ESQUIRE COMMUNICATIONS LTD.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD NOVEMBER 17, 1998
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of
Esquire Communications Ltd. (the "Company") will be held at the San Diego
Marriott Hotel and Marina, 333 West Harbor Drive, San Diego, California 92101,
on November 17, 1998 at 9:00 in the morning for the following purposes:
1. To elect eight (8) Directors.
2. To authorize and approve amendments to the Company's 1993 Stock
Option Plan.
3. To authorize and approve an amendment to the Company's Certificate
of Incorporation (a) to effect a one-for-two reverse stock split of all
outstanding (but not all authorized) shares of the Company's Common Stock and
(b) to increase the par value of the Company's Common Stock from $.01 to $.02
per share.
4. To approve the appointment of KPMG Peat Marwick LLP as independent
auditors of the Company for the fiscal year ending December 31, 1998.
5. To transact such other business as may properly come before the
meeting, or any adjournment thereof.
Stockholders of record at the close of business on September 30, 1998,
shall be entitled to notice of, and to vote at, the meeting.
By order of the Board of Directors
David A. Higson
Secretary
Dated: San Diego, California
October 7, 1998
IMPORTANT: PLEASE FILL IN, DATE, SIGN AND MAIL PROMPTLY THE ENCLOSED
PROXY IN THE POSTAGE-PAID ENVELOPE PROVIDED TO ASSURE THAT YOUR SHARES ARE
REPRESENTED AT THE MEETING.
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
750 "B" STREET
SUITE 2350
SAN DIEGO, CALIFORNIA 92101
PROXY STATEMENT
The accompanying proxy is solicited by the Board of Directors of
Esquire Communications Ltd., a Delaware corporation (the "Company" or
"Esquire"), for use at the Annual Meeting of Stockholders to be held on November
17, 1998, at 9:00 in the morning, at the San Diego Marriott Hotel and Marina,
333 West Harbor Drive, San Diego, California, 92101, or any adjournment thereof,
at which stockholders of record at the close of business on September 30, 1998,
shall be entitled to vote. The cost of solicitation of proxies will be borne by
the Company. The Company may use the services of its directors, officers,
employees and others to solicit proxies, personally or by telephone;
arrangements may also be made with brokerage houses and other custodians,
nominees, fiduciaries and stockholders of record to forward solicitation
material to the beneficial owners of stock held of record by such persons. The
Company may reimburse such solicitors for reasonable out-of-pocket expenses
incurred by them in soliciting, but no compensation will be paid for their
services. Any proxy granted as a result of this solicitation may be revoked at
any time before its exercise.
The Annual Report to Stockholders for the fiscal year ended December
31, 1997 accompanies this Proxy Statement. The date of this Proxy Statement is
the approximate date on which this Proxy Statement and form of proxy were first
sent or given to stockholders. THE COMPANY WILL FURNISH WITHOUT CHARGE (OTHER
THAN A REASONABLE CHARGE FOR ANY EXHIBIT REQUESTED) TO ANY STOCKHOLDER OF THE
COMPANY WHO SO REQUESTS IN WRITING, A COPY OF THE COMPANY'S ANNUAL REPORT ON
FORM 10-K, INCLUDING THE FINANCIAL STATEMENTS AND THE SCHEDULES THERETO, FOR THE
YEAR ENDED DECEMBER 31, 1997 AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION. ANY SUCH REQUEST SHOULD BE DIRECTED TO STOCKHOLDER RELATIONS,
ESQUIRE COMMUNICATIONS LTD., 750 "B" STREET, SUITE 2350, SAN DIEGO, CALIFORNIA
92101.
If the accompanying proxy card is properly signed and returned to the
Company and not revoked, it will be voted in accordance with the instructions
contained therein. Unless contrary instructions are given, the persons
designated as proxy holders in the proxy card will vote FOR the slate of
nominees proposed by the Board of Directors, FOR the amendment to the Company's
Certificate of Incorporation, FOR the amendments to the Company's 1993 Stock
Option Plan (the "Plan"), FOR ratification of the appointment of KPMG Peat
Marwick LLP as the Company's independent accountants for the fiscal year ending
December 31, 1998 and as recommended by the Board of Directors with regard to
all other matters or, if no such recommendation is given, in their own
discretion. Each stockholder may revoke a previously granted proxy at any time
before it is exercised by filing with the Secretary of the Company a revoking
instrument or a duly executed proxy bearing a later date. The powers of the
proxy holders will be suspended if the person executing the proxy attends the
Annual Meeting in person and so requests. Attendance at the Annual Meeting will
not, in itself, constitute revocation of a previously granted proxy.
Pursuant to the By-laws, the Board of Directors has fixed the time and
date for the determination of stockholders entitled to vote at the meeting,
notwithstanding any transfer of any stock on the books of the Company
thereafter. The presence at the Annual Meeting, in person or by proxy, of the
holders of a majority of the votes entitled to be voted will constitute a
quorum. Abstentions and broker non-votes are counted for purposes of determining
the presence or absence of a quorum. On September 30, 1998, the Company had
outstanding and entitled to vote with respect to all matters to be acted upon at
the meeting 9,493,957 shares of Common Stock and 22,500 shares of Series A
Convertible Preferred Stock. Holders of record of outstanding shares of Common
Stock and Series A Convertible Preferred Stock will be entitled to vote together
as a single class at the Annual Meeting. Each holder of Common Stock is entitled
to one vote for each share of stock held by such holder and each holder of
Series A Convertible Preferred Stock is entitled to 333 1/3 votes per share (the
number of shares of Common Stock into which it is convertible). Abstentions are
counted in the calculation of the votes cast with respect to any of the matters
submitted to a vote of stockholders, whereas broker non-votes are not counted
for purposes of determining whether a proposal has been approved.
It is expected that the following business will be considered at the
meeting and action taken thereon:
1. ELECTION OF DIRECTORS
It is proposed to elect eight (8) Directors at this meeting to hold
office until the next annual meeting of stockholders and until their successors
are duly elected and qualified. It is intended that the accompanying form of
proxy will be voted for the nominees set forth below, all of whom are presently
directors of the Company. If some unexpected occurrence should make necessary,
in the Board of Directors' judgment, the substitution of some other person for
any of the nominees, shares will be voted for such other person as the Board of
Directors may select. The following table sets forth certain information with
respect to each of the nominees.
NOMINEES FOR ELECTION
DIRECTOR OR
NAME AGE POSITION WITH COMPANY OFFICER SINCE
Malcolm L. Elvey 57 Chairman of the Board and 1993
Director
David A. White 46 Chief Executive Officer and 1997
Director
David A. Higson 51 Executive Vice President, 1997
Chief Financial Officer,
Secretary and Director
Cary A. Sarnoff 51 Senior Vice President-West 1994
Coast Operations, Vice
Chairman and Director
Mortimer R. Feinberg(1)(2) 76 Director 1993
Gary L. Monroe 44 Director 1998
Joseph P. Nolan(1)(2) 34 Director 1996
Bruce V. Rauner 42 Director 1996
- ---------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Malcolm L. Elvey has served as Chairman of the Board of Directors of
the Company since its inception in 1993 and also served as Chief Executive
Officer of the Company until February 1997. Mr. Elvey is a Chartered Accountant
and has a Master of Business Administration from the University of Cape Town.
Mr. Elvey is also a director of Algol, a public company based in Italy.
David A. White has been Chief Executive Officer and a director of the
Company since February 1997. He has also been an officer of Harlingwood &
Company LLC ("Harlingwood") since January 1997. From 1992 to December 1996, Mr.
White was President of MedTrans ("MedTrans"), a division of Laidlaw, Inc., where
he successfully led the implementation of an acquisition program focused on
consolidating and improving profitability within the ambulance services
industry.
David A. Higson has been Executive Vice President of the Company since
February 1998, Chief Financial Officer and Secretary since May 1997 and a
director since June 1998 and was Senior Vice President from May 1997 to February
1998. From June 1993 to April 1997, he was Senior Vice President-Administration
and Financial Operations of MedTrans where he successfully assisted in
implementing an acquisition program focused on consolidating and improving
profitability within the ambulance services industry.
Cary A. Sarnoff has been Vice Chairman of the Company since November
1994. In June 1998, he was appointed to the additional position of Senior Vice
President of West Coast Operations for the Company. Prior thereto, Mr. Sarnoff
was President of Sarnoff Deposition Service, Inc. ("SDS"), a court reporting
firm acquired by the Company in 1994. Mr. Sarnoff has more than 25 years
experience in the court reporting industry.
