preferred Stock") and granted
warrants to acquire 2,123,072 shares of its Common Stock to CSI
Investment Partners II, L.P. ("CSI Partners II"), for aggregate cash
consideration of $2.0 million. In January 1997, the Registrant issued
1,000 additional shares of Series A Preferred Stock to CSI Partners II,
for aggregate cash consideration of $1.0 million. In each case, the
Registrant relied on the exemption provided by Section 4(2) of the
Securities Act. In March 1997, as a condition of a $3.0 million
subordinated loan to the Registrant made by Canterbury Mezzanine
Capital, L.P. ("Canterbury Capital"), CSI Partners II exchanged its
3,000 outstanding shares of Series A Preferred Stock for 6,433,550
shares of the Registrant's Common Stock and exercised its warrants (at
a nominal exercise price aggregating $1,000) for 2,123,072 shares of
Common Stock.
(d) In March 1997, the Registrant granted warrants to purchase a total of
1,038,600 shares of its Common Stock to Canterbury Capital in
connection with Canterbury Capital's $3.0 million subordinated loan to
the Registrant. The Registrant relied on the exemption provided by
Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
-------------- -------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.
**3.1(i) Certificate of Incorporation of the Registrant, as amended.
**3.1(ii) Amended and Restated Certificate of Incorporation of the Registrant.
**3.2 Amended and Restated Bylaws of the Registrant.
**4.1 Specimen Common Stock Certificate.
**4.2 Form of Registration Rights Agreement among the Registrant, CSI
Investment Partners II, L.P., and Canterbury Mezzanine Capital, L.P.
**4.3 Warrant Agreement between the Registrant and Canterbury Mezzanine
Capital, L.P., dated as of March 10, 1997, as amended.
**5.1 Opinion of Maloney, Mehlman & Katz.
**10.1+ Consumer Credit Subscriber Service Agreement, dated October 18, 1994,
entered into by TRW Inc., and the Registrant.
**10.2 Office Lease, dated as of June 13, 1995, by and between TGALMA Limited
and the Registrant, as amended.
**10.3 SubLease Agreement, dated as of December 6, 1994, by and between
Cal-Surance Associates and the Registrant; Office Lease dated August 23,
1988, by and between Metropolitan Tishman Tower Venture and Cal-Surance
Associates, Inc., as amended.
**10.4 Employment Agreement, dated as of May 9, 1997, by and between David C.
Thompson and the Registrant.
**10.5 Employment Agreement, dated as of August 15, 1996, by and between Chuck
Caudle and the Registrant.
**10.6 Letter Agreement, dated August 16, 1995, by and between Mike Cossel and
the Registrant.
**10.7 Letter Agreement, dated September 5, 1995, by and between James Rothe and
the Registrant.
**10.8 Employment Agreement, dated as of December, 1996, by and between Vineet
Pruthi and the Registrant.
**10.9 Letter Agreement, dated October 1, 1994, by and between Gerry Keehan and
the Registrant.
</TABLE>
II-2
<PAGE> 78
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
-------------- -------------------------------------------------------------------------
<S> <C>
**10.10 Employment Agreement, dated as of December 3, 1996, by and between Donald
J. Shea, Jr., and the Registrant.
**10.11 Credentials Services International, Inc. 1997 Stock Option Plan.
**10.12(i) Credit Agreement, dated as of January 14, 1997, between the Registrant
and LaSalle National Bank.
**10.12(ii) Revolving Note, dated January 14, 1997, of the Registrant payable to
LaSalle National Bank.
**10.12(iii) Term Note, dated January 14, 1997, of the Registrant payable to LaSalle
National Bank.
**10.12(iv) Security Agreement, dated as of January 14, 1997, between the Registrant
and LaSalle National Bank.
**10.12(v) Patent, Trademark and Copyright Security Agreement, dated as of January
14, 1997, between the Registrant and LaSalle National Bank.
**10.12(vi) Collateral Assignment of Contracts, dated as of January 14, 1997, between
the Registrant and LaSalle National Bank.
**10.12(vii) Pledge Agreement, dated as of January 14, 1997, made by CSI Investment
Partners II, L.P., in favor of LaSalle National Bank.
**10.12(viii) Pledge Agreement, dated as of January 14, 1997, made by CIS Acquisition
Partners, L.P., in favor of LaSalle National Bank.
**10.12(ix) First Amendment to Credit Agreement, dated March 10, 1997, between the
Registrant and LaSalle National Bank.
**10.12(x) Second Amendment to Credit Agreement, dated August 13, 1997, between the
Registrant and LaSalle National Bank.
**10.12(xi) Third Amendment to Credit Agreement, dated September 26, 1997, between
the Registrant and LaSalle National Bank.
**10.13 Form of Director and Officer Indemnification Agreement.
**10.14 Form of Common Stock Agreement among the Registrant, CSI Investment
Partners II, L.P., and the Restricted Shareholder named therein.
**10.15 Amended and Restated Agreement of Limited Partnership of CSI Investment
Partners II, L.P., dated as of October 7, 1997.
**10.16 Amended and Restated Agreement of Limited Partnership of CSI Investment
Partners II, L.P., dated as of November 15, 1997.
**11.1 Statement re Computation of Per Share Earnings.
23.1 Consent of Coopers & Lybrand L.L.P.
**23.2 Consent of Maloney, Mehlman & Katz (included in its opinion filed as
Exhibit 5.1 to this Registration Statement).
**24.1 Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
** Filed previously.
+ Confidential treatment has been requested with respect to certain portions of
this agreement.
(b) FINANCIAL STATEMENT SCHEDULES
Financial statement schedules other than those referred to above have been
omitted because they are not applicable or not required or because the
information is included elsewhere in the Financial Statements or the notes
thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"), 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
II-3
<PAGE> 79
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the 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 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 and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus 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.
(3) It will provide to the underwriters at the closing(s) specified in
the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
II-4
<PAGE> 80
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Orange,
State of California, on the 9th day of December, 1997.
CREDENTIALS SERVICES INTERNATIONAL, INC.
By /s/ DAVID C. THOMPSON
----------------------------------------
David C. Thompson
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------------------------------- ------------------------- -------------------
<C> <S> <C>
/s/ DAVID C. THOMPSON President, Chief December 9, 1997
- --------------------------------------------- Executive Officer and
David C. Thompson Director (Principal
Executive Officer)
/s/ VINEET PRUTHI* Executive Vice President December 9, 1997
- --------------------------------------------- and Chief Financial
Vineet Pruthi Officer (Principal
Financial and Accounting
Officer)
/s/ THOMAS J. MALONEY* Chairman and Director December 9, 1997
- ---------------------------------------------
Thomas J. Maloney
/s/ C. KENNETH CLAY* Director December 9, 1997
- ---------------------------------------------
C. Kenneth Clay
/s/ NICHOLAS DUNPHY* Director December 9, 1997
- ---------------------------------------------
Nicholas Dunphy
/s/ WILLIAM A. HALL* Director December 9, 1997
- ---------------------------------------------
William A. Hall
/s/ M. GERARD KEEHAN* Director December 9, 1997
- ---------------------------------------------
M. Gerard Keehan
*By: /s/ DAVID C. THOMPSON
----------------------------------------
David C. Thompson
Attorney-in-fact
</TABLE>
II-5
<PAGE> 81
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
-------------- -------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.
**3.1(i) Certificate of Incorporation of the Registrant, as amended.
**3.1(ii) Amended and Restated Certificate of Incorporation of the Registrant.
**3.2 Amended and Restated Bylaws of the Registrant.
**4.1 Specimen Common Stock Certificate.
**4.2 Form of Registration Rights Agreement among the Registrant, CSI
Investment Partners II, L.P., and Canterbury Mezzanine Capital, L.P.
**4.3 Warrant Agreement between the Registrant and Canterbury Mezzanine
Capital, L.P., dated as of March 10, 1997, as amended.
**5.1 Opinion of Maloney, Mehlman & Katz.
**10.1+ Consumer Credit Subscriber Service Agreement, dated October 18, 1994,
entered into by TRW Inc., and the Registrant.
**10.2 Office Lease, dated as of June 13, 1995, by and between TGALMA Limited
and the Registrant, as amended.
**10.3 SubLease Agreement, dated as of December 6, 1994, by and between
Cal-Surance Associates and the Registrant; Office Lease dated August 23,
1988, by and between Metropolitan Tishman Tower Venture and Cal-Surance
Associates, Inc., as amended.
**10.4 Employment Agreement, dated as of May 9, 1997, by and between David C.
Thompson and the Registrant.
**10.5 Employment Agreement, dated as of August 15, 1996, by and between Chuck
Caudle and the Registrant.
**10.6 Letter Agreement, dated August 16, 1995, by and between Mike Cossel and
the Registrant.
**10.7 Letter Agreement, dated September 5, 1995, by and between James Rothe and
the Registrant.
**10.8 Employment Agreement, dated as of December, 1996, by and between Vineet
Pruthi and the Registrant.
**10.9 Letter Agreement, dated October 1, 1994, by and between Gerry Keehan and
the Registrant.
