<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 000-23217
COMPASS INTERNATIONAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-3540815
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Penn Plaza
Suite 4430
New York, New York 10119
(Address of principal executive offices, including zip code)
(212) 967-7770
(Registrant's telephone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
Yes No X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
12,352,511 Shares of Common Stock, par value $.01 per share, at May
13, 1998
<PAGE> 2
COMPASS INTERNATIONAL SERVICES CORPORATION
FORM 10-Q
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
General Information
Compass International Services Corporation Consolidated Statement of
Operations for the Three Months Ended March 31, 1998
Compass International Services Corporation Consolidated Balance
Sheets at December 31, 1997 and March 31, 1998
Compass International Services Corporation Consolidated Statement of
Cash Flows for the Three Months Ended March 31, 1998
Compass International Services Corporation Consolidated Statement of
Stockholders' Equity for the Three Months Ended March 31, 1998
The Mail Box, Inc. Consolidated Statements of Operations for the Three
Months Ended March 31, 1997 and the Two Months Ended February 28, 1998
The Mail Box, Inc. Consolidated Balance Sheets at December 31, 1997
and February 28, 1998
The Mail Box, Inc. Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1997 and the Two Months Ended February 28, 1998
Notes to Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II OTHER INFORMATION..............................................
Item 1 Legal Proceedings..............................................
Item 6 Exhibits and Reports on Form 8-K
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
GENERAL INFORMATION
Compass International Services Corporation ("Compass" or the "Company") was
organized to create a leading integrated provider of outsourced business
services to public and private entities throughout a customer's sales cycle. On
March 4, 1998, simultaneously with the closing of its initial public offering
(the "Offering") of its common stock (the "Common Stock"), Compass acquired all
of the outstanding capital stock of five companies providing accounts
receivable management services, mailing services and teleservices (the
"Founding Companies") in separate purchase transactions (the "Acquisitions").
The Founding Companies include The Mail Box, Inc. ("Mail Box"), National Credit
Management Corporation ("NCMC"), B.R.M.C. of Delaware, Inc. ("Bomar"),
Mid-Continent Agencies Inc. ("MCA") and Impact Telemarketing Group, Inc.
("Impact").
COMPASS INTERNATIONAL SERVICES CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share data)
(UNAUDITED)
<TABLE>
Three Months
Ended
March 31, 1998
--------------
<S> <S>
Revenues........................................................ $ 8,552
Cost of Revenues................................................ 5,164
--------------
Gross Profit.................................................. 3,388
Selling, general and administrative expenses.................... 2,478
--------------
Operating income 910
Other (income) expense:
Interest expense.............................................. 35
Interest income............................................... (39)
---------------
Income before income taxes.................................... 914
Provision for income taxes...................................... 416
---------------
Net income...................................................... $ 498
===============
Earnings per share:
Basic $ 0.10
===============
Diluted $ 0.10
===============
Weighted average shares outstanding:
Basic 5,114,237
===============
Diluted 5,150,450
===============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 4
COMPASS INTERNATIONAL SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
December 31, 1997 March 31, 1998
(AUDITED) (UNAUDITED)
----------------- --------------
Current Assets
Cash and cash equivalents $ - $15,616
Trade and other receivables, less
allowance of $201 at March 31, 1998 - 12,337
Inventory - 690
Postage on hand - 1,812
Prepaid expenses and other current assets - 1,402
----------------- --------------
Total current assets - 31,857
Deferred offering costs 3,942 -
Property and equipment, net - 9,069
Goodwill - 51,152
Other assets - 2,955
----------------- --------------
Total assets $3,942 $95,033
================= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short term debt $1,045 $ 2,018