Mortimer R. Feinberg, Ph.D., has served as a director of the Company
since its incorporation. He is the co-founder of BFS Psychological Associates,
Inc., a human resources consulting firm, and has served as Chairman of its Board
of Directors since 1960. Dr. Feinberg is Professor Emeritus, Baruch College,
City University of New York and is a frequent contributor to the WALL STREET
JOURNAL on human resources and other business topics.
Gary L. Monroe has served as a director of the Company since June
1998. Mr. Monroe has been the Chairman of the Board of Lason, Inc. ("Lason"), an
integrated outsourcing services company, since 1998, Chief Executive Officer
since February 1996, President since April 1997 and a director since he joined
Lason in September 1995. From September 1995 to February 1996, Mr. Monroe served
as Executive Vice President of Lason. From May 1992 to September 1995, Mr.
Monroe served as President of Kodak Imaging Services, Inc., a subsidiary of
Eastman Kodak Co.
Joseph P. Nolan has served as a director of the Company since October
1996. Mr. Nolan is a Principal of GTCR Golder Rauner, LLC and has been a
Principal of Golder, Thoma, Cressey, Rauner, Inc. ("GTCR Inc."), which is a
general partner of Golder, Thoma, Cressey, Rauner Fund IV, L.P. ("GTCR"), since
July 1996. Mr. Nolan joined GTCR Inc. in February 1994. From May 1990 to January
1994, Mr. Nolan served as Vice President Corporate Finance at Dean Witter
Reynolds Inc. Mr. Nolan is also a director of Lason and Province Healthcare,
Inc.
Bruce V. Rauner has served as a director of the Company since October
1996. Mr. Rauner is the Managing Principal of GTCR Golder Rauner, LLC and has
been a Principal of GTCR Inc. for more than five years prior to the date hereof.
Mr. Rauner is also a director of Lason, Polymer Group, Inc., Coinmach Laundry
Corporation, Province Healthcare, Inc. and Metamor Worldwide, Inc.
Mr. White has agreed to resign as a director of the Company at any
time upon the request of GTCR. All other directors will hold office until the
next annual meeting of stockholders and until the election and qualification of
their successors, or until death, resignation or removal.
The Board of Directors of the Company has two standing committees: a
Compensation Committee and an Audit Committee. The Compensation Committee,
consisting of Messrs. Feinberg and Nolan, reviews and recommends the
compensation arrangements for management of the Company and administers the
Plan. The Audit Committee, consisting of Messrs. Feinberg and Nolan, among other
things, recommends the accounting firm to be appointed as independent
accountants to audit the Company's financial statements, discusses the scope and
results of the audit with the independent accountants, reviews with management
and the independent accountants the Company's interim and year-end operating
results, considers the adequacy of the internal accounting controls and audit
procedures of the Company and reviews the non-audit services to be performed by
the independent accountants.
During the fiscal year ended December 31, 1997, there were ten
meetings of the Board of Directors, one meeting of the Compensation Committee
and one meeting of the Audit Committee. Each incumbent director of the Company
attended in excess of 75% of the aggregate of the total number of meetings of
the Board of Directors and committees thereof on which such director served,
except for Mr. Rauner, who attended four of the meetings of the Board of
Directors.
The Company is not aware of any family relationship between any
director, executive officer or person nominated to become a director or
executive officer.
DIRECTOR COMPENSATION
Compensation for directors who are not officers of the Company is
$1,250 per meeting, plus reimbursement for any out-of-pocket expenses incurred
in connection with attending such meetings. In addition, each current outside
director has received, and each outside director upon election to the Board of
Directors will receive, options pursuant to the Plan to purchase 10,000 shares
of Common Stock of the Company.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding
compensation paid by the Company or accrued for services rendered in all
capacities during the fiscal year ended December 31, 1997, to the Company's
Chief Executive Officer and to each of the other most highly compensated
executive officers of the Company whose aggregate cash compensation exceeded
$100,000:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual
Compensation Awards Payouts
------------------------------ ---------- --------
Other Restricted Options/ All Other
Base Annual Stock SARs LTIP Compensation
Name and Principal Position Year Salary Bonus($) Compensation($) Awards ($) Stock (#) Payouts ($) ($)
- --------------------------- ---- ------ -------- --------------- ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Malcolm L. Elvey............ 1997 $200,043 -- -- -- 100,000 -- --
Chairman 1996 194,595 $115,000 -- -- 50,000 -- --
1995 166,431 -- -- -- -- -- --
David A. White.............. 1997 174,791 -- -- -- 250,000 -- --
Chief Executive Officer (1)
Cary A. Sarnoff............. 1997 191,675 -- -- -- 75,000 -- --
Vice Chairman 1996 190,436 -- -- -- 50,000 -- --
1995 160,629 -- -- -- -- -- --
David A. Higson............. 1997 93,750 13,000 -- -- 125,000 -- --
Senior Vice President (2)
David J. Feldman............ 1997 229,890 -- -- -- -- -- --
President (3) 1996 188,927 358,665 -- -- 50,000 -- --
1995 161,335 238,543 -- -- -- -- --
Debra Neiderfer............. 1997 183,175 20,000 -- -- -- -- --
Vice President 1996 115,967 48,666 -- -- 5,000 -- --
1995 82,660 18,650 -- -- -- -- --
- --------------------
(1) Amounts were paid to Harlingwood. See "Certain Relationships and
Related Transactions."
(2) Represents compensation for the partial year from May 15, 1997.
(3) Mr. Feldman resigned as President in May 1997.
</TABLE>
EMPLOYMENT AND RELATED AGREEMENTS
Malcolm L. Elvey is employed under an employment agreement which
expires May 1999 and is automatically renewed on a year-by-year basis unless
terminated by either party upon at least 60 days notice prior to the renewal
date. Mr. Elvey receives an annual salary of $203,187, which is subject to cost
of living increases. Mr. Elvey is also entitled to an annual bonus ranging from
3% of pre-tax earnings of the Company in excess of $750,000 to 15% of pre-tax
earnings of the Company in excess of $2,500,000; provided, however, that the
bonus will not exceed 100% of Mr. Elvey's annual salary. In the event the
Company consummates any acquisitions, these pre-tax earnings levels are
increased by 70% of the net income before taxes of the acquired business,
excluding any extraordinary items of gain or loss (which amount is prorated for
the portion of any year in which the acquired business operations are
consolidated with the Company's). The employment agreement terminates upon the
death or permanent disability of Mr. Elvey or for cause. Cause is defined as a
material breach of the employment agreement by Mr. Elvey, his gross negligence
or willful misconduct in the performance of his duties, his dishonesty to the
Company, conviction of a felony or excessive absenteeism unrelated to a
disability. In addition, Mr. Elvey has agreed not to compete with the Company
for a period of two years following the termination of his employment with the
Company.
David A. White is employed under a one-year agreement which expires
June 1999 at an annual salary of $250,000 and is automatically renewed on a
year-by-year basis unless terminated by either party upon at least 60 days
notice prior to the renewal date. If the agreement is not renewed by the
Company, the Company has agreed to pay to Mr. White six months of severance pay.
Mr. White's employment agreement contains termination provisions which are
substantially the same as those of Mr. Elvey's employment agreement. Mr. White
has agreed not to compete with the Company for a period of one year following
the termination of his employment with the Company.
In connection with the acquisition of SDS, on June 22, 1994, the
Company entered into an employment agreement with Cary A. Sarnoff which expires
in June 1999 and is automatically renewed on a year-by-year basis unless
terminated by either party upon at least 60 days prior notice. Mr. Sarnoff
receives an annual salary at the rate of $196,467, which is subject to cost of
living increases. Mr. Sarnoff's employment agreement contains termination
provisions which are substantially the same as those of Mr. Elvey's employment
agreement. Mr. Sarnoff has agreed not to compete with the Company for a period
of two years following the termination of his employment with the Company.
