1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 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 X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
13,122,352 Shares of Common Stock, par value $.01 per share, at August 12, 1998
2
COMPASS INTERNATIONAL SERVICES CORPORATION
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
General Information
Compass International Services Corporation Consolidated
Statement of Operations for the Three Months Ended June 30,
1998 (Unaudited)
Compass International Services Corporation Consolidated
Statement of Operations for the Six Months Ended June 30, 1998
(Unaudited)
Compass International Services Corporation Consolidated
Balance Sheets at December 31, 1997 and June 30, 1998
(Unaudited)
Compass International Services Corporation Consolidated
Statement of Cash Flows for the Six Months Ended June 30, 1998
(Unaudited)
Compass International Services Corporation Consolidated
Statement of Stockholders' Equity for the Six Months Ended
June 30, 1998 (Unaudited)
The Mail Box, Inc. (Accounting Acquiror) Consolidated
Statements of Operations for the Three and Six Months
Ended June 30, 1997 and the Two Months Ended February 28,
1998 (Unaudited)
The Mail Box, Inc. (Accounting Acquiror) Consolidated
Balance Sheets at December 31, 1997 and February 28,
1998 (Unaudited)
The Mail Box, Inc. (Accounting Acquiror) Consolidated
Statements of Cash Flows for the Six Months Ended June 30,
1997 and the Two Months Ended February 28, 1998 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (Unaudited)
PART II OTHER INFORMATION (Unaudited)
Item 1 Legal Proceedings
Item 2 Changes in Securities and Use of Proceeds
Item 6 Exhibits and Reports on Form 8-K
Signatures
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 "Founding Companies
Acquisition"). The Founding Companies included 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"). Prior to the Offering and the closing of the Founding
Companies Acquisitions, Compass had no operating activities. On June 1, 1998,
Compass reorganized its consumer collections businesses by merging Bomar and
the consumer collections businesses of NCMC and MCA into Compass Receivables
Management Corporation, a newly created entity and a wholly owned subidiary of
Compass.
COMPASS INTERNATIONAL SERVICES CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
THREE MONTHS
ENDED
JUNE 30, 1998
--------------
Revenues $ 33,622
Cost of Revenues 21,830
-------------
Gross Profit 11,792
Selling, general and administrative expenses 7,970
-------------
Operating income 3,822
Interest expense (241)
Interest income 60
-------------
Income before income taxes 3,641
Provision for income taxes 1,663
-------------
Net income $ 1,978
=============
Earnings per share:
Basic $ 0.16
=============
Diluted $ 0.16
=============
Weighted average shares outstanding:
Basic 12,523,516
=============
Diluted 12,665,891
=============
See Notes to Consolidated Financial Statements
4
COMPASS INTERNATIONAL SERVICES CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
SIX MONTHS
ENDED
JUNE 30, 1998
-------------
Revenues $ 42,174
Cost of Revenues 26,994
-------------
Gross Profit 15,180
Selling, general and administrative expenses 10,448
-------------
Operating income 4,732
Interest expense (276)
Interest income 99
-------------
Income before income taxes 4,555
Provision for income taxes 2,079
-------------
Net income $ 2,476
=============
Earnings per share:
Basic $ 0.28
=============
Diluted $ 0.28
=============
Weighted average shares outstanding:
Basic 8,839,344
=============
Diluted 8,929,144
=============
See Notes to Consolidated Financial Statements
5
COMPASS INTERNATIONAL SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, JUNE 30,
1997 1998
(AUDITED) (UNAUDITED)
--------- -----------
ASSETS
Current Assets
Cash and cash equivalents $ - $ 8,919
Trade and other receivables, less
allowance of $395 at June 30, 1998 - 15,778
Inventory - 1,382
Postage on hand - 1,937
Prepaid expenses and other current assets - 2,301
------ --------
Total current assets - 30,317
Deferred offering costs 3,942 -
Property and equipment, net - 14,696
Goodwill - 84,003
Other assets - 1,410
------ --------
Total assets $3,942 $130,426
====== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short term debt $1,045 $ 3,516
Accounts payable and accrued expenses 2,747 10,451
Collections due to clients - 3,804
Postage advances and deposits - 2,001
Income taxes payable - 505
Capital lease obligations - 954
------ --------
Total current liabilities 3,792 21,231
Long-term debt - 19,780
Capital lease obligations - 1,604
Other non-current liabilities - 622
------ --------
Total liabilities 3,792 43,237
------ --------
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 13,108,067 shares
issued and outstanding at December 31, 1997
and June 30, 1998, respectively 17 131
Additional paid-in capital 133 81,079
Retained earnings - 5,979
------ --------
Total stockholders' equity 150 87,189
------ --------
Total liabilities and stockholders' equity $3,942 $130,426
====== ========
See Notes to Consolidated Financial Statements
6
COMPASS INTERNATIONAL SERVICES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS
ENDED
JUNE 30,1998
------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,476
Adjustments to Net income to net cash
provided by operating activities:
Depreciation 1,107
Amortization 646
CHANGES IN OPERATING ASSETS AND LIABILITIES, NET
OF EFFECT FROM ACQUISITIONS:
Accounts receivable 1,969
Inventories (140)
Postage on hand (423)
Prepaid expenses and other current assets (672)
Other assets 335
Accounts payable and accrued expenses (1,276)
Collections due to clients 382
Postage advances and deposits 431
Income taxes payable (63)
Other non-current liabilities (8)
------------
Net cash provided by operating activities 4,764
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property & equipment (3,055)
Business acquisitions, net of cash acquired (37,663)
------------
Net cash used in investing activities (40,718)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital lease obligations (734)
Net proceeds from initial public offering 40,368
Proceeds from revolving credit facility borrowings 19,500
Repayment of debt (14,261)
------------
Cash flows from financing activities 44,873
------------
Net increase in cash and cash equivalents 8,919
Cash and cash equivalents, beginning of period 0
------------
Cash and cash equivalents, end of period $ 8,919
------------
Supplemental Disclosures of cash flow information
Cash paid for interest $ 265
============
Cash paid for income taxes $ 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
============
See Notes to Consolidated Financial Statements
7
COMPASS INTERNATIONAL SERVICES CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL
------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ------- -------- -----
Balance, December 31, 1997 1,682,769 $ 17 $ 133 $ - $ 150
Shares issued in Offering 4,715,000 47 45,995 - 46,042
Offering Costs - - (5,825) - (5,825)
Shares issued for Acquisitions 6,710,298 67 26,741 - 26,808
Retained earnings of Mailbox,
accounting acquiror - - - 3,503 3,503
Increase in value of shares exchanged
for Compass pre-offering shares - - 13,985 - 13,985
Other - - 50 - 50
Net Income - - - 2,476 2,476
---------- ---- ------- ------ -------
Balance, June 30, 1998 13,108,067 $131 $81,079 $5,979 $87,189
========== ==== ======= ====== =======
See Notes to Consolidated Financial Statements
8
THE MAIL BOX, INC.
(ACCOUNTING ACQUIROR)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS SIX MONTHS TWO MONTHS
ENDED ENDED ENDED
JUNE 30, JUNE 30, FEBRUARY 28,
1997 1997 1998
---- ---- ----
Revenues $7,740 $15,804 $ 5,866
Cost of Revenues 5,059 10,367 3,814
------- ------- ---------
Gross Profit 2,681 5,437 2,052
Selling, general and administrative
expenses 1,837 3,653 1,392
------- ------- ---------
Operating income 844 1,784 660
Interest expense 114 209 71
------- ------- ---------
Income before income taxes 730 1,575 589
Provision for income taxes 261 562 217
------- ------- ---------
Net income $ 469 $1,013 $ 372
======= ======= =========
See Notes to Consolidated Financial Statements
9
THE MAIL BOX, INC.
(ACCOUNTING ACQUIROR)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, FEBRUARY 28,
1997 1998
(AUDITED) (UNAUDITED)
--------- -----------
ASSETS
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
========= ==========
See Notes to Consolidated Financial Statements
10
THE MAIL BOX, INC.
