<PAGE>
FILED PURSUANT TO RULE NO. 424(b)(4)
REGISTRATION NO. 333-37205
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. 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..... $10.50 $0.735 $9.765
Total(3)...... $43,050,000 $3,013,500 $40,036,500
- -------------------------------------------------------------
- -------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company, estimated at $4,500,000.
(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 $49,507,500, $3,465,525, and $46,041,975, 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 LLC on or about March 4, 1998.
----------------
NationsBanc Montgomery Securities LLC
Lehman Brothers
February 27, 1998
<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 112.1846-for-1 stock split that was effected on December 3, 1997,
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 $34.2 million in 1992 to $87.2 million in
1997, representing a compound annual growth rate of 20.6%.
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 900 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.
Graphic of Sales Cycle
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 and will depend on certain
factors including, without limitation, the absence of a combined operating
history and the Company's ability to: (i) effectively manage growth; (ii)
market and cross-sell its services while maintaining high quality and expanding
the services offered; (iii) recruit and retain qualified personnel; (iv)
identify, acquire and integrate new businesses; and (v) access additional
capital. 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 $17.5 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 One Penn Plaza, Suite 4430,
New York, New York 10119, and its telephone number is (212) 967-7770.
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 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--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 an acquisition completed by Bomar (as defined below under the heading "The
Company") in September 1997, 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
DECEMBER 31,
------------
1997
------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (1):
Revenues................................................... $87,153
Operating expenses......................................... 53,353
----------
Gross profit............................................. 33,800
Selling, general and administrative expenses (2)........... 23,229
Amortization of goodwill and other intangibles (3)......... 1,531
----------
Income from operations................................... 9,040
Other expense, net (4)..................................... 625
----------
Income before income taxes................................. 8,415
Provision for income taxes (5)........................... 3,978
----------
Net income................................................. $ 4,437
==========
Net income per share....................................... $ 0.43
==========
Shares used in computing net income per share (6).......... 10,426,150
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------
PRO FORMA AS
COMBINED (7) ADJUSTED (8)
------------ -----------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)........................... $(19,783)(9) $ 9,658
Total assets........................................ 84,884 84,351
Total long-term debt, net of current portion........ 8,106 2,010
Stockholders' equity................................ 33,739 69,276
</TABLE>
- --------
(1) The pro forma combined statement of operations data assume that the
Acquisitions and the Offering were consummated on January 1, 1997, 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 $4.1 million for the year ended December 31, 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.
6
<PAGE>
(3) Reflects (i) the amortization of goodwill of $50.8 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 $547,000 for the year ended
December 31, 1997 and a reduction of interest income of $75,000 for the
year ended December 31, 1997, 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)
3,307,690 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 December 31, 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 $17.5 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>
YEARS ENDED DECEMBER 31,(1)
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
MAIL BOX:
Revenues..................................... $ 17,370 $ 26,156 $ 32,566
Operating expenses........................... 12,402 17,953 21,493
--------- --------- ---------
Gross profit................................. 4,968 8,203 11,073
Selling, general and administrative expenses. 4,370 5,891 7,824
--------- --------- ---------
Income from operations....................... $ 598 $ 2,312 $ 3,249
========= ========= =========
NCMC(2):
Revenues..................................... $ 12,287 $ 13,579 $ 15,620
Operating expenses........................... 6,322 7,945 9,433
--------- --------- ---------
Gross profit................................. 5,965 5,634 6,187
Selling, general and administrative expenses. 4,328 4,798 6,340
--------- --------- ---------
Income (loss) from operations................ $ 1,637 $ 836 $ (153)
========= ========= =========
BOMAR:
Revenues..................................... $ 7,416 $ 9,597 $ 14,266
Operating expenses........................... 4,229 5,814 8,208
--------- --------- ---------
Gross profit................................. 3,187 3,783 6,058
Selling, general and administrative expenses. 2,934 3,458 5,078
--------- --------- ---------
Income from operations....................... $ 253 $ 325 $ 980
========= ========= =========
MID-CONTINENT:
Revenues..................................... $ 8,763 $ 9,038 $ 9,451
Operating expenses........................... 2,851 2,875 3,105
--------- --------- ---------
Gross profit................................. 5,912 6,163 6,346
Selling, general and administrative expenses. 5,974 6,054 6,239
--------- --------- ---------
Income (loss) from operations................ $ (62) $ 109 $ 107
========= ========= =========
IMPACT(3):
Revenues..................................... $ 8,748 $ 8,869 $ 12,870
Operating expenses........................... 6,108 6,961 9,725
--------- --------- ---------
Gross profit................................. 2,640 1,908 3,145
Selling, general and administrative expenses. 2,590 2,108 2,823
--------- --------- ---------
Income (loss) from operations................ $ 50 $ (200) $ 322
========= ========= =========
</TABLE>
- --------
(1) Selling, general and administrative expenses for the Founding Companies for
each of the years in the three-year period ended December 31, 1997 do not
include a reduction for the Compensation Differential as indicated below.
The historical Compensation Differential shown for Bomar does not include
$73,000, $169,000, and $64,000, for the years ended December 31, 1995, 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>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
MAIL BOX......................................... $ 310 $ 875 $ 1,776
NCMC............................................. 169 210 124
BOMAR............................................ 658 986 822
MID-CONTINENT.................................... 1,057 1,161 1,313
IMPACT........................................... -- -- --
-------- -------- --------
Total........................................... $ 2,194 $ 3,232 $ 4,035
======== ======== ========
</TABLE>
(2) NCMC's operating data for the year ended December 31, 1997 include 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 year ended December 31, 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 $31.8 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.
POTENTIAL ADVERSE EFFECT IF COMPANY IS UNABLE TO MANAGE 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."
NO ASSURANCE OF SUSTAINED INTERNAL GROWTH; POTENTIAL ADVERSE EFFECT OF
DECENTRALIZED OPERATING STRATEGY
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
9
<PAGE>
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."
DEPENDENCE ON ACQUISITIONS; POTENTIAL INABILITY TO CONSUMMATE ACQUISITIONS AND
INTEGRATE ACQUIRED BUSINESSES
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. The Company has obtained a commitment from a bank for a $35.0
million three-year revolving credit facility which is expected to contain
provisions restricting the Company's ability to engage in certain
acquisitions. There can be no assurance that the credit facility will be
obtained. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Pro Forma Combined Liquidity and Capital Resources."
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.
POTENTIAL NEED FOR ADDITIONAL FINANCING TO FUND FUTURE ACQUISITIONS
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 $50.8 million, or 60.2%, of the Company's pro forma as
adjusted total assets as of December 31, 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
10
<PAGE>
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 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. In addition, the inventor
has recently alleged (although no claim has been filed) that NCMC has misused
the APS Patent, thereby rendering it unenforceable. While management believes
that these allegations are without merit, if such claims are litigated, a
decision adverse to NCMC could have a material adverse effect on the Company's
results of operations and financial condition. 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.
11
<PAGE>
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.
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. In 1997, the
Company's 10 largest clients accounted for approximately 45.5% of the Company's
revenues on a pro forma combined basis. VarTec Telecom, Inc. ("VarTec")
accounted for 17.9% of the Company's 1997 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."
12
<PAGE>
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 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.
DEPENDENCE ON ABILITY TO RESPOND TO 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
13
<PAGE>
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 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 $17.5 million, or 49.4%, 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 $5.3 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 December 31, 1997, $3.9 million of expenses in connection with the
Company's formation, the Offering and the Acquisitions. This amount and any
additional amounts incurred by BGL prior to the consummation of the Offering,
together with interest thereon at 8.0% per annum from the date of payment by
BGL, 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
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<PAGE>
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 LLC 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."
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 was 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 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 $8.94 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 the 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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<PAGE>
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 December 31, 1997, Mail Box processed approximately 830 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. Mail Box's clients 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 $32.6 million in 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.
NCMC's clients 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 $15.6 million in 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. Bomar's clients 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 $14.3 million in 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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<PAGE>
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 clients include Beverly Enterprises,
Inc., CNA Insurance, Reynolds and Reynolds, Sentry Insurance and eight state
workers' compensation funds. Mid-Continent's revenues were $9.0 million in
1996 and $9.5 million in 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 260 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 clients
include MemberWorks, Inc., Gerber Life Insurance Co. and MBNA America Bank,
N.A. Impact's revenues were $8.9 million in 1996 and $12.9 million in 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 $17.5 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."
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<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 $35.5 million
($41.5 million if the Underwriters' over-allotment option is exercised in
full). Of the net proceeds, approximately $17.5 million will be used to pay
the cash portion of the purchase price for the Founding Companies, of which
approximately $12.8 million will be paid to former stockholders of the
Founding Companies who will become officers or directors of the Company 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 $14.3 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
11.0%, 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
Company's acquisition of Bomar.
The remaining $3.3 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:
(i) the cash balances of the Founding Companies (which totaled approximately
$2.0 million as of December 31, 1997); (ii) net receivables of $697,000 from
Founding Company stockholders, which receivables will be collected by Compass
upon closing of the Offering; and (iii) capital contributions by BGL and
management totaling $150,000. In January 1998, the Company obtained a
commitment from a bank for a $35.0 million three-year revolving credit
facility (the "Credit Facility"), subject to consummation of the Offering and
to customary closing conditions. There can be no assurance that the Credit
Facility will be obtained. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Pro Forma Combined Liquidity
and Capital Resources."
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, the Credit
Facility is expected to include restrictions on the Company's ability to pay
dividends without the consent of the lender.
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CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company at December 31, 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>
DECEMBER 31, 1997
-----------------
PRO AS
FORMA(1) ADJUSTED
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt (2).......................................... $10,269 $ 1,021
======= =======
Long-term debt, net of current portion (2)................... $ 8,106 $ 2,010
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................................. 30,537 66,033
Retained earnings.......................................... 3,131 3,131
------- -------
Total stockholders' equity............................... 33,739 69,276
------- -------
Total capitalization................................... $41,845 $71,286
======= =======
</TABLE>
- --------
(1) Combines the respective accounts of Compass and the Founding Companies at
December 31, 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--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
December 31, 1997 was approximately $22.0 million or $3.09 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 the
initial public offering price of $10.50 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
December 31, 1997 would have been approximately $17.5 million, or $1.56 per
share. This represents an immediate increase in pro forma net tangible book
value of $4.65 per share to existing stockholders and an immediate dilution of
$8.94 per share to new investors purchasing the shares in the Offering. The
following table illustrates this pro forma dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share...................... $10.50
Pro forma deficit in net tangible book value per share
before the Offering....................................... $(3.09)
Increase in pro forma net tangible book value per share
attributable to new investors............................. 4.65
------
Pro forma net tangible book value per share after the
Offering.................................................... 1.56
------
Dilution per share to new investors.......................... $ 8.94
======
</TABLE>
The following table sets forth, on a pro forma basis to give effect to the
Acquisitions as of December 31, 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(1) PER SHARE
---------- ------- ---------------- ---------
<S> <C> <C> <C> <C>
Existing stockholders.......... 7,118,460 63.5% $(12,785,000) $ (1.80)
New investors.................. 4,100,000 36.5% 43,050,000 10.50
---------- ------ ------------
Total........................ 11,218,460 100.0% $ 30,265,000
========== ====== ============
</TABLE>
- --------
(1) Total consideration paid by existing stockholders represents the combined
stockholders' equity of Compass and 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, 1996 and 1997 and for the years ended December 31, 1995, 1996 and
1997 have been derived from the audited financial statements of Mail Box
included elsewhere in this Prospectus. The selected historical financial data
of Mail Box as of December 31, 1995 and for the year ended December 31, 1994
have been derived from the audited financial statements of Mail Box not
included in this Prospectus. The following selected historical financial data
for Mail Box as of December 31, 1993 and 1994 and for the year ended December
31, 1993 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 an acquisition completed by Bomar in September 1997; 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>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
MAIL BOX
Revenues......................... $14,314 $15,354 $17,370 $26,156 $32,566
Operating expenses............... 11,286 11,168 12,402 17,953 21,493
------- ------- ------- ------- -----------
Gross profit..................... 3,028 4,186 4,968 8,203 11,073
Selling, general and
administrative expenses......... 2,957 3,442 4,370 5,891 7,824
------- ------- ------- ------- -----------
Income from operations........... 71 744 598 2,312 3,249
Other expense.................... 128 212 302 337 382
------- ------- ------- ------- -----------
Income (loss) before income
taxes........................... (57) 532 296 1,975 2,867
Provision (benefit) for income
taxes........................... (13) 206 134 700 985
------- ------- ------- ------- -----------
Net (loss) income ............... $ (44) $ 326 $ 162 $ 1,275 $ 1,882
======= ======= ======= ======= ===========
PRO FORMA COMBINED (1):
Revenues.......................................................... $87,153
Operating expenses................................................ 53,353
-----------
Gross profit..................................................... 33,800
Selling, general and administrative expenses (2).................. 23,229
Goodwill and intangible amortization (3).......................... 1,531
-----------
Income from operations............................................ 9,040
Interest and other expense, net (4)............................... 625
-----------
Income before income taxes........................................ 8,415
Provision for income taxes (5).................................... 3,978
-----------
Net income........................................................ $ 4,437
===========
Net income per share.............................................. $ 0.43
===========
Shares used in computing net income per share (6)................. 10,426,150
</TABLE>
<TABLE>
<CAPTION>
MAIL BOX COMBINED COMPANIES
-------------------------------------- -------------------------
DECEMBER 31, DECEMBER 31, 1997
-------------------------------------- -------------------------
PRO FORMA AS
1993 1994 1995 1996 1997 COMBINED ADJUSTED (8)
------ ------ ------ ------- ------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficit)............. $ (597) $ (218) $ 36 $ 272 $ 294 $(19,783)(9) $ 9,658
Total assets........... 4,374 5,481 7,425 12,539 11,290 84,884 84,351
Long-term debt, net of
current portion....... 582 871 1,485 1,266 1,576 8,106 2,010
Stockholders' equity... 191 642 995 2,206 3,184 33,739 69,276
</TABLE>
- --------
(1) The pro forma combined statement of operations data assume that the
Acquisitions and the Offering were consummated on January 1, 1997, 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 $4.1 million for 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.
