<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 24, 1997
REGISTRATION NO. 333-37205
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
COMPASS INTERNATIONAL SERVICES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 7322 22-3540815
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE NO.)
ORGANIZATION)
5 INDEPENDENCE WAY, SUITE 300, PRINCETON, NEW JERSEY 08540; (609) 514-5156
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
MICHAEL J. CUNNINGHAM
5 INDEPENDENCE WAY
SUITE 300
PRINCETON, NEW JERSEY 08540
(609) 514-5156
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
HOWARD S. LANZNAR, ESQ. NEIL GOLD, ESQ.
MARGUERITE M. ELIAS, ESQ. CAROLINE AIKEN KOSTER, ESQ.
KATTEN MUCHIN & ZAVIS FULBRIGHT & JAWORSKI L.L.P.
525 WEST MONROE STREET 666 FIFTH AVENUE
SUITE 1600 31ST FLOOR
CHICAGO, ILLINOIS 60661 NEW YORK, NEW YORK 10103
(312) 902-5200 (212) 318-3000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
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, check the following box and
list the Securities Act registration statement number of 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: [X].
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
TITLE OF EACH CLASS OF AMOUNT PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE TO BE MAXIMUM AGGREGATE REGISTRATION
REGISTERED REGISTERED OFFERING PRICE OFFERING PRICE FEE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock............ 4,715,000 shares(1) $12.50 per share(2) $58,937,500(2) $17,860(3)
- ---------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) Includes 615,000 shares to be offered upon exercise of the Underwriters'
over-allotment option.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 of Regulation C under the Securities Act of 1933, as amended.
(3) $17,146 previously paid. The balance of $714 is being paid with this
filing.
---------------
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
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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, DATED NOVEMBER 24, 1997
4,100,000 SHARES
LOGO
COMPASS INTERNATIONAL SERVICES CORPORATION
COMMON STOCK
All of the shares of Common Stock offered hereby are being offered by Compass
International Services Corporation ("Compass" or the "Company").
Prior to this offering (the "Offering"), there has been no public market for
the Common Stock of the Company. It is currently estimated that the initial
public offering price of the Common Stock will be between $10.50 and $12.50 per
share. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. The Common Stock has been
approved for quotation on the Nasdaq National Market under the symbol "CMPS."
SEE "RISK FACTORS" COMMENCING ON PAGE 9 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public Discount(1) Company(2)
- --------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........... $ $ $
Total(3)............ $ $ $
- --------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company, estimated at $3,400,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 615,000 additional shares of Common Stock solely to cover over-
allotments, if any. If the Underwriters exercise this option in full, the
total Price to Public, Underwriting Discount and Proceeds to Company will
be $ , $ , and $ , respectively. See "Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of NationsBanc Montgomery Securities, Inc. on or about
, 1997.
-----------
NationsBanc Montgomery Securities, Inc.
Lehman Brothers
, 1997
<PAGE>
The inside front cover of the Prospectus contains five photographs depicting
the various operations of the Company. In the upper left corner is the Company's
logo.
----------------
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 stabilizing, the purchase of Common Stock to
cover syndicate short positions and the imposition of penalty bids. For a
description of these activities, see "Underwriting."
2
<PAGE>
PROSPECTUS SUMMARY
Simultaneously with and as a condition to the closing of the Offering made by
this Prospectus, Compass will acquire five business services outsourcing
companies (the "Founding Companies"), in separate transactions (collectively,
the "Acquisitions"), in exchange for cash and shares of its Common Stock.
Unless otherwise indicated, all references to the "Company" herein include the
Founding Companies and references to "Compass" shall mean Compass International
Services Corporation prior to the effectiveness of the Acquisitions. For more
information about the Acquisitions, see "Certain Transactions."
The following summary is qualified in its entirety by, and should be read in
conjunction with, the detailed information and financial statements, including
the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise
indicated, all such financial information and share and per share data in this
Prospectus (i) have been adjusted to give effect to the Acquisitions, (ii) give
effect to the approximate 112.185-for-1 stock split to be effected prior to the
consummation of the Offering, and (iii) assume that the Underwriters' over-
allotment option is not exercised.
THE COMPANY
Compass was organized to create a leading provider of outsourced business
services to public and private entities throughout the sales cycle (as
illustrated below, the "Sales Cycle"). The five Founding Companies collectively
provide accounts receivable management services, mailing services and
teleservices to clients in a broad range of sectors including
telecommunications, financial services, insurance, healthcare, education,
government and utilities. In addition, through its proprietary Accelerated
Payment Systems ("APS") process, one of the Founding Companies is a leading
provider of telephonic check drafting services which enable clients to accept
payments through checks authorized by phone. The Founding Companies, each of
which has been in business for more than ten years, have collectively achieved
substantial growth in recent years. On a pro forma combined basis, the Founding
Companies' revenues increased from $30.9 million in 1992 to $71.8 million in
1996, representing a compound annual growth rate of 23.5%. Revenues of the
Founding Companies for the nine months ended September 30, 1997 totaled $63.6
million on a pro forma combined basis.
Upon the consummation of the Acquisitions, the Company's accounts receivable
management services will include the recovery of traditional delinquent
accounts from both consumer and commercial debtors and the management of early
stage delinquencies. Mailing services will include lead generating direct mail,
often to prompt inbound sales calls, and direct mail for billing, payment
processing or collection purposes. Mailing services will also include
presorting, freight and drop shipping, data processing, laser printing, mailing
list rental and order fulfillment. Teleservices will include outbound
telemarketing, inbound customer service and inbound sales. Each of the services
to be provided by the Company, including APS, can be utilized at various stages
of the Sales Cycle. Upon completion of the Offering, the Company will be one of
the largest providers of its services in the United States in terms of
revenues, servicing clients from 12 call centers in ten states equipped with a
total of approximately 980 workstations, a mail processing center in Texas,
four sales centers in the United States and one sales center in the United
Kingdom.
Companies are increasingly outsourcing to third party experts a variety of
non-core business functions throughout the Sales Cycle, and the Company
believes, although there can be no assurance, that this trend toward
outsourcing will continue. In addition to the general trend toward outsourcing,
management believes that a number of significant factors and trends are
creating opportunities in the Company's businesses. Both the accounts
receivable management industry and the direct marketing industry have
experienced significant growth in recent years. According to a recent report
concerning the accounts receivable management industry, receivables outsourced
to third parties for management and recovery in the United States increased
from approximately $79.0 billion in 1994 to approximately $84.3 billion in
1995, an increase of approximately 6.7%.
3
<PAGE>
The Direct Marketing Association estimates that direct marketing advertising
expenditures in the United States for telemarketing increased from
approximately $42.4 billion in 1991 to $57.8 billion in 1996, a compound annual
growth rate of 6.4%, while direct mail advertising expenditures increased from
approximately $24.5 billion to $34.6 billion during the same period, a compound
annual growth rate of 7.1%. Each of the accounts receivable management, direct
mail and teleservices industries is highly fragmented, includes a large number
of small, independent businesses and is currently experiencing consolidation.
The Company believes significant opportunities are available to a well
capitalized company providing a broad offering of outsourced business services
with a high level of customer service.
Compass believes that companies are increasingly seeking partners who can
provide a comprehensive set of outsourced services, spanning the entire Sales
Cycle, while maintaining a high level of client service. The diagram below
illustrates the processes that comprise the Sales Cycle, from direct marketing
through accounts receivable collection, and the services to be provided by the
Company that can be utilized at various stages throughout the Sales Cycle.
LOGO
The Company's goal is to become a leading, single-source provider of
outsourced business services throughout the Sales Cycle. In order to achieve
this goal, the Company intends to: (i) provide a broad array of complementary
business services; (ii) focus on high quality client service; (iii) leverage
and expand its technology and operational infrastructures; and (iv) operate
with a decentralized management structure.
The Company intends to implement a focused internal growth strategy and
pursue an aggressive acquisition program.
INTERNAL GROWTH STRATEGY. While the Company intends to acquire additional
outsourcing services companies, strong internal growth remains the core of the
Company's growth strategy. A key element of the internal growth strategy is to
capitalize on significant cross-selling opportunities. Each of the Founding
Companies is a specialist in the services it provides and has many long
standing relationships with large clients that have multiple outsourcing needs.
Combining the Founding Companies will enable the Company to capitalize on
existing clients' desires for a single point of service, and to offer bundled
services by leveraging the Founding Companies' client relationships and
reputations for quality. The Company expects to use the expertise of the
Founding Companies as a point of entry with new clients. In addition, the
Company intends to: (i) implement an aggressive, coordinated marketing program;
(ii) selectively expand its service offerings with the goal of providing
integrated "end-to-end" services to clients throughout the Sales Cycle; (iii)
implement best practices throughout the Company's operations; (iv) achieve
economies of scale; and (v) pursue opportunities in the growing international
market.
4
<PAGE>
ACQUISITION STRATEGY. Compass believes that industry trends toward
consolidation and increased acceptance of outsourcing create opportunities for
expansion of the Company's business. The Company intends to capitalize on the
highly fragmented nature of the industries in which it competes by implementing
an aggressive strategic acquisition program following the Offering. Using the
Founding Companies as platforms for growth and consolidation, the Company will
pursue acquisitions within the industry segments and markets currently served
by the Founding Companies to add to the growth of its existing businesses and
gain market share. In addition, the Company plans to acquire additional
companies that broaden and complement its menu of services and the markets it
serves.
The Company's ability to successfully execute its internal growth and
acquisition strategies is subject to certain risks. See "Risk Factors"
beginning on page 9 of this Prospectus.
THE ACQUISITIONS
Compass has conducted no operations and generated no revenues to date, and
its management group was assembled only recently, in June 1997. Compass has
entered into agreements to acquire all of the outstanding capital stock of each
of the Founding Companies. The aggregate consideration to be paid by Compass
consists of approximately $19.2 million in cash and 5,435,691 shares of Common
Stock. The cash consideration to be paid for each Founding Company is subject
to possible post-closing adjustment based upon adjusted 1997 earnings. The
maximum possible increase and decrease in the cash consideration to be paid by
Compass is approximately $4.1 million and $8.2 million, respectively. Pursuant
to the Acquisitions, the Company will assume the outstanding indebtedness of
the Founding Companies. The consummation of each Acquisition is contingent upon
the consummation of the Offering and customary closing conditions. The
Acquisition Agreements contain covenants not to compete and require certain
executives of the Founding Companies to enter into employment agreements with
their respective Founding Companies upon consummation of the Acquisitions. One
executive from each of the Founding Companies will be appointed to Compass'
Board of Directors following the consummation of the Offering. See "The
Company," "Management--Executive Compensation; Employment Agreements; Covenants
Not to Compete" and "Certain Transactions."
The Company's executive offices are located at 5 Independence Way, Suite 300,
Princeton, New Jersey 08540, and its telephone number is (609) 514-5156. The
Company intends to relocate its headquarters to the metropolitan New York area
after the consummation of the Offering.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the
Company........................... 4,100,000 shares
Common Stock to be outstanding
after the Offering................ 11,218,460 shares(1)
Use of proceeds.................... To pay the cash portion of the purchase
price for the Founding Companies, to retire
certain outstanding indebtedness of the
Founding Companies, and for working capital
and general corporate purposes, including
future acquisitions. See "Use of Proceeds."
Proposed Nasdaq National Market
symbol............................ CMPS
</TABLE>
- --------
(1) Does not include: (i) up to 2,000,000 additional shares reserved for
issuance pursuant to the Company's 1997 Employee Incentive Compensation
Plan (the "Incentive Plan"), of which options to purchase 690,000 shares of
Common Stock will be granted under the Incentive Plan concurrently with the
Offering at an exercise price equal to the initial public offering price;
(ii) 500,000 additional shares reserved for issuance under the Company's
Employee Stock Purchase Plan; or (iii) 100,000 shares of Common Stock
issuable upon the exercise of warrants to be issued concurrently with the
Offering. See "Management--1997 Employee Incentive Compensation Plan" and
"--Employee Stock Purchase Plan" and "Certain Transactions."
5
<PAGE>
SUMMARY PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Compass will acquire the Founding Companies simultaneously with and as a
condition to the consummation of this Offering. For financial statement
presentation purposes, The Mail Box, Inc., one of the Founding Companies, has
been designated as the accounting acquiror. The following unaudited summary pro
forma combined financial data present certain data for the Company as adjusted
to give effect to (i) the consummation of the Acquisitions, (ii) certain pro
forma adjustments to the historical financial statements, including adjustments
for three acquisitions completed by Bomar (as defined below under the heading
"The Company") since August 1996, and (iii) the consummation of this Offering
and the application of the net proceeds therefrom. See the Unaudited Pro Forma
Combined Financial Statements and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
PRO FORMA COMBINED
--------------------------------
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------ -------------------
1996 1996 1997
------------ --------- ---------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (1):
Revenues...................................... $71,783 $52,043 $63,619
Operating expenses............................ 44,474 31,868 38,905
--------- --------- ---------
Gross profit................................ 27,309 20,175 24,714
Selling, general and administrative expenses
(2).......................................... 20,169 14,954 17,143
Amortization of goodwill and other intangibles
(3).......................................... 1,685 1,263 1,263
--------- --------- ---------
Income from operations...................... 5,455 3,958 6,308
Other expense, net (4)........................ 210 209 496
--------- --------- ---------
Income before income taxes.................... 5,245 3,749 5,812
Provision for income taxes (5).............. 2,772 2,005 2,830
--------- --------- ---------
Net income.................................... $ 2,473 $ 1,744 $ 2,982
========= ========= =========
Net income per share.......................... $ 0.25 $ 0.18 $ 0.30
========= ========= =========
Shares used in computing net income per share
(6).......................................... 9,809,146 9,809,146 9,809,146
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------
PRO FORMA AS
COMBINED (7) ADJUSTED (8)
------------ -----------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)........................... $(22,642)(9) $12,091
Total assets........................................ 87,161 94,254
Total long-term debt, net of current portion........ 7,832 2,115
Stockholders' equity................................ 35,568 76,018
</TABLE>
- --------
(1) The pro forma combined statement of operations data assume that the
Acquisitions and the Offering were consummated on January 1, 1996, are not
necessarily indicative of the operating results that would have been
achieved had these events actually then occurred and should not be
construed as representative of future operating results. The summary pro
forma combined statement of operations data should be read in conjunction
with the Unaudited Pro Forma Combined Financial Statements and the notes
thereto and the historical financial statements of Compass and the Founding
Companies and the notes thereto included elsewhere in this Prospectus.
(2) The pro forma combined statement of operations data reflect reductions in
salaries, bonuses and benefits to the stockholders of the Founding
Companies to which they have agreed prospectively in the employment
agreements to be entered into upon consummation of the Offering (the
"Compensation Differential"). The Compensation Differential was
approximately $3.4 million, $2.4 million and $3.1 million for the year
ended December 31, 1996 and the nine months ended September 30, 1996 and
1997, respectively. Additionally, the pro forma combined statement of
operations data reflect the elimination of a compensation charge of
approximately $1.3 million associated with the issuance of NCMC shares to
certain key employees and a director of NCMC, and the non-recurring
compensation charge of $5.8 million associated with the issuance of shares
to management of Compass.
6
<PAGE>
(3) Reflects (i) the amortization of goodwill of $51.4 million to be recorded
as a result of the Acquisitions over periods ranging from 15 to 40 years;
and (ii) the amortization of $1.0 million in intangible assets over a
period of 15 years.
(4) Reflects a reduction of interest expense associated with long term debt to
be repaid from the proceeds of the Offering of $271,000 for the year ended
December 31, 1996, and $178,000 and $345,000 for the nine months ended
September 30, 1996 and 1997, respectively, and a reduction of interest
income of $61,000 for the year ended December 31, 1996 and $47,000 and
$54,000 for the nine-month periods ended September 30, 1996 and 1997,
respectively, relating to stockholder notes to be paid off upon
consummation of the Offering.
(5) Assumes that all income is subject to a corporate income tax rate of 40%
and that all goodwill is non-deductible.
(6) Includes: (i) 1,682,769 shares issued to BGL Capital Partners, L.L.C.
("BGL"), and management of Compass; (ii) 5,435,691 shares issued to owners
of the Founding Companies in connection with the Acquisitions; and (iii)
2,690,686 shares representing the number of shares sold in the Offering
necessary to pay the cash portion of the consideration for the
Acquisitions, to pay the underwriting discount and estimated expenses of
the Acquisitions and the Offering, and to repay certain indebtedness
assumed by Compass in the Acquisitions, net of repayment of stockholder
receivables. See "Certain Transactions."
(7) The pro forma combined balance sheet data assume that the Acquisitions were
consummated on September 30, 1997, are not necessarily indicative of the
financial position that would have been achieved had these events actually
then occurred and should not be construed as representative of future
financial position. The summary pro forma balance sheet data should be read
in conjunction with the Unaudited Pro Forma Combined Financial Statements
and the notes thereto and the historical financial statements of Compass
and the Founding Companies and the notes thereto included elsewhere in this
Prospectus.
(8) Adjusted to reflect the sale of the 4,100,000 shares of Common Stock
offered hereby and the application of the estimated net proceeds therefrom.
See "Use of Proceeds."
(9) Includes $19.2 million payable to stockholders of the Founding Companies,
representing the cash portion of the consideration for the Acquisitions to
be paid from the net proceeds of the Offering. See "Use of Proceeds" and
"Notes to Unaudited Pro Forma Combined Financial Statements."
7
<PAGE>
SUMMARY INDIVIDUAL FOUNDING COMPANY FINANCIAL DATA
(IN THOUSANDS)
The following table presents summary operating data for each of the Founding
Companies (see "The Company" for the complete names of each Founding Company)
on a historical basis for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31,(1) SEPTEMBER 30,(1)
------------------------------ ------------------
1994 1995 1996 1996 1997
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
MAIL BOX:
Revenues.................. $ 15,354 $ 17,370 $ 26,156 $ 18,472 $ 23,188
Operating expenses........ 11,168 12,402 17,953 12,816 15,286
--------- --------- --------- -------- --------
Gross profit.............. 4,186 4,968 8,203 5,656 7,902
Selling, general and
administrative expenses.. 3,442 4,370 5,891 4,185 5,642
--------- --------- --------- -------- --------
Income from operations.... $ 744 $ 598 $ 2,312 $ 1,471 $ 2,260
========= ========= ========= ======== ========
NCMC(2):
Revenues.................. $ 8,874 $ 12,287 $ 13,579 $ 10,055 $ 11,759
Operating expenses........ 4,550 6,322 7,945 5,806 7,314
--------- --------- --------- -------- --------
Gross profit.............. 4,324 5,965 5,634 4,249 4,445
Selling, general and
administrative expenses.. 3,400 4,328 4,798 3,680 5,065
--------- --------- --------- -------- --------
Income from operations.... $ 924 $ 1,637 $ 836 $ 569 $ (620)
========= ========= ========= ======== ========
BOMAR:
Revenues.................. $ 6,859 $ 7,416 $ 9,597 $ 7,040 $ 10,268
Operating expenses........ 3,952 4,229 5,814 4,318 5,914
--------- --------- --------- -------- --------
Gross profit.............. 2,907 3,187 3,783 2,722 4,354
Selling, general and
administrative expenses.. 2,490 2,934 3,458 2,458 3,705
--------- --------- --------- -------- --------
Income from operations.... $ 417 $ 253 $ 325 $ 264 $ 649
========= ========= ========= ======== ========
MID-CONTINENT:
Revenues.................. $ 9,086 $ 8,763 $ 9,038 $ 6,810 $ 7,066
Operating expenses........ 2,963 2,851 2,875 2,210 2,294
--------- --------- --------- -------- --------
Gross profit.............. 6,123 5,912 6,163 4,600 4,772
Selling, general and
administrative expenses.. 5,862 5,974 6,054 4,509 4,677
--------- --------- --------- -------- --------
Income (loss) from
operations............... $ 261 $ (62) $ 109 $ 91 $ 95
========= ========= ========= ======== ========
IMPACT(3):
Revenues.................. $ 6,698 $ 8,748 $ 8,869 $ 5,950 $ 8,958
Operating expenses........ 4,705 6,108 6,961 4,356 6,708
--------- --------- --------- -------- --------
Gross profit.............. 1,993 2,640 1,908 1,594 2,250
Selling, general and
administrative expenses.. 1,787 2,590 2,108 1,597 2,089
--------- --------- --------- -------- --------
Income (loss) from
operations............... $ 206 $ 50 $ (200) $ (3) $ 161
========= ========= ========= ======== ========
</TABLE>
- --------
(1) Selling, general and administrative expenses for the Founding Companies for
each of the years in the three-year period ended December 31, 1996 and for
the nine months ended September 30, 1996 and 1997 do not include a
reduction for the Compensation Differential as indicated below. The
historical Compensation Differential shown for Bomar does not include
$86,000, $73,000, $169,000, $67,000 and $64,000, for the years ended
December 31, 1994, 1995 and 1996, for the nine months ended September 30,
1996 and the eight months ended August 31, 1997, respectively, related to
Bomar's acquisition of FCCI which was completed in September 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- -----------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
MAIL BOX....................... $ 152 $ 310 $ 875 $ 520 $ 1,299
NCMC........................... 75 169 210 161 90
BOMAR.......................... 456 658 986 830 715
MID-CONTINENT.................. 981 1,057 1,161 868 968
IMPACT......................... -- -- -- -- --
-------- -------- -------- -------- --------
Total......................... $ 1,664 $ 2,194 $ 3,232 $ 2,379 $ 3,072
======== ======== ======== ======== ========
</TABLE>
(2) NCMC's operating data for the nine months ended September 30, 1997 includes
a compensation charge of approximately $1.3 million associated with the
issuance of NCMC shares to certain key employees.
(3) Impact's operating data for the years ended December 31, 1994 and 1995
reflect the operating results for the year ended September 30 for its
affiliate, Impact Tele-marketing, Inc.
8
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered by this Prospectus
involves a high degree of risk. In addition to the other information contained
in this Prospectus, the following factors should be considered carefully
before purchasing any of the shares of Common Stock offered hereby.
ABSENCE OF COMBINED OPERATING HISTORY; RISKS OF INTEGRATION
Compass was recently formed and has conducted no operations and generated no
revenues to date. Compass has entered into agreements to acquire the Founding
Companies simultaneously with and as a condition to the closing of the
Offering. Approximately $31.1 million of the net proceeds from the Offering
will be used to pay the cash portion of the purchase price for the Founding
Companies and to repay certain indebtedness assumed by the Company in the
Acquisitions. The Founding Companies have been operating as separate
independent entities. Currently, the Company has no centralized financial
reporting system and will initially rely on the existing reporting systems of
the Founding Companies. The success of the Company will depend, in part, on
the Company's ability to integrate the operations of the Founding Companies,
including centralizing certain functions to achieve cost savings and
developing programs and processes that will promote cooperation and the
sharing of opportunities and resources among the Founding Companies. The
Company's management group has been assembled only recently and there can be
no assurance that the management group will effectively be able to oversee the
combined entity and implement the Company's operating or growth strategies.
Further, to the extent that the Company is able to implement its acquisition
strategy, the resulting growth of the Company will place significant demands
on management and on the Company's internal systems and controls. There can be
no assurance that the newly assembled management group will effectively be
able to direct the Company through a period of significant growth.
A number of the Founding Companies offer different services, employ
different technologies and operating systems and target different markets and
client segments. These differences increase the risk inherent in successfully
completing integration of the Founding Companies. Further, there can be no
assurance that the Company's integration strategy will be successful, or that
the clients of the Founding Companies will accept the Company as a provider of
a variety of outsourced business services. In addition, there can be no
assurance that the operating results of the Company will match or exceed the
combined individual operating results achieved by the Founding Companies prior
to the Offering.
RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH
The Company expects to grow internally and through acquisitions. The Company
expects to expend significant time and effort in expanding existing businesses
and identifying, completing and integrating acquisitions. The Company's
ability to manage growth successfully will require the Company to continue to
improve its operations, management and financial systems and controls as well
as expand its employee work force. Any future growth can be expected to place
significant additional responsibilities on the Company's management,
operations, employees and resources. There can be no assurance the Company
will be able to maintain or accelerate its current growth, effectively manage
its expanding operations or achieve planned growth on a timely or profitable
basis. To the extent that the Company is unable to manage its growth
efficiently and effectively, the Company's business, financial condition and
results of operations could be materially adversely affected. See "Business--
Growth Strategy" and "Management."
RISKS ASSOCIATED WITH INTERNAL GROWTH AND OPERATING STRATEGIES
A key element of the Company's strategy is to generate internal growth by
capitalizing on cross-selling opportunities, generating new clients through
aggressive marketing and expanding its service offerings. Internal growth will
depend upon factors including the effective initiation, development and
maintenance of client
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relationships; the expansion of marketing operations; the Company's ability to
maintain the high quality of the services and products it offers and to expand
such services and products; and the recruitment, motivation and retention of
qualified management and other personnel. Sustaining growth will also require
continued access by the Company to capital, the successful cross-selling of
products and services among the Founding Companies and realization by the
Company of economies of scale. There can be no assurance that the Company's
strategies will continue to generate internal growth or that it will be able
to generate cash flow adequate for its operations and to support growth. A key
component of the Company's strategy is to operate the Founding Companies and
subsequently acquired businesses on a decentralized basis, with local
management retaining responsibility for day-to-day operations, profitability
and the growth of the business. If proper overall business controls are not
implemented, this decentralized operating strategy could result in
inconsistent operating and financial practices at the Founding Companies and
subsequently acquired businesses and the Company's overall profitability could
be adversely affected. See "Business--Growth Strategy."
RISKS ASSOCIATED WITH THE COMPANY'S ACQUISITION STRATEGY AND FINANCING OF
ACQUISITIONS
A significant element in the Company's growth strategy is the acquisition of
additional outsourced business services companies that will add to the growth
of or complement its existing businesses. There can be no assurance that the
Company will be able to identify or reach mutually agreeable terms with
acquisition candidates and their owners, or that the Company will be able to
profitably manage additional businesses or successfully integrate such
additional businesses into the Company without substantial costs, delays or
other problems. In addition, acquisitions may involve a number of special
risks, including adverse short-term effects on the Company's reported
operating results; diversion of management's attention; dependence on
retention, hiring and training of key personnel; unanticipated problems or
legal liabilities; and amortization of acquired intangible assets. Some or all
of these risks could have a material adverse effect on the Company's
operations and financial performance. In addition, increased competition for
attractive acquisition candidates may develop, in which case there may be
fewer acquisition opportunities available to the Company as well as high
acquisition prices. There can be no assurance that the Founding Companies or
other businesses acquired in the future will achieve anticipated revenues or
earnings.
The Company currently intends to finance future acquisitions by using its
Common Stock for all or a portion of the consideration to be paid. In the
event that the Common Stock does not maintain sufficient value, or potential
acquisition candidates are unwilling to accept Common Stock as consideration
for the sale of their businesses, the Company may be required to utilize more
of its cash resources, if available, in order to continue its acquisition
program. If the Company does not have sufficient cash resources, its growth
could be limited unless it is able to obtain capital through additional debt
or equity financings. There can be no assurance that such debt or equity
financings will be obtained or that, if obtained, such financing will be on
terms that are favorable to the Company or sufficient for the Company's needs.
If the Company is unable to obtain sufficient financing, it may be unable to
fully implement its acquisition strategy.
MATERIAL AMOUNT OF INTANGIBLE ASSETS
Approximately $55.5 million, or 58.9%, of the Company's as adjusted pro
forma total assets as of September 30, 1997, represents goodwill subsequent to
the Acquisitions. Goodwill is an intangible asset that represents the
difference between the aggregate purchase price for the assets acquired and
the amount of such purchase price allocated to such assets for purposes of the
Company's pro forma balance sheet. The Company will amortize the goodwill from
the Acquisitions over periods ranging from 15 to 40 years with the amount
amortized in a particular period constituting an expense that reduces the
Company's net income for that period. The amount amortized, however, will not
give rise to a deduction for tax purposes. In addition, the Company will be
required to amortize the goodwill, if any, from any future acquisitions. Under
accounting rules, the Company is required to periodically evaluate if goodwill
has been impaired by reviewing the cash flows of acquired companies and
comparing such amounts with the carrying value of the associated goodwill. If
goodwill
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is impaired, the Company would be required to write down goodwill and incur a
related charge to its income. A reduction in net income resulting from the
amortization or writedown of goodwill could have an adverse impact upon the
market price of the Common Stock.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
Results for any quarter are not necessarily indicative of the results that
the Company may achieve for any subsequent quarter or a full fiscal year.
Quarterly results may vary materially as a result of the timing and structure
of acquisitions, the timing and magnitude of costs related to such
acquisitions or the gain or loss of material client relationships. Since a
significant portion of the Company's revenues are generated on a project-by-
project basis, the timing or completion of material projects could result in
fluctuations in the Company's results of operations for particular quarterly
periods. Because the anticipated financial benefits of the combination of the
Founding Companies may not be generated immediately, if at all, the Company's
initial results as a combined company may reflect corporate overhead that
exceeds the realized benefits. Unexpected variations in quarterly results
could also adversely affect the price of the Common Stock, which in turn could
limit the ability of the Company to make acquisitions.
PATENT LITIGATION; DEPENDENCE ON PROPRIETARY TECHNOLOGY
The success of the Company's APS business is dependent in part upon a patent
covering the APS process (the "APS Patent") that was purchased by and assigned
to the Company in 1996. NCMC is currently engaged in several disputes with
respect to the APS Patent. NCMC has filed suit against the former owner and
inventor of the APS Patent (collectively, the "Defendants"), alleging that the
Defendants have breached the agreement between NCMC and the Defendants and
violated NCMC's exclusive rights to the APS Patent and related intellectual
property used in the APS portion of NCMC's business. The Defendants have filed
a counterclaim that seeks, among other things, rescission of the agreement
under which NCMC purchased the APS Patent, restoration of a prior agreement
pursuant to which the Defendants licensed the APS Patent to NCMC, return of
the APS Patent to the Defendants and unspecified damages. There can be no
assurances that Defendants will not prevail with respect to some or all of
their counterclaims. If the purchase agreement is rescinded and the prior
license agreement restored, the royalties payable by NCMC would be higher than
those currently being paid, damages could be assessed and the ownership of the
APS Patent would be transferred to the Defendants. See "Business--Litigation."
NCMC is currently a plaintiff in two other lawsuits in which NCMC is
alleging that a competitor and a former customer are infringing the APS
Patent. These defendants have denied any infringement and filed counterclaims
seeking a declaration that the APS Patent is invalid. There can be no
assurances that NCMC will prevail in these or other patent infringement
actions it may pursue, that the APS Patent will not be declared invalid or
that the loss of either of these two lawsuits or the defendants' counterclaims
will not have a material adverse effect on the Company's business, results of
operations or financial condition. See "Business--Litigation." In addition,
there can be no assurances that the Company's competitors will not be able to
develop similar or better technology than the APS Patent.
DEPENDENCE ON LABOR FORCE
The Company's success depends in part on its ability to recruit, hire, train
and retain qualified employees. The Company's operations are very labor
intensive and have experienced high personnel turnover. A significant increase
in the Company's employee turnover rate could increase the Company's
recruiting and training costs and decrease operating efficiencies and
productivity. If the Company's growth strategy is successful, the Company will
be required to recruit, hire and train qualified personnel at an accelerated
rate. There can be no assurance that the Company will be able to hire, train
and retain a sufficient labor force of qualified employees. Because a
significant portion of the Company's operating costs consist of wages to
hourly workers, an increase in wages, costs of employee benefits or employment
taxes could have a material adverse effect on the Company's business, results
of operations and financial condition. In addition, certain of the Company's
facilities are located in geographic areas with relatively low unemployment
rates, thus potentially making it more difficult and costly to hire qualified
personnel.
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DEPENDENCE ON CERTAIN SECTORS; CONTRACT RISKS
Most of the Company's revenues are derived from clients in the
telecommunications, financial services, education, healthcare, retail and
commercial, insurance, government and utilities sectors. A significant
reduction in expenditures in these sectors or trends to reduce or eliminate
the use of third-party services could have a materially adverse impact on the
Company's business, results of operations and financial condition. The Company
enters into contracts with most of its clients which define, among other
things, general fee arrangements, the basic scope of services and termination
provisions. Clients may usually terminate such contracts on short notice.
Accordingly, there can be no assurance that existing clients will continue to
use the Company's services at historical levels, if at all. The Company's 10
largest clients in 1996 accounted for approximately 39.8% of the Company's
revenues on a pro forma combined basis. During 1996 and the nine months ended
September 30, 1997, VarTec Telecom, Inc. ("VarTec") accounted for 11.2% and
17.6%, respectively, of the Company's revenues on a pro forma combined basis.
The Company's contract with VarTec allows for termination on short notice. A
significant reduction in business from VarTec could have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Business--Client Relationships."
COMPETITION
The markets in which the Company competes are highly competitive, and the
Company expects competition to persist and intensify in the future. The
Company's competitors include small firms offering specific business services,
divisions of large entities, large independent firms and, most significantly,
the in-house operations of clients or potential clients. Some of the Company's
competitors have substantially greater financial, marketing and other
resources, offer more diversified services and operate in broader geographic
areas than the Company. There can be no assurance that additional competitors
with greater resources than the Company will not enter the Company's markets.
All of the services offered by the Company may be performed in-house. Many
larger clients retain multiple service providers which exposes the Company to
continuous competition in order to remain a preferred vendor. There can be no
assurance that outsourcing of the services performed by the Company will
continue or that existing Company clients will not bring some or all of such
services in-house.
RELIANCE ON MANAGEMENT
The Company's operations are dependent on the efforts of Michael J.
Cunningham, its Chief Executive Officer, Mahmud U. Haq, its President and
Chief Operating Officer, and Richard A. Alston, its Chief Financial Officer,
as well as the senior management of the Founding Companies. Furthermore, the
Company will likely be dependent on the senior management of any businesses
acquired in the future. If any of these individuals becomes unable to continue
his role, the Company's business or prospects could be adversely affected.
There can be no assurance that such individuals will continue in their present
capacities for any particular period of time. The Company does not intend to
obtain key man life insurance covering any of its executive officers or
members of senior management of the Founding Companies. See "Management--
Executive Officers and Directors" and "--Executive Compensation; Employment
Agreements; Covenants Not to Compete."
DEPENDENCE ON TELEPHONE AND POSTAL SERVICE
The Company's business is materially dependent upon service provided by
various local and long distance telephone companies and the United States
Postal Service. Rate increases imposed by telephone companies would increase
the Company's operating expenses and adversely affect its operating results to
the extent that the Company is unable to pass the increases through to its
clients. A significant increase in postage rates could adversely affect the
demand for the mailing services provided by the Company. Any significant
interruption or capacity limitation in either service would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Services Offered."
GOVERNMENT REGULATION
The accounts receivable management and telemarketing industries are
regulated under various federal and state statutes. The Company is subject to
the Fair Debt Collection Practices Act (the "FDCPA") and various state debt
collection laws, which, among other things, establish specific guidelines and
procedures debt collectors
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must follow in communicating with consumer debtors, including the time, place
and manner of such communications. The accounts receivable management business
is also subject to state regulation, and some states require that the Company
be licensed as a debt collection company. The Company is also subject to the
Fair Credit Reporting Act (the "FCRA"), which regulates the consumer credit
reporting industry and which may impose liability on the Company to the extent
that the adverse credit information reported on a consumer to a credit bureau
is false, inaccurate or outside of the scope of the Company's transactions
with such consumers. With respect to the other teleservices offered by the
Company, including telemarketing, the Telemarketing and Consumer Fraud and
Abuse Prevention Act of 1994 broadly authorizes the Federal Trade Commission
(the "FTC") to issue regulations prohibiting misrepresentations in
telemarketing sales. The FTC's telemarketing sales rules, among other things,
limit the hours during which telemarketers may call, prohibit
misrepresentations of the cost, terms, restrictions, performance or duration
of products or services offered by telephone solicitation and specifically
address other perceived telemarketing abuses in the offering of prizes and the
sale of investment opportunities. In addition, the Telephone Consumer
Protection Act of 1991 (the "TCPA") restricts the use of automated telephone
equipment for telemarketing purposes, including limiting the hours during
which telemarketers may call consumers and prohibiting the use of automated
telephone dialing equipment to call certain telephone numbers. A number of
states also regulate telemarketing and some states have enacted restrictions
similar to the TCPA. The failure to comply with applicable statutes and
regulations could have a materially adverse effect on the Company's business,
results of operations and financial condition. There can be no assurance that
additional federal or state legislation, or changes in regulatory
implementation, would not limit the activities of the Company in the future or
significantly increase the cost of regulatory compliance.
Several of the industries served by the Company are also subject to varying
degrees of government regulation. Although compliance with these regulations
is generally the responsibility of the Company's clients, the Company could be
subject to a variety of enforcement or private actions for its failure or the
failure of its clients to comply with such regulations.
RISK OF BUSINESS INTERRUPTION
The Company's operations are dependent upon its ability to protect its call
centers, computer and telecommunications equipment and software systems
against damage from fire, power loss, telecommunications interruption or
failure, natural disaster and other similar events. In the event the Company
experiences a temporary or permanent interruption through casualty, operating
malfunction or otherwise, the Company's business could be materially adversely
affected and the Company may be required to pay contractual damages to some
clients or allow some clients to terminate or renegotiate their contracts with
the Company. The Company's property and business interruption insurance may
not adequately compensate the Company for all losses that it may incur.
RISKS ASSOCIATED WITH RAPIDLY CHANGING TECHNOLOGY
The Company's business is highly dependent on its computer and
telecommunications equipment and software systems. The Company's failure to
maintain its technological capabilities or to respond effectively to
technological changes could have a material adverse effect on the Company's
business, results of operations or financial condition. The Company's future
success also will be highly dependent upon its ability to enhance existing
services and introduce new services to respond to changing technological
developments. There can be no assurance that the Company can successfully
develop and bring to market any new services in a timely manner, that such
services or products will be commercially successful or that competitors'
technologies or services will not render the Company's products or services
noncompetitive or obsolete.
CONTROL OF THE COMPANY BY INITIAL STOCKHOLDERS
Following the completion of the Offering, the directors and executive
officers of the Company and their affiliates and the former stockholders of
the Founding Companies (collectively, the "Initial Stockholders") will
beneficially own approximately 63.5% of the then outstanding shares of Common
Stock (60.2% if the
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Underwriters' over-allotment option is exercised in full). These persons, if
acting in concert, will have the ability to exercise substantial control over
the Company's affairs and would likely be able to elect a sufficient number of
directors to control the Board and to approve or disapprove any matter
submitted to a vote of stockholders. The Initial Stockholders have entered
into an agreement whereby each party has agreed, for the five years following
the Offering, to vote all shares of Common Stock held by them (i) for the
nomination and reelection of the directors serving at the time of the Offering
or such successors as shall be nominated in accordance with the agreement and
(ii) as to any other matter brought to a stockholder vote, in accordance with
the recommendation of the then-incumbent Board of Directors. The ownership
position of the Initial Stockholders may have the effect of delaying,
deferring or preventing a change in control of the Company. See "Certain
Transactions," "Principal Stockholders" and "Description of Capital Stock--
Stockholders' Agreement."
SUBSTANTIAL PROCEEDS OF OFFERING PAYABLE TO AFFILIATES
Approximately $19.2 million, or 47.5%, of the net proceeds of the Offering
will be used to pay the cash portion of the purchase price for the Founding
Companies. Some of the recipients of these funds will become directors and/or
officers of the Company and/or holders of more than 5.0% of the shares of
Common Stock outstanding after the Offering. Certain of the Founding Companies
have incurred an aggregate of approximately $5.1 million of indebtedness which
is personally guaranteed by their principal stockholders and will be repaid
from the net proceeds of the Offering. In addition, BGL, which will own 10.0%
of the shares of Common Stock outstanding after the Offering, had incurred,
through September 30, 1997, $1.8 million of expenses in connection with the
Company's formation, the Offering and the Acquisitions. This amount and any
additional amounts advanced by BGL prior to the consummation of the Offering,
together with interest thereon at 8.0% per annum, will be repaid from the net
proceeds of the Offering. See "Certain Transactions."
POTENTIAL ADVERSE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON
STOCK
The market price of the Common Stock of the Company could be adversely
affected by the sale of substantial amounts of Common Stock of the Company in
the public market following the Offering. The 4,100,000 shares of Common Stock
being sold in the Offering will be freely tradeable unless acquired by
affiliates (as that term is defined under the rules and regulations of the
Securities Act of 1933, as amended (the "Securities Act")) of the Company,
which shares will be subject to the resale limitations of Rule 144 ("Rule
144") promulgated under the Securities Act.
Upon completion of the Offering, the holders of Common Stock who did not
purchase shares in the Offering will own 7,118,460 shares of Common Stock,
including (i) the stockholders of the Founding Companies who will receive, in
the aggregate, 5,435,691 shares in connection with the Acquisitions and (ii)
BGL and members of management who own 1,682,769 shares. These shares have not
been registered under the Securities Act and, therefore, may not be sold
unless registered under the Securities Act or sold pursuant to an exemption
from registration, such as the exemption provided by Rule 144. Furthermore,
these stockholders have agreed with Compass not to sell, transfer or otherwise
dispose of any of these shares of Common Stock for a one-year period following
the Offering. Such stockholders have certain piggyback registration rights
beginning one year after the Offering and one demand registration right for
the six month period beginning twenty months after the Offering with respect
to their shares of Common Stock.
The Company and the holders of all shares outstanding prior to the Offering
(including the holders of shares issued in connection with the Acquisitions)
have agreed not to offer, sell, contract to sell or otherwise dispose of any
shares of Common Stock, or any securities convertible into or exercisable or
exchangeable for Common Stock, for a period of 180 days after the date of this
Prospectus without the prior written consent of NationsBanc Montgomery
Securities, Inc. except for: (i) in the case of the Company, Common Stock
issued pursuant to any employee or director plan described herein or in
connection with acquisitions; (ii) in the case of all such holders, the
exercise of stock options pursuant to benefit plans described herein and
shares of Common Stock disposed of as bona fide gifts; and (iii) in the case
of BGL, distributions of Common Stock to its members, subject, in each case,
to any remaining portion of the 180-day period applying to any shares so
issued or transferred. See "Shares Eligible for Future Sale" and
"Underwriting."
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The Company plans to register an additional 3,000,000 shares of its Common
Stock under the Securities Act after completion of the Offering for use by the
Company as consideration for future acquisitions. Upon such registration,
these shares will generally be freely tradable after issuance, unless the
resale thereof is contractually restricted. The registration rights described
above will not apply to the registration statement to be filed with respect to
these 3,000,000 shares. It is contemplated that the shares issued as
consideration for future acquisitions will be subject to restrictions at least
as restrictive as those described in the preceding paragraph. See "Shares
Eligible for Future Sale."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock,
and there can be no assurance that an active public market for the Common
Stock will develop or continue after the Offering. The initial public offering
price for the Common Stock will be determined by negotiation between the
Company and the Representatives of the Underwriters and may bear no
relationship to the price at which the Common Stock will trade after the
Offering. See "Underwriting" for the factors to be considered in determining
the initial public offering price. After the Offering, the market price of the
Common Stock may be subject to significant fluctuations in response to
numerous factors, including variations in the annual or quarterly financial
results of the Company or its competitors, changes by financial research
analysts in their estimates of the earnings of the Company or the failure of
the Company to meet such estimates, conditions in the economy in general or in
the industries in which the Company competes, unfavorable publicity or changes
in applicable laws and regulations (or judicial or administrative
interpretations thereof) affecting the Company or the industries in which the
Company competes. From time to time, the stock market experiences significant
price and volume volatility, which may affect the market price of the Common
Stock for reasons unrelated to the Company's performance.
IMMEDIATE AND SUBSTANTIAL DILUTION
The purchasers of the shares of Common Stock offered hereby will experience
immediate dilution in the net tangible book value of their shares of
approximately $9.76 per share. In the event the Company issues additional
Common Stock in the future, including shares which may be issued in connection
with future acquisitions, purchasers of Common Stock in this Offering may
experience further dilution. See "Dilution."
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
The Board of Directors of the Company is authorized to issue preferred stock
in one or more series without stockholder action. The Board of Directors of
the Company serve staggered terms. The existence of this "blank-check"
preferred stock and the staggered Board of Directors could render more
difficult or discourage an attempt to obtain control of the Company by means
of a tender offer, merger, proxy contest or otherwise. Certain provisions of
the Delaware General Corporation Law may also discourage takeover attempts
that have not been approved by the Board of Directors. See "Management--Board
of Directors" and "Description of Capital Stock."
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THE COMPANY
Compass was formed to create a leading provider of outsourced business
services to public and private entities throughout the Sales Cycle. Although
it has conducted no operations to date, Compass has entered into agreements
(the "Acquisition Agreements") to acquire the five Founding Companies
simultaneously with, and as a condition to, the closing of the Offering. A
brief description of each Founding Company is set forth below.
THE MAIL BOX, INC.
The Mail Box, Inc. (together with its subsidiary, "Mail Box"), founded in
1971, provides direct mailing services, billing services, mail presorting,
freight and drop shipping, data processing, laser printing, mailing list
rental and other related services to companies located principally in the
southwest United States. Mail Box also provides order fulfillment services and
sells printed materials such as letterhead, envelopes and business forms. Mail
Box is headquartered in Dallas where its operations are housed in four
buildings containing approximately 338,000 square feet. In the twelve months
ended June 30, 1997, Mail Box processed approximately 840 million pieces of
mail, utilizing sophisticated technology in its lettershop, data processing
and presort facilities. Mail Box has received the Mail Advertising Service
Association's Award for Excellence in Education in 1996 for establishing the
industry's first full-time training facility. In addition, Kenneth W. Murphy,
Mail Box's chief executive officer, received in 1992 the United States Postal
Service Industry Excellence Award which recognizes individuals who set
standards for excellence in the mailing industry. Significant clients of Mail
Box include VarTec Telecom, Inc., Medic Computer Systems, Inc., Sears Roebuck
& Co., Advantis Business Services, Inc., The Army and Air Force Exchange
Services and Southwestern Bell Mobile Systems, Inc. Mail Box's revenues were
$26.2 million in 1996 and $23.2 million in the nine months ended September 30,
1997.
NATIONAL CREDIT MANAGEMENT CORPORATION
National Credit Management Corporation (together with its subsidiary,
"NCMC"), founded in 1984, provides accounts receivable management services
and, through its patented Accelerated Payment Systems ("APS") technology,
telephonic check drafting services. NCMC is based in Hunt Valley, Maryland (a
suburb of Baltimore), where it operates a call center and sales office, and
operates an additional call center and sales office in Las Vegas. NCMC
provides traditional delinquency collection services, as well as an early
receivables management service, primarily to clients in the education,
utilities, government and healthcare industries and its APS check drafting
services primarily to clients in the financial services and utilities sectors.
Significant clients of NCMC include EduCap, Inc., MBNA America Bank, N.A., the
State of Maryland and General Electric Capital Services, Inc. NCMC's revenues
were $13.6 million in 1996 and $11.8 million in the nine months ended
September 30, 1997.
B.R.M.C. OF DELAWARE, INC.
B.R.M.C. of Delaware, Inc. (together with its subsidiaries, "Bomar"),
founded in 1984, provides accounts receivable management services, primarily
for clients in the telecommunications, insurance, financial services and
healthcare industries. Bomar is based in Destin, Florida, and conducts
operations in Atlanta, Phoenix, Houston and Tampa. Since August 1996, Bomar
has acquired three accounts receivable management companies. In August 1996
Bomar acquired a 75% interest in Advanced Credit Services, Inc. ("ACS"), in
November 1996 it acquired Clayton-Parker & Associates ("CPA") and in September
1997 it acquired Financial Claims Control, Inc. ("FCCI"). Bomar will acquire
the remaining 25% of ACS simultaneously with the Acquisitions. Bomar derives
the substantial majority of its revenues from primary, secondary and tertiary
consumer collections. In addition, Bomar collects subrogated accounts for
insurance companies and recently began providing early receivables management
services. Significant clients of Bomar include Bellsouth Telecommunications,
Inc., AT&T Wireless Services, MD Anderson Cancer Hospital, The FACS Group
(Federated Department Stores, Inc.) and Capital One Financial Corporation.
Bomar's revenues were $9.6 million in 1996 and $10.3 million in the nine
months ended September 30, 1997.
MID-CONTINENT AGENCIES, INC.
Mid-Continent Agencies, Inc. (together with its subsidiaries, "Mid-
Continent"), founded in 1932, provides accounts receivable management services
primarily to companies in the manufacturing, insurance, wholesale
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distribution and commercial sectors. Mid-Continent was one of the first
companies in its industry to provide early receivables management services. It
derives the substantial majority of its revenues from commercial collections
with the balance derived from consumer collections. Mid-Continent is based in
Rolling Meadows, Illinois (a suburb of Chicago) where it operates a call
center, and has additional call centers in Louisville and Buffalo. Mid-
Continent also has an office in the United Kingdom which specializes in
commercial debt recovery and international credit reporting services. In a
December 1996 survey prepared by the Institute of Management & Administration,
Inc., an independent industry trade publication, Mid-Continent was ranked
first by companies comparing the services and results provided by commercial
collection agencies. Mid-Continent's significant clients include Beverly
Enterprises, Inc., CNA Insurance, Reynolds and Reynolds, Sentry Insurance and
seven state workers' compensation funds. Mid-Continent's revenues were $9.0
million in 1996 and $7.1 million in the nine months ended September 30, 1997.
IMPACT TELEMARKETING GROUP, INC.
Impact Telemarketing Group, Inc. and Impact Tele-marketing, Inc.
(collectively, "Impact"), founded in 1984, provides primarily outbound
telemarketing services to national and regional companies in the insurance,
financial services, telecommunications and utilities industries. To a lesser
extent, Impact also provides inbound telemarketing and ancillary services.
Impact is based in Woodbury, New Jersey (a suburb of Philadelphia), and
operates approximately 379 call stations from its two New Jersey call centers.
In addition, Impact has an arrangement to use 160 additional call stations
located in North Dakota, as needed. Impact has been named one of Telemarketing
Magazine's Top Fifty Service Agencies every year since 1991. Impact's major
clients include MemberWorks, Inc., the Telecommunication Division of AT&T,
Gerber Life Insurance Co. and MBNA America Bank, N.A. Impact's revenues were
$8.9 million in 1996 and $9.0 million in the nine months ended September 30,
1997.
THE ACQUISITIONS
Simultaneously with, and as a condition to, the closing of the Offering,
Compass will acquire all of the outstanding capital stock of each of the
Founding Companies. The aggregate consideration to be paid by Compass consists
of approximately $19.2 million in cash and 5,435,691 shares of Common Stock.
Pursuant to the Acquisitions, the Company will assume the outstanding
indebtedness of the Founding Companies. The consideration to be paid for the
Founding Companies was determined through arm's-length negotiations among
Compass and representatives of the Founding Companies. For a description of
the Acquisitions, see "Certain Transactions."
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,100,000 shares of
Common Stock offered hereby, after deducting the underwriting discount and
estimated offering expenses, are estimated to be approximately $40.4 million
($47.0 million if the Underwriters' over-allotment option is exercised in
full). Of the net proceeds, approximately $19.2 million will be used to pay
the cash portion of the purchase price for the Founding Companies, of which
approximately $14.0 million will be paid to former stockholders of the
Founding Companies who will become officers, directors or holders of more than
5% of the shares of Common Stock outstanding after the Offering. Such cash
portion will vary depending on the initial public offering price. In addition,
the consideration to be paid to the Founding Companies is subject to post-
closing adjustment. Approximately $11.9 million of the net proceeds will be
used to repay certain indebtedness assumed by the Company in the Acquisitions.
See "Certain Transactions." The indebtedness to be repaid from the proceeds of
the Offering bears interest at effective rates up to 10.95%, with a weighted
average interest rate of 8.4%. Such indebtedness would otherwise mature at
various dates through 2006. Approximately $440,000 of the net proceeds will be
used to pay a finders' fee in connection with the Bomar acquisition.
The remaining $9.0 million of net proceeds will be used for working capital
and general corporate purposes, including future acquisitions. The Company
continues to review various strategic acquisition opportunities. Except for
the Acquisitions, the Company is not currently involved in negotiations and is
not a party to any current arrangements, agreements or understandings with
respect to any acquisitions. Pending such uses, the net proceeds will be
invested in short-term, interest-bearing, investment grade securities.
In addition to the net proceeds of the Offering, the Company will retain the
cash balances of the Founding Companies. Such balances totaled approximately
$2.5 million as of September 30, 1997. The Company is seeking to obtain a bank
revolving credit facility in an amount up to $35 million. No commitment has
been obtained, and there can be no assurance that the Company will be able to
obtain this facility, or other financing it may need, on terms the Company
deems acceptable.
DIVIDEND POLICY
The Company intends to retain its earnings, if any, to finance the expansion
of its business and for general corporate purposes and therefore does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future. Any payment of future dividends will be at the discretion of the Board
of Directors and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, level of indebtedness, contractual
restrictions with respect to the payment of dividends and other factors that
the Company's Board of Directors deems relevant. In addition, in the event the
Company is successful in obtaining one or more lines of credit, it is likely
that any such facility will include restrictions on the Company's ability to
pay dividends without the consent of the lender.
18
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company at September 30, 1997: (i) on a pro forma combined basis to give
effect to the Acquisitions; and (ii) as further adjusted to give effect to the
Offering and the application of the estimated net proceeds therefrom. This
table should be read in conjunction with the Unaudited Pro Forma Combined
Financial Statements of the Company and the notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-----------------
PRO AS
FORMA(1) ADJUSTED
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt (2).......................................... $ 9,993 $ 2,002
======= =======
Long-term debt, net of current portion (2)................... $ 7,832 $ 2,115
Stockholders' equity:
Preferred Stock, par value $0.01 per share, 10,000,000
shares authorized; none issued or outstanding............. --
Common Stock, par value $0.01 per share, 50,000,000 shares
authorized; 7,118,460 shares issued and outstanding, pro
forma; 11,218,460 shares issued and outstanding, as
adjusted (3).............................................. 71 112
Additional paid-in-capital................................. 32,995 73,404
Retained earnings............................................ 2,502 2,502
------- -------
Total stockholders' equity............................... 35,568 76,018
------- -------
Total capitalization................................... $43,400 $78,133
======= =======
</TABLE>
- --------
(1) Combines the respective accounts of Compass and the Founding Companies at
September 30, 1997 and gives effect to the reclassification of the capital
structures of NCMC, Bomar, Mid-Continent and Impact as additional paid-in-
capital.
(2) For a description of the Company's debt, see Notes to the Financial
Statements of the Founding Companies.
(3) Does not include: (i) up to 2,000,000 additional shares reserved for
issuance pursuant to the Incentive Plan, of which options to purchase
690,000 shares of Common Stock will be granted concurrently with the
Offering at an exercise price equal to the initial public offering price;
(ii) 500,000 additional shares reserved for issuance under the Company's
Employee Stock Purchase Plan; or (iii) 100,000 shares of Common Stock
issuable upon the exercise of warrants to be issued concurrently with the
Offering. See "Management-- 1997 Employee Incentive Compensation Plan" and
"--Employee Stock Purchase Plan" and "Certain Transactions."
19
<PAGE>
DILUTION
The deficit in pro forma net tangible book value of the Company as of
September 30, 1997 was approximately $22.9 million or $3.22 per share of
Common Stock, after giving effect to the Acquisitions. The deficit in pro
forma net tangible book value per share represents the Company's pro forma net
tangible assets less total liabilities divided by the number of shares of
Common Stock to be outstanding after giving effect to the Acquisitions. After
giving effect to the sale of the 4,100,000 shares of Common Stock offered
hereby (at an assumed initial public offering price of $11.50 per share less
the underwriting discount and estimated offering expenses) and the application
of the net proceeds therefrom, the Company's pro forma net tangible book value
at September 30, 1997 would have been approximately $19.5 million, or $1.74
per share. This represents an immediate increase in pro forma net tangible
book value of $4.96 per share to existing stockholders and an immediate
dilution of $9.76 per share to new investors purchasing the shares in the
Offering. The following table illustrates this pro forma dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $11.50
Pro forma deficit in net tangible book value per share
before the Offering....................................... $(3.22)
Increase in pro forma net tangible book value per share
attributable to new investors............................. 4.96
------
Pro forma net tangible book value per share after the
Offering.................................................... 1.74
------
Dilution per share to new investors.......................... $9.76
======
</TABLE>
The following table sets forth, on a pro forma basis to give effect to the
Acquisitions as of September 30, 1997, the number of shares of Common Stock
purchased from the Company, the total consideration paid and the average price
per share paid by existing stockholders (after giving effect to the
Acquisitions) and the new investors purchasing shares of Common Stock from the
Company in the Offering:
<TABLE>
<CAPTION>
SHARES PURCHASED AVERAGE
------------------ TOTAL PRICE
NUMBER PERCENT CONSIDERATION PER SHARE
---------- ------- ------------- ---------
<S> <C> <C> <C> <C>
Existing stockholders............. 7,118,460 63.5% $(15,620,000) $ (2.19)
New investors..................... 4,100,000 36.5% 47,150,000 11.50
---------- ------ ------------
Total........................... 11,218,460 100.0% $ 31,530,000
========== ====== ============
</TABLE>
- --------
(1) Total consideration paid by existing stockholders represents the combined
stockholders' equity of the Founding Companies before this Offering,
adjusted to reflect (i) the cash portion of the consideration payable to
the stockholders of the Founding Companies in connection with the
Acquisitions and (ii) $4.3 million of debt assumed in conjunction with the
acquisition of Mid-Continent.
20
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Compass will acquire the Founding Companies simultaneously with and as a
condition to the consummation of this Offering. For financial statement
presentation purposes, Mail Box has been identified as the accounting
acquiror. The following selected historical financial data of Mail Box as of
December 31, 1995 and 1996 and for the years ended December 31, 1994, 1995 and
1996 have been derived from the audited financial statements of Mail Box
included elsewhere in this Prospectus. The following selected historical
financial data for Mail Box as of December 31, 1992, 1993 and 1994 and as of
September 30, 1997, for the years ended December 31, 1992 and 1993 and for the
nine months ended September 30, 1996 and 1997 have been derived from unaudited
financial statements of Mail Box, which have been prepared on the same basis
as the audited financial statements and, in the opinion of Mail Box, reflect
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of such data. The selected unaudited pro forma
combined financial data present data for the Company, adjusted for (i) the
consummation of the Acquisitions; (ii) certain pro forma adjustments to the
historical financial statements, including adjustments for three acquisitions
completed by Bomar since August 1996; and (iii) the consummation of this
Offering and the application of the net proceeds therefrom. See the Unaudited
Pro Forma Combined Financial Statements and the notes thereto and the
historical Financial Statements of Mail Box and the other Founding Companies
and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
MAIL BOX
Revenues............... $10,688 $14,314 $15,354 $17,370 $ 26,156 $ 18,472 $ 23,188
Operating expenses..... 8,236 11,286 11,168 12,402 17,953 12,816 15,286
------- ------- ------- ------- ---------- ---------- ----------
Gross profit........... 2,452 3,028 4,186 4,968 8,203 5,656 7,902
Selling, general and
administrative
expenses.............. 2,589 2,957 3,442 4,370 5,891 4,185 5,642
------- ------- ------- ------- ---------- ---------- ----------
Income (loss) from
operations............ (137) 71 744 598 2,312 1,471 2,260
Other expense.......... 182 128 212 302 337 254 310
------- ------- ------- ------- ---------- ---------- ----------
Income (loss) before
income taxes.......... (319) (57) 532 296 1,975 1,217 1,950
Provision (benefit) for
income taxes.......... (86) (13) 206 134 700 432 697
------- ------- ------- ------- ---------- ---------- ----------
Net (loss) income ..... $ (233) $ (44) $ 326 $ 162 $ 1,275 $ 785 $ 1,253
======= ======= ======= ======= ========== ========== ==========
PRO FORMA COMBINED (1):
Revenues................................................ $ 71,783 $ 52,043 $ 63,619
Operating expenses...................................... 44,474 31,868 38,905
---------- ---------- ----------
Gross profit........................................... 27,309 20,175 24,714
Selling, general and administrative expenses (2)........ 20,169 14,954 17,143
Goodwill and intangible amortization (3)................ 1,685 1,263 1,263
---------- ---------- ----------
Income from operations.................................. 5,455 3,958 6,308
Interest and other expense, net (4)..................... 210 209 496
---------- ---------- ----------
Income before income taxes.............................. 5,245 3,749 5,812
Provision for income taxes (5).......................... 2,772 2,005 2,830
---------- ---------- ----------
Net income.............................................. $ 2,473 $ 1,744 $ 2,982
========== ========== ==========
Net income per share.................................... $ .25 $ .18 $ .30
========== ========== ==========
Shares used in computing net income per share (6)....... 9,809,146 9,809,146 9,809,146
</TABLE>
<TABLE>
<CAPTION>
MAIL BOX COMBINED COMPANIES
---------------------------------------------------- ----------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1997
-------------------------------------- ------------- ----------------------
PRO
FORMA AS
1992 1993 1994 1995 1996 1997 COMBINED ADJUSTED (8)
------ ------ ------ ------ ------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficit)............. $ (488) $ (587) $ (218) $ 36 $ 272 $ 37 $(22,642) $12,091
Total assets........... 4,267 4,374 5,481 7,425 12,539 12,421 87,161 94,254
Long-term debt, net of
current portion....... 1,022 582 871 1,485 1,266 1,855 7,832 2,115
Stockholders' equity... 253 191 642 995 2,206 2,555 35,568 76,018
</TABLE>
- --------
(1) The pro forma combined statement of operations data assume that the
Acquisitions and the Offering were consummated on January 1, 1996, are not
necessarily indicative of the operating results that would have
21
<PAGE>
been achieved had these events actually then occurred and should not be
construed as representative of future operating results. The summary pro
forma combined statement of operations data should be read in conjunction
with the Unaudited Pro Forma Combined Financial Statements and the notes
thereto and the historical financial statements of Compass and the Founding
Companies and the notes thereto included elsewhere in this Prospectus.
(2) The pro forma combined statement of operations data reflect reductions in
salaries, bonuses and benefits to the stockholders of the Founding
Companies to which they have agreed prospectively in the employment
agreements to be entered into upon consummation of the Offering (the
"Compensation Differential"). The Compensation Differential was
approximately $3.4 million, $2.4 million and $3.1 million, respectively,
for 1996 and the nine months ended September 30, 1996 and 1997.
Additionally, the pro forma combined statement of operations data reflect
the elimination of a compensation charge of approximately $1.3 million
associated with the issuance of NCMC shares to certain key employees and a
director of NCMC, and the non-recurring compensation charge of $5.8
million associated with the issuance of shares to management of Compass.
(3) Reflects: (i) the amortization of goodwill of $51.4 million to be recorded
as a result of the Acquisitions; and (ii) the amortization of $1.0 million
in intangible assets over a period of 15 years.
(4) Reflects a reduction of interest expense associated with long term debt to
be repaid from the proceeds of the Offering of $271,000 for the year ended
December 31, 1996, and $178,000 and $345,000 for the nine months ended
September 30, 1996 and 1997, respectively, and a reduction of interest
income of $61,000 for the year ended December 31, 1996 and $47,000 and
$54,000 for the nine-month periods ended September 30, 1996 and 1997,
respectively, relating to stockholder notes to be paid off upon
consummation of the Offering.
(5) Assumes that all income is subject to a corporate income tax rate of 40%
and that all goodwill is non-deductible.
(6) Includes: (i) 1,682,769 shares issued to BGL and management of Compass;
(ii) 5,435,691 shares issued to owners of the Founding Companies in
connection with the Acquisitions; and (iii) 2,690,686 shares representing
the number of shares sold in the Offering necessary to pay the cash
portion of the consideration for the Acquisitions, to pay the underwriting
discount and estimated expenses of the Acquisitions and the Offering, and
to repay certain indebtedness assumed by Compass in the Acquisitions, net
of repayment of stockholder receivables. See "Certain Transactions."
(7) The pro forma combined balance sheet data assume that the Acquisitions
were consummated on September 30, 1997, are not necessarily indicative of
the financial position that would have been achieved had these events
actually then occurred and should not be construed as representative of
future financial position. The summary pro forma balance sheet data should
be read in conjunction with the Unaudited Pro Forma Combined Financial
Statements and the notes thereto and the historical financial statements
of Compass and the Founding Companies and the notes thereto included
elsewhere in this Prospectus.
(8) Adjusted to reflect the sale of the 4,100,000 shares of Common Stock
offered hereby and the application of the estimated net proceeds
therefrom. See "Use of Proceeds."
(9) Includes $19.2 million payable to stockholders of the Founding Companies,
representing the cash portion of the consideration for the Acquisitions to
be paid from a portion of the net proceeds of the Offering. See "Use of
Proceeds" and "Notes to Unaudited Pro Forma Combined Financial
Statements."
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains certain forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from the results anticipated in these forward-looking statements as a result
of certain of the factors set forth under "Risk Factors" and elsewhere in this
Prospectus. The following should be read in conjunction with "Selected
Financial Data" and the Founding Companies' Financial Statements and related
Notes thereto appearing elsewhere in this Prospectus.
INTRODUCTION
General
The Company was established to create a leading provider of outsourced
business services to public and private entities throughout the Sales Cycle.
The five Founding Companies collectively provide accounts receivable
management services, mailing services and teleservices to clients in a broad
range of sectors including telecommunications, financial services, insurance,
healthcare, education, government and utilities. Upon consummation of the
Offering, the Founding Companies will be acquired by Compass.
Compass was formed in April 1997 and has conducted no operations and
generated no revenues to date. Unless otherwise indicated, all references to
the "Company" in the following discussion include the Founding Companies as if
the Acquisitions had occurred during all periods discussed and references to
"Compass" shall mean Compass International Services Corporation prior to the
effectiveness of the Acquisitions.
The Company's revenues are derived from the recovery of delinquent accounts
receivable and providing mailing services and teleservices. The Company
generally charges its clients for accounts receivable management services on a
contingency fee basis, with the amount of the fee determined by the length of
the delinquency of the accounts and the extent to which prior collection
efforts have been made. Revenue is earned and recognized upon collection of
accounts receivable. The Company provides a variety of mailing services
including the mailing of direct marketing materials, billing services, mail
presorting, freight and drop shipping, data processing, mailing list rental,
and other services related to mail handling. Typically, the Company charges a
fixed fee per piece for processing mail. These fees are earned and recognized
as revenue upon delivery to the United States Postal Service. Postage expenses
are passed directly through to the Company's clients and are not recognized as
revenues or expenses on the Company's financial statements. Revenues for
outbound and inbound teleservices consist of hourly rate charges and incentive
based commissions that are recognized as these services are provided. The
Company also generates revenue from APS which enables clients to accept
payments through checks authorized by phone. Clients are typically charged an
initial setup fee and a transaction fee for each usage of the APS service.
Revenues are recognized for APS when services are provided.
The Company and most of its clients enter into contracts which define, among
other things, fee arrangements, scope of services and termination provisions.
In most cases, clients may terminate contracts with 30 or 60 days notice.
The Company's operating expenses consist primarily of payroll,
telecommunications expense and postage expense (other than client postage
relating to mailing services). Payroll consists of wages and salaries,
commissions, bonuses and benefits for all employees of the Company directly
involved in providing services to clients. Telecommunications expense includes
telephone costs associated with inbound and outbound teleservice and
collection activities. Postage expense is related primarily to the mailing of
collection notices and APS check confirmation letters. Selling, general and
administrative expenses include management salaries, selling commissions,
occupancy and other facilities costs, equipment maintenance and depreciation,
and data processing costs.
Following the Acquisitions, the Company expects to realize certain savings
as a result of: (i) consolidation of telecommunications, postage, systems and
other operating expenses; (ii) consolidation of insurance, employee benefits
and other administrative expenses; and (iii) the Company's ability to borrow
at interest rates lower than those at which most of the Founding Companies
have borrowed historically. The Company has not and cannot quantify these
savings until completion of the Acquisitions. The Company also expects to
incur additional costs associated with public ownership and the new management
team. These costs cannot be quantified precisely. Accordingly, neither the
expected savings nor the expected costs have been included in the pro forma
combined financial information of the Company.
23
<PAGE>
Since August 1996, Bomar has made three acquisitions, two in 1996 and one in
the third quarter of 1997. As a result of these acquisitions, the Company has:
(i) expanded its geographic presence in the accounts receivable collection
market; (ii) gained access to new information systems and customer service
capabilities; and (iii) expanded its secondary and tertiary collection
capabilities. The acquisitions have been accounted for using the purchase
method of accounting with the results of the acquired companies included in
Bomar's statements of income beginning on the respective dates of the
acquisitions. The Unaudited Pro Forma Combined Financial Statements give
effect to these acquisitions as if they had occurred on January 1, 1996.
In July 1996, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 97 ("SAB 97") relating to business combinations immediately prior
to an initial public offering. SAB 97 requires the application of purchase
accounting when three or more substantive operating entities combine in a
single business combination effected by the issuance of stock just prior to or
contemporaneously with an initial public offering and the combination does not
meet the pooling-of-interests criteria of Accounting Principles Board Opinion
No. 16. In accordance with SAB 97, Mail Box has been designated as the
accounting acquiror. Accordingly, the excess purchase price over the fair
value of the net assets acquired from NCMC, Bomar, Mid-Continent and Impact of
approximately $40.0 million, goodwill of $11.4 million attributable to the
1,121,846 shares of Common Stock issued to BGL and existing goodwill of
approximately $4.1 million recorded with respect to Bomar, will be amortized
over periods ranging from 15 to 40 years as a non-cash charge to the Company's
income statement. This amortization, including the amortization of an
intangible asset associated with a patent at NCMC over a 15-year period, is
approximately $1.7 million per year. The amount of goodwill to be recorded and
the related amortization expense will depend in part on the initial public
offering price. See "Certain Transactions--The Acquisitions."
The Compensation Differential
The Founding Companies have operated as independent, privately-owned
entities throughout the periods presented. Their results from operations
reflect varying historical levels of owners' compensation. The owners and key
employees of the Founding Companies have agreed to certain reductions of their
salaries, bonuses, and benefits in connection with the Acquisitions (the
"Compensation Differential"). Pursuant to the Acquisition Agreements, members
of senior management of the Founding Companies have agreed, simultaneously
with the closing of the Acquisitions, to enter into employment agreements with
their respective Founding Companies that provide for specified annual salaries
in addition to certain benefits including vacation, health and insurance
benefits. Such agreements also provide for the payment of annual bonuses if
specified performance criteria are achieved. See "Management--Executive
Compensation; Employment Agreements; Covenants Not to Compete." Certain other
employees of the Founding Companies, who will not enter into contracts with
the Company, have orally agreed to reductions in their compensation. The
Compensation Differential was approximately $3.4 million, $2.4 million and
$3.1 million for 1996 and the nine months ended September 30, 1996 and 1997,
respectively. Additionally, the results for the nine months ended September
30, 1997 include a compensation charge of $1.3 million for NCMC associated
with the issuance of NCMC shares to certain key employees and a director of
NCMC. These amounts have been reflected as a pro forma adjustment in the
Unaudited Pro Forma Combined Statement of Operations. The Unaudited Pro Forma
Combined Statement of Operations includes a provision for income tax as if all
Founding Companies had been subject to applicable federal and state statutory
tax rates.
Amortization of Intangible Assets
Approximately $55.5 million, or 58.9%, of the Company's pro forma total
assets as of September 30, 1997 consists of goodwill subsequent to the
Acquisitions. Goodwill is an intangible asset that represents the difference
between the aggregate purchase price for the assets acquired and the amount of
such purchase price allocated to such assets for purposes of the Company's pro
forma balance sheet. The Company is required to amortize the goodwill from the
Acquisitions over a period of time, with the amount amortized in a particular
period constituting an expense that reduces the Company's net income for that
period. The amount amortized, however, will not give rise to a deduction for
tax purposes. In addition, the Company will be required to amortize the
goodwill, if any, from any future acquisitions.
The Company plans to amortize goodwill associated with the acquisitions of
the Founding Companies over periods ranging from 15 to 40 years. The Company
plans to evaluate continually whether events or circumstances have occurred
that indicate that the remaining useful life of goodwill may warrant revision.
Additionally, in
24
<PAGE>
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," the Company will evaluate any potential
goodwill impairments by reviewing the future cash flows of the respective
acquired entities' operations and comparing these amounts with the carrying
value of the associated goodwill.
Recently Issued Accounting Standards
Earnings Per Share. In February 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 128 "Earnings Per Share." SFAS No. 128
establishes standards for computing and presenting earnings per share ("EPS")
and applies to entities with publicly held common stock or potential common
stock. SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997; earlier application is not permitted. SFAS No.
128 requires restatement of all prior-period EPS data presented. The
implementation of SFAS No. 128 is not expected to have a material effect on
the Company's earnings per share as determined under current accounting rules.
Reporting Comprehensive Income. In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. SFAS No. 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence
as other financial statements. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements
for earlier periods provided for comparative purposes is required. The Company
intends to adopt SFAS No. 130 in 1998.
PRO FORMA COMBINED RESULTS OF OPERATIONS
The following table provides the pro forma operating results of the Company
for the year ended December 31, 1996 and the nine months ended September 30,
1996 and 1997. For a discussion of the pro forma adjustments, see the
Unaudited Pro Forma Combined Financial Statements and the notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
YEAR ENDED 30,
DECEMBER 31, ----------------------------
1996 1996 1997
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues.......................... $71,783 100.0% $52,043 100.0% $63,619 100.0%
Operating expenses................ 44,474 62.0 31,868 61.2 38,905 61.2
------- ----- ------- ----- ------- -----
Gross profit...................... 27,309 38.0 20,175 38.8 24,714 38.8
Selling, general and
administrative expenses.......... 20,169 28.1 14,954 28.8 17,143 26.9
Goodwill and intangible
amortization..................... 1,679 2.3 1,263 2.4 1,263 2.0
------- ----- ------- ----- ------- -----
Income from operations............ $ 5,461 7.6% $ 3,958 7.6% $ 6,308 9.9%
======= ===== ======= ===== ======= =====
</TABLE>
PRO FORMA COMBINED RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996
Revenues. Revenues increased $11.6 million, or 22.2%, from $52.0 million for
the nine months ended September 30, 1996 to $63.6 million for the nine months
ended September 30, 1997. The increase was primarily attributable to increased
business from existing clients of Mail Box, Impact and NCMC, as well as growth
within ACS and CPA, companies acquired by Bomar in 1996 and 1997.
Operating expenses. Operating expenses increased $7.0 million, or 22.0%,
from $31.9 million for the nine months ended September 30, 1996 to $38.9
million for the nine months ended September 30, 1997. As a percentage of
revenues, operating expenses remained unchanged at 61.2% for the nine months
ended September 30, 1996 and 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $2.2 million, or 14.6%, from $15.0 million
for the nine months ended September 30, 1996 to $17.1 million for the nine
months ended September 30, 1997. Selling, general and administrative expenses
decreased as a percentage of revenues from 28.8% for the nine months ended
September 30, 1996 to 26.9% for the nine months ended September 30, 1997 as
the costs of management and administrative personnel were spread over a larger
revenue base.