Accounts payable and accrued expenses 2,747 10,428
Collections due to clients - 1,934
Postage advances and deposits - 1,890
Income taxes payable - 858
Capital lease obligations - 267
----------------- --------------
Total current liabilities 3,792 17,395
Long-term debt - 145
Deferred income taxes - 431
Capital lease obligations - 1,329
Other non current liabilities - 262
----------------- --------------
Total liabilities 3,792 19,562
----------------- --------------
Stockholders' equity:
Preferred stock, 10,000,000 shares authorized,
no shares issued or outstanding
Common Stock: 50,000,000 share authorized,
$.01 par value, 1,682,769 and 11,833,460 shares
issued and outstanding at December 31, 1997
and March 31, 1998, respectively 17 118
Additional paid-in capital 133 71,352
Retained earnings - 4,001
----------------- --------------
Total stockholders' equity 150 75,471
----------------- --------------
Total liabilities and
stockholders' equity $3,942 $95,033
================= ==============
See Notes to Consolidated Financial Statements
<PAGE> 5
COMPASS INTERNATIONAL SERVICES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(UNAUDITED)
Three Months
Ended
March 31, 1998
- ----------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 498
Adjustments to Net income to net cash
provided by operating activities:
Depreciation 205
Amortization 130
CHANGES IN OPERATING ASSETS AND LIABILITIES, NET
OF EFFECT FROM ACQUISITIONS:
Accounts receivable 105
Inventories 32
Postage on hand (377)
Prepaid expenses and other assets (2)
Other liabilities 51
Accounts payable and accrued expenses 388
Collections due to clients 461
Postage advances and deposits 474
Income taxes payable 357
---------------
Net cash provided by operating activities 2,322
---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property & equipment (498)
Business acquisitions net of cash acquired (15,053)
---------------
Net cash used in investing activities (15,551)
---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital lease obligations (70)
Net proceeds from initial public offering 41,926
Repayment of debt (13,011)
---------------
Cash flows from financing activities 28,845
---------------
Net increase in cash and cash equivalents 15,616
---------------
Cash and cash equivalents, beginning of period 0
Cash and cash equivalents at end of period $ 15,616
---------------
Supplemental Disclosures of cash flow information
Cash paid for interest $ 88
===============
Cash paid for income taxes $ 2
===============
Non cash investing activities:
Fair value of net assets acquired $ 64,001
Value of common stock issued (45,660)
Value of warrants issued (50)
---------------
Net cash paid 18,291
Cash acquired in acquisitions (3,238)
---------------
Net cash paid for acquisitions $ 15,053
===============
See Notes to Consolidated Financial Statements
<PAGE> 6
COMPASS INTERNATIONAL SERVICES CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(In thousands, except share data)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings Total
------------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 1,682,769 $ 17 $ 133 $ 0 $ 150
Shares issued in offering 4,715,000 47 45,995 - 46,042
Offering Costs - (5,181) - (5,181)
Shares issued for Acquisitions 5,435,691 54 16,370 - 16,424
Retained earnings of Mailbox, accounting acquiror - 3,503 3,503
Increase in value of shares exchanged - 13,985 - 13,985
for Compass pre-offering shares
Other - 50 - 50
Net Income - - 498 498
----------- ---- ------- ------ -------
Balance, March 31, 1998 11,833,460 $118 $71,352 $4,001 $75,471
---------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 7
THE MAIL BOX, INC.
(Accounting Acquiror)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(UNAUDITED)
Three Months Two Months
Ended Ended
March 31, 1997 February 28, 1998
-------------- -----------------
<TABLE>
<S> <C> <C>
Revenues................................ $8,064 $5,866
Cost of Revenues........................ 5,308 3,814
-------------- -----------------
Gross Profit.......................... 2,756 2,052
Selling, general and administrative
expenses.............................. 1,816 1,392
-------------- -----------------
Operating income...................... 940 660
Interest expense...................... 95 71
-------------- -----------------
Income before income taxes............ 845 589
Provision for income taxes.............. 301 217
-------------- -----------------
Net income.............................. $ 544 $ 372
============== =================
</TABLE>
<PAGE> 8
THE MAIL BOX, INC.
