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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, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 000-23217
COMPASS INTERNATIONAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 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:
As of May 13, 1999, 14,405,973 Shares of Common Stock, par value $.01 per share,
were outstanding.
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COMPASS INTERNATIONAL SERVICES CORPORATION
FORM 10-Q
PART I FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited):
General Information 3
Consolidated Statements of Operations for the
Three Months Ended March 31, 1999 and 1998 3
Consolidated Balance Sheets at March 31, 1999 and
December 31, 1998 4
Consolidated Statement of Stockholders' Equity for
the Three Months Ended March 31, 1999 5
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 18
PART II OTHER INFORMATION
Item 1 Legal Proceedings 18
Item 2 Changes in Securities and Use of Proceeds 19
Item 6 Exhibits and Reports on Form 8-K 20
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAL INFORMATION
Compass International Services Corporation ("Compass" or the "Company") was
organized to create a leading provider of outsourced business services to public
and private entities throughout the United States. On March 4, 1998,
simultaneously with the closing of its initial public offering (the "Offering")
of its common stock (the "Common Stock"), Compass acquired all of the
outstanding capital stock of five companies providing accounts receivable
management services, mailing services and teleservices (the "Founding
Companies") in separate purchase transactions (the "Acquisitions"). The Founding
Companies included The Mail Box, Inc., National Credit Management Corporation,
B.R.M.C. of Delaware, Inc., Mid-Continent Agencies Inc. and Impact Telemarketing
Group, Inc. Prior to the Offering and the closing of the Founding Companies
Acquisitions, Compass had no operating activities. Subsequent to the Offering,
Compass completed nine additional acquisitions and reorganized certain of its
operating entities.
COMPASS INTERNATIONAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
1999 1998
---- ----
Net revenues $ 41,720 $ 8,552
Cost of revenues 28,640 5,164
----------- -----------
Gross profit 13,080 3,388
Selling, general and
administrative expenses 9,469 2,348
Goodwill amortization 888 130
----------- -----------
Operating income 2,723 910
Interest expense
(income), net 1,174 (4)
----------- ------------
Income before provision
for income taxes 1,549 914
Provision for income taxes 692 416
---------- -----------
Net income $ 857 $ 498
========== ===========
Net income per share:
Basic and diluted $ 0.06 $ 0.10
========== ==========
Weighted average number of shares outstanding:
Basic 14,405,973 5,114,237
========== =========
Diluted 14,405,973 5,150,450
========== =========
See Notes to Consolidated Financial Statements
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COMPASS INTERNATIONAL SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
1999 1998
---- ----
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 9,075 $ 8,606
Cash held in trust for clients 5,690 4,346
Trade receivables, less
allowance of $737 at March 31, 1999
and $725 at December 31, 1998 21,783 20,704
Inventory 1,352 1,282
Postage on hand 1,790 2,067
Prepaid expenses and other current assets 1,308 1,819
Deferred income taxes 877 877
------ --------
Total current assets 41,875 39,701
Property and equipment, net 18,804 18,285
Goodwill, net 127,977 127,857
Other assets 1,056 1,495
-------- --------
Total assets $189,712 $187,338
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade payables $ 6,709 $ 6,783
Accrued expenses 6,741 5,540
Accrued earn-outs payable 3,500 8,904
Collections due to clients 5,690 4,346
Customer postage advances and deposits 2,485 2,484
Notes payable 7,180 1,924
Capital lease obligations 1,702 1,798
-------- --------
Total current liabilities 34,007 31,779
Long-term debt 53,000 48,000
Notes payable 1,569 7,760
Capital lease obligations 3,124 2,644
Deferred income taxes 273 273
-------- --------
Total liabilities 91,973 90,456
-------- --------
Stockholders' equity:
Preferred stock, 10,000,000 shares authorized
$.01 par value, no shares issued or outstanding - -
Common stock, 50,000,000 shares authorized
$.01 par value, 14,405,973 and 13,804,846 shares
issued and outstanding at March 31, 1999 and
December 31, 1998, respectively 144 138
Additional paid-in capital 87,536 85,041
Value of shares to be issued - 2,501
Retained earnings 10,059 9,202
-------- --------
Total stockholders' equity 97,739 96,882
-------- --------
Total liabilities and stockholders' equity $189,712 $187,338
======== ========
See notes to Consolidated Financial Statements.
