<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 JUNE 30, 1999
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 2-3540815
(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 X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
As of August 12, 1999, 14,405,973 Shares of Common Stock, par value $.01 per
share, were outstanding.
<PAGE> 2
COMPASS INTERNATIONAL SERVICES CORPORATION
FORM 10-Q
PART I FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
General Information 3
Consolidated Statements of Operations for the
Three Months Ended June 30, 1999 and 1998 3
Consolidated Statements of Operations for the
Six Months Ended June 30, 1999 and 1998 4
Consolidated Balance Sheets at June 30, 1999 and
December 31, 1998 5
Consolidated Statement of Stockholders' Equity for
the Six Months Ended June 30,1999 6
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1999 and 1998 7
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 23
PART II OTHER INFORMATION
Item 1 Legal Proceedings 24
Item 6 Exhibits and Reports on Form 8-K 25
2
<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 provider of outsourced business services to public
and private entities throughout the United States. 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 included The Mail Box, Inc., National Credit Management Corporation,
B.R.M.C. of Delaware, Inc., Mid-Continent Agencies Inc. and Impact Telemarketing
Group, Inc. Prior to the Offering and the closing of the Founding Companies
Acquisitions, Compass had no operating activities. Subsequent to the Offering,
Compass completed nine additional acquisitions and reorganized certain of its
operating entities.
COMPASS INTERNATIONAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net revenues $ 39,873 $ 33,622
Cost of revenues 28,169 22,732
------------ ------------
Gross profit 11,704 10,890
Selling, general and
administrative expenses 10,016 6,552
Merger related expenses (see note 7) 1,009 --
Goodwill amortization 889 516
------------ ------------
Operating (loss) income (210) 3,822
Interest expense 1,346 181
------------ ------------
(Loss) income before (benefit) provision
for income taxes (1,556) 3,641
(Benefit) provision for income taxes (114) 1,663
------------ ------------
Net (loss) income $ (1,442) $ 1,978
------------ ============
Net (loss) income per share:
Basic and diluted $ (0.10) $ 0.16
============ ============
Weighted average number of
shares outstanding:
Basic 14,405,973 12,523,516
============ ============
Diluted 14,405,973 12,665,891
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE> 4
COMPASS INTERNATIONAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net revenues $ 81,593 $ 42,174
Cost of revenues 56,809 28,100
------------ ------------
Gross profit 24,784 14,074
Selling, general and
administrative expenses 19,183 8,696
Merger related expenses (see note 7) 1,312 --
Goodwill amortization 1,777 646
------------ ------------
Operating income 2,512 4,732
Interest expense 2,520 177
------------ ------------
(Loss) income before provision
for income taxes (8) 4,555
Provision for income taxes 578 2,079
------------ ------------
Net (loss)income $ (586) $ 2,476
============ ============
Net (loss) income per share:
Basic and diluted $ (0.04) $ 0.28
============ ============
Weighted average number of
shares outstanding:
Basic 14,405,973 8,839,344
============ ============
Diluted 14,405,973 8,929,144
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE> 5
COMPASS INTERNATIONAL SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---- ----
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,189 $ 8,606
Cash held in trust for clients 5,153 4,346
Trade receivables, less
allowance of $638 at June 30, 1999
and $725 at December 31, 1998 20,453 20,704
Inventory 1,433 1,282
Postage on hand 1,505 2,067
Prepaid expenses and other current assets 2,223 1,819
Deferred income taxes 877 877
-------- --------
Total current assets 38,833 39,701
Property and equipment, net 19,923 18,285
Goodwill, net 127,178 127,857
Other assets 1,410 1,495
-------- --------
Total assets $187,344 $187,338
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Credit Facility $ 53,700 $ --
Trade payables 7,423 6,783
Accrued expenses 7,777 5,540
Accrued earn-outs payable 1,339 8,904
Collections due to clients 5,153 4,346
Customer postage advances and deposits 2,578 2,484
Notes payable 6,682 1,924
Capital lease obligations 1,845 1,798
-------- --------
Total current liabilities 86,497 31,779
Credit facility -- 48,000
Notes payable 1,616 7,760
Capital lease obligations 2,662 2,644
Deferred income taxes 273 273
-------- --------
Total liabilities 91,048 90,456
-------- --------
Stockholders' equity:
Preferred stock, 10,000,000 shares authorized
$.01 par value, no shares issued or outstanding -- --
Common stock, 50,000,000 shares authorized
$.01 par value, 14,405,973 and 13,804,846 shares
issued and outstanding at June 30, 1999 and
December 31, 1998, respectively 144 138
Additional paid-in capital 87,536 85,041
Value of shares to be issued -- 2,501
Retained earnings 8,616 9,202
-------- --------
Total stockholders' equity 96,296 96,882
-------- --------
Total liabilities and stockholders' equity $187,344 $187,338
======== ========
</TABLE>
See notes to Consolidated Financial Statements.
5
<PAGE> 6
COMPASS INTERNATIONAL SERVICES CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 13,804,846 $ 138 $ 87,542 $ 9,202 $ 96,882
Shares issued for earn-outs 601,127 6 (6) -- --
Net loss -- -- -- (586) (586)
---------- ---------- ---------- ---------- ----------
Balance, June 30,1999 14,405,973 $ 144 $ 87,536 $ 8,616 $ 96,296
========== ========== ========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE> 7
COMPASS INTERNATIONAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (586) 2,476
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation 2,205 1,107
Amortization 1,777 646
CHANGES IN OPERATING ASSETS AND LIABILITIES, NET
OF EFFECT FROM ACQUISITIONS:
Cash held in trust for clients (807) --
Trade receivables 251 1,969
Inventory (151) (140)
Postage on hand 562 (423)
Prepaid expenses and other current assets (404) (672)
Other assets 16 335
Trade payables and accrued expenses 2,877 (1,276)
Collections due to clients 807 382
Customer postage advances and deposits 94 431
Income taxes payable -- (63)
Other non-current liabilities -- (8)
--------- ---------
Net cash provided by operating activities 6,641 4,764
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property & equipment (2,644) (3,055)
Business acquisitions, net of cash acquired (8,594) (37,663)
--------- ---------
Net cash used in investing activities (11,238) (40,718)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital lease obligations (1,134) (734)
Net proceeds from initial public offering -- 40,368
Proceeds from credit facility 5,700 19,500
Repayment of debt (1,386) (14,261)
--------- ---------
Cash flows provided by financing activities 3,180 44,873
--------- ---------
Net (decrease) increase in cash
and cash equivalents (1,417) 8,919
Cash and cash equivalents, beginning of period 8,606 --
--------- ---------
Cash and cash equivalents at end of period $ 7,189 $ 8,919
========= =========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 1,486 $ 265
========= =========
Cash paid for income taxes $ 1,599 $ 673
========= =========
Non cash investing activities:
Fair value of net assets acquired $ 100,077
Value of common stock issued (56,044)
Value of warrants issued (50)
Notes issued (1,300)
---------
Net cash paid 42,683
Cash acquired in acquisitions (5,020)
---------
Net cash paid for acquisitions $ 37,663
=========
</TABLE>
In 1999, non-cash financing activities included $1,199 of capital lease
obligations incurred for equipment.