(Accounting Acquiror)
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
December 31, 1997 February 28, 1998
ASSETS (AUDITED) (UNAUDITED)
- ------ ----------------- -----------------
<S> <C> <C>
Current assets:
Cash $ 16 $ 239
Accounts receivable, net of allowance for doubtful accounts of $125 and
$125, at December 31, 1997 and February 28, 1998 4,481 4,411
Inventories 733 722
Postage on hand 1,231 1,435
Prepaid expenses and other current assets 154 155
Deferred income taxes 44 44
--------------- -----------------
Total current assets 6,659 7,006
Property and equipment, net 4,327 4,534
Other assets 304 274
--------------- -----------------
Total assets $ 11,290 $ 11,814
=============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 1,168 $ 1,191
Note payable, current portion 471 328
Secured equipment financing facilities, current portion 329 434
Capitalized lease obligations, current portion 423 423
Accounts payable 1,373 1,519
Accrued expenses and other liabilities 1,235 1,192
Income taxes payable 416 181
Postage advances and deposits 950 1,416
--------------- -----------------
Total current liabilities 6,365 6,684
Long-term liabilities:
Note payable, net of current portion 242 326
Secured equipment financing facilities, net of current portion 712 533
Capitalized lease obligations, net of current portion 622 548
Deferred income taxes 165 167
--------------- -----------------
Total liabilities 8,106 8,258
Stockholders' equity:
Common stock, $.10 par value, 500,000 shares authorized, 138,900 and 138,900 shares
issued and 102,900 and 96,900 shares outstanding at December 31, 1997 and
February 28, 1998, respectively 14 14
Additional paid in capital 1,126 1,126
Treasury stock at cost 36,000 shares at December 31, 1997 (1,087) (1,087)
Retained earnings 3,131 3,503
--------------- -----------------
Total stockholders' equity 3,184 3,556
--------------- -----------------
Total liabilities and stockholders' equity $ 11,290 $ 11,814
=============== =================
</TABLE>
<PAGE> 9
THE MAIL BOX, INC.
(Accounting Acquiror)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
<TABLE>
Three Months Two Months
Ended Ended
March 31, 1997 February 28, 1998
-------------- -----------------
<S> <C> <C>
Cash Flows from Operating Activities:
- -------------------------------------
Net Income $ 544 $ 372
Adjustments to Net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 230 168
Changes in deferred taxes -- 2
Changes in operating assets & liabilities:
- -----------------------------------------
Accounts receivable (1,898) 70
Inventory 90 11
Postage on hand 3,593 (204)
Prepaid expense and other assets (105) 29
Income taxes payable 101 (235)
Postage advances and deposits (2,956) 466
Accounts payable and accrued expenses (488) 103
-------------- -----------------
Net cash (used in) provided by operating activities (889) 782
-------------- -----------------
Cash flows from investing activities:
- -------------------------------------
Purchases of property & equipment (325) (375)
-------------- -----------------
Net cash used in investing activities ($325) ($375)
-------------- -----------------
Cash flows from financing activities:
- -------------------------------------
Net borrowings on line of credit (101) 23
Repayments of capital lease obligations (486) (74)
Repurchase of treasury stock (987) --
Repayment of debt (327) (133)
Proceeds from long term debt 1,751 --
-------------- -----------------
Net cash used in financing activities (150) (184)
-------------- -----------------
Net (decrease) increase in cash and cash equivalents $(1,364) 223
-------------- -----------------
Cash and cash equivalents, beginning of period 1,419 16
Cash and cash equivalents at end of period $ 55 $ 239
-------------- -----------------
Supplemental Disclosure of cash flow information
Cash paid for interest $ 92 $ 71
============== =================
Cash paid for income taxes $ 200 $ 450
============== =================
</TABLE>
<PAGE> 10
COMPASS INTERNATIONAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
Compass was formed in April, 1997 and organized to create a leading
provider of outsourced business services to public and private entities. On
March 4, 1998, Compass acquired the Founding Companies for consideration
consisting of cash and Common Stock. The closing of the Acquisitions and the
Offering occurred on that date.
The Acquisitions were accounted for using the purchase method of
accounting. For financial statement purposes, Mail Box, one of the Founding
Companies, has been identified as the accounting acquiror. Accordingly, in
recording the Acquisitions the accounts of Mail Box continue to be reflected on
its historic basis of accounting, while the aggregate purchase price for the
other Founding Companies was allocated based on the fair value of assets
acquired and liabilities assumed. The allocations were based on preliminary
estimates and may be revised as additional information becomes available. The
excess of purchase price over the net assets acquired of approximately $51.2
million is being amortized on a straight-line basis over lives ranging from
15-40 years. The results of operations of the Founding Companies have been
included in the consolidated results of the Company since the Acquisitions.
The interim financial statements as of March 31, 1998 are unaudited.
However, they have been prepared in accordance with Rule 10-01 of Regulation S-X
and, in the opinion of management, all adjustments, consisting only of normal
recurring adjustments necessary to fairly present the financial position,
results of operations and cash flows with respect to the interim statements,
have been included. The results of operations for the interim period are not
necessarily indicative of the results for the year ending December 31, 1998.