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COMPASS INTERNATIONAL SERVICES CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ADDITIONAL
COMMON STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ------- -------- -----
Balance, December 31, 1998 13,804,846 $138 $87,542 $9,202 $96,882
Shares issued for earn-outs 601,127 6 (6) - -
Net Income - - - 857 857
----------- ---- ------- ------- -------
Balance, March 31, 1999 14,405,973 $144 $87,536 $10,059 $97,739
========== ==== ======= ======= =======
See Notes to Consolidated Financial Statements
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COMPASS INTERNATIONAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 857 $ 498
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 1,074 205
Amortization 888 130
CHANGES IN OPERATING ASSETS AND LIABILITIES, NET
OF EFFECT FROM ACQUISITIONS:
Cash held in trust for clients (1,344) -
Trade receivables (1,079) 105
Inventory (70) 32
Postage on hand 277 (377)
Prepaid expenses and other current assets 916 (2)
Other liabilities - 51
Accounts payable and accrued expenses 1,127 388
Collections due to clients 1,344 461
Customer postage advances and deposits 1 474
Income taxes payable - 357
------- --------
Net cash provided by operating activities 3,991 2,322
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property & equipment (699) (498)
Business acquisitions, net of cash acquired (6,378) (16,203)
------- -------
Net cash used in investing activities (7,077) (16,701)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital lease obligations (510) (70)
Net proceeds from initial public offering - 41,926
Proceeds from credit facility 5,000 -
Repayment of debt (935) (13,011)
------- --------
Net cash provided by financing activities 3,555 28,845
------- --------
Net increase in cash and cash equivalents 469 14,466
Cash and cash equivalents, beginning of period 8,606 -
------- --------
Cash and cash equivalents at end of period $ 9,075 $ 14,466
======= ========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 986 $ 88
======= ========
Cash paid for income taxes $ 534 $ 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 (2,088)
--------
Net cash paid for acquisitions $ 16,203
========
In 1999, non-cash financing activities included $841 of capital lease
obligations incurred for equipment.
See Notes to Consolidated Financial Statements
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COMPASS INTERNATIONAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
NOTE 1 - BUSINESS AND ORGANIZATION
Compass International Services Corporation, a Delaware corporation
("Compass" or the "Company") is a leading provider of accounts receivable
management services and other complementary outsourced services. Compass'
Accounts Receivable Management segment provides a suite of accounts receivable
management solutions to clients, including traditional third party collection
services, pre-collection customer contact programs, innovative payment options,
credit report-related services, an attorney network for severely delinquent
accounts, and bankruptcy and probate collection strategies. Compass' Print and
Mail segment offers printing, mailing and related services which complement the
accounts receivable management services, including expertise and efficiency in
direct mail and billing, presorting, freight and drop shipping, data processing,
laser printing, mailing list rental and order fulfillment. The Company's
Teleservices segment provides state-of-the-art call management and reporting.
On March 4, 1998, simultaneously with the closing of the Company's
initial public offering ("IPO" or the "Offering") of its common stock, Compass
acquired in separate purchase transactions, all of the outstanding capital stock
of five companies providing accounts receivable management services, print and
mail services and teleservices (the "Founding Companies"). Prior to the
Offering, Compass had no operating activities. Since the Offering, Compass has
completed nine additional acquisitions and has reorganized certain of its
operating entities. These consolidated financial statements reflect the results
of operations of Compass and its subsidiaries subsequent to the IPO and initial
acquisitions.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions for Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of only
normal recurring items) considered necessary for a fair presentation have been
included. Operating results for the three month period ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999 or for any other interim period. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K, as amended, filed
with the Securities and Exchange Commission.
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Principles of Consolidation
The consolidated financial statements include the accounts of Compass
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. While management believes that the estimates and related
assumptions used in the preparation of these financial statements are
appropriate, actual results could differ from those estimates.
Earnings Per Share
Basic and diluted earnings per share have been calculated based upon
the provisions of FASB Statement No. 128, Earnings per Share. Basic earnings per
share ("Basic EPS") for the three months ended March 31, 1999 reflect the number
of shares of Common Stock outstanding for the entire period. The average market
price for the quarter was below the exercise price of all outstanding options
and warrants. Therefore, all outstanding options and warrants would have had an
anti-dilutive effect on earnings per share and have been excluded from the
calculation.
The computation of 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") for
the 1998 period includes the effect of options and warrants outstanding during
such period.