See Notes to Consolidated Financial Statements
7
<PAGE> 8
COMPASS INTERNATIONAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
NOTE 1 - BUSINESS AND ORGANIZATION
Compass International Services Corporation, a Delaware corporation
("Compass" or the "Company") is a leading provider of accounts receivable
management services and other complementary outsourced services. Compass'
Accounts Receivable Management segment provides a suite of accounts receivable
management solutions to clients, including traditional third party collection
services, pre-collection customer contact programs, innovative payment options,
credit report-related services, an attorney network for severely delinquent
accounts, and bankruptcy and probate collection strategies. Compass' Print and
Mail segment offers printing, mailing and related services which complement the
accounts receivable management services, including expertise and efficiency in
direct mail and billing, presorting, freight and drop shipping, data processing,
laser printing, mailing list rental and order fulfillment. The Company's
Teleservices segment provides state-of-the-art call management and reporting.
On March 4, 1998, simultaneously with the closing of the Company's
initial public offering ("IPO" or the "Offering") of its common stock, Compass
acquired in separate purchase transactions, all of the outstanding capital stock
of five companies providing accounts receivable management services, print and
mail services and teleservices (the "Founding Companies"). Prior to the
Offering, Compass had no operating activities. Since the Offering, Compass has
completed nine additional acquisitions and has reorganized certain of its
operating entities. These consolidated financial statements reflect the results
of operations of Compass and its subsidiaries subsequent to the IPO and initial
acquisitions.
As further discussed in note 7 - "Sale of Company", the Company has signed a
definitive agreement with the NCO Group, Inc. ("NCO") to sell the outstanding
shares of Compass in exchange for NCO shares. This transaction is subject to
shareholder approval. No adjustments have been made to the accompanying
financial statements to reflect this possible transaction.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of only normal recurring items) considered necessary for a fair presentation
have been included. Operating results for the three and six month periods ended
June 30, 1999 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1999 or for any other interim period. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K, as
amended, filed with the Securities and Exchange Commission.
8
<PAGE> 9
Principles of Consolidation
The consolidated financial statements include the accounts of Compass
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Reclassifications
Certain balances presented for 1998 have been reclassified to conform
to the 1999 presentation.
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.
Earnings Per Share
Basic and diluted earnings per share have been calculated based upon
the provisions of FASB Statement No. 128, Earnings per Share. Basic earnings per
share ("Basic EPS") for the three and six month periods ended June 30, 1999
reflect the number of shares of Common Stock outstanding for the entire period.
The average market prices of the common stock for these periods were below the
exercise prices of all outstanding options and warrants. Therefore, all
outstanding options and warrants, totaling 957,425 would have had an
anti-dilutive effect on earnings per share and have been excluded from the
calculation of diluted earnings per share.
The computation of Basic EPS for the six months ended June 30, 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 Founding
Companies Acquisitions and Offering (11,218,460) from February 27, 1998 until
March 25, 1998, the number of shares following the exercise of the underwriters'
overallotment option (11,883,460) from March 25, 1998 until the respective dates
of the Purchase Acquisitions that occurred during the three months ended June
30, 1998 and the number of shares then outstanding (13,108,067) for the
remainder of the period ended June 30, 1998.
The computation of Basic EPS for the three months ended June 30, 1998
reflects the number of shares of Common Stock outstanding as of April 1, 1998
(11,833,460) plus the effect of the additional shares issued in connection with
the Purchase Acquisitions from their respective dates for the remainder of the
three months ended June 30, 1998.
Diluted earnings per share ("Diluted EPS") for the three and six months
ended June 30, 1998 include the effect of shares issuable for dilutive options
and warrants outstanding, net of treasury shares that could be purchased in the
open market based on the average closing share price for the periods presented.
9
<PAGE> 10
Shares used in the calculation of EPS for the three and six month periods ended
June 30, 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, 1998 June 30, 1998
------------- -------------
<S> <C> <C>
Basic (weighted average shares outstanding) 12,523,516 8,839,344
Effect of dilutive potential securities 142,375 89,800
---------- ----------
Shares used in calculation of Diluted EPS 12,665,891 8,929,144
========== ==========
</TABLE>
NOTE 3 - ACQUISITIONS
Founding Companies
On March 4, 1998, Compass acquired the Founding Companies for
consideration consisting of common stock, cash and debt. The closing of the
Founding Companies Acquisitions and the Offering occurred on that date. The
Founding Companies include providers of accounts receivable management services:
National Credit Management Corporation, B.R.M.C. of Delaware, Inc.,
Mid-Continent Agencies, Inc.; print and mail services: The Mail Box, Inc. ("Mail
Box"); and telemarketing services: Impact Telemarketing Group, Inc. Mail Box has
been identified as the accounting acquirer. Accordingly, in recording the
Founding Companies 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.
Acquired Companies
Subsequent to the IPO, the Company made additional acquisitions in the
accounts receivable management services and the print and mail services
industries. These acquisitions included the following accounts receivable
management services companies: Professional American Collections, Inc.
Nationwide Debt Recovery, Ltd., Delivery Verification Service, Inc., Midwest
Collection Service, Inc., R.C. Wilson Company, and Rosenfeld Attorney Network.
The print and mail services companies acquired included: Metrowebb, Inc. and MWI
Laser Group, Inc., Maher & Associates Mailing Services, Inc. and Bender Direct
Mail Service, Inc. The businesses acquired by Compass subsequent to the IPO are
collectively referred to as the "Acquired Companies." The aggregate purchase
price for each acquisition has been assigned to their respective assets based
upon the fair value of the assets acquired and liabilities assumed. As each of
these acquisitions has been accounted for as a purchase, the Company's
consolidated financial statements reflect the operations of the acquired
companies subsequent to the respective date of the acquisition.
The following unaudited pro forma summary presents the combined results
of operations of the Company, the Founding Companies and the Acquired Companies,
as if the acquisitions and Compass' IPO occurred at January 1, 1998. The pro
forma amounts give effect to certain adjustments including: adjustments to
salaries, bonuses and benefits to former owners and key management of the
Founding Companies and the Acquired Companies, repayment of long-term debt
acquired, amortization of goodwill and other intangible assets resulting from
the acquisitions and the Founding Companies and the Acquired Companies, interest
expense on additional debt for the Acquired Companies and provision for income
taxes as if income were subject to corporate federal and state income taxes
during the period. The pro forma summary does not purport to represent what
Compass' operations would actually have been if such transactions
10
<PAGE> 11
had occurred on January 1, 1998, and are not necessarily representative of
Compass' results of operations for any future period.
Since the Founding Companies and the Acquired Companies were not under common
control or management prior to their acquisition by Compass, historical combined
results may not be comparable to, or indicative of, future performance.