These statements should be read in conjunction with the financial statements and
notes thereto of Compass and the Founding Companies included in the Company's
Registration Statement on Form S-1 (No. 333-37205), as amended, filed with the
Securities and Exchange Commission in connection with the Offering.
2. CREDIT FACILITY
On April 23, 1998, Compass entered into an agreement (the "Revolver")
with Bank of America, NT & SA together with a group of other financial
institutions, with respect to a $35 million revolving credit facility. The
Revolver may be used for acquisitions, capital expenditures, refinancing debt,
and for general corporate purposes. The Revolver requires Compass to comply with
various covenants which include maintenance of certain financial ratios,
restrictions on additional indebtedness and restrictions on liens, guarantees,
investments, capital expenditures, sales of assets, mergers and acquisitions,
and dividends. Indebtedness under the Revolver bears interest based on an
initial increment of 125 basis point over the Interbank Offered Rate or upon a
Base Rate, as defined therein. The Revolver has a three year term. The Revolver
is secured by the common stock of the Founding Companies, their subsidiaries and
other companies that Compass has acquired or may acquire in the future.
In addition, if the Company fails to maintain specified financial ratios,
the lenders may obtain a security interest in substantially all the
assets of the Company and its subsidiaries.
<PAGE> 11
3. CAPITAL STOCK
In addition to 1,682,769 shares of Compass common shares outstanding at December
31, 1997, on March 4, 1998, Compass issued an aggregate of 9,535,691 shares of
Common Stock in connection with the Acquisitions (5,435,691 shares) and the
Offering (4,100,000 shares). Shares issued in connection with the Offering were
sold at a price to the public of $10.50 per share. The net proceeds to Compass
from the Offering (after deducting underwriting discounts, commissions and
offering expenses) were approximately $34.9 million. Of this amount, $17.9
million represents the cash consideration paid to Founding Company shareholders.
An additional $13.0 million was paid by Compass to repay certain indebtedness of
Founding Companies. On March 25, 1998, the underwriters' overallotment option
was exercised and an additional 615,000 shares were issued, yielding net
proceeds (after deducting underwriting discounts) of $6.0 million.
4. EARNINGS PER SHARE
The period ended March 31, 1998 represents the results of operations of Compass
since January 1, 1998 and the Founding Companies since March 1, 1998. The
computation of basic earnings per share ("Basic EPS") for the three months
ended March 31, 1998 reflects the number of shares of Common Stock outstanding
(1,682,769) attributable to BGL Capital Partners, LLC and Compass management
from January 1, 1998 until February 27, 1998, the number of shares following the
Acquisitions and Offering (11,218,460) from February 27, 1998 until the
underwriters' overallotment option was exercised on March 25, 1998 and
11,833,460 shares thereafter until March 31, 1998. Diluted earnings per share
("Diluted EPS") includes the effect of options and warrants outstanding. Compass
was not formed until April 1997 and, therefore, there were no historical
operating activities in the period ended March 31, 1997 for which to compute
earnings per share.
Shares used in the calculation of EPS for the quarter were:
<TABLE>
<S> <C>
Basic (weighted average shares outstanding) 5,114,237
Effect of dilutive potential securities 36,213
---------
Shares used in calculation of Diluted EPS 5,150,450
---------
</TABLE>
The computation of historical Diluted EPS for the three months ended March 31,
1998 assumes the exercise of option shares (720,000) granted to management,
directors and employees. The proceeds of such exercise are assumed to be used to
repurchase shares in the open market based on the average per share closing
price from the date of the Offering through March 31, 1998. For this
computation, the average closing share price from February 27, 1998 to March 31,
1998 was $12.23. The shares used in the computation of Diluted EPS exclude
warrants to purchase 100,000 shares as the exercise price was greater than the
average closing market price of Common Stock.
5. PRO FORMA RESULTS OF OPERATIONS
The unaudited pro forma financial information for the three months ended March
31, 1997 and 1998 includes the results of Compass combined with the Founding
Companies as if the Acquisitions and the Offering had occurred at the beginning
of each year. The pro forma financial information includes the effects of: (i)
the Acquisitions and the offering; (ii) certain adjustments to salaries,
bonuses, and benefits to former owners and key management of the Founding
Companies (the "Compensation Differential"); (iii) provision for income taxes as
if income were subject to corporate federal and state income taxes during the
period; (iv) repayment of long term debt of $13.0 million; and (v) amortization
of goodwill and other intangible assets resulting from the Acquisitions. Prior
to the Acquisitions, the Founding Companies were not under common control of
management. Consequently, the pro forma financial information may not be
indicative of the results of operations had the Acquisitions and Offering taken
place at the beginning of each year.