(3) Reflects: (i) the amortization of goodwill of $50.8 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 $547,000 for the year ended
December 31, 1997 and a reduction of interest income of $75,000 for the
year ended December 31, 1997 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) 3,307,690 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 December 31, 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 $17.5 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 the 1997 acquisition as if it had occurred on January 1, 1997.
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 $32.8 million, goodwill of $14.0 million attributable to the
1,682,769 shares of Common Stock issued to BGL and management, 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 $1.5 million per year. 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." In addition,
two non-management employees of one of the Founding Companies have agreed in
writing that their salaries will be reduced upon the closing of the
Acquisitions. The Compensation Differential was approximately $4.1 million in
1997. Additionally, the results for 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 $50.8 million, or 60.2%, of the Company's pro forma as
adjusted total assets as of December 31, 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 years ended December 31, 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>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1997
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues.......................................... $71,783 100.0% $87,153 100.0%
Operating expenses................................ 44,474 62.0 53,353 61.2
------- ----- ------- -----
Gross profit...................................... 27,309 38.0 33,800 38.8
Selling, general and administrative expenses...... 20,169 28.1 23,229 26.6
Goodwill and intangible amortization.............. 1,531 2.1 1,531 1.8
------- ----- ------- -----
Income from operations............................ $ 5,609 7.8% $ 9,040 10.4%
======= ===== ======= =====
</TABLE>
PRO FORMA COMBINED RESULTS FOR 1997 COMPARED TO 1996
Revenues. Revenues increased $15.4 million, or 21.4%, from $71.8 million in
1996 to $87.2 million in 1997. The increase was primarily attributable to
increased business from existing clients of Mail Box, Impact, NCMC and Bomar.
Operating expenses. Operating expenses increased $8.9 million, or 20.0%,
from $44.5 million in 1996 to $53.4 million in 1997. Operating expenses
decreased as a percentage of revenues from 62.0% in 1996 to 61.2% in 1997 as a
result of improved operating efficiency at Mail Box, Bomar and Impact.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $3.1 million, or 15.2%, from $20.2 million
in 1996 to $23.2 million in 1997. Selling, general and administrative expenses
decreased as a percentage of revenues from 28.1% in 1996 to 26.6% in 1997 as
the costs of management and administrative personnel were spread over a larger
revenue base.
Income from operations. Income from operations increased $3.4 million, or
61.2%, from $5.6 million in 1996 to $9.0 million in 1997 as a result of the
factors discussed above.
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. Based upon the cash balances
of the Founding Companies as of December 31, 1997, after the consummation of
the Acquisitions and the Offering and the application by the Company of the
net proceeds therefrom, the Company will have approximately $6.1 million of
cash.
In January 1998, the Company obtained from a bank a commitment for a $35.0
million three-year revolving credit facility (the "Credit Facility"). Amounts
outstanding under the Credit Facility will bear interest, at the Company's
option, at the bank's base rate plus an applicable margin of up to 0.50% or a
reserve adjusted offshore borrowing rate plus an applicable margin of 1.25% to
1.75%. The Company's obligations under the Credit Facility will be guaranteed
by the Company's subsidiaries, and will be secured by a pledge of the capital
stock of the Company's subsidiaries and all inter-company notes from any
subsidiary to the Company. In addition, if the Company fails to maintain
specified financial ratios, the bank will obtain a first priority security
interest in all assets of the Company and its subsidiaries. The Credit
Facility is expected to contain certain covenants, including (i) limitations
on asset sales; (ii) restrictions on other indebtedness; (iii) limitations on
liens, restricted payments, dividends and restricted investments; and (iv)
maintenance of certain financial ratios including a minimum net worth. In
addition, the Credit Facility will contain certain limitations on mergers and
acquisitions including without limitation: (i) limiting the maximum cash and
assumed debt portion of acquisition consideration to a multiple of 6.0 times
the acquiree's earnings before interest, taxes, depreciation and amortization
for the 12 months preceding the acquisition, (ii) requiring lender approval of
acquisitions with cash consideration in excess of $10.0 million; and (iii)
requiring that acquisitions be in the Company's general lines of business and
non-hostile. The Company will be obligated to pay an underwriting fee of 0.75%
of the total amount of the Credit Facility, an annual administration fee of
$15,000 and an annual commitment fee of 0.35% to 0.45% on the unutilized
portion of the Credit Facility. Execution of the Credit Facility is
conditioned on the consummation of the Offering and the satisfaction of
customary closing conditions, including completion of definitive
documentation. There can be no assurance that the Credit Facility will be
obtained.
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 $3.9 million in 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.
26
<PAGE>
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>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues.......................... $17,370 100.0% $26,156 100.0% $32,566 100.0%
Operating expenses................ 12,402 71.4 17,953 68.6 21,493 66.0
------- ----- ------- ----- ------- -----
Gross profit...................... 4,968 28.6 8,203 31.4 11,073 34.0
Selling, general and
administrative expenses.......... 4,370 25.2 5,891 22.6 7,824 24.0
------- ----- ------- ----- ------- -----
Income from operations............ $ 598 3.4% $ 2,312 8.8% $ 3,249 10.0%
======= ===== ======= ===== ======= =====
</TABLE>
RESULTS FOR 1997 COMPARED TO 1996--MAIL BOX
Revenues. Revenues increased $6.4 million, or 24.5%, from $26.2 million in
1996 to $32.6 million in 1997, primarily due to new mailing programs initiated
by existing customers. Mail volume increased in 1997 compared to 1996
primarily due to increased volume with existing clients.
Operating expenses. Operating expenses increased approximately $3.5 million,
or 19.7%, from $18.0 million in 1996 to $21.5 million in 1997, primarily as a
result of higher wage expenses associated with the mailing and freight
businesses and increased list rental costs. As a percentage of revenues,
operating expenses decreased from 68.6% in 1996 to 66.0% in 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 $1.9 million, or 32.8%, from $5.9 million in
1996 to $7.8 million in 1997. The increase was primarily attributable to
higher management salaries and increases in depreciation and rent expenses. As
a percentage of revenues, selling, general and administrative expenses
increased from 22.6% in 1996 to 24.0% in 1997. Excluding Compensation
Differential of $875,000 in 1996 and $1.8 million in 1997, selling, general
and administrative expenses decreased from 19.2% of revenues to 18.6% of
revenues.
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, primarily as a
result of higher wage expenses in the mailing business and increased list
rental costs. 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. The increase was primarily attributable to
higher sales and management salaries, as well as increased systems, rent and
depreciation expenses. As a percentage of revenues, selling, general and
administrative expenses decreased from 25.2% in 1995 to 22.6% 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.
LIQUIDITY AND CAPITAL RESOURCES--MAIL BOX
Mail Box provided $2.9 million and $246,000 of cash from operating
activities in 1996 and 1997, respectively. The decrease in 1997 was due to
timing differences in operating accounts, specifically postage on hand and
postage deposits and advances. 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 $1.5
27
<PAGE>
million in 1996 and 1997, respectively. Mail Box used cash of $473,000 and
$146,000 for financing activities during 1996 and 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 DECEMBER 31,
--------------------------------------------
1995 1996 1997
------------- ------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues........................ $12,287 100.0% $13,579 100.0% $15,620 100.0%
Operating expenses.............. 6,322 51.5 7,945 58.5 9,433 60.4
------- ----- ------- ----- ------- -----
Gross profit.................... 5,965 48.5 5,634 41.5 6,187 39.6
Selling, general and
administrative expenses........ 4,328 35.2 4,798 35.3 6,340 40.6
------- ----- ------- ----- ------- -----
Income (loss) from operations... $ 1,637 13.3% $ 836 6.2% $ (153) (1.0)%
======= ===== ======= ===== ======= =====
</TABLE>
RESULTS FOR 1997 COMPARED TO 1996--NCMC
Revenues. Revenues increased approximately $2.0 million, or 15.0%, from
$13.6 million in 1996 to $15.6 million in 1997, primarily due to increased
transaction volume with existing APS customers and increased collections
business from existing customers. APS check transaction volume increased from
5.5 million checks in 1996 to 9.4 million checks in 1997. While transaction
volume grew 70.9%, per check prices decreased 30.9% as a result of increased
competition.
Operating expenses. Operating expenses increased approximately $1.5 million,
or 18.7%, from $7.9 million in 1996 to $9.4 million in 1997. As a percentage
of revenues, operating expenses increased from 58.5% in 1996 to 60.4% in 1997,
primarily due to a $650,000 increase in mailing costs associated with APS
check confirmation letters without a commensurate increase in revenues. Costs
were also unfavorably impacted by certain special charges 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 $1.5 million, or 32.1%, from
$4.8 million in 1996 to $6.3 million in 1997. The increase was almost entirely
attributable to a one-time compensation expense recognized in the third
quarter of 1997 relating to shares issued to key employees. As a percentage of
revenues, selling, general and administrative expenses increased from 35.3% in
1996 to 40.6% in 1997. Excluding the $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 as a percentage of
revenues decreased from 35.3% in 1996 to 32.0% in 1997.
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 slightly 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.
28
<PAGE>
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. The increase was primarily attributable to
increased legal, rent, systems and insurance expenses. As a percentage of
revenues, selling, general and administrative expenses increased slightly from
35.2% in 1995 to 35.3% in 1996.
LIQUIDITY AND CAPITAL RESOURCES--NCMC
NCMC provided $566,000 and $1.2 million of cash from operating activities in
1996 and 1997, respectively. 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 1997, net cash provided by operations included a $256,000
increase in trade payables relating to the purchase of systems equipment. Net
cash used for purchases of property and equipment totaled $164,000 and $2.1
million for the years ended December 31, 1996 and 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 $956,000
from financing activities in 1997, primarily in connection with borrowings
under its term loan.
RESULTS OF OPERATIONS--BOMAR
Bomar provides accounts receivable management services primarily for clients
in the telecommunications, insurance, financial services and healthcare
industries.
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>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997
------------ ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues............................ $7,416 100.0% $9,597 100.0% $14,266 100.0%
Operating expenses.................. 4,229 57.0 5,814 60.6 8,208 57.5
------ ----- ------ ----- ------- -----
Gross profit........................ 3,187 43.0 3,783 39.4 6,058 42.5
Selling, general and administrative
expenses........................... 2,934 39.6 3,458 36.0 5,078 35.6
------ ----- ------ ----- ------- -----
Income from operations.............. $ 253 3.4% $ 325 3.4% $ 980 6.9%
====== ===== ====== ===== ======= =====
</TABLE>
RESULTS FOR 1997 COMPARED TO 1996--BOMAR
Revenues. Revenues increased $4.7 million, or 48.7%, from $9.6 million in
1996 to $14.3 million in 1997, primarily due to the acquisitions of ACS in
August 1996, CPA in November 1996 and FCCI in September 1997 which added
revenues of $1.4 million, $1.3 million and $1.2 million, respectively, in
1997. Additionally, revenues grew as a result of increased business from
existing clients.
Operating expenses. Operating expenses increased approximately $2.4 million,
or 41.2%, from $5.8 million in 1996 to $8.2 million in 1997. The increase was
primarily attributable to increased collector salaries and incentives as well
as operating expenses associated with FCCI and CPA which were acquired in
September 1997 and November 1996, respectively. As a percentage of revenues,
operating expenses decreased from 60.6% for 1996 to 57.5% for 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 $1.6 million, or 46.8%, from $3.5 million in
1996 to $5.1 million in 1997. The increase was primarily attributable to
increased depreciation, insurance and rent expenses as well as expenses
associated with FCCI and CPA which were acquired in September 1997 and
November 1996, respectively. As a percentage of revenues, selling, general and
administrative expenses decreased from 36.0% in 1996 to 35.6% in 1997. This
decrease as a percentage of revenues was primarily the result of selling,
general and administration expenses of FCCI that were lower as a percentage of
revenues than Bomar's operations.
29
<PAGE>
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. The increase was primarily attributable to
higher rent expenses as well as expenses associated with CPA and ACS which
were acquired in November 1996 and August 1996, respectively. As a percentage
of revenues, selling, general and administrative expenses decreased from 39.6%
in 1995 to 36.0% in 1996.
LIQUIDITY AND CAPITAL RESOURCES--BOMAR
Bomar provided $359,000 and $887,000 of cash from operating activities in
1996 and 1997, respectively. 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 and $3.8 million in
1996 and 1997, respectively (including $791,000 and $3.7 million for
acquisitions in 1996 and 1997, respectively). Bomar had cash inflows of
$920,000 and $3.3 million for financing activities during 1996 and 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>
YEARS ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues........................... $8,763 100.0% $9,038 100.0% $9,451 100.0%
Operating expenses................. 2,851 32.5 2,875 31.8 3,105 32.9
------ ----- ------ ----- ------ -----
Gross profit....................... 5,912 67.5 6,163 68.2 6,346 67.1
Selling, general and administrative
expenses.......................... 5,974 68.2 6,054 67.0 6,239 66.0
------ ----- ------ ----- ------ -----
Income (loss) from operations...... $ (62) (0.7)% $ 109 1.2% $ 107 1.1%
====== ===== ====== ===== ====== =====
</TABLE>
RESULTS FOR 1997 COMPARED TO 1996--MID-CONTINENT
Revenues. Revenues increased $413,000, or 4.6%, from $9.0 million in 1996 to
$9.5 million in 1997, primarily due to increased volume from new clients.