JUNE 30, 1998
-------------
(Unaudited)
Net revenues $88,881
Operating income $11,823
Net income $ 5,563
Net income per share-basic $ 0.39
NOTE 4 - CREDIT FACILITY
At June 30, 1999, the Company was not in compliance with certain
covenants under its $55 million credit facility, for which the Company has
obtained a waiver through August 31, 1999. Subsequent to August 31, 1999, the
lenders could demand immediate repayment of amounts outstanding under the
facility; accordingly, the $53,700 of debt outstanding under the facility at
June 30, 1999 has been classified as current.
As described in note 7 - "Sale of Company", the Company has entered
into a definitive agreement with NCO pursuant to which NCO will acquire the
outstanding shares of the Company. This transaction is expected to close in
August 1999. If, for some reason, this transaction is not completed, management
will seek to revise the covenants for future periods to amounts that the Company
projects it will be able to meet. There can be no assurances that these
transactions can be consummated. However, the Company's inability to consummate
these transactions may lead to circumstances where the lenders may demand
immediate repayment of amounts outstanding under the facility. The requirement
to repay such amounts within the next year, absent alternative long-term
financing, may have a material adverse effect on the business and raise
substantial doubt about the Company's ability to continue as a going concern.
NOTE 5 - BUSINESS SEGMENTS
The Company's operations are principally in three industry segments:
accounts receivable management services, print and mail services and
teleservices. The Company's operations are principally within the United States.
It should be noted that industry segment information might be of
limited usefulness in comparing an industry segment of the Company with a
similar industry segment of another enterprise.
11
<PAGE> 12
Selected information by industry segment is summarized below for the
six months ended June 30, 1999 and 1998, respectively. The consolidated
financial statements reflect the results of operations of Compass and its
subsidiaries subsequent to the IPO. Therefore, the results of operations for the
six months ended June 30, 1998 reflect four months of operating activity.
<TABLE>
<CAPTION>
ACCOUNTS
RECEIVABLE PRINT & TELESER- CONSOLID-
MANAGEMENT MAIL VICES CORPORATE ATED
---------- ---- ----- --------- ----
Six months ended June 30, 1999
- ------------------------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 44,019 $ 28,925 $ 8,649 $ 81,593
======== ======== ======== ========
Operating income $ 5,899 $ 1,021 $ 454 $ (4,862) $ 2,512
======== ======== ======== ======== ========
Total assets $118,980 $ 42,188 $ 7,625 $ 18,551 $187,344
======== ======== ======== ======== ========
Depreciation $ 808 $ 1,169 $ 106 $ 122 $ 2,205
======== ======== ======== ======== ========
Capital Expend-
itures $ 292 $ 3,097 $ 89 $ 365 $ 3,843
======== ======== ======== ======== ========
Six months ended June 30, 1998
- ------------------------------
Net revenues $ 15,582 $ 20,375 $ 6,217 $ 42,174
======== ======== ======== ========
Operating income $ 2,466 $ 2,647 $ 344 $ (725) $ 4,732
======== ======== ======== ======== ========
Total assets $ 74,499 $ 41,452 $ 8,357 $ 6,118 $130,426
======== ======== ======== ======== ========
Depreciation $ 430 $ 593 $ 84 $ -- $ 1,107
======== ======== ======== ======== ========
Capital Expend-
itures $ 910 $ 1,815 $ 11 $ 319 $ 3,055
======== ======== ======== ======== ========
</TABLE>
NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement No. 133, Accounting for
Derivative Instruments and for Hedging Activities. The statement is effective
for fiscal years beginning after June 15, 2000 and defines a derivative and
establishes common accounting principles for all types of instruments. The
Company plans to adopt Statement No. 133 for the fiscal year ending December 31,
2001, however, management does not expect its adoption to have a significant
impact on the Company's financial position, results of operations or cash flows.
NOTE 7 - SALE OF COMPANY
On May 12, 1999, the Company signed a definitive agreement with the NCO
Group, Inc. ("NCO"), a provider of accounts receivable management services, to
exchange the outstanding shares of Compass in a stock transaction. Under the
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<PAGE> 13
terms of the transaction, NCO will issue 0.23739 shares in exchange for each
common share of Compass. The merger agreement with NCO is conditioned on
Compass' sale of its Print and Mail segment. In this regard, Compass has signed
a definitive agreement to sell the Print and Mail operations to that segment's
current management team for total cash consideration of approximately $35.1
million plus the assumption of certain debt.
These definitive agreements were filed with the Securities and Exchange
Commission as part of the combined NCO-Compass Proxy statement/prospectus dated
July 20, 1999. A meeting of the Company's shareholders to approve the NCO merger
is scheduled for August 18, 1999 and the transactions are expected to close in
August 1999.
In connection with the merger transaction, Compass stockholders who own
approximately 6,067,900 shares of common stock, representing approximately 42%
of outstanding common shares as of the record date have entered into voting
agreements with NCO in which these stockholders have agreed to vote their shares
in favor of the merger.
Operating results for the Print and Mail segment are presented in Note
5 - "Business Segments". Such results do not reflect an allocation of corporate
overhead costs, a portion of which are not expected to be incurred if the
segment were sold. At June 30, 1999, the net assets being sold had a net book
value of approximately $32,449.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements of Compass and related notes thereto included herein and in
the Company's Form 10-K as amended and filed with the Securities and Exchange
Commission.
Presented below are discussions of the Company's results of operations on both a
historical and pro forma basis. Although the Company was formed in April, 1997,
there were no operating activities prior to the IPO and the closing of the
Founding Companies Acquisitions. Furthermore, since the Founding Companies
Acquisitions did not occur until March 4, 1998, the historical operating results
for the six-months ended June 30, 1998 include only four months of results from
the Founding Companies and include the results for the subsequent acquisitions
from their respective dates of acquisition. Accordingly, management has also
provided a discussion of the pro forma operating results, which the reader might
find useful.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1998- HISTORICAL
NET REVENUES. Net revenues for the three months ended June 30, 1999 increased
$6.3 million, or 18.6%, from $33.6 million for the three months ended June 30,
1998 to $39.9 million for the three months ended June 30, 1999.
Net revenues for the Accounts Receivable Management segment increased
$9.7 million or 82.9% from $11.7 million to $21.4 million. Companies acquired
during and subsequent to the second quarter of 1998 provided $10.2 million of
increased net revenues. On a comparative basis, revenues from the founding
companies decreased $0.5 million as the pending sale of the Company has affected
the generation of new business.
Net revenues for the Print and Mail segment decreased $3.1 million or
18.0%, from $17.2 million to $14.1 million. The segment continued to be affected
by its largest customer, who, in late 1998, as a result of competitive
pressures, changed direct mail advertising campaigns from long-run print and
mail roll-outs to short run test packages. Net revenues from this customer in
the current quarter were $5.2 million less than the same quarter of the prior
year. This decrease in net revenue was partially offset by $2.1 million in net
revenue growth from both existing and new accounts.