<PAGE> 12
The estimated pro forma results were (in thousands except per share amounts):
<TABLE>
<CAPTION>
March 31,
1997 1998
------- -------
<S> <C> <C>
Pro Forma Revenues $21,559 $24,586
Pro Forma Net Income $ 1,439 $ 1,514
Pro forma Basic Earnings Per Share $ 0.14 $ 0.14
</TABLE>
Pro forma Basic EPS was computed using a share count that included (i) 1,682,769
shares issued to BGL Capital Partners, LLC, and management of Compass; (ii)
5,435,691 shares issued to owners of the Founding Companies in connection with
the Acquisitions; and (iii) 3,342,471 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 pay certain indebtedness assumed by
Compass in the Acquisitions.
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements of Compass, Mail Box and the other Founding Companies and related
notes thereto included herein and in the Company's Registration Statement on
Form S-1 (No. 333-37205), as amended, filed with the Securities and Exchange
Commission in connection with the Offering.
Presented below are discussions of the Company's results of operations on a
historic and pro forma basis. Since the Company was not formed until April, 1997
there are no comparative prior year historic operating results for the first
quarter. Furthermore, since the Acquisitions did not occur until March 4, 1998,
the 1998 historic operating results include only one month of results from the
Founding Companies. Accordingly, management has also provided a discussion of
pro forma operating results which readers may find useful. Certain statements
contained in this discussion regarding future events and financial performance
are not based on historical facts and, as such, constitute "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, that involve uncertainties and risk. There can be no assurance that
actual results will not differ materially from the Company's expectations.
Factors that could cause such differences include the timing and pace of
acquisitions, the Company's ability to achieve expected growth in revenues,
earnings and operating efficiencies, and other risks described in the Company's
Registration Statement.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998-HISTORICAL
As Compass was not formed until April, 1997, there are no historical comparable
results with which to compare results for the three months ended March 31,
1998. Historical results of operations reflect the activities of Compass and
the Founding Companies since February 28, 1998.
REVENUES. Revenues for the three months ended March 31, 1998 were $8.6 million.
OPERATING EXPENSES. Operating expenses for the three months ended March 31,
1998 were $5.2 million, or 60.4% of revenues. Gross profit for the three months
ended March 31, 1998 was $3.4 million, or 39.6% of revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense for the three months ended March 31, 1998 were $2.5
million, or 28.9% of revenues. Selling, general and administrative expense for
this period included costs of public ownership that totaled $270,000.
OPERATING INCOME. Operating income from operations was $910,000, or 10.6% of
revenues, for the three months ended March 31, 1998.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31,
1997-PRO FORMA
Pro forma results presented below assume Acquisitions occurred on January 1,
1997 and reflect an adjustment for the Compensation Differential.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1997 1998
---------------------------------------
<S> <C> <C>
Revenues $21,559 100.0% $24,526 100.0%
Operating Expenses 12,909 59.9 14,977 61.1
Gross Profit 8,650 40.1 9,549 38.9
Selling General & Administrative 5,533 25.7 6,334 25.8
Goodwill Amortization 382 1.8 380 1.5
Operating Income 2,735 12.7 2,835 11.6
</TABLE>
REVENUES. Revenues increased $3.0 million, or 13.8%, from $21.6 million in the
three months ended March 31, 1997 to $24.5 million in the three months ended
March 31, 1998. The increase was primarily attributable to increased teleservice
call volume at Impact and increases in electronic inserting for existing mail
service customers at Mail Box.
OPERATING EXPENSES Operating expenses increased $2.1 million, or 16.0%, from
$12.9 million in the three months ended March 31, 1997 to $15.0 million in the
three months ended March 31, 1998. Operating expenses increased as a percentage
of revenues as a result of higher wages in call centers at teleservice and
collection operations. Mail service operating expenses declined as a percentage
of revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $800,000, or 14.5%, from $5.5
million in the three months ended March 31, 1997 to $6.3 million in the three
months ended March 31, 1998. Included in administrative expenses in the three
months ended March 31, 1998 was approximately $270,000 of expenses associated
with public ownership that did not exist in the three months ended March 31,
1997. As a percentage of revenue, selling, general and administrative expenses
remained unchanged. Excluding the cost of public ownership, selling, general and
administrative expense would have decreased as a percentage of revenues to
24.7%.