Shares used in the calculation of EPS for the three months ended March 31, 1998
are as follow:
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
=========
NOTE 3 - ACQUISITIONS
Founding Companies
On March 4, 1998, Compass acquired the Founding Companies for
consideration consisting of common stock, cash and debt. The closing of the
Founding Companies Acquisitions and the Offering occurred on that date. The
Founding Companies include providers of accounts receivable management
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services: National Credit Management Corporation, B.R.M.C. of Delaware,
Inc., Mid-Continent Agencies, Inc.; print and mail services: The Mail Box, Inc.
("Mail Box"); and telemarketing services: Impact Telemarketing Group, Inc. Mail
Box has been identified as the accounting acquirer. Accordingly, in recording
the Founding Companies Acquisitions, the accounts of Mail Box continue to be
reflected on its historic basis of accounting, while the aggregate purchase
price for the other Founding Companies was allocated based on the fair value of
assets acquired and liabilities assumed.
Acquired Companies
Subsequent to the IPO, the Company made additional acquisitions in the
accounts receivable management services and the print and mail services
industries. These acquisitions included the following accounts receivable
management services companies: Professional American Collections, Inc.
Nationwide Debt Recovery, Ltd., Delivery Verification Service, Inc., Midwest
Collection Service, Inc., R.C. Wilson Company, and Rosenfeld Attorney Network.
The print and mail services companies acquired included: Metrowebb, Inc. and MWI
Laser Group, Inc., Maher & Associates Mailing Services, Inc. and Bender Direct
Mail Service, Inc. The businesses acquired by Compass subsequent to the IPO are
collectively referred to as the "Acquired Companies." The aggregate purchase
price for each acquisition has been assigned to their respective assets based
upon the fair value of the assets acquired and liabilities assumed. As each of
these acquisitions has been accounted for as a purchase, the Company's
consolidated financial statements reflect the operations of the acquired
companies subsequent to the respective date of the acquisition.
Pursuant to the acquisitions, the Company undertook a program to
consolidate and streamline the operations of the accounts receivable management
services operations and to eliminate certain other redundant positions. A total
charge amounting to $1,433 was recorded as part of the goodwill recorded in the
acquisition transactions. Of this amount, $1,333 related to the severance of
approximately 20 employees and $100 related to the close-down and consolidation
of operations. As of March 31, 1999, $409 was included in accrued expenses
relating to severance.
The following unaudited pro forma summary presents the combined results
of operations of the Company, the Founding Companies and the Acquired Companies,
as if the acquisitions and Compass' IPO occurred at January 1, 1998. The pro
forma amounts give effect to certain adjustments including: adjustments to
salaries, bonuses and benefits to former owners and key management of the
Founding Companies and the Acquired Companies, repayment of long-term debt
acquired, amortization of goodwill and other intangible assets resulting from
the acquisitions and the Founding Companies and the Acquired Companies, interest
expense on additional debt for the Acquired Companies and provision for income
taxes as if income were subject to corporate federal and state income taxes
during the period. The pro forma summary does not purport to represent what
Compass' operations would actually have been if such transactions had occurred
on January 1, 1998, and are not necessarily representative of Compass' results
of operations for any future period.
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Since the Founding Companies and the Acquired Companies were not under common
control or management prior to their acquisition by Compass, historical combined
results may not be comparable to, or indicative of, future performance.
MAR. 31, 1998
-------------
(Unaudited)
Net revenues $45,472
Operating income $6,208
Net income $2,975
Net income per share-basic $ 0.21
NOTE 4 - CREDIT FACILITY
On March 30, 1999, the Company's $55 million credit facility was
amended to: a) revise certain definitions, b) establish termination fees should
the facility be terminated prior to December 31, 1999, c) prohibit additional
acquisitions until the Leverage Ratio, as defined, is less than 2-to-1 for two
consecutive fiscal quarters, but at least until January 1, 2000, d) increase the
Maximum Leverage Ratio, as defined, from 2.0 to a quarterly scale ranging from
3.0-to-1 to 2.25-to-1, e) establish a Maximum Senior Leverage Ratio and f)
redefine the Debt-to-Capitalization Ratio. The Company was in compliance with
all of the covenants contained in the credit agreement for the period ended
March 31, 1999 and through the date of filing on Form 10-Q.
In addition, pursuant to the amendment, the interest rate under the credit
agreement was increased from 150 basis points to 225 basis points over the
Interbank Offered Rate or a Base Rate as defined in the Agreement.
NOTE 5 - BUSINESS SEGMENTS
The Company's operations are principally in three industry segments:
accounts receivable management services, print and mail services and
teleservices. The Company's operations are principally within the United States.
It should be noted that industry segment information might be of
limited usefulness in comparing an industry segment of the Company with a
similar industry segment of another enterprise.