25
<PAGE>
PRO FORMA COMBINED LIQUIDITY AND CAPITAL RESOURCES
The Company is a holding company that conducts all of its operations through
its subsidiaries. Accordingly, the primary internal source of the Company's
liquidity is the cash flow of its subsidiaries. After the consummation of the
Acquisitions and the Offering, the Company will have approximately $12.3
million of cash. It is expected that certain short and long term debt of the
Founding Companies, totaling $11.9 million at September 30, 1997, will be
repaid from the net proceeds of the Offering.
The Company has obtained from a bank a proposal for a revolving credit
facility of up to $35 million. No commitment has been obtained, and there can
be no assurance that the Company will be able to obtain this revolving
facility, or other financing it may need, on terms the Company deems
acceptable. It is expected that the facility, if obtained, will require the
Company to comply with various loan covenants including: (i) maintenance of
certain financial ratios including minimum tangible net worth; (ii)
restriction on additional indebtedness; and (iii) restrictions on liens,
guarantees, advances, and dividends. The facility is intended to be used for
acquisitions, capital expenditures, and general corporate purposes.
The Company believes that its cash flow from operations will provide cash in
excess of the Company's expected working capital needs, debt service
requirements and planned capital expenditures. The Company made capital
expenditures of $2.0 million in 1996 and $3.4 million during the nine months
ended September 30, 1997. Each of the Founding Companies has upgraded its
information systems over the past two years. In addition, Mail Box has
invested in new intelligent inserting and sorting equipment to upgrade and
expand its mail services capabilities. As a result, the Company does not
expect to have significant capital expenditures for information systems in the
next two years, other than as may be required to integrate the systems of the
Founding Companies and to upgrade and integrate companies that are acquired in
the future. After the consummation of the Acquisitions, the Company intends to
study the feasibility of integrating the systems of the Founding Companies.
Consequently, the Company has not yet established its capital needs for such
integration, which capital requirements are likely to change as the Company
acquires other companies in the future.
The Company intends to pursue attractive acquisition opportunities. The
timing, size or success of any acquisition efforts is unpredictable.
Accordingly, the Company is unable to accurately estimate its expected capital
commitments. Funding for future acquisitions will likely come from a
combination of proceeds of the Offering, cash flow from operations, borrowings
under the proposed credit facility and the issuance of additional equity. The
Company plans to register an additional 3,000,000 shares of its Common Stock
under the Securities Act after completion of the Offering for use by the
Company as consideration for future acquisitions.
RESULTS OF OPERATIONS--MAIL BOX
Mail Box provides direct mailing services, billing services, mail
presorting, freight and drop shipping, data processing, laser printing,
mailing list rental and order fulfillment to companies located principally in
the southwest United States.
The following table sets forth certain selected financial data for Mail Box
on a historical basis and as a percentage of revenues for the periods
indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
YEARS ENDED DECEMBER 31, 30,
------------------------------------------- ----------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $15,354 100.0% $17,370 100.0% $26,156 100.0% $18,472 100.0% $23,188 100.0%
Operating expenses...... 11,168 72.7 12,402 71.4 17,953 68.6 12,816 69.4 15,286 65.9
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross profit............ 4,186 27.3 4,968 28.6 8,203 31.4 5,656 30.6 7,902 34.1
Selling, general and
administrative
expenses............... 3,442 22.4 4,370 25.2 5,891 22.5 4,185 22.6 5,642 24.4
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income from operations.. $ 744 4.8% $ 598 3.4% $ 2,312 8.8% $ 1,471 8.0% $ 2,260 9.7%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
26
<PAGE>
RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1996--MAIL BOX
Revenues. Revenues increased $4.7 million, or 25.5%, from $18.5 million for
the nine months ended September 30, 1996 to $23.2 million for the nine months
ended September 30, 1997, primarily due to new mailing programs initiated by
existing customers. Mail volume increased in the nine months ended September
30, 1997 compared to the nine months ended September 30, 1996 primarily due to
increased volume with existing clients.
Operating expenses. Operating expenses increased approximately $2.5 million,
or 19.3%, from $12.8 million for the nine months ended September 30, 1996 to
$15.3 million for the nine months ended September 30, 1997. As a percentage of
revenues, operating expenses decreased from 69.4% in the nine months ended
September 30, 1996 to 65.9% in the nine months ended September 30, 1997,
primarily due to improved efficiency in mailing operations and revenue mix
changes, with higher margin list rental revenues growing as a percentage of
revenues.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1.5 million, or 34.8%, from $4.2 million
for the nine months ended September 30, 1996 to $5.6 million for the nine
months ended September 30, 1997. As a percentage of revenues, selling, general
and administrative expenses increased from 22.6% in the nine months ended
September 30, 1996 to 24.4% in the nine months ended September 30, 1997.
Excluding Compensation Differential of $520,000 for the nine months ended
September 30, 1996 and $1.3 million for the nine months ended September 30,
1997, selling, general and administrative expenses decreased from 19.8% of
revenues to 18.7% of revenues, respectively.
RESULTS FOR 1996 COMPARED TO 1995--MAIL BOX
Revenues. Revenues increased $ 8.8 million, or 50.6%, from $17.4 million in
1995 to $26.2 million in 1996, primarily due to expanded volume with existing
customers. In addition, Mail Box generated an additional $2.3 million in
revenues from a new client in the medical claims industry. Mail volume
increased from approximately 500 million pieces in 1995 to approximately 840
million pieces in 1996.
Operating expenses. Operating expenses increased approximately $5.6 million,
or 44.8%, from $12.4 million in 1995 to $18.0 million in 1996. As a percentage
of revenues, operating expenses decreased from 71.4% in 1995 to 68.6% in 1996,
primarily due to improved efficiency in mailing operations.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1.5 million, or 34.8%, from $4.4 million in
1995 to $5.9 million in 1996. As a percentage of revenues, selling, general
and administrative expenses decreased from 25.2% in 1995 to 22.5% in 1996.
Excluding Compensation Differential of $310,000 in 1995 and $875,000 in 1996,
selling, general and administrative expenses decreased from 23.4% of revenues
to 19.2% of revenues, respectively. This decrease as a percentage of revenues
was the result of spreading fixed expenses over a larger revenue base.
RESULTS FOR 1995 COMPARED TO 1994--MAIL BOX
Revenues. Revenues increased $2.0 million, or 13.1%, from $15.4 million in
1994 to $17.4 million in 1995, primarily due to expanded volume with existing
clients, including large telecommunication service providers, and growth
within Mail Box's data processing and freight services. Mail volume increased
from approximately 440 million pieces in 1994 to approximately 500 million
pieces in 1995.
Operating expenses. Operating expenses increased approximately $1.2 million,
or 11.0%, from $11.2 million in 1994 to $12.4 million in 1995. Operating
expenses as a percentage of revenues decreased from 72.7% in 1994 to 71.4% in
1995. The primary cause of this improvement was a change in revenue mix to
higher margin services, specifically an increase in mailing services and a
decrease in laser printing as a percentage of revenues.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $928,000, or 27.0%, from $3.4 million in
1994 to $4.4 million in 1995. As a percentage of revenues, selling, general
and administrative expenses increased from 22.4% in 1994 to 25.2% in 1995.
27
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES--MAIL BOX
Mail Box provided $2.9 million of cash from operating activities in 1996. In
the nine months ended September 30, 1997, Mail Box provided $1.4 million of
cash from operating activities. Net cash provided by operations is primarily
comprised of net income, non-cash expenses (primarily depreciation and
amortization) and changes in operating assets and liabilities (primarily
routine fluctuations in trade accounts receivable and payable, postage on hand
and postage advances and deposits). Capital expenditures for the purchase of
property and equipment totaled $1.0 million and $1.2 million for the year
ended December 31, 1996 and the nine months ended September 30, 1997,
respectively. Mail Box used cash of $473,000 and $900,000 for financing
activities during 1996 and the nine-month period ended September 30, 1997,
respectively, primarily in connection with the net repayment of various
borrowings and, in the latter period, the repurchase of treasury stock in the
amount of $1.0 million.
RESULTS OF OPERATIONS--NCMC
NCMC provides accounts receivable management services primarily to clients
in the education, utilities, government and healthcare industries. NCMC also
provides APS check drafting services initiated by telephone instruction
primarily to clients in the financial services and utilities sectors.
The following table sets forth certain selected financial data for NCMC on a
historical basis and as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------------ -----------------------------
1994 1995 1996 1996 1997
------------ ------------- ------------- ------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $8,874 100.0% $12,287 100.0% $13,579 100.0% $10,055 100.0% $11,759 100.0%
Operating expenses...... 4,550 51.3 6,322 51.5 7,945 58.5 5,806 57.7 7,314 62.2
------ ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross profit............ 4,324 48.7 5,965 48.5 5,634 41.5 4,249 42.3 4,445 37.8
Selling, general and
administrative
expenses............... 3,400 38.3 4,328 35.2 4,798 35.3 3,680 36.6 5,065 43.1
------ ----- ------- ----- ------- ----- ------- ----- ------- -----
Income from operations.. $ 924 10.4% $ 1,637 13.3% $ 836 6.2% $ 569 5.7% $ (620) (5.3)%
====== ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1996--NCMC
Revenues. Revenues increased approximately $1.7 million, or 16.9%, from
$10.1 million for the nine months ended September 30, 1996 to $11.8 million
for the nine months ended September 30, 1997, primarily due to increased
transaction volume with existing APS customers and increased collections
business from existing customers. APS check transaction volume increased from
3.8 million checks for the nine months ended September 30, 1996 to 6.8 million
checks for the nine months ended September 30, 1997. While transaction volume
grew 78.9%, per check prices decreased 32.2% as a result of increased
competition.
Operating expenses. Operating expenses increased approximately $1.5 million,
or 26.0%, from $5.8 million for the nine months ended September 30, 1996 to
$7.3 million for the nine months ended September 30, 1997. As a percentage of
revenues, operating expenses increased from 57.7% for the nine months ended
September 30, 1996 to 62.2% for the nine months ended September 30, 1997,
primarily due to a $428,000 increase in mailing costs associated with APS
check confirmation letters, without a commensurate increase in revenues. Costs
were also unfavorably impacted by one-time non-recurring expenses including
$160,000 of compensation related expenses, $119,000 of relocation expenses and
executive search fees, and $76,000 of legal expenses.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased approximately $1.4 million, or 37.6%, from
$3.7 million for the nine months ended September 30, 1996 to $5.1 million for
the nine months ended September 30, 1997. As a percentage of revenues,
selling, general and administrative expenses increased from 36.6% for the nine
months ended September 30, 1996 to 43.1% for the nine months ended
September 30, 1997. Excluding $1.3 million of compensation expense recognized
in the third quarter of 1997 relating to shares issued to key employees,
selling, general and administrative expenses decreased from 36.6% to 31.6% for
the nine months ended September 30, 1996 and 1997, respectively.
28
<PAGE>
RESULTS FOR 1996 COMPARED TO 1995--NCMC
Revenues. Revenues increased $1.3 million, or 10.5%, from $12.3 million in
1995 to $13.6 million in 1996, primarily due to expanded APS check volume with
existing customers. APS transaction volume increased from approximately 3.6
million checks in 1995 to approximately 5.5 million checks in 1996. This 52.8%
increase was partly offset by a 21.2% average APS per check price decrease
during 1996 as a result of increased competition. Receivables management
revenues grew modestly during 1996 as NCMC restructured its operations and
sales management.
Operating expenses. Operating expenses increased approximately $1.6 million,
or 25.7%, from $6.3 million in 1995 to $7.9 million in 1996. As a percentage
of revenues, operating expenses increased from 51.5% in 1995 to 58.5% in 1996,
primarily due to increased mailing costs associated with APS check
confirmation letters and growth in direct payroll. As a percentage of
revenues, mailing costs increased from 10.7% in 1995 to 12.3% in 1996.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $470,000, or 10.9%, from $4.3 million in
1995 to $4.8 million in 1996. As a percentage of revenues, selling, general
and administrative expenses increased from 35.2% in 1995 to 35.3% in 1996.
RESULTS FOR 1995 COMPARED TO 1994--NCMC
Revenues. Revenues increased $3.4 million, or 38.5%, from $8.9 million in
1994 to $12.3 million in 1995 primarily due to expanded volume with existing
customers as well as the addition of new customers. Expanded APS check volume
with large credit card issuers accounted for most of the increase. APS check
volume increased from approximately 1.5 million checks in 1994 to
approximately 3.6 million checks in 1995. Receivables management revenues grew
$395,000, or 6.1%, from $6.5 million in 1994 to $6.9 million in 1995. This
increase was primarily attributable to new customer activity.
Operating expenses. Operating expenses increased approximately $1.8 million,
or 38.9%, from $4.6 million in 1994 to $6.3 million in 1995. As a percentage
of revenues, operating expenses increased from 51.3% in 1994 to 51.5% in 1995,
primarily due to increased payroll and other direct operating expenses.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $928,000, or 27.3%, from $3.4 million in
1994 to $4.3 million in 1995. As a percentage of revenues, selling, general
and administrative expenses decreased from 38.3% in 1994 to 35.2% in 1995.
This decrease resulted from lower management salaries and depreciation as a
percentage of revenues.
LIQUIDITY AND CAPITAL RESOURCES--NCMC
NCMC provided $566,000 of cash from operating activities in 1996. In the
nine months ended September 30, 1997, NCMC provided $1.8 million of cash from
operating activities. Net cash provided by operations is primarily comprised
of net income, non-cash expenses (primarily depreciation and amortization) and
changes in operating assets and liabilities (primarily routine fluctuations in
trade accounts receivable and payable and prepaid expenses). For the nine
months ended September 30, 1997, net cash provided by operations included a
$1.3 million non-cash compensation charge. Also included was a $1.0 million
increase in trade payables relating to the purchase of systems equipment. Net
cash used for purchases of property and equipment totaled $164,000 and $1.9
million for the year ended December 31, 1996 and the nine months ended
September 30, 1997, respectively. NCMC used cash of $420,000 for financing
activities during 1996, primarily for the payments under its line of credit
and capital leases. NCMC received $315,000 from financing activities during
the nine-month period ended September 30, 1997, primarily in connection with
line of credit borrowings.
RESULTS OF OPERATIONS--BOMAR
Bomar provides accounts receivable management services primarily for clients
in the telecommunications, insurance, financial services and healthcare
industries.
29
<PAGE>
The following table sets forth certain selected financial data for Bomar on
a historical basis and as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- ---------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $6,859 100.0% $7,416 100.0% $9,597 100.0% $7,040 100.0% $10,268 100.0%
Operating expenses...... 3,952 57.6 4,229 57.0 5,814 60.6 4,318 61.3 5,914 57.6
------ ----- ------ ----- ------ ----- ------ ----- ------- -----
Gross profit............ 2,907 42.4 3,187 43.0 3,783 39.4 2,722 38.7 4,354 42.4
Selling, general and
administrative
expenses............... 2,490 36.3 2,934 39.6 3,458 36.0 2,458 34.9 3,705 36.1
------ ----- ------ ----- ------ ----- ------ ----- ------- -----
Income from operations.. $ 417 6.1% $ 253 3.4% $ 325 3.4% $ 264 3.8% $ 649 6.3%
====== ===== ====== ===== ====== ===== ====== ===== ======= =====
</TABLE>
RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1996--BOMAR
Revenues. Revenues increased $3.2 million, or 45.9%, from $7.0 million for
the nine months ended September 30, 1996 to $10.3 million for the nine months
ended September 30, 1997, primarily due to the acquisitions of ACS in August
1996 and CPA in November 1996 and FCCI in September 1997 which added revenues
of $990,000, $928,000 and $289,000, respectively, in the nine months ended
September 30, 1997. Additionally, revenues grew as a result of increased
business from existing clients.
Operating expenses. Operating expenses increased approximately $1.6 million,
or 37.0%, from $4.3 million for the nine months ended September 30, 1996 to
$5.9 million for the nine months ended September 30, 1997. As a percentage of
revenues, operating expenses decreased from 61.3% for the nine months ended
September 30, 1996 to 57.6% for the nine months ended September 30, 1997,
primarily due to a decrease as a percentage of revenues in collector salaries
and incentives and telephone expense.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1.2 million, or 50.7%, from $2.5 million
for the nine months ended September 30, 1996 to $3.7 million for the nine
months ended September 30, 1997. As a percentage of revenues, selling, general
and administrative expenses increased from 34.9% for the nine months ended
September 30, 1996 to 36.1% for the nine months ended September 30, 1997. This
increase as a percentage of revenues was primarily the result of selling,
general and administration expenses of acquired operations that were higher as
a percentage of revenue than Bomar's operations.
RESULTS FOR 1996 COMPARED TO 1995--BOMAR
Revenues. Revenues increased $2.2 million, or 29.4%, from $7.4 million in
1995 to $9.6 million in 1996, due in part to the acquisitions of ACS and CPA,
which together contributed over $300,000 of revenues in 1996, and in part to
business from new clients.
Operating expenses. Operating expenses increased approximately $1.6 million,
or 37.5%, from $4.2 million in 1995 to $5.8 million in 1996. As a percentage
of revenues, operating expenses increased from 57.0% in 1995 to 60.6% in 1996,
primarily due to higher collector salaries which increased $1.1 million from
$2.1 million to $3.2 million as a result of an increase in full time employees
in the second half of 1996. The acquired companies also had higher operating
expenses as a percentage of revenues.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $524,000, or 17.9%, from $2.9 million in
1995 to $3.5 million in 1996. As a percentage of revenues, selling, general
and administrative expenses decreased from 39.6% in 1995 to 36.0% in 1996.
RESULTS FOR 1995 COMPARED TO 1994--BOMAR
Revenues. Revenues increased $557,000, or 8.1%, from $6.9 million in 1994 to
$7.4 million in 1995, primarily due to increased business from existing
clients.
30
<PAGE>
Operating expenses. Operating expenses increased approximately $277,000, or
7.0%, from $4.0 million in 1994 to $4.2 million in 1995. As a percentage of
revenues, operating expenses decreased from 57.6% in 1994 to 57.0% in 1995.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $444,000, or 17.8%, from $2.5 million in
1994 to $2.9 million in 1995. As a percentage of revenues, selling, general
and administrative expenses increased from 36.3% in 1994 to 39.6% in 1995.
This increase resulted from a $202,000 increase in management compensation in
1995, as well as increased occupancy costs as a result of new space for call
centers. Excluding Compensation Differential of $456,000 in 1994 and $658,000
in 1995, selling, general and administrative expenses as a percentage of
revenues increased from 29.7% in 1994 to 30.7% in 1995.
LIQUIDITY AND CAPITAL RESOURCES--BOMAR
Bomar provided $359,000 of cash from operating activities in 1996. In the
nine months ended September 30, 1997, Bomar provided $580,000 of cash from
operating activities. Net cash provided by operations is primarily comprised
of net income, non-cash expenses (primarily depreciation and amortization) and
changes in operating assets and liabilities (primarily routine fluctuations in
commissions receivable and trade accounts payable). Net cash used in investing
activities totaled $1.4 million (including $791,000 for acquisitions) and $3.8
million (including $3.7 million for acquisitions) for 1996 and the nine months
ended September 30, 1997, respectively. Bomar had cash inflows of $920,000 and
$3.4 million for financing activities during 1996 and the nine-month period
ended September 30, 1997, respectively, primarily in connection with the net
borrowings under Bomar's line of credit and issuances of long-term debt.
RESULTS OF OPERATIONS--MID-CONTINENT
Mid-Continent provides accounts receivable management services primarily to
companies in the manufacturing, insurance, wholesale distribution and
commercial sectors. Mid-Continent's business is comprised of contingency fee
collections and outsourced collection services.
The following table sets forth certain selected financial data for Mid-
Continent on a historical basis and as a percentage of revenues for the
periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- --------------------------
1995 1996 1996 1997
------------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $8,763 100.0% $9,038 100.0% $6,810 100.0% $7,066 100.0%
Operating expenses...... 2,851 32.5 2,875 31.8 2,210 32.5 2,294 32.5
------ ----- ------ ----- ------ ----- ------ -----
Gross profit............ 5,912 67.5 6,163 68.2 4,600 67.5 4,772 67.5
Selling, general and
administrative
expenses............... 5,974 68.2 6,054 67.0 4,509 66.2 4,677 66.2
------ ----- ------ ----- ------ ----- ------ -----
Income (loss) from
operations............. $ (62) (0.7)% $ 109 1.2% $ 91 1.3% $ 95 1.3%
====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE
MONTHS ENDED
SEPTEMBER 30, 1996--MID-CONTINENT
Revenues. Revenues increased $256,000, or 3.8%, from $6.8 million for the
nine months ended September 30, 1996 to $7.1 million for the nine months ended
September 30, 1997, primarily due to increased volume from new clients.
Operating expenses. Operating expenses increased $84,000, or 3.8%, from $2.2
million for the nine months ended September 30, 1996 to $2.3 million for the
nine months ended September 30, 1997, primarily due to increased collector
costs. As a percentage of revenues, operating expenses remained flat between
the periods.
31
<PAGE>
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $168,000, or 3.7%, from $4.5 million for the
nine months ended September 30, 1996 to $4.7 million for the nine months ended
September 30, 1997. As a percentage of revenues, selling, general and
administrative expenses were the same in both periods.
RESULTS FOR 1996 COMPARED TO 1995--MID-CONTINENT
Revenues. Revenues increased $275,000, or 3.1%, from $8.8 million in 1995 to
$9.0 million in 1996, primarily due to increased contingency fee business from
existing clients.
Operating expenses. Operating expenses increased approximately $24,000, or
0.8%, from $2.8 million in 1995 to $2.9 million in 1996. As a percentage of
revenues, operating expenses decreased from 32.5% in 1995 to 31.8% in 1996, as
a result of an increase in revenues.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $80,000, or 1.3%, from $6.0 million in 1995
to $6.1 million in 1996. As a percentage of revenues, selling, general and
administrative expenses decreased from 68.2% in 1995 to 67.0% in 1996.
Excluding the Compensation Differential in both years, selling, general and
administrative expenses as a percentage of revenues decreased from 56.1% in
1995 to 54.1% in 1996.
LIQUIDITY AND CAPITAL RESOURCES--MID-CONTINENT
Mid-Continent provided $176,000 of cash from operating activities in 1996.
In the nine months ended September 30, 1997, Mid-Continent provided $1,000 of
cash from operating activities. Net cash provided by operations is primarily
comprised of net income, non-cash expenses (primarily depreciation and
amortization) and changes in operating assets and liabilities (primarily
routine fluctuations in trade accounts receivable and payable and accrued
expenses). Net cash used for purchases of property and equipment totaled
$49,000 and $55,000 for the year ended December 31, 1996 and the nine months
ended September 30, 1997, respectively. Mid-Continent used cash of $131,000
and received cash of $168,000 for financing activities during 1996 and the
nine-month period ended September 30, 1997, respectively, primarily in
connection with borrowing activity and advances to stockholders.
RESULTS OF OPERATIONS--IMPACT
Impact provides primarily outbound telemarketing services to national and
regional companies in the insurance, financial services, telecommunications
and utilities industries.
The following table sets forth certain selected financial data for Impact on
a historical basis and as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------- ----------------------------
1996 1996 1997
------------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues......................... $8,869 100.0% $5,950 100.0% $8,958 100.0%
Operating expenses............... 6,961 78.5 4,356 73.2 6,708 74.9
------ ----- ------ ----- ------ -----
Gross profit..................... 1,908 21.5 1,594 26.8 2,250 25.1
Selling, general and
administrative expenses......... 2,108 23.8 1,597 26.9 2,089 23.3
------ ----- ------ ----- ------ -----
Income (loss) from operations.... $ (200) (2.3)% $ (3) (.1)% $ 161 1.8%
====== ===== ====== ===== ====== =====
</TABLE>
RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1996--IMPACT
Revenues. Revenues increased $3.0 million, or 50.6%, from $6.0 million for
the nine months ended September 30, 1996 to $9.0 million for the nine months
ended September 30, 1997, primarily due to increased business from existing
clients.
32
<PAGE>
Operating expenses. Operating expenses increased approximately $2.4 million,
or 54.0%, from $4.4 million for the nine months ended September 30, 1996 to
$6.7 million for the nine months ended September 30, 1997. As a percentage of
revenues, operating expenses increased from 73.2% for the nine months ended
September 30, 1996 to 74.9% for the nine months ended September 30, 1997,
primarily due to personnel and expenses related to the recent increase in
Impact's call center capacity.
Selling, general, and administrative expenses. Selling, general and
administrative expenses increased $492,000, or 30.8%, from $1.6 million for
the nine months ended September 30, 1996 to $2.1 million for the nine months
ended September 30, 1997. As a percentage of revenues, selling, general and
administrative expenses decreased from 26.9% for the nine months ended
September 30, 1996 to 23.3% for the nine months ended September 30, 1997. This
decrease as a percentage of revenues was the result of spreading fixed
expenses over a larger revenue base.
LIQUIDITY AND CAPITAL RESOURCES--IMPACT
Impact provided $96,000 of cash from operating activities in 1996. In the
nine months ended September 30, 1997, Impact used $411,000 of cash from
operating activities. Net cash provided by operations is primarily comprised
of net income (loss), non-cash expenses (primarily depreciation and
amortization) and changes in operating assets and liabilities (primarily
routine fluctuations in trade accounts receivable and payable and accrued
liabilities). Net cash provided by investing activities totaled $2,000 in 1996
and net cash used in investing activities totaled $52,000 for the nine months
ended September 30, 1997. Impact used cash of $90,000 and received cash of
$399,000 for financing activities during 1996 and the nine-month period ended
September 30, 1997, respectively, primarily in connection with the net
repayment of various borrowings and distributions to stockholders.
33
<PAGE>
BUSINESS
INTRODUCTION
Compass was organized to create a leading provider of outsourced business
services to public and private entities throughout the Sales Cycle. The five
Founding Companies collectively provide accounts receivable management
services, mailing services and teleservices to clients in a broad range of
sectors including telecommunications, financial services, insurance,
healthcare, education, government and utilities. In addition, through its
proprietary Accelerated Payment Systems ("APS") process, one of the Founding
Companies is a leading provider of telephonic check drafting services which
enable clients to accept payments through checks authorized by phone. The
Founding Companies, each of which has been in business for more than ten years,
have collectively achieved substantial growth in recent years. On a pro forma
combined basis, the Founding Companies' revenues increased from $30.9 million
in 1992 to $71.8 million in 1996, representing a compound annual growth rate of
23.5%. Revenues of the Founding Companies for the nine months ended September
30, 1997 totaled $63.6 million on a pro forma combined basis.
Upon the consummation of the Acquisitions, the Company's accounts receivable
management services will include the recovery of traditional delinquent
accounts from both consumer and commercial debtors and the management of early
stage delinquencies. Mailing services will include lead generating direct mail,
often to prompt inbound sales calls, and direct mail for billing, payment
processing or collection purposes. Mailing services will also include
presorting, freight and drop shipping, data processing, laser printing, mailing
list rental and order fulfillment. Teleservices will include outbound
telemarketing, inbound customer service and inbound sales. Each of the services
to be provided by the Company, including APS, can be utilized at various stages
of the Sales Cycle. Upon completion of the Offering, the Company will be one of
the largest providers of its services in the United States in terms of
revenues, servicing clients from 12 call centers in ten states equipped with a
total of approximately 980 workstations, a mail processing center in Texas,
four sales centers in the United States and one sales center in the United
Kingdom.
Compass believes that companies are increasingly seeking partners who can
provide a comprehensive set of outsourcing services, spanning the entire Sales
Cycle, while maintaining a high level of client service. The diagram below
illustrates the processes that comprise the Sales Cycle, from direct marketing
through accounts receivable collection, and the services of the Company that
can be utilized at various stages throughout the Sales Cycle.
LOGO
Following the Offering, the Company will become a single source provider of
outsourced business services throughout the Sales Cycle. The Company intends to
leverage the strong client relationships developed by the Founding Companies to
cross-sell additional services to existing clients and to use the expertise of
the Founding Companies as a point of entry with new clients. In addition, the
Company intends to pursue an aggressive acquisition program to broaden the
services it offers, expand its client base and gain access to new markets.
34
<PAGE>
INDUSTRY OVERVIEW
Companies are increasingly outsourcing to third party experts a variety of
non-core business functions throughout the Sales Cycle. The Company believes,
although there can be no assurance, that this trend toward outsourcing will
continue due to a number of factors. Outsourcing allows companies to focus on
strategic issues and redirect resources to core business activities while
having operational details assumed by a third party provider. In addition, by
partnering with specialized outsourcing providers, a company gains access to
new technology, tools and techniques that it may not possess internally. By
outsourcing functions previously performed in-house, companies can convert the
fixed costs associated with investments in equipment, processes, technology
and personnel into variable costs incurred only when such functions are
needed, and can perform these functions more cost effectively.
In addition to the general trend toward outsourcing, management believes
that a number of significant factors and trends are creating opportunities in
the Company's businesses. In particular, both the accounts receivable
management industry and the direct marketing industry have experienced
significant growth in recent years.
According to a recent report concerning the accounts receivable management
industry, receivables outsourced to third parties for management and recovery
in the United States increased from approximately $79.0 billion in 1994 to
approximately $84.3 billion in 1995, an increase of approximately 6.7%. The
Company believes that this growth results in large part from a combination of
increasing delinquent consumer debt and the increasing trend of companies and
government entities to outsource collection of such debt to third parties.
According to the Federal Reserve Board, consumer debt increased from
approximately $3.6 trillion in 1990 to nearly $5.0 trillion in 1995. As debt
levels have increased, companies are outsourcing more as a result of the (i)
increased investment associated with large-scale collection efforts, (ii)
ability to use a third party agency to collect funds thereby minimizing the
negative impact on customer relations and (iii) increasing complexity of the
collection process. Based on ACA estimates and industry assumptions that three
percent of consumer debt becomes delinquent, the percentage of delinquent debt
referred for collection increased from 41.5% in 1990 to 57.0% in 1995. The
Company also believes, based on its recent experience, that companies are
beginning to utilize third party service providers earlier in the collection
cycle.
According to the Direct Marketing Association ("DMA"), a trade association,
overall media spending for direct marketing initiatives totalled $144.5
billion in 1996, a 6.3% increase from 1995. The DMA estimates that direct
marketing advertising expenditures in the United States for telemarketing (the
largest component of total direct marketing expenditures) increased from
approximately $42.4 billion in 1991 to $57.8 billion in 1996, a compound
annual growth rate of 6.4%. Direct mail advertising expenditures, which
constitute the second largest (after telemarketing) component of total direct
marketing expenditures, increased from approximately $24.5 billion in 1991 to
$34.6 billion in 1996, a compound annual growth rate of 7.1%. Management
believes that direct marketing will continue to grow, due in part to the
increasing cost effectiveness of direct marketing as compared to other
marketing methods, increased competition in the telecommunications industry
and rapidly changing, complex technology. Although a very small percentage of
teleservices and direct mail business is currently being outsourced, the
Company believes that the percentage of the market that is outsourced will
also increase as businesses continue to recognize the benefits of outsourcing.
Each of the accounts receivable management, direct mail and teleservices
industries is highly fragmented, includes a large number of small, independent
businesses and is currently experiencing consolidation. As companies seek to
focus on their core competencies and maximize asset utilization, they are
increasingly turning to outside parties who have the technological expertise,
service focus and full range of capabilities necessary to efficiently perform
complex or large projects on a multi-regional or national basis. In addition,
management believes that companies are increasingly seeking to limit the
number of vendors that satisfy their outsourcing needs by finding vendors that
can provide multiple outsourcing services. Compass believes that outsourcing
35
<PAGE>
companies will require significant capital to grow and to deploy state-of-the-
art technology in order to meet the demands of their clients. As a result, the
Company believes significant opportunities are available to a well capitalized
company providing a broad offering of outsourced business services with a high
level of customer service.
BUSINESS STRATEGY
The Company's goal is to become a leading, single-source provider of
outsourced business services throughout the Sales Cycle. In order to achieve
this goal, the Company intends to pursue the following strategy:
Provide Broad Array of Complementary Services. Each of the Founding
Companies has developed extensive expertise and a strong reputation with
respect to the services it provides. Upon completion of the Offering, the
Company will be able to provide clients with a broad range of services. The
Company expects to offer bundled and complementary services to companies that
are currently outsourcing to multiple vendors or performing such functions in-
house. In response to the particular needs of each client, the Company will
develop customized, coordinated solutions, such as a package of direct
marketing, mail fulfillment, billing, customer service and accounts receivable
management services. Management believes that companies that can provide a
broad array of complementary business services are well positioned for growth
as clients are increasingly demanding strategic business partnerships with
their vendors, including a single point of contact for many services. In
addition, management believes that the Company's reputation for and focus on
creating individual business solutions will help it to compete on a basis
other than price.
Focus on High Quality Client Service. The Company believes that maintaining
high levels of service and satisfaction is integral to attracting and
retaining clients. In addition to the importance of customized, value-added
solutions, client and end-user satisfaction is an important differentiating
factor in vendor selection. Each Founding Company has a strong commitment to
quality and satisfaction, and conducts regular client performance reviews. For
example, Impact has dedicated account teams who implement an extensive quality
process that includes validation of the data sent by a client, constant
monitoring of the phone conversations done on-site or at the client's location
to ensure that scripts are properly executed, and an internally designed
verification process to ensure that all of the client's requirements have been
fulfilled.
Leverage and Expand Technology and Operational Infrastructures. A key
element of the Company's strategy will be to capitalize on the investments
made by the Founding Companies in technology and the development of
operational processes in order to deliver the most effective client solutions.
The Company intends to continue to invest in sophisticated telecommunications,
mail center and information technology. Continued investment in technology
will facilitate the Company's ability to integrate its existing service
offerings and expand its menu of services. In addition, the Company will
review technology and operational practices across its businesses with the
goal of leveraging the best platforms and processes, optimizing MIS
capabilities and sharing technologies.
Operate with Decentralized Management Structure. Compass believes that the
experienced local management teams at the Founding Companies have a valuable
understanding of their respective markets and businesses and strong client
relationships upon which they may capitalize. Accordingly, the Company intends
to operate with a decentralized management strategy. Senior management at the
Founding Companies will continue to make day-to-day operating decisions and
will be responsible for the profitability and growth of their business. The
Company's executive management team will work closely with the Founding
Companies to coordinate, integrate and expand their service offerings. The
Company intends to utilize stock ownership, as well as appropriate incentive
compensation, to ensure that the objectives of local management are aligned
with those of the Company.
36
<PAGE>
GROWTH STRATEGY
The Company believes that there are significant opportunities to expand its
business and to further penetrate the market for outsourced business services.
The key elements of its growth strategy are as follows:
Implement Internal Growth Strategy. While the Company intends to acquire
additional outsourcing services companies, strong internal growth remains the
core of the Company's growth strategy. The key elements of the Company's
internal growth strategy include the following:
Capitalize on Cross-Selling Opportunities. Each of the Founding Companies
is a specialist in the services it provides, and each has many long
standing relationships with large clients who have multiple outsourcing
needs. Combining the Founding Companies will enable the Company to
capitalize on clients' desires for a single point of service, and to offer
bundled services by leveraging the Founding Companies' client relationships
and reputations for quality. For example, the Company will offer follow-up
teleservices to its direct mailing services clients, utilizing identical
databases for both processes. The Company also intends to offer accounts
receivable management services to its billing services clients.
Generate New Clients Through an Aggressive Marketing Program. The Company
intends to expand its client base by capitalizing on the breadth of its
services, its size, financial resources and geographic scope. The Company
will establish a coordinated marketing strategy to effectively market and
sell the services of all Founding Companies on a national basis.
Expand Service Offerings. The Company expects to continue to selectively
expand its service offerings, with the goal of providing integrated "end-
to-end" services to clients throughout the Sales Cycle. New services will
be complementary to and further leverage the Company's current offerings.
Implement Best Practices. The Company will identify best practices at
each of the Founding Companies that can be implemented throughout the
Company. For example, the Company intends to identify and utilize the most
effective call center management programs, collection techniques, mail
services and technologies. In addition, the Company intends to focus on the
most effective hiring, training, benefits and employee retention programs
of the Founding Companies and implement those practices throughout its
operations.
Achieve Economies of Scale. The Company believes that it can achieve
significant cost savings as a result of the Acquisitions, as well as future
acquisitions. The Company expects to benefit from greater purchasing power
in such key expense areas as telecommunications, postage, credit bureau
reports, insurance and employee benefits. The Company believes that it can
reduce the total operating expenses of the Founding Companies and other
acquired businesses by eliminating or consolidating certain duplicative
administrative functions. In addition, the Company expects to realize cost
savings and maximize capacity utilization by shifting work among its
locations as appropriate.
Pursue International Opportunities. Management believes that
international markets for accounts receivable management and teleservices
are growing rapidly in conjunction with the growth of overall credit card
spending and the expansion of the business of major credit card issuers
overseas. Management also believes that the United States is significantly
more advanced in outsourcing technology and procedures than the rest of the
world. Accordingly, the Company intends to pursue opportunities in
international markets in order to provide services to its multinational
clients. In addition, the Company may pursue other expansion overseas as
attractive opportunities arise. Where appropriate, the Company may enter
into a strategic partnership with an existing local business to facilitate
entry into a new international market. The Company believes that it is
well-positioned to capitalize on international opportunities through its
existing relationships with multinational clients as well as the expertise
and reputations of the Founding Companies.
Pursue an Aggressive Acquisition Program. Compass believes that industry
trends toward consolidation and increased acceptance of outsourcing create
opportunities for expansion of the Company's business. The Company intends to
capitalize on the highly fragmented nature of the industries in which it
competes by implementing an aggressive strategic acquisition program following
the Offering. Using the Founding Companies as platforms for growth and
consolidation, the Company will pursue acquisitions within the industry
37
<PAGE>
segments and markets currently served by the Founding Companies to add to the
growth of its existing businesses and gain market share. In addition, the
Company plans to acquire additional companies that broaden and complement the
Company's menu of services and the markets it serves. In analyzing acquisition
candidates, the Company will look for profitable companies with strong
management teams and a reputation for high quality client service. The Company
may also consider acquiring companies that possess technology or proprietary
rights to functions or services that would significantly enhance the value
provided by the Company to its clients.
The Company believes that the opportunity to be acquired by Compass will be
attractive to many specialized outsourcing companies. The Company offers
owners of potential acquisition candidates: (i) significant opportunities to
enhance the growth of their businesses through cross-selling the Company's
wide range of outsourced services; (ii) access to sophisticated technology and
operational processes; (iii) the Company's financial strength and visibility
as a public company; (iv) a decentralized management structure; and (v) near-
term liquidity.
In selecting the Founding Companies, Compass analyzed significant data on
outsourced business services companies and met with owners of many individual
companies. In addition, the owners of the Founding Companies have extensive
industry knowledge and strong reputations and have developed relationships
with other companies in their industry sectors, and the Company believes that
this will be of significant value in the Company's acquisition program. The
Company continues to review various strategic acquisition opportunities. Other
than the Acquisitions, the Company is not currently involved in negotiations
and is not a party to any current arrangements, agreements or understandings
regarding any acquisitions.
As consideration for future acquisitions, the Company intends to use various
combinations of Common Stock, cash and notes. Following the Offering, the
Company plans to register an additional 3,000,000 shares of its Common Stock
under the Securities Act for use by the Company as all or a portion of the
consideration to be paid in future acquisitions.
The Company's ability to successfully execute its growth strategy is subject
to certain risks. See "Risk Factors" beginning on page 9 of this Prospectus.
SERVICES OFFERED BY THE COMPANY
The Company provides a broad array of complementary business services which
can be utilized by its clients throughout the Sales Cycle. These services
include accounts receivable management services, mailing services and
teleservices. In addition, the Company provides telephonic check drafting
services through its APS service bureau. The services related to accounts
receivable management include recovery of early and later stage delinquent
consumer and commercial accounts. Mailing services include data processing,
printing, addressing, inserting, presorting and other aspects of mail
handling. Teleservices include telemarketing, customer service, market
research and lead generation activities. Several of the Company's services,
such as customer service and APS, can be utilized at multiple stages of the
Sales Cycle.
Accounts Receivable Management Services
The Company, through NCMC, Bomar and Mid-Continent, provides a wide range of
accounts receivable management services with respect to the collection of both
consumer and commercial accounts. The Company primarily provides services
related to the recovery of traditional delinquent accounts which can be
categorized as primary (generally 90 to 360 days past due), secondary
(generally 12 to 18 months past due with some previous collection efforts) and
tertiary (generally more than 18 months past due with extensive previous
collection efforts). The Company also provides recovery services for early
stage receivables (generally less than 90 days past due) at either the
client's location or the Company's location, sometimes on an outsourced basis.
The Company charges a fee per account or a contingency fee (generally 2% to
25% of the amount collected) for early stage receivables. With respect to
traditional delinquent receivables, the Company generally charges its clients
on a contingency fee basis at various rates depending on the category of debt.
Generally, the Company charges 25% to 35% of the amount collected for primary
accounts, 35% to 50% for secondary accounts and 50% to 70% for tertiary
accounts.
Recovery activities begin with the Company working with a client to design a
customized recovery solution based upon various factors including age and size
of the account, type and source of debt, and the client's specific
38
<PAGE>
requirements and standards. After the Company and the client have determined
the approach, the Company electronically or manually transfers data provided
by the client onto its system. The Company then searches various databases,
public records and other sources to locate customers whose telephone numbers
or addresses are not available from the client. Once the customer is located,
the Company forwards a past due notification letter which serves as official
notification to the customer under the FDCPA. The Company continues the
recovery process through notifications by mail and/or telephone, based on the
nature of the account, during which time the Company's telephone
representatives continue the dialogue with customers to seek immediate payment
or develop a payment program. At the client's request, the Company will report
delinquent accounts to one or more of the national credit bureaus. Payments
collected by the Company are either remitted to the client net of the
Company's fee or remitted in full, with the Company billing the client for its
services. The Company also provides litigation management services for clients
with respect to certain accounts. Such services include managing the attorney
relationships and facilitating the transfer of necessary documentation.
Throughout this process, the Company provides activity reports to the client.
Mailing Services
The Company, through Mail Box, provides direct mailing services and billing
services, mail presorting, freight and drop shipping, data processing, laser
printing, mailing list rental and other services related to mail handling.
Mailing services involve the high speed inserting, addressing and stamping of
mail. Utilizing the Company's inserting machines and addressing and stamping
systems, the Company processed approximately 840 million pieces of mail during
the twelve months ended June 30, 1997. The Company also provides mail
presorting services (i.e., combining volumes of like mail and presorting and
bar coding it to United States Postal Service specifications), which are
designed to generate significant postal discounts for its customers. Utilizing
the Company's sophisticated technology, mail can be presorted to the walk
sequence of a specific mail carrier. The mail which is presorted includes both
mail processed by other vendors and mail processed by the Company. Fees
charged for mailing and presorting are based on the number of pieces
processed. Another service offered by the Company which is designed to
generate postage savings is drop shipping, whereby the Company, instead of
sending mail from its Dallas location, transports the mail to other locations
in order to be mailed. The fee charged for drop shipping is a percentage of
the postal savings realized by the client.
Data processing and laser printing services include converting data sent by
the client and processing it to produce a letter or a bill. For example, if a
client transfers billing information and a corresponding mailing list, the
Company standardizes the mailing list in order to reduce postage costs (e.g.,
deleting duplicative addresses, correcting street names and obtaining current
addresses through its change-of-address technology) and merges the list with
the bills to be mailed. Data processing services also include state of the art
predictive modeling and analysis for market segmentation to achieve higher
response rates for direct marketing campaigns. The fee charged for data
processing is based on the number of pieces processed. The Company also rents
mailing lists, which the Company customizes for a particular client utilizing
lists purchased from other sources. Other services of the Company include
order fulfillment and sales of printed material such as letterhead, envelopes
and forms.
Teleservices
The Company, through Impact, provides primarily outbound business-to-
consumer teleservices where telephone representatives place calls to parties
targeted by the client to offer products or services or to obtain information.
The Company currently has a total of approximately 379 call stations, all of
which are available for outbound telemarketing. The Company has an arrangement
to use 160 additional call stations located in North Dakota, as needed. The
Company outsources additional business during peak periods. At the beginning
of a typical outbound program, the Company receives customer data files that
the client has selected to match the demographic profile of the targeted
customer for the product or service being offered. These files contain each
targeted customer's name, address, phone number and other relevant data. The
Company's data management system checks the files for duplicate information,
updates for recent area code changes and otherwise modifies the information as
needed. Prior to the beginning of the calling effort, the Company works with
the client to develop a script appropriate to the specific program.
39
<PAGE>
Actual telephone calling at the centers is controlled by computerized call
management systems that utilize a predictive dialing system to automatically
dial the telephone numbers in the files. The call management system then
forwards all connected calls, along with the customer's name and other
information, to the workstation of a telephone representative who has been
trained for the client's program. The telephone representative uses the
customized script to solicit an order for the product or service or to request
information that will be added to the client's database. Information regarding
sales and other aspects of the program is captured, processed and verified by
software systems and made available to clients in customized report formats.
The Company charges its outbound teleservices clients on a commission basis,
at an hourly rate or through a combination of both.
Inbound teleservices account for a small percentage of the Company's
teleservices revenues, although the Company intends to expand this business.
Forty of the Company's call stations may be used for inbound teleservices
which involve the processing of incoming calls, often placed by customers
using toll-free numbers, to a customer service representative for service,
order fulfillment or product information. Inbound teleservices include
activities such as customer care services, credit card and loan application
processing and catalog sales. More sophisticated inbound programs assist
clients in responding to customer inquiries, offering technical and product
support services and assessing overall customer satisfaction. Inbound
teleservices are normally billed at an hourly or cost-per-minute rate.
Accelerated Payment Systems
Accelerated Payment Systems ("APS") was introduced to the market by NCMC in
1992 and patented in 1996. It was originally developed to service the "urgency
payment" market in the collections industry by allowing consumers to resolve
delinquencies on mortgage, telephone, utility, credit card or other recurring
bills through telephonic authorization of a payment by check. The use of APS
has since expanded to retail, telecommunications, utilities, banking, sales
and other industries as clients have begun to appreciate the advantages of
telephonically authorized payments by check as compared to other methods of
immediate payment such as wire transfers, money orders, overnight mail, credit
cards and debit cards. Compass believes that the advantages include the
following: (i) APS does not require written authorization; (ii) APS checks can
be printed at the client's location for same day deposit; and (iii) credit
cards are not a payment option in the urgency payment market for certain
receivables such as credit card debt.
The APS procedure begins when the client's representative obtains verbal
authorization and checking account, bank and other information from the
customer. The client enters such information into the computer where the APS
software has been installed, and transmits the data to the APS service bureau.
APS receives the transmission and either prints the checks on site for
overnight delivery to the client or a designated bank or provides the client
access to print the checks at the client's location for same day deposit.
The Company charges its APS clients a one-time setup fee as well as a per
transaction fee. APS includes a license to use its proprietary software, bank
and zip code database updates, software upgrades, data backup and service
bureau support including a client help desk and consumer hotline. Management
believes that the combination of the Founding Companies creates a significant
opportunity to apply APS beyond the urgency payment market. For example, the
Company intends to offer APS to its clients as a payment option to improve
response rates on outbound telemarketing calls.
CLIENT RELATIONSHIPS
The Company provides its services to clients in a broad range of sectors
including telecommunications, financial services, insurance, healthcare,
education, government and utilities. The Company's 10 largest clients in 1996
accounted for approximately 39.8% of the Company's revenues on a pro forma
combined basis. In 1996 and the nine months ended September 30, 1997, VarTec
Telecom, Inc. ("VarTec") accounted for approximately 11.2% and 17.6% of the
Company's revenues on a pro forma combined basis. Other than VarTec, no client
accounted for more than 10% of the Company's revenues on a pro forma combined
basis in such periods.
40
<PAGE>
The Company enters into contracts with most of its clients which define,
among other things, fee arrangements, scope of services and termination
provisions. Clients may usually terminate such contracts on short notice.
The following table sets forth a list of certain of the Company's
representative clients:
<TABLE>
<CAPTION>
FINANCIAL
SERVICES EDUCATION HEALTHCARE
--------- --------- ----------
<S> <C> <C>
Capital One
Financial Columbia University Beverly Enterprises, Inc.
Corporation DeVRY, INC. MD Anderson Cancer Hospital
General EduCap, Inc.
Electric Loyola University of Chicago
Capital
Services, Medical Resource Systems, Inc.
Inc. Medic Computer Systems, Inc.
MBNA America Roosevelt College
Bank, N.A.
Fleet Bank
<CAPTION>
GOVERNMENT
AND
UTILITIES TELECOMMUNICATIONS RETAIL AND COMMERCIAL
---------- ------------------ ---------------------
<S> <C> <C>
The Army and AT&T Corporation Advantis Business Services, Inc.
Air Force AT&T Wireless Services Circuit City, Inc.
Exchange
Services
Baltimore Bellsouth Telecommunications, Inc. The FACS Group (Federated
Gas & Southwestern Bell Mobile Systems, Inc. Department Stores, Inc.)
Electric
Company
Georgia VarTec Telecom, Inc.
Power Co. MemberWorks, Inc.
State of
Maryland Sears Roebuck & Co.
Nevada Power
Company
</TABLE>
QUALITY ASSURANCE AND CLIENT SERVICE
The Company's reputation for quality service is critical to acquiring and
retaining clients and the Company has a strong commitment to quality and
client satisfaction. With respect to the Company's telephone representatives,
the Company and its clients monitor such representatives for compliance with
the clients' specifications and the Company's policies. The Company regularly
measures the quality of its services by capturing and reviewing such
information as the amount of time spent talking with clients' customers, level
of customer complaints and a variety of other operating measures. In order to
provide ongoing improvement in the performance of the Company's telephone
representatives and to assure compliance with the Company's policies and
standards, quality assurance personnel monitor each telephone representative
on a regular basis and provide ongoing training to the representative based on
this review. The Company's information systems enable it to provide clients
with reports as to the status of their accounts. In some cases, clients can
choose to network with the Company's computer system to access such
information directly.
The Company believes that extensive training of employees is essential in
providing high quality service. For example, Mail Box established the Mail Box
Academy, a dedicated training facility at which all new mailing service
employees must complete a six-week program that includes training in United
States postal regulations, data processing and operation of inserting and
presorting machines.
SALES AND MARKETING
Each Founding Company has dedicated sales personnel who work directly with
clients and potential clients to develop solutions to satisfy their
outsourcing needs and cultivate successful, long term relationships.
Historically, the Founding Companies have acquired new clients and marketed
services by pursuing client referrals, responding to requests for proposals,
attending trade and industry conferences and using targeted direct marketing
efforts. As of September 30, 1997, the Company's sales force included 41
direct sales employees and 14 independent contractors.
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The Company intends to continue the Founding Companies' emphasis on
developing and maintaining long-
term client relationships. The Company will implement a marketing strategy
which: (i) provides a broad range of high quality, complementary services;
(ii) expands service offerings; and (iii) enables the cross-selling of
services to existing and new clients. Marketing strategies will be coordinated
to optimize the sales force efforts and prioritize new client acquisitions of
major national accounts.
TECHNOLOGY AND INFRASTRUCTURE
Accounts Receivable Management Services
The Company has made a substantial investment in its client/server and
local- and wide-area networks which run its collection agency software and
call management systems such as predictive dialers, automated call
distribution systems and digital switching.
The Company utilizes predictive dialers to address its low balance, high
volume accounts. These systems scan the Company's database and simultaneously
initiate calls on all available telephone lines and determine if a live
connection is made. Upon determining that a live connection has been made, the
computer immediately switches the call to an available representative and
instantaneously displays the associated account record on the telephone
representative's workstation. Calls that reach other signals, such as a busy
signal, telephone company intercept or no answer, are tagged for statistical
analysis and placed in priority recall queues or multiple-pass calling cycles.
The system also automates virtually all recordkeeping and follow-up activities
including letter and report generation. The Company's automated operations
improve the productivity of the Company's collection staff.
Mailing Services
The Company utilizes software and technology in its lettershop, presort, and
data processing facilities. For data processing, the Company utilizes an IBM
mainframe and sophisticated letter processing and database management systems
to provide high speed data manipulation, flexibility in letter text setup and
predictive modeling and analysis. In addition, the Company is able to use its
data processing technology to reduce postage costs for clients by deleting
duplicative addresses, correcting street names and obtaining current addresses
through its change-of-address technology. In the lettershop, the Company has
64 inserting machines, including intelligent inserting machines which burst,
fold, select, match or handle multiple page inserts, and 20 addressing and
stamping systems which allows the Company to process high volumes of mail in a
short period of time. For mail presorting, the Company utilizes multiline
optical character readers which read the address, cross reference the National
Postal Database and encode the corresponding bar code.
Teleservices
The Company provides its teleservices through call stations which utilize
sophisticated call management systems including a predictive dialing system,
automated call distribution systems and digital switching which are integrated
with database management systems and local and wide area networks. In
addition, the Company uses proprietary software for customizing scripts used
by its telephone representatives. The Company's predictive dialing system was
designed to be used in conjunction with its scripting and data capture
software, while allowing for the import of data in any standardized format.
This system can run up to 128 campaigns simultaneously and was designed to
allow the Company to increase capacity rapidly and cost effectively.
The Company has implemented procedures to protect the loss of data against
power loss, fire and other casualty. In addition, the Company has installed a
security system to protect the integrity and confidentiality of its computer
system and data.
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COMPETITION
The markets in which the Company competes are highly competitive, and the
Company expects competition to persist and intensify in the future. As a
result, the Company faces aggressive price competition in most of its
businesses and expects price competition to continue. The Company's
competitors include small firms offering specific applications, divisions of
large entities, large independent firms and, most significantly, the in-house
operations of clients or potential clients. Some of the Company's competitors
have substantially greater financial, marketing and other resources, offer
more diversified services and operate in broader geographic areas than the
Company. There can be no assurance that additional competitors with greater
resources than the Company will not enter the Company's markets. All of the
services offered by the Company may be performed in-house. Many larger clients
retain multiple accounts receivable management providers which exposes the
Company to continuous competition in order to remain a preferred vendor. There
can be no assurance that outsourcing of the services performed by the Company
will continue or that existing Company clients will not bring some or all of
such services in-house. The Company competes primarily on performance, client
service, range of services offered and price.
GOVERNMENT REGULATION
The accounts receivable management and telemarketing industries are
regulated under various federal and state statutes. The Company is subject to
the FDCPA and various state debt collection laws, which, among other things,
establish specific guidelines and procedures debt collectors must follow in
communicating with consumer debtors, including the time, place and manner of
such communications. The accounts receivable management business is also
subject to state regulation, and some states require that the Company be
licensed as a debt collection company. The Company is also subject to the
FCRA, which regulates the consumer credit reporting industry and which may
impose liability on the Company to the extent that the adverse credit
information reported on a consumer to a credit bureau is false, inaccurate or
outside of the scope of the Company's transactions with such consumers. With
respect to the other teleservices offered by the Company, including
telemarketing, the Telemarketing and Consumer Fraud and Abuse Prevention Act
of 1994 broadly authorizes the FTC to issue regulations prohibiting
misrepresentations in telemarketing sales. The FTC's telemarketing sales
rules, among other things, limit the hours during which telemarketers may
call, prohibit misrepresentations of the cost, terms, restrictions,
performance or duration of products or services offered by telephone
solicitation and specifically address other perceived telemarketing abuses in
the offering of prizes and the sale of business opportunities or investments.
In addition, the TCPA restricts the use of automated telephone equipment for
telemarketing purposes, including limiting the hours during which
telemarketers may call consumers and prohibiting the use of automated
telephone dialing equipment to call certain telephone numbers. A number of
states also regulate telemarketing and some states have enacted restrictions
similar to the TCPA. The failure to comply with applicable statutes and
regulations could have a materially adverse effect on the Company's business,
results of operations and financial condition. There can be no assurance that
additional federal or state legislation, or changes in regulatory
implementation, would not limit the activities of the Company in the future or
significantly increase the cost of regulatory compliance.
Several of the industries served by the Company are also subject to varying
degrees of government regulation. Although compliance with these regulations
is generally the responsibility of the Company's clients, the Company could be
subject to a variety of enforcement or private actions for its failure or the
failure of its clients to comply with such regulations.
The Company devotes significant and continuous efforts, through training of
personnel and monitoring of compliance, to ensure that it is in compliance
with all federal and state regulatory requirements. The Company believes that
it is in material compliance with all such regulatory requirements.
EMPLOYEES
As of September 30, 1997, the Founding Companies employed a total of 1,028
full-time and 337 part-time employees, of whom 625 were employed in connection
with accounts receivable management services, 387 were employed in connection
with teleservices and 353 were employed in connection with mailing services.
In
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addition, the Company uses independent contractors and hires temporary
employees as needed. None of the Company's employees is represented by a labor
union. The Company believes that its relations with its employees are good.
FACILITIES
The Company currently operates 15 leased facilities. The chart below sets
forth certain information regarding such facilities.
<TABLE>
<CAPTION>
LOCATION OF APPROXIMATE
FACILITY COMPANY AND OPERATIONS CONDUCTED SQUARE FEET
----------- -------------------------------- -----------
<S> <C> <C>
Atlanta, GA Bomar--Accounts receivable management 3,000
Buffalo, NY Mid-Continent--Accounts receivable management, sales and administrative 7,700
Destin, FL Bomar--Administrative 1,200
Dallas, TX Mail Box--Mailing services and administrative 338,000
Houston, TX Bomar--Accounts receivable management 2,800
Hunt Valley, MD NCMC--Accounts receivable management and administrative 18,600
Las Vegas, NV NCMC--Accounts receivable management 3,000
Louisville, KY Mid-Continent--Accounts receivable management, sales and administrative 5,500
Norcross, GA Bomar--Accounts receivable management and sales 22,700
Phoenix, AZ Bomar--Accounts receivable management 4,000
Princeton, NJ (1) Compass--Corporate headquarters 1,000
Rolling Meadows, IL Mid-Continent--Accounts receivable management, sales and administrative 17,000
Tampa, FL Bomar--Accounts receivable management 8,000
Voorhees, NJ Impact--Outbound telemarketing 16,000
Woodbury, NJ Impact--Telemarketing, data processing and administrative 8,500
</TABLE>
- --------
(1) The Company intends to relocate its headquarters from Princeton, New
Jersey to the metropolitan New York area after consummation of the
Offering.
LITIGATION
The Company is engaged in certain disputes concerning a patent (the "APS
Patent") owned by the Company and used in its APS process to provide
telephonic check drafting services. The following is a summary of such
disputes:
In January 1994, NCMC entered into an Intellectual Property Licensing
Agreement (the "1994 Agreement") with Autoscribe Corporation ("ASC") and
Robert E. Pollin (the "Inventor"). Pursuant to the 1994 Agreement, NCMC was
granted, with certain exceptions, the exclusive right to use certain
intellectual property that was at the time the subject of a patent
application. In March 1996, NCMC purchased the intellectual property from ASC
and the Inventor pursuant to an Intellectual Property Purchase and License
Agreement (the "1996 Agreement") that superseded the 1994 Agreement. The APS
Patent was issued in April 1996 and assigned to NCMC.
NCMC is a plaintiff in two lawsuits (the "Patent Infringement Lawsuits")
alleging that a competitor and a former customer willfully infringed the APS
Patent. In June 1996, NCMC filed a lawsuit against Western Union Financial
Services, Inc. in the United States District Court for the Southern District
of New York, and in September 1996, NCMC filed suit against Discover Card
Services, Inc., Novus Services, Inc. and Dean Witter, Discover & Co. in the
United States District Court for the District of Maryland. NCMC's claims
against the defendants seek lost profits, damages, attorneys' fees and costs,
treble damages for willful infringement and punitive damages. The defendants
in the Patent Infringement Lawsuits have denied infringing the APS Patent and
have challenged the validity of the APS Patent in a counterclaim. Management
believes that the counterclaim is without merit. Compass has entered into an
agreement with NCMC and its stockholders with respect to the allocation of
damages, if any, awarded to NCMC in the Patent Infringement Lawsuits. See
"Certain Transactions."
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<PAGE>
In April 1997, ASC and the Inventor filed an arbitration claim against NCMC
seeking rescission of the 1996 Agreement and certain monetary damages. In May
1997, NCMC filed a lawsuit against ASC and the Inventor in the Circuit Court
for Montgomery County, Maryland alleging that ASC and the Inventor have
violated NCMC's ownership rights to the APS Patent and exclusive rights to use
the intellectual property by continuing to solicit maintenance customers and
provide maintenance services in contravention of the 1996 Agreement. NCMC
seeks unspecified damages and injunctive relief. ASC and the Inventor have
denied NCMC's claims and have filed a counterclaim seeking rescission of the
1996 Agreement, reassignment of the APS Patent to the Inventor, reinstatement
of the 1994 Agreement, the ability to participate as a plaintiff in the Patent
Infringement Lawsuits, unspecified damages and other relief. ASC and the
Inventor allege that the 1996 Agreement should be rescinded because the
Inventor lacked the capacity to sign the 1996 Agreement and because the 1996
Agreement was the product of misrepresentations and duress and is not
supported by adequate consideration. ASC and the Inventor also allege that (i)
NCMC was and is required under the 1996 Agreement to pay royalties at a rate
equal to 7.25% of NCMC's APS-related revenues rather than the 4.5% rate at
which they have been paid; (ii) NCMC improperly offset against the royalties
certain litigation expenses incurred by it in the Patent Infringement
Lawsuits; and (iii) NCMC failed to properly prosecute the Patent Infringement
Lawsuits. NCMC has denied these allegations.
While NCMC believes that the counterclaims are without merit, there can be
no assurance that ASC and the Inventor will not prevail with respect to some
or all of their counterclaims. In the event that ASC and the Inventor are
successful in their counterclaims, both an award of damages and rescission of
the 1996 Agreement could occur, with the future rights of the parties being
determined by the 1994 Agreement. If the 1994 Agreement were reinstated, NCMC
would be required to pay royalties at the rate of 7.25% of its APS-related
revenues rather than the 4.5% rate at which royalties are being paid under the
1996 Agreement. Management does not believe that a decision adverse to NCMC in
this dispute would have a material adverse effect on the Company's business,
results of operations or financial condition.
The Company is not involved in any other legal proceedings material to the
financial condition or results of operations of the Company.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information concerning the Company's
directors, executive officers and certain key employees, as well as those
persons who will become directors and executive officers upon consummation of
the Offering.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Michael J. Cunningham... 40 Chairman of the Board and Chief Executive Officer
Mahmud U. Haq........... 38 President and Chief Operating Officer; Director
Richard A. Alston....... 42 Chief Financial Officer
Kenneth W. Murphy....... 58 Chief Executive Officer--Mail Box; Director
Leeds Hackett........... 57 Chief Executive Officer--NCMC; Director
John Maloney............ 52 Chief Operating Officer--Bomar; Director
Les J. Kirschbaum....... 55 Chief Executive Officer--Mid-Continent; Director
Edward A. DuCoin........ 32 Co-President--Impact; Director
Howard L. Clark, Jr..... 53 Director
Scott H. Lang........... 51 Director
Tomasso Zanzotto........ 55 Director
Gene Collins............ 55 Chief Executive Officer--Bomar
David T. DuCoin......... 39 Co-President--Impact
</TABLE>
MICHAEL J. CUNNINGHAM joined Compass in June 1997 and has served as a
director since September 1997. Prior to joining the Company, Mr. Cunningham
held various senior executive positions at American Express Company ("American
Express"). From 1992 until June 1997, Mr. Cunningham was Vice President--
Operations of the Travel Related Services division of American Express where
he was responsible for management of the billing and payment processes for all
domestic credit card holders, as well as the collection agency management
function. He also chaired the steering committee and managed the group that
develops and enhances the global system that generates Travel Related Services
customer statements throughout the world. From 1988 to 1992, Mr. Cunningham
was the Vice President of Finance of the Travel Related Services division and
from 1984 to 1988 he served as Director of Corporate Financial Analysis for
American Express. Mr. Cunningham formerly served on the Advisory Council for
the National Foundation for Consumer Credit.
MAHMUD U. HAQ joined Compass in April 1997 and has served as a director
since October 1997. From December 1996 until joining the Company, Mr. Haq was
the Executive Vice President of Global Business Development at Nationwide
Credit, Inc., one of the nation's largest accounts receivable management
companies. From 1985 to 1996, Mr. Haq held various senior executive positions
at American Express, including Vice President--Risk Management of Global
Collections for the Travel Related Services division (1994-1996) and Vice
President and Controller--Consumer Card Group Operations for the Travel
Related Services division (1992-1994). Mr. Haq formerly served on the Board of
Directors of the Consumer Credit Association.
RICHARD A. ALSTON joined Compass in June 1997. From December 1994 to March
1997, Mr. Alston served as the Executive Vice President--Finance and Corporate
Development at National Processing, Inc., the nation's second largest credit
card processing company. From 1991 to 1994, Mr. Alston was the President of
Alston Associates which provided strategic and operations consulting services
to Fortune 500 clients. From 1986 to 1991, Mr. Alston was a Senior Vice
President at Sealy, Inc. where he oversaw the implementation of new
manufacturing and financial systems throughout the Company and was responsible
for the Company's international licensing activities and contract sales.
KENNETH W. MURPHY will become a director of the Company after the
consummation of the Offering. Mr. Murphy has served as the President and Chief
Executive Officer of Mail Box since its founding in 1971. Mr. Murphy was the
Chairman of the Board of Directors of The Mail Advertising Service
Association, International
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<PAGE>
("MASA"), a mailing industry trade association, from 1987 to 1993. He is
currently a member of the Board of Directors of MASA-Southwest and a member of
the Advertising Mail Marketing Association, the Direct Marketing Association
of North Texas and the Dallas-Fort Worth and Austin Postal Customer Councils.
LEEDS HACKETT will become a director of the Company after the consummation
of the Offering. Mr. Hackett has served as the Chairman and Chief Executive
Officer of NCMC since 1991. From 1989 to 1991, Mr. Hackett was Executive Vice
President and Chief Financial Officer of The Union Corporation, a New York
Stock Exchange company, which has subsidiaries in the debt collection
business. From 1987 to 1989, he was the President and Chief Executive Officer
of The Park Avenue Bank, N.A. and from 1965 to 1986, he held various
management positions at Marine Midland Bank.
JOHN MALONEY will become a director of the Company after the consummation of
the Offering. Mr. Maloney has served as the Chief Operating Officer of Bomar
since its founding in 1986. In such position, Mr. Maloney manages all of
Bomar's operations and production processes. He has played an integral role in
Bomar's strategic planning and development since its formation.
LES J. KIRSCHBAUM will become a director of the Company after the
consummation of the Offering. Mr. Kirschbaum has served as President of Mid-
Continent since 1974 and became Chief Executive Officer in 1995. Mr.
Kirschbaum served as the Chairman of the Commercial Agency Section ("CAS") of
the Commercial Law League of America ("CLLA") from 1986 to 1988, and was the
CAS representative on the Board of Governors of the CLLA from 1991 to 1994.
The CLLA is a trade association of commercial attorneys and commercial
collection agencies with approximately 6,000 members.
EDWARD A. DUCOIN will become a director of the Company after the
consummation of the Offering. Mr. DuCoin founded Impact in 1984 and serves as
its Co-President with his brother, David T. DuCoin. He was a member of the
Board of Directors of the American Telemarketing Association from 1992 to 1993
and has been a national speaker on the subject of telemarketing.
HOWARD L. CLARK, JR. will become a director of the Company after the
consummation of the Offering. Mr. Clark has served as Vice Chairman of Lehman
Brothers Inc. since 1993. He was Chairman, President and Chief Executive
Officer of Shearson Lehman Brothers Holdings, Inc. from 1990 until he assumed
his current position. Prior thereto, Mr. Clark was Executive Vice President
and Chief Financial Officer of American Express, having held various positions
with that firm since 1981. He is also a director of Lehman Brothers Inc., Fund
American Enterprises Holdings, Inc., The Maytag Corporation, Walter
Industries, Inc. and Plasti-Line Inc. Lehman Brothers Inc. is a co-managing
underwriter for the Offering.
SCOTT H. LANG became a director of the Company in April 1997. Since 1996,
Mr. Lang has been a managing member of BGL Management Company, LLC, which is
the managing member of BGL Capital Partners, LLC ("BGL"), a merchant banking
firm which originates and finances industry consolidations. Mr. Lang is also a
Managing Director and Principal of Brown, Gibbons, Lang & Company, L.P., an
investment banking firm, a position he has held since 1995. From 1985 to 1995,
he served as Executive Vice President and Managing Director of Investment
Banking at Rodman & Renshaw, Inc., a Chicago-based securities firm.
TOMMASO ZANZOTTO will become a director of the Company after the
consummation of the Offering. Mr. Zanzotto is the President of Toscana Ville
E. Castelli, a real estate development company which owns and operates
residential and commercial properties in the lodging and hotel industry. From
1994 to 1996, he was the Chairman and Chief Executive Officer of Hilton
International. From 1969 to 1993, Mr. Zanzotto held various positions with
American Express Travel Related Services including President International,
American Express Financial and Travel Services (1990-1993); President,
American Express Corporate Card Division (1987-1990); and President, American
Express Travelers Cheques (Europe, Africa, Middle East). He is also a director
of Travel Services International, Inc., a distributor of specialized leisure
travel services.
47
<PAGE>
GENE COLLINS has served as the Chief Executive Officer of Bomar since its
founding in 1986. In such position, he manages the marketing efforts and
business development of the organization. In addition, Mr. Collins is
responsible for Bomar's financial planning and works closely with Mr. Maloney
in determining the company's strategic plan.
DAVID T. DUCOIN became actively involved with Impact in 1986 and has served
as its Co-President since 1993. He has been instrumental in the development of
Impact's proprietary predictive dialing system as well as the integration of
inbound and outbound technology in a shared database environment. Prior to
joining Impact, Mr. DuCoin was involved in television production and was the
Senior Editor and Chief Engineer for a variety of programs including major
league sports broadcasts.
MANAGEMENT OF THE COMPANY FOLLOWING THE ACQUISITIONS
Upon the consummation of the Offerings, the Company intends to operate with
a decentralized management strategy. Messrs. Cunningham, Haq and Alston will
manage the Company's operations and be responsible for areas including
strategic planning, resource allocation, capital financing, financial
reporting, marketing efforts and human resources. They will work closely with
the Founding Companies to coordinate, integrate and expand their service
offerings. Messrs. Murphy, Hackett, Maloney, Kirschbaum, Collins, Edward A.
DuCoin and David T. DuCoin will continue to make day-to-day operating
decisions and be primarily responsible for the operations of their respective
Founding Companies.
BOARD OF DIRECTORS
After consummation of the Acquisitions, the Board of Directors of the
Company will consist of ten directors divided into three classes with each
class serving for a term of three years. At each annual meeting of
stockholders, directors will be elected by the holders of the Common Stock to
succeed those directors whose terms are expiring. Directors whose terms will
expire in 1998 are: Mahmud U. Haq, Les J. Kirschbaum, Edward A. DuCoin and
Tomasso Zanzotto; directors whose terms will expire in 1999 are: John Maloney,
Scott H. Lang and Howard L. Clark, Jr.; directors whose terms will expire in
2000 are: Leeds Hackett, Kenneth W. Murphy and Michael J. Cunningham. The
Initial Stockholders have entered into an agreement with respect to nominating
and electing directors in the five years following the Offering. See
"Description of Capital Stock--Stockholders' Agreement." The Company expects
that the Board of Directors will establish an Audit Committee, a Compensation
Committee, and such other committees as the Board may determine. The members
of each committee are expected to be determined at the first meeting of the
Board of Directors following the consummation of the Acquisitions. Directors
elected by the Company's stockholders may be removed only for cause.
DIRECTOR COMPENSATION
Directors who are also employees of the Company or one of its subsidiaries
do not receive compensation for serving as directors. Each director who is not
an employee of the Company or one of its subsidiaries receives a fee of $2,000
for attendance at each Board of Directors' meeting and $1,000 for each
committee meeting (unless held on the same day as a Board of Directors'
meeting). Directors are also reimbursed for out-of-pocket expenses incurred in
attending meetings of the Board of Directors or committees thereof or
otherwise incurred in their capacity as directors. Upon the consummation of
the Offering, each non-employee director will be granted options to purchase
10,000 shares of Common Stock at an exercise price equal to the initial public
offering price. See "--1997 Employee Incentive Compensation Plan."
EXECUTIVE COMPENSATION; EMPLOYMENT AGREEMENTS; COVENANTS NOT TO COMPETE
Compass was incorporated in April 1997 and has conducted no operations and
generated no revenue to date. BGL has entered into agreements with Messrs.
Cunningham, Haq and Alston, dated April 28, 1997, March 31, 1997 and May 28,
1997, respectively, pursuant to which Messrs. Cunningham, Haq and Alston
provide
48
<PAGE>
consulting services to BGL in connection with the Acquisitions and the
Offering. As compensation for these consulting services, Messrs. Cunningham,
Haq and Alston are receiving annual consulting fees of $225,000, $200,000 and
$200,000, respectively. Such fees will remain in effect until the earliest of
the closing of the Offering, the execution of an employment agreement with
Compass, as described below, or termination of the consulting agreement.
Amounts paid by BGL pursuant to the consulting agreements, together with
interest thereon at 8% per annum, will be repaid by Compass to BGL from the
net proceeds of the Offering.
Prior to the consummation of the Offering, Messrs. Cunningham, Haq and
Alston will enter into three-year employment agreements with the Company
providing for annual base salaries of $225,000 for Mr. Cunningham and $200,000
for each of Mr. Haq and Mr. Alston. Each agreement provides that the executive
is eligible to earn an annual bonus of up to 100% of his salary based upon
specified performance criteria. Unless terminated or not renewed by the
Company or the executive, the term of each such employment agreement will
continue thereafter on a year-to-year basis on the same terms and conditions
existing at the time of renewal. Each employment agreement will contain a
covenant not to compete with the Company for a period of one year following
termination of employment. Under this covenant, the executive is prohibited
from: (i) engaging in any business in competition with the Company anywhere in
the United States; (ii) enticing a managerial employee of the Company away
from the Company; (iii) soliciting or selling any competitive products or
services to any person or entity which is, or has been within one year prior
to the date of termination, a customer of the Company, or that was actively
solicited by the Company during such period; or (iv) calling upon a
prospective acquisition candidate which the employee knew was approached or
analyzed by the Company, for the purpose of acquiring the entity. The covenant
may be enforced by injunctions or restraining orders and shall be construed in
accordance with the changing activities, business and location of the Company.
Each employment agreement requires the executive to devote his full time to
the Company.