Operating expenses. Operating expenses increased $230,000, or 8.0%, from
$2.9 million in 1996 to $3.1 million in 1997, primarily due to increased
collector costs. As a percentage of revenues, operating expenses increased
from 31.8% in 1996 to 32.9% in 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $185,000, or 3.1%, from $6.1 million in 1996
to $6.2 million in 1997. The increase was primarily attributable to
30
<PAGE>
increased management compensation expenses. As a percentage of revenues,
selling, general and administrative expenses decreased from 67.0% in 1996 to
66.0% in 1997.
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 were $2.9 million in 1995 and 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 slightly by $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 1997, Mid-Continent used $36,000 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 $65,000 in 1996 and 1997,
respectively. Mid-Continent used cash of $131,000 and received cash of
$266,000 for financing activities during 1996 and 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>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1997
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues......................................... $8,869 100.0% $12,870 100.0%
Operating expenses............................... 6,961 78.5 9,725 75.6
------ ----- ------- -----
Gross profit..................................... 1,908 21.5 3,145 24.4
Selling, general and administrative expenses..... 2,108 23.8 2,823 21.9
------ ----- ------- -----
Income (loss) from operations.................... $ (200) (2.3)% $ 322 2.5
====== ===== ======= =====
</TABLE>
RESULTS FOR 1997 COMPARED TO 1996--IMPACT
Revenues. Revenues increased $4.0 million, or 45.1%, from $8.9 million in
1996 to $12.9 million in 1997, primarily due to increased business from
existing clients.
Operating expenses. Operating expenses increased approximately $2.8 million,
or 39.7%, from $7.0 million in 1996 to $9.7 million in 1997. As a percentage
of revenues, operating expenses decreased from 78.5% in 1996 to 75.6% in 1997,
primarily due to higher revenues per hour due to changes in customer mix.
31
<PAGE>
Selling, general, and administrative expenses. Selling, general and
administrative expenses increased $715,000, or 33.9%, from $2.1 million in
1996 to $2.8 million in 1997. The increase was primarily attributable to
increased rent, depreciation, and systems expenses associated with Impact's
call center expansion in 1997. As a percentage of revenues, selling, general
and administrative expenses decreased from 23.8% in 1996 to 21.9% in 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 1997,
Impact used $306,000 of cash from operating activities primarily as a result
of increased accounts receivable. 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 in 1997. Impact used
cash of $90,000 and received cash of $337,000 for financing activities during
1996 and 1997, respectively, primarily in connection with the net repayment of
various borrowings and distributions to stockholders.
32
<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 $34.2 million
in 1992 to $87.2 million in 1997, representing a compound annual growth rate of
20.6%.
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 900 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.
Graphic of Sales Cycle
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.
33
<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
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
34
<PAGE>
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.
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:
35
<PAGE>
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
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
36
<PAGE>
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.
37
<PAGE>
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
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 830 million pieces of mail during
the twelve months ended December 31, 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 260 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
38
<PAGE>
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.
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. In 1997, the Company's 10 largest clients
accounted for approximately 45.5% of the Company's revenues on a pro forma
combined basis. VarTec Telecom, Inc. ("VarTec") accounted for approximately
17.9% of the Company's 1997 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 1997.
39
<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
Fleet Bank EduCap, Inc. Medical Resource Systems, Inc.
Roosevelt College Medic Computer Systems, Inc.
General
Electric
Capital
Services,
Inc.
MBNA America
Bank, N.A.
<CAPTION>
GOVERNMENT
AND
UTILITIES TELECOMMUNICATIONS RETAIL AND COMMERCIAL
---------- ------------------ ---------------------
<S> <C> <C>
The Army and AT&T Wireless Services Advantis Business Services, Inc.
Air Force Bellsouth Telecommunications, Inc. Circuit City, Inc.
Exchange Southwestern Bell Mobile Systems, Inc.
Services
Baltimore VarTec Telecom, Inc. The FACS Group (Federated
Gas & Department Stores, Inc.)
Electric
Company
Georgia
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 December 31, 1997, the Company's sales force included 39 direct
sales employees and five independent contractors.
40
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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.
41
<PAGE>
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 December 31, 1997, the Founding Companies employed a total of 1,032
full-time and 438 part-time employees, of whom 626 were employed in connection
with accounts receivable management services, 473 were employed in connection
with teleservices and 371 were employed in connection with mailing
42
<PAGE>
services. In 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
New York, NY Compass--Corporate headquarters 4,500
Norcross, GA Bomar--Accounts receivable management and sales 22,700
Phoenix, AZ Bomar--Accounts receivable management 4,000
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>
LITIGATION
Disputes Relating to the APS Patent
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 (the "Western Union Lawsuit")
against Western Union Financial Services, Inc. in the United States District
Court for the Southern District of New York, and in January 1998, NCMC amended
its complaint to add Affiliated Computer Services, Inc., a software provider,
as a defendant. In December 1996, NCMC filed suit (the "Discover Lawsuit")
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 in the Patent Infringement
Lawsuits seek lost profits, damages, attorneys' fees and costs, treble damages
for willful infringement and punitive
43
<PAGE>
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.
The parties to the Western Union Lawsuit are currently engaged in discovery.
In the Discover Lawsuit, discovery has been concluded, and NCMC and the
defendant have each filed motions for summary judgment with respect to the
patent infringement claims. Such motions are currently pending. 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."
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; (iii) NCMC failed to properly prosecute the Patent Infringement
Lawsuits; and (iv) NCMC was required under the 1994 Agreement to pay royalties
at the rate of 7.25% for the period between March 1, 1995 and March 1, 1996,
rather than the 4.5% rate at which they were paid during such period. NCMC has
denied these allegations. The litigation is currently in the discovery phase.
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.
On February 18, 1998, the Inventor sent NCMC a notice of claim which alleges
that NCMC, by attempting to enforce the non-competition provisions of the 1996
Agreement, has misused the APS Patent thereby rendering the APS Patent
unenforceable. The notice states that ASC and the Inventor intend to hold NCMC
liable for any losses or damages arising from such alleged misuse. On February
24, 1998, NCMC sent the Inventor a notice of claim in which NCMC denied the
allegations of patent misuse, alleged breaches by the Inventor of certain
warranties and covenants set forth in the 1996 Agreement and stated that NCMC
intends to hold the Inventor and ASC liable for any damages caused by the
position taken by the Inventor in the February 18 notice. Should these recent
claims result in additional litigation, NCMC intends to vigorously pursue its
breach of contract claims and vigorously defend against the allegations of
patent misuse and unenforceability. While management believes that the
Inventor's allegations are without merit, if such claims are litigated, a
decision adverse to NCMC with respect to these claims could have a material
adverse effect on the Company's results of operations and financial condition.
Other Disputes
In October 1997, Mid-Continent and its New York subsidiary filed a lawsuit
in the State of New York, Supreme Court, County of Erie (the "New York Supreme
Court") against Vincent S. Burgio, Eric R. Main and Michael Luksch (all of
whom are former employees of Mid-Continent's subsidiary), as well as
Continental
44
<PAGE>
Commercial Group of New York, Inc. and L.A. Commercial Group, Inc. The
complaint alleges (i) breach of employment agreement; (ii) breach of the duty
of loyalty; (iii) interference with business relationships; (iv) conversion of
confidential information; and (v) misappropriation of trade secrets, and seeks
injunctive relief and unspecified damages. The litigation is currently in the
discovery stage.
In February 1998, the defendants in the above-described lawsuit filed two
lawsuits in the New York Supreme Court. The first lawsuit, filed by Mr.
Burgio, names as defendants Mid-Continent, its New York subsidiary and William
Vallecourse, an employee of the subsidiary, and alleges (i) breach of
contract; (ii) breach of contract and constructive discharge; (iii) fraud;
(iv) tortious interference with employment contract; and (v) unjust
enrichment. The complaint seeks aggregate damages in excess of $1.3 million.
The second lawsuit, filed by Messrs. Burgio, Main and Luksch, names as
defendants Mid-Continent, its New York subsidiary, Les J. Kirschbaum, Mr.
Vallecourse and Michelle Helmer (an employee of the New York subsidiary),
alleges defamation of Messrs. Burgio, Main and Luksch and seeks aggregate
compensatory damages of $1.5 million in addition to punitive damages. Mid-
Continent believes that the allegations against it and its co-defendants are
without merit; however, because this litigation is at an early stage, its
outcome cannot be predicted. Mid-Continent's stockholders have agreed to
indemnify the Company for losses and damages, if any, arising from these
lawsuits.
The Company is not involved in any other legal proceedings material to the
business, financial condition or results of operations of the Company.
45
<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..... 54 Director
Scott H. Lang........... 51 Director
Tomasso Zanzotto........ 56 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
46
<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. At each
annual meeting of stockholders commencing in 1999, directors will be elected
to three-year terms by the holders of the Common Stock to succeed those
directors whose terms are expiring. Directors whose terms will expire in 1999
are: Mahmud U. Haq, Les J. Kirschbaum, Edward A. DuCoin and Tomasso Zanzotto;
directors whose terms will expire in 2000 are: John Maloney, Scott H. Lang and
Howard L. Clark, Jr.; directors whose terms will expire in 2001 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 "--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.
Messrs. Cunningham, Haq and Alston have entered into three-year employment
agreements with the Company, effective upon the consummation of the Offering,
that provide 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 contains 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 provides 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 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.
The Company intends to enter into supplemental compensation agreements with
each of Messrs. Cunningham, Haq and Alston with respect to possible income tax
liabilities. See "Certain Transactions--Other Transactions."
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
49
<PAGE>
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 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 "--Employee Incentive
Compensation Plan."
EMPLOYEE INCENTIVE COMPENSATION PLAN
The Board of Directors and the Company's stockholders have approved the
Company's 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. Options granted to management of the Founding Companies will
vest in three equal annual installments commencing on the first anniversary of
the grant while options granted to non-management employees will vest entirely
on the first anniversary of the grant. These options 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
50
<PAGE>
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 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
The Company has adopted 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 112.1846-for-one stock split effected on
December 3, 1997, the 15,000 shares of Common Stock initially issued by the
Company to its founders 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 $17.5 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 STOCK ASSUMED(1)
---------------- ------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Mail Box..................................... $ 8,616 2,461,852 $ 3,967
NCMC......................................... 2,535 965,801 1,467
Bomar........................................ 4,031 1,151,787 5,340
Mid-Continent................................ 1,635 467,127 4,535
Impact....................................... 721 389,124 1,378
------- --------- -------
Total...................................... $17,538 5,435,691 $16,687
======= ========= =======
</TABLE>
- --------
(1) 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 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
52
<PAGE>
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)................................ $6,214,981 1,586,911
Leeds Hackett....................................... 728,816 393,329
Gene Collins........................................ 1,734,494 532,334
Mary Maloney........................................ 1,734,494 532,334
Les J. Kirschbaum................................... 1,634,945 467,127
Edward A. DuCoin.................................... 360,507 194,562
David T. DuCoin..................................... 360,507 194,562
</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 $5.3 million of
indebtedness that is personally guaranteed by certain stockholders of the
Founding Companies. As of December 31, 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--$928,000 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 Company's acquisition of Bomar.
OTHER TRANSACTIONS
As of December 31, 1997, BGL had incurred $3.9 million in expenses 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 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 from the date of
payment by BGL, will be repaid by Compass from the net proceeds of the
Offering.
In connection with the proposed Credit Facility, BGL and Compass have
agreed, jointly and severally, to indemnify the bank and its affiliates
against claims incurred by them in connection with the Credit Facility, and to
reimburse the bank and an affiliate for all costs and expenses incurred by
them in connection with the Credit Facility.
53
<PAGE>
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 an additional $165,000 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. In addition to its ownership
interest, Mail Box is entitled to receive 20% of gross monthly revenues of
MBS.
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 1995 and 1996 and
$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 $131,000, $139,000
and $110,000 for 1995, 1996 and 1997, respectively. Effective July 1, 1997,
the annual rent was reduced to $84,000.
At December 31, 1997, the outstanding balance of advances made by Impact to
Edward and David DuCoin and to Eastern Shore Travel, a partnership owned by
the DuCoins, was $105,000. These advances will be repaid in full
simultaneously with the closing of the Acquisitions.
At December 31, 1995, 1996 and 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.
The Company intends to enter into supplemental compensation agreements with
each of Messrs. Cunningham, Haq and Alston. Pursuant to such agreements,
should any of these executives become liable for income taxes with respect to
the shares of Common Stock purchased by the executive at the time of Compass'
initial capitalization, the Company would pay the executive a bonus in an
amount such that after paying taxes on the bonus, the net amount remaining
would be sufficient to compensate the executive for any income taxes
attributable to the stock purchase.
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.
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<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).................. 1,586,911 22.3% 14.1%
Leeds Hackett......................... 393,329 5.5% 3.5%
Gene Collins.......................... 532,334 7.5% 4.7%
Mary Maloney.......................... 532,334 7.5% 4.7%
John Maloney(3)....................... 532,334 7.5% 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)....... 5,613,928 78.5% 49.9%
</TABLE>
- --------
* Less than 1.0%.
(1) Unless otherwise indicated, the address of the beneficial owners is c/o
Compass, One Penn Plaza, Suite 4430, New York, New York 10119.
(2) Certain of these shares are owned by the Kenneth W. Murphy Childrens
Trust.