OPERATING INCOME. Operating income increased $100,000, or 3.7%, from $2.7
million in the three months ended March 31, 1997 to $2.8 million in the three
months ended march 31, 1998. Excluding the cost of public ownership, operating
income would have been $3.1 million, or 12.7% of revenues, in the three months
ended March 31, 1998.
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY AND CAPITAL TRANSACTIONS
During the three months ended March 31, 1998, net cash provided by operating
activities of Compass and the Founding Companies was approximately $2.3
million. Capital expenditures during the period were approximately $500,000.
Repayment of Founding Company debt was approximately $13.0 million.
Approximately $17.9 million was used to make cash payments to Founding Company
shareholders as part of the Acquisitions.
OFFERING AND ACQUISITIONS
On March 4, 1998, Compass issued an aggregate of 9,535,691 shares of Common
Stock in connection with the Acquisitions (5,435,691 shares) and the Offering
(4,100,000 shares). Shares issued in connection with the Offering were sold at
a price to the public of $10.50 per share. The net proceeds to Compass from the
Offering (after deducting underwriting discounts, commissions and offering
expenses) were approximately $34.9 million. Of this amount, $17.9 million
represents the cash consideration paid to Founding Company shareholders. An
additional $13.0 million was paid by Compass to repay certain indebtedness of
Founding Companies. On March 25, 1998, the underwriters' overallotment option
was exercised. Accordingly, an additional 615,000 shares were issued, yielding
net proceeds (after deducting underwriting discounts) of $6.0 million. The
remaining cash will be used for acquisitions and general corporate purposes.
CREDIT FACILITY
On April 23, 1998, Compass entered into an agreement (the "Revolver") with Bank
of America, NT & SA together with a group of other financial institutions, with
respect to a $35 million revolving credit facility. The Revolver may be used for
acquisitions, capital expenditures, refinancing debt, and for general corporate
purposes. The Revolver requires Compass to comply with various covenants which
include maintenance of certain financial ratios, restrictions on additional
indebtedness and restrictions on liens, guarantees, investments, capital
expenditures, sales of assets, mergers and acquisitions, and dividends.
Indebtedness under the Revolver bears interest based on an initial increment of
125 basis points over the Interbank Offered Rate or upon a Base Rate, as defined
therein. The Revolver has a three year term. The Revolver is secured by the
common stock of the Founding Companies, their subsidiaries and other companies
that Compass has acquired or may acquire in the future. In addition, if the
Company fails to maintain specified financial ratios, the lenders may obtain a
security interest in substantially all the assets of the Company and its
subsidiaries.
<PAGE> 15
RECENT DEVELOPMENTS
In April, 1998, Compass acquired a mail services provider in Tulsa, Oklahoma
for cash and stock. Compass issued 234,939 common shares in connection with
the acquisition. In May, 1988, Compass purchased a mail services provider in
Dallas, Texas for cash and stock. Compass issued 284,112 common shares in
connection with this acquisition Also in May, Compass purchased a provider of
letter-based collection service for cash and notes. The aggregate cash
consideration paid in connection with these three acquisitions was $7.2 million.
The Company will account for these acquisitions using the purchase method
of accounting.
Compass is continuing to pursue acquisitions opportunities. The Company cannot
predict, however, the timing, size or success of any acquisition effort, nor the
associated potential capital commitments. The Company intends to fund future
acquisitions primarily through a combination of stock and cash from the
remaining proceeds of the Offering, bank borrowings and cash flows generated by
the Founding Companies and other acquired operations. The Company has
registered 3,000,000 shares of its Common Stock under the Securities Act of
1933 for use as consideration in future acquisitions. To the extent that
sources of financing other than those described above are required to fund
future acquisitions, if any, there can be no assurance that the Company can
secure such financing if and when it may be needed or upon terms acceptable to
the Company.