**10.10 Employment Agreement, dated as of December 3, 1996, by and between Donald
J. Shea, Jr., and the Registrant.
**10.11 Credentials Services International, Inc. 1997 Stock Option Plan.
**10.12(i) Credit Agreement, dated as of January 14, 1997, between the Registrant
and LaSalle National Bank.
**10.12(ii) Revolving Note, dated January 14, 1997, of the Registrant payable to
LaSalle National Bank.
**10.12(iii) Term Note, dated January 14, 1997, of the Registrant payable to LaSalle
National Bank.
**10.12(iv) Security Agreement, dated as of January 14, 1997, between the Registrant
and LaSalle National Bank.
**10.12(v) Patent, Trademark and Copyright Security Agreement, dated as of January
14, 1997, between the Registrant and LaSalle National Bank.
</TABLE>
<PAGE> 82
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
-------------- -------------------------------------------------------------------------
<S> <C>
**10.12(vi) Collateral Assignment of Contracts, dated as of January 14, 1997, between
the Registrant and LaSalle National Bank.
**10.12(vii) Pledge Agreement, dated as of January 14, 1997, made by CSI Investment
Partners II, L.P., in favor of LaSalle National Bank.
**10.12(viii) Pledge Agreement, dated as of January 14, 1997, made by CIS Acquisition
Partners, L.P., in favor of LaSalle National Bank.
**10.12(ix) First Amendment to Credit Agreement, dated March 10, 1997, between the
Registrant and LaSalle National Bank.
**10.12(x) Second Amendment to Credit Agreement, dated August 13, 1997, between the
Registrant and LaSalle National Bank.
**10.12(xi) Third Amendment to Credit Agreement, dated September 26, 1997, between
the Registrant and LaSalle National Bank.
**10.13 Form of Director and Officer Indemnification Agreement.
**10.14 Form of Common Stock Agreement among the Registrant, CSI Investment
Partners II, L.P., and the Restricted Shareholder named therein.
**10.15 Amended and Restated Agreement of Limited Partnership of CSI Investment
Partners II, L.P., dated as of October 7, 1997.
**10.16 Amended and Restated Agreement of Limited Partnership of CSI Investment
Partners II, L.P., dated as of November 15, 1997.
**11.1 Statement re Computation of Per Share Earnings.
23.1 Consent of Coopers & Lybrand L.L.P.
**23.2 Consent of Maloney, Mehlman & Katz (included in its opinion filed as
Exhibit 5.1 to this Registration Statement).
**24.1 Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
** Filed previously.
+ Confidential treatment has been requested with respect to certain portions of
this agreement.
<PAGE> 1
5,500,000 Shares
CREDENTIALS SERVICES INTERNATIONAL, INC.
Common Stock
UNDERWRITING AGREEMENT
December __, 1997
PAINEWEBBER INCORPORATED
HAMBRECHT & QUIST, LLC
As Representatives of the
several Underwriters
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Dear Sirs:
Credentials Services International, Inc., a Delaware
corporation (the "Company"), and the persons named in Schedule I (the "Selling
Stockholders") propose to sell an aggregate of 5,500,000 shares (the "Firm
Shares") of the Company's Common Stock, $.01 par value per share (the "Common
Stock"), of which 1,050,000 shares are to be issued and sold by the Company and
an aggregate of 4,450,000 shares are to be sold by the Selling Stockholders in
the respective amounts set forth opposite their respective names in Schedule I,
in each case to you and to the other underwriters named in Schedule II
(collectively, the "Underwriters"), for whom you are acting as representatives
(the "Representatives"). The Selling Stockholders have also agreed to grant to
you and the other Underwriters an option (the "Option") to purchase up to an
additional 825,000 shares of Common Stock (the "Option Shares") on the terms
and for the purposes set forth in
<PAGE> 2
Section 1(b). The Firm Shares and the Option Shares are hereinafter
collectively referred to as the "Shares."
The initial public offering price per share for the Shares and
the purchase price per share for the Shares to be paid by the several
Underwriters shall be agreed upon by the Company, the Selling Stockholders and
the Representatives, acting on behalf of the several Underwriters, and such
agreement shall be set forth in a separate written instrument substantially in
the form of Exhibit A hereto (the "Price Determination Agreement"). The Price
Determination Agreement may take the form of an exchange of any standard form
of written telecommunication among the Company, the Selling Stockholders and
the Representatives and shall specify such applicable information as is
indicated in Exhibit A hereto. The offering of the Shares will be governed by
this Agreement, as supplemented by the Price Determination Agreement. From and
after the date of the execution and delivery of the Price Determination
Agreement, this Agreement shall be deemed to incorporate, and, unless the
context otherwise indicates, all references contained herein to "this
Agreement" and to the phrase "herein" shall be deemed to include the Price
Determination Agreement.
Each Selling Stockholder has executed and delivered a Custody
Agreement and a Power of Attorney in the form attached hereto as Exhibit B
(collectively, the "Agreement and Power of Attorney") pursuant to which each
Selling Stockholder has placed his Firm Shares in custody and appointed the
persons designated therein as a committee (the "Committee") with authority to
execute and deliver this Agreement on behalf of such Selling Stockholder and to
take certain other actions with respect thereto and hereto.
The Company and the Selling Stockholders confirm as follows
their respective agreements with the Representatives and the several other
Underwriters.
1. Agreement to Sell and Purchase.
(a) On the basis of the respective
representations, warranties and agreements of the Company and the Selling
Stockholders herein contained and subject to all the terms and conditions of
this Agreement, (i) the Company and each of the Selling Stockholders, severally
and not jointly, agree to sell to the several Underwriters and (ii) each of the
Underwriters, severally and not jointly, agrees to purchase from the Company
and the Selling Stockholders, at the purchase price per share for the Firm
Shares to be agreed upon by the Representatives, the Company and the Selling
Stockholders in accordance with Section 1(c) and set forth in the Price
Determination Agreement, the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule II, plus such additional number of Firm Shares
which such Underwriter may become obligated to purchase pursuant to Section 9
hereof. Schedule II may be attached to the Price Determination Agreement.
2
<PAGE> 3
(b) Subject to all the terms and conditions of
this Agreement, the Selling Stockholders grant the Option to the several
Underwriters, on a pro rata basis based on the number of Firm Shares to be sold
by such Selling Stockholders to purchase, severally and not jointly, up to
825,000 Option Shares from the Selling Stockholders at the same price per share
as the Underwriters shall pay for the Firm Shares. The Option may be exercised
only to cover over-allotments in the sale of the Firm Shares by the
Underwriters and may be exercised in whole or in part at any time (but not more
than once) on or before the 45th day after the date of this Agreement (or, if
the Company has elected to rely on Rule 430A, on or before the 45th day after
the date of the Price Determination Agreement), upon written or telegraphic
notice (the "Option Shares Notice") by the Representatives to the Committee no
later than 12:00 noon, New York City time, at least two and no more than five
business days before the date specified for closing in the Option Shares Notice
(the "Option Closing Date") setting forth the aggregate number of Option Shares
to be purchased and the time and date for such purchase. On the Option Closing
Date, the Selling Stockholders will sell to the Underwriters the number of
Option Shares set forth in the Option Shares Notice, and each Underwriter will
purchase such percentage of the Option Shares as is equal to the percentage of
Firm Shares that such Underwriter is purchasing, as adjusted by the
Representatives in such manner as they deem advisable to avoid fractional
shares.
(c) The initial public offering price per share
for the Firm Shares and the purchase price per share for the Firm Shares to be
paid by the several Underwriters shall be agreed upon and set forth in the
Price Determination Agreement. In the event such price has not been agreed
upon and the Price Determination Agreement has not been executed by the close
of business on the fourteenth business day following the date on which the
Registration Statement becomes effective, this Agreement shall terminate
forthwith, without liability of any party to any other party except that
Section 5(i), Section 5(j) and Section 7 shall remain in effect.
2. Delivery and Payment. Delivery of
the Firm Shares shall be made to the Representatives for the accounts of the
Underwriters against payment of the purchase price by wire transfer in
immediately available funds. Such payment shall be made at 10:00 a.m., New
York City time, on the [third] [fourth] business day after the date on which
the first bona fide offering of the Shares to the public is made by the
Underwriters or at such time on such other date, not later than ten business
days after such date, as may be agreed upon by the Company and the
Representatives (such date is hereinafter referred to as the "Closing Date").
To the extent the Option is exercised, delivery of
the Option Shares against payment by the Underwriters (in the manner specified
above) will take place at the time and date (which may be the Closing Date)
specified in the Option Shares Notice.
3
<PAGE> 4
Certificates evidencing the Shares shall be in
definitive form and shall be registered in such names and in such denominations
as the Representatives shall request at least two business days prior to the
Closing Date or the Option Closing Date, as the case may be, by written notice
to the Company. For the purpose of expediting the checking and packaging of
certificates for the Shares, the Company agrees to make such certificates
available for inspection at least 24 hours prior to the Closing Date or the
Option Closing Date, as the case may be.