(ACCOUNTING ACQUIROR)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS TWO MONTHS
ENDED ENDED
JUNE 30, FEBRUARY 28,
1997 1998
---- ----
Cash Flows from Operating Activities:
Net Income $ 1,013 $ 372
Adjustments to Net income to net cash
provided by operating activities:
Depreciation and amortization 467 168
Provision for doubtful accounts 45 --
Changes in deferred taxes 22 2
Changes in operating assets & liabilities:
Accounts receivable 764 70
Inventory 346 11
Postage on hand 1,676 (204)
Prepaid expense and other assets (89) 29
Income taxes payable 106 (235)
Postage advances and deposits (3,213) 466
Accounts payable and accrued expenses (291) 103
------- ------
Net cash provided by operating activities 846 782
------- ------
Cash flows from investing activities:
Purchases of property & equipment (784) (375)
Proceeds from disposal of property and equipment 38 --
------- ------
Net cash used in investing activities (746) (375)
------- ------
Cash flows from financing activities:
Net (payments) borrowings on line of credit (569) 23
Repayments of capital lease obligations (305) (74)
Repurchase of treasury stock (987) --
Repayment of debt (160) (133)
Proceeds from long term debt 1,360 --
------- -----
Net cash used in financing activities (661) (184)
------- -----
Net (decrease) increase in cash and
cash equivalents (561) 223
Cash and cash equivalents, beginning of period 1,419 16
------- -----
Cash and cash equivalents, end of period $ 858 $ 239
======= =====
Supplemental Disclosure of cash flow information
Cash paid for interest $ 207 $ 71
======= =====
Cash paid for income taxes $ 433 $ 450
======= =====
Noncash investing and financing activities:
Equipment acquired under capital leases $ 594 $ --
======= =====
See Notes to Consolidated Financial Statements
11
COMPASS INTERNATIONAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 Founding Companies
Acquisitions and the Offering occurred on that date. Prior to Offering and the
closing of the Founding Companies Acquisitions, Compass had no operating
activities.
The Founding Companies 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 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. 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 $54.2 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 Founding Companies Acquisitions.
The interim financial statements as of June 30, 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. ACQUISITIONS
During the three months ended June 30, 1998, Compass acquired all of the
outstanding capital stock of two mail services providers, Bender Direct Mail
Service, Inc. and Maher & Associates Mailing Services, Inc., located in Tulsa,
Oklahoma and Dallas, Texas, respectively. Compass also acquired all of the
outstanding capital stock of two affiliated direct mail printing service
providers, MetroWebb, Inc. and MWI Laser Group, Inc., both located in Dallas,
Texas.
During the three months ended June 30, 1998, Compass also acquired the
assets and assumed certain liabilities of Delivery Verification Service, Inc., a
provider of letter-based accounts receivable collection services based in
Wilmington, Delaware, and Nationwide Debt Recovery, Ltd., a provider of consumer
accounts receivable collection services based in Houston, Texas. Compass also
acquired all of the outstanding capital stock of Midwest Collection Service,
Inc., an Indiana based provider of accounts receivable collection services to
the healthcare sector.
The acquisitions described above (collectively the "Purchase
Acquisitions") were acquired for an aggregate purchase price of approximately
$36.2 million, which includes acquisition related costs. In addition, certain
of the Purchase Acquisitions provide that contingent payments may be payable
by Compass in calendar 1999 based on certain of the acquisitions attaining
certain earnings levels during the remainder of calendar 1998. The Purchase
Acquisitions were funded by Compass with cash payments aggregating $24.5
million, of which $19.5 million was borrowed under the $35 million revolving
credit facility, the issuance of 1,274,607 shares of common stock and $1.3
million of notes.
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The Purchase Acquisitions will each be accounted for using the purchase
method of accounting. The excess of the purchase price over the net assets
acquired of approximately $30.4 million is being amortized on a straight-line
basis over 40 years subject to revision as additional information becomes
available. The results of the operations of the Purchase Acquisitions have been
included in the consolidated results of operations of the Company from their
respective dates of acquisition.