TECHNOLOGY
To continue growth through internal sources and acquisitions, it will be
necessary for Compass to make capital commitments for information systems
technology, among others. Compass expects that the financial systems software
and hardware acquired in April, 1998 will enable the Founding Companies and
operations of other acquired businesses to improve financial reporting controls
and the timeliness and availability of periodic financial data. While the final
date for the completion of this system implementation is uncertain, the Company
estimates that the capital required in connection with this technology project
will exceed $300,000 in 1998. Additionally, the capital expenditures planned for
1998 which relate to equipment needed to maintain and upgrade the operation
systems and processing equipment of the Founding Companies are expected to total
approximately $4.2 million.
YEAR 2000
Based on the review by an independent system consultant of Compass and the
Founding Companies, no material issues relating to the Year 2000 exist.
Financial reporting systems that are not compliant with the Year 2000
requirements will be replaced before December 31, 1998 with software (described
in "TECHNOLOGY") that has been Year 2000 certified. The Year 2000 issues that
exist relative to the operating systems of the Compass commercial collection
business have been identified and are currently being corrected as part of a
systems upgrade that is currently under way. The estimated cost of this system
upgrade is approximately $600,000. Completion of this upgrade is expected prior
to December 31, 1998.
SEASONALITY
The operations of Compass and the Founding Companies are not subject to
seasonal factors that have a material impact on results from operations.
<PAGE> 16
Part II OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS
Disputes Relating to the APS Patent
The Company is engaged in certain disputes concerning a patent (the "APS
Patent") owned by the Company and used in its APS process to provide telephonic
check drafting services. The following is a summary of such disputes:
In January 1994, NCMC entered into an Intellectual Property Licensing
Agreement (the "1994 Agreement") with Autoscribe Corporation ("ASC") and Robert
E. Pollin (the "Inventor"). Pursuant to the 1994 Agreement, NCMC was granted,
with certain exceptions, the exclusive right to use certain intellectual
property that was at the time the subject of a patent application. In March
1996, NCMC purchased the intellectual property from ASC and the Inventor
pursuant to an Intellectual Property Purchase and License Agreement (the "1996
Agreement") that superseded the 1994 Agreement. The APS Patent was issued in
April 1996 and assigned to NCMC.
NCMC is a plaintiff in two lawsuits (the "Patent Infringement Lawsuits")
alleging that a competitor and a former customer willfully infringed the APS
Patent. In June 1996, NCMC filed a lawsuit (the "Western Union Lawsuit")
against Western Union Financial Services, Inc. in the United States District
Court for the Southern District of New York, and in January 1998, NCMC amended
its complaint to add Affiliated Computer Services, Inc., a software provider,
as a defendant. In December 1996, NCMC filed suit (the "Discover Lawsuit")
against Discover Card Services, Inc., Novus Services, Inc. and Dean Witter,
Discover & Co. in the United States District Court for the District of
Maryland. NCMC's claims against the defendants in the Patent Infringement
Lawsuits seek lost profits, damages, attorneys' fees and costs, treble damages
for willful infringement and punitive damages. The defendants in the Patent
Infringement Lawsuits have denied infringing the APS Patent and have challenged
the validity of the APS Patent in a counterclaim. Management believes that the
counterclaim is without merit. The parties to the Western Union Lawsuit are
currently engaged in discovery. In the Discover Lawsuit, on March 5, 1998,
following motions by both parties, the judge granted defendants' motion for
summary judgment. NCMC has appealed the ruling. Compass has entered into an
agreement with NCMC and its stockholders with respect to the allocation of
damages, if any, awarded to NCMC in the Patent Infringement Lawsuits. See
"Certain Transactions."