(3) Includes 532,334 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
57
<PAGE>
receive, in the aggregate, 5,435,691 shares in connection with the
Acquisitions and founders and executive 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, these stockholders 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. 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 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 LLC 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 LLC 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 LLC 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 LLC........................... 1,350,000
Lehman Brothers Inc............................................. 1,350,000
BancAmerica Robertson Stephens.................................. 140,000
Bear, Stearns & Co. Inc......................................... 140,000
BT Alex Brown Incorporated...................................... 140,000
A.G. Edwards & Sons, Inc........................................ 140,000
CIBC Oppenheimer Corp........................................... 140,000
Prudential Securities Incorporated.............................. 140,000
Smith Barney Inc................................................ 140,000
William Blair & Company, L.L.C.................................. 70,000
Cruttenden Roth Incorporated.................................... 70,000
Gerard Klauer Mattison & Co., LLC............................... 70,000
The Robinson-Humphrey Company, LLC.............................. 70,000
H.C. Wainwright & Co., Inc...................................... 70,000
Weatherly Securities Corporation................................ 70,000
---------
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 $0.42 per share; and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $0.10 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
59
<PAGE>
Securities LLC 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 LLC
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 LLC 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.
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 LLC 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. 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.
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<PAGE>
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 December 31, 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, 1996 and 1997 and for each of the three years in the period ended December
31, 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 audited consolidated financial statements of National Credit Management
Corporation and Subsidiary as of December 31, 1997 and 1996 and for each of
the years in the three-year period ended December 31, 1997, 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
December 31, 1997 and 1996 and for each of the three years in the period ended
December 31, 1997 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, 1996 and 1997 and for each of the three years in the period ended
December 31, 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
December 31, 1996 and 1997 and for the years then ended 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
61
<PAGE>
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.
62
<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 Statement of Operations................... F-4
Notes to Unaudited Pro Forma Combined Financial Statements............. F-5
COMPASS INTERNATIONAL SERVICES CORPORATION:
Report of Independent Accountants...................................... F-9
Balance Sheet.......................................................... F-10
Notes to Financial Statement........................................... F-11
THE MAIL BOX, INC.:
Report of Independent Accountants...................................... F-13
Consolidated Balance Sheet............................................. F-14
Consolidated Statement of Operations................................... F-15
Consolidated Statement of Stockholders' Equity......................... F-16
Consolidated Statement of Cash Flows................................... F-17
Notes to Consolidated Financial Statements............................. F-18
NATIONAL CREDIT MANAGEMENT CORPORATION AND SUBSIDIARY:
Report of Independent Public Accountants............................... F-25
Consolidated Balance Sheets............................................ F-26
Consolidated Statements of Operations.................................. F-27
Consolidated Statements of Stockholders' Equity........................ F-28
Consolidated Statements of Cash Flows.................................. F-29
Notes to Consolidated Financial Statements............................. F-30
B.R.M.C. OF DELAWARE, INC.:
Report of Independent Auditors......................................... F-37
Consolidated Balance Sheets............................................ F-38
Consolidated Statements of Income...................................... F-39
Consolidated Statements of Stockholders' Equity........................ F-40
Consolidated Statements of Cash Flows.................................. F-41
Notes to Consolidated Financial Statements............................. F-42
MID-CONTINENT AGENCIES, INC. AND SUBSIDIARIES:
Report of Independent Accountants...................................... F-47
Consolidated Balance Sheet............................................. F-48
Consolidated Statement of Operations................................... F-49
Consolidated Statement of Stockholders' Equity......................... F-50
Consolidated Statement of Cash Flows................................... F-51
Notes to Consolidated Financial Statements............................. F-52
IMPACT TELEMARKETING GROUP, INC.:
Report of Independent Accountants...................................... F-59
Combined Balance Sheet................................................. F-60
Combined Statement of Operations....................................... F-61
Combined Statement of Stockholders' Equity............................. F-62
Combined Statement of Cash Flows....................................... F-63
Notes to Combined Financial Statements................................. F-64
</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 December 31, 1997.
The unaudited pro forma combined statement of operations gives effect to the
Acquisitions as if they had occurred on January 1, 1997, 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 an
acquisition by Bomar as if it had occurred on January 1, 1997.
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
DECEMBER 31, 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............ $ -- $ 16 $1,214 $ 429 $ 165 $ 145 $ 697 $ 2,666 $ 3,409 $ 6,075
Cash held for clients... -- -- -- 727 -- -- -- 727 -- 727
Commissions/accounts
receivable, net........ -- 4,481 2,969 1,125 603 2,688 -- 11,866 -- 11,866
Due from related parties
and stockholders....... -- -- -- -- 1,517 105 (1,590) 32 -- 32
Inventories............. -- 733 -- -- -- -- -- 733 -- 733
Postage on hand......... -- 1,231 -- -- -- -- -- 1,231 -- 1,231
Prepaid expenses and
other.................. -- 198 730 85 350 22 -- 1,385 -- 1,385
Deferred offering costs. 3,942 -- -- -- -- -- -- 3,942 (3,942) --
------ ------- ------ ------ ------ ------ ------- ------- -------- -------
Total current assets. 3,942 6,659 4,913 2,366 2,635 2,960 (893) 22,582 (533) 22,049
Property and equipment,
net.................... -- 4,327 2,486 823 159 775 -- 8,570 -- 8,570
Goodwill, net........... -- -- -- 4,018 -- -- 46,800 50,818 -- 50,818
Other assets............ -- 304 420 960 208 22 1,000 2,914 -- 2,914
------ ------- ------ ------ ------ ------ ------- ------- -------- -------
Total assets......... $3,942 $11,290 $7,819 $8,167 $3,002 $3,757 $46,907 $84,884 $ (533) $84,351
====== ======= ====== ====== ====== ====== ======= ======= ======== =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Short-term debt......... $1,045 $ 2,391 $ 364 $4,587 $ 928 $ 954 $ -- $10,269 $ (9,248) $ 1,021
Accounts payable and
accrued expenses....... 2,747 2,608 1,781 959 659 2,177 440 11,371 (3,187) 8,184
Collections due to
clients................ -- -- 522 727 -- -- -- 1,249 -- 1,249
Checks issued in excess
of cash balance........ -- -- -- 260 -- -- -- 260 -- 260
Postage allowances and
deposits............... -- 950 -- -- -- -- -- 950 -- 950
Income taxes payable.... -- 416 -- 311 -- -- -- 727 -- 727
Payable to Founding
Company stockholders... -- -- -- -- 51 -- 17,488 17,539 (17,539) --
------ ------- ------ ------ ------ ------ ------- ------- -------- -------
Total current
liabilities......... 3,792 6,365 2,667 6,844 1,638 3,131 17,928 42,365 (29,974) 12,391
Long-term debt.......... -- 954 945 406 -- -- 4,250 6,555 (6,096) 459
Capital lease
obligations............ -- 622 158 347 -- 424 -- 1,551 -- 1,551
Deferred income taxes... -- 165 241 51 -- -- -- 457 -- 457
Other................... -- -- -- 40 177 -- -- 217 -- 217
------ ------- ------ ------ ------ ------ ------- ------- -------- -------
Total liabilities.... 3,792 8,106 4,011 7,688 1,815 3,555 22,178 51,145 (36,070) 15,075
Minority interest in
subsidiary............. -- -- -- 6 -- -- (6) -- -- --
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 -- 27,048 30,537 35,496 66,033
Retained earnings...... -- 3,131 1,709 412 1,114 111 (3,346) 3,131 -- 3,131
Unrealized loss on
securities............ -- -- -- -- (10) -- 10 -- -- --
Less: Treasury stock... -- (1,087) -- -- -- -- 1,087 -- -- --
------ ------- ------ ------ ------ ------ ------- ------- -------- -------
Total stockholders'
equity.............. 150 3,184 3,808 473 1,187 202 24,735 33,739 35,537 69,276
------ ------- ------ ------ ------ ------ ------- ------- -------- -------
Total liabilities and
stockholders'
equity.............. $3,942 $11,290 $7,819 $8,167 $3,002 $3,757 $46,907 $84,884 $ (533) $84,351
====== ======= ====== ====== ====== ====== ======= ======= ======== =======
</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, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
OTHER PRO FORMA
ACQUISITIONS ADJUSTMENTS
MID- (SEE (SEE NOTE PRO FORMA
MAIL BOX NCMC BOMAR CONTINENT IMPACT NOTE 4) 5) COMBINED
-------- ------- ------- --------- ------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $32,566 $15,620 $14,266 $9,451 $12,870 $2,380 -- $87,153
Operating expenses...... 21,493 9,433 8,208 3,105 9,725 1,389 -- 53,353
------- ------- ------- ------ ------- ------ ------- ----------
Gross profit........... 11,073 6,187 6,058 6,346 3,145 991 -- 33,800
Selling, general and
administrative
expenses............... 7,824 6,340 4,951 6,239 2,823 522 $(4,099)(A) 23,229
-- -- -- -- -- -- (1,345)(B) --
-- -- -- -- -- -- (26)(C) --
Goodwill and intangible
amortization........... -- -- 127 -- -- 10 1,394 (D) 1,531
------- ------- ------- ------ ------- ------ ------- ----------
Income (loss) from
operations............ 3,249 (153) 980 107 322 459 4,076 9,040
Other (income) expense:
Interest expense....... 382 77 310 81 163 1 (547)(E) 467
Interest income........ -- (46) -- (70) -- -- 75 (F) (41)
Other, net............. -- 199 -- -- -- -- -- 199
------- ------- ------- ------ ------- ------ ------- ----------
Income (loss) before
income taxes........... 2,867 (383) 670 96 159 458 4,548 8,415
Provision (benefit) for
income taxes.......... 985 (128) 302 14 -- 187 2,618 (G) 3,978
------- ------- ------- ------ ------- ------ ------- ----------
Net income (loss)....... $ 1,882 $ (255) $ 368 $ 82 $ 159 $ 271 $ 1,930 $ 4,437
======= ======= ======= ====== ======= ====== ======= ==========
Net income per share.... $ 0.43
==========
Shares used in computing
pro forma basic and
diluted net income per
share (See Note 6)..... 10,426,150
==========
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
F-4
<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 with and as a condition to 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, 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 with and as a condition to 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
initial public offering price of $10.50, less a 20% discount of the 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 COMMON STOCK OF SHARES WARRANTS FEE CONSIDERATION
------- ------------ --------- -------- ------ -------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Mail Box....... $ 8,616 2,461,852 $20,680 $29,296
NCMC........... 2,535 965,801 8,113 $50 10,698
Bomar.......... 4,031 1,151,787 9,675 $440 14,146
Mid-Continent.. 1,635 467,127 3,924 5,559
Impact......... 721 389,124 3,269 3,990
------- --------- ------- --- ---- -------
Total.......... $17,538 5,435,691 $45,661 $50 $440 $63,689
======= ========= ======= === ==== =======
</TABLE>
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.................. $10,698 $1,000 $ 3,808 $ 5,890
Bomar................. 14,146 473 13,673
Mid-Continent......... 5,559 (3,905) 9,464
Impact................ 3,990 202 3,788
------- ------ ------- -------
$34,393 $1,000 $ 578 $32,815
======= ====== ======= =======
</TABLE>
F-5
<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............ $ -- $ -- $ 697 $ 697 $35,687 $(32,278) $ 3,409
Due from stockholders... (842) -- (748) (1,590) -- -- --
Deferred offering costs. -- -- -- -- (3,942) -- (3,942)
----- ------- ----- ------- ------- -------- --------
Total current assets. (842) -- (51) (893) 31,745 (32,278) (533)
Goodwill, net........... -- 46,800 -- 46,800 -- -- --
Other assets............ -- 1,000 -- 1,000 -- -- --
----- ------- ----- ------- ------- -------- --------
Total assets......... $(842) $47,800 $ (51) $46,907 $31,745 $(32,278) $ (533)
===== ======= ===== ======= ======= ======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short term debt......... $ -- $ -- $ -- $ -- $(1,045) $ (8,203) $ (9,248)
Accounts payable and
accrued expenses....... -- 440 -- 440 (2,747) (440) (3,187)
Payable to Founding
Company stockholders... -- 17,539 (51) 17,488 -- (17,539) (17,539)
----- ------- ----- ------- ------- -------- --------
Total current
liabilities......... -- 17,979 (51) 17,928 (3,792) (26,182) (29,974)
Long-term debt.......... -- 4,250 -- 4,250 -- (6,096) (6,096)
----- ------- ----- ------- ------- -------- --------
Total liabilities.... -- 22,229 (51) 22,178 (3,792) (32,278) (36,070)
Minority interest in
subsidiary............. -- (6) -- (6) -- -- --
Stockholders' equity:
Common stock........... -- (64) (64) 41 -- 41
Additional paid-in
capital............... -- 27,048 -- 27,048 35,496 -- 35,496
Retained earnings...... (842) (2,504) -- (3,346) -- -- --
Unrealized loss on
securities............ -- 10 -- 10 -- -- --
Treasury stock......... -- 1,087 -- 1,087 -- -- --
----- ------- ----- ------- ------- -------- --------
Total stockholders'
equity.............. (842) 25,577 -- 24,735 35,537 -- 35,537
----- ------- ----- ------- ------- -------- --------
Total liabilities and
stockholders'
equity.............. $(842) $47,800 $ (51) $46,907 $31,745 $(32,278) $ (533)
===== ======= ===== ======= ======= ======== ========
</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 $17,539,000
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 $4,250,000 million of debt as part of the
consideration for Mid-Continent; (iv) the allocation of the purchase price
to the Company's historical assets
F-6
<PAGE>
and liabilities based on their respective carrying values and to an
identifiable intangible associated with a patent at NCMC of $1.0 million;
(v) the recognition of $32,815,000 of goodwill representing the excess of
the purchase price over the fair value of net assets acquired; and (vi)
goodwill of $13,985,000 recorded attributable to the 1,682,769 shares of
Common Stock issued to BGL and management. The Common Stock consideration
was valued at $8.40 per share, which represents a 20% discount from the
offering price of $10.50 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 $643,000
stockholder receivable at Mid-Continent, a stockholder receivable of
$105,000 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. 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 $4,250,000 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 $2,463,000 at
Mail Box, $1,103,000 at NCMC, $4,792,000 at Bomar, $928,000 at Mid-
Continent and $763,000 at Impact) and to pay certain Acquisition-related
liabilities.