3. 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. On August 7, 1998, the
Revolver was amended to increase the total amount available to $50 million. 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 Compass' current and future subsidiaries.
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.
4. 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 Founding Companies 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
$34.2 million. Of this amount, $17.6 million represents the cash consideration
paid to Founding Company shareholders. An additional $13.5 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.
During the three months ended June 30, 1998, Compass issued an additional
1,274,607 shares of unregistered common stock, which contain restrictions on
transfer, in connection with the Purchase Acquisitions.
5. EARNINGS PER SHARE
The six months ended June 30, 1998 represent the results of operations of
Compass since January 1, 1998, the Founding Companies since March 1, 1998 and
the Purchase Acquisitions since their respective dates of acquisition.
The computation of basic earnings per share ("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 (11,833,460) 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 earnings per share for the three months ended June
30, 1998 reflects the number of shares of Common Stock outstanding as of April
1,
13
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 includes 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.
Three Months Six Months
Ended Ended
Shares used in the calculation of
Basic and Diluted EPS: June 30, 1998 June 30, 1998
------------- -------------
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
---------- ---------
6. PRO FORMA RESULTS OF OPERATIONS
The unaudited pro forma financial information for the three and six months
ended June 30, 1997 and 1998 includes the results of Compass combined with the
Founding Companies and the Purchase Acquisitions as if the Offering and Founding
Companies Acquisitions and the Purchase Acquisition had all occurred at the
beginning of each year. The pro forma financial information includes the effects
of: (i) the Founding Companies 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;
(v) amortization of goodwill and other intangible assets resulting from the
Founding Companies Acquisitions and the Purchase Acquisitions; and (vi)
interest expense on additional debt for the Purchase Acquisitions. Prior to
the Founding Companies Acquisitions and the Purchase Acquisitions, the
operations of each company were not under the common control of management.
Consequently, the pro forma financial information may not be indicative of the
results of operations had the Founding Companies Acquisitions and Offering and
the Purchase Acquisitions taken place at the beginning of each year.
14
The pro forma results were (in thousands except per share amounts):
Three Months Three Months
Ended Ended
June 30, 1997 June 30,1998
------------- ------------
Pro Forma Revenues $31,449 $35,262
Pro Forma Net Income $ 1,380 $ 2,422
Pro forma Basic Earnings Per Share $ 0.11 $ 0.19
Six Months Six Months
Ended Ended
June 30, 1997 June 30,1998
------------- ------------
Pro Forma Revenues $61,984 $71,026
Pro Forma Net Income $ 3,216 $ 4,727
Pro forma Basic Earnings Per Share $ 0.25 $ 0.36
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 Founding Companies Acquisitions; (iii) 4,715,000 shares representing
the number of shares sold in the Offering; and (iv) 1,274,607 shares issued
in connection with the Purchase Acquisitions.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (UNAUDITED)
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. Although the Company was formed in April,
1997, there were no operating activities prior to the Offering and the closing
of the Founding Companies Acquisitions. Furthermore, since the Founding
Companies Acquisitions did not occur until March 4, 1998, the historic
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
Purchase Acquisitions from their respective dates of acquisition. Accordingly,
management has also provided a discussion of the 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 JUNE 30, 1998-HISTORICAL
Historical results of operations reflect the activities of Compass and the
Founding Companies since February 28, 1998 and the Purchase Acquisition since
their respective dates of acquisition during the three months ended June 30,
1998.
Revenues. Revenues for the three months ended June 30, 1998 were $33.6 million.
Operating Expenses. Operating expenses for the three months ended June 30, 1998
were $21.8 million, or 64.9% of revenues. Gross profit for the three months
ended June 30, 1998 was $11.8 million, or 35.1% of revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended June 30, 1998 were $8.0
million, or 23.7% of revenues.
Operating Income. Operating income was $3.8 million, or 11.4% of revenues, for
the three months ended June 30, 1998.