Net revenues for the Teleservices segment decreased $0.3 million, or
6.4%, from $4.7 million to $4.4 million. This decrease is attributable to the
temporary reduction of business from one client as a result of internal issues
at that client and as a result of the relocation of a major call processing
facility.
COST OF REVENUES. Cost of revenues for the three months ended June 30, 1999
increased $5.5 million, or 24.2% from $22.7 million for the prior year
three-month period to $28.2 million for the current year three month period.
Cost of revenues as a percentage of net revenues amounted to 70.6% for the 1999
period as compared to 67.6% for the 1998 period.
Cost of revenues for the Accounts Receivable Management segment
increased $7.4 million or 110.4%, from $6.7 million to $14.1 million. As a
percentage of net revenue, cost of revenues amounted to 65.9% in the current
quarter as compared to 57.3% for the same quarter of the prior year.
14
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The companies acquired after the second quarter of 1998 provided cost structures
that were higher than those incurred in the second quarter of 1998.
Cost of revenues for the Print and Mail segment decreased $1.6 million
or 13.0%, from $12.3 million to $10.7 million. As a percentage of net revenues,
these costs amounted to 75.9% for the 1999 period as compared to 71.5% for the
same period of 1998. The increase reflects the excess capacity resulting from
reduced levels of business in the current quarter as compared to the same
quarter of the prior year and additional occupancy costs as the segment
consolidates into a larger facility.
Cost of sales for the Teleservices segment decreased $0.3 million, or
8.1%, from $3.7 million to $3.4 million. As a percentage of net revenues, these
costs amounted to 77.3% for the 1999 period as compared to 78.7% for the same
period of 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the 1999 period increased $3.5 million, or 52.9%,
from $6.6 million to $10.0 million. As a percentage of net revenues, such
expenses increased to 25.1% in 1999 from 19.5% in 1998.
Selling, general and administrative expenses in the Accounts Receivable
Management segment increased $1.7 million or 60.7% from $2.8 million to $4.5
million. The increase is associated to the companies acquired subsequent to the
second quarter of 1998.
Selling, general and administrative expenses in the Print and Mail
segment remained consistent at $2.7 million.
Selling, general and administrative expenses in the Teleservices
segment increased $0.2 million, or 28.6%, from $0.7 million to $0.9 million. The
increase is comprised of facility moving and close down costs, duplicate
facility costs and increased payroll costs.
Corporate expenses increased $1.6 million or 533.3% from $0.3 million
to $1.9 million. The increase is represented by: (a) severances, bonuses and
relocation costs of $0.5 million, (b) increases in employee related costs in the
amount of $0.3 million and (c) other costs including advertising, director
costs, public company costs and insurance of $0.8 million.
MERGER RELATED EXPENSES. Merger related expenses for the 1999 period amounted to
$1.0 million and include the costs associated with the sale of the Company to
NCO and the sale of the Print and Mail segment including legal, accounting,
advisory and other costs directly associated with the transactions.
GOODWILL AMORTIZATION. Goodwill amortization increased $0.4 million or 80.0%,
from $0.5 million for the quarter ended June 30, 1998 to $0.9 million for the
quarter ended June 30, 1999 as a result of acquisitions made subsequent to the
second quarter of 1998.
INTEREST EXPENSE. Interest expense amounted to $1.3 million in the current
period, as compared to $0.2 million for the prior period. The interest primarily
relates to borrowings under the Company's credit facility, which were used to
make acquisitions and loans to selling shareholders in connection with the
acquisition of their companies, and to interest imputed on capital leases.
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INCOME TAXES. The effective income tax rates used for the 1999 and 1998 periods
exceeded the statutory rate of 35% as a result of the non-deductibility of
goodwill arising primarily from the stock acquisitions and, for 1998, state
income taxes.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30,
1998-PRO FORMA
Pro forma results of operations presented below assume that all of the
acquisitions in the Accounts Receivable Management segment occurred on January
1, 1998 and reflect certain pro forma adjustments within that segment. All of
the acquisitions in the Print and Mail segment were made as of the beginning of
the second quarter of 1998 and the Teleservices segment was included in the
historical results of operations for the entire second quarter of 1998. See Note
3 of Notes to the Consolidated Financial Statements.
(Dollars in thousands)
THREE MONTHS ENDED JUNE 30,
1999 1998
---- ----
Net revenues $39,873 $43,409
Cost of revenues 28,169 29,182
------- -------
Gross Profit 11,704 14,227
Selling, general and
administrative expenses 10,016 7,832
Merger related expenses 1,009 -
Goodwill amortization 889 780
------- -------
Operating (loss) income $ (210) $ 5,615
======= =======
NET REVENUES. Net revenues decreased $3.5 million, or 8.1%, from $43.4 million
for the three months ended June 30, 1998 to $39.9 million for the three months
ended June 30, 1999.
Net revenues for the Accounts Receivable Management segment decreased
$0.1 million, or 0.5%, from $21.5 million to $21.4 million.
Net revenues for the Print and Mail segment decreased $3.1 million or
18.0%, from $17.2 million to $14.1 million. The segment continued to be affected
by its largest customer, who, in late 1998, as a result of competitive
pressures, changed direct mail advertising campaigns from long-run print and
mail roll-outs to short run test packages. Net revenues from this customer in
the current quarter were $5.2 million less than the same quarter of the prior
year. This decrease in net revenue was partially offset by $2.1 million in net
revenue growth from both existing and new accounts.
Net revenues for the Teleservices segment decreased $0.3 million, or
6.4%, from $4.7 million to $4.4 million. This decrease is attributable to the
temporary reduction of business from one client as a result of internal issues
at that client and as a result of the relocation of a major call processing
facility.
COST OF REVENUES. Cost of revenues decreased $1.0 million, or 3.4%, from $29.2
million for the prior year three-month period to $28.2 million for the current
year three-month period. Cost of revenues as a percentage of net revenues
amounted to 70.6% for the 1999 period as compared to 67.2% for the 1998 period.
Cost of revenues for the Accounts Receivable Management segment
increased $1.0 million or 7.6%, from $13.1 million to $14.1 million. As a
percentage of net revenues, these costs amounted to 65.9% in the current period
as compared to 60.9% in the prior period. This increase is primarily reflected
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<PAGE> 17
in labor costs associated with the segment.
Cost of revenues for the Print and Mail segment decreased $1.7 million
or 13.7%, from $12.4 million to $10.7 million. As a percentage of net revenues,
these costs amounted to 75.9% for the 1999 period as compared to 72.1% for the
same period of 1998. The increase reflects the excess capacity resulting from
reduced levels of business in the current quarter as compared to the same
quarter of the prior year and additional occupancy costs as the segment
consolidates into a larger facility.
Cost of sales for the Teleservices segment decreased $0.3 million, or
8.1%, from $3.7 million to $3.4 million. As a percentage of net revenues, these
costs amounted to 77.3% for the 1999 period as compared to 78.7% for the same
period of 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the 1999 period increased $2.2 million, or 27.9%,
from $7.8 million to $10.0 million.