NOTE 4--OTHER ACQUISITIONS
Gives effect to the acquisition by Bomar of Financial Claims Control, Inc.
("FCCI") consummated in September 1997, as if this acquisition was consummated
on January 1, 1997, 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 YEAR ENDED
DECEMBER 31, 1997
------------------
(IN THOUSANDS)
<S> <C>
Mail Box............................................... $1,776
NCMC................................................... 124
Bomar.................................................. 822
Mid-Continent.......................................... 1,313
Impact................................................. --
Other Acquisitions..................................... 64
------
$4,099
======
</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.
F-7
<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 $46.8 million of goodwill to be recorded
as a result of these Acquisitions and the 1,121,844 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 YEAR ENDED
DECEMBER 31, 1997
------------------
(IN THOUSANDS)
<S> <C>
Mail Box............................................... $157
NCMC................................................... 22
Bomar.................................................. 228
Mid-Continent.......................................... 81
Impact................................................. 59
----
$547
====
</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) 3,307,690 shares representing the
number of shares sold in the Offering necessary to pay the $17.5 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-8
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Compass International Services Corporation
In our opinion, the accompanying balance sheet presents fairly, in all
material respects, the financial position of Compass International Services
Corporation at December 31, 1997, in conformity with generally accepted
accounting principles. This financial statement is the responsibility of the
Company's management; our responsibility is to express an opinion on this
financial statement based on our audit. We conducted our audit of this
statement in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statement is 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
January 28, 1998
F-9
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
ASSETS 1997
------ ------------
<S> <C>
Deferred offering costs........................................... $3,942
------
Total assets.................................................. $3,942
======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C>
Accrued expenses.................................................. $2,747
Notes payable..................................................... 1,045
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...................................... 133
------
Total stockholders' equity.................................... 150
------
Total liabilities and stockholders' equity.................... $3,942
======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-10
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENT
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.
On October 1, 1997, the Board of Directors approved several actions in
connection with the Offering. These actions included the approval of a
112.1846-for-1 stock split which was effected on December 3, 1997. All common
stock related information included in the financial statement has been
adjusted to reflect this split.
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 $17.5
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................................................ $ 8,616 2,461,852
NCMC.................................................... 2,535 965,801
Bomar................................................... 4,031 1,151,787
Mid-Continent........................................... 1,635 467,127
Impact.................................................. 721 389,124
------- ---------
Total............................................... $17,538 5,435,691
======= =========
</TABLE>
Compass has not conducted any operations, and all activities to date have
related to the Offering and the Acquisitions. Accordingly, the statements of
operations and of cash flows for this period would not provide meaningful
information and have been omitted. Expenditures have been funded by advances
from BGL Capital Partners, which are payable upon consummation of the
Offering, with interest at 8%. As of December 31, 1997, costs of approximately
$3,942,000 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.
On October 6, 1997, Compass filed a registration statement on Form S-1 for
the Offering.
F-11
<PAGE>
COMPASS INTERNATIONAL SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENT--(CONTINUED)
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 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.
F-12
<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, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 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
January 17, 1998
F-13
<PAGE>
THE MAIL BOX, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- -------
ASSETS
------
<S> <C> <C>
Current assets:
Cash....................................................... $ 1,419 $ 16
Accounts receivable, net of allowance for doubtful accounts
of
$81 and $125, respectively................................ 3,419 4,481
Inventories................................................ 708 733
Postage on hand............................................ 3,593 1,231
Prepaid expenses and other current assets.................. 69 154
Deferred income taxes...................................... 26 44
------- -------
Total current assets..................................... 9,234 6,659
Property and equipment, net.................................. 3,205 4,327
Other assets................................................. 100 304
------- -------
Total assets............................................. $12,539 $11,290
======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Line of credit............................................. $ 569 $ 1,168
Note payable, current portion.............................. -- 471
Secured equipment financing facilities, current portion.... 327 329
Capitalized lease obligations, current portion............. 450 423
Accounts payable........................................... 1,450 1,373
Accrued expenses and other liabilities..................... 824 1,235
Income taxes payable....................................... 524 416
Postage advances and deposits.............................. 4,818 950
------- -------
Total current liabilities................................ 8,962 6,365
Long-term liabilities:
Note payable, net of current portion....................... -- 570
Secured equipment financing facilities, net of current
portion................................................... 616 384
Capitalized lease obligations, net of current portion...... 650 622
Deferred income taxes...................................... 105 165
------- -------
Total liabilities........................................ 10,333 8,106
Commitments and contingencies
Stockholders' equity:
Common stock, $.10 par value, 500,000 shares authorized,
132,900 and 138,900 shares issued, and 129,300 and 102,900
shares outstanding at December 31, 1996 and 1997,
respectively.............................................. 13 14
Additional paid-in-capital................................. 947 1,126
Treasury stock, at cost, 3,600 and 36,000 shares at
December 31, 1996 and 1997, respectively.................. (100) (1,087)
Retained earnings.......................................... 1,346 3,131
------- -------
Total stockholders' equity............................... 2,206 3,184
------- -------
Total liabilities and stockholders' equity............... $12,539 $11,290
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE>
THE MAIL BOX, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Revenues............................................... $17,370 $26,156 $32,566
Operating expenses..................................... 12,402 17,953 21,493
------- ------- -------
Gross profit......................................... 4,968 8,203 11,073
Selling, general and administrative expenses........... 4,370 5,891 7,824
------- ------- -------
Income from operations............................... 598 2,312 3,249
Other expense:
Interest expense..................................... 302 337 382
------- ------- -------
Income before income taxes............................. 296 1,975 2,867
Provision for income taxes............................. 134 700 985
------- ------- -------
Net income............................................. $ 162 $ 1,275 $ 1,882
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15
<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,
1995................... 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............. 1,882 1,882
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, December 31,
1997................... 138,900 $14 $1,126 $(1,087) $-- $3,131 $3,184
======= === ====== ======= ==== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE>
THE MAIL BOX, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------
1995 1996 1997
----- ------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 162 $1,275 $1,882
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization....................... 616 768 980
ESOP compensation................................... 77 -- --
Employee stock compensation......................... 86 -- --
Provision for doubtful accounts..................... 60 82 70
Change in deferred taxes............................ (48) 114 42
Changes in operating assets and liabilities:
Accounts receivable................................. (862) (104) (1,131)
Inventories......................................... (322) (218) (25)
Postage on hand..................................... (65) (2,706) 2,362
Prepaid expenses and other assets................... 47 18 (290)
Accounts payable and accrued expenses............... 340 566 332
Postage advances and deposits....................... 1,328 2,778 (3,868)
Federal income taxes payable........................ 107 310 (108)
----- ------ ------
Net cash provided by operating activities......... 1,526 2,883 246
Cash flows from investing activities:
Purchases of property and equipment................... (810) (1,007) (1,541)
Proceeds from disposal of property and equipment...... -- -- 38
----- ------ ------
Net cash used in investing activities............. (810) (1,007) (1,503)
Cash flows from financing activities:
Net borrowings (payments) on line of credit........... (725) 130 600
Repayments of capital lease obligations............... (321) (439) (654)
Proceeds from long-term debt.......................... 692 161 1,517
Repayment of long-term debt........................... (360) (261) (705)
Proceeds from issuance of common stock................ 140 -- 180
Repurchases of treasury stock......................... (51) -- (987)
Cash dividends paid................................... (85) (64) (97)
----- ------ ------
Net cash provided by (used in) financing
activities....................................... (710) (473) (146)
Net increase (decrease) in cash......................... 6 1,403 (1,403)
Cash at beginning of period............................. 10 16 1,419
----- ------ ------
Cash at end of period................................... $ 16 $1,419 $ 16
===== ====== ======
Supplemental disclosure of cash flow information:
Cash paid for interest................................ $ 302 $ 338 $ 382
Cash paid for taxes................................... 74 276 1,051
Noncash investing and financing activities:
Equipment acquired under capital leases............... 551 592 600
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<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.
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.
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.
F-18
<PAGE>
THE MAIL BOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Accounting for Stock Based Compensation
The Company accounts for its employee stock options under Accounting
Principles Board Opinion No. 25 (APB 25).
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.
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,
-----------
1996 1997
----- -----
(IN
THOUSANDS)
<S> <C> <C>
Work in progress............................................. $ 466 $ 390
Spare parts.................................................. 130 253
Paper and envelope stock..................................... 112 90
----- -----
$ 708 $ 733
===== =====
</TABLE>
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Furniture and fixtures.................................. $ 552 $ 665
Plant equipment......................................... 3,996 5,495
Computer equipment and software......................... 3,654 3,745
Leasehold improvements.................................. 70 470
------- -------
8,272 10,375
Accumulated depreciation and amortization............... (5,067) (6,048)
------- -------
$ 3,205 $ 4,327
======= =======
</TABLE>
Depreciation and amortization expense was $616,000, $768,000 and $980,000
for the years ended December 31, 1995, 1996 and 1997.
F-19
<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,
-----------
1996 1997
---- ------
(IN
THOUSANDS)
<S> <C> <C>
Accrued compensation......................................... $314 $ 357
Accrued vacation............................................. 214 278
Other liabilities............................................ 296 600
---- ------
Total accrued expenses and other liabilities................. $824 $1,235
==== ======
</TABLE>
NOTE 6--NOTE PAYABLE AND CREDIT FACILITIES
Obligations under long term note payable and credit facilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
----- ------
(IN
THOUSANDS)
<S> <C> <C>
Note payable to financial institution, interest at 30
day commercial rate plus 2.8% (8.4% at December 31,
1997), principal payment of $27,000 due monthly,
balance due on January 1, 2000......................... $ -- $1,041
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................................................... 943 713
Less: Current portion................................... (327) (800)
----- ------
$ 616 $ 954
===== ======
</TABLE>
The Company's note payable to a financial institution is secured by the
personal guarantee of its principal stockholder.
As of December 31, 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,
1997 and for the next four years:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
(IN THOUSANDS)
<S> <C>
1998.................................................... $ 800
1999.................................................... 648
2000.................................................... 275
2001.................................................... 31
------
$1,754
======
</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 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 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 8.4% at December 31,
1995, 1996 and 1997, respectively.)
F-20
<PAGE>
THE MAIL BOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 December 31, 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,
--------------
1996 1997
------ ------
(IN
THOUSANDS)
<S> <C> <C>
Furniture and fixtures.................................... $ 71 $ 155
Plant equipment........................................... 799 1,119
Computer equipment and software........................... 959 530
------ ------
1,829 1,804
Accumulated amortization.................................. (669) (565)
------ ------
Total................................................... $1,160 $1,239
====== ======
</TABLE>
The following is a schedule of future annual minimum lease payments due
under capital lease obligations at December 31, 1997, together with the
present value of the future minimum lease payments for the years ended:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
(IN THOUSANDS)
<S> <C> <C>
1998................................................... $ 499
1999................................................... 415
2000................................................... 172
2001................................................... 85
2002................................................... 7
------
Total future minimum lease payments.................. 1,178
Less: Amount representing interest..................... (133)
------
Present value of future minimum lease payments....... $1,045
======
</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,
1997
------------
(IN THOUSANDS)
<S> <C> <C>
1998.................................................... $2,082
1999.................................................... 1,662
2000.................................................... 1,264
2001.................................................... 903
2002.................................................... 396
Thereafter.............................................. 85
------
$6,392
======
</TABLE>
F-21
<PAGE>
THE MAIL BOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Rent expense was $1,390,000, $1,534,000 and $1,695,000 for the years ended
December 31, 1995, 1996 and 1997, respectively.
NOTE 7--INCOME TAXES
The Company's provision for income taxes is comprised of the following for
the years ended December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current tax expense...................................... $182 $586 $943
Deferred tax expense (benefit)........................... (48) 114 42
---- ---- ----
Total provision for income taxes......................... $134 $700 $985
==== ==== ====
</TABLE>
The effective income tax rate for the years ended December 31, 1995, 1996
and 1997 varied from the federal statutory rate as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Tax provision computed at statutory rate of 35%.......... $104 $694 $970
Nondeductible expenses and other......................... (1) 6 15
Employee stock compensation expense...................... 31 -- --
---- ---- ----
$134 $700 $985
==== ==== ====
</TABLE>
The components of the net deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
DECEMBER
31,
------------
1996 1997
----- -----
(IN
THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Deferred compensation.................................... $ -- $ --
Allowance for doubtful accounts.......................... 26 44
Other.................................................... 4 4
----- -----
30 48
Deferred tax liabilities:
Depreciation and amortization............................ (109) (169)
----- -----
Net deferred tax asset (liability)..................... $ (79) $(121)
===== =====
</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
$64,000 for the years ended December 31, 1996 and 1997, respectively.
