-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KAT5hdj3xmsZL4BGIT3URPhdK5lgVRNSMjrenYMhbyrc5X+O9tdyCe7EXQhAjYi8 fGB4o/awvwpKMuJ/7PxdqQ== 0000950131-97-006012.txt : 19971007 0000950131-97-006012.hdr.sgml : 19971007 ACCESSION NUMBER: 0000950131-97-006012 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19971006 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPASS INTERNATIONAL SERVICES CORP CENTRAL INDEX KEY: 0001046817 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-37205 FILM NUMBER: 97691060 BUSINESS ADDRESS: STREET 1: 5 INDEPENDENCE WAY STREET 2: SUITE 300 CITY: PRINCETON STATE: NJ ZIP: 08540 BUSINESS PHONE: 6095145156 MAIL ADDRESS: STREET 1: 5 INDEPENDENCE WAY STREET 2: SUITE 300 CITY: PRINCETON STATE: NJ ZIP: 08540 S-1 1 FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 6, 1997 REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- COMPASS INTERNATIONAL SERVICES CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ---------------- DELAWARE 7322 22-3540815 (STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.) INCORPORATION OR CODE NO.) ORGANIZATION) 5 INDEPENDENCE WAY, SUITE 300, PRINCETON, NEW JERSEY 08540; (609) 514-5156 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------------- MICHAEL J. CUNNINGHAM 5 INDEPENDENCE WAY SUITE 300 PRINCETON, NEW JERSEY 08540 (609) 514-5156 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: HOWARD S. LANZNAR, ESQ. NEIL GOLD, ESQ. MARGUERITE M. ELIAS, ESQ. CAROLINE AIKEN KOSTER, ESQ. KATTEN MUCHIN & ZAVIS FULBRIGHT & JAWORSKI L.L.P. 525 WEST MONROE STREET 666 FIFTH AVENUE SUITE 1600 31ST FLOOR CHICAGO, ILLINOIS 60661 NEW YORK, NEW YORK 10103 (312) 902-5200 (212) 318-3000 ---------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box [_] . If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of earlier effective registration statement for the same offering: [_] . If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [_] . If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: [X]. CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED TITLE OF EACH CLASS OF AMOUNT PROPOSED MAXIMUM AMOUNT OF SECURITIES TO BE TO BE MAXIMUM AGGREGATE REGISTRATION REGISTERED REGISTERED OFFERING PRICE OFFERING PRICE FEE - --------------------------------------------------------------------------------------------------- Common Stock............ 4,715,000 shares(1) $12.00 per share(2) $56,580,000(2) $17,146 - ---------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- (1) Includes 615,000 shares to be offered upon exercise of the Underwriters' over-allotment option. (2) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457 of Regulation C under the Securities Act of 1933, as amended. ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED OCTOBER 6, 1997 4,100,000 SHARES LOGO COMPASS INTERNATIONAL SERVICES CORPORATION COMMON STOCK All of the 4,100,000 shares of Common Stock offered hereby are being sold by the Company. Prior to this offering (the "Offering") there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price of the Common Stock will be between $ and $ per share. See "Underwriting" for a discussion of the factors considered in determining the initial public offering price. Application has been made to have the Common Stock 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. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Price to Underwriting Proceeds to Public Discount(1) Company(2) - ----------------------------------------------- Per Share.... $ $ $ Total(3). $ $ $ - -----------------------------------------------
- -------------------------------------------------------------------------------- (1) See "Underwriting" for information concerning indemnification of the Underwriters and other matters. (2) Before deducting expenses payable by the Company, estimated at $3,000,000. (3) The Company has granted to the Underwriters a 30-day option to purchase up to 615,000 additional shares of Common Stock solely to cover over- allotments, if any. If the Underwriters exercise this option in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ , and $ , respectively. See "Underwriting." The shares of Common Stock are offered by the several Underwriters named herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of the certificates representing such shares will be made against payment therefor at the office of NationsBanc Montgomery Securities, Inc., on or about , 1997. ----------- NationsBanc Montgomery Securities, Inc. Lehman Brothers , 1997 [Description of photographs and captions on inside front cover to come.] ---------------- 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 PROSPECTUS SUMMARY Simultaneously with and as a condition to the closing of the Offering made by this Prospectus, Compass will acquire five business services outsourcing companies (the "Founding Companies"), in separate transactions (collectively, the "Acquisitions"), in exchange for cash and shares of its Common Stock. Unless otherwise indicated, all references to the "Company" herein include the Founding Companies and references to "Compass" shall mean Compass International Services Corporation prior to the effectiveness of the Acquisitions. For more information about the Acquisitions, see "Certain Transactions." The following summary is qualified in its entirety by, and should be read in conjunction with, the detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all such financial information and share and per share data in this Prospectus (i) have been adjusted to give effect to the Acquisitions, (ii) give effect to the approximate 112.185-for-1 stock split to be effected prior to the consummation of the Offering, and (iii) assume that the Underwriters' over- allotment option is not exercised. THE COMPANY Compass was organized to create a leading provider of outsourced business services to public and private entities throughout the sales cycle (as illustrated below, the "Sales Cycle"). The five Founding Companies collectively provide accounts receivable management services, mailing services and teleservices to clients in a broad range of sectors including telecommunications, financial services, insurance, healthcare, education, government and utilities. In addition, through its proprietary Accelerated Payment Systems ("APS") process, the Company is a leading provider of telephonic check drafting services which enable clients to accept payments through checks authorized by phone. The Founding Companies, each of which has been in business for more than ten years, have collectively achieved substantial growth in recent years. On a pro forma combined basis, the Founding Companies' revenues increased from $30.9 million in 1992 to $71.8 million in 1996, representing a compound annual growth rate of 23.5%. The Company's accounts receivable management services include the recovery of traditional delinquent accounts from both consumer and commercial debtors and the management of early stage delinquencies. Mailing services include lead generating direct mail, often to prompt inbound sales calls, and direct mail for billing, payment processing or collection purposes. Mailing services also include presorting, freight and drop shipping, data processing, laser printing, mailing list rental and order fulfillment. Teleservices include outbound telemarketing, inbound customer service and inbound sales. Each of the Company's services, 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, 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 that this trend toward outsourcing will continue. Both the accounts receivable management industry and the direct marketing industry have experienced significant growth in recent years. The American Collectors Association estimates that consumer receivables outsourced to third parties for management and recovery in the United States increased from approximately $43.7 billion in 1990 to approximately $84.3 billion in 1995, a compound annual growth rate of 14.0%. The Direct Marketing Association estimates that advertising expenditures in the United States for telemarketing increased from approximately $63.4 billion in 1991 to $87.9 billion in 1996, a compound annual growth rate of 6.8%, 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 3 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 of the Company that can be utilized at various stages throughout the Sales Cycle. [DIAGRAM 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. 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 4 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 OFFERING 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
- -------- (1) Does not include: (i) up to 1,000,000 additional shares reserved for issuance pursuant to the Company's 1997 Employee Incentive Compensation Plan (the "Incentive Plan"), of which options to purchase approximately 600,000 shares of Common Stock will be granted under the Incentive Plan concurrently with the Offering at an exercise price equal to the initial public offering price; (ii) 500,000 additional shares reserved for issuance under the Company's Employee Stock Purchase Plan; or (iii) 100,000 shares of Common Stock issuable upon the exercise of warrants to be issued concurrently with the Offering. See "Management--1997 Employee Incentive Compensation Plan" and "--Employee Stock Purchase Plan" and "Certain Transactions." 5 SUMMARY PRO FORMA COMBINED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Compass will acquire the Founding Companies simultaneously with and as a condition to the consummation of this Offering. For financial statement presentation purposes, The Mail Box, Inc., one of the Founding Companies, has been designated as the accounting acquiror. The following unaudited summary pro forma combined financial data present certain data for the Company as adjusted to give effect to (i) the consummation of the Acquisitions, (ii) certain pro forma adjustments to the historical financial statements, including adjustments for three acquisitions completed by Bomar since August 1996, and (iii) the consummation of this Offering and the application of the net proceeds therefrom. See the Unaudited Pro Forma Combined Financial Statements and the notes thereto included elsewhere in this Prospectus.
PRO FORMA COMBINED ---------------------------------- YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, ------------ --------------------- 1996 1996 1997 ------------ ---------- ---------- STATEMENT OF OPERATIONS DATA (1): Revenues.................................... $71,783 $34,878 $43,307 Operating expenses.......................... 45,079 21,037 27,069 ---------- ---------- ---------- Gross profit.............................. 26,704 13,841 16,238 Selling, general and administrative expenses (2)........................................ 19,510 9,861 10,879 Amortization of goodwill and other intangibles (3)............................ 1,251 625 625 ---------- ---------- ---------- Income from operations.................... 5,943 3,355 4,734 Other expense, net (4)...................... 333 146 254 ---------- ---------- ---------- Income before income taxes.................. 5,610 3,209 4,480 Provision for income taxes (5)............ 2,744 1,534 2,042 ---------- ---------- ---------- Net income.................................. $ 2,866 $ 1,675 $ 2,438 ========== ========== ========== Net income per share........................ $ 0.28 $ 0.16 $ 0.24 ========== ========== ========== Shares used in computing net income per share (6).................................. 10,269,126 10,269,126 10,269,126
JUNE 30, 1997 -------------------------- PRO FORMA AS COMBINED (7) ADJUSTED (8) ------------ ----------- BALANCE SHEET DATA: Working capital (deficit)........................... $(18,197)(9) $ Total assets........................................ 66,382 Total long-term debt, net of current portion........ 11,613 Stockholders' equity................................ 19,354
- -------- (1) The pro forma combined statement of operations data assume that the Acquisitions and the Offering were consummated on January 1, 1996, are not necessarily indicative of the operating results that would have been achieved had these events actually then occurred and should not be construed as representative of future operating results. The summary pro forma combined statement of operations data should be read in conjunction with the Unaudited Pro Forma Combined Financial Statements and the notes thereto and the historical financial statements of Compass and the Founding Companies and the notes thereto included elsewhere in this Prospectus. (2) The pro forma combined statement of operations data reflect reductions in salaries, bonuses and benefits to the stockholders of the Founding Companies to which they have agreed prospectively in the employment agreements to be entered into upon consummation of the Offering (the "Compensation Differential"). The Compensation Differential was approximately $3.5 million, $1.8 million and $2.1 million for the year ended December 31, 1996 and the six months ended June 30, 1996 and 1997, respectively. 6 (3) Reflects (i) the amortization of goodwill of $37.0 million to be recorded as a result of the Acquisitions and $3.4 million to be recorded as a result of an acquisition by Bomar in September 1997 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 $148,000 for the year ended December 31, 1996, and $94,000 and $138,000 for the six months ended June 30, 1996 and 1997, respectively and a reduction of interest income of $61,000 for the year ended December 31, 1996 and $33,000 and $21,000 for the six-month periods ended June 30, 1996 and 1997, respectively, relating to stockholder notes to be paid off upon consummation of the Offering. (5) Assumes that all income is subject to a corporate income tax rate of 40% and that all goodwill is non-deductible. (6) Includes: (i) 1,682,769 shares issued to BGL Capital Partners, L.L.C., and management of Compass; (ii) 5,435,691 shares issued to owners of the Founding Companies in connection with the Acquisitions; and (iii) 3,150,666 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 June 30, 1997, are not necessarily indicative of the financial position that would have been achieved had these events actually then occurred and should not be construed as representative of future financial position. The summary pro forma balance sheet data should be read in conjunction with the Unaudited Pro Forma Combined Financial Statements and the notes thereto and the historical financial statements of Compass and the Founding Companies and the notes thereto included elsewhere in this Prospectus. (8) Adjusted to reflect the sale of the 4,100,000 shares of Common Stock offered hereby and the application of the estimated net proceeds therefrom. See "Use of Proceeds." (9) Includes $20.0 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 SUMMARY INDIVIDUAL FOUNDING COMPANY FINANCIAL DATA (IN THOUSANDS) The following table presents summary operating data for each of the individual Founding Companies on a historical basis for the periods indicated.
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,(1) JUNE 30,(1) ------------------------------ ----------------- 1994 1995 1996 1996 1997 --------- --------- --------- -------- -------- MAIL BOX: Revenues.................... $ 15,354 $ 17,370 $ 26,156 $ 12,070 $ 15,804 Operating expenses.......... 11,168 12,402 17,953 8,456 10,367 --------- --------- --------- -------- -------- Gross profit................ 4,186 4,968 8,203 3,614 5,437 Selling, general and administrative expenses.... 3,442 4,370 5,891 2,776 3,653 --------- --------- --------- -------- -------- Income from operations...... $ 744 $ 598 $ 2,312 $ 838 $ 1,784 ========= ========= ========= ======== ======== NCMC: Revenues.................... $ 8,874 $ 12,287 $ 13,579 $ 6,856 $ 8,044 Operating expenses.......... 4,550 6,322 7,945 3,703 5,018 --------- --------- --------- -------- -------- Gross profit................ 4,324 5,965 5,634 3,153 3,026 Selling, general and administrative expenses.... 3,400 4,328 4,798 2,498 2,531 --------- --------- --------- -------- -------- Income from operations...... $ 924 $ 1,637 $ 836 $ 655 $ 495 ========= ========= ========= ======== ======== BOMAR: Revenues.................... $ 6,859 $ 7,416 $ 9,597 $ 4,766 $ 6,677 Operating expenses.......... 4,236 4,569 6,419 2,888 4,259 --------- --------- --------- -------- -------- Gross profit................ 2,623 2,847 3,178 1,878 2,418 Selling, general and administrative expenses.... 2,206 2,594 2,853 1,566 1,965 --------- --------- --------- -------- -------- Income from operations...... $ 417 $ 253 $ 325 $ 312 $ 453 ========= ========= ========= ======== ======== MID-CONTINENT: Revenues.................... $ 9,086 $ 8,763 $ 9,038 $ 4,548 $ 4,741 Operating expenses.......... 2,963 2,851 2,875 1,470 1,551 --------- --------- --------- -------- -------- Gross profit................ 6,123 5,912 6,163 3,078 3,190 Selling, general and administrative expenses.... 5,862 5,974 6,054 3,025 3,116 --------- --------- --------- -------- -------- Income (loss) from operations................. $ 261 $ (62) $ 109 $ 53 $ 74 ========= ========= ========= ======== ======== IMPACT(2): Revenues.................... $ 6,698 $ 8,748 $ 8,869 $ 4,045 $ 6,257 Operating expenses.......... 4,705 6,108 6,961 2,884 4,817 --------- --------- --------- -------- -------- Gross profit................ 1,993 2,640 1,908 1,161 1,440 Selling, general and administrative expenses.... 1,787 2,590 2,108 1,093 1,340 --------- --------- --------- -------- -------- Income (loss) from operations................. $ 206 $ 50 $ (200) $ 68 $ 100 ========= ========= ========= ======== ========
- -------- (1) Selling, general and administrative expenses for the Founding Companies for each of the years in the three-year period ended December 31, 1996 and for the six months ended June 30, 1996 and 1997 do not include a reduction for the Compensation Differential as indicated below. The historical Compensation Differential shown for Bomar does not include $86,000, $73,000, $169,000, $46,000 and $48,000, for the years ended December 31, 1994, 1995 and 1996 and for the six months ended June 30, 1996 and 1997 respectively, related to Bomar's acquisition of FCCI which was completed in September 1997.
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, -------------------------- ----------------- 1994 1995 1996 1996 1997 -------- -------- -------- -------- -------- MAIL BOX....................... $ 152 $ 310 $ 875 $ 369 $ 781 NCMC........................... 75 169 210 91 65 BOMAR.......................... 516 718 1,046 684 600 MID-CONTINENT.................. 981 1,057 1,161 577 632 IMPACT......................... -- -- -- -- -- -------- -------- -------- -------- -------- Total......................... $ 1,724 $ 2,254 $ 3,292 $ 1,721 $ 2,078 ======== ======== ======== ======== ========
(2) Impact's operating data for the years ended December 31, 1994 and 1995 reflect the operating results for the year ended September 30 for its affiliate, Impact Tele-marketing, Inc. 8 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. 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 in the following risk factors and elsewhere in this Prospectus. 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. 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, utilize different accounting policies and procedures, employ different technologies and operating systems and target different markets and client segments. While the Company believes that there are substantial opportunities in integrating the businesses of the Founding Companies, these differences increase the risk inherent in successfully completing such integration. 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. MANAGEMENT OF GROWTH The Company expects to grow internally and through acquisitions. The Company expects to expend significant time and effort in expanding existing businesses and identifying, completing and integrating acquisitions. The Company's ability to manage growth successfully will require the Company to continue to improve its operations, management and financial systems and controls as well as expand its employee work force. Any future growth can be expected to place significant additional responsibilities on the Company's management, operations, employees and resources. There can be no assurance the Company will be able to maintain or accelerate its current growth, effectively manage its expanding operations or achieve planned growth on a timely or profitable basis. To the extent that the Company is unable to manage its growth efficiently and effectively, the Company's business, financial condition and results of operations could be materially adversely affected. See "Business-- Growth Strategy" and "Management." FACTORS AFFECTING INTERNAL GROWTH AND OPERATING STRATEGIES A key element of the Company's strategy is to generate internal growth by capitalizing on cross-selling opportunities, generating new clients through aggressive marketing and expanding its service offerings. Internal growth will depend upon factors including the effective initiation, development and maintenance of client 9 relationships; the expansion of marketing operations; the Company's ability to maintain the high quality of the services and products it offers and to expand such services and products; and the recruitment, motivation and retention of qualified management and other personnel. Sustaining growth will also require continued access by the Company to capital, the successful cross-selling of products and services among the Founding Companies and realization by the Company of economies of scale. There can be no assurance that the Company's strategies will continue to generate internal growth or that it will be able to generate cash flow adequate for its operations and to support growth. A key component of the Company's strategy is to operate the Founding Companies and subsequently acquired businesses on a decentralized basis, with local management retaining responsibility for day-to-day operations, profitability and the growth of the business. If proper overall business controls are not implemented, this decentralized operating strategy could result in inconsistent operating and financial practices at the Founding Companies and subsequently acquired businesses and the Company's overall profitability could be adversely affected. See "Business--Growth Strategy." RISKS ASSOCIATED WITH THE COMPANY'S ACQUISITION STRATEGY AND FINANCING OF ACQUISITIONS A significant element in the Company's growth strategy is the acquisition of additional outsourced business services companies that will add to the growth of or complement its existing businesses. There can be no assurance that the Company will be able to identify or reach mutually agreeable terms with acquisition candidates and their owners, or that the Company will be able to profitably manage additional businesses or successfully integrate such additional businesses into the Company without substantial costs, delays or other problems. In addition, acquisitions may involve a number of special risks, including adverse short-term effects on the Company's reported operating results; diversion of management's attention; dependence on retention, hiring and training of key personnel; unanticipated problems or legal liabilities; and amortization of acquired intangible assets. Some or all of these risks could have a material adverse effect on the Company's operations and financial performance. In addition, increased competition for attractive acquisition candidates may develop, in which case there may be fewer acquisition opportunities available to the Company as well as high acquisition prices. There can be no assurance that the Founding Companies or other businesses acquired in the future will achieve anticipated revenues or earnings. The Company currently intends to finance future acquisitions by using its Common Stock for all or a portion of the consideration to be paid. In the event that the Common Stock does not maintain sufficient value, or potential acquisition candidates are unwilling to accept Common Stock as consideration for the sale of their businesses, the Company may be required to utilize more of its cash resources, if available, in order to continue its acquisition program. If the Company does not have sufficient cash resources, its growth could be limited unless it is able to obtain capital through additional debt or equity financings. There can be no assurance that such debt or equity financings will be obtained or that, if obtained, such financing will be on terms that are favorable to the Company or sufficient for the Company's needs. If the Company is unable to obtain sufficient financing, it may be unable to fully implement its acquisition strategy. 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. 10 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. Although NCMC believes that the counterclaims are without merit, there can be no assurances that Defendants will not prevail with respect to some or all of their counterclaims. If the purchase agreement is rescinded and the prior license agreement restored, the royalties payable by NCMC would be higher than those currently being paid, damages could be assessed and the ownership of the APS Patent would be transferred to the Defendants. See "Business--Litigation." NCMC is currently a plaintiff in two other lawsuits in which NCMC is alleging that a competitor and a former customer are infringing the APS Patent. These defendants have denied any infringement and filed counterclaims seeking a declaration that the APS Patent is invalid. There can be no assurances that NCMC will prevail in these or other patent infringement actions it may pursue, that the APS Patent will not be declared invalid or that the loss of either of these two lawsuits or the defendants' counterclaims will not have a material adverse effect on the Company's business, results of operations or financial condition. See "Business--Litigation." In addition, there can be no assurances that the Company's competitors will not be able to develop similar or better technology than the APS Patent. DEPENDENCE ON LABOR FORCE The Company's success depends in part on its ability to recruit, hire, train and retain qualified employees. The Company's operations are very labor intensive and have experienced high personnel turnover. A significant increase in the Company's employee turnover rate could increase the Company's recruiting and training costs and decrease operating efficiencies and productivity. If the Company's growth strategy is successful, the Company will be required to recruit, hire and train qualified personnel at an accelerated rate. There can be no assurance that the Company will be able to hire, train and retain a sufficient labor force of qualified employees. Because a significant portion of the Company's operating costs consist of wages to hourly workers, an increase in wages, costs of employee benefits or employment taxes could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, certain of the Company's facilities are located in geographic areas with relatively low unemployment rates, thus potentially making it more difficult and costly to hire qualified personnel. 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, fee arrangements, scope of services and termination provisions. Clients may usually terminate such contracts on short notice. Accordingly, there can be no assurance that existing clients will continue to use the Company's services at historical levels, if at all. The Company's 10 largest clients in 1996 accounted for approximately 39.8% of the Company's revenues on a pro forma combined basis. During 1996 and the six months ended June 30, 1997, VarTec Telecom, Inc. ("VarTec") accounted for 11.2% and 14.6%, respectively, of the Company's revenues on a pro forma combined basis. The Company's contract with VarTec allows for termination on short notice. A significant reduction in business from VarTec could have a material adverse effect on the Company's business, results of operations and financial condition. See "Business--Client Relationships." COMPETITION The markets in which the Company competes are highly competitive, and the Company expects competition to persist and intensify in the future. The Company's competitors include small firms offering specific business 11 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. Although the Company has entered into an employment agreement with each of the Company's executive officers and the senior management of each of the Founding Companies, 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." 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. 12 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. While the Company intends to obtain property and business interruption insurance, such insurance may not adequately compensate the Company for all losses that it may incur. RISKS ASSOCIATED WITH RAPIDLY CHANGING TECHNOLOGY The Company's business is highly dependent on its computer and telecommunications equipment and software systems. The Company's failure to maintain its technological capabilities or to respond effectively to technological changes could have a material adverse effect on the Company's business, results of operations or financial condition. The Company's future success also will be highly dependent upon its ability to enhance existing services and introduce new services to respond to changing technological developments. There can be no assurance that the Company can successfully develop and bring to market any new services in a timely manner, that such services or products will be commercially successful or that competitors' technologies or services will not render the Company's products or services noncompetitive or obsolete. CONTROL OF THE COMPANY 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." POTENTIAL 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, 13 therefore, may not be sold unless registered under the Securities Act or sold pursuant to an exemption from registration, such as the exemption provided by Rule 144. Furthermore, these stockholders have agreed with Compass not to sell, transfer or otherwise dispose of any of these shares of Common Stock for a one- year period following the Offering. Such stockholders have certain piggyback registration rights beginning one year after the Offering and one demand registration right for the six month period beginning twenty months after the Offering with respect to their shares of Common Stock. The Company and the holders of all shares outstanding prior to the Offering (including the holders of shares issued in connection with the Acquisitions) have agreed not to offer, sell, contract to sell or otherwise dispose of any shares of Common Stock, or any securities convertible into or exercisable or exchangeable for Common Stock, for a period of 180 days after the date of this Prospectus without the prior written consent of NationsBanc Montgomery Securities, Inc. except for: (i) in the case of the Company, Common Stock issued pursuant to any employee or director plan described herein or in connection with acquisitions and (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, 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 will be determined by negotiation between the Company and the Representatives of the Underwriters and may bear no relationship to the price at which the Common Stock will trade after the Offering. See "Underwriting" for the factors to be considered in determining the initial public offering price. After the Offering, the market price of the Common Stock may be subject to significant fluctuations in response to numerous factors, including variations in the annual or quarterly financial results of the Company or its competitors, changes by financial research analysts in their estimates of the earnings of the Company or the failure of the Company to meet such estimates, conditions in the economy in general or in the industries in which the Company competes, unfavorable publicity or changes in applicable laws and regulations (or judicial or administrative interpretations thereof) affecting the Company or the industries in which the Company competes. From time to time, the stock market experiences significant price and volume volatility, which may affect the market price of the Common Stock for reasons unrelated to the Company's performance. IMMEDIATE AND SUBSTANTIAL DILUTION The purchasers of the shares of Common Stock offered hereby will experience immediate dilution in the net tangible book value of their shares of approximately $ per share. In the event the Company issues additional Common Stock in the future, including shares which may be issued in connection with future acquisitions, purchasers of Common Stock in this Offering may experience further dilution. See "Dilution." ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS The Board of Directors of the Company is authorized to issue preferred stock in one or more series without stockholder action. The Board of Directors of the Company serve staggered terms. The existence of this "blank-check" preferred stock and the staggered Board of Directors could render more difficult or discourage an attempt to obtain control of the Company by means of a tender offer, merger, proxy contest or otherwise. Certain provisions of the Delaware General Corporation Law may also discourage takeover attempts that have not been approved by the Board of Directors. See "Management--Board of Directors" and "Description of Capital Stock." 14 THE COMPANY Compass was formed to create a leading provider of outsourced business services to public and private entities throughout the Sales Cycle. Although it has conducted no operations to date, Compass has entered into agreements (the "Acquisition Agreements") to acquire the five Founding Companies simultaneously with, and as a condition to, the closing of the Offering. A brief description of each Founding Company is set forth below. THE MAIL BOX, INC. The Mail Box, Inc. (together with its subsidiary, "Mail Box"), founded in 1971, provides direct mailing services, billing services, mail presorting, freight and drop shipping, data processing, laser printing, mailing list rental and other related services to companies located principally in the southwest United States. Mail Box also provides order fulfillment services and sells printed materials such as letterhead, envelopes and business forms. Mail Box is headquartered in Dallas where its operations are housed in four buildings containing approximately 338,000 square feet. In the twelve months ended June 30, 1997, Mail Box processed approximately 840 million pieces of mail, utilizing sophisticated technology in its lettershop, data processing and presort facilities. Mail Box has received numerous quality awards including the U.S. Postal Service Industry Excellence Award in 1992 for progressive practices in the direct marketing industry and the Mail Advertising Service Association's Award for Excellence in Education in 1996 for establishing the industry's first full-time training facility. Significant clients of Mail Box include VarTec Telecom, Inc., Medic Computer Systems, Inc., Sears Roebuck & Co., Advantis Business Services, Inc., The Army and Air Force Exchange Services and Southwestern Bell Mobile Systems, Inc. Mail Box's revenues were $26.2 million in 1996 and $15.8 million in the six months ended June 30, 1997. NATIONAL CREDIT MANAGEMENT CORPORATION National Credit Management Corporation (together with its subsidiary, "NCMC"), founded in 1984, provides accounts receivable management services and, through its patented Accelerated Payment Systems ("APS") technology, telephonic check drafting services. NCMC is based in Hunt Valley, Maryland (a suburb of Baltimore), where it operates a call center and sales office, and operates an additional call center and sales office in Las Vegas. NCMC provides traditional delinquency collection services, as well as an early receivables management service, primarily to clients in the education, utilities, government and healthcare industries and its APS check drafting services primarily to clients in the financial services and utilities sectors. Significant clients of NCMC include University Support Services, MBNA America Bank, N.A., the State of Maryland, Bank One Corporation and General Electric Capital Services, Inc. NCMC's revenues were $13.6 million in 1996 and $8.0 million in the six months ended June 30, 1997. B.R.M.C. OF DELAWARE, INC. B.R.M.C. of Delaware, Inc. (together with its subsidiaries, "Bomar"), founded in 1984, provides accounts receivable management services, primarily for clients in the telecommunications, insurance, financial services and healthcare industries. Bomar is based in Destin, Florida, and conducts operations in Atlanta, Phoenix, Houston and Tampa. Since August 1996, Bomar has acquired three accounts receivable management companies. In August 1996 Bomar acquired a 75% interest in Advanced Credit Services, Inc. ("ACS"), in November 1996 it acquired Clayton-Parker & Associates ("CPA") and in September 1997 it acquired Financial Claims Control, Inc. ("FCCI"). Bomar derives the substantial majority of its revenues from primary, secondary and tertiary consumer collections. In addition, Bomar collects subrogated accounts for insurance companies and recently began providing early receivables management services. Significant clients of Bomar include Bellsouth Telecommunications, Inc., AT&T Wireless Services, MD Anderson Cancer Hospital, The FACS Group (Federated Department Stores, Inc.) and Capital One Financial Corporation. Bomar's revenues were $9.6 million in 1996 and $6.7 million in the six months ended June 30, 1997. MID-CONTINENT AGENCIES, INC. Mid-Continent Agencies, Inc. (together with its subsidiaries, "Mid- Continent"), founded in 1932, provides accounts receivable management services primarily to companies in the manufacturing, insurance, wholesale 15 distribution and commercial sectors. Mid-Continent was one of the first companies in its industry to provide early receivables management services. It derives the substantial majority of its revenues from commercial collections with the balance derived from consumer collections. Mid-Continent is based in Rolling Meadows, Illinois (a suburb of Chicago) where it operates a call center, and has additional call centers in Louisville and Buffalo. Mid- Continent also has an office in the United Kingdom which specializes in commercial debt recovery and international credit reporting services. In a December 1996 survey prepared by the Institute of Management & Administration, Inc., an independent industry trade publication, Mid-Continent was ranked first by companies comparing the services and results provided by commercial collection agencies. Mid-Continent's significant clients include Beverly Enterprises, Inc., CNA Insurance, Reynolds and Reynolds, Sentry Insurance and seven state workers' compensation funds. Mid-Continent's revenues were $9.0 million in 1996 and $4.7 million in the six months ended June 30, 1997. IMPACT TELEMARKETING GROUP, INC. Impact Telemarketing Group, Inc. and Impact Tele-marketing, Inc. (collectively, "Impact"), founded in 1984, provides primarily outbound telemarketing services to national and regional companies in the insurance, financial services, telecommunications and utilities industries. To a lesser extent, Impact also provides inbound telemarketing and ancillary services. Impact is based in Woodbury, New Jersey (a suburb of Philadelphia), and operates approximately 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 won numerous quality awards including being named one of Telemarketing Magazine's Top Fifty Service Agencies every year since 1991, and Impact has been named in Telemarketing Magazine as the fastest growing telemarketing company in the United States in 1995, 1996 and 1997. Impact's major clients include MemberWorks, Inc., the Telecommunication Division of AT&T, Gerber Life Insurance Co. and MBNA America Bank, N.A. Impact's revenues were $8.9 million in 1996 and $6.3 million in the six months ended June 30, 1997. THE ACQUISITIONS Simultaneously with, and as a condition to, the closing of the Offering, Compass will acquire all of the outstanding capital stock of each of the Founding Companies. The aggregate consideration to be paid by Compass consists of approximately $20.0 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." The Company's executive offices are located at 5 Independence Way, Suite 300, Princeton, New Jersey 08540, and its telephone number is (609) 514-5156. The Company intends to relocate its headquarters to the metropolitan New York area after the consummation of the Offering. 16 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 $ million ($ million if the Underwriters' over-allotment option is exercised in full). Of the net proceeds, approximately $20.0 million will be used to pay the cash portion of the purchase price for the Founding Companies, of which approximately $15.4 million will be paid to former stockholders of the Founding Companies who will become officers, directors or holders of more than 5% of the shares of Common Stock outstanding after the Offering. Such cash portion will vary depending on the initial public offering price. In addition, the consideration to be paid to the Founding Companies is subject to post- closing adjustment. Approximately $11.8 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 19.5%, with a weighted average interest rate of 8.4%. Such indebtedness would otherwise mature at various dates through 2006. The remaining $ 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 Acquisition Agreements with the Founding Companies, the Company has no agreement with respect to any acquisitions. Pending such uses, the net proceeds will be invested in short-term, interest-bearing, investment grade securities. In addition to the net proceeds of the Offering, the Company will retain the cash balances of the Founding Companies. Such balances totaled approximately $3.7 million as of June 30, 1997. The Company is seeking to obtain a bank line of credit in an amount up to $35 million. No commitment has been obtained, and there can be no assurance that the Company will be able to obtain this line of credit, or other financing it may need, on terms the Company deems acceptable. DIVIDEND POLICY The Company intends to retain its earnings, if any, to finance the expansion of its business and for general corporate purposes and therefore does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. Any payment of future dividends will be at the discretion of the Board of Directors and will depend upon, among other things, the Company's earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends and other factors that the Company's Board of Directors deems relevant. In addition, in the event the Company is successful in obtaining one or more lines of credit, it is likely that any such facility will include restrictions on the Company's ability to pay dividends without the consent of the lender. 17 CAPITALIZATION The following table sets forth the short-term debt and capitalization of the Company at June 30, 1997: (i) on a pro forma combined basis to give effect to the Acquisitions; and (ii) as further adjusted to give effect to the Offering and the application of the estimated net proceeds therefrom. This table should be read in conjunction with the Unaudited Pro Forma Combined Financial Statements of the Company and the notes thereto included elsewhere in this Prospectus.