The cost of original issue tax stamps, if any, in
connection with the issuance and delivery of the Firm Shares and Option Shares
by the Company to the respective Underwriters shall be borne by the Company.
The cost of tax stamps, if any, in connection with the sale of the Firm Shares
by the Selling Stockholders shall be borne by the Selling Stockholders. The
Company and the Selling Stockholders will pay and save each Underwriter and any
subsequent holder of the Shares harmless from any and all liabilities with
respect to or resulting from any failure or delay in paying Federal and state
stamp and other transfer taxes, if any, which may be payable or determined to
be payable in connection with the original issuance or sale to such Underwriter
of the Firm Shares and Option Shares.
3. Representations and Warranties of the Company. The
Company and CSI Investment Partners II, L.P. ("CSI II") represent, warrant and
covenant to each Underwriter that:
(a) A registration statement (Registration No.
333-37461) on Form S-1 relating to the Shares, including a preliminary
prospectus and such amendments to such registration statement as may have been
required to the date of this Agreement, has been prepared by the Company under
the provisions of the Securities Act of 1933, as amended (the "Act"), and the
rules and regulations (collectively referred to as the "Rules and Regulations")
of the Securities and Exchange Commission (the "Commission") thereunder, and
has been filed with the Commission. The term "preliminary prospectus" as used
herein means a preliminary prospectus as contemplated by Rule 430 or Rule 430A
("Rule 430A") of the Rules and Regulations included at any time as part of the
registration statement. Copies of such registration statement and amendments
and of each related preliminary prospectus have been delivered to the
Representatives. The term "Registration Statement" means the registration
statement as amended at the time it becomes or became effective (the "Effective
Date"), including financial statements and all exhibits and any information
deemed to be included by Rule 430A or Rule 434 of the Rules and Regulations.
If the Company files a registration statement to register a portion of the
Shares and relies on Rule 462(b) of the Rules and Regulations for such
registration statement to become effective upon filing with the Commission (the
"Rule 462 Registration Statement"), then any reference to the "Registration
Statement" shall be deemed to include the Rule 462 Registration Statement, as
amended from time to time. The term "Prospectus" means the prospectus as first
filed with the
4
<PAGE> 5
Commission pursuant to Rule 424(b) of the Rules and Regulations or, if no such
filing is required, the form of final prospectus included in the Registration
Statement at the Effective Date.
(b) On the Effective Date, the date the
Prospectus is first filed with the Commission pursuant to Rule 424(b) (if
required), at all times subsequent to and including the Closing Date and, if
later, the Option Closing Date and when any post-effective amendment to the
Registration Statement becomes effective or any amendment or supplement to the
Prospectus is filed with the Commission, the Registration Statement and the
Prospectus (as amended or as supplemented if the Company shall have filed with
the Commission any amendment or supplement thereto), including the financial
statements included in the Prospectus, did or will comply in all material
respects with all applicable provisions of the Act and the Rules and
Regulations and will contain all statements required to be stated therein in
accordance with the Act and the Rules and Regulations. On the Effective Date
and when any post-effective amendment to the Registration Statement becomes
effective, no part of the Registration Statement or any such amendment did or
will contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading. At the Effective Date, the date the
Prospectus or any amendment or supplement to the Prospectus is filed with the
Commission and at the Closing Date and, if later, the Option Closing Date, the
Prospectus did not or will not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading. The
foregoing representations and warranties in this Section 3(b) do not apply to
any statements or omissions made in reliance on and in conformity with
information relating to any Underwriter furnished in writing to the Company by
the Representatives specifically for inclusion in the Registration Statement or
Prospectus or any amendment or supplement thereto. For all purposes of this
Agreement, the amounts of the selling concession and reallowance set forth in
the Prospectus constitute the only information relating to any Underwriter
furnished in writing to the Company by the Representatives specifically for
inclusion in the preliminary prospectus, the Registration Statement or the
Prospectus. The Company has not distributed (except through the Underwriters)
any offering material in connection with the offering or sale of the Shares
other than the Registration Statement, the preliminary prospectus, the
Prospectus or any other materials, if any, permitted by the Act.
(c) The Company is, and at the Closing Date will
be, duly incorporated and validly existing as a corporation and in good
standing under the laws of the State of Delaware. The Company has, and at the
Closing Date will have, full power and authority to conduct all the activities
conducted by it, to own or lease all the assets owned or leased by it and to
conduct its business as described in the Registration Statement and the
Prospectus. The Company is, and at the Closing Date will be, duly licensed or
qualified to
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<PAGE> 6
do business and in good standing as a foreign corporation in all jurisdictions
in which the nature of the activities conducted by it or the character of the
assets owned or leased by it makes such licensing or qualification necessary.
The Company does not own, and at the Closing Date will not own, directly or
indirectly, any shares of stock or any other equity or long-term debt
securities of any corporation or have any equity interest in any firm,
partnership, joint venture, association or other entity. Complete and correct
copies of the certificate of incorporation and of the by-laws of the Company
and all amendments thereto have been delivered to the Representatives, and no
changes therein will be made subsequent to the date hereof and prior to the
Closing Date or, if later, the Option Closing Date.
(d) The Company has an authorized capitalization
as set forth in the Registration Statement and the Prospectus and all of the
outstanding shares of Common Stock have been, and the Shares to be issued and
sold by the Company to the Underwriters hereunder upon such issuance will be,
duly authorized, validly issued, fully paid and nonassessable and will not be
subject to any preemptive or similar right. The description of the Common
Stock in the Registration Statement and the Prospectus is, and at the Closing
Date will be, complete and accurate in all respects. Except as set forth in
the Prospectus, the Company does not have outstanding, and at the Closing Date
will not have outstanding, any options to purchase, or any rights or warrants
to subscribe for, or any securities or obligations convertible into, or any
contracts or commitments to issue or sell, any shares of Common Stock or any
such warrants, convertible securities or obligations.
(e) The financial statements and schedules
included in the Registration Statement or the Prospectus present fairly the
financial condition of the Company as of the respective dates thereof and the
results of operations and cash flows of the Company for the respective periods
covered thereby, all in conformity with generally accepted accounting
principles applied on a consistent basis throughout the entire period involved,
except as otherwise disclosed in the Prospectus. No other financial statements
or schedules of the Company are required by the Act or the Rules and
Regulations to be included in the Registration Statement or the Prospectus.
Coopers & Lybrand LLP (the "Accountants"), who have reported on such financial
statements and schedules, are independent accountants with respect to the
Company as required by the Act and the Rules and Regulations. The statements
included in the Registration Statement with respect to the Accountants pursuant
to Rule 509 of Regulation S-K of the Rules and Regulations are true and correct
in all material respects.
(f) The Company maintains a system of internal
accountings control sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (iii) access
to assets is
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<PAGE> 7
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any material differences.
(g) Subsequent to the respective dates as of
which information is given in the Registration Statement and the Prospectus and
prior to the Closing Date, except as set forth in or contemplated by the
Registration Statement and the Prospectus, (i) there has not been and will not
have been any change in the capitalization of the Company, or in the business,
properties, business prospects, condition (financial or otherwise) or results
of operations of the Company, arising for any reason whatsoever, (ii) the
Company has not incurred nor will it incur any material liabilities or
obligations, direct or contingent, nor has it entered into nor will it enter
into any material transactions other than pursuant to this Agreement and the
transactions referred to herein and (iii) the Company has not and will not have
paid or declared any dividends or other distributions of any kind on any class
of its capital stock.
(h) The Company is not an "investment company" or
an "affiliated person" of, or "promoter" or "principal underwriter" for, an
"investment company," as such terms are defined in the Investment Company Act
of 1940, as amended.
(i) Except as set forth in the Registration
Statement and the Prospectus, there are no actions, suits or proceedings
pending or, to the best of the Company's knowledge, threatened against or
affecting the Company or any of its officers in their capacity as such, before
or by any Federal or state court, commission, regulatory body, administrative
agency or other governmental body, domestic or foreign, wherein an unfavorable
ruling, decision or finding might materially and adversely affect the Company
or its business, properties, business prospects, condition (financial or
otherwise) or results of operations.
(j) The Company has, and at the Closing Date will
have, (i) all material governmental licenses, permits, consents, orders,
approvals and other authorizations necessary to carry on its business as
contemplated in the Prospectus, (ii) complied in all material respects with all
laws, regulations and orders applicable to it or its business and (iii)
performed in all material respects all its obligations required to be performed
by it, and is not, and at the Closing Date will not be, in default, under any
indenture, mortgage, deed of trust, voting trust agreement, loan agreement,
bond, debenture, note agreement, lease, contract or other agreement or
instrument (collectively, a "contract or other agreement") to which it is a
party or by which its property is bound or affected. To the best knowledge of
the Company, no other party under any contract or other agreement to which it
is a party is in default in any material respect thereunder. The Company is
not, and at the Closing Date will not be, in violation of any provision of its
certificate of incorporation or bylaws.