F-22
<PAGE>
THE MAIL BOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 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
$215,000 and $108,000 for 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, 1995,
1996 and 1997, is $290,000, $290,000 and $321,000, respectively, for payments
under this lease. Future annual minimum lease payments under this agreement
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
(IN THOUSANDS)
<S> <C> <C>
1998.......................................................... $ 343
1999.......................................................... 343
2000.......................................................... 343
2001.......................................................... 343
2002.......................................................... 143
Thereafter.................................................... --
------
$1,515
======
</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 1995, certain employees were awarded an aggregate of 2,500 shares of
common stock, with an aggregate value of $86,000. 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 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 47.9% of revenues for 1997.
F-23
<PAGE>
THE MAIL BOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1996 and 1997, approximately 11.5% and 39.4%, 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.
F-24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
National Credit Management Corporation
We have audited the accompanying consolidated balance sheets of National
Credit Management Corporation and Subsidiary (a Maryland corporation), as of
December 31, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years ended December
31, 1995, 1996 and 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, 1996 and 1997,
and the results of its operations and its cash flows for the years ended
December 31, 1995, 1996 and 1997, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Baltimore, Maryland,
January 16, 1998
F-25
<PAGE>
NATIONAL CREDIT MANAGEMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
ASSETS 1996 1997
------ ------ ------
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................... $1,149 $1,214
Accounts receivable, net of allowance for doubtful accounts of
$88 and $102, respectively.................................... 2,141 2,969
Prepaid expenses and other..................................... 361 667
Deferred tax asset............................................. 73 63
------ ------
Total current assets......................................... 3,724 4,913
Property and equipment, net...................................... 1,053 2,486
Other assets, net of accumulated amortization of $272 and $284,
respectively.................................................... 73 420
------ ------
Total assets................................................. $4,850 $7,819
====== ======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Current portion of term loan................................... $ $ 105
Note payable................................................... -- 53
Trade accounts payable......................................... 356 702
Client payables................................................ 484 522
Accrued compensation and related benefits...................... 500 676
Current portion of capital lease obligations................... 327 206
Other accrued expenses......................................... 185 403
------ ------
Total current liabilities.................................... 1,852 2,667
Deferred tax liability........................................... 96 241
Long-term portion of term loan................................... -- 945
Long-term capital lease obligations.............................. 184 158
------ ------
Total liabilities............................................ 2,132 4,011
------ ------
Commitments and contingencies
Stockholders' equity:
Common stock--Class A, $.01 par value, 5,000,000 shares
authorized, 210,000 and 231,500 shares issued and outstanding,
respectively.................................................. 2 2
Common stock--Class B, $.01 par value, 250 shares authorized,
no shares issued and outstanding.............................. -- --
Additional paid-in-capital..................................... 752 2,097
Retained earnings.............................................. 1,964 1,709
------ ------
Total stockholders' equity................................... 2,718 3,808
------ ------
Total liabilities and stockholders' equity................... $4,850 $7,819
====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-26
<PAGE>
NATIONAL CREDIT MANAGEMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Revenues............................................ $12,287 $13,579 $15,620
Operating expenses.................................. 6,322 7,945 9,433
------- ------- -------
Gross profit...................................... 5,965 5,634 6,187
Selling, general and administrative expenses........ 4,328 4,798 6,340
------- ------- -------
Income (loss) from operations..................... 1,637 836 (153)
------- ------- -------
Other (income) expense:
Interest income................................... (62) (46) (46)
Interest expense.................................. 90 79 77
Other............................................. 5 15 199
------- ------- -------
Total other expense, net........................ 33 48 230
------- ------- -------
Income (loss) before income taxes................... 1,604 788 (383)
Provision (benefit) for income taxes................ 648 335 (128)
------- ------- -------
Net income (loss)................................... $ 956 $ 453 $ (255)
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-27
<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,
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 issued pursuant to
termination of stock
option plan............ 21,500 -- -- -- 1,345 -- 1,345
Net loss.............. -- -- -- -- -- (255) (255)
------- --- --- ---- ------ ------ ------
Balance, December 31,
1997................... 231,500 $ 2 -- $-- $2,097 $1,709 $3,808
======= === === ==== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-28
<PAGE>
NATIONAL CREDIT MANAGEMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
------------------------
1995 1996 1997
------ ------ --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $ 956 $ 453 $ (255)
Adjustments to reconcile net income (loss) to net
cash flows provided by operating activities--
Compensation expense charge related to stock
issued pursuant to termination of stock option
plan............................................ -- -- 1,345
Loss from disposal of property and equipment..... 20 15 199
Deferred tax provision........................... 59 48 155
Depreciation and amortization.................... 322 337 483
Increase in accounts receivable.................. (653) (147) (828)
Increase in prepaid expenses and other........... (39) (232) (306)
Increase in other assets......................... (11) (5) (359)
Increase (decrease) in trade accounts payable and
other accrued expenses.......................... 204 (39) 564
Increase (decrease) in client payables........... 56 (116) 38
(Decrease) increase in accrued compensation and
related benefits................................ (192) 252 176
------ ------ --------
Net cash flows provided by operating
activities.................................... 722 566 1,212
------ ------ --------
Cash flows from investing activities:
Additions to property and equipment................ (194) (164) (2,103)
------ ------ --------
Net cash flows used in investing activities.... (194) (164) (2,103)
------ ------ --------
Cash flows from financing activities:
Net (payments) borrowings from term loan........... (200) (100) 1,050
Increase in notes payable.......................... -- -- 53
Principal payments under capital lease obligations. (223) (320) (147)
------ ------ --------
Net cash flows (used in) provided by financing
activities.................................... (423) (420) 956
------ ------ --------
Net increase (decrease) in cash and cash
equivalents................................... 105 (18) 65
Cash and cash equivalents, beginning of period....... 1,062 1,167 1,149
------ ------ --------
Cash and cash equivalents, end of period............. $1,167 $1,149 $ 1,214
====== ====== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-29
<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 (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.
All significant intercompany transactions have been eliminated in
consolidation.
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 term loan and capital lease
obligations, all of which approximate fair value. In addition, the Company has
entered into an interest rate cap agreement, which is described in Note 3.
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>
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.
F-30
<PAGE>
NATIONAL CREDIT MANAGEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 assets and 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 16%, 16% and 19% of the Company's total revenues for the years
ended December 31, 1995, 1996 and 1997, respectively.
New Accounting Standards
In July 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" (SFAS No. 131), which is effective for
fiscal years beginning after December 15, 1997. The statement establishes
revised standards under which an entity must report business segment
information in its financial statements. The Company is currently evaluating
whether SFAS No. 131 is applicable to it.
2. PROPERTY AND EQUIPMENT, NET:
Property and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
------ ------
(IN
THOUSANDS)
<S> <C> <C>
Computer hardware and software............................. $1,754 $2,488
Office furniture and equipment............................. 892 1,189
Leasehold improvements..................................... 81 101
------ ------
2,727 3,778
Less--accumulated depreciation............................. 1,674 1,292
------ ------
Property and equipment, net................................ $1,053 $2,486
====== ======
</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. There were no balances outstanding
under this agreement as of December 31, 1996 and 1997. 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 $1,250,000 as of
December 31, 1997.
F-31
<PAGE>
NATIONAL CREDIT MANAGEMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under the line of credit agreement, substantially all of the Company's
assets are pledged as collateral.
On August 14, 1997, the Company entered into an interest rate cap agreement.
Under the cap agreement, the Company has a cap rate of 7.0% on borrowings up
to $1,250,000. The Company receives a cash return if the LIBOR rate exceeds
the cap rate. 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 Loan
On September 17, 1997, the Company entered into a term loan with a bank
which expires on October 15, 2003. The Company may borrow up to $1,500,000
under the loan. The loan bears interest at LIBOR plus 2.0%. Principal
repayments begin June 15, 1998 and continue monthly. As of December 31, 1997,
the Company has outstanding borrowings under the loan of $1,050,000.
Future payments under the term loan as of December 31, 1997 are as follows
(in thousands):
<TABLE>
<S> <C>
1998............................................................... $ 105
1999............................................................... 207
2000............................................................... 238
2001............................................................... 295
2002............................................................... 205
-----
1,050
Less-current portion of term loan.................................. 105
-----
Long-term portion of term loan................................... $ 945
=====
</TABLE>
Under the term loan 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, 1997, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
(IN THOUSANDS)
<S> <C>
1998.................................................... $231
1999.................................................... 130
2000.................................................... 40
----
Total payments.......................................... 401
Less--amount representing interest...................... 37
----
364
Less--current portion of capital lease obligation....... 206
----
Long-term capital lease obligations................... $158
====
</TABLE>
F-32
<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 $195,000, $325,000 and
$410,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
Future minimum payments on operating leases and service contract commitments
as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
--------------
(IN THOUSANDS)
<S> <C>
1998....................................................... $ 383
1999....................................................... 380
2000....................................................... 335
2001....................................................... 275
------
Total.................................................... $1,373
======
</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 or
results of operations. 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,
---------------
1995 1996 1997
---- ---- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Current income tax provision (benefit):
Federal.............................................. $487 $235 $(285)
State................................................ 102 52 2
---- ---- -----
589 287 (283)
---- ---- -----
Deferred income tax provision (benefit):
Federal.............................................. 51 41 154
State................................................ 8 7 1
---- ---- -----
59 48 155
---- ---- -----
Total income tax provision (benefit)............... $648 $335 $(128)
==== ==== =====
</TABLE>
F-33
<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,
----------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Property and equipment................................. $ (144) $ (304)
Net operating loss carryforwards....................... 35 43
Nondeductible reserves................................. 66 63
Other.................................................. 20 20
------- -------
Deferred tax liability, net.......................... $ (23) $ (178)
======= =======
</TABLE>
The net deferred tax (liability) asset consists of the following items
included on the accompanying balance sheets as of December 31, 1996 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax asset....................................... $ 73 $ 63
Deferred tax liability................................... (96) (241)
------ -------
$ (23) $ (178)
====== =======
</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, 1996 and 1997, the Company had $0 and $603,000 of income
taxes receivable, included in prepaid expenses and other in the accompanying
consolidated balance sheets. This income tax receivable resulted from the
compensation expense recorded in the third quarter (see Note 9), which was not
previously considered in the Company's estimated tax payments.
As of December 31, 1996 and 1997, the Company has net operating loss (NOL)
carryforwards of approximately $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 $251,000, $228,000 and
$64,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
7. STATEMENTS OF CASH FLOWS--SUPPLEMENTAL DISCLOSURE:
During 1995, 1996 and 1997, the Company paid interest of approximately
$90,000, $79,000 and $73,000, respectively. In addition, the Company paid
income taxes of approximately $595,000, $498,000 and $210,000 during 1995,
1996 and 1997, respectively.
Noncash transactions during 1995, 1996 and 1997 were as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------
1995 1996 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Property acquired under capital lease obligations......... $673 $157 $207
</TABLE>
F-34
<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 $41,000 for the years ended December 31, 1995, 1996,
and 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-35
<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 three years ended December 31, 1995, 1996 and 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 December 31, 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 which has been reflected in selling,
general and administrative expenses in the accompanying consolidated
statements of operations. On October 2, 1997, the Company issued the shares of
common stock based upon this decision.
F-36
<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 1997 and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 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 1997, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
January 27, 1998
Atlanta, Georgia
F-37
<PAGE>
B.R.M.C. OF DELAWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
ASSETS 1996 1997
------ ------ ------
<S> <C> <C>
Current assets:
Cash........................................................... $ 6 $ 429
Cash held for clients.......................................... 743 727
Commissions receivable, net.................................... 1,021 1,125
Receivable from related parties................................ 53 --
Other assets................................................... 39 85
------ ------
Total current assets......................................... 1,862 2,366
Furniture and equipment, net..................................... 866 823
Goodwill, net.................................................... 873 4,018
Non-compete agreement, net....................................... -- 444
Other assets..................................................... 141 516
------ ------
Total assets................................................. $3,742 $8,167
====== ======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Collections due to clients..................................... $ 743 $ 727
Checks issued in excess of cash balance........................ 90 260
Accounts payable and accrued liabilities....................... 672 959
Income taxes................................................... 64 311
Current portion of long-term debt and capital lease
obligations................................................... 517 3,087
Borrowings under line of credit................................ 450 1,500
------ ------
Total current liabilities.................................... 2,536 6,844
Long-term debt, less current portion............................. 525 406
Capital lease obligations, less current portion.................. 502 347
Deferred income taxes............................................ 14 51
Other liabilities................................................ 56 40
Minority interest in subsidiary.................................. 4 6
Stockholders' equity:
Common stock, $1 par value, 1,000 shares authorized, issued and
outstanding................................................... 1 1
Additional paid-in capital..................................... 60 60
Retained earnings.............................................. 44 412
------ ------
Total stockholders' equity................................... 105 473
------ ------
Total liabilities and stockholders' equity................... $3,742 $8,167
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
B.R.M.C. OF DELAWARE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------
1995 1996 1997
------ ------ -------
<S> <C> <C> <C>
Revenues................................................. $7,416 $9,597 $14,266
Operating expenses....................................... 4,229 5,814 8,208
------ ------ -------
Gross profit........................................... 3,187 3,783 6,058
Selling, general and administrative expenses............. 2,934 3,458 5,078
------ ------ -------
Income from operations................................. 253 325 980
Other expense:
Interest expense....................................... 103 122 310
------ ------ -------
Income before income taxes............................... 150 203 670
Provision for income taxes............................... -- 73 302
------ ------ -------
Net income............................................... $ 150 $ 130 $ 368
====== ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
B.R.M.C. OF DELAWARE, INC.