Selling, general and administrative expenses in the Accounts Receivable
Management segment increased $1.0 million or 28.5%, from $3.5 million to $4.5
million. Actual administrative costs include the effects of increased head count
as compared to the pro forma period.
Selling, general and administrative expenses in the Print and Mail
segment remained consistent at $2.7 million.
Selling, general and administrative expenses in the Teleservices
segment increased $0.2 million, or 28.6%, from $0.7 million to $0.9 million. The
increase is comprised of facility moving and close down costs, duplicate
facility costs and increased payroll costs.
Corporate expenses increased $1.0 million or 111.1%, increasing from
$0.9 million to $1.9 million. The increase is represented by: (a) severances,
bonuses and relocation costs of $0.4 million and (b)employee related costs in
the amount of $0.6 million.
MERGER RELATED EXPENSES. Merger related expenses in 1999 amounted to $1.0
million and include the costs associated with the sale of the Company to NCO and
the sale of the Print and Mail segment including legal, accounting, advisory and
other costs directly associated with the transactions.
GOODWILL AMORTIZATION. Goodwill amortization increased $0.1 million or 12.5%,
from $0.8 million to $0.9 million as a result of acquisitions made subsequent to
the second quarter of 1998.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
1998-HISTORICAL
Historical operations for the six months ended June 30, 1999 include the Company
and its consolidated subsidiaries for the entire six month period. Since the
Founding Companies Acquisitions did not occur until March 4, 1998, the
historical operating results for the six-months ended June 30, 1998 include only
four months of results from the Founding Companies and include the results for
the subsequent acquisitions from their respective dates of acquisition.
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<PAGE> 18
NET REVENUES. Net revenues for the six months ended June 30, 1999 amounted to
$81.6 million. Among the segments, Accounts Receivable Management contributed
$44.0 million, or 53.9%, Print and Mail contributed $28.9 million, or 35.4%, and
Teleservices contributed $8.7 million, or 10.7%.
Net revenues for the six months ended June 30, 1998 amounted to $42.2
million. Among the segments, Accounts Receivable Management contributed $15.6
million, or 37.0%, Print and Mail contributed $20.4 million or 48.3% and
Teleservices contributed $6.2 or 14.7%.
COST OF REVENUES. Cost of revenues for the six months ended June 30, 1999 were
$56.8 million, or 69.6% of net revenues. By segment, cost of revenues for
Accounts Receivable Management amounted to $28.0 million, or 63.6% of segment
net revenues. Cost of revenues for Print and Mail amounted to $22.2 million, or
76.8% of segment net revenues. Cost of revenues for Teleservices amounted to
$6.6 million, or 75.8% of net revenues.
Cost of revenues for the six months ended June 30, 1998 amounted to
$28.1 million or 66.6% of net revenues. Among the segments, cost of revenues for
Accounts Receivable Management amounted to $8.9 million, or 57.1% of net
revenues. Cost of revenues for Print and Mail amounted to $14.4 million, or
70.6% of net revenues. Cost of revenues for Teleservices amounted to $4.8
million, or 77.4% of net revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the six months ended June 30, 1999 were $19.2
million, or 23.5% of net revenues. Selling, general and administrative expenses
in the Accounts Receivable Management segment amounted to $8.9 million, or 20.2%
of segment net revenues. Selling, general and administrative expenses in the
Print and Mail segment amounted to $5.5 million, or 19.0% of segment net
revenues. Selling, general and administrative expenses for the Teleservices
segment amounted to $1.6 million, or 18.4% of segment net revenues. Corporate
expenses amounted to $3.2 million.
Selling, general and administrative expenses for the six months ended
June 30, 1998 were $8.7 million or 20.6% of net revenues. Selling, general and
administrative expenses in the Accounts Receivable Management segment amounted
to $3.9 million, or 25.0% of segment net revenues. Selling, general and
administrative expenses in the Print and Mail segment amounted to $3.2 million,
or 15.7% of segment net revenues. Selling, general and administrative expenses
for the Teleservices segment amounted to $1.0 million, or 16.1% of segment net
revenues. Corporate expenses amounted to $0.6
MERGER RELATED EXPENSES. Merger related expenses in 1999 amounted to $1.3
million and include the costs associated with the sale of the Company to NCO and
the sale of the Print and Mail segment including legal, accounting, advisory and
other costs directly associated with the transactions.
GOODWILL AMORTIZATION. Goodwill amortization increased $1.1 million or 157.1%,
from $0.7 million to $1.8 million as a result of acquisitions made subsequent to
the second quarter of 1998.
INTEREST EXPENSE. Interest expense amounted to $2.5 million in the current
period. The interest primarily relates to borrowings under the Company's credit
facility, which were used to make acquisitions and loans to selling shareholders
in connection with the acquisition of their companies, and to interest imputed
on capital leases.
Interest expense for the 1998 period was $0.1 million.
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INCOME TAXES. The effective income tax rates used for the 1999 and 1998 periods
were higher than the statutory rate of 35% as a result of the effects of state
income taxes and the non-deductibility of goodwill arising primarily from the
stock acquisitions.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998-PRO
FORMA
Pro forma results of operations presented below assume that the IPO,
the Founding Companies Acquisitions and the subsequent acquisitions occurred on
January 1, 1998 and reflect certain pro forma adjustments. See Note 3 of Notes
to the Consolidated Financial Statements.
(Dollars in thousands)
SIX MONTHS ENDED JUNE 30,
1999 1998
---- ----
Net revenues $81,593 $88,881
Cost of revenues 56,809 58,538
------- -------
Gross Profit 24,784 30,343
Selling, general and
administrative expenses 19,183 16,960
Merger related expenses 1,312 -
Goodwill amortization 1,777 1,560
------- -------
Operating income $ 2,512 $11,823
======= =======
NET REVENUES. Net revenues decreased $7.3 million, or 8.2%, from $88.9 million
for the six months ended June 30, 1998 to $81.6 million for the six months ended
June 30, 1999.
Net revenues for the Accounts Receivable Management segment increased
$0.1 million or 0.2%, from $43.9 million to $44.0 million.
Net revenues for the Print and Mail segment decreased $6.5 million or
18.5%, from $35.4 million to $28.9 million. Net revenues from the segment's
largest customer decreased $8.4 million for the six month period ended June 30,
1999 as compared to the same period of the prior year. This decrease has been
partially offset by $2.1 million in net revenue growth from both existing and
new accounts.
Net revenues for the Teleservices segment decreased $0.8 million, or
8.4%, from $9.4 million to $8.7 million. This decrease is attributable to the
temporary reduction of business from one client as a result of internal issues
at that client, the implementation of a strategy designed to replace high volume
but low margin business with more profitable client relationships, and as a
result of the relocation of a major call processing center to a new facility.
COST OF REVENUES. Cost of revenues decreased $1.7 million, or 2.9%, from $58.5
million for the prior year six-month period to $56.8 million for the current
year six month period. Cost of revenues as a percentage of net revenues amounted
to 69.6% for the 1999 period as compared to 65.9% for the 1998 period.