JUNE 30, 1997 ----------------- PRO AS FORMA(1) ADJUSTED -------- -------- (IN THOUSANDS) Short-term debt (2).......................................... $ 3,997 $ ======= ======= Long-term debt, net of current portion (2)................... $11,613 $ 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.................................................. 71 Additional paid-in-capital................................. 16,924 Retained earnings............................................ 2,359 ------- ------- Total stockholders' equity............................... 19,354 ------- ------- Total capitalization................................... $30,967 $ ======= =======
- -------- (1) Combines the respective accounts of Compass and the Founding Companies at June 30, 1997 and gives effect to the reclassification of the capital structures of NCMC, Bomar, Mid-Continent and Impact as additional paid-in- capital. (2) For a description of the Company's debt, see Notes to the Financial Statements of the Founding Companies. (3) Does not include: (i) up to 1,000,000 additional shares reserved for issuance pursuant to the Incentive Plan, of which options to purchase approximately 600,000 shares of Common Stock will be granted concurrently with the Offering at an exercise price equal to the initial public offering price; (ii) 500,000 additional shares reserved for issuance under the Company's Employee Stock Purchase Plan; or (iii) 100,000 shares of Common Stock issuable upon the exercise of warrants to be issued concurrently with the Offering. See "Management-- 1997 Employee Incentive Compensation Plan" and "--Employee Stock Purchase Plan" and "Certain Transactions." 18 DILUTION The deficit in pro forma net tangible book value of the Company as of June 30, 1997 was approximately $23.1 million or $3.24 per share of Common Stock, after giving effect to the Acquisitions. The deficit in pro forma net tangible book value per share represents the Company's pro forma net tangible assets less total liabilities divided by the number of shares of Common Stock to be outstanding after giving effect to the Acquisitions. After giving effect to the sale of the 4,100,000 shares of Common Stock offered hereby (at an assumed initial public offering price of $ 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 June 30, 1997 would have been approximately $ , or $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors purchasing the shares in the Offering. The following table illustrates this pro forma dilution: Assumed initial public offering price per share............ $ Pro forma deficit in net tangible book value per share before the Offering..................................... $(3.24) Increase in pro forma net tangible book value per share attributable to new investors........................... ------ Pro forma net tangible book value per share after the Offering.................................................. -------- Dilution per share to new investors........................ ========
The following table sets forth, on a pro forma basis to give effect to the Acquisitions as of June 30, 1997, the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by existing stockholders (after giving effect to the Acquisitions) and the new investors purchasing shares of Common Stock from the Company in the Offering:
SHARES PURCHASED AVERAGE ------------------ TOTAL PRICE NUMBER PERCENT CONSIDERATION PER SHARE ---------- ------- ------------- --------- Existing stockholders............. 7,118,460 63.5% New investors..................... 4,100,000 36.5% ---------- ------ ------- Total........................... 11,218,460 100.0% ========== ====== =======
19 SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Compass will acquire the Founding Companies simultaneously with and as a condition to the consummation of this Offering. For financial statement presentation purposes, Mail Box has been identified as the accounting acquiror. The following selected historical financial data of Mail Box as of December 31, 1995 and 1996 and for the years ended December 31, 1994, 1995 and 1996 have been derived from the audited financial statements of Mail Box included elsewhere in this Prospectus. The following selected historical financial data for Mail Box as of December 31, 1992, 1993 and 1994 and as of June 30, 1997, for the years ended December 31, 1992 and 1993 and for the six months ended June 30, 1996 and 1997 have been derived from unaudited financial statements of Mail Box, which have been prepared on the same basis as the audited financial statements and, in the opinion of Mail Box, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of such data. The selected unaudited pro forma combined financial data present data for the Company, adjusted for (i) the consummation of the Acquisitions; (ii) certain pro forma adjustments to the historical financial statements, including adjustments for three acquisitions completed by Bomar since August 1996; and (iii) the consummation of this Offering and the application of the net proceeds therefrom. See the Unaudited Pro Forma Combined Financial Statements and the notes thereto and the historical Financial Statements of Mail Box and the other Founding Companies and the notes thereto included elsewhere in this Prospectus.
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, --------------------------------------------- ----------------------- 1992 1993 1994 1995 1996 1996 1997 ------- ------- ------- ------- ----------- ----------- ----------- STATEMENT OF OPERATIONS DATA: MAIL BOX Revenues........ $10,688 $14,314 $15,354 $17,370 $ 26,156 $ 12,070 $ 15,804 Operating expenses....... 8,236 11,286 11,168 12,402 17,953 8,456 10,367 ------- ------- ------- ------- ----------- ----------- ----------- Gross profit.... 2,452 3,028 4,186 4,968 8,203 3,614 5,437 Selling, general and administrative expenses....... 2,589 2,957 3,442 4,370 5,891 2,776 3,653 ------- ------- ------- ------- ----------- ----------- ----------- Income (loss) from operations..... (137) 71 744 598 2,312 838 1,784 Other expense... 182 128 212 302 337 167 209 ------- ------- ------- ------- ----------- ----------- ----------- Income (loss) before income taxes.......... (319) (57) 532 296 1,975 671 1,575 Provision (benefit) for income taxes... (86) (13) 206 134 700 240 562 ------- ------- ------- ------- ----------- ----------- ----------- Net (loss) income ........ $ (233) $ (44) $ 326 $ 162 $ 1,275 $ 431 $ 1,013 ======= ======= ======= ======= =========== =========== =========== PRO FORMA COMBINED (1): Revenues........................................ $ 71,783 $ 34,878 $ 43,307 Operating expenses.............................. 45,079 21,037 27,069 ----------- ----------- ----------- Gross profit................................... 26,704 13,841 16,238 Selling, general and administrative expenses (2)............................................ 19,510 9,861 10,879 Goodwill and intangible amortization (3)........ 1,251 625 625 ----------- ----------- ----------- Income from operations.......................... 5,943 3,355 4,734 Interest and other expense, net (4)............. 333 146 254 ----------- ----------- ----------- Income before income taxes...................... 5,610 3,209 4,480 Provision for income taxes (5).................. 2,744 1,534 2,042 ----------- ----------- ----------- Net income...................................... $ 2,866 $ 1,675 $ 2,438 =========== =========== =========== Net income per share............................ $ 0.28 $ 0.16 $ 0.24 =========== =========== =========== Shares used in computing net income per share (6)............................................ 10,269,126 10,269,126 10,269,126
MAIL BOX COMBINED COMPANIES ----------------------------------------------- ------------------------- DECEMBER 31, JUNE 30, JUNE 30, 1997 -------------------------------------- -------- ------------------------- PRO FORMA AS 1992 1993 1994 1995 1996 1997 COMBINED ADJUSTED (8) ------ ------ ------ ------ ------- -------- -------- ------------ BALANCE SHEET DATA: Working capital (deficit)...... $ (488) $ (587) $ (218) $ 36 $ 272 $ 376 $(18,197)(9) Total assets.... 4,267 4,374 5,481 7,425 12,539 10,127 66,382 Long-term debt, net of current portion........ 1,022 582 871 1,485 1,266 2,224 11,613 Stockholders' equity......... 253 191 642 995 2,206 2,232 19,354
- -------- (1) The pro forma combined statement of operations data assume that the Acquisitions and the Offering were consummated on January 1, 1996, are not necessarily indicative of the operating results that would have 20 been achieved had these events actually then occurred and should not be construed as representative of future operating results. The summary pro forma combined statement of operations data should be read in conjunction with the Unaudited Pro Forma Combined Financial Statements and the notes thereto and the historical financial statements of Compass and the Founding Companies and the notes thereto included elsewhere in this Prospectus. (2) The pro forma combined statement of operations data reflect reductions in salaries, bonuses and benefits to the stockholders of the Founding Companies to which they have agreed prospectively in the employment agreements to be entered into upon consummation of the Offering (the "Compensation Differential"). The Compensation Differential was approximately $3.5 million, $1.8 million and $2.1 million, respectively for 1996 and the six months ended June 30, 1996 and 1997. (3) Reflects: (i) the amortization of goodwill of $37.0 million to be recorded as a result of the Acquisitions and $3.4 million of goodwill to be recorded as a result of an acquisition by Bomar in September 1997; 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 $148,000 for the year ended December 31, 1996, and $94,000 and $138,000 for the six months ended June 30, 1996 and 1997, respectively and a reduction of interest income of $61,000 for the year ended December 31, 1996 and $33,000 and $21,000 for the six-month periods ended June 30, 1996 and 1997, respectively, relating to stockholder notes to be paid off upon consummation of the Offering. (5) Assumes that all income is subject to a corporate income tax rate of 40% and that all goodwill is non-deductible. (6) Includes: (i) 1,682,769 shares issued to BGL Capital Partners, L.L.C., and management of Compass; (ii) 5,435,691 shares issued to owners of the Founding Companies in connection with the Acquisitions; and (iii) 3,150,666 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 June 30, 1997, are not necessarily indicative of the financial position that would have been achieved had these events actually then occurred and should not be construed as representative of future financial position. The summary pro forma balance sheet data should be read in conjunction with the Unaudited Pro Forma Combined Financial Statements and the notes thereto and the historical financial statements of Compass and the Founding Companies and the notes thereto included elsewhere in this Prospectus. (8) Adjusted to reflect the sale of the 4,100,000 shares of Common Stock offered hereby and the application of the estimated net proceeds therefrom. See "Use of Proceeds." (9) Includes $20.0 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." 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 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. The Company was formed in April 1997 and has conducted no operations to date. Upon consummation of the Offering, the Founding Companies will be acquired by the Company. The Company's revenue is 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. 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"). The Compensation Differential was approximately $3.5 million, $1.8 million and $2.1 million for 1996 and the six months ended June 30, 1996 and 1997, respectively. 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. 22 Following the Acquisitions, the Company expects to realize certain savings as a result of: (i) consolidation of telecommunications, postage 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. Since August 1996, Bomar has made three acquisitions, two in 1996 and one in the third quarter of 1997. As a result of these acquisitions, the Company has: (i) expanded its geographic presence in the accounts receivable collection market; (ii) gained access to new information systems and customer service capabilities; and (iii) expanded its secondary and tertiary collection capabilities. The acquisitions have been accounted for using the purchase method of accounting with the results of the acquired companies included in Bomar's statements of income beginning on the respective dates of the acquisitions. The Unaudited Pro Forma Combined Financial Statements give effect to these acquisitions as if they had occurred on January 1, 1996. In July 1996, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 97 ("SAB 97") relating to business combinations immediately prior to an initial public offering. SAB 97 requires that these combinations be accounted for using the purchase method of acquisition accounting. 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 $37.0 million, and goodwill of approximately $3.4 million recorded as a result of an acquisition by Bomar in September 1997, 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 $1.3 million per year. The amount of goodwill to be recorded and the related amortization expense will depend in part on the initial public offering price. See "The Company." PRO FORMA COMBINED RESULTS OF OPERATIONS The following table provides the pro forma operating results of the Company for the year ended December 31, 1996 and the six months ended June 30, 1996 and 1997. For a discussion of the pro forma adjustments, see the Unaudited Pro Forma Combined Financial Statements and the notes thereto included elsewhere in this Prospectus.
YEAR ENDED SIX MONTHS ENDED JUNE 30, DECEMBER 31, ---------------------------- 1996 1996 1997 ------------- ------------- ------------- (DOLLARS IN THOUSANDS) Revenues.......................... $71,783 100.0% $34,878 100.0% $43,307 100.0% Operating expenses................ 45,079 62.8 21,037 60.3 27,069 62.5 ------- ----- ------- ----- ------- ----- Gross profit...................... 26,704 37.2 13,841 39.7 16,238 37.5 Selling, general and administrative expenses.......... 19,510 27.2 9,861 28.3 10,879 25.1 Goodwill amortization............. 1,251 1.7 625 1.8 625 1.4 ------- ----- ------- ----- ------- ----- Income from operations............ $ 5,943 8.3% $ 3,355 9.6% $ 4,734 10.9% ======= ===== ======= ===== ======= =====
PRO FORMA COMBINED RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1996 Revenues. Revenues increased $8.4 million, or 24.2%, from $34.9 million for the six months ended June 30, 1996 to $43.3 million for the six months ended June 30, 1997. The increase was primarily attributable to increased business from existing clients of Mail Box, Impact and NCMC, as well as growth within ACS and CPA, companies acquired by Bomar in 1996. 23 Operating expenses. Operating expenses increased $6.0 million, or 28.7%, from $21.0 million for the six months ended June 30, 1996 to $27.1 million for the six months ended June 30, 1997. As a percentage of revenues, operating expenses increased from 60.3% for the six months ended June 30, 1996 to 62.5% for the six months ended June 30, 1997. The primary reasons for the increase in operating expenses as a percentage of revenues were: (i) increased personnel and related expenses at Impact associated with its recent increase in call center capacity; and (ii) decreases in the price per APS check while related costs remained substantially unchanged. Additionally, operating expenses as a percentage of revenues of the companies acquired by Bomar in 1996 were higher than those of existing businesses. Selling, general and administrative expenses. Selling, general and administrative expenses increased $1.0 million, or 10.3%, from $9.9 million for the six months ended June 30, 1996 to $10.9 million for the six months ended June 30, 1997. Selling, general and administrative expenses decreased as a percentage of revenues from 28.3% for the six months ended June 30, 1996 to 25.1% for the six months ended June 30, 1997 as the costs of management and administrative personnel were spread over a larger revenue base, particularly at Impact. PRO FORMA COMBINED LIQUIDITY AND CAPITAL RESOURCES The Company is a holding company that conducts all of its operations through its subsidiaries. Accordingly, the primary internal source of the Company's liquidity is the cash flow of its subsidiaries. After the consummation of the Acquisitions and the Offering, the Company will have approximately $ million of cash. It is expected that the short term debt of the Founding Companies which totaled $2.3 million at June 30, 1997 will be repaid either from the net proceeds of the Offering or the line of credit described below. The Company is seeking to obtain a bank line of credit of up to $35 million. No commitment has been obtained, and there can be no assurance that the Company will be able to obtain this line of credit, or other financing it may need, on terms the Company deems acceptable. It is expected that the line of credit, if obtained, will require the Company to comply with various loan covenants including: (i) maintenance of certain financial ratios including minimum tangible net worth; (ii) restriction on additional indebtedness; and (iii) restrictions on liens, guarantees, advances, and dividends. The facility is intended to be used for acquisitions, capital expenditures, and general corporate purposes. The Company believes that its cash flow from operations will provide cash in excess of the Company's expected working capital needs, debt service requirements and planned capital expenditures. The Company made capital expenditures of $2.0 million in 1996 and $1.1 million during the six months ended June 30, 1997. Each of the Founding Companies has upgraded its information systems over the past two years. In addition, Mail Box has invested in new intelligent inserting and sorting equipment to upgrade and expand its mail services capabilities. As a result, the Company does not expect to have significant capital expenditures for information systems in the next two years, other than as may be required to integrate the systems of the Founding Companies and to upgrade and integrate companies that are acquired in the future. After the consummation of the Acquisitions, the Company intends to study the feasibility of integrating the systems of the Founding Companies. Consequently, the Company has not yet established its capital needs for such integration, which capital requirements are likely to change as the Company acquires other companies in the future. The Company intends to pursue attractive acquisition opportunities. The timing, size or success of any acquisition efforts is unpredictable. Accordingly, the Company is unable to accurately estimate its expected capital commitments. Funding for future acquisitions will likely come from a combination of proceeds of the Offering, cash flow from operations, borrowings under the proposed credit facility and the issuance of additional equity. The Company plans to register an additional 3,000,000 shares of its Common Stock under the Securities Act after completion of the Offering for use by the Company as consideration for future acquisitions. RESULTS OF OPERATIONS--MAIL BOX Mail Box provides direct mailing services, billing services, mail presorting, freight and drop shipping, data processing, laser printing, mailing list rental and order fulfillment to companies located principally in the southwest United States. 24 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:
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ------------------------------------------- ---------------------------- 1994 1995 1996 1996 1997 ------------- ------------- ------------- ------------- ------------- (DOLLARS IN THOUSANDS) Revenues................ $15,354 100.0% $17,370 100.0% $26,156 100.0% $12,070 100.0% $15,804 100.0% Operating expenses...... 11,168 72.7 12,402 71.4 17,953 68.6 8,456 70.1 10,367 65.6 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Gross profit............ 4,186 27.3 4,968 28.6 8,203 31.4 3,614 29.9 5,437 34.4 Selling, general and administrative expenses............... 3,442 22.4 4,370 25.2 5,891 22.5 2,776 23.0 3,653 23.1 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Income from operations.. $ 744 4.8% $ 598 3.4% $ 2,312 8.8% $ 838 6.9% $ 1,784 11.3% ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1996--MAIL BOX Revenues. Revenues increased $3.7 million, or 30.9%, from $12.1 million for the six months ended June 30, 1996 to $15.8 million for the six months ended June 30, 1997, primarily due to new mailing programs initiated by existing customers. Mail volume increased from approximately 340 million pieces in the six months ended June 30, 1996 to approximately 445 million pieces in the six months ended June 30, 1997. Operating expenses. Operating expenses increased approximately $1.9 million, or 22.6%, from $8.5 million for the six months ended June 30, 1996 to $10.4 million for the six months ended June 30, 1997. As a percentage of revenues, operating expenses decreased from 70.1% in the six months ended June 30, 1996 to 65.6% in the six months ended June 30, 1997, primarily due to improved efficiency in mailing operations and revenue mix changes, with higher margin list rental revenues growing as a percentage of revenues. Selling, general and administrative expenses. Selling, general and administrative expenses increased $877,000, or 31.6%, from $2.8 million for the six months ended June 30, 1996 to $3.7 million for the six months ended June 30, 1997. As a percentage of revenues, selling, general and administrative expenses increased from 23.0% in the six months ended June 30, 1996 to 23.1% in the six months ended June 30, 1997. Excluding Compensation Differential of $369,000 for the six months ended June 30, 1996 and $781,000 for the six months ended June 30, 1997, selling, general and administrative expenses decreased from 19.9% of revenues to 18.2% of revenues, respectively. RESULTS FOR 1996 COMPARED TO 1995--MAIL BOX Revenues. Revenues increased $ 8.8 million, or 50.6%, from $17.4 million in 1995 to $26.2 million in 1996, primarily due to expanded volume with existing customers. In addition, Mail Box generated an additional $2.3 million in revenues from a new client in the medical claims industry. Mail volume increased from approximately 500 million pieces in 1995 to approximately 840 million pieces in 1996. Operating expenses. Operating expenses increased approximately $5.6 million, or 44.8%, from $12.4 million in 1995 to $18.0 million in 1996. As a percentage of revenues, operating expenses decreased from 71.4% in 1995 to 68.6% in 1996, primarily due to improved efficiency in mailing operations. Selling, general and administrative expenses. Selling, general and administrative expenses increased $1.5 million, or 34.8%, from $4.4 million in 1995 to $5.9 million in 1996. As a percentage of revenues, selling, general and administrative expenses decreased from 25.2% in 1995 to 22.5% in 1996. Excluding Compensation Differential of $310,000 in 1995 and $875,000 in 1996, selling, general and administrative expenses decreased from 23.4% of revenues to 19.2% of revenues, respectively. This decrease as a percentage of revenues was the result of spreading fixed expenses over a larger revenue base. RESULTS FOR 1995 COMPARED TO 1994--MAIL BOX Revenues. Revenues increased $2.0 million, or 13.1%, from $15.4 million in 1994 to $17.4 million in 1995, primarily due to expanded volume with existing clients, including large telecommunication service providers, and growth within Mail Box's data processing and freight services. Mail volume increased from approximately 440 million pieces in 1994 to approximately 500 million pieces in 1995. 25 Operating expenses. Operating expenses increased approximately $1.2 million, or 11.0%, from $11.2 million in 1994 to $12.4 million in 1995. Operating expenses as a percentage of revenues decreased from 72.7% in 1994 to 71.4% in 1995. The primary cause of this improvement was a change in revenue mix to higher margin services, specifically an increase in mailing services and a decrease in laser printing as a percentage of revenues. Selling, general and administrative expenses. Selling, general and administrative expenses increased $928,000, or 27.0%, from $3.4 million in 1994 to $4.4 million in 1995. As a percentage of revenues, selling, general and administrative expenses increased from 22.4% in 1994 to 25.2% in 1995. LIQUIDITY AND CAPITAL RESOURCES--MAIL BOX Mail Box provided $2.9 million of cash from operating activities in 1996. In the six months ended June 30, 1997, Mail Box provided $846,000 of cash from operating activities. Net cash used in investing activities totaled $1.0 million and $746,000 for the year ended December 31, 1996 and the six months ended June 30, 1997, respectively. RESULTS OF OPERATIONS--NCMC NCMC provides accounts receivable management services primarily to clients in the education, utilities, government and healthcare industries. NCMC also provides 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:
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ------------------------------------------ -------------------------- 1994 1995 1996 1996 1997 ------------ ------------- ------------- ------------ ------------ (DOLLARS IN THOUSANDS) Revenues................ $8,874 100.0% $12,287 100.0% $13,579 100.0% $6,856 100.0% $8,044 100.0% Operating expenses...... 4,550 51.3 6,322 51.5 7,945 58.5 3,703 54.0 5,018 62.4 ------ ----- ------- ----- ------- ----- ------ ----- ------ ----- Gross profit............ 4,324 48.7 5,965 48.5 5,634 41.5 3,153 46.0 3,026 37.6 Selling, general and administrative expenses............... 3,400 38.3 4,328 35.2 4,798 35.3 2,498 36.4 2,531 31.5 ------ ----- ------- ----- ------- ----- ------ ----- ------ ----- Income from operations.. $ 924 10.4% $ 1,637 13.3% $ 836 6.2% $ 655 9.6% $ 495 6.2% ====== ===== ======= ===== ======= ===== ====== ===== ====== =====
RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1996-- NCMC Revenues. Revenues increased $1.2 million, or 17.3%, from $6.9 million for the six months ended June 30, 1996 to $8.0 million for the six months ended June 30, 1997, primarily due to increased transaction volume with existing APS customers and increased collections business from existing customers. APS check transaction volume increased from 2.4 million checks in the six months ended June 30, 1996 to 4.3 million checks in the six months ended June 30, 1997. While transaction volume grew 78.9%, per check prices decreased 35.5% as a result of increased competition. Operating expenses. Operating expenses increased approximately $1.3 million, or 35.5%, from $3.7 million for the six months ended June 30, 1996 to $5.0 million for the six months ended June 30, 1997. As a percentage of revenues, operating expenses increased from 54.0% for the six months ended June 30, 1996 to 62.4% for the six months ended June 30, 1997, primarily due to a $361,000 increase in mailing costs associated with APS check confirmation letters, without a commensurate increase in revenues. Costs during the period were also unfavorably impacted by one-time non-recurring expenses including $160,000 of compensation related expenses, $104,000 of relocation expenses and executive search fees, and $76,000 in legal expenses. Selling, general and administrative expenses. Selling, general and administrative expenses were approximately $2.5 million in both periods. As a percentage of revenues, selling, general and administrative expenses decreased from 36.4% for the six months ended June 30, 1996 to 31.5% for the six months ended June 30, 1997. This decrease as a percentage of revenues was the result of spreading fixed expenses over a larger revenue base. 26 RESULTS FOR 1996 COMPARED TO 1995--NCMC Revenues. Revenues increased $1.3 million, or 10.5%, from $12.3 million in 1995 to $13.6 million in 1996, primarily due to expanded APS check volume with existing customers. APS transaction volume increased from approximately 3.6 million checks in 1995 to approximately 5.5 million checks in 1996. This 52.8% increase was partly offset by a 21.2% average APS per check price decrease during 1996 as a result of increased competition. Receivables management revenues grew modestly during 1996 as NCMC restructured its operations and sales management. Operating expenses. Operating expenses increased approximately $1.6 million, or 25.7%, from $6.3 million in 1995 to $7.9 million in 1996. As a percentage of revenues, operating expenses increased from 51.5% in 1995 to 58.5% in 1996, primarily due to increased mailing costs associated with APS check confirmation letters and growth in direct payroll. As a percentage of revenues, mailing costs increased from 10.7% in 1995 to 12.3% in 1996. Selling, general and administrative expenses. Selling, general and administrative expenses increased $470,000, or 10.9%, from $4.3 million in 1995 to $4.8 million in 1996. As a percentage of revenues, selling, general and administrative expenses increased from 35.2% in 1995 to 35.3% in 1996. RESULTS FOR 1995 COMPARED TO 1994--NCMC Revenues. Revenues increased $3.4 million, or 38.5%, from $8.9 million in 1994 to $12.3 million in 1995 primarily due to expanded volume with existing customers as well as the addition of new customers. Expanded APS check volume with large credit card issuers accounted for most of the increase. APS check volume increased from approximately 1.5 million checks in 1994 to approximately 3.6 million checks in 1995. Receivables management revenues grew $395,000, or 6.1%, from $6.5 million in 1994 to $6.9 million in 1995. This increase was primarily attributable to new customer activity. Operating expenses. Operating expenses increased approximately $1.8 million, or 38.9%, from $4.6 million in 1994 to $6.3 million in 1995. As a percentage of revenues, operating expenses increased from 51.3% in 1994 to 51.5% in 1995, primarily due to increased payroll and other direct operating expenses. Selling, general and administrative expenses. Selling, general and administrative expenses increased $928,000, or 27.3%, from $3.4 million in 1994 to $4.3 million in 1995. As a percentage of revenues, selling, general and administrative expenses decreased from 38.3% in 1994 to 35.2% in 1995. This decrease resulted from lower management salaries and depreciation as a percentage of revenues. LIQUIDITY AND CAPITAL RESOURCES--NCMC NCMC provided $566,000 of cash from operating activities in 1996. In the six months ended June 30, 1997, NCMC provided $495,000 of cash from operating activities. Net cash used in investing activities totaled $164,000 and $195,000 for the year ended December 31, 1996 and the six months ended June 30, 1997, respectively. 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:
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ---------------------------------------- -------------------------- 1994 1995 1996 1996 1997 ------------ ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS) Revenues................ $6,859 100.0% $7,416 100.0% $9,597 100.0% $4,766 100.0% $6,677 100.0% Operating expenses...... 4,236 61.8 4,569 61.6 6,419 66.9 2,888 60.6 4,259 63.8 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Gross profit............ 2,623 38.2 2,847 38.4 3,178 33.1 1,878 39.4 2,418 36.2 Selling, general and administrative expenses............... 2,206 32.2 2,594 35.0 2,853 29.7 1,566 32.9 1,965 29.4 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Income from operations.. $ 417 6.1% $ 253 3.4% $ 325 3.4% $ 312 6.5% $ 453 6.8% ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
27 RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1996--BOMAR Revenues. Revenues increased $1.9 million, or 40.1%, from $4.8 million for the six months ended June 30, 1996 to $6.7 million for the six months ended June 30, 1997, primarily due to the acquisitions of ACS in August 1996 and CPA in November 1996, which added revenues of $589,000 and $635,000, respectively, in the six months ended June 30, 1997. Additionally, revenues grew as a result of increased business from existing clients. Operating expenses. Operating expenses increased approximately $1.4 million, or 47.5%, from $2.9 million for the six months ended June 30, 1996 to $4.3 million for the six months ended June 30, 1997. As a percentage of revenues, operating expenses increased from 60.6% for the six months ended June 30, 1996 to 63.8% for the six months ended June 30, 1997, primarily due to increased collector salaries and incentives which increased $1.2 million from $1.8 million to $3.0 million. Selling, general and administrative expenses. Selling, general and administrative expenses increased $399,000, or 25.5%, from $1.6 million for the six months ended June 30, 1996 to $2.0 million for the six months ended June 30, 1997. As a percentage of revenues, selling, general and administrative expenses decreased from 32.9% for the six months ended June 30, 1996 to 29.4% for the six months ended June 30, 1997. This decrease as a percentage of revenues was the result of spreading fixed expenses over a larger revenue base. 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 $1.9 million, or 40.5%, from $4.6 million in 1995 to $6.4 million in 1996. As a percentage of revenues, operating expenses increased from 61.6% in 1995 to 66.9% in 1996, primarily due to higher collector salaries which increased $1.2 million from $3.0 million to $4.2 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 $259,000, or 10.0%, from $2.6 million in 1995 to $2.9 million in 1996. As a percentage of revenues, selling, general and administrative expenses decreased from 35.0% in 1995 to 29.7% in 1996. RESULTS FOR 1995 COMPARED TO 1994--BOMAR Revenues. Revenues increased $557,000, or 8.1%, from $6.9 million in 1994 to $7.4 million in 1995, primarily due to increased business from existing clients. Operating expenses. Operating expenses increased approximately $333,000, or 7.9%, from $4.2 million in 1994 to $4.6 million in 1995. As a percentage of revenues, operating expenses decreased from 61.8% in 1994 to 61.6% in 1995. Selling, general and administrative expenses. Selling, general and administrative expenses increased $388,000, or 17.6%, from $2.2 million in 1994 to $2.6 million in 1995. As a percentage of revenues, selling, general and administrative expenses increased from 32.2% in 1994 to 35.0% in 1995. This increase resulted from a $202,000 increase in management compensation in 1995, as well as increased occupancy costs as a result of new space for call centers. Excluding Compensation Differential of $516,000 in 1994 and $718,000 in 1995, selling, general and administrative expenses as a percentage of revenues increased slightly from 24.6% in 1994 to 25.3% in 1995. LIQUIDITY AND CAPITAL RESOURCES--BOMAR Bomar provided $359,000 of cash from operating activities in 1996. In the six months ended June 30, 1997, Bomar provided $723,000 of cash from operating activities. Net cash used in investing activities totaled $1.4 million (including $791,000 for acquisitions) and $57,000 for 1996 and the six months ended June 30, 1997, respectively. 28 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:
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ---------------------------- -------------------------- 1995 1996 1996 1997 ------------- ------------ ------------ ------------ (DOLLARS IN THOUSANDS) Revenues................ $8,763 100.0% $9,038 100.0% $4,548 100.0% $4,741 100.0% Operating expenses...... 2,851 32.5 2,875 31.8 1,470 32.3 1,551 32.7 ------ ----- ------ ----- ------ ----- ------ ----- Gross profit............ 5,912 67.5 6,163 68.2 3,078 67.7 3,190 67.3 Selling, general and administrative expenses............... 5,974 68.2 6,054 67.0 3,025 66.5 3,116 65.7 ------ ----- ------ ----- ------ ----- ------ ----- Income (loss) from operations............. $ (62) (0.7)% $ 109 1.2% $ 53 1.2% $ 74 1.6% ====== ===== ====== ===== ====== ===== ====== =====
RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1996--MID-CONTINENT Revenues. Revenues increased $193,000, or 4.2%, from $4.5 million for the six months ended June 30, 1996 to $4.7 million for the six months ended June 30, 1997, primarily due to increased volume relating to outsourced collection services. Operating expenses. Operating expenses increased $81,000, or 5.5%, from $1.5 million for the six months ended June 30, 1996 to $1.6 million for the six months ended June 30, 1997 primarily due to increased collector costs. As a percentage of revenues, operating expenses remained relatively flat between the periods. Selling, general and administrative expenses. Selling, general and administrative expenses increased $91,000, or 3.0%, from $3.0 million for the six months ended June 30, 1996 to $3.1 million for the six months ended June 30, 1997. As a percentage of revenues, selling, general and administrative expenses decreased from 66.5% for the six months ended June 30, 1996 to 65.7% for the six months ended June 30, 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 increased approximately $24,000, or 0.8%, from $2.8 million in 1995 to $2.9 million in 1996. As a percentage of revenues, operating expenses decreased from 32.5% in 1995 to 31.8% in 1996, as a result of an increase in revenues. Selling, general and administrative expenses. Selling, general and administrative expenses increased $80,000, or 1.3%, from $6.0 million in 1995 to $6.1 million in 1996. As a percentage of revenues, selling, general and administrative expenses decreased from 68.2% in 1995 to 67.0% in 1996. Excluding the Compensation Differential in both years, selling, general and administrative expenses as a percentage of revenues decreased from 56.1% in 1995 to 54.1% in 1996. LIQUIDITY AND CAPITAL RESOURCES--MID-CONTINENT Mid-Continent provided $176,000 of cash from operating activities in 1996. In the six months ended June 30, 1997, Mid-Continent provided $6,000 of cash from operating activities. Net cash used in investing activities totaled $46,000 and $25,000 for the year ended December 31, 1996 and the six months ended June 30, 1997, respectively. 29 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:
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ------------- -------------------------- 1996 1996 1997 ------------- ------------ ------------ (DOLLARS IN THOUSANDS) Revenues........................... $8,869 100.0% $4,045 100.0% $6,257 100.0% Operating expenses................. 6,961 78.5 2,884 71.3 4,817 77.0 ------ ----- ------ ----- ------ ----- Gross profit....................... 1,908 21.5 1,161 28.7 1,440 23.0 Selling, general and administrative expenses.......................... 2,108 23.8 1,093 27.0 1,340 21.4 ------ ----- ------ ----- ------ ----- Income (loss) from operations...... $ (200) (2.3)% $ 68 1.7% $ 100 1.6% ====== ===== ====== ===== ====== =====
RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1996--IMPACT Revenues. Revenues increased $2.2 million, or 54.7%, from $4.0 million for the six months ended June 30, 1996 to $6.3 million for the six months ended June 30, 1997, primarily due to increased business from existing clients. Operating expenses. Operating expenses increased approximately $1.9 million, or 67.0%, from $2.9 million for the six months ended June 30, 1996 to $4.8 million for the six months ended June 30, 1997. As a percentage of revenues, operating expenses increased from 71.3% for the six months ended June 30, 1996 to 77.0% for the six months ended June 30, 1997, primarily due to personnel and related expenses associated with the recent increase in Impact's call center capacity. Selling, general, and administrative expenses. Selling, general and administrative expenses increased $247,000, or 22.6%, from $1.1 million for the six months ended June 30, 1996 to $1.3 million for the six months ended June 30, 1997. As a percentage of revenues, selling, general and administrative expenses decreased from 27.0% for the six months ended June 30, 1996 to 21.4% for the six months ended June 30, 1997. This decrease as a percentage of revenues was the result of spreading fixed expenses over a larger revenue base. LIQUIDITY AND CAPITAL RESOURCES--IMPACT Impact provided $96,000 of cash from operating activities in 1996. In the six months ended June 30, 1997, Impact used $306,000 of cash from operating activities. Net cash provided by investing activities totaled $2,000 in 1996 and net cash used in investing activities totaled $19,000 for the six months ended June 30, 1997, respectively. 30 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, the Company 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 combined basis, the Founding Companies' revenues increased from $30.9 million in 1992 to $71.8 million in 1996, representing a compound annual growth rate of 23.5%. The Company's accounts receivable management services include the recovery of traditional delinquent accounts from both consumer and commercial debtors and the management of early stage delinquencies. Mailing services include lead generating direct mail, often to prompt inbound sales calls, and direct mail for billing, payment processing or collection purposes. Mailing services also include presorting, freight and drop shipping, data processing, laser printing, mailing list rental and order fulfillment. Teleservices include outbound telemarketing, inbound customer service and inbound sales. Each of the Company's services, 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, 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. [DIAGRAM 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. 31 INDUSTRY OVERVIEW Companies are increasingly outsourcing to third party experts a variety of non-core business functions throughout the Sales Cycle. The Company believes 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. The American Collectors Association ("ACA"), an industry trade group, estimates that consumer receivables outsourced to third parties for management and recovery in the United States increased from approximately $43.7 billion in 1990 to approximately $84.3 billion in 1995, a compound annual growth rate of 14.0%. 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 ACA, consumer debt increased from approximately $3.6 trillion in 1990 to nearly $5.0 trillion in 1995 and the delinquent amount of consumer debt increased from $106 billion to $147 billion during the same period. 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. The percentage of delinquent consumer 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 advertising expenditures in the United States for telemarketing (the largest component of total direct marketing expenditures) increased from approximately $63.4 billion in 1991 to $87.9 billion in 1996, a compound annual growth rate of 6.8%. 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 32 companies will require significant capital to grow and to deploy state-of-the- art technology in order to meet the demands of their clients. As a result, the Company believes significant opportunities are available to a well capitalized company providing a broad offering of outsourced business services with a high level of customer service. BUSINESS STRATEGY The Company's goal is to become a leading, single-source provider of outsourced business services throughout the Sales Cycle. In order to achieve this goal, the Company intends to pursue the following strategy: Provide Broad Array of Complementary Services. Each of the Founding Companies has developed extensive expertise and a strong reputation with respect to the services it provides. Upon completion of the Offering, the Company will be able to provide clients with a broad range of services. The Company expects to offer bundled and complementary services to companies that are currently outsourcing to multiple vendors or performing such functions in- house. In response to the particular needs of each client, the Company will develop customized, coordinated solutions, such as a package of direct marketing, mail fulfillment, billing, customer service and accounts receivable management services. Management believes that companies that can provide a broad array of complementary business services are well positioned for growth as clients are increasingly demanding strategic business partnerships with their vendors, including a single point of contact for many services. In addition, management believes that the Company's reputation for and focus on creating individual business solutions will help it to compete on a basis other than price. Focus on High Quality Client Service. The Company believes that maintaining high levels of service and satisfaction is integral to attracting and retaining clients. In addition to the importance of customized, value-added solutions, client and end-user satisfaction is an important differentiating factor in vendor selection. Each Founding Company has a strong commitment to quality and satisfaction, and conducts regular client performance reviews. For example, Impact has dedicated account teams who implement an extensive quality process that includes validation of the data sent by a client, constant monitoring of the phone conversations done on-site or at the client's location to ensure that scripts are properly executed, and an internally designed verification process to ensure that all of the client's requirements have been fulfilled. Leverage and Expand Technology and Operational Infrastructures. A key element of the Company's strategy will be to capitalize on the investments made by the Founding Companies in technology and the development of operational processes in order to deliver the most effective client solutions. The Company intends to continue to invest in sophisticated telecommunications, mail center and information technology. Continued investment in technology will facilitate the Company's ability to integrate its existing service offerings and expand its menu of services. In addition, the Company will review technology and operational practices across its businesses with the goal of leveraging the best platforms and processes, optimizing MIS capabilities and sharing technologies. Operate with Decentralized Management Structure. Compass believes that the experienced local management teams at the Founding Companies have a valuable understanding of their respective markets and businesses and strong client relationships upon which they may capitalize. Accordingly, the Company intends to operate with a decentralized management strategy. Senior management at the Founding Companies will continue to make day-to-day operating decisions and will be responsible for the profitability and growth of their business. The Company's executive management team will work closely with the Founding Companies to coordinate, integrate and expand their service offerings. The Company intends to utilize stock ownership, as well as appropriate incentive compensation, to ensure that the objectives of local management are aligned with those of the Company. 