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Selected information by industry segment is summarized below for the
quarters ended March 31, 1999 and 1998, respectively. The consolidated financial
statements reflect the results of operations of Compass and its subsidiaries
subsequent to the IPO. Therefore, the results of operations for the three months
ended March 31, 1998 reflect one month of operating activity.
ACCOUNTS
RECEIVABLES PRINT & TELESER- CONSOLID-
MANAGEMENT MAIL VICES CORPORATE ATED
---------- ---- --------- --------- ----
Three months ended March 31, 1999
- ---------------------------------
Net revenues $ 22,607 $14,827 $4,286 $ 41,720
======== ======= ====== ========
Operating income $ 3,651 $ 529 $ 367 $(1,824) $ 2,723
======== ======= ====== ======== ========
Total assets $122,747 $42,284 $7,473 $17,208 $189,712
======== ======= ====== ======= ========
Depreciation $ 400 $ 570 $ 51 $ 53 $ 1,074
======== ======= ====== ======= ========
Capital expend-
itures $ 85 $ 1,118 $ 25 $ 312 $ 1,540
======== ======= ====== ======= ========
Three months ended March 31, 1998
- ---------------------------------
Net revenues $ 3,849 $ 3,176 $ 1,527 $ 8,552
======= ======= ======= ========
Operating income $ 522 $ 572 $ 116 $ (300) $ 910
======= ======= ====== ========= ========
Total assets $54,703 $12,324 $8,090 $19,916 $ 95,033
======= ======= ====== ======= ========
Depreciation $ 96 $ 88 $ 21 $ - $ 205
======== ======= ====== ======= ========
Capital expend-
itures $ 123 $ 354 $ - $ 21 $ 498
======== ======= ====== ======= ========
NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement No. 133, Accounting for
Derivative Instruments and for Hedging Activities. The statement is effective
for fiscal years beginning after June 15, 1999 and defines a derivative and
establishes common accounting principles for all types of instruments. The
Company plans to adopt Statement No. 133 for the fiscal year ending December 31,
2000, however, management does not expect its adoption to have a significant
impact on the Company's financial position, results of operations or cash flows.
NOTE 7 - SUBSEQUENT EVENTS
On May 12, 1999, the Company signed a definitive agreement with NCO
Group, Inc. ("NCO"), a provider of accounts receivable management services,
under which NCO will acquire all outstanding shares of Compass in a
stock-for-stock transaction. Under the terms of the transaction, it is
anticipated that NCO will issue 0.23739 shares of NCO common stock in exchange
for each common share of Compass.
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In conjunction with the above transaction, Compass will divest its
Print and Mail business to a company formed by the division's current management
team for total cash consideration of approximately $35.1 million plus assumption
of certain obligations.
The NCO transaction is subject to customary closing conditions,
including Hart-Scott-Rodino approval, approval by Compass' shareholders and
completion of the management buyout of the Print and Mail division. Both
transactions are currently expected to close in the third quarter of 1999.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements of Compass and related notes thereto included herein and in
the Company's Form 10-K as amended and filed with the Securities and Exchange
Commission.
Presented below are discussions of the Company's results of operations on both a
historical and pro forma basis. Although the Company was formed in April, 1997,
there were no operating activities prior to the IPO and the closing of the
Founding Companies Acquisitions. Furthermore, since the Founding Companies
Acquisitions did not occur until March 4, 1998, the historical operating results
for the quarter ended March 31, 1998 include only one month of results from the
Founding Companies. The Company did not make any additional acquisitions in the
month of March 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1998-HISTORICAL
NET REVENUES. Net revenues for the three months ended March 31, 1999 amounted to
$41.7 million. Among the segments, Accounts Receivable Management contributed
$22.6 million, or 54.2%, Print and Mail contributed $14.8 million, or 35.5%, and
Teleservices contributed $4.3 million, or 10.3%.
Net revenues for the three months ended March 31, 1998 amounted to $8.5
million. Among the segments, Accounts Receivable Management contributed $3.8
million, or 45.0%, Print and Mail contributed $3.2 million, or 37.1%, and
Teleservices contributed $1.5 million, or 17.9%.
COST OF REVENUES. Cost of revenues for the three months ended March 31, 1999
were $28.6 million, or 68.6% of net revenues. By segment, cost of revenues for
Accounts Receivable Management amounted to $13.9 million, or 61.5% of segment
net revenues. Cost of revenues for Print and Mail amounted to $11.5 million, or
77.3% of segment net revenues. Cost of revenues for Teleservices amounted to
$3.2 million, or 74.4% of net revenues.