Cost of revenues for the Accounts Receivable Management segment
increased $1.6 million or 6.1% from $26.4 million to $28.0 million. As a
percentage of net revenues, these costs amounted to 63.6% for the current period
as compared to 60.1% for the same period of the prior year. The increase is
primarily attributable to staffing levels that have increased at a more rapid
pace than revenues have grown.
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<PAGE> 20
Cost of revenues for the Print and Mail segment decreased $2.7 million
or 10.9%, from $24.9 million to $22.2 million. As a percentage of net revenues,
these costs amounted to 76.8% for the six months ended June 30, 1999 as compared
to 70.3% for the six months ended June 30, 1998. The increase as a percentage of
net revenues reflects the excess capacity resulting from reduced levels of
business in the current period as compared to the prior period.
Cost of revenues for the Teleservices segment decreased $0.6 million,
or 8.3%, from $7.2 million to $6.6 million. As a percentage of net revenues,
these costs amounted to 75.9% for the 1999 period as compared to 76.6% for the
same period of 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the 1999 period increased $2.2 million, or 13.1%,
from $17.0 million to $19.2 million. As a percentage of net revenues, such
expenses increased to 23.5% in 1999 from 19.1% in 1998.
Selling, general and administrative expenses in the Accounts Receivable
Management segment increased $1.2 million or 15.6%, from $7.7 million to $8.9
million. Actual administrative costs include the effects of increased head count
as compared to the pro forma period.
Selling, general and administrative expenses in the Print and Mail
segment decreased $0.2 million or 3.5%, from $5.7 million to $5.5 million. The
benefits of cost reduction programs instituted at most of the segments locations
are reflective of the reduction.
Selling, general and administrative expenses in the Teleservices
segment decreased $0.2 million, or 11.1%, from $1.8 million to $1.6 million. The
decrease reflects efficiencies gained from improved systems in the areas of
administration and client services, offset by the cost of closing and moving one
of the call centers.
Corporate expenses increased $1.4 million or 41.2%, from $3.4 million to $4.8
million. The increase is represented by: (a) severances, bonuses and relocation
costs of $0.5 million and (b) other costs including advertising, director costs,
public company costs and insurance of $0.9 million.
MERGER RELATED EXPENSES. Merger related expenses in 1999 amounted to $1.3
million and include the costs associated with the sale of the Company to NCO and
the sale of the Print and Mail segment including legal, accounting, advisory and
other costs directly associated with the transactions.
GOODWILL AMORTIZATION. Goodwill amortization increased $0.2 million or 12.5%,
from $1.6 million to $1.8 million as a result of acquisitions made subsequent to
the second quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1999, net cash provided by
operating activities amounted to $6.6 million. Operating activities included
$3.6 million of earnings before depreciation and amortization. Changes in
operating assets and liabilities added an additional $3.0 million in net cash.
Cash used in investing activities for the first six months of 1999
included net cash paid for acquisitions completed in 1998, primarily related to
earn-out agreements, in the amount of $8.6 million, and $2.6 million in capital
expenditures which were primarily comprised of purchases of equipment for Print
and Mail Services.
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Financing activities for the six months ended June 30, 1999 generated
net cash in the amount of $3.2 million. Of this amount, proceeds in the amount
of $5.7 million were borrowed under the Company's revolving credit facility
(which is further discussed in the following paragraphs). Financing activities
that required cash included the repayment of acquired debt in the amount of $1.3
million and repayments of capital lease obligations of $1.1 million.
At June 30, 1999, borrowings under the Agreement totaled $53.7 million,
there were $0.8 million in outstanding letters of credit and $0.5 million
remained available for borrowing. An additional $0.5 million was borrowed in
July 1999 and a letter of credit in the amount of $0.1 was cancelled. The
Company expects to pay an additional $1.1 million with respect to an earn out
agreement during 1999. In addition, the Company anticipates that the integration
and consolidation of acquired print and mail companies will result in cash
payments of approximately $0.4 million in 1999, which will be funded by
operations.
At June 30, 1999, the Company was not in compliance with certain
covenants under its $55 million credit facility, for which the Company has
obtained a waiver through August 31, 1999. Subsequent to August 31, 1999, the
lenders could demand immediate repayment of amounts outstanding under the
facility; accordingly, the $53.7 million of debt outstanding under the facility
at June 30, 1999 has been classified as current.
As described in note 7 - "Sale of Company", the Company has entered a
definitive agreement with NCO pursuant to which NCO will acquire the outstanding
shares of the Company. This transaction is expected to close in August 1999. If,
for some reason, this transaction is not completed, management will seek to
revise the covenants for future periods to amounts that the Company projects it
will be able to meet. There can be no assurances that these transactions can be
consummated. However, the Company's inability to consummate these transactions
may lead to circumstances where the lenders may demand immediate repayment of
amounts outstanding under the facility. The requirement to repay such amounts
within the next year, absent alternative long-term financing, may have a
material adverse effect on the business and raise substantial doubt about the
Company's ability to continue as a going concern.
SEASONALITY
The operations of Compass are not subject to seasonal factors that have
a material impact on the results of operations.
RECENT DEVELOPMENTS
On May 12, 1999, the Company signed a definitive agreement with NCO, a
provider of accounts receivable management services, to exchange the outstanding
shares of Compass in a stock transaction. Under the terms of the transaction,
NCO will issue 0.23739 shares in exchange for each common share of Compass. The
merger agreement with NCO is conditioned on Compass' sale of its Print and Mail
segment. In this regard, Compass has signed a definitive agreement to sell the
Print and Mail operations to that segment's current management team for total
cash consideration of approximately $35.1 million plus the assumption of certain
debt.
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<PAGE> 22
These definitive agreements were filed with the Securities and Exchange
Commission as part of the combined NCO-Compass Proxy statement/prospectus dated
July 20, 1999. A meeting of the Company's shareholders to approve the NCO merger
is scheduled for August 18, 1999 and the transactions are expected to close in
August 1999.
In connection with the merger transaction, Compass stockholders who own
approximately 6,067,900 shares of common stock, representing approximately 42%
of outstanding common shares as of the record date, have entered into voting
agreements with NCO in which these stockholders have agreed to vote their shares
in favor of the merger. In addition, these stockholders have agreed to
contribute to Compass, shares of common stock with an aggregate value of $5.0
million immediately prior to the completion of the merger. The effect of this
contribution will be to reduce the number of shares, which would otherwise be
issued by NCO in the merger.