CONSOLIDATED STATEMENTS 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, 1995..... 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 1997................ -- -- -- 368 368
----- --- --- ----- -----
Balance at December 31, 1997... 1,000 $ 1 $60 $ 412 $ 473
===== === === ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
B.R.M.C. OF DELAWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------
1995 1996 1997
----- ------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 150 $ 130 $ 368
Adjustments to reconcile net income to net cash (used
in) provided by operating activities:
Depreciation and amortization........................ 177 228 560
Minority interest.................................... -- 4 2
Change in operating assets and liabilities:
Commissions receivable............................. 101 (6) (104)
Cash held for clients.............................. -- (53) 16
Other current assets............................... -- (39) (46)
Receivable from related parties.................... -- (53) 53
Other assets....................................... 4 (107) (375)
Accounts payable and accrued liabilities........... (36) 34 (25)
Current income taxes payable....................... -- 64 247
Due to clients..................................... -- 53 (16)
Deferred revenue................................... (65) -- --
Deferred income taxes.............................. -- 14 37
Checks issued in excess of cash.................... (506) 90 170
----- ------ ------
Net cash (used in) provided by operating
activities..................................... (175) 359 887
Cash flows from investing activities:
Purchases of furniture and equipment................... (60) (589) (102)
Collections of purchased receivables................... 718 -- --
Business combinations net of cash acquired............. -- (791) (3,684)
----- ------ ------
Net cash provided by (used in) investing
activities..................................... 658 (1,380) (3,786)
Cash flows from financing activities:
Borrowings under line of credit........................ -- 450 1,050
Additions under capital lease obligations.............. -- 346 --
Repayment of line of credit............................ (777) -- --
Principal payments of capital lease obligations........ (78) (124) (188)
Issuance of long-term debt............................. 750 466 2,785
Principal payments of long-term debt................... (271) (271) (325)
Capital contributions.................................. -- 53 --
----- ------ ------
Net cash (used in) provided by financing
activities..................................... (376) 920 3,322
----- ------ ------
Net increase (decrease) in cash.......................... 107 (101) 423
Cash at beginning of year................................ -- 107 6
----- ------ ------
Cash at end of year...................................... $ 107 $ 6 $ 429
===== ====== ======
Supplemental disclosure of cash flow information:
Cash paid for interest................................. $ 100 $ 116 $ 302
===== ====== ======
Cash paid for income taxes............................. $ -- $ -- $ 25
===== ====== ======
Furniture and equipment acquired through capital lease
obligations........................................... $ -- $ 542 $ --
===== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<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 years 1996 and 1997 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 December 31, 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.
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. 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 $3,198,000 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 December 31, 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
F-42
<PAGE>
B.R.M.C. OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$281,000, respectively, for the twelve months ended December 31, 1997. Had the
acquisition occurred on January 1, 1996, revenues and net income of the
consolidated entity would have increased $3,129,000 and $160,000,
respectively, for the year 1996.
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, 1996 and 1997, commissions receivable from companies in
the telecommunications industry totaled approximately $454,000 and $474,000,
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 consolidated financial statements and have been within
management's expectations.
Notes Receivable
Included in other assets at December 31, 1996 and 1997 is a note receivable
from a related party in the amount of $110,000 and $133,000, respectively.
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 1997 was $16,000 and
$132,000, respectively. Goodwill is measured for possible impairment
periodically and is reduced through a charge to earnings if impairment exists.
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.
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.
F-43
<PAGE>
B.R.M.C. OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Major Customer
For the years ended December 31, 1996 and 1997, one customer accounted for
approximately 31% and 28%, respectively, of revenues. The loss of the
Company's major customer could have a material adverse effect on the Company's
business.
2. FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Furniture and equipment.................................. $ 2,940 $2,217
Less accumulated depreciation............................ 2,074 1,394
------- -------
$ 866 $ 823
======= =======
</TABLE>
Furniture and equipment includes $826,000 and $1,090,000 acquired under
various capital leases at December 31, 1996 and 1997, respectively.
Accumulated depreciation on this equipment at December 31, 1996 and 1997 was
$113,000 and $617,000, respectively. Depreciation expense was $176,000,
$216,000 and $352,000 for the years ended December 31, 1995, 1996 and 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 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%.
Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER
31,
-----------
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............................................ $340 $ 72
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.................................................. -- 35
Note payable to related party, interest at 8.0% per
annum;
interest payable monthly; due March 1998.............. -- 2,750
Note payable, interest at 9.5% per annum;
payable in equal monthly installments through
September 1998........................................ -- 15
Note payable, interest at 8.9% per annum; payable in
equal monthly installments through December 2006...... -- 420
Note payable, interest at 8.0% per annum
payable in equal monthly installments through December
2006.................................................. 450 --
---- ------
$841 $3,292
==== ======
</TABLE>
F-44
<PAGE>
B.R.M.C. OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Principal maturities of long-term debt at December 31, 1997 were as follows
(in thousands):
<TABLE>
<S> <C>
1998............................................................... $2,886
1999............................................................... 52
2000............................................................... 43
2001............................................................... 42
2002............................................................... 45
Thereafter......................................................... 224
------
$3,292
======
</TABLE>
The Company has negotiated a commitment with a lending institution to
refinance long-term debt maturing in the year ending December 31, 1998.
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.
Future minimum rental payments required under the operating lease agreements
at December 31, 1997 were as follows (in thousands):
<TABLE>
<S> <C>
1998............................................................... $ 516
1999............................................................... 503
2000............................................................... 478
2001............................................................... 348
2002............................................................... 21
------
$1,866
======
</TABLE>
Total rent expense was $280,000, $319,000 and $474,000 for the years ended
December 31, 1995, 1996 and 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>
1998................................................................. $201
1999................................................................. 160
2000................................................................. 70
2001................................................................. 117
Thereafter........................................................... --
----
$548
====
</TABLE>
Obligations under capital leases as scheduled above include imputed interest
of approximately $60,000.
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 $11,000, $7,000 and $21,000 in 1995, 1996 and 1997,
respectively.
F-45
<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
$54,000, $91,000 and $77,000 in 1995, 1996 and 1997, respectively.
6. INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Current:
Federal................................................. $ 49 $230
State................................................... 3 42
------ -------
52 272
Deferred:
Federal................................................. 20 25
State................................................... 1 5
------ -------
21 30
------ -------
Total..................................................... $ 73 $302
====== =======
</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. No tax expense was recorded for the year ended December 31, 1995.
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, 1996 and
1997 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Depreciation.......................................... $ 10 $29
Capitalized leases.................................... 11 22
------- -------
Total deferred tax liabilities.......................... 21 51
Deferred tax assets..................................... -- --
------- -------
Net deferred tax liabilities............................ $ 21 $51
======= =======
</TABLE>
The Company utilized $32,000 in net operating losses (NOL) 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.
In 1995, deferred tax assets and liability consisted of an insignificant
deferred tax asset at December 31, 1995 consisting of an NOL carryforward. A
valuation allowance was established for the total deferred NOL carryforward
amounts for 1995. The Company utilized approximately $150,000 of its NOL
carryforwards in 1995. Deferred tax assets and valuation allowances were
reduced by approximately $52,000 during 1995.
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 operations of the Company.
F-46
<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, 1996 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 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
Chicago, Illinois
January 23, 1998
F-47
<PAGE>
MID-CONTINENT AGENCIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
ASSETS 1996 1997
------ ------ ------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................... $ -- $ 165
Accounts receivable, trade................................... 546 603
Receivables due from stockholders............................ 1,421 1,517
Prepaid expenses and other current assets.................... 165 350
------ ------
Total current assets....................................... 2,132 2,635
Funds held in trust for clients
Property and equipment, net.................................... 146 159
Deferred income tax benefit.................................... 70 67
Other assets................................................... 136 141
------ ------
Total assets............................................... $2,484 $3,002
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses........................ $ 590 $ 659
Notes payable to stockholders................................ 51 51
Notes payable, current portion............................... 388 928
------ ------
Total current liabilities.................................. 1,029 1,638
Funds held in trust for clients
Notes payable.................................................. 178 --
Deferred compensation.......................................... 174 177
------ ------
Total liabilities.......................................... 1,381 1,815
------ ------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value, 10,000 shares authorized, 1,000
shares issued and outstanding............................... 10 10
Additional paid-in capital................................... 73 73
Retained earnings............................................ 1,032 1,114
Unrealized gain (loss) on securities......................... (12) (10)
------ ------
Total stockholders' equity................................. 1,103 1,187
------ ------
Total liabilities and stockholders' equity..................... $2,484 $3,002
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE>
MID-CONTINENT AGENCIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Revenues................................................ $8,763 $9,038 $9,451
Operating expenses...................................... 2,851 2,875 3,105
------ ------ ------
Gross profit.......................................... 5,912 6,163 6,346
Selling, general and administrative expenses............ 5,974 6,054 6,239
------ ------ ------
Income (loss) from operations......................... (62) 109 107
Other (income) expense:
Interest and investment income, net................... (99) (117) (70)
Interest expense...................................... 48 68 81
Loss on disposal of property and equipment............ -- 3 --
------ ------ ------
(51) (46) 11
------ ------ ------
Income (loss) before income taxes....................... (11) 155 96
Provision for income taxes.............................. 34 107 14
------ ------ ------
Net income (loss)....................................... $ (45) $ 48 $ 82
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<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
loss on securities.... -- -- -- -- (15) (15)
--- --- --- ------ ---- ------
Balance, December 31,
1996................... 10 10 73 1,032 (12) 1,103
Net income............. -- -- -- 82 -- 82
Change in unrealized
gain on securities.... -- -- -- -- 2 2
--- --- --- ------ ---- ------
Balance, December 31,
1997................... 10 $10 $73 $1,114 $(10) $1,187
=== === === ====== ==== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE>
MID-CONTINENT AGENCIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $ (45) $ 48 $ 82
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization...................... 44 64 52
Loss on disposal of property and equipment......... -- 3 --
Changes in deferred taxes.......................... (13) (2) 3
Changes in operating assets and liabilities:
Accounts receivable, trade........................ (106) (11) (57)
Prepaid expenses and other current assets......... 39 (6) (185)
Accounts payable and accrued expenses............. (60) 68 69
Deferred compensation............................. 21 16 3
Other assets...................................... (54) (4) (3)
----- ----- -----
Net cash provided by (used in) operating
activities................................... (174) 176 (36)
Cash flows from investing activities:
Purchase of property and equipment.................. (89) (49) (65)
Proceeds from sale of property and equipment........ -- 3 --
----- ----- -----
Net cash used in investing activities......... (89) (46) (65)
Cash flows from financing activities:
Proceeds from notes payable......................... 600 250 1,000
Payments of notes payable........................... (376) (257) (638)
Payments of notes payable to stockholders........... (10) -- --
Proceeds from notes receivable from stockholders.... (159) (124) (96)
----- ----- -----
Net cash provided by (used in) financing activities... 55 (131) 266
Net increase (decrease) in cash....................... (208) (1) 165
Cash and cash equivalents at beginning of period...... 209 1 --
----- ----- -----
Cash and cash equivalents at end of period............ $ 1 $ -- $ 165
===== ===== =====
Supplemental disclosure of cash flow information:
Cash paid for interest.............................. $ 48 $ 69 $ 78
Cash paid for income taxes.......................... 46 90 98
Increase (decrease) in funds held in trust for
clients............................................ (53) (253) 286
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE>
MID-CONTINENT AGENCIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--NATURE OF OPERATIONS
Mid-Continent Agencies, Inc. ("Mid-Continent") 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.
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.
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 Mid-Continent 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
$1,214,000 and $1,500,000 at December 31, 1996 and 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
F-52
<PAGE>
MID-CONTINENT AGENCIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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, 1996 and 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.
NOTE 3--RECEIVABLES DUE FROM STOCKHOLDERS
Receivables due from stockholders includes demand notes receivable with
aggregate principal and interest amounts of $1,371,000 and $1,517,000 at
December 31, 1996 and 1997, respectively. The notes receivable accrue interest
at the short-term annual Applicable Federal Rate prescribed by the Internal
Revenue Service, with
F-53
<PAGE>
MID-CONTINENT AGENCIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 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
==== ===== ==== ====
DECEMBER 31, 1997:
Equity securities...................... $ 2 $ -- $ (1) $ 1
Debt securities issued by the U.S.
Treasury and other U.S. government
agencies.............................. 196 -- (11) 185
Debt securities issued by foreign
governments........................... 2 -- -- 2
Corporate debt securities.............. 300 5 -- 305
Mortgage-backed securities............. 107 -- (3) 104
Other debt securities.................. 70 -- -- 70
---- ----- ---- ----
$677 $ 5 $(15) $667
==== ===== ==== ====
</TABLE>
Net realized (losses)/gains from the sale of investment securities were
$(6,000), $12,000 and $(21,000) for the years ended December 31, 1995, 1996
and 1997, respectively.
The cost and estimated fair value of available for sale securities by
contractual maturity at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
ESTIMATED
COST FAIR VALUE
---- ----------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less................................... $100 $100
Due after one year through five years..................... 203 208
Investment funds or mortgage-backed securities not due
at a single maturity date................................ 374 359
---- ----
Total................................................. $677 $667
==== ====
</TABLE>
Expected maturities may differ from contractual maturities because the
issuers of the securities may have the right to prepay obligations without
prepayment penalties.
F-54
<PAGE>
MID-CONTINENT AGENCIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--PROPERTY AND EQUIPMENT, NET
Property and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Furniture and fixtures.................................. $ 480 $ 483
Equipment............................................... 798 865
Leasehold improvements.................................. 40 35
------- -------
1,318 1,383
Accumulated depreciation................................ (1,172) (1,224)
------- -------
Property and equipment, net............................. $ 146 $ 159
======= =======
</TABLE>
Depreciation expense aggregated $44,000, $64,000 and $42,000 for the years
ended 1995, 1996 and 1997, respectively.