SIX MONTHS ENDED JUNE 30, 1998-HISTORICAL
Historical results of operations reflect the activities of Compass and the
Founding Companies since February 28, 1998 and the Purchase Acquisition since
their respective dates of acquisition during the three months ended June 30,
1998.
Revenues. Revenues for the six months ended June 30, 1998 were $42.2 million.
Operating Expenses. Operating expenses for the six months ended June 30, 1998
were $27.0 million, or 64.0% of revenues. Gross profit for the six months ended
June 30, 1998 was $15.2 million, or 36.0% of revenues.
16
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the six months ended June 30, 1998 were $10.4
million, or 24.8% of revenues.
Operating Income. Operating income was $4.7 million, or 11.2% of revenues, for
the six months ended June 30, 1998.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30,
1997-PRO FORMA
Pro forma results presented below assume that the Founding Companies
Acquisitions and the Purchase Acquisitions occurred on January 1, 1997 and
reflect certain pro forma adjustments. See Note 6 of Notes to Consolidated
Financial Statements.
THREE MONTHS ENDED JUNE 30,
1997 1998
---- ----
Revenues $31,449 100.0% $35,261 100.0%
Operating Expenses 20,796 66.1 22,715 64.4
Gross Profit 10,653 33.9 12,546 35.6
Selling, General & Administrative 7,329 23.3 7,419 21.0
Operating Income 2,764 8.8 4,567 13.0
Revenues. Revenues increased $3.8 million, or 12.1%, from $31.4 million in the
three months ended June 30, 1997 to $35.3 million in the three months ended June
30, 1998. The increase was primarily attributable to increases in printing and
mailing services and increased teleservices call volume.
Operating Expenses Operating expenses increased $1.9 million, or 9.2%, from
$20.8 million in the three months ended June 30, 1997 to $22.7 million in the
three months ended June 30, 1998. The increase was primarily attributable to
increases in operating expenses for the printing, mailing and teleservices
operations, which increases were at rates proportionately less than the
increases in their respective revenues, partially offset by a decrease in
operating expenses at the collections and receivable management operations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $142,000, or 1.9%, from $7.3 million in the
three months ended June 30, 1997 to $7.5 million in the three months ended June
30, 1998. This increase was at rates proportionately less than the increase in
revenues which caused selling, general and administrative expenses to decrease
as a percentage of revenue from 23.3% to 21.2%.
Operating Income. Operating income increased $1.8 million, or 63.4%, from $2.8
million in the three months ended June 30, 1997 to $4.5 million in the three
months ended June 30, 1998.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997-PRO
FORMA
Pro forma results presented below assume that the Founding Companies
Acquisitions and the Purchase Acquisitions occurred on January 1, 1997 and
reflect certain pro forma adjustments. See Note 6 of Notes to Consolidated
Financial Statements.
SIX MONTHS ENDED JUNE 30,
1997 1998
---- ----
Revenues $61,984 100.0% $71,025 100.0%
Operating Expenses 40,461 65.3 45,919 64.7
Gross Profit 21,523 34.7 25,106 35.3
Selling, General & Administrative 14,140 22.8 15,120 21.3
Operating Income 6,263 10.1 8,860 12.5
17
Revenues. Revenues increased $9.0 million, or 14.6%, from $62.0 million in the
six months ended June 30, 1997 to $71.0 million in the six months ended June 30,
1998. The increase was primarily attributable to increases in printing and
mailing services and increased teleservices call volumes.
Operating Expenses Operating expenses increased $5.5 million, or 13.5%, from
$40.4 million in the six months ended June 30, 1997 to $45.9 million in the six
months ended June 30, 1998. The increases were primarily attributable to
increases in operating expenses for the printing, mailing and teleservices
operations, which increases were at rates proportionately less than the
increases in their respective revenues, partially offset by a decrease in
operating expenses at the collections and receivable management operations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.0 million, or 7.1%, from $14.1 million in
the six months ended June 30, 1997 to $15.1 million in the six months ended June
30, 1998. These increases were at rates proportionately less than the increase
in revenues which caused selling, general and administrative expenses to
decrease as a percentage of revenue from 22.8% to 21.3%.