33 GROWTH STRATEGY The Company believes that there are significant opportunities to expand its business and to further penetrate the market for outsourced business services. The key elements of its growth strategy are as follows: Implement Internal Growth Strategy. While the Company intends to acquire additional outsourcing services companies, strong internal growth remains the core of the Company's growth strategy. The key elements of the Company's internal growth strategy include the following: Capitalize on Cross-Selling Opportunities. Each of the Founding Companies is a specialist in the services it provides, and each has many long standing relationships with large clients who have multiple outsourcing needs. Combining the Founding Companies will enable the Company to capitalize on clients' desires for a single point of service, and to offer bundled services by leveraging the Founding Companies' client relationships and reputations for quality. For example, the Company will offer follow-up teleservices to its direct mailing services clients, utilizing identical databases for both processes. The Company also intends to offer accounts receivable management services to its billing services clients. Generate New Clients Through an Aggressive Marketing Program. The Company intends to expand its client base by capitalizing on the breadth of its services, its size, financial resources and geographic scope. The Company will establish a coordinated marketing strategy to effectively market and sell the services of all Founding Companies on a national basis. Expand Service Offerings. The Company expects to continue to selectively expand its service offerings, with the goal of providing integrated "end- to-end" services to clients throughout the Sales Cycle. New services will be complementary to and further leverage the Company's current offerings. Implement Best Practices. The Company will identify best practices at each of the Founding Companies that can be implemented throughout the Company. For example, the Company intends to identify and utilize the most effective call center management programs, collection techniques, mail services and technologies. In addition, the Company intends to focus on the most effective hiring, training, benefits and employee retention programs of the Founding Companies and implement those practices throughout its operations. Achieve Economies of Scale. The Company believes that it can achieve significant cost savings as a result of the Acquisitions, as well as future acquisitions. The Company expects to benefit from greater purchasing power in such key expense areas as telecommunications, postage, credit bureau reports, insurance and employee benefits. The Company believes that it can reduce the total operating expenses of the Founding Companies and other acquired businesses by eliminating or consolidating certain duplicative administrative functions. In addition, the Company expects to realize cost savings and maximize capacity utilization by shifting work among its locations as appropriate. Pursue International Opportunities. Management believes that international markets for accounts receivable management and teleservices are growing rapidly in conjunction with the growth of overall credit card spending and the expansion of the business of major credit card issuers overseas. Management also believes that the United States is significantly more advanced in outsourcing technology and procedures than the rest of the world. Accordingly, the Company intends to pursue opportunities in international markets in order to provide services to its multinational clients. In addition, the Company may pursue other expansion overseas as attractive opportunities arise. Where appropriate, the Company may enter into a strategic partnership with an existing local business to facilitate entry into a new international market. The Company believes that it is well-positioned to capitalize on international opportunities through its existing relationships with multinational clients as well as the expertise and reputations of the Founding Companies. Pursue an Aggressive Acquisition Program. Compass believes that industry trends toward consolidation and increased acceptance of outsourcing create opportunities for expansion of the Company's business. The Company intends to capitalize on the highly fragmented nature of the industries in which it competes by implementing an aggressive strategic acquisition program following the Offering. Using the Founding Companies as platforms for growth and consolidation, the Company will pursue acquisitions within the industry 34 segments and markets currently served by the Founding Companies to add to the growth of its existing businesses and gain market share. In addition, the Company plans to acquire additional companies that broaden and complement the Company's menu of services and the markets it serves. In analyzing acquisition candidates, the Company will look for profitable companies with strong management teams and a reputation for high quality client service. The Company may also consider acquiring companies that possess technology or proprietary rights to functions or services that would significantly enhance the value provided by the Company to its clients. The Company believes that the opportunity to be acquired by Compass will be attractive to many specialized outsourcing companies. The Company offers owners of potential acquisition candidates: (i) significant opportunities to enhance the growth of their businesses through cross-selling the Company's wide range of outsourced services; (ii) access to sophisticated technology and operational processes; (iii) the Company's financial strength and visibility as a public company; (iv) a decentralized management structure; and (v) near-term liquidity. In selecting the Founding Companies, Compass analyzed significant data on outsourced business services companies and met with owners of many individual companies. In addition, the owners of the Founding Companies have extensive industry knowledge and strong reputations and have developed relationships with other companies in their industry sectors, and the Company believes that this will be of significant value in the Company's acquisition program. The Company continues to review various strategic acquisition opportunities. Other than the Acquisition Agreements with the Founding Companies, the Company is not a party to any agreements 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. 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 delinquencies (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 generally charges its clients on a contingency fee basis at various rates depending on the category of debt. Generally, the Company charges (i) 2% to 25% of the amount collected for early stage delinquencies; (ii) 25% to 35% for primary accounts; (iii) 35% to 50% for secondary accounts and (iv) 50% to 70% for tertiary accounts. Recovery activities begin with the Company working with a client to design a customized recovery solution based upon various factors including age and size of the account, type and source of debt, and the client's specific 35 requirements and standards. After the Company and the client have determined the approach, the Company electronically or manually transfers data provided by the client onto its system. The Company then searches various databases, public records and other sources to locate customers whose telephone numbers or addresses are not available from the client. Once the customer is located, the Company forwards a past due notification letter which serves as official notification to the customer under the FDCPA. The Company continues the recovery process through notifications by mail and/or telephone, based on the nature of the account, during which time the Company's telephone representatives continue the dialogue with customers to seek immediate payment or develop a payment program. At the client's request, the Company will report delinquent accounts to one or more of the national credit bureaus. Payments collected by the Company are either remitted to the client net of the Company's fee or remitted in full, with the Company billing the client for its services. The Company also provides litigation management services for clients with respect to certain accounts. Such services include managing the attorney relationships and facilitating the transfer of necessary documentation. Throughout this process, the Company provides activity reports to the client. Mailing Services The Company, through Mail Box, provides direct mailing services and billing services, mail presorting, freight and drop shipping, data processing, laser printing, mailing list rental and other services related to mail handling. Mailing services involve the high speed inserting, addressing and stamping of mail. Utilizing the Company's inserting machines and addressing and stamping systems, the Company processed approximately 840 million pieces of mail during the twelve months ended June 30, 1997. The Company also provides mail presorting services (i.e., combining volumes of like mail and presorting and bar coding it to United States Postal Service specifications), which are designed to generate significant postal discounts for its customers. Utilizing the Company's sophisticated technology, mail can be presorted to the walk sequence of a specific mail carrier. The mail which is presorted includes both mail processed by other vendors and mail processed by the Company. Fees charged for mailing and presorting are based on the number of pieces processed. Another service offered by the Company which is designed to generate postage savings is drop shipping, whereby the Company, instead of sending mail from its Dallas location, transports the mail to other locations in order to be mailed. The fee charged for drop shipping is a percentage of the postal savings realized by the client. Data processing and laser printing services include converting data sent by the client and processing it to produce a letter or a bill. For example, if a client transfers billing information and a corresponding mailing list, the Company standardizes the mailing list in order to reduce postage costs (e.g., deleting duplicative addresses, correcting street names and obtaining current addresses through its change-of-address technology) and merges the list with the bills to be mailed. Data processing services also include state of the art predictive modeling and analysis for market segmentation to achieve higher response rates for direct marketing campaigns. The fee charged for data processing is based on the number of pieces processed. The Company also rents mailing lists, which the Company customizes for a particular client utilizing lists purchased from other sources. Other services of the Company include order fulfillment and sales of printed material such as letterhead, envelopes and forms. Teleservices The Company, through Impact, provides primarily outbound business-to- consumer teleservices where telephone representatives place calls to parties targeted by the client to offer products or services or to obtain information. The Company currently has a total of approximately 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 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. 36 Actual telephone calling at the centers is controlled by computerized call management systems that utilize a predictive dialing system to automatically dial the telephone numbers in the files. The call management system then forwards all connected calls, along with the customer's name and other information, to the workstation of a telephone representative who has been trained for the client's program. The telephone representative uses the customized script to solicit an order for the product or service or to request information that will be added to the client's database. Information regarding sales and other aspects of the program is captured, processed and verified by software systems and made available to clients in customized report formats. The Company charges its outbound teleservices clients on a commission basis, at an hourly rate or through a combination of both. Inbound teleservices account for a small percentage of the Company's teleservices revenues, although the Company intends to expand this business. Forty of the Company's call stations may be used for inbound teleservices which involve the processing of incoming calls, often placed by customers using toll-free numbers, to a customer service representative for service, order fulfillment or product information. Inbound teleservices include activities such as customer care services, credit card and loan application processing and catalog sales. More sophisticated inbound programs assist clients in responding to customer inquiries, offering technical and product support services and assessing overall customer satisfaction. Inbound teleservices are normally billed at an hourly or cost-per-minute rate. Accelerated Payment Systems Accelerated Payment Systems ("APS") was introduced to the market by NCMC in 1992 and patented in 1996. It was originally developed to service the "urgency payment" market in the collections industry by allowing consumers to resolve delinquencies on mortgage, telephone, utility, credit card or other recurring bills through telephonic authorization of a payment by check. The use of APS has since expanded to retail, telecommunications, utilities, banking, sales and other industries as clients have begun to appreciate the advantages of telephonically authorized payments by check as compared to other methods of immediate payment such as wire transfers, money orders, overnight mail, credit cards and debit cards. Compass believes that the advantages include the following: (i) APS does not require written authorization; (ii) APS checks can be printed at the client's location for same day deposit; and (iii) credit cards are not a payment option in the urgency payment market for certain receivables such as credit card debt. The APS procedure begins when the client's representative obtains verbal authorization and checking account, bank and other information from the customer. The client enters such information into the computer where the APS software has been installed, and transmits the data to the APS service bureau. APS receives the transmission and either prints the checks on site for overnight delivery to the client or a designated bank or provides the client access to print the checks at the client's location for same day deposit. The Company charges its APS clients a one-time setup fee as well as a per transaction fee. APS includes a license to use its proprietary software, bank and zip code database updates, software upgrades, data backup and service bureau support including a client help desk and consumer hotline. Management believes that the combination of the Founding Companies creates a significant opportunity to apply APS beyond the urgency payment market. For example, the Company intends to offer APS to its clients as a payment option to improve response rates on outbound telemarketing calls. CLIENT RELATIONSHIPS The Company provides its services to clients in a broad range of sectors including telecommunications, financial services, insurance, healthcare, education, government and utilities. The Company's 10 largest clients in 1996 accounted for approximately 39.8% of the Company's revenues on a pro forma combined basis. In 1996 and the six months ended June 30, 1997, VarTec Telecom, Inc. ("VarTec") accounted for approximately 11.2% and 14.6% of the Company's revenues on a pro forma combined basis. Other than VarTec, no client accounted for more than 10% of the Company's revenues on a pro forma combined basis in such periods. 37 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:
FINANCIAL SERVICES EDUCATION HEALTHCARE --------- --------- ---------- Allstate Insurance Columbia University Beverly Enterprises, Inc. Bank One DeVRY, INC. MD Anderson Cancer Hospital Corporation Capital One Loyola University of Chicago Medical Resource Systems, Inc. Financial Roosevelt College Medic Computer Systems, Inc. Corporation General University Support Services Electric Capital Services, Inc. MBNA America Bank, N.A. GOVERNMENT AND UTILITIES TELECOMMUNICATIONS RETAIL AND COMMERCIAL ---------- ------------------ --------------------- The Army AT&T Corporation Advantis Business Services, Inc. and Air AT&T Wireless Services Circuit City, Inc. Force Exchange Services Baltimore Bellsouth Telecommunications, Inc. The FACS Group (Federated Gas & Southwestern Bell Mobile Systems, Inc. Department Stores, Inc.) Electric Company Georgia VarTec Telecom, Inc. Power Co. MemberWorks, Inc. State of Maryland Sears Roebuck & Co. Nevada Power Company
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. The Company's sales force includes 40 direct sales employees and six independent contractors. 38 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 sixty inserting machines, including intelligent inserting machines which burst, fold, select, match or handle multiple page inserts, and eighteen 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. 39 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 August 31, 1997, the Founding Companies employed a total of 1,023 full-time and 283 part-time employees, of whom 625 were employed in connection with accounts receivable management services, 331 were 40 employed in connection with teleservices and 350 were employed in connection with mailing services. In addition, the Company currently uses 255 independent contractors (primarily for its mailing services) 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.
LOCATION OF APPROXIMATE FACILITY COMPANY AND OPERATIONS CONDUCTED SQUARE FEET ----------- -------------------------------- ----------- Atlanta, GA Bomar--Accounts receivable management 3,000 Buffalo, NY Mid-Continent--Accounts receivable management, sales and administrative 7,700 Destin, FL Bomar--Administrative 1,200 Dallas, TX Mail Box--Mailing services and administrative 338,000 Houston, TX Bomar--Accounts receivable management 2,800 Hunt Valley, MD NCMC--Accounts receivable management and administrative 18,600 Las Vegas, NV NCMC--Accounts receivable management 3,000 Louisville, KY Mid-Continent--Accounts receivable management, sales and administrative 5,500 Norcross, GA Bomar--Accounts receivable management and sales 22,700 Phoenix, AZ Bomar--Accounts receivable management 4,000 Princeton, NJ (1) Compass--Corporate headquarters 1,000 Rolling Meadows, IL Mid-Continent--Accounts receivable management, sales and administrative 17,000 Tampa, FL Bomar--Accounts receivable management 8,000 Voorhees, NJ Impact--Outbound telemarketing 16,000 Woodbury, NJ Impact--Telemarketing, data processing and administrative 8,500
- -------- (1) The Company intends to relocate its headquarters from Princeton, New Jersey to the metropolitan New York area after consummation of the Offering. LITIGATION The Company is engaged in certain disputes concerning a patent (the "APS Patent") owned by the Company and used in its APS process to provide telephonic check drafting services. The following is a summary of such disputes: In January 1994, NCMC entered into an Intellectual Property Licensing Agreement (the "1994 Agreement") with Autoscribe Corporation ("ASC") and Robert E. Pollin (the "Inventor"). Pursuant to the 1994 Agreement, NCMC was granted, with certain exceptions, the exclusive right to use certain intellectual property that was at the time the subject of a patent application. In March 1996, NCMC purchased the intellectual property from ASC and the Inventor pursuant to an Intellectual Property Purchase and License Agreement (the "1996 Agreement") that superseded the 1994 Agreement. The APS Patent was issued in April 1996 and assigned to NCMC. NCMC is a plaintiff in two lawsuits (the "Patent Infringement Lawsuits") alleging that a competitor and a former customer willfully infringed the APS Patent. NCMC's claims against the defendants seek lost profits, damages, attorneys' fees and costs, treble damages for willful infringement and punitive damages. The defendants in the Patent Infringement Lawsuits have denied infringing the APS Patent and have challenged the validity of the APS Patent in a counterclaim. Management believes that the counterclaim is without merit. Compass has entered into an agreement with NCMC and its stockholders with respect to the allocation of damages, if any, awarded to NCMC in the Patent Infringement Lawsuits. See "Certain Transactions." 41 In April 1997, ASC and the Inventor filed an arbitration claim against NCMC seeking rescission of the 1996 Agreement and certain monetary damages. In May 1997, NCMC filed a lawsuit against ASC and the Inventor in the Circuit Court for Montgomery County, Maryland alleging that ASC and the Inventor have violated NCMC's ownership rights to the APS Patent and exclusive rights to use the intellectual property by continuing to solicit maintenance customers and provide maintenance services in contravention of the 1996 Agreement. NCMC seeks unspecified damages and injunctive relief. ASC and the Inventor have denied NCMC's claims and have filed a counterclaim seeking rescission of the 1996 Agreement, reassignment of the APS Patent to the Inventor, reinstatement of the 1994 Agreement, the ability to participate as a plaintiff in the Patent Infringement Lawsuits, unspecified damages and other relief. ASC and the Inventor allege that the 1996 Agreement should be rescinded because the Inventor lacked the capacity to sign the 1996 Agreement and because the 1996 Agreement was the product of misrepresentations and duress and is not supported by adequate consideration. ASC and the Inventor also allege that (i) NCMC was and is required under the 1996 Agreement to pay royalties at a rate equal to 7.25% of NCMC's APS-related revenues rather than the 4.5% rate at which they have been paid; (ii) NCMC improperly offset against the royalties certain litigation expenses incurred by it in the Patent Infringement Lawsuits; and (iii) NCMC failed to properly prosecute the Patent Infringement Lawsuits. NCMC intends to deny these allegations. While NCMC believes that the counterclaims are without merit, there can be no assurance that ASC and the Inventor will not prevail with respect to some or all of their counterclaims. In the event that ASC and the Inventor are successful in their counterclaims, both an award of damages and rescission of the 1996 Agreement could occur, with the future rights of the parties being determined by the 1994 Agreement. If the 1994 Agreement were reinstated, NCMC would be required to pay royalties at the rate of 7.25% of its APS-related revenues rather than the 4.5% rate at which royalties are being paid under the 1996 Agreement. Management does not believe that a decision adverse to NCMC in this dispute would have a material adverse effect on the Company's business, results of operations or financial condition. The Company is not involved in any other legal proceedings material to the financial condition or results of operations of the Company. 42 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. In addition to the persons named as directors below, it is anticipated that two independent directors will be elected to the Company's board at or prior to the consummation of the Offering. The Company is in the process of selecting these two individuals.
NAME AGE POSITION ---- --- -------- Michael J. Cunningham... 40 Chairman of the Board and Chief Executive Officer Mahmud U. Haq........... 38 President and Chief Operating Officer 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 Scott H. Lang........... 51 Director Gene Collins............ 55 Chief Executive Officer--Bomar David T. DuCoin......... 39 Co-President--Impact
MICHAEL J. CUNNINGHAM joined Compass in June 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. At this position, Mr. Cunningham managed approximately 1,400 employees in seven locations with an annual operating budget exceeding $300 million. 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. 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 of New York. 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. During Mr. Alston's tenure, National Processing, Inc. completed an initial public offering in August 1996. 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. 43 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 ("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. Mr. Kirschbaum frequently gives in-house seminars and guest lectures for a variety of companies and trade associations. He is an active member of two presidents' organizations: The Executive Committee and the Chief Executive Officers' Club. 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. Mr. DuCoin was recently selected by the Philadelphia Business Journal as one of its "40 under 40" Young Business Leaders. 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. 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. 44 BOARD OF DIRECTORS After consummation of the Acquisitions, the Board of Directors of the Company will consist of nine directors divided into three classes with each class serving for a term of three years. At each annual meeting of stockholders, directors will be elected by the holders of the Common Stock to succeed those directors whose terms are expiring. Directors whose terms will expire in 1998 are: Les J. Kirschbaum, Edward A. DuCoin and an independent director to be named; directors whose terms will expire in 1999 are: John Maloney, Scott H. Lang and an independent director to be named; directors whose terms will expire in 2000 are: Leeds Hackett, Kenneth W. Murphy and Michael J. Cunningham. The Initial Stockholders have entered into an agreement with respect to nominating and electing directors in the five years following the Offering. See "Description of Capital Stock--Stockholders' Agreement." The Company expects that the Board of Directors will establish an Audit Committee, a Compensation Committee, and such other committees as the Board may determine. The members of each committee are expected to be determined at the first meeting of the Board of Directors following the consummation of the Acquisitions. Directors elected by the Company's stockholders may be removed only for cause. DIRECTOR COMPENSATION Directors who are also employees of the Company or one of its subsidiaries do not receive compensation for serving as directors. Each director who is not an employee of the Company or one of its subsidiaries receives a fee of $2,000 for attendance at each Board of Directors' meeting and $1,000 for each committee meeting (unless held on the same day as a Board of Directors' meeting). Directors are also reimbursed for out-of-pocket expenses incurred in attending meetings of the Board of Directors or committees thereof or otherwise incurred in their capacity as directors. Upon the consummation of the Offering, each non-employee director will be granted options to purchase 10,000 shares of Common Stock at an exercise price equal to the initial public offering price. See "--1997 Employee Incentive Compensation Plan." EXECUTIVE COMPENSATION; EMPLOYMENT AGREEMENTS; COVENANTS-NOT-TO-COMPETE Compass was incorporated in April 1997 and has conducted no operations and generated no revenue to date. BGL has entered into agreements with Messrs. Cunningham, Haq and Alston, dated April 28, 1997, March 31, 1997 and May 28, 1997, respectively, pursuant to which Messrs. Cunningham, Haq and Alston provide consulting services to BGL in connection with the Acquisitions and the Offering. As compensation for these consulting services, Messrs. Cunningham, Haq and Alston are receiving annual consulting fees of $225,000, $200,000 and $200,000, respectively. Such fees will remain in effect until the earliest of the closing of the Offering, the execution of an employment agreement with Compass, as described below, or termination of the consulting agreement. Amounts paid by BGL pursuant to the consulting agreements, together with interest thereon at 8% per annum, will be repaid by Compass to BGL from the net proceeds of the Offering. Prior to the consummation of the Offering, Messrs. Cunningham, Haq and Alston will enter into three-year employment agreements with the Company providing for annual base salaries of $225,000 for Mr. Cunningham and $200,000 for each of Mr. Haq and Mr. Alston. Each agreement provides that the executive is eligible to earn an annual bonus of up to 100% of his salary based upon specified performance criteria. Unless terminated or not renewed by the Company or the executive, the term of each such employment agreement will continue thereafter on a year-to-year basis on the same terms and conditions existing at the time of renewal. Each employment agreement will contain a covenant not to compete with the Company for a period of two years 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. 45 Each of these employment agreements will provide that, in the event of a termination of employment by the Company without cause during the term of the agreement, the Company will pay to the executive, as severance compensation, (i) his then current salary plus the bonus paid to him the last fiscal year for a period of two years following the date of termination and (ii) his bonus for the current year prorated through the termination date. Payment is due in equal installments on the Company's normal payroll payment dates during the severance period. The employment agreements will further provide that in the event of a change in control of the Company (as defined in the employment agreements), the executive will have the right, following such change in control, to terminate his employment for Good Reason (or, in the 60 days immediately following such change in control, for any reason) and be entitled to receive severance benefits as described above. So long as the executive does not engage in conduct giving rise to the right to terminate employment for cause, Good Reason includes (i) the failure to elect the executive to the office previously held, the removal of the executive from his position or the assignment to the executive of any additional duties or responsibilities or a reduction in executive's duties or responsibilities which, in either case, are inconsistent with those customarily associated with such position and (ii) a relocation by the Company of the executive's place of employment beyond a specified area. Upon the consummation of the Acquisitions, the Founding Companies will enter into five-year employment agreements with certain of their executive officers, including Messrs. Murphy, Hackett, Maloney, Kirschbaum, Collins, Edward A. DuCoin and David T. DuCoin. Each agreement 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 a term of two years. Unless terminated or not renewed by the Founding Companies or the employee, the term of each employment agreement will continue thereafter on a year-to-year basis on the same terms and conditions existing at the time of renewal. Each employment agreement will contain a covenant not to compete whereby, for a two-year period following termination of employment (one year with respect to employees other than executive officers), the employee is prohibited from (i) engaging in any business in competition with the business in which the applicable Founding Company engages anywhere in the United States, (ii) enticing a managerial employee of the Founding Company away from the Founding Company, (iii) soliciting or selling any competitive products or services to any person or entity which is, or has been within one year prior to the date of termination, a customer of the Founding Company, or that was actively solicited by the Founding Company during such period, or (iv) calling upon a prospective acquisition candidate which the employee knew was approached or analyzed by the Company, for the purpose of acquiring the entity. Each agreement will provide that upon termination of employment by the Founding Company without cause, the employee will be entitled to receive from the Company his or her annual salary for a period of two years following termination (one year with respect to employees other than executive officers) plus his or her bonus for the current year prorated through the termination date. Upon the consummation of the Offering, certain of the executive officers of the Company will be granted options to purchase Common Stock at an exercise price equal to the initial public offering price. See "--1997 Employee Incentive Compensation Plan." 1997 EMPLOYEE INCENTIVE COMPENSATION PLAN Prior to the consummation of the Offering, the Board of Directors and the Company's stockholders are expected to approve the Company's 1997 Employee Incentive Compensation Plan (the "Plan"). The purpose of the Plan is to provide directors, officers, employees, consultants and independent contractors with additional incentives by increasing their ownership interests in the Company. Individual awards under the Plan may take the form of one or more of: (i) either incentive stock options ("ISOs") or non-qualified stock options ("NQSOs"); (ii) stock appreciation rights ("SARs"); (iii) restricted or deferred stock; (iv) dividend equivalents; and (v) cash awards or other awards not otherwise provided for, the value of which is based in whole or in part upon the value of the Common Stock. The Compensation Committee will administer the Plan and generally select the individuals who will receive awards and the terms and conditions of those awards. The Company has reserved 1,000,000 shares of Common Stock for use in connection with the Plan. Beginning with the Company's first fiscal quarter after the closing of the Offering and continuing each fiscal quarter thereafter, the number of shares available for use in connection with the Plan will be the greater of 1,000,000 shares or 10% of the aggregate number of shares of Common Stock outstanding on the last day of the preceding calendar quarter. 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. 46 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 600,000 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, and an aggregate of 250,000 options will be granted to certain employees of the Founding Companies. The grants of all of the foregoing options will be effective as of the date of the Offering and each option will have an exercise price equal to the initial public offering price per share in the Offering. These options will vest in three equal annual installments commencing on the first anniversary of the grant, and will expire 10 years from the date of grant or three months following termination of employment. The Plan also provides for: (i) the automatic grant to each non-employee director (a "Participant") serving at the commencement of the Offering of an option to purchase 10,000 shares of Common Stock; and thereafter (ii) the automatic grant to each Participant of an option to purchase 10,000 shares upon such person's initial election as a director. In addition, the Plan provides for an automatic annual grant to each Participant of an option to purchase 5,000 shares at each annual meeting of stockholders following the Offering, provided, however, that if the first annual meeting of stockholders following a person's initial election as a non-employee director is within three months of the date of such election or appointment, such person will not be granted an option to purchase 5,000 shares of Common Stock at such annual meeting. These options will have an exercise price per share equal to the fair market value of a share at the date of grant. Options granted under the Plan will expire at the earlier of 10 years from the date of grant or one year after termination of service as a director, and options will be immediately exercisable. The Plan affords the Compensation Committee discretion to fashion performance awards for eligible participants with incentives the Compensation Committee deems appropriate. It permits the issuance of awards based on the satisfaction of specific performance criteria in cash or Common Stock. The performance goals for any year may be based on a broad array of performance measures as selected by the Compensation Committee, including financial results on a consolidated basis or an operating unit basis depending on the responsibility of the participant, as well as achievement of personal performance goals. The maximum value of such awards for any participant in any year is 100% of such participant's salary. In addition, the Compensation Committee has discretion to pay, cancel or provide for the substitution or assumption of such bonus awards. EMPLOYEE STOCK PURCHASE PLAN Prior to consummation of the Offering, the Company will adopt the Employee Stock Purchase Plan (the "Stock Purchase Plan"), pursuant to which a total of 500,000 shares of Common Stock will be reserved for issuance. The Stock Purchase Plan, which is intended to qualify under Section 423 of the Code, permits eligible employees of the Company to purchase Common Stock through payroll deductions with all such deductions credited to an account under the Stock Purchase Plan. Payroll deductions may not exceed $25,000 for all purchase periods ending with any Plan Year (as hereinafter defined). The Stock Purchase Plan operates on a calendar year basis (the "Plan Year"). To be eligible to participate during a Plan Year, an employee must file all requisite forms prior to a specified due date known as the "Grant Date." Generally the first day of each Plan Year will be the Grant Date and the last day of each Plan Year will be an Exercise Date (the "Exercise Date"). The determination of the Grant Date and the Exercise Dates are completely within the discretion of the Plan Committee. On each Exercise Date, participants' payroll deductions credited to their accounts will be automatically applied to the purchase price of Common Stock at a price per share which is the lesser of eighty-five percent (85%) of the fair market value of the Common Stock on the Grant Date or on the Exercise Date. Employees may end their participation in the Stock Purchase Plan at any time during an offering period, and their payroll deductions to date will be refunded. Participation ends automatically upon termination of employment with the Company. 47 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. 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 Partner of BGL Management Company, LLC, which is the managing member of BGL. Following the approximate 112.185-for-one stock split to be effected prior to the consummation of the Offering, the 15,000 shares of Common Stock initially issued by the Company to its founders will total 1,682,769 shares. The aggregate consideration to be paid by Compass in the Acquisitions consists of approximately $20.0 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.
SHARES OF COMMON DEBT FOUNDING COMPANY CASH(1) STOCK(1) ASSUMED(2) ---------------- ------- --------- ---------- (DOLLARS IN THOUSANDS) Mail Box..................................... $ 9,847 2,461,852 $ 3,532 NCMC......................................... 2,897 965,801 265 Bomar........................................ 4,607 1,151,787 4,937 Mid-Continent................................ 1,869 467,127 4,997 Impact....................................... 824 389,124 618 ------- --------- ------- Total...................................... $20,044 5,435,691 $14,349 ======= ========= =======
- -------- (1) The number of shares of Common Stock to be issued to the stockholders of the Founding Companies is fixed. If the initial public offering price is higher or lower than the assumed price, the cash consideration will vary proportionately. For example, a $1.00 per share increase or decrease from the assumed offering price will result in a $1.7 million increase or decrease, respectively, in the aggregate cash consideration paid to Founding Company stockholders. (2) Reflects: (i) long-term debt of the Founding Companies, including capital leases; (ii) debt related to Bomar's acquisition of FCCI; and (iii) 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 $4.3 million. The potential increase in goodwill due to this increase in consideration is approximately $2.3 million, with associated amortization of approximately $69,000 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 $8.5 million. The potential decrease in goodwill due to this decrease in consideration is approximately $4.6 million, with an associated reduction in amortization of approximately $138,000 per year. The consideration to be paid for the Founding Companies was determined through arm's-length negotiations between Compass and representatives of each Founding Company. The factors considered by the parties in 48 determining the consideration to be paid include, among others, the historical operating results, the net worth, the levels and type of indebtedness and the future prospects of the Founding Companies. Each Founding Company was represented by independent counsel in the negotiation of the terms and conditions of the Acquisitions. Each Acquisition Agreement contains standard representations and warranties of each party as well as indemnification provisions in the event of a breach of any representations and warranties made by any party to the agreement. Furthermore, each Acquisition Agreement provides that the consummation of the acquisition is subject to customary conditions. These conditions include, among others, (i) the continuing material accuracy on the closing date of the Acquisitions of the representations and warranties of the Founding Company, the stockholders of the Founding Company and Compass; (ii) the performance of all covenants included in the Acquisition Agreements; (iii) the absence of a material adverse change in the results of operations, financial condition or business of the Founding Company; and (iv) the simultaneous closing of all of the Acquisitions. 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 the Company will receive cash and shares of Common Stock of the Company as follows:
SHARES OF COMMON NAME CASH STOCK ---- ---------- --------- Kenneth W. Murphy................................... $6,861,606 1,715,401 Leeds Hackett....................................... 1,110,084 370,050 Gene Collins........................................ 2,121,672 530,418 Mary Maloney........................................ 2,121,672 530,418 Les J. Kirschbaum................................... 1,868,508 467,127 Edward A. DuCoin.................................... 412,013 194,562 David T. DuCoin..................................... 412,013 194,562
The Company intends to repay certain indebtedness of the Founding Companies from the net proceeds of the Offering, including approximately $4.0 million of indebtedness that is personally guaranteed by certain stockholders of the Founding Companies. As of June 30, 1997, the approximate aggregate amount of such guarantees for each of such individuals was as follows: Kenneth W. Murphy--$2.0 million; Gene Collins and John Maloney--$530,000; Les J. Kirschbaum--$747,000; and Edward A. DuCoin and David T. DuCoin--$675,000. OTHER TRANSACTIONS As of June 30, 1997, BGL had paid $104,000 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, will be repaid by Compass from the net proceeds of the Offering. Mail Box owns a 50% interest in MB Strategic, Ltd. ("MBS"), a database management company which commenced operations in February 1997. Mail Box provided MBS with $20,000 in start-up capital and continues to fund monthly operating expenses of $15,000 for a total commitment of $185,000, which is intended to cover compensation paid to the president of MBS. Mail Box provides MBS space within its facilities and the use of data management systems, and pays the salaries and benefits of MBS' clerical employees. Mail Box is entitled to receive 20% of gross monthly revenues of MBS, in addition to 50% of its operating profits and losses. 49 Since 1982, Mail Box has leased its corporate headquarters and certain of its mailing facilities from TDC #12, Ltd. ("TDC") pursuant to a lease which expires in October 2002. Mr. Murphy is a 50% limited partner of TDC. The annual rent under this lease was approximately $290,000 in 1996 and will total approximately $321,000 in 1997. From April 1996 through August 1996, Mail Box leased certain inserting machines from a partnership, the partners of which include certain stockholders of Mail Box. The cost of the equipment was $223,000 and in September 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 the former stockholders of NCMC to the extent that the amounts remaining are paid with respect to infringement occurring prior to the closing of the Acquisitions; and fourth, all remaining amounts to the Company. Mr. Hackett, a director of the Company and a former stockholder of NCMC, is a party to this agreement. See "Business--Litigation." Impact leases office space on a month to month basis from a partnership owned by Edward and David DuCoin. Total rent expense was $139,000 and $62,000 for 1996 and the six months ended June 30, 1997, respectively. Effective July 1, 1997, the annual rent was reduced to $84,000. At December 31, 1996 and June 30, 1997, the outstanding balance of advances made by Impact to Edward and David DuCoin and to Woodbury Executive Center and Eastern Shore Travel, which are partnerships owned by the DuCoins, was $188,000. These advances will be repaid in full simultaneously with the closings of the Acquisitions. At December 31, 1995 and 1996 and June 30, 1997, the outstanding balance of loans made by Mid-Continent to Les J. Kirschbaum totaled $710,000, $751,000 and $784,000, 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 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 Offering and the Acquisitions. 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. In addition, the Company will pay a finders' fee of $440,000 from the net proceeds of the Offering to an unaffiliated business broker in connection with the Bomar acquisition. COMPANY POLICY In the future, any 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. 50 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.