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<PAGE> 8
(k) No consent, approval, authorization or order
of, or any filing or declaration with, any court or governmental agency or body
is required in connection with the authorization, issuance, transfer, sale or
delivery of the Shares by the Company, in connection with the execution,
delivery and performance of this Agreement by the Company or in connection with
the taking by the Company of any action contemplated hereby, except such as
shall have been obtained under the Act or the Rules and Regulations and such as
may be required under state securities or Blue Sky laws or the by-laws and
rules of the National Association of Securities Dealers, Inc. (the "NASD") in
connection with the purchase and distribution by the Underwriters of the Shares
to be sold by the Company.
(l) The Company has full corporate power and
authority to enter into this Agreement. This Agreement has been duly
authorized, executed and delivered by the Company and constitutes a valid and
binding agreement of the Company and is enforceable against the Company in
accordance with the terms hereof. The performance of this Agreement and the
consummation of the transactions contemplated hereby and the application of the
net proceeds to be obtained by the Company from the offering and sale of the
Shares to be sold by the Company in the manner set forth in the Prospectus
under "Use of Proceeds" will not result in the creation or imposition of any
lien, charge or encumbrance upon any of the assets of the Company pursuant to
the terms or provisions of, or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, or give any other party
a right to terminate any of its obligations under, or result in the
acceleration of any obligation under, any contract or other agreement to which
the Company is a party or by which the Company or any of its properties is
bound or affected, or violate or conflict with any judgment, ruling, decree,
order, statute, rule or regulation of any court or other governmental agency or
body having jurisdiction over the Company or any of its properties, in each
case that is reasonably likely to have a material adverse affect on the
business, properties, business prospects, condition (financial or otherwise) or
results of operations of the Company, or the validity, performance or
consummation of the transactions contemplated hereby; nor will such action
result in a breach or violation of any of the terms or provisions of the
certificate of incorporation or bylaws of the Company.
(m) The Company owns no real property and has
good and marketable title to all personal property and assets described in the
Prospectus as owned by it, free and clear of all liens, charges, encumbrances
or restrictions, except such as are described in the Prospectus or are not
material to the business of the Company. The Company has valid, subsisting and
enforceable leases or subleases for the properties described in the Prospectus
as leased by it, with such exceptions as are not material and do not materially
interfere with the use made and proposed to be made of such properties by the
Company.
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<PAGE> 9
(n) There is no document or contract of a
character required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement which is
not described or filed as required. All such contracts to which the Company is
a party have been duly authorized, executed and delivered by the Company,
constitute valid and binding agreements of the Company and are enforceable
against the Company in accordance with the terms thereof.
(o) No statement, representation, warranty or
covenant made by the Company in this Agreement or made in any certificate or
document required by this Agreement to be delivered to the Representatives was
or will be, when made, inaccurate, untrue or incorrect in any material respect.
(p) Neither the Company nor any of its directors,
officers or controlling persons has taken, directly or indirectly, any action
intended, or which might reasonably be expected, to cause or result, under the
Act or otherwise, in, or which has constituted, stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale of
the Shares.
(q) No holder of securities of the Company has
the right to require the Company to include such securities in the Registration
Statement being used to register the Shares.
(r) Prior to the Closing Date, the Shares will be
duly authorized for quotation on the Nasdaq National Market ("NNM") upon
official notice of issuance.
(s) The Company is not involved in any material
labor dispute nor, to the knowledge of the Company, is any such dispute
threatened.
(t) The Company owns, or is licensed or otherwise
has the full exclusive right to use, all material trademarks and trade names
which are used in or necessary for the conduct of its businesses as described
in the Prospectus. No claims have been asserted by any person to the use of
any such trademarks or trade names or challenging or questioning the validity
or effectiveness of any such trademark or trade name. The use, in connection
with the business and operations of the Company of such trademarks and trade
names does not, to the Company's knowledge, infringe in any material respect on
the rights of any person.
(u) Neither the Company nor, to the Company's
knowledge, any employee or agent of the Company has made any payment of funds
of the Company or received or retained any funds in violation of any law, rule
or regulation of a character required to be disclosed in the Prospectus.
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<PAGE> 10
(v) Neither the Company nor, to the Company's
knowledge, any employee or agent of the Company has violated any of the rules
or regulations of the Federal Trade Commission applicable to tele-marketing or
direct mail solicitations the violation of which could reasonably be expected
to have a material adverse effect on the business, properties, business
prospects, condition (financial or otherwise) or results of operations of the
Company.
(w) The Company and, to the Company's knowledge,
each employee and agent of the Company has acted in compliance with all
applicable provisions of the Federal Fair Credit Reporting Act or any similar
act of any state, the violation of which could reasonably be expected to have a
material adverse effect on the business, properties, business prospects,
condition (financial or otherwise) or results of operations of the Company.
(x) The Company is not a "credit repair
organization" as such term is defined under the Federal Credit Repair
Organizations Act.
4. Representations and Warranties of the Selling
Stockholders. Each Selling Stockholder, severally and not jointly, represents,
warrants and covenants to each Underwriter that:
(a) Such Selling Stockholder has full power and
authority to enter into this Agreement and the Agreement and Power of Attorney.
All authorizations and consents necessary for the execution and delivery by
such Selling Stockholder of the Agreement and Power of Attorney, and for the
execution of this Agreement on behalf of such Selling Stockholder, have been
given. Each of the Agreement and Power of Attorney and this Agreement has been
duly authorized, executed and delivered by or on behalf of such Selling
Stockholder and constitutes a valid and binding agreement of such Selling
Stockholder and is enforceable against such Selling Stockholder in accordance
with the terms thereof and hereof.
(b) Such Selling Stockholder now has, and at the
time of delivery thereof hereunder will have, (i) good and marketable title to
the Shares to be sold by such Selling Stockholder hereunder, free and clear of
all liens, encumbrances and claims whatsoever (other than pursuant to the
Agreement and Power of Attorney), and (ii) full legal right and power, and all
authorizations and approvals required by law, to sell, transfer and deliver
such Shares to the Underwriters hereunder and to make the representations,
warranties and agreements made by such Selling Stockholder herein. Upon the
delivery of and payment for such Shares hereunder, such Selling Stockholder
will deliver good and marketable title thereto, free and clear of all liens,
encumbrances and claims whatsoever.
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<PAGE> 11
(c) On the Closing Date or the Option Closing
Date, as the case may be, all stock transfer or other taxes (other than income
taxes) which are required to be paid in connection with the sale and transfer
of the Shares to be sold by such Selling Stockholder to the several
Underwriters hereunder will have been fully paid or provided for by such
Selling Stockholder and all laws imposing such taxes will have been fully
complied with.
(d) The performance of this Agreement and the
consummation of the transactions contemplated hereby will not result in the
creation or imposition of any lien, charge or encumbrance upon any of the
assets of such Selling Stockholder pursuant to the terms or provisions of, or
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, or result in the acceleration of any obligation
under, if such Selling Stockholder is a corporation or partnership, the
organizational documents of such Selling Stockholder, or, as to all such
Selling Stockholders, any contract or other agreement to which such Selling
Stockholder is a party or by which such Selling Stockholder or any of its
property is bound or affected, or under any ruling, decree, judgment, order,
statute, rule or regulation of any court or other governmental agency or body
having jurisdiction over such Selling Stockholder or the property of such
Selling Stockholder.
(e) No consent, approval, authorization or order
of, or any filing or declaration with, any court or governmental agency or body
is required for the consummation by such Selling Stockholder of the
transactions on its part contemplated herein and in the Agreement and Power of
Attorney, except such as have been obtained under the Act or the Rules and
Regulations and such as may be required under state securities or Blue Sky laws
or the by-laws and rules of the NASD in connection with the purchase and
distribution by the Underwriters of the Shares to be sold by such Selling
Stockholder.
(f) Such Selling Stockholder has no knowledge of
any material fact or condition not set forth in the Registration Statement or
the Prospectus which has adversely affected, or may adversely affect, the
business, properties, business prospects, condition (financial or otherwise) or
results of operations of the Company, and the sale of the Shares proposed to be
sold by such Selling Stockholder is not prompted by any such knowledge.
(g) All information with respect to such Selling
Stockholder contained in the Registration Statement and the Prospectus (as
amended or supplemented, if the Company shall have filed with the Commission
any amendment or supplement thereto) complied and will comply with all
applicable provisions of the Act and the Rules and Regulations, contains and
will contain all statements required to be stated therein in accordance with
the Act and the Rules and Regulations, and does not and will not contain an
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary in order to make the statements therein not
misleading.
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<PAGE> 12
(h) To the best knowledge of such Selling
Stockholder, the representations and warranties of the Company contained in
Section 3 are true and correct.
(i) Other than as permitted by the Act and the
Rules and Regulations, such Selling Stockholder has not distributed and will
not distribute any preliminary prospectus, the Prospectus or any other offering
material in connection with the offering and sale of the Shares. Such Selling
Stockholder has not taken, directly or indirectly, any action intended, or
which might reasonably be expected, to cause or result in, under the Act or
otherwise, or which has caused or resulted in, stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale of
the Shares.