Operating Income. Operating income increased $2.6 million, or 41.3%, from $6.3
million in the six months ended June 30, 1997 to $8.8 million in the six months
ended June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY AND CAPITAL TRANSACTIONS
During the six months ended June 30, 1998, net cash provided by operations
activities was approximately $4.8 million. This was comprised of primarily $4.2
million of earnings before depreciation and amortization and a $2.0 million
decrease of accounts receivable. Capital expenditures of approximately $3.0
million were comprised primarily of purchases of equipment for mailing
services and teleservices. Repayment of debt was approximately $14.3 million.
Proceeds from borrowing on the revolving credit facility were $19.5 million.
OFFERING AND ACQUISITIONS
On March 4, 1998, Compass issued an aggregate of 9,535,691 shares of
Common Stock in connection with the Founding Companies 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 $34.2 million. Of this
amount, $17.6 million represents the cash consideration paid to Founding
Company shareholders. An additional $13.5 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.
During the three months ended June 30, 1998, the Company consummated the
Purchase Acquisitions that were acquired for an aggregate purchase price of
approximately $36.2 million, which includes acquisition related costs. In
addition, certain of the Purchase Acquisitions provide that contingent payments
may be payable by Compass in calendar 1999 based on certain of the acquisitions
attaining certain earnings levels during the remainder of calendar 1998. The
Purchase Acquisitions were funded by Compass with cash payments aggregating
$24.5 million, of which $19.5 million was borrowed under the $35 million
revolving credit facility, the issuance of 1,274,607 shares of common stock
and $1.3 million of notes.
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. On August 7, 1998, the
Revolver was amended to increase the total amount available to $50 million. 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
18
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 Compass' current and future subsidiaries. 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. As of August 12, 1998, approximately $18.9 million was
available under the revolving credit facility.
RECENT DEVELOPMENTS
In July, 1998, Compass acquired a consumer accounts receivable collection
services provider based in St. Louis, Missouri and a legal network and accounts
receivable collection services provider based in Washington, DC. Compass issued
14,285 shares of common stock and paid an aggregate cash consideration of
$11.1 million and issued an aggregate of $1.5 million of notes payable to the
prior owners. 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 bank
borrowings and cash flows generated by the Founding Companies and the Purchase
Acquisitions. 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 Purchase Acquisitions 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 are expected to total approximately $4.2
million.
YEAR 2000
The Company is in the process of identifying operating and software
problems related to the "Year 2000" issue, both internally and externally.
Financial reporting systems that are not currently Year 2000 compliant will be
replaced with the new, Year 2000 compliant financial system described above
under "Technology." Such system, which would have been implemented irrespective
of the Year 2000 issue, is expected to be implemented throughout the Company
before December 31, 1998. The Company has identified certain Year 2000 issues
relative to the operations of the commercial collections business and is
currently implementing a systems upgrade that will bring such operations into
compliance. Based in part upon a review by an independent consultant obtained
prior to the Founding Companies Acquisitions, Compass believes that there are
no other material Year 2000 issues at Compass or the Founding Companies. The
Company has not yet completed its analysis of the Year 2000 preparedness of the
businesses acquired in the quarter ended June 30, 1998. 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. However,
any failure to effectively complete the necessary changes to the Company's
financial and operating systems on a timely basis could have a material adverse
effect on the Company's business and results of operations. The Company intends
within the current quarter to communicate with its significant customers,
vendors and other critical service providers to determine if such third 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. Based upon the responses that
it receives from third parties, the Company will assess its risks and develop
contingency plans as needed. There can be no assurance that non-compliance of
third parties will not have a material adverse effect on Compass.
SEASONALITY
The operations of Compass, the Founding Companies and the Purchase
Acquisitions are not subject to seasonal factors that have a material impact on
results from operations.