David J. Feldman had been employed as President and Chief Operating
Officer of the Company from September 1993 until his resignation effective May
1, 1997. Under his employment agreement, Mr. Feldman received an annual salary
at the rate of $229,890. Mr. Feldman was also entitled to receive an annual
bonus of 4.25% of total annual revenues of the Company in excess of $4,200,000
and 5% of total annual revenues of the Company in excess of $9,000,000, as
adjusted for subsequent acquisitions by the Company. During the first two years,
Mr. Feldman was entitled to a minimum bonus of $175,000 per year and during the
third and fourth years was entitled to a minimum bonus of $225,000 per year. In
connection with the resignation, the Company agreed to pay to Mr. Feldman the
aggregate amount of $641,035, payable as follows: (a) from May 1, 1997 through
March 31, 1998, the amount of $22,185 per month; (b) for the period April 1,
1998 through September 30, 1998, the amount of $6,000 per month; (c) on August
15, 1997, the amount of $161,000; (d) on November 15, 1997, the amount of
$150,000; and (e) on May 1, 1997 through September 30, 1997, the amount of
$10,000 per month. On May 1, 1997 through September 30, 1998, Mr. Feldman was
paid the amount of $1,500 per month in connection with conducting monthly sales
meetings. Mr. Feldman had also agreed to make himself available to the Company
through September 30, 1998 for consulting services for which he was entitled to
additional compensation at the rate of $2,000 per day (or portion thereof). All
heretofore unvested options to purchase Common Stock held by Mr. Feldman became
vested on September 30, 1998 and will continue to be exercisable until the first
to occur of two years from his ceasing to be a director of the Company or ten
years from the respective dates the options were granted. Mr. Feldman had agreed
not to compete with the Company through September 30, 1998.
David A. Higson is employed under a one-year agreement which expires
June 1999 at an annual salary of $175,000 and is automatically renewed on a
year-by-year basis unless terminated by either party upon at least 60 days
notice prior to the renewal date. If the agreement is not renewed by the
Company, the Company has agreed to pay Mr. Higson six months severance pay. Mr.
Higson's employment agreement contains termination provisions which are
substantially the same as those of Mr. Elvey's employment agreement. Mr. Higson
has agreed not to compete with the Company for a period of one year following
the termination of his employment with the Company.
The Company has entered into change in control agreements with Messrs.
Elvey, Higson, Sarnoff and White and its other key executive officers, which
provide that if the executive's employment is terminated within six months after
a change in control of the Company, or the executive terminates employment
within such six month period of time, then the executive shall be entitled to a
lump sum severance payment and all of the executive's options, if any, which are
not then vested shall immediately vest. The lump sum severance payment for
Messrs. Higson and White is 150% of base salary and bonus at the time of
termination and for the other executives is 100% of base salary and bonus at the
time of termination. At June 1, 1998 and based on salary levels currently in
effect, in the event of a change in control, Messrs. Elvey, Higson, Sarnoff and
White would have been entitled to receive a lump sum of $203,187, $262,500,
$196,467 and $375,000, respectively. The agreements have a one year term, but
will be automatically renewed for successive one year terms unless terminated at
least 60 days prior to June 30th of any year and prior to a "change in control."
If the payments to be received under the agreements would not be deductible for
tax purposes by the Company as a result of such payment constituting an excess
parachute payment, the payment would be reduced to an amount which would make
the entire payment deductible for tax purposes. As used in the agreements,
change in control means a person or a group of persons becomes the beneficial
owner of more than 30% of the Company's Common Stock, stockholders approve a
merge of the Company into another entity or a sale of substantially all of the
Company's assets or a change in the composition of a majority of the members of
the Board of Directors.
STOCK OPTION PLAN
In February 1993, the Board of Directors of the Company adopted the
1993 Stock Option Plan, which was approved by all stockholders of the Company.
The Plan was amended in June 1998 to increase the number of options which may be
granted thereunder from 2,000,000 to 3,500,000 shares of Common Stock and to
provide for members of the Compensation Committee to be eligible to receive
grants of stock options under the Plan, subject to stockholder approval. Both
incentive stock options, intended to qualify under Section 422 of the Internal
Revenue Code of 1986, as amended, and nonqualified stock options may be granted
under the Plan.
The Plan is administered by the Compensation Committee of the Board of
Directors, which may grant options to key employees and directors of and
consultants and independent contractors to the Company. The term of each option
may not exceed ten years from the date of grant. The exercise price of an option
may not be less than 100% of the fair market value of a share of Common Stock at
the date of grant. The options generally vest over a three-year period,
commencing one year following their issuance.
The table below sets forth information regarding the grant of stock
options made to the executive officers named in the Summary Compensation Table
during the fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
PERCENT
NUMBER OF POTENTIAL REALIZABLE
OF TOTAL EXERCISE VALUE AT ASSUMED ANNUAL
SECURITIES OPTIONS/SARS OR RATES OF STOCK
UNDERLYING GRANTED TO BASE PRICE APPRECIAITON
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION FOR OPTION TERM ($)
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% 10%
- ----- -------------- -------------- --------- ----------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Malcolm L. Elvey......... 100,000 14.33% $3.75 6/2007 $420,056 $862,923
David A. White(1)........ 150,000 21.49% $9.00 2/2007 0 447,936
100,000 14.33% $3.75 6/2007 407,128 823,624
David J. Feldman......... 0 ---- ---- ---- 0 0
Cary A. Sarnoff.......... 75,000 10.24% $3.75 6/2007 315,042 647,192
David A. Higson.......... 100,000 14.33% $3.50 5/2007 448,288 897,747
25,000 3.58% $3.75 6/2007 105,014 215,731
Debra Neiderfer.......... 0 ---- ---- ---- 0 0
- --------------
(1) These options were granted to Harlingwood.
</TABLE>
<PAGE>
The table below sets forth information for the executive officers
named in the Summary Compensation Table concerning option exercises during 1997
and outstanding options at December 31, 1997.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN 1997
AND DECEMBER 31, 1997 OPTION/SAR VALUES
NUMBER OF VALUE OF
SHARES SECURITIES UNEXERCISED
ACQUIRED UNDERLYING IN-THE-MONEY
ON VALUE UNEXERCISED OPTIONS/SARS
NAME EXERCISE REALIZED OPTIONS/SARS AT AT
- ---- -------- -------- DECEMBER 31, 1997 DECEMBER 31, 1997
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Malcolm L. Elvey.............. 0 ---- 141,666 133,334 $158,332 $191,668
David A. White (1)............ 100,000 $212,500 0 150,000 ---- 0
David J. Feldman.............. 0 ---- 91,666 33,334 108,332 66,668
Cary A. Sarnoff............... 0 ---- 16,666 108,334 33,332 160,418
David A. Higson............... 0 ---- 0 125,000 ---- 181,250
Debra Neiderfer............... 0 ---- 51,666 3,334 53,540 7,085
- ---------------
(1) These options were granted to, and exercised by, Harlingwood.
</TABLE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
beneficial ownership of Common Stock at June 30, 1998 by (i) each person known
by the Company to beneficially own more than five percent of outstanding Common
Stock, (ii) each director of the Company, (iii) each of the most highly
compensated executive officers of the Company, and (iv) all directors and
executive officers of the Company as a group. Except as noted below, each person
or entity has sole voting and investment power with respect to all shares listed
as owned by such person or entity. Unless otherwise indicated, the address of
each person who is known by the Company to own beneficially 5% or more of the
Common Stock listed below is c/o Esquire Communications Ltd., 750 B Street,
Suite 2350, San Diego, California 92101.
NAME AND ADDRESS NUMBER PERCENT OF CLASS
Malcolm L. Elvey(1) 879,000 9.6%
216 East 45th Street
New York, NY 10017
The Sarnoff Trust(2) 750,000 8.5%
2100 Broadway
Santa Ana, CA 92706
David J. Feldman(3) 625,900 7.0%
216 East 45th Street
New York, NY 10017
Allied Investment Corporation(4) 625,000 6.6%
Allied Investment Corporation II
Allied Capital Corporation II
1666 K Street
Washington, DC 20006
CMNY Capital, L.P.(5) 472,500 5.4%
135 E. 57th Street
New York, NY 10022
Mortimer R. Feinberg --- ---
Gary L. Monroe --- ---
Golder, Thoma, Cressey, Rauner Fund 7,312,500 45.4%
IV, L.P. (6)
Joseph P. Nolan (6) --- ---
Bruce V. Rauner (6) --- ---
Cary A. Sarnoff(7) 957,780 10.6%
Harlingwood & Company LLC(8) 700,000 7.6%
David A. White(8) 700,000 7.6%
David A. Higson(9) 300,000 3.3%
Debra Neiderfer(10) 77,000 *
All directors and executive 3,385,307 33.0%
officers as a group (12 persons)(11)
- ------------------
* Less than 1%
(1) Includes options to purchase 315,000 shares of the Company's Common
Stock granted to Mr. Elvey under the Plan.
(2) The Sarnoff Trust is a revocable trust of which Cary A. Sarnoff and his
wife, Michelle A. Sarnoff, are settlors, trustees and beneficiaries.
(3) Includes options to purchase 125,000 shares of the Company's Common
Stock granted to Mr. Feldman under the Plan.
(4) These entities in the aggregate own warrants to purchase an aggregate
of 625,000 shares of Common Stock at an exercise price of $2.90 per
share, subject to adjustment.