(j) Certificates in negotiable form for the Firm
Shares and Option Shares to be sold hereunder by such Selling Stockholder have
been placed in custody, for the purpose of making delivery of such Firm Shares
and Option Shares under this Agreement, under the Agreement and Power of
Attorney which appoints ______________ as custodian (the "Custodian") for each
Selling Stockholder. Such Selling Stockholder agrees that the Shares
represented by the certificates held in custody for him or it under the
Agreement and Power of Attorney are for the benefit of and coupled with and
subject to the interest hereunder of the Custodian, the Committee, the
Underwriters, each other Selling Stockholder and the Company, that the
arrangements made by such Selling Stockholder for such custody and the
appointment of the Custodian and the Committee by such Selling Stockholder are
irrevocable for the period of time stated in the Agreement and Power of
Attorney, and that the obligations of such Selling Stockholder hereunder shall
not be terminated by operation of law, whether by the death, disability,
incapacity or liquidation of any Selling Stockholder or the occurrence of any
other event (other than as provided in such Agreement and Power of Attorney).
If any Selling Stockholder should die, become disabled or incapacitated or be
liquidated or if any other such event should occur before the delivery of the
Shares hereunder, certificates for the Shares shall be delivered by the
Custodian in accordance with the terms and conditions of this Agreement and
actions taken by the Committee and the Custodian pursuant to the Agreement and
Power of Attorney shall be as valid as if such death, liquidation, incapacity
or other event had not occurred, regardless of whether or not the Custodian or
the Committee, or either of them, shall have received notice thereof.
5. Agreements of the Company and the Selling
Stockholders. The Company and the Selling Stockholders (as to Sections 5(i),
(j), (o), (p), (q) and (r)) agree, severally and not jointly, with the several
Underwriters as follows:
(a) The Company will not, either prior to the
Effective Date or thereafter during such period as the Prospectus is required
by law to be delivered in connection with sales of the Shares by an Underwriter
or dealer, file any amendment or supplement to the Registration Statement or
the Prospectus, unless a copy thereof shall first
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<PAGE> 13
have been submitted to the Representatives within a reasonable period of time
prior to the filing thereof and the Representatives shall not have objected
thereto in good faith.
(b) The Company will use its best efforts to
cause the Registration Statement to become effective, and will notify the
Representatives promptly, and will confirm such advice in writing, (i) when the
Registration Statement has become effective and when any post-effective
amendment thereto becomes effective, (ii) of any request by the Commission for
amendments or supplements to the Registration Statement or the Prospectus or
for additional information, (iii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose or the threat thereof, (iv) of
the happening of any event during the period mentioned in the third sentence of
Section 5(e) that in the judgment of the Company makes any statement made in
the Registration Statement or the Prospectus untrue or that requires the making
of any changes in the Registration Statement or the Prospectus in order to make
the statements therein, in light of the circumstances in which they are made,
not misleading and (v) of receipt by the Company or any representative of the
Company of any other communication from the Commission relating to the Company,
the Registration Statement, any preliminary prospectus or the Prospectus. If
at any time the Commission shall issue any order suspending the effectiveness
of the Registration Statement, the Company will make every reasonable effort to
obtain the withdrawal of such order at the earliest possible moment. The
Company will use its best efforts to comply with the provisions of and make all
requisite filings with the Commission pursuant to Rule 430A and to notify the
Representatives promptly of all such filings.
(c) The Company will furnish to each
Representative, without charge, two signed copies of the Registration Statement
and of any post-effective amendment thereto, including financial statements and
schedules, and all exhibits thereto and will furnish to the Representatives,
without charge, for transmittal to each of the other Underwriters, a copy of
the Registration Statement and any post- effective amendment thereto, including
financial statements and schedules but without exhibits.
(d) The Company will comply with all the
provisions of any undertakings contained in the Registration Statement.
(e) On the Effective Date, and thereafter from
time to time, the Company will deliver to each of the Underwriters, without
charge, as many copies of the Prospectus or any amendment or supplement thereto
as the Representatives may reasonably request. The Company consents to the use
of the Prospectus or any amendment or supplement thereto by the several
Underwriters and by all dealers to whom the Shares may be sold, both in
connection with the offering or sale of the Shares and for any period of time
thereafter during which the Prospectus is required by law to be delivered in
connection
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<PAGE> 14
therewith. If during such period of time any event shall occur which in the
judgment of the Company or counsel to the Underwriters should be set forth in
the Prospectus in order to make any statement therein, in light of the
circumstances under which it was made, not misleading, or if it is necessary to
supplement or amend the Prospectus to comply with law, the Company will
forthwith prepare and duly file with the Commission an appropriate supplement
or amendment thereto, and will deliver to each of the Underwriters, without
charge, such number of copies thereof as the Representatives may reasonably
request.
(f) Prior to any public offering of the Shares by
the Underwriters, the Company will cooperate with the Representatives and
counsel to the Underwriters in connection with the registration or
qualification of the Shares for offer and sale under the securities or Blue Sky
laws of such jurisdictions as the Representatives may request; provided, that
in no event shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any action which would
subject it to general service of process in any jurisdiction where it is not
now so subject.
(g) During the period of three years commencing
on the Effective Date, the Company will furnish to the Representatives and each
other Underwriter who may so request copies of such financial statements and
other periodic and special reports as the Company may from time to time
distribute generally to the holders of any class of its capital stock, and will
furnish to the Representatives and each other Underwriter who may so request a
copy of each annual or other report it shall be required to file with the
Commission.
(h) The Company will make generally available to
holders of its securities as soon as may be practicable but in no event later
than the last day of the fifteenth full calendar month following the calendar
quarter in which the Effective Date falls, an earnings statement (which need
not be audited but shall be in reasonable detail) for a period of 12 months
ended commencing after the Effective Date, and satisfying the provisions of
Section 11(a) of the Act (including Rule 158 of the Rules and Regulations).
(i) Whether or not the transactions contemplated
by this Agreement are consummated or this Agreement is terminated, the Company
and the Selling Stockholders, jointly and severally, will pay, or reimburse if
paid by the Representatives, all costs and expenses incident to the performance
of the obligations of the Company and the Selling Stockholders under this
Agreement, including but not limited to costs and expenses of or relating to
(1) the preparation, printing and filing of the Registration Statement and
exhibits thereto, each preliminary prospectus, the Prospectus and any amendment
or supplement to the Registration Statement or the Prospectus, (2) the
preparation and delivery of certificates representing the Shares, (3) the
printing of this Agreement, the Agreement Among Underwriters, any Dealer
Agreements, any Underwriters' Questionnaire and the
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<PAGE> 15
Agreement and Power of Attorney, (4) furnishing (including costs of shipping,
mailing and courier) such copies of the Registration Statement, the Prospectus
and any preliminary prospectus, and all amendments and supplements thereto, as
may be requested for use in connection with the offering and sale of the Shares
by the Underwriters or by dealers to whom Shares may be sold, (5) the listing
of the Shares on the NNM, (6) any filings required to be made by the
Underwriters with the NASD, and the reasonable fees, disbursements and other
charges of counsel for the Underwriters in connection therewith, (7) the
registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions designated pursuant to
Section 5(f), including the reasonable fees, disbursements and other charges of
counsel to the Underwriters in connection therewith, and the preparation and
printing of preliminary, supplemental and final Blue Sky memoranda, (8) counsel
to the Company and counsel to the Selling Stockholders, (9) the transfer agent
for the Shares and (10) the Accountants. Nothing contained in this Section
5(i) shall be deemed to affect the ability of the Company and the Selling
Stockholders to enter into separate arrangements amongst themselves as to which
party shall be responsible for the aforementioned fees and expenses.
(j) If this Agreement shall be terminated by the
Company or the Selling Stockholders pursuant to any of the provisions hereof
(other than pursuant to Section 9) or if for any reason the Company or any
Selling Stockholder shall be unable to perform its obligations hereunder, the
Company and the Selling Stockholders, jointly and severally, will reimburse the
several Underwriters for all out-of- pocket expenses (including the fees,
disbursements and other charges of counsel to the Underwriters) reasonably
incurred by them in connection herewith.
(k) The Company will not at any time, directly or
indirectly, take any action intended, or which might reasonably be expected, to
cause or result in, or which will constitute, stabilization of the price of the
shares of Common Stock to facilitate the sale or resale of any of the Shares.
(l) The Company will apply the net proceeds to
the Company from the offering and sale of the Shares to be sold by the Company
in the manner set forth in the Prospectus under "Use of Proceeds" and shall
file such reports with the Commission with respect to the sale of the Shares
and the application of the proceeds therefrom as may be required in accordance
with Rule 463 under the Act.
(m) During the period of 180 days commencing at
the Closing Date, the Company will not, without the prior written consent of
PaineWebber Incorporated, grant options to purchase shares of Common Stock at a
price less than the initial public offering price.