PERCENTAGE OWNED ------------------------------ SHARES OF NAME AND ADDRESS OF BENEFICIAL COMMON OWNER(1) STOCK BEFORE OFFERING AFTER OFFERING ------------------------------ --------- --------------- -------------- Kenneth W. Murphy..................... 1,715,401 24.1% 15.3% Leeds Hackett......................... 370,050 5.2% 3.3% Gene Collins.......................... 530,418 7.5% 4.7% Mary Maloney.......................... 530,418 7.5% 4.7% John Maloney(2)....................... 530,418 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 3.6% 2.3% Mahmud U. Haq......................... 196,323 2.8% 1.8% Richard A. Alston..................... 112,185 1.6% 1.0% Scott H. Lang(3)(4)................... 1,131,846 15.9% 10.1% BGL Capital Partners, L.L.C. (4)...... 1,121,846 15.8% 10.0% All directors and officers as a group (eleven persons)(2)(3)............... 5,695,307 80.0% 50.7%
- -------- (1) Unless otherwise indicated, the address of the beneficial owners is c/o Compass, 5 Independence Way, Suite 300, Princeton, New Jersey 08540. (2) Includes 530,418 shares of Common Stock owned by Mr. Maloney's spouse, of which he may be deemed the beneficial owner. (3) 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 and 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. (4) The address of each of Mr. Lang and BGL is 225 W. Washington Street, 16th Floor, Chicago, Illinois 60606. 51 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 52 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 . SHARES ELIGIBLE FOR FUTURE SALE After the Offering, the Company will have outstanding 11,218,460 shares of Common Stock. The 4,100,000 shares being sold in the Offering are freely tradable without restriction unless acquired by affiliates of the Company. None of the remaining 7,118,460 outstanding shares of Common Stock has been registered under the Securities Act, which means that they may be resold publicly only upon registration under the Securities Act or in compliance with an exemption from the registration requirements of the Securities Act, including the exemption provided by Rule 144 thereunder. In general, under Rule 144 as currently in effect, if one year has elapsed since the later of the date of the acquisition of restricted shares of Common Stock from either the Company or any affiliate of the Company, the acquiror or subsequent holder thereof may sell, within any three-month period commencing 90 days after the date of the Prospectus relating to the Offering, a number of shares that does not exceed the greater of one percent of the then outstanding shares of the Common Stock, or the average weekly trading volume of the Common Stock on the Nasdaq National Market during the four calendar weeks preceding the date on which notice of the proposed sale is sent to the Commission. Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. If two years have elapsed since the later of the date of the acquisition of restricted shares of Common Stock from the Company or any affiliate of the Company, a person who is not deemed to have been an affiliate of the Company at any time for 90 days preceding a sale would be entitled to sell such shares under Rule 144 without regard to the volume limitations, manner of sale provisions or notice requirements. Upon completion of the Offering, the holders of Common Stock who did not purchase shares in the Offering will own 7,118,460 shares of Common Stock, including the stockholders of the Founding Companies who will receive, in the aggregate, 5,435,601 shares in connection with the Acquisitions and founders and executive 53 officers of Compass who own 1,682,769 shares. These shares have not been registered under the Securities Act and, therefore, may not be sold unless registered under the Securities Act or sold pursuant to an exemption from registration, such as the exemption provided by Rule 144. Furthermore, the stockholders of the Founding Companies have agreed with the Company not to sell, transfer or otherwise dispose of any of these shares for a one-year period following the Offering. The stockholders of the Founding Companies have certain piggyback registration rights beginning one year after the Offering and one demand registration right for the six-month period beginning twenty months after the Offering with respect to these shares. The Company and the holders of all shares outstanding prior to the Offering (including the holders of shares issued in connection with the Acquisitions) have agreed not to offer, sell, contract to sell or otherwise dispose of any shares of Common Stock, or any securities convertible into or exercisable or exchangeable for Common Stock, for a period of 180 days after the date of this Prospectus without the prior written consent of NationsBanc Montgomery Securities, Inc. except for: (i) in the case of the Company, Common Stock issued pursuant to any employee or director plan described herein or in connection with acquisitions and (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, subject, in each case, to any remaining portion of the 180-day period applying to any shares so issued or transferred. In evaluating any request for a waiver of the 180-day lock-up period, NationsBanc Montgomery Securities, Inc. will consider, in accordance with their customary practice, all relevant facts and circumstances at the time of the request, including, without limitation, the recent trading market for the Common Stock, the size of the request and, with respect to a request by the Company to issue additional equity securities, the purpose of such an issuance. The 3,000,000 shares of Common Stock to be registered pursuant to the Company's shelf registration statement will be, upon issuance thereof, freely tradable unless acquired by parties to the acquisition or affiliates of such parties, other than the issuer, in which case they may be sold pursuant to Rule 145 under the Securities Act. Rule 145 permits such persons to resell immediately securities acquired in transactions covered under the Rule, provided such securities are resold in accordance with the public information, volume limitations and manner of sale requirements of Rule 144. If a period of one year has elapsed since the date such securities were acquired in such transaction and if the issuer meets the public information requirements of Rule 144, Rule 145 permits a person who is not an affiliate of the issuer to freely resell such securities. The Company intends to contractually restrict the sale of shares issued in connection with future acquisitions. The registration rights described above do not apply to such shelf registration statement. Sales, or the availability for sale of, substantial amounts of the Common Stock in the public market could adversely affect prevailing market prices and the ability of the Company to raise equity capital in the future. 54 UNDERWRITING The Underwriters named below (the "Underwriters"), represented by NationsBanc Montgomery Securities, Inc. and Lehman Brothers Inc. (the "Representatives"), have severally agreed, subject to the terms and conditions in the underwriting agreement (the "Underwriting Agreement"), by and between the Company and the Underwriters, to purchase from the Company the number of shares of Common Stock indicated below opposite its name, at the public offering price less the underwriting discount set forth on the cover page of this Prospectus. The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters are committed to purchase all of the shares of Common Stock, if they purchase any.
NUMBER OF UNDERWRITERS SHARES ------------ --------- NationsBanc Montgomery Securities, Inc.......................... Lehman Brothers Inc............................................. --------- Total....................................................... 4,100,000 =========
The Representatives have advised the Company that the Underwriters propose initially to offer the shares of Common Stock to the public on the terms set forth on the cover page of this Prospectus. The Underwriters may allow selected dealers a concession of not more than $ per share; and the Underwriters may allow, and such dealers may reallow, a concession of not more than $ per share to certain other dealers. After the public offering, the offering price and other selling terms may be changed by the Representatives. The Common Stock is offered subject to receipt and acceptance by the Underwriters and to certain other conditions, including the right to reject orders in whole or in part. The Company has granted to the Underwriters an over-allotment option, exercisable for 30 days from the date of this Prospectus, to purchase up to a maximum of 615,000 additional shares of Common Stock to cover over-allotments, if any, at the same price per share as the initial shares to be purchased by the Underwriters. To the extent the Underwriters exercise such over-allotment option, each of the Underwriters will be committed, subject to certain conditions, to purchase such additional shares in approximately the same proportion as set forth in the above table. The Underwriters may exercise this over-allotment option only to cover over-allotments made in connection with the Offering. The Underwriting Agreement provides that the Company will indemnify the Underwriters against certain liabilities, including civil liabilities under the Securities Act, or will contribute to payments the Underwriters may be required to make in respect thereof. The Company's officers and directors and all of the stockholders of the Company prior to the Offering (including the holders of shares issued in connection with the Acquisitions) have agreed that for a period of 180 days after the date of this Prospectus they will not, without the prior written consent of NationsBanc Montgomery Securities, Inc. directly or indirectly sell, offer, contract or grant any option to sell, pledge, transfer, establish an open put equivalent position or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock or securities exchangeable or exercisable for or convertible into shares of Common Stock. The Company has also agreed not to issue, offer, sell, grant options to purchase or otherwise dispose of any of the Company's equity securities for a period of 180 days after the effective date of this Offering without the prior written consent of NationsBanc Montgomery Securities, Inc. except for securities issued by the Company in connection with acquisitions and for grants and exercises of stock options, subject in each case to any remaining portion of the 180-day period applying to shares issued or transferred. In evaluating any request for a waiver of the 180-day lock-up period, NationsBanc Montgomery Securities, Inc. will consider, in accordance with their customary practice, all relevant facts and circumstances at the time of the request, including, without limitation, the recent trading market for the Common Stock, the size of the request and, with respect to a request by the Company to issue additional equity securities, the purpose of such an issuance. See "Shares Eligible for Future Sale." 55 In connection with the Offering, certain Underwriters and selling group members and their respective affiliates may engage in transactions that stabilize, maintain or otherwise affect the market price of the Common Stock. Such transactions may include stabilization transactions effected in accordance with Rule 104 of Regulation M under the Securities and Exchange Act of 1934, as amended, pursuant to which such persons may bid for or purchase Common Stock for the purpose of stabilizing its market price. The Underwriters also may create a short position for the account of the Underwriters by selling more Common Stock in connection with the Offering than they are committed to purchase from the Company and, in such case, may purchase Common Stock in the open market following completion of the Offering to cover all or a portion of such short position. The Underwriters may also cover all or a portion of such short position, up to 615,000 shares of Common Stock, by exercising the Underwriters' over-allotment option referred to above. In addition, NationsBanc Montgomery Securities, Inc. on behalf of the Underwriters, may impose "penalty bids" under contractual arrangements with the Underwriters whereby it may reclaim from an Underwriter (or dealer participating in the Offering) for the account of the other Underwriters, the selling concession with respect to Common Stock that is distributed in the Offering but subsequently purchased for the account of the Underwriters in the open market. Any of the transactions described in this paragraph may result in the maintenance of the price of the Common Stock at a level above that which might otherwise prevail in the open market. None of the transactions described in this paragraph is required, and, if they are undertaken, they may be discontinued at any time. The Representatives have informed the Company that the Underwriters do not intend to confirm sales of Common Stock offered by this Prospectus to accounts over which they exercise discretionary authority in excess of 5% of the number of shares of Common Stock offered hereby. Prior to the Offering, there has been no public trading market for the Common Stock. Consequently, the initial public offering price was determined by negotiations between the Company and the Representatives. Among the factors considered in such negotiations were the history of and prospects for the Company and the industries in which it operates, an assessment of the Company's management, its past and present earnings and the trend of such earnings, the prospects for future earnings of the Company, the present state of the Company's development, the general condition of securities markets at the time of the Offering and the market price of publicly traded stock of comparable companies in recent periods. 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 June 30, 1997 included in this Prospectus has been so included in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The consolidated financial statements of The Mail Box, Inc. as of December 31, 1995 and 1996 and for each of the three years in the period ended December 31, 1996 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, 1996 and 1995 and for each of the years in the three-year period ended December 31, 1996, included in this Prospectus, have been audited by Arthur Andersen LLP, independent public accountants, as stated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. 56 The consolidated financial statements of B.R.M.C. of Delaware, Inc. at December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996 appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report, given upon the authority of such firm as experts in accounting and auditing. The consolidated financial statements of Mid-Continent Agencies, Inc. as of December 31, 1995 and 1996 and for the years then ended, included in this Prospectus have been so included in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The combined financial statements of Impact Telemarketing Group, Inc. as of and for the year ended December 31, 1996, included in this Prospectus have been so included in reliance on the report (which contains an explanatory paragraph relating to Impact Telemarketing Group, Inc.'s ability to continue as a going concern as described in Note 1 to the financial statements) of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 (which term shall encompass any and all amendments thereto) under the Securities Act with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract or any other document are not necessarily complete and in each instance reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. For further information with respect to the Company, reference is hereby made to the Registration Statement and such exhibits and schedules filed as a part thereof, which may be inspected without charge, at the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at Seven World Trade Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission maintains a web site that contains reports, proxy and information statements regarding registrants that file electronically with the SEC. The address of this web site is http://www.sec.gov. Copies of all or any portion of the Registration Statement may be obtained from the Public Reference Section of the Commission, upon payment of the prescribed fees. The Company intends to furnish its stockholders with an annual report containing audited financial statements and an opinion thereon expressed by independent auditors for each fiscal year and with quarterly reports containing unaudited summary information for the first three quarters of each fiscal year. 57 COMPASS INTERNATIONAL SERVICES CORPORATION INDEX TO FINANCIAL STATEMENTS
PAGE ---- COMPASS INTERNATIONAL SERVICES CORPORATION UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS: Introduction to Unaudited Pro Forma Combined Financial Statements...... F-2 Unaudited Pro Forma Combined Balance Sheet............................. F-3 Unaudited Pro Forma Combined Statements of Operations.................. F-4 Notes to Unaudited Pro Forma Combined Financial Statements............. F-7 COMPASS INTERNATIONAL SERVICES CORPORATION: Report of Independent Accountants...................................... F-10 Balance Sheet.......................................................... F-11 Notes to Financial Statement........................................... F-12 THE MAIL BOX, INC.: Report of Independent Accountants...................................... F-14 Consolidated Balance Sheet............................................. F-15 Consolidated Statement of Operations................................... F-16 Consolidated Statement of Stockholders' Equity......................... F-17 Consolidated Statement of Cash Flows................................... F-18 Notes to Consolidated Financial Statements............................. F-19 NATIONAL CREDIT MANAGEMENT CORPORATION AND SUBSIDIARY: Report of Independent Public Accountants............................... F-26 Consolidated Balance Sheets............................................ F-27 Consolidated Statements of Operations.................................. F-28 Consolidated Statements of Stockholders' Equity........................ F-29 Consolidated Statements of Cash Flows.................................. F-30 Notes to Financial Statements.......................................... F-31 B.R.M.C. OF DELAWARE INC.: Report of Independent Auditors......................................... F-37 Consolidated Balance Sheet............................................. F-38 Consolidated Statement of Operations................................... F-39 Consolidated Statement of Stockholders' Equity......................... F-40 Consolidated Statement of Cash Flows................................... F-41 Notes to Consolidated Financial Statements............................. F-42 MID-CONTINENT AGENCIES, INC.: 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
F-1 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, the Offering and an acquisition by Bomar in September 1997 as if they had occurred on June 30, 1997. The unaudited pro forma combined statement of operations gives effect to the Acquisitions as if they had occurred on January 1, 1996, reflects reductions in salaries, bonuses and certain benefits to the owners of the Founding Companies to which they have agreed prospectively, reflects reductions in interest expense associated with reductions in debt and gives effect to the three acquisitions by Bomar as if they had occurred on January 1, 1996. With respect to other potential cost savings, Compass has not and cannot quantify these savings until completion of the Acquisitions of the Founding Companies. It is anticipated that these savings will be offset by costs related to Compass' new corporate management and by the costs associated with being a public company. However, these costs, like the savings they offset, cannot be accurately quantified at this time. Neither the expected savings nor the anticipated costs have been included in the pro forma combined financial information of Compass. The pro forma adjustments are based on estimates, available information and certain assumptions and may be revised as additional information becomes available. The pro forma combined financial data do not purport to represent what Compass' financial position or results of operations would actually have been if such transactions in fact had occurred on those dates and are not necessarily representative of Compass' financial position or results of operations for any future period. Since the Founding Companies were not under common control or management, historical combined results may not be comparable to, or indicative of, future performance. The unaudited pro forma combined financial statements should be read in conjunction with the other financial statements and notes thereto included elsewhere in this Prospectus. See "Risk Factors" included elsewhere herein. F-2 COMPASS INTERNATIONAL SERVICES CORPORATION UNAUDITED PRO FORMA COMBINED BALANCE SHEET JUNE 30, 1997 (IN THOUSANDS)
ACQUISITION OFFERING ADJUSTMENTS PRO ADJUSTMENTS (SEE NOTE FORMA (SEE NOTE ASSETS COMPASS MAIL BOX NCMC BOMAR MCA IMPACT 3) COMBINED 3) AS ADJUSTED - ------ ------- -------- ------ ------ ------ ------ ----------- -------- ----------- ----------- Cash and cash equivalents............ $-- $ 858 $1,363 $ 183 $ 121 $ 187 $ 1,022 $ 3,734 $ 10,704 $14,438 Cash held for clients... -- -- -- 792 -- -- 117 909 -- 909 Commissions/accounts receivable, net........ -- 2,610 2,498 1,111 485 1,991 -- 8,695 -- 8,695 Due from related parties and stockholders....... -- -- -- 30 1,463 216 (1,552) 157 -- 157 Inventories............. -- 362 -- -- -- -- -- 362 -- 362 Postage on hand......... -- 1,917 -- -- -- -- -- 1,917 -- 1,917 Prepaid expenses and other.................. -- 155 192 34 168 4 -- 553 -- 553 Deferred offering costs. 254 -- -- -- -- -- -- 254 (254) -- ---- ------- ------ ------ ------ ------ ------- ------- -------- ------- Total current assets. 254 5,902 4,053 2,150 2,237 2,398 (413) 16,581 10,450 27,031 Property and equipment, net.................... -- 4,078 1,061 899 150 630 41 6,859 -- 6,859 Goodwill, net........... -- -- -- 848 -- -- 40,347 41,195 -- 41,195 Other assets............ -- 147 192 159 214 26 1,009 1,747 -- 1,747 ---- ------- ------ ------ ------ ------ ------- ------- -------- ------- Total assets......... $254 $10,127 $5,306 $4,056 $2,601 $3,054 $40,984 $66,382 $ 10,450 $76,832 ==== ======= ====== ====== ====== ====== ======= ======= ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Short-term debt......... $104 $ 1,308 $ 237 $ 948 $ 569 $ 831 $ -- $ 3,997 $ (1,744) $ 2,253 Accounts payable and accrued expenses....... -- 1,983 1,845 1,051 510 1,759 562 7,710 (544) 7,166 Collections due to clients................ -- -- -- 792 -- -- -- 792 -- 792 Postage allowances and deposits............... -- 1,605 -- -- -- -- -- 1,605 -- 1,605 Income taxes payable.... -- 630 -- -- -- -- -- 630 -- 630 Payable to Founding Company stockholders... -- -- -- -- 52 -- 19,992 20,044 (20,044) -- ---- ------- ------ ------ ------ ------ ------- ------- -------- ------- Total current liabilities......... 104 5,526 2,082 2,791 1,131 2,590 20,554 34,778 (22,332) 12,446 Long-term debt.......... -- 1,375 28 426 178 -- 8,011 10,018 (10,018) -- Capital lease obligations............ -- 849 96 313 -- 337 -- 1,595 -- 1,595 Deferred income taxes... -- 145 120 14 -- -- -- 279 -- 279 Other................... -- -- -- 173 179 -- -- 352 -- 352 ---- ------- ------ ------ ------ ------ ------- ------- -------- ------- Total liabilities.... 104 7,895 2,326 3,717 1,488 2,927 28,565 47,022 (32,350) 14,672 Minority interest in subsidiary............. -- -- -- 6 -- -- -- 6 -- 6 Stockholders' equity: Common stock........... 17 13 2 1 10 91 (63) 71 41 112 Additional paid-in capital............... 133 947 752 60 73 -- 14,959 16,924 42,759 59,683 Retained earnings...... -- 2,359 2,226 272 1,044 36 (3,578) 2,359 -- 2,359 Unrealized loss on securities............ -- -- -- -- (14) -- 14 -- -- Less: Treasury stock... -- (1,087) -- -- -- -- 1,087 -- -- -- ---- ------- ------ ------ ------ ------ ------- ------- -------- ------- Total stockholders' equity.............. 150 2,232 2,980 333 1,113 127 12,419 19,354 42,800 62,154 ---- ------- ------ ------ ------ ------ ------- ------- -------- ------- Total liabilities and stockholders' equity.............. $254 $10,127 $5,306 $4,056 $2,601 $3,054 $40,984 $66,382 $ 10,450 $76,832 ==== ======= ====== ====== ====== ====== ======= ======= ======== =======
F-3 COMPASS INTERNATIONAL SERVICES CORPORATION UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PRO OTHER FORMA ACQUISI- ADJUST- TIONS MENTS MAIL (SEE (SEE PRO FORMA BOX NCMC BOMAR MCA IMPACT NOTE 4) NOTE 5) COMBINED ------- ------- ------ ------ ------ -------- ------- ---------- Revenues................ $26,156 $13,579 $9,597 $9,038 $8,869 $4,544 -- $71,783 Operating expenses...... 17,953 7,945 6,419 2,875 6,961 2,926 -- 45,079 ------- ------- ------ ------ ------ ------ ------- ---------- Gross profit........... 8,203 5,634 3,178 6,163 1,908 1,618 -- 26,704 Selling, general and administrative expenses............... 5,891 4,798 2,853 6,054 2,108 1,328 $(3,461)(A) 19,510 -- -- -- -- -- -- (61)(B) -- Goodwill and intangible amortization........... -- -- -- -- -- 85 1,166 (C) 1,251 ------- ------- ------ ------ ------ ------ ------- ---------- Income (loss) from operations............ 2,312 836 325 109 (200) 205 2,356 5,943 Other (income) expense: Interest expense....... 337 79 122 68 30 36 (148)(D) 524 Interest income........ -- (46) -- (117) -- (2) 61 (E) (104) Other, net............. -- 15 -- 3 (105) -- -- (87) ------- ------- ------ ------ ------ ------ ------- ---------- Income (loss) before income taxes.......... 1,975 788 203 155 (125) 171 2,443 5,610 Provision for income taxes.................. 700 335 73 107 -- -- 1,529 (F) 2,744 ------- ------- ------ ------ ------ ------ ------- ---------- Net income (loss)....... $ 1,275 $ 453 $ 130 $ 48 $ (125) $ 171 $ 914 $ 2,866 ======= ======= ====== ====== ====== ====== ======= ========== Net income per share.... $ 0.28 ========== Shares used in computing pro forma net income per share (See Note 6). 10,269,126 ==========
See Notes to Unaudited Pro Forma Combined Financial Statements. F-4 COMPASS INTERNATIONAL SERVICES CORPORATION UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
OTHER ACQUISI- TIONS PRO FORMA (SEE ADJUST-MENTS PRO FORMA MAIL BOX NCMC BOMAR MCA IMPACT NOTE 4) (SEE NOTE 5) COMBINED -------- ------ ------ ------ ------ -------- ------------ ---------- Revenues................ $12,070 $6,856 $4,766 $4,548 $4,045 $2,593 -- $34,878 Operating expenses...... 8,456 3,703 2,888 1,470 2,884 1,636 -- 21,037 ------- ------ ------ ------ ------ ------ ------- ---------- Gross profit........... 3,614 3,153 1,878 3,078 1,161 957 13,841 Selling, general and administrative......... 2,776 2,498 1,566 3,025 1,093 705 $(1,767)(A) 9,861 -- -- -- -- -- -- (35)(B) -- Goodwill and intangible amortization........... -- -- -- -- -- 42 583 (C) 625 ------- ------ ------ ------ ------ ------ ------- ---------- Income from operations. 838 655 312 53 68 210 1,219 3,355 Other (income) expense: Interest expense....... 167 39 43 37 7 13 (94)(D) 212 Interest income........ -- (26) -- (76) -- -- 33 (E) (69) Other, net............. -- -- -- 3 -- -- -- 3 ------- ------ ------ ------ ------ ------ ------- ---------- Income before income taxes.................. 671 642 269 89 61 197 1,280 3,209 Provision for income taxes................. 240 264 42 58 -- -- 930 (F) 1,534 ------- ------ ------ ------ ------ ------ ------- ---------- Net income.............. $ 431 $ 378 $ 227 $ 31 $ 61 $ 197 $ 350 $ 1,675 ======= ====== ====== ====== ====== ====== ======= ========== Net income per share.... $ 0.16 ========== Shares used in computing pro forma net income per share (See Note 6)........... 10,269,126 ==========
See Notes to Unaudited Pro Forma Combined Financial Statements. F-5 COMPASS INTERNATIONAL SERVICES CORPORATION UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
OTHER PRO FORMA ACQUISITIONS ADJUSTMENTS (SEE (SEE NOTE PRO FORMA MAIL BOX NCMC BOMAR MCA IMPACT NOTE 4) 5) COMBINED -------- ------ ------ ------ ------ ------------ ----------- ---------- Revenues................ $15,804 $8,044 $6,677 $4,741 $6,257 $1,784 -- $43,307 Operating expenses...... 10,367 5,018 4,259 1,551 4,817 1,057 -- 27,069 ------- ------ ------ ------ ------ ------ ------- ---------- Gross profit........... 5,437 3,026 2,418 3,190 1,440 727 -- 16,238 Selling, general and administrative expenses............... 3,653 2,531 1,965 3,116 1,340 413 $(2,126)(A) 10,879 -- -- -- -- -- -- (13)(B) -- Goodwill and intangible amortization........... -- -- -- -- -- 42 583 (C) 625 ------- ------ ------ ------ ------ ------ ------- ---------- Income from operations. 1,784 495 453 74 100 272 1,556 4,734 Other (income) expense: Interest expense....... 209 23 103 41 42 1 (138)(D) 281 Interest income........ -- (24) -- (25) -- -- 21 (E) (28) Other, net............. -- 1 -- -- -- -- -- 1 ------- ------ ------ ------ ------ ------ ------- ---------- Income before income taxes.................. 1,575 495 350 58 58 271 1,673 4,480 Provision for income taxes................. 562 233 122 46 -- -- 1,079 (F) 2,042 ------- ------ ------ ------ ------ ------ ------- ---------- Net income.............. $ 1,013 $ 262 $ 228 $ 12 $ 58 $ 271 $ 594 $ 2,438 ======= ====== ====== ====== ====== ====== ======= ========== Net income per share.... $ 0.24 ========== Shares used in computing pro forma net income per share (See Note 6). 10,269,126 ==========
See Notes to Unaudited Pro Forma Combined Financial Statements. F-6 COMPASS INTERNATIONAL SERVICES CORPORATION NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE DATA) NOTE 1--GENERAL Compass International Services Corporation ("Compass") was organized to create a leading provider of outsourced business services to public and private entities. Compass has conducted no operations to date and will acquire the Founding Companies concurrently and as a condition with the closing of this Offering. The historical financial statements reflect the financial position and results of operations of Compass and the Founding Companies and were derived from the respective financial statements. The periods included in these financial statements for all of the individual Founding Companies are as of and for the year ended December 31, 1996 and as of and for the six months ended June 30, 1996 and 1997. The audited historical financial statements included elsewhere herein have been included in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 80. NOTE 2--ACQUISITION OF FOUNDING COMPANIES Concurrently and as a condition with the closing of this Offering, Compass will acquire all of the outstanding capital stock of the Founding Companies. The Acquisitions will be accounted for using the purchase method of accounting with Mail Box treated as the accounting acquiror. The following table sets forth the consideration to be paid in cash and in shares of Common Stock to the common stockholders of each of the Founding Companies.