Cost of revenues for the three months ended March 31, 1998 amounted to
$5.2 million or 60.4% of net revenues. Among the segments, cost of revenues for
Accounts Receivable Management amounted to $2.0 million, or 52.6% of net
revenues. Cost of revenues for Print and Mail amounted to $2.1 million, or
65.6% of net revenues. Cost of revenues for Teleservices amounted to $1.1
million, or 73.3% of net revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expense for the three months ended March 31, 1999 were $10.3
million, or 24.7% of net revenues. Selling, general and administrative expenses
in the Accounts Receivable Management segment amounted to $4.9 million, or 21.7%
of segment net revenues. Selling, general and administrative expenses in the
Print and Mail segment amounted to $2.8 million, or 18.9% of segment net
revenues. Selling, general and administrative expenses for the Teleservices
segment amounted to $0.8 million, or 18.7% of segment net revenues.
Corporate expenses amounted to $1.8 million and included $0.3 million
relating to the evaluation of the Company's strategic investment alternatives.
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Selling, general and administrative expenses for the three months ended
March 31, 1998 were $2.5 million or 29% of net revenues.
INTEREST EXPENSE. Interest expense amounted to $1.2 million in the current
period. The interest primarily relates to borrowings under the Company's credit
facility, which were used to make acquisitions and loans from selling
shareholders in connection with the acquisition of their companies, and to
interest imputed on capital leases.
Interest income, net for the 1998 period was negligible as the Company
had not completed its credit facility and had made no acquisitions other than
the Founding Companies.
INCOME TAXES. The effective income tax rates used for the 1999 and 1998 periods
were 44.7% and 45.5%, respectively, as compared to the statutory rate of 35%.
The difference primarily relates to the effects of state income taxes and the
non-deductibility of goodwill arising primarily from the stock acquisitions.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31,
1998-PRO FORMA
Pro forma results of operations presented below assume that the IPO,
the Founding Companies Acquisitions and the subsequent acquisitions occurred on
January 1, 1998 and reflect certain pro forma adjustments. See Note 3 of Notes
to the Consolidated Financial Statements.
(Dollars in thousands)
THREE MONTHS ENDED MARCH 31,
1999 1998
---- ----
Net revenues $41,720 $45,472
Cost of revenues 28,640 30,151
------- -------
Gross Profit 13,080 15,321
Selling, general and
administrative expenses 10,357 9,113
------- -------
Operating income $ 2,723 $ 6,208
======= =======
NET REVENUES. Net revenues decreased $3.8 million, or 8.4%, from $45.5
million for the three months ended March 31, 1998 to $41.7 million for the three
months ended March 31, 1999.
Net revenues for the Accounts Receivable Management segment increased
$0.3 million, or 1.3%, from $22.3 million to $22.6 million.
Net revenues for the Print and Mail segment decreased $3.6 million, or
19.6%, from $18.4 million to $14.8 million. $3.2 million of the decrease
resulted from the segment's largest customer, who, as a result of competitive
pressures, changed direct mail advertising campaigns from long-run print and
mail roll-outs to short-run test packages. Net revenues for the segment included
a one-time large order in the first quarter of 1998. New customers and volume
increases with existing customers resulted in $1.1 million of new net revenues.
Net revenues for the Teleservices segment decreased $0.5 million, or
10%, from $4.8 million to $4.3 million. This decrease was expected as the
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segment implemented a strategy designed to replace high volume but low margin
business with more profitable client relationships.
COST OF REVENUES. Cost of revenues decreased $1.5 million, or 5.0%, from $30.1
million for the prior year three month period to $28.6 million for the current
year three month period. Cost of revenues as a percentage of net revenues
amounted to 68.6% for the 1999 period as compared to 66.3% for the 1998 period.
Cost of revenues for the Accounts Receivable Management segment
increased by $0.4 million, or 3%, from $13.5 million to $13.9 million. This
increase is reflective of a shift in the mix of service offerings in the
segment.
Cost of revenues for the Print and Mail segment decreased $1.6 million,
or 12.2%, from $13.1 million to $11.5 million. As a percentage of net revenues,
these costs increased from 71.2% to 77.3%. The increase reflects the excess
capacity that resulted from the reduced level of business during the current
quarter as compared to the same period of 1998.
