-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UyGrPIMPT5E5v+WDoQML65vwM3qx7uc3ekGHeFdH4hmYLjqCSHgcbegV/6FX8GhK cho9P4sP4i19QGPqv+aCUA== 0000950152-98-004687.txt : 19980518 0000950152-98-004687.hdr.sgml : 19980518 ACCESSION NUMBER: 0000950152-98-004687 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPASS INTERNATIONAL SERVICES CORP CENTRAL INDEX KEY: 0001046817 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MAILING, REPRODUCTION, COMMERCIAL ART & PHOTOGRAPHY [7330] IRS NUMBER: 223540815 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23217 FILM NUMBER: 98626067 BUSINESS ADDRESS: STREET 1: 5 INDEPENDENCE WAY STREET 2: SUITE 300 CITY: PRINCETON STATE: NJ ZIP: 08540 BUSINESS PHONE: 6095145156 MAIL ADDRESS: STREET 1: 5 INDEPENDENCE WAY STREET 2: SUITE 300 CITY: PRINCETON STATE: NJ ZIP: 08540 10-Q 1 COMPASS INTERNATIONAL SERVICES CORP--FORM 10-Q 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 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 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) Three Months Ended March 31, 1998 -------------- 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 ===============
See Notes to Consolidated Financial Statements 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 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 6 COMPASS INTERNATIONAL SERVICES CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 1998 (In thousands, except share data)
Additional Common Stock Paid-In Retained Shares Amount Capital Earnings Total ------------ ------ ------- -------- ----- 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 ---------------------------------------------------
See Notes to Consolidated Financial Statements 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 -------------- ----------------- 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 ============== =================
8 THE MAIL BOX, INC. (Accounting Acquiror) CONSOLIDATED BALANCE SHEETS (In thousands, except share data) December 31, 1997 February 28, 1998 ASSETS (AUDITED) (UNAUDITED) - ------ ----------------- ----------------- 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 =============== =================
9 THE MAIL BOX, INC. (Accounting Acquiror) CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (UNAUDITED) Three Months Two Months Ended Ended March 31, 1997 February 28, 1998 -------------- ----------------- 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 ============== =================
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. 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: 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 ---------
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. 12 The estimated pro forma results were (in thousands except per share amounts):
March 31, 1997 1998 ------- ------- 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
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. 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.
THREE MONTHS ENDED MARCH 31, 1997 1998 --------------------------------------- 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
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. 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. 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. 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. 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. 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 EX-27 2 EXHIBIT 27
5 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 15,616 0 12,538 201 690 31,857 18,208 9,139 95,033 17,395 0 0 0 118 75,353 95,033 0 8,552 0 5,164 2,478 6 35 914 416 498 0 0 0 498 .10 .10
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