SHARES OF COMMON CASH(1) STOCK ----------------- ------------------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) Mail Box............................ $ 9,847 2,461,852 NCMC................................ 2,897 965,801 Bomar............................... 4,607 1,151,787 Mid-Continent....................... 1,869 467,127 Impact.............................. 824 389,124 ----------------- ------------------- Total............................... $ 20,044 5,435,691 ================= ===================
- -------- (1) The number of shares of Common Stock to be paid to the stockholders of the Founding Companies is fixed. If the initial public offering price is higher or lower than the assumed price, the cash consideration will vary proportionately. For example, a $1.00 per share increase or decrease from the assumed offering price will result in a $1.7 million increase or decrease, respectively, in the aggregate cash consideration paid to Founding Company stockholders. The 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 $4.3 million. The potential increase in goodwill due to this increase in consideration is approximately $2.3 million, with associated amortization of approximately $69,000 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 $8.5 million. The potential decrease in goodwill due to this decrease in consideration is approximately $4.6 million, with an associated reduction in amortization of approximately $138,000 per year. F-7 COMPASS INTERNATIONAL SERVICES CORPORATION NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED) NOTE 3--UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS The following table summarizes unaudited pro forma combined balance sheet adjustments (in thousands):
OFFERING TOTAL ASSETS ACQUISITION ADJUSTMENTS TOTAL ADJUSTMENTS OFFERING ------ ---------------------------- ACQUISITION ----------------- ADJUST- (A) (B) (C) (D) ADJUSTMENTS (E) (F) MENTS ------ ----- ------- ----- ----------- ------- -------- -------- Cash and cash equivalents............ $ 195 $ -- $ -- $ 827 $ 1,022 $42,950 $(32,246) $10,704 Cash held for clients... 117 -- -- -- 117 -- -- -- Due from stockholders... 127 (800) -- (879) (1,552) -- -- -- Deferred offering costs. -- -- -- -- -- (254) -- (254) ------ ----- ------- ----- ------- ------- -------- ------- Total current assets. 439 (800) -- (52) (413) 42,696 (32,246) 10,450 Property and equipment.. 41 -- -- -- 41 -- -- -- Other assets............ 9 -- 1,000 -- 1,009 -- -- -- Goodwill, net........... 3,394 -- 36,953 -- 40,347 -- -- -- ------ ----- ------- ----- ------- ------- -------- ------- Total assets......... $3,883 $(800) $37,953 $ (52) $40,984 $42,696 $(32,246) $10,450 ====== ===== ======= ===== ======= ======= ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Short term debt......... $ -- $ -- $ -- $ -- $ -- $ -- $ (1,744) $(1,744) Accounts payable and accrued expenses....... 122 -- 440 -- 562 (104) (440) (544) Payable to Founding Company stockholders... -- -- 20,044 (52) 19,992 -- (20,044) (20,044) ------ ----- ------- ----- ------- ------- -------- ------- Total current liabilities......... 122 -- 20,484 (52) 20,554 (104) (22,228) (22,332) Long-term debt.......... 3,761 -- 4,250 -- 8,011 -- (10,018) (10,018) ------ ----- ------- ----- ------- ------- -------- ------- Total liabilities.... 3,883 -- 24,734 (52) 28,565 (104) (32,246) (32,350) Stockholders' equity: Common stock........... -- -- (63) -- (63) 41 -- 41 Additional paid-in capital............... -- -- 14,959 -- 14,959 42,759 -- 42,759 Retained earnings...... -- (800) (2,778) -- (3,578) -- -- -- Unrealized loss on securities............ -- -- 14 -- 14 -- -- -- Treasury stock......... -- -- 1,087 -- 1,087 -- -- -- ------ ----- ------- ----- ------- ------- -------- ------- Total stockholders' equity.............. -- (800) 13,219 -- 12,419 42,800 -- 42,800 ------ ----- ------- ----- ------- ------- -------- ------- Total liabilities and stockholders' equity.............. $3,883 $(800) $37,953 $ (52) $40,984 $42,696 $(32,246) $10,450 ====== ===== ======= ===== ======= ======= ======== =======
- ------- (A) Records the assets and liabilities of FCCI as of June 30, 1997, a company acquired by Bomar subsequent to June 30, 1997 and includes debt incurred by Bomar to finance the acquisition and associated goodwill. (B) Reflects the exclusion of a note receivable from a stockholder of Mid- Continent which will be retained by the stockholder. (C) 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 $20.0 million and a broker fee of $440,000; (ii) the issuance of 5,435,691 shares of Common Stock to the stockholders of the Founding Companies; (iii) the assumption of $4.3 million of debt as part of the consideration for Mid- Continent; (iv) the allocation of the purchase price to the Company's historical assets and liabilities based on their respective values and to certain identifiable intangible assets acquired; and (v) the recognition of goodwill representing the excess of the purchase price over the fair value of net assets acquired. The Common Stock consideration was valued at $9.00 per share, which represents a 25% discount of the assumed offering price of $12.00 due to the restrictions on the transferability of the Common Stock to be acquired by the stockholders of the Founding Companies. (D) Represents the settlement of certain stockholder receivables and payables pursuant to the Acquisition Agreements. (E) Records the cash proceeds from the issuance of 4,100,000 shares of Common Stock, net of estimated Offering costs (based on an assumed initial public offering price of $12.00 per share). Offering costs primarily consist of the underwriting discount, accounting fees, legal fees and printing expenses. (F) 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, to repay certain long-term debt of the Founding Companies and to pay certain Acquisition-related liabilities. F-8 NOTE 4--OTHER ACQUISITIONS Gives effect to two acquisitions of Bomar consummated in fiscal 1996 and the acquisition by Bomar of Financial Claims Control, Inc. ("FCCI") in September 1997, as if these acquisitions were consummated on January 1, 1996, including the amortization of approximately $3.4 million of goodwill over 40 years. NOTE 5--UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS (A) Reflects the reduction in salaries, bonuses and benefits to the owners of the Founding Companies to which they have agreed prospectively as a condition of the Acquisitions. (B) Reflects a reduction in rent expense related to a lease on a building controlled by a stockholder of a Founding Company which has been agreed to prospectively as a condition of the Acquisition. (C) Reflects (i) the amortization of $37.0 million of goodwill to be recorded as a result of these Acquisitions over the respective goodwill lives ranging from 15 to 40 years, and (ii) the amortization of a $1.0 million intangible asset associated with a patent at NCMC amortized over 15 years. (D) Reflects the net reduction in interest expense associated with long-term debt to be paid from the proceeds of the Offering. (E) Reflects a net reduction of interest income on stockholder loans to one of the Founding Companies. (F) 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; (iii) 2,240,333 shares representing the number of shares sold in the Offering necessary to pay the $20.0 million cash portion of the consideration for the Acquisitions and to pay the estimated underwriting discount and other acquisition and offering related costs; and (iv) 910,333 shares to be issued in connection with the offering necessary to fund approximately $11.8 million of debt to be repaid from proceeds of the Offering, net of repayments from stockholder receivables. F-9 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Compass International Services Corporation The Stock Split described in Note 3 to the financial statements has not been consummated at September 24, 1997. When it has been consummated, we will be in a position to furnish the following report: "In our opinion, the accompanying balance sheet presents fairly, in all material respects, the financial position of Compass International Services Corporation at June 30, 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 statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above." /s/ Price Waterhouse LLP Minneapolis, Minnesota September 24, 1997 F-10 COMPASS INTERNATIONAL SERVICES CORPORATION BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, ASSETS 1997 ------ -------- Deferred offering costs............................................... $254 ---- Total assets...................................................... $254 ==== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Notes payable......................................................... $104 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........................ $254 ====
The accompanying notes are an integral part of these financial statements. F-11 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, the Company issued 1,682,769 shares (post split) of common stock for $150,000. Compass has not conducted any operations, and all activities to date have related to the Offering and the Acquisitions. Expenditures have been funded by advances from BGL Capital Partners, which are payable upon consummation of the Offering, with interest at 8%. Accordingly, statements of operations and cash flows for this period would not provide meaningful information and have been omitted. As of June 30, 1997, approximately $254,000 has been incurred in connection with the Offering and the Company has capitalized these costs as Deferred Offering Costs. These costs include legal and accounting fees which will be offset against the proceeds of the Offering at closing. Compass is dependent upon the Offering to execute the pending Acquisitions. There is no assurance that the pending Acquisitions discussed will be completed or that Compass will be able to generate future operating revenues. NOTE 2--NEW ACCOUNTING PRONOUNCEMENTS Accounting for Stock-Based Compensation Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," allows entities to choose between a fair value based method of accounting for employee stock options or similar equity instruments and the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB No. 25"). Entities electing to remain with the accounting in APB Opinion No. 25 must make pro forma disclosures of net income and earnings per share as if the fair value method of accounting has been applied. The Company will provide pro forma disclosure of net income and earnings per share, as applicable, in the notes to future consolidated financial statements. Earnings Per Share In February 1997, the Financial Accounting Standards Board issued Statement of Accounting Standards No. 128 "Earnings per Share" ("SFAS No. 128"). 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. NOTE 3--UNAUDITED SUBSEQUENT EVENTS Subsequent Events On October 1, 1997, the Board of Directors approved several actions in connection with the Offering. These actions included the approval of a 112.185-for-1 stock split which will occur prior to the effectiveness of the Company's Registration Statement. All common stock related information included in the financial statements has been adjusted to reflect this split. F-12 COMPASS INTERNATIONAL SERVICES CORPORATION NOTES TO FINANCIAL STATEMENT--(CONTINUED) Compass has signed definitive agreements to acquire all of the outstanding capital stock of five companies ("Founding Companies") to be consummated contemporaneously with the Offering. The Founding Companies are The Mail Box, Inc. (Mail Box), National Credit Management Corp. (NCMC), BRMC of Delaware, Inc. (Bomar), Mid-Continent Agencies, Inc. (Mid-Continent) and Impact Telemarketing Group, Inc. (Impact). The aggregate consideration that will be paid by Compass to acquire the Founding Companies is approximately $20.0 million in cash and 5,435,691 shares of Common Stock. The consideration to be paid for each Founding Company is subject to possible post-closing adjustment based on adjusted 1997 earnings. On October 6, 1997, Compass filed a registration statement on Form S-1 for the Offering. F-13 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders of The Mail Box, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of The Mail Box, Inc. and its wholly-owned subsidiary, Mail Box Data Services, Inc. (the "Company") at December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, 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 September 22, 1997 F-14 THE MAIL BOX, INC. CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, --------------- JUNE 30, 1995 1996 1997 ------ ------- ----------- (UNAUDITED) ASSETS ------ Current assets: Cash............................................. $ 16 $ 1,419 $ 858 Accounts receivable, net of allowance for doubtful accounts of $116, $81 and $125, respectively................ 3,397 3,419 2,610 Inventories...................................... 490 708 362 Postage on hand.................................. 887 3,593 1,917 Prepaid expenses and other current assets........ 78 69 111 Deferred income taxes............................ 74 26 44 ------ ------- ------- Total current assets........................... 4,942 9,234 5,902 Property and equipment, net........................ 2,374 3,205 4,078 Other assets....................................... 109 100 147 ------ ------- ------- Total assets................................... $7,425 $12,539 $10,127 ====== ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Line of credit................................... $ 439 $ 569 $ -- Notes payable, current portion................... -- -- 309 Secured equipment financing facilities, current portion......................................... 251 327 459 Capitalized lease obligations, current portion... 254 450 540 Accounts payable................................. 1,114 1,450 1,089 Accrued expenses and other liabilities........... 594 824 894 Income taxes payable............................. 214 524 630 Postage advances and deposits.................... 2,040 4,818 1,605 ------ ------- ------- Total current liabilities...................... 4,906 8,962 5,526 Long-term liabilities: Notes payable, net of current portion............ -- -- 568 Secured equipment financing facilities, net of current portion................................. 792 616 807 Capitalized lease obligations, net of current portion......................................... 693 650 849 Deferred income taxes............................ 39 105 145 ------ ------- ------- Total liabilities.............................. 6,430 10,333 7,895 Commitments and contingencies Stockholders' equity: Common stock, $.10 par value, 500,000 shares authorized, 132,900, 132,900 and 132,900 shares issued, and 129,300, 129,300, and 96,900 shares outstanding at December 31, 1995 and 1996 and June 30, 1997, respectively.................................... 13 13 13 Additional paid-in-capital....................... 947 947 947 Treasury stock, at cost, 3,600, 3,600, and 36,000 shares at December 31, 1995 and 1996 and June 30, 1997, respectively.................................... (100) (100) (1,087) Retained earnings................................ 135 1,346 2,359 ------ ------- ------- Total stockholders' equity..................... 995 2,206 2,232 ------ ------- ------- Total liabilities and stockholders' equity..... $7,425 $12,539 $10,127 ====== ======= =======
The accompanying notes are an integral part of these financial statements. F-15 THE MAIL BOX, INC. CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS)
YEARS ENDED SIX MONTHS DECEMBER 31, ENDED JUNE 30, ----------------------- --------------- 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- (UNAUDITED) Revenues............................... $15,354 $17,370 $26,156 $12,070 $15,804 Operating expenses..................... 11,168 12,402 17,953 8,456 10,367 ------- ------- ------- ------- ------- Gross profit......................... 4,186 4,968 8,203 3,614 5,437 Selling, general and administrative expenses.............................. 3,442 4,370 5,891 2,776 3,653 ------- ------- ------- ------- ------- Income from operations............... 744 598 2,312 838 1,784 Other expense: Interest expense..................... 212 302 337 167 209 ------- ------- ------- ------- ------- Income before income taxes............. 532 296 1,975 671 1,575 Provision for income taxes............. 206 134 700 240 562 ------- ------- ------- ------- ------- Net income............................. $ 326 $ 162 $ 1,275 $ 431 $ 1,013 ======= ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements. F-16 THE MAIL BOX, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL UNEARNED -------------- PAID-IN- TREASURY ESOP RETAINED SHARES AMOUNT CAPITAL STOCK COMPENSATION EARNINGS TOTAL ------- ------ ---------- -------- ------------ -------- ------ Balance January 1, 1994. 102,900 $10 $622 $ (61) $(113) $ (268) $ 190 Net income............. 326 326 ESOP compensation...... 20 68 88 Capital contribution... 50 50 Sales of treasury stock................. 12 12 Cash dividends, $.25 per share............. (25) (25) ------- --- ---- ------- ----- ------ ------ Balance, December 31, 1994................... 102,900 10 692 (49) (45) 33 641 Net income............. 162 162 ESOP compensation...... 32 45 77 Capital contribution... 86 86 Purchases of treasury stock................. (51) (51) Cash dividends, $.50 per share............. (60) (60) Sale of common stock... 30,000 3 137 140 ------- --- ---- ------- ----- ------ ------ Balance, December 31, 1995................... 132,900 13 947 (100) 135 995 Net income............. 1,275 1,275 Cash dividends, $.50 per share............. (64) (64) ------- --- ---- ------- ----- ------ ------ Balance, December 31, 1996................... 132,900 13 947 (100) 1,346 2,206 Net income (unaudited). 1,013 1,013 Purchases of treasury stock (unaudited)........... (987) (987) ------- --- ---- ------- ----- ------ ------ Balance, June 30, 1997, (unaudited)............ 132,900 $13 $947 $(1,087) $ -- $2,359 $2,232 ======= === ==== ======= ===== ====== ======
The accompanying notes are an integral part of these financial statements. F-17 THE MAIL BOX, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS YEARS ENDED ENDED JUNE DECEMBER 31, 30, ------------------- -------------- 1994 1995 1996 1996 1997 ---- ----- ------ ------ ------ (UNAUDITED) Cash flows from operating activities: Net income.............................. $326 $ 162 $1,275 $ 431 $1,013 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization......... 400 616 768 375 467 ESOP compensation..................... 88 77 -- -- -- Employee stock compensation........... 50 86 -- -- -- Provision for doubtful accounts....... 47 60 82 40 45 Change in deferred taxes.............. 98 (48) 114 89 22 Changes in operating assets and liabilities: Accounts receivable................... (456) (862) (104) 542 764 Inventories........................... (23) (322) (218) (503) 346 Postage on hand....................... (387) (65) (2,706) (2,612) 1,676 Prepaid expenses and other assets..... (13) 47 18 (38) (89) Accounts payable and accrued expenses. 45 340 566 (217) (291) Postage advances and deposits......... (50) 1,328 2,778 2,660 (3,213) Federal income taxes payable.......... 107 107 310 (125) 106 ---- ----- ------ ------ ------ Net cash provided by operating activities......................... 232 1,526 2,883 642 846 Cash flows from investing activities: Purchases of property and equipment..... (486) (810) (1,007) (488) (784) Proceeds from disposal of property and equipment.............................. -- -- -- -- 38 ---- ----- ------ ------ ------ Net cash used in investing activities......................... (486) (810) (1,007) (488) (746) Cash flows from financing activities: Net borrowings (payments) on line of credit................................. 97 (725) 130 58 (569) Repayments of capital lease obligations. (217) (321) (439) (196) (305) Proceeds from long-term debt............ 585 692 161 180 1,360 Repayment of long-term debt............. (214) (360) (261) (134) (160) Proceeds from issuance of common stock.. 12 140 -- -- -- Repurchases of treasury stock........... -- (51) -- -- (987) Cash dividends paid..................... -- (85) (64) (64) -- ---- ----- ------ ------ ------ Net cash provided by (used in) financing activities............... 263 (710) (473) (156) (661) Net increase (decrease) in cash........... 9 6 1,403 (2) (561) Cash at beginning of period............... 1 10 16 16 1,419 ---- ----- ------ ------ ------ Cash at end of period..................... $ 10 $ 16 $1,419 $ 14 $ 858 ==== ===== ====== ====== ====== Supplemental disclosure of cash flow information: Cash paid for interest.................. $213 $ 302 $ 338 $ 167 $ 207 Cash paid for taxes..................... -- 74 276 276 433 Noncash investing and financing activities: Equipment acquired under capital leases. 267 551 592 223 594
The accompanying notes are an integral part of these financial statements. F-18 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") provides 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 southwest United States. The Company operates from a single location in Dallas, Texas. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While management believes that the estimates and related assumptions used in the preparation of these financial statements are appropriate, actual results could differ from those estimates. Estimates are made when accounting for the allowance for doubtful accounts, inventories, depreciation and amortization and income taxes. Principles of Consolidation The consolidated financial statements include the accounts of The Mail Box, Inc. and its wholly owned subsidiary, Mail Box Data Services, Inc. All significant inter-company transactions have been eliminated. Revenue Recognition Revenues are recognized when services are rendered and are presented in the financial statements net of sales allowances. The Company's services are considered rendered when all printing, sorting, labeling and ancillary services have been provided and the mailing material has been received and accepted by the United States Postal Service. Property and Equipment Property and equipment is recorded at cost less accumulated depreciation and amortization. Depreciation, and amortization of assets recorded under capital leases, is provided using the straight-line method over estimated useful lives of each class of assets, or, if shorter, the terms of leases for capital leases. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the term of the lease. Average useful lives range from 5 to 7 years. Expenditures for maintenance and repairs are charged to expense as incurred. Inventories Inventories consist of work in progress, spare parts, and paper and envelope stock, recorded at cost not to exceed market. The cost of work in process includes the costs of completed but unmailed production. Income Taxes The Company records income taxes using the liability method, under which deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, using enacted tax rates. Accounting for Stock Based Compensation The Company accounts for its employee stock options under Accounting Principles Board Opinion No. 25 (APB 25). F-19 THE MAIL BOX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Earnings Per Share Earnings per share for the Company have not been presented in the accompanying financial statements because such disclosure is not deemed meaningful considering the proposed transaction discussed in Note 14. Unaudited Interim Financial Information The interim financial information as of June 30, 1997 and for the six month periods ended June 30, 1996 and 1997 has been prepared from the unaudited financial records of the Company and in the opinion of management, reflects all adjustments, consisting only of normal recurring items, necessary for a fair presentation of the financial position and results of operations and of cash flows for the respective interim periods. 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 payables and long-term debt, approximate fair value. NOTE 3--INVENTORIES Inventories consist of the following:
DECEMBER 31, --------- JUNE 30, 1995 1996 1997 ---- ---- -------- (IN THOUSANDS) Work in progress................................... $294 $466 $ 98 Spare parts........................................ 103 130 196 Paper and envelope stock........................... 93 112 68 ---- ---- ---- $490 $708 $362 ==== ==== ====
NOTE 4--PROPERTY AND EQUIPMENT Property and equipment consist of the following:
DECEMBER 31, ---------------- 1995 1996 ------- ------- (IN THOUSANDS) Furniture and fixtures.............................. $ 538 $ 552 Plant equipment..................................... 2,812 3,996 Computer equipment and software..................... 3,321 3,654 Leasehold improvements.............................. -- 70 ------- ------- 6,671 8,272 Accumulated depreciation and amortization........... (4,297) (5,067) ------- ------- $ 2,374 $ 3,205 ======= =======
Depreciation and amortization expense was $400,000, $616,000 and $768,000 for the years ended December 31, 1994, 1995 and 1996. F-20 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:
DECEMBER 31, ----------- 1995 1996 ----- ----- (IN THOUSANDS) Accrued compensation...................................... $ 263 $ 314 Accrued vacation.......................................... 184 214 Other liabilities......................................... 147 296 ----- ----- Total accrued expenses and other liabilities.............. $ 594 $ 824 ===== =====
NOTE 6--CREDIT FACILITIES Obligations under long term credit facilities are as follows:
DECEMBER 31, ------------ 1995 1996 ------ ---- (IN THOUSANDS) 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 2000................................... $1,043 $943 Less: Current portion................................ (251) (327) ------ ---- $ 792 $616 ====== ====
As of December 31, 1996, approximately $279,000 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 principal payments under secured equipment financing facilities at December 31, 1996 for the next four years (in thousands): 1997................................ $327 1998................................ 335 1999................................ 205 2000................................ 76 ---- $943 ====
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 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% and 8.8% at December 31, 1995 and 1996, respectively.) The revolving credit facility contains, among other provisions, requirements to maintain defined levels of working capital, net worth, various financial ratios, limit capital expenditures, and restricts distributions to stockholders. At December 31, 1996, the Company was in violation of the net worth provision. An appropriate waiver was subsequently obtained from the lender. F-21 THE MAIL BOX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company leases certain equipment under agreements which are classified as capital leases. Certain equipment is leased from a related party, as discussed more fully in Note 9. The following is a schedule of capital leases by asset class:
DECEMBER 31, -------------- 1995 1996 ------ ------ (IN THOUSANDS) Furniture and fixtures................................ $ 71 $ 71 Plant equipment....................................... 216 799 Computer equipment and software....................... 1,426 959 ------ ------ 1,713 1,829 Accumulated amortization.............................. (800) (669) ------ ------ Total............................................... $ 913 $1,160 ====== ======
The following is a schedule of future minimum lease payments due under capital lease obligations at December 31, 1996, together with the present value of the future minimum lease payments (in thousands): 1997.............................................................. $ 568 1998.............................................................. 395 1999.............................................................. 255 2000.............................................................. 77 2001.............................................................. 11 ------ Total future minimum lease payments............................. 1,306 Less: Amount representing interest................................ (206) ------ Present value of future minimum lease payments.................. $1,100 ======
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 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 (in thousands): 1997............................................................... $1,561 1998............................................................... 1,754 1999............................................................... 1,386 2000............................................................... 1,064 2001............................................................... 857 Thereafter......................................................... 350 ------ $6,972 ======
Rent expense was $1,086,000, $1,390,000 and $1,534,000 for the years ended December 31, 1994, 1995 and 1996, respectively. F-22 THE MAIL BOX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 7--INCOME TAXES The Company's provision for income taxes is comprised of the following for the years ended December 31:
1994 1995 1996 ---- ---- ---- (IN THOUSANDS) Current tax expense...................................... $108 $182 $586 Deferred tax expense (benefit)........................... 98 (48) 114 ---- ---- ---- Total provision for income taxes......................... $206 $134 $700 ==== ==== ====
The effective income tax rate for the years ended December 31 varied from the federal statutory rate as follows:
1994 1995 1996 ---- ---- ---- (IN THOUSANDS) Tax provision computed at statutory rate of 35%.......... $187 $104 $694 Nondeductible expenses and other......................... 1 (1) 6 Employee stock compensation expense...................... 18 31 -- ---- ---- ---- $206 $134 $700 ==== ==== ====
The components of the net deferred tax asset (liability) are as follows:
DECEMBER 31, ----------- 1995 1996 ---- ----- (IN THOUSANDS) Deferred tax assets: Deferred compensation..................................... $ 35 $ -- Allowance for doubtful accounts........................... 39 26 Other..................................................... -- 4 ---- ----- 74 30 Deferred tax liabilities Depreciation and amortization............................. (39) (109) ---- ----- Net deferred tax asset (liability)...................... $ 35 $ (79) ==== =====
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 such employee contributions. The Company made no contributions to the Plan in 1996. During 1994, 1995, and 1996, the Company sponsored the ESOP, which covered all full time employees. The Company made contributions to the ESOP equal to scheduled debt payments plus discretionary contributions based on results of operations. As services were rendered by plan participants, the Company recorded compensation expense equal to the average fair value of the shares allocated to participant accounts during the period. ESOP compensation expense was $152,000, $215,000, and $108,000 for 1994, 1995, and 1996, respectively. The ESOP was terminated in 1996 and all shares (32,400) were repurchased by the Company for $987,000 in the first quarter of 1997. The Company funded the termination with a three-year amortizing loan from a financial institution in the amount of $987,000 with an interest rate of 2.8% plus the 30-day commercial rate and recorded the reacquisition of shares as treasury stock. F-23 THE MAIL BOX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 in each of the three years ended December 31, 1994, 1995 and 1996 is $290,000 for payments under this lease. Future minimum lease payments under this agreement are as follows (in thousands): 1997............................................................... $ 321 1998............................................................... 343 1999............................................................... 343 2000............................................................... 343 2001............................................................... 343 Thereafter......................................................... 143 ------ $1,836 ======
The Company also leases certain equipment from a partnership, the partners of which include certain Company stockholders. The lease for this equipment commenced on April 1, 1996 and is recorded as a capital lease. The cost of this equipment was $223,000. The future minimum lease payments under this agreement are as follows (in thousands): 1997.............................................................. $111 1998.............................................................. 111 1999.............................................................. 27 ---- Total future minimum lease payments................................. 249 Less: Amount representing interest.................................. (65) ---- Present value of future minimum lease payments...................... $184 ====
NOTE 10--CAPITAL TRANSACTIONS In 1995, the Company purchased into treasury from the majority stockholder, 1,600 shares of common stock for $51,000. In 1994 and 1995, certain employees were awarded an aggregate of 1,600 shares and 2,500 shares of common stock, respectively, with an aggregate value of $50,000 and $86,000, respectively. The shares were granted to the employees by the majority stockholder and were accounted for as capital contributions and employee stock compensation expense. In December 1996, the Company granted to a certain employee-stockholder an option to purchase 6,000 shares at $30.00 per share, the approximate fair value at the date of grant. The option was exercised on July 17, 1997. In view of the terms of this option, the fair value is not deemed to be significantly different from the intrinsic value. NOTE 11--CONCENTRATION OF CREDIT RISK The Company had two customers that accounted for 11.5% and 14.5% of 1994 revenues, respectively, two customers that accounted for 15.5% and 11.7% of 1995 revenues, respectively, and one customer that accounted for 30.9% of 1996 revenues. At December 31, 1995, approximately 11.0% of the Company's total accounts receivable balance was due from a single customer. F-24 THE MAIL BOX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 management estimates does not exceed $11.0 million. NOTE 13--COMMITMENTS AND CONTINGENCIES The Company is party from time to time to various legal proceedings incidental to its business. In the opinion of management, the resolution of these items, individually or in the aggregate, would not have a significant effect on the financial position, results of operations, or cash flows of the Company. NOTE 14--SUBSEQUENT EVENTS (UNAUDITED) The Company and its stockholders have entered into a definitive agreement with Compass International Services Corporation ("Compass") pursuant to which Compass will acquire all outstanding shares of the Company's common stock in exchange for cash and common stock of Compass, concurrent with the consummation of the initial public offering of the common stock of Compass. F-25 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of National Credit Management Corporation and Subsidiary We have audited the accompanying consolidated balance sheets of National Credit Management Corporation and Subsidiary (a Maryland corporation), as of December 31, 1995 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 1994, 1995 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of National Credit Management Corporation and Subsidiary as of December 31, 1995 and 1996, and the results of its operations and its cash flows for the years ended December 31, 1994, 1995 and 1996, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Baltimore, Maryland, February 11, 1997 F-26 NATIONAL CREDIT MANAGEMENT CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ------------- JUNE 30, ASSETS 1995 1996 1997 ------ ------ ------ ----------- (UNAUDITED) Current assets: Cash and cash equivalents.......................... $1,167 $1,149 $1,363 Accounts receivable, net of allowance for doubtful accounts of $88, $113 and $116, respectively...... 1,994 2,141 2,498 Prepaid expenses and other......................... 129 361 134 Deferred tax asset................................. 106 73 58 ------ ------ ------ Total current assets............................. 3,396 3,724 4,053 Property and equipment, net.......................... 1,084 1,053 1,061 Other assets, net of accumulated amortization of $22, $21 and $25, respectively........................... 69 73 192 ------ ------ ------ Total assets..................................... $4,549 $4,850 $5,306 ====== ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Current portion of note payable.................... $ -- $ -- $ 50 Trade accounts payable............................. 220 356 411 Client payables.................................... 600 484 648 Accrued compensation and related benefits.......... 248 500 534 Current portion of capital lease obligations....... 274 327 187 Other accrued expenses............................. 360 185 252 ------ ------ ------ Total current liabilities........................ 1,702 1,852 2,082 Deferred tax liability............................... 81 96 120 Borrowings under line of credit...................... 100 -- 28 Long-term capital lease obligations.................. 401 184 96 ------ ------ ------ Total liabilities................................ 2,284 2,132 2,326 ------ ------ ------ Commitments and contingencies Stockholders' equity: Common stock--Class A, $.01 par value, 5,000,000 shares authorized, 210,000 shares issued and outstanding....................................... 2 2 2 Common stock--Class B, $.01 par value, 250 shares authorized, no shares issued and outstanding...... -- -- -- Additional paid-in-capital......................... 752 752 752 Retained earnings.................................. 1,511 1,964 2,226 ------ ------ ------ Total stockholders' equity....................... 2,265 2,718 2,980 ------ ------ ------ Total liabilities and stockholders' equity....... $4,549 $4,850 $5,306 ====== ====== ======
The accompanying notes are an integral part of these consolidated balance sheets. F-27 NATIONAL CREDIT MANAGEMENT CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
SIX MONTHS YEARS ENDED ENDED DECEMBER 31, JUNE 30, ------------------------ -------------- 1994 1995 1996 1996 1997 ------ ------- ------- ------ ------ (UNAUDITED) Revenues............................. $8,874 $12,287 $13,579 $6,856 $8,044 Operating expenses................... 4,550 6,322 7,945 3,703 5,018 ------ ------- ------- ------ ------ Gross profit....................... 4,324 5,965 5,634 3,153 3,026 Selling, general and administrative expenses............................ 3,400 4,328 4,798 2,498 2,531 ------ ------- ------- ------ ------ Income from operations............. 924 1,637 836 655 495 ------ ------- ------- ------ ------ Other (income) expense: Interest income.................... (18) (62) (46) (26) (24) Interest expense................... 60 90 79 39 23 Other.............................. (3) 5 15 -- 1 ------ ------- ------- ------ ------ Total other expense, net......... 39 33 48 13 -- ------ ------- ------- ------ ------ Income before income taxes........... 885 1,604 788 642 495 Provision for income taxes........... 354 648 335 264 233 ------ ------- ------- ------ ------ Net income........................... $ 531 $ 956 $ 453 $ 378 $ 262 ====== ======= ======= ====== ======
The accompanying notes are an integral part of these consolidated statements. F-28 NATIONAL CREDIT MANAGEMENT CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
CLASS A CLASS B COMMON STOCK COMMON STOCK ------------------ ------------------ ADDITIONAL TOTAL SHARES SHARES PAID-IN RETAINED STOCKHOLDERS' OUTSTANDING AMOUNT OUTSTANDING AMOUNT CAPITAL EARNINGS EQUITY ----------- ------ ----------- ------ ---------- -------- ------------- Balance, December 31, 1993................... 210 $-- -- $-- $754 $ 24 $ 778 One thousand for one stock split.......... 209,790 2 -- -- (2) -- -- Net income............ -- -- -- -- -- 531 531 ------- ---- --- ---- ---- ------ ------ Balance, December 31, 1994................... 210,000 2 -- -- 752 555 1,309 Net income............ -- -- -- -- -- 956 956 ------- ---- --- ---- ---- ------ ------ Balance, December 31, 1995................... 210,000 2 -- -- 752 1,511 2,265 Net income............ -- -- -- -- -- 453 453 ------- ---- --- ---- ---- ------ ------ Balance, December 31, 1996................... 210,000 2 -- -- 752 1,964 2,718 Net income (unaudited).......... -- -- -- -- -- 262 262 ------- ---- --- ---- ---- ------ ------ Balance, June 30, 1997 (unaudited)............ 210,000 $ 2 -- $-- $752 $2,226 $2,980 ======= ==== === ==== ==== ====== ======
The accompanying notes are an integral part of these consolidated statements. F-29 NATIONAL CREDIT MANAGEMENT CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, ---------------------- ----------------- 1994 1995 1996 1996 1997 ------ ------ ------ -------- -------- (UNAUDITED) Cash flows from operating activities: Net income........................ $ 531 $ 956 $ 453 $ 378 $ 262 Adjustments to reconcile net income to net cash flows provided by operating activities-- Loss from disposal of property and equipment.................. -- 20 15 -- -- Change in deferred taxes........ (23) 59 48 63 39 Depreciation and amortization... 310 322 337 166 189 Provision for bad debts......... 35 37 (25) -- -- Increase in accounts receivable. (533) (690) (122) (220) (357) (Increase) decrease in prepaid expenses and other............. 73 (39) (232) (82) 227 Increase in other assets........ (10) (11) (5) (6) (121) Increase (decrease) in trade accounts payable and other accrued expenses............... (206) 323 30 (4) 57 (Decrease) increase in client payables....................... -- 56 (116) (132) 165 (Decrease) increase in income taxes payable.................. 188 (119) (69) (188) -- Increase (decrease) in accrued compensation and related benefits....................... 276 (192) 252 172 34 ------ ------ ------ ------- -------- Net cash flows provided by operating activities......... 641 722 566 147 495 ------ ------ ------ ------- -------- Cash flows from investing activities: Additions to property and equipment........................ (104) (194) (164) (129) (195) ------ ------ ------ ------- -------- Net cash flows used in investing activities......... (104) (194) (164) (129) (195) ------ ------ ------ ------- -------- Cash flows from financing activities: Repayment on borrowings from line of credit, net of proceeds....... (30) (200) (100) (100) -- Increase in notes payable......... -- -- -- -- 77 Principal payments under capital lease obligations................ (171) (223) (320) (93) (163) ------ ------ ------ ------- -------- Net cash flows used in financing activities......... (201) (423) (420) (193) (86) ------ ------ ------ ------- -------- Net (decrease) increase in cash and cash equivalents 336 105 (18) (175) 214 Cash and cash equivalents, beginning of period.......................... 726 1,062 1,167 1,167 1,149 ------ ------ ------ ------- -------- Cash and cash equivalents, end of period............................. $1,062 $1,167 $1,149 $ 992 $ 1,363 ====== ====== ====== ======= ========
The accompanying notes are an integral part of these consolidated statements. F-30 NATIONAL CREDIT MANAGEMENT CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization and Business National Credit Management Corporation, a Maryland corporation, and Subsidiary (the "Company") provides accounts receivable management services and, through its patented Accelerated Payment Systems ("APS") process, telephonic check drafting services. The Company's collection services are provided to a broad range of clients and industries. In addition to standard contingency fee collections, the Company provides early-stage accounts receivable management services to clients in the education, utilities, government and healthcare sectors through its wholly-owned subsidiary, Total Early Receivables Management Corporation. Basis of Presentation The accompanying financial statements have been prepared on the accrual basis of accounting. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Interim Financial Statements The consolidated financial statements for the six months ended June 30, 1996 and 1997, are unaudited but, in the opinion of management, such financial statements have been presented on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of the financial position, and results of operations and cash flows for these periods. Financial Instruments Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, borrowings under line of credit and capital lease obligations, all of which approximate fair value. Cash and Cash Equivalents Cash and cash equivalents consist primarily of cash and overnight investments stated at cost which approximate market value. Property and Equipment Property and equipment is stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the following estimated useful lives: 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
F-31 NATIONAL CREDIT MANAGEMENT CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Other Assets Other assets consist of security deposits on leases, patent costs and other intangible assets. Client Payables The Company, which is licensed as a collection agency in many states, regularly receives payments on behalf of its clients which are deposited in bank accounts. The Company has recorded a liability for the portion of payments which are owed to clients as of year-end. Income Taxes Income taxes have been accounted for in accordance with Financial Accounting Standards Board Statement No. 109, "Accounting for Income Taxes." Under Statement 109, the liability method is used in accounting for income taxes. Deferred tax liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using tax rates and laws that are expected to be in effect when the differences are scheduled to reverse. Revenue Recognition The Company recognizes revenues in its collections business at the time a payment is received on an account directly from the debtor, or when reported as paid by the client. Revenue is typically based upon contractual percentages of amounts collected. Revenues for the Company's accounts receivable management services are recognized based upon completion of services performed for the client. The APS division of the Company recognizes revenue based upon the number of transactions processed for each client during the month, as well as certain supplementary services. Significant Customers During 1994, approximately 14% and 21% of revenues were generated by clients in the telecommunications and secondary education and student loan industries, respectively. During 1995, approximately 10%, 20% and 34% of revenues were generated by clients in the retail, secondary education and student loan, and financial services industries, respectively. During 1996, approximately 11%, 12%, 19% and 34% of revenues were generated by clients in the retail, medical, secondary education and student loan and financial services industries, respectively. University Support Services represented approximately 22%, 16% and 16% of the Company's total revenues for the years ended December 31, 1994, 1995 and 1996, respectively. 2. PROPERTY AND EQUIPMENT, NET Property and equipment consists of:
DECEMBER 31, ------------- 1995 1996 ------ ------ (IN THOUSANDS) Computer hardware and software.......................... $1,583 $1,754 Office furniture and equipment.......................... 826 892 Leasehold improvements.................................. 81 81 ------ ------ 2,490 2,727 Less--accumulated depreciation.......................... 1,406 1,674 ------ ------ Property and equipment, net............................. $1,084 $1,053 ====== ======
F-32 NATIONAL CREDIT MANAGEMENT CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 expires May 15, 1997. The line of credit requires interest to be paid monthly at the lender's prime rate plus 0.25%. The balance outstanding under this agreement as of December 31, 1995 and 1996, is $100,000 and $0, respectively. On January 23, 1997, the line of credit agreement was modified to increase available borrowings to $1,250,000 and extend the expiration date to May 15, 1999. The line of credit has available borrowings of $750,000 as of December 31, 1995 and 1996. Under the line of credit agreement, substantially all of the Company's assets are pledged as collateral. Capital Lease Obligations Certain property and equipment leases have been capitalized using interest rates ranging from approximately 8.75% to 16.0%. Future payments on capital lease obligations as of December 31, 1996, are as follows (in thousands): 1997................................................................ $375 1998................................................................ 145 1999................................................................ 50 ---- Total payments...................................................... 570 Less--amount representing interest.................................. 59 ---- 511 Less--current portion of capital lease obligation................... 327 ---- Long-term capital lease obligations............................... $184 ====
4. COMMITMENTS AND CONTINGENCIES: Operating Leases and Service Contract Commitments The Company leases its office space under operating leases which expire through August 2001. In addition, the Company has service contracts on certain office equipment and computer systems held under capital leases. Total rental expense under these agreements was approximately $225,000 $195,000 and $325,000 for the years ended December 31, 1994, 1995 and 1996, respectively. Future minimum payments on operating leases and service contract commitments as of December 31, 1996, are as follows (in thousands): 1997............................................................... $ 355 1998............................................................... 341 1999............................................................... 337 2000............................................................... 293 2001............................................................... 238 ------ Total............................................................ $1,564 ======
Litigation Lawsuits and claims are filed from time to time against the Company in the ordinary course of business. The Company, after reviewing developments to date with legal counsel, is of the opinion that the outcome of such matters will not have a material adverse effect on the Company's financial position. Accordingly, no amounts have been provided for these claims in the accompanying financial statements. F-33 NATIONAL CREDIT MANAGEMENT CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 5. INCOME TAXES: The components of the Company's income tax provision are as follows:
1994 1995 1996 ---- ---- ---- (IN THOUSANDS) Current income tax provision: Federal................... $308 $487 $268 State..................... 70 102 59 ---- ---- ---- 378 589 327 ---- ---- ---- Deferred income tax provision: Federal................... (21) 51 7 State..................... (3) 8 1 ---- ---- ---- (24) 59 8 ---- ---- ---- Total income tax provision.............. $354 $648 $335 ==== ==== ====
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:
1995 1996 ------- ------- (IN THOUSANDS) Property and equipment......................... $ (117) $ (144) Net operating loss carryforwards............... 62 35 Nondeductible reserves......................... 52 66 Other.......................................... 28 20 ------- ------- Deferred tax (liability) asset, net.......... $ 25 $ (23) ======= =======
The net deferred tax (liability) asset consists of the following items included on the accompanying balance sheets as of December 31, 1995 and 1996:
1995 1996 ------- ------- (IN THOUSANDS) Deferred tax asset.................................. $ 106 $ 73 Deferred tax liability.............................. (81) (96) ------- ------- $ 25 $ (23) ======= =======
The difference between the recorded income tax provision and the federal statutory tax rate is mainly due to lobbying expenses, premiums paid for officers' life insurance, travel and entertainment expenses and other nondeductible differences. As of December 31, 1995 and 1996, the Company has net operating loss (NOL) carryforwards of approximately $160,000 and $91,000, respectively, to offset future taxable income. These loss carryforwards will expire during various periods through 2007. The utilization of these NOL's may be limited pursuant to Internal Revenue Code Section 382. 6. ADVERTISING EXPENSES: The Company incurs advertising expenses related to promoting its services to potential clients. These costs are expensed as incurred. The Company recognized advertising expenses of approximately $40,000, $251,000 and $228,000 for the years ended December 31, 1994, 1995 and 1996, respectively. F-34 NATIONAL CREDIT MANAGEMENT CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7. STATEMENTS OF CASH FLOWS--SUPPLEMENTAL DISCLOSURE: During 1994, 1995 and 1996, the Company paid interest of approximately $60,000, $90,000, and $79,000, respectively. In addition, the Company paid income taxes of approximately $188,000, $595,000 and $498,000 during 1994, 1995 and 1996, respectively. Noncash transactions during 1994, 1995 and 1996 were as follows:
1994 1995 1996 ---- ---- ---- (IN THOUSANDS) Property acquired under capital lease obligations..................................... $60 $673 $157
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 $1,000 per individual. The Company's contribution, including plan administrative expense, was $22,000 and $39,000 for the years ended December 31, 1995 and 1996, 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:
1995 1996 ------- ------- Risk-free interest rate................................. 5.85% 5.20% Expected dividend yield................................. -- % -- % Expected lives.......................................... 2 years 2 years
F-35 NATIONAL CREDIT MANAGEMENT CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 statement of income would have been reduced to the following "pro forma" amounts:
1995 1996 ----- ----- (IN THOUSANDS) Net Income: As reported............................................. $ 956 $ 453 Pro forma............................................... $ 952 $ 432
The following table summarizes all stock option and purchase right activity for the two years ended December 31, 1995 and 1996.