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<PAGE> 16
(n) The Company will not, and will cause each of
its executive officers, directors and each beneficial owner of more than 5% of
the outstanding shares of Common Stock to enter into agreements with the
Representatives in the form set forth in Exhibit C to the effect that they will
not, for a period of 180 days after the commencement of the public offering of
the Shares, without the prior written consent of PaineWebber Incorporated,
sell, contract to sell or otherwise dispose of any shares of Common Stock or
rights to acquire such shares (other than pursuant to employee stock option
plans or in connection with other employee incentive compensation
arrangements).
(o) The Selling Stockholders will not, for a
period of 180 days after the commencement of the public offering of the Shares,
without the prior written consent of PaineWebber Incorporated, sell, contract
to sell or otherwise dispose of any shares of Common Stock, other than pursuant
to bona fide gifts to persons who agree in writing with PaineWebber
Incorporated, to be bound by the provisions of this Section 5(o).
(p) The Selling Stockholders will not, without
the prior written consent of PaineWebber Incorporated, make any bid for or
purchase any shares of Common Stock during the 180-day period following the
date hereof.
(q) As soon as any Selling Stockholder is advised
thereof, such Selling Stockholder will advise the Representatives and confirm
such advice in writing, (1) of receipt by such Selling Stockholder, or by any
representative of such Selling Stockholder, of any communication from the
Commission relating to the Registration Statement, the Prospectus or any
preliminary prospectus, or any notice or order of the Commission relating to
the Company or any of the Selling Stockholders in connection with the
transactions contemplated by this Agreement and (2) of the happening of any
event during the period from and after the Effective Date that in the judgment
of such Selling Stockholder makes any statement made in the Registration
Statement or the Prospectus untrue or that requires the making of any changes
in the Registration Statement or the Prospectus in order to make the statements
therein, in light of the circumstances in which they were made, not misleading.
(r) The Selling Stockholders will deliver to the
Representatives prior to or on the Effective Date a properly completed and
executed United States Treasury Department Form W-9 (or other applicable form
or statement specified by Treasury Department regulations in lieu thereof).
6. Conditions of the Obligations of the Underwriters.
In addition to the execution and delivery of the Price Determination Agreement,
the obligations of each Underwriter hereunder are subject to the following
conditions:
16
<PAGE> 17
(a) Notification that the Registration Statement
has become effective under the Act shall be received by the Representatives not
later than 5:00 p.m., New York City time, on the date of this Agreement or at
such later date and time as shall be consented to in writing by PaineWebber
Incorporated and all filings required by Rule 424 of the Rules and Regulations
and Rule 430A shall have been made.
(b) (i) No stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall be pending or threatened by the Commission,
(ii) no order suspending the effectiveness of the Registration Statement or the
qualification or registration of the Shares under the securities or Blue Sky
laws of any jurisdiction shall be in effect and no proceeding for such purpose
shall be pending before or threatened or contemplated by the Commission or the
authorities of any such jurisdiction, (iii) any request for additional
information on the part of the staff of the Commission or any such authorities
shall have been complied with to the satisfaction of the staff of the
Commission or such authorities, (iv) after the date hereof no amendment or
supplement to the Registration Statement or the Prospectus shall have been
filed unless a copy thereof was first submitted to the Representatives and the
Representatives did not object thereto in good faith and (v) the
Representatives shall have received certificates, dated the Closing Date and
the Option Closing Date and signed by the Chief Executive Officer or the
Chairman of the Board of Directors of the Company and the Chief Financial
Officer of the Company (who may, as to proceedings threatened, rely upon the
best of their information and belief), to the effect of clauses (i), (ii) and
(iii).
(c) Since the respective dates as of which
information is given in the Registration Statement and the Prospectus, (i)
there shall not have been a material adverse change in the general affairs,
business, business prospects, properties, management, condition (financial or
otherwise) or results of operations of the Company whether or not arising from
transactions in the ordinary course of business, in each case other than as set
forth in or contemplated by the Registration Statement and the Prospectus and
(ii) the Company shall not have sustained any material loss or interference
with its business or properties from fire, explosion, flood or other casualty,
whether or not covered by insurance, or from any labor dispute or any court or
legislative or other governmental action, order or decree, which is not set
forth in the Registration Statement and the Prospectus, if in the judgment of
the Representatives any such development makes it impracticable or inadvisable
to consummate the sale and delivery of the Shares by the Underwriters at the
initial public offering price.
(d) Since the respective dates as of which
information is given in the Registration Statement and the Prospectus, there
shall have been no litigation or other proceeding instituted against the
Company or any of its officers or directors in their capacities as such, before
or by any Federal, state or local court, commission, regulatory
17
<PAGE> 18
body, administrative agency or other governmental body, domestic or foreign, in
which litigation or proceeding an unfavorable ruling, decision or finding would
materially and adversely affect the business, properties, business prospects,
condition (financial or otherwise) or results of operations of the Company.
(e) Each of the representations and warranties of
the Company and the Selling Stockholders contained herein shall be true and
correct in all material respects at the Closing Date and, with respect to the
Option Shares, at the Option Closing Date, as if made at the Closing Date and,
with respect to the Option Shares, at the Option Closing Date, and all
covenants and agreements herein contained to be performed on the part of the
Company and the Selling Stockholders and all conditions herein contained to be
fulfilled or complied with by the Company and the Selling Stockholders at or
prior to the Closing Date and, with respect to the Option Shares, at or prior
to the Option Closing Date, shall have been duly performed, fulfilled or
complied with.
(f) The Representatives shall have received an
opinion, dated the Closing Date and the Option Closing Date, and satisfactory
in form and substance to counsel for the Underwriters, from Maloney, Mehlman &
Katz, counsel to the Company and CSI II, to the effect set forth in Exhibit D.
(g) The Representatives shall have received an
opinion, dated the Closing Date and the Option Closing Date, and satisfactory
in form and substance to counsel for the Underwriters, from Pillsbury, Madison
& Sutro LLP, special securities +counsel to the Company, to the effect set
forth in Exhibit E.
(h) The Representatives shall have received an
opinion, dated the Closing Date and the Option Closing Date, and satisfactory
in form and substance to counsel for the Underwriters, from Webster,
Chamberlain & Bean, special regulatory counsel to the Company, to the effect
set forth in Exhibit F.
(i) The Representatives shall have received an
opinion, dated the Closing Date and the Option Closing Date, from Shearman &
Sterling, counsel to the Underwriters, with respect to the Registration
Statement, the Prospectus and this Agreement, which opinion shall be
satisfactory in all respects to the Representatives.
(j) On the date of the Prospectus, the
Accountants shall have furnished to the Representatives a letter, dated the
date of its delivery, addressed to the Representatives and in form and
substance satisfactory to the Representatives, confirming that they are
independent accountants with respect to the Company as required by the Act and
the Rules and Regulations and with respect to the financial and other
statistical and numerical information contained in the Registration Statement.
At the Closing Date and, as to the
18
<PAGE> 19
Option Shares, the Option Closing Date, the Accountants shall have furnished to
the Representatives a letter, dated the date of its delivery, which shall
confirm, on the basis of a review in accordance with the procedures set forth
in the letter from the Accountants, that nothing has come to their attention
during the period from the date of the letter referred to in the prior sentence
to a date (specified in the letter) not more than five days prior to the
Closing Date and the Option Closing Date which would require any change in the
letter referred to in the prior sentence, if it were required to be dated and
delivered at the Closing Date and the Option Closing Date.
(k) At the Closing Date and, as to the Option
Shares, the Option Closing Date, there shall be furnished to the
Representatives an accurate certificate, dated the date of its delivery, signed
by each of the Chief Executive Officer and the Chief Financial Officer of the
Company, in form and substance satisfactory to the Representatives, to the
effect that:
(i) Each signer of such certificate has
carefully examined the Registration Statement and the Prospectus and
(A) as of the date of such certificate, such documents are true and
correct in all material respects and do not omit to state a material
fact required to be stated therein or necessary in order to make the
statements therein not untrue or misleading and (B) since the
Effective Date, no event has occurred as a result of which it is
necessary to amend or supplement the Prospectus in order to make the
statements therein not untrue or misleading in any material respect.
(ii) Each of the representations and
warranties of the Company contained in this Agreement were, when
originally made, and are, at the time such certificate is delivered,
true and correct in all material respects.
(iii) Each of the covenants required
herein to be performed by the Company on or prior to the date of such
certificate has been duly, timely and fully performed and each
condition herein required to be complied with by the Company on or
prior to the delivery of such certificate has been duly, timely and
fully complied with.
(l) At the Closing Date [and, as to the Option
Shares, the Option Closing Date,] there shall have been furnished to the
Representatives an accurate certificate, dated the date of its delivery, signed
by the Committee on behalf of each of the Selling Stockholders, in form and
substance satisfactory to the Representatives, to the effect that the
representations and warranties of each of the Selling Stockholders contained
herein are true and correct in all material respects on and as of the date of
such certificate as if made on and as of the date of such certificate, and each
of the covenants and conditions required herein to
19
<PAGE> 20
be performed or complied with by the Selling Stockholders on or prior to the
date of such certificate has been duly, timely and fully performed or complied
with.