On May 14, 1999, a purported stockholder class action suit was filed in
the Delaware Court of Chancery against Compass, NCO and members of Compass'
board of directors. The complaint alleged, among other matters, that the Compass
board of directors breached their fiduciary duties to Compass stockholders by
failing to maximize stockholder value and by agreeing to an unfair and
inadequate merger, and that NCO aided and abetted this alleged breach of
fiduciary duty. On July 19, 1999, the attorneys for all parties entered into a
memorandum of understanding containing an agreement in principle for the
settlement of the litigation. The principal terms of the settlement, which is
subject to court approval, include the following:
(a) The $5 million reduction in the number of shares of NCO common
stock to be issued in the merger will be borne entirely by the
stockholders signing voting agreements and not by other public
stockholders of Compass;
(b) In the event that the average closing price of NCO common stock
during the five trading days ending one day before the Compass
stockholder meeting to approve the merger is less than $29.50 per
share, NCO will pay an additional 43,684 shares of NCO common
stock, to be distributed pro rata to holders of shares of Compass
stock, other than with respect to shares beneficially owned by
the individual defendants, which payment will result in
additional payment of approximately 0.00393 shares of NCO common
stock per share of Compass common stock, so that each stockholder
of Compass other than the shares beneficially owned by the
individual defendants, will receive total payment in the merger
of 0.24138 shares of NCO common stock for each share of Compass
common stock;
(c) The litigation will be certified as a class action on behalf of
all persons who owned Compass common stock on or after May 13,
1999 and all claims that were or could have been asserted in the
litigation on behalf of the class, or that otherwise relate to
the merger, will be released and forever barred; and
(d) Plaintiffs' counsel will apply for an award of attorneys' fees
and expenses in an amount not to exceed $250. Such amount will be
paid through existing insurance coverage.
YEAR 2000
The Company has been addressing identified Year 2000 issues, which
resulted from the inventory and prioritization processes previously undertaken.
All mission-critical Year 2000 issues have been remediated, or are expected to
be remediated by August 31, 1999 except for a system upgrade involving
22
<PAGE> 23
Delivery Verification Service, Inc, a subsidiary of the company, which is
expected to be upgraded in September 1999. Additionally, the Company has
communicated with landlords, significant vendors and other critical service
providers to determine if such parties are year 2000 compliant or have effective
plans in place to address the year 2000 issue and to determine the extent of the
Company's vulnerability to the failure of such parties to remediate such issues.
It has received responses from many of these third parties and is awaiting
responses and/or re-contacting the non-responding third parties. None of the
responses received to date have identified any Year 2000 issues which are not
on-track to be remediated well in advance of the requisite date(s). The Company
will continue to assess its risks and develop appropriate contingency plans as
needed if responses from landlords, significant vendors and other critical
service providers so warrant. The Company does not believe that the costs of
modifications, upgrades or replacements which would not have been incurred but
for the Year 2000 issue will be material.
The Company does not expect the impact of the Year 2000 to have a
material adverse impact on the Company's business or results of operations.
However, any failure to effectively complete the necessary changes to the
Company's financial and operating systems on a timely basis, or, the occurrence
of unanticipated or undiscovered Year 2000 compliance problems could have a
material adverse effect on the Company's business and results of operations. In
addition, there can be no assurance that Year 2000 non-compliance by any of the
Company's clients or significant suppliers or vendors will not have a material
adverse effect on the Company's business or results of operations.
FORWARD-LOOKING INFORMATION-SAFE HARBOR STATEMENT
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 Company's ability to achieve expected growth in revenues, earnings and
operating efficiencies, year 2000 uncertainties and other risks described in the
Company's Form 10-K, as amended and Form S-1 filed with the Securities and
Exchange Commission at the time of the IPO.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risk (i.e. the risk of loss arising from adverse
changes in market rates and prices) to which the Company is exposed is interest
rates on debt.
At June 30, 1999, the Company had $13.7 million of debt subject to
variable interest rates. A one- percent change in interest rates would impact
interest expense by $0.14 million with respect to the amount of debt that is
subject to variable interest rates.
The Company has entered into interest rate swap arrangements to reduce
the risk of increases in interest rates on $40 million of outstanding Revolver
debt through October 15, 2000. A one percent change in interest rates would have
affected interest expense by $0.4 million with respect to the amount of debt
covered by the interest rate swaps.
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The Company does not hold or issue derivative financial instruments for
speculation or trading purposes.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 1997, Mid-Continent Agencies, Inc. (a Founding Company) and
its New York subsidiary filed a lawsuit in the State of New York, Supreme Court,
County of Erie (the "New York Supreme Court") against Vincent S. Burgio, Eric R.
Main and Michael Luksch (all of whom are former employees of Mid-Continent's
subsidiary), as well as Continental 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.
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
Vallecorse, 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. The Company believes that the allegations against it and its
co-defendants are without merit, however, because this litigation is still at an
early state, its outcome cannot be predicted. The cases remain in the discovery
stage. The former stockholders of Mid-Continent Agencies, Inc. agreed, in the
purchase agreement whereby Compass agreed to purchase Mid-Continent, to
indemnify the Company for losses and damages, if any, arising from these
lawsuits. A related case was filed on March 18, 1999 in New York Supreme Court
for Erie County against Compass International Services Corporation.
In October 1998, a subsidiary of one of the Founding Companies, Bomar
Credit Corporation, and Compass Receivable Management Corporation, a subsidiary
of the Company, received a Civil Investigative Demand from the Federal Trade
Commission's ("FTC") Chicago Regional Office requesting various categories of
information relating to compliance with the Fair Debt Collection Practices Act.
The Company has cooperated fully with the FTC's request, provided responsive
documents to the FTC in February 1999 and has continued to provide additional
information upon the FTC's request. Since the FTC is still reviewing the
Company's submissions, an assessment of the duration and outcome, and associated
liability and expense, if any, cannot reasonably be made at this time. However,
there can be no assurances that future developments relating to this matter will
not have a material adverse impact on the Company's business, financial
condition or results of operations.
In May 1999, a purported class action was filed on behalf of Compass
shareholders challenging the fairness of the consideration provided for under
the merger agreement with the NCO Group. A memorandum of understanding proposing
settlement of this litigation was entered into on July 19, 1999. The litigation
and its proposed settlement are discussed in the section above entitled "Recent
Developments".
24
<PAGE> 25
In June 1999, Richard Alston, former Chief Financial Officer and then
Executive Vice President for Corporate Development filed suit against the
Company alleging breach of his employment agreement with the Company and seeking
$800,000 in damages. The Company has answered the Complaint and intends to
vigorously defend.
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
10.1 Fifth Amendment dated June 15, 1999 to the Credit
Agreement dated March 17, 1998 among the Company and
Various Financial Institutions
10.2 Waiver dated August 12, 1999 to the Credit Agreement
dated March 17, 1998 among the Company and Various
Financial Institutions
B. FORM 8-K
No reports on Form 8-K were filed during the period.
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: August 13, 1999 COMPASS INTERNATIONAL SERVICES
CORPORATION
By: /s/ MAHMUD U. HAQ
Mahmud U. Haq
Chief Executive Officer
25
<PAGE> 1
EXHIBIT 10.1
- ------------
June 15, 1999
Compass International Services Corporation
1 Penn Plaza, Suite 4430
New York, New York 10119
Re: Fifth Amendment and Waiver
--------------------------
Ladies and Gentlemen:
- ---------------------
Please refer to the Credit Agreement dated as of March 17, 1998 (the
"Credit Agreement") among Compass International Services Corporation, various
financial institutions and Bank of America National Trust and Savings
Association, as Administrative Agent. Capitalized terms used but not otherwise
defined herein have the meanings assigned thereto in the Credit Agreement.