EXERCISE NUMBER OF PRICE PER OPTIONS SHARE --------- ----------- 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 ======
10. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED) The Company and its stockholders have entered into a definitive agreement with Compass International Services Corporation ("Compass") pursuant to which Compass will acquire all 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. 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. On October 2, 1997, the Company terminated its stock option plan and issued 21,500 shares of common stock to the former stock option holders. F-36 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders B.R.M.C. of Delaware, Inc. We have audited the accompanying consolidated balance sheets of B.R.M.C. of Delaware, Inc. as of December 31, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. 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 B.R.M.C. of Delaware, Inc. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP January 24, 1997 Atlanta, Georgia F-37 B.R.M.C. OF DELAWARE, INC. CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, -------------- JUNE 30, ASSETS 1995 1996 1997 ------ ------ ------ ----------- (UNAUDITED) Current assets: Cash.............................................. $ 107 $ 6 $ 183 Cash held for clients............................. 690 743 792 Commissions receivable, net....................... 1,015 1,021 1,111 Receivable from related parties................... -- 53 30 Other assets...................................... -- 39 34 ------ ------ ------ Total current assets............................ 1,812 1,862 2,150 Furniture and equipment, net........................ 291 866 899 Goodwill............................................ -- 873 848 Other assets........................................ 56 141 159 ------ ------ ------ Total assets.................................... $2,159 $3,742 $4,056 ====== ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ---------------------------------------------- Current liabilities: Collections due to clients........................ $ 690 $ 743 $ 792 Checks issued in excess of cash balance........... -- 90 -- Accounts payable and accrued liabilities.......... 694 736 1,051 Current portion of long-term debt and capital lease obligations................................ 307 517 448 Borrowings under line of credit................... -- 450 500 ------ ------ ------ Total current liabilities....................... 1,691 2,536 2,791 Long-term debt, less current portion................ 341 525 426 Capital lease obligations, less current portion..... 205 502 313 Deferred income taxes............................... -- 14 14 Other liabilities................................... -- 56 173 Minority interest in subsidiary..................... -- 4 6 Stockholders' equity (deficit): Common stock, $1 par value, 1,000 shares authorized, issued and outstanding............... 1 1 1 Additional paid-in capital........................ 7 60 60 Retained earnings (accumulated deficit)........... (86) 44 272 ------ ------ ------ Total stockholders' equity (deficit)............ (78) 105 333 ------ ------ ------ Total liabilities and stockholders' equity...... $2,159 $3,742 $4,056 ====== ====== ======
The accompanying notes are an integral part of these financial statements. F-38 B.R.M.C. OF DELAWARE, INC. CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS)
SIX MONTHS YEARS ENDED ENDED JUNE DECEMBER 31, 30, -------------------- ------------- 1994 1995 1996 1996 1997 ------ ------ ------ ------ ------ (UNAUDITED) Revenues................................ $6,859 $7,416 $9,597 $4,766 $6,677 Operating expenses...................... 4,236 4,569 6,419 2,888 4,259 ------ ------ ------ ------ ------ Gross profit.......................... 2,623 2,847 3,178 1,878 2,418 Selling, general and administrative expenses............................... 2,206 2,594 2,853 1,566 1,965 ------ ------ ------ ------ ------ Income from operations................ 417 253 325 312 453 Other expense: Interest expense...................... 274 103 122 43 103 ------ ------ ------ ------ ------ Income before income taxes.............. 143 150 203 269 350 Provision for income taxes.............. -- -- 73 42 122 ------ ------ ------ ------ ------ Net income.............................. $ 143 $ 150 $ 130 $ 227 $ 228 ====== ====== ====== ====== ======
The accompanying notes are an integral part of these financial statements. F-39 B.R.M.C. OF DELAWARE, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
TOTAL COMMON STOCK ADDITIONAL RETAINED STOCKHOLDERS' ------------- PAID-IN (DEFICIT) EQUITY SHARES AMOUNT CAPITAL EARNINGS (DEFICIT) ------ ------ ---------- --------- ------------- Balance at January 1, 1994.... 1,000 $ 1 $ 7 $(379) $(371) Net income.................... -- -- -- 143 143 ----- --- --- ----- ----- Balance at December 31, 1994.. 1,000 1 7 (236) (228) Net income.................... -- -- -- 150 150 ----- --- --- ----- ----- Balance at December 31, 1995.. 1,000 1 7 (86) (78) Capital contribution.......... -- -- 53 -- 53 Net income.................... -- -- -- 130 130 ----- --- --- ----- ----- Balance at December 31, 1996.. 1,000 1 60 44 105 Net income for the six months ended June 30, 1997 (unaudited).................. -- -- -- 228 228 ----- --- --- ----- ----- Balance at June 30, 1997 (unaudited).................. 1,000 $ 1 $60 $ 272 $ 333 ===== === === ===== =====
The accompanying notes are an integral part of these financial statements. F-40 B.R.M.C. OF DELAWARE, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED SIX MONTHS DECEMBER 31, ENDED JUNE 30, ---------------------- ---------------- 1994 1995 1996 1996 1997 ------- ----- ------ ------- ------- (UNAUDITED) Cash flows from operating activities: Net income.......................... $ 143 $ 150 $ 130 $ 227 $ 228 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization..... 190 177 228 93 50 Minority interest................. -- -- 4 -- 2 Change in operating assets and liabilities: Commissions receivable.......... (770) 101 (6) 134 (89) Cash held for clients........... -- -- (53) 353 255 Other current assets............ -- -- (39) (103) 5 Receivable from related parties. -- -- (53) -- 23 Other assets.................... (2) 4 (107) (8) (141) Accounts payable and accrued liabilities.................... 280 (36) 98 16 431 Due to clients.................. -- -- 53 (81) 49 Checks issued in excess of cash. 11 (506) 90 -- (90) Deferred revenue................ (30) (65) -- -- -- Deferred income taxes........... -- -- 14 -- -- ------- ----- ------ ------- ------- Net cash (used in) provided by operating activities..... (178) (175) 359 631 723 Cash flows from investing activities: Purchases of furniture and equipment.......................... (118) (60) (589) (115) (57) Purchases of accounts receivable.... (1,718) -- -- -- -- Collections of purchased receivables........................ 2,101 718 -- -- -- Business combinations net of cash acquired........................... -- -- (791) -- -- ------- ----- ------ ------- ------- Net cash provided by (used in) investing activities.... 265 658 (1,380) (115) (57) Cash flows from financing activities: Borrowings under line of credit..... 2,699 -- 450 -- 50 Additions under capital lease obligations........................ -- -- 346 -- -- Repayment of line of credit......... (2,627) (777) -- -- -- Principal payments of capital lease obligations........................ (113) (78) (124) (88) (92) Issuance of long-term debt.......... -- 750 466 -- 35 Principal payments of long-term debt............................... (46) (271) (271) (166) (170) Capital contributions............... -- -- 53 -- -- ------- ----- ------ ------- ------- Net cash (used in) provided by financing activities..... (87) (376) 920 (254) (177) ------- ----- ------ ------- ------- Net increase (decrease) in cash....... -- 107 (101) 262 489 Cash at beginning of period........... -- -- 107 107 6 ------- ----- ------ ------- ------- Cash at end of period................. $ -- $ 107 $ 6 $ 369 $ 495 ======= ===== ====== ======= ======= Supplemental disclosure of cash flow information: Cash paid for interest.............. $ 274 $ 100 $ 116 $ 43 $ 103 ======= ===== ====== ======= ======= Cash paid for income taxes.......... $ -- $ -- $ -- $ -- $ 25 ======= ===== ====== ======= ======= Furniture and equipment acquired through capital lease obligations.. $ 153 $ -- $ 542 $ 33 $ -- ======= ===== ====== ======= =======
The accompanying notes are an integral part of these financial statements. F-41 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., at which time the name of the company was changed to 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 exchanged their shares for those of B.R.M.C. of Delaware (the "Parent"). The assets and liabilities of BoMar Credit Corporation were transferred to two newly formed and wholly owned subsidiaries of the Parent, BoMar Credit Corporation of Georgia and BoMar Credit Corporation of Texas. The accompanying financial statements reflect the operations of these wholly owned subsidiaries for the period January 1, 1996 to December 31, 1996 as the above noted transactions were accounted for in a manner similar to a pooling of interests. All assets and liabilities were transferred at net book value. At December 31, 1996, B.R.M.C. of Delaware had four subsidiaries: BoMar Credit Corporation of Georgia; BoMar Credit Corporation of Texas; Advanced Credit Services ("ACS"); and Clayton-Parker & Associates ("CPA"). All subsidiaries are wholly owned by the Company, with the exception of Advanced Credit Services, 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, a Delaware corporation. The transaction was accounted for as a purchase. The Parent obtained a note receivable from the sole shareholder of ACS in the amount of $75,000 as the fair value of liabilities assumed exceeded assets received. As such, no goodwill was recorded in conjunction with the acquisition. The accompanying financial statements reflect the results of operations of ACS from the date of acquisition to December 31, 1996. On November 26, 1996, the Parent acquired CPA, an Arizona corporation. The Parent paid cash of $400,000 and issued promissory notes in the amount of $450,000 in connection with the transaction which was accounted for as a purchase. Goodwill of $836,000 was recorded in conjunction with the acquisition. The accompanying financial statements reflect the results of operations of CPA from the date of acquisition to December 31, 1996. Cash Held for Clients and Collections Due to Clients Cash held for clients and collections due to clients consists of amounts collected on behalf of the Company's clients, net of the Company's commission. Commissions Receivable As of December 31, 1995 and 1996, commissions receivable from companies in the telecommunications industry totaled approximately $400,000 and $454,000, respectively. Credit is extended based on an evaluation of the customer's financial condition, and generally collateral is not required. Credit losses are provided for in the financial statements and have been within management's expectations. F-42 B.R.M.C. OF DELAWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 was $16,000. Goodwill is measured for possible impairment periodically and is reduced through a charge to earnings if impairment exists. Accounts Receivable Purchased Accounts receivable purchased consist of receivables purchased from the Georgia Power Company at a discount from the gross receivable owed to the client. The Company is guaranteed, by the Georgia Power Company, to collect 16.2% of the gross receivables purchased within one year of the purchase. The Company initially records receivables purchased at the guaranteed amount. The guaranteed collection rate of at least 16.2% is approximately 4% above the average purchase price of the receivables. The uncollected gross amounts of receivables purchased were $31 million at December 31, 1995. The contract also provides for profit sharing with the utility if collections exceed 17.2%, in that the Company agrees to pay the client 32.5% of such surplus amounts collected. Deferred Revenue When receivables were purchased from the Georgia Power Company, the guaranteed portion of the gross receivable (16.2%) was recorded. Since accounts are purchased for approximately 12.2%, deferred revenue was established at the purchase date representing approximately 4% of the gross receivables purchased. The revenue is deferred as the earnings process was not complete at the purchase date. Deferred revenue is amortized into income over a three month period, representing the period the guaranteed amount is earned. Furniture and Equipment Furniture and equipment are stated at cost and are depreciated using the double declining balance method over the estimated useful lives of the individual assets which range from five to seven years. Included in depreciation expense is amortization of assets recorded under capital leases. Revenue Recognition The Company recognizes revenue (commission income) based on contractual rates in the period in which collection occurs. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 which requires the liability method of accounting for income taxes. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Interim Statements The interim financial data for the six months ended June 30, 1996 and 1997 is unaudited; however, in the opinion of management, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods, on a consistent basis. F-43 B.R.M.C. OF DELAWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 2. FURNITURE AND EQUIPMENT Furniture and equipment consisted of the following:
DECEMBER 31, --------------- 1995 1996 ------- ------- (IN THOUSANDS) Furniture and equipment.................................. $ 1,125 $ 2,940 Less accumulated depreciation............................ 834 2,074 ------- ------- $ 291 $ 866 ======= =======
Furniture and equipment includes $449,000 and $826,000 acquired under various capital leases at December 31, 1995 and 1996, respectively. Accumulated depreciation on this equipment at December 31, 1995 and 1996 was $315,000 and $113,000, respectively. Depreciation expense was $189,000, $176,000 and $216,000 for the years ended December 31, 1994, 1995 and 1996, respectively. 3. DEBT Borrowings Under Line of Credit Borrowings under a line of credit at were as follows: As of December 31, 1996 borrowings under a $1,500,000 line of credit totaled $450,000. The line of credit is payable on September 30, 1997 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:
DECEMBER 31, --------------- 1995 1996 ------- ------- (IN THOUSANDS) Note payable, interest at 10.5% per annum; secured by substantially all of the assets of the Company, payable in equal monthly installments through March 1998............................................. $ 583 $ 340 Note payable, interest at 19.5% per annum; payable in equal monthly installments through March 2000................................................... -- 51 Note payable, interest at 8% per annum's payable in equal monthly installments through December 2006................................................... -- 450 ------- ------- $ 583 $ 841 ======= =======
Principal maturities of long-term debt at December 31, 1996 were as follows (in thousands): 1997................................................................. $316 1998................................................................. 120 1999................................................................. 52 2000................................................................. 43 2001................................................................. 42 Thereafter........................................................... 268 ---- $841 ====
F-44 B.R.M.C. OF DELAWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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, 1996 were as follows (in thousands): 1997............................................................... $ 399 1998............................................................... 389 1999............................................................... 376 2000............................................................... 344 2001............................................................... 243 Thereafter......................................................... 4 ------ $1,755 ======
Total rent expense was $187,000, $280,000 and $319,000 for the year ended December 31, 1994, 1995 and 1996, 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): 1997................................................................. $244 1998................................................................. 201 1999................................................................. 189 2000................................................................. 99 2001................................................................. 43 Thereafter........................................................... -- ---- $776 ====
Obligations under capital leases as scheduled above include imputed interest of approximately $168,000. 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, 1997. 5. EMPLOYEE BENEFIT PLANS The Company sponsors a defined contribution 401(k) plan which permits substantially all employees to make tax deferred contributions of up to 15% of their annual compensation. The Company currently makes a discretionary matching contribution of 25% of the employee contribution. The Company contributed approximately $9,000, $11,000 and $7,000 in 1994, 1995 and 1996, respectively. In addition, the Company sponsors a Medical Plan. The Company voluntarily contributes approximately 50% of the premiums for all employees who elect to participate in the Medical Plan. The Company contributed approximately $48,000, $54,000 and $91,000 in 1994, 1995 and 1996, respectively. F-45 B.R.M.C. OF DELAWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. INCOME TAXES The provision for income taxes consisted of the following:
YEAR ENDED DECEMBER 31, 1996 ----------------- (IN THOUSANDS) Current: Federal............................................... $49 State................................................. 3 --- 52 Deferred: Federal............................................... 20 State................................................. 1 --- 21 --- Provision for income taxes.............................. $73 ===
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. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets at December 31, 1995 and 1996 were as follows:
DECEMBER 31, --------------- 1995 1996 ------- ------- (IN THOUSANDS) Deferred tax liabilities: Depreciation.......................................... $ -- $ 10 Capitalized leases.................................... -- 11 ------- ------- Total deferred tax liabilities.......................... -- 21 Deferred tax assets..................................... 25 -- ------- ------- Net deferred tax assets (liabilities)................... $ 25 $ (21) ======= =======
The Company's deferred income taxes in 1995 consist of net operating loss (NOL) carryforwards of approximately $72,000 at December 31, 1995. The NOL amounts result in deferred tax assets of approximately $25,000 at December 31, 1995. A valuation allowance was established for the total deferred NOL carryforward amounts for 1995. The Company utilized approximately $155,000 and $150,000 of their NOL carryforwards in 1994 and 1995, respectively. Deferred tax assets and valuation allowances were reduced by approximately $54,000 and $52,000 during 1994 and 1995, respectively. No tax expense was recorded for the years ended December 31, 1994 and 1995. The Company utilized $32,000 in net operating losses during the year ended December 31, 1996. There are no remaining NOL carryforwards. During 1996, the Company reversed a previously recorded deferred tax asset valuation allowance of approximately $28,000. 7. SUBSEQUENT EVENTS (UNAUDITED) Effective September 1, 1997, the Company purchased all outstanding common shares of Financial Claims Control, Inc. ("FCCI"), a Florida corporation. FCCI had revenues of $ for the year ended December 31, 1996 and $1,733,000 for the six months ended June 30, 1997. The acquisition is expected to be accounted for as a purchase. The Company and its stockholders have entered into a definitive agreement with Compass International Services Corporation ("Compass") pursuant to which Compass will acquire all outstanding shares of the Company's common stock in exchange for cash and common stock of Compass, concurrent with the consummation of the initial public offering of the common stock of Compass. F-46 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders of Mid-Continent Agencies, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Mid- Continent Agencies, Inc. and its subsidiaries at December 31, 1995 and 1996, and 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. /s/ Price Waterhouse LLP Chicago, Illinois September 19, 1997 F-47 MID-CONTINENT AGENCIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ------------- JUNE 30, ASSETS 1995 1996 1997 ------ ------ ------ ----------- (UNAUDITED) Current assets: Cash and cash equivalents......................... $ 1 $ -- $ 121 Accounts receivable, trade........................ 535 546 485 Receivables due from stockholders................. 1,297 1,421 1,463 Prepaid expenses and other current assets......... 159 165 168 ------ ------ ------ Total current assets............................ 1,992 2,132 2,237 Funds held in trust for clients Property and equipment, net......................... 165 146 150 Deferred income tax benefit......................... 54 70 73 Other assets........................................ 132 136 141 ------ ------ ------ Total assets.................................... $2,343 $2,484 $2,601 ====== ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable and accrued expenses............. $ 492 $ 590 $ 510 Notes payable to stockholders..................... 51 51 52 Notes payable, current portion.................... 232 388 569 ------ ------ ------ Total current liabilities....................... 775 1,029 1,131 Funds held in trust for clients Notes payable....................................... 340 178 178 Deferred compensation............................... 158 174 179 ------ ------ ------ Total liabilities............................... 1,273 1,381 1,488 ------ ------ ------ Commitments and contingencies Stockholders' equity: Common stock, no par value, 10,000 shares authorized, 1,000 shares issued and outstanding.. 10 10 10 Additional paid-in capital........................ 73 73 73 Retained earnings................................. 984 1,032 1,044 Unrealized gain (loss) on securities.............. 3 (12) (14) ------ ------ ------ Total stockholders' equity...................... 1,070 1,103 1,113 ------ ------ ------ Total liabilities and stockholders' equity.......... $2,343 $2,484 $2,601 ====== ====== ======
The accompanying notes are an integral part of these financial statements. F-48 MID-CONTINENT AGENCIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS)
SIX MONTHS YEARS ENDED ENDED DECEMBER 31, JUNE 30, -------------- -------------- 1995 1996 1996 1997 ------ ------ ------ ------ (UNAUDITED) Revenues........................................ $8,763 $9,038 $4,548 $4,741 Operating expenses.............................. 2,851 2,875 1,470 1,551 ------ ------ ------ ------ Gross profit.................................. 5,912 6,163 3,078 3,190 Selling, general and administrative expenses.... 5,974 6,054 3,025 3,116 ------ ------ ------ ------ Income (loss) from operations................. (62) 109 53 74 Other (income) expense: Interest and investment income................ (99) (117) (76) (25) Interest expense.............................. 48 68 37 41 Loss on disposal of property and equipment.... -- 3 3 -- ------ ------ ------ ------ (51) (46) (36) 16 ------ ------ ------ ------ Income (loss) before income taxes............... (11) 155 89 58 Provision for income taxes...................... 34 107 58 46 ------ ------ ------ ------ Net income (loss)............................... $ (45) $ 48 $ 31 $ 12 ====== ====== ====== ======
The accompanying notes are an integral part of these financial statements. F-49 MID-CONTINENT AGENCIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ---------------- UNREALIZED NUMBER RETAINED GAIN (LOSS) OF SHARES AMOUNT PAID-IN-CAPITAL EARNINGS ON SECURITIES TOTAL --------- ------ --------------- -------- ------------- ------ 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) gain on securities............ -- -- -- -- (15) (15) --- --- --- ------ ---- ------ Balance, December 31, 1996................... 10 10 73 1,032 (12) 1,103 Net income (unaudited). -- -- -- 12 -- 12 Change in unrealized (loss) gain on securities (unaudited)........... -- -- -- -- (2) (2) --- --- --- ------ ---- ------ Balance, June 30, 1997 (unaudited)............ 10 $10 $73 $1,044 $(14) $1,113 === === === ====== ==== ======
The accompanying notes are an integral part of these financial statements. F-50 MID-CONTINENT AGENCIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED SIX MONTHS DECEMBER ENDED JUNE 31, 30, ------------ ------------ 1995 1996 1996 1997 ----- ----- ----- ----- (UNAUDITED) Cash flows from operating activities: Net income (loss)................................ $ (45) $ 48 $ 31 $ 12 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization................... 44 64 32 21 Loss on disposal of property and equipment...... -- 3 4 -- Changes in deferred taxes....................... (13) (2) (1) 1 Changes in operating assets and liabilities: Accounts receivable, trade..................... (106) (11) 48 60 Prepaid expenses and other current assets...... 39 (6) 24 (2) Accounts payable and accrued expenses.......... (60) 68 141 (86) Deferred compensation.......................... 21 16 9 5 Other assets................................... (54) (4) (4) (5) ----- ----- ----- ----- Net cash provided by (used in) operating activities................................ (174) 176 284 6 Cash flows from investing activities: Purchase of property and equipment............... (89) (49) (22) (25) Proceeds from sale of property and equipment..... -- 3 3 -- ----- ----- ----- ----- Net cash used in investing activities...... (89) (46) (19) (25) Cash flows from financing activities: Proceeds from notes payable...................... 600 250 250 550 Payments of notes payable........................ (376) (257) (118) (369) Payments of notes payable to stockholders........ (10) -- -- -- Proceeds from notes receivable from stockholders. (159) (124) (64) (41) ----- ----- ----- ----- Net cash provided by (used in) financing activities........................................ 55 (131) 68 140 Net increase (decrease) in cash.................... (208) (1) 333 121 Cash and cash equivalents at beginning of period... 209 1 -- -- ----- ----- ----- ----- Cash and cash equivalents at end of period......... $ 1 $ -- $ 333 $ 121 ===== ===== ===== ===== Supplemental disclosure of cash flow information: Cash paid for interest........................... $ 48 $ 69 $ 38 $ 42 Cash paid for income taxes....................... 46 90 39 33 Increase (decrease) in funds held in trust for clients......................................... (53) (253) 243 157
The accompanying notes are an integral part of these financial statements. F-51 MID-CONTINENT AGENCIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--NATURE OF OPERATIONS Mid-Continent Agencies, Inc. ("MCA") and subsidiaries (collectively referred to as the "Company") provides accounts receivable management services primarily to companies in the manufacturing, insurance, wholesale distribution and commercial sectors. The Company has three domestic offices located in Chicago, IL, Louisville, KY and Buffalo, NY and an office in the United Kingdom. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principles of Consolidation The consolidated financial statements include accounts of MCA and its subsidiaries. All intercompany balances and transactions have been eliminated. Cash and Cash Equivalents Cash and cash equivalents are highly liquid unrestricted investments with original maturities of three months or less. Cash equivalents are stated at cost which approximates market. Accounts Receivable, Trade The Company remits collections to clients either on the net method, in which funds are remitted to the client net of the related earned commission or on the gross method, in which all collected funds are remitted to the client and the Company bills the client separately for its earned commission, resulting in a trade account receivable. Due to the nature of the trade accounts receivable, no allowance is provided and the carrying value is considered to estimate the fair value. Funds Held in Trust for Clients Funds held in trust for clients consists of funds collected on behalf of clients, net of the Company's commission. These funds are held in segregated accounts and are regularly remitted to clients. Funds held in trust of $1,468,000 and $1,214,000 at December 31, 1995 and 1996, respectively, and their offsetting liability are presented net for financial statement presentation purposes. The Company is entitled to invest these funds in specified marketable debt and equity instruments. Amounts not invested in marketable debt and equity instruments are invested in cash equivalents (See Note 4). Investments in marketable securities are accounted for in accordance with Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Management has classified all marketable securities as "available for sale" and accordingly, net unrealized gains and losses are presented, net of tax, as a separate component of equity. Realized gains are computed based on cost of investments sold. F-52 MID-CONTINENT AGENCIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Property and Equipment Property and equipment, including additions and improvements and expenditures for repairs and maintenance that significantly add to productivity or extend the economic lives of the assets, are capitalized at cost and depreciated using an accelerated depreciation method, the results of which are not materially different from the straight-line method, over their estimated useful lives as follows: Furniture and fixtures..................................... 5 to 7 years Equipment.................................................. 5 to 7 years Leasehold improvements..................................... Term of lease
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% and 30% of its revenues at December 31, 1995 and 1996. No one client represents more than 5% of revenues. Revenue Recognition The Company generates revenues from contingency fees and contractual services. Contingency fee revenue is recognized as a contractual percentage of the net funds collected on behalf of clients, in the period the collection occurs. Contractual services revenue is deferred and recognized over the period in which the services are performed. Unaudited Interim Financial Information The interim financial information as of June 30, 1997 and for the six month period June 30, 1996 and 1997 has been prepared from unaudited financial records of the Company and, in the opinion of management, reflects all adjustments consisting only of normal recurring items, necessary for a fair presentation of the financial position and results of operations and of cash flows for the respective interim periods. F-53 MID-CONTINENT AGENCIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 3--RECEIVABLES DUE FROM STOCKHOLDERS Receivables due from stockholders includes demand notes receivable with aggregate principal and interest amounts of $1,297,000 and $1,371,000 at December 31, 1995 and 1996, respectively. The notes receivable accrue interest at the short-term annual Applicable Federal Rate prescribed by the Internal Revenue Service, with the balance of principal and interest due upon demand. Due to the demand provision, management estimates the carrying value of the notes receivable from stockholders approximates fair value. NOTE 4--MARKETABLE SECURITIES The following is a summary of the marketable debt and equity instruments of the funds held in trust:
UNREALIZED UNREALIZED ESTIMATED HOLDING HOLDING FAIR COST GAIN LOSS VALUE ---- ---------- ---------- --------- (IN THOUSANDS) DECEMBER 31, 1995: Equity securities...................... $ 21 $ 2 $ (5) $ 18 Debt securities issued by the U.S. Treasury and other U.S. government agencies.............................. 196 -- (10) 186 Debt securities issued by foreign governments........................... 2 -- -- 2 Corporate debt securities.............. 150 6 -- 156 Mortgage-backed securities............. 139 -- (7) 132 Other debt securities.................. 264 19 (1) 282 ---- ---- ---- ---- $772 $ 27 $(23) $776 ==== ==== ==== ==== DECEMBER 31, 1996: Equity securities...................... $ 11 $-- $ (4) $ 7 Debt securities issued by the U.S. Treasury and other U.S. government agencies.............................. 195 -- (15) 180 Debt securities issued by foreign governments........................... 2 -- -- 2 Corporate debt securities.............. 202 4 (1) 205 Mortgage-backed securities............. 107 -- (4) 103 Other debt securities.................. 294 -- -- 294 ---- ---- ---- ---- $811 $ 4 $(24) $791 ==== ==== ==== ====
Net realized (losses)/gains from the sale of investment securities were $(6,000) and $12,000 for the years ended December 31, 1995 and 1996, respectively. The cost and estimated fair value of available for sale securities by contractual maturity at December 31, 1996 is as follows (in thousands):
ESTIMATED COST FAIR VALUE ---- ---------- Due in one year or less................................... $103 $103 Due after one year through five years..................... 102 105 Investment funds or mortgage-backed securities not due at a single maturity date................................ 596 577 ---- ---- Total................................................. $801 $785 ==== ====
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 MID-CONTINENT AGENCIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 5--PROPERTY AND EQUIPMENT, NET Property and equipment consists of:
DECEMBER 31, ---------------- 1995 1996 ------- ------- (IN THOUSANDS) Furniture and fixtures.............................. $ 491 $ 480 Equipment........................................... 793 798 Leasehold improvements.............................. 40 40 ------- ------- 1,324 1,318 Accumulated depreciation............................ (1,159) (1,172) ------- ------- Property and equipment, net......................... $ 165 $ 146 ======= =======
Depreciation expense aggregated $44,000 and $64,000 for the years ended 1995 and 1996, respectively. NOTE 6--OTHER ASSETS Other assets consist of:
DECEMBER 31, ----------- 1995 1996 ----- ----- (IN THOUSANDS) Cash value of life insurance.............................. $ 28 $ 31 Deposits.................................................. 99 101 Other..................................................... 5 4 ----- ----- $ 132 $ 136 ===== =====
NOTE 7--ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of:
DECEMBER 31, ----------- 1995 1996 ----- ----- (IN THOUSANDS) Accounts payable.......................................... $ 104 $ 136 Accrued salaries.......................................... 82 130 Accrued bonus............................................. 114 93 Accrued vacation.......................................... 111 127 Income taxes payable...................................... 11 32 Other..................................................... 70 72 ----- ----- $ 492 $ 590 ===== =====
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 each of December 31, 1995 and 1996 was $51,000. No interest was accrued on the note at December 31, 1995. Interest of $6,000 and $5,000 for the years ended December 31, 1995 and 1996, respectively, was paid by the stockholders. Due to the demand provision, management estimates the carrying value of the notes payable to stockholders approximates fair value. F-55 MID-CONTINENT AGENCIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 9--NOTES PAYABLE
DECEMBER 31, ------------ 1995 1996 ----- ----- (IN THOUSANDS) Notes payable consist of the following: Notes payable to bank, interest at prime plus 0.5%, extinguished January 15, 1996............................ $ 5 $ -- Notes payable to bank, interest at prime plus 0.5%, extinguished December 16, 1996........................... 100 -- Note payable to bank, interest at prime plus 0.5% (8.75% at December 31, 1996), principal payments of $10,000 due quarterly, balance due January 15, 1998.................. 140 100 Note payable to bank, interest at prime plus 0.5% (8.75% at December 31, 1996), principal payments of $22,000 due quarterly, balance due January 15, 1998.................. 327 241 Note payable to bank, interest at prime plus 0.5% (8.75% at December 31, 1996), principal payments of $13,000 due monthly, balance due February 28, 1998................... -- 175 Notes payable to bank, interest at prime plus 0.5% (8.75% at December 31, 1996), principal due on September 15, 1997..................................................... -- 50 Notes payable to bank, interest at prime plus 0.5%, principal due on October 31, 1997........................ -- -- ----- ----- 572 566 Current portion of long-term debt......................... (232) (388) ----- ----- Long-term debt............................................ $ 340 $ 178 ===== =====
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 are as follows (in thousands): 1997................................................................. $388 1998................................................................. 178 ---- $566 ====
NOTE 10--INCOME TAXES The components of the provision for income taxes are as follows:
DECEMBER 31, ---------------- 1995 1996 ------- ------- (IN THOUSANDS) Current tax expense: Federal........................................... $ 37 $ 90 State & local..................................... 10 19 ------- ------- 47 109 Deferred tax expense (benefit) Federal........................................... (11) (1) State & local..................................... (2) (1) ------- ------- (13) (2) ------- ------- Total............................................... $ 34 $ 107 ======= =======
F-56 MID-CONTINENT AGENCIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The provision for income taxes differs from the amount computed as the statutory rates as follows:
DECEMBER 31, ---------------- 1995 1996 ------- ------- (IN THOUSANDS) Federal income at statutory rate........................ $ (4) $ 53 State income taxes, net of federal benefit.............. 5 12 Nondeductible expenses.................................. 41 41 Federal surtax exemption................................ (9) (2) Change in valuation allowance........................... 1 3 ------ ------- Total................................................. $ 34 $ 107 ====== =======
The significant items giving rise to the deferred tax assets and (liabilities) are as follows:
DECEMBER 31, ---------------- 1995 1996 ------- ------- (IN THOUSANDS) Deferred tax asset--non-current: Deferred compensation................................. $ 60 $ 67 Unrealized loss on securities......................... -- 8 Charitable contribution carryforward.................. 10 13 Deferred tax asset valuation allowance................ (10) (13) ------- ------- Net deferred tax asset--non-current................. 60 75 Deferred tax liability--non-current: Unrealized gain on securities......................... (2) -- Property plan & equipment............................. (4) (5) ------- ------- Net deferred tax liability--non-current............. (6) (5) ------- ------- Total................................................. $ 54 $ 70 ======= =======
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 and $26,000, for the years ended December 31, 1995 and 1996, 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. F-57 MID-CONTINENT AGENCIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company leases office space and equipment under operating leases and had not entered into any capital lease transactions for the years ended December 31, 1995 and 1996. Minimum future rentals under non-cancelable operating leases with initial or remaining terms of one year or more consist of the following at December 31, 1996 (in thousands): 1997............................................................... $ 56 1998............................................................... 511 1999............................................................... 456 2000............................................................... 394 2001............................................................... 339 Thereafter......................................................... 644 ------ $2,400 ======
Rent expense was $510,000 and $468,000 for the years ended December 31, 1995 and 1996, respectively. NOTE 13--SUBSEQUENT EVENTS (UNAUDITED) The Company and its stockholders have entered into a definitive agreement with Compass International Services Corporation ("Compass") pursuant to which Compass will acquire all outstanding shares of the Company's common stock in exchange for cash and common stock of Compass, concurrent with the consummation of the initial public offering of the common stock of Compass. F-58 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders of Impact Telemarketing Group, Inc. In our opinion, the accompanying combined balance sheet and the related combined statements of operations, stockholders' equity and cash flows present fairly, in all material respects, the financial position of Impact Telemarketing Group, Inc. and affiliated companies at December 31, 1996 and the results of their operations and their cash flows for the year 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 audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred losses from operations and is not in compliance with certain covenants contained in its loan agreement. As a result, the Company is limited in its ability to obtain additional borrowings on its line of credit to fund operations. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Price Waterhouse LLP Chicago, Illinois September 30, 1997 F-59 IMPACT TELEMARKETING GROUP, INC. COMBINED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, JUNE 30, ASSETS 1996 1997 ------ ------------ ----------- (UNAUDITED) Current assets: Cash and cash equivalents........................... $ 166 $ 187 Accounts receivable, trade, net of allowance for doubtful accounts of $40 and $66, respectively..... 1,618 1,991 Related party receivables........................... 188 190 Due from affiliate.................................. 26 Prepaid expenses and other current assets........... 4 4 ------ ------ Total current assets.............................. 1,976 2,398 Property and equipment, net........................... 573 630 Other assets.......................................... 27 26 ------ ------ $2,576 $3,054 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Current portion of long-term debt................... $ 153 $ 139 Borrowings on line of credit........................ 80 550 Current portion of capitalized lease obligations.... 119 142 Accounts payable.................................... 1,605 1,320 Accrued expenses.................................... 209 439 ------ ------ Total current liabilities......................... 2,166 2,590 Capitalized lease obligations, net of current portion. 293 337 ------ ------ Total liabilities................................. 2,459 2,927 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 36 ------ ------ Total stockholders' equity........................ 117 127 ------ ------ $2,576 $3,054 ====== ======
The accompanying notes are an integral part of these financial statements. F-60 IMPACT TELEMARKETING GROUP, INC. COMBINED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE DATA)
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, ------------- 1996 1996 1997 ------------ ------ ------ (UNAUDITED) Revenues............................................ $8,869 $4,045 $6,257 Operating expenses.................................. 6,961 2,884 4,817 ------ ------ ------ Gross profit...................................... 1,908 1,161 1,440 Selling, general and administrative................. 2,108 1,093 1,340 ------ ------ ------ Income (loss) from operations..................... (200) 68 100 Other (income) expense: Interest expense.................................. 30 7 42 Gain on sale of property and equipment............ (105) -- -- ------ ------ ------ Net income (loss)................................... $ (125) $ 61 $ 58 ====== ====== ====== Pro forma tax provision (Unaudited) (See Note 2): Income (loss) before income taxes................. $ (125) $ 61 $ 58 Pro forma provision for income taxes.............. (50) 24 23 ------ ------ ------ Pro forma net income (loss)....................... $ (75) $ 37 $ 35 ====== ====== ======
The accompanying notes are an integral part of these financial statements. F-61 IMPACT TELEMARKETING GROUP, INC. COMBINED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ---------------- ADDITIONAL NUMBER PAID-IN RETAINED OF SHARES AMOUNT CAPITAL EARNINGS TOTAL --------- ------ ---------- -------- ----- 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 (unaudited)............. -- -- -- 58 58 Distributions to stockholders (unaudited)....................... -- -- -- (48) (48) --- ---- --- ---- ---- Balance, June 30, 1997 (unaudited).. 100 $-- $91 $ 36 $127 === ==== === ==== ====