(5) Robert Davidoff and Edwin Marks are the general partners of CMNY
Capital, L.P. and may be deemed to control it.
(6) GTCR is the direct owner of 21,937.50 shares of Series A
Convertible Preferred Stock which are convertible into
7,312,500 shares of Common Stock. GTCR IV, L.P., a limited
partnership, is the general partner of GTCR and GTCR Inc.
is the general partner of GTCR IV, L.P. As such they may
be deemed to be the indirect beneficial owners of such
securities. Messrs. Nolan and Rauner are principals of GTCR Inc.
(7) Includes shares owned by The Sarnoff Trust and options to purchase
200,000 shares of Common Stock granted to Mr. Sarnoff under the Plan.
See Note (2).
(8) Mr. White is an officer of Harlingwood. Includes 350,000 shares owned
by Harlingwood and options to purchase 350,000 shares of Common Stock
owned by Harlingwood.
(9) Consists of options to purchase 300,000 shares of Common Stock of the
Company granted to Mr. Higson under the Plan.
(10) Includes options to purchase 55,000 shares of Common Stock of the
Company.
(11) Includes options to purchase 1,460,000 shares of Common Stock of the
Company.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires the Company's executive officers and directors, and persons who
own more than ten percent of the Company's common stock to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). Executive officers, directors and holders of more than ten percent
are required by SEC regulations to furnish the Company with copies of all
Section 16(a) forms they file. Based solely on a review of the copies of such
forms furnished to the Company and written representations from the Company's
executive officers and directors, the Company believes that during the year
ended December 31, 1997, its executive officers, directors and holders of more
than ten percent complied with all applicable Section 16(a) filing requirements.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between members of the Company's
Board of Directors or the Compensation Committee or officers responsible for
compensation decisions and the board of directors or compensation committee of
any other company, nor has such interlocking relationship existed in the past.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since June 1994, the Company has leased its Santa Ana, California
office from an affiliate of Cary A. Sarnoff. The lease expires in August 2008.
The Company believes the terms of the lease are comparable to market terms. At
December 31, 1997, Mr. Sarnoff no longer had an interest in the premises.
For as long as The Sarnoff Trust owns 20% or more of the Common Stock
issued in connection with the acquisition of SDS, the Company has agreed to
nominate, recommend and use its best efforts to have Mr. Sarnoff elected as a
director of the Company.
On October 23, 1996, the Company entered into a Purchase Agreement, as
amended (the "Purchase Agreement"), pursuant to which the Company sold to GTCR
and Antares Leveraged Capital Corp. (collectively, the "Investors") 21,937.5 and
562.5 shares of Series A Convertible Preferred Stock, respectively, for an
aggregate purchase price of $22.5 million. In addition, in January 1998, the
Investors were given the further right on or prior to December 2, 1999 to
acquire up to 5,000 shares of Series B Convertible Preferred Stock at a price of
$1,000 per share. In June 1998, GTCR acquired an option to acquire up to an
additional 2,500 shares of Series B Convertible Preferred Stock at a price of
$1,000 per share, which stock is convertible into an aggregate of 416,667 shares
of Common Stock at a conversion price of $6.00 per share.
The Series A Convertible Preferred Stock is convertible into Common
Stock of the Company at a conversion price of $3.00 per share (subject to
anti-dilution adjustments) and bears cumulative annual dividends at the rate of
6% ($60.00) per annum. The holders of Series A Convertible Preferred Stock have
a liquidation preference of $1,000 per share, plus accrued dividends. Holders of
Series A Convertible Preferred Stock have the right to vote together with the
holders of Common Stock and are entitled to one vote for each whole share of
Common Stock into which the Series A Convertible Preferred Stock is convertible
(presently 333 1/3 votes per share). GTCR was granted various rights to ask for
registration under the Securities Act of 1933, as amended (the "Securities Act")
of any shares of Common Stock acquired by it upon conversion of the Series A
Convertible Preferred Stock. Without the consent of the holders of a majority of
the Series A Convertible Preferred Stock, the Company may not take various
actions, including paying dividends on capital stock if there are any accrued
but unpaid dividends on the Series A Convertible Preferred Stock, issuing any
equity securities which are senior to or on a parity with the Series A
Convertible Preferred Stock, merging with another entity, selling or otherwise
disposing of all or substantially all its assets, or acquiring other entities.
In addition, the Company may not issue in a private offering any equity
securities without first offering the holders of Series A Convertible Preferred
Stock the right to acquire their pro rata share. In connection with the Purchase
Agreement, the Investors and Malcolm L. Elvey, Chairman of the Board of the
Company, Cary A. Sarnoff, Vice Chairman of the Company, David J. Feldman, former
President of the Company, CMNY Capital L.P. and Allied Investment Corporation,
Allied Investment Corporation II and Allied Capital Corporation II
(collectively, "Allied") entered into a Stockholder's Agreement dated as of
October 23, 1996, as amended (the "Stockholder's Agreement"), pursuant to which
(a) the parties agreed to vote their shares to elect as directors four
representatives designated by management, two representatives designated by GTCR
and four representatives jointly designated by GTCR and management; provided,
however, that if they are unable to agree on such joint designees within 90
days, then GTCR may elect the joint designees; (b) management granted to the
other stockholders rights of first refusal to acquire their shares if they
desire to sell the same, subject to exceptions for public sales and for
transfers to family members; and (c) if the Company's Board of Directors
approves a sale of the Company's assets or capital stock (whether by merger or
otherwise), each stockholder other than Allied and CMNY Capital L.P. agreed to
consent to such transaction.
The Series B Convertible Preferred Stock is identical to the Series A
Convertible Preferred Stock except that it is junior to the Series A Convertible
Preferred Stock, has a conversion price of $6.00 per share and has 166 2/3 votes
per share.
SDS was a party to an agreement with Edward Sarnoff, the father of
Cary Sarnoff, pursuant to which SDS agreed to pay to Edward Sarnoff, in the
event of the sale of SDS, the amount of $1.0 million payable in equal monthly
installments over a period of five years. In connection with the Company's
acquisition of SDS, the Company assumed the obligations of SDS under this
agreement.
In February 1997, the Company entered into a management agreement with
Harlingwood, pursuant to which Harlingwood provided management services to the
Company. This agreement terminated effective upon the Company entering into an
employment agreement with Mr. White. Mr. White fulfilled Harlingwood's
obligations under the management agreement. In connection with the management
agreement, the Company granted options to Harlingwood to purchase 150,000 shares
of Common Stock at an exercise price of $9.00 per share and sold to Harlingwood
250,000 shares of Common Stock at a price of $3.125 per share, which purchase
price was paid by Harlingwood issuing to the Company a promissory note in the
principal amount of $781,250, bearing interest at the rate of 7% per annum. The
note is secured by a pledge of the shares and is payable in full on April 15,
2001. The shares and options vest 25% on February 13, 1998 and ratably over a
three year period of time subsequent thereto. On December 15, 1997, Harlingwood
exercised options to purchase 100,000 shares of Common Stock at an exercise
price of $3.75 per share and delivered to the Company in payment of the exercise
price a promissory note in the principal amount of $375,000, bearing interest at
the rate of 7% per annum. The note is secured by a pledge of the shares and is
payable in full on December 15, 2001. As the result of the foregoing, at
December 31, 1997, Harlingwood was indebted to the Company in the principal
amount of $1,156,250. In May 1998, the Company granted to Harlingwood options to
purchase 200,000 shares of Common Stock at an exercise price of $6.00 per share.
The Company has agreed to loan to Harlingwood any funds needed to pay the
exercise price in connection with the exercise of the options. During 1997, the
Company paid to Harlingwood $45,000 for services rendered in connection with an
acquisition.
The Company has engaged Harlingwood Partners, L.P., a partnership of
which Mr. White is a principal ("Harlingwood Partners"), to provide acquisition
services for acquisitions other than in the court reporting area. Harlingwood
Partners will be entitled to a fee of 1% of value of each completed transaction.
In connection with the acquisitions of A-L Associates and A-L Attorneys on
Assignment in May 1998 and Gregory & Gregory Associates and Gregory & Gregory
Staffing in August 1998, Harlingwood Partners is entitled to receive total fees
of $162,500.