19
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
Disputes Relating to the APS Patent
On August 11, 1998, the Company announced that it had resolved all
disputes concerning a patent (the "APS Patent") owned by the Company's
subsidiary, National Credit Management Corporation ("NCMC") and used in its
Accelerated Payment Systems ("APS") process to provide telephonic check
drafting services. NCMC was engaged in litigation with the inventor of the APS
process. In addition, NCMC was the plaintiff in two lawsuits (the "Patent
Infringement Lawsuits") alleging that a competitor and a former customer
willfully infringed the APS Patent. Such disputes were described in the
Company's Report on Form 10-Q for the quarter ended March 31, 1998.
On August 4, 1998, NCMC entered into a settlement agreement with
AutoScribe Corp. and Robert E. Pollin, the inventor of the APS process. Pursuant
to the agreement, NCMC assigned its APS patent rights to AutoScribe Corp. in
return for a royalty free license to utilize the patent and other intellectual
property rights for the life of the patent. In addition, NCMC filed a motion
with the Southern District Court in New York substituting AutoScribe Corp. in
place of NCMC as plaintiff in the litigation alleging infringement of the patent
by an APS competitor.
On June 22, 1998, a Stipulation of Dismissal was entered in the United
States District Court for the District of Maryland dismissing litigation between
NCMC and Novus Services and Dean Witter, Discover & Co. alleging patent
infringement. The Dismissal was filed as a result of a settlement agreement
entered into by the parties on June 19, 1998. NCMC received an undisclosed
payment as a result of this agreement.
Other Disputes
In October 1997, Mid-Continent 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. 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.
20
ITEM 2. Changes in Securities and Use of Proceeds.
(c) On April 7, 1998, Compass issued 234,939 shares of common stock to
the stockholders of Bender Direct Mail Service, Inc., as a portion of the
purchase price for Compass' acquisition of the stock of Bender Direct Mail
Service, Inc.
On May 1, 1998, Compass issued 284,112 shares of common stock to the sole
stockholder of Maher & Associates Mailing Services, Inc., as a portion of the
purchase price for Compass' acquisition of the stock of Maher & Associates
Mailing Services, Inc.
On May 22, 1998, Compass issued 550,000 shares of common stock to the
stockholders of Metro Webb, Inc. and MWI Laser Group, Inc., as a portion of the
purchase price for Compass' acquisition of the stock of MetroWebb, Inc. and MWI
Laser Group, Inc.
On June 14, 1998, Compass issued 205,556 shares of common stock to
Nationwide Debt Recovery, Ltd., as a portion of the purchase price for Compass'
acquisition of the assets of the Nationwide Debt Recovery, Ltd.
All such sales were exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933, as amended, as transactions not involving a public
offering.
(d) In March 1998, the Company completed an initial public offering of
$4,715,000 shares of common stock at a price to the public of $10.50 per share
for gross proceeds of $49,507,500. The Company paid underwriting discounts of
$3,465,525 and offering expenses of approximately $5,825,000. Of such offering
expenses, $2,366,932 was paid to BGL Capital Partners, L.L.C., an affiliate of
the Company, as reimbursement for amounts advanced by BGL, together with
interest on such advances. Of the $40,217,000 in net proceeds, $17,636,000 was
paid to shareholders of the Founding Companies as a portion of the purchase
price for the Founding Companies Acquisitions, $13,505,000 was used to repay
Founding Company indebtedness, approximately $5,000,000 was used to finance
acquisitions that occurred in the quarter ended June 30, 1998 and $500,000 was
used to repay indebtedness of the acquisition that occurred in the quarter
ended June 30, 1998. The balance of the proceeds were used to finance working
capital requirements consisting primarily of $1,700,000 for federal income
taxes.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
Exhibit No. 27 - Financial Data Schedule
(b) FORM 8-K:
No reports on Form 8-K were filed during the three months ended June
30, 1998.
21
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.
COMPASS INTERNATIONAL SERVICES CORPORATION
Dated: August 14, 1998 By: /s/ Michael J. Cunningham
---------------------------------------
Michael J. Cunningham
Chairman of the Board and
Chief Executive Officer
Dated: August 14, 1998 By: /s/ Vincent A. Favia
---------------------------------------
Vincent A. Favia
Chief Accounting Officer