Each of these employment agreements will provide that, in the event of a
termination of employment by the Company without cause during the term of the
agreement, the Company will pay to the executive, as severance compensation,
(i) his then current salary plus the bonus paid to him the last fiscal year
for a period of two years following the date of termination and (ii) his bonus
for the current year prorated through the termination date. Payment is due in
equal installments on the Company's normal payroll payment dates during the
severance period. The employment agreements will further provide that in the
event of a change in control of the Company (as defined in the employment
agreements), the executive will have the right, following such change in
control, to terminate his employment for Good Reason (or, in the 60 days
immediately following such change in control, for any reason) and be entitled
to receive severance benefits as described above. So long as the executive
does not engage in conduct giving rise to the right to terminate employment
for cause, Good Reason includes (i) the failure to elect the executive to the
office previously held, the removal of the executive from his position or the
assignment to the executive of any additional duties or responsibilities or a
reduction in executive's duties or responsibilities which, in either case, are
inconsistent with those customarily associated with such position and (ii) a
relocation by the Company of the executive's place of employment beyond a
specified area.
Upon the consummation of the Acquisitions, the Founding Companies will enter
into five-year employment agreements with certain of their executive officers,
including Messrs. Murphy, Hackett, Maloney, Kirschbaum, Collins, Edward A.
DuCoin and David T. DuCoin. Each agreement requires the executive to devote
his full time to the Founding Company, specifies an annual base salary and
provides that the executive is eligible to earn an annual bonus of up to 100%
of salary upon specified performance criteria. The Founding Companies will
also enter into employment agreements with other key employees for terms
ranging from one to five years. Unless terminated or not renewed by the
Founding Companies or the employee, the term of each employment agreement will
continue thereafter on a year-to-year basis on the same terms and conditions
existing at the time of renewal. Each employment agreement will contain a
covenant not to compete whereby, for a two-year period following termination
of employment (one year with respect to employees other than executive
officers), the employee is prohibited from (i) engaging in any business in
competition with the business in which the applicable Founding Company engages
anywhere in the United States, (ii) enticing a managerial employee of the
Founding Company away from the Founding Company, (iii) soliciting or selling
any competitive products or services to any person or entity which is, or has
been within one year prior to the date of termination, a customer of the
Founding
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<PAGE>
Company, or that was actively solicited by the Founding Company during such
period, or (iv) calling upon a prospective acquisition candidate which the
employee knew was approached or analyzed by the Company, for the purpose of
acquiring the entity. Each agreement will provide that upon termination of
employment by the Founding Company without cause, the employee will be entitled
to receive from the Company his or her annual salary for a period of two years
following termination (one year with respect to employees other than executive
officers) plus his or her bonus for the current year prorated through the
termination date.
Upon the consummation of the Offering, certain of the executive officers of
the Company will be granted options to purchase Common Stock at an exercise
price equal to the initial public offering price. See "--1997 Employee
Incentive Compensation Plan."
1997 EMPLOYEE INCENTIVE COMPENSATION PLAN
Prior to the consummation of the Offering, the Board of Directors and the
Company's stockholders are expected to approve the Company's 1997 Employee
Incentive Compensation Plan (the "Plan"). The purpose of the Plan is to provide
directors, officers, employees, consultants and independent contractors with
additional incentives by increasing their ownership interests in the Company.
Individual awards under the Plan may take the form of one or more of: (i)
either incentive stock options ("ISOs") or non-qualified stock options
("NQSOs"); (ii) stock appreciation rights ("SARs"); (iii) restricted or
deferred stock; (iv) dividend equivalents; and (v) cash awards or other awards
not otherwise provided for, the value of which is based in whole or in part
upon the value of the Common Stock. The Compensation Committee will administer
the Plan and generally select the individuals who will receive awards and the
terms and conditions of those awards.
The Company has reserved 2,000,000 shares of Common Stock for use in
connection with the Plan. It is the policy of the Company that the number of
shares of Common Stock subject to options granted under the Plan will not
exceed 10% of the number of shares of Common Stock then outstanding. Shares of
Common Stock which are attributable to awards which have expired, terminated or
been canceled or forfeited are available for issuance or use in connection with
future awards.
The Plan will remain in effect until terminated by the Board of Directors.
The Plan may be amended by the Board of Directors without the consent of the
stockholders of the Company, except that any amendment, although effective when
made, will be subject to stockholder approval if required by any federal or
state law or regulation or by the rules of any stock exchange or automated
quotation system on which the Common Stock may then be listed or quoted.
In connection with the Offering, NQSOs to purchase a total of 690,000 shares
of Common Stock will be granted. Of this amount, options to purchase 350,000
shares of Common Stock will be granted to management of the Company, including
150,000 options to Mr. Cunningham and 100,000 options to each of Messrs. Haq
and Alston, an aggregate of 65,000 options will be granted to other employees
of the Company and an aggregate of 275,000 options will be granted to certain
employees of the Founding Companies. The grants of all of the foregoing options
will be effective as of the date of the Offering and each option will have an
exercise price equal to the initial public offering price per share in the
Offering. These options will vest in three equal annual installments commencing
on the first anniversary of the grant, and will expire 10 years from the date
of grant or three months following termination of employment.
The Plan also provides for: (i) the automatic grant to each non-employee
director (a "Participant") serving at the commencement of the Offering of an
option to purchase 10,000 shares of Common Stock; and thereafter (ii) the
automatic grant to each Participant of an option to purchase 10,000 shares upon
such person's initial election as a director. In addition, the Plan provides
for an automatic annual grant to each Participant of an option to purchase
5,000 shares at each annual meeting of stockholders following the Offering,
provided, however, that if the first annual meeting of stockholders following a
person's initial election as a non-employee director is within three months of
the date of such election or appointment, such person will not be granted an
option to
50
<PAGE>
purchase 5,000 shares of Common Stock at such annual meeting. These options
will have an exercise price per share equal to the fair market value of a
share at the date of grant. Options granted under the Plan will expire at the
earlier of 10 years from the date of grant or one year after termination of
service as a director, and options will be immediately exercisable.
The Plan affords the Compensation Committee discretion to fashion
performance awards for eligible participants with incentives the Compensation
Committee deems appropriate. It permits the issuance of awards based on the
satisfaction of specific performance criteria in cash or Common Stock. The
performance goals for any year may be based on a broad array of performance
measures as selected by the Compensation Committee, including financial
results on a consolidated basis or an operating unit basis depending on the
responsibility of the participant, as well as achievement of personal
performance goals. The maximum value of such awards for any participant in any
year is 100% of such participant's salary. In addition, the Compensation
Committee has discretion to pay, cancel or provide for the substitution or
assumption of such bonus awards.
EMPLOYEE STOCK PURCHASE PLAN
Prior to consummation of the Offering, the Company will adopt the Employee
Stock Purchase Plan (the "Stock Purchase Plan"), pursuant to which a total of
500,000 shares of Common Stock will be reserved for issuance. The Stock
Purchase Plan, which is intended to qualify under Section 423 of the Code,
permits eligible employees of the Company to purchase Common Stock through
payroll deductions with all such deductions credited to an account under the
Stock Purchase Plan. Payroll deductions may not exceed $25,000 for all
purchase periods ending with any Plan Year (as hereinafter defined).
The Stock Purchase Plan operates on a calendar year basis (the "Plan Year").
To be eligible to participate during a Plan Year, an employee must file all
requisite forms prior to a specified due date known as the "Grant Date."
Generally the first day of each Plan Year will be the Grant Date and the last
day of each Plan Year will be an Exercise Date (the "Exercise Date"). The
determination of the Grant Date and the Exercise Dates are completely within
the discretion of the Plan Committee. On each Exercise Date, participants'
payroll deductions credited to their accounts will be automatically applied to
the purchase price of Common Stock at a price per share which is the lesser of
eighty-five percent (85%) of the fair market value of the Common Stock on the
Grant Date or on the Exercise Date. Employees may end their participation in
the Stock Purchase Plan at any time during an offering period, and their
payroll deductions to date will be refunded. Participation ends automatically
upon termination of employment with the Company.
Employees are eligible to participate in the Stock Purchase Plan if they are
customarily employed by the Company or a designated subsidiary for at least 20
hours per week and for more than five months in any calendar year. No person
will be able to purchase Common Stock under the Stock Purchase Plan if such
person, immediately after the purchase, would own stock possessing 5% or more
of the total combined voting power or value of all outstanding shares of all
classes of stock of the Company.
51
<PAGE>
CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
The Company was formed in April 1997. The Company was initially capitalized
by BGL and Messrs. Cunningham, Haq and Alston. Mr. Lang, a director of the
Company, is a managing member of BGL Management Company, LLC, which is the
managing member of BGL. Following the approximate 112.185-for-one stock split
to be effected prior to the consummation of the Offering, the 15,000 shares of
Common Stock initially issued by the Company to its founders will total
1,682,769 shares. Shortly after the consummation of the Offering, the Company
expects that BGL will distribute its shares of Common Stock to its members.
THE ACQUISITIONS
The aggregate consideration to be paid by Compass in the Acquisitions
consists of approximately $19.2 million in cash and 5,435,691 shares of Common
Stock. The following table sets forth the consideration to be paid to the
stockholders of each of Founding Companies and the debt of each Founding
Company to be assumed by Compass in the Acquisitions.
<TABLE>
<CAPTION>
SHARES OF
COMMON DEBT
FOUNDING COMPANY CASH(1) STOCK(1) ASSUMED(2)
---------------- ------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Mail Box..................................... $ 9,437 2,461,852 $ 3,213
NCMC......................................... 2,777 965,801 826
Bomar........................................ 4,415 1,151,787 5,497
Mid-Continent................................ 1,790 467,127 4,458
Impact....................................... 790 389,124 1,440
------- --------- -------
Total...................................... $19,209 5,435,691 $15,434
======= ========= =======
</TABLE>
- --------
(1) The number of shares of Common Stock to be issued to the stockholders of
the Founding Companies is fixed. If the initial public offering price is
higher or lower than the assumed price, the cash consideration will vary
proportionately. For example, a $1.00 per share increase or decrease from
the assumed offering price will result in a $1.7 million increase or
decrease, respectively, in the aggregate cash consideration paid to
Founding Company stockholders.
(2) Reflects: (i) debt of the Founding Companies, including capital leases and
lines of credit; and (ii) debt incurred by Mid-Continent in connection
with a stock redemption.
The consideration to be paid for each Founding Company is subject to
possible post-closing adjustment based upon adjusted 1997 earnings. If a
Founding Company's adjusted earnings exceed current estimates of adjusted
earnings by more than five percent, Compass will pay the former stockholders
of such Founding Company additional cash consideration equal to five percent
of the total consideration previously paid for such Founding Company in the
Acquisition. The maximum possible increase in the consideration paid by
Compass for all Founding Companies is approximately $4.1 million. The
potential increase in goodwill due to this increase in consideration is
approximately $2.2 million, with associated amortization of approximately
$66,000 per year. If a Founding Company's adjusted 1997 earnings are less than
current estimates of adjusted earnings by more than five percent, the former
stockholders of such Founding Company will be required to repay to Compass in
cash up to ten percent of the total consideration previously paid to them in
the Acquisition. The maximum possible decrease in the consideration paid by
Compass for all Founding Companies is approximately $8.2 million. The
potential decrease in goodwill due to this decrease in consideration is
approximately $4.4 million, with an associated reduction in amortization of
approximately $132,000 per year.
The consideration for each Founding Company was determined through arm's
length negotiations between Compass and representatives of each Founding
Company, and based on a uniform formula, applied to each of the Founding
Companies in the same manner reflecting primarily their respective operating
incomes, as adjusted to reflect long-term debt assumed, contractually agreed
upon compensation adjustments, to eliminate the effects
52
<PAGE>
of certain non-recurring expenses, and to reflect certain other agreed upon
matters. No independent appraisals of any Founding Company were obtained. Each
Founding Company was represented by independent counsel in the negotiation of
the terms and conditions of the Acquisitions.
Each Acquisition Agreement contains standard representations and warranties
of each party as well as indemnification provisions in the event of a breach of
any representations and warranties made by any party to the agreement.
Furthermore, each Acquisition Agreement provides that the consummation of the
acquisition is subject to customary conditions. These conditions include, among
others, (i) the continuing material accuracy on the closing date of the
Acquisitions of the representations and warranties of the Founding Company, the
stockholders of the Founding Company and Compass; (ii) the performance of all
covenants included in the Acquisition Agreements; (iii) the absence of a
material adverse change in the results of operations, financial condition or
business of the Founding Company; and (iv) the simultaneous closing of all of
the Acquisitions. There are no other material conditions to the closing of the
Acquisitions.
Pursuant to each Acquisition Agreement, the principal stockholders of the
Founding Companies have agreed not to compete with the Company for five years
following the closing of the Acquisitions wherever the Company conducts
business.
In connection with the Acquisitions, and as consideration for their interests
in the Founding Companies, certain officers, directors and holders of more than
5% of the outstanding shares of Common Stock will receive cash and shares of
Common Stock as follows:
<TABLE>
<CAPTION>
SHARES OF
COMMON
NAME CASH STOCK
---- ---------- ---------
<S> <C> <C>
Kenneth W. Murphy(1)................................ $6,806,884 1,587,000
Leeds Hackett....................................... 798,227 393,329
Gene Collins........................................ 1,899,684 525,099
Mary Maloney........................................ 1,899,684 525,099
Les J. Kirschbaum................................... 1,790,653 467,127
Edward A. DuCoin.................................... 394,846 194,562
David T. DuCoin..................................... 394,846 194,562
</TABLE>
- --------
(1) Includes cash and shares of Common Stock to be received by a trust
established for the benefit of Mr. Murphy's children.
Upon the consummation of the Acquisitions, the Founding Companies will enter
into employment agreements with certain officers, directors and holders of more
than 5% of the outstanding Common Stock. See "Management--Executive
Compensation; Employment Agreements; Covenant Not to Compete."
The Company intends to repay certain indebtedness of the Founding Companies
from the net proceeds of the Offering, including approximately $5.1 million of
indebtedness that is personally guaranteed by certain stockholders of the
Founding Companies. As of September 30, 1997, the approximate aggregate amount
of such guarantees for each of such individuals was as follows: Kenneth W.
Murphy--$2.0 million of Mail Box indebtedness; Gene Collins and Mary Maloney--
$1.6 million of Bomar indebtedness; Les J. Kirschbaum--$747,000 of Mid-
Continent indebtedness; and Edward A. DuCoin and David T. DuCoin--$766,000 of
Impact indebtedness.
The Company will pay a finders' fee of approximately $440,000 from the net
proceeds of the Offering to an unaffiliated business broker in connection with
the Bomar acquisition.
OTHER TRANSACTIONS
As of September 30, 1997, BGL had incurred $1.8 million in connection with
Compass' formation, the Offering and the Acquisitions. This amount includes (i)
payment of certain expenses and (ii) payment of consulting fees to Messrs.
Cunningham, Haq and Alston under their consulting agreements. See "Management."
The Company anticipates that additional amounts will be advanced by BGL on
Compass' behalf prior to the
53
<PAGE>
consummation of the Offering. All amounts advanced by BGL to Compass and paid
by BGL under the consulting agreements, together with interest thereon at 8%
per annum, will be repaid by Compass from the net proceeds of the Offering.
Mail Box owns a 50% interest in MB Strategic, Ltd. ("MBS"), a database
management company which commenced operations in February 1997. Mail Box
provided MBS with $20,000 in start-up capital and continues to fund monthly
operating expenses of $15,000 for a total commitment of $185,000, which is
intended to cover compensation paid to the president of MBS. Mail Box provides
MBS space within its facilities and the use of data management systems, and
pays the salaries and benefits of MBS' clerical employees. Mail Box is
entitled to receive 20% of gross monthly revenues of MBS, in addition to 50%
of its operating profits and losses.
Since 1982, Mail Box has leased its corporate headquarters and certain of
its mailing facilities from TDC #12, Ltd. ("TDC") pursuant to a lease which
expires in October 2002. Mr. Murphy is a 50% limited partner of TDC. The
annual rent under this lease was approximately $290,000 in 1996 and will total
approximately $321,000 in 1997.
From April 1996 through August 1996, Mail Box leased certain inserting
machines from a partnership, the partners of which include certain
stockholders of Mail Box. The cost of the equipment was $223,000 and in August
1997, Mail Box exercised its option to purchase the equipment for $130,000.
In connection with the Patent Infringement Lawsuits, Compass has entered
into an agreement with NCMC and its former stockholders whereby any monetary
settlement or judgement in NCMC's favor will be allocated: first, to the
Company in an amount necessary to pay income or other taxes arising therefrom;
second, to the Company in an amount necessary to reimburse it for all fees and
costs incurred in pursuing the litigation; third, to certain individuals in
amounts to be determined by Leeds Hackett with the approval of the Company
(such individuals are expected to include Mr. Hackett and other former
stockholders of NCMC) to the extent that the amounts remaining are paid with
respect to infringement occurring prior to the closing of the Acquisitions;
and fourth, all remaining amounts to the Company. Mr. Hackett, a director of
the Company and a former stockholder of NCMC, is a party to this agreement.
See "Business--Litigation."
Impact leases office space on a month to month basis from a partnership
owned by Edward and David DuCoin. Total rent expense was $139,000 and $89,000
for 1996 and the nine months ended September 30, 1997, respectively. Effective
July 1, 1997, the annual rent was reduced to $84,000.
At December 31, 1996 and September 30, 1997, the outstanding balance of
advances made by Impact to Edward and David DuCoin and to Woodbury Executive
Center and Eastern Shore Travel, which are partnerships owned by the DuCoins,
was $188,000. These advances will be repaid in full simultaneously with the
closings of the Acquisitions.
At December 31, 1995 and 1996 and September 30, 1997, the outstanding
balance of loans made by Mid-Continent to Les J. Kirschbaum totaled $710,000,
$751,000 and $808,000, respectively. These loans accrue interest at the short-
term annual Applicable Federal Rate prescribed by the Internal Revenue
Service, with the balance of principal and interest due upon demand.
Immediately prior to the closing of the Acquisitions, Mid-Continent will
redeem certain of Mr. Kirschbaum's shares in retirement of his loans.
Mid-Continent Agencies of New York, Inc. ("MCNY"), a subsidiary of Mid-
Continent, leases office space from William J. Vallecourse, a stockholder of
MCNY, pursuant to a lease that expires in May 2004. Annual rent under this
lease is approximately $90,000.
COMPANY POLICY
Certain related-party transactions described above under "Other
Transactions" were not negotiated on an arm's-length basis. It is the
Company's policy that any future transactions with officers, directors and
affiliates will be approved by a majority of the Board, including a majority
of the disinterested members of the Board, and will be made on terms no less
favorable to the Company than could be obtained from unaffiliated third
parties.
54
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, after giving effect to the Acquisitions,
certain information with respect to the beneficial ownership of the Company's
Common Stock by: (i) each person known by the Company to own beneficially more
than 5% of the outstanding shares of Common Stock; (ii) each director and
person who is or will become a director upon consummation of the Offering;
(iii) each executive officer; and (iv) all executive officers and directors as
a group.
<TABLE>
<CAPTION>
SHARES OF PERCENTAGE OWNED
COMMON ------------------------------
NAME AND ADDRESS OF BENEFICIAL
OWNER(1) STOCK BEFORE OFFERING AFTER OFFERING
------------------------------ --------- --------------- --------------
<S> <C> <C> <C>
Kenneth W. Murphy(2).................. 1,587,000 22.3% 14.1%
Leeds Hackett......................... 393,329 5.5% 3.5%
Gene Collins.......................... 525,099 7.4% 4.7%
Mary Maloney.......................... 525,099 7.4% 4.7%
John Maloney(3)....................... 525,099 7.4% 4.7%
Les J. Kirschbaum..................... 467,127 6.6% 4.2%
Edward A. DuCoin...................... 194,562 2.7% 1.7%
David T. DuCoin....................... 194,562 2.7% 1.7%
Michael J. Cunningham................. 252,415 3.5% 2.3%
Mahmud U. Haq......................... 196,323 2.8% 1.8%
Richard A. Alston..................... 112,185 1.6% 1.0%
Howard L. Clark, Jr.(4)............... 10,000 * *
Scott H. Lang(4)(5)(6)................ 1,131,846 15.9% 10.1%
Tomasso Zanzotto(4)................... 10,000 * *
BGL Capital Partners, L.L.C.(5)(6).... 1,121,846 15.8% 10.0%
All directors and officers as a group
(thirteen persons)(2)(3)(4)(5)....... 5,599,547 78.3% 49.8%
</TABLE>
- --------
* Less than 1.0%.
(1) Unless otherwise indicated, the address of the beneficial owners is c/o
Compass, 5 Independence Way, Suite 300, Princeton, New Jersey 08540.
(2) Certain of these shares are owned by the Kenneth W. Murphy Childrens Trust.
(3) Includes 525,099 shares of Common Stock owned by Mr. Maloney's spouse, of
which he may be deemed the beneficial owner.
(4) Includes 10,000 shares of Common Stock issuable upon the exercise of
options which will be granted and vest upon the closing of the Offering.
(5) Includes 1,121,846 shares held by BGL. Mr. Lang is a managing member of BGL
Management Company, L.L.C., which is the managing member of BGL. BGL
intends to distribute its shares of Common Stock to its members following
the consummation of the Offering.
(6) The address of each of Mr. Lang and BGL is 225 W. Washington Street, 16th
Floor, Chicago, Illinois 60606.
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, and 10,000,000 shares of preferred stock, $.01 par value per
share ("Preferred Stock").
COMMON STOCK
Of the 50,000,000 shares of Common Stock authorized, 11,218,460 shares will
be outstanding upon consummation of the Offering. Subject to the rights of the
holders of Preferred Stock, the holders of outstanding shares of Common Stock
are entitled to share ratably in dividends declared out of assets legally
available therefor at such time and in such amounts as the Board of Directors
may from time to time lawfully determine. Each holder of Common Stock is
entitled to one vote for each share held. Subject to the rights of holders of
any outstanding Preferred Stock, upon liquidation, dissolution or winding up
of the Company, any assets legally available for distribution to stockholders
as such are to be distributed ratably among the holders of the Common Stock
then outstanding. All shares of Common Stock currently outstanding are, and
all shares of Common Stock offered hereby when duly issued and paid for will
be, fully paid and nonassessable. Shares of Common Stock are not subject to
any redemption provisions and are not convertible into any other securities of
the Company.
The Board of Directors is classified into three classes as nearly equal in
number as possible, with the term of each class expiring on a staggered basis.
See "Management--Board of Directors." The classification of the Board of
Directors may make it more difficult to change the composition of the Board of
Directors and thereby may discourage or make more difficult an attempt by a
person or group to obtain control of the Company. Cumulative voting for the
election of directors is not permitted, enabling holders of a majority of the
outstanding Common Stock to elect all members of the class of Directors whose
terms are then expiring.
PREFERRED STOCK
The Amended and Restated Certificate of Incorporation of the Company
authorizes the Board of Directors to issue preferred stock in classes or
series and to establish the designations, preferences, qualifications,
limitations or restrictions of any class or series with respect to, among
other things, the rate and nature of dividends, the price, terms and
conditions on which shares may be redeemed, the terms and conditions for
conversion or exchange into any other class or series of the stock and voting
rights. The Company will have authority, without approval of the holders of
Common Stock, to issue preferred stock that has voting, dividend or
liquidation rights superior to the Common Stock and that may adversely affect
the rights of holders of Common Stock. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things, adversely affect the voting
power of the holders of Common Stock and could have the effect of delaying,
deferring or preventing a change in control of the Company. The Company
currently has no plans to issue any shares of Preferred Stock.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest,
merger or otherwise, and thereby to protect the continuity of the Company's
management. The issuance of shares of the Preferred Stock pursuant to the
Board of Directors' authority described above may adversely affect the rights
of the holders of Common Stock. For example, Preferred Stock issued by the
Company may rank prior to the Common Stock as to dividend rights, liquidation
preference or both, may have full or limited voting rights and may be
convertible into shares of Common Stock. Accordingly, the issuance of shares
of Preferred Stock may discourage bids for the Common Stock or may otherwise
adversely affect the market price of the Common Stock.
STOCKHOLDERS' AGREEMENT
In connection with the Acquisitions, the Initial Stockholders entered into
an agreement (the "Stockholders' Agreement") with respect to nominating and
electing Directors to the Board of Directors of the Company. The
56
<PAGE>
Stockholders' Agreement sets forth the manner and terms by which the
stockholders of the Founding Companies and founders of Compass may nominate
Directors in each of the Classes. Each of the parties to the Stockholders'
Agreement has agreed to vote its Common Stock (i) for the reelection of the
incumbent directors of the Company or their successors as described below and
(ii) with respect to any matter put to a stockholder vote, in accordance with
the recommendation of the incumbent Board of Directors. In the event that an
incumbent director who is a former shareholder of a Founding Company is unable
to or does not stand for reelection, the former shareholders of such Founding
Company may designate his successor for nomination. Should Mr. Lang be unable
to or not stand for reelection, BGL may designate his successor. Nominees for
other vacancies will be selected by a majority of the then-incumbent Board of
Directors. The Stockholders' Agreement terminates immediately following the
Company's annual meeting of stockholders relating to fiscal year 2002 (but
occurring in fiscal year 2003). The Stockholders' Agreement may be amended by
the holders of a majority of the aggregate number of shares of outstanding
Common Stock then held by the Initial Stockholders.
CERTAIN PROVISIONS AFFECTING STOCKHOLDERS
Delaware, like many other states, permits a corporation to adopt a number of
measures through amendment of the corporate charter or bylaws or otherwise,
which may have the effect of delaying or deterring any unsolicited takeover
attempts. In addition, Section 203 of the Delaware General Corporation Law
restricts certain "business combinations" with "interested stockholders"
(generally a holder of 15% or more of the Company's voting stock) for three
years following the date that person becomes an interested stockholder. By
delaying or deterring unsolicited takeover attempts, these provisions could
adversely affect prevailing market prices for the Common Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is First
Chicago Trust Company of New York.
SHARES ELIGIBLE FOR FUTURE SALE
After the Offering, the Company will have outstanding 11,218,460 shares of
Common Stock. The 4,100,000 shares being sold in the Offering are freely
tradable without restriction unless acquired by affiliates of the Company.
None of the remaining 7,118,460 outstanding shares of Common Stock has been
registered under the Securities Act, which means that they may be resold
publicly only upon registration under the Securities Act or in compliance with
an exemption from the registration requirements of the Securities Act,
including the exemption provided by Rule 144 thereunder.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of the acquisition of restricted shares of Common
Stock from either the Company or any affiliate of the Company, the acquiror or
subsequent holder thereof may sell, within any three-month period commencing
90 days after the date of the Prospectus relating to the Offering, a number of
shares that does not exceed the greater of one percent of the then outstanding
shares of the Common Stock, or the average weekly trading volume of the Common
Stock on the Nasdaq National Market during the four calendar weeks preceding
the date on which notice of the proposed sale is sent to the Commission. Sales
under Rule 144 are also subject to certain manner of sale provisions, notice
requirements and the availability of current public information about the
Company. If two years have elapsed since the later of the date of the
acquisition of restricted shares of Common Stock from the Company or any
affiliate of the Company, a person who is not deemed to have been an affiliate
of the Company at any time for 90 days preceding a sale would be entitled to
sell such shares under Rule 144 without regard to the volume limitations,
manner of sale provisions or notice requirements.
Upon completion of the Offering, the holders of Common Stock who did not
purchase shares in the Offering will own 7,118,460 shares of Common Stock,
including the stockholders of the Founding Companies who will receive, in the
aggregate, 5,435,691 shares in connection with the Acquisitions and founders
and executive
57
<PAGE>
officers of Compass who own 1,682,769 shares. These shares have not been
registered under the Securities Act and, therefore, may not be sold unless
registered under the Securities Act or sold pursuant to an exemption from
registration, such as the exemption provided by Rule 144. Furthermore, the
stockholders of the Founding Companies have agreed with the Company not to
sell, transfer or otherwise dispose of any of these shares for a one-year
period following the Offering. The stockholders of the Founding Companies have
certain piggyback registration rights beginning one year after the Offering
and one demand registration right for the six-month period beginning twenty
months after the Offering with respect to these shares.
The Company and the holders of all shares outstanding prior to the Offering
(including the holders of shares issued in connection with the Acquisitions)
have agreed not to offer, sell, contract to sell or otherwise dispose of any
shares of Common Stock, or any securities convertible into or exercisable or
exchangeable for Common Stock, for a period of 180 days after the date of this
Prospectus without the prior written consent of NationsBanc Montgomery
Securities, Inc. except for: (i) in the case of the Company, Common Stock
issued pursuant to any employee or director plan described herein or in
connection with acquisitions; (ii) in the case of all such holders, the
exercise of stock options pursuant to benefit plans described herein and
shares of Common Stock disposed of as bona fide gifts; and (iii) in the case
of BGL, distributions of Common Stock to its members, subject, in each case,
to any remaining portion of the 180-day period applying to any shares so
issued or transferred. In evaluating any request for a waiver of the 180-day
lock-up period, NationsBanc Montgomery Securities, Inc. will consider, in
accordance with their customary practice, all relevant facts and circumstances
at the time of the request, including, without limitation, the recent trading
market for the Common Stock, the size of the request and, with respect to a
request by the Company to issue additional equity securities, the purpose of
such an issuance.
The 3,000,000 shares of Common Stock to be registered pursuant to the
Company's shelf registration statement will be, upon issuance thereof, freely
tradable unless acquired by parties to the acquisition or affiliates of such
parties, other than the issuer, in which case they may be sold pursuant to
Rule 145 under the Securities Act. Rule 145 permits such persons to resell
immediately securities acquired in transactions covered under the Rule,
provided such securities are resold in accordance with the public information,
volume limitations and manner of sale requirements of Rule 144. If a period of
one year has elapsed since the date such securities were acquired in such
transaction and if the issuer meets the public information requirements of
Rule 144, Rule 145 permits a person who is not an affiliate of the issuer to
freely resell such securities. The Company intends to contractually restrict
the sale of shares issued in connection with future acquisitions. The
registration rights described above do not apply to such shelf registration
statement.
Sales, or the availability for sale of, substantial amounts of the Common
Stock in the public market could adversely affect prevailing market prices and
the ability of the Company to raise equity capital in the future.
58
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), represented by
NationsBanc Montgomery Securities, Inc. and Lehman Brothers Inc. (the
"Representatives"), have severally agreed, subject to the terms and conditions
in the underwriting agreement (the "Underwriting Agreement"), by and between
the Company and the Underwriters, to purchase from the Company the number of
shares of Common Stock indicated below opposite its name, at the public
offering price less the underwriting discount set forth on the cover page of
this Prospectus. The Underwriting Agreement provides that the obligations of
the Underwriters are subject to certain conditions precedent and that the
Underwriters are committed to purchase all of the shares of Common Stock, if
they purchase any.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
NationsBanc Montgomery Securities, Inc..........................
Lehman Brothers Inc.............................................
---------
Total....................................................... 4,100,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public on the terms set
forth on the cover page of this Prospectus. The Underwriters may allow
selected dealers a concession of not more than $ per share; and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $ per share to certain other dealers. After the public offering,
the offering price and other selling terms may be changed by the
Representatives. The Common Stock is offered subject to receipt and acceptance
by the Underwriters and to certain other conditions, including the right to
reject orders in whole or in part.
The Company has granted to the Underwriters an over-allotment option,
exercisable for 30 days from the date of this Prospectus, to purchase up to a
maximum of 615,000 additional shares of Common Stock to cover over-allotments,
if any, at the same price per share as the initial shares to be purchased by
the Underwriters. To the extent the Underwriters exercise such over-allotment
option, each of the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may exercise this
over-allotment option only to cover over-allotments made in connection with
the Offering.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under
the Securities Act, or will contribute to payments the Underwriters may be
required to make in respect thereof.
The Company's officers and directors and all of the stockholders of the
Company prior to the Offering (including the holders of shares issued in
connection with the Acquisitions) have agreed that for a period of 180 days
after the date of this Prospectus they will not, without the prior written
consent of NationsBanc Montgomery Securities, Inc. directly or indirectly
sell, offer, contract or grant any option to sell, pledge, transfer, establish
an open put equivalent position or otherwise dispose of any shares of Common
Stock, options or warrants to acquire shares of Common Stock or securities
exchangeable or exercisable for or convertible into shares of Common Stock,
except for the exercise of stock options, shares of Common Stock disposed of
as bona fide gifts and in the case of BGL, distributions of Common Stock to
its members, subject in each case to any remaining portion of the 180-day
period applying to shares issued or transferred. The Company has also agreed
not to issue, offer, sell, grant options to purchase or otherwise dispose of
any of the Company's equity securities for a period of 180 days after the
effective date of this Offering without the prior written consent of
NationsBanc Montgomery Securities, Inc. except for securities issued by the
Company in connection with acquisitions and for grants and exercises of stock
options, subject in each case to any remaining portion of the 180-day period
applying to shares issued or transferred. In evaluating any request for a
waiver of the 180-day lock-up period, NationsBanc Montgomery Securities, Inc.
will consider, in accordance with their customary practice, all relevant facts
and circumstances at the time of the request, including, without limitation,
the recent trading market for the Common Stock, the size of the request and,
with respect to a request by the Company to issue additional equity
securities, the purpose of such an issuance.
59
<PAGE>
In connection with the Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M under the Securities and Exchange Act
of 1934, as amended, pursuant to which such persons may bid for or purchase
Common Stock for the purpose of stabilizing its market price. The Underwriters
also may create a short position for the account of the Underwriters by
selling more Common Stock in connection with the Offering than they are
committed to purchase from the Company and, in such case, may purchase Common
Stock in the open market following completion of the Offering to cover all or
a portion of such short position. The Underwriters may also cover all or a
portion of such short position, up to 615,000 shares of Common Stock, by
exercising the Underwriters' over-allotment option referred to above. In
addition, NationsBanc Montgomery Securities, Inc. on behalf of the
Underwriters, may impose "penalty bids" under contractual arrangements with
the Underwriters whereby it may reclaim from an Underwriter (or dealer
participating in the Offering) for the account of the other Underwriters, the
selling concession with respect to Common Stock that is distributed in the
Offering but subsequently purchased for the account of the Underwriters in the
open market. Any of the transactions described in this paragraph may result in
the maintenance of the price of the Common Stock at a level above that which
might otherwise prevail in the open market. None of the transactions described
in this paragraph is required, and, if they are undertaken, they may be
discontinued at any time.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales of Common Stock offered by this Prospectus to accounts
over which they exercise discretionary authority in excess of 5% of the number
of shares of Common Stock offered hereby.
Prior to the Offering, there has been no public trading market for the
Common Stock. Consequently, the initial public offering price was determined
by negotiations between the Company and the Representatives. Among the factors
considered in such negotiations were the history of and prospects for the
Company and the industries in which it operates, an assessment of the
Company's management, its past and present earnings and the trend of such
earnings, the prospects for future earnings of the Company, the present state
of the Company's development, the general condition of securities markets at
the time of the Offering and the market price of publicly traded stock of
comparable companies in recent periods.
The Company has agreed to issue warrants (the "Warrants") to purchase an
aggregate of 100,000 shares of Common Stock to Catamount Capital, L.L.C. as a
fee for consulting services in connection with the acquisition of NCMC.
Affiliates of Catamount Capital, L.L.C. may participate as underwriters in the
Offering. The Warrants will be exercisable for a period of five years
commencing on the first anniversary of the Offering, at a price equal to 120%
of the initial public offering price, subject to adjustment in certain events.
Each Warrant contains certain piggyback registration rights relating to the
shares issuable thereunder.
CERTAIN LEGAL MATTERS
The legality of the shares of Common Stock offered hereby will be passed
upon for the Company by Katten Muchin & Zavis, Chicago, Illinois. Certain
partners of Katten Muchin & Zavis are investors in BGL, which will own 10.0%
of the shares of Common Stock outstanding upon completion of the Offering.
Certain legal matters in connection with this offering will be passed upon for
the Underwriters by Fulbright & Jaworski L.L.P., New York, New York.
EXPERTS
The balance sheet of Compass as of September 30, 1997 included in this
Prospectus has been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts
in auditing and accounting.
The consolidated financial statements of The Mail Box, Inc. as of December
31, 1995 and 1996 and September 30, 1997 and for each of the three years in
the period ended December 31, 1996 and the nine months ended September 30,
1997 included in this Prospectus have been so included in reliance on the
report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
60
<PAGE>
The audited consolidated financial statements of National Credit Management
Corporation and Subsidiary as of September 30, 1997 and December 31, 1996 and
1995 and for the nine months ended September 30, 1997 and for each of the
years in the three-year period ended December 31, 1996, included in this
Prospectus, have been audited by Arthur Andersen LLP, independent public
accountants, as stated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
report.
The consolidated financial statements of B.R.M.C. of Delaware, Inc. at
September 30, 1997 and December 31, 1996 and 1995 and for the nine months
ended September 30, 1997 and for each of the three years in the period ended
December 31, 1996 appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report, given upon the authority of such firm as experts in accounting
and auditing.
The consolidated financial statements of Mid-Continent Agencies, Inc. as of
December 31, 1995 and 1996 and September 30, 1997 and for the years ended
December 31, 1995 and 1996 and the nine months ended September 30, 1997,
included in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The combined financial statements of Impact Telemarketing Group, Inc. as of
and for the year ended December 31, 1996 and as of and for the nine months
ended September 30, 1997, included in this Prospectus have been so included in
reliance on the report (which contains an explanatory paragraph relating to
Impact Telemarketing Group, Inc.'s ability to continue as a going concern as
described in Note 1 to the financial statements) of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (which term shall encompass any and all amendments thereto) 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. Statements
contained in this Prospectus as to the contents of any contract or any other
document are not necessarily complete and in each instance reference is made
to the copy of such contract or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. For further information with respect to the Company, reference
is hereby made to the Registration Statement and such exhibits and schedules
filed as a part thereof, which may be inspected without charge, at the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. The Commission maintains a web site that contains reports,
proxy and information statements regarding registrants that file
electronically with the SEC. The address of this web site is
http://www.sec.gov. Copies of all or any portion of the Registration Statement
may be obtained from the Public Reference Section of the Commission, upon
payment of the prescribed fees.
The Company intends to furnish its stockholders with an annual report
containing audited financial statements and an opinion thereon expressed by
independent auditors for each fiscal year and with quarterly reports
containing unaudited summary information for the first three quarters of each
fiscal year.
61
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COMPASS INTERNATIONAL SERVICES CORPORATION UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS:
Introduction to Unaudited Pro Forma Combined Financial Statements...... F-2
Unaudited Pro Forma Combined Balance Sheet............................. F-3
Unaudited Pro Forma Combined Statements of Operations.................. F-4
Notes to Unaudited Pro Forma Combined Financial Statements............. F-7
COMPASS INTERNATIONAL SERVICES CORPORATION:
Report of Independent Accountants...................................... F-11
Balance Sheet.......................................................... F-12
Statement of Operations................................................ F-13
Statement of Stockholders' Equity...................................... F-14
Statement of Cash Flows................................................ F-15
Notes to Financial Statements.......................................... F-16
THE MAIL BOX, INC.:
Report of Independent Accountants...................................... F-18
Consolidated Balance Sheet............................................. F-19
Consolidated Statement of Operations................................... F-20
Consolidated Statement of Stockholders' Equity......................... F-21
Consolidated Statement of Cash Flows................................... F-22
Notes to Consolidated Financial Statements............................. F-23
NATIONAL CREDIT MANAGEMENT CORPORATION AND SUBSIDIARY:
Report of Independent Public Accountants............................... F-30
Consolidated Balance Sheets............................................ F-31
Consolidated Statements of Operations.................................. F-32
Consolidated Statements of Stockholders' Equity........................ F-33
Consolidated Statements of Cash Flows.................................. F-34
Notes to Financial Statements.......................................... F-35
B.R.M.C. OF DELAWARE INC.:
Report of Independent Auditors......................................... F-42
Consolidated Balance Sheet............................................. F-43
Consolidated Statement of Operations................................... F-44
Consolidated Statement of Stockholders' Equity......................... F-45
Consolidated Statement of Cash Flows................................... F-46
Notes to Consolidated Financial Statements............................. F-47
MID-CONTINENT AGENCIES, INC.:
Report of Independent Accountants...................................... F-53
Consolidated Balance Sheet............................................. F-54
Consolidated Statement of Operations................................... F-55
Consolidated Statement of Stockholders' Equity......................... F-56
Consolidated Statement of Cash Flows................................... F-57
Notes to Consolidated Financial Statements............................. F-58
IMPACT TELEMARKETING GROUP, INC.:
Report of Independent Accountants...................................... F-65
Combined Balance Sheet................................................. F-66
Combined Statement of Operations....................................... F-67
Combined Statement of Stockholders' Equity............................. F-68
Combined Statement of Cash Flows....................................... F-69
Notes to Combined Financial Statements................................. F-70
</TABLE>
F-1
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
INTRODUCTION TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements give effect
to the acquisitions by Compass International Services Corporation ("Compass")
of the outstanding capital stock of The Mail Box, Inc. ("Mail Box"), National
Credit Management Corp. ("NCMC"), B.R.M.C. of Delaware, Inc. ("Bomar"), Mid-
Continent Agencies, Inc. ("Mid-Continent") and Impact Telemarketing Group,
Inc. ("Impact") (together, the "Founding Companies"). These acquisitions (the
"Acquisitions") will occur simultaneously with the closing of Compass's
initial public offering (the "Offering") and will be accounted for using the
purchase method of accounting. In accordance with the provisions of Securities
and Exchange Commission Staff Accounting Bulletin No. 97, Mail Box is deemed
to be the accounting acquiror as the stockholders of Mail Box will receive the
largest portion of the voting rights in the combined corporation.
The unaudited pro forma combined balance sheet gives effect to the
Acquisitions and the Offering as if they had occurred on September 30, 1997.
The unaudited pro forma combined statement of operations gives effect to the
Acquisitions as if they had occurred on January 1, 1996, reflects reductions
in salaries, bonuses and certain benefits to the owners of the Founding
Companies to which they have agreed prospectively, reflects reductions in
interest expense associated with reductions in debt and gives effect to the
three acquisitions by Bomar as if they had occurred on January 1, 1996.
With respect to other potential cost savings, Compass has not and cannot
quantify these savings until completion of the Acquisitions of the Founding
Companies. It is anticipated that these savings will be offset by costs
related to Compass' new corporate management and by the costs associated with
being a public company. However, these costs, like the savings they offset,
cannot be accurately quantified at this time. Neither the expected savings nor
the anticipated costs have been included in the pro forma combined financial
information of Compass.
The pro forma adjustments are based on estimates, available information and
certain assumptions and may be revised as additional information becomes
available. The pro forma combined financial data do not purport to represent
what Compass' financial position or results of operations would actually have
been if such transactions in fact had occurred on those dates and are not
necessarily representative of Compass' financial position or results of
operations for any future period. Since the Founding Companies were not under
common control or management, historical combined results may not be
comparable to, or indicative of, future performance. The unaudited pro forma
combined financial statements should be read in conjunction with the other
financial statements and notes thereto included elsewhere in this Prospectus.
See "Risk Factors" included elsewhere herein.
F-2
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACQUISITION OFFERING
ADJUSTMENTS PRO ADJUSTMENTS
MID- (SEE NOTE FORMA (SEE NOTE
ASSETS COMPASS MAIL BOX NCMC BOMAR CONTINENT IMPACT 3) COMBINED 3) AS ADJUSTED
- ------ ------- -------- ------ ------ --------- ------ ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ $ -- $ 675 $1,361 $ 243 $ 114 $ 102 $ 770 $ 3,265 $ 9,034 $12,299
Cash held for clients... -- -- -- 797 -- -- -- 797 -- 797
Commissions/accounts
receivable, net........ -- 3,888 2,303 1,462 518 1,912 -- 10,083 -- 10,083
Due from related parties
and stockholders....... -- -- -- -- 1,495 188 (1,650) 33 -- 33
Inventories............. -- 781 -- -- -- -- -- 781 -- 781
Postage on hand......... -- 2,442 -- -- -- -- -- 2,442 -- 2,442
Prepaid expenses and
other.................. -- 102 842 35 142 27 -- 1,148 -- 1,148
Deferred offering costs. 1,941 -- -- -- -- -- -- 1,941 (1,941) --
------ ------- ------ ------ ------ ------ ------- ------- -------- -------
Total current assets. 1,941 7,888 4,506 2,537 2,269 2,229 (880) 20,490 7,093 27,583
Property and equipment,
net.................... -- 4,258 2,478 894 159 844 -- 8,633 -- 8,633
Goodwill, net........... -- -- -- 4,088 -- -- 51,457 55,545 -- 55,545
Other assets............ -- 275 275 707 214 22 1,000 2,493 -- 2,493
------ ------- ------ ------ ------ ------ ------- ------- -------- -------
Total assets......... $1,941 $12,421 $7,259 $8,226 $2,642 $3,095 $51,577 $87,161 $ 7,093 $94,254
====== ======= ====== ====== ====== ====== ======= ======= ======== =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Short-term debt......... $1,791 $ 1,358 $ 374 $4,695 $ 808 $ 967 $ -- $ 9,993 $ (7,991) $ 2,002
Accounts payable and
accrued expenses....... -- 2,424 2,101 940 479 1,499 440 7,883 (440) 7,443
Collections due to
clients................ -- -- 639 797 -- -- -- 1,436 -- 1,436
Checks issued in excess
of cash balance........ -- -- -- 308 -- -- -- 308 -- 308
Postage allowances and
deposits............... -- 3,719 -- -- -- -- -- 3,719 -- 3,719
Income taxes payable.... -- 350 -- 234 -- -- -- 584 -- 584
Payable to Founding
Company stockholders... -- -- -- -- 51 -- 19,158 19,209 (19,209) --
------ ------- ------ ------ ------ ------ ------- ------- -------- -------
Total current
liabilities......... 1,791 7,851 3,114 6,974 1,338 2,466 19,598 43,132 (27,640) 15,492
Long-term debt.......... -- 1,133 256 419 -- -- 4,250 6,058 (5,717) 341
Capital lease
obligations............ -- 722 196 383 -- 473 -- 1,774 -- 1,774
Deferred income taxes... -- 160 192 47 -- -- -- 399 -- 399
Other................... -- -- -- 47 183 -- -- 230 -- 230
------ ------- ------ ------ ------ ------ ------- ------- -------- -------
Total liabilities.... 1,791 9,866 3,758 7,870 1,521 2,939 23,848 51,593 (33,357) 18,236
Minority interest in
subsidiary............. -- -- -- 9 -- -- (9) -- -- --
Stockholders' equity:
Common stock........... 17 14 2 1 10 91 (64) 71 41 112
Additional paid-in
capital............... 133 1,126 2,097 60 73 -- 29,506 32,995 40,409 73,404
Retained earnings...... -- 2,502 1,402 286 1,051 65 (2,804) 2,502 -- 2,502
Unrealized loss on
securities............ -- -- -- -- (13) -- 13 -- -- --
Less: Treasury stock... -- (1,087) -- -- -- -- 1,087 -- -- --
------ ------- ------ ------ ------ ------ ------- ------- -------- -------
Total stockholders'
equity.............. 150 2,555 3,501 347 1,121 156 27,738 35,568 40,450 76,018
------ ------- ------ ------ ------ ------ ------- ------- -------- -------
Total liabilities and
stockholders'
equity.............. $1,941 $12,421 $7,259 $8,226 $2,642 $3,095 $51,577 $87,161 $ 7,093 $94,254
====== ======= ====== ====== ====== ====== ======= ======= ======== =======
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
F-3
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO
OTHER FORMA
ACQUISI- ADJUST-
TIONS MENTS
MAIL MID- (SEE (SEE PRO FORMA
BOX NCMC BOMAR CONTINENT IMPACT NOTE 4) NOTE 5) COMBINED
------- ------- ------ --------- ------ -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $26,156 $13,579 $9,597 $9,038 $8,869 $4,544 -- $71,783
Operating expenses...... 17,953 7,945 5,814 2,875 6,961 2,926 -- 44,474
------- ------- ------ ------ ------ ------ ------- ---------
Gross profit........... 8,203 5,634 3,783 6,163 1,908 1,618 -- 27,309
Selling, general and
administrative
expenses............... 5,891 4,798 3,452 6,054 2,108 1,328 $(3,401)(A) 20,169
-- -- -- -- -- -- (61)(C) --
Goodwill and intangible
amortization........... -- -- 6 -- -- 131 1,548 (D) 1,685
------- ------- ------ ------ ------ ------ ------- ---------
Income (loss) from
operations............ 2,312 836 325 109 (200) 159 1,914 5,455
Other (income) expense:
Interest expense....... 337 79 122 68 30 36 (271)(E) 401
Interest income........ -- (46) -- (117) -- (2) 61 (F) (104)
Other, net............. -- 15 -- 3 (105) -- -- (87)
------- ------- ------ ------ ------ ------ ------- ---------
Income (loss) before
income taxes.......... 1,975 788 203 155 (125) 125 2,124 5,245
Provision for income
taxes.................. 700 335 73 107 -- -- 1,557 (G) 2,772
------- ------- ------ ------ ------ ------ ------- ---------
Net income (loss)....... $ 1,275 $ 453 $ 130 $ 48 $ (125) $ 125 $ 567 $ 2,473
======= ======= ====== ====== ====== ====== ======= =========
Net income per share.... $ .25
=========
Shares used in computing
pro forma net income
per share (See Note 6). 9,809,146
=========
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
F-4
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
OTHER
ACQUISI-
TIONS PRO FORMA
MID- (SEE ADJUST-MENTS PRO FORMA
MAIL BOX NCMC BOMAR CONTINENT IMPACT NOTE 4) (SEE NOTE 5) COMBINED
-------- ------- ------ --------- ------ -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $18,472 $10,055 $7,040 $6,810 $5,950 $3,716 -- $52,043
Operating expenses...... 12,816 5,806 4,318 2,210 4,356 2,362 -- 31,868
------- ------- ------ ------ ------ ------ ------- ---------
Gross profit........... 5,656 4,249 2,722 4,600 1,594 1,354 20,175
Selling, general and
administrative......... 4,185 3,680 2,458 4,509 1,597 1,019 $(2,446)(A) 14,954
-- -- -- -- -- -- (48)(C) --
Goodwill and intangible
amortization........... -- -- -- -- -- 103 1,160 (D) 1,263
------- ------- ------ ------ ------ ------ ------- ---------
Income from operations. 1,471 569 264 91 (3) 232 1,334 3,958
Other (income) expense:
Interest expense....... 254 61 76 53 12 15 (178)(E) 293
Interest income........ -- (36) -- (98) -- -- 47 (F) (87)
Other, net............. -- -- -- 3 -- -- -- 3
------- ------- ------ ------ ------ ------ ------- ---------
Income before income
taxes.................. 1,217 544 188 133 (15) 217 1,465 3,749
Provision for income
taxes................. 432 256 42 87 -- -- 1,188 (G) 2,005
------- ------- ------ ------ ------ ------ ------- ---------
Net income.............. $ 785 $ 288 $ 146 $ 46 $ (15) $ 217 $ 277 $ 1,744
======= ======= ====== ====== ====== ====== ======= =========
Net income per share.... $ .18
=========
Shares used in computing
pro forma net income
per share
(See Note 6)........... 9,809,146
=========
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
F-5
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
OTHER PRO FORMA
ACQUISITIONS ADJUSTMENTS
MID- (SEE (SEE NOTE PRO FORMA
COMPASS MAIL BOX NCMC BOMAR CONTINENT IMPACT NOTE 4) 5) COMBINED
------- -------- ------- ------- --------- ------ ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ -- $23,188 $11,759 $10,268 $7,066 $8,958 $2,380 -- $63,619
Operating expenses...... -- 15,286 7,314 5,914 2,294 6,708 1,389 -- 38,905
------- ------- ------- ------- ------ ------ ------ ------- ---------
Gross profit........... -- 7,902 4,445 4,354 4,772 2,250 991 -- 24,714
Selling, general and
administrative
expenses............... $ 5,761 5,642 5,065 3,655 4,677 2,089 522 $(8,897)(A) 17,143
-- -- -- -- -- -- -- (1,345)(B) --
-- -- -- -- -- -- -- (26)(C) --
Goodwill and intangible
amortization........... -- -- -- 50 -- -- 53 1,160 (D) 1,263
------- ------- ------- ------- ------ ------ ------ ------- ---------
Income (loss) from
operations............ (5,761) 2,260 (620) 649 95 161 416 9,108 6,308
Other (income) expense:
Interest expense....... -- 310 45 185 60 74 1 (345)(E) 330
Interest income........ -- -- (35) -- (52) -- -- 54 (F) (33)
Other, net............. -- -- 199 -- -- -- -- -- 199
------- ------- ------- ------- ------ ------ ------ ------- ---------
Income (loss) before
income taxes........... (5,761) 1,950 (829) 464 87 87 415 9,399 5,812
Provision (benefit) for
income taxes.......... -- 697 (267) 222 68 -- -- 2,110 (G) 2,830
------- ------- ------- ------- ------ ------ ------ ------- ---------
Net income (loss)....... $(5,761) $ 1,253 $ (562) $ 242 $ 19 $ 87 $ 415 $ 7,289 $ 2,982
======= ======= ======= ======= ====== ====== ====== ======= =========
Net income per share.... $ .30
=========
Shares used in computing
pro forma net income
per share (See Note 6). 9,809,146
=========
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
F-6
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTE 1--GENERAL
Compass International Services Corporation ("Compass") was organized to
create a leading provider of outsourced business services to public and
private entities. Compass has conducted no operations to date and will acquire
the Founding Companies concurrently and as a condition with the closing of
this Offering.
The historical financial statements reflect the financial position and
results of operations of Compass and the Founding Companies and were derived
from the respective financial statements. The periods included in these
financial statements for all of the individual Founding Companies and Compass
are for the year ended December 31, 1996 and for the nine months ended
September 30, 1996 and as of and for the nine months ended September 30, 1997.
The audited historical financial statements included elsewhere herein have
been included in accordance with Securities and Exchange Commission Staff
Accounting Bulletin No. 80.
NOTE 2--ACQUISITION OF FOUNDING COMPANIES
Concurrently and as a condition with the closing of this Offering, Compass
will acquire all of the outstanding capital stock of the Founding Companies.
The Acquisitions will be accounted for using the purchase method of accounting
with Mail Box treated as the accounting acquiror.
The following table sets forth the consideration to be paid in cash and in
shares of Common Stock to the common stockholders of each of the Founding
Companies, as well as finders' fees payable in cash and warrants to purchase
Common Stock as described elsewhere in this Prospectus under "Certain
Transactions" and "Underwriting." For purposes of computing the estimated
purchase price for accounting purposes, the value of shares is based upon the
assumed initial public offering price of $11.50, less a 10% discount of the
assumed offering price due to the restrictions on the transferability of the
Common Stock to be acquired by the stockholders of the Founding Companies.
<TABLE>
<CAPTION>
SHARES OF VALUE BROKER TOTAL
CASH(1) COMMON STOCK OF SHARES WARRANTS FEE CONSIDERATION
------- ------------ --------- -------- ------ -------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Mail Box....... $ 9,437 2,461,852 $25,480 $34,917
NCMC........... 2,777 965,801 9,996 $50 12,823
Bomar.......... 4,415 1,151,787 11,921 $440 16,776
Mid-Continent.. 1,790 467,127 4,835 6,625
Impact......... 790 389,124 4,027 4,817
------- --------- ------- --- ---- -------
Total.......... $19,209 5,435,691 $56,259 $50 $440 $75,958
======= ========= ======= === ==== =======
</TABLE>
- --------
(1) The number of shares of Common Stock to be paid to the stockholders of the
Founding Companies is fixed. If the initial public offering price is
higher or lower than the assumed price, the cash consideration will vary
proportionately. For example, a $1.00 per share increase or decrease from
the assumed offering price will result in a $1.7 million increase or
decrease, respectively, in the aggregate cash consideration paid to
Founding Company stockholders.
The above purchase price consideration has been allocated to the assets and
liabilities acquired based on their respective carrying values, with the
exception of a patent developed at one of the entities, as these carrying
values are deemed to represent fair market value of these assets and
liabilities. The fair market value of the patent was determined based on the
present value of the incremental revenue stream that is estimated to be
realized over the 15 year life of the patent.
The allocation of the purchase price is considered preliminary until such
time as the closing of transaction and consummation of the Acquisitions. The
Company does not anticipate that the final allocation of purchase price will
differ significantly from that presented.
<TABLE>
<CAPTION>
TOTAL INTANGIBLE NET ASSETS
CONSIDERATION IDENTIFIABLE ASSETS ACQUIRED GOODWILL
------------- ------------------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
NCMC.................. $12,823 $1,000 $ 3,501 $ 8,322
Bomar................. 16,776 347 16,429
Mid-Continent......... 6,625 (3,958) 10,583
Impact................ 4,817 156 4,661
------- ------ ------- -------
$41,041 $1,000 $ 46 $39,995
======= ====== ======= =======
</TABLE>
F-7
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The consideration to be paid for each Founding Company is subject to possible
post-closing adjustment based upon adjusted 1997 earnings. If a Founding
Company's adjusted earnings exceed current estimates of adjusted earnings by
more than five percent, Compass will pay the former stockholders of such
Founding Company additional cash consideration equal to five percent of the
total consideration previously paid for such Founding Company in the
Acquisition. The maximum possible increase in the consideration paid by Compass
for all Founding Companies is approximately $4.1 million. The potential
increase in goodwill due to this increase in consideration is approximately
$2.2 million, with associated amortization of approximately $66,000 per year.
If a Founding Company's adjusted 1997 earnings are less than current estimates
of adjusted earnings by more than five percent, the former stockholders of such
Founding Company will be required to repay to Compass in cash up to ten percent
of the total consideration previously paid to them in the Acquisition. The
maximum possible decrease in the consideration paid by Compass for all Founding
Companies is approximately $8.2 million. The potential decrease in goodwill due
to this decrease in consideration is approximately $4.4 million, with an
associated reduction in amortization of approximately $132,000 per year.
NOTE 3--UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
The following table summarizes unaudited pro forma combined balance sheet
adjustments (in thousands):
<TABLE>
<CAPTION>
ACQUISITION OFFERING TOTAL
ASSETS ADJUSTMENTS TOTAL ADJUSTMENTS OFFERING
------ --------------------- ACQUISITION ----------------- ADJUST-
(A) (B) (C) ADJUSTMENTS (D) (E) MENTS
----- ------- ----- ----------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ $ -- $ -- $ 770 $ 770 $40,600 $(31,566) $ 9,034
Due from stockholders... (829) -- (821) (1,650) -- -- --
Deferred offering costs. -- -- -- -- (1,941) -- (1,941)
----- ------- ----- ------- ------- -------- --------
Total current assets. (829) -- (51) (880) 38,659 (31,566) 7,093
Goodwill, net........... -- 51,457 -- 51,457 -- -- --
Other assets............ -- 1,000 -- 1,000 -- -- --
----- ------- ----- ------- ------- -------- --------
Total assets......... $(829) $52,457 $ (51) $51,577 $38,659 $(31,566) $ 7,093
===== ======= ===== ======= ======= ======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short term debt......... $ -- $ -- $ -- $ -- $(1,791) $ (6,200) $ (7,991)
Accounts payable and
accrued expenses....... -- 440 -- 440 -- (440) (440)
Payable to Founding
Company stockholders... -- 19,209 (51) 19,158 -- (19,209) (19,209)
----- ------- ----- ------- ------- -------- --------
Total current
liabilities......... -- 19,649 (51) 19,598 (1,791) (25,849) (27,640)
Long-term debt.......... -- 4,250 -- 4,250 -- (5,717) (5,717)
----- ------- ----- ------- ------- -------- --------
Total liabilities.... -- 23,899 (51) 23,848 (1,791) (31,566) (33,357)
Minority interest in
subsidiary............. -- (9) -- (9) -- -- --
Stockholders' equity:
Common stock........... -- (64) -- (64) 41 -- 41
Additional paid-in
capital............... -- 29,506 -- 29,506 40,409 -- 40,409
Retained earnings...... (829) (1,975) -- (2,804) -- -- --
Unrealized loss on
securities............ -- 13 -- 13 -- -- --
Treasury stock......... -- 1,087 -- 1,087 -- -- --
----- ------- ----- ------- ------- -------- --------
Total stockholders'
equity.............. (829) 28,567 -- 27,738 40,450 -- 40,450
----- ------- ----- ------- ------- -------- --------
Total liabilities and
stockholders'
equity.............. $(829) $52,457 $ (51) $51,577 $38,659 $(31,566) $ 7,093
===== ======= ===== ======= ======= ======== ========
</TABLE>
- --------
(A) Reflects the exclusion of a note receivable from a stockholder of Mid-
Continent which will be retained by the stockholder.
(B) Records the Acquisitions of the Founding Companies including: (i)
establishment of the liability for the cash portion of the consideration to
be paid to the stockholders of the Founding Companies of $19.2 million and
a broker fee of $440,000; (ii) the issuance of 5,435,691 shares of Common
Stock to the stockholders of the Founding Companies; (iii) the assumption
of $4.3 million of debt as part of the consideration for Mid-Continent;
(iv) the allocation of the purchase price to the Company's historical
assets and liabilities based
F-8
<PAGE>
on their respective carrying values and to an identifiable intangible
associated with a patent at NCMC of $1.0 million; (v) the recognition of
$39,995,000 of goodwill representing the excess of the purchase price over
the fair value of net assets acquired; and (vi) goodwill of $11,462,000
recorded attributable to the 1,121,846 shares of Common Stock issued to
BGL. The Common Stock consideration was valued at $10.35 per share, which
represents a 10% discount from the assumed offering price of $11.50 due to
the restrictions on the transferability of the Common Stock to be acquired
by the stockholders of the Founding Companies and BGL.
(C) Represents the settlement of certain stockholder receivables and payables
pursuant to the Acquisition Agreements (comprised of a $633,000
stockholder receivable at Mid-Continent, a stockholder receivable of
$188,000 at Impact and a stockholder payable of $51,000 at Mid-Continent).
(D) Records the cash proceeds from the issuance of 4,100,000 shares of Common
Stock, net of estimated Offering costs (based on an assumed initial public
offering price of $11.50 per share). Offering costs primarily consist of
the underwriting discount, accounting, legal and consulting fees and
printing expenses.
(E) Records the use of Offering proceeds to pay the cash portion of the
consideration due to the stockholders of the Founding Companies in
connection with the Acquisitions, including the $4.3 million of debt
assumed as part of the consideration for Mid-Continent, to repay certain
long-term and short-term debt of the Founding Companies (comprised of
$1,490,000 at Mail Box, $365,000 at NCMC, $4,878,000 at Bomar, $808,000 at
Mid-Continent and $126,000 at Impact) and to pay certain Acquisition-
related liabilities.
NOTE 4--OTHER ACQUISITIONS
Gives effect to two acquisitions of Bomar consummated in fiscal 1996 and the
acquisition by Bomar of Financial Claims Control, Inc. ("FCCI") in September
1997, as if these acquisitions were consummated on January 1, 1996, including
the amortization of approximately $3.2 million of goodwill over 40 years.
NOTE 5--UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS
(A) Reflects the reduction in salaries, bonuses and benefits to the owners of
the Founding Companies to which they have agreed prospectively pursuant to
agreements and, in nearly all cases, as a condition of the Acquisitions,
as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
FOR THE YEAR ENDED -------------------
DECEMBER 31, 1996 1996 1997
------------------ --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Mail Box........................... $ 875 $ 520 $ 1,299
NCMC............................... 210 161 90
Bomar.............................. 986 830 715
Mid-Continent...................... 1,161 868 968
Impact............................. -- -- --
Other Acquisitions................. 169 67 64
------ --------- ---------
$3,401 $ 2,446 $ 3,136
====== ========= =========
</TABLE>
Pursuant to the terms of employment agreements to be entered into upon
consummation of the Acquisitions, the owners of the Founding Companies will
be eligible for performance-based bonuses of up to 100% of their respective
annual base salaries. Bonuses under the employment agreements will be
awarded based upon substantial improvement in the operating performance of
both the Founding Companies and Compass. The bonuses paid historically to
the owners of the Founding Companies were not awarded based upon the same
performance criteria and compensation expense has been reduced accordingly
in the pro forma adjustments. Whether the bonuses that may be awarded under
the new employment agreements will be earned cannot be determined at this
time and therefore are not reflected in the pro forma adjustments. If
bonuses are awarded, compensation expense would increase.
Additionally, reflects the elimination of a non-recurring compensation
charge of $5.8 million associated with the issuance of Common Stock to
Compass management.
F-9
<PAGE>
(B) Reflects elimination of NCMC compensation expense recognized during the
third quarter of 1997 in connection with the issuance of shares of common
stock to certain employees in connection with the termination of a stock
option plan. The termination of the stock option plan was done in
preparation for the planned Acquisitions.
(C) Reflects a reduction in rent expense related to a lease on a building
controlled by a stockholder of Impact which has been agreed to
prospectively as a condition of the Acquisition.
(D) Reflects (i) the amortization of $51.4 million of goodwill to be recorded
as a result of these Acquisitions and the 1.1 million shares issued to BGL
over the respective goodwill lives, as follows: NCMC, 40 years; Bomar, 40
years; Mid-Continent, 40 years; Impact, 15 years; Compass, 40 years and
(ii) the amortization of a $1.0 million intangible asset associated with a
patent at NCMC amortized over 15 years.
(E) Reflects the net reduction in interest expense associated with long-term
debt to be paid from the proceeds of the Offering, as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
FOR THE YEAR ENDED -------------------
DECEMBER 31, 1996 1996 1997
------------------ --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Mail Box........................... $128 $ 76 $ 137
NCMC............................... -- -- 5
Bomar.............................. 60 40 135
Mid-Continent...................... 68 53 61
Impact............................. 15 9 7
---- --------- ---------
$271 $ 178 $ 345
==== ========= =========
</TABLE>
(F) Reflects a net reduction of interest income on stockholder loans of Mid-
Continent.
(G) Reflects the incremental provision for federal and state income taxes
assuming all entities were subject to federal and state income tax and
relating to the other statements of operations' adjustments and for income
taxes on S Corporation income.
NOTE 6--NET INCOME PER SHARE
The shares used in computing net income per share include: (i) 1,682,769
shares issued to BGL Capital Partners, L.L.C. and management of Compass; (ii)
5,435,691 shares to be issued to the stockholders of the Founding Companies in
connection with the Acquisitions; and (iii) 2,690,686 shares representing the
number of shares sold in the Offering necessary to pay the $19.2 million cash
portion of the consideration for the Acquisitions; to pay the estimated
underwriting discount and other acquisition and offering related costs; and to
repay certain indebtedness assumed by Compass in the Acquisitions, net of
repayments from stockholder receivables.
F-10
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Compass International Services Corporation
The Stock Split described in Note 1 to the financial statements has not been
consummated at November 5, 1997. When it has been consummated, we will be in a
position to furnish the following report:
"In our opinion, the accompanying balance sheet and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in
all material respects, the financial position of Compass International
Services Corporation at September 30, 1997, and the results of its operations
and cash flows for the period April 29, 1997 (inception) through September 30,
1997 in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above."
/s/ Price Waterhouse LLP
Minneapolis, Minnesota
November 5, 1997
F-11
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30,
ASSETS 1997
------ -------------
<S> <C>
Deferred offering costs.......................................... $1,941
------
Total assets................................................. $1,941
======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C>
Notes payable.................................................... $1,791
Stockholders' equity:
Preferred Stock, 10,000,000 shares authorized, no shares issued
or outstanding;
Common Stock, 50,000,000 authorized, $.01 par value, 1,682,769
shares issued and outstanding................................. 17
Additional paid-in-capital..................................... 5,894
Accumulated Deficit............................................ (5,761)
------
Total stockholders' equity................................... 150
------
Total liabilities and stockholders' equity................... $1,941
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 29
(INCEPTION)-
SEPTEMBER 30,
1997
-------------
<S> <C>
Selling, general and administrative expenses...................... $ 5,761
-------
Operating loss.................................................. (5,761)
-------
Net loss.......................................................... $(5,761)
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
---------------- ADDITIONAL
NUMBER PAID-IN ACCUMULATED
OF SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------ ---------- ----------- -----
<S> <C> <C> <C> <C> <C>
April 29, 1997 (Inception)
Issuance of Common Stock to
founders........................ 1,121,844 $11 $ 89 $100
Issuance of Common Stock to
management...................... 560,925 6 5,805 $(5,761) 50
--------- --- ------ ------- ----
Balance at September 30, 1997.... 1,682,769 $17 $5,894 $(5,761) $150
========= === ====== ======= ====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 29
(INCEPTION)-
SEPTEMBER 30,
1997
-------------
<S> <C>
Cash flows from operating activities:
Net loss....................................................... $(5,761)
Adjustments to reconcile net loss to net cash used in operating
activities:
Non-cash compensation charge on stock issuance............... 5,761
Increase in deferred offering costs.......................... (1,941)
-------
Net cash used in operating activities........................ (1,941)
Cash flows from financing activities:
Proceeds from issuance of common stock......................... 150
Proceeds from notes payable.................................... 1,791
-------
Net cash provided by financing activities.................... 1,941
-------
Net change in cash........................................... $ 0
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1--BUSINESS AND ORGANIZATION
Compass International Services Corporation, a Delaware corporation
("Compass" or the "Company") was founded in April 1997 to create a leading
provider of outsourced business services to public and private entities
throughout the United States upon consummation of an initial public offering
(the "Offering") of its common stock.
In connection with the organization and initial capitalization of Compass,
in April 1997 the Company issued 1,570,584 shares (post split) of common stock
for $140,000 and in May 1997 issued 112,185 shares (post split) for $10,000.
Of these shares issued, 560,925 were issued to management of the Company for a
total price of $50,000. As a result, the Company recorded a non-recurring,
non-cash compensation charge of $5,761,000, representing the difference
between the amount paid for the shares and an estimated fair value of the
shares at the date of sale as if the Founding Companies were combined.
On October 1, 1997, the Board of Directors approved several actions in
connection with the Offering. These actions included the approval of a
112.185-for-1 stock split which will occur prior to the effectiveness of the
Company's Registration Statement. All common stock related information
included in the financial statements has been adjusted to reflect this split.
Compass has not conducted any operations, and all activities to date have
related to the Offering and the Acquisitions. Expenditures have been funded by
advances from BGL Capital Partners, which are payable upon consummation of the
Offering, with interest at 8%. As of September 30, 1997, costs of
approximately $1,941,000 have been incurred in connection with the Offering
and the Company has capitalized these costs as Deferred Offering Costs. These
costs include legal, accounting and miscellaneous other fees which will be
offset against the proceeds of the Offering at closing. Compass is dependent
upon the Offering to execute the pending Acquisitions. There is no assurance
that the pending Acquisitions discussed will be completed or that Compass will
be able to generate future operating revenues.
NOTE 2--NEW ACCOUNTING PRONOUNCEMENTS
Accounting for Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," allows entities to choose between a fair value
based method of accounting for employee stock options or similar equity
instruments and the intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25 ("APB No. 25"). Entities electing
to remain with the accounting in APB Opinion No. 25 must make pro forma
disclosures of net income and earnings per share as if the fair value method
of accounting has been applied. The Company will provide pro forma disclosure
of net income and earnings per share, as applicable, in the notes to future
consolidated financial statements.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128 "Earnings per Share." For the Company, SFAS No. 128 will be
effective for the year ended December 31, 1997. SFAS No. 128 simplifies the
standards required under current accounting rules for computing earnings per
share and replaces the presentation of primary earnings per share and fully
diluted earnings per share with a presentation of basic earnings per share
("basic EPS") and diluted earnings per share ("diluted EPS"). Basic EPS
excludes dilution and is determined by dividing income available to common
stockholders by the weighted average
F-16
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENT--(CONTINUED)
number of common shares outstanding during the period. Diluted EPS reflects the
potential dilution that could occur if securities and other contracts to issue
common stock were exercised or converted into common stock. Diluted EPS is
computed similarly to fully diluted earnings per share under current accounting
rules. The implementation of SFAS No. 128 is not expected to have a material
effect on the Company's earnings per share as determined under current
accounting rules.
Reporting Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general-purpose financial statements. The Statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. SFAS No. 130 requires
that an enterprise (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. The
Statement is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company intends to adopt SFAS No. 130 in
1998.
NOTE 3--SUBSEQUENT EVENTS
Compass has signed definitive agreements to acquire all of the outstanding
capital stock of five companies ("Founding Companies") to be consummated
contemporaneously with the Offering. The Founding Companies are The Mail Box,
Inc. (Mail Box), National Credit Management Corp. (NCMC), BRMC of Delaware,
Inc. (Bomar), Mid-Continent Agencies, Inc. (Mid-Continent) and Impact
Telemarketing Group, Inc. (Impact). The aggregate consideration that will be
paid by Compass to acquire the Founding Companies is approximately $20.0
million in cash and 5,435,691 shares of Common Stock. The consideration to be
paid for each Founding Company is subject to possible post-closing adjustment
based on adjusted 1997 earnings.
The following table reflects the consideration to be paid in cash and shares
of Common Stock:
<TABLE>
<CAPTION>
SHARES OF
COMMON
FOUNDING COMPANY CASH STOCK
---------------- ------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Mail Box................................................ $ 9,437 2,461,852
NCMC.................................................... 2,777 965,801
Bomar................................................... 4,415 1,151,787
Mid-Continent........................................... 1,790 467,127
Impact.................................................. 790 389,124
------- ---------
Total............................................... $19,209 5,435,691
======= =========
</TABLE>
On October 6, 1997, Compass filed a registration statement on Form S-1 for
the Offering.
F-17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
The Mail Box, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of The
Mail Box, Inc. and its wholly-owned subsidiary, Mail Box Data Services, Inc.
(the "Company") at December 31, 1995 and 1996 and September 30, 1997, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996 and the nine months ended September 30,
1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ Price Waterhouse LLP
Minneapolis, Minnesota
November 5, 1997
F-18
<PAGE>
THE MAIL BOX, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1995 1996 1997
------ ------- -------------
ASSETS
------
<S> <C> <C> <C>
Current assets:
Cash.......................................... $ 16 $ 1,419 $ 675
Accounts receivable, net of allowance for
doubtful accounts of
$116, $81 and $125, respectively............. 3,397 3,419 3,888
Inventories................................... 490 708 781
Postage on hand............................... 887 3,593 2,442
Prepaid expenses and other current assets..... 78 69 58
Deferred income taxes......................... 74 26 44
------ ------- -------
Total current assets........................ 4,942 9,234 7,888
Property and equipment, net..................... 2,374 3,205 4,258
Other assets.................................... 109 100 275
------ ------- -------
Total assets................................ $7,425 $12,539 $12,421
====== ======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current liabilities:
Line of credit................................ $ 439 $ 569 $ 125
Note payable, current portion................. -- -- 329
Secured equipment financing facilities,
current portion.............................. 251 327 487
Capitalized lease obligations, current
portion...................................... 254 450 417
Accounts payable.............................. 1,114 1,450 1,314
Accrued expenses and other liabilities........ 594 824 1,110
Income taxes payable.......................... 214 524 350
Postage advances and deposits................. 2,040 4,818 3,719
------ ------- -------
Total current liabilities................... 4,906 8,962 7,851
Long-term liabilities:
Note payable, net of current portion.......... -- -- 466
Secured equipment financing facilities, net of
current portion.............................. 792 616 667
Capitalized lease obligations, net of current
portion...................................... 693 650 722
Deferred income taxes......................... 39 105 160
------ ------- -------
Total liabilities........................... 6,430 10,333 9,866
Commitments and contingencies
Stockholders' equity:
Common stock, $.10 par value, 500,000 shares
authorized,
132,900, 132,900 and 138,900 shares issued,
and 129,300, 129,300 and 102,900 shares
outstanding at December 31, 1995 and 1996 and
September 30, 1997, respectively............. 13 13 14
Additional paid-in-capital.................... 947 947 1,126
Treasury stock, at cost, 3,600, 3,600 and
36,000 shares at
December 31, 1995 and 1996 and September 30,
1997, respectively........................... (100) (100) (1,087)
Retained earnings............................. 135 1,346 2,502
------ ------- -------
Total stockholders' equity.................. 995 2,206 2,555
------ ------- -------
Total liabilities and stockholders' equity.. $7,425 $12,539 $12,421
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
THE MAIL BOX, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------- -------------------
1994 1995 1996 1996 1997
------- ------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................... $15,354 $17,370 $26,156 $18,472 $23,188
Operating expenses................. 11,168 12,402 17,953 12,816 15,286
------- ------- ------- ------- -------
Gross profit..................... 4,186 4,968 8,203 5,656 7,902
Selling, general and administrative
expenses.......................... 3,442 4,370 5,891 4,185 5,642
------- ------- ------- ------- -------
Income from operations........... 744 598 2,312 1,471 2,260
Other expense:
Interest expense................. 212 302 337 254 310
------- ------- ------- ------- -------
Income before income taxes......... 532 296 1,975 1,217 1,950
Provision for income taxes......... 206 134 700 432 697
------- ------- ------- ------- -------
Net income......................... $ 326 $ 162 $ 1,275 $ 785 $ 1,253
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
THE MAIL BOX, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL UNEARNED
-------------- PAID-IN- TREASURY ESOP RETAINED
SHARES AMOUNT CAPITAL STOCK COMPENSATION EARNINGS TOTAL
------- ------ ---------- -------- ------------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1994..... 102,900 $10 $ 622 $ (61) $(113) $ (268) $ 190
Net income................. 326 326
ESOP compensation.......... 20 68 88
Capital contribution....... 50 50
Sales of treasury stock.... 12 12
Cash dividends, $.25 per
share..................... (25) (25)
------- --- ------ ------- ----- ------ ------
Balance, December 31, 1994.. 102,900 10 692 (49) (45) 33 641
Net income................. 162 162
ESOP compensation.......... 32 45 77
Capital contribution....... 86 86
Purchases of treasury
stock..................... (51) (51)
Cash dividends, $.50 per
share..................... (60) (60)
Sale of common stock....... 30,000 3 137 140
------- --- ------ ------- ----- ------ ------
Balance, December 31, 1995.. 132,900 13 947 (100) -- 135 995
Net income................. 1,275 1,275
Cash dividends, $.50 per
share..................... (64) (64)
------- --- ------ ------- ----- ------ ------
Balance, December 31, 1996.. 132,900 13 947 (100) -- 1,346 2,206
Net income................. 1,253 1,253
Purchases of treasury
stock .................... (987) (987)
Cash dividends, $1.00 per
share..................... (97) (97)
Common stock issued on
exercise of options....... 6,000 1 179 180
------- --- ------ ------- ----- ------ ------
Balance, September 30, 1997. 138,900 $14 $1,126 $(1,087) $ -- $2,502 $2,555
======= === ====== ======= ===== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
THE MAIL BOX, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- ------------------
1994 1995 1996 1996 1997
---- ----- ------ ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.......................... $326 $ 162 $1,275 $ 785 $1,253
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization..... 400 616 768 534 744
ESOP compensation................. 88 77 -- -- --
Employee stock compensation....... 50 86 -- -- --
Provision for doubtful accounts... 47 60 82 60 70
Change in deferred taxes.......... 98 (48) 114 101 37
Changes in operating assets and
liabilities:
Accounts receivable............... (456) (862) (104) (461) (538)
Inventories....................... (23) (322) (218) (148) (73)
Postage on hand................... (387) (65) (2,706) (1,961) 1,151
Prepaid expenses and other assets. (13) 47 18 14 (165)
Accounts payable and accrued
expenses......................... 45 340 566 192 148
Postage advances and deposits..... (50) 1,328 2,778 3,676 (1,099)
Federal income taxes payable...... 107 107 310 54 (174)
---- ----- ------ ------ ------
Net cash provided by operating
activities..................... 232 1,526 2,883 2,846 1,354
Cash flows from investing activities:
Purchases of property and equipment. (486) (810) (1,007) (579) (1,236)
Proceeds from disposal of property
and equipment...................... -- -- -- -- 38
---- ----- ------ ------ ------
Net cash used in investing
activities..................... (486) (810) (1,007) (579) (1,198)
Cash flows from financing activities:
Net borrowings (payments) on line of
credit............................. 97 (725) 130 (438) (443)
Repayments of capital lease
obligations........................ (217) (321) (439) (327) (561)
Proceeds from long-term debt........ 585 692 161 161 1,517
Repayment of long-term debt......... (214) (360) (261) (185) (509)
Proceeds from issuance of common
stock.............................. 12 140 -- -- 180
Repurchases of treasury stock....... -- (51) -- -- (987)
Cash dividends paid................. -- (85) (64) (64) (97)
---- ----- ------ ------ ------
Net cash provided by (used in)
financing activities........... 263 (710) (473) (853) (900)
Net increase (decrease) in cash....... 9 6 1,403 1,414 (744)
Cash at beginning of period........... 1 10 16 16 1,419
---- ----- ------ ------ ------
Cash at end of period................. $ 10 $ 16 $1,419 $1,430 $ 675
==== ===== ====== ====== ======
Supplemental disclosure of cash flow
information:
Cash paid for interest.............. $213 $ 302 $ 338 $ 254 $ 310
Cash paid for taxes................. -- 74 276 276 833
Noncash investing and financing
activities:
Equipment acquired under capital
leases............................. 267 551 592 513 600
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
THE MAIL BOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--NATURE OF OPERATIONS
The Mail Box, Inc. and its wholly owned subsidiary Mail Box Data Services,
Inc. (collectively the "Company") provide direct mailing services, billing
services, mail presorting, freight and drop shipping, data processing, laser
printing, mailing list rental and order fulfillment to companies based
primarily in the southwestern United States. The Company operates from a
single location in Dallas, Texas.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. While management believes that the estimates and related
assumptions used in the preparation of these financial statements are
appropriate, actual results could differ from those estimates. Estimates are
made when accounting for the allowance for doubtful accounts, inventories,
depreciation and amortization and income taxes.
Principles of Consolidation
The consolidated financial statements include the accounts of The Mail Box,
Inc. and its wholly-owned subsidiary, Mail Box Data Services, Inc. All
significant inter-company transactions have been eliminated.
Revenue Recognition
Revenues are recognized when services are rendered and are presented in the
financial statements net of sales allowances. The Company's services are
considered rendered when all printing, sorting, labeling and ancillary
services have been provided and the mailing material has been received and
accepted by the United States Postal Service.
Property and Equipment
Property and equipment is recorded at cost less accumulated depreciation and
amortization. Depreciation, and amortization of assets recorded under capital
leases, is provided using the straight-line method over estimated useful lives
of each class of assets, or, if shorter, the terms of leases for capital
leases. Leasehold improvements are amortized using the straight-line method
over the shorter of the estimated useful life of the asset or the term of the
lease. Average useful lives range from 5 to 7 years. Expenditures for
maintenance and repairs are charged to expense as incurred.
Inventories
Inventories consist of work in progress, spare parts, and paper and envelope
stock, recorded at cost not to exceed market. The cost of work in process
includes the costs of completed but unmailed production.
Income Taxes
The Company records income taxes using the liability method, under which
deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis, using enacted tax rates.
Accounting for Stock Based Compensation
The Company accounts for its employee stock options under Accounting
Principles Board Opinion No. 25 (APB 25).
F-23
<PAGE>
THE MAIL BOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Earnings Per Share
Earnings per share for the Company have not been presented in the
accompanying financial statements because such disclosure is not deemed
meaningful considering the proposed transaction discussed in Note 14.
Unaudited Interim Financial Information
The interim financial information for the nine month period ended September
30, 1996 has been prepared from the unaudited financial records of the Company
and in the opinion of management, reflects all adjustments, consisting only of
normal recurring items, necessary for a fair presentation of the financial
position and results of operations and of cash flows for the interim period.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk are principally accounts receivable. The Company
performs ongoing credit evaluations of its customers' financial condition and
requires no collateral from its customers. The allowance for doubtful accounts
is maintained based upon the expected collectability of the accounts
receivable.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including cash,
accounts receivable, accounts payable and long-term debt, approximate fair
value.
NOTE 3--INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER
31,
--------- SEPTEMBER 30,
1995 1996 1997
---- ---- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Work in progress.............................. $294 $466 $481
Spare parts................................... 103 130 231
Paper and envelope stock...................... 93 112 69
---- ---- ----
$490 $708 $781
==== ==== ====
</TABLE>
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Furniture and fixtures................... $ 538 $ 552 $ 663
Plant equipment.......................... 2,812 3,996 5,226
Computer equipment and software.......... 3,321 3,654 3,728
Leasehold improvements................... -- 70 452
------- ------- -------
6,671 8,272 10,069
Accumulated depreciation and
amortization............................ (4,297) (5,067) (5,811)
------- ------- -------
$ 2,374 $ 3,205 $ 4,258
======= ======= =======
</TABLE>
Depreciation and amortization expense was $400,000, $616,000 and $768,000
for the years ended December 31, 1994, 1995 and 1996 and $744,000 for the nine
months ended September 30, 1997.
F-24
<PAGE>
THE MAIL BOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER
31,
--------- SEPTEMBER 30,
1995 1996 1997
---- ---- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Accrued compensation.............................. $263 $314 $ 465
Accrued vacation.................................. 184 214 229
Other liabilities................................. 147 296 416
---- ---- ------
Total accrued expenses and other liabilities...... $594 $824 $1,110
==== ==== ======
</TABLE>
NOTE 6--NOTE PAYABLE AND CREDIT FACILITIES
Obligations under long term note payable and credit facilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1995 1996 1997
------ ----- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Note payable to financial institution,
interest at 30 day commercial rate plus
2.8% (8.3% at September 30, 1997),
principal payment of $27,000 due monthly,
balance due on January 1, 2000............ $ -- $ -- $ 795
Secured equipment financing facilities
payable to financial institutions. Monthly
fixed payments ranging from $1,000 to
$14,000. Interest rates ranging from 8.98%
to 10.95%. Maturity dates ranging from
1998 to 2001.............................. 1,043 943 1,154
Less: Current portion...................... (251) (327) (816)
------ ----- ------
$ 792 $ 616 $1,133
====== ===== ======
</TABLE>
The Company's note payable to a financial institution is secured by the
personal guarantee of its principal stockholder.
As of September 30, 1997, approximately $459,000 of these balances may not
be prepaid prior to February 27, 1998; thereafter, such balances may be
prepaid, subject to declining prepayment penalties. Other balances may be
prepaid at any time subject to a 2% prepayment penalty.
The following summarizes the Company's required annual principal payments
under note payable and secured equipment financing facilities at December 31,
1996 and September 30, 1997 for the next five years:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
1997........................................... $327 $ --
1998........................................... 335 816
1999........................................... 205 674
2000........................................... 76 378
2001........................................... -- 81
---- ------
$943 $1,949
==== ======
</TABLE>
Revolving Credit Facility
The Company has a revolving credit facility with a financial institution
which provides for borrowings of $2,250,000 at December 31, 1996 and September
30, 1997 to be utilized for working capital purposes. The facility matures on
October 31, 1998. The line of credit is collateralized by certain property and
equipment, and accounts receivable of the Company. Borrowings outstanding are
also secured by a pledge of all of the
F-25
<PAGE>
THE MAIL BOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company's common stock owned by the principal stockholder. Borrowings
outstanding from time to time bear interest at a short term floating interest
rate (8.6%, 8.8% and 8.3% at December 31, 1995 and 1996, and September 30,
1997, respectively.)
The revolving credit facility contains, among other provisions, requirements
to maintain defined levels of working capital, net worth, various financial
ratios, limit capital expenditures, and restricts distributions to
stockholders. At September 30, 1997, the Company was in compliance with all
covenants.
The Company leases certain equipment under agreements which are classified
as capital leases. The following is a schedule of capital leases by asset
class:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Furniture and fixtures...................... $ 71 $ 71 $ 155
Plant equipment............................. 216 799 1,119
Computer equipment and software............. 1,426 959 530
------ ------ ------
1,713 1,829 1,804
Accumulated amortization.................... (800) (669) (497)
------ ------ ------
Total..................................... $ 913 $1,160 $1,307
====== ====== ======
</TABLE>
The following is a schedule of future annual minimum lease payments due
under capital lease obligations at December 31, 1996 and September 30, 1997,
together with the present value of the future minimum lease payments for the
years ended:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
1997.......................................... $ 568 $ --
1998.......................................... 395 501
1999.......................................... 255 422
2000.......................................... 77 253
2001.......................................... 11 93
2002.......................................... -- 26
------ ------
Total future minimum lease payments......... 1,306 1,295
Less: Amount representing interest............ (206) (156)
------ ------
Present value of future minimum lease
payments................................... $1,100 $1,139
====== ======
</TABLE>
The Company also leases certain facilities and equipment under non-
cancelable operating leases. The facilities leases provide that the Company
pay the taxes, insurance and maintenance expenses related to the leased
facilities. Certain of the facilities are leased from a related party as
discussed more fully in Note 9. Future annual minimum payments, by year and in
the aggregate, under these non-cancelable operating leases with initial or
remaining terms of one year or more consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
1997........................................... $1,561 $ --
1998........................................... 1,754 2,078
1999........................................... 1,386 1,755
2000........................................... 1,064 1,362
2001........................................... 857 919
2002........................................... 350 610
Thereafter..................................... -- 84
------ ------
$6,972 $6,808
====== ======
</TABLE>
F-26
<PAGE>
THE MAIL BOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Rent expense was $1,086,000, $1,390,000, $1,534,000 and $1,410,000 for the
years ended December 31, 1994, 1995 and 1996 and the nine months ended
September 30, 1997, respectively.
NOTE 7--INCOME TAXES
The Company's provision for income taxes is comprised of the following for
the years ended December 31, 1994, 1995 and 1996 and the nine months ended
September 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1994 1995 1996 1997
---- ---- ---- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current tax expense......................... $108 $182 $586 $660
Deferred tax expense (benefit).............. 98 (48) 114 37
---- ---- ---- ----
Total provision for income taxes............ $206 $134 $700 $697
==== ==== ==== ====
</TABLE>
The effective income tax rate for the years ended December 31, 1994, 1995
and 1996 and the nine months ended September 30, 1997 varied from the federal
statutory rate as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1994 1995 1996 1997
---- ---- ---- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Tax provision computed at statutory rate
of 35%................................... $187 $104 $694 $682
Nondeductible expenses and other.......... 1 (1) 6 15
Employee stock compensation expense....... 18 31 -- --
---- ---- ---- ----
$206 $134 $700 $697
==== ==== ==== ====
</TABLE>
The components of the net deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
DECEMBER
31,
----------- SEPTEMBER 30,
1995 1996 1997
---- ----- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Deferred compensation........................ $ 35 $ -- $ --
Allowance for doubtful accounts.............. 39 26 44
Other........................................ -- 4 4
---- ----- -----
74 30 48
Deferred tax liabilities:
Depreciation and amortization................ (39) (109) (164)
---- ----- -----
Net deferred tax asset (liability)......... $ 35 $ (79) $(116)
==== ===== =====
</TABLE>
NOTE 8--EMPLOYEE BENEFIT PLANS
The Company sponsors a savings plan under Section 401(k) of the Internal
Revenue Code (the "Plan"), which was adopted in 1996 to provide employees an
opportunity to rollover their vested accounts received in connection with the
termination of the Company's leveraged employee stock ownership plan ("ESOP"),
as discussed below. The Plan allows all eligible employees to defer up to 8%
of their base salary on a pretax basis through contributions to the Plan, and
the Company will match on a discretionary basis, 25% of the first 5% of such
employee contributions. The Company made contributions to the Plan of $0 and
$51,000 for the year ended December 31, 1996 and the nine months ended
September 30, 1997, respectively.
F-27
<PAGE>
THE MAIL BOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1994, 1995, and 1996, the Company sponsored the ESOP, which covered
all full time employees. The Company made contributions to the ESOP equal to
scheduled debt payments plus discretionary contributions based on results of
operations. As services were rendered by plan participants, the Company
recorded compensation expense equal to the average fair value of the shares
allocated to participant accounts during the period. ESOP compensation expense
was $152,000, $215,000, and $108,000 for 1994, 1995, and 1996, respectively.
The ESOP was terminated in 1996 and all shares (32,400) were repurchased by
the Company for $987,000 in the first quarter of 1997. The Company funded the
termination with a three-year amortizing loan from a financial institution in
the amount of $987,000 and recorded the reacquisition of shares as treasury
stock.
NOTE 9--RELATED PARTIES
The Company leases its main office and certain mailshop facilities from a
partnership in which the Company's principal stockholder is a limited partner.
Included in rent expense for each of the three years ended December 31, 1994,
1995 and 1996 and the nine months ended September 30, 1997, is $290,000,
$290,000, $290,000 and $235,000, respectively, for payments under this lease.
Future annual minimum lease payments under this agreement are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
1997................................................. $ 321 $ --
1998................................................. 343 343
1999................................................. 343 343
2000................................................. 343 343
2001................................................. 343 343
2002................................................. 143 229
Thereafter........................................... -- --
------ ------
$1,836 $1,601
====== ======
</TABLE>
In August 1997, the Company purchased certain equipment previously leased
from a partnership, the partners of which include certain Company
stockholders. The equipment was purchased for $130,000.
NOTE 10--CAPITAL TRANSACTIONS
In 1995, the Company purchased into treasury from the majority stockholder,
1,600 shares of common stock for $51,000.
In 1994 and 1995, certain employees were awarded an aggregate of 1,600
shares and 2,500 shares of common stock, respectively, with an aggregate value
of $50,000 and $86,000, respectively. The shares were granted to the employees
by the majority stockholder and were accounted for as capital contributions
and employee stock compensation expense.
In December 1996, the Company granted to a certain employee-stockholder an
option to purchase 6,000 shares at $30.00 per share, the approximate fair
value at the date of grant. The option was exercised on July 17, 1997. In view
of the terms of this option, the fair value is not deemed to be significantly
different from the intrinsic value.
NOTE 11--CONCENTRATION OF CREDIT RISK
The Company had two customers that accounted for 11.5% and 14.5% of 1994
revenues, respectively, two customers that accounted for 15.5% and 11.7% of
1995 revenues, respectively, one customer that accounted for 30.9% of 1996
revenues, and one customer that accounted for 48.2% of revenues for the nine
months ended September 30, 1997.
F-28
<PAGE>
THE MAIL BOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1995 and 1996 and September 30, 1997, approximately 11.0%,
11.5% and 48.0%, respectively, of the Company's total accounts receivable
balance was due from a single customer.
NOTE 12--INVENTORIES HELD IN TRUST FOR CUSTOMERS
In the ordinary course of the Company's business activities as a mailing
service company, the Company receives and stores customers' letter, statement
and paper and form stock for use in customers' mailing production processes.
The Company does not take legal title to the inventories, and accordingly,
these inventories are not carried on the Company's financial statements. The
Company maintains casualty risk insurance in amounts sufficient to cover
potential damages arising from the Company's custody of such inventories,
which varies from time to time but, according to management estimates, does
not exceed $11.0 million.
NOTE 13--COMMITMENTS AND CONTINGENCIES
The Company is party from time to time to various legal proceedings
incidental to its business. In the opinion of management, the resolution of
these items, individually or in the aggregate, would not have a significant
effect on the financial position, results of operations, or cash flows of the
Company.
NOTE 14--SUBSEQUENT EVENTS
The Company and its stockholders have entered into a definitive agreement
with Compass International Services Corporation ("Compass") pursuant to which
Compass will acquire all outstanding shares of the Company's common stock in
exchange for cash and common stock of Compass, concurrent with the
consummation of the initial public offering of the common stock of Compass.
F-29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
National Credit Management Corporation and Subsidiary
We have audited the accompanying consolidated balance sheets of National
Credit Management Corporation and Subsidiary (a Maryland corporation), as of
December 31, 1995 and 1996, and September 30, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1994, 1995 and 1996, and the nine months ended
September 30, 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 the 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of National
Credit Management Corporation and Subsidiary as of December 31, 1995 and 1996,
and September 30, 1997, and the results of its operations and its cash flows
for the years ended December 31, 1994, 1995 and 1996, and the nine months
ended September 30, 1997, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Baltimore, Maryland,
October 17, 1997
F-30
<PAGE>
NATIONAL CREDIT MANAGEMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
ASSETS 1995 1996 1997
------ ------ ------ -------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................ $1,167 $1,149 $1,361
Accounts receivable, net of allowance for
doubtful accounts of $113, $88 and $117,
respectively.................................... 1,994 2,141 2,303
Prepaid expenses and other....................... 129 361 699
Deferred tax asset............................... 106 73 143
------ ------ ------
Total current assets........................... 3,396 3,724 4,506
Property and equipment, net........................ 1,084 1,053 2,478
Other assets, net of accumulated amortization of
$271, $272 and $278, respectively................. 69 73 275
------ ------ ------
Total assets................................... $4,549 $4,850 $7,259
====== ====== ======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current liabilities:
Current portion of term loan..................... $ $ $ 60
Current portion of note payable.................. -- -- 49
Trade accounts payable........................... 220 356 1,455
Client payables.................................. 600 484 639
Accrued compensation and related benefits........ 248 500 439
Current portion of capital lease obligations..... 274 327 265
Other accrued expenses........................... 360 185 207
------ ------ ------
Total current liabilities...................... 1,702 1,852 3,114
Deferred tax liability............................. 81 96 192
Long-term portion of note payable.................. -- -- 16
Borrowings under line of credit.................... 100 -- --
Long-term portion of term loan..................... -- -- 240
Long-term capital lease obligations................ 401 184 196
------ ------ ------
Total liabilities.............................. 2,284 2,132 3,758
------ ------ ------
Commitments and contingencies
Stockholders' equity:
Common stock--Class A, $.01 par value, 5,000,000
shares authorized, 231,500 shares issued and
outstanding..................................... 2 2 2
Common stock--Class B, $.01 par value, 250 shares
authorized, no shares issued and outstanding.... -- -- --
Additional paid-in-capital....................... 752 752 2,097
Retained earnings................................ 1,511 1,964 1,402
------ ------ ------
Total stockholders' equity..................... 2,265 2,718 3,501
------ ------ ------
Total liabilities and stockholders' equity..... $4,549 $4,850 $7,259
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-31
<PAGE>
NATIONAL CREDIT MANAGEMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------ -------------------
1994 1995 1996 1996 1997
------ ------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................ $8,874 $12,287 $13,579 $10,055 $11,759
Operating expenses.............. 4,550 6,322 7,945 5,806 7,314
------ ------- ------- ------- -------
Gross profit.................. 4,324 5,965 5,634 4,249 4,445
Selling, general and
administrative expenses........ 3,400 4,328 4,798 3,680 5,065
------ ------- ------- ------- -------
Income (loss) from operations. 924 1,637 836 569 (620)
------ ------- ------- ------- -------
Other (income) expense:
Interest income............... (18) (62) (46) (36) (35)
Interest expense.............. 60 90 79 61 45
Other......................... (3) 5 15 -- 199
------ ------- ------- ------- -------
Total other expense, net.... 39 33 48 25 209
------ ------- ------- ------- -------
Income (loss) before income
taxes.......................... 885 1,604 788 544 (829)
Provision (benefit) for income
taxes.......................... 354 648 335 256 (267)
------ ------- ------- ------- -------
Net income (loss)............... $ 531 $ 956 $ 453 $ 288 $ (562)
====== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-32
<PAGE>
NATIONAL CREDIT MANAGEMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK
------------------ ------------------ ADDITIONAL TOTAL
SHARES SHARES PAID-IN RETAINED STOCKHOLDERS'
OUTSTANDING AMOUNT OUTSTANDING AMOUNT CAPITAL EARNINGS EQUITY
----------- ------ ----------- ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1993................... 210 $-- -- $-- $ 754 $ 24 $ 778
One thousand for one
stock split.......... 209,790 2 -- -- (2) -- --
Net income............ -- -- -- -- -- 531 531
------- ---- --- ---- ------ ------ ------
Balance, December 31,
1994................... 210,000 2 -- -- 752 555 1,309
Net income............ -- -- -- -- -- 956 956
------- ---- --- ---- ------ ------ ------
Balance, December 31,
1995................... 210,000 2 -- -- 752 1,511 2,265
Net income............ -- -- -- -- -- 453 453
------- ---- --- ---- ------ ------ ------
Balance, December 31,
1996................... 210,000 2 -- -- 752 1,964 2,718
Stock tendered pursuant
to termination of stock
option plan............ 21,500 -- -- -- 1,345 -- 1,345
Net loss.............. -- -- -- -- -- (562) (562)
------- ---- --- ---- ------ ------ ------
Balance, September 30,
1997................... 231,500 $ 2 -- $-- $2,097 $1,402 $3,501
======= ==== === ==== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-33
<PAGE>
NATIONAL CREDIT MANAGEMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- --------------------
1994 1995 1996 1996 1997
------ ------ ------ ---------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss).............. $ 531 $ 956 $ 453 $ 288 $ (562)
Adjustments to reconcile net
income (loss) to net cash
flows provided by operating
activities--
Stock tendered pursuant to
termination of stock option
plan........................ -- -- -- -- 1,345
Loss from disposal of
property and equipment...... -- 20 15 -- 199
Change in deferred taxes..... (23) 59 48 81 26
Depreciation and
amortization................ 310 322 337 252 309
(Increase) decrease in
accounts receivable......... (498) (653) (147) 30 (162)
Decrease (increase) in
prepaid expenses and other.. 73 (39) (232) (274) (338)
Increase in other assets..... (10) (11) (5) (9) (208)
Increase (decrease) in trade
accounts payable and other
accrued expenses............ 198 204 (39) 47 1,121
(Decrease) increase in client
payables.................... (132) 56 (116) (65) 155
Increase (decrease) in
accrued compensation and
related benefits............ 192 (192) 252 146 (61)
------ ------ ------ ------ --------
Net cash flows provided by
operating activities...... 641 722 566 496 1,824
------ ------ ------ ------ --------
Cash flows from investing
activities:
Additions to property and
equipment..................... (104) (194) (164) (256) (1,927)
------ ------ ------ ------ --------
Net cash flows used in
investing activities...... (104) (194) (164) (256) (1,927)
------ ------ ------ ------ --------
Cash flows from financing
activities:
Repayment on borrowings from
term loan, net of proceeds.... (30) (200) (100) -- 300
Increase in notes payable...... -- -- -- (100) 65
Principal payments under
capital lease obligations..... (171) (223) (320) (86) (50)
------ ------ ------ ------ --------
Net cash flows used in
financing activities...... (201) (423) (420) (186) 315
------ ------ ------ ------ --------
Net (decrease) increase in
cash and cash equivalents. 336 105 (18) 54 212
Cash and cash equivalents,
beginning of period............. 726 1,062 1,167 1,167 1,149
------ ------ ------ ------ --------
Cash and cash equivalents, end of
period.......................... $1,062 $1,167 $1,149 $1,221 $ 1,361
====== ====== ====== ====== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-34
<PAGE>
NATIONAL CREDIT MANAGEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Business
National Credit Management Corporation, a Maryland corporation, and
Subsidiary (the "Company") provides accounts receivable management services
and, through its patented Accelerated Payment Systems ("APS") process,
telephonic check drafting services. The Company's collection services are
provided to a broad range of clients and industries. In addition to standard
contingency fee collections, the Company provides early-stage accounts
receivable management services to clients in the education, utilities,
government and healthcare sectors through its wholly-owned subsidiary, Total
Early Receivables Management Corporation.
Basis of Presentation
The accompanying financial statements have been prepared on the accrual
basis of accounting. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Interim Financial Statements
The consolidated financial statements for the nine months ended September
30, 1996, are unaudited but, in the opinion of management, such financial
statements have been presented on the same basis as the audited consolidated
financial statements and include all adjustments, consisting only of normal
recurring adjustments necessary for a fair presentation of the financial
position, and results of operations and cash flows for these periods.
Contemplated Initial Public Offering
The Company and its stockholders have entered into a definitive agreement
with Compass International Services Corporation ("Compass") pursuant to which
Compass will acquire all of the outstanding shares of the Company's common
stock in exchange for cash and common stock of Compass, concurrent with the
consummation of the initial public offering of the common stock of Compass.
Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, accounts payable, borrowings under line of credit and capital
lease obligations, all of which approximate fair value.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of cash and overnight
investments stated at cost which approximate market value.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the following
estimated useful lives:
<TABLE>
<S> <C>
Computer hardware and software..................... 3-5 years
Office furniture and equipment..................... 4-8 years
Leasehold improvements............................. Life of related leases
Property and equipment held under capital leases... 3-8 years
</TABLE>
F-35
<PAGE>
NATIONAL CREDIT MANAGEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Other Assets
Other assets consist of security deposits on leases, patent costs and other
intangible assets.
Client Payables
The Company, which is licensed as a collection agency in many states,
regularly receives payments on behalf of its clients which are deposited in
bank accounts. The Company has recorded a liability for the portion of
payments which are owed to clients as of year-end.
Income Taxes
Income taxes have been accounted for in accordance with Financial Accounting
Standards Board Statement No. 109, "Accounting for Income Taxes." Under
Statement 109, the liability method is used in accounting for income taxes.
Deferred tax liabilities are determined based on differences between financial
reporting and tax basis of assets and liabilities and are measured using tax
rates and laws that are expected to be in effect when the differences are
scheduled to reverse.
Revenue Recognition
The Company recognizes revenues in its collections business at the time a
payment is received on an account directly from the debtor, or when reported
as paid by the client. Revenue is typically based upon contractual percentages
of amounts collected. Revenues for the Company's accounts receivable
management services are recognized based upon completion of services performed
for the client. The APS division of the Company recognizes revenue based upon
the number of transactions processed for each client during the month, as well
as certain supplementary services.
Significant Customers
EduCap, Inc. (formerly University Support Services) represented
approximately 22%, 16%, 16% and 18% of the Company's total revenues for the
years ended December 31, 1994, 1995 and 1996, and the nine months ended
September 30, 1997, respectively.
2. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Computer hardware and software................ $1,583 $1,754 $2,377
Office furniture and equipment................ 826 892 1,139
Leasehold improvements........................ 81 81 86
------ ------ ------
2,490 2,727 3,602
Less--accumulated depreciation................ 1,406 1,674 1,124
------ ------ ------
Property and equipment, net................... $1,084 $1,053 $2,478
====== ====== ======
</TABLE>
3. BORROWINGS UNDER LINE OF CREDIT AND CAPITAL LEASE OBLIGATIONS:
Borrowings Under Line of Credit
The Company has a line of credit agreement with a bank dated October 4,
1995, which was to expire May 15, 1997. The balance outstanding under this
agreement as of December 31, 1995 and 1996 and September 30,
F-36
<PAGE>
NATIONAL CREDIT MANAGEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1997, is $100,000, $0 and $0, respectively. On January 23, 1997, the line of
credit agreement was modified to increase available borrowings to $1,250,000
and extend the expiration date to May 15, 1999. The agreement was further
modified on September 17, 1997, to require interest to be paid at variable
rates at the borrower's option, as well as to amend certain financial
covenants. The line of credit has available borrowings of $750,000 as of
December 31, 1995 and 1996 and $1,250,000 as of September 30, 1997.
Under the line of credit agreement, substantially all of the Company's
assets are pledged as collateral.
On August 14, 1997, the Company purchased an interest rate cap. The term of
the interest rate cap is three years beginning September 15, 1997 and
terminating on September 15, 2000. The cost of the cap was $12,663, which will
be amortized over the life of the cap.
Term Note
On September 17, 1997, the Company entered into a term note with a bank
which expires on October 15, 2003. The Company may borrow up to $1,500,000
under the note. The note bears interest at LIBOR plus 2.0%. Principal
repayments begin June 15, 1998 and continue monthly. As of September 30, 1997,
the Company has outstanding borrowings under the note of $300,000.
Future payments under the term note as of September 30, 1997 are as follows
(in thousands):
<TABLE>
<S> <C>
1998................................................................ $ 60
1999................................................................ 200
2000................................................................ 40
----
300
Less-current portion of term note................................... 60
----
Long-term portion of term note.................................... $240
====
</TABLE>
Under the term note agreement, substantially all of the Company's assets are
pledged as collateral.
Capital Lease Obligations
Certain property and equipment leases have been capitalized using interest
rates ranging from approximately 8.75% to 16.0%. Future payments on capital
lease obligations as of December 31, 1996, and September 30, 1997 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
1997.......................................... $375 $ 0
1998.......................................... 145 298
1999.......................................... 50 157
2000.......................................... 0 53
---- ----
Total payments................................ 570 508
Less--amount representing interest............ 59 47
---- ----
511 461
Less--current portion of capital lease
obligation................................... 327 265
---- ----
Long-term capital lease obligations......... $184 $196
==== ====
</TABLE>
F-37
<PAGE>
NATIONAL CREDIT MANAGEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. COMMITMENTS AND CONTINGENCIES:
Operating Leases and Service Contract Commitments
The Company leases its office space under operating leases which expire
through August 2001. In addition, the Company has service contracts on certain
office equipment and computer systems held under capital leases. Total rental
expense under these agreements was approximately $225,000 $195,000, $325,000
and $272,000 for the years ended December 31, 1994, 1995 and 1996 and the nine
months ended September 30, 1997, respectively. Future minimum payments on
operating leases and service contract commitments as of December 31, 1996 and
September 30, 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
1997........................................... $ 355 $ --
1998........................................... 341 384
1999........................................... 337 376
2000........................................... 293 332
2001........................................... 238 298
2002 and thereafter............................ 0 50
------ ------
Total........................................ $1,564 $1,440
====== ======
</TABLE>
Litigation
Lawsuits and claims are filed from time to time against the Company in the
ordinary course of business. The Company, after reviewing developments to date
with legal counsel, is of the opinion that the outcome of such matters will
not have a material adverse effect on the Company's financial position.
Accordingly, no amounts have been provided for these claims in the
accompanying financial statements.
In May 1997, the Company filed suit against the former owner and inventor of
the APS patent (collectively, the "Defendants"), alleging that the Defendants
have breached the agreement between the Company and the Defendants and
violated the Company's exclusive rights to the APS patent and related
intellectual property used in the APS portion of the Company's business. The
Defendants have filed a counterclaim that seeks, among other things,
rescission of the agreement under which the Company purchased the APS patent,
restoration of a prior agreement pursuant to which the Defendants licensed the
APS patent to the Company, return of the APS patent to the Defendants and
unspecified damages. Although the Company believes that the counterclaims are
without merit, there can be no assurance that the Defendants will not prevail
with respect to some or all of their counterclaims. Management does not
believe that a decision adverse to the Company in this dispute would have a
material adverse effect on the Company's business, results of operations or
financial condition.
5. INCOME TAXES:
The components of the Company's income tax provision (benefit) are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1994 1995 1996 1997
---- ---- ---- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current income tax provision (benefit):
Federal.................................. $308 $487 $268 $(237)
State.................................... 70 102 59 (45)
---- ---- ---- -----
378 589 327 (282)
---- ---- ---- -----
Deferred income tax provision (benefit):
Federal.................................. (21) 51 7 13
State.................................... (3) 8 1 2
---- ---- ---- -----
(24) 59 8 15
---- ---- ---- -----
Total income tax provision (benefit)... $354 $648 $335 $(267)
==== ==== ==== =====
</TABLE>
F-38
<PAGE>
NATIONAL CREDIT MANAGEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax assets and liabilities result from differences in timing of the
recognition of certain items for tax and financial accounting purposes. The
sources of the deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
DECEMBER
31,
------------ SEPTEMBER 30,
1995 1996 1997
----- ----- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Property and equipment........................ $(117) $(144) $(151)
Net operating loss carryforwards.............. 62 35 43
Nondeductible reserves........................ 52 66 63
Other......................................... 28 20 (4)
----- ----- -----
Deferred tax asset (liability), net......... $ 25 $ (23) $ (49)
===== ===== =====
</TABLE>
The net deferred tax (liability) asset consists of the following items
included on the accompanying balance sheets as of December 31, 1995 and 1996
and September 30, 1997:
<TABLE>
<CAPTION>
DECEMBER
31,
---------- SEPTEMBER 30,
1995 1996 1997
---- ---- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax asset.............................. $106 $ 73 $143
Deferred tax liability.......................... (81) (96) (192)
---- ---- ----
$ 25 $(23) $(49)
==== ==== ====
</TABLE>
The difference between the recorded income tax provision and the federal
statutory tax rate is mainly due to lobbying expenses, premiums paid for
officers' life insurance, travel and entertainment expenses and other
nondeductible differences.
As of December 31, 1995, 1996 and September 30, 1997, the Company has net
operating loss (NOL) carryforwards of approximately $160,000, $91,000 and
$110,000 respectively, to offset future taxable income. These loss
carryforwards will expire during various periods through 2007. The utilization
of these NOL's may be limited pursuant to Internal Revenue Code Section 382.
6. ADVERTISING EXPENSES:
The Company incurs advertising expenses related to promoting its services to
potential clients. These costs are expensed as incurred. The Company
recognized advertising expenses of approximately $40,000, $251,000 and
$228,000 and $56,000 for the years ended December 31, 1994, 1995, 1996, and
the nine months ended September 30, 1997, respectively.
7. STATEMENTS OF CASH FLOWS--SUPPLEMENTAL DISCLOSURE:
During 1994, 1995 and 1996 and the nine months ended September 30, 1997, the
Company paid interest of approximately $60,000, $90,000, $79,000 and $45,000,
respectively. In addition, the Company paid income taxes of approximately
$188,000, $595,000, $498,000 and $210,000 during 1994, 1995, 1996 and the nine
months ended September 30, 1997, respectively.
Noncash transactions during 1994, 1995 and 1996 were as follows:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED
-------------- SEPTEMBER 30,
1994 1995 1996 1997
---- ---- ---- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Property acquired under capital lease
obligations............................... $60 $673 $157 $207
</TABLE>
F-39
<PAGE>
NATIONAL CREDIT MANAGEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. EMPLOYEE BENEFIT PLAN:
The Company provides a 401(k) plan (the Plan) for eligible employees of the
Company. Beginning in 1995, the Board of Directors approved discretionary
contributions to the Plan. In 1996, contributions were made by the Company at
the rate of 25% of employee contributions up to a maximum amount of $1,400 per
individual. The Company's contribution, including plan administrative expense,
was $22,000, $39,000 and $36,000 for the years ended December 31, 1995, 1996,
and the nine months ended September 30, 1997, respectively.
9. STOCK OPTION AGREEMENTS:
On August 14, 1994, the Company instituted a stock option plan whereby the
Board of Directors, at its discretion, can award employees options to purchase
shares of the Company's common stock. Unvested options granted under this plan
expire upon termination of the employee. Fully vested options expire ten years
from the date of grant. No option is exercisable until the employee has been
an employee of the Company for at least one year on a full-time salaried
basis. Typically, one-third of the options granted are vested immediately upon
grant. The remaining two-thirds of the options generally become vested
proportionately over a two-year period. The Company has reserved 23,331 shares
of common stock for these options.
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock Based Compensation," which defines a fair value based
method of accounting for an employee stock option or similar equity
instrument. This statement allows an entity to continue to measure
compensation cost for those plans using the method of accounting prescribed by
the Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for
Stock Issued to Employees." Entities electing to remain with the accounting in
APB No. 25 must make pro forma footnote disclosures of net income, as if the
fair value based method of accounting defined in SFAS No. 123 has been
applied.
The Company has elected to account for its stock-based compensation plans in
accordance with APB No. 25, under which no compensation cost has been
recognized. The Company has computed for pro forma disclosure purposes the
value of all options granted during 1995 and 1996, using the Black-Scholes
option pricing model as prescribed by SFAS No. 123 and the following weighted
average assumptions used for grants:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------
1995 1996
------- -------
<S> <C> <C>
Risk-free interest rate................................. 5.85% 5.20%
Expected dividend yield................................. -- % -- %
Expected lives.......................................... 2 years 2 years
</TABLE>
Options were assumed to be exercised upon vesting for the purposes of this
valuation. Adjustments are made for options forfeited prior to vesting. Had
compensation costs for this plan been determined consistent with SFAS No. 123,
the Company's net income reflected on the accompanying statements of
operations would have been reduced to the following "pro forma" amounts:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------
1995 1996
------ ------
(IN
THOUSANDS)
<S> <C> <C>
Net Income:
As reported............................................... $ 956 $ 453
Pro forma................................................. $ 952 $ 432
</TABLE>
F-40
<PAGE>
NATIONAL CREDIT MANAGEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes all stock option and purchase right activity
for the two years ended December 31, 1995 and 1996 and the nine months ended
September 30, 1997.
<TABLE>
<CAPTION>
EXERCISE
NUMBER OF PRICE PER
OPTIONS SHARE
--------- -----------
<S> <C> <C>
Outstanding as of December 31, 1994................. 6,800 $12.03
Granted........................................... 7,500 22.75
------- -----------
Outstanding as of December 31, 1995................. 14,300 12.03-22.75
Granted........................................... 9,300 40.12
Repurchased....................................... (8,400) 12.03-40.12
------- -----------
Outstanding as of December 31, 1996................. 15,200 12.03-40.12
Granted........................................... 6,300 39.22
Termination of option plan.......................... (21,500) 12.03-40.12
------- -----------
Outstanding as of September 30, 1997................ --
=======
</TABLE>
On September 30, 1997, the Company elected to terminate its stock option
plan and issue 21,500 shares of common stock to the former stock option
holders. As a result, the Company recorded compensation expense in the third
quarter of approximately $1.3 million. On October 2, 1997, the Company issued
the shares of common stock based upon this decision.
F-41
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
B.R.M.C. of Delaware, Inc.
We have audited the accompanying consolidated balance sheets of B.R.M.C. of
Delaware, Inc. as of December 31, 1996 and 1995 and September 30, 1997 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996, and
the nine months ended September 30, 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 the 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of B.R.M.C. of Delaware, Inc. at December 31, 1996 and 1995 and September 30,
1997, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 1996, and the nine
months ended September 30, 1997, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
October 24, 1997
Atlanta, Georgia
F-42
<PAGE>
B.R.M.C. OF DELAWARE, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
ASSETS 1995 1996 1997
------ ------ ------ -------------
<S> <C> <C> <C>
Current assets:
Cash............................................ $ 107 $ 6 $ 243
Cash held for clients........................... 690 743 797
Commissions receivable, net..................... 1,015 1,021 1,462
Receivable from related parties................. -- 53 --
Other assets.................................... -- 39 35
------ ------ ------
Total current assets.......................... 1,812 1,862 2,537
Furniture and equipment, net...................... 291 866 894
Goodwill.......................................... -- 873 4,088
Non-compete agreement, net........................ -- -- 497
Other assets...................................... 56 141 210
------ ------ ------
Total assets.................................. $2,159 $3,742 $8,226
====== ====== ======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
<S> <C> <C> <C>
Current liabilities:
Collections due to clients...................... $ 690 $ 743 $ 797
Checks issued in excess of cash balance......... -- 90 308
Accounts payable and accrued liabilities........ 694 736 940
Income taxes.................................... -- -- 234
Current portion of long-term debt and capital
lease obligations.............................. 307 517 3,195
Borrowings under line of credit................. -- 450 1,500
------ ------ ------
Total current liabilities..................... 1,691 2,536 6,974
Long-term debt, less current portion.............. 341 525 419
Capital lease obligations, less current portion... 205 502 383
Deferred income taxes............................. -- 14 47
Other liabilities................................. -- 56 47
Minority interest in subsidiary................... -- 4 9
Stockholders' equity (deficit):
Common stock, $1 par value, 1,000 shares
authorized, issued and outstanding............. 1 1 1
Additional paid-in capital...................... 7 60 60
Retained earnings (accumulated deficit)......... (86) 44 286
------ ------ ------
Total stockholders' equity (deficit).......... (78) 105 347
------ ------ ------
Total liabilities and stockholders' equity.... $2,159 $3,742 $8,226
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
B.R.M.C. OF DELAWARE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- -------------------
1994 1995 1996 1996 1997
------ ------ ------ ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.............................. $6,859 $7,416 $9,597 $7,040 $10,268
Operating expenses.................... 3,952 4,229 5,814 4,318 5,914
------ ------ ------ ------ -------
Gross profit........................ 2,907 3,187 3,783 2,722 4,354
Selling, general and administrative
expenses............................. 2,490 2,934 3,458 2,458 3,705
------ ------ ------ ------ -------
Income from operations.............. 417 253 325 264 649
Other expense:
Interest expense.................... 274 103 122 76 185
------ ------ ------ ------ -------
Income before income taxes............ 143 150 203 188 464
Provision for income taxes............ -- -- 73 42 222
------ ------ ------ ------ -------
Net income............................ $ 143 $ 150 $ 130 $ 146 $ 242
====== ====== ====== ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE>
B.R.M.C. OF DELAWARE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL RETAINED STOCKHOLDERS'
------------- PAID-IN (DEFICIT) EQUITY
SHARES AMOUNT CAPITAL EARNINGS (DEFICIT)
------ ------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994.... 1,000 $ 1 $ 7 $(379) $(371)
Net income.................... -- -- -- 143 143
----- --- --- ----- -----
Balance at December 31, 1994.. 1,000 1 7 (236) (228)
Net income.................... -- -- -- 150 150
----- --- --- ----- -----
Balance at December 31, 1995.. 1,000 1 7 (86) (78)
Capital contribution.......... -- -- 53 -- 53
Net income.................... -- -- -- 130 130
----- --- --- ----- -----
Balance at December 31, 1996.. 1,000 1 60 44 105
Net income for the nine months
ended September 30, 1997..... -- -- -- 242 242
----- --- --- ----- -----
Balance at September 30, 1997. 1,000 $ 1 $60 $ 286 $ 347
===== === === ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE>
B.R.M.C. OF DELAWARE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- -------------------
1994 1995 1996 1996 1997
------- ----- ------ -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income....................... $ 143 $ 150 $ 130 $ 146 $ 242
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization.. 190 177 228 138 334
Minority interest.............. -- -- 4 1 5
Change in operating assets and
liabilities:
Commissions receivable....... (770) 101 (6) (191) (441)
Cash held for clients........ -- -- (53) (91) (54)
Other current assets......... -- -- (39) 3 (93)
Receivable from related
parties..................... -- -- (53) (53) 53
Other assets................. (2) 4 (107) (100) (200)
Accounts payable and accrued
liabilities................. 280 (36) 98 53 430
Due to clients............... -- -- 53 92 54
Deferred revenue............. (30) (65) -- -- --
Deferred income taxes........ -- -- 14 -- 33
Checks issued in excess of
cash........................ 11 (506) 90 281 217
------- ----- ------ -------- ---------
Net cash (used in)
provided by operating
activities............... (178) (175) 359 279 580
Cash flows from investing
activities:
Purchases of furniture and
equipment....................... (118) (60) (589) (445) (90)
Purchases of accounts receivable. (1,718) -- -- -- --
Collections of purchased
receivables..................... 2,101 718 -- -- --
Business combinations net of cash
acquired........................ -- -- (791) -- (3,684)
------- ----- ------ -------- ---------
Net cash provided by (used
in) investing activities. 265 658 (1,380) (445) (3,774)
Cash flows from financing
activities:
Borrowings under line of credit.. 2,699 -- 450 -- 1,050
Additions under capital lease
obligations..................... -- -- 346 419 --
Repayment of line of credit...... (2,627) (777) -- -- --
Principal payments of capital
lease obligations............... (113) (78) (124) (219) (143)
Issuance of long-term debt....... -- 750 466 16 2,785
Principal payments of long-term
debt............................ (46) (271) (271) (210) (261)
Capital contributions............ -- -- 53 53 --
------- ----- ------ -------- ---------
Net cash (used in)
provided by financing
activities............... (87) (376) 920 59 3,431
------- ----- ------ -------- ---------
Net increase (decrease) in cash.... -- 107 (101) (107) 237
Cash at beginning of period........ -- -- 107 107 6
------- ----- ------ -------- ---------
Cash at end of period.............. $ -- $ 107 $ 6 $ -- $ 243
======= ===== ====== ======== =========
Supplemental disclosure of cash
flow information:
Cash paid for interest........... $ 274 $ 100 $ 116 $ 66 $ 160
======= ===== ====== ======== =========
Cash paid for income taxes....... $ -- $ -- $ -- $ -- $ 25
======= ===== ====== ======== =========
Furniture and equipment acquired
through capital lease
obligations..................... $ 153 $ -- $ 542 $ 343 $ --
======= ===== ====== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE>
B.R.M.C. OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization of the Company and Nature of Business
BoMar Credit Corporation, formerly Credit Interaction Agency, Inc. was
incorporated on June 1, 1984 under the laws of the state of Georgia. In
February 1988, BoMar was acquired by East Coast Financial Services, Inc.
Subsequently, East Coast Financial Services, Inc. combined with BoMar Credit
Corporation. On April 22, 1996 BoMar Receivable Management Company (B.R.M.C.)
of Delaware, Inc. was incorporated under the laws of the state of Delaware. As
of that date, the shareholders of BoMar Credit Corporation and BoMar Credit
Corporation of Texas exchanged their shares for those of B.R.M.C. of Delaware
(the "Parent"). The assets and liabilities of BoMar Credit Corporation were
transferred to two newly formed and wholly owned subsidiaries of the Parent,
BoMar Credit Corporation of Georgia and BoMar Credit Corporation of Texas. The
accompanying financial statements reflect the operations of these wholly owned
subsidiaries for the period January 1, 1996 to December 31, 1996 as the above
noted transactions were accounted for in a manner similar to a pooling of
interests. All assets and liabilities were transferred at net book value.
At September 30, 1997, B.R.M.C. of Delaware had five subsidiaries: BoMar
Credit Corporation of Georgia; BoMar Credit Corporation of Texas; Advanced
Credit Services ("ACS"); Clayton-Parker & Associates ("CPA"); and Financial
Claims Control, Inc. ("FCCI"). All subsidiaries are wholly owned by the
Company, with the exception of ACS, of which the Company has 75% ownership.
The accompanying financial statements present the consolidated financial
condition and results of operations of B.R.M.C. of Delaware and subsidiaries
(the "Company"). All significant intercompany accounts and transactions have
been eliminated in consolidation.
The Company provides accounts receivable management services primarily for
clients in the telecommunications, insurance, financial services and
healthcare industries. The Company is paid a collection fee by the clients
based on a percentage of the dollar amount collected. The Company's operations
are primarily in the continental United States, however, some business is
conducted internationally.
Business Combinations
On August 1, 1996, the Parent acquired a controlling interest in ACS. The
transaction was accounted for as a purchase. The Parent obtained a note
receivable from the sole shareholder of ACS in the amount of $75,000 as the
fair value of liabilities assumed exceeded assets received. As such, no
goodwill was recorded in conjunction with the acquisition. The accompanying
financial statements reflect the results of operations of ACS from the date of
acquisition to December 31, 1996.
On November 26, 1996, the Parent acquired CPA, an Arizona corporation. The
Parent paid cash of $400,000 and issued promissory notes in the amount of
$450,000 in connection with the transaction which was accounted for as a
purchase. Goodwill of $836,000 was recorded in conjunction with the
acquisition. The accompanying financial statements reflect the results of
operations of CPA from the date of acquisition to December 31, 1996. Had the
acquisition of CPA occurred on January 1, 1996, revenues for the consolidated
entity would have increased by approximately $970,000 for the period ended
December 31, 1996. However, net income for the period would not have been
significantly impacted.
On September 1, 1997, the Parent acquired FCCI, a Florida corporation. The
Parent paid cash of $1,000,000 and issued promissory notes in the amount of
$2,750,000 in connection with the transaction which was accounted for as a
purchase. Goodwill of $3,197,593 and non-compete agreements of $500,000 were
recorded in conjunction with the acquisition. The accompanying financial
statements reflect the results of operations of FCCI from the date of
acquisition to September 30, 1997. If the acquisition of FCCI had occurred on
January 1, 1997, revenues and net income for the consolidated entity would
have increased by approximately $2,380,000 and $281,000, respectively, for the
nine months ended September 30, 1997.
F-47
<PAGE>
B.R.M.C. OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash Held for Clients and Collections Due to Clients
Cash held for clients and collections due to clients consists of amounts
collected on behalf of the Company's clients, net of the Company's commission.
Commissions Receivable
As of December 31, 1995 and 1996 and September 30, 1997, commissions
receivable from companies in the telecommunications industry totaled
approximately $400,000, $454,000 and $822,000, respectively. Credit is
extended based on an evaluation of the customer's financial condition, and
generally collateral is not required. Credit losses are provided for in the
financial statements and have been within management's expectations.
Notes Receivable
Included in other assets is a note receivable from a related party in the
amount of $112,619.
Goodwill
Goodwill relates to the excess of purchase price over net assets acquired in
business combinations. Such amounts are amortized over a fifteen year period.
Accumulated amortization as of December 31, 1996 and September 30, 1997 was
$16,000 and $81,000, respectively. Goodwill is measured for possible
impairment periodically and is reduced through a charge to earnings if
impairment exists.
Accounts Receivable Purchased
Accounts receivable purchased consist of receivables purchased from the
Georgia Power Company at a discount from the gross receivable owed to the
client. The Company is guaranteed, by the Georgia Power Company, to collect
16.2% of the gross receivables purchased within one year of the purchase. The
Company initially records receivables purchased at the guaranteed amount. The
guaranteed collection rate of at least 16.2% is approximately 4% above the
average purchase price of the receivables.
The contract also provides for profit sharing with the utility if
collections exceed 17.2%, in that the Company agrees to pay the client 32.5%
of such surplus amounts collected.
Deferred Revenue
When receivables were purchased from the Georgia Power Company, the
guaranteed portion of the gross receivable (16.2%) was recorded. Since
accounts are purchased for approximately 12.2%, deferred revenue was
established at the purchase date representing approximately 4% of the gross
receivables purchased. The revenue is deferred as the earnings process was not
complete at the purchase date. Deferred revenue is amortized into income over
a three month period, representing the period the guaranteed amount is earned.
Furniture and Equipment
Furniture and equipment are stated at cost and are depreciated using the
double declining balance method over the estimated useful lives of the
individual assets which range from five to seven years. Included in
depreciation expense is amortization of assets recorded under capital leases.
F-48
<PAGE>
B.R.M.C. OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
The Company recognizes revenue (commission income) based on contractual
rates in the period in which collection occurs.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 which requires the liability method of
accounting for income taxes.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates.
Interim Statements
The interim financial data for the nine months ended September 30, 1996 is
unaudited; however, in the opinion of management, the interim data includes
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair statement of the results for the interim periods, on a consistent
basis.
2. FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Furniture and equipment....................... $1,125 $2,940 $2,205
Less accumulated depreciation................. 834 2,074 1,311
------ ------ ------
$ 291 $ 866 $ 894
====== ====== ======
</TABLE>
Furniture and equipment includes $449,000, $826,000 and $1,090,000 acquired
under various capital leases at December 31, 1995 and 1996 and September 30,
1997, respectively. Accumulated depreciation on this equipment at December 31,
1995 and 1996 and September 30, 1997 was $315,000, $113,000 and $560,000,
respectively. Depreciation expense was $189,000, $176,000, $216,000 and
$266,000 for the years ended December 31, 1994, 1995 and 1996 and the nine
months ended September 30, 1997, respectively.
3. DEBT
Borrowings Under Line of Credit
Borrowings under a line of credit at were as follows:
As of December 31, 1996 and September 30, 1997, borrowings under a
$1,500,000 line of credit totaled $450,000 and $1,500,000, respectively.
The line of credit is payable on September 30, 1998 and is secured by
substantially all assets of the Company, with simple interest payable
monthly at a rate of 9.75%.
F-49
<PAGE>
B.R.M.C. OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER
31,
--------- SEPTEMBER 30,
1995 1996 1997
---- ---- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Note payable, interest at 10.5% per annum;
secured by substantially all of the assets of
the Company, payable in equal monthly
installments through March 1998................. $583 $340 $ 141
Note payable, interest at 19.5% per annum;
payable in equal monthly installments through
March 2000...................................... -- 51 --
Note payable, interest at 8% per annum;
payable in equal monthly installments through
March 2000...................................... -- -- 39
Note payable to related party, interest at 8.0%
per annum;
interest payable monthly; due January 1998...... -- -- 2,750
Note payable, interest at 9.5% per annum;
payable in equal monthly installments through
September 1998.................................. -- -- 19
Note payable, interest at 8.9% per annum; payable
in equal monthly installments through December
2006............................................ -- -- 428
Note payable, interest at 8.0% per annum
payable in equal monthly installments through
December 2006................................... -- 450 --
---- ---- ------
$583 $841 $3,377
==== ==== ======
</TABLE>
Principal maturities of long-term debt at December 31, 1996 were as follows
(in thousands):
<TABLE>
<S> <C>
1997................................................................. $316
1998................................................................. 120
1999................................................................. 52
2000................................................................. 43
2001................................................................. 42
Thereafter........................................................... 268
----
$841
====
</TABLE>
Principal maturities of long-term debt at September 30, 1997 were as follows
(in thousands):
<TABLE>
<S> <C>
For the twelve months ending September 30:
1998.............................................................. $2,959
1999.............................................................. 51
2000.............................................................. 46
2001.............................................................. 42
2002.............................................................. 45
Thereafter........................................................ 234
------
$3,377
======
</TABLE>
4. LEASES AND OTHER COMMITMENTS
The Company leases office space for its operations in Arizona, Georgia,
Florida and Texas under noncancelable operating lease agreements. Certain
leases have escalation clauses which provide for increases in annual rentals.
The leases for office space expire in years through fiscal 2002.
F-50
<PAGE>
B.R.M.C. OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum rental payments required under the operating lease agreements
at December 31, 1996 were as follows (in thousands):
<TABLE>
<S> <C>
1997............................................................... $ 399
1998............................................................... 389
1999............................................................... 376
2000............................................................... 344
2001............................................................... 243
Thereafter......................................................... 3
------
$1,754
======
</TABLE>
Future minimum rental payments required under the operating lease agreements
at September 30, 1997 were as follows (in thousands):
<TABLE>
<S> <C>
For the twelve months ending September 30:
1998.............................................................. $ 524
1999.............................................................. 521
2000.............................................................. 491
2001.............................................................. 378
2002.............................................................. 21
Thereafter........................................................ --
------
$1,935
======
</TABLE>
Total rent expense was $187,000, $280,000, $319,000 and $328,000 for the
years ended December 31, 1994, 1995 and 1996 and the nine months ended
September 30, 1997, respectively.
In addition, the Company has entered into various capital leases to finance
equipment. Future minimum lease payments under capital leases are as follows
(in thousands):
<TABLE>
<S> <C>
For the twelve months ending December 31:
1997................................................................ $244
1998................................................................ 201
1999................................................................ 189
2000................................................................ 99
2001................................................................ 43
Thereafter.......................................................... --
----
$776
====
</TABLE>
<TABLE>
<S> <C>
For the twelve months ending September 30:
1998................................................................ $284
1999................................................................ 197
2000................................................................ 129
2001................................................................ 58
2002................................................................ --
Thereafter.......................................................... --
----
$668
====
</TABLE>
Obligations under capital leases as scheduled above include imputed interest
of approximately $48,000.
In addition to the lease commitments above, the Company entered into an
agreement to pay a minimum of $360,000 annually for certain telecommunications
services. The agreement expires July 15, 1998.
5. EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution 401(k) plan which permits
substantially all employees to make tax deferred contributions of up to 15% of
their annual compensation. The Company currently makes a discretionary
matching contribution of 25% of the employee contribution. The Company
contributed approximately $9,000, $11,000, $7,000 and $16,000 in 1994, 1995,
1996 and the nine months ended September 30, 1997, respectively.
F-51
<PAGE>
B.R.M.C. OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In addition, the Company sponsors a Medical Plan. The Company voluntarily
contributes approximately 50% of the premiums for all employees who elect to
participate in the Medical Plan. The Company contributed approximately
$48,000, $54,000, $91,000 and $51,000 in 1994, 1995, 1996 and the nine months
ended September 30, 1997, respectively.
6. INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
Current:
Federal............................ $49 $164
State.............................. 3 31
--- ----
52 195
Deferred:
Federal............................ 20 23
State.............................. 1 4
--- ----
21 27
--- ----
Provision for income taxes........... $73 $222
=== ====
</TABLE>
Income tax expense differs from income taxes computed at statutory rates due
to certain non-deductible expenses and the effect of net operating loss
carryforwards. The most significant of these differences is non-deductible
goodwill.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets at December 31, 1995 and
1996 and September 30, 1997 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax liabilities:
Depreciation............................... $ -- $ 10 $27
Capitalized leases......................... -- 11 20
------ ------ ---
Total deferred tax liabilities............... -- 21 47
Deferred tax assets.......................... 25 -- --
------ ------ ---
Net deferred tax assets (liabilities)........ $ 25 $ (21) $47
====== ====== ===
</TABLE>
The Company's deferred income taxes in 1995 consist of net operating loss
(NOL) carryforwards of approximately $72,000 at December 31, 1995. The NOL
amounts result in deferred tax assets of approximately $25,000 at December 31,
1995. A valuation allowance was established for the total deferred NOL
carryforward amounts for 1995. The Company utilized approximately $143,000 and
$150,000 of their NOL carryforwards in 1994 and 1995, respectively. Deferred
tax assets and valuation allowances were reduced by approximately $50,000 and
$52,000 during 1994 and 1995, respectively. No tax expense was recorded for
the years ended December 31, 1994 and 1995.
The Company utilized $32,000 in net operating losses during the year ended
December 31, 1996. There are no remaining NOL carryforwards. During 1996, the
Company reversed a previously recorded deferred tax asset valuation allowance
of approximately $28,000.
7. SUBSEQUENT EVENTS
The Company and its stockholders have entered into a definitive agreement
with Compass International Services Corporation ("Compass") pursuant to which
Compass will acquire all outstanding shares of the Company's common stock in
exchange for cash and common stock of Compass, concurrent with the
consummation of the initial public offering of the common stock of Compass. In
connection with the acquisition, certain employees of the Company, at and
contingent upon Closing, are entitled to additional compensation, which may be
material to the future operating results of the Company.
F-52
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
Mid-Continent Agencies, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of Mid-
Continent Agencies, Inc. and its subsidiaries at December 31, 1995 and 1996
and September 30, 1997, and the results of their operations and their cash
flows for the years and the nine months then ended in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Chicago, Illinois
October 31, 1997
F-53
<PAGE>
MID-CONTINENT AGENCIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
ASSETS 1995 1996 1997
------ ------ ------ -------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents....................... $ 1 $ -- $ 114
Accounts receivable, trade...................... 535 546 518
Receivables due from stockholders............... 1,297 1,421 1,495
Prepaid expenses and other current assets....... 159 165 142
------ ------ ------
Total current assets.......................... 1,992 2,132 2,269
Funds held in trust for clients
Property and equipment, net....................... 165 146 159
Deferred income tax benefit....................... 54 70 73
Other assets...................................... 132 136 141
------ ------ ------
Total assets.................................. $2,343 $2,484 $2,642
====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses........... $ 492 $ 590 $ 479
Notes payable to stockholders................... 51 51 51
Notes payable, current portion.................. 232 388 808
------ ------ ------
Total current liabilities..................... 775 1,029 1,338
Funds held in trust for clients
Notes payable..................................... 340 178 --
Deferred compensation............................. 158 174 183
------ ------ ------
Total liabilities............................. 1,273 1,381 1,521
------ ------ ------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value, 10,000 shares
authorized, 1,000 shares issued and
outstanding.................................... 10 10 10
Additional paid-in capital...................... 73 73 73
Retained earnings............................... 984 1,032 1,051
Unrealized gain (loss) on securities............ 3 (12) (13)
------ ------ ------
Total stockholders' equity.................... 1,070 1,103 1,121
------ ------ ------
Total liabilities and stockholders' equity........ $2,343 $2,484 $2,642
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE>
MID-CONTINENT AGENCIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------- ------------------
1995 1996 1996 1997
------ ------ ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues................................... $8,763 $9,038 $6,810 $7,066
Operating expenses......................... 2,851 2,875 2,210 2,294
------ ------ ------ ------
Gross profit............................. 5,912 6,163 4,600 4,772
Selling, general and administrative
expenses.................................. 5,974 6,054 4,509 4,677
------ ------ ------ ------
Income (loss) from operations............ (62) 109 91 95
Other (income) expense:
Interest and investment income........... (99) (117) (98) (52)
Interest expense......................... 48 68 53 60
Loss on disposal of property and
equipment............................... -- 3 3 --
------ ------ ------ ------
(51) (46) (42) 8
------ ------ ------ ------
Income (loss) before income taxes.......... (11) 155 133 87
Provision for income taxes................. 34 107 87 68
------ ------ ------ ------
Net income (loss).......................... $ (45) $ 48 $ 46 $ 19
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE>
MID-CONTINENT AGENCIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
---------------- UNREALIZED
NUMBER RETAINED GAIN (LOSS)
OF SHARES AMOUNT PAID-IN-CAPITAL EARNINGS ON SECURITIES TOTAL
--------- ------ --------------- -------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1995................... 10 $10 $73 $1,029 $-- $1,112
Net loss............... -- -- -- (45) -- (45)
Change in unrealized
gain on securities.... -- -- -- -- 3 3
--- --- --- ------ ---- ------
Balance, December 31,
1995................... 10 10 73 984 3 1,070
Net income............. -- -- -- 48 -- 48
Change in unrealized
gain (loss) on
securities............ -- -- -- -- (15) (15)
--- --- --- ------ ---- ------
Balance, December 31,
1996................... 10 10 73 1,032 (12) 1,103
Net income............. -- -- -- 19 -- 19
Change in unrealized
gain (loss) on
securities............ -- -- -- -- (1) (1)
--- --- --- ------ ---- ------
Balance, September 30,
1997................... 10 $10 $73 $1,051 $(13) $1,121
=== === === ====== ==== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-56
<PAGE>
MID-CONTINENT AGENCIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER NINE MONTHS ENDED
31, SEPTEMBER 30,
------------ -----------------
1995 1996 1996 1997
----- ----- ----------- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................... $ (45) $ 48 $ 46 $ 19
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization.......... 44 64 46 42
Loss on disposal of property and
equipment............................. -- 3 3 --
Changes in deferred taxes.............. (13) (2) (54) (3)
Changes in operating assets and
liabilities:
Accounts receivable, trade............ (106) (11) 52 28
Prepaid expenses and other current
assets............................... 39 (6) 19 23
Accounts payable and accrued expenses. (60) 68 25 (111)
Deferred compensation................. 21 16 12 9
Other assets.......................... (54) (4) (10) (6)
----- ----- ----- -----
Net cash provided by (used in)
operating activities............. (174) 176 139 1
Cash flows from investing activities:
Purchase of property and equipment...... (89) (49) (38) (55)
Proceeds from sale of property and
equipment.............................. -- 3 3 --
----- ----- ----- -----
Net cash used in investing
activities....................... (89) (46) (35) (55)
Cash flows from financing activities:
Proceeds from notes payable............. 600 250 250 800
Payments of notes payable............... (376) (257) (136) (558)
Payments of notes payable to
stockholders........................... (10) -- -- --
Proceeds from notes receivable from
stockholders........................... (159) (124) (94) (74)
----- ----- ----- -----
Net cash provided by (used in) financing
activities............................... 55 (131) 20 168
Net increase (decrease) in cash........... (208) (1) 124 114
Cash and cash equivalents at beginning of
period................................... 209 1 1 --
----- ----- ----- -----
Cash and cash equivalents at end of
period................................... $ 1 $ -- $ 125 $ 114
===== ===== ===== =====
Supplemental disclosure of cash flow
information:
Cash paid for interest.................. $ 48 $ 69 $ 53 $ 57
Cash paid for income taxes.............. 46 90 67 76
Increase (decrease) in funds held in
trust for clients...................... (53) (253) (45) 196
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE>
MID-CONTINENT AGENCIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--NATURE OF OPERATIONS
Mid-Continent Agencies, Inc. ("MCA") and subsidiaries (collectively referred
to as the "Company") provides accounts receivable management services
primarily to companies in the manufacturing, insurance, wholesale distribution
and commercial sectors. The Company has three domestic offices located in
Chicago, IL, Louisville, KY and Buffalo, NY and an office in the United
Kingdom.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include accounts of MCA and its
subsidiaries. All intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents are highly liquid unrestricted investments with
original maturities of three months or less. Cash equivalents are stated at
cost which approximates market.
Accounts Receivable, Trade
The Company remits collections to clients either on the net method, in which
funds are remitted to the client net of the related earned commission or on
the gross method, in which all collected funds are remitted to the client and
the Company bills the client separately for its earned commission, resulting
in a trade account receivable. Due to the nature of the trade accounts
receivable, no allowance is provided and the carrying value is considered to
estimate the fair value.
Funds Held in Trust for Clients
Funds held in trust for clients consists of funds collected on behalf of
clients, net of the Company's commission. These funds are held in segregated
accounts and are regularly remitted to clients. Funds held in trust of
$1,468,000, $1,214,000 and $1,410,000 at December 31, 1995 and 1996 and
September 30, 1997, respectively, and their offsetting liability are presented
net for financial statement presentation purposes.
The Company is entitled to invest these funds in specified marketable debt
and equity instruments. Amounts not invested in marketable debt and equity
instruments are invested in cash equivalents (See Note 4). Investments in
marketable securities are accounted for in accordance with Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". Management has classified all marketable securities as
"available for sale" and accordingly, net unrealized gains and losses are
presented, net of tax, as a separate component of equity. Realized gains are
computed based on cost of investments sold.
F-58
<PAGE>
MID-CONTINENT AGENCIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment
Property and equipment, including additions and improvements and
expenditures for repairs and maintenance that significantly add to
productivity or extend the economic lives of the assets, are capitalized at
cost and depreciated using an accelerated depreciation method, the results of
which are not materially different from the straight-line method, over their
estimated useful lives as follows:
<TABLE>
<S> <C>
Furniture and fixtures..................................... 5 to 7 years
Equipment.................................................. 5 to 7 years
Leasehold improvements..................................... Term of lease
</TABLE>
Maintenance, repairs, and minor replacements of these items are charged to
expense as incurred.
Deferred Compensation
Deferred compensation represents executive termination benefits for four key
officers of the Company. Deferred compensation is determined generally by the
formulas specified in the officers' employment agreements. Deferred
compensation is charged to income currently.
Income Taxes
Provisions are made to record deferred income taxes for items reported in
different periods for financial reporting purposes than for federal and state
income tax purposes. The Company records deferred income taxes using the
liability method in accordance with Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes".
Concentration of Credit Risk
The Company has over 300 commercial insurance clients which accounted for
38%, 30% and 25% of its revenues at December 31, 1995 and 1996 and September
30, 1997. No one client represents more than 5% of revenues.
Revenue Recognition
The Company generates revenues from contingency fees and contractual
services. Contingency fee revenue is recognized as a contractual percentage of
the net funds collected on behalf of clients, in the period the collection
occurs. Contractual services revenue is deferred and recognized over the
period in which the services are performed.
Unaudited Interim Financial Information
The interim financial information for the nine month period ended September
30, 1996 has been prepared from unaudited financial records of the Company
and, in the opinion of management, reflects all adjustments consisting only of
normal recurring items, necessary for a fair presentation of the financial
position and results of operations and of cash flows for the respective
interim periods.
F-59
<PAGE>
MID-CONTINENT AGENCIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--RECEIVABLES DUE FROM STOCKHOLDERS
Receivables due from stockholders includes demand notes receivable with
aggregate principal and interest amounts of $1,297,000, $1,371,000 and
$1,495,000 at December 31, 1995 and 1996 and September 30, 1997, respectively.
The notes receivable accrue interest at the short-term annual Applicable
Federal Rate prescribed by the Internal Revenue Service, with the balance of
principal and interest due upon demand. Due to the demand provision,
management estimates the carrying value of the notes receivable from
stockholders approximates fair value.
NOTE 4--MARKETABLE SECURITIES
The following is a summary of the marketable debt and equity instruments of
the funds held in trust:
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED ESTIMATED
HOLDING HOLDING FAIR
COST GAIN LOSS VALUE
----- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1995:
Equity securities..................... $ 21 $ 2 $ (5) $ 18
Debt securities issued by the U.S.
Treasury and other U.S. government
agencies............................. 196 -- (10) 186
Debt securities issued by foreign
governments.......................... 2 -- -- 2
Corporate debt securities............. 150 6 -- 156
Mortgage-backed securities............ 139 -- (7) 132
Other debt securities................. 264 19 (1) 282
----- ----- ----- -----
$ 772 $ 27 $ (23) $ 776
===== ===== ===== =====
DECEMBER 31, 1996:
Equity securities..................... $ 11 $ -- $ (4) $ 7
Debt securities issued by the U.S.
Treasury and other U.S. government
agencies............................. 195 -- (15) 180
Debt securities issued by foreign
governments.......................... 2 -- -- 2
Corporate debt securities............. 202 4 (1) 205
Mortgage-backed securities............ 107 -- (4) 103
Other debt securities................. 294 -- -- 294
----- ----- ----- -----
$ 811 $ 4 $ (24) $ 791
===== ===== ===== =====
SEPTEMBER 30, 1997:
Equity securities..................... $ -- $ -- $ -- $ --
Debt securities issued by the U.S.
Treasury and other U.S. government
agencies............................. 195 -- (13) 182
Debt securities issued by foreign
governments.......................... 2 -- -- 2
Corporate debt securities............. 202 4 -- 206
Mortgage-backed securities............ 107 -- (3) 104
Other debt securities................. 67 -- -- 67
----- ----- ----- -----
$ 573 $ 4 $ (16) $ 561
===== ===== ===== =====
</TABLE>
Net realized (losses)/gains from the sale of investment securities were
$(6,000), $12,000 and $(18,000) for the years ended December 31, 1995 and
1996, and the nine months ended September 30, 1997, respectively.
F-60
<PAGE>
MID-CONTINENT AGENCIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The cost and estimated fair value of available for sale securities by
contractual maturity at September 30, 1997 is as follows:
<TABLE>
<CAPTION>
ESTIMATED
COST FAIR VALUE
---- ----------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less................................... $151 $154
Due after one year through five years..................... 53 55
Investment funds or mortgage-backed securities not due
at a single maturity date................................ 369 352
---- ----
Total................................................. $573 $561
==== ====
</TABLE>
Expected maturities may differ from contractual maturities because the
issuers of the securities may have the right to prepay obligations without
prepayment penalties.
NOTE 5--PROPERTY AND EQUIPMENT, NET
Property and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Furniture and fixtures.................... $ 491 $ 480 $ 480
Equipment................................. 793 798 853
Leasehold improvements.................... 40 40 40
------- ------- -------
1,324 1,318 1,373
Accumulated depreciation.................. (1,159) (1,172) (1,214)
------- ------- -------
Property and equipment, net............... $ 165 $ 146 $ 159
======= ======= =======
</TABLE>
Depreciation expense aggregated $44,000, $64,000 and $42,000 for the years
ended 1995 and 1996 and the nine months ended September 30, 1997,
respectively.
NOTE 6--OTHER ASSETS
Other assets consist of:
<TABLE>
<CAPTION>
DECEMBER
31,
--------- SEPTEMBER 30,
1995 1996 1997
---- ---- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash value of life insurance...................... $ 28 $ 31 $ 35
Deposits.......................................... 99 101 101
Other............................................. 5 4 5
---- ---- ----
$132 $136 $141
==== ==== ====
</TABLE>
NOTE 7--ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of:
<TABLE>
<CAPTION>
DECEMBER
31,
--------- SEPTEMBER 30,
1995 1996 1997
---- ---- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Accounts payable.................................. $104 $136 $170
Accrued salaries.................................. 82 130 105
Accrued bonus..................................... 114 93 39
Accrued vacation.................................. 111 127 135
Income taxes payable.............................. 11 32 24
Other............................................. 70 72 6
---- ---- ----
$492 $590 $479
==== ==== ====
</TABLE>
The fair value of accounts payable and accrued expenses are considered to
approximate carrying value based on the short term nature of the accounts.
F-61
<PAGE>
MID-CONTINENT AGENCIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--NOTE PAYABLE TO STOCKHOLDERS
The Company has entered into a note payable agreement with its stockholders.
The note payable is unsecured, accrues interest at prime plus 0.5% and is due
on demand. The outstanding balance under the note at each of December 31, 1995
and 1996 and September 30, 1997 was $51,000. No interest was accrued on the
note at December 31, 1995. Interest of $6,000, $5,000 and $ for the years
ended December 31, 1995 and 1996 and the nine months ended September 30, 1997,
respectively, was paid by the stockholders. Due to the demand provision,
management estimates the carrying value of the notes payable to stockholders
approximates fair value.
NOTE 9--NOTES PAYABLE
<TABLE>
<CAPTION>
DECEMBER
31,
------------ SEPTEMBER 30,
1995 1996 1997
----- ----- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Notes payable consist of the following:
Notes payable to bank, interest at prime plus
0.5%, extinguished January 15, 1996............ $ 5 $ -- $ --
Notes payable to bank, interest at prime plus
0.5%, extinguished December 16, 1996........... 100 -- --
Note payable to bank, interest at prime plus
0.5% (9.0% at September 30, 1997), principal
payments of $10,000 due monthly, balance due
November 15, 1997.............................. 140 100 20
Note payable to bank, interest at prime plus
0.5% (9.0% at September 30, 1997), principal
payments of $22,000 due quarterly, balance due
January 15, 1998............................... 327 241 175
Note payable to bank, interest at prime plus
0.5% (9.0% at September 30, 1997), principal
payments of $13,000 due monthly, balance due
February 28, 1998.............................. -- 175 63
Notes payable to bank, interest at prime plus
0.5%, extinguished September 15, 1997.......... -- 50 --
Notes payable to bank, interest at prime plus
0.5% (9.0% at September 30, 1997), principal
amount due October 31, 1997.................... -- -- 300
Notes payable to bank, interest at prime plus
0.5% (9.0% at September 30, 1997), principal
amount due December 31, 1997................... -- -- 250
----- ----- -----
572 566 808
Current portion of long-term debt............... (232) (388) (808)
----- ----- -----
Long-term debt.................................. $ 340 $ 178 $ --
===== ===== =====
</TABLE>
All notes payable are payable to American National Bank and Trust Company of
Chicago and are secured by the assets of the Company and by personal
guarantees of the two stockholders. Due to the short maturities, management
estimates the carrying value of the notes payable approximates fair value.
Aggregate maturities of notes payable at December 31, 1996 and September 30,
1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
1997................................................. $388 $630
1998................................................. 178 178
---- ----
$566 $808
==== ====
</TABLE>
F-62
<PAGE>
MID-CONTINENT AGENCIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current tax expense:
Federal................................... $ 37 $ 90 $56
State & local............................. 10 19 12
------ ------ ---
47 109 68
Deferred tax expense (benefit)
Federal................................... (11) (1) 1
State & local............................. (2) (1) (1)
------ ------ ---
(13) (2) --
------ ------ ---
Total....................................... $ 34 $ 107 $68
====== ====== ===
</TABLE>
The provision for income taxes differs from the amount computed as the
statutory rates as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income at statutory rate............. $ (4) $ 53 $29
State income taxes, net of federal benefit... 5 12 8
Nondeductible expenses....................... 41 41 31
Federal surtax exemption..................... (9) (2) (3)
Change in valuation allowance................ 1 3 3
----- ------ ---
Total...................................... $ 34 $ 107 $68
===== ====== ===
</TABLE>
The significant items giving rise to the deferred tax assets and
(liabilities) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax asset--non-current:
Deferred compensation.................... $ 60 $ 67 $ 70
Unrealized loss on securities............ -- 8 8
Charitable contribution carryforward..... 10 13 16
Deferred tax asset valuation allowance... (10) (13) (16)
------ ------ ----
Net deferred tax asset--non-current.... 60 75 78
Deferred tax liability--non-current:
Unrealized gain on securities............ (2) -- --
Property plan & equipment................ (4) (5) (5)
------ ------ ----
Net deferred tax liability--non-
current............................... (6) (5) (5)
------ ------ ----
Total.................................... $ 54 $ 70 $ 73
====== ====== ====
</TABLE>
The valuation allowance has been provided due to uncertainty surrounding the
realizability of charitable contribution carryforwards, which expire in years
1998 to 2002. Net operating loss carryforwards for state tax
F-63
<PAGE>
MID-CONTINENT AGENCIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
purposes exist in the aggregate of approximately $1.2 million. No benefit has
been recognized for these carryforwards.
Due to the fact that the Company has filed tax returns based on a fiscal
year ending April 30, certain estimates have been used in deriving the
provisions for income taxes contained herein.
NOTE 11--EMPLOYEE BENEFIT PLANS
The Company has established a defined contribution and profit sharing plan
under Section 401(k) of the Internal Revenue Code (the "Plan") which covers
substantially all employees. Discretionary contributions to the plan were
$13,000, $26,000 and $20,000, for the years ended December 31, 1995 and 1996
and the nine months ended September 30, 1997, respectively.
NOTE 12--COMMITMENTS AND CONTINGENCIES
The Company is party from time to time to various legal proceedings
incidental to its business. In the opinion of management none of these items
individually or in the aggregate would have a significant effect on the
financial position, results of operations, or cash flows of the Company.
The Company leases office space and equipment under operating leases and had
not entered into any capital lease transactions for the years ended December
31, 1995 and 1996. Minimum future rentals under non-cancelable operating
leases with initial or remaining terms of one year or more consist of the
following at December 31, 1996 and September 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
1997........................................... $ 56 $ 149
1998........................................... 511 566
1999........................................... 456 513
2000........................................... 394 452
2001........................................... 339 397
Thereafter..................................... 644 663
------ ------
$2,400 $2,740
====== ======
</TABLE>
Rent expense was $510,000, $468,000 and $348,000 for the years ended
December 31, 1995 and 1996 and the nine months ended September 30, 1997,
respectively.
NOTE 13--SUBSEQUENT EVENTS (UNAUDITED)
The Company and its stockholders have entered into a definitive agreement
with Compass International Services Corporation ("Compass") pursuant to which
Compass will acquire all outstanding shares of the Company's common stock in
exchange for cash and common stock of Compass, concurrent with the
consummation of the initial public offering of the common stock of Compass.
F-64
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
Impact Telemarketing Group, Inc.
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of Impact
Telemarketing Group, Inc. and affiliated companies at December 31, 1996 and
September 30, 1997 and the results of their operations and their cash flows
for the year ended December 31, 1996 and the nine month period ended September
30, 1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred losses from operations and is
not in compliance with certain covenants contained in its loan agreement. As a
result, the Company is limited in its ability to obtain additional borrowings
on its line of credit to fund operations. These matters raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
/s/ Price Waterhouse LLP
Chicago, Illinois
November 6, 1997
F-65
<PAGE>
IMPACT TELEMARKETING GROUP, INC.
COMBINED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
ASSETS 1996 1997
------ ------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 166 $ 102
Accounts receivable, trade, net of allowance for
doubtful accounts of $40 and $66, respectively... 1,618 1,912
Related party receivables......................... 188 188
Prepaid expenses and other current assets......... 4 27
------ ------
Total current assets............................ 1,976 2,229
Property and equipment, net......................... 573 844
Other assets........................................ 27 22
------ ------
$2,576 $3,095
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt................. $ 153 $ 126
Borrowings on line of credit...................... 80 650
Current portion of capitalized lease obligations.. 119 191
Accounts payable.................................. 1,605 1,319
Accrued expenses.................................. 209 180
------ ------
Total current liabilities....................... 2,166 2,466
Capitalized lease obligations, net of current
portion............................................ 293 473
------ ------
Total liabilities............................... 2,459 2,939
Commitments and contingencies
Stockholders' equity:
Common stock, no par value, 2,500 and 2,500 shares
authorized, 100 and 2,489 shares issued and
outstanding for Impact Telemarketing Group, Inc.
and Impact Telemarketing, Inc.................... 91 91
Retained earnings................................. 26 65
------ ------
Total stockholders' equity...................... 117 156
------ ------
$2,576 $3,095
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE>
IMPACT TELEMARKETING GROUP, INC.
COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ------------------
1996 1996 1997
------------ ----------- ------
(UNAUDITED)
<S> <C> <C> <C>
Revenues..................................... $8,869 $5,950 $8,958
Operating expenses........................... 6,961 4,356 6,708
------ ------ ------
Gross profit............................... 1,908 1,594 2,250
Selling, general and administrative.......... 2,108 1,597 2,089
------ ------ ------
Income (loss) from operations.............. (200) (3) 161
Other (income) expense:
Interest expense........................... 30 12 74
Gain on sale of property and equipment..... (105) -- --
------ ------ ------
Net income (loss)............................ $ (125) $ (15) $ 87
====== ====== ======
Pro forma tax provision (Unaudited) (See Note
2):
Income (loss) before income taxes.......... $ (125) $ (15) $ 87
Pro forma provision for income taxes....... (50) (6) (35)
------ ------ ------
Pro forma net income (loss)................ $ (75) $ (9) $ 52
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE>
IMPACT TELEMARKETING GROUP, INC.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
---------------- ADDITIONAL
NUMBER PAID-IN RETAINED
OF SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ------ ---------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995.......... 100 $ -- $91 $191 $282
Net loss........................... -- -- -- (125) (125)
Distributions to stockholders...... -- -- -- (40) (40)
--- ----- --- ---- ----
Balance, December 31, 1996.......... 100 -- 91 26 117
Net income......................... -- -- -- 87 87
Distributions to stockholders...... -- -- -- (48) (48)
--- ----- --- ---- ----
Balance, September 30, 1997......... 100 $ -- $91 $ 65 $156
=== ===== === ==== ====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-68
<PAGE>
IMPACT TELEMARKETING GROUP, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, -----------------
1996 1996 1997
------------ ----------- -----
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................. $(125) $ (15) $ 87
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization............... 128 80 129
Gain on sale of property and equipment...... (105) -- --
Provision for doubtful accounts............. 77 8 26
Changes in operating assets and liabilities:
Accounts receivable, trade................ 443 873 (320)
Prepaid expenses and other current assets. 7 (10) (23)
Related party receivables................. (72) (61) --
Due from affiliate........................ -- (47) --
Other assets.............................. (12) 15 5
Accounts payable and accrued liabilities.. (245) (754) (315)
----- ----- -----
Net cash provided by (used in) operating
activities............................. 96 89 (411)
Cash flows from investing activities:
Proceeds from sale of property and equipment.. 157 -- --
Purchase of property and equipment............ (155) (78) (52)
----- ----- -----
Net cash provided by (used in) investing
activities............................. 2 (78) (52)
Cash flows from financing activities:
Net borrowings on line of credit.............. 80 50 570
Payments on notes payable..................... (45) (43) (173)
Payments on capital lease obligations......... (85) (64) (96)
Borrowings under term loan.................... -- -- 146
Distributions to stockholders................. (40) (40) (48)
----- ----- -----
Net cash provided by (used in) financing
activities............................. (90) (97) 399
Net increase (decrease) in cash................. 8 (86) (64)
Cash and cash equivalents at beginning of year.. 158 158 166
----- ----- -----
Cash and cash equivalents at end of year........ $ 166 $ 72 $ 102
===== ===== =====
Supplemental disclosure of cash flow
information:
Cash paid for interest........................ $ 30 $ 23 $ 67
Noncash investing and financing activities:
Property acquired under capital leases...... $ 330 $ 26 $ 348
Assumption of North Dakota debt by third
party in conjunction with the sale of North
Dakota assets.............................. $ 67 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-69
<PAGE>
IMPACT TELEMARKETING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1--NATURE OF OPERATIONS
The affiliated companies of Impact Telemarketing Group, Inc. ("Impact" or
the "Company") are individually incorporated companies owned by the same
stockholders. Each of the companies is engaged in providing primarily outbound
telemarketing services to national and regional companies in the insurance,
financial services, telecommunications and utilities industries. The
affiliated companies are comprised of Impact Telemarketing Group, Inc.
("Group"), Impact Tele-marketing, Inc. ("Inc."), and Impact Telemarketing of
North Dakota, Inc. ("North Dakota"). The Company's headquarters are in
Woodbury, New Jersey.
The results of operations for the year ended December 31, 1996 include the
expenses of North Dakota. North Dakota provided telemarketing services to
Group only. North Dakota's net assets were sold to a third party on December
31, 1996 for $157,000 in cash and the assumption of $67,000 in liabilities. A
gain of $105,000 has been recognized for the difference between the total
purchase price and the net book value of the assets that were sold.
At September 30, 1997, the Company has a working capital deficit of $237,000
and is not in compliance with certain covenants contained in its loan
agreement with a bank. Total amounts outstanding as of September 30, 1997
under the Company's term loan and line of credit of $116,000 and $650,000,
respectively, are currently due and payable at the discretion of the bank. The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern. Even with income from operations, the Company may
require additional financing to achieve its plans for 1997 and beyond.
However, should the Company be unable to obtain such financings, the Company
will be required to reduce discretionary spending. Management believes that it
will be able to reduce discretionary spending if required. The accompanying
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of Combination
The combination of the financial statements includes the accounts of all the
affiliated companies (Group, Inc. and North Dakota) in which the principal
stockholders exercised similar control and which had similar operations. All
significant inter-company transactions have been eliminated.
Revenue Recognition
The Company recognizes revenues on programs as services are performed,
generally based on hours incurred.
Major Customers and Concentration of Credit Risk
For the year ended December 31, 1996, one customer accounted for
approximately 51% of revenues. For the nine months ended September 30, 1996,
two customers accounted for 51% and 14% of revenues, respectively. For the
nine months ended September 30, 1997, three customers accounted for 52%, 13%
and 12% of revenues, respectively. The loss of the Company's major customer
could have a material adverse effect on the Company's business.
F-70
<PAGE>
IMPACT TELEMARKETING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and accounts
receivable. The Company holds deposits in money market accounts. The Company's
accounts receivable are derived from sales to customers located in the United
States. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral for its accounts receivable. The Company
maintains reserves for potential credit losses based upon the expected
collectibility of all accounts receivable. At December 31, 1996, one customer
accounted for approximately 81% of accounts receivable. At September 30, 1997,
two customers accounted for approximately 63% and 13% of accounts receivable,
respectively.
Cash and Cash Equivalents
Cash includes cash and highly liquid investments purchased with an original
maturity of three months or less.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over
the estimated useful lives of the respective assets, generally five to seven
years. Leasehold improvements are amortized over the lesser of the estimated
useful lives of the equipment or the lease term, generally ten years.
Income Taxes
The affiliated companies include separate legal entities that are controlled
by common shareholders. These entities file separate tax returns. Two
companies elected to be treated as an S Corporation for federal and state
income tax purposes and accordingly any liabilities for income taxes are the
direct responsibility of the stockholders. The other entity is a tax paying
entity which accounts for income taxes using the asset and liability method,
whereby deferred income tax assets and liabilities are determined based on the
differences between financial reporting and tax bases of assets and
liabilities and are measured using currently enacted tax rates and laws.
The taxable entity incurred losses for the year ended December 31, 1996 and
for the nine months ended September 30, 1997. The differences between
financial reporting and tax basis of assets and liabilities are not
significant. As of September 30, 1997, Inc. had net operating loss
carryforwards of approximately $472,000 each for federal and state. These
carryforwards expire from 2003 through 2011. Management believes sufficient
uncertainty exists with regard to the realization of these carryforwards.
Accordingly, a full valuation allowance has been provided as of September 30,
1997.
The unaudited pro forma income tax information included in the Statement of
Operations is presented in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," as if the Company had been
subject to federal and state income taxes for the entire periods presented.
Fair Value of Financial Instruments
Cash, accounts receivable, accounts payable and accrued liabilities are
reflected in the financial statements at fair value due to the short-term
nature of those instruments. The carrying amount of the long-term debt and
capitalized lease obligations approximates fair value at September 30, 1997.
F-71
<PAGE>
IMPACT TELEMARKETING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Unaudited Interim Financial Information
The interim financial information as of September 30, 1996 and for the nine
months ended September 30, 1996 has been prepared from the unaudited financial
records of the Company and, in the opinion of management, reflect all
adjustments, consisting only of normal recurring items, necessary for a fair
presentation of the financial position and results of operations and of cash
flows for the respective interim periods.
NOTE 3--RELATED PARTY TRANSACTIONS
The Company rents office space owned by a partnership whose partners are the
sole stockholders of the Company. The office space is rented on a month to
month basis at above market rates. Total rent expense was $139,000 for the
year ended December 31, 1996 and $111,000 and $89,000 for the nine months
ended September 30, 1996 and 1997, respectively.
As of September 30, 1997, the Company has total loans receivable from its
sole stockholders and partnerships owned by the Company's sole stockholders of
$188,000. There are no scheduled dates of repayment or interest rates
associated with these loans.
NOTE 4--PROPERTY AND EQUIPMENT, NET
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Furniture and fixtures..................... $ 144 $ 243
Computer equipment and software............ 752 1,053
Leasehold improvements..................... 81 81
----- ------
$ 977 $1,377
Less: Accumulated depreciation............. (404) (533)
----- ------
$ 573 $ 844
===== ======
</TABLE>
Depreciation expense was $75,000 for the year ended December 31, 1996 and
$47,000 and $27,000 for the nine months ended September 30, 1996 and 1997,
respectively.
Included in fixed assets shown above as of September 30, 1997 are fixed
assets under capital leases with a gross amount of $880,000. Total
amortization expense was $53,000 for the year ended December 31, 1996 and
$33,000 and $102,000 for the nine months ended September 30, 1996 and 1997,
respectively.
NOTE 5--NOTES PAYABLE
In December 1996, the Company entered into a Loan Agreement (the
"Agreement") with a bank which provided for a $650,000 line of credit and a
$150,000 term loan (the "Term Loan"). Borrowings on the line of credit are
limited to 75% of eligible accounts receivable, as defined. Principal
outstanding on the line of credit and Term Loan bear interest at the bank's
prime rate, as defined, plus .50% (9.0% as of September 30, 1997). The line of
credit expires December 1, 1997 and is secured by substantially all of the
Company's assets. Payments are due monthly for accrued interest only beginning
on March 1, 1997. All principal and remaining interest is due and payable on
December 1, 1997. Amounts outstanding under this line of credit are $30,000
and $650,000 as of December 31, 1996 and September 30, 1997, respectively. The
Agreement contains restrictive covenants, which, among other things, require
the maintenance of a debt service ratio, limitations on debt and dividends and
minimum tangible net worth, as defined in the Agreement.
F-72
<PAGE>
IMPACT TELEMARKETING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
In May 1997, the Company's line of credit under the Agreement was increased
to $850,000. In June 1997, the line of credit was reduced to $650,000 as a
result of the Company's default on certain covenants contained in the
Agreement.
In April 1997, the Company obtained a $100,000 letter of credit facility
under the Agreement. Borrowings under the letter of credit facility are due
upon demand, bear interest at the bank's prime rate, as defined, plus 2%
(10.5% as of September 30, 1997) and are secured by substantially all of the
Company's assets. No borrowings were outstanding under this letter of credit
facility as of September 30, 1997.
At December 31, 1996, the Company had a $100,000 revolving line of credit
agreement with a bank. Borrowings bear interest at the bank's prime rate, as
defined, plus 1.5% (9.75% at December 31, 1996). The balance outstanding under
this line of $50,000 at December 31, 1996 was repaid in January 1997 upon
termination of the line of credit agreement.
Notes payable consists of:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Term loan payable to a bank, secured by
substantially all of the Company's assets,
payable in equal monthly installments of
$4,000 over 36 months..................... -- $116
Installment note payable to a bank, secured
by accounts receivable, furniture and
fixtures, and liens on personal assets of
stockholders, payable in equal monthly
installments of $3,000, including interest
at 9.5% through
May 2001.................................. $143 --
Note payable to a relative of the
stockholders. No stated maturity date or
interest rate............................. 10 10
---- ----
$153 $126
==== ====
</TABLE>
The installment note payable was repaid in January 1997 with borrowings
obtained from the term loan.
NOTE 6--CAPITAL LEASES
The Company leases certain equipment under capital leases. The Company's
weighted average interest rate was 12% as of September 30, 1997. Future
minimum lease payments as of September 30, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1997................................................................ $ 69
1998................................................................ 250
1999................................................................ 200
2000................................................................ 163
2001................................................................ 110
2002................................................................ 28
----
Total minimum obligations........................................... $820
Less interest....................................................... 156
----
Present value of minimum lease payments............................. 664
Less: Current portion............................................... 191
----
$473
====
</TABLE>
F-73
<PAGE>
IMPACT TELEMARKETING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONCLUDED)
NOTE 7--EMPLOYEE BENEFIT PLANS
The Company has a savings plan under Section 401(k) of the Internal Revenue
Code (the "Plan"). The Plan allows all eligible employees to defer up to 15%
of their income on a pretax basis through contributions to the Plan. As of
September 30, 1997, the Company has not made any contributions under the Plan.
NOTE 8--COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain facilities and equipment under noncancelable
operating leases through the year 2002. Future minimum payments, by year and
in the aggregate, under noncancelable operating leases with initial or
remaining terms of one year or more consist of the following at September 30,
1997 (in thousands):
<TABLE>
<S> <C>
1997............................................................... $ 57
1998............................................................... 230
1999............................................................... 234
2000............................................................... 239
2001............................................................... 243
Thereafter......................................................... 174
------
$1,177
======
</TABLE>
Rent expense was $182,000 for the year ended December 31, 1996 and $120,000
and $202,000 for the nine months ended September 30, 1996 and 1997,
respectively.
Subcontractor Arrangements
Impact has guaranteed the payments of telephone charges incurred by its
major subcontractors with the telephone company. This guaranty arrangement
expires in March, 1998, and to date, no amounts have been claimed by the
telephone company under this arrangement. Impact has a contractual right to
offset any claims by the telephone company against amounts owed by Impact to
these subcontractors.
Legal Matters
The Company became a party to certain lawsuits and claims arising out of the
conduct of its business. While the ultimate outcome of these matters cannot be
predicted with certainty, management expects that these matters will not have
a material adverse effect on the financial position or results of the Company.
NOTE 9--SUBSEQUENT EVENT (UNAUDITED)
The Company and its stockholders have entered into a definitive agreement
with Compass International Services Corporation ("Compass") pursuant to which
Compass will acquire all outstanding shares of the Company's common stock in
exchange for cash and common stock of Compass, concurrent with the
consummation of the initial public offering of the common stock of Compass.
F-74
<PAGE>
The inside back cover of the Prospectus contains a map of the United States
and an inset map of the United Kingdom in the upper right corner, with all of
the Company's locations represented by dots except the Company's headquarters
which is represented by a star. In the lower right corner is the Company's
logo.
Offices: US: Atlanta, GA, Buffalo, NY, Destin, FL, Dallas, TX. Houston, TX, Hunt
Valley, MD, Las Vegas, NV, Louisville, KY, Norcross, GA, Phoenix, AZ,
New York, NY, (Corporate Headquarters) Rolling Meadows, IL, Tampa, FL,
Voorhees, NJ, Woodbury, NJ.
Office U.K.: Manchester
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with the Of-
fering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been au-
thorized by the Company or the Underwriters. This Prospectus does not consti-
tute an offer to sell or a solicitation of any offer to buy any securities
other than the shares of Common Stock to which it relates or an offer to, or a
solicitation of, any person in any jurisdiction where such an offer or solici-
tation would be unlawful. Neither the delivery of this Prospectus nor any sale
made hereunder shall, under any circumstances, create implication that there
has been no change in the affairs of the Company or that information contained
herein is correct as of any time subsequent to the date hereof.
-------------------
TABLE OF CONTENTS
-------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 9
The Company............................................................... 16
Use of Proceeds........................................................... 18
Dividend Policy........................................................... 18
Capitalization............................................................ 19
Dilution.................................................................. 20
Selected Financial Data................................................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 23
Business.................................................................. 34
Management................................................................ 46
Certain Transactions...................................................... 52
Principal Stockholders.................................................... 55
Description of Capital Stock.............................................. 56
Shares Eligible for Future Sale........................................... 57
Underwriting.............................................................. 59
Certain Legal Matters..................................................... 60
Experts................................................................... 60
Additional Information.................................................... 61
Index to Financial Statements............................................. F-1
</TABLE>
Until , 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities offered hereby,
whether or not participating in this distribution, may be required to deliver
a Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus when acting as Underwriters and with respect to their unsold
allotments or subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4,100,000 SHARES
LOGO
COMPASS INTERNATIONAL
SERVICES CORPORATION
COMMON STOCK
----------------
PROSPECTUS
----------------
NationsBanc Montgomery
Securities, Inc.
Lehman Brothers
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an estimate of the approximate amount of fees and
expenses (other than underwriting commissions and discounts) payable by the
Company in connection with the issuance and distribution of the Common Stock
pursuant to the Prospectus contained in this Registration Statement. The
Company will pay all of these expenses.
<TABLE>
<CAPTION>
APPROXIMATE
AMOUNT
-----------
<S> <C>
Securities and Exchange Commission registration fee........... $ 17,146
NASD filing fee............................................... 6,158
Nasdaq National Market listing fee............................ 47,084
Accountants' fees and expenses................................ 900,000
Blue Sky fees and expenses.................................... 10,000
Legal fees and expenses....................................... 1,300,000
Transfer Agent and Registrar fees and expenses................ 10,000
Printing and engraving........................................ 200,000
Miscellaneous expenses........................................ 909,612
----------
Total....................................................... $3,400,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Amended and Restated Certificate of Incorporation provides
that the Company shall, to the fullest extent permitted by Section 145 of the
Delaware General Corporation Law, as amended from time to time, indemnify all
persons whom it may indemnify pursuant thereto.
Section 145 of the Delaware General Corporation Law permits a corporation,
under specified circumstances, to indemnify its directors, officers, employees
or agents against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlements actually and reasonably incurred by them in
connection with any action, suit or proceeding brought by third parties by
reason of the fact that they were or are directors, officers, employees, or
agents of the corporation, if such directors, officers, employees or agents
acted in good faith and in a manner they reasonably believed to be in or not
opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, i.e., one by or in the right of the
corporation, indemnification may be made only for expenses actually and
reasonably incurred by directors, officers, employees or agents in connection
with the defense or settlement of an action or suit, and only with respect to
a matter as to which they shall have acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made if such person shall
have been adjudged liable to the corporation, unless and only to the extent
that the court in which the action or suit was brought shall determine upon
application that the defendant directors, officers, employees or agents are
fairly and reasonably entitled to be indemnified for such expenses despite
such adjudication of liability.
The Company's Amended and Restated Certificate of Incorporation provides
that the Company's directors will not be personally liable to the Company or
its stockholders for monetary damages resulting from breaches of their
fiduciary duty as directors except (a) for any breach of the duty of loyalty
to the Company or its stockholders, (b) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(c) under Section 174 of the Delaware General Corporation Law, which makes
directors liable for unlawful dividends or unlawful stock repurchase or
redemptions or (d) for transactions from which directors derive improper
personal benefit.
II-1
<PAGE>
Upon the effectiveness of this Registration Statement the Company will enter
into indemnification agreements with its directors and officers. The form of
such agreement is filed as an Exhibit hereto. The Company expects to have
director and officer insurance coverage concurrently with the consummation of
the Offering.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following information relates to securities of the Company issued or
sold by the Company since inception that were not registered under the
Securities Act:
The Company was organized in April 1997 and issued 15,000 shares of its
Common Stock to its founders at a price of $10.00 per share. Of such shares,
10,000 were issued to BGL Capital Partners, LLC, 2,250 were issued to Michael
J. Cunningham, 1,750 were issued to Mahmud U. Haq and 1,000 were issued to
Richard A. Alston. The offer and sale of these shares was exempt from
registration under the Securities Act of 1933, as amended ("Securities Act"),
in reliance on the exemption provided by Section 4(2) thereof. Prior to the
consummation of the Offering, the number of these shares will be increased to
1,682,769 by a 112.185-to-1 stock split.
See "Certain Transactions" for a discussion of the shares of Common Stock to
be issued in connection with the Acquisitions. It is anticipated these
transactions will be completed without registration under the Securities Act
in reliance on the exemption provided by Section 4(2).
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
2.1* Stock Purchase Agreement dated as of October 3, 1997 by and
among the Registrant, The Mail Box, Inc. and the Stockholders
named therein.
2.2* Stock Purchase Agreement dated as of October 3, 1997 by and
among the Registrant, National Credit Management Corporation,
and the Stockholders named therein.
2.3* Stock Purchase Agreement dated as of October 3, 1997 by and
among the Registrant, BRMC of Delaware, Inc. and the
Stockholders named therein.
2.4* Stock Purchase Agreement dated as of October 3, 1997 by and
among the Registrant, Mid-Continent Agencies, Inc. and the
Stockholder named therein.
2.5* Stock Purchase Agreement dated as of October 3, 1997 by and
among the Registrant, Impact Telemarketing Group, Inc. and the
Stockholders named therein.
3.1* Form of Amended and Restated Certificate of Incorporation of the
Registrant.
3.2* Bylaws of the Registrant.
4.1 Specimen stock certificate representing Common Stock.
5** Opinion of Katten Muchin & Zavis as to the legality of the
securities being registered (including consent).
10.1 Form of 1997 Employee Incentive Compensation Plan.
10.2 Form of Employee Stock Purchase Plan.
10.3 Form of Employment Agreement between the Registrant and Michael
J. Cunningham.
10.4 Form of Employment Agreement between the Registrant and Mahmud
U. Haq.
10.5 Form of Employment Agreement between the Registrant and Richard
A. Alston.
10.6* Form of Employment Agreement between The Mail Box, Inc. and
Kenneth W. Murphy.
10.7* Form of Stockholders' Agreement.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.8* Bonus Agreement dated as of October 2, 1997 among the
Registrant, National Credit Management Corporation and the
Stockholders named therein.
10.9* Form of Indemnification Agreement between the Registrant and its
officers and directors.
10.10* Form of Employment Agreement between National Credit Management
Corp. and Leeds Hackett.
10.11* Form of Employment Agreement between B.R.M.C. of Delaware, Inc.
and John Maloney.
10.12* Form of Employment Agreement between B.R.M.C. of Delaware, Inc.
and H. Gene Collins.
10.13* Form of Employment Agreement between B.R.M.C. of Delaware, Inc.
and Mary Maloney.
10.14* Form of Employment Agreement between Mid-Continent Agencies,
Inc. and Leslie J. Kirschbaum.
10.15* Form of Employment Agreement between Impact Telemarketing Group,
Inc. and Edward A. DuCoin.
10.16* Form of Employment Agreement between Impact Telemarketing Group,
Inc. and David T. DuCoin.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Ernst & Young LLP.
23.4** Consent of Katten Muchin & Zavis (contained in its opinion to be
filed as Exhibit 5 hereto).
23.5* Consent to be named as prospective director (Kenneth W. Murphy).
23.6* Consent to be named as prospective director (Leeds Hackett)
23.7* Consent to be named as prospective director (John Maloney)
23.8* Consent to be named as prospective director (Leslie J.
Kirschbaum)
23.9* Consent to be named as prospective director (Edward A. DuCoin)
23.10* Consent to be named as prospective director (Tomasso Zanzotto)
23.11* Consent to be named as prospective director (Howard L. Clark,
Jr.)
24* Power of Attorney.
</TABLE>
- --------
*Previously filed
**To be filed by amendment
(b) FINANCIAL STATEMENT SCHEDULES.
Not Applicable.
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes:
(1) To provide to the Underwriters at the closing 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-3
<PAGE>
(2) 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 Company 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.
(3) 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.
Insofar as indemnification for liabilities arising under 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 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 of controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter had 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.
II-4
<PAGE>
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 Chicago,
and State of Illinois on the 21st day of November, 1997.
Compass International Services
Corporation
/s/ Michael J. Cunningham
By: _________________________________
Michael J. Cunningham
Chairman 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>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Michael J. Cunningham Chairman and Chief Executive November 21, 1997
____________________________________ Officer (Principal
Michael J. Cunningham Executive Officer)
/s/ Richard A. Alston Chief Financial Officer November 21, 1997
____________________________________ (Principal Financial and
Richard A. Alston Accounting Officer)
/s/ Scott H. Lang Director November 21, 1997
____________________________________
Scott H. Lang
/s/ Mahmud U. Haq Director November 21, 1997
____________________________________
Mahmud U. Haq
</TABLE>
II-5
<PAGE>
Exhibit 1.1
4,100,000 Shares
Compass International Services Corporation
Common Stock
Underwriting Agreement
dated _____________, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 1. Representations and Warranties of the Company....................................................... 2
Compliance with Registration Requirements......................................................... 2
Offering Materials Furnished to Underwriters...................................................... 3
Distribution of Offering Material By the Company.................................................. 3
The Underwriting Agreement........................................................................ 3
Authorization of the Common Shares................................................................ 3
No Applicable Registration or Other Similar Rights................................................ 3
No Material Adverse Change........................................................................ 4
Independent Accountants........................................................................... 4
Preparation of the Financial Statements........................................................... 5
Incorporation and Good Standing of the Company.................................................... 5
Capitalization and Other Capital Stock Matters.................................................... 6
Stock Exchange Listing............................................................................ 6
Non-Contravention of Existing Instruments; No
Further Authorizations or Approvals Required................................................... 7
No Material Actions or Proceedings................................................................ 7
Intellectual Property Rights...................................................................... 8
All Necessary Permits, etc........................................................................ 8
Title to Properties............................................................................... 8
Tax Law Compliance................................................................................ 8
Company Not an "Investment Company"............................................................... 9
Insurance......................................................................................... 9
No Price Stabilization or Manipulation............................................................ 9
Related Party Transactions........................................................................ 9
No Unlawful Contributions or Other Payments....................................................... 9
Accounting Systems................................................................................ 9
Compliance with Environmental Laws................................................................ 10
ERISA Compliance.................................................................................. 10
Compliance with Certain Laws...................................................................... 11
Acquisition Agreements............................................................................ 11
Representations in Acquisition Agreements......................................................... 12
Patent............................................................................................ 12
Bomar Acquisition................................................................................. 12
Section 2. Purchase, Sale and Delivery of the Common Shares.................................................... 12
The Firm Common Shares.............................................................................. 12
The First Closing Date.............................................................................. 12
The Optional Common Shares; the Second Closing Date................................................. 13
Public Offering of the Common Shares................................................................ 13
Payment for the Common Shares....................................................................... 14
</TABLE>
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<TABLE>
<CAPTION>
Page
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<S> <C>
Delivery of the Common Shares........................................ 14
Delivery of Prospectus to the Underwriters........................... 14
Section 3. Additional Covenants of the Company.................................. 14
Representatives' Review of Proposed Amendments and
Supplements........................................................ 15
Securities Act Compliance.......................................... 15
Amendments and Supplements to the Prospectus and
Other Securities Act Matters....................................... 15
Copies of any Amendments and Supplements to the
Prospectus......................................................... 16
Blue Sky Compliance................................................ 16
Use of Proceeds.................................................... 16
Transfer Agent..................................................... 16
Earnings Statement................................................. 16
Periodic Reporting Obligations..................................... 16
Agreement Not To Offer or Sell Additional Securities............... 16
Future Reports to the Representatives.............................. 17
Satisfaction of Founding Company Acquisition
Conditions......................................................... 17
Section 4. Payment of Expenses.................................................. 17
Section 5. Conditions of the Obligations of the Underwriters.................... 18
Accountants' Comfort Letter........................................ 18
Compliance with Registration Requirements; No Stop
Order; No Objection from NASD...................................... 19
No Material Adverse Change......................................... 19
Opinion of Counsel for the Company................................. 19
Opinion of Counsel for the Underwriters............................ 19
Officers' Certificate.............................................. 20
Bring-down Comfort Letter.......................................... 20
Acquisition Closings............................................... 20
Acquisition Agreements........................................... 21
Lock-Up Agreement from Certain Stockholders of the
Company............................................................ 21
Additional Documents............................................... 21
Section 6. Reimbursement of Underwriters' Expenses.............................. 22
Section 7. Effectiveness of this Agreement...................................... 22
Section 8. Indemnification...................................................... 22
Indemnification of the Underwriters................................ 22
</TABLE>
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Page
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<S> <C> <C>
Indemnification of the Company, its Directors
and Officers............................................. 24
Notifications and Other Indemnification Procedures.......... 24
Settlements................................................. 25
Section 9. Contribution................................................... 26
Section 10. Default of One or More of the Several Underwriters............. 27
Section 11. Termination of this Agreement.................................. 28
Section 12. Representations and Indemnities to Survive Delivery............ 29
Section 13. Notices........................................................ 29
Section 14. Successors..................................................... 29
Section 15. Partial Unenforceability....................................... 30
Section 16. Governing Law Provisions....................................... 30
Consent to Jurisdiction..................................... 30
Section 17. General Provisions............................................. 30
</TABLE>
iii
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Underwriting Agreement
, 1997
NATIONSBANC MONTGOMERY SECURITIES, INC.
LEHMAN BROTHERS, INC.
As Representatives of the several Underwriters
c/o NATIONSBANC MONTGOMERY SECURITIES, INC.
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
Introductory. Compass International Services Corporation, a Delaware
corporation (the "Company"), proposes to issue and sell to the several
underwriters named in Schedule A (the "Underwriters") an aggregate of 4,100,000
shares (the "Firm Common Shares") of its Common Stock, par value $.01 per share
(the "Common Stock"). In addition, the Company has granted to the Underwriters
an option to purchase up to an additional 615,000 shares (the "Optional Common
Shares") of Common Stock, as provided in Section 2. The Firm Common Shares and,
if and to the extent such option is exercised, the Optional Common Shares are
collectively called the "Common Shares". NationsBanc Montgomery Securities,
Inc. ("NationsBanc Montgomery") and Lehman Brothers, Inc. have agreed to act as
representatives of the several Underwriters (in such capacity, the
"Representatives") in connection with the offering and sale of the Common
Shares.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File No.
333-37205), which contains a form of prospectus to be used in connection with
the public offering and sale of the Common Shares. Such registration statement,
as amended, including the financial statements, exhibits and schedules thereto,
in the form in which it was declared effective by the Commission under the
Securities Act of 1933 and the rules and regulations promulgated thereunder
(collectively, the "Securities Act"), including any information deemed to be a
part thereof at the time of effectiveness pursuant to Rule 430A or Rule 434
under the Securities Act, is called the "Registration Statement". Any
registration statement filed by the Company pursuant to Rule 462(b) under the
Securities Act is called the "Rule 462(b) Registration Statement", and from and
after the date and time of filing of the Rule 462(b) Registration Statement the
term "Registration Statement" shall include the Rule 462(b) Registration
Statement. Such prospectus, in the form first used by the Underwriters to
confirm sales of the Common Shares, is called the "Prospectus"; provided,
however, if the Company has, with the
<PAGE>
consent of the Representatives, elected to rely upon Rule 434 under the
Securities Act, the term "Prospectus" shall mean the Company's prospectus
subject to completion (each, a "preliminary prospectus") dated ___________, 1997
(such preliminary prospectus is called the "Rule 434 preliminary prospectus"),
together with the applicable term sheet (the "Term Sheet") prepared and filed by
the Company with the Commission under Rules 434 and 424(b) under the Securities
Act and all references in this Agreement to the date of the Prospectus shall
mean the date of the Term Sheet. All references in this Agreement to the
Registration Statement, the Rule 462(b) Registration Statement, a preliminary
prospectus, the Prospectus or the Term Sheet, or any amendments or supplements
to any of the foregoing, shall include any copy thereof filed with the
Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval
System ("EDGAR").
Simultaneously with the closing of the purchase of the Firm Common
Shares by the Underwriters, the Company will acquire all of the outstanding
capital stock of each of the Founding Companies (as hereinafter defined)
(collectively, the "Founding Company Acquisitions"), the consideration for which
will be a combination of cash and shares of Common Stock as described in the
Registration Statement.
The Company hereby confirms its agreements with the Underwriters
as follows:
Section 1. Representations and Warranties of the Company.
The Company hereby represents, warrants and covenants to each
Underwriter as follows:
(a) Compliance with Registration Requirements. The Registration
Statement and any Rule 462(b) Registration Statement have been declared
effective by the Commission under the Securities Act. The Company has complied
with all requests of the Commission for additional or supplemental information.
No stop order suspending the effectiveness of the Registration Statement or any
Rule 462(b) Registration Statement is in effect and no proceedings for such
purpose have been instituted or are pending or, to the best knowledge of the
Company, are contemplated or threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed complied in
all material respects with the Securities Act and, if filed by electronic
transmission pursuant to EDGAR (except as may be permitted by Regulation S-T
under the Securities Act), was identical to the copy thereof delivered to the
Underwriters for use in connection with the offer and sale of the Common Shares.
Each of the Registration Statement, any Rule 462(b) Registration Statement and
any post-effective amendment thereto, at the time it became effective or will
become effective, complied and will comply in all material respects with the
Securities Act and did not and will not contain any untrue statement of a
material fact or omit to state a material fact required
2
<PAGE>
to be stated therein or necessary to make the statements therein not misleading.
The Prospectus, as amended or supplemented, as of its date and at all subsequent
times, did not and will not contain any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
The representations and warranties set forth in the two immediately preceding
sentences do not apply to statements in or omissions from the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment thereto, or the Prospectus, or any amendments or supplements thereto,
made in reliance upon and in conformity with information relating to any
Underwriter furnished to the Company in writing by the Representatives expressly
for use therein. There are no contracts or other documents required to be
described in the Prospectus or to be filed as exhibits to the Registration
Statement which have not been described or filed as required.
(b) Offering Materials Furnished to Underwriters. The Company has
delivered to the Representatives two complete manually signed copies of the
Registration Statement and of each consent and certificate of experts filed as a
part thereof, and conformed copies of the Registration Statement (without
exhibits) and preliminary prospectuses and the Prospectus, as amended or
supplemented, in such quantities and at such places as the Representatives have
reasonably requested for each of the Underwriters.
(c) Distribution of Offering Material By the Company. The Company has
not distributed and will not distribute, prior to the later of the Second
Closing Date (as defined below) and the completion of the Underwriters'
distribution of the Common Shares, any offering material in connection with the
offering and sale of the Common Shares other than a preliminary prospectus, the
Prospectus or the Registration Statement.
(d) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding agreement of,
the Company, enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as the
enforcement hereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting the rights and
remedies of creditors or by general equitable principles.
(e) Authorization of the Common Shares. The Common Shares to be
purchased by the Underwriters from the Company have been duly authorized for
issuance and sale pursuant to this Agreement and, when issued and delivered by
the Company pursuant to this Agreement, will be validly issued, fully paid and
nonassessable.
(f) No Applicable Registration or Other Similar Rights. There are no
persons with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included in
the
3
<PAGE>
offering contemplated by this Agreement, except for such rights as have been
duly waived.
(g) No Material Adverse Change. Except as otherwise disclosed in the
Prospectus, subsequent to the respective dates as of which information is given
in the Prospectus: (i) there has been no material adverse change, or any
development that could reasonably be expected to result in a material adverse
change, in the condition, financial or otherwise, or in the earnings, business,
operations or prospects, whether or not arising from transactions in the
ordinary course of business, of the Company, B.R.M.C. of Delaware, Inc. and its
subsidiaries (collectively, "Bomar"), Impact Telemarketing Group, Inc. and
Impact Tele-Marketing, Inc. (together, "Impact"), The Mail Box, Inc. and its
subsidiaries (collectively, "Mail Box"), Mid-Continent Agencies, Inc. and its
subsidiaries (collectively, "Mid-Continent") and National Credit Management
Corporation and its subsidiaries (together, "National") (collectively, the
"Founding Companies"), considered as one entity (any such change is called a
"Material Adverse Change"); (ii) the Company and the Founding Companies,
considered as one entity, have not incurred any material liability or
obligation, indirect, direct or contingent, not in the ordinary course of
business nor entered into any material transaction or agreement not in the
ordinary course of business; (iii) there has been no adverse change with respect
to the goodwill and other intangible assets of the Company and the Founding
Companies (collectively, the "Intangible Assets") such that, had the Founding
Company Acquisitions been consummated on the date hereof, the Intangible Assets,
net of accumulated amortization, would not have a value at least equal to the
value reflected in the pro forma combined balance sheet of the Company contained
in the Registration Statement and no part of the Intangible Assets shown on such
balance sheet are required to be written down in conformity with generally
accepted accounting principles applied on a basis consistent with prior periods;
and (iv) except as disclosed in the Registration Statement, there has been no
dividend or distribution of any kind declared, paid or made by the Company or
any Founding Company or, except for dividends paid to the Company or other
subsidiaries, any of its subsidiaries on any class of capital stock or
repurchase or redemption by the Company, any of its subsidiaries or any Founding
Company of any class of capital stock.
(h) Independent Accountants. Price Waterhouse LLP, who have audited
certain financial statements as set forth under the heading "Experts" and
expressed their opinion with respect to such financial statements (which term as
used in this Agreement includes the related notes thereto) filed with the
Commission as a part of the Registration Statement and included in the
Prospectus, are independent public or certified public accountants with respect
to the Company, Mail Box, Mid-Continent and Impact as required by the Securities
Act. Arthur Andersen LLP, who have audited certain financial statements (which
term as used in this Agreement includes the related notes thereto) as set forth
under the heading "Experts" and expressed their opinion with respect to such
financial statements (which term as used in this Agreement includes the related
notes thereto) filed with the Commission as a part of the Registration Statement
and included in the Prospectus, are independent public or certified public
accountants with respect to National as required by the
4
<PAGE>
Securities Act. Ernst & Young LLP, who have audited certain financial
statements (which term as used in this Agreement includes the related notes
thereto) as set forth under the heading "Experts" and expressed their opinion
with respect to such financial statements (which term as used in this Agreement
includes the related notes thereto) filed with the Commission as a part of the
Registration Statement and included in the Prospectus, are independent public or
certified public accountants with respect to Bomar as required by the Securities
Act.
(i) Preparation of the Financial Statements. The separate financial
statements of the Company and each of the Founding Companies, in each case
together with related notes, filed with the Commission as a part of the
Registration Statement and included in the Prospectus present fairly the
financial position, results of operations and cash flows of the Company and each
of such Founding Companies and of the Company, respectively, at the dates
specified and for the periods specified. Such financial statements have been
prepared in conformity with generally accepted accounting principles applied on
a consistent basis throughout the periods involved, except as may be expressly
stated in the related notes thereto, and all adjustments necessary for a fair
presentation of results for such period have been made. Except for the pro
forma financial statements discussed below, no other financial statements are
required to be included in the Registration Statement. No supporting schedules
are required to be included in the Registration Statement. The financial data
set forth in the Prospectus under the captions "Prospectus Summary--Summary Pro
Forma Combined Financial Data" and "--Summary Individual Founding Company
Financial Data," "Capitalization" and "Selected Financial Data" fairly present
the information set forth therein on a basis consistent with that of the audited
and pro forma financial statements contained in the Registration Statement and
the books and records of the Company and the Founding Companies, as applicable.
The pro forma combined financial statements of the Company and the Founding
Companies together with the related notes thereto included under the captions
"Prospectus Summary--Summary Pro Forma Combined Financial Data," "Selected
Financial Data," "Capitalization" and "Compass International Services
Corporation Unaudited Pro Forma Combined Financial Statements" and elsewhere in
the Prospectus and in the Registration Statement present fairly the information
contained therein, have been prepared in accordance with the Commission's rules
and guidelines with respect to pro forma financial statements and have been
properly presented on the pro forma bases described therein, and the assumptions
used in the preparation thereof are reasonable and the adjustments used therein
are appropriate to give effect to the transactions and circumstances referred to
therein.
(j) Incorporation and Good Standing of the Company and the Founding
Companies. Each of the Company and the Founding Companies has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation and has corporate power and
authority to own, lease and operate its properties and to conduct its business
as described in the Prospectus and, in the case of the Company, to enter into
and perform its obligations under this Agreement. The Company has no
subsidiaries. Each of the Company and
5
<PAGE>
each Founding Company is duly qualified as a foreign corporation to transact
business and is in good standing in each other jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except for such jurisdictions where the
failure to so qualify or to be in good standing would not, individually or in
the aggregate, result in a Material Adverse Change. As of the First Closing
Date (as hereinafter defined), after giving effect to the Founding Company
Acquisitions, all of the outstanding shares of the capital stock of each of the
Founding Companies will be owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge, lien,
encumbrance or claim; and no options, warrants or other rights to purchase,
agreements or other obligations to issue or other rights to convert any
obligations into shares of capital stock or ownership interests in any of the
Founding Companies are outstanding. As of the date hereof, the Company does not
own or control, directly or indirectly, any corporation, association or other
entity. Except as described in the Registration Statement and the Prospectus,
the Company is not party to any agreement or understanding, written or oral,
regarding the acquisition of, or of an interest in, any corporation, firm,
partnership, joint venture, association or other entity.
(k) Capitalization and Other Capital Stock Matters. The authorized,
issued and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" (other than for subsequent
issuances, if any, pursuant to employee benefit plans described in the
Prospectus or upon exercise of outstanding options or warrants described in the
Prospectus). The Common Stock (including the Common Shares) conforms in all
material respects to the description thereof contained in the Prospectus. All
of the issued and outstanding shares of Common Stock have been duly authorized
and validly issued, are fully paid and nonassessable and have been issued in
compliance with federal and state securities laws. None of the outstanding
shares of Common Stock were issued in violation of any preemptive rights, rights
of first refusal or other similar rights to subscribe for or purchase securities
of the Company. Upon completion of the Founding Company Acquisitions in the
manner described in the Registration Statement, the shares of Common Stock of
the Company to be issued in such Acquisitions will be duly authorized, validly
issued and fully paid and non-assessable. There are no authorized or
outstanding options, warrants, preemptive rights, rights of first refusal or
other rights to purchase, or equity or debt securities convertible into or
exchangeable or exercisable for, any capital stock of the Company or any of its
subsidiaries other than those described in the Prospectus. The description of
the Company's stock option, stock bonus and other stock plans or arrangements,
and the options or other rights granted thereunder, set forth in the Prospectus
accurately and fairly presents the information required to be shown with respect
to such plans, arrangements, options and rights.
(l) Stock Exchange Listing. The Common Shares have been approved for
inclusion on the Nasdaq National Market, subject only to official notice of
issuance.
6
<PAGE>
(m) Non-Contravention of Existing Instruments; No Further
Authorizations or Approvals Required. Neither the Company nor any of the
Founding Companies is in violation of its charter or by-laws or is in default
(or, with the giving of notice or lapse of time, would be in default)
("Default") under any indenture, mortgage, loan or credit agreement, note,
contract, franchise, lease or other instrument to which the Company or any
Founding Company is a party or by which it or any of them may be bound, or to
which any of the property or assets of the Company or any Founding Company is
subject (each, an "Existing Instrument"), except for such Defaults as would not,
individually or in the aggregate, result in a Material Adverse Change. The
Company's execution, delivery and performance of this Agreement and the
Acquisition Agreements and consummation of the transactions contemplated hereby
and thereby and by the Prospectus (i) have been duly authorized by all necessary
corporate action and will not result in any violation of the provisions of the
charter or by-laws of the Company or any Founding Company, (ii) will not
conflict with or constitute a breach of, or Default under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any Founding Company pursuant to, or require the
consent of any other party to, any Existing Instrument, except for such
conflicts, breaches, Defaults, liens, charges or encumbrances as would not,
individually or in the aggregate, result in a Material Adverse Change and except
for such consents as have ben or will, prior to the First Closing Date, be
obtained; and (iii) will not result in any violation of any law, administrative
regulation or administrative or court decree applicable to the Company or any
Founding Company. No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental or regulatory
authority or agency, is required for the Company's execution, delivery and
performance of this Agreement or any Acquisition Agreement and consummation of
the transactions contemplated hereby or thereby and by the Prospectus, except
such as are required under the Securities Act, applicable state securities or
blue sky laws and by the National Association of Securities Dealers, Inc. (the
"NASD").
(n) No Material Actions or Proceedings. Except as disclosed in the
Registration Statement and the Prospectus, there are no legal or governmental
actions, suits or proceedings pending or, to the best of the Company's
knowledge, threatened (i) against or affecting the Company or any of its
subsidiaries or any Founding Company, (ii) which has as the subject thereof any
officer or director of, or property owned or leased by, the Company or any of
its subsidiaries or any Founding Company or (iii) relating to environmental,
discrimination, debt collection, telephone solicitation or related matters,
where in any such case (A) there is a reasonable possibility that such action,
suit or proceeding might be determined adversely to the Company or such
subsidiary or such Founding Company and (B) any such action, suit or proceeding,
if so determined adversely, would reasonably be expected to result in a Material
Adverse Change or adversely affect the consummation of the transactions
contemplated by this Agreement. No material labor dispute with the employees of
the Company or any Founding Company exists or, to the best of the Company's
knowledge, is threatened or imminent. The descriptions of the legal actions of
the Founding Companies set forth in the Prospectus under the captions "Risk
Factors -- Patent
7
<PAGE>
Litigation; Dependence on Proprietary Technology" and "Litigation" are true and
correct and accurately and fairly present the information required to be shown
with respect to such legal actions, and no additional pending or threatened
legal actions or proceedings are required to be disclosed.
(o) Intellectual Property Rights. The Company, its subsidiaries and
the Founding Companies own or possess sufficient trademarks, trade names, patent
rights, copyrights, licenses, approvals, trade secrets and other similar rights
(collectively, "Intellectual Property Rights") reasonably necessary to conduct
their businesses as now conducted; and, as of the date hereof, the expected
expiration of any of such Intellectual Property Rights would not result in a
Material Adverse Change. Except as disclosed in the Registration Statement and
the Prospectus, neither the Company nor any of the Founding Companies has
received any notice of infringement or conflict with asserted Intellectual
Property Rights of others, which infringement or conflict, if the subject of an
unfavorable decision, would result in a Material Adverse Change.
(p) All Necessary Permits, etc. The Company and each Founding Company
possess such valid and current certificates, authorizations or permits issued by
the appropriate state, federal or foreign regulatory agencies or bodies
necessary to conduct their respective businesses, and neither the Company nor
any of the Founding Companies has received any notice of proceedings relating to
the revocation or modification of, or non-compliance with, any such certificate,
authorization or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a Material Adverse
Change.
(q) Title to Properties. The Company and each Founding Company has
good and marketable title to all the properties and assets reflected as owned in
the financial statements referred to in Section 1(i) above (or elsewhere in the
Prospectus), in each case free and clear of any security interests, mortgages,
liens, encumbrances, equities, claims and other defects, except such as do not
materially and adversely affect the value of such property and do not materially
interfere with the use made or proposed to be made of such property by the
Company or such Founding Company. The real property, improvements, equipment
and personal property held under lease by the Company or any Founding Company
are held under valid and enforceable leases, with such exceptions as do not
materially interfere with the use made or proposed to be made of such real
property, improvements, equipment or personal property by the Company or such
Founding Company.
(r) Tax Law Compliance. The Company and each of the Founding
Companies have filed all necessary federal, state and foreign income and
franchise tax returns and have paid all taxes required to be paid by any of them
and, if due and payable, any related or similar assessment, fine or penalty
levied against any of them. The Company has made adequate charges, accruals and
reserves in the applicable financial statements referred to in Section 1(i)
above in respect of all federal,
8
<PAGE>
state and foreign income and franchise taxes for all periods as to which the tax
liability of the Company or any Founding Company has not been finally
determined.
(s) Company Not an "Investment Company". The Company has been advised
of the rules and requirements under the Investment Company Act of 1940, as
amended (the "Investment Company Act"). The Company is not, and after receipt
of payment for the Common Shares will not be, an "investment company" within the
meaning of Investment Company Act.
(t) Insurance. Each of the Company and the Founding Companies are
insured by recognized, financially sound and reputable institutions with
policies in such amounts and with such deductibles and covering such risks as
are generally deemed adequate and customary for their businesses including, but
not limited to, policies covering real and personal property owned or leased by
the Company and its subsidiaries and the Founding Companies against theft,
damage, destruction and acts of vandalism. The Company has no reason to believe
that it or any Founding Company will not be able (i) to renew its existing
insurance coverage as and when such policies expire or (ii) to obtain comparable
coverage from similar institutions as may be necessary or appropriate to conduct
its business as now conducted and at a cost that would not result in a Material
Adverse Change (without taking into account cost changes in the insurance
industry unrelated to the Company, or any Founding Company). Neither of the
Company nor any Founding Company has been denied any insurance coverage which it
has sought in the last five years or for which it has applied.
(u) No Price Stabilization or Manipulation. Neither the Company, nor
to the Company's best knowledge, any of its affiliates or any of the Founding
Companies or any of their affiliates, has taken or will take, directly or
indirectly, any action designed to or that might be reasonably expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Common Shares.
(v) Related Party Transactions. There are no related-party
transactions involving the Company, any subsidiary, any Founding Company or any
other person required to be described in the Prospectus which have not been
described as required.
(w) No Unlawful Contributions or Other Payments. Neither the Company
nor any Founding Company nor, to the best of the Company's knowledge, any
employee or agent of the Company or any Founding Company, has made any
contribution or other payment to any official of, or candidate for, any federal,
state or foreign office in violation of any law or of the character required to
be disclosed in the Prospectus.
(x) Accounting Systems. The Company and each of the Founding
Companies maintain a system of accounting controls sufficient to provide
reasonable assurances that (i) transactions are executed in accordance with
management's general
9
<PAGE>
or specific authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles as applied in the United States and to maintain
accountability for assets; (iii) access to assets is 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
differences.
(y) Compliance with Environmental Laws. Except as would not,
individually or in the aggregate, result in a Material Adverse Change (i)
neither the Company nor any Founding Company is in violation of any federal,
state, local or foreign law or regulation relating to pollution or protection of
human health or the environment (including, without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata) or wildlife,
including without limitation, laws and regulations relating to emissions,
discharges, releases or threatened releases of chemicals, pollutants,
contaminants, wastes, toxic substances, hazardous substances, petroleum and
petroleum products (collectively, "Materials of Environmental Concern"), or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Materials of Environment Concern
(collectively, "Environmental Laws"), which violation includes, but is not
limited to, noncompliance with any permits or other governmental authorizations
required for the operation of the business of the Company or the Founding
Companies under applicable Environmental Laws, or noncompliance with the terms
and conditions thereof, nor has the Company or any Founding Company received any
written communication, whether from a governmental authority, citizens group,
employee or otherwise, that alleges that the Company or any Founding Company is
in violation of any Environmental Law; (ii) there is no claim, action or cause
of action filed with a court or governmental authority, no investigation with
respect to which the Company or any Founding Company has received written
notice, and no written notice received by the Company from any person or entity
alleging potential liability for investigatory costs, cleanup costs,
governmental responses costs, natural resources damages, property damages,
personal injuries, attorneys' fees or penalties arising out of, based on or
resulting from the presence, or release into the environment, of any location
owned, leased or operated by the Company or any Founding Company, now or in the
past (collectively, "Environmental Claims"), pending or, to the best of the
Company's knowledge, threatened against the Company or any Founding Company or
any person or entity whose liability for any Environmental Claim the Company or
any Founding Company has retained or assumed either contractually or by
operation of law; and (iii) to the best of the Company's knowledge, there are no
past or present actions, activities, circumstances, conditions, events or
incidents, including, without limitation, the release, emission, discharge,
presence or disposal of any Material of Environmental Concern, that reasonably
could result in a violation of any Environmental Law or form the basis of a
potential Environmental Claim against the Company or any Founding Company or
against any person or entity whose liability for any such Environmental Claim
the Company or any Founding Company has retained or assumed either contractually
or by operation of law.
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(z) ERISA Compliance. The Company and each of the Founding Companies
and any "employee benefit plan" (as defined under the Employee Retirement Income
Security Act of 1974, as amended, and the regulations and published
interpretations thereunder (collectively, "ERISA")) established or maintained by
the Company, any Founding Company or their "ERISA Affiliates" (as defined below)
are in compliance in all material respects with ERISA. "ERISA Affiliate" means,
with respect to the Company or a Founding Company, any member of any group of
organizations described in Sections 414(b),(c),(m) or (o) of the Internal
Revenue Code of 1986, as amended, and the regulations and published
interpretations thereunder (the "Code") of which the Company or such Founding
Company is a member. No "reportable event" (as defined under ERISA) has
occurred or is reasonably expected to occur with respect to any "employee
benefit plan" established or maintained by the Company, any Founding Company or
any of their ERISA Affiliates. No "employee benefit plan" established or
maintained by the Company, any Founding Company or any of their ERISA
Affiliates, if such "employee benefit plan" were terminated, would have any
"amount of unfunded benefit liabilities" (as defined under ERISA). Neither the
Company, any Founding Company nor any of their ERISA Affiliates has incurred or
reasonably expects to incur any liability under (i) Title IV of ERISA with
respect to termination of, or withdrawal from, any "employee benefit plan" or
(ii) Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit
plan" established or maintained by the Company, any Founding Company or any of
their ERISA Affiliates that is intended to be qualified under Section 401(a) of
the Code is so qualified and nothing has occurred, whether by action or failure
to act, which would cause the loss of such qualification.
(aa) Compliance with Certain Laws. The Company and each subsidiary
and each Founding Company are in compliance in all material respects with the
Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the
Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 and the
Telephone Consumer Protection Act of 1991 (collectively, the "Consumer Laws").
Except as would not, individually or in the aggregate, result in a Material
Adverse Change, (i) there is no claim, action or cause of action filed with a
court or governmental authority, no investigation with respect to which the
Company or any Founding Company has received written notice, and no written
notice by any person or entity alleging potential liability for damages,
attorneys' fees or penalties arising out of, based on or resulting from the
violation or alleged violation by the Company or any Founding Company of the
Consumer Laws, pending or, to the best of the Company's knowledge, threatened
against the Company or any Founding Company or any person or entity whose
liability for any such claim the Company or any Founding Company has retained or
assumed either contractually or by operation of law; and (ii) to the best of the
Company's knowledge, there are no past or present actions, activities,
circumstances, conditions, events or incidents that reasonably could result in a
violation of any Consumer Law or form the basis of a potential claim against the
Company or any Founding Company or against any person or entity whose liability
for any such claim the Company or any Founding Company has retained or assumed
either contractually or by operation of law.
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(ab) Acquisition Agreements. The Company has entered into the
agreements (the "Acquisition Agreements"), set forth as Exhibits 2.1, 2.2, 2.3,
2.4 and 2.5 to the Registration Statement, pursuant to which the Company will
acquire all of the outstanding capital stock of each of the Founding Companies.
Each of the Acquisition Agreements is in full force and effect, has been duly
and validly authorized, executed and delivered by the parties thereto,
constitutes a valid and binding agreement of the parties thereto, and is
enforceable against the parties thereto in accordance with its terms, except as
such enforcement may be subject to (i) bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting or relating to enforcement of creditors'
rights generally and (ii) general equitable principles except as rights to
indemnification may be limited by principles of public policy as they relate to
federal and state securities laws, and none of the parties thereto is in default
in any respect thereunder. A complete and correct copy of each Acquisition
Agreement (including exhibits and schedules) has been delivered to the
Representatives and no changes therein will be made subsequent hereto and prior
to the Closing Date.
(ac) Representations in Acquisition Agreements. The representations
and warranties made in each Acquisition Agreement by the Company and by each
Founding Company and/or its stockholders are true and correct in all material
respects, except for such changes permitted or contemplated by such Acquisition
Agreement.
(ad) Patent. National Credit Management Corp. owns free and clear all
right, title and interest in and to the intellectual property rights comprising
the "Accelerated Payment System" as defined in the Prospectus, including, but
not limited to, United States Letters Patent No. 5,504,667.
(ae) Bomar Acquisition. The representations and warranties made in
the acquisition agreement by Bomar and by FCCI and/or its stockholders are true
and correct in all material respects.
Any certificate signed by an officer of the Company and delivered to
the Representatives or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the matters
set forth therein.
Section 2. Purchase, Sale and Delivery of the Common Shares.
The Firm Common Shares. The Company agrees to issue and sell to the
several Underwriters the Firm Common Shares upon the terms herein set forth. On
the basis of the representations, warranties and agreements herein contained,
and upon the terms but subject to the conditions herein set forth, the
Underwriters agree, severally and not jointly, to purchase from the Company the
respective number of Firm Common Shares set forth opposite their names on
Schedule A. The purchase price per Firm Common Share to be paid by the several
Underwriters to the Company shall be $___ per share.
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The First Closing Date. Delivery of certificates for the Firm Common
Shares to be purchased by the Underwriters and payment therefor shall be made at
the offices of Montgomery Securities, 600 Montgomery Street, San Francisco,
California (or such other place as may be agreed to by the Company and the
Representatives) at 6:00 a.m. San Francisco time, on ____________, 1997 or such
other time and date not later than 10:30 a.m. San Francisco time, on
____________, 1997 as the Representatives shall designate by notice to the
Company (the time and date of such closing are called the "First Closing Date")
and subject to postponement by the Representatives or the Company under the
circumstances described in Section 10. The Company hereby acknowledges that
circumstances under which the Representatives may provide notice to postpone the
First Closing Date as originally scheduled include, but are in no way limited
to, any determination by the Company or the Representatives to recirculate to
the public copies of an amended or supplemented Prospectus or a delay as
contemplated by the provisions of Section 10.
The Optional Common Shares; the Second Closing Date. In addition, on
the basis of the representations, warranties and agreements herein contained,
and upon the terms but subject to the conditions herein set forth, the Company
hereby grants an option to the several Underwriters to purchase, severally and
not jointly, up to an aggregate of 615,000 Optional Common Shares from the
Company at the purchase price per share to be paid by the Underwriters for the
Firm Common Shares. The option granted hereunder is for use by the Underwriters
solely in covering any over-allotments in connection with the sale and
distribution of the Firm Common Shares. The option granted hereunder may be
exercised at any time (but not more than once) upon notice by the
Representatives to the Company, which notice may be given at any time within 30
days from the date of this Agreement. Such notice shall set forth (i) the
aggregate number of Optional Common Shares as to which the Underwriters are
exercising the option, (ii) the names and denominations in which the
certificates for the Optional Common Shares are to be registered and (iii) the
time, date and place at which such certificates will be delivered (which time
and date may be simultaneous with, but not earlier than, the First Closing Date;
and in such case the term "First Closing Date" shall refer to the time and date
of delivery of certificates for the Firm Common Shares and the Optional Common
Shares). Such time and date of delivery, if subsequent to the First Closing
Date, is called the "Second Closing Date" and shall be determined by the
Representatives and shall not be earlier than three nor later than five full
business days after delivery of such notice of exercise. If any Optional Common
Shares are to be purchased, each Underwriter agrees, severally and not jointly,
to purchase the number of Optional Common Shares (subject to such adjustments to
eliminate fractional shares as the Representatives may determine) that bears the
same proportion to the total number of Optional Common Shares to be purchased as
the number of Firm Common Shares set forth on Schedule A opposite the name of
such Underwriter bears to the total number of Firm Common Shares. The
Representatives may cancel the option at any time prior to its expiration by
giving written notice of such cancellation to the Company.
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Public Offering of the Common Shares. The Representatives hereby
advise the Company that the Underwriters intend to offer for sale to the public
upon the terms described in the Prospectus, their respective portions of the
Common Shares as soon after this Agreement has been executed and the
Registration Statement has been declared effective as the Representatives, in
their sole judgment, have determined is advisable and practicable.
Payment for the Common Shares. Payment for the Common Shares shall be
made at the First Closing Date (and, if applicable, at the Second Closing Date)
by wire transfer of immediately available funds to the order of the Company.
It is understood that the Representatives have been authorized, for
their own accounts and the accounts of the several Underwriters, to accept
delivery of and receipt for, and make payment of the purchase price for, the
Firm Common Shares and any Optional Common Shares the Underwriters have agreed
to purchase. Montgomery Securities, individually and not as a Representative of
the Underwriters, may (but shall not be obligated to) make payment for any
Common Shares to be purchased by any Underwriter whose funds shall not have been
received by the Representatives by the First Closing Date or the Second Closing
Date, as the case may be, for the account of such Underwriter, but any such
payment shall not relieve such Underwriter from any of its obligations under
this Agreement.
Delivery of the Common Shares. The Company shall deliver, or cause to
be delivered, to the Representatives for the accounts of the several
Underwriters certificates for the Firm Common Shares at the First Closing Date,
against the irrevocable release of a wire transfer of immediately available
funds for the amount of the purchase price therefor. The Company shall also
deliver, or cause to be delivered, to the Representatives for the accounts of
the several Underwriters, certificates for the Optional Common Shares the
Underwriters have agreed to purchase at the First Closing Date or the Second
Closing Date, as the case may be, against the irrevocable release of a wire
transfer of immediately available funds for the amount of the purchase price
therefor. The certificates for the Common Shares shall be in definitive form
and registered in such names and denominations as the Representatives shall have
requested at least two full business days prior to the First Closing Date (or
the Second Closing Date, as the case may be) and shall be made available for
inspection on the business day preceding the First Closing Date (or the Second
Closing Date, as the case may be) at a location in New York City as the
Representatives may designate. Time shall be of the essence, and delivery at
substantially the time and place specified in this Agreement is a further
condition to the obligations of the Underwriters.
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Delivery of Prospectus to the Underwriters. Not later than 12:00 p.m.
on the second business day following the date the Common Shares are released by
the Underwriters for sale to the public, the Company shall deliver or cause to
be delivered copies of the Prospectus in such quantities and at such places as
the Representatives shall reasonably request.
Section 3. Additional Covenants of the Company. The Company further
covenants and agrees with each Underwriter as follows:
(a) Representatives' Review of Proposed Amendments and
Supplements. During such period beginning on the date hereof and ending on the
later of the First Closing Date or such date as of which, as in the opinion of
counsel for the Underwriters, the Prospectus is no longer required by law to be
delivered in connection with sales by an Underwriter or dealer (the "Prospectus
Delivery Period"), prior to amending or supplementing the Registration Statement
(including any registration statement filed under Rule 462(b) under the
Securities Act) or the Prospectus, the Company shall furnish to the
Representatives for review a copy of each such proposed amendment or supplement,
and the Company shall not file any such proposed amendment or supplement to
which the Representatives reasonably object.
(b) Securities Act Compliance. After the date of this Agreement,
the Company shall promptly advise the Representatives in writing (i) of the
receipt of any comments of, or requests for additional or supplemental
information from, the Commission, (ii) of the time and date of any filing of any
post-effective amendment to the Registration Statement or any amendment or
supplement to any preliminary prospectus or the Prospectus, (iii) of the time
and date that any post-effective amendment to the Registration Statement becomes
effective and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or any post-effective
amendment thereto or of any order preventing or suspending the use of any
preliminary prospectus or the Prospectus, or of any proceedings to remove,
suspend or terminate from listing or quotation the Common Stock from any
securities exchange upon which it is listed for trading or included or
designated for quotation, or of the threatening or initiation of any proceedings
for any of such purposes. If the Commission shall enter any such stop order at
any time, the Company will use its best efforts to obtain the lifting of such
order at the earliest possible moment. Additionally, the Company agrees that it
shall comply with the provisions of Rules 424(b), 430A and 434, as applicable,
under the Securities Act and will use its reasonable efforts to confirm that any
filings made by the Company under such Rule 424(b) were received in a timely
manner by the Commission.
(c) Amendments and Supplements to the Prospectus and Other
Securities Act Matters. If, during the Prospectus Delivery Period, any event
shall occur or condition exist as a result of which it is necessary to amend or
supplement the Prospectus in order to make the statements therein, in the light
of the circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if in the opinion of the Representatives or counsel for the
Underwriters it is otherwise necessary to amend
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or supplement the Prospectus to comply with law, the Company agrees to promptly
prepare (subject to Section 3(a) hereof), file with the Commission and furnish
at its own expense to the Underwriters and to dealers, amendments or supplements
to the Prospectus so that the statements in the Prospectus as so amended or
supplemented will not, in the light of the circumstances when the Prospectus is
delivered to a purchaser, be misleading or so that the Prospectus, as amended or
supplemented, will comply with law.
(d) Copies of any Amendments and Supplements to the Prospectus.
The Company agrees to furnish the Representatives, without charge, during the
Prospectus Delivery Period, as many copies of the Prospectus and any amendments
and supplements thereto as the Representatives may reasonably request.
(e) Blue Sky Compliance. The Company shall cooperate with the
Representatives and counsel for the Underwriters to qualify or register the
Common Shares for sale under (or obtain exemptions from the application of) the
Blue Sky or state securities laws of those jurisdictions designated by the
Representatives, shall comply with such laws and shall continue such
qualifications, registrations and exemptions in effect so long as required for
the distribution of the Common Shares. The Company shall not be required to
qualify as a foreign corporation or to take any action that would subject it to
general service of process in any such jurisdiction where it is not presently
qualified or where it would be subject to taxation as a foreign corporation.
The Company will advise the Representatives promptly of the suspension of the
qualification or registration of (or any such exemption relating to) the Common
Shares for offering, sale or trading in any jurisdiction or any initiation or
threat of any proceeding for any such purpose, and in the event of the issuance
of any order suspending such qualification, registration or exemption, the
Company shall use its best efforts to obtain the withdrawal thereof at the
earliest possible moment.
(f) Use of Proceeds. The Company shall apply the net proceeds
from the sale of the Common Shares sold by it in the manner described under the
caption "Use of Proceeds" in the Prospectus.
(g) Transfer Agent. The Company shall engage and maintain, at
its expense, a registrar and transfer agent for the Common Stock.
(h) Earnings Statement. As soon as practicable, the Company will
make generally available to its security holders and to the Representatives an
earnings statement (which need not be audited) covering a period of at least
twelve months beginning after the effective date of the Registration Statement
that satisfies the provisions of Section 11(a) of the Securities Act.
(i) Periodic Reporting Obligations. During the Prospectus
Delivery Period the Company shall file, on a timely basis, with the Commission
and, if required, the Nasdaq National Market, all reports and documents required
to be filed
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under the Exchange Act. Additionally, the Company shall include in its filings
with the Commission all disclosure as may be required under Rule 463 under the
Securities Act.
(j) Agreement Not To Offer or Sell Additional Securities. During
the period of 180 days following the date of the Prospectus, the Company will
not, without the prior written consent of NationsBanc Montgomery (which consent
may be withheld at the sole discretion of NationsBanc Montgomery), directly or
indirectly, sell, offer, contract or grant any option to sell, pledge, transfer
or establish an open "put equivalent position" within the meaning of Rule 16a-
1(h) under the Exchange Act, or otherwise dispose of or transfer, or announce
the offering of, or file any registration statement under the Securities Act in
respect of, any shares of Common Stock, options or warrants to acquire shares of
Common Stock or securities exchangeable or exercisable for or convertible into
shares of Common Stock (other than as contemplated by this Agreement with
respect to the Common Shares); provided, however, that the Company may issue
shares of its Common Stock or options to purchase its Common Stock, or shares of
Common Stock upon exercise of options, pursuant to any stock option, stock bonus
or other stock plan or arrangement described in the Prospectus and may issue
shares of Common Stock in connection with the acquisition of additional
outsourced business service companies, but only if the holders of such shares,
options, or shares issued upon exercise of such options, agree in writing not to
sell, offer, dispose of or otherwise transfer any such shares or options during
such 180 day period without the prior written consent of NationsBanc Montgomery
(which consent may be withheld at the sole discretion of NationsBanc
Montgomery).
(k) Future Reports to the Representatives. During the period of
five years after the date of this Agreement the Company will furnish to the
Representatives (i) as soon as practicable after the end of each fiscal year,
copies of the Annual Report of the Company containing the balance sheet of the
Company as of the close of such fiscal year and statements of income,
stockholders' equity and cash flows for the year then ended and the opinion
thereon of the Company's independent public or certified public accountants;
(ii) as soon as practicable after the filing thereof, copies of each proxy
statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current
Report on Form 8-K or other report filed by the Company with the Commission, the
NASD or any securities exchange; and (iii) as soon as available, copies of any
report or communication of the Company mailed generally to holders of its
capital stock.
(l) Satisfaction of Founding Company Acquisition Conditions. The
Company will: (i) use its best efforts to satisfy all conditions to consummation
of the Founding Company Acquisitions as set forth in the Acquisition Agreements
with respect thereto; (ii) use its best efforts to cause each other party to
such Acquisition Agreements to satisfy all conditions to the consummation of the
Founding Company Acquisitions; and (iii) promptly notify the Representatives of
the occurrence of any event which may result in the non-consummation of any of
the Founding Company Acquisitions on the First Closing Date.
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The Representatives, on behalf of the several Underwriters, may, in
their sole discretion, waive in writing the performance by the Company of any
one or more of the foregoing covenants or extend the time for their performance.
Section 4. Payment of Expenses. The Company agrees to pay all costs,
fees and expenses incurred in connection with the performance of its obligations
under this Agreement and in connection with the transactions contemplated hereby
and in connection with the Founding Company Acquisitions, including without
limitation (i) all expenses incident to the issuance and delivery of the Common
Shares (including all printing and engraving costs), (ii) all fees and expenses
of the registrar and transfer agent of the Common Stock, (iii) all necessary
issue, transfer and other stamp taxes in connection with the issuance and sale
of the Common Shares to the Underwriters, (iv) all fees and expenses of the
Company's counsel, independent public or certified pubic accountants and other
advisors, (v) all costs and expenses incurred in connection with the
preparation, printing, filing, shipping and distribution of the Registration
Statement (including financial statements, exhibits, schedules, consents and
certificates of experts), each preliminary prospectus and the Prospectus, and
all amendments and supplements thereto, (vi) all filing fees, attorneys' fees
and expenses incurred by the Company or the Underwriters in connection with
qualifying or registering (or obtaining exemptions from the qualification or
registration of) all or any part of the Common Shares for offer and sale under
the Blue Sky laws, and, if requested by the Representatives, preparing and
printing a "Blue Sky Survey" or memorandum, and any supplements thereto,
advising the Underwriters of such qualifications, registrations and exemptions,
(vii) the filing fees incident to, and the reasonable fees and expenses of
counsel for the Underwriters in connection with, the NASD's review and approval
of the Underwriters' participation in the offering and distribution of the
Common Shares, (viii) the fees and expenses associated with including the Common
Shares on the Nasdaq National Market, and (ix) all other fees, costs and
expenses referred to in Item 14 of Part II of the Registration Statement.
Except as provided in this Section 4, Section 6, Section 8 and Section 9 hereof,
the Underwriters shall pay their own expenses, including the fees and
disbursements of their counsel.
Section 5. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Common
Shares as provided herein on the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date, shall be subject to the
accuracy of the representations and warranties on the part of the Company set
forth in Section 1 hereof as of the date hereof and as of the First Closing Date
as though then made and, with respect to the Optional Common Shares, as of the
Second Closing Date as though then made, to the timely performance by the
Company of its covenants and other obligations hereunder, and to each of the
following additional conditions:
(a) Accountants' Comfort Letter. On the date hereof, the
Representatives shall have received from each of (i) Price Waterhouse LLP,
independent public or certified public accountants for the Company, Mail Box,
Mid-Continent and Impact, (ii) Arthur Andersen LLP, independent public or
certified public
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accountants for National and (iii) Ernst & Young LLP, independent public or
certified public accountants for Bomar, a letter dated the date hereof addressed
to the Underwriters, in form and substance satisfactory to the Representatives,
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters, delivered according to Statement
of Auditing Standards No. 72 (or any successor bulletin), with respect to the
audited and unaudited financial statements and certain financial information
contained in the Registration Statement and the Prospectus (and the
Representative shall have received an additional [___] conformed copies of such
accountants' letters for each of the several Underwriters). The specified date
referred to therein for the carrying out of procedures shall be no more than
five days prior to the date of this Agreement.
(b) Compliance with Registration Requirements; No Stop Order; No
Objection from NASD. For the period from and after effectiveness of this
Agreement and prior to the First Closing Date and, with respect to the Optional
Common Shares, the Second Closing Date:
(i) the Company shall have filed the Prospectus with the
Commission (including the information required by Rule 430A under the
Securities Act) in the manner and within the time period required by
Rule 424(b) under the Securities Act; or the Company shall have filed
a post-effective amendment to the Registration Statement containing
the information required by such Rule 430A, and such post-effective
amendment shall have become effective; or, if the Company elected to
rely upon Rule 434 under the Securities Act and obtained the
Representatives' consent thereto, the Company shall have filed a Term
Sheet with the Commission in the manner and within the time period
required by such Rule 424(b);
(ii) no stop order suspending the effectiveness of the
Registration Statement, any Rule 462(b) Registration Statement, or
any post-effective amendment to the Registration Statement, shall be
in effect and no proceedings for such purpose shall have been
instituted or threatened by the Commission; and
(iii) the NASD shall have raised no objection to the fairness
and reasonableness of the underwriting terms and arrangements.
(c) No Material Adverse Change. For the period from and after the
date of this Agreement and prior to the First Closing Date and, with respect to
the Optional Common Shares, the Second Closing Date, in the judgment of the
Representatives there shall not have occurred any Material Adverse Change.
(d) Opinion of Counsel for the Company. On each of the First Closing
Date and the Second Closing Date the Representatives shall have received the
favorable opinion of Katten, Muchin & Zavis, counsel for the Company, dated as
of such Closing
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Date, the form of which is attached as Exhibit A (and the Representatives shall
have received an additional [___] conformed copies of such counsel's legal
opinion for each of the several Underwriters).
(e) Opinion of Counsel for the Underwriters. On each of the First
Closing Date and the Second Closing Date the Representatives shall have received
the favorable opinion of Fulbright & Jaworski L.L.P., counsel for the
Underwriters, dated as of such Closing Date, with respect to such matters as are
customarily contained in such opinion (and the Representatives shall have
received an additional [___] conformed copies of such counsel's legal opinion
for each of the several Underwriters).
(f) Officers' Certificate. On each of the First Closing Date and the
Second Closing Date the Representatives shall have received a written
certificate executed by the Chairman of the Board, Chief Executive Officer or
President of the Company and the Chief Financial Officer or Chief Accounting
Officer of the Company, dated as of such Closing Date, to the effect set forth
in subsections (b)(ii) and (c) (in the judgment of the Company) of this Section
5, and further to the effect that:
(i) for the period from and after the date of this Agreement and
prior to such Closing Date, there has not occurred any Material
Adverse Change;
(ii) the representations, warranties and covenants of the Company
set forth in Section 1 of this Agreement are true and correct with
the same force and effect as though expressly made on and as of such
Closing Date; and
(iii) the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied
at or prior to such Closing Date.
(g) Bring-down Comfort Letter. On each of the First Closing Date and
the Second Closing Date the Representatives shall have received from Price
Waterhouse LLP, independent public or certified public accountants for the
Company, Mail Box, Mid-Continent and Impact, (ii) Arthur Andersen LLP,
independent public or certified public accountants for National and (iii) Ernst
& Young LLP, independent public or certified public accountants for Bomar, a
letter dated such date, in form and substance satisfactory to the
Representatives, to the effect that they reaffirm the statements made in the
letter furnished by them pursuant to subsection (a) of this Section 5, except
that the specified date referred to therein for the carrying out of procedures
shall be no more than five days prior to the First Closing Date or Second
Closing Date, as the case may be (and the Representatives shall have received an
additional [___] conformed copies of such accountants' letter for each of the
several Underwriters).
(h) Acquisition Closings. With respect to the Founding Company
Acquisitions:
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(i) Each condition to the obligations of the Company set forth in
Section 9 of each of the Acquisition Agreements shall have been
satisfied, without waiver or modification, except as may be approved
by the Representatives.
(ii) Each certificate delivered to the Company pursuant to each
Acquisition Agreement shall have also been delivered to the
Representatives.
(iii) Counsel for each of the Founding Companies shall have
furnished to the Representatives a letter, in form and substance
satisfactory to the Representatives, to the effect that they are
entitled to rely on the opinion of such counsel delivered to the
Company pursuant to each Acquisition Agreement as if such opinion
were addressed to them.
(iv) On the first Closing Date the Representatives shall have
received opinions, in form and substance satisfactory to the
Representatives, from counsel for the Company and counsel for each of
the Founding Companies, to the effect that, after giving effect to
the Founding Company Acquisitions, all of the outstanding shares of
the capital stock of each of the Founding Companies will be owned by
the Company free and clear of any security interest, mortgage,
pledge, lien, encumbrance or claim and no options, warrants or other
rights to purchase, agreements or other obligations to issue or other
rights to convert any obligations into shares of capital stock or
ownership interests in any of the Founding Companies are outstanding.
(v) The Company shall have acquired all of the outstanding
capital stock of each of the Founding Companies free and clear of any
security interest, mortgage, pledge, lien, encumbrance or claim and
no options, warrants or other rights to purchase, agreements or other
obligations to issue or other rights to convert any obligations into
shares of capital stock or ownership interests in any of the Founding
Companies shall be outstanding.
(i) Acquisition Agreements. The Acquisition Agreements shall be in
full force and effect and none of the parties thereto shall be in default
thereunder.
(j) Lock-Up Agreement from Certain Stockholders of the Company. On
the date hereof, the Company shall have furnished to the Representatives an
agreement in the form of Exhibit B hereto from each director, officer and each
beneficial owner of Common Stock (as defined and determined according to Rule
13d-3 under the Exchange Act, except that a 180 day period shall be used rather
than the sixty day period set forth therein), including, without limitation,
each person who will receive shares of Common Stock pursuant to the terms of the
Acquisition Agreements, and
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<PAGE>
such agreement shall be in full force and effect on each of the First Closing
Date and the Second Closing Date.
(k) Additional Documents. On or before each of the First Closing Date
and the Second Closing Date, the Representatives and counsel for the
Underwriters shall have received such information, documents and opinions as
they may reasonably require for the purposes of enabling them to pass upon the
issuance and sale of the Common Shares as contemplated herein, or in order to
evidence the accuracy of any of the representations and warranties, or the
satisfaction of any of the conditions or agreements, herein contained.
If any condition specified in this Section 5 is not satisfied when and
as required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Optional Common Shares, at any time prior
to the Second Closing Date, which termination shall be without liability on the
part of any party to any other party, except that Section 4, Section 6, Section
8 and Section 9 shall at all times be effective and shall survive such
termination.
Section 6. Reimbursement of Underwriters' Expenses. If this
Agreement is terminated by the Representatives pursuant to Section 5, Section 7,
Section 10 or Section 11, or if the sale to the Underwriters of the Common
Shares on the First Closing Date is not consummated because of any refusal,
inability or failure on the part of the Company to perform any agreement herein
or to comply with any provision hereof, the Company agrees to reimburse the
Representatives and the other Underwriters (or such Underwriters as have
terminated this Agreement with respect to themselves), severally, upon demand
for all out-of-pocket expenses that shall have been reasonably incurred by the
Representatives and the Underwriters in connection with the proposed purchase
and the offering and sale of the Common Shares, including but not limited to
reasonable fees and disbursements of counsel, printing expenses, travel
expenses, postage, facsimile and telephone charges.
Section 7. Effectiveness of this Agreement.
This Agreement shall not become effective until the later of (i) the
execution of this Agreement by the parties hereto and (ii) notification by the
Commission to the Company and the Representative of the effectiveness of the
Registration Statement under the Securities Act.
Prior to such effectiveness, this Agreement may be terminated by any
party by notice to each of the other parties hereto, and any such termination
shall be without liability on the part of (a) the Company to any Underwriter,
except that the Company shall be obligated to reimburse the expenses of the
Representatives and the Underwriters pursuant to Sections 4 and 6 hereof, (b)
any Underwriter to the Company, or (c) any party hereto to any other party
except that the provisions of
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<PAGE>
Section 8 and Section 9 shall at all times be effective and shall survive such
termination.
Section 8. Indemnification.
(a) Indemnification of the Underwriters. The Company agrees to
indemnify and hold harmless each Underwriter, its officers and employees, and
each person, if any, who controls any Underwriter within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act against any
loss, claim, damage, liability or expense, as incurred, to which such
Underwriter or such controlling person may become subject, under the Securities
Act, the Exchange Act or other federal or state statutory law or regulation, or
at common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of the Company), insofar as such
loss, claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based (i) upon any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement, or any amendment thereto, including any information deemed to be a
part thereof pursuant to Rule 430A or Rule 434 under the Securities Act, or the
omission or alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein not misleading; or (ii) upon
any untrue statement or alleged untrue statement of a material fact contained in
any preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; or (iii) in whole or
in part upon any inaccuracy in the representations and warranties of the Company
contained herein; or (iv) in whole or in part upon any failure of the Company to
perform its obligations hereunder or under law; or (v) any act or failure to act
or any alleged act or failure to act by any Underwriter in connection with, or
relating in any manner to, the Common Stock or the offering contemplated hereby,
and which is included as part of or referred to in any loss, claim, damage,
liability or action arising out of or based upon any matter covered by clause
(i) or (ii) above, provided that the Company shall not be liable under this
clause (v) to the extent that a court of competent jurisdiction shall have
determined by a final judgment that such loss, claim, damage, liability or
action resulted directly from any such acts or failures to act undertaken or
omitted to be taken by such Underwriter through its gross negligence or willful
misconduct; and to reimburse each Underwriter and each such controlling person
for any and all expenses (including the reasonable fees and disbursements of
counsel chosen by Montgomery Securities) as such expenses are reasonably
incurred by such Underwriter or such controlling person in connection with
investigating, defending, settling, compromising or paying any such loss, claim,
damage, liability, expense or action; provided, however, that the foregoing
indemnity agreement shall not apply to any loss, claim, damage, liability or
expense to the extent, but only to the extent, arising out of or based upon any
untrue statement or alleged untrue statement or omission or alleged omission
made in reliance upon and in conformity with written information furnished to
the Company by the Representatives expressly for use in the Registration
Statement, any preliminary prospectus or the Prospectus (or
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<PAGE>
any amendment or supplement thereto); and provided, further, that with respect
to any preliminary prospectus, the foregoing indemnity agreement shall not inure
to the benefit of any Underwriter from whom the person asserting any loss,
claim, damage, liability or expense purchased Common Shares, or any person
controlling such Underwriter, if copies of the Prospectus were timely delivered
to the Underwriter pursuant to Section 2 and a copy of the Prospectus (as then
amended or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such Underwriter
to such person, if required by law so to have been delivered, at or prior to the
written confirmation of the sale of the Common Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect giving
rise to such loss, claim, damage, liability or expense. The indemnity agreement
set forth in this Section 8(a) shall be in addition to any liabilities that the
Company may otherwise have.
(b) Indemnification of the Company, its Directors and Officers. Each
Underwriter agrees, severally and not jointly, to indemnify and hold harmless
the Company, each of its directors, each person named as a prospective director
in the Registration Statement, each of its officers who signed the Registration
Statement and each person, if any, who controls the Company within the meaning
of either Section 15 of the Securities Act or Section 20 the Exchange Act,
against any loss, claim, damage, liability or expense, as incurred, to which the
Company, or any such director, officer, prospective director or controlling
person may become subject, under the Securities Act, the Exchange Act, or other
federal or state statutory law or regulation, or at common law or otherwise
(including in settlement of any litigation, if such settlement is effected with
the written consent of such Underwriter), insofar as such loss, claim, damage,
liability or expense (or actions in respect thereof as contemplated below)
arises out of or is based upon any untrue or alleged untrue statement of a
material fact contained in the Registration Statement, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto), or arises
out of or is based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in the Registration Statement, any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto), in reliance upon and in
conformity with written information furnished to the Company by the
Representatives expressly for use therein; and to reimburse the Company, or any
such director, officer, prospective director or controlling person for any and
all expenses (including the reasonable fees and expenses of counsel chosen by
the Company) as such expenses are reasonably incurred by the Company or any such
director, officer or controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action. The Company hereby acknowledges that the only
information that the Underwriters have furnished to the Company expressly for
use in the Registration Statement, any preliminary prospectus or the Prospectus
(or any amendment or supplement thereto) are the statements set forth (A) as the
last paragraph on the inside front cover page of the Prospectus concerning
stabilization and other transactions by the Underwriters and (B)
24
<PAGE>
in the table after the first paragraph and in the second, sixth and seventh
paragraphs under the caption "Underwriting" in the Prospectus; and the
Underwriters confirm that such statements are correct. The indemnity agreement
set forth in this Section 8(b) shall be in addition to any liabilities that each
Underwriter may otherwise have.
(c) Notifications and Other Indemnification Procedures. Promptly
after receipt by an indemnified party under this Section 8 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 8, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section 8 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that a conflict may arise between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of such indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the expenses of
more than one separate counsel (together with local counsel), approved by the
indemnifying party (Montgomery Securities in the case of Section 8(b) and
Section 9), representing the indemnified parties who are parties to such action)
or (ii) the indemnifying party shall not have employed counsel satisfactory to
the indemnified party to represent the indemnified party within a reasonable
time after notice of commencement of the action, in each of which cases the fees
and expenses of counsel shall be at the expense of the indemnifying party.
(d) Settlements. The indemnifying party under this Section 8 shall
not be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the
25
<PAGE>
indemnifying party agrees to indemnify the indemnified party against any loss,
claim, damage, liability or expense by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified party
for fees and expenses of counsel as contemplated by Section 8(c) hereof, the
indemnifying party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 30 days after receipt by such indemnifying party of the
aforesaid request and (ii) such indemnifying party shall not have reimbursed the
indemnified party in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement, compromise or consent to the entry
of judgment in any pending or threatened action, suit or proceeding in respect
of which any indemnified party is or could have been a party and indemnity was
or could have been sought hereunder by such indemnified party, unless such
settlement, compromise or consent includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter of
such action, suit or proceeding.
Section 9. Contribution.
If the indemnification provided for in Section 8 is for any reason
held to be unavailable to or otherwise insufficient to hold harmless an
indemnified party in respect of any losses, claims, damages, liabilities or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount paid or payable by such indemnified party, as incurred, as
a result of any losses, claims, damages, liabilities or expenses referred to
therein (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company, on the one hand, and the Underwriters, on the
other hand, from the offering of the Common Shares pursuant to this Agreement or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company, on the one hand, and the Underwriters, on the other hand, in
connection with the statements or omissions or inaccuracies in the
representations and warranties herein which resulted in such losses, claims,
damages, liabilities or expenses, as well as any other relevant equitable
considerations. The relative benefits received by the Company, on the one hand,
and the Underwriters, on the other hand, in connection with the offering of the
Common Shares pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the Common
Shares pursuant to this Agreement (before deducting expenses) received by the
Company and the total underwriting discount received by the Underwriters, in
each case as set forth on the front cover page of the Prospectus (or, if Rule
434 under the Securities Act is used, the corresponding location on the Term
Sheet) bear to the aggregate initial public offering price of the Common Shares
as set forth on such cover. The relative fault of the Company, on the one hand,
and the Underwriters, on the other hand, shall be determined by reference to,
among other things, whether any such untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact or any
such inaccurate or alleged inaccurate representation or warranty relates to
26
<PAGE>
information supplied by the Company, on the one hand, or the Underwriters, on
the other hand, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 8(c), any legal or
other fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim. The provisions set forth in
Section 8(c) with respect to notice of commencement of any action shall apply if
a claim for contribution is to be made under this Section 9; provided, however,
that no additional notice shall be required with respect to any action for which
notice has been given under Section 8(c) for purposes of indemnification.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 9 were 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 account of the
equitable considerations referred to in this Section 9.
Notwithstanding the provisions of this Section 9, no Underwriter shall
be required to contribute any amount in excess of the underwriting commissions
received by such Underwriter in connection with the Common Shares underwritten
by it and distributed to the public. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 9 are several, and not joint, in proportion to their
respective underwriting commitments as set forth opposite their names in
Schedule A. For purposes of this Section 9, each officer and employee of an
Underwriter and each person, if any, who controls an Underwriter within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act
shall have the same rights to contribution as such Underwriter, and each
director of the Company, each officer of the Company who signed the Registration
Statement, each person named as prospective director in the Registration
Statement and each person, if any, who controls the Company with the meaning of
the Securities Act and the Exchange Act shall have the same rights to
contribution as the Company.
Section 10. Default of One or More of the Several Underwriters. If,
on the First Closing Date or the Second Closing Date, as the case may be, any
one or more of the several Underwriters shall fail or refuse to purchase Common
Shares that it or they have agreed to purchase hereunder on such date, and the
aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase does not exceed 10% of the
aggregate number of the Common Shares to be purchased on such date, the other
Underwriters shall be obligated, severally, in the proportions that the number
of Firm Common Shares set forth opposite their respective names on Schedule A
bear to the aggregate number of Firm
27
<PAGE>
Common Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as may be specified by the
Representatives with the consent of the non-defaulting Underwriters, to purchase
the Common Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase on such date. If, on the First Closing Date or the
Second Closing Date, as the case may be, any one or more of the Underwriters
shall fail or refuse to purchase Common Shares and the aggregate number of
Common Shares with respect to which such default occurs exceeds 10% of the
aggregate number of Common Shares to be purchased on such date, and arrangements
satisfactory to the Representatives and the Company for the purchase of such
Common Shares are not made within 48 hours after such default, this Agreement
shall terminate without liability of any party to any other party except that
the provisions of Section 4, Section 6, Section 8 and Section 9 shall at all
times be effective and shall survive such termination. In any such case either
the Representative or the Company shall have the right to postpone the First
Closing Date or the Second Closing Date, as the case may be, but in no event for
longer than seven days in order that the required changes, if any, to the
Registration Statement and the Prospectus or any other documents or arrangements
may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
10. Any action taken under this Section 10 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
Section 11. Termination of this Agreement. Prior to the First
Closing Date this Agreement maybe terminated by the Representative by notice
given to the Company if at any time (i) trading or quotation in any of the
Company's securities shall have been suspended or limited by the Commission or
by the Nasdaq Stock Market or trading in securities generally on either the
Nasdaq Stock Market or the New York Stock Exchange shall have been suspended or
limited, or minimum or maximum prices shall have been generally established on
any of such stock exchanges by the Commission or the NASD; (ii) a general
banking moratorium shall have been declared by any of federal, New York,
Delaware or California authorities; (iii) there shall have occurred any outbreak
or escalation of national or international hostilities or any crisis or
calamity, or any change in the United States or international financial markets,
or any substantial change or development involving a prospective substantial
change in United States or international political, financial or economic
conditions, as in the judgment of the Representatives is material and adverse
and makes it impracticable to market the Common Shares in the manner and on the
terms described in the Prospectus or to enforce contracts for the sale of
securities; (iv) in the judgment of the Representatives there shall have
occurred any Material Adverse Change; or (v) the Company shall have sustained a
loss by strike, fire, flood, earthquake, accident or other calamity of such
character as in the judgment of the Representatives may interfere materially
with the conduct of the business and operations of the Company regardless of
whether or not such loss shall have been insured. Any termination pursuant to
this Section 11 shall be without liability on the part of (a) the Company to any
Underwriter, except that the Company shall be obligated to reimburse the
expenses
28
<PAGE>
of the Representatives and the Underwriters pursuant to Sections 4 and 6 hereof,
(b) any Underwriter to the Company, or (c) any party hereto to any other party
except that the provisions of Section 8 and Section 9 shall at all times be
effective and shall survive such termination.
Section 12. Representations and Indemnities to Survive Delivery.
The respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of its or their partners, officers or directors or any
controlling person, as the case may be, and will survive delivery of and payment
for the Common Shares sold hereunder and any termination of this Agreement.
Section 13. Notices. All communications hereunder shall be in
writing and shall be mailed, hand delivered or telecopied and confirmed to the
parties hereto as follows:
If to the Representatives:
NationsBanc Montgomery Securities, Inc.
600 Montgomery Street
San Francisco, California 94111
Facsimile: 415-249-5558
Attention: Mr. Richard A. Smith
with a copy to:
NationsBanc Montgomery Securities, Inc.
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5553
Attention: David A. Baylor, Esq.
If to the Company:
Compass International Services Corporation
5 Independence Way, Suite 300
Princeton, New Jersey 08540
Facsimile: (609) 514-5157
Attention: Mr. Michael Cunningham
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
29
<PAGE>
Section 14. Successors. This Agreement will inure to the benefit
of and be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 10 hereof, and to the benefit of the employees, officers,
directors, prospective directors and controlling persons referred to in Section
8 and Section 9, and in each case their respective successors, and no other
person will have any right or obligation hereunder. The term "successors" shall
not include any purchaser of the Common Shares as such from any of the
Underwriters merely by reason of such purchase.
Section 15. Partial Unenforceability. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
Section 16. Governing Law Provisions. (a) THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF
NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE.
(b) Consent to Jurisdiction. Any legal suit, action or proceeding
arising out of or based upon this Agreement or the transactions contemplated
hereby ("Related Proceedings") may be instituted in the federal courts of the
United States of America located in the City and County of San Francisco or the
courts of the State of California in each case located in the City and County of
San Francisco (collectively, the "Specified Courts"), and each party irrevocably
submits to the exclusive jurisdiction (except for proceedings instituted in
regard to the enforcement of a judgment of any such court (a "Related
Judgment"), as to which such jurisdiction is non-exclusive) of such courts in
any such suit, action or proceeding. Service of any process, summons, notice or
document by mail to such party's address set forth above shall be effective
service of process for any suit, action or other proceeding brought in any such
court. The parties irrevocably and unconditionally waive any objection to the
laying of venue of any suit, action or other proceeding in the Specified Courts
and irrevocably and unconditionally waive and agree not to plead or claim in any
such court that any such suit, action or other proceeding brought in any such
court has been brought in an inconvenient forum.
Section 17. General Provisions. This Agreement constitutes the
entire agreement of the parties to this Agreement and supersedes all prior
written or oral and all contemporaneous oral agreements, understandings and
negotiations with respect to the subject matter hereof. This Agreement may be
executed in two or more counterparts, each one of which shall be an original,
with the same effect as if the signatures thereto and hereto were upon the same
instrument. This Agreement may not be amended or modified unless in writing by
all of the parties hereto, and no condition herein (express or implied) may be
waived unless waived in writing by each
30
<PAGE>
party whom the condition is meant to benefit. The Table of Contents and the
Section headings herein are for the convenience of the parties only and shall
not affect the construction or interpretation of this Agreement.
Each of the parties hereto acknowledges that it is a sophisticated
business person who was adequately represented by counsel during negotiations
regarding the provisions hereof, including, without limitation, the
indemnification provisions of Section 8 and the contribution provisions of
Section 9, and is fully informed regarding said provisions. Each of the parties
hereto further acknowledges that the provisions of Sections 8 and 9 hereto
fairly allocate the risks in light of the ability of the parties to investigate
the Company, its affairs and its business in order to assure that adequate
disclosure has been made in the Registration Statement, any preliminary
prospectus and the Prospectus (and any amendments and supplements thereto), as
required by the Securities Act and the Exchange Act.
31
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to the Company the enclosed copies hereof,
whereupon this instrument, along with all counterparts hereof, shall become a
binding agreement in accordance with its terms.
Very truly yours,
COMPASS INTERNATIONAL
SERVICES CORPORATION
By:_________________________________
Name:
Title:
The foregoing Underwriting Agreement is hereby confirmed and accepted
by the Representatives in San Francisco, California as of the date first above
written.
NATIONSBANC MONTGOMERY SECURITIES, INC.
LEHMAN BROTHERS, INC.
Acting as Representatives of the
several Underwriters named in
the attached Schedule A.
By: NATIONSBANC MONTGOMERY SECURITIES, INC.
By:_________________________________
Name:
Title:
32
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of Firm
Common Shares
Underwriters to be Purchased
<S> <C>
NationsBanc Montgomery Securities, Inc..................
Lehman Brothers, Inc. ..................................
=========
Total.............................................. 4,100,000
</TABLE>
<PAGE>
EXHIBIT A
Opinion of counsel for the Company to be delivered pursuant to Section
5(e) of the Underwriting Agreement.
References to the Prospectus in this Exhibit A include any supplements
thereto at the Closing Date.
(i) The Company has been duly incorporated and is existing as a
corporation in good standing under the laws of the State of Delaware.
(ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the
Underwriting Agreement. The Company has all necessary authorizations,
approvals, consents, licenses, certificates and permits of and from all
Federal and state governmental or regulatory bodies or officials, to
conduct all the activities conducted by them, to own or lease all the
assets owned or leased by it and to conduct its businesses, all as
described in the Registration Statement and the Prospectus.
(iii) The Company is duly qualified as a foreign corporation and is
in good standing in each jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or the
conduct of business, except for such jurisdictions where the failure to so
qualify or to be in good standing would not, individually or in the
aggregate, result in a Material Adverse Change.
(iv) The Company's authorized, issued and outstanding capital stock is
as set forth under the heading "Capitalization" in the Prospectus. The
authorized capital stock of the Company (including the Common Stock)
conforms as to legal matters to the description thereof set forth in the
Prospectus. All of the outstanding shares of Common Stock have been duly
authorized and validly issued, are fully paid and nonassessable and, to the
best of such counsel's knowledge, have been issued in compliance with the
registration and qualification requirements of federal and state securities
laws. The form of certificate used to evidence the Common Stock complies
with all applicable requirements of the charter and by-laws of the Company
and the General Corporation Law of the State of Delaware. The description
of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and exercised
thereunder, set forth in the Prospectus accurately and fairly presents the
information required to be shown with respect to such plans, arrangements,
options and rights.
A-1
<PAGE>
(v) No stockholder of the Company or any other person has any
preemptive right, right of first refusal or other similar right to
subscribe for or purchase securities of the Company arising (a) by
operation of the charter or by-laws of the Company or the General
Corporation Law of the State of Delaware or (b) any contract known to such
counsel to which the Company is a party.
(vi) The Underwriting Agreement has been duly authorized, executed and
delivered by, and is a valid and binding agreement of, the Company,
enforceable in accordance with its terms, except as rights to
indemnification and contribution thereunder may be limited by applicable
law and public policy considerations and except as the enforcement thereof
may be limited by bankruptcy, insolvency, reorganization, receivership,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles except as rights to
indemnification may be limited by principles of public policy as they
relate to federal and state securities laws.
(vii) The Common Shares to be purchased by the Underwriters from the
Company have been duly authorized for issuance and sale pursuant to the
Underwriting Agreement and, when issued and delivered by the Company
pursuant to the Underwriting Agreement against payment of the consideration
set forth therein, will be validly issued, fully paid and nonassessable.
The shares of Common Stock to be issued in connection with the Founding
Company Acquisitions have been duly authorized for issuance and, when
issued and delivered by the Company in connection with the Founding Company
Acquisitions, will be validly issued, fully paid and nonassessable.
(viii) Each of the Registration Statement and the Rule 462(b)
Registration Statement, if any, has been declared effective by the
Commission under the Securities Act. To the best knowledge of such
counsel, no stop order suspending the effectiveness of either of the
Registration Statement or the Rule 462(b) Registration Statement, if any,
has been issued under the Securities Act and no proceedings for such
purpose have been instituted or are pending or are threatened by the
Commission. Any required filing of the Prospectus and any supplement
thereto pursuant to Rule 424(b) under the Securities Act has been made in
the manner and within the time period required by such Rule 424(b).
(ix) The Registration Statement, including any Rule 462(b)
Registration Statement, the Prospectus and each amendment or supplement to
the Registration Statement and the Prospectus, as of their respective
effective or issue dates (other than the financial statements and
supporting schedules and other financial or accounting data included
therein or in exhibits to or excluded from the Registration Statement, as
to which no opinion need be rendered) comply as to form in all material
respects with the applicable requirements of the Securities Act.
A-2
<PAGE>
(x) The Company has been advised by the NASD that the Common Shares
have been approved for listing on the Nasdaq National Market.
(xi) The statements (a) in the Prospectus under the captions "Risk
Factors--Anti-Takeover Effect of Certain Charter Provisions," "--Patent
Litigation; Dependence on Proprietary Technology," "--Potential Effect of
Shares Eligible for Future Sale or Price of Common Stock," "Management--
Executive Compensation; Employment Agreements; Covenants-Not-to-Compete,"
"--1997 Employee Incentive Compensation Plan," "Employee Stock Purchase
Plan," "Certain Transactions," "Litigation," "Principal Stockholders,"
"Description of Capital Stock" and "Shares Eligible for Future Sale" and
(b) in Item 14 and Item 15 of the Registration Statement, insofar as such
statements constitute matters of law, summaries of legal matters, the
Company's charter or by-law provisions, documents or legal proceedings, or
legal conclusions, have been reviewed by such counsel and fairly present
and summarize, in all material respects, the matters referred to therein.
[As discussed, if you are not comfortable giving the patent-related
portions of the opinion, please discuss the opinion with counsel to NCMC.]
(xii) To the best knowledge of such counsel, there are no legal or
governmental actions, suits or proceedings pending or threatened which are
required to be disclosed in the Registration Statement, other than those
disclosed therein.
(xiii) To the best knowledge of such counsel, there are no Existing
Instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed as exhibits thereto; and the descriptions
thereof and references thereto in the Registration Statement and Prospectus
are accurate in all material respects.
(xiv) No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental authority or
agency, is required for the Company's execution, delivery and performance
of the Underwriting Agreement and of each Acquisition Agreement and
consummation of the transactions contemplated thereby and by the
Prospectus, except as required under the Securities Act and the securities
or blue sky laws of any jurisdiction and by the NASD.
(xv) The execution and delivery of the Underwriting Agreement and of
each Acquisition Agreement by the Company and the performance by the
Company of its obligations thereunder (other than performance by the
Company of its obligations under the indemnification section of the
Underwriting Agreement, as to which no opinion need be rendered) (a) have
been duly authorized by all necessary corporate action on the part of the
Company; (b) will not result in any violation of the provisions of the
charter or by-laws of the
A-3
<PAGE>
Company; (c) will not constitute a breach of, or Default under, or result
in the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any of its subsidiaries pursuant to,
to the best knowledge of such counsel, any other material Existing
Instrument; and (d) to the best knowledge of such counsel, will not result
in any violation of (i) any law, administrative regulation normally
applicable to transactions of the sort contemplated by the Underwriting
Agreement and the Acquisition Agreements or (ii) administrative or court
decree known to such counsel to which the Company is a party or by which it
or its properties are expressly bound.
(xvi) The Company is not, and after receipt of payment for the
Common Shares will not be, an "investment company" within the meaning of
Investment Company Act.
(xvii) Except as disclosed in the Prospectus under the caption
"Shares Eligible for Future Sale", to the best knowledge of such counsel,
there are no persons with registration or other similar rights to have any
equity or debt securities registered for sale under the Registration
Statement or included in the offering contemplated by the Underwriting
Agreement, except for such rights as have been duly waived.
(xviii) To the best knowledge of such counsel, the Company is not in
violation of its charter or by-laws or any law, administrative regulation
or administrative or court decree applicable to the Company or is in
Default in the performance or observance of any obligation, agreement,
covenant or condition contained in any material Existing Instrument, except
in each such case for such violations or Defaults as would not,
individually or in the aggregate, result in a Material Adverse Change.
(xix) Each of the Acquisition Agreements has been duly and validly
authorized, executed and delivered by the Company, is the valid and binding
agreement of the Company and is enforceable against the Company in
accordance with its terms except as such enforcement may be subject to (i)
bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting or relating to enforcement of creditors' rights generally and
(ii) general equitable principles, and none of the parties thereto is in
default in any respect thereunder. A complete and correct copy of each
Acquisition Agreement (including exhibits and schedules) has been delivered
to the Representatives and no changes therein will be made subsequent
hereto and prior to the Closing Date and, to the best knowledge of such
counsel, none of the parties thereto is in default in any respect
thereunder. [May rely on a certificate from Founding Companies in order to
give default opinion.] The Acquisitions pursuant to the Acquisition
Agreements have become effective. Such Acquisitions were consummated in
accordance with the provisions of the Acquisition Agreements and comply in
all respects with applicable law. After giving effect to the Founding
Company Acquisitions, all of the outstanding shares of the capital
A-4
<PAGE>
stock of each of the Founding Companies will be owned by the Company free
and clear of any security interest, mortgage, pledge, lien, encumbrance or
claim and no options, warrants or other rights to purchase, agreements or
other obligations to issue or other rights to convert any obligations into
shares of capital stock or ownership interests in any of the Founding
Companies are outstanding.
(xx) National Credit Management Corp. owns free and clear all right,
title and interest in and to the intellectual property rights comprising
the "Accelerated Payment System" as defined in the Prospectus, including,
but not limited to, United States Letters Patent No. 5,504,667 and that the
acquisition of National will not result in an assignment under the laws of
the State of Maryland, of the 1994 Agreement or the 1996 Agreement, each as
defined in the Prospectus, for which a valid consent has not been obtained.
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company,
representatives of the independent public or certified public accountants
for the Company and with representatives of the Underwriters at which the
contents of the Registration Statement and the Prospectus, and any
supplements or amendments thereto, and related matters were discussed and,
although such counsel is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus (other than as
specified above), and any supplements or amendments thereto, on the basis
of the foregoing, nothing has come to their attention which would lead them
to believe that either the Registration Statement or any amendments
thereto, at the time the Registration Statement or such amendments became
effective, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading or that the Prospectus, as of its
date or at the First Closing Date or the Second Closing Date, as the case
may be, contained an untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading
(it being understood that such counsel need express no belief as to the
financial statements or schedules or other financial or accounting data
derived therefrom, included in the Registration Statement or the Prospectus
or any amendments or supplements thereto).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the General
Corporation Law of the State of Delaware, the State of New York or the federal
law of the United States, to the extent they deem proper and specified in such
opinion, upon the opinion (which shall be dated the First Closing Date or the
Second Closing Date, as the case may be, shall be satisfactory in form and
substance to the Underwriters, shall expressly state that the Underwriters may
rely on such opinion as if it were addressed to them
A-5
<PAGE>
and shall be furnished to the Representative) of other counsel of good standing
whom they believe to be reliable and who are satisfactory to counsel for the
Underwriters; provided, however, that such counsel shall further state that they
believe that they and the Underwriters are justified in relying upon such
opinion of other counsel, and (B) as to matters of fact, to the extent they deem
proper, on certificates of responsible officers of the Company, the transfer
agent and public officials.
A-6
<PAGE>
EXHIBIT B
, 1997
NationsBanc Montgomery Securities, Inc.
Lehman Brothers, Inc.
As Representatives of the Several Underwriters
c/o NationsBanc Montgomery Securities, Inc.
600 Montgomery Street
San Francisco, California 94111
RE: Compass International Services Corporation (the "Company")
----------------------------------------------------------
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain shares of
Common Stock of the Company ("Common Stock") or securities convertible into or
exchangeable or exercisable for Common Stock. The Company proposes to carry out
a public offering of Common Stock (the "Offering") for which you will act as the
representatives of the underwriters. The undersigned recognizes that the
Offering will be of benefit to the undersigned and will benefit the Company by,
among other things, raising additional capital for its operations. The
undersigned acknowledges that you and the other underwriters are relying on the
representations and agreements of the undersigned contained in this letter in
carrying out the Offering and in entering into underwriting arrangements with
the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not, without the prior written consent of Montgomery Securities
(which consent may be withheld in its sole discretion), directly or indirectly,
sell, offer, contract or grant any option to sell (including without limitation
any short sale), pledge, transfer, establish an open "put equivalent position"
within the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934,
or otherwise dispose of any shares of Common Stock, options or warrants to
acquire shares of Common Stock, or securities exchangeable or exercisable for or
convertible into shares of Common Stock currently or hereafter owned either of
record or beneficially (as defined in Rule 13d-3 under Securities Exchange Act
of 1934, as amended) by the undersigned, or publicly announce the undersigned's
intention to do any of the foregoing, for a period commencing on the date hereof
and continuing through the close of trading on the date 180 days after the date
of the final Prospectus used in connection with the Offering. The undersigned
also agrees and consents to the entry of stop transfer instructions with the
Company's transfer agent and registrar against the transfer of shares of Common
Stock or securities convertible into or exchangeable or exercisable for Common
Stock held by the undersigned except in compliance with the foregoing
restrictions.
With respect to the Offering only, the undersigned waives any registration
rights relating to registration under the Securities Act of any Common Stock
owned either of
B-1
<PAGE>
record or beneficially by the undersigned, including any rights to receive
notice of the Offering.
This agreement is irrevocable and will be binding on the undersigned and the
respective successors, heirs, personal representatives, and assigns of the
undersigned.
________________________________________________________________________________
Printed Name of Holder
By:_____________________________________________________________________________
Signature
________________________________________________________________________________
Printed Name of Person Signing
(and indicate capacity of person signing if signing as custodian, trustee, or on
behalf of an entity)
B-2
<PAGE>
EXHIBIT B
[BGL Form]
, 1997
NationsBanc Montgomery Securities, Inc.
Lehman Brothers, Inc.
As Representatives of the Several Underwriters
c/o NationsBanc Montgomery Securities, Inc.
600 Montgomery Street
San Francisco, California 94111
RE: Compass International Services Corporation (the "Company")
----------------------------------------------------------
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain shares of
Common Stock of the Company ("Common Stock") or securities convertible into or
exchangeable or exercisable for Common Stock. The Company proposes to carry out
a public offering of Common Stock (the "Offering") for which you will act as the
representatives of the underwriters. The undersigned recognizes that the
Offering will be of benefit to the undersigned and will benefit the Company by,
among other things, raising additional capital for its operations. The
undersigned acknowledges that you and the other underwriters are relying on the
representations and agreements of the undersigned contained in this letter in
carrying out the Offering and in entering into underwriting arrangements with
the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not, without the prior written consent of Montgomery Securities
(which consent may be withheld in its sole discretion), directly or indirectly,
sell, offer, contract or grant any option to sell (including without limitation
any short sale), pledge, transfer, establish an open "put equivalent position"
within the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934,
or otherwise dispose of any shares of Common Stock, options or warrants to
acquire shares of Common Stock, or securities exchangeable or exercisable for or
convertible into shares of Common Stock currently or hereafter owned either of
record or beneficially (as defined in Rule 13d-3 under Securities Exchange Act
of 1934, as amended) by the undersigned, or publicly announce the undersigned's
intention to do any of the foregoing, for a period commencing on the date hereof
and continuing through the close of trading on the date 180 days after the date
of the final Prospectus used in connection with the Offering; provided, however,
that the undersigned shall be entitled to distribute the shares of Common Stock
owned by it to its members provided that each entity which receives such shares
executes this letter agreement. The undersigned also agrees and consents to the
entry of stop transfer instructions with the Company's transfer agent and
registrar against the transfer of shares of Common Stock or securities
convertible into or exchangeable or
B-1
<PAGE>
exercisable for Common Stock held by the undersigned except in compliance with
the foregoing restrictions.
With respect to the Offering only, the undersigned waives any registration
rights relating to registration under the Securities Act of any Common Stock
owned either of record or beneficially by the undersigned, including any rights
to receive notice of the Offering.
This agreement is irrevocable and will be binding on the undersigned and the
respective successors, heirs, personal representatives, and assigns of the
undersigned.
________________________________________________________________________________
Printed Name of Holder
By:_____________________________________________________________________________
Signature
________________________________________________________________________________
Printed Name of Person Signing
(and indicate capacity of person signing if signing as custodian, trustee, or on
behalf of an entity)
B-2
<PAGE>
Exhibit 4.1
Number Number
[Logo]
COMPASS INTERNATIONAL SERVICES CORPORATION
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFICATE IS SEE REVERSE SIDE
TRANSFERABLE IN THE FOR CERTAIN
CITY OF NEW YORK DEFINITIONS
CUSIP 20450K 10 8
This is to certify that
is the owner of
SHARES OF FULLY PAID AND NON-ASSESSABLE COMMON STOCK OF THE PAR VALUE OF $.01
EACH OF
Compass International Services Corporation
transferable on the books of the Company, by the registered owner hereof in
person or by duly authorized attorney upon surrender of this Certificate
properly endorsed. This Certificate and the shares represented hereby are issued
and shall be subject to all of the provisions of the Certificate of
Incorporation of the Company and all amendments thereto, and to the By-Laws of
the Company, to all of which the holder hereof by acceptance of this Certificate
hereby assents.
This Certificate is not valid unless countersigned by the Transfer Agent
and registered by the Registrar.
WITNESS the facsimile seal of the Company and the facsimile signatures of
its duly authorized officers.
/s/ Michael J. Cunningham
Dated: -------------------------------------
----------------------- CHAIRMAN AND CHIEF EXECUTIVE OFFICER
/s/ Richard A. Alston
-------------------------------------
SECRETARY
COUNTERSIGNED AND REGISTERED
FIRST CHICAGO TRUST COMPANY OF NEW YORK
(NEW YORK)
TRANSFER AGENT AND REGISTRAR
BY:
---------------------------
AUTHORIZED OFFICER
<PAGE>
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM--as tenants in common
TEN ENT--as tenants by the entireties
JT TEN --as joint tenants with right of survivorship
and not as tenants in common
UNIF GIFT MIN ACT--______________________ Custodian________________________
(Cust) (Minor)
under Uniform Gifts to Minors
Act_______________________________________________
(State)
Additional abbreviations may also be used though not in the above list.
COMPASS INTERNATIONAL SERVICES CORPORATION
The Company or its Transfer Agent will furnish to any shareholder upon request
and without charge a statement of (1) all of the voting powers, designations,
preferences, and relative, participating, optional or other rights, if any, or
the qualifications, limitations, or the restrictions thereof, if any, of the
shares of each class of stock, including series of preference stock, authorized
to be issued by the Company, (2) the variations in the relative rights and
preferences between the shares of different series (if more than one) of
preference stock, and (3) the authority of the Board of Directors to fix and
determine the relative rights and preferences of subsequent series.
For value received, ___________________hereby sells, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
shares of the capital stock represented by the within Certificate, and does
hereby irrevocably constitute and appoint
- --------------------------------------------------------------------------------
attorney to transfer the said stock on the books of the within named Company
with full power of substitution in the premises.
Dated ________________________________
NOTICE: The Signature to this Assignment must correspond
with the name as written upon the face of the Certificate
in every particular, without alteration or enlargement or
any change whatever. X ________________________
Signature of Stockholder
<PAGE>
Exhibit 10.1
COMPASS INTERNATIONAL SERVICES CORPORATION
1997 EMPLOYEE INCENTIVE COMPENSATION PLAN
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
1997 EMPLOYEE INCENTIVE COMPENSATION PLAN
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C> <C>
ARTICLE I ESTABLISHMENT........................................... 1
1.1 Purpose................................................. 1
ARTICLE II DEFINITIONS............................................. 1
2.1 "Affiliate"............................................. 1
2.2 "Agreement" or "Award Agreement"........................ 1
2.3 "Annual Incentive Award"................................ 1
2.4 "Award"................................................. 1
2.5 "Beneficiary"........................................... 1
2.6 "Board of Directors" or "Board"......................... 2
2.7 "Cause"................................................. 2
2.8 "Change in Control" and "Change in Control Price"....... 2
2.9 "Code" or "Internal Revenue Code"....................... 2
2.10 "Commission"............................................ 2
2.11 "Committee"............................................. 2
2.12 "Common Stock".......................................... 2
2.13 "Company"............................................... 2
2.14 "Covered Employee"...................................... 2
2.15 "Deferred Stock"........................................ 2
2.16 "Disability"............................................ 3
2.17 "Effective Date"........................................ 3
2.18 "Exchange Act".......................................... 3
2.19 "Extraordinary Termination of Employment"............... 3
2.20 "Fair Market Value"..................................... 3
2.21 "Grant Date"............................................ 3
2.22 "Incentive Stock Option"................................ 3
2.23 "Nonqualified Stock Option"............................. 3
2.24 "Option Period"......................................... 3
2.25 "Option Price".......................................... 3
2.26 "Participant"........................................... 3
2.27 "Performance Shares".................................... 4
2.28 "Plan".................................................. 4
2.29 "Representative"........................................ 4
2.30 "Restricted Stock"...................................... 4
2.31 "Retirement"............................................ 4
2.32 "Rule 16b-3" and "Rule 16a-1(c)(3)"..................... 4
2.33 "Stock Appreciation Right".............................. 4
2.34 "Stock Option" or "Option".............................. 4
2.35 "Termination of Employment"............................. 4
ARTICLE III ADMINISTRATION.......................................... 5
3.1 Committee Structure and Authority....................... 5
</TABLE>
i
<PAGE>
<TABLE>
<C> <S> <C>
ARTICLE IV STOCK SUBJECT TO PLAN.......................................................... 7
4.1 Number of Shares............................................................... 7
4.2 Release of Shares.............................................................. 7
4.3 Restrictions on Shares......................................................... 8
4.4 Stockholder Rights............................................................. 8
4.5 Best Efforts To Register....................................................... 8
4.6 Anti-Dilution.................................................................. 9
ARTICLE V ELIGIBILITY.................................................................... 9
5.1 Eligibility.................................................................... 9
ARTICLE VI STOCK OPTIONS.................................................................. 10
6.1 General........................................................................ 10
6.2 Grant and Exercise............................................................. 10
6.3 Terms and Conditions........................................................... 10
6.4 Termination by Reason of Death................................................. 12
6.5 Termination by Reason of Disability............................................ 12
6.6 Other Termination.............................................................. 13
6.7 Cashing Out of Option.......................................................... 13
6.8 Formula Grants................................................................. 13
ARTICLE VII STOCK APPRECIATION RIGHTS...................................................... 14
7.1 General........................................................................ 14
7.2 Grant.......................................................................... 14
7.3 Terms and Conditions........................................................... 14
ARTICLE VIII RESTRICTED STOCK............................................................... 15
8.1 General........................................................................ 15
8.2 Awards and Certificates........................................................ 16
8.3 Terms and Conditions........................................................... 16
ARTICLE IX DEFERRED STOCK................................................................. 17
9.1 General........................................................................ 17
9.2 Terms and Conditions........................................................... 18
ARTICLE X PERFORMANCE SHARES............................................................. 19
10.1 General........................................................................ 19
10.2 Price.......................................................................... 19
10.3 Performance Share Agreement.................................................... 19
10.4 Performance Periods............................................................ 19
10.5 Performance Goals.............................................................. 19
10.6 Earning of Performance Shares.................................................. 20
10.7 Termination of Employment Due to Death, Disability or Retirement or at
the Request of the Company Without Cause .................................... 20
10.8 Termination of Employment for Other Reasons.................................... 20
10.9 Nontransferability............................................................. 20
10.10 Amendment of Awards............................................................ 21
</TABLE>
ii
<PAGE>
<TABLE>
<C> <S> <C>
ARTICLE XI ANNUAL INCENTIVE AWARDS....................................................... 21
11.1 Eligibility................................................................... 21
11.2 Earning of Annual Incentive Awards............................................ 21
11.3 Payments and Election......................................................... 22
11.4 Amendment of Awards........................................................... 23
11.5 Performance Threshold......................................................... 23
11.6 Maximum Awards................................................................ 23
ARTICLE XII PROVISIONS APPLICABLE TO STOCK ACQUIRED UNDER THIS PLAN....................... 23
12.1 Limited Transfer During Offering.............................................. 23
ARTICLE XIII CHANGE IN CONTROL PROVISIONS.................................................. 24
13.1 Impact of Event............................................................... 24
13.2 Definition of Change in Control............................................... 24
13.3 Change in Control Price....................................................... 26
ARTICLE XIV MISCELLANEOUS................................................................. 26
14.1 Amendments and Termination.................................................... 26
14.2 Unfunded Status of Plan....................................................... 26
14.3 Status of Awards Under Code Section 162(m).................................... 27
14.4 General Provisions............................................................ 27
14.5 Mitigation of Excise Tax...................................................... 28
14.6 Rights with Respect to Continuance of Employment.............................. 29
14.7 Awards in Substitution for Awards Granted by Other Corporations............... 29
14.8 Procedure for Adoption........................................................ 29
14.9 Procedure for Withdrawal...................................................... 29
14.10 Delay......................................................................... 29
14.11 Headings...................................................................... 30
14.12 Severability.................................................................. 30
14.13 Successors and Assigns........................................................ 30
14.14 Entire Agreement.............................................................. 30
</TABLE>
iii
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
1997 EMPLOYEE INCENTIVE COMPENSATION PLAN
ARTICLE I
---------
ESTABLISHMENT
-------------
1.1 Purpose.
The Compass International Services Corporation 1997 Employee Incentive
Compensation Plan ("Plan") is hereby established by Compass International
Services Corporation ("Company"). The purpose of this Plan is to promote the
overall financial objectives of the Company and its stockholders by motivating
those persons selected to participate in this Plan to achieve long-term growth
in stockholder equity in the Company and by retaining the association of those
individuals who are instrumental in achieving this growth. The Plan and the
grant of awards hereunder are expressly conditioned upon the Plan's approval by
the stockholders of the Company. If such approval is not obtained, then this
Plan and all Awards (as defined herein) hereunder shall be null and void ab
initio.
ARTICLE II
----------
DEFINITIONS
-----------
For purposes of this Plan, the following terms are defined as set forth
below:
2.1 "Affiliate" means any individual, corporation, partnership,
association, limited liability company, joint-stock company, trust,
unincorporated association or other entity (other than the Company) that
directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, the Company including, without
limitation, any member of an affiliated group of which the Company is a common
parent corporation as provided in Section 1504 of the Code.
2.2 "Agreement" or "Award Agreement" means any agreement entered into
pursuant to this Plan pursuant to which an Award is granted to a Participant.
2.3 "Annual Incentive Award" means an award granted pursuant to Article
XI.
2.4 "Award" means any Stock Option, Stock Appreciation Right, Restricted
Stock, Deferred Stock, Performance Share or Annual Incentive Award granted to a
Participant under the Plan.
2.5 "Beneficiary" means the person, persons, trust or trusts which have
been designated by a Participant in his or her most recent written beneficiary
designation filed with the Committee
<PAGE>
to receive the benefit specified under the Plan to the extent permitted. If
there is no designated beneficiary, then the term means the person or persons,
trust or trusts entitled by will or the laws of descent and distribution to
receive such benefits.
2.6 "Board of Directors" or "Board" means the Board of Directors of the
Company.
2.7 "Cause" shall mean, for purposes of whether and when a Participant has
incurred a Termination of Employment for Cause, any act or omission which
permits the Company to terminate a written agreement or arrangement (employment
or otherwise) between the Participant and the Company or an Affiliate for Cause
as defined in such agreement or arrangement, or in the event there is no such
agreement or arrangement or the agreement or arrangement does not define the
term "cause," then Cause shall mean (a) any act or failure to act deemed to
constitute cause under the Company's established practices, policies or
guidelines applicable to the Participant or (b) the Participant's act or
omission constituting gross misconduct with respect to the Company or an
Affiliate in any material respect.
2.8 "Change in Control" and "Change in Control Price" have the meanings
set forth in Sections 13.2 and 13.3, respectively.
2.9 "Code" or "Internal Revenue Code" means the Internal Revenue Code of
1986, as amended, final Treasury Regulations thereunder and any subsequent
Internal Revenue Code.
2.10 "Commission" means the Securities and Exchange Commission or any
successor agency.
2.11 "Committee" means the person or persons appointed by the Board of
Directors to administer this Plan, as further described herein; provided,
however, the Committee shall consist of directors who are "disinterested"
persons or "non-employees" within the meaning of Rule 16b-3 and each of whom is
an "outside" director under Section 162(m) of the Code.
2.12 "Common Stock" means the shares of the regular voting Common Stock,
$.01 par value per share, whether presently or hereafter issued, and any other
stock or security resulting from adjustment thereof as described hereinafter or
the common stock of any successor to the Company which is designated for the
purpose of this Plan.
2.13 "Company" means Compass International Services Corporation, a Delaware
corporation, and includes any successor or assignee corporation or corporations
into which the Company may be merged, changed or consolidated; any corporation
for whose securities all or substantially all of the securities of the Company
shall be exchanged; and any assignee of or successor to substantially all of the
assets of the Company.
2.14 "Covered Employee" means a Participant who is a "covered employee"
within the meaning of Section 162(m) of the Code.
2.15 "Deferred Stock" means an award made pursuant to Article IX to receive
Common Stock at the end of a specified period.
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2.16 "Disability" means a mental or physical illness that entitles the
Participant to receive benefits under the long term disability plan of the
Company or an Affiliate, or if the Participant is not covered by such a plan or
the Participant is not an employee of the Company or an Affiliate, a mental or
physical illness that renders a Participant totally and permanently incapable of
performing the Participant's duties for the Company or an Affiliate.
Notwithstanding the foregoing, a Disability shall not qualify under this Plan if
it is the result of (i) a willfully self-inflicted injury or willfully self-
induced sickness; or (ii) an injury or disease contracted, suffered, or
incurred, while participating in a criminal offense. Notwithstanding the
foregoing, if the Participant and the Company or an Affiliate have entered into
an employment agreement which defines the term "Disability" (or a similar term),
such definition shall govern for purposes of determining whether such
Participant suffers a Disability for purposes of this Plan. The determination
of Disability shall be made by the Committee. The determination of Disability
for purposes of this Plan shall not be construed to be an admission of
disability for any other purpose.
2.17 "Effective Date" means ____________, 1997.
2.18 "Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
2.19 "Extraordinary Termination of Employment" means the Termination of
Employment of the Participant due to death, Disability or Retirement.
2.20 "Fair Market Value" means the fair market value of Common Stock,
Awards, or other property as determined by the Committee or under procedures
established by the Committee. Unless otherwise determined by the Committee, the
Fair Market Value per share of Common Stock as of any date shall be the closing
sale price per share reported on a consolidated basis for stock listed on the
principal stock exchange or market on which the Common Stock is traded on the
date as of which such value is being determined or, if there is no sale on that
date, then on the last previous day on which a sale was reported.
2.21 "Grant Date" means the date that as of which an Award is granted
pursuant to this Plan.
2.22 "Incentive Stock Option" means any Stock Option intended to be and
designated as an "incentive stock option" within the meaning of Section 422 of
the Code.
2.23 "Nonqualified Stock Option" means an Option to purchase Common Stock
in the Company granted under this Plan the taxation of which is pursuant to
Section 83 of the Code.
2.24 "Option Period" means the period during which the Option shall be
exercisable in accordance with the Agreement and Article VI.
2.25 "Option Price" means the price at which the Common Stock may be
purchased under an Option as provided in Section 6.3.
2.26 "Participant" means a person who satisfies the eligibility conditions
of Article V and to whom an Award has been granted by the Committee under this
Plan, and in the event a
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Representative is appointed for a Participant or another person becomes a
Representative, then the term "Participant" shall mean such Representative. The
term shall also include a trust for the benefit of the Participant, a
partnership the interest of which is by or for the benefit of the Participant,
the Participant's parents, spouse or descendants, or a custodian under a uniform
gifts to minors act or similar statute for the benefit of the Participant's
descendants, to the extent permitted by the Committee and not inconsistent with
the Rule 16b-3 or the status of the Option as an Incentive Stock Option to the
extent intended. Notwithstanding the foregoing, the term "Termination of
Employment" shall mean the Termination of Employment of the employee (and other
terms intended to refer solely to the employee shall be interpreted in a manner
that is consistent with such intent).
2.27 "Performance Shares" means a right, granted under Article X, to
receive Awards based upon criteria specified by the Committee.
2.28 "Plan" means this Compass International Services Corporation 1997
Employee Incentive Compensation Plan, as the same may be amended from time to
time.
2.29 "Representative" means (a) the person or entity acting as the
executor or administrator of a Participant's estate pursuant to the last will
and testament of a Participant or pursuant to the laws of the jurisdiction in
which the Participant had the Participant's primary residence at the date of the
Participant's death; (b) the person or entity acting as the guardian or
temporary guardian of a Participant; (c) the person or entity which is the
Beneficiary of the Participant upon or following the Participant's death; or (d)
any person to whom an Option has been transferred with the permission of the
Committee or by operation of law; provided that only one of the foregoing shall
be the Representative at any point in time as determined under applicable law
and recognized by the Committee.
2.30 "Restricted Stock" means an award of Common Stock under Article VIII
that is subject to certain restrictions and a risk of forfeiture.
2.31 "Retirement" means the Participant's Termination of Employment after
attaining either the normal retirement age or the early retirement age as
defined in the principal (as determined by the Committee) tax-qualified plan of
the Company or an Affiliate, if the Participant is covered by such plan, and if
the Participant is not covered by such a plan, then age 65, or age 55 with the
accrual of 10 years of service.
2.32 "Rule 16b-3" and "Rule 16a-1(c)(3)" means Rule 16b-3 and Rule 16a-
1(c)(3), as from time to time in effect and applicable to the Plan and
Participants, promulgated by the Securities and Exchange Commission under
Section 16 of the Exchange Act.
2.33 "Stock Appreciation Right" means a right granted under Article VII.
2.34 "Stock Option" or "Option" means a right to purchase stock on
specified conditions granted under Article VI.
2.35 "Termination of Employment" means the occurrence of any act or event
whether pursuant to an employment agreement or otherwise that actually or
effectively causes or results
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in the person's ceasing, for whatever reason, to be an officer, consultant,
director or employee of the Company or of any Affiliate, or to be an officer,
independent contractor, director or employee of any entity that provides
services to the Company or an Affiliate, including, without limitation, death,
Disability, dismissal, severance at the election of the Participant, Retirement,
or severance as a result of the discontinuance, liquidation, sale or transfer by
the Company or its Affiliates of all businesses owned or operated by the Company
or its Affiliates. With respect to any person who is not an employee with
respect to the Company or an Affiliate, the Agreement may establish what act or
event shall constitute a Termination of Employment for purposes of this Plan. A
transfer of employment from the Company to an Affiliate, or from an Affiliate to
the Company, shall not be a Termination of Employment, unless expressly
determined by the Committee. A Termination of Employment shall occur with
respect to an employee who is employed by an Affiliate if the Affiliate shall
cease to be an Affiliate and the Participant shall not immediately thereafter
become an employee of the Company or an Affiliate.
In addition, certain other terms used herein have definitions given to them
in the first place in which they are used.
ARTICLE III
-----------
ADMINISTRATION
--------------
3.1 Committee Structure and Authority. This Plan shall be administered by
the Committee which shall be comprised of one or more persons. The Committee
shall be the Compensation Committee of the Board of Directors, unless such
committee does not exist or the Board establishes a committee whose purpose is
the administration of this Plan. In the absence of an appointment, the Board or
the portion that qualifies as the Committee shall be the Committee. A majority
of the Committee shall constitute a quorum at any meeting thereof (including
telephone conference) and the acts of a majority of the members present, or acts
approved in writing by a majority of the entire Committee without a meeting,
shall be the acts of the Committee for purposes of this Plan. The Committee may
authorize any one or more of its members or an officer of the Company to execute
and deliver documents on behalf of the Committee. This Plan is intended to
qualify for exemption from Section 16(b) of the Exchange Act and to qualify as
performance-based compensation under Section 162(m) of the Code and shall be
interpreted in such a way as to result in such qualification. A member of the
Committee shall not exercise any discretion respecting himself or herself under
this Plan. The Board shall have the authority to remove, replace or fill any
vacancy of any member of the Committee upon notice to the Committee and the
affected member. Any member of the Committee may resign upon notice to the
Board. The Committee may allocate among one or more of its members, or may
delegate to one or more of its agents, such duties and responsibilities as it
determines.
Among other things, the Committee shall have the authority, (i) subject to
the terms of this Plan, and (ii) subject to the approval of the Board (to the
extent required to qualify an option granted hereunder for exemption under
Section 16(b) of the Exchange Act and as "performance-based compensation" under
Section 162(m) of the Code):
(a) to select those persons to whom Awards may be granted from time
to time;
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(b) to determine whether and to what extent Awards are to be granted
hereunder;
(c) to determine the number of shares of Common Stock to be covered
by each Award granted hereunder;
(d) to determine the terms and conditions of any Award granted
hereunder (including, but not limited to, the Option Price, the Option
Period, any exercise restriction or limitation; any exercise acceleration
or forfeiture waiver or any performance criteria regarding any Award and
the shares of Common Stock relating thereto);
(e) to adjust the terms and conditions, at any time or from time to
time, of any Award, subject to the limitations of Section 14.1;
(f) to determine to what extent and under what circumstances Common
Stock and other amounts payable with respect to an Award shall be deferred;
(g) to determine under what circumstances an Award may be settled in
cash or Common Stock.
(h) to provide for the forms of Agreement to be utilized in
connection with this Plan;
(i) to determine whether a Participant has a Disability or a
Retirement;
(j) to determine what securities law requirements are applicable to
this Plan, Awards, and the issuance of shares of Common Stock and to
require of a Participant that appropriate action be taken with respect to
such requirements;
(k) to cancel, with the consent of the Participant or as otherwise
provided in this Plan or an Agreement, outstanding Awards;
(l) to interpret and make a final determination with respect to the
remaining number of shares of Common Stock available under this Plan;
(m) to require as a condition of the exercise of an Award or the
issuance or transfer of a certificate of Common Stock, the withholding from
a Participant of the amount of any federal, state or local taxes as may be
necessary in order for the Company or any other employer to obtain a
deduction or as may be otherwise required by law;
(n) to determine whether and with what effect an individual has
incurred a Termination of Employment;
(o) to determine whether the Company or any other person has a right
or obligation to purchase Common Stock from a Participant and, if so, the
terms and conditions on which such Common Stock is to be purchased;
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(p) to determine the restrictions or limitations on the transfer of
Common Stock;
(q) to determine whether an Award is to be adjusted, modified or
purchased, or is to become fully exercisable, under this Plan or the terms
of an Agreement;
(r) to determine the permissible methods of Award exercise and
payment, including cashless exercise arrangements;
(s) to adopt, amend and rescind such rules and regulations as, in its
opinion, may be advisable in the administration of this Plan; and
(t) to appoint and compensate agents, counsel, auditors or other
specialists to aid it in the discharge of its duties.
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing this Plan as it shall,
from time to time, deem advisable, to interpret the terms and provisions of this
Plan and any Award issued under this Plan (and any Agreement) and to otherwise
supervise the administration of this Plan. The Committee's policies and
procedures may differ with respect to Awards granted at different times or to
different Participants.
Any determination made by the Committee pursuant to the provisions of this
Plan shall be made in its sole discretion, and in the case of any determination
relating to an Award, may be made at the time of the grant of the Award or,
unless in contravention of any express term of this Plan or an Agreement, at any
time thereafter. All decisions made by the Committee pursuant to the provisions
of this Plan shall be final and binding on all persons, including the Company
and Participants. Any determination shall not be subject to de novo review if
challenged in court.
ARTICLE IV
----------
STOCK SUBJECT TO PLAN
---------------------
4.1 Number of Shares. Subject to the adjustment under Section 4.6, the
total number of shares of Common Stock initially reserved and available for
distribution pursuant to Awards under this Plan shall be 2,000,000 shares of
Common Stock. Notwithstanding the foregoing, unless approved by the Board of
Directors, the number of shares of Common Stock available for distribution
hereunder shall not exceed 10% of the shares of Common Stock then outstanding;
provided, however, that the number of shares available shall at no time be less
than 1,000,000. Such shares may consist, in whole or in part, of authorized and
unissued shares or treasury shares.
4.2 Release of Shares. The Committee shall have full authority to
determine the number of shares of Common Stock available for Award, and in its
discretion may include (without limitation) as available for distribution any
shares of Common Stock that have ceased to be subject to an Award, any shares of
Common Stock subject to any Award that are forfeited, any Award that otherwise
terminates without issuance of shares of Common Stock being made to the
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Participant, or any shares (whether or not restricted) of Common Stock that are
received by the Company in connection with the exercise of an Award including
the satisfaction of any tax liability or the satisfaction of a tax withholding
obligation. If any shares could not again be available for Awards to a
particular Participant under any applicable law, such shares shall be available
exclusively for Awards to Participants who are not subject to such limitations.
4.3 Restrictions on Shares. Shares of Common Stock issued upon exercise of
an Award shall be subject to the terms and conditions specified herein and to
such other terms, conditions and restrictions as the Committee in its discretion
may determine or provide in the Award Agreement. The Company shall not be
required to issue or deliver any certificates for shares of Common Stock, cash
or other property prior to (i) the listing of such shares on any stock exchange
(or other public market) on which the Common Stock may then be listed (or
regularly traded), (ii) the completion of any registration or qualification of
such shares under federal or state law, or any ruling or regulation of any
government body which the Committee determines to be necessary or advisable, and
(iii) the satisfaction of any applicable withholding obligation in order for the
Company or an Affiliate to obtain a deduction with respect to the exercise of an
Award. The Company may cause any certificate for any share of Common Stock to be
delivered to be properly marked with a legend or other notation reflecting the
limitations on transfer of such Common Stock as provided in this Plan or as the
Committee may otherwise require. The Committee may require any person exercising
an Award to make such representations and furnish such information as it may
consider appropriate in connection with the issuance or delivery of the shares
of Common Stock in compliance with applicable law or otherwise. Fractional
shares shall not be delivered, but shall be rounded to the next lower whole
number of shares, with appropriate payment made with respect to such fractional
shares.
4.4 Stockholder Rights. No person shall have any rights of a stockholder
as to shares of Common Stock subject to an Award until, after proper exercise of
the Award or other action required, such shares shall have been recorded on the
Company's official stockholder records as having been issued and transferred.
Upon exercise of the Award or any portion thereof, the Company will have a
reasonable time in which to issue the shares, and the Participant will not be
treated as a stockholder for any purpose whatsoever prior to such issuance. No
adjustment shall be made for cash dividends or other rights for which the record
date is prior to the date such shares are recorded as issued and transferred in
the Company's official stockholder records, except as provided herein or in an
Agreement.
4.5 Best Efforts To Register. If there has been an initial public offering
of the Common Stock, the Company will register under the Securities Act the
Common Stock delivered or deliverable pursuant to Awards on Commission Form S-8
if available to the Company for this purpose (or any successor or alternate form
that is substantially similar to that form to the extent available to effect
such registration), in accordance with the rules and regulations governing such
forms, as soon as such forms are available for registration to the Company for
this purpose. The Company will use its best efforts to cause the registration
statement to become effective as soon as possible and will file such supplements
and amendments to the registration statement as may be necessary to keep the
registration statement in effect until the earliest of (a) one year following
the expiration of the last relevant period of the last Award outstanding, (b)
the date the Company is no longer a reporting company under the Exchange Act and
(c) the date all Participants have disposed of all shares of Common Stock
delivered pursuant to any Award. The Company may
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delay the foregoing obligation if the Committee reasonably determines that any
such registration would materially and adversely affect the Company's interests
or if there is no material benefit to Participants.
4.6 Anti-Dilution. In the event of any Company stock dividend, stock
split, combination or exchange of shares, recapitalization or other change in
the capital structure of the Company, corporate separation or division of the
Company (including, but not limited to, a split-up, spin-off, split-off or
distribution to Company stockholders other than a normal cash dividend), sale by
the Company of all or a substantial portion of its assets (measured on either a
stand-alone or consolidated basis), reorganization, rights offering, a partial
or complete liquidation, or any other corporate transaction, Company share
offering or event involving the Company and having an effect similar to any of
the foregoing, then the Committee may adjust or substitute, as the case may be,
the number of shares of Common Stock available for Awards under this Plan, the
number of shares of Common Stock covered by outstanding Awards, the exercise
price per share of outstanding Awards, and any other characteristics or terms of
the Awards as the Committee shall deem necessary or appropriate to reflect
equitably the effects of such changes to the Participants; provided, however,
that the Committee may limit any such adjustment so as to maintain the
deductibility of the Awards under Section 162(m) of the Code, and that any
fractional shares resulting from such adjustment shall be eliminated by rounding
to the next lower whole number of shares with appropriate payment for such
fractional share as shall reasonably be determined by the Committee.
ARTICLE V
---------
ELIGIBILITY
-----------
5.1 Eligibility. Except as herein provided, the persons who shall be
eligible to participate in this Plan and be granted Awards shall be those
persons who are officers, directors, employees or consultants of the Company or
any subsidiary, who shall be in a position, in the opinion of the Committee, to
make contributions to the growth, management, protection and success of the
Company and its subsidiaries. Of those persons described in the preceding
sentence, the Committee may, from time to time, select persons to be granted
Awards and shall determine the terms and conditions with respect thereto. In
making any such selection and in determining the form of the Award, the
Committee may give consideration to the functions and responsibilities of the
person's contributions to the Company and its subsidiaries, the value of the
individual's service to the Company and its subsidiaries and such other factors
deemed relevant by the Committee. The Committee may designate any person who is
not eligible to participate in this Plan if such person would otherwise be
eligible to participate in this Plan (and members of the Committee are expressly
excluded from participation to the extent necessary for purposes of Rule 16b-3,
Section 162(m) of the Code or any other legal reason).
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ARTICLE VI
----------
STOCK OPTIONS
-------------
6.1 General. The Committee shall have authority to grant Options under
this Plan at any time or from time to time. Stock Options may be granted alone
or in addition to other Awards and may be either Incentive Stock Options or Non-
Qualified Stock Options. An Option shall entitle the Participant to receive
shares of Common Stock upon exercise of such Option, subject to the
Participant's satisfaction in full of any conditions, restrictions or
limitations imposed in accordance with this Plan or an Agreement (the terms and
provisions of which may differ from other Agreements) including without
limitation, payment of the Option Price.
6.2 Grant and Exercise. The grant of a Stock Option shall occur as of the
date the Committee determines. Each Option granted under this Plan shall be
evidenced by an Agreement, in a form approved by the Committee, which shall
embody the terms and conditions of such Option and which shall be subject to the
express terms and conditions set forth in this Plan. Such Agreement shall become
effective upon execution by the Participant. Only a person who is a common-law
employee of the Company, any parent corporation of the Company or a subsidiary
(as such terms are defined in Section 424 of the Code) on the Grant date shall
be eligible to be granted an Option which is intended to be and is an Incentive
Stock Option. To the extent that any Stock Option is not designated as an
Incentive Stock Option or even if so designated does not qualify as an Incentive
Stock Option, it shall constitute a Non-Qualified Stock Option.
6.3 Terms and Conditions. Stock Options shall be subject to such terms and
conditions as shall be determined by the Committee, including the following:
(a) Option Period. The Option Period of each Stock Option shall be
fixed by the Committee; provided that no Non-Qualified Stock Option shall
be exercisable more than ten (10) years after the date the Stock Option is
granted. In the case of an Incentive Stock Option, the Option Period shall
not exceed ten (10) years from the date of grant or five (5) years in the
case of an individual who owns more than ten percent (10%) of the combined
voting power of all classes of stock of the Company, a corporation which is
a parent corporation of the Company or any subsidiary of the Company (each
as defined in Section 424 of the Code). No Option which is intended to be
an Incentive Stock Option shall be granted more than ten (10) years from
the date this Plan is adopted by the Company or the date this Plan is
approved by the stockholders of the Company, whichever is earlier.
(b) Option Price. The Option Price per share of the Common Stock
purchasable under an Option shall be determined by the Committee. If such
Option is intended to qualify as an Incentive Stock Option, the Option
Price per share shall be not less than the Fair Market Value per share on
the date the Option is granted, or where granted to an individual who owns
or who is deemed to own stock possessing more than ten percent (10%) of the
combined voting power of all classes of stock of the Company, a corporation
which is a parent corporation of the Company or any subsidiary of the
Company (each as defined in Section 424 of the Code), not less than one
hundred ten percent (110%) of such Fair Market Value per share.
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(c) Exercisability. Subject to Section 13.1, Stock Options shall
be exercisable at such time or times and subject to such terms and
conditions as shall be determined by the Committee. If the Committee
provides that any Stock Option is exercisable only in installments, the
Committee may at any time waive such installment exercise provisions, in
whole or in part. In addition, the Committee may at any time accelerate the
exercisability of any Stock Option. If the Committee intends that an Option
be an Incentive Stock Option, the Committee shall, in its discretion,
provide that the aggregate Fair Market Value (determined at the Grant Date)
of Incentive Stock Option which is exercisable for the first time during
the calendar year shall not exceed $100,000.
(d) Method of Exercise. Subject to the provisions of this Article VI,
a Participant may exercise Stock Options, in whole or in part, at any time
during the Option Period by the Participant's giving written notice of
exercise on a form provided by the Committee to the Company specifying the
number of shares of Common Stock subject to the Stock Option to be
purchased. Such notice shall be accompanied by payment in full of the
purchase price by cash or check or such other form of payment as the
Company may accept. If approved by the Committee (including approval at the
time of exercise), payment in full or in part may also be made (i) by
delivering Common Stock already owned by the Participant having a total
Fair Market Value on the date of such delivery equal to the Option Price;
(ii) by the execution and delivery of a note or other evidence of
indebtedness (and any security agreement thereunder) satisfactory to the
Committee and permitted in accordance with Section 6.3(e); (iii) by
authorizing the Company to retain shares of Common Stock which would
otherwise be issuable upon exercise of the Option having a total Fair
Market Value on the date of delivery equal to the Option Price; (iv) by the
delivery of cash or the extension of credit by a broker-dealer to whom the
Participant has submitted a notice of exercise or otherwise indicated an
intent to exercise an Option (in accordance with Part 220, Chapter II,
Title 12 of the Code of Federal Regulations, so-called "cashless"
exercise); (v) by certifying ownership of shares of Common Stock owned by
the Participant to the satisfaction of the Committee for later delivery to
the Company as specified by the Company; or (vi) by any combination of the
foregoing. If payment of the Option Price of a Non-Qualified Stock Option
is made in whole or in part in the form of Restricted Stock or Deferred
Stock, the number of shares of Common Stock to be received upon such
exercise equal to the number of shares of Restricted Stock or Deferred
Stock used for payment of the Option Price shall be subject to the same
forfeiture restrictions or deferral limitations to which such Restricted
Stock or Deferred Stock was subject, unless otherwise determined by the
Committee. In the case of an Incentive Stock Option, the right to make a
payment in the form of already owned shares of Common Stock of the same
class as the Common Stock subject to the Stock Option may be authorized
only at the time the Stock Option is granted. No shares of Common Stock
shall be issued until full payment therefor, as determined by the
Committee, has been made. Subject to any forfeiture restrictions or
deferral limitations that may apply if a Stock Option is exercised using
Restricted Stock or Deferred Stock, a Participant shall have all of the
rights of a stockholder of the Company holding the class of Common Stock
that is subject to such Stock Option (including, if applicable, the right
to vote the shares and the right to receive dividends), when the
Participant has given written notice of exercise, has paid in full for such
shares and such shares have been recorded on the Company's official
stockholder records as having been issued and transferred.
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(e) Company Loan or Guarantee. Upon the exercise of any Option and
subject to the pertinent Agreement and the discretion of the Committee, the
Company may at the request of the Participant:
(i) lend to the Participant, an amount equal to such portion of
the Option Price as the Committee may determine; or
(ii) guarantee a loan obtained by the Participant from a third-party for the
purpose of tendering the Option Price.
The terms and conditions of any loan or guarantee, including the term,
interest rate, whether the loan is with recourse against the Participant
and any security interest thereunder, shall be determined by the Committee,
except that no extension of credit or guarantee shall obligate the Company
for an amount to exceed the lesser of the aggregate Fair Market Value per
share of the Common Stock on the date of exercise, less the par value of
the shares of Common Stock to be purchased upon the exercise of the Award,
or the amount permitted under applicable laws or the regulations and rules
of the Federal Reserve Board and any other governmental agency having
jurisdiction.
(f) Non-transferability of Options. Except as provided herein or in
an Agreement and then only consistent with the intent that the Option be an
Incentive Stock Option (as applicable), no Stock Option or interest therein
shall be transferable by the Participant other than by will or by the laws
of descent and distribution or by a designation of beneficiary effective
upon the death of the Participant, and all Stock Options shall be
exercisable during the Participant's lifetime only by the Participant. If
and to the extent transferability is permitted by Rule 16b-3 and except as
otherwise provided herein or by an Agreement, every Option granted
hereunder shall be freely transferable, but only if such transfer does not
result in liability under Section 16 of the Exchange Act to the Participant
or other Participants and is consistent with registration of the Option and
sale of Common Stock on Form S-8 (or a successor form) or the Committee's
waiver of such condition.
6.4 Termination by Reason of Death. Unless otherwise provided in an
Agreement or determined by the Committee, if a Participant incurs a Termination
of Employment due to death, any unexpired and unexercised Stock Option held by
such Participant shall thereafter be fully exercisable for a period of one (1)
year (or such other period or no period as the Committee may specify)
immediately following the date of such death or until the expiration of the
Option Period, whichever period is the shorter.
6.5 Termination by Reason of Disability. Unless otherwise provided in an
Agreement or determined by the Committee, if a Participant incurs a Termination
of Employment due to a Disability, any unexpired and unexercised Stock Option
held by such Participant shall thereafter be fully exercisable by the
Participant for the period of one (1) year (or such other period or no period as
the Committee may specify) immediately following the date of such Termination of
Employment or until the expiration of the Option Period, whichever period is
shorter, and the Participant's death at any time following such Termination of
Employment due to Disability shall not affect the foregoing. In the event of
Termination of Employment by reason of Disability, if
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an Incentive Stock Option is exercised after the expiration of the exercise
periods that apply for purposes of Section 422 of the Code, such Stock Option
will thereafter be treated as a Non-Qualified Stock Option.
6.6 Other Termination. Unless otherwise provided in an Agreement or
determined by the Committee, if a Participant incurs a Termination of Employment
due to Retirement, or the Termination of Employment is involuntary on the part
of the Participant (but is not due to death, Disability or with Cause), any
Stock Option held by such Participant shall thereupon terminate, except that
such Stock Option, to the extent then exercisable, may be exercised for the
lesser of the ninety (90) day period commencing with the date of such
Termination of Employment or until the expiration of the Option Period. Unless
otherwise provided in an Agreement or determined by the Committee, if the
Participant incurs a Termination of Employment which is either (a) voluntary on
the part of the Participant (and is not due to Retirement) or (b) with Cause,
the Option shall terminate immediately. Unless otherwise provided in an
Agreement or determined by the Committee, the death or Disability of a
Participant after a Termination of Employment otherwise provided herein shall
not extend the exercisability of the time permitted to exercise an Option.
6.7 Cashing Out of Option. On receipt of written notice of exercise, the
Committee may elect to cash out all or part of the portion of any Stock Option
by paying the Participant an amount, in cash or Common Stock, equal to the
excess of the Fair Market Value of the Common Stock that is subject to the
Option over the Option Price times the number of shares of Common Stock subject
to the Option on the effective date of such cash out.
6.8 Formula Grants. Each person who is a non-employee Director on the
Effective Date shall become a Participant and shall be granted an Option to
purchase ten thousand (10,000) shares of Common Stock without further action by
the Board or the Committee. Each non-employee who is subsequently elected or
appointed as a Director shall become a Participant and shall, on his date of
election or appointment, without further action by the Board or the Committee,
be granted an Option to purchase ten thousand (10,000) shares of Common Stock.
Thereafter, on the date of each annual meeting of stockholders of the Company
after which a Participant continues as a non-employee Director, but only with
respect to an annual meeting which is more than three months after the date of
the initial grant of an Option to such Participant under this Section 6.8, such
Participant shall be granted an Option to purchase five thousand (5,000) shares
of Common Stock. If the number of shares of Common Stock available to grant
under the Plan on a scheduled date of grant is insufficient to make all
automatic grants required to be made pursuant to the Plan on such date, then
each eligible Director shall receive an Option to purchase a pro rata number of
the remaining shares of Common Stock available under the Plan; provided further,
however, that if such proration results in fractional shares of Common Stock,
then such Option shall be rounded down to the nearest number of whole shares of
Common Stock. If there is no whole number of shares remaining to be granted,
then no grants shall be made under the Plan. Each Option granted under the Plan
shall be evidenced by an Agreement, in a form approved by the Committee, which
shall embody the terms and conditions of such Option and which shall be subject
to the express terms and conditions set forth in the Plan. Such Agreement shall
become effective upon execution by the Participant. Any Option granted pursuant
to this Section 6.8 shall terminate upon the first anniversary of the date the
Participant first ceased to hold the position of Director.
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ARTICLE VII
-----------
STOCK APPRECIATION RIGHTS
-------------------------
7.1 General. The Committee shall have authority to grant Stock
Appreciation Rights under this Plan at any time or from time to time. Subject
to the Participant's satisfaction in full of any conditions, restrictions or
limitations imposed in accordance with this Plan or an Agreement, a Stock
Appreciation Right shall entitle the Participant to surrender to the Company the
Stock Appreciation Right and to be paid therefor in shares of the Common Stock,
cash or a combination thereof as herein provided, the amount described in
Section 7.3(b).
7.2 Grant. Stock Appreciation Rights may be granted in conjunction with
all or part of any Stock Option granted under this Plan, in which case the
exercise of the Stock Appreciation Right shall require the cancellation of a
corresponding portion of the Stock Option, and the exercise of the Stock Option
will result in cancellation of a corresponding portion of the Stock Appreciation
Right. In the case of a Non-Qualified Stock Option, such rights may be granted
either at or after the time of grant of such Stock Option. In the case of an
Incentive Stock Option, such rights may be granted only at the time of grant of
such Stock Option. A Stock Appreciation Right may also be granted on a stand
alone basis. The grant of a Stock Appreciation Right shall occur as of the date
the Committee determines. Each Stock Appreciation Right granted under this Plan
shall be evidenced by an Agreement, which shall embody the terms and conditions
of such Stock Appreciation Right and which shall be subject to the terms and
conditions set forth in this Plan. During any three-calendar-year period, no
more Stock Appreciation Rights shall be granted to any Participant than the
number of Options that may be granted to any Participant under Section 6.1.
7.3 Terms and Conditions. Stock Appreciation Rights shall be subject to
such terms and conditions as shall be determined by the Committee, including the
following:
(a) Period and Exercise. The term of a Stock Appreciation Right
shall be established by the Committee. If granted in conjunction with a
Stock Option, the Stock Appreciation Right shall have a term which is the
same as the Option Period and shall be exercisable only at such time or
times and to the extent the related Stock Options would be exercisable in
accordance with the provisions of Article VI. A Stock Appreciation Right
which is granted on a stand alone basis shall be for such period and shall
be exercisable at such times and to the extent provided in an Agreement.
Stock Appreciation Rights shall be exercised by the Participant's giving
written notice of exercise on a form provided by the Committee to the
Company specifying the portion of the Stock Appreciation Right to be
exercised.
(b) Amount. Upon the exercise of a Stock Appreciation Right, a
Participant shall be entitled to receive an amount in cash, shares of
Common Stock or both as determined by the Committee or as otherwise
permitted in an Agreement equal in value to the excess of the Fair Market
Value per share of Common Stock over the Option Price per share of Common
Stock specified in the related Agreement multiplied by the number of shares
in respect of which the Stock Appreciation Right is exercised. In the case
of a Stock Appreciation Right granted on a stand alone basis, the Agreement
shall specify the
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value to be used in lieu of the Option Price per share of Common Stock.
The aggregate Fair Market Value per share of the Common Stock shall be
determined as of the date of exercise of such Stock Appreciation Right.
(c) Special Rules. In the case of Stock Appreciation Rights relating
to Stock Options held by Participants who are actually or potentially
subject to Section 16(b) of the Exchange Act to the extent required by Rule
16b-3:
(i) The Committee may require that such Stock Appreciation
Rights be exercised only in accordance with the provisions
of Rule 16b-3; and
(ii) The Committee may provide that the amount to be paid upon
exercise of such Stock Appreciation Rights (other than those
relating to Incentive Stock Options) shall be based on the
highest mean sales price of the Common Stock on the
principal exchange on which the Common Stock is traded,
NASDAQ or other relevant market for determining value.
(d) Non-transferability of Stock Appreciation Rights. Stock
Appreciation Rights shall be transferable only when and to the extent that
a Stock Option would be transferable under this Plan unless otherwise
provided in an Agreement.
(e) Termination. A Stock Appreciation Right shall terminate at such
time as a Stock Option would terminate under this Plan, unless otherwise
provided in an Agreement.
(f) Effect on Shares Under this Plan. Upon the exercise of a Stock
Appreciation Right, the Stock Option or part thereof to which such Stock
Appreciation Right is related shall be deemed to have been exercised for
the purpose of the limitation set forth in Section 4.1 on the number of
shares of Common Stock to be issued under this Plan, but only to the extent
of the number of shares of Common Stock covered by the Stock Appreciation
Right at the time of exercise based on the value of the Stock Appreciation
Right at such time.
(g) Incentive Stock Option. A Stock Appreciation Right granted in
tandem with an Incentive Stock Option shall not be exercisable unless the
Fair Market Value of the Common Stock on the date of exercise exceeds the
Option Price. In no event shall any amount paid pursuant to the Stock
Appreciation Right exceed the difference between the Fair Market Value on
the date of exercise and the Option Price.
ARTICLE VIII
------------
RESTRICTED STOCK
----------------
8.1 General. The Committee shall have authority to grant Restricted Stock
under this Plan at any time or from time to time. Shares of Restricted Stock
may be awarded either alone
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or in addition to other Awards granted under this Plan. The Committee shall
determine the persons to whom and the time or times at which grants of
Restricted Stock will be awarded, the number of shares of Restricted Shares to
be awarded to any Participant, the time or times within which such Awards may be
subject to forfeiture and any other terms and conditions of the Awards. Each
Award shall be confirmed by, and be subject to the terms of, an Agreement. The
Committee may condition the grant of Restricted Stock upon the attainment of
specified performance goals by the Participant or by the Company or an Affiliate
(including a division or department of the Company or an Affiliate) for or
within which the Participant is primarily employed or upon such other factors or
criteria as the Committee shall determine. The provisions of Restricted Stock
Awards need not be the same with respect to any Participant. The purchase price
for shares of Restricted Stock shall be set by the Committee and may be zero.
8.2 Awards and Certificates. Notwithstanding the limitations on issuance
of shares of Common Stock otherwise provided in this Plan, each Participant
receiving an Award of Restricted Stock shall be issued a certificate in respect
of such shares of Restricted Stock. Such certificate shall be registered in the
name of such Participant and shall bear an appropriate legend referring to the
terms, conditions, and restrictions applicable to such Award as determined by
the Committee. The Committee may require that the certificates evidencing such
shares be held in custody by the Company until the restrictions thereon shall
have lapsed and that, as a condition of any Award of Restricted Stock, the
Participant shall have delivered a stock power, endorsed in blank, relating to
the Common Stock covered by such Award.
8.3 Terms and Conditions. Shares of Restricted Stock shall be subject to
the following terms and conditions:
(a) Limitations on Transferability. Subject to the provisions of this
Plan and the Agreement, during a period set by the Committee, commencing
with the date of such Award (the "Restriction Period"), the Participant
shall not be permitted to sell, assign, transfer, pledge or otherwise
encumber any interest in shares of Restricted Stock. Unless otherwise
determined by the Committee, awards of Restricted Stock must be accepted by
a Participant within a period of 60 days (or such shorter periods as the
Committee may specify at grant) after the Grant Date, by executing a
Restricted Stock Agreement and paying whatever price, if any, is required.
The Participant shall not have any rights with respect to such Award,
unless and until such Participant has executed an agreement evidencing the
Award and has delivered a fully executed copy thereof to the Company, and
has otherwise complied with the applicable terms and conditions of such
Award.
(b) Rights. Except as provided in Section 8.3(a), the Participant
shall have, with respect to the shares of Restricted Stock, all of the
rights of a stockholder of the Company holding the class of Common Stock
that is the subject of the Restricted Stock, including, if applicable, the
right to vote the shares and the right to receive any cash dividends.
Unless otherwise determined by the Committee and subject to this Plan, cash
dividends on the class of Common Stock that is the subject of the
Restricted Stock shall be automatically deferred and reinvested in
additional Restricted Stock, and dividends on the class of Common Stock
that is the subject of the Restricted Stock payable in Common Stock shall
be paid in the form of Restricted Stock of the same class as the Common
Stock on which such dividend was paid.
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<PAGE>
(c) Criteria. Based on service, performance by the Participant or by
the Company or the Affiliate, including any division or department for
which the Participant is employed or such other factors or criteria as the
Committee may determine, the Committee may provide for the lapse of
restrictions in installments and may accelerate the vesting of all or any
part of any Award and waive the restrictions for all or any part of such
Award.
(d) Forfeiture. Unless otherwise provided in an Agreement or
determined by the Committee, if the Participant incurs a Termination of
Employment during the Restriction Period due to death or Disability, the
restrictions shall lapse and the Participant shall be fully vested in the
Restricted Stock. Except to the extent otherwise provided in the
applicable Agreement and this Plan, upon a Participant's Termination of
Employment for any reason during the Restriction Period other than death or
Disability, all shares of Restricted Stock still subject to restriction
shall be forfeited by the Participant, except the Committee shall have the
discretion to waive in whole or in part any or all remaining restrictions
with respect to any or all of such Participant's shares of Restricted
Stock.
(e) Delivery. If and when the Restriction Period expires without a
prior forfeiture of the Restricted Stock subject to such Restriction
Period, unlegended certificates for such shares shall be delivered to the
Participant.
(f) Election. A Participant may elect to further defer receipt of the
Restricted Stock for a specified period or until a specified event, subject
in each case to the Committee's approval and to such terms as are
determined by the Committee. Subject to any exceptions adopted by the
Committee, such election must be made one (1) year prior to completion of
the Restriction Period.
ARTICLE IX
----------
DEFERRED STOCK
--------------
9.1 General. The Committee shall have authority to grant Deferred Stock
under this Plan at any time or from time to time. Shares of Deferred Stock may
be awarded either alone or in addition to other Awards granted under this Plan.
The Committee shall determine the persons to whom and the time or times at which
Deferred Stock will be awarded, the number of shares of Deferred Stock to be
awarded to any Participant, the duration of the period (the "Deferral Period")
prior to which the Common Stock will be delivered, and the conditions under
which receipt of the Common Stock will be deferred and any other terms and
conditions of the Awards. Each Award shall be confirmed by, and be subject to
the terms of, an Agreement. The Committee may condition the grant of Deferred
Stock upon the attainment of specified performance goals by the Participant or
by the Company or an Affiliate, including a division or department of the
Company or an Affiliate for or within which the Participant is primarily
employed or upon such other factors or criteria as the Committee shall
determine. The provisions of Deferred Stock Awards need not be the same with
respect to any Participant.
17
<PAGE>
9.2 Terms and Conditions. Deferred Stock Awards shall be subject to the
following terms and conditions:
(a) Limitations on Transferability. Subject to the provisions of this
Plan and except as may otherwise be provided in an Agreement, neither
Deferred Stock Awards, nor any interest therein, may be sold, assigned,
transferred, pledged or otherwise encumbered during the Deferral Period. At
the expiration of the Deferral Period (or Elective Deferral Period as
defined in Section 9.2(e), where applicable), the Committee may elect to
deliver Common Stock, cash equal to the Fair Market Value of such Common
Stock or a combination of cash and Common Stock, to the Participant for the
shares covered by the Deferred Stock Award.
(b) Rights. Unless otherwise determined by the Committee and subject
to this Plan, cash dividends on the Common Stock that is the subject of the
Deferred Stock Award shall be automatically deferred and reinvested in
additional Deferred Stock, and dividends on the Common Stock that is the
subject of the Deferred Stock Award payable in Common Stock shall be paid
in the form of Deferred Stock of the same class as the Common Stock on
which such dividend was paid.
(c) Criteria. Based on service, performance by the Participant or by
the Company or the Affiliate, including any division or department for
which the Participant is employed or such other factors or criteria as the
Committee may determine, the Committee may provide for the lapse of
deferral limitations in installments and may accelerate the vesting of all
or any part of any Award and waive the deferral limitations for all or any
part of such Award.
(d) Forfeiture. Unless otherwise provided in an Agreement or
determined by the Committee, if the Participant incurs a Termination of
Employment during the Deferral Period due to death or Disability, the
restrictions shall lapse and the Participant shall be fully vested in the
Deferred Stock. Unless otherwise provided in an Agreement or determined by
the Committee, upon a Participant's Termination of Employment for any
reason during the Deferral Period other than death or Disability, the
rights to the shares still covered by the Award shall be forfeited by the
Participant, except the Committee shall have the discretion to waive in
whole or in part any or all remaining deferral limitations with respect to
any or all of such Participant's Deferred Stock.
(e) Election. A Participant may elect to further defer receipt of the
Deferred Stock payable under an Award (or an installment of an Award) for a
specified period or until a specified event (an "Elective Deferral
Period"), subject in each case to the Committee's approval and to such
terms as are determined by the Committee. Subject to any exceptions adopted
by the Committee, such election must be made at least one (1) year prior to
completion of the Deferral Period for the Award (or the applicable
installment thereof).
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ARTICLE X
---------
PERFORMANCE SHARES
------------------
10.1 General. Subject to the terms and conditions described below,
Performance Shares may be granted to any Participant at any time and from time
to time as determined by the Committee. The Committee shall have complete
discretion in determining the number of Performance Shares granted to each
Participant; provided, however, that no Participant who is a Covered Employee
may earn more than one half the number of shares of Common Stock reserved under
the Plan as Performance Shares with respect to any Performance Period (as
defined below).
10.2 Price. The purchase price for Performance Shares shall be zero
unless otherwise specified by the Committee.
10.3 Performance Share Agreement. Subject to the provisions of this Plan,
all the terms and conditions of an Award of Performance Shares shall be
determined by the Committee in its discretion and shall be confirmed by a
Performance Share Award Agreement which shall be executed by the Company and the
Participant. Not later than the date required or permitted for "qualified
performance-based compensation" under Code Section 162(m), the Committee shall
determine the Participants who are Covered Employees who will potentially
receive individual Performance Share Awards for the Performance Period and the
amount or method for determining the amount of such Participant's number of
Performance Shares.
10.4 Performance Periods. Any time period (the "Performance Period")
relating to a Performance Share Award (commencing with the Grant Date) shall be
at least one calendar or Company fiscal year in length unless otherwise provided
by the Committee.
10.5 Performance Goals. Not later than the date required or permitted for
"qualified performance-based compensation" under Section 162(m), the Committee
shall establish in writing the performance goals ("Performance Goals") for such
Performance Period, which shall be based on any of the following performance
criteria, either alone or in any combination, and on either a consolidated or
business unit level, as the Committee may determine: sales, net asset turnover,
earnings per share, cash flow, cash flow from operations, operating profit or
income, net income, operating margin, net income margin, return on net assets,
return on total assets, return on common equity, return on total capital, and
total shareholder return. The foregoing criteria shall have any reasonable
definitions that the Committee may specify, which may include or exclude any or
all of the following items as the Committee may specify; extraordinary, unusual
or nonrecurring items; effects of accounting changes; effects of financing
activities (e.g., effect on earnings per share of issuance of convertible debt
securities); expenses for restructuring or productivity initiates; other
nonoperating items; spending for acquisitions; effects of divestitures; and
effects of litigation activities and settlements. Any such performance
criterion or combination of such criteria may apply to the Participant's Award
opportunity in its entirety or to any designated portion or portions of the
Award opportunity, as the Committee may specify. Unless the Committee
determines otherwise for any Performance Period, extraordinary items, such as
capital gains and losses, which affect any performance criterion applicable to
the Award (including but not limited to the criterion of net income) shall be
excluded or included in determining the
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<PAGE>
extent to which the correspondence performance goal has been achieved, whichever
will produce the higher Award. The Committee may, in its discretion, vary the
terms and conditions of any Performance Share Award, including, without
limitation, the Performance Period and Performance Goals, without shareholder
approval, as applied to any recipient who is not a Covered Employee with respect
to the Company. In the event applicable tax or securities laws change to permit
the Committee discretion to alter the governing performance measures without
obtaining shareholder approval of such changes, the Committee shall have sole
discretion to make such changes without obtaining shareholder approval.
10.6 Earning of Performance Shares. After the applicable Performance
Period shall have ended, the Committee shall certify the extent to which the
established Performance Goals have been achieved. The retention of Performance
Shares shall be a direct function of the extent to which the Company's
Performance Goals have been achieved. A Participant may earn more or less than
the number of Performance Shares originally awarded, or no Performance Shares at
all. Performance Shares shall be paid in the form of Common Stock.
Unrestricted certificates representing such number of shares of Common Stock as
equals the number of Performance Shares earned under the Award shall be
delivered to the Participant as soon as practicable after the end of the
applicable Performance Period. Participants shall also be entitled to any
dividends or other distributions that have been or would have been paid or
earned in respect of such shares of Common Stock during the period from the
initial award date to the final payout on the Performance Shares, and may be
paid in the form of Common Stock. Unless otherwise provided, in its discretion,
by the Committee, any such dividends or other distributions shall not bear
interest. All determinations by the Committee as to the establishment of
Performance Goals and the potential Awards related to such Performance Goals and
as to the achievement of Performance Goals relating to such Awards, and the
number of any Performance Shares shall be made in writing in the case of any
Award intended to qualify under Code Section 162(m). The Committee may not
delegate any responsibility relating to such Awards, and may not exercise
discretion to increase the amount payable in respect of a Performance Share
Award to a Covered Employee.
10.7 Termination of Employment Due to Death, Disability or Retirement or
at the Request of the Company Without Cause. In the event of an Extraordinary
Termination of Employment or a Termination of Employment by the Company without
Cause during a Performance Period, the Participant may receive a prorated payout
with respect to the Performance Shares relating to such Performance Period. The
prorated payout shall be determined by the Committee, in its sole discretion,
and shall be based upon the length of time that the Participant held the
Performance Shares during the Performance Period and based upon the achievement
of the established Performance Goals. Distribution of earned Performance Shares
shall be made at the same time payments are made to Participants who did not
incur a Termination of Employment during the applicable Performance Period.
10.8 Termination of Employment for Other Reasons. Unless otherwise
provided in an Agreement, in the event that a Participant's employment
terminates for any reason other than those reasons set forth in Section 10.7,
all Performance Shares shall be forfeited by the Participant to the Company.
10.9 Nontransferability. Unless otherwise provided in an Agreement,
Performance Shares may not be sold, transferred, pledged, assigned or otherwise
alienated or hypothecated,
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other than by will or by the laws of descent and distribution. Further, a
Participant's rights under the Plan shall be exercisable during the
Participant's lifetime only by the Participant or a Representative.
10.10 Amendment of Awards. The Committee has discretion, subject to the
Plan's constituting a plan of performance-based compensation under Code Section
162(m), to vary the terms and conditions of any Performance Share Award,
including, without limitation, the Performance Goals, without shareholder
approval, as applied to any Participant who is not a "covered employee" with
respect to the Company as defined in Section 162(m) of the Code.
ARTICLE XI
----------
ANNUAL INCENTIVE AWARDS
-----------------------
11.1 Eligibility. Participants designated by the Committee shall be
eligible for an Annual Incentive Award, the amount of which will be based on the
satisfaction of specified bonus targets ("Award Targets"). Not later than the
date required as permitted for "qualified performance-based compensation" under
Code Section 162(m), the Committee shall establish in writing (i) the Award
Targets and (ii) the Annual Incentive Awards which may be earned by
Participants, based upon the extent to which the Award Targets are achieved
("Award Opportunities"). The Award Targets and Award Opportunities shall be
confirmed in Agreements between the Company and the Participants. The Award
Targets shall be based on any of the following performance criteria, either
alone or in any combination, and on either a consolidated or business unit
level, as the Committee may determine: sales, net asset turnover, earnings per
share, cash flow, cash flow from operations, operating profit or income, net
income, operating margin, net income margin, return on net assets, return on
total assets, return on common equity, return on total capital, and total
shareholder return. The foregoing criteria shall have any reasonable
definitions that the Committee may specify, which may include or exclude any or
all of the following items; effects of accounting changes; effects of financing
activities (e.g., effect on earnings per share of issuance of convertible debt
securities); expenses for restructuring or productivity initiates; other
nonoperating items; spending for acquisitions; effects of divestitures; and
effects of litigation activities and settlements. Any such performance
criterion or combination of such criteria may apply to the Participant's Award
opportunity in its entirety or to any designated portion or portions of the
Award opportunity, as the Committee may specify. Unless the Committee
determines otherwise for any Performance Period, extraordinary items, such as
capital gains and losses, which affect any performance criterion applicable to
the Award (including but not limited to the criterion of net income) shall be
excluded or included in determining the extent to which the corresponding
performance goal has been achieved, whichever will produce the higher Award.
The Committee may specify the amount of the individual Award as a percentage of
such business criteria, a percentage thereof in excess of a threshold amount, or
another amount which need not bear a strictly mathematical relationship to such
relationship criteria. With respect to any Performance Period, the Committee
may establish an aggregate limit or individual limit with respect to the value
of the Awards.
11.2 Earning of Annual Incentive Awards. After the applicable fiscal year
shall have ended, the Committee shall certify in writing the extent to which the
established Award Targets
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have been achieved. The Committee may, in its discretion, determine that the
amount payable to any Participant as a final Annual Incentive Award shall be
increased or reduced from the amount of his or her potential Award, including a
determination to make no final Award whatsoever, but the Committee may not
exercise discretion to increase any such amount in the case of an individual
Award with respect to a Covered Employee intended to qualify under Code Section
162(m). Unless otherwise determined by the Committee, during a Performance
Period, an Award shall be payable under this Plan to the Participant who incurs
an Extraordinary Termination of Employment or a Termination of Employment by the
Company without cause, which shall be adjusted, pro rata, for the period of
time during the year the Participant actually worked. Unless otherwise provided
by the Committee, a Participant who incurs a Termination of Employment other
than an Extraordinary Termination of Employment or a Termination of Employment
by the Company with Cause prior to the end of the Performance Period shall not
be entitled to any Award under the Performance Period. Subsequently, the
Committee shall calculate the Annual Incentive Award (if any) for each
Participant, based upon the Award Opportunities established by the Committee
prior to the beginning of the applicable year. Each Annual Incentive Award
shall be solely a function of the degree to which the established Award Targets
have been achieved.
11.3 Payments and Election. Participants may elect to receive Annual
Incentive payouts in cash, Common Stock, Deferred Stock, Restricted Stock or a
combination of the foregoing, provided that any election for payment in Common
Stock is subject to the approval of the Committee. Payouts with respect to a
fiscal year will be made within ninety (90) days of the end of such year. To
elect the payout of a portion of an Annual Incentive Award in Common Stock, a
Participant must inform the Committee in writing prior to the start of the
fiscal year with respect to which payout would be made or at such other time as
the Committee may permit. Unless modified by the Committee before the beginning
of a fiscal year of the Company, terms and conditions of Deferred or Restricted
Stock payouts shall include the following:
(a) Any portion of an Annual Incentive Award can be elected for
payout in Deferred or Restricted Stock, either in a dollar amount or as a
percentage of the total Annual Incentive Award.
(b) Deferred or Restricted Stock will be issued on the same date that
cash payouts would be made, based on the closing price of the Common Stock
as of the date of the award ("Closing Price") on the principal exchange on
which the Common Stock shall then be listed or quoted.
(c) Deferred or Restricted Stock will be issued pursuant to, and
shall be subject to the terms and conditions contained in this Plan. Unless
otherwise agreed, the Deferral Period or Restriction Period, respectively,
will be for a period determined by the Committee of at least three (3)
years in duration, after which time the Common Stock will be distributed or
released to the Participant.
(d) The number of shares of Deferred Stock or Restricted Stock
granted to a Participant will equal the product of (A) such number of
shares of Common Stock as have an aggregate closing price equal to the
dollar amount of the Annual Incentive Award elected to be received in the
form of Deferred Stock or Restricted Stock, multiplied by (B)
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a factor greater than 1.00 but less than or equal to 1.30, as determined by
the Committee prior to the beginning of the Company's applicable fiscal
year.
(e) If the Participant (who is not a Covered Employee) incurs a
Termination of Employment by reason of death, Disability or Retirement or
by the Company without Cause, the Committee, at its discretion, may provide
for waiver of all, or a portion of the deferrals or restrictions applicable
to such Awards. If the Participant's incurs a Termination of Employment
for any other reason, the shares of Deferred or Restricted Stock may be
forfeited.
11.4 Amendment of Awards. The Committee has discretion, subject to the
Plan's constituting a plan of performance-based compensation under Code Section
162(m), to vary the terms and conditions of any Annual Incentive Award,
including, without limitation, the Award Targets, without shareholder approval,
as applied to any Participant who is not a "covered employee" with respect to
the Company as defined in Section 162(m) of the Code.
11.5 Performance Threshold. The Committee may establish minimum levels of
Company performance which must be achieved during a fiscal year before any
Annual Incentive Awards shall be paid to Participants.
11.6 Maximum Awards. The Committee may establish guidelines governing the
maximum Annual Incentive Awards that may be earned by Participants (either in
the aggregate, by employee class or among individual Participants), provided
that no Participant may receive an Annual Incentive Award in an amount
(including the value of any Common Stock constituting any portion of such Annual
Incentive Awards) greater than $1,500,000 with respect to any fiscal year of the
Company.
ARTICLE XII
-----------
PROVISIONS APPLICABLE TO STOCK ACQUIRED UNDER THIS PLAN
-------------------------------------------------------
12.1 Limited Transfer During Offering. In the event there is an effective
registration statement under the Securities Act pursuant to which shares of
Common Stock shall be offered for sale in an underwritten offering, a
Participant shall not, during the period requested by the underwriters managing
the registered public offering, effect any public sale or distribution of shares
received directly or indirectly pursuant to an exercise of an Award.
12.2 No Company Obligation. None of the Company, an Affiliate or the
Committee shall have any duty or obligation to affirmatively disclose to a
record or beneficial holder of Common Stock or an Award, and such holder shall
have no right to be advised of any material information regarding the Company or
any Affiliate at any time prior to, upon or in connection with receipt or the
exercise of an Award or the Company's purchase of Common Stock or an Award from
such holder in accordance with the terms hereof.
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ARTICLE XIII
------------
CHANGE IN CONTROL PROVISIONS
----------------------------
13.1 Impact of Event. Notwithstanding any other provision of this Plan to
the contrary, in the event of a Change in Control (as defined in Section 13.2),
the Committee shall have full discretion, notwithstanding anything herein or in
an Agreement to the contrary, to do any or all of the following with respect to
an outstanding Award:
(a) to provide that the Stock Options and Stock Appreciation Rights
outstanding as of the date of the Change in Control which are not then
exercisable shall become fully exercisable to the full extent of the
original grant;
(b) to provide that the restrictions and deferral limitations
applicable to any Restricted Stock, Deferred Stock or other Award shall
lapse, and such Restricted Stock, Deferred Stock or other Award shall
become free of all restrictions and become fully vested and transferrable
to the full extent of the original grant;
(c) to deem any performance goal or other condition with respect to
any Performance Shares or Annual Incentive Award to have been satisfied in
full, and such Award shall be fully distributable;
(d) to cause any Award to be cancelled, provided notice of at least
15 days thereof is provided before the date of cancellation;
(e) to provide that the securities of another entity be substituted
hereunder for the Common Stock and to make equitable adjustment with
respect thereto;
(f) to grant the Participant the right to elect by giving notice
during a set period of time from and after a Change in Control to surrender
all or part of a stock-based Award to the Company and to receive cash in an
amount equal to the amount by the "Change in Control Price" (as defined in
Section 13.3) per share of the Common Stock on the date of the election
exceeds the amount the Participant must pay to exercise the Award per share
of Common Stock under the Award (the "Spread") multiplied by the number of
shares of Common Stock granted under the Award; and
(g) to take any other action the Committee determines to take.
13.2 Definition of Change in Control. For purposes of this Plan, a "Change
in Control" shall mean the happening of any of the following events:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of thirty percent (30%) or more of either (i) the then-
outstanding shares of common stock of the Company (the "Outstanding Company
Common Stock") or (ii) the combined voting power of the then-outstanding
voting securities of the Company entitled to vote generally in the election
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of directors (the "Outstanding Company Voting Securities"); provided,
however, that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change of Control: (i) any acquisition
directly from the Company other than in connection with the acquisition by
the Company or an Affiliate of a business, (ii) any acquisition by the
Company, (iii) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation controlled
by the Company, (iv) any acquisition by a lender to the Company pursuant to
a debt restructuring of the Company, or (v) any acquisition by any
corporation pursuant to a transaction which complies with clauses (i), (ii)
and (iii) of subsection (c) of this Section 13.2;
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority
of the Board; provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination for election by
the Company's shareholders, was approved by a vote of at least a majority
of the directors then comprising the Incumbent Board shall be considered as
though such individual were a member of the Incumbent Board, but excluding,
for this purpose, any such individual whose initial assumption of office
occurs as a result of an actual or threatened election contest with respect
to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than
the Board.
(c) Consummation of a reorganization, merger or consolidation of the
Company or sale or other disposition of all or substantially all of the
assets of the Company (a "Business Combination"), in each case, unless,
following such Business Combination, (i) all or substantially all of the
individuals and entities who were the beneficial owners, respectively, of
the Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such Business Combination beneficially own,
directly or indirectly, more than sixty percent (60%) of, respectively, the
then-outstanding shares of common stock and the combined voting power of
the then outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation resulting
from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or all
or substantially all of the Company's assets either directly or through one
or more subsidiaries) in substantially the same proportions as their
ownership, immediately prior to such Business Combination of the
Outstanding Company Common Stock and Outstanding Company Voting Securities,
as the case may be, (ii) no Person (excluding any corporation resulting
from such Business Combination or any employee benefit plan (or related
trust) of the Company or such corporation resulting from such Business
Combination) beneficially owns, directly or indirectly, thirty percent
(30%) or more of, respectively, the then outstanding shares of common stock
of the corporation resulting from such Business Combination, or the
combined voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to the
Business Combination and (iii) at least a majority of the members of the
board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
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(d) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company other than to a corporation which
would satisfy the requirements of clauses (i), (ii) or (iii) of Subsection
(c) of this Section 13.2, assuming for this purpose that such liquidation
or dissolution was a Business Combination.
13.3 Change in Control Price. For purposes of this Plan, "Change in
Control Price" means the higher of (a) the highest reported sales price of a
share of Common Stock in any transaction reported on the principal exchange on
which such shares are listed or on Nasdaq during the 60-day period prior to and
including the date of a Change in Control or (b) if the Change in Control is the
result of a tender or exchange offer or a Corporate Transaction, the highest
price per share of Common Stock paid in such tender or exchange offer or a
Corporate Transaction, except that, in the case of Incentive Stock Options and
Stock Appreciation Rights relating to Incentive Stock Options, such price shall
be based only on the Fair Market Value of the Common Stock on the date such
Incentive Stock Option or Stock Appreciation Right is exercised. To the extent
that the consideration paid in any such transaction described above consists all
or in part of securities or other non-cash consideration, the value of such
securities or other non-cash consideration shall be determined in the sole
discretion of the Committee.
ARTICLE XIV
-----------
MISCELLANEOUS
-------------
14.1 Amendments and Termination. The Board may amend, alter or discontinue
the Plan at any time, but no amendment, alteration or discontinuation shall be
made which would impair the rights of a Participant under an Award theretofore
granted without the Participant's consent, except such an amendment (a) made to
avoid an expense charge to the Company or an Affiliate, (b) made to cause the
Plan to qualify for the exemption provided by Rule 16b-3, or (c) made to permit
the Company or an Affiliate a deduction under the Code. In addition, no such
amendment shall be made without the approval of the Company's stockholders to
the extent such approval is required by law or agreement. The Committee may
amend, alter or discontinue the terms of any Award theretofore granted,
prospectively or retroactively, on the same conditions and limitations (and
exceptions to limitations) as the Board and further subject to any approval or
limitations the Board may impose.
Notwithstanding anything in the Plan to the contrary, if any right under
this Plan would cause a transaction to be ineligible for pooling of interest
accounting that would, but for the right hereunder, be eligible for such
accounting treatment, the Committee may modify or adjust the right so that
pooling of interest accounting shall be available, including the substitution of
Common Stock having a Fair Market Value equal to the cash otherwise payable
hereunder for the right which caused the transaction to be ineligible for
pooling of interest accounting.
14.2 Unfunded Status of Plan. It is intended that this Plan be an
"unfunded" plan for incentive and deferred compensation. The Committee may
authorize the creation of trusts or other arrangements to meet the obligations
created under this Plan to deliver Common Stock or make payments; provided,
however, that, unless the Committee otherwise determines, the
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existence of such trusts or other arrangements is consistent with the "unfunded"
status of this Plan.
14.3 Status of Awards Under Code Section 162(m). It is the intent of the
Company that Awards granted to persons who are Covered Employees within the
meaning of Code Section 162(m) shall constitute "qualified performance-based
compensation" satisfying the requirements of Code Section 162(m). Accordingly,
the provisions of the Plan shall be interpreted in a manner consistent with Code
Section 162(m). If any provision of the Plan or any agreement relating to such
an Award does not comply or is inconsistent with the requirements of Code
Section 162(m), such provision shall be construed or deemed amended to the
extent necessary to conform to such requirements.
14.4 General Provisions.
------------------
(a) Representation. The Committee may require each person purchasing
or receiving shares pursuant to an Award to represent to and agree with the
Company in writing that such person is acquiring the shares without a view
to the distribution thereof. The certificates for such shares may include
any legend which the Committee deems appropriate to reflect any
restrictions on transfer.
(b) No Additional Obligation. Nothing contained in this Plan shall
prevent the Company or an Affiliate from adopting other or additional
compensation arrangements for its employees.
(c) Withholding. No later than the date as of which an amount first
becomes includible in the gross income of the Participant for Federal
income tax purposes with respect to any Award, the Participant shall pay to
the Company (or other entity identified by the Committee), or make
arrangements satisfactory to the Company or other entity identified by the
Committee regarding the payment of, any Federal, state, local or foreign
taxes of any kind required by law to be withheld with respect to such
amount required in order for the Company or an Affiliate to obtain a
current deduction. To the extent permitted by the Committee, withholding
obligations may be settled with Common Stock, including Common Stock that
is part of the Award that gives rise to the withholding requirement
provided that any applicable requirements under Section 16 of the Exchange
Act are satisfied. The obligations of the Company under this Plan shall be
conditional on such payment or arrangements, and the Company and its
Affiliates shall, to the extent permitted by law, have the right to deduct
any such taxes from any payment otherwise due to the Participant. If the
Participant disposes of shares of Common Stock acquired pursuant to an
Incentive Stock Option in any transaction considered to be a disqualifying
transaction under the Code, the Participant must give written notice of
such transfer and the Company shall have the right to deduct any taxes
required by law to be withheld from any amounts otherwise payable to the
Participant.
(d) Reinvestment. The reinvestment of dividends in additional
Deferred or Restricted Stock at the time of any dividend payment shall only
be permissible if sufficient shares of Common Stock are available for such
reinvestment (taking into account then outstanding Options and other
Awards).
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<PAGE>
(e) Representation. The Committee shall establish such procedures as
it deems appropriate for a Participant to designate a Representative to
whom any amounts payable in the event of the Participant's death are to be
paid.
(f) Controlling Law. This Plan and all Awards made and actions taken
thereunder shall be governed by and construed in accordance with the laws
of the State of Delaware (other than its law respecting choice of law).
This Plan shall be construed to comply with all applicable law, and to
avoid liability to the Company, an Affiliate or a Participant, including,
without limitation, liability under Section 16(b) of the Exchange Act.
(g) Offset. Any amounts owed to the Company or an Affiliate by the
Participant of whatever nature may be offset by the Company from the value
of any shares of Common Stock, cash or other thing of value under this Plan
or an Agreement to be transferred to the Participant, and no shares of
Common Stock, cash or other thing of value under this Plan or an Agreement
shall be transferred unless and until all disputes between the Company and
the Participant have been fully and finally resolved and the Participant
has waived all claims to such against the Company or an Affiliate.
(h) Fail-Safe. With respect to persons subject to Section 16 of the
Exchange Act, transactions under this Plan are intended to comply with all
applicable conditions of Rule 16b-3 or Rule 16a-1(c)(3), as applicable. To
the extent any provision of the Plan or action by the Committee fails to so
comply, it shall be deemed null and void, to the extent permitted by law
and deemed advisable by the committee. Moreover, in the event the Plan does
not include a provision required by Rule 16b-3 or Rule 16a-1(c)(3) to be
stated herein, such provision (other than one relating to eligibility
requirements or the price and amount of Awards) shall be deemed to be
incorporated by reference into the Plan with respect to Participants
subject to Section 16.
(i) Right to Capitalize. The grant of an Award shall in no way
affect the right of the Company to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of
its business or assets.
14.5 Mitigation of Excise Tax. Subject to any other agreement between the
participant and the Company or an Affiliate, if any payment or right accruing to
a Participant under this Plan (without the application of this Section 14.5),
either alone or together with other payments or rights accruing to the
Participant from the Company or an Affiliate ("Total Payments") would constitute
a "parachute payment" (as defined in Section 280G of the Code and regulations
thereunder), such payment or right shall be reduced to the largest amount or
greatest right that will result in no portion of the amount payable or right
accruing under this Plan being subject to an excise tax under Section 4999 of
the Code or being disallowed as a deduction under Section 280G of the Code. The
determination of whether any reduction in the rights or payments under this Plan
is to apply shall be made by the Committee in good faith after consultation with
the Participant, and such determination shall be conclusive and binding on the
Participant. The Participant shall cooperate in good faith with the Committee in
making such determination and providing the necessary information for this
purpose. The foregoing provisions of this Section
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<PAGE>
14.5 shall apply with respect to any person only if after reduction for any
applicable federal excise tax imposed by Section 4999 of the Code and federal
income tax imposed by the Code, the Total Payments accruing to such person would
be less than the amount of the Total Payments as reduced, if applicable, under
the foregoing provisions of this Plan and after reduction for only federal
income taxes.
14.6 Rights with Respect to Continuance of Employment. Nothing contained
herein shall be deemed to alter the relationship between the Company or an
Affiliate and a Participant, or the contractual relationship between a
Participant and the Company or an Affiliate if there is a written contract
regarding such relationship. Nothing contained herein shall be construed to
constitute a contract of employment between the Company or an Affiliate and a
Participant. The Company or an Affiliate and each of the Participants continue
to have the right to terminate the employment or service relationship at any
time for any reason, except as provided in a written contract. The Company or an
Affiliate shall have no obligation to retain the Participant in its employ or
service as a result of this Plan. There shall be no inference as to the length
of employment or service hereby, and the Company or an Affiliate reserves the
same rights to terminate the Participant's employment or service as existed
prior to the individual becoming a Participant in this Plan.
14.7 Awards in Substitution for Awards Granted by Other Corporations.
Awards may be granted under this Plan from time to time in substitution for
awards in respect of other plans of other entities. The terms and conditions of
the Awards so granted may vary from the terms and conditions set forth in this
Plan at the time of such grant as the majority of the members of the Committee
may deem appropriate to conform, in whole or in part, to the provisions of the
awards in substitution for which they are granted.
14.8 Procedure for Adoption. Any Affiliate of the Company on the
Effective Date shall be deemed to have adopted this Plan on the Effective Date.
Any other Affilitate of the Company may by resolution of such Affiliate's board
of directors, with the consent of the Board of Directors and subject to such
conditions as may be imposed by the Board of Directors, adopt this Plan as of
the date specified in the board resolution.
14.9 Procedure for Withdrawal. Any Affiliate which has adopted this Plan
may, by resolution of the board of directors of such direct or indirect
subsidiary, with the consent of the Board of Directors and subject to such
conditions as may be imposed by the Board of Directors, terminate its adoption
of this Plan.
14.10 Delay. If at the time a Participant incurs a Termination of
Employment (other than due to Cause) or if at the time of a Change in Control,
the Participant is subject to "short-swing" liability under Section 16 of the
Exchange Act, any time period provided for under this Plan or an Agreement to
the extent necessary to avoid the imposition of liability shall be suspended and
delayed during the period the Participant would be subject to such liability,
but not more than six (6) months and one (1) day and not to exceed the Option
Period, or the period for exercise of a Stock Appreciation Right as provided in
the Agreement, whichever is shorter. The Company shall have the right to suspend
or delay any time period described in this Plan or an Agreement if the Committee
shall determine that the action may constitute a violation of any law or result
in liability under any law to the Company, an Affiliate or a stockholder of the
Company until such time as the action required or permitted shall not constitute
a violation of law or result in liability
29
<PAGE>
to the Company, an Affiliate or a stockholder of the Company. The Committee
shall have the discretion to suspend the application of the provisions of this
Plan required solely to comply with Rule 16b-3 if the Committee shall determine
that Rule 16b-3 does not apply to this Plan.
14.11 Headings. The headings contained in this Plan are for reference
purposes only and shall not affect the meaning or interpretation of this Plan.
14.12 Severability. If any provision of this Plan shall for any reason be
held to be invalid or unenforceable, such invalidity or unenforceability shall
not effect any other provision hereby, and this Plan shall be construed as if
such invalid or unenforceable provision were omitted.
14.13 Successors and Assigns. This Plan shall inure to the benefit of and
be binding upon each successor and assign of the Company. All obligations
imposed upon a Participant, and all rights granted to the Company hereunder,
shall be binding upon the Participant's heirs, legal representatives and
successors.
14.14 Entire Agreement. This Plan and the Agreement constitute the entire
agreement with respect to the subject matter hereof and thereof, provided that
in the event of any inconsistency between this Plan and the Agreement, the terms
and conditions of the Agreement shall control.
Effective as of ____________________, 1997.
COMPASS INTERNATIONAL SERVICES CORPORATION
By _____________________________
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Exhibit 10.2
COMPASS INTERNATIONAL SERVICES CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
----------------------------
(1997)
INTRODUCTION
------------
The purpose of this Employee Stock Purchase Plan (the "Plan") is to benefit
Compass International Services Corporation (the "Corporation") (and its parent
or subsidiaries) by offering eligible employees a favorable opportunity to
become stockholders of the Corporation over a period of years, thereby giving
them a proprietary interest in the growth and prosperity of the Corporation and
encouraging the continuance of their dedicated services with the Corporation (or
its parent or subsidiaries).
Pursuant to this Plan, 500,000 shares of authorized but unissued common
stock of the Corporation may be offered for sale to eligible employees (as
determined under Section 2 of this Plan) through periodic offerings to be made
during the ten-year period commencing January 1, 1998 (the "Effective Date").
The Plan will be implemented by making four (4) offerings annually of the
Corporation's common stock (the "Offerings" and individually, an "Offering"),
beginning on the first day of each calendar quarter, each Offering terminating
on the last day of such quarter ("Offering Period"). The maximum number of
shares issued in each Offering shall be 25,000 shares.
The Plan is intended to qualify as an Employee Stock Purchase Plan under
Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"), and
the regulations promulgated thereunder.
<PAGE>
1. Committee. The Plan will be administered by a committee (the
"Committee") appointed by the Corporation's Board of Directors. The Committee
shall consist of one or more members of the Board of Directors, none of whom
shall be eligible to participate in the Plan. The Committee's interpretations
and decisions with regard thereto shall be final and conclusive.
2. Eligibility. All employees of the Corporation (and its parent and
subsidiaries) on the date of any Offering (as hereinafter described) shall be
eligible to participate in the Plan, except that the following classes of
employees shall not be eligible:
(a) employees who are not employed by the Corporation (or its parent or
one of its subsidiaries) as of the date one year prior to the first
day of an Offering;
(b) employees whose customary employment is for not more than 5 months in
any calendar year;
(c) employees who would, immediately after the grant of an option under
the Plan, own Corporation stock possessing 5% or more of the total
combined voting power or value of all classes of stock of the
Corporation (or its parent or subsidiaries);
(d) employees whose customary employment with the Corporation is 20 hours
or less per week;
(e) members of the Committee.
For purposes of subparagraph (a), above, a participating employee who
terminates his or her employment and is subsequently reemployed by the
Corporation (or its parent or one of its subsidiaries) within one year of the
termination date shall be eligible to participate in any Offering under this
Plan as of the first day of the Offering Period following the one year
anniversary of the date of such reemployment (as if the employee were a new
employee). Additionally, in determining an employee's employment for purposes of
this Plan, such
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employee's employment with any business entity, the assets, business, stock or
product line of which is acquired by the Corporation (or its parent or one of
its subsidiaries) through purchase, merger or otherwise will be deemed to be
employment with the Corporation. For purposes of subparagraph (c) of this
Section 2, the rules of Section 424(d) of the Code shall apply in determining
the stock ownership of an employee, and stock which the employee may purchase
under outstanding options shall be treated as stock owned by the employee. For
purposes of this Plan, a subsidiary of the Corporation shall mean a "subsidiary
corporation" as defined in Section 424(f) of the Code, and a parent of the
Corporation shall mean a "parent corporation" as defined in section 424(e) of
the Code.
3. Offerings. The Corporation will make four (4) annual Offerings to
employees to purchase stock under this Plan. Each Offering Period shall be three
(3) months in duration, during which the amounts of Base Compensation (as
defined below) directed pursuant to Section 4 by an employee (plus the amount of
any dividends received on any shares purchased by the employee under the Plan
while such shares are registered in the name of a custodian, if one is appointed
pursuant to Section 9 hereof) shall constitute the measure by which the
employee's participation in the Offering is based. For all purposes of this
Plan, "Base Compensation" shall mean cash payments on account of the employee's
employment with the Corporation or its subsidiaries, and shall include regular
wage or salary payments only. Overtime premium, shift pay for Saturday, Sunday
or holiday work, emergency call-in cash payments, bonuses, commissions and all
other non-regular compensation, if any, shall be excluded from Base Compensation
for both salaried and hourly employees.
No employee may be granted an option which permits his rights to purchase
stock under this Plan, and any other stock purchase plan of the Corporation (and
its parent or subsidiaries),
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to accrue at a rate which exceeds $25,000 of the fair market value of such stock
(determined at the effective date of the Offering) for each calendar year in
which the Offering is outstanding at any time. For purposes of the preceding
sentence, the rules set forth in Section 423(b)(8) of the Code shall apply.
4. Participation. Subject to the third sentence of Section 7, an employee
eligible on the effective date of any Offering may participate in such Offering
on any enrollment date by completing and forwarding a payroll deduction
authorization form to the Human Resources Department. The form will authorize a
regular payroll deduction from the employee's direct, after-tax Base
Compensation, and must specify the date on which such deduction is to commence,
which shall be the first day of the next Offering Period and may not be
retroactive. The form may also authorize the purchase of additional shares with
any dividends received on any shares purchased by the employee under this Plan
while such shares are registered in the name of a custodian, if one is appointed
pursuant to Section 9 hereof.
5. Payroll Deductions. The Corporation will maintain payroll deduction
accounts for all participating employees. With respect to any Offering made
under this Plan, an employee may authorize a payroll deduction in terms of whole
number percentages from a minimum of 1% up to a maximum of 10% of the gross,
pre-tax Base Compensation an employee receives during the Offering Period.
Notwithstanding the foregoing, in no event may more than $5,000.00 be deducted
from an employee's Base Compensation for each Offering Period.
6. Deduction Terminations. An employee may, at any time, terminate the
employee's payroll deduction by filing a payroll deduction termination form. The
change will
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not become effective sooner than the next pay period after receipt of the form
by the Human Resources Department. Upon filing such payroll deduction
termination form, the employee shall also be deemed to have elected a
"withdrawal of funds" in accordance with Section 7, below.
7. Withdrawal of Funds. An employee may at any time more than 15 days prior
to the end of an Offering Period, and for any reason, permanently draw out the
balance accumulated in the employee's account for the Offering Period for which
such payroll deduction form is effective and thereby withdraw from participation
in an Offering for the Offering Period. Upon an election in accordance with this
Section 7, all payroll withdrawals for the Offering Period shall be returned to
the employee as soon as administratively practicable and such employee's option
shall be automatically terminated. An employee may thereafter resume
participation again only as of the first day of the next Offering Period (and/or
the first day of each Offering Period thereafter); provided, however, that an
employee who is an officer or director of the Corporation may not thereafter
resume participation in that Offering or participate in a subsequent Offering
until the first day of an Offering Period which occurs at least six months after
the date of such withdrawal. Partial withdrawals will not be permitted.
8. Purchase of Shares. Each employee participating in any Offering under
this Plan will be granted an option, upon the effective date of such Offering,
for as many full shares of the Corporation's common stock as can be purchased by
such employee, which shall equal the sum of the following:
(a) the amount of payroll deduction elected by the employee up to 10% of
such employee's gross, pre-tax Base Compensation received during the
specified Offering Period, but not to exceed $5,000; and
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<PAGE>
(b) the amount of any dividends received on any shares purchased by the
employee under this Plan while such shares are registered in the name
of a custodian appointed pursuant to Section 9 hereof, if any.
Notwithstanding the foregoing, the maximum number of shares which can be
purchased by an employee shall not exceed the amount of payroll deduction
elected by the employee for the Offering Period (not to exceed $5,000) divided
by 85% of the fair market value (as defined in Section 11) of the stock on the
first day of the Offering Period.
9. Purchase Price of Shares. The purchase price for each share purchased
will be 85% of the fair market value (as defined in Section 11) of the stock at
the time the option is exercised, or, if lower, on the first day of the Offering
Period (such price hereinafter referred to as the "Subscription Price"), when
there are sufficient funds in the employee's account to purchase one or more
full shares. Each option shall be automatically exercised at the Subscription
Price at the end of the Offering Period. The employee's account shall be charged
for the amount of the purchase price and ownership of such share or shares shall
be appropriately entered in the books of the Corporation. The Committee may
appoint a custodian to accept custody of such shares on behalf of each
participating employee. Upon an employee's request, the employee shall be issued
a certificate for any or all of the shares held by the custodian on his or her
behalf by completing a form approved by the Committee. If no such custodian is
appointed, employees will be issued a certificate for shares as soon as
practical after exercising an option.
A participating employee may not purchase a share under any Offering beyond
60 months from the effective date thereof. Any balance remaining in an
employee's payroll deduction account at the end of an Offering Period shall be
carried over to the next Offering Period. In
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no event will such balance exceed the Subscription Price of one share on the
last day of the last month of the Offering Period.
10. Registration of Certification. Any certificates issued to an employee
may be registered only in the name of the employee, or, if the employee so
indicates on the employee's payroll deduction authorization form, in the
employee's name jointly with a member of the employee's family, with right of
survivorship.
11. Fair Market Value. The "fair market value" for any day shall be the
last sale price, regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Exchange or, if such
shares are not listed or admitted to trading on the New York Stock Exchange, as
reported in the principal consolidated transaction reporting system with respect
to securities listed on the principal national securities exchange on which the
shares are listed or admitted to trading or, if the shares are not listed or
admitted to trading on any national securities exchange, the last quoted sale
price on such date or, if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the National
Association of Securities Dealers, Automated Quotation System ("NASDAQ") or
such other system then in use, or, if on any such date the shares are not quoted
by any such organization, the average of the closing bid and asked prices as
furnished by a professional market maker making a market in such shares selected
by the Committee. If such prices are not available on a given day, then the
Committee may use the prices of such stock on the next preceding trading day for
which such prices are available.
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12. Rights as a Stockholder. None of the rights or privileges of a
stockholder of the Corporation shall exist with respect to shares purchased
under this Plan unless and until a stock certificate with respect to such full
shares shall have been issued to the employee or the custodian, if any, on his
behalf.
13. Rights on Retirement, Death or Termination of Employment. In the event
of a participating employee's retirement, death or termination of employment
(other than an authorized leave of absence), no payroll deduction shall be taken
from any pay due and owing to an employee at such time and the balance in the
employee's account shall be paid to the employee or, in the event of the
employee's death, to the employee's estate, as soon as practicable thereafter.
Such employee's option shall be automatically terminated.
14. Rights Not Transferable. Rights under this Plan are not transferable by
a participating employee other than by will or the laws of descent and
distribution, and, during the employee's lifetime, said rights are exercisable
only by the employee.
15. Application of Funds. All funds received or held by the Corporation
under this Plan may be used for any corporate purpose, and the Corporation shall
not be obligated to segregate any payroll deductions. No interest shall be
allocated to the payroll deductions credited to an employee's account under the
Plan.
16. Adjustment in Case of Changes Affecting Compass International Services
Corporation Stock. The number of shares subject to the Plan and to Offerings
granted under the Plan shall be adjusted as follows: (a) in the event that the
Corporation's outstanding common
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<PAGE>
stock is changed by any stock dividend, stock split or combination of shares,
the number of shares subject to the Plan and to Offerings theretofore granted
thereunder shall be proportionately adjusted; (b) in the event of any merger or
consolidation of the Corporation with any other corporation or corporations,
there shall be substituted for each share of Compass International Services
Corporation then subject to the Plan, whether or not at the time subject to
outstanding Offerings, the number and kind of shares of common stock or other
securities to which the holders of common stock of the Corporation will be
entitled pursuant to the transaction; and (c) in the event of any other relevant
change in the capitalization of the Corporation, the Committee shall provide for
an equitable adjustment in the number of shares of Compass International
Services Corporation common stock subject to the Plan, whether or not then
subject to outstanding Offerings. In the event of any such adjustment, the
Subscription Price(s) per share shall be appropriately adjusted.
17. Amendment of the Plan. The Committee may at any time, or from time to
time, amend this Plan in any respect, except that, without the approval of a
majority of the shares of stock of the Corporation then issued and outstanding
and entitled to vote, no amendment shall be made (i) increasing or decreasing
the number of shares approved for this Plan (other than as provided in Section
16) or (ii) amending provisions governing which employees (or class of
employees) are eligible to receive options under the Plan. Said shareholder
approval must be obtained within 12 months of the amendment's adoption by the
Committee.
18. Termination of the Plan. This Plan and all rights of employees under
any Offering pursuant to the Plan hereunder shall terminate:
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<PAGE>
(a) on the day that participating employees become entitled to purchase a
number of shares equal to or greater than the number of shares
remaining available for purchase. If the number of shares so
purchasable is greater than the shares remaining available, the
available shares shall be allocated by the Committee on a pro rata
basis of each participant's Base Compensation earned during the prior
Offering Period or, if none, during the immediately prior fiscal year
of the Corporation; or
(b) at any time, at the discretion of the Board of Directors.
No Offering hereunder shall be made which shall extend beyond the ten year
anniversary of the Effective Date. Upon termination of this Plan, all amounts in
the accounts of participating employees shall be carried forward into the
employees' payroll deduction account under a successor employee stock purchase
plan, if any, or refunded as soon as practicable thereafter.
19. Governmental Regulations. The Corporation's obligation to sell and
deliver Compass International Services Corporation common stock under this Plan
is subject to the approval of any governmental authority required in connection
with the authorization, issuance or sale of such common stock.
Each option shall also be subject to the requirement that, if at any time
the Corporation determines, in its discretion, that the listing, registration or
qualification of the shares subject to the option upon any securities exchange
or under any state or federal law, or the consent or approval of any government
regulatory body is necessary or desirable as a condition of, or in connection
with, the issue or purchase of shares thereunder, the option may not be
exercised in whole or in part unless such listing, registration, qualification,
consent or approval shall have been effected or obtained free of any conditions
not acceptable by the Corporation.
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<PAGE>
20. Purchase of Shares. Purchase of outstanding shares may be made pursuant
to and on behalf of this Plan, upon such terms of the Corporation may approve,
for delivery under this Plan.
21. Shareholder Approval. No options shall be exercised or shares issued
hereunder before the Plan shall have been approved by the stockholders of the
Company. Such approval must be obtained within 12 months before or after the
date the Plan is adopted, and shall comply with all applicable laws and the
requirements of Section 423 of the Code.
22. No Employment Rights. The Plan does not provide any employment rights
to any employee, and it shall not be deemed to interfere in any way with an
employer's right to terminate, or otherwise modify, an employee's employment at
any time.
23. Applicable Law. The laws of the State of Illinois shall govern all
matters relating to this Plan, except to the extent such laws are superseded by
the laws of the United States.
24. Additional Restrictions of Rule 16b-3. The terms and conditions of
options granted hereunder to, and the purchase of shares by, persons subject to
Section 16 of the Securities Exchange Act of 1934, as amended ("Section 16"),
shall comply with the applicable provisions of Rule 16b-3. This Plan shall be
deemed to contain, such options shall contain, and the shares issued upon
exercise thereof shall be subject to, such additional conditions and
restrictions as may be required by Rule 16b-3 to qualify for the maximum
exemption from Section 16 with respect to Plan transactions.
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<PAGE>
25. Plan Administration. The Committee shall have full and exclusive
discretionary authority to construe, interpret and apply the terms of the Plan,
to determine eligibility and to adjudicate all disputed claims under the Plan.
All notices or other communications hereunder shall be deemed to have been duly
given when received in the form specified by the Committee at the location, or
by the person, designated by the Committee for the receipt thereof.
IN WITNESS WHEREOF, this Plan is adopted this ____ day of __________, 1997.
COMPASS INTERNATIONAL SERVICES CORPORATION
By: ______________________________________
Its: ______________________________________
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Exhibit 10.3
FORM OF
EMPLOYMENT AGREEMENT
BY AND BETWEEN
COMPASS INTERNATIONAL SERVICES CORPORATION
AND
MICHAEL J. CUNNINGHAM
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of
__________________, 1997, by and between Compass International Services
Corporation, a Delaware corporation (the "Company"), and Michael J. Cunningham
("Employee").
PRELIMINARY RECITALS
A. Reference is made to those certain Stock Purchase Agreements dated as
of October 3, 1997 (collectively, the "Stock Purchase Agreement"), pursuant to
which the outstanding capital stock of B.R.M.C. of Delaware, Inc., The Mail Box,
Inc., Mid-Continent Agencies, Inc., National Credit Management Corp. and Impact
Telemarketing Group, Inc. will be acquired by the Company (the "Acquisitions").
Concurrently therewith, the Company will close an initial public offering of its
common stock.
B. Following the consummation of the Acquisitions, the Company, through
its subsidiaries, will be a provider of outsourced business services on a
national basis (the "Business").
C. The Company desires to employ Employee, and Employee desires to be
employed by the Company, in an executive capacity, all under the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the premises, the mutual covenants of
the parties hereinafter set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. Employment.
1.1 Engagement of Employee. The Company agrees to employ Employee as
Chief Executive Officer of the Company and Employee agrees to accept such
employment, all in accordance with the terms and conditions of this
Agreement.
1.2 Duties and Powers. During the Employment Period (as defined
herein), Employee will serve as the Company's Chief Executive Officer and
will have such responsibilities, duties and authorities, and will render
such services for the Company and its affiliates as the Board of Directors
of the Company (the "Board") shall from time to time reasonably direct;
provided, however, that such duties and responsibilities shall be
commensurate with the position of Chief Executive Officer of the Company.
Employee shall report to the Company's Board of Directors. Employee agrees
to serve the Company diligently and faithfully during the Employment Period
and to devote Employee's best efforts, highest talents and skills and full
time and attention to the furtherance and success of the Business.
1.3 Employment Period. Employee's employment under this Agreement
shall be for a period of three years beginning on the date of the Closing
of the Acquisitions
<PAGE>
(the "Initial Employment Period"). This Agreement shall automatically
renew for successive one-year periods (each one-year period shall be
referred to herein as a "Renewal Period") unless either the Company or
Employee, as the case may be, provides written notice to the other party at
least one hundred twenty (120) days prior to the termination of any such
period, stating its/his desire to terminate this Agreement. The Initial
Employment Period and each successive Renewal Period shall be referred to
herein together as the "Employment Period". Notwithstanding anything to
the contrary contained herein, the Employment Period is subject to
termination pursuant to Section 1.4 below.
1.4 Termination of Employment for Cause, Death or Disability. The
Company has the right to terminate Employee's employment under this
Agreement, by notice to Employee in writing at any time, for Cause (as
hereinafter defined), and such employment shall automatically terminate
upon the death or the Disability (as hereinafter defined) of Employee. Any
such termination shall be effective upon the date of service of such notice
pursuant to Section 6.7 hereof, in the case of termination for Cause, or
immediately upon the death or Disability of Employee, and the Employment
Period shall terminate as of the effective date of such termination.
"Cause," as used herein, means the occurrence of any of the following
events:
(i) final non-appealable conviction of (A) a felony or (B) any
crime involving moral turpitude;
(ii) the willful failure of Employee to comply with reasonable
directions of the Board after (A) written notice is delivered to
Employee describing such willful failure and (B) Employee has failed
to cure or take substantial steps to cure such willful failure after a
reasonable time period, as determined by the Board in its reasonable
discretion (not to be less than 30 days);
(iii) any act by Employee in the course of his employment
constituting fraud or misappropriation of property of the Company or
its affiliates;
(iv) a material breach by Employee of any of the terms,
conditions or covenants set forth in Sections 3.2, 3.3, 3.4 or 3.5 of
this Agreement if (A) written notice is delivered to Employee
describing such breach and (B) Employee has failed to cure or take
substantial steps to cure such breach after a reasonable time period,
as determined by the Board in its reasonable discretion (not to be
less than 30 days).
Employee shall be deemed to have a "Disability" for purposes of this
Agreement if he is unable to perform, by reason of physical or mental
incapacity, his material duties or obligations under this Agreement, with
or without reasonable accommodation, for a total period of 90 days in any
360-day period. The Board shall determine, according to the facts then
available, whether and when the Disability of the Employee has occurred.
Such determination shall not be arbitrary or unreasonable and the Board
will, if possible, take into consideration the expert medical opinion of a
physician chosen by the Company,
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<PAGE>
after such physician has completed an examination of Employee. Employee
agrees to make himself available for such examination upon the reasonable
request of the Company.
2. Compensation and Benefits.
2.1 Salary. In consideration of Employee performing his duties under
this Agreement during the Employment Period, the Company will pay Employee
a base salary at a rate of $225,000 per annum (the "Base Salary"), payable
in accordance with the Company's regular payroll policy for salaried
employees. The Base Salary may be increased (but not decreased), from time
to time during the Employment Period, as determined by the Compensation
Committee of the Board (the "Compensation Committee"), in its sole
discretion. If the Employment Period is terminated pursuant to Section 1.4
above, then the Base Salary for any partial year will be prorated based on
the number of days elapsed in such year during which services were actually
performed by Employee.
2.2 Bonus. Employee shall participate in Compass' Executive
Compensation Program (the "Bonus Program"), under which Employee shall be
eligible to earn an annual bonus of up to 100% of Employee's Base Salary
based upon such factors as (i) the financial performance of the Company,
and/or (ii) the achievement of personal performance goals. The criteria
and/or goals for the Bonus Program shall be established by the Compensation
Committee at the beginning of each fiscal year. All bonuses awarded to
Employee hereunder shall be payable in accordance with Company policy.