NOTE 6--OTHER ASSETS
Other assets consist of:
<TABLE>
<CAPTION>
DECEMBER
31,
---------
1996 1997
---- ----
(IN
THOUSANDS)
<S> <C> <C> <C>
Cash value of life insurance.............................. $ 31 $ 44
Deposits.................................................. 101 97
Other..................................................... 4 --
---- ----
$136 $141
==== ====
</TABLE>
NOTE 7--ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of:
<TABLE>
<CAPTION>
DECEMBER
31,
-----------
1996 1997
----- -----
(IN
THOUSANDS)
<S> <C> <C>
Accounts payable.............................................. $ 136 $ 338
Accrued salaries.............................................. 130 146
Accrued bonus................................................. 93 30
Accrued vacation.............................................. 127 135
Income taxes payable.......................................... 32 --
Other......................................................... 72 10
----- -----
$ 590 $ 659
===== =====
</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.
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
F-55
<PAGE>
MID-CONTINENT AGENCIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
December 31, 1996 and 1997 was $51,000. No interest was accrued on the note at
December 31, 1995. Interest of $6,000, $5,000 and $5,000 for the years ended
December 31, 1995, 1996 and 1997, respectively, was paid to 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,
------------
1996 1997
----- -----
(IN
THOUSANDS)
<S> <C> <C>
Notes payable consist of the following:
Note payable to bank, interest at prime plus 0.5%, principal
payments of $10,000 due monthly, extinguished November 15,
1997......................................................... $ 100 $ --
Note payable to bank, interest at prime plus 0.5% (9.0% at
December 31, 1997), principal payments of $22,000 due
quarterly, balance due January 15, 1998...................... 241 153
Note payable to bank, interest at prime plus 0.5% (9.0% at
December 31, 1997), principal payments of $13,000 due
monthly, balance due February 28, 1998....................... 175 25
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
December 31, 1997), principal amount due January 15, 1998.... -- 300
Notes payable to bank, interest at prime plus 0.5% (9.0% at
December 31, 1997), principal amount due December 31, 1997... -- 250
Notes payable to bank, interest at prime plus 0.5% (9.0% at
December 31, 1997), principal amount due January 15, 1998.... -- 200
----- -----
566 928
Current portion............................................... (388) (928)
----- -----
Long-term debt................................................ $ 178 $ --
===== =====
</TABLE>
Certain notes payable were not paid at their stated maturity dates. Mid-
Continent has obtained extensions of the notes to March 31, 1998.
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 1997 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
------------
(IN
THOUSANDS)
<S> <C> <C>
1997............................................................... $ 388 $ --
1998............................................................... 178 928
----- ------
$566 $ 928
===== ======
</TABLE>
F-56
<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,
----------------
1995 1996 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current tax expense:
Federal............................................... $ 37 $ 90 $10
State & local......................................... 10 19 5
---- ---- ---
47 109 15
Deferred tax expense (benefit)
Federal............................................... (11) (1) --
State & local......................................... (2) (1) (1)
---- ---- ---
(13) (2) (1)
---- ---- ---
Total................................................... $ 34 $107 $14
==== ==== ===
</TABLE>
The provision for income taxes differs from the amount computed as the
statutory rates as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1996 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income at statutory rate........................ $(4) $ 53 $ 33
State income taxes, net of federal benefit.............. 5 12 4
Nondeductible expenses.................................. 41 41 (18)
Federal surtax exemption................................ (9) (2) (13)
Change in valuation allowance........................... 1 3 8
--- ---- ----
Total................................................. $34 $107 $ 14
=== ==== ====
</TABLE>
The significant items giving rise to the deferred tax assets and
(liabilities) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax asset--non-current:
Bad debt reserve...................................... -- $ 4
Deferred compensation................................. $ 67 64
Unrealized loss on securities......................... 8 4
Charitable contribution carryforward.................. 13 20
Deferred tax asset valuation allowance................ (13) (20)
------- ------
Net deferred tax asset--non-current................. 75 72
Deferred tax liability--non-current:
Unrealized gain on securities......................... -- --
Property plan & equipment............................. (5) (5)
------- ------
Net deferred tax liability--non-current............. (5) (5)
------- ------
Total................................................. $ 70 $ 67
======= ======
</TABLE>
F-57
<PAGE>
MID-CONTINENT AGENCIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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 $28,000, for the years ended December 31, 1995, 1996 and
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, 1996 and 1997. 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 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997
--------------
(IN THOUSANDS)
<S> <C> <C>
1998................................................... $ 562
1999................................................... 517
2000................................................... 454
2001................................................... 397
2002................................................... 358
Thereafter............................................. 306
------
$2,594
======
</TABLE>
Rent expense was $510,000, $468,000 and $500,000 for the years ended
December 31, 1995, 1996 and 1997, respectively.
F-58
<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, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Impact
Telemarketing Group, Inc. and affiliated companies at December 31, 1996 and
1997 and the results of their operations and their cash flows for the years
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.
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 is not in compliance with certain covenants
contained in its loan agreement and the line of credit was due and payable on
December 1, 1997. As a result, the Company does not have the ability to obtain
additional borrowings under its loan agreement 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
January 23, 1998
F-59
<PAGE>
IMPACT TELEMARKETING GROUP, INC.
COMBINED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
ASSETS 1996 1997
------ ------ ------
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................... $ 166 $ 145
Accounts receivable, trade, net of allowance for doubtful
accounts of $40 and $77, respectively......................... 1,618 2,688
Related party receivables...................................... 188 105
Prepaid expenses and other current assets...................... 4 22
------ ------
Total current assets......................................... 1,976 2,960
Property and equipment, net...................................... 573 775
Other assets..................................................... 27 22
------ ------
$2,576 $3,757
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt.............................. $ 153 $ 113
Borrowings on line of credit................................... 80 650
Current portion of capitalized lease obligations............... 119 191
Accounts payable............................................... 1,605 1,882
Accrued expenses............................................... 209 295
------ ------
Total current liabilities.................................... 2,166 3,131
Capitalized lease obligations, net of current portion............ 293 424
------ ------
Total liabilities............................................ 2,459 3,555
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.............................................. 26 111
------ ------
Total stockholders' equity................................... 117 202
------ ------
$2,576 $3,757
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE>
IMPACT TELEMARKETING GROUP, INC.
COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------
1996 1997
------ -------
<S> <C> <C>
Revenues....................................................... $8,869 $12,870
Operating expenses............................................. 6,961 9,725
------ -------
Gross profit................................................. 1,908 3,145
Selling, general and administrative............................ 2,108 2,823
------ -------
Income (loss) from operations................................ (200) 322
Other (income) expense:
Interest expense............................................. 30 163
Gain on sale of property and equipment....................... (105) --
------ -------
Net income (loss).............................................. $ (125) $ 159
====== =======
Pro forma tax provision (Unaudited) (See Note 2):
Income (loss) before income taxes............................ $ (125) $ 159
Pro forma provision (benefit) for income taxes............... (50) 64
------ -------
Pro forma net income (loss).................................. $ (75) $ 95
====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<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......................... -- -- -- 159 159
Distributions to stockholders...... -- -- -- (74) (74)
--- ----- --- ---- ----
Balance, December 31, 1997.......... 100 $ -- $91 $111 $202
=== ===== === ==== ====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE>
IMPACT TELEMARKETING GROUP, INC.
COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------
1996 1997
----- ------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).............................................. $(125) $ 159
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization................................ 128 192
Gain on sale of property and equipment....................... (105) --
Provision for doubtful accounts.............................. 77 11
Changes in operating assets and liabilities:
Accounts receivable, trade................................. 443 (1,081)
Prepaid expenses and other current assets.................. 7 (18)
Related party receivables.................................. (72) 63
Other assets............................................... (12) 5
Accounts payable and accrued liabilities................... (245) 363
----- ------
Net cash provided by (used in) operating activities...... 96 (306)
Cash flows from investing activities:
Proceeds from sale of property and equipment................... 157 --
Purchase of property and equipment............................. (155) (52)
----- ------
Net cash provided by (used in) investing activities...... 2 (52)
Cash flows from financing activities:
Net borrowings on line of credit............................... 80 570
Payments on notes payable...................................... (45) (186)
Payments on capital lease obligations.......................... (85) (145)
Borrowings under term loan..................................... -- 146
Distributions to stockholders.................................. (40) (48)
----- ------
Net cash provided by (used in) financing activities...... (90) 337
Net increase (decrease) in cash.................................. 8 (21)
Cash and cash equivalents at beginning of year................... 158 166
----- ------
Cash and cash equivalents at end of year......................... $ 166 $ 145
===== ======
Supplemental disclosure of cash flow information:
Cash paid for interest......................................... $ 30 $ 106
Noncash investing and financing activities:
Property acquired under capital leases....................... $ 330 $ 348
Assumption of North Dakota debt by third party in conjunction
with the sale of North Dakota assets........................ $ 67 $ --
Distributions of assets from an affiliated company........... $ -- $ 20
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<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 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.
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. The
distribution of the remaining assets of North Dakota has been treated as a
distribution to the stockholders.
At December 31, 1997, the Company has a working capital deficit of $171,000
and is not in compliance with certain covenants contained in its loan
agreement with a bank. Total amounts outstanding as of December 31, 1997 under
the Company's term loan and line of credit of $103,000 and $650,000,
respectively, are currently due and payable at the discretion of the bank
based on the violation of these covenants. Additionally, the line of credit
expired and was due on December 1, 1997. The amounts outstanding under the
term loan and the line of credit have not been liquidated by the Company and
the bank has not demanded payment. The Company has not completed an
arrangement for a replacement credit facility. 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 1998 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. As the operations
of North Dakota have been sold, North Dakota is not combined in the accounts
of the Company for the year ended December 31, 1997.
F-64
<PAGE>
IMPACT TELEMARKETING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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 year ended December 31, 1997, two
customers accounted for 47% and 11% of revenues, respectively. The loss of the
Company's major customer could have a material adverse effect on the Company's
business.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and accounts
receivable. The Company holds deposits in operating 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 December 31, 1997,
four customers accounted for approximately 39%, 21%, 15% and 11% 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 stockholders. These entities file separate tax returns. Group and
North Dakota each 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. Inc. is a C Corporation 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.
Inc. incurred losses for the years ended December 31, 1996 and 1997. The
differences between the financial reporting and the tax basis of assets and
liabilities are not significant. As of December 31, 1997, Inc. had net
operating loss carryforwards of approximately $717,000 each for federal and
state. These carryforwards expire from 2003 through 2012. Management believes
sufficient uncertainty exists with regard to the realization of these
carryforwards. Accordingly, a full valuation allowance has been provided as of
December 31, 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.
F-65
<PAGE>
IMPACT TELEMARKETING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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 December 31, 1997.
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 and
$110,000 for the years ended December 31, 1996 and 1997, respectively.
As of December 31, 1997, the Company has total loans receivable from its
sole stockholders of $105,000. There are no scheduled dates of repayment or
interest rates associated with these loans.
NOTE 4--PROPERTY AND EQUIPMENT, NET
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Furniture and fixtures............................... $ 144 $ 243
Computer equipment and software...................... 752 1,047
Leasehold improvements............................... 81 81
------ -------
$ 977 $ 1,371
Less: Accumulated depreciation....................... (404) (596)
------ -------
$ 573 $ 775
====== =======
</TABLE>
Depreciation expense was $75,000 and $36,000 for the years ended December
31, 1996 and 1997, respectively.
Included in fixed assets shown above as of December 31, 1997 are fixed
assets under capital leases with a gross amount of $880,000. Total
amortization expense was $53,000 and $156,000 for the years ended December 31,
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 December 31, 1997). The line of
credit is secured by substantially all of the Company's assets. The line of
credit expired on December 1, 1997 and all principal and remaining interest
was due and payable. Amounts outstanding under this line of credit are $30,000
and $650,000 as of December 31, 1996 and 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.
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 December 31, 1997) and are secured by substantially all of the
Company's assets. No borrowings were outstanding under this letter of credit
facility as of December 31, 1997.
F-66
<PAGE>
IMPACT TELEMARKETING GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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,
-------------
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..................... -- $ 103
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 $ 113
====== ======
</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 December 31, 1997. Future minimum
lease payments as of December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998................................................................ $250
1999................................................................ 200
2000................................................................ 163
2001................................................................ 110
2002................................................................ 28
----
Total minimum obligations........................................... $751
Less interest....................................................... 136
----
Present value of minimum lease payments............................. 615
Less: Current portion............................................... 191
----
$424
====
</TABLE>
F-67
<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
December 31, 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 December 31,
1997 (in thousands):
<TABLE>
<S> <C>
1998............................................................... $ 230
1999............................................................... 234
2000............................................................... 239
2001............................................................... 243
2002............................................................... 174
------
$1,120
======
</TABLE>
Rent expense was $182,000 and $283,000 for the years ended December 31, 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.
F-68
<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>
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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.................................................................. 33
Management................................................................ 46
Certain Transactions...................................................... 52
Principal Stockholders.................................................... 55
Description of Capital Stock.............................................. 56
Shares Eligible for Future Sale........................................... 57
Underwriting.............................................................. 59
Certain Legal Matters..................................................... 61
Experts................................................................... 61
Additional Information.................................................... 61
Index to Financial Statements............................................. F-1
</TABLE>
Until March 24, 1998 (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.
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4,100,000 SHARES
LOGO
COMPASS INTERNATIONAL
SERVICES CORPORATION
COMMON STOCK
----------------
PROSPECTUS
----------------
NationsBanc Montgomery
Securities LLC
Lehman Brothers
February 27, 1998
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