The Required Lenders hereby agree that through August 31, 1999, no
Event of Default or Unmatured Event of Default shall result solely from the
Company's failure to comply with the covenants set forth in Section 8.11, 8.13
and 8.22 of the Credit Agreement (including the Company's failure to comply with
Section 8.13 of the Credit Agreement for the period ending March 31, 1999) so
long as the Company does not permit: (i) the Leverage Ratio at any time to
exceed 3.35 to 1.0, (ii) the Senior Leverage Ratio at any time to exceed 3.35 to
1.0 or (iii) the Fixed Charge Coverage Ratio as of the end of any fiscal quarter
to be less than 2.0 to 1.
The Company, the Required Lenders and the Administrative Agent hereby
agree that Section 2.10(c) of the Credit Agreement shall be amended and restated
in its entirety to read as follows:
"(c) The Company shall pay to the Administrative Agent a
termination fee in the amount of (i) $137,500, to be
distributed to the Lenders pro rata according to each Lender's
Percentage of the Commitment Amount (as in effect immediately
prior to the termination of the Commitments, subject to any
changes resulting from assignments) if the Commitments are
terminated on or before July 31, 1999 and (ii) $125,000, to be
distributed to the Lenders pro rata according to each Lender's
Percentage of the Commitment Amount (as in effect immediately
prior to the termination of the Commitments, subject to any
changes resulting from assignments) if the Commitments are
terminated after July 31, 1999 but before March 17, 2001."
This letter agreement shall become effective when the Administrative
Agent shall have received a counterpart of this letter agreement executed by the
Company, the Administrative Agent and the Required Lenders (or, in the case of
any party from which the Administrative Agent has not received a counterpart
hereof, facsimile confirmation of the execution of a counterpart hereof by such
party).
This letter agreement may be executed in any number of counterparts and
by the different parties on separate counterparts, and each such counterpart
shall be deemed to be an original but all such counterparts shall together
constitute one and the same letter agreement.
26
<PAGE> 2
As herein amended, the Credit Agreement shall remain in full force and
effect and is hereby ratified and confirmed in all respects. After this letter
agreement becomes effective, all references in the Credit Agreement and the
other Loan Documents to " Credit Agreement" or similar terms shall refer to the
Credit Agreement, as amended hereby.
The Company agrees that on the earlier of (i) the termination of the
Commitments and (ii) August 31, 1999 it will pay to the Administrative Agent for
the account of each Lender an amendment fee in the amount of $55,000, to be
distributed to the Lenders pro rata according to each Lender's Percentage of the
Commitment Amount (as in effect immediately prior to the date such amendment fee
becomes payable).
Without limiting the Company's obligations under any other Loan
Document, the Company agrees that if any of the Escrow Shares (as defined in the
Escrow Agreement described below) and any stock powers executed in blank related
to such shares are delivered to the Company pursuant to the terms of the Escrow
Agreement dated as of May 12, 1999 (the "Escrow Agreement") among the Company,
the P&M Purchaser and Harris Trust and Savings Bank, the Company will promptly
deliver such Escrow Shares and stock powers to the Administrative Agent, such
Escrow Shares to be held as collateral pursuant to the Security Agreement.
The Company agrees to pay the reasonable costs and expenses of the
Administrative Agent (including reasonable attorney's fees and charges) in
connection with the preparation, execution and delivery of this letter
agreement.
Very truly yours,
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as Administrative Agent
By
Title
BANK OF AMERICA NATIONAL
TRUST AND SAVINGS
ASSOCIATION, as Issuing
Lender and as a Lender By
Title
FIRST NATIONAL BANK OF MARYLAND
By
Title
FLEET NATIONAL BANK
By
Title
PNC BANK, NATIONAL ASSOCIATION
By
Title
Accepted and Agreed to
this 15th day of June, 1999
COMPASS INTERNATIONAL SERVICES
CORPORATION
27
<PAGE> 1
EXHIBIT 10.2
- ------------
August 12, 1999
Compass International Services Corporation
1 Penn Plaza, Suite 4430
New York, New York 10119
Ladies and Gentlemen:
Please refer to the Credit Agreement dated as of March 17, 1998 (the
"Credit Agreement") among Compass International Services Corporation, various
financial institutions and Bank of America, National Association (formerly known
as Bank of America National Trust and Savings Association), as Administrative
Agent. Capitalized terms used but not otherwise defined herein have the meanings
assigned thereto in the Credit Agreement.
The Required Lenders hereby agree that through August 31, 1999, no
Event of Default or Unmatured Event of Default shall result solely from the
Company's failure to comply with the covenants set forth in Sections 8.11, 8.13,
8.14 and 8.22 of the Credit Agreement.
The foregoing waiver is limited to its express terms and does not
constitute a waiver of any other provision of the Credit Agreement. This waiver
letter shall be governed by the laws of the State of Illinois applicable to
contracts made and to be performed entirely within such State.
Very truly yours,
BANK OF AMERICA, NATIONAL ASSOCIATION,
as Administrative Agent
By /s/ David A. Johanson
-----------------------
Title David A. Johanson
---------------------
Vice President
1
<PAGE> 2
BANK OF AMERICA, NATIONAL ASSOCIATION,
as Issuing Lender and as a Lender
By /s/ Christine M. Tierney
----------------------------
Title Senior Vice President
-------------------------
FIRST NATIONAL BANK OF MARYLAND
By /s/_________________________
Title__________________________
FLEET NATIONAL BANK
By /s/_________________________
Title__________________________
PNC BANK, NATIONAL ASSOCIATION
By /s/_________________________
Title__________________________
2
<PAGE> 3
BANK OF AMERICA, NATIONAL ASSOCIATION,
as Issuing Lender and as a Lender
By /s/ Christine M. Tierney
-------------------------
Title Senior Vice President
-------------------------
FIRST NATIONAL BANK OF MARYLAND
By /s/_________________________
Title__________________________
FLEET NATIONAL BANK
By /s/ Jeffrey P. Kinney
----------------------------
Title Vice President
-------------------------
PNC BANK, NATIONAL ASSOCIATION
By /s/_________________________
Title__________________________
2
<PAGE> 4
BANK OF AMERICA, NATIONAL ASSOCIATION,
as Issuing Lender and as a Lender
By /s/_________________________
Title__________________________
ALL FIRST BANK
(formerly) FIRST NATIONAL BANK OF MARYLAND
By /s/ Anne E. Quirk
----------------------------
Title Vice President
-------------------------
FLEET NATIONAL BANK
By /s/_________________________
Title__________________________
PNC BANK, NATIONAL ASSOCIATION
By /s/_________________________
Title__________________________
2
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