2.3 Compensation After Termination of Employment.
(a) If the Company shall terminate Employee's employment during
the Employment Period for any reason (other than for Cause pursuant to
Section 1.4 of this Agreement), Employee shall be entitled to receive
severance compensation equal to the sum of (A) continuance of his Base
Salary and Deemed Bonus for a period of two years commencing on the
last day of the Employment Period (the "Severance Period"), (B) (i) if
permitted under Company's group health, life and disability insurance
coverage ("Insurance Coverage"), continuation at the cost of Company
of Employee's coverage thereunder (subject to such changes in coverage
as shall apply to Company's employees generally) or (ii) if not so
permitted, reimbursement by the Company of the premiums for group
health insurance coverage otherwise payable by Employee under COBRA,
until the end of the Severance Period or until other employment is
obtained, whichever occurs first, and (C) his pro rated bonus, as
determined by the Compensation Committee in its good faith judgment,
for the portion of any fiscal year prior to the termination date ((A),
(B) and (C) collectively, the "Severance Benefits"). The Severance
Benefits payable under (A) and (B) (ii) above shall be paid in equal
installments on the Company's normal payroll payment dates occurring
during the Severance Period. It shall be a condition to Employee's
right to receive the Severance Benefits that (i) Employee shall
execute and deliver to the Company
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a written separation agreement, in form and substance satisfactory to
the Company, which agreement shall, among other things, contain (X) a
general release by Employee of all claims arising out of Employee's
employment or termination of employment, (Y) a covenant by Employee to
cooperate with the Company in prosecuting or defending any litigation
involving third parties and (Z) a covenant by Employee not to
disparage the Company, and (ii) Employee shall be in compliance with
all of Employee's obligations which survive termination hereof,
including without limitation those arising under Sections 3 and 4
hereof. In addition, the Company may, as a condition to such
Severance Benefits, require that Employee provide consulting services
to the Company on a reasonable basis during the first 60 days of the
Severance Period, provided that the timing of such consulting services
shall not unreasonably interfere with Employee's ability to obtain
other full-time employment or to fulfill his obligations relating to
that employment. The Severance Benefits are intended to be in lieu of
all other payments to which Employee might otherwise be entitled in
respect of termination of Employee's employment without Cause.
Employee shall not be required to seek other employment during the
Severance Period. Except as expressly provided above or in the
Compass Stock Option Plan, no fringe or other employee benefits shall
be payable during or after the Severance Period.
(b) If Employee shall voluntarily terminate his employment for
Good Reason (as defined below) during the Employment Period and at any
time after a Change of Control (as defined below), Employee shall be
entitled to receive the same Severance Benefits as are provided for in
Section 2.3(a) above, subject to all of the terms and conditions set
forth in said Section, except that the Severance Period shall be a
period of three years commencing on the last day of the Employment
Period.
(c) For purposes of this Agreement, "Good Reason" shall mean,
so long as Employee has not been guilty of the conduct giving rise to
the right to terminate Employee for Cause, (i) the failure to elect
Employee to the office of Chief Executive Officer of the Company (or a
comparable or superior office), the removal of Employee from such
position or the assignment to Employee of any additional duties or
responsibilities or a reduction in Employee's duties or
responsibilities which, in either case, are inconsistent with those
customarily associated with such position or an adverse change in the
Employee's reporting lines; (ii) the Company's requiring Employee to
be based at any office or location other than in the metropolitan New
York City area, except for travel reasonably required in the
performance of Employee's duties; (iii) any decrease in the Employee's
compensation; (iv) a material breach of this Agreement by the Company
if (A) written notice is delivered to the Company describing such
breach and (B) the Company has failed to cure or take substantial
steps to cure such breach after a reasonable period of time (not to
exceed 30 days); and (v) the termination by the Company of any
employee benefit plan in which the Employee is participating unless
(A) such plan is terminated as to all managerial employees of the
Company, and (B) the value of the remaining compensation and benefits
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<PAGE>
offered to Employee (including any compensation and benefits offered
in lieu of such plan) is not less than prior to such termination.
(d) For purposes of this Agreement, a "Change of Control" of the
Company shall be deemed to have occurred on the first of any of the
following:
(i) The acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"))
(a "Person") of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of thirty percent (30%)
or more of either (A) the then-outstanding shares of common stock
of the Company (the "Outstanding Company Common Stock") or (B)
the combined voting power of the then-outstanding voting
securities of the Company entitled to vote generally in the
election of directors (the "Outstanding Company Voting
Securities"); provided, however, that for purposes of this
subsection (i), the following acquisitions shall not constitute a
Change of Control: (A) any acquisition directly from the Company
other than in connection with the acquisition by the Company or
its affiliates of a business, (B) any acquisition by the Company,
(C) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation
controlled by the Company, (D) any acquisition by a lender to the
Company pursuant to a debt restructuring of the Company, or (E)
any acquisition by any corporation pursuant to a transaction
which complies with clauses (A), (B) and (C) of subsection (iii)
of this Section 2.3(d);
(ii) Individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute
at least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the date hereof
whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of
the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the
Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result
of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person
other than the Board;
(iii) Consummation of a reorganization, merger or
consolidation of the Company or any direct or indirect subsidiary
of the Company or sale or other disposition of all or
substantially all of the assets of the Company (a "Business
Combination"), in each case, unless, following such Business
Combination, (A) all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such Business Combination
beneficially
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<PAGE>
own, directly or indirectly, more than sixty percent (60%) of,
respectively, the then-outstanding shares of common stock and the
combined voting power of the then-outstanding voting securities
entitled to vote generally in the election of directors, as the
case may be, of the corporation resulting from such Business
Combination (which shall include for these purposes, without
limitation, a corporation which as a result of such transaction
owns the Company or all or substantially all of the Company's
assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership,
immediately prior to such Business Combination, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities, as the case may be, (B) no Person (excluding any
corporation resulting from such Business Combination or any
employee benefit plan (or related trust) of the Company or such
corporation resulting from such Business Combination and any
Person beneficially owning, immediately prior to such Business
Combination, directly or indirectly, 30% or more of the
Outstanding Common Stock or Outstanding Voting Securities, as the
case may be) beneficially owns, directly or indirectly, thirty
percent (30%) or more of, respectively, the then-outstanding
shares of common stock of the corporation resulting from such
Business Combination, or the combined voting power of the then
outstanding voting securities of such corporation entitled to
vote generally in the election of directors and (C) at least a
majority of the members of the board of directors of the
corporation resulting from such Business Combination were members
of the Incumbent Board at the time of the execution of the
initial agreement, or of the action of the Board, providing for
such Business Combination; or
(iv) Approval by the shareholders of the Company of a
complete liquidation or dissolution of the Company other than to
a corporation which would satisfy the requirements of clauses
(A), (B) and (C) of Subsection (iii) of this Section 2.3(d),
assuming for this purpose that such liquidation or dissolution
was a Business Combination.
(e) For purposes of this Agreement, "Deemed Bonus" means an
amount equal to the higher of (A) the bonus paid or payable to
Employee under the Bonus Program for the fiscal year immediately
proceeding the fiscal year in which termination of employment occurs
and (B) the maximum bonus payable to Employee under the Bonus Program
for the fiscal year in which termination of employment occurs.
(f) If the Company shall terminate Employee's employment during
the Employment Period pursuant to Section 1.4, the Company shall have
no further obligations hereunder or otherwise with respect to
Employee's employment from and after the termination or expiration
date (except payment of Employee's Base Salary accrued through the
date of termination or expiration), and the Company shall continue to
have all other rights available hereunder (including, without
limitation, all rights under Sections 3 and 4 hereof at law or in
equity); provided
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that if Employee's employment terminates by reason of Employee's death
or disability, Employee or Employee's estate shall have the right to
exercise Employee's stock options for a period of 12 months thereafter
and all options shall be immediately exercisable.
(g) For the avoidance of doubt, Severance Benefits shall not be
payable if Employee's employment is terminated by reason of his death
or Disability, but shall continue to be payable during the Severance
Period if his employment is terminated without Cause and he
subsequently dies or becomes disabled.
2.4 Benefits, Expenses and Pension Plan. During the Employment
Period, the Company agrees to provide to Employee such fringe and other
employee benefits as are generally provided, from time to time, to other
senior officers of the Company, including without limitation vacation,
health and insurance benefits, and the opportunity to participate in the
Company's Employee Incentive Compensation Plan and Employee Stock Purchase
Plan. The Company shall retain the right to discontinue or modify any
employee benefit program at any time. The Company will reimburse Employee
in accordance with Company policy for his normal out-of-pocket expenses
incurred in the course of performing his duties hereunder.
3. Covenants.
3.1 Employee's Acknowledgment. Employee acknowledges that:
(i) the Company is and will be engaged in the Business during the
Employment Period and thereafter;
(ii) Employee is one of a limited number of persons who will
manage the Business;
(iii) Employee will occupy a position of trust and confidence
with the Company after the date of this Agreement, and during the
Employment Period and Employee's employment under this Agreement,
Employee will become familiar with the Company's proprietary and
confidential information concerning the Company and the Business;
(iv) the agreements and covenants contained in this Section 3 are
essential to protect the Company and the goodwill of the Business and
are a condition precedent to the Company's entering into this
Agreement;
(v) Employee's employment with the Company has special, unique
and extraordinary value to the Company and the Company would be
irreparably damaged if Employee were to provide services to any person
or entity in violation of the provisions of this Agreement; and
(vi) Employee has means to support himself and his dependents
other than by engaging in the Business as conducted by the Company
during the
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Restrictive Period (the "Restricted Business") and the provisions of
this Section 3 will not impair such ability.
3.2 Non-Compete. Employee hereby agrees that during the Employment
Period and through the period ending with the second anniversary of the
last day of the Employment Period (collectively, the "Restrictive Period"),
he shall not (except on behalf of the Company during the Employment
Period), for any reason whatsoever, directly or indirectly, whether
individually or as an officer, director, shareholder, owner, partner, joint
venturer, employee, independent contractor, consultant or advisor to or of
any entity, or in any other capacity:
(i) engage, participate or invest in any business which is
competitive with the Restricted Business anywhere in the United States
of America (the "Territory"); provided, however, that nothing
contained herein shall be construed to prevent Employee from investing
in up to 2% of the outstanding stock of any competing corporation that
is widely-traded and listed on a recognized national, international or
regional securities exchange or traded in the U.S. over-the-counter
market, but only if Employee is not actively involved in and does not
render consulting services to the business of said corporation,
(ii) sell or provide any competitive products or services to, or
solicit for the purpose of selling or providing any competitive
products or services to, any person or entity that was a customer of
the Company at any time during the one-year period ending on the last
day of the Employment Period (the "Termination Date") or that was
actively being solicited by the Company to become a customer of the
Company at any time during such period,
(iii) solicit for employment or engagement, or influence or
induce to leave the Company's employment, or knowingly cause to be
employed or engaged, any person who is employed or engaged by the
Company in a managerial capacity on the Termination Date or during the
Restrictive Period, unless such person has been out of the employ of
the Company for at least 180 days; provided, that the Employee shall
be permitted to solicit and hire any member of his immediate family,
or
(iv) enter into, or call upon or request non-public information
for the purpose of entering into, an Acquisition Transaction with any
entity with respect to which Company for made an offer or proposal
for, or entered into discussions or negotiations for, or evaluated
with the intent of making a proposal for, an Acquisition Transactions,
within the six-month period immediately preceding the Termination
Date.
For purposes of this Agreement, an "Acquisition Transaction" means a
merger, consolidation, purchase of material assets, purchase of a material
equity interest, tender offer, recapitalization, accumulation of shares,
proxy solicitation or other business combination.
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<PAGE>
3.3 Intellectual Property Rights. Employee will promptly
communicate, disclose and transfer to the Company free of all encumbrances
and restrictions (and will execute and deliver any papers and take any
action at any time deemed reasonably necessary by the Company to further
establish such transfer) all of Employee's right, title and interest in and
to all ideas, discoveries, inventions and improvements relating to the
Business created, originated, developed or conceived of by Employee solely
or jointly with others during the term of Employee's employment hereunder,
whether or not during normal working hours. Employee agrees that all
right, title and interest in and to all such ideas, discoveries, inventions
and improvements shall belong solely to the Company, whether or not they
are protected or protectible under applicable patent, trademark, service
mark, copyright or trade secret laws. Employee agrees that all work or
other material containing or reflecting any such ideas, discoveries,
inventions or improvements shall be deemed work made for hire as defined in
Section 101 of the Copyright Act, 15 U.S.C.(S)101. Such transfer shall
include all patent rights, copyrights, trademark and service mark rights,
and trade secret rights (if any) to such ideas, discoveries, inventions and
improvements in the United States and in all other countries. Employee
further agrees, at the expense of the Company, to take all such reasonable
actions and to execute and deliver all such assignments and other lawful
papers relating to any aspect of the prosecution of such rights in the
United States and all other countries as the Company may request at any
time during the Employment Period or after termi nation thereof.
3.4 Interference with Relationships. Other than in the performance
of his duties hereunder, during the Restrictive Period, Employee shall not,
directly or indirectly, as employee, agent, consultant, stockholder,
director, co-partner or in any other individual or representative capacity
solicit or encourage any present or future customer, supplier or other
third party to terminate or otherwise alter his, her or its relationship
with the Company with respect to the Restricted Business.
3.5 Confidential Information. Other than in the performance of his
duties hereunder, during the Restrictive Period and thereafter, Employee
shall keep secret and retain in strictest confidence, and shall not,
without the prior written consent of the Company, directly or indirectly
furnish, make available or disclose to any third party or use for the
benefit of himself or any third party, any Confidential Information. As
used in this Agreement, "Confidential Information" shall mean any
information relating to the business or affairs of the Company or the
Business, including, but not limited to, information relating to financial
statements, employees, customers, suppliers, pricing, marketing, equipment,
programs, strategies, analyses, profit margins, or other proprietary
information of or used by the Company or any subsidiary of Company in
connection with the Business; provided, however, that Confidential
Information shall not include any information which is in the public domain
or becomes known in the industry through no wrongful act on the part of
Employee. Employee acknowledges that the Confidential Information is
vital, sensitive, confidential and proprietary to the Company.
3.6 Blue-Pencil. If any court of competent jurisdiction shall at any
time deem the Restrictive Period too lengthy or the Territory too
extensive, the other provisions of this Section 3 shall nevertheless stand,
the Restrictive Period herein shall be deemed to
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be the longest period permissible by law under the circumstances and the
Territory herein shall be deemed to comprise the largest territory
permissible by law under the circumstances. The court in each case shall
reduce the time period and/or territory to permissible duration or size.
3.7 Return of Company Materials Upon Termination. Employee
acknowledges that all price lists, sales manuals, catalogs, binders,
customer lists and other customer information, supplier lists and other
supplier information, financial information, memoranda, correspondence and
other records or documents including information stored on computer disks
or in computer readable form, containing Confidential Information prepared
by Employee or coming into Employee's possession by virtue of Employee's
employment by the Company is and shall remain the property of the Company
and that upon termination of Employee's employment hereunder, Employee
shall return immediately to the Company all such items in Employee's
possession, together with all copies thereof.
3.8 Remedies. Employee acknowledges and agrees that the covenants
set forth in this Section 3 (collectively, the "Restrictive Covenants") are
reasonable and necessary for the protection of the Company's business
interests, that irreparable injury will result to the Company if Employee
breaches any of the terms of said Restrictive Covenants, and that in the
event Employee breaches or threatens to breach any such Restrictive
Covenants, the Company will have no adequate remedy at law. Employee
accordingly agrees that in the event Employee breaches or threatens to
breach any of the Restrictive Covenants, the Company shall be entitled to
immediate temporary injunctive and other equitable relief, without bond and
without the necessity of showing actual monetary damages. Nothing
contained herein shall be construed as prohibiting the Company from
pursuing any other remedies available to it for such breach or the threat
of such a breach by Employee, including the recovery of any damages which
it is able to prove.
3.9 Company. For purposes of this Section 3, the term "Company"
shall include the Company and its respective subsidiaries, affiliates,
assignees and any successors in interest of the Company or its
subsidiaries.
4. Effect of Termination. If Employee or the Company should terminate
Employee's employment for any reason, then, notwithstanding such termination,
those provisions contained in Sections 3, 4, 5 and 6 hereof shall remain in full
force and effect.
5. Income Tax Treatment. Employee and the Company acknowledge that it is
the intention of the Company to deduct all amounts paid under Section 2 hereof
as ordinary and necessary business expenses for income tax purposes. Employee
agrees and represents that he will treat all such amounts as required pursuant
to all applicable tax laws and regulations, and should he fail to report such
amounts as required, he will indemnify and hold the Company harmless from and
against any and all taxes, penalties, interest, costs and expenses, including
reasonable attorneys' and accounting fees and costs, which are incurred by
Company directly or indirectly as a result thereof.
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6. Miscellaneous.
6.1 Life Insurance. The Company may at its discretion and at any
time apply for and procure as owner and for its own benefit and at its own
expense, insurance on the life of Employee in such amounts and in such form
or forms as the Company may choose. Employee shall cooperate with the
Company in procuring such insurance and shall, at the request of the
Company, submit to such medical examinations, supply such information and
execute such documents as may be required by the insurance company or
companies to whom the Company has applied for such insurance. Employee
shall have no interest whatsoever in any such policy or policies, except
that, upon the termination of Employee's employment hereunder, Employee
shall have the privilege of purchasing any such insurance from the Company
for an amount equal to the actual premiums thereon previously paid by the
Company.
6.2 Assignment. No party hereto may assign or delegate any of its
rights or obligations hereunder without the prior written consent of the
other party hereto; provided, however, that the Company shall have the
right to assign all or any part of its rights and obligations under this
Agreement (i) to any affiliate of the Company to which the Business of the
Company is assigned at any time, any subsidiary or affiliate of the Company
or any surviving entity following any merger or consolidation of any of
those entities with any entity other than the Company or (ii) in connection
with the sale of the Business by the Company. Except as otherwise
expressly provided herein, all covenants and agreements contained in this
Agreement by or on behalf of any of the parties hereto shall bind and inure
to the benefit of the respective legal representatives, heirs, successors
and assigns of the parties hereto whether so expressed or not.
6.3 Entire Agreement. Except as otherwise expressly set forth
herein, this Agreement and all other agreements entered into by the parties
hereto on the date hereof set forth the entire understanding of the
parties, and supersede and preempt all prior oral or written understandings
and agreements, with respect to the subject matter hereof.
6.4 Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of this Agreement.
6.5 Amendment; Modification. No amendment or modification of this
Agreement and no waiver by any party of the breach of any covenant
contained herein shall be binding unless executed in writing by the party
against whom enforcement of such amendment, modification or waiver is
sought. No waiver shall be deemed a continuing waiver or a waiver in
respect of any subsequent breach or default, either of a similar or
different nature, unless expressly so stated in writing.
6.6 Governing Law. This Agreement shall be construed and enforced in
accordance with, and all questions concerning the construction, validity,
interpretation
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and performance of this Agreement shall be governed by, the laws of the
State of New York, without giving effect to provisions thereof regarding
conflict of laws.
6.7 Notices. All notices, demands or other communications to be
given or delivered hereunder or by reason of the provisions of this
Agreement shall be in writing and shall be deemed to have been properly
served if (a) delivered personally, (b) delivered by a recognized overnight
courier service, (c) sent by certified or registered mail, return receipt
requested and first class postage prepaid, or (d) sent by facsimile
transmission followed by a confirmation copy delivered by a recognized
overnight courier service the next day. Such notices, demands and other
communications shall be sent to the addresses indicated below:
(a) If to Employee:
Mr. Michael J. Cunningham
21 Bridge Road
Nanuet, New York 10954
(b) If to the Company:
Compass International Services Corporation
5 Independence Way, Suite 300
Princeton, NJ 08540
Attention: President
with a copy to:
Katten Muchin & Zavis
525 West Monroe, Suite 1600
Chicago, IL 60661
Attention: Howard S. Lanznar, Esq.
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
Date of service of such notice shall be (i) the date such notice is
personally delivered or sent by facsimile transmission (with issuance by
the transmitting machine of a confirmation of successful transmission),
(ii) three business days after the date of mailing if sent by certified or
registered mail or (iii) one business day after date of delivery to the
overnight courier if sent by overnight courier.
6.8 Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same Agreement.
6.9 Descriptive Headings; Interpretation. The descriptive headings in
this Agreement are inserted for convenience of reference only and are not
intended to be part of or to affect the meaning or interpretation of this
Agreement. The use of the word "including" in this Agreement
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<PAGE>
shall be by way of example rather than by limitation. The Preliminary Recitals
set forth above are incorporated by reference into this Agreement.
6.10 No Strict Construction. The language used in this Agreement will be
deemed to be the language chosen by the parties hereto to express their mutual
interest, and no rule of strict construction will be applied against any party
hereto.
6.11 Effectiveness. This Agreement shall become effective upon the
Closing of the Acquisitions.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
COMPANY:
COMPASS INTERNATIONAL SERVICES CORPORATION
By: _________________________________________________
Its: ________________________________________________
EMPLOYEE:
______________________________________________________
Michael J. Cunningham
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Exhibit 10.4
FORM OF
EMPLOYMENT AGREEMENT
BY AND BETWEEN
COMPASS INTERNATIONAL SERVICES CORPORATION
AND
MAHMUD U. HAQ
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of
__________________, 1997, by and between Compass International Services
Corporation, a Delaware corporation (the "Company"), and Mahmud U. Haq
("Employee").
PRELIMINARY RECITALS
A. Reference is made to those certain Stock Purchase Agreements dated as
of October 3, 1997 (collectively, the "Stock Purchase Agreement"), pursuant to
which the outstanding capital stock of B.R.M.C. of Delaware, Inc., The Mail Box,
Inc., Mid-Continent Agencies, Inc., National Credit Management Corp. and Impact
Telemarketing Group, Inc. will be acquired by the Company (the "Acquisitions").
Concurrently therewith, the Company will close an initial public offering of its
common stock.
B. Following the consummation of the Acquisitions, the Company, through
its subsidiaries, will be a provider of outsourced business services on a
national basis (the "Business").
C. The Company desires to employ Employee, and Employee desires to be
employed by the Company, in an executive capacity, all under the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the premises, the mutual covenants of
the parties hereinafter set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. Employment.
1.1 Engagement of Employee. The Company agrees to employ Employee as
President and Chief Operating Officer of the Company and Employee agrees to
accept such employment, all in accordance with the terms and conditions of
this Agreement.
1.2 Duties and Powers. During the Employment Period (as defined
herein), Employee will serve as the Company's President and Chief Operating
Officer and will have such responsibilities, duties and authorities, and
will render such services for the Company and its affiliates as the Board
of Directors of the Company (the "Board") shall from time to time
reasonably direct; provided, however, that such duties and responsibilities
shall be commensurate with the positions of President and Chief Operating
Officer of the Company. Employee shall report to the Company's Chief
Executive Officer. Employee agrees to serve the Company diligently and
faithfully during the Employment Period and to devote Employee's best
efforts, highest talents and skills and full time and attention to the
furtherance and success of the Business.
1.3 Employment Period. Employee's employment under this Agreement
shall be for a period of three years beginning on the date of the Closing
of the Acquisitions
<PAGE>
(the "Initial Employment Period"). This Agreement shall automatically
renew for successive one-year periods (each one-year period shall be
referred to herein as a "Renewal Period") unless either the Company or
Employee, as the case may be, provides written notice to the other party at
least one hundred twenty (120) days prior to the termination of any such
period, stating its/his desire to terminate this Agreement. The Initial
Employment Period and each successive Renewal Period shall be referred to
herein together as the "Employment Period". Notwithstanding anything to
the contrary contained herein, the Employment Period is subject to
termination pursuant to Section 1.4 below.
1.4 Termination of Employment for Cause, Death or Disability. The
Company has the right to terminate Employee's employment under this
Agreement, by notice to Employee in writing at any time, for Cause (as
hereinafter defined), and such employment shall automatically terminate
upon the death or the Disability (as hereinafter defined) of Employee. Any
such termination shall be effective upon the date of service of such notice
pursuant to Section 6.7 hereof, in the case of termination for Cause, or
immediately upon the death or Disability of Employee, and the Employment
Period shall terminate as of the effective date of such termination.
"Cause," as used herein, means the occurrence of any of the following
events:
(i) final non-appealable conviction of (A) a felony or (B) any
crime involving moral turpitude;
(ii) the willful failure of Employee to comply with reasonable
directions of the Board after (A) written notice is delivered to
Employee describing such willful failure and (B) Employee has failed
to cure or take substantial steps to cure such willful failure after a
reasonable time period, as determined by the Board in its reasonable
discretion (not to be less than 30 days);
(iii) any act by Employee in the course of his employment
constituting fraud or misappropriation of property of the Company or
its affiliates;
(iv) a material breach by Employee of any of the terms,
conditions or covenants set forth in Sections 3.2, 3.3, 3.4 or 3.5 of
this Agreement if (A) written notice is delivered to Employee
describing such breach and (B) Employee has failed to cure or take
substantial steps to cure such breach after a reasonable time period,
as determined by the Board in its reasonable discretion (not to be
less than 30 days).
Employee shall be deemed to have a "Disability" for purposes of this
Agreement if he is unable to perform, by reason of physical or mental
incapacity, his material duties or obligations under this Agreement, with
or without reasonable accommodation, for a total period of 90 days in any
360-day period. The Board shall determine, according to the facts then
available, whether and when the Disability of the Employee has occurred.
Such determination shall not be arbitrary or unreasonable and the Board
will, if possible, take into consideration the expert medical opinion of a
physician chosen by the Company,
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<PAGE>
after such physician has completed an examination of Employee. Employee
agrees to make himself available for such examination upon the reasonable
request of the Company.
2. Compensation and Benefits.
2.1 Salary. In consideration of Employee performing his duties under
this Agreement during the Employment Period, the Company will pay Employee
a base salary at a rate of $200,000 per annum (the "Base Salary"), payable
in accordance with the Company's regular payroll policy for salaried
employees. The Base Salary may be increased (but not decreased), from time
to time during the Employment Period, as determined by the Compensation
Committee of the Board (the "Compensation Committee"), in its sole
discretion. If the Employment Period is terminated pursuant to Section 1.4
above, then the Base Salary for any partial year will be prorated based on
the number of days elapsed in such year during which services were actually
performed by Employee.
2.2 Bonus. Employee shall participate in Compass' Executive
Compensation Program (the "Bonus Program"), under which Employee shall be
eligible to earn an annual bonus of up to 100% of Employee's Base Salary
based upon such factors as (i) the financial performance of the Company,
and/or (ii) the achievement of personal performance goals. The criteria
and/or goals for the Bonus Program shall be established by the Compensation
Committee at the beginning of each fiscal year. All bonuses awarded to
Employee hereunder shall be payable in accordance with Company policy.
2.3 Compensation After Termination of Employment.
(a) If the Company shall terminate Employee's employment during
the Employment Period for any reason (other than for Cause pursuant to
Section 1.4 of this Agreement), Employee shall be entitled to receive
severance compensation equal to the sum of (A) continuance of his Base
Salary and Deemed Bonus for a period of two years commencing on the
last day of the Employment Period (the "Severance Period"), (B) (i) if
permitted under Company's group health, life and disability insurance
coverage ("Insurance Coverage"), continuation at the cost of Company
of Employee's coverage thereunder (subject to such changes in coverage
as shall apply to Company's employees generally) or (ii) if not so
permitted, reimbursement by the Company of the premiums for group
health insurance coverage otherwise payable by Employee under COBRA,
until the end of the Severance Period or until other employment is
obtained, whichever occurs first, and (C) his pro rated bonus, as
determined by the Compensation Committee in its good faith judgment,
for the portion of any fiscal year prior to the termination date ((A),
(B) and (C) collectively, the "Severance Benefits"). The Severance
Benefits payable under (A) and (B) (ii) above shall be paid in equal
installments on the Company's normal payroll payment dates occurring
during the Severance Period. It shall be a condition to Employee's
right to receive the Severance Benefits that (i) Employee shall
execute and deliver to the Company
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a written separation agreement, in form and substance satisfactory to
the Company, which agreement shall, among other things, contain (X) a
general release by Employee of all claims arising out of Employee's
employment or termination of employment, (Y) a covenant by Employee to
cooperate with the Company in prosecuting or defending any litigation
involving third parties and (Z) a covenant by Employee not to
disparage the Company, and (ii) Employee shall be in compliance with
all of Employee's obligations which survive termination hereof,
including without limitation those arising under Sections 3 and 4
hereof. In addition, the Company may, as a condition to such
Severance Benefits, require that Employee provide consulting services
to the Company on a reasonable basis during the first 60 days of the
Severance Period, provided that the timing of such consulting services
shall not unreasonably interfere with Employee's ability to obtain
other full-time employment or to fulfill his obligations relating to
that employment. The Severance Benefits are intended to be in lieu of
all other payments to which Employee might otherwise be entitled in
respect of termination of Employee's employment without Cause.
Employee shall not be required to seek other employment during the
Severance Period. Except as expressly provided above or in the
Compass Stock Option Plan, no fringe or other employee benefits shall
be payable during or after the Severance Period.
(b) If Employee shall voluntarily terminate his employment for
Good Reason (as defined below) during the Employment Period and at any
time after a Change of Control (as defined below), Employee shall be
entitled to receive the same Severance Benefits as are provided for in
Section 2.3(a) above, subject to all of the terms and conditions set
forth in said Section, except that the Severance Period shall be a
period of three years commencing on the last day of the Employment
Period.
(c) For purposes of this Agreement, "Good Reason" shall mean,
so long as Employee has not been guilty of the conduct giving rise to
the right to terminate Employee for Cause, (i) the failure to elect
Employee to the offices of President and Chief Operating Officer of
the Company (or a comparable or superior office), the removal of
Employee from such position or the assignment to Employee of any
additional duties or responsibilities or a reduction in Employee's
duties or responsibilities which, in either case, are inconsistent
with those customarily associated with such position or an adverse
change in the Employee's reporting lines; (ii) the Company's requiring
Employee to be based at any office or location other than in the
metropolitan New York City area, except for travel reasonably required
in the performance of Employee's duties; (iii) any decrease in the
Employee's compensation; (iv) a material breach of this Agreement by
the Company if (A) written notice is delivered to the Company
describing such breach and (B) the Company has failed to cure or take
substantial steps to cure such breach after a reasonable period of
time (not to exceed 30 days); and (v) the termination by the Company
of any employee benefit plan in which the Employee is participating
unless (A) such plan is terminated as to all managerial employees of
the Company, and (B) the value of the remaining
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<PAGE>
compensation and benefits offered to Employee (including any
compensation and benefits offered in lieu of such plan) is not less
than prior to such termination.
(d) For purposes of this Agreement, a "Change of Control" of the
Company shall be deemed to have occurred on the first of any of the
following:
(i) The acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"))
(a "Person") of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of thirty percent (30%)
or more of either (A) the then-outstanding shares of common stock
of the Company (the "Outstanding Company Common Stock") or (B)
the combined voting power of the then-outstanding voting
securities of the Company entitled to vote generally in the
election of directors (the "Outstanding Company Voting
Securities"); provided, however, that for purposes of this
subsection (i), the following acquisitions shall not constitute a
Change of Control: (A) any acquisition directly from the Company
other than in connection with the acquisition by the Company or
its affiliates of a business, (B) any acquisition by the Company,
(C) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation
controlled by the Company, (D) any acquisition by a lender to the
Company pursuant to a debt restructuring of the Company, or (E)
any acquisition by any corporation pursuant to a transaction
which complies with clauses (A), (B) and (C) of subsection (iii)
of this Section 2.3(d);
(ii) Individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute
at least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the date hereof
whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of
the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the
Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result
of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person
other than the Board;
(iii) Consummation of a reorganization, merger or
consolidation of the Company or any direct or indirect subsidiary
of the Company or sale or other disposition of all or
substantially all of the assets of the Company (a "Business
Combination"), in each case, unless, following such Business
Combination, (A) all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such Business Combination
beneficially
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<PAGE>
own, directly or indirectly, more than sixty percent (60%) of,
respectively, the then-outstanding shares of common stock and the
combined voting power of the then-outstanding voting securities
entitled to vote generally in the election of directors, as the
case may be, of the corporation resulting from such Business
Combination (which shall include for these purposes, without
limitation, a corporation which as a result of such transaction
owns the Company or all or substantially all of the Company's
assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership,
immediately prior to such Business Combination, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities, as the case may be, (B) no Person (excluding any
corporation resulting from such Business Combination or any
employee benefit plan (or related trust) of the Company or such
corporation resulting from such Business Combination and any
Person beneficially owning, immediately prior to such Business
Combination, directly or indirectly, 30% or more of the
Outstanding Common Stock or Outstanding Voting Securities, as the
case may be) beneficially owns, directly or indirectly, thirty
percent (30%) or more of, respectively, the then-outstanding
shares of common stock of the corporation resulting from such
Business Combination, or the combined voting power of the then
outstanding voting securities of such corporation entitled to
vote generally in the election of directors and (C) at least a
majority of the members of the board of directors of the
corporation resulting from such Business Combination were members
of the Incumbent Board at the time of the execution of the
initial agreement, or of the action of the Board, providing for
such Business Combination; or
(iv) Approval by the shareholders of the Company of a
complete liquidation or dissolution of the Company other than to
a corporation which would satisfy the requirements of clauses
(A), (B) and (C) of Subsection (iii) of this Section 2.3(d),
assuming for this purpose that such liquidation or dissolution
was a Business Combination.
(e) For purposes of this Agreement, "Deemed Bonus" means an
amount equal to the higher of (A) the bonus paid or payable to
Employee under the Bonus Program for the fiscal year immediately
proceeding the fiscal year in which termination of employment occurs
and (B) the maximum bonus payable to Employee under the Bonus Program
for the fiscal year in which termination of employment occurs.
(f) If the Company shall terminate Employee's employment during
the Employment Period pursuant to Section 1.4, the Company shall have
no further obligations hereunder or otherwise with respect to
Employee's employment from and after the termination or expiration
date (except payment of Employee's Base Salary accrued through the
date of termination or expiration), and the Company shall continue to
have all other rights available hereunder (including, without
limitation, all rights under Sections 3 and 4 hereof at law or in
equity); provided
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that if Employee's employment terminates by reason of Employee's death
or disability, Employee or Employee's estate shall have the right to
exercise Employee's stock options for a period of 12 months thereafter
and all options shall be immediately exercisable.
(g) For the avoidance of doubt, Severance Benefits shall not be
payable if Employee's employment is terminated by reason of his death
or Disability, but shall continue to be payable during the Severance
Period if his employment is terminated without Cause and he
subsequently dies or becomes disabled.
2.4 Benefits, Expenses and Pension Plan. During the Employment
Period, the Company agrees to provide to Employee such fringe and other
employee benefits as are generally provided, from time to time, to other
senior officers of the Company, including without limitation vacation,
health and insurance benefits, and the opportunity to participate in the
Company's Employee Incentive Compensation Plan and the Employee Stock
Purchase Plan. The Company shall retain the right to discontinue or modify
any employee benefit program at any time. The Company will reimburse
Employee in accordance with Company policy for his normal out-of-pocket
expenses incurred in the course of performing his duties hereunder.
3. Covenants.
3.1 Employee's Acknowledgment. Employee acknowledges that:
(i) the Company is and will be engaged in the Business during the
Employment Period and thereafter;
(ii) Employee is one of a limited number of persons who will
manage the Business;
(iii) Employee will occupy a position of trust and confidence
with the Company after the date of this Agreement, and during the
Employment Period and Employee's employment under this Agreement,
Employee will become familiar with the Company's proprietary and
confidential information concerning the Company and the Business;
(iv) the agreements and covenants contained in this Section 3 are
essential to protect the Company and the goodwill of the Business and
are a condition precedent to the Company's entering into this
Agreement;
(v) Employee's employment with the Company has special, unique
and extraordinary value to the Company and the Company would be
irreparably damaged if Employee were to provide services to any person
or entity in violation of the provisions of this Agreement; and
(vi) Employee has means to support himself and his dependents
other than by engaging in the Business as conducted by the Company
during the
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Restrictive Period (the "Restricted Business") and the provisions of
this Section 3 will not impair such ability.
3.2 Non-Compete. Employee hereby agrees that during the Employment
Period and through the period ending with the second anniversary of the
last day of the Employment Period (collectively, the "Restrictive Period"),
he shall not (except on behalf of the Company during the Employment
Period), for any reason whatsoever, directly or indirectly, whether
individually or as an officer, director, shareholder, owner, partner, joint
venturer, employee, independent contractor, consultant or advisor to or of
any entity, or in any other capacity:
(i) engage, participate or invest in any business which is
competitive with the Restricted Business anywhere in the United States
of America (the "Territory"); provided, however, that nothing
contained herein shall be construed to prevent Employee from investing
in up to 2% of the outstanding stock of any competing corporation that
is widely-traded and listed on a recognized national, international or
regional securities exchange or traded in the U.S. over-the-counter
market, but only if Employee is not actively involved in and does not
render consulting services to the business of said corporation,
(ii) sell or provide any competitive products or services to, or
solicit for the purpose of selling or providing any competitive
products or services to, any person or entity that was a customer of
the Company at any time during the one-year period ending on the last
day of the Employment Period (the "Termination Date") or that was
actively being solicited by the Company to become a customer of the
Company at any time during such period,
(iii) solicit for employment or engagement, or influence or
induce to leave the Company's employment, or knowingly cause to be
employed or engaged, any person who is employed or engaged by the
Company in a managerial capacity on the Termination Date or during the
Restrictive Period, unless such person has been out of the employ of
the Company for at least 180 days; provided, that the Employee shall
be permitted to solicit and hire any member of his immediate family,
or
(iv) enter into, or call upon or request non-public information
for the purpose of entering into, an Acquisition Transaction with any
entity with respect to which Company for made an offer or proposal
for, or entered into discussions or negotiations for, or evaluated
with the intent of making a proposal for, an Acquisition Transactions,
within the six-month period immediately preceding the Termination
Date.
For purposes of this Agreement, an "Acquisition Transaction" means a
merger, consolidation, purchase of material assets, purchase of a material
equity interest, tender offer, recapitalization, accumulation of shares,
proxy solicitation or other business combination.
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3.3 Intellectual Property Rights. Employee will promptly
communicate, disclose and transfer to the Company free of all encumbrances
and restrictions (and will execute and deliver any papers and take any
action at any time deemed reasonably necessary by the Company to further
establish such transfer) all of Employee's right, title and interest in and
to all ideas, discoveries, inventions and improvements relating to the
Business created, originated, developed or conceived of by Employee solely
or jointly with others during the term of Employee's employment hereunder,
whether or not during normal working hours. Employee agrees that all
right, title and interest in and to all such ideas, discoveries, inventions
and improvements shall belong solely to the Company, whether or not they
are protected or protectible under applicable patent, trademark, service
mark, copyright or trade secret laws. Employee agrees that all work or
other material containing or reflecting any such ideas, discoveries,
inventions or improvements shall be deemed work made for hire as defined in
Section 101 of the Copyright Act, 15 U.S.C.(S)101. Such transfer shall
include all patent rights, copyrights, trademark and service mark rights,
and trade secret rights (if any) to such ideas, discoveries, inventions and
improvements in the United States and in all other countries. Employee
further agrees, at the expense of the Company, to take all such reasonable
actions and to execute and deliver all such assignments and other lawful
papers relating to any aspect of the prosecution of such rights in the
United States and all other countries as the Company may request at any
time during the Employment Period or after termination thereof.
3.4 Interference with Relationships. Other than in the performance
of his duties hereunder, during the Restrictive Period, Employee shall not,
directly or indirectly, as employee, agent, consultant, stockholder,
director, co-partner or in any other individual or representative capacity
solicit or encourage any present or future customer, supplier or other
third party to terminate or otherwise alter his, her or its relationship
with the Company with respect to the Restricted Business.
3.5 Confidential Information. Other than in the performance of his
duties hereunder, during the Restrictive Period and thereafter, Employee
shall keep secret and retain in strictest confidence, and shall not,
without the prior written consent of the Company, directly or indirectly
furnish, make available or disclose to any third party or use for the
benefit of himself or any third party, any Confidential Information. As
used in this Agreement, "Confidential Information" shall mean any
information relating to the business or affairs of the Company or the
Business, including, but not limited to, information relating to financial
statements, employees, customers, suppliers, pricing, marketing, equipment,
programs, strategies, analyses, profit margins, or other proprietary
information of or used by the Company or any subsidiary of Company in
connection with the Business; provided, however, that Confidential
Information shall not include any information which is in the public domain
or becomes known in the industry through no wrongful act on the part of
Employee. Employee acknowledges that the Confidential Information is
vital, sensitive, confidential and proprietary to the Company.
3.6 Blue-Pencil. If any court of competent jurisdiction shall at any
time deem the Restrictive Period too lengthy or the Territory too
extensive, the other provisions of this Section 3 shall nevertheless stand,
the Restrictive Period herein shall be deemed to
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<PAGE>
be the longest period permissible by law under the circumstances and the
Territory herein shall be deemed to comprise the largest territory
permissible by law under the circumstances. The court in each case shall
reduce the time period and/or territory to permissible duration or size.
3.7 Return of Company Materials Upon Termination. Employee
acknowledges that all price lists, sales manuals, catalogs, binders,
customer lists and other customer information, supplier lists and other
supplier information, financial information, memoranda, correspondence and
other records or documents including information stored on computer disks
or in computer readable form, containing Confidential Information prepared
by Employee or coming into Employee's possession by virtue of Employee's
employment by the Company is and shall remain the property of the Company
and that upon termination of Employee's employment hereunder, Employee
shall return immediately to the Company all such items in Employee's
possession, together with all copies thereof.
3.8 Remedies. Employee acknowledges and agrees that the covenants
set forth in this Section 3 (collectively, the "Restrictive Covenants") are
reasonable and necessary for the protection of the Company's business
interests, that irreparable injury will result to the Company if Employee
breaches any of the terms of said Restrictive Covenants, and that in the
event Employee breaches or threatens to breach any such Restrictive
Covenants, the Company will have no adequate remedy at law. Employee
accordingly agrees that in the event Employee breaches or threatens to
breach any of the Restrictive Covenants, the Company shall be entitled to
immediate temporary injunctive and other equitable relief, without bond and
without the necessity of showing actual monetary damages. Nothing
contained herein shall be construed as prohibiting the Company from
pursuing any other remedies available to it for such breach or the threat
of such a breach by Employee, including the recovery of any damages which
it is able to prove.
3.9 Company. For purposes of this Section 3, the term "Company"
shall include the Company and its respective subsidiaries, affiliates,
assignees and any successors in interest of the Company or its
subsidiaries.
4. Effect of Termination. If Employee or the Company should terminate
Employee's employment for any reason, then, notwithstanding such termination,
those provisions contained in Sections 3, 4, 5 and 6 hereof shall remain in full
force and effect.
5. Income Tax Treatment. Employee and the Company acknowledge that it is
the intention of the Company to deduct all amounts paid under Section 2 hereof
as ordinary and necessary business expenses for income tax purposes. Employee
agrees and represents that he will treat all such amounts as required pursuant
to all applicable tax laws and regulations, and should he fail to report such
amounts as required, he will indemnify and hold the Company harmless from and
against any and all taxes, penalties, interest, costs and expenses, including
reasonable attorneys' and accounting fees and costs, which are incurred by
Company directly or indirectly as a result thereof.
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6. Miscellaneous.
6.1 Life Insurance. The Company may at its discretion and at any
time apply for and procure as owner and for its own benefit and at its own
expense, insurance on the life of Employee in such amounts and in such form
or forms as the Company may choose. Employee shall cooperate with the
Company in procuring such insurance and shall, at the request of the
Company, submit to such medical examinations, supply such information and
execute such documents as may be required by the insurance company or
companies to whom the Company has applied for such insurance. Employee
shall have no interest whatsoever in any such policy or policies, except
that, upon the termination of Employee's employment hereunder, Employee
shall have the privilege of purchasing any such insurance from the Company
for an amount equal to the actual premiums thereon previously paid by the
Company.
6.2 Assignment. No party hereto may assign or delegate any of its
rights or obligations hereunder without the prior written consent of the
other party hereto; provided, however, that the Company shall have the
right to assign all or any part of its rights and obligations under this
Agreement (i) to any affiliate of the Company to which the Business of the
Company is assigned at any time, any subsidiary or affiliate of the Company
or any surviving entity following any merger or consolidation of any of
those entities with any entity other than the Company or (ii) in connection
with the sale of the Business by the Company. Except as otherwise
expressly provided herein, all covenants and agreements contained in this
Agreement by or on behalf of any of the parties hereto shall bind and inure
to the benefit of the respective legal representatives, heirs, successors
and assigns of the parties hereto whether so expressed or not.
6.3 Entire Agreement. Except as otherwise expressly set forth
herein, this Agreement and all other agreements entered into by the parties
hereto on the date hereof set forth the entire understanding of the
parties, and supersede and preempt all prior oral or written understandings
and agreements, with respect to the subject matter hereof.
6.4 Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of this Agreement.
6.5 Amendment; Modification. No amendment or modification of this
Agreement and no waiver by any party of the breach of any covenant
contained herein shall be binding unless executed in writing by the party
against whom enforcement of such amendment, modification or waiver is
sought. No waiver shall be deemed a continuing waiver or a waiver in
respect of any subsequent breach or default, either of a similar or
different nature, unless expressly so stated in writing.
6.6 Governing Law. This Agreement shall be construed and enforced in
accordance with, and all questions concerning the construction, validity,
interpretation
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and performance of this Agreement shall be governed by, the laws of the
State of New York, without giving effect to provisions thereof regarding
conflict of laws.
6.7 Notices. All notices, demands or other communications to be
given or delivered hereunder or by reason of the provisions of this
Agreement shall be in writing and shall be deemed to have been properly
served if (a) delivered personally, (b) delivered by a recognized overnight
courier service, (c) sent by certified or registered mail, return receipt
requested and first class postage prepaid, or (d) sent by facsimile
transmission followed by a confirmation copy delivered by a recognized
overnight courier service the next day. Such notices, demands and other
communications shall be sent to the addresses indicated below:
(a) If to Employee:
Mr. Mahmud U. Haq
10 Beekman Road
Franklin Park, New Jersey 08823
(b) If to the Company:
Compass International Services Corporation
5 Independence Way, Suite 300
Princeton, NJ 08540
Attention: Chief Executive Officer
with a copy to:
Katten Muchin & Zavis
525 West Monroe, Suite 1600
Chicago, IL 60661
Attention: Howard S. Lanznar, Esq.
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
Date of service of such notice shall be (i) the date such notice is
personally delivered or sent by facsimile transmission (with issuance by
the transmitting machine of a confirmation of successful transmission),
(ii) three business days after the date of mailing if sent by certified or
registered mail or (iii) one business day after date of delivery to the
overnight courier if sent by overnight courier.
6.8 Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same Agreement.
6.9 Descriptive Headings; Interpretation. The descriptive headings in
this Agreement are inserted for convenience of reference only and are not
intended to be part of or to affect the meaning or interpretation of this
Agreement. The use of the word "including" in this Agreement
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shall be by way of example rather than by limitation. The Preliminary Recitals
set forth above are incorporated by reference into this Agreement.
6.10 No Strict Construction. The language used in this Agreement will be
deemed to be the language chosen by the parties hereto to express their mutual
interest, and no rule of strict construction will be applied against any party
hereto.
6.11 Effectiveness. This Agreement shall become effective upon the
Closing of the Acquisitions.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
COMPANY:
COMPASS INTERNATIONAL SERVICES CORPORATION
By: _________________________________________
Its: ________________________________________
EMPLOYEE:
______________________________________________
Mahmud U. Haq
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Exhibit 10.5
FORM OF
EMPLOYMENT AGREEMENT
BY AND BETWEEN
COMPASS INTERNATIONAL SERVICES CORPORATION
AND
RICHARD A. ALSTON
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of
__________________, 1997, by and between Compass International Services
Corporation, a Delaware corporation (the "Company"), and Richard A. Alston
("Employee").
PRELIMINARY RECITALS
A. Reference is made to those certain Stock Purchase Agreements dated as
of October 3, 1997 (collectively, the "Stock Purchase Agreement"), pursuant to
which the outstanding capital stock of B.R.M.C. of Delaware, Inc., The Mail Box,
Inc., Mid-Continent Agencies, Inc., National Credit Management Corp. and Impact
Telemarketing Group, Inc. will be acquired by the Company (the "Acquisitions").
Concurrently therewith, the Company will close an initial public offering of its
common stock.
B. Following the consummation of the Acquisitions, the Company, through
its subsidiaries, will be a provider of outsourced business services on a
national basis (the "Business").
C. The Company desires to employ Employee, and Employee desires to be
employed by the Company, in an executive capacity, all under the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the premises, the mutual covenants of
the parties hereinafter set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. Employment.
1.1 Engagement of Employee. The Company agrees to employ Employee as
Chief Financial Officer of the Company and Employee agrees to accept such
employment, all in accordance with the terms and conditions of this
Agreement.
1.2 Duties and Powers. During the Employment Period (as defined
herein), Employee will serve as the Company's Chief Financial Officer and
will have such responsibilities, duties and authorities, and will render
such services for the Company and its affiliates as the Board of Directors
of the Company (the "Board") shall from time to time reasonably direct;
provided, however, that such duties and responsibilities shall be
commensurate with the position of Chief Financial Officer of the Company.
Employee shall report to the Company's Chief Executive Officer. Employee
agrees to serve the Company diligently and faithfully during the Employment
Period and to devote Employee's best efforts, highest talents and skills
and full time and attention to the furtherance and success of the Business.
1.3 Employment Period. Employee's employment under this Agreement
shall be for a period of three years beginning on the date of the Closing
of the Acquisitions
<PAGE>
(the "Initial Employment Period"). This Agreement shall automatically renew
for successive one-year periods (each one-year period shall be referred to
herein as a "Renewal Period") unless either the Company or Employee, as the
case may be, provides written notice to the other party at least one
hundred twenty (120) days prior to the termination of any such period,
stating its/his desire to terminate this Agreement. The Initial Employment
Period and each successive Renewal Period shall be referred to herein
together as the "Employment Period". Notwithstanding anything to the
contrary contained herein, the Employment Period is subject to termination
pursuant to Section 1.4 below.
1.4 Termination of Employment for Cause, Death or Disability. The
Company has the right to terminate Employee's employment under this
Agreement, by notice to Employee in writing at any time, for Cause (as
hereinafter defined), and such employment shall automatically terminate
upon the death or the Disability (as hereinafter defined) of Employee. Any
such termination shall be effective upon the date of service of such notice
pursuant to Section 6.7 hereof, in the case of termination for Cause, or
immediately upon the death or Disability of Employee, and the Employment
Period shall terminate as of the effective date of such termination.
"Cause," as used herein, means the occurrence of any of the following
events:
(i) final non-appealable conviction of (A) a felony or (B) any
crime involving moral turpitude;
(ii) the willful failure of Employee to comply with reasonable
directions of the Board after (A) written notice is delivered to
Employee describing such willful failure and (B) Employee has failed
to cure or take substantial steps to cure such willful failure after a
reasonable time period, as determined by the Board in its reasonable
discretion (not to be less than 30 days);
(iii) any act by Employee in the course of his employment
constituting fraud or misappropriation of property of the Company or
its affiliates;
(iv) a material breach by Employee of any of the terms,
conditions or covenants set forth in Sections 3.2, 3.3, 3.4 or 3.5 of
this Agreement if (A) written notice is delivered to Employee
describing such breach and (B) Employee has failed to cure or take
substantial steps to cure such breach after a reasonable time period,
as determined by the Board in its reasonable discretion (not to be
less than 30 days).
Employee shall be deemed to have a "Disability" for purposes of this
Agreement if he is unable to perform, by reason of physical or mental
incapacity, his material duties or obligations under this Agreement, with
or without reasonable accommodation, for a total period of 90 days in any
360-day period. The Board shall determine, according to the facts then
available, whether and when the Disability of the Employee has occurred.
Such determination shall not be arbitrary or unreasonable and the Board
will, if possible, take into consideration the expert medical opinion of a
physician chosen by the Company,
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after such physician has completed an examination of Employee. Employee
agrees to make himself available for such examination upon the reasonable
request of the Company.
2. Compensation and Benefits.
2.1 Salary. In consideration of Employee performing his duties under
this Agreement during the Employment Period, the Company will pay Employee
a base salary at a rate of $200,000 per annum (the "Base Salary"), payable
in accordance with the Company's regular payroll policy for salaried
employees. The Base Salary may be increased (but not decreased), from time
to time during the Employment Period, as determined by the Compensation
Committee of the Board (the "Compensation Committee"), in its sole
discretion. If the Employment Period is terminated pursuant to Section 1.4
above, then the Base Salary for any partial year will be prorated based on
the number of days elapsed in such year during which services were actually
performed by Employee.
2.2 Bonus. Employee shall participate in Compass' Executive
Compensation Program (the "Bonus Program"), under which Employee shall be
eligible to earn an annual bonus of up to 100% of Employee's Base Salary
based upon such factors as (i) the financial performance of the Company,
and/or (ii) the achievement of personal performance goals. The criteria
and/or goals for the Bonus Program shall be established by the Compensation
Committee at the beginning of each fiscal year. All bonuses awarded to
Employee hereunder shall be payable in accordance with Company policy.
2.3 Compensation After Termination of Employment.
(a) If the Company shall terminate Employee's employment during
the Employment Period for any reason (other than for Cause pursuant to
Section 1.4 of this Agreement), Employee shall be entitled to receive
severance compensation equal to the sum of (A) continuance of his Base
Salary and Deemed Bonus for a period of two years commencing on the
last day of the Employment Period (the "Severance Period"), (B) (i) if
permitted under Company's group health, life and disability insurance
coverage ("Insurance Coverage"), continuation at the cost of Company
of Employee's coverage thereunder (subject to such changes in coverage
as shall apply to Company's employees generally) or (ii) if not so
permitted, reimbursement by the Company of the premiums for group
health insurance coverage otherwise payable by Employee under COBRA,
until the end of the Severance Period or until other employment is
obtained, whichever occurs first, and (C) his pro rated bonus, as
determined by the Compensation Committee in its good faith judgment,
for the portion of any fiscal year prior to the termination date ((A),
(B) and (C) collectively, the "Severance Benefits"). The Severance
Benefits payable under (A) and (B) (ii) above shall be paid in equal
installments on the Company's normal payroll payment dates occurring
during the Severance Period. It shall be a condition to Employee's
right to receive the Severance Benefits that (i) Employee shall
execute and deliver to the Company
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a written separation agreement, in form and substance satisfactory to
the Company, which agreement shall, among other things, contain (X) a
general release by Employee of all claims arising out of Employee's
employment or termination of employment, (Y) a covenant by Employee to
cooperate with the Company in prosecuting or defending any litigation
involving third parties and (Z) a covenant by Employee not to
disparage the Company, and (ii) Employee shall be in compliance with
all of Employee's obligations which survive termination hereof,
including without limitation those arising under Sections 3 and 4
hereof. In addition, the Company may, as a condition to such Severance
Benefits, require that Employee provide consulting services to the
Company on a reasonable basis during the first 60 days of the
Severance Period, provided that the timing of such consulting services
shall not unreasonably interfere with Employee's ability to obtain
other full-time employment or to fulfill his obligations relating to
that employment. The Severance Benefits are intended to be in lieu of
all other payments to which Employee might otherwise be entitled in
respect of termination of Employee's employment without Cause.
Employee shall not be required to seek other employment during the
Severance Period. Except as expressly provided above or in the Compass
Stock Option Plan, no fringe or other employee benefits shall be
payable during or after the Severance Period.
(b) If Employee shall voluntarily terminate his employment for
Good Reason (as defined below) during the Employment Period and at any
time after a Change of Control (as defined below), Employee shall be
entitled to receive the same Severance Benefits as are provided for in
Section 2.3(a) above, subject to all of the terms and conditions set
forth in said Section, except that the Severance Period shall be a
period of three years commencing on the last day of the Employment
Period.
(c) For purposes of this Agreement, "Good Reason" shall mean,
so long as Employee has not been guilty of the conduct giving rise to
the right to terminate Employee for Cause, (i) the failure to elect
Employee to the office of Chief Financial Officer of the Company (or a
comparable or superior office), the removal of Employee from such
position or the assignment to Employee of any additional duties or
responsibilities or a reduction in Employee's duties or
responsibilities which, in either case, are inconsistent with those
customarily associated with such position or an adverse change in the
Employee's reporting lines; (ii) the Company's requiring Employee to
be based at any office or location other than in the metropolitan New
York City area, except for travel reasonably required in the
performance of Employee's duties; (iii) any decrease in the Employee's
compensation; (iv) a material breach of this Agreement by the Company
if (A) written notice is delivered to the Company describing such
breach and (B) the Company has failed to cure or take substantial
steps to cure such breach after a reasonable period of time (not to
exceed 30 days); and (v) the termination by the Company of any
employee benefit plan in which the Employee is participating unless
(A) such plan is terminated as to all managerial employees of the
Company, and (B) the value of the remaining compensation and benefits
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<PAGE>
offered to Employee (including any compensation and benefits offered
in lieu of such plan) is not less than prior to such termination.
(d) For purposes of this Agreement, a "Change of Control" of the
Company shall be deemed to have occurred on the first of any of the
following:
(i) The acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"))
(a "Person") of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of thirty percent (30%)
or more of either (A) the then-outstanding shares of common stock
of the Company (the "Outstanding Company Common Stock") or (B)
the combined voting power of the then-outstanding voting
securities of the Company entitled to vote generally in the
election of directors (the "Outstanding Company Voting
Securities"); provided, however, that for purposes of this
subsection (i), the following acquisitions shall not constitute a
Change of Control: (A) any acquisition directly from the Company
other than in connection with the acquisition by the Company or
its affiliates of a business, (B) any acquisition by the Company,
(C) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation
controlled by the Company, (D) any acquisition by a lender to the
Company pursuant to a debt restructuring of the Company, or (E)
any acquisition by any corporation pursuant to a transaction
which complies with clauses (A), (B) and (C) of subsection (iii)
of this Section 2.3(d);
(ii) Individuals who, as of the date hereof, constitute
the Board (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board; provided, however,
that any individual becoming a director subsequent to the date
hereof whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board
shall be considered as though such individual were a member of
the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result
of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person
other than the Board;
(iii) Consummation of a reorganization, merger or
consolidation of the Company or any direct or indirect subsidiary
of the Company or sale or other disposition of all or
substantially all of the assets of the Company (a "Business
Combination"), in each case, unless, following such Business
Combination, (A) all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such Business Combination
beneficially
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<PAGE>
own, directly or indirectly, more than sixty percent (60%) of,
respectively, the then-outstanding shares of common stock and the
combined voting power of the then-outstanding voting securities
entitled to vote generally in the election of directors, as the
case may be, of the corporation resulting from such Business
Combination (which shall include for these purposes, without
limitation, a corporation which as a result of such transaction
owns the Company or all or substantially all of the Company's
assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership,
immediately prior to such Business Combination, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities, as the case may be, (B) no Person (excluding any
corporation resulting from such Business Combination or any
employee benefit plan (or related trust) of the Company or such
corporation resulting from such Business Combination and any
Person beneficially owning, immediately prior to such Business
Combination, directly or indirectly, 30% or more of the
Outstanding Common Stock or Outstanding Voting Securities, as the
case may be) beneficially owns, directly or indirectly, thirty
percent (30%) or more of, respectively, the then-outstanding
shares of common stock of the corporation resulting from such
Business Combination, or the combined voting power of the then
outstanding voting securities of such corporation entitled to
vote generally in the election of directors and (C) at least a
majority of the members of the board of directors of the
corporation resulting from such Business Combination were members
of the Incumbent Board at the time of the execution of the
initial agreement, or of the action of the Board, providing for
such Business Combination; or
(iv) Approval by the shareholders of the Company of a
complete liquidation or dissolution of the Company other than to
a corporation which would satisfy the requirements of clauses
(A), (B) and (C) of Subsection (iii) of this Section 2.3(d),
assuming for this purpose that such liquidation or dissolution
was a Business Combination.
(e) For purposes of this Agreement, "Deemed Bonus" means an
amount equal to the higher of (A) the bonus paid or payable to
Employee under the Bonus Program for the fiscal year immediately
proceeding the fiscal year in which termination of employment occurs
and (B) the maximum bonus payable to Employee under the Bonus Program
for the fiscal year in which termination of employment occurs.
(f) If the Company shall terminate Employee's employment during
the Employment Period pursuant to Section 1.4, the Company shall have
no further obligations hereunder or otherwise with respect to
Employee's employment from and after the termination or expiration
date (except payment of Employee's Base Salary accrued through the
date of termination or expiration), and the Company shall continue to
have all other rights available hereunder (including, without
limitation, all rights under Sections 3 and 4 hereof at law or in
equity); provided
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that if Employee's employment terminates by reason of Employee's death
or disability, Employee or Employee's estate shall have the right to
exercise Employee's stock options for a period of 12 months thereafter
and all options shall be immediately exercisable.
(g) For the avoidance of doubt, Severance Benefits shall not be
payable if Employee's employment is terminated by reason of his death
or Disability, but shall continue to be payable during the Severance
Period if his employment is terminated without Cause and he
subsequently dies or becomes disabled.
2.4 Benefits, Expenses and Pension Plan. During the Employment Period,
the Company agrees to provide to Employee such fringe and other employee
benefits as are generally provided, from time to time, to other senior
officers of the Company, including without limitation vacation, health and
insurance benefits, and the opportunity to participate in the Company's
Employee Incentive Compensation Plan and the Employee Stock Purchase Plan.
The Company shall retain the right to discontinue or modify any employee
benefit program at any time. The Company will reimburse Employee in
accordance with Company policy for his normal out-of-pocket expenses
incurred in the course of performing his duties hereunder.
3. Covenants.
3.1 Employee's Acknowledgment. Employee acknowledges that:
(i) the Company is and will be engaged in the Business during the
Employment Period and thereafter;
(ii) Employee is one of a limited number of persons who will
manage the Business;
(iii) Employee will occupy a position of trust and confidence
with the Company after the date of this Agreement, and during the
Employment Period and Employee's employment under this Agreement,
Employee will become familiar with the Company's proprietary and
confidential information concerning the Company and the Business;
(iv) the agreements and covenants contained in this Section 3 are
essential to protect the Company and the goodwill of the Business and
are a condition precedent to the Company's entering into this
Agreement;
(v) Employee's employment with the Company has special, unique
and extraordinary value to the Company and the Company would be
irreparably damaged if Employee were to provide services to any person
or entity in violation of the provisions of this Agreement; and
(vi) Employee has means to support himself and his dependents
other than by engaging in the Business as conducted by the Company
during the
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Restrictive Period (the "Restricted Business") and the provisions of
this Section 3 will not impair such ability.
3.2 Non-Compete. Employee hereby agrees that during the Employment
Period and through the period ending with the second anniversary of the
last day of the Employment Period (collectively, the "Restrictive Period"),
he shall not (except on behalf of the Company during the Employment
Period), for any reason whatsoever, directly or indirectly, whether
individually or as an officer, director, shareholder, owner, partner, joint
venturer, employee, independent contractor, consultant or advisor to or of
any entity, or in any other capacity:
(i) engage, participate or invest in any business which is
competitive with the Restricted Business anywhere in the United States
of America (the "Territory"); provided, however, that nothing
contained herein shall be construed to prevent Employee from investing
in up to 2% of the outstanding stock of any competing corporation that
is widely-traded and listed on a recognized national, international or
regional securities exchange or traded in the U.S. over-the-counter
market, but only if Employee is not actively involved in and does not
render consulting services to the business of said corporation,
(ii) sell or provide any competitive products or services to, or
solicit for the purpose of selling or providing any competitive
products or services to, any person or entity that was a customer of
the Company at any time during the one-year period ending on the last
day of the Employment Period (the "Termination Date") or that was
actively being solicited by the Company to become a customer of the
Company at any time during such period,
(iii) solicit for employment or engagement, or influence or
induce to leave the Company's employment, or knowingly cause to be
employed or engaged, any person who is employed or engaged by the
Company in a managerial capacity on the Termination Date or during the
Restrictive Period, unless such person has been out of the employ of
the Company for at least 180 days; provided, that the Employee shall
be permitted to solicit and hire any member of his immediate family,
or
(iv) enter into, or call upon or request non-public information
for the purpose of entering into, an Acquisition Transaction with any
entity with respect to which Company for made an offer or proposal
for, or entered into discussions or negotiations for, or evaluated
with the intent of making a proposal for, an Acquisition Transactions,
within the six-month period immediately preceding the Termination
Date.
For purposes of this Agreement, an "Acquisition Transaction" means a
merger, consolidation, purchase of material assets, purchase of a material
equity interest, tender offer, recapitalization, accumulation of shares,
proxy solicitation or other business combination.
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<PAGE>
3.3 Intellectual Property Rights. Employee will promptly communicate,
disclose and transfer to the Company free of all encumbrances and
restrictions (and will execute and deliver any papers and take any action
at any time deemed reasonably necessary by the Company to further establish
such transfer) all of Employee's right, title and interest in and to all
ideas, discoveries, inventions and improvements relating to the Business
created, originated, developed or conceived of by Employee solely or
jointly with others during the term of Employee's employment hereunder,
whether or not during normal working hours. Employee agrees that all right,
title and interest in and to all such ideas, discoveries, inventions and
improvements shall belong solely to the Company, whether or not they are
protected or protectible under applicable patent, trademark, service mark,
copyright or trade secret laws. Employee agrees that all work or other
material containing or reflecting any such ideas, discoveries, inventions
or improvements shall be deemed work made for hire as defined in Section
101 of the Copyright Act, 15 U.S.C.(S)101. Such transfer shall include all
patent rights, copyrights, trademark and service mark rights, and trade
secret rights (if any) to such ideas, discoveries, inventions and
improvements in the United States and in all other countries. Employee
further agrees, at the expense of the Company, to take all such reasonable
actions and to execute and deliver all such assignments and other lawful
papers relating to any aspect of the prosecution of such rights in the
United States and all other countries as the Company may request at any
time during the Employment Period or after termination thereof.
3.4 Interference with Relationships. Other than in the performance of
his duties hereunder, during the Restrictive Period, Employee shall not,
directly or indirectly, as employee, agent, consultant, stockholder,
director, co-partner or in any other individual or representative capacity
solicit or encourage any present or future customer, supplier or other
third party to terminate or otherwise alter his, her or its relationship
with the Company with respect to the Restricted Business.
3.5 Confidential Information. Other than in the performance of his
duties hereunder, during the Restrictive Period and thereafter, Employee
shall keep secret and retain in strictest confidence, and shall not,
without the prior written consent of the Company, directly or indirectly
furnish, make available or disclose to any third party or use for the
benefit of himself or any third party, any Confidential Information. As
used in this Agreement, "Confidential Information" shall mean any
information relating to the business or affairs of the Company or the
Business, including, but not limited to, information relating to financial
statements, employees, customers, suppliers, pricing, marketing, equipment,
programs, strategies, analyses, profit margins, or other proprietary
information of or used by the Company or any subsidiary of Company in
connection with the Business; provided, however, that Confidential
Information shall not include any information which is in the public domain
or becomes known in the industry through no wrongful act on the part of
Employee. Employee acknowledges that the Confidential Information is vital,
sensitive, confidential and proprietary to the Company.
3.6 Blue-Pencil. If any court of competent jurisdiction shall at any
time deem the Restrictive Period too lengthy or the Territory too
extensive, the other provisions of this Section 3 shall nevertheless stand,
the Restrictive Period herein shall be deemed to
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be the longest period permissible by law under the circumstances and the
Territory herein shall be deemed to comprise the largest territory
permissible by law under the circumstances. The court in each case shall
reduce the time period and/or territory to permissible duration or size.
3.7 Return of Company Materials Upon Termination. Employee
acknowledges that all price lists, sales manuals, catalogs, binders,
customer lists and other customer information, supplier lists and other
supplier information, financial information, memoranda, correspondence and
other records or documents including information stored on computer disks
or in computer readable form, containing Confidential Information prepared
by Employee or coming into Employee's possession by virtue of Employee's
employment by the Company is and shall remain the property of the Company
and that upon termination of Employee's employment hereunder, Employee
shall return immediately to the Company all such items in Employee's
possession, together with all copies thereof.
3.8 Remedies. Employee acknowledges and agrees that the covenants set
forth in this Section 3 (collectively, the "Restrictive Covenants") are
reasonable and necessary for the protection of the Company's business
interests, that irreparable injury will result to the Company if Employee
breaches any of the terms of said Restrictive Covenants, and that in the
event Employee breaches or threatens to breach any such Restrictive
Covenants, the Company will have no adequate remedy at law. Employee
accordingly agrees that in the event Employee breaches or threatens to
breach any of the Restrictive Covenants, the Company shall be entitled to
immediate temporary injunctive and other equitable relief, without bond and
without the necessity of showing actual monetary damages. Nothing contained
herein shall be construed as prohibiting the Company from pursuing any
other remedies available to it for such breach or the threat of such a
breach by Employee, including the recovery of any damages which it is able
to prove.
3.9 Company. For purposes of this Section 3, the term "Company" shall
include the Company and its respective subsidiaries, affiliates, assignees
and any successors in interest of the Company or its subsidiaries.
4. Effect of Termination. If Employee or the Company should terminate
Employee's employment for any reason, then, notwithstanding such termination,
those provisions contained in Sections 3, 4, 5 and 6 hereof shall remain in full
force and effect.
5. Income Tax Treatment. Employee and the Company acknowledge that it is
the intention of the Company to deduct all amounts paid under Section 2 hereof
as ordinary and necessary business expenses for income tax purposes. Employee
agrees and represents that he will treat all such amounts as required pursuant
to all applicable tax laws and regulations, and should he fail to report such
amounts as required, he will indemnify and hold the Company harmless from and
against any and all taxes, penalties, interest, costs and expenses, including
reasonable attorneys' and accounting fees and costs, which are incurred by
Company directly or indirectly as a result thereof.
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6. Miscellaneous.
6.1 Life Insurance. The Company may at its discretion and at any time
apply for and procure as owner and for its own benefit and at its own
expense, insurance on the life of Employee in such amounts and in such form
or forms as the Company may choose. Employee shall cooperate with the
Company in procuring such insurance and shall, at the request of the
Company, submit to such medical examinations, supply such information and
execute such documents as may be required by the insurance company or
companies to whom the Company has applied for such insurance. Employee
shall have no interest whatsoever in any such policy or policies, except
that, upon the termination of Employee's employment hereunder, Employee
shall have the privilege of purchasing any such insurance from the Company
for an amount equal to the actual premiums thereon previously paid by the
Company.
6.2 Assignment. No party hereto may assign or delegate any of its
rights or obligations hereunder without the prior written consent of the
other party hereto; provided, however, that the Company shall have the
right to assign all or any part of its rights and obligations under this
Agreement (i) to any affiliate of the Company to which the Business of the
Company is assigned at any time, any subsidiary or affiliate of the Company
or any surviving entity following any merger or consolidation of any of
those entities with any entity other than the Company or (ii) in connection
with the sale of the Business by the Company. Except as otherwise expressly
provided herein, all covenants and agreements contained in this Agreement
by or on behalf of any of the parties hereto shall bind and inure to the
benefit of the respective legal representatives, heirs, successors and
assigns of the parties hereto whether so expressed or not.
6.3 Entire Agreement. Except as otherwise expressly set forth herein,
this Agreement and all other agreements entered into by the parties hereto
on the date hereof set forth the entire understanding of the parties, and
supersede and preempt all prior oral or written understandings and
agreements, with respect to the subject matter hereof.
6.4 Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of this Agreement.
6.5 Amendment; Modification. No amendment or modification of this
Agreement and no waiver by any party of the breach of any covenant
contained herein shall be binding unless executed in writing by the party
against whom enforcement of such amendment, modification or waiver is
sought. No waiver shall be deemed a continuing waiver or a waiver in
respect of any subsequent breach or default, either of a similar or
different nature, unless expressly so stated in writing.
6.6 Governing Law. This Agreement shall be construed and enforced in
accordance with, and all questions concerning the construction, validity,
interpretation
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and performance of this Agreement shall be governed by, the laws of the
State of New York, without giving effect to provisions thereof regarding
conflict of laws.
6.7 Notices. All notices, demands or other communications to be given
or delivered hereunder or by reason of the provisions of this Agreement
shall be in writing and shall be deemed to have been properly served if (a)
delivered personally, (b) delivered by a recognized overnight courier
service, (c) sent by certified or registered mail, return receipt requested
and first class postage prepaid, or (d) sent by facsimile transmission
followed by a confirmation copy delivered by a recognized overnight courier
service the next day. Such notices, demands and other communications shall
be sent to the addresses indicated below:
(a) If to Employee:
Mr. Richard A. Alston
408 Duff Lane
Louisville, Kentucky 40207
(b) If to the Company:
Compass International Services Corporation
5 Independence Way, Suite 300
Princeton, NJ 08540
Attention: Chief Executive Officer
with a copy to:
Katten Muchin & Zavis
525 West Monroe, Suite 1600
Chicago, IL 60661
Attention: Howard S. Lanznar, Esq.
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
Date of service of such notice shall be (i) the date such notice is
personally delivered or sent by facsimile transmission (with issuance by
the transmitting machine of a confirmation of successful transmission),
(ii) three business days after the date of mailing if sent by certified or
registered mail or (iii) one business day after date of delivery to the
overnight courier if sent by overnight courier.
6.8 Counterparts. This Agreement may be executed in multiple counterparts,
each of which shall be deemed an original, but all of which taken together shall
constitute one and the same Agreement.
6.9 Descriptive Headings; Interpretation. The descriptive headings in this
Agreement are inserted for convenience of reference only and are not intended to
be part of or to affect the meaning or interpretation of this Agreement. The use
of the word "including" in this Agreement
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shall be by way of example rather than by limitation. The Preliminary Recitals
set forth above are incorporated by reference into this Agreement.
6.10 No Strict Construction. The language used in this Agreement will be
deemed to be the language chosen by the parties hereto to express their mutual
interest, and no rule of strict construction will be applied against any party
hereto.
6.11 Effectiveness. This Agreement shall become effective upon the Closing
of the Acquisitions.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
COMPANY:
COMPASS INTERNATIONAL SERVICES CORPORATION
By:_______________________________________
Its:______________________________________
EMPLOYEE:
__________________________________________
Richard A. Alston
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EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our reports relating to the respective
financial statements which appear in such Prospectus.
Financial Statements Date
- -------------------- ----
Compass International Services Corporation November 5, 1997
The Mail Box, Inc. November 5, 1997
Mid-Continent Agencies, Inc. October 31, 1997
Impact Telemarketing Group, Inc. November 6, 1997
We also consent to the reference to us under the heading "Experts".
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Minneapolis, Minnesota
November 21, 1997
<PAGE>
Exhibit 23.2
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our Firm included in or made a part of this
Registration Statement.
/s/ Arthur Andersen LLP
Baltimore, Maryland,
November 21, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated October 24, 1997, with respect to the financial
statements of BRMC of Delaware, Inc. included in the Registration Statement
(Form S-1 No. 333-37205) and related Prospectus of Compass International
Services Corporation for the registration of 4,715,000 shares of its common
stock.
/s/ Ernst & Young LLP
November 21, 1997
Atlanta, Georgia