The accompanying notes are an integral part of these financial statements. F-62 IMPACT TELEMARKETING GROUP, INC. STATEMENT OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS YEAR ENDED ENDED JUNE 30, DECEMBER 31, ---------------- 1996 1996 1997 ------------ ------- ------- (UNAUDITED) Cash flows from operating activities: Net income (loss).............................. $(125) $ 61 $ 58 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization................ 128 75 91 Gain on sale of properties and equipment..... (105) Provision for doubtful accounts.............. 77 8 26 Changes in operating assets and liabilities: Accounts receivable, trade................. 443 465 (399) Prepaid expenses and other current assets.. 7 Related party receivables.................. (72) (57) (2) Due from affiliate......................... (26) Other assets............................... (12) 3 1 Accounts payable and accrued liabilities... (245) (478) (55) ----- ------- ------- Net cash provided by (used in) operating activities.............................. 96 77 (306) Cash flows from investing activities: Proceeds from sale of property and equipment... 157 Purchase of property and equipment............. (155) (77) (19) ----- ------- ------- Net cash provided by (used in) investing activities.............................. 2 (77) (19) Cash flows from financing activities: Net (payments) borrowings on line of credit.... 80 456 Payments on notes payable...................... (45) (31) (146) Payments on capital lease obligations.......... (85) (45) (62) Borrowings under term loan..................... 146 Distributions to stockholders.................. (40) (40) (48) ----- ------- ------- Net cash provided by (used in) financing activities.............................. (90) (116) 346 Net increase (decrease) in cash.................. 8 (116) 21 Cash and cash equivalents at beginning of year... 158 158 166 ----- ------- ------- Cash and cash equivalents at end of year......... $ 166 $ 42 $ 187 ===== ======= ======= Supplemental disclosure of cash flow information: Cash paid for interest......................... $ 30 $ 13 $ 44 Noncash investing and financing activities: Property acquired under capital leases....... $ 330 $ 26 $ 129 Assumption of North Dakota debt by third party in conjunction with the sale of North Dakota assets............................... $ 67 $ -- $ --
The accompanying notes are an integral part of these financial statements. F-63 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 Telemarketing, Inc. ("Inc."), and Impact Telemarketing of North Dakota, Inc. ("North Dakota"). The Company's headquarters are in Woodbury, New Jersey. The results of operations for the year ended December 31, 1996 include the expenses of North Dakota. North Dakota provided telemarketing services to Group only. North Dakota's net assets were sold to a third party on December 31, 1996 for $157,000 in cash and the assumption of $67,000 in liabilities. A gain of $105,000 has been recognized for the difference between the total purchase price and the net book value of the assets that were sold. At June 30, 1997, the Company has a working capital deficit of $196,000 and is not in compliance with certain covenants contained in its loan agreement with a bank. Total amounts outstanding as of June 30, 1997 under the Company's term loan and line of credit of $129,000 and $550,000, respectively, are currently due and payable at the discretion of the bank. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. Even with income from operations, the Company may require additional financing to achieve its plans for 1997 and beyond. However, should the Company be unable to obtain such financings, the Company will be required to reduce discretionary spending. Management believes that it will be able to reduce discretionary spending if required. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of these financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Principles of Combination The combination of the financial statements includes the accounts of all the affiliated companies (Group, Inc. and North Dakota) in which the principal stockholders exercised similar control and which had similar operations. All significant inter-company transactions have been eliminated. Revenue Recognition The Company recognizes revenues on programs as services are performed, generally based on hours incurred. Major Customers and Concentration of Credit Risk For the year ended December 31, 1996, one customer accounted for approximately 51% of revenues. The loss of the Company's major customer could have a material adverse effect on the Company's business. F-64 IMPACT TELEMARKETING GROUP, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. The Company holds deposits in money market accounts. The Company's accounts receivable are derived from sales to customers located in the United States and Canada. 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 June 30, 1997, two customers accounted for approximately 61% and 15% of accounts receivable. Cash and Cash Equivalents Cash includes cash and highly liquid investments purchased with an original maturity of three months or less. Property and Equipment Property and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets, generally five to seven years. Leasehold improvements are amortized over the lesser of the estimated useful lives of the equipment or the lease term, generally ten years. Income Taxes The affiliated companies include separate legal entities that are controlled by common shareholders. These entities file separate tax returns. Two companies elected to be treated as an S Corporation for federal and state income tax purposes and accordingly any liabilities for income taxes are the direct responsibility of the stockholders. The other entity is a tax paying entity which accounts for income taxes using the asset and liability method, whereby deferred income tax assets and liabilities are determined based on the differences between financial reporting and tax bases of assets and liabilities and are measured using currently enacted tax rates and laws. The taxable entity incurred losses in 1996. As of December 31, 1996, Inc. had federal and state net operating loss carryforwards of approximately $47,000 and $28,000, respectively. These carryforwards expire from 2003 through 2010. Management believes sufficient uncertainty exists with regard to the realization of these carryforwards. Accordingly, a valuation allowance of $75,000 has been provided as of December 31, 1996. The unaudited pro forma income tax information included in the Statement of Operations is presented in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," as if the Company had been subject to federal and state income taxes for the entire periods presented. Fair Value of Financial Instruments Cash, accounts receivable, accounts payable and accrued liabilities are reflected in the financial statements at fair value due to the short-term nature of those instruments. The carrying amount of the long-term debt and capitalized lease obligations approximates fair value at December 31, 1996. F-65 IMPACT TELEMARKETING GROUP, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) Unaudited Interim Financial Information The interim financial information as of June 30, 1997 and for the six months ended June 30, 1996 and 1997 has been prepared from the unaudited financial records of the Company and, in the opinion of management, reflect all adjustments, consisting only of normal recurring items, necessary for a fair presentation of the financial position and results of operations and of cash flows for the respective interim periods. NOTE 3--RELATED PARTY TRANSACTIONS The Company rents office space owned by a partnership whose partners are the sole stockholders of the Company. The office space is rented on a month to month basis at above market rates. Total rent expense was $139,000 for the year ended December 31, 1996. As of December 31, 1996, the Company has total loans receivable from its sole stockholders and partnerships owned by the Company's sole stockholders of $188,000. There are no scheduled dates of repayment or interest rates associated with these loans. NOTE 4--PROPERTY AND EQUIPMENT, NET
DECEMBER 31, 1996 -------------- (IN THOUSANDS) Furniture and fixtures................................. $ 144 Computer equipment and software........................ 752 Leasehold improvements................................. 81 ----- $ 977 Less: Accumulated depreciation......................... (404) ----- $ 573 =====
Depreciation expense for the year ended December 31, 1996 was $75,000. Included in fixed assets shown above as of December 31, 1996 are fixed assets under capital leases with a gross amount of $518,000. Total amortization expense was $53,000 for the year ended December 31, 1996. 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% ( 8.75% and 9.0% as of December 31, 1996 and June 30, 1997, respectively). The line of credit expires December 31, 1997 and is secured by substantially all of the Company's assets. Payments are due monthly for accrued interest only beginning on March 1, 1997. All principal and remaining interest is due and payable on December 1, 1997. Amounts outstanding under this line of credit are $30,000 and $550,000 as of December 31, 1996 and June 30, 1997, respectively. The Agreement contains restrictive covenants, which, among other things, require the maintenance of a debt service ratio, limitations on debt and dividends and minimum tangible net worth, as defined in the Agreement. F-66 IMPACT TELEMARKETING GROUP, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) In May 1997, the Company's line of credit under the Agreement was increased to $850,000. In June 1997, the line of credit was reduced to $650,000 as a result of the Company's default on certain covenants contained in the Agreement. In April 1997, the Company obtained a $100,000 letter of credit facility under the Agreement. Borrowings under the letter of credit facility are due upon demand, bear interest at the bank's prime rate, as defined, plus 2% (10.5% as of June 30, 1997) and are secured by substantially all of the Company's assets. No borrowings were outstanding under this letter of credit facility as of June 30, 1997. At December 31, 1996, the Company had a $100,000 revolving line of credit agreement with a bank. Borrowings bear interest at the bank's prime rate, as defined, plus 1.5% (9.75% at December 31, 1996). The balance outstanding under this line of $50,000 at December 31, 1996 was repaid in January 1997 upon termination of the line of credit agreement. Notes payable consists of:
DECEMBER 31, JUNE 30, 1996 1997 ------------ ----------- (UNAUDITED) (IN THOUSANDS) 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......................... -- $129 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 $139 ==== ====
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 9% for the year ended December 31, 1996. Future minimum lease payments as of December 31, 1996 are as follows (in thousands): 1997................................................................ $151 1998................................................................ 135 1999................................................................ 89 2000................................................................ 64 2001................................................................ 46 ---- Total minimum obligations........................................... $485 Less interest at 9%................................................. 73 ---- Present value of minimum lease payments............................. 412 Less: Current portion............................................... 119 ---- $293 ====
F-67 IMPACT TELEMARKETING GROUP, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) 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 June 30, 1997, the Company has not made any contributions under the Plan. NOTE 8--COMMITMENTS AND CONTINGENCIES Leases The Company leases certain facilities and equipment under noncancelable operating leases through the year 2001. 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, 1996 (in thousands): 1997................................................................. $123 1998................................................................. 125 1999................................................................. 127 2000................................................................. 130 2001................................................................. 110 ---- $615 ====
On April 7, 1997, the Company amended the operating lease for one of its facilities. Under this amendment, the lease term was extended through 2002 and the leased space was expanded. The expansion of space results in additional annual rent from September 15, 1997 through September 15, 2002 as follows (in thousands): 1997................................................................. $ 30 1998................................................................. 105 1999................................................................. 107 2000................................................................. 109 2001................................................................. 133 Thereafter........................................................... 174 ---- $658 ====
Rent expense was $182,000 for the year ended December 31, 1996. 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 In 1996 the Company became a party to certain lawsuits and claims arising out of the conduct of its business. While the ultimate outcome of these matters cannot be predicted with certainty, management expects that these matters will not have a material adverse effect on the financial position or results of the Company. NOTE 9--SUBSEQUENT EVENT (UNAUDITED) The Company and its stockholders have entered into a definitive agreement with Compass International Services Corporation ("Compass") pursuant to which Compass will acquire all outstanding shares of the Company's common stock in exchange for cash and common stock of Compass, concurrent with the consummation of the initial public offering of the common stock of Compass. F-68 The inside back cover of the Prospectus contains a map of the United States with all of the Company's locations - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 -------------------
Page ---- Prospectus Summary........................................................ 3 Risk Factors.............................................................. 9 The Company............................................................... 15 Use of Proceeds........................................................... 17 Dividend Policy........................................................... 17 Capitalization............................................................ 18 Dilution.................................................................. 19 Selected Financial Data................................................... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 22 Business.................................................................. 31 Management................................................................ 43 Certain Transactions...................................................... 48 Principal Stockholders.................................................... 51 Description of Capital Stock.............................................. 52 Shares Eligible for Future Sale........................................... 53 Underwriting.............................................................. 55 Certain Legal Matters..................................................... 56 Experts................................................................... 56 Additional Information.................................................... 57 Index to Financial Statements............................................. F-1
------------------- Until , 1997 (25 days after the date of this Prospectus), all dealers effecting transactions in the registered securities offered hereby, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when acting as Underwriters and with respect to their unsold allotments or subscriptions. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 4,100,000 SHARES LOGO COMPASS INTERNATIONAL SERVICES CORPORATION COMMON STOCK ---------------- PROSPECTUS ---------------- NationsBanc Montgomery Securities, Inc. Lehman Brothers , 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. Set forth below is an estimate of the approximate amount of fees and expenses (other than underwriting commissions and discounts) payable by the Company in connection with the issuance and distribution of the Common Stock pursuant to the Prospectus contained in this Registration Statement. The Company will pay all of these expenses.
APPROXIMATE AMOUNT ----------- Securities and Exchange Commission registration fee........... $ 17,146 NASD filing fee............................................... 6,158 Nasdaq National Market listing fee............................ 47,084 Accountants' fees and expenses................................ 900,000 Blue Sky fees and expenses.................................... 10,000 Legal fees and expenses....................................... 900,000 Transfer Agent and Registrar fees and expenses................ 10,000 Printing and engraving........................................ 200,000 Miscellaneous expenses........................................ 909,612 ---------- Total....................................................... $3,000,000 ==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company's Amended and Restated Certificate of Incorporation provides that the Company shall, to the fullest extent permitted by Section 145 of the Delaware General Corporation Law, as amended from time to time, indemnify all persons whom it may indemnify pursuant thereto. Section 145 of the Delaware General Corporation Law permits a corporation, under specified circumstances, to indemnify its directors, officers, employees or agents against expenses (including attorneys' fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by them in connection with any action, suit or proceeding brought by third parties by reason of the fact that they were or are directors, officers, employees, or agents of the corporation, if such directors, officers, employees or agents acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reason to believe their conduct was unlawful. In a derivative action, i.e., one by or in the right of the corporation, indemnification may be made only for expenses actually and reasonably incurred by directors, officers, employees or agents in connection with the defense or settlement of an action or suit, and only with respect to a matter as to which they shall have acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made if such person shall have been adjudged liable to the corporation, unless and only to the extent that the court in which the action or suit was brought shall determine upon application that the defendant directors, officers, employees or agents are fairly and reasonably entitled to be indemnified for such expenses despite such adjudication of liability. The Company's Amended and Restated Certificate of Incorporation provides that the Company's directors will not be personally liable to the Company or its stockholders for monetary damages resulting from breaches of their fiduciary duty as directors except (a) for any breach of the duty of loyalty to the Company or its stockholders, (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) under Section 174 of the Delaware General Corporation Law, which makes directors liable for unlawful dividends or unlawful stock repurchase or redemptions or (d) for transactions from which directors derive improper personal benefit. II-1 Upon the effectiveness of this Registration Statement the Company will enter into indemnification agreements with its directors and officers. The form of such agreement is filed as an Exhibit hereto. The Company expects to have director and officer insurance coverage concurrently with the consummation of the Offering. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. The following information relates to securities of the Company issued or sold by the Company since inception that were not registered under the Securities Act: The Company was organized in April 1997 and issued 15,000 shares of its Common Stock to its founders at a price of $10.00 per share. Of such shares, 10,000 were issued to BGL Capital Partners, LLC, 2,250 were issued to Michael J. Cunningham, 1,750 were issued to Mahmud U. Haq and 1,000 were issued to Richard A. Alston. The offer and sale of these shares was exempt from registration under the Securities Act of 1933, as amended ("Securities Act"), in reliance on the exemption provided by Section 4(2) thereof. Prior to the consummation of the Offering, the number of these shares will be increased to 1,682,769 by a 112.185-to-1 stock split. See "Certain Transactions" for a discussion of the shares of Common Stock to be issued in connection with the Acquisitions. It is anticipated these transactions will be completed without registration under the Securities Act in reliance on the exemption provided by Section 4(2). ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) EXHIBITS. 1.1* Form of Underwriting Agreement. 2.1* Stock Purchase Agreement dated as of October 3, 1997 by and among the Registrant, The Mail Box, Inc. and the Stockholders named therein. 2.2* Stock Purchase Agreement dated as of October 3, 1997 by and among the Registrant, National Credit Management Corporation, and the Stockholders named therein. 2.3* Stock Purchase Agreement dated as of October 3, 1997 by and among the Registrant, BRMC of Delaware, Inc. and the Stockholders named therein. 2.4* Stock Purchase Agreement dated as of October 3, 1997 by and among the Registrant, Mid-Continent Agencies, Inc. and the Stockholder named therein. 2.5* Stock Purchase Agreement dated as of October 3, 1997 by and among the Registrant, Impact Telemarketing Group, Inc. and the Stockholders named therein. 3.1 Form of Amended and Restated Certificate of Incorporation of the Registrant. 3.2 Bylaws of the Registrant. 4.1* Specimen stock certificate representing Common Stock. 5* Opinion of Katten Muchin & Zavis as to the legality of the securities being registered (including consent). 10.1* Form of 1997 Employee Incentive Compensation Plan. 10.2* Form of Employee Stock Purchase Plan. 10.3* Form of Employment Agreement between the Registrant and Michael J. Cunningham. 10.4* Form of Employment Agreement between the Registrant and Mahmud U. Haq. 10.5* Form of Employment Agreement between the Registrant and Richard A. Alston. 10.6* Form of Employment Agreement between the Registrant and certain Founding Company owners. 10.7* Form of Stockholders' Agreement.
II-2 10.8* Bonus Agreement dated as of October 2, 1997 among the Registrant, National Credit Management Corporation and the Stockholders named therein. 10.9 Form of Indemnification Agreement between the Registrant and its officers and directors. 23.1 Consent of Price Waterhouse LLP. 23.2 Consent of Arthur Andersen LLP. 23.3 Consent of Ernst & Young LLP. 23.4* Consent of Katten Muchin & Zavis (contained in its opinion to be filed as Exhibit 5 hereto). 23.5 Consent to be named as prospective director (Kenneth W. Murphy). 23.6 Consent to be named as prospective director (Leeds Hackett) 23.7 Consent to be named as prospective director (John Maloney) 23.8 Consent to be named as prospective director (Leslie J. Kirschbaum) 23.9 Consent to be named as prospective director (Edward A. DuCoin) 24 Power of Attorney (see signature page).
- -------- *To be filed by amendment (b) FINANCIAL STATEMENT SCHEDULES. Not Applicable. ITEM 17. UNDERTAKINGS. The Registrant hereby undertakes: (1) To provide to the Underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (2) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (3) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer of controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter had been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Chicago, and State of Illinois on the 2nd day of October, 1997. Compass International Services Corporation /s/ Michael J. Cunningham By: _________________________________ Michael J. Cunningham Chairman and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints Michael J. Cunningham his true and lawful attorney-in-fact and agent, to sign on his behalf, individually and in each capacity stated below, all amendments and post-effective amendments to this Registration Statement on Form S-1 and to file the same, with all exhibits thereto and any other documents in connection therewith, with the Commission under the Securities Act of 1933, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as each might or could do in person, hereby ratifying and confirming each act that said attorneys-in-fact and agent may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Michael J. Cunningham Chairman and Chief Executive October 2, 1997 ____________________________________ Officer (Principal Michael J. Cunningham Executive Officer) /s/ Richard A. Alston Chief Financial Officer October 2, 1997 ____________________________________ (Principal Financial and Richard A. Alston Accounting Officer) /s/ Scott H. Lang Director October 2, 1997 ____________________________________
Scott H. Lang II-4 EX-3.1 2 FORM OF AMENDED & RESTATED CERTIFICATE OF INCORP. EXHIBIT 3.1 FORM OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF COMPASS INTERNATIONAL SERVICES CORPORATION (Original Certificate of Incorporation filed April 29, 1997) Compass International Services Corporation (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Law"), does hereby certify: A. That the Board of Directors of the Corporation adopted a resolution setting forth the Amended and Restated Certificate of Incorporation set forth below, declaring it advisable and submitting it to the stockholders entitled to vote in respect thereof for their consideration of such Amended and Restated Certificate of Incorporation. B. That by written consent executed in accordance with Section 228 of the Law, the holders of a majority of the outstanding stock has voted in favor of the adoption of the Amended and Restated Certificate of Incorporation set forth below. C. That the Amended and Restated Certificate of Incorporation set forth below has been duly adopted in accordance with Sections 242 and 245 of the Law: ARTICLE I The name of the corporation is Compass International Services Corporation. ARTICLE II The address of the Corporation's registered office in the State of Delaware is 30 Old Rudnick Lane, Suite 100, Dover, Delaware 19901, in the County of Kent. The name of its registered agent at such address is Lexis Document Services. ARTICLE III The nature of the business to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the Law. ARTICLE IV A. The Corporation shall have authority to issue the following classes of stock, in the number of shares and at the par value as indicated opposite the name of the class:
NUMBER OF SHARES PAR VALUE CLASS AUTHORIZED PER SHARE --------------- ---------- ------------- Common Stock 50,000,000 $.01 Preferred Stock 10,000,000 $.01
As of the date of the filing of this Amended and Restated Certificate of Incorporation, each issued share of Common Stock of the Corporation shall be reclassified and changed into 112.1846 shares of Common Stock having the terms specified in this ARTICLE IV. Each outstanding stock certificate which immediately prior to the date hereof represented a number of shares of Common Stock shall, without any action on the part of the holder, hereupon and hereafter, until surrendered as hereinafter provided, represent that number of shares of Common Stock equal to 112.1846 times the number of shares of the Common Stock represented by such certificate. The registered holder of each such certificate may on or after the date hereof surrender such certificate to the Corporation for cancellation and, upon such surrender, shall receive in exchange therefor, without charge, a new certificate registered in the name of such holder representing that number of shares of Common Stock equal to 112.1846 times the number of shares of Common Stock which, prior to the date of filing hereof, was represented by the certificate(s) representing shares of Common Stock. B. The designations and the powers, preferences and relative, participating, optional or other rights of the capital stock and the qualifications, limitations or restrictions thereof are as follows: 1. Common Stock. ------------ a. Voting Rights: Except as otherwise required by law or expressly provided herein, the holders of shares of Common Stock shall be entitled to one vote per share on each matter submitted to a vote of the stockholders of the Corporation. b. Dividends: Subject to the rights of the holders, if any, of preferred stock, the holders of Common Stock shall be entitled to receive dividends at such times and in such amounts as may be determined by the Board of Directors of the Corporation. -2- c. Liquidation Rights: In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the Corporation and the preferential amounts to which the holders of any outstanding shares of Preferred Stock shall be entitled upon dissolution, liquidation or winding up, the assets of the Corporation available for distribution to stockholders shall be distributed ratably among the holders of the shares of Common Stock. 2. Preferred Stock. --------------- Preferred Stock may be issued from time to time in one or more series. Subject to the other provisions of this Amended and Restated Certificate of Incorporation, the Board of Directors is authorized, subject to any limitations prescribed by law, to provide for the issuance of and to issue shares of the Preferred Stock in series, and by filing a certificate pursuant to the laws of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and any qualifications, limitations or restrictions thereof. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the Common Stock, without a vote of the holders of any Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the certificate or certificates establishing such series of Preferred Stock. ARTICLE V The business and affairs of the Corporation shall be managed by or under the direction of a board of directors. The number of directors shall be determined from time to time by resolution adopted by the affirmative vote of a majority of the directors in office at the time of adoption of such resolution. Initially, the number of directors shall be nine. Such directors shall be divided into three classes, Class I, Class II and Class III; with each Class having three members. At the election of directors immediately following the adoption of this Amended and Restated Certificate of Incorporation, Class I directors will be elected for a term expiring at the annual meeting relating to the Corporation's 1998 fiscal year (but occurring in calendar year 1999) (the "1998 Annual Meeting"), Class II directors will be elected for a term expiring at the annual meeting following the Corporation's 1999 fiscal year (but occurring in calendar year 2000) and Class III directors will be elected for a term expiring at the annual meeting relating to the Corporation's 2000 fiscal year (but occurring in calendar year 2001). At each annual meeting of stockholders commencing with the 1998 Annual Meeting, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes by the Board of Directors so as to maintain the number -3- of directors in each class as nearly equal as reasonably possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class. In no case will a decrease in the number of directors shorten the term of any incumbent director even though such decrease may result in an inequality of the classes until the expiration of such term. A director shall hold office until the annual meeting of the year in which his or her term expires and until his or her successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement or removal from office. No director elected by the stockholders of the Corporation may be removed except for cause. Except as required by law or the provisions of this Amended and Restated Certificate of Incorporation, all vacancies on the board of directors and newly-created directorships shall be filled by the board of directors. Any director elected to fill a vacancy not resulting from an increase in the number of directors shall have the same remaining term as that of his or her predecessor. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of preferred stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorship shall be governed by the terms of this Amended and Restated Certificate of Incorporation and any resolutions of the Board of Directors applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Article V. Notwithstanding anything to the contrary contained in this Amended and Restated Certificate of Incorporation, the affirmative vote of the holders of at least 80% of the voting power of the shares entitled to vote generally in the election of directors shall be required to amend, alter or repeal, or to adopt any provision inconsistent with, this Article V. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to adopt, amend or repeal the By- laws of the Corporation. ARTICLE VI Election of Directors need not be by written ballot unless the By-laws of the Corporation so provide. ARTICLE VII The Corporation reserves the right to amend, alter or repeal any provision contained in this Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon the stockholders herein are granted subject to this reservation. -4- ARTICLE VIII The Corporation shall, in accordance with and to the full extent now or hereafter permitted by law, indemnify and upon request advance expenses to any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including, without limitation, an action by or in the right of the Corporation), by reason of his acting as a director or officer of the Corporation (and the Corporation, in the discretion of the Board of Directors, may so indemnify a person by reason of the fact that he is or was an employee of the Corporation or is or was serving at the request of the Corporation in any other capacity for or on behalf of the Corporation) against any liability or expense (including attorneys' fees and expenses) actually and reasonably incurred by such person in respect thereof; provided, however, that the Corporation shall not be obligated to indemnify or advance expenses to any such person (i) with respect to proceedings, claims or actions initiated or brought voluntarily by such person and not by way of defense, or (ii) for any amounts paid in settlement of an action effected without the prior written consent of the Corporation to such settlement. Such indemnification is not exclusive of any other right to indemnification provided by law, agreement or otherwise. ARTICLE IX No director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided, however, that this provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Law, or (iv) for any transaction from which the director derived an improper personal benefit. ARTICLE X No amendment to or repeal of Articles VIII or IX of this Amended and Restated Certificate of Incorporation shall apply to or have any effect on the rights of any individual referred to in Articles VIII or IX for or with respect to acts or omissions of such individual occurring prior to such amendment or repeal. ARTICLE XI A. Written Consent. At any time after the closing of an initial public offering of the Corporation's Common Stock, any action required or permitted to be taken by the stockholders -5- of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders. B. Special Meetings. Special meetings of stockholders of the Corporation may be called upon not less than ten nor more than 60 days' written notice only by the Board of Directors pursuant to a resolution approved by a majority of the Board of Directors. C. Amendment. Notwithstanding anything contained in this Amended and Restated Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 80% of the shares entitled to vote generally in the election of directors shall be required to amend, alter or repeal, or to adopt any provision inconsistent with, this Article XI. ARTICLE XII Meetings of stockholders may be held within or without the State of Delaware as the By-Laws of the Corporation may provide. The books of the Corporation may be kept outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors of the Corporation or in the By-laws of the Corporation. ARTICLE XIII The By-laws of the Corporation may be altered, amended, or repealed or new By-laws may be adopted by the Board of Directors or by the vote of the holders of 66-2/3% of the votes entitled to be cast by the shares entitled to vote generally for the election of directors if notice of such alteration, amendment, repeal or adoption of new By-laws is contained in the notice of such special meeting. IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated Certificate of Incorporation to be signed by its Chief Executive Officer on _______________. COMPASS INTERNATIONAL SERVICES CORPORATION By: ____________________________________ Name: ____________________________________ Its: ____________________________________ -6- EX-3.2 3 BYLAWS OF THE REGISTRANT EXHIBIT 3.2 BY-LAWS OF COMPASS INTERNATIONAL SERVICES CORPORATION ARTICLE I Offices Section 1.1. The registered office shall be in the City of Dover, County of Kent, State of Delaware. Section 1.2. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II Meetings of Stockholders Section 2.1. All meetings of the stockholders for the election of directors shall be held at such place within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of Delaware, as shall be stated by the Board of Directors in its notice of the meeting. Section 2.2. Annual meetings of stockholders, at which stockholders shall elect directors as provided in the Corporation's Certificate of Incorporation and Section 2.4 of Article II of the by-laws and transact such other business as may properly be brought before the meeting in accordance with Section 2.5 of Article II of the by-laws, shall be held on such business day within the 180-day period following the end of the Corporation's fiscal year as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Section 2.3. Except as otherwise required by law, written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not fewer than 10 nor more than 60 days before the date of the meeting. Section 2.4. Only persons who are nominated in accordance with the following procedures shall be eligible to serve as directors. Nominations of persons for election to the Board of Directors of the Corporation at a meeting of stockholders may be made (i) by or at the direction of the Board of Directors, or (ii) by any stockholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Article II, Section 2.4. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to, or mailed and received by, the Secretary of the Corporation at the principal executive offices of the Corporation not less than 60 nor more than 90 days prior to the meeting; provided, however, that if the Corporation has not "publicly disclosed" (in the manner provided in the last sentence of this Article II, Section 2.4) the date of the meeting at least 70 days prior to the meeting date, notice may be timely made by a stockholder under this Section if received by the Secretary of the Corporation not later than the close of business on the tenth day following the day on which the Corporation publicly disclosed the meeting date. Such stockholder's notice shall set forth (i) as to each person whom the stockholder proposes to nominate for election or re-election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as director if elected); and (ii) as to the stockholder giving notice (A) the name and address, as they appear on the Corporation's books, of such stockholder and (B) the class and number of shares of the Corporation which are beneficially owned by such stockholder. At the request of the Board of Directors any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. No person shall be eligible to serve as a director of the Corporation unless nominated in accordance with the procedures set forth herein. The presiding officer shall, if the facts so warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the by-laws, and if such officer should so determine, such officer shall so declare to the meeting and the defective nomination shall be disregarded. For purposes of these by- laws, "publicly disclosed" or "public disclosure" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or a comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission. Section 2.5. At an annual meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting (i) by or at the direction of the Board of Directors, or (ii) by any stockholder of the Corporation who complies with the notice procedures set forth in this Article II, Section 2.5, in the time herein provided. For business to be properly brought before an annual meeting by a stockholder, the stockholders must deliver written notice to, or mail such written notice so that it is received by, the Secretary of the Corporation, at the principal executive offices of the Corporation, not less than 120 nor more than 150 days prior to the first anniversary of the date of the Corporation's consent solicitation or proxy statement released to stockholders in connection with the previous year's election of directors or meeting of stockholders, except that if no annual meeting of stockholders or election by consent was held in the previous year or if the date of the annual meeting has been changed by more than 30 days from the previous year's meeting, a proposal shall be received by the Corporation within 10 days after the Corporation has "publicly disclosed" the date of the meeting in the manner provided in Article II, Section 2.4 above. The stockholder's notice to the -2- Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (A) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (B) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (C) the class and number of shares of the Corporation which are beneficially owned by the stockholder and (D) any material interest of the stockholder in such business. At an annual meeting, the presiding officer shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Article II, Section 2.5, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Whether or not the foregoing procedures are followed, no matter which is not a proper matter for stockholder consideration shall be brought before the meeting. Section 2.6. Special meetings of the stockholders may be called only by the Board of Directors. The business transacted at any special meeting of the stockholders shall be limited to the purposes stated in the notice for the meeting transmitted to stockholders. Section 2.7. Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given not fewer than 10 nor more than 60 days before the date of the meeting, to each stockholder entitled to vote at such meeting. Section 2.8. In order that the Corporation may determine the stockholders entitled to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which shall not precede the date upon which the resolution fixing the record date is adopted, and which shall be (i) not more than 60 nor less than 10 days before the date of a meeting, and (ii) not more than 60 days prior to the other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for any adjourned meeting. Section 2.9. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. -3- Section 2.10. The holders of a majority of the voting power of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the Certificate of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented; provided that if the adjournment is for more than 30 days, or if a new record date is fixed by the directors, a new notice shall be transmitted to the shareholders. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted at the meeting as originally notified. Section 2.11. When a quorum is present at any meeting, the affirmative vote of the holders of a majority of the voting power of the stock, and cast affirmatively or negatively at the meeting, shall decide any question brought before such meeting, unless the question is one upon which by express provision of statute or of the Certificate of Incorporation, a different vote is required in which case such express provision shall govern and control the decision of such question; provided, however, all elections shall be determined by a plurality of the votes cast. Section 2.12. Unless otherwise provided in the Certificate of Incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted on after three years from its date, unless the proxy provides for a longer period. At any meeting of the stockholders, every stockholder entitled to vote may vote in person or by proxy authorized by an instrument in writing or by a transmission permitted by law filed in accordance with the procedure established for the meeting. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this paragraph may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used; provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. All voting, including on the election of directors but excepting where otherwise required by law, may be by a voice vote; provided, however, that upon demand therefor by a stockholder entitled to vote or by his or her proxy, a stock vote shall be taken. Every stock vote shall be taken by ballots, each of which shall state the name of the stockholder or proxy voting and such other information as may be required under the procedure established for the meeting. The Corporation may, and to the extent required by law shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting may, and to the extent required by law shall, appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. Every -4- vote taken by ballots shall be counted by an inspector or inspectors appointed by the chairman of the meeting. Section 2.13. The Chairman of the Board of Directors shall preside at all meetings of the stockholders. In the absence or inability to act of the Chairman, the President or an Executive Vice President (in that order) shall preside, and in their absence or inability to act another person designated by one of them shall preside. The Secretary of the Corporation shall act as Secretary of each meeting of the stockholders. In the event of his absence or inability to act, the chairman of the meeting shall appoint a person who need not be a stockholder to act as Secretary of the meeting. Section 2.14. Meetings of the stockholders shall be conducted in a fair manner but need not be governed by any prescribed rules of order. The presiding officer's rulings on procedural matters shall be final. The presiding officer is authorized to impose reasonable time limits on the remarks of individual stockholders and may take such steps as such officer may deem necessary or appropriate to assure that the business of the meeting is conducted in a fair and orderly manner. ARTICLE III ----------- Directors --------- Section 3.1. The business and affairs of the Corporation shall be under the direction of or managed by a board comprised of directors who need not be residents of the State of Delaware or stockholders of the Corporation. The number of directors shall be determined in the manner provided in the Certificate of Incorporation of the Corporation. Section 3.2. Directors shall be elected by class for three year or other terms as specified in the Certificate of Incorporation, and each director elected shall hold office during the term for which he or she is elected and until his or her successor is elected and qualified, subject, however, to his or her prior death, resignation, retirement or removal from office. Section 3.3. Any vacancies occurring in the Board of Directors and newly created directorships shall be filled as provided in the Certificate of Incorporation of the Corporation. Meetings of the Board of Directors ---------------------------------- Section 3.4. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the State of Delaware. Members of the Board of Directors may participate in any such meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation by such means shall constitute presence in person at such meeting. -5- Section 3.5. The first meeting of each newly elected Board of Directors shall be held immediately following the adjournment of the annual meeting of the stockholders at the same place as such annual meeting and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event such meeting is not held at such time and place, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by all of the directors. Section 3.6. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the board. Section 3.7. Special meetings of the Board of Directors may be called by the Chairman or Chief Executive Officer on at least one days' notice to each director, either personally, or by courier, telephone, telefax, mail or telegram. Special meetings shall be called by the Chairman or Chief Executive Officer in like manner and on like notice at the written request of one-half or more of the directors comprising the board stating the purpose or purposes for which such meeting is requested. Notice of any meeting of the Board of Directors for which a notice is required may be waived in writing signed by the person or persons entitled to such notice, whether before or after the time of such meeting, and such waiver shall be equivalent to the giving of such notice. Attendance of a director at any such meeting shall constitute a waiver of notice thereof, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because such meeting is not lawfully convened. Neither the business to be transacted at nor the purpose of any meeting of the Board of Directors for which a notice is required need be specified in the notice, or waiver of notice, of such meeting. The Chairman shall preside at all meetings of the Board of Directors. In the absence or inability to act of the Chairman, the Chief Executive Officer, President or an Executive Vice President (in that order) shall preside, and in their absence or inability to act another director designated by one of them shall preside. Section 3.8. At all meetings of the Board of Directors, a majority of the then duly elected directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 3.9. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting, if all members of the board consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board or committee. -6- Committees of Directors ----------------------- Section 3.10. The Board of Directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he, she or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors as provided in subsection (a) of Section 151 of the Delaware General Corporation Law, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the number of shares of any series), and if the resolution which designates the committee or a supplemental resolution of the Board of Directors shall so provide, such committee shall have the power and authority to adopt a certificate of ownership and merger pursuant to Section 253 of the Delaware General Corporation Law or to declare a dividend or to authorize the issuance of stock. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Section 3.11. Each committee shall keep regular minutes of its meetings and shall file such minutes and all written consents executed by its members with the Secretary of the Corporation. Each committee may determine the procedural rules for meeting and conducting its business and shall act in accordance therewith, except as otherwise provided herein or required by law. Adequate provision shall be made for notice to members of all meetings; one- third of the members shall constitute a quorum unless the committee shall consist of one or two members, in which event one member shall constitute a quorum; and all matters shall be determined by a majority vote of the members present. Action may be taken by any committee without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of the proceedings of such committee. Members of any committee of the Board of Directors may participate in any such meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation by such means shall constitute presence in person at such meeting. -7- Compensation of Directors ------------------------- Section 3.12. In the discretion of the Board of Directors, the directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a committee thereof or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. ARTICLE IV ---------- Notices ------- Section 4.1. Whenever, under applicable law or the Certificate of Incorporation or these by-laws, notice is required to be given to any director or stockholder, unless otherwise provided in the Certificate of Incorporation or these by-laws, such notice may be given in writing, by courier or mail, addressed to such director or stockholder, at his or her address as it appears on the records of the Corporation, with freight or postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall have been deposited with such courier or in the United States mail. Section 4.2. Whenever any notice is required to be given under applicable law or the provisions of the Certificate of Incorporation or these by-laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE V --------- Officers -------- Section 5.1. Officers. The officers of the Corporation shall be a Chairman of the Board, a Chief Executive Officer, a President, a Chief Operating Officer, one or more Executive Vice Presidents, a Chief Financial Officer and a Secretary, all of whom shall be elected by the Board of Directors. Any two or more offices, except those of the Chief Executive Officer and Secretary or the Chief Executive Officer and Chief Financial Officer, may be held by the same person. Nothing herein contained shall be construed to require that a vacancy in an office or offices of the Corporation must be filled, and in the event any office or offices of the Corporation are not filled, by annual election or otherwise, the Corporation shall not be considered dissolved therefor. The Board of Directors may elect one or more Vice Presidents, Assistant Officers or other Officers who shall perform such duties from time to time as may be assigned to them by -8- the Chief Executive Officer, the President, the Chief Operating Officer or the Board of Directors. Subject to Section 5.13 of this Article, each officer or assistant officer elected by the Board of Directors shall hold office until the first meeting of the Board of Directors after the annual meeting of stockholders next following his or her election and until his or her successor shall be chosen and qualified or until his or her death or until he or she shall resign or shall have been removed in the manner hereinafter provided. Section 5.2. The Chairman of the Board. The Chairman of the Board shall be a director. He or she shall, when present, preside as Chairman at all meetings of the stockholders and of the Board of Directors. He or she may call meetings of the Board of Directors whenever he or she deems it advisable. In the absence or incapacity of the President to act, the Chairman of the Board shall perform all duties and functions and exercise all the powers of the President. Unless otherwise provided by the Board of Directors, he or she may execute and deliver bonds, notes, contract agreements or other obligations or instruments in the name of the Corporation. The Chairman of the Board shall have such powers and perform such other duties as from time to time may be assigned to him or her by the Board of Directors. Section 5.3. The Chief Executive Officer. The Chief Executive Officer shall have general direction over the affairs of the Corporation and establish all major policies, subject to the control and direction for the Board of Directors. Upon consultation with the Chief Operating Officer and Chief Financial Officer, he or she shall authorize all capital and other major expenditures, and major contracts of the Corporation, and shall keep the Chief Operating Officer and Chief Financial Officer fully informed respecting the same. He or she shall consult with, advise and instruct the Chief Operating Officer in the latter's management, administration and operation of the Corporation. In the absence or incapacity of the Chief Operating Officer (or if no Chief Operating Officer is elected, such functions shall be the Chief Executive Officer's responsibility), he or she shall exercise all of the powers of and perform all of the duties of the Chief Operating Officer. He or she shall have such further and other powers and duties as shall be prescribed by the Board of Directors. Section 5.4. The President. The President shall keep the Chairman of the Board fully informed concerning the business of the Corporation under his supervision. In the absence or incapacity of the Chairman of the Board, if the Chairman of the Board has been designated Chief Executive Officer, the President shall perform the duties of the Chief Executive Officer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Chief Executive Officer. The President shall have concurrent power with the Chief Executive Officer to execute and deliver bonds, notes, contracts, agreements or other obligations or instruments in the name of the Corporation. The President shall have such other powers and duties from time to time assigned to him or her by the Board of Directors. Section 5.5. The Chief Operating Officer. The Chief Operating Officer shall have general charge, control and supervision over the administration and operations of the -9- Corporation, and shall consult with and keep the Chief Executive Officer fully informed respecting the same. In the absence or incapacity of the Chief Executive Officer, the Chief Operating Officer shall exercise all the powers of and perform all the duties of the Chief Executive Officer. He or she shall see that all resolutions of the Board of Directors and all orders of the Chief Executive Officer are carried into effect. With the consent and approval of the Chief Executive Officer, he or she shall appoint and is in charge of all executives (other than the officers and assistant officers required by these by- laws to be elected or appointed by the Board of Directors) of the Corporation. He or she may sign, singly or with the Secretary or any other proper officer of the Corporation thereunto authorized by the Board of Directors, any deeds, mortgages, bonds, contracts or other instruments which the Board of Directors or the Chief Executive Officer has authorized to be executed, except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors or by these by-laws to some other officer or agent of the Corporation as shall be required by law to be otherwise signed or executed. He or she shall have such further and other powers and duties as shall be prescribed by the Board of Directors. Section 5.6. The Executive Vice Presidents. In the absence or incapacity of the Chairman of the Board and of the President, then an Executive Vice President designated by the Chairman of the Board or by the Board of Directors shall perform all the duties and functions and exercise all powers of the Chairman of the Board and of the President. In the absence or incapacity of the Chief Executive Officer and the Chief Operating Officer, then an Executive Vice President designated by the Chief Executive Officer or by the Board of Directors shall perform all duties and functions and exercise all power of the Chief Executive Officer and of the Chief Operating Officer. Each Executive Vice President shall have such other powers as in these by-laws are prescribed for other Vice Presidents of the Corporation and shall exercise such other powers and perform such other duties as from time to time may be assigned to him or her by the Board of Directors or may be delegated to him by the Chairman of the Board or the President. Section 5.7. Vice Presidents. In the absence or incapacity of the Chairman of the Board, the President, and the Executive Vice Presidents, a Vice President designated by the Chairman of the Board or by the Board of Directors shall perform all duties of the Chairman of the Board and of the President. In the absence or incapacity of the Chairman of the Board, the President, and the Executive Vice Presidents, a Vice President designated by the Chief Executive Officer or by the Board of Directors shall perform all duties and functions and exercise all powers of the Chief Executive Officer and of the Chief Operating Officer. Each Vice President shall have such other powers and shall perform such other duties as from time to time may be assigned to him or her by the Chief Executive Officer, the Chief Operating Officer or by the Board of Directors. Section 5.8. Chief Financial Officer. The Chief Financial Officer shall be the principal financial officer of the Corporation. The Chief Financial Officer shall: (a) keep a register of the post office address of each stockholder, (b) have a general charge of the stock transfer books of the Corporation, and (c) perform such other duties as may be assigned to him or her from -10- time to time by the Board of Directors, Chairman of the Board, President, Chief Executive Officer, or Chief Operating Officer. Section 5.9. The Treasurer. Under the direction of the Chief Financial Officer, the Treasurer shall in general perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him or her by the Chief Executive Officer, the Chief Operating Officer, the Chief Financial Officer, or by the Board of Directors. In the absence or incapacity of the Chief Financial Officer, the Treasurer shall perform the powers and duties of the Chief Financial Officer. If required by the Board of Directors, the Treasurer shall give bond for the faithful discharge of his or her duties in such sum and with such surety or sureties as the Board of Directors shall determine. Section 5.10. The Secretary. The Secretary shall: (a) if he or she is present, act as Secretary of all meetings for the stockholders and of the directors, and, if he or she is not present, the officer presiding at any such meeting shall appoint a Secretary for the meeting; (b) keep the minutes of all meetings of stockholders and of the Board of Directors in one or more books provided for that purpose; (c) see that all notices are duly given in accordance with the provisions of these by-laws or as required by Delaware law; (d) be custodian of the corporate records and of the seal of the Corporation and see that the seal of the Corporation is affixed to all documents, the execution of which on behalf of the Corporation under its seal is duly authorized in accordance with the provisions of these by-laws; and (e) in general perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned to him or her by the Chief Executive Officer, the Chief Operating Officer or by the Board of Directors. Section 5.11. Salaries. The salaries or other compensation of the officers shall be fixed from time to time by the Board of Directors, and no officer shall be prevented from receiving such salary or other compensation by reason of the fact that he or she is also a director of the Corporation. Section 5.12. Removal of Officers. Any officer may be removed, either with or without cause, by the vote of a majority of the directors then in office at any meeting of the Board of Directors. Section 5.13. Filling of Vacancies. If a vacancy shall exist in the office of any officer or assistant officer of the Corporation, the Board of Directors may elect any person to fill such vacancy, such person to hold office as provided in Section 5.1 of this Article. -11- ARTICLE VI ---------- Certificates of Stock --------------------- Section 6.1. Every holder of stock in the Corporation shall be entitled to have a certificate, signed by, or in the name of the Corporation by (a) the President or Chief Executive Officer, and (b) the Chief Financial Officer, Treasurer, the Secretary or an Assistant Secretary of the Corporation; certifying the number of shares owned in the Corporation. If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, the designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock; provided that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, a statement that the Corporation will furnish without charge to each stockholder who so requests the designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Section 6.2. Where a certificate is countersigned (1) by a transfer agent other than the Corporation or its employee, or (2) by a registrar other than the Corporation or its employee, any other signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. Section 6.3. Subject to the foregoing, certificates for stock of the Corporation shall be in such form as the Board of Directors may from time to time prescribe. Lost Certificates ----------------- Section 6.4. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his or her legal representative, to advertise the same in such manner as it shall require and/or give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation or its transfer agent or registrar with respect to the certificate alleged to have been lost, stolen or destroyed. -12- Transfers of Stock ------------------ Section 6.5. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Registered Stockholders ----------------------- Section 6.6. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VII ----------- Conflict of Interests --------------------- Section 7.1. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other Corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board of committee thereof which authorizes the contract or transaction, or solely because his, her or their votes are counted for such purpose, if: (1) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the board or committee in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) The material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) The contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof, or the stockholders. -13- Section 7.2. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. ARTICLE VIII ------------ General Provisions ------------------ Dividends --------- Section 8.1. Dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock or rights to acquire same, subject to the provisions of the Certificate of Incorporation. Section 8.2. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the directors shall think conducive to the interest of the Corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. Checks ------ Section 8.3. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. Fiscal Year ----------- Section 8.4. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. Seal ---- Section 8.5. The corporate seal shall have inscribed thereon the name of the Corporation and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. -14- ARTICLE IX ---------- Amendments ---------- These by-laws may be altered, amended, or repealed or new by-laws may be adopted only in the manner provided in the Corporation's Certificate of Incorporation. -15- EX-10.9 4 FORM OF INDEMNIFICATION AGREEMENT EXHIBIT 10.9 FORM OF INDEMNIFICATION AGREEMENT ------------------------- THIS INDEMNIFICATION AGREEMENT is entered into as of this _____ day of _________________, 199__, by and between COMPASS INTERNATIONAL SERVICES CORPORATION, a Delaware corporation (the "Company"), and _________________________ ("Indemnitee"). RECITALS A. The Company is aware that because of the increased exposure to litigation costs and risks resulting from their service to such corporations, talented and experienced persons are increasingly reluctant to serve or continue serving as directors or officers of corporations unless they are protected by comprehensive liability insurance and indemnification. B. The statutes and judicial decisions regarding the duties of directors and officers are often difficult to apply, ambiguous, or conflicting, and therefore fail to provide such directors and officers with adequate guidance regarding the proper course of action. C. The Company believes that it is fair and proper to protect the Company's directors and officers, and the directors and officers of the Company's subsidiaries, from the risk of judgments, settlements and other expenses which may occur as a result of their service to the Company, even in cases in which such persons received no personal profit or were not otherwise culpable. D. The Board of Directors of the Company (the "Board") has concluded that, to retain and attract talented and experienced individuals to serve as officers and directors of the Company and its subsidiaries and to encourage such individuals to take the business risks necessary for the success of the Company and its subsidiaries, the Company should contractually indemnify its officers and directors, and the officers and directors of its subsidiaries, in connection with claims against such officers and directors in connection with their services to the Company and its subsidiaries, and has further concluded that the failure to provide such contractual indemnification could be detrimental to the Company, its subsidiaries and shareholders. NOW, THEREFORE, the parties, intending to be legally bound, hereby agree as follows: 1. Definitions. ----------- (a) Agent. "Agent" means any person who is or was a director, officer, employee or other agent of the Company or a subsidiary of the Company; or is or was serving at the request of, for the convenience of, or to represent the interests of, the Company or a subsidiary of the Company as a director, officer, employee or agent of another entity or enterprise; or was a director, officer, employee or agent of a predecessor corporation of the Company or a Subsidiary of the Company, or was a director, officer, employee or agent of another enterprise at the request of, for the convenience of, or to represent the interests of such predecessor corporation. (b) Expenses. "Expenses" means all direct and indirect costs of any type or nature whatsoever (including, without limitation, all attorneys' fees, costs of investigation and related disbursements) incurred by the Indemnitee in connection with the investigation, settlement, defense or appeal of a claim or Proceeding covered hereby or establishing or enforcing a right to indemnification under this Agreement. (c) Proceeding. "Proceeding" means any threatened, pending, or completed claim, suit or action, whether civil, criminal, administrative, investigative or otherwise. (d) Subsidiary. "Subsidiary" means any corporation of which more than 10% of the outstanding voting securities is owned directly or indirectly by the Company, and one or more other Subsidiaries, taken as a whole. 2. Maintenance of Liability Insurance. ---------------------------------- (a) The Company hereby covenants and agrees with Indemnitee that, so long Indemnitee shall continue to serve as an Agent of the Company and thereafter so long as the Indemnitee shall be subject to any claim or Proceeding by reason of the fact that Indemnitee was an Agent of the Company or in connection with Indemnitee's acts as such an Agent, the Company, subject to Section 2(b), shall obtain and maintain in full force and effect directors' and officers' liability insurance ("D&O Insurance") in reasonable amounts as the Board of Director shall determine from established and reputable insurers, but no less than the amounts currently in effect on the date hereof. In all policies of D&O Insurance, Indemnitee shall be named as an insured. (b) Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain D&O Insurance if the Company determines in good faith that the premium costs for such insurance are (i) disproportionate to the amount of coverage provided after giving effect to exclusions, and (ii) substantially more burdensome to the Company than the premiums now paid by the Company. 3. Mandatory Indemnification. The Company shall defend, indemnify and hold harmless Indemnitee: (a) Third Party Actions. If Indemnitee is a person who was or is a party or is threatened to be made a party to any Proceeding (other than an action by or in the right of the Company) by reason of the fact that Indemnitee is or was an Agent of the Company, or by reason of anything done or not done by Indemnitee in any such -2- capacity, against any and all Expenses and liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) incurred by him in connection with the investigation, defense, settlement or appeal of such Proceeding, so long as the Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, or, with respect to any criminal action or Proceeding, had reasonable cause to believe his conduct was not unlawful. (b) Derivative Actions. If Indemnitee is a person who was or is a party or is threatened to be made a party to any Proceeding by or in the right of the Company by reason of the fact that he is or was an Agent of the Company, or by reason of anything done or not done by him in any such capacity, against any amounts paid in settlement of any such Proceeding and all other Expenses incurred by him in connection with the investigation, defense, settlement or appeal of such Proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company; except that no indemnification under this subsection shall be made, and Indemnitee shall repay all amounts previously advanced by the Company, in respect of any claim, issue or matter for which such person is judged in a final, non-appealable decision to be liable to the Company by a court of competent jurisdiction due to willful misconduct in the performance of his duties to the Company, unless and only to the extent that the court in which such Proceeding was brought shall determine that Indemnitee is fairly and reasonably entitled to indemnity. (c) Actions Where Indemnitee Is Deceased. If Indemnitee is a person who was or is a party or is threatened to be made a party to any Proceeding by reason of the fact that he is or was an Agent of the Company, or by reason of anything done or not done by him in any such capacity, and prior to, during the pendency of, or after completion of, such Proceeding, the Indemnitee shall die, then the Company shall defend, indemnify and hold harmless the estate, heirs and legatees of the Indemnitee against any and all Expenses and liabilities incurred by or for such persons or entities in connection with the investigation, defense, settlement or appeal of such Proceeding on the same basis as provided for the Indemnitee in Sections 3(a) and 3(b) above. The Expenses and liabilities covered hereby shall be net of any payments by D&O Insurance carriers or others. 4. Partial Indemnification. If Indemnitee is found under Section 3(b), 7 or 10 hereof not to be entitled to indemnification for all of the Expenses relating to a Proceeding, the Company shall indemnify the Indemnitee for any portion of such Expenses not specifically precluded by the operation of such Section 3(b), 7 or 10. 5. Mandatory Advancement of Expenses. Until a determination to the contrary under Section 7 hereof is made, and unless the provisions of Section 10 apply, the Company shall advance all Expenses incurred by Indemnitee in connection with the investigation, defense, -3- settlement or appeal of any Proceeding to which Indemnitee is a party or is threatened to be made a party covered by the indemnification in Section 3 hereof. If required by law, as a condition to such advances, Indemnitee shall, at the request of the Company, undertake in a manner satisfactory to the Company to repay such amounts advanced if it shall ultimately be determined by a final order of a court that Indemnitee is not entitled to be indemnified by the Company by the terms hereof or under applicable law. Subject to Section 6 hereof, the advances to be made hereunder shall be paid by the Company to Indemnitee within 20 days following delivery of a written request by Indemnitee to the Company, which request shall be accompanied by vouchers, invoices and similar evidence documenting the amounts requested. 6. Indemnification Procedures. -------------------------- (a) Promptly after receipt by Indemnitee of notice of the commencement or threat of any Proceeding covered hereby, Indemnitee shall notify the Company of the commencement or threat thereof, provided that any failure to so notify shall not relieve the Company of any of its obligations hereunder, except to the extent that such failure or delay increases the liability of the Company hereunder. (b) If, at the time of the receipt of a notice pursuant to Section 6(a) above, the Company has D&O Insurance in effect, the Company shall give prompt notice of the Proceeding to its insurers in accordance with the procedures set forth in the applicable policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay all amounts payable as a result of such Proceeding in accordance with the terms of such policies, and the Indemnitee shall not take any action (by waiver, settlement or otherwise) which would adversely affect the ability of the Company to obtain payment from its insurers. (c) If the Company shall be obligated to pay the Expenses of Indemnitee, the Company shall assume the defense (with counsel reasonably acceptable to Indemnitee, approval thereof not to be unreasonably withheld) of the Proceeding to which the Expenses relate and shall deliver a notice of assumption to the Indemnitee. The Company will not be liable to Indemnitee under this Agreement for any fees of counsel incurred after delivery of such notice with respect to such Proceeding or any costs of settlement not approved in advance in writing by the Company, provided that (i) Indemnitee shall have the right to employ his own counsel in any such Proceeding at Indemnitee's expense, and (ii) if (1) the employment of counsel by Indemnitee has been previously authorized by the Company, (2) the Indemnitee shall have provided the Company with an opinion of counsel stating that there is a strong argument that a conflict of interest exists between the Company and Indemnitee in the conduct of any such defense, or (3) the Company shall not have assumed the defense of such Proceeding, the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. -4- 7. Determination of Right to Indemnification. ----------------------------------------- (a) To the extent Indemnitee has been successful on the merits or otherwise in defense of any Proceeding, claim, issue or matter covered hereby, the Indemnitee need not repay any of the Expenses advanced in connection with the investigation, defense or appeal of such Proceeding. (b) If Section 7(a) is inapplicable, the Company shall remain obligated to indemnify Indemnitee, and the Indemnitee need not repay Expenses previously advanced, unless the Company, by motion before a court of competent jurisdiction, obtains a preliminary or permanent relief suspending or denying the obligation to advance or indemnification for Expenses. (c) Notwithstanding a determination by a court that the Indemnitee is not entitled to indemnification with respect to a specific Proceeding, Indemnitee shall have the right to apply to the Court of Chancery of Delaware for the purpose of enforcing the Indemnitee's right to indemnification pursuant to this Agreement. (d) Notwithstanding any other provision in this Agreement to the contrary, the Company shall indemnify Indemnitee against all Expenses incurred by the Indemnitee in connection with any Proceeding under Section 7(b) or 7(c) and against all Expenses incurred by Indemnitee in connection with any other Proceeding between the Company and Indemnitee involving the interpretation or enforcement of the rights of the Indemnitee under this Agreement unless a court of competent jurisdiction finds that the material claims and/or defenses of Indemnitee in any such Proceeding were frivolous or made in bad faith. 8. Certificate of Incorporation and By-Laws. The Company agrees that the Amended and Restated Certificate of Incorporation and By-laws of the Company in effect on the date hereof shall not be amended to reduce, limit, hinder or delay (i) the rights of Indemnitee granted hereby or (ii) the ability of the Company to indemnify Indemnitee as required hereby. The Company further agrees that it shall exercise the powers granted to it under its Amended and Restated Certificate of Incorporation, its By-laws and applicable law to indemnify any Indemnitee to the fullest extent possible as required hereby. 9. Witness Expenses. The Company agrees to reimburse Indemnitee for all Expenses, including attorneys' fees and travel costs, incurred by Indemnitee in connection with being a witness, or if Indemnitee is threatened to be made a witness, with respect to any Proceeding, by reason of his serving or having served as an Agent of the Company. 10. Exceptions. Notwithstanding any other provision herein to the contrary, the Company shall not be obligated pursuant to the terms of this Agreement: -5- (a) Claims Initiated by Indemnitee. To indemnify or advance Expenses to Indemnitee with respect to Proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense (other than Proceedings brought to establish or enforce a right to indemnification under this Agreement or the provisions of the Company's Amended and Restated Certificate of Incorporation or By-laws unless a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such Proceeding were not made in good faith or were frivolous). (b) Unauthorized Settlements. To indemnify Indemnitee under this Agreement for any amounts paid in settlement of a Proceeding covered hereby without the prior written consent of the Company to such settlement. 11. Non-exclusivity. This Agreement is not the exclusive arrangement between the Company and Indemnitee regarding the subject matter hereof and shall not diminish or affect any other rights which Indemnitee may have under any provision of law, the Company's Amended and Restated Certificate of Incorporation or By-laws, under other agreements, or otherwise. 12. Continuation After Term. Indemnitee's rights hereunder shall continue after Indemnitee has ceased acting as a director or Agent of the Company and the benefits hereof shall inure to the benefit of the heirs, executors and administrators of Indemnitee. 13. Interpretation of Agreement. This Agreement shall be interpreted and enforced so as to provide indemnification to Indemnitee to the fullest extent now or hereafter permitted by law. 14. Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable, (i) the validity, legality and enforceability of the remaining provisions of the Agreement shall not in any way be affected or impaired thereby, and (ii) to the fullest extent possible, the provisions of this Agreement shall be construed or altered by the court so as to remain enforceable and to provide Indemnitee with as many of the benefits contemplated hereby as are permitted under law. 15. Counterparts, Modification and Waiver. This Agreement may be signed in counterparts. This Agreement constitutes a separate agreement between the Company and Indemnitee and may be supplemented or amended as to Indemnitee only by a written instrument signed by the Company and Indemnitee, with such amendment binding only the Company and Indemnitee. All waivers must be in a written document. No waiver of any of the provisions of this Agreement shall be implied by the conduct of the parties. A waiver of any right hereunder shall not constitute a waiver of any other right hereunder. 16. Notices. All notices, demands, consents, requests, approvals and other communications required or permitted hereunder shall be in writing and shall be deemed to have been properly given if hand delivered (effective upon receipt or when refused), or if sent by a -6- courier freight prepaid (effective upon receipt or when refused), in the case of the Company, at the addresses listed below, and in the case of Indemnitee, at Indemnitee's address of record at the office of the Company, or to such other addresses as the parties may notify each other in writing. To Company: Compass International Services Corporation ____________________ _________ ___________, _________ XXXXX Attention: Chief Executive Officer with a copy to: Katten Muchin & Zavis 525 West Monroe Street, Suite 1600 Chicago, Illinois 60661-3693 Attention: Marguerite M. Elias, Esq. 17. Evidence of Coverage. Upon request by Indemnitee, the Company shall provide evidence of the liability insurance coverage required by this Agreement. The Company shall promptly notify Indemnitee of any change in the Company's D&O Insurance coverage. 18. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the application of the laws of the State of Delaware regarding conflicts of laws. -7- IN WITNESS WHEREOF, the parties hereto have entered into this Indemnification Agreement effective as of the date first above written. COMPASS INTERNATIONAL SERVICES CORPORATION By: _____________________________ Its: _____________________________ ATTEST: ___________________________ Secretary AGREED AND ACCEPTED: INDEMNITEE: ______________________________ -8- EX-23.1 5 CONSENT OF PRICE WATERHOUSE LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our reports relating to the respective financial statements which appear in such Prospectus. Financial Statements Date - -------------------- ---- Compass International Services Corporation September 24, 1997 The Mail Box, Inc. September 22, 1997 Mid-Continent Agencies, Inc. September 19, 1997 Impact Telemarketing Group, Inc. September 30, 1997 We also consent to the reference to us under the heading "Experts". /s/ Price Waterhouse LLP Price Waterhouse LLP Minneapolis, Minnesota October 3, 1997 EX-23.2 6 CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23.2 ARTHUR ANDERSEN LLP CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report and to all references to our Firm included in or made a part of this Registration Statement. /s/ Arthur Andersen LLP Baltimore, Maryland, October 3, 1997 EX-23.3 7 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.3 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated January 24, 1997, with respect to the financial statements of BRMC of Delaware, Inc. included in the Registration Statement (Form S-1 No. 333- ) and related Prospectus of Compass International Services Corporation for the registration of 4,715,000 shares of its common stock. /s/ Ernst & Young LLP October 3, 1997 Atlanta, Georgia EX-23.5 8 CONSENT TO BE NAMED (KENNETH W. MURPHY) EXHIBIT 23.5 Consent I, Kenneth W. Murphy, do hereby consent to the inclusion of biographical information about me, including my name, age, positions to be held with Compass International Services Corporation, a Delaware corporation (the "Company") and its subsidiary, my expected term as a director of the Company and the other information required to be provided in the Company's Registration Statement on Form S-1 (the "Registration Statement") to be filed with the Securities and Exchange Commission on or about October 3, 1997 which information will appear principally in the section entitled "Management--Executive Officers and Directors." I further consent to the filing of this consent as an exhibit to the Registration Statement. /s/ Kenneth W. Murphy ---------------------------------- Kenneth W. Murphy Dated: October 1, 1997 EX-23.6 9 CONSENT TO BE NAMED (LEEDS HACKETT) EXHIBIT 23.6 Consent I, Leeds Hackett, do hereby consent to the inclusion of biographical information about me, including my name, age, positions to be held with Compass International Services Corporation, a Delaware corporation (the "Company") and its subsidiary, my expected term as a director of the Company and the other information required to be provided in the Company's Registration Statement on Form S-1 (the "Registration Statement") to be filed with the Securities and Exchange Commission on or about October 3, 1997 which information will appear principally in the section entitled "Management--Executive Officers and Directors." I further consent to the filing of this consent as an exhibit to the Registration Statement. /s/ Leeds Hackett ---------------------------------- Leeds Hackett Dated: October 1, 1997 EX-23.7 10 CONSENT TO BE NAMED (JOHN MALONEY) EXHIBIT 23.7 Consent I, John Maloney, do hereby consent to the inclusion of biographical information about me, including my name, age, positions to be held with Compass International Services Corporation, a Delaware corporation (the "Company") and its subsidiary, my expected term as a director of the Company and the other information required to be provided in the Company's Registration Statement on Form S-1 (the "Registration Statement") to be filed with the Securities and Exchange Commission on or about October 3, 1997 which information will appear principally in the section entitled "Management--Executive Officers and Directors." I further consent to the filing of this consent as an exhibit to the Registration Statement. /s/ John Maloney ---------------------------------- John Maloney Dated: October 1, 1997 EX-23.8 11 CONSENT TO BE NAMED (LESLIE J. KIRSCHBAUM) EXHIBIT 23.8 Consent I, Les J. Kirschbaum, do hereby consent to the inclusion of biographical information about me, including my name, age, positions to be held with Compass International Services Corporation, a Delaware corporation (the "Company") and its subsidiary, my expected term as a director of the Company and the other information required to be provided in the Company's Registration Statement on Form S-1 (the "Registration Statement") to be filed with the Securities and Exchange Commission on or about October 3, 1997 which information will appear principally in the section entitled "Management--Executive Officers and Directors." I further consent to the filing of this consent as an exhibit to the Registration Statement. /s/ Les J. Kirschbaum ---------------------------------- Les J. Kirschbaum Dated: October 1, 1997 EX-23.9 12 CONSENT TO BE NAMED (EDWARD A. DUCOIN) EXHIBIT 23.9 Consent I, Edward A. DuCoin, do hereby consent to the inclusion of biographical information about me, including my name, age, positions to be held with Compass International Services Corporation, a Delaware corporation (the "Company") and its subsidiary, my expected term as a director of the Company and the other information required to be provided in the Company's Registration Statement on Form S-1 (the "Registration Statement") to be filed with the Securities and Exchange Commission on or about October 3, 1997 which information will appear principally in the section entitled "Management--Executive Officers and Directors." I further consent to the filing of this consent as an exhibit to the Registration Statement. /s/ Edward A. DuCoin ---------------------------------- Edward A. DuCoin Dated: October 1, 1997 -----END PRIVACY-ENHANCED MESSAGE-----