In April 1997, ASC and the Inventor filed an arbitration claim against NCMC
seeking rescission of the 1996 Agreement and certain monetary damages. In May
1997, NCMC filed a lawsuit against ASC and the Inventor in the Circuit Court
for Montgomery County, Maryland alleging that ASC and the Inventor have
violated NCMC's ownership rights to the APS Patent and exclusive rights to use
the intellectual property by continuing to solicit maintenance customers and
provide maintenance services in contravention of the 1996 Agreement. NCMC seeks
unspecified damages and injunctive relief. ASC and the Inventor have denied
NCMC's claims and have filed a counterclaim seeking rescission of the 1996
Agreement, reassignment of the APS Patent to the Inventor, reinstatement of the
1994 Agreement, the ability to participate as a plaintiff in the Patent
Infringement Lawsuits, unspecified damages and other relief. ASC and the
Inventor allege that the 1996 Agreement should be rescinded because the Inventor
lacked the capacity to sign the 1996 Agreement and because the 1996 Agreement
was the product of misrepresentations and duress and is not supported by
adequate consideration. ASC and the Inventor also allege that (i) NCMC was and
is required under the 1996 Agreement to pay royalties at a rate equal to 7.25%
of NCMC's APS-related revenues rather than the 4.5% rate at which they have
been paid; (ii) NCMC improperly offset against the royalties certain litigation
expenses incurred by it in the Patent Infringement Lawsuits; (iii) NCMC failed
to properly prosecute the Patent Infringement Lawsuits; and (iv) NCMC was
required under the 1994 Agreement to pay royalties at the rate of 7.25% for the
period between March 1, 1995 and March 1, 1996, rather than the 4.5% rate at
which they were paid during such period. NCMC has denied these allegations. The
litigation is currently in the discovery phase.
<PAGE> 17
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 conditions.
On February 18, 1998, the Inventor sent NCMC a notice of claim which alleges
that NCMC, by attempting to enforce the non-competition provisions of the 1996
Agreement, has misused the APS Patent thereby rendering the APS Patent
unenforceable. The notice states that ASC and the Inventor intend to hold NCMC
liable for any losses or damages arising from such alleged misuse. On February
24, 1998, NCMC sent the Inventor a notice of claim in which NCMC denied the
allegations of patent misuse, alleged breaches by the Inventor of certain
warranties and covenants set forth in the 1996 Agreement and stated that NCMC
intends to hold the Inventor and ASC liable for any damages caused by the
position taken by the Inventor in the February 18 notice. Should these recent
claims result in additional litigation, NCMC intends to vigorously pursue its
breach of contract claims and vigorously defend against the allegations of
patent misuse and unenforceability. While management believes that the
Inventor's allegations are without merit, if such claims are litigated, a
decision adverse to NCMC with respect to these claims could have material
adverse effect on the Company's results of operations and financial condition.
Other Disputes
In October 1997, Mid-Continent and its New York subsidiary filed a lawsuit in
the Sate of New York, Supreme Court, County of Erie (the "New York Supreme
Court") against Vincent S. Burgio, Eric R. Main and Michael Luksch (all of whom
are former employees of Mid-Continent's subsidiary), as well as Continental
Commercial Group of New York, Inc. and L.A. Commercial Group, Inc. The
complaint alleges (i) breach of employment agreement; (ii) breach of the duty
of loyalty; (iii) interference with business relationships; (iv) conversion of
confidential information; and (v) misappropriation of trade secrets, and seeks
injunctive relief and unspecified damages. The litigation is currently in the
discovery stage.
In February 1998, the defendants in the above-described lawsuit filed two
lawsuits in the New York Supreme Court. The first lawsuit, filed by Mr. Burgio,
names as defendants Mid-Continent, its New York subsidiary and William
Vallecourse, an employee of the subsidiary, and alleges (i) breach of contract;
(ii) breach of contract and constructive discharge; (iii) fraud; (iv) tortious
interference with employment contract; and (v) unjust enrichment. The complaint
seeks aggregate damages in excess of $1.3 million. The second lawsuit, filed by
Messrs. Burgio, Main and Luksch, names as defendants Mid-Continent, its New
York subsidiary, Les J. Kirschbaum, Mr. Vallecourse and Michelle Helmer (an
employee of the New York subsidiary), alleges defamation of Messrs. Burgio,
Main and Luksch and seeks aggregate compensatory damages of $1.5 million in
addition to punitive damages. Mid-Continent believes that the allegations
against it and its co-defendants are without merit, however, because this
litigation is at an early state, its outcome cannot be predicted.
Mid-Continent's stockholders have agreed to indemnify the Company for losses
and damages, if any, arising from these lawsuits.
The Company is not involved in any other legal proceedings material to the
business, financial condition or results of operations of the Company.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
Not Applicable
B. FORM 8-K
No reports on Form 8-K were filed during the period.
<PAGE> 18
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 14, 1998 COMPASS INTERNATIONAL SERVICES
CORPORATION
By: /s/ Richard A. Alston
-------------------------------
Richard A. Alston
Chief Financial Officer
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