In connection with the Company's acquisition of Gregory & Gregory
Associates and Gregory & Gregory Staffing in August 1998, GTCR has guaranteed
the repayment of a $2.5 million overadvance made to the Company under the
Company's credit agreement and received a fee of $125,000 in consideration of
such guarantee. If GTCR is required to make a payment under its guarantee, it
will receive a new series of convertible preferred stock of the Company which
will be identical to the Series B Convertible Preferred Stock (including the
same $6.00 initial conversion price). The liquidation value of this new series
will equal the amount of the payment required to be made by GTCR. In addition,
if a public offering is not consummated by the Company by October 31, 1998, GTCR
will convert its option to acquire 7,500 shares of Series B Convertible
Preferred Stock into Common Stock at a conversion price equal to the average of
the closing prices of a share of Common Stock for the 20 days prior to
conversion; provided, however, that no more than 750,000 shares of Common Stock
will be issued to GTCR. Upon repayment of the overadvance, the GTCR guarantee
will be terminated.
2. PROPOSAL TO AMEND
THE 1993 STOCK OPTION PLAN
In February, 1993, the Board of Directors of the Company adopted the
Plan, which was approved by all stockholders of the Company. In January 1994,
the Board of Directors amended the Plan, which amendment was approved by
stockholders, to increase the number of options (the "Options") which may be
granted thereunder from 250,000 to 450,000 shares of Common Stock. In November
1994, the Board of Directors amended the Plan, which was approved by
stockholders, to increase the number of Options which may be granted thereunder
from 450,000 to 600,000 shares of Common Stock. In June 1997, the Board of
Directors amended the Plan, which was approved by stockholders, to increase the
number of Options which may be granted thereunder to 2,000,000 shares of Common
Stock. In June 1998, the Board of Directors amended the Plan to increase the
number of Options which may be granted thereunder from 2,000,000 to 3,500,000
shares of Common Stock and to provide for members of the Compensation Committee
to receive grants of Options, subject to stockholder approval. Incentive stock
options, intended to qualify under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and nonqualified stock options may be granted
under the Plan. The following is a summary of the material provisions of the
Plan.
PURPOSE
The purpose of the Plan is to advance the interests of the Company by
encouraging and enabling the acquisition of a larger personal proprietary
interest in the Company by directors, key employees, consultants and independent
contractors who are employed by, or perform services for, the Company and its
subsidiaries and upon whose judgment and keen interest the Company is largely
dependent for the successful conduct of its operations. It is also expected that
the opportunity to acquire such a proprietary interest will enable the Company
and its subsidiaries to attract and retain desirable personnel, directors and
other service providers. The purpose of the amendment is (a) to increase the
number of options available which may be granted under the Plan from 2,000,000
to 3,500,000 shares of Common Stock and (b) to provide for members of the
Compensation Committee to be eligible to receive grants of Options under the
Plan, to enhance the ability of the Company to further the general purposes of
the Plan. For the purposes of this Proposal 2, all references to the Company
include all subsidiaries of the Company, unless the context otherwise requires.
ADMINISTRATION
The Plan is administered by the Compensation Committee of the Board of
Directors, which for the purposes of the Plan must consist of two or more
directors of the Company, each of whom must be a "disinterested person" within
the meaning of Rule 16b-3(c)(2) under the Exchange Act. The Compensation
Committee may grant options to key employees and directors of and consultants
and independent contractors to the Company. The term of each option may not
exceed ten years from the date of grant. The exercise price of an option may not
be less than 100% of the fair market value of a share of Common Stock. The
options generally vest over a three-year period, commencing one year following
their issuance.
Determinations of the Compensation Committee as to any question which
may arise with respect to the interpretation of the provisions of the Plan and
Options are final. The Compensation Committee may authorize and establish such
rules, regulations and revisions thereof not inconsistent with the provisions of
the Plan, as it may deem advisable to make the Plan and Options effective or
provide for their administration, and may take such other action with regard to
the Plan and Options as it deems desirable to effectuate their purpose.
MAJOR PROVISIONS OF THE PLAN
TYPES OF OPTIONS TO BE GRANTED. Under the Plan, the Compensation
Committee may grant either an "incentive stock option" within the meaning of
Section 422 of the Code or options which do not satisfy Section 422 of the Code
("non-qualified stock options"). Options with respect to which no designation is
made by the Compensation Committee are deemed to be incentive stock options. No
option which is intended to qualify as an incentive stock option may be granted
under the Plan to any individual who, at the time of such grant, is not an
employee of the Company.
ELIGIBILITY. The potential recipients of Options under the Plan are
directors of the Company, key employees of the Company, as determined by the
Compensation Committee, and consultants and independent contractors used by the
Company (collectively, the "Eligible Participants") each individually as
determined by the Compensation Committee in its sole discretion. At September 1,
1998, approximately 100 persons were eligible to participate in the Plan. No
Option which is intended to qualify as an incentive stock option may be granted
under this Plan to any employee who, at the time the Option is granted, owns
shares possessing more than ten percent of the total combined voting power or
value of all classes of stock of the Company, unless the exercise price under
such Option is at least 110% of the fair market value of a share of Common Stock
on the date such Option is granted and the duration of such Option is no more
than five years.
SHARES OF COMMON STOCK SUBJECT TO THE PLAN. The Board of Directors
proposes for stockholder approval that the Plan be amended so that the number of
shares of Common Stock that may be the subject of Options may not exceed
3,500,000 in the aggregate, which Common Shares may be held in treasury or
authorized but unissued. If any Option shall expire, be canceled or terminate
for any reason without having been exercised in full, the unpurchased shares
subject thereto may again be made subject to Options under the Plan.
GRANT OF OPTIONS. The Compensation Committee, in its sole discretion
(subject to the Plan) determines the number of shares of Common Stock subject to
each Option granted to any Eligible Participant under the Plan. The terms of the
Plan do not prohibit the issuance of Options at different times to the same
Eligible Participant.
OPTION EXERCISE PRICE AND DURATION. The Compensation Committee fixes
the price per share of the Common Stock to be purchased pursuant to the exercise
of any Option, which in any event, may not be less than the Fair Market Value
(as defined in the Plan) of a share of Common Stock on the day on which the
Option is granted. The Compensation Committee fixes the duration of an Option up
to a maximum of ten years from the date of grant.
CONSIDERATION FOR OPTIONS. The Company must obtain such consideration
for the grant of an Option as the Compensation Committee in its discretion may
request.
EXERCISE OF OPTIONS. An Option, once granted, will be exercisable by
the holder (or if deceased, by his estate) at such rate and times as may be
fixed by the Compensation Committee, but in no event may any Option be exercised
until at least six months after the date upon which the Option was granted
except upon (i) the holder's retirement on or after his 65th birthday, (ii) the
disability or death of the holder (subject to the provisions on termination of
employment), or (iii) under special circumstances which in the opinion of the
Compensation Committee warrant special consideration. Options may not be
transferred nor assigned by the holder.
TERMINATION OF OPTIONS. Options terminate at the end of the tenth
business day following the holder's cessation of service as an employee,
director, consultant or independent contractor. This period is extended to three
months in the case of the holder's retirement on or after attaining age 65 or
disability, and to six months in the case of the holder's death (in which case
the Option is exercisable by the holder's estate). If the employment or service
of an Option holder is terminated due to a violation of his duties, the Option
terminates immediately.
PAYMENT FOR AND ISSUANCE OF SHARES. Payment for the shares purchased
pursuant to the exercise of an Option shall be made in full at the time of the
exercise of the Option, in cash, by check, by delivery of previously- owned
shares of Common Stock (beneficially owned for at least six months and valued at
their Fair Market Value as of the date of the exercise), or by such other
methods as the Compensation Committee may permit from time to time. The Plan
contains standard provisions to assure that any exercise of an Option or the
issuance of shares pursuant thereto will not violate applicable securities and
income tax withholding laws.
ADJUSTMENT OF SHARES. The Plan contains usual anti-dilution provisions
in the event of certain corporate transactions.
AMENDMENT AND TERMINATION OF THE PLAN. The Board of Directors or the
Compensation Committee may at any time withdraw or from time to time amend the
Plan and any Options not theretofore granted. With respect to any outstanding
Option, the Board of Directors or the Compensation Committee, with the consent
of the affected holder of an Option, may at any time withdraw or from time to
time amend the Plan and the terms and conditions of any outstanding Option.
Notwithstanding the foregoing, any amendment by the Board of Directors or the
Committee which would increase the number of shares of Common Stock issuable
under Options or change the class of employees to whom Options may be granted
shall be subject to the approval of the Stockholders of the Company within one
year of such amendment. No Option shall be granted under the Plan after February
25, 2003.
FEDERAL INCOME TAX CONSIDERATIONS
The following description of certain federal income tax consequences
of transactions under the Plan is based on the Code, the applicable Treasury
Regulations promulgated thereunder, judicial authority and current
administrative rulings and practices as in effect on the date of this Proxy
Statement. This discussion is for general information only and does not address
all the tax consequences that may be relevant to a particular participant. Each
participant may wish to discuss specific questions with his own tax adviser or
attorney. In addition, there may be tax considerations under state and local
laws applicable to participants.
INCENTIVE STOCK OPTIONS. An employee will not recognize income upon
the grant or exercise of an incentive stock option. If an employee disposes of
the shares acquired upon exercise of an incentive stock option at least two
years after the date the Option was granted and at least one year after the date
the shares are transferred to him upon the exercise of an Option (the "One-Year,
Two-Year Requirement"), the employee will realize long-term capital gain in an
amount equal to the excess, if any, of his selling price for the shares over the
exercise price. In such case, the Company will not be entitled to any tax
deduction. Depending on the holding period of the shares, such capital gain may
be long-term gain or, with respect to transactions after December 31, 2000,
qualified 5-year gain. If an employee disposes of the shares acquired upon the
exercise of an incentive stock option before the One-Year, Two- Year
Requirements are met, any gain realized will be taxable at such time as follows:
(1) as ordinary income to the extent of the difference between the Option
exercise price and the lesser of (a) the fair market value of the shares on the
date the shares were transferred to him or (b) the amount realized on such
disposition, and (2) as capital gain to the extent of any excess, which gain
shall be treated as long-term or short-term capital gain depending upon the
employee's holding period. In such case, the Company may claim an income tax
deduction for the amount taxable to the employee as ordinary income. The
difference between the fair market value of the shares at the time the incentive
stock option is exercised and the exercise price will constitute an item of
adjustment, for purposes of determining the employee's alternative minimum
taxable income, and as such may under certain circumstances be subject, in the
year in which the Option is exercised, to the alternative minimum tax.
If an individual uses shares of Common Stock of the Company that he
owns to pay, in whole or in part, the exercise price under an incentive stock
option, (a) the individual's holding period for the newly-issued shares equal in
number to the surrendered shares (the "exchanged shares") shall include the
period during which the surrendered shares were held, (b) the employee's basis
in such exchanged shares will be the same as his basis in the surrendered
shares, and (c) no gain or loss will be recognized by the employee on the
exchange of the surrendered shares for the exchanged shares. Further, the
employee will have a zero basis in any additional shares received over and above
the exchanged shares, and the employee's holding period for such shares shall
begin on the date such shares are acquired. However, if an employee tenders
shares acquired pursuant to the exercise of an incentive stock option to pay all
or part of the exercise price under an incentive stock option, such tender will
constitute a disposition of such shares for purposes of the One-Year, Two-Year
Requirement applicable to incentive stock options and such tender will be
treated as a taxable exchange if such holding period has not been met.
NON-QUALIFIED STOCK OPTIONS. A holder will not recognize any income at
the time a non-qualified stock option is granted. If the employee is not a
director, officer, or principal stockholder (i.e., an owner of more than ten
percent of the Common Stock of the Company), he will recognize ordinary income
at the time he exercises a non- qualified stock option in a total amount equal
to: (1) in the case of Options which the employee exercises with cash, the
excess of the then fair market value of the shares acquired over the exercise
price and (2) in the case of Options which an employee exercises by tendering
previously owned shares, the then fair market value of the number of shares
issued in excess of the fair market value of the number of shares surrendered
upon such exercise. Section 83 of the Code generally provides that if a
director, officer, or principal stockholder receives shares pursuant to the
exercise of a non-qualified stock option, he is not required to recognize income
until the date on which he can sell such shares at a profit without being
subject to liability under Section 16(b) of the Exchange Act. In general,
pursuant to regulations under Section 16(b) of the Exchange Act the restriction
on selling such shares at a profit will be considered to have lapsed six months
after the later of the original grant date of the option or the option holder's
intervening purchase of shares or other equity securities of the Company in a
transaction that is subject to the short- swing profit recovery provisions of
Section 16(b) of the Exchange Act. Alternatively, a director, officer or
principal stockholder who would not otherwise be subject to tax on the value of
his shares as of the date they were acquired can file a written election, within
30 days after the shares are transferred to him, pursuant to Section 83(b) of
the Code, to be taxed as of the date of transfer. Any subsequent appreciation in
the value of shares will be taxed when the shares are sold, as either long-term,
short-term or qualified 5-year capital gain. In either case, the director,
officer, or principal stockholder would recognize income equal to the amount by
which the fair market value, at the time the income is required to be
recognized, of the shares acquired pursuant to the exercise of such option
exceeds the price paid for such shares.
All income recognized upon the exercise of any non-qualified stock
option will be taxed as ordinary income. The Company may claim an income tax
deduction (if applicable tax withholding rules are satisfied) for the amount
taxable to a holder in the same year as those amounts are taxable to a holder.
Shares issued upon the exercise of a non-qualified stock option are generally
eligible for capital gain or loss treatment upon any subsequent disposition.
Generally, a holder's holding period will commence from the date such shares are
issued to him, and his basis in such shares will equal their fair market value
as of that date, but the holding period of a director, officer, or principal
stockholder begins on the date he recognizes income with respect to such shares,
and his basis in the shares will be equal to the greater of the then fair market
value of the shares or the amount paid for such shares. If an individual uses
shares of Common Stock that he owns to exercise a non-qualified stock option,
(a) the individual's holding period for the newly-issued shares equal in number
to the surrendered shares (the "exchanged shares") shall include the period
during which the surrendered shares were held, (b) the holder's basis in such
exchanged shared will be the same as his basis in the surrendered shares, and
(c) no gain or loss will be recognized by the holder on the exchange of the
surrendered shares for the exchanged shares.
SECTION 280G OF THE CODE. In addition to the Federal income tax
consequences discussed above, Section 280G of the Code provides that if an
officer, stockholder or highly compensated individual receives a payment which
is in the nature of compensation and which is contingent upon a change in
control of the employer, and such payment equals or exceeds three times his Base
Salary (as hereinafter defined), then any amount received in excess of Base
Salary shall be considered an "excess parachute payment." An individual's Base
Salary is equal to his average annual compensation over the five-year period (or
period of employment, if shorter) ending with the close of the individual's
taxable year immediately preceding the taxable year in which the change in
control occurs. In addition to any income tax which would otherwise be owed on
such payment, the individual will be subject to an excise tax equal to 20% of
such excess payment (and the Company will not be allowed any deduction which
might otherwise have been allowed for such excess payment). If the taxpayer
establishes, by clear and convincing evidence, that the amount received is
reasonable compensation for past or future services, all or a portion of such
amount shall be deemed not to be an excess parachute payment.
Section 280G provides that payments made pursuant to a contract
entered into within one year of the change in control are presumed to be
parachute payments unless the individual establishes, by clear and convincing
evidence, that such contract was not entered into in contemplation of a change
in control. In addition, the General Explanation of the Tax Reform Act of 1984
prepared by the Staff of the Joint Committee on Taxation indicates that the
grant of an Option within one year of the change in control or the acceleration
of an Option because of a change in control may be considered a parachute
payment, in an amount equal to the value of the Option or the value of the
accelerated portion of the Option, as the case may be. Pursuant to proposed
regulations, the acceleration of a non- qualified stock option because of a
change in control will be considered a parachute payment. Even if the grant of
an Option, if any, within one year of the change in control or the acceleration
of an Option, if any, is not a parachute payment for purposes of Section 280G,
the exercise of an Option granted within one year of the change in control or
the exercise of the accelerated portion of an Option may result in a parachute
payment, in an amount equal to the excess of the fair market value of the shares
received upon exercise of the Option over the exercise price. Payments received
for the cancellation of an Option, if any, because of a change in control may
also result in parachute payments.
OPTIONS GRANTED
Pursuant to the Plan, all current directors and executive officers as
a group have been granted Options for a total of 1,389,000 shares and all
employees as a group have been granted Options for a total of 418,218 shares. On
October 2, 1998 the closing price of the Company's Common Stock on the Nasdaq
SmallCap Market was $3.56 per share.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of holders of a majority of the voting power of
the Company present, or represented by proxy, and entitled to vote at the Annual
Meeting is required for approval of the amendments to the Plan.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE FOR APPROVAL
OF THE AMENDMENTS TO THE PLAN.
3. PROPOSAL TO AMEND CERTIFICATE OF INCORPORATION
TO EFFECT A ONE-FOR-TWO REVERSE STOCK
SPLIT AND TO INCREASE THE PAR VALUE OF
SHARES OF THE COMPANY'S COMMON STOCK
The Board of Directors of the Company has adopted resolutions to
approve, and to submit to stockholders for approval, a reverse stock split of
the Company's outstanding shares of Common Stock, $.01 par value ("Old Common
Stock"), on the basis of one new share of Common Stock for each two shares of
presently outstanding Common Stock and an increase in the par value of the
Common Stock from $.01 to $.02 per share. The foregoing actions would be
effected by an amendment to the Company's Certificate of Incorporation, as
amended (the "Certificate of Incorporation").
Assuming the proposed amendment to the Certificate of Incorporation
effecting the reverse stock split of shares of Old Common Stock and changing the
par value of the Common Stock is approved, a Certificate of Amendment amending
the Certificate of Incorporation will, subject to the discretion of the Board of
Directors, be filed with the Secretary of State of the State of Delaware as
promptly as practicable thereafter. The amendment and the proposed reverse stock
split would become effective as of the date of such filing (the "Effective
Date").
GENERAL
The Company is presently authorized to issue 100,000,000 shares of Old
Common Stock, of which 9,493,957 shares were outstanding, 183,500 shares were
held in treasury and 12,361,218 shares were reserved for issuance at September
30, 1998. If this Proposal 3 is approved, the Company will have 100,000,000
shares of Common Stock, $.02 par value ("New Common Stock"), authorized, of
which approximately 4,746,978 shares will be outstanding, 91,750 shares will be
held in treasury and 6,180,609 shares will be reserved for issuance.
In addition to Common Stock, the Certificate of Incorporation
authorizes the issuance of 1,000,000 shares of preferred stock, $.01 par value.
At September 30, 1998, there were issued and outstanding 22,500 shares of Series
A Convertible Preferred Stock. The authorized and outstanding number of shares
of preferred stock, and the par value thereof, will not change as a result of
this Proposal 3.
PRINCIPAL EFFECTS OF THE PROPOSED REVERSE STOCK SPLIT
Based upon the 9,493,957 shares of Old Common Stock outstanding on
September 30, 1998, the proposed one-for-two reverse stock split would decrease
the outstanding shares of Common Stock by 50%, and thereafter 4,746,978 shares
of New Common Stock would be outstanding. The proposed reverse stock split will
not affect any common stockholder's proportionate equity interest in the
Company, subject to the provisions relating to the elimination of fractional
shares as described below.
At September 30, 1998, there were outstanding options to purchase an
aggregate of 1,807,218 shares of Old Common Stock under the Plan and an
aggregate of 1,514,367 shares were available for grant under the Plan, subject
to approval by stockholders of Proposal 2 herein. The Plan provides automatic
adjustment in the event of a reverse stock split so that the amount of shares
issuable upon exercise of outstanding options and the number of shares available
for grant will be reduced to one-half of the amount issuable prior to the
Effective Date, and the exercise prices would be two times the present exercise
prices. In addition to the foregoing options granted pursuant to the Plan, at
September 30, 1998, there were outstanding options to purchase 580,000 shares of
Old Common Stock granted in connection with completed acquisitions. These
options will also be adjusted such that on the Effective Date they will be
exercisable for 290,000 shares of New Common Stock and the exercise prices would
be two times the present exercise prices.
Each share of Series A Convertible Preferred Stock is presently
convertible into 333 1/3 shares of Old Common Stock. Accordingly, based upon
22,500 shares of Series A Convertible Preferred Stock outstanding on September
30, 1998, 7,500,000 shares of Old Common Stock were reserved for issuance at
such date. Pursuant to the provisions of the Certificate of Amendment
authorizing the issuance of the Series A Convertible Preferred Stock, on the
Effective Date, each share of Series A Convertible Preferred Stock will become
convertible into 166 2/3 share of Common Stock. Based upon 22,500 shares of
Series A Convertible Preferred Stock outstanding on September 30, 1998,
3,750,000 shares of New Common Stock will be reserved for issuance on the
Effective Date.
At September 30, 1998, the Company, in addition to options and the
Series A Convertible Preferred Stock, had outstanding warrants to purchase
709,000 shares of Old Common Stock and debt securities convertible into 515,000
shares of Old Common Stock. Pursuant to the provisions of the relevant
instruments pursuant to which such warrants and convertible debt securities were
issued, the number of shares of Common Stock into which such warrants will be
exercised and such debt securities will be converted will be automatically
decreased by 50% and the exercise prices will be automatically increased by a
factor of two.
The foregoing may be summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF COMMON STOCK AS OF SEPTEMBER 30, 1998 IF PROPOSAL 3 IS APPROVED *
<S> <C> <C>
Authorized 100,000,000 100,000,000
Issued and Outstanding 9,493,957 4,746,978
Treasury Shares 183,500 91,750
Reserved for Issuance** 12,361,218 6,180,609
Available for Future Issuance 78,144,825 89,072,413
Par Value Per Share $.01 $.02
NUMBER OF SHARES OF PREFERRED STOCK
Authorized 1,000,000 1,000,000
Issued and Outstanding:
Series A 22,500 22,500
Treasury Shares 0 0
Conversion Ratio of Series A
Preferred Stock to Common Stock 1:333 1/3 1:166 2/3
Par Value Per Share $.01 $.01
- ----------------
* Without giving effect to fractional shares.
** Maximum number of shares reserved for issuance upon conversion of the
Company's Series A Convertible Preferred Stock, warrants, options and
convertible debt securities.
</TABLE>
REASONS FOR THE PROPOSED REVERSE STOCK SPLIT
The Board of Directors believes that the relatively low per share
market price of the Old Common Stock impairs the acceptability of the Old Common
Stock to institutional investors and other members of the investing public.
Theoretically the number of shares outstanding should not, by itself, affect the
marketability of the Old Common Stock, the type of investor who acquires it, or
the Company's reputation in the financial community. In practice this is not
necessarily the case, as many institutional investors look upon low-priced stock
as unduly speculative in nature and, as a matter of policy, avoid investment in
such stocks. In addition, option and derivative instrument exchanges prohibit
contracts on stocks selling for under certain prices per share.
Further, the Board of Directors believes that the current per-share
level of the Old Common Stock has reduced the effective marketability of the
shares because of the reluctance of many leading brokerage firms to recommend
low-priced stock to their clients. In addition, a variety of brokerage house
policies and practices tend to discourage individual brokers within those firms
from dealing in low-priced stocks. Some of those policies and practices pertain
to the payment of brokers' commissions and to time-consuming procedures that
function to make the handling of low-priced stock unattractive to brokers from
an economic standpoint. Additionally, the structure of trading commissions also
tends to have an adverse impact upon holders of low-priced stock because the
brokerage commission on a sale of low-priced stock generally represents a higher
percentage of the sales price than the commission on a relatively higher priced
stock.
The Company's Common Stock is currently included for listing in the
Nasdaq SmallCap Market. The Nasdaq National Market has advised the Company that
it will consider the Company's application to list its New Common Stock if the
Company effects the proposed one-for-two reverse stock split and complies with
various other conditions. The Nasdaq National Market's listing qualifications
require, in addition to satisfying various other tests, that the minimum bid
price of common stock to be listed must exceed $5.00 per share. The Board of
Directors believes that the listing of the New Common Stock on the Nasdaq
National Market will increase the marketability of the Company's shares and will
increase market liquidity in the Company's shares. There can be no assurance
that the Nasdaq National Market will accept the New Common Stock for listing,
or, if accepted, that marketability or liquidity will increase. The Board of
Directors reserves the right not to effectuate the proposed amendment even after
it has been approved by stockholders by not filing the Certificate of Amendment
if the Nasdaq National Market listing is not approved or for any other reason in
their discretion.
The proposed reverse stock split is intended to result in a higher per
share market price for the Company's Common Stock that will increase investor
interest and eliminate the resistance of brokerage firms.
THERE CAN BE NO ASSURANCE THAT THE MARKET PRICE OF THE COMMON STOCK
AFTER THE PROPOSED REVERSE STOCK SPLIT WILL BE TWO TIMES THE MARKET PRICE BEFORE
THE PROPOSED REVERSE STOCK SPLIT, OR THAT SUCH PRICE WILL EITHER EXCEED OR
REMAIN IN EXCESS OF THE CURRENT MARKET PRICE.
REASON FOR THE PROPOSED INCREASE IN AUTHORIZED SHARES
As part of this Proposal 3, the Board of Directors recommends that the
number of authorized post-split shares of New Common Stock be maintained at
100,000,000. This will result in an increase in the number of shares available
for issuance from 78,144,825 to 89,072,413.