Cost of revenues for the Teleservices segment decreased $0.4 million,
or 11.1%, from $3.6 million to $3.2 million. As a percentage of net revenues,
these costs amounted to 73.5% for the 1999 period as compared to 75.2% for the
same period of 1998. The decrease in cost of revenues as a percentage of net
revenues reflects management's efforts to focus on higher margin business as
well as a reduction in telecommunications expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the 1999 period increased $1.3 million, or 14.3%,
from $9.1 million to $10.4 million. As a percentage of net revenues, such
expenses increased to 24.8% in 1999 from 20.0% in 1998.
Selling, general and administrative expenses in the Accounts Receivable
Management segment increased $0.1 million, or 2.1%, from $4.8 million to $4.9
million. This increase is reflective of the continued cost of integration of the
separate business units within the segment.
Selling, general and administrative expenses in the Print and Mail
segment increased $0.4 million, or 16.0%, from $2.5 million to $2.9 million.
This increase is reflective of the cost of additional administrative personnel.
Selling, general and administrative expenses for the Teleservices
segment decreased $0.2 million, or 20%, from $1.0 million to $0.8 million. The
decrease reflects efficiencies gained from improved systems in the areas of
administration and client services.
Corporate expenses increased $1.0 million, or 125.0%, from $0.8 million
to $1.8 million. This increase reflects the addition of personnel, legal,
consulting and other professional fees and costs associated with evaluating the
strategic alternatives available to the Company.
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended March 31, 1999, net cash provided by operating
activities amounted to $4.0 million. Operating activities included $2.8
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million of earnings before depreciation and amortization. Changes in operating
assets and liabilities added an additional $1.2 million in net cash.
Cash used in investing activities for the first quarter of 1999
included net cash paid for acquisitions completed in 1998, primarily related to
earn-out agreements, in the amount of $6.4 million, and $0.7 million in capital
expenditures which were primarily comprised of purchases of equipment for Print
and Mail Services.
Financing activities for the quarter ended March 31, 1999 generated net
cash in the amount of $3.6 million. Of this amount, proceeds in the amount of
$5.0 million were borrowed under the Company's revolving credit facility (which
is further discussed in the following paragraphs). Financing activities that
required cash included the repayment of acquired debt in the amount of $0.9
million and repayments of capital lease obligations of $0.5 million.
On March 30, 1999, the Company's $55 million credit facility (the
"Agreement") was amended to: a) revise certain definitions, b) establish
termination fees should the facility be terminated prior to December 31, 1999,
c) prohibit additional acquisitions until the Leverage Ratio, as defined, is
less than 2-to-1 for two consecutive fiscal quarters, but at least until January
1, 2000, d) increase the Maximum Leverage Ratio, as defined, from 2.0 to a
quarterly scale ranging from 3.0-to-1 to 2.25-to-1, e) establish a Maximum
Senior Leverage Ratio and f) redefine the Debt-to-Capitalization Ratio.
In addition, the interest rate under Agreement was increased from 150
basis points to 225 basis points over the Interbank Offered Rate or a Base Rate
as defined in the Agreement. The Company was in compliance with all of the
covenants under the Agreement for the period ended March 31, 1999.
At March 31, 1999, borrowings under the Agreement totaled $53 million,
there were $.8 million in outstanding letters of credit and $1.2 million
remained available for borrowing. An additional $0.7 million was borrowed in
April 1999.
During the three months ended March 31, 1999, the Company has paid $5.4
million in cash with respect to earn-out agreements, and the Company expects to
pay up to an additional $3.5 million (of which, $1.0 million was paid in April
1999). The cash payments under notes payable remaining to be paid during 1999 is
expected to be $0.5 million. The Company anticipates that the integration and
consolidation of acquired print and mail companies will result in cash payments
of approximately $1.4 million in 1999.
Based upon its current projections, management believes that cash flows
from operations combined with the remaining availability under the Agreement
will be sufficient to meet the Company's working capital needs in 1999.
SEASONALITY
The operations of Compass are not subject to seasonal factors that have
a material impact on the results of operations.
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RECENT DEVELOPMENTS
On May 12, 1999, the Company signed a definitive agreement with NCO, a
provider of accounts receivable management services, under which NCO will
acquire all outstanding shares of Compass in a stock-for-stock transaction.
Under the terms of the transaction, it is anticipated that NCO will issue
0.23739 shares of NCO common stock in exchange for each common share of Compass.
In conjunction with the above transaction, Compass will divest its
Print and Mail business to a company formed by the division's current management
team for total cash consideration of approximately $35.1 million plus assumption
of certain obligations.
The NCO transaction is subject to customary closing conditions,
including Hart-Scott-