(m) On or prior to the Closing Date, the
Representatives shall have received the executed agreements referred to in
Section 5(n).
(n) The Shares shall be qualified for sale in
such states as the Representatives may reasonably request and each such
qualification shall be in effect and not subject to any stop order or other
proceeding on the Closing Date and the Option Closing Date.
(o) Prior to the Closing Date, the Shares shall
have been authorized for quotation on the NNM upon official notice of issuance.
(p) The Company and the Selling Stockholders
shall have furnished to the Representatives such certificates, in addition to
those specifically mentioned herein, as the Representatives may have reasonably
requested as to the accuracy and completeness at the Closing Date and the
Option Closing Date of any statement in the Registration Statement or the
Prospectus, as to the accuracy at the Closing Date and the Option Closing Date
of the representations and warranties of the Company and the Selling
Stockholders herein, as to the performance by the Company and the Selling
Stockholders of its and their respective obligations hereunder, or as to the
fulfillment of the conditions concurrent and precedent to the obligations
hereunder of the Representatives.
7. Indemnification.
(a) Each of the Company and the Selling
Stockholders, jointly and severally, will indemnify and hold harmless each
Underwriter, the directors, officers, employees and agents of each Underwriter
and each person, if any, who controls each Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), from and against any and all losses, claims,
liabilities, expenses and damages (including any and all investigative, legal
and other expenses reasonably incurred in connection with, and any amount paid
in settlement of, any action, suit or proceeding between any of the indemnified
parties and any indemnifying parties or between any indemnified party and any
third party, or otherwise, or any claim asserted), to which they, or any of
them, may become subject under the Act, the Exchange Act or other Federal or
state statutory law or regulation, at common law or otherwise, insofar as such
losses, claims, liabilities, expenses or damages arise out of or are based on
any untrue statement or alleged untrue statement of a material fact contained
in any preliminary prospectus, the Registration Statement or the Prospectus or
any amendment or supplement to the Registration Statement or the Prospectus, or
the omission or alleged
20
<PAGE> 21
omission to state in such document a material fact required to be stated in it
or necessary to make the statements in it not misleading; provided that the
Company and the Selling Stockholders will not be liable to the extent that such
loss, claim, liability, expense or damage arises from the sale of the Shares in
the public offering to any person by an Underwriter and is based on an untrue
statement or omission or alleged untrue statement or omission made in reliance
on and in conformity with information relating to any Underwriter furnished in
writing to the Company by the Representatives on behalf of any Underwriter
expressly for inclusion in the Registration Statement, any preliminary
prospectus or the Prospectus; and provided further that each Selling
Stockholder other than CSI II (such other Selling Stockholders being referred
to herein as the "Limited Selling Stockholders") will be liable in any case
only to the extent that any such loss, claim, liability, expense or damage
arises out of or is based upon statements in or omissions from the Registration
Statement (or any amendment thereto) based upon information furnished to the
Company by such Limited Selling Stockholder expressly for use therein. This
indemnity agreement will be in addition to any liability that the Company or
any Selling Stockholder might otherwise have.
(b) Each Underwriter will indemnify and hold
harmless the Company, the Selling Stockholders, each person, if any, who
controls the Company or the Selling Stockholders within the meaning of Section
15 of the Act or Section 20 of the Exchange Act, each director of the Company
and each officer of the Company who signs the Registration Statement to the
same extent as the foregoing indemnity from the Company and the Selling
Stockholders to each Underwriter, but only insofar as losses, claims,
liabilities, expenses or damages arise out of or are based on any untrue
statement or omission or alleged untrue statement or omission made in reliance
on and in conformity with information relating to any Underwriter furnished in
writing to the Company by the Representatives on behalf of such Underwriter
expressly for use in the Registration Statement, any preliminary prospectus or
the Prospectus. This indemnity will be in addition to any liability that each
Underwriter might otherwise have.
(c) Any party that proposes to assert the right
to be indemnified under this Section 7 will, promptly after receipt of notice
of commencement of any action against such party in respect of which a claim is
to be made against an indemnifying party or parties under this Section 7,
notify each such indemnifying party of the commencement of such action,
enclosing a copy of all papers served, but the omission to so notify such
indemnifying party will not relieve such indemnifying party from any liability
that it may have to any indemnified party under the foregoing provisions of
this Section 7 unless, and only to the extent that, such omission results in
the forfeiture of substantive rights or defenses by the indemnifying party. If
any such action is brought against any indemnified party and it notifies the
indemnifying party of its commencement, the indemnifying party will be entitled
to participate in and, to the extent that it elects by delivering written
notice to the indemnified party promptly after receiving notice of the
commencement of the action from
21
<PAGE> 22
the indemnified party, jointly with any other indemnifying party similarly
notified, to assume the defense of the action, with counsel satisfactory to the
indemnified party, and after notice from the indemnifying party to the
indemnified party of its election to assume the defense, the indemnifying party
will not be liable to the indemnified party for any legal or other expenses
except as provided below and except for the reasonable costs of investigation
subsequently incurred by the indemnified party in connection with the defense.
The indemnified party will have the right to employ its own counsel in any such
action, but the fees, expenses and other charges of such counsel will be at the
expense of such indemnified party unless (1) the employment of counsel by the
indemnified party has been authorized in writing by the indemnifying party, (2)
the indemnified party has reasonably concluded (based on advice of counsel)
that there may be legal defenses available to it or other indemnified parties
that are different from or in addition to those available to the indemnifying
party, (3) a conflict or potential conflict exists (based on advice of counsel
to the indemnified party) between the indemnified party and the indemnifying
party (in which case the indemnifying party will not have the right to direct
the defense of such action on behalf of the indemnified party) or (4) the
indemnifying party has not in fact employed counsel to assume the defense of
such action within a reasonable time after receiving notice of the commencement
of the action, in each of which cases the reasonable fees, disbursements and
other charges of counsel will be at the expense of the indemnifying party or
parties. It is understood that the indemnifying party or parties shall not, in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the reasonable fees, disbursements and other charges of more than
one separate firm admitted to practice in such jurisdiction at any one time for
all such indemnified party or parties. All such fees, disbursements and other
charges will be reimbursed by the indemnifying party promptly as they are
incurred. An indemnifying party will not be liable for any settlement of any
action or claim effected without its written consent (which consent will not be
unreasonably withheld). No indemnifying party shall, without the prior written
consent of each indemnified party, settle or compromise or consent to the entry
of any judgment in any pending or threatened claim, action or proceeding
relating to the matters contemplated by this Section 7 (whether or not any
indemnified party is a party thereto), unless such settlement, compromise or
consent includes an unconditional release of each indemnified party from all
liability arising or that may arise out of such claim, action or proceeding.
(d) In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in the
foregoing paragraphs of this Section 7 is applicable in accordance with its
terms but for any reason is held to be unavailable from the Company, the
Selling Stockholders or the Underwriters, the Company, the Selling Stockholders
and the Underwriters will contribute to the total losses, claims, liabilities,
expenses and damages (including any investigative, legal and other expenses
reasonably incurred in connection with, and any amount paid in settlement of,
any action, suit or proceeding or any claim asserted, but after deducting any
contribution received by the
22
<PAGE> 23
Company or the Selling Stockholders from persons other than the Underwriters,
such as persons who control the Company or the Selling Stockholders within the
meaning of the Act, officers of the Company who signed the Registration
Statement and directors of the Company, who also may be liable for
contribution) to which the Company or the Selling Stockholders and any one or
more of the Underwriters may be subject in such proportion as shall be
appropriate to reflect the relative benefits received by the Company and
Selling Stockholders on the one hand and the Underwriters on the other. The
relative benefits received by the Company and the Selling Stockholders on the
one hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company and the Selling Stockholders bear to the
total underwriting discounts and commissions received by the Underwriters, in
each case as set forth in the table on the cover page of the Prospectus. If,
but only if, the allocation provided by the foregoing sentence is not permitted
by applicable law, the allocation of contribution shall be made in such
proportion as is appropriate to reflect not only the relative benefits referred
to in the foregoing sentence but also the relative fault of the Company and the
Selling Stockholders, on the one hand, and the Underwriters, on the other, with
respect to the statements or omissions which resulted in such loss, claim,
liability, expense or damage, or action in respect thereof, as well as any
other relevant equitable considerations with respect to such offering. Such
relative fault shall be determined by reference to whether the untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact relates to information supplied by the Company or the
Representatives on behalf of the Underwriters, the intent of the parties and
their relative knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company, the Selling Stockholders and
the Underwriters agree that it would not be just and equitable if contributions
pursuant to this Section 7(d) were to be determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by
any other method of allocation which does not take into account the equitable
considerations referred to herein. The amount paid or payable by an
indemnified party as a result of the loss, claim, liability, expense or damage,
or action in respect thereof, referred to above in this Section 7(d) shall be
deemed to include, for purpose of this Section 7(d), any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 7(d), no Underwriter shall be required to contribute
any amount in excess of the underwriting discounts received by it, and no
person found guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) will be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations to contribute as provided in this Section 7(d) are several in
proportion to their respective underwriting obligations and not joint. For
purposes of this Section 7(d), any person who controls a party to this
Agreement within the meaning of the Act will have the same rights to
contribution as that party, and each officer of the Company who signed the
Registration Statement will have the same rights to contribution as the
23
<PAGE> 24
Company, subject in each case to the provisions hereof. Any party entitled to
contribution, promptly after receipt of notice of commencement of any action
against such party in respect of which a claim for contribution may be made
under this Section 7(d), will notify any such party or parties from whom
contribution may be sought, but the omission to so notify will not relieve the
party or parties from whom contribution may be sought from any other obligation
it or they may have under this Section 7(d). No party will be liable for
contribution with respect to any action or claim settled without its written
consent (which consent shall not be unreasonably withheld).
(e) The indemnity and contribution agreements
contained in this Section 7 and the representations and warranties of the
Company and the Selling Stockholders contained in this Agreement shall remain
operative and in full force and effect regardless of (i) any investigation made
by or on behalf of the Underwriters, (ii) acceptance of any of the Shares and
payment therefor or (iii) any termination of this Agreement.
8. Termination. The obligations of the several
Underwriters under this Agreement may be terminated at any time prior to the
Closing Date (or, with respect to the Option Shares, on or prior to the Option
Closing Date), by notice to the Company from the Representatives, without
liability on the part of any Underwriter to the Company or any Selling
Stockholder, if, prior to delivery and payment for the Shares (or the Option
Shares, as the case may be), in the sole judgment of the Representatives, (i)
trading in any of the equity securities of the Company shall have been
suspended by the Commission, by an exchange that lists the Shares or by the
Nasdaq Stock Market, (ii) trading in securities generally on the New York Stock
Exchange shall have been suspended or limited or minimum or maximum prices
shall have been generally established on such exchange, or additional material
governmental restrictions, not in force on the date of this Agreement, shall
have been imposed upon trading in securities generally by such exchange or by
order of the Commission or any court or other governmental authority, (iii) a
general banking moratorium shall have been declared by either Federal or New
York State authorities or (iv) any material adverse change in the financial or
securities markets in the United States or in political, financial or economic
conditions in the United States or any outbreak or material escalation of
hostilities or declaration by the United States of a national emergency or war
or other calamity or crisis shall have occurred, the effect of any of which is
such as to make it, in the sole judgment of the Representatives, impracticable
or inadvisable to market the Shares on the terms and in the manner contemplated
by the Prospectus.
9. Substitution of Underwriters. If any one or more of
the Underwriters shall fail or refuse to purchase any of the Firm Shares which
it or they have agreed to purchase hereunder, and the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase is not more than one-tenth of the aggregate number of Firm
Shares, the other Underwriters shall be obligated,
24
<PAGE> 25
severally, to purchase the Firm Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase, in the proportions which
the number of Firm Shares which they have respectively agreed to purchase
pursuant to Section 1 bears to the aggregate number of Firm Shares which all
such non-defaulting Underwriters have so agreed to purchase, or in such other
proportions as the Representatives may specify; provided that in no event shall
the maximum number of Firm Shares which any Underwriter has become obligated to
purchase pursuant to Section 1 be increased pursuant to this Section 9 by more
than one-ninth of the number of Firm Shares agreed to be purchased by such
Underwriter without the prior written consent of such Underwriter. If any
Underwriter or Underwriters shall fail or refuse to purchase any Firm Shares
and the aggregate number of Firm Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase exceeds one-tenth of the
aggregate number of the Firm Shares and arrangements satisfactory to the
Representatives, the Company and the Committee for the purchase of such Firm
Shares are not made within 48 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter, or
the Company or any Selling Stockholder for the purchase or sale of any Shares
under this Agreement. In any such case either the Representatives or the
Company and the Committee shall have the right to postpone the Closing Date,
but in no event for longer than seven days, in order that the required changes,
if any, in the Registration Statement and in the Prospectus or in any other
documents or arrangements may be effected. Any action taken pursuant to this
Section 9 shall not relieve any defaulting Underwriter from liability in
respect of any default of such Underwriter under this Agreement.
10. Miscellaneous. Notice given pursuant to any of the
provisions of this Agreement shall be in writing and, unless otherwise
specified, shall be mailed or delivered (a) if to the Company, at the office of
the Company, 333 City Boulevard West, 10th Floor, Orange, California 92868,
Attention: Chief Financial Officer, (b) if to any Selling Stockholder, to
[________________], Attention: [___________], or (c) if to the Underwriters, to
PaineWebber Incorporated at the offices of PaineWebber Incorporated, 1285
Avenue of the Americas, New York, New York 10019, Attention: Corporate Finance
Department. Any such notice shall be effective only upon receipt. Any notice
under Section 8 or 9 may be made by telex or telephone, but if so made shall be
subsequently confirmed in writing.
This Agreement has been and is made solely for the benefit of
the several Underwriters, the Company and the Selling Stockholders and of the
controlling persons, directors and officers referred to in Section 7, and their
respective successors and assigns, and no other person shall acquire or have
any right under or by virtue of this Agreement. The term "successors and
assigns" as used in this Agreement shall not include a purchaser, as such
purchaser, of Shares from any of the several Underwriters.
25
<PAGE> 26
With respect to any obligation of the Company and the Selling
Stockholders hereunder to make any payment, to indemnify for any liability or
to reimburse for any expense, notwithstanding the fact that such obligation is
a joint and several obligation of the Company and the Selling Stockholders, the
Underwriters (or any other person to whom such payment, indemnification or
reimbursement is owed) may pursue the Company with respect thereto prior to
pursuing any Selling Stockholder.
All representations, warranties and agreements of the Company
and the Selling Stockholders contained herein or in certificates or other
instruments delivered pursuant hereto, shall remain operative and in full force
and effect regardless of any investigation made by or on behalf of any
Underwriter or any of their controlling persons and shall survive delivery of
and payment for the Shares hereunder.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE
CONFLICT OF LAWS PRINCIPLES OF SUCH STATE. This Agreement may be signed in two
or more counterparts with the same effect as if the signatures thereto and
hereto were upon the same instrument.
In case any provision in this Agreement shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
The Company, the Selling Stockholders and the Underwriters
each hereby irrevocably waive any right they may have to a trial by jury in
respect of any claim based upon or arising out of this Agreement or the
transactions contemplated hereby.
This Agreement may not be amended or otherwise modified nor
may any provision hereof be waived except by an instrument in writing signed by
the Representatives and the Company.
26
<PAGE> 27
Please confirm that the foregoing correctly sets forth the
agreement among the Company, the Selling Stockholders and the several
Underwriters.
Very truly yours,
CREDENTIAL SERVICES INTERNATIONAL,
INC., a Delaware corporation
By: ________________________
Title:
CSI INVESTMENT PARTNERS II, L.P.
By: ________________________
Title:
THE SELLING STOCKHOLDERS NAMED
IN SCHEDULE I ATTACHED HERETO
By: The Committee
By: _________________________
Confirmed as of the date first
above mentioned:
PAINEWEBBER INCORPORATED
HAMBRECHT & QUIST, LLC
Acting on behalf of themselves
and as the Representatives of the
other several Underwriters
named in Schedule II hereof.
By: PAINEWEBBER INCORPORATED
By: ________________________
Title:
27
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 2 to Registration
Statement on Form S-1 (File No. 333-37461) of our report dated November 4, 1997
(except for Note 15 as to which the date is November 21, 1997), on our audits of
the financial statements of Credentials Services International, Inc. We also
consent to the reference to our firm under the captions "Experts," "Selected
Financial Data," and "Summary Financial Information."
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Los Angeles, CA
December 8, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> SEP-27-1996 SEP-26-1997
<PERIOD-START> OCT-01-1995 SEP-28-1996
<PERIOD-END> SEP-27-1996 SEP-26-1997
<CASH> 1,613 413
<SECURITIES> 0 0
<RECEIVABLES> 854 2,529
<ALLOWANCES> 147 459
<INVENTORY> 0 0
<CURRENT-ASSETS> 9,096 18,796
<PP&E> 3,646 5,671
<DEPRECIATION> 381 1,092
<TOTAL-ASSETS> 27,552 41,412
<CURRENT-LIABILITIES> 32,462 41,057
<BONDS> 0 0
0 0
0 0
<COMMON> 1 96
<OTHER-SE> 3,999 7,104
<TOTAL-LIABILITY-AND-EQUITY> 27,552 41,412
<SALES> 0 0
<TOTAL-REVENUES> 24,556 38,039
<CGS> 0 0
<TOTAL-COSTS> 12,999 10,852
<OTHER-EXPENSES> 32,819 24,332
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,185 1,455
<INCOME-PRETAX> (22,447) 1,400
<INCOME-TAX> 0 61
<INCOME-CONTINUING> (22,447) 1,339
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 91
<CHANGES> 0 0
<NET-INCOME> (22,447) 1,248
<EPS-PRIMARY> (2.33) .13
<EPS-DILUTED> 0 0
</TABLE>