The Board of Directors believes that it is in the best interests of
the Company and its stockholders to effectively increase the number of
authorized shares of New Common Stock available for prompt issuance, in the
discretion of the Board, in the acquisition of properties or businesses, in
financing future growth, or for other corporate purposes without the
time-consuming costly need to hold a special meeting of stockholders in every
case. The Board of Directors will determine whether, when and on what terms the
issuance of shares of Common Stock may be warranted, and the Company is and will
continue to be receptive to all methods of financing which may be reasonably
available and acquisition opportunities which may arise from time to time. The
Board of Directors believes that, in the future, occasions may arise where the
time required to obtain stockholder approval might adversely delay the Company's
ability to enter into a desirable transaction. Authorized but unissued shares of
New Common Stock will be used by the Company from time to time as appropriate
and opportune situations arise.
Pursuant to the Company's Certificate of Incorporation, stockholders
of the Company have no preemptive rights with respect to the effective increase
in the authorized number of shares. The Certificate of Incorporation does not
require further approval by stockholders prior to the issuance of any additional
shares of New Common Stock. However, in certain circumstances (generally
relating to the number of shares to be issued and the identity of the
recipients), the rules of the Nasdaq National Market System require stockholder
authorization in connection with the issuance of such additional shares. Subject
to the rules of the Nasdaq National Market System, if applicable, the Board of
Directors has the sole discretion to issue additional shares of Common Stock on
such terms and for such consideration as may be determined by the Board of
Directors. The issuance of any additional shares of stock would have the effect
of diluting the percentage of stock ownership and voting rights of the present
stockholders of the Company.
Management is not aware of any present efforts of any persons to
accumulate Common Stock or to obtain control of the Company, and the proposed
reverse stock split is not intended to be an anti-takeover device.
There are no other existing charter or by-law provisions which may be
deemed to have anti-takeover effects and management does not presently intend to
propose any further amendments to the charter or by-laws with such effects.
EXCHANGE OF STOCK CERTIFICATES AND ELIMINATION OF FRACTIONAL SHARE INTERESTS
Because of the reduction in the actual number of shares of Common
Stock outstanding after the reverse stock split, stockholders will be required
to exchange their certificates representing shares of Old Common Stock for new
certificates representing shares of New Common Stock. Stockholders will be
furnished the necessary materials and instructions to effect such exchange at
the appropriate time by the Company's transfer agent. Stockholders should not
submit any certificates until requested to do so.
No scrip or fractional shares of New Common Stock will be issued.
Accordingly, stockholders who would otherwise be entitled to receive fractional
shares of New Common Stock will receive cash in lieu thereof, computed at the
average of the mean of the closing bid and asked prices of the Old Common stock
as listed in the Nasdaq SmallCap Market for the five trading days immediately
preceding the Effective Date. Under Delaware law, stockholders will not be
entitled to appraisal rights with respect to the reverse stock split or the
payment for their fractional shares, if any.
FEDERAL INCOME TAX CONSEQUENCES
The following description of federal income tax consequences of the
reverse stock split is based on the Code, the applicable Treasury Regulations
promulgated thereunder, judicial authority and current administrative rulings
and practices as in effect on the date of this Proxy Statement. This discussion
is for general information only and does not address all the tax consequences
that may be relevant to a particular stockholder (such as stockholders who hold
this stock as part of a "straddle," a "hedge" or a "conversion transaction,"
persons that have a "functional currency" other than the U.S. dollar, investors
in pass-through entities, non-resident aliens, broker-dealers or insurance
companies). Furthermore, no foreign, state or local tax consequences are
discussed herein. ACCORDINGLY, STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS TO DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT
TO THEM.
The exchange of shares of Old Common Stock for shares of New Common
Stock will not result in recognition of gain or loss (except in the case of cash
received for fractional shares as described below). The holding period of the
shares of New Common Stock will include the stockholder's holding period for the
shares of Old Common Stock exchanged therefor, and the aggregate tax basis of
the shares of the New Common Stock will be the same as the aggregate tax basis
of the shares of Old Common Stock exchanged therefor, reduced by the tax basis
allocable to the receipt of cash in lieu of fractional shares.
If cash is received by a stockholder as a result of the sale of a
fractional share interest by the Transfer Agent, the Company will be treated as
distributing the fractional share to the stockholder and the stockholder will be
treated as selling the fractional share interest. Such stockholder will
recognize gain or loss, as the case may be, measured by the difference between
the amount of cash received and the basis of such stockholder's pre-split stock
allocable to such fractional share. Such gain or loss will be capital gain or
loss (if such stock was held as a capital asset), and any of such capital gain
or loss will be long-term capital gain or loss, to the extent that such
stockholder's holding period for his or her stock exceeds 12 months. Under
recently enacted legislation, the maximum regular individual U.S. federal income
tax rate on capital gains is 20% for property held for more than one year.
Capital gains on the sale of property held for one year or less are subject to
U.S. federal income tax at ordinary income rates.
RESOLUTION TO BE PRESENTED AT THE ANNUAL MEETING
The following resolution will be proposed for consideration at the
Annual Meeting:
RESOLVED, that, in connection with (i) a reverse split of this
Corporation's outstanding Common Stock, $.01 par value, on the
basis of one new share of Common Stock for each two shares of
Common Stock and (ii) an increase in the par value of the
Common Stock of this Corporation from $.01 to $.02, and in the
discretion of this corporation's Board of Directors, the first
paragraph of Article FOURTH of this corporation's Certificate
of Incorporation shall be amended to read in its entirety as
follows:
"FOURTH: The total number of
shares of stock which the Corporation
is authorized to issue is 101,000,000
shares, of which 100,000,000 shares
shall be designated Common Stock, $.02
par value per share, and 1,000,000
shares shall be designated Preferred
Stock, $.01 par value per share."
VOTE REQUIRED FOR APPROVAL
Under Delaware law, the affirmative vote of the holders of a majority
of the outstanding voting power of the Company entitled to notice of, and to
vote at, the Annual Meeting is required to adopt the proposed amendment to
Article FOURTH. The Board of Directors reserves the right, notwithstanding
stockholder approval and without further action by the stockholders, to elect
not to proceed with the reverse stock split, if at any time prior to filing the
Certificate of Amendment, the Board of Directors, in its sole discretion,
determines that the Reverse Stock Split is no longer in the best interests of
the Company and its stockholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE AUTHORIZATION AND
APPROVAL OF THE AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION.
4. APPOINTMENT OF INDEPENDENT AUDITORS
Effective October 23, 1996, the Company engaged KPMG Peat Marwick LLP
as its independent accountants to audit its financial statements in place of
Freed Maxick Sachs & Murphy, P.C. (the "Former Accountant"). The decision to
change accountants was approved by the Board of Directors and the Audit
Committee of the Company and was the result of the Company's belief that due to
its increasing size and nationwide scope of operations, it needed a "Big 6"
accounting firm with nationwide operations to audit its financial statements.
The Former Accountant's report on the financial statements of the Company for
each of the past two years did not contain an adverse opinion or a disclaimer of
opinion, and was not qualified or modified as to uncertainty, audit scope or
accounting principles. There were no disagreements of the type described in
paragraph (a)(1)(iv) of Item 304 of Regulation S-K promulgated under the
Securities Act ("Item 304 of Regulation S-K"), or any reportable event as
described in paragraph (a)(1)(v), paragraph (a)(2) or paragraph (b) of Item 304
of Regulation S-K.
The Board of Directors of the Company has selected KPMG Peat Marwick
LLP as independent auditors of the Company for the fiscal year ending December
31, 1998. A representative of KPMG Peat Marwick LLP is expected to be present at
the meeting with the opportunity to make a statement if he so desires and to
respond to appropriate questions. A representative of the Former Accountant is
not expected to be present at the Meeting.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE FOR APPROVAL
OF THE APPOINTMENT OF KPMG PEAT MARWICK LLP AS THE COMPANY'S AUDITORS.
OTHER MATTERS
At the date of this Proxy Statement, the only business which the Board
of Directors intends to present or knows that others will present at the meeting
is that hereinabove set forth. If any other matter or matters are properly
brought before the meeting, or any adjournment thereof, it is the intention of
the persons named in the accompanying form of proxy to vote the proxy on such
matters in accordance with their judgment.
MISCELLANEOUS
The Company anticipates that the 1999 Annual Meeting of Stockholders
will be held in August 1999. Proposals of stockholders intended to be presented
at the Company's 1999 Annual Meeting of Stockholders must be received by the
Company on or prior to February 15, 1999, to be eligible for inclusion in the
Company's Proxy Statement and form of proxy to be used in connection with the
1999 Annual Meeting.
By order of the Board of Directors
David A. Higson
Secretary
Dated: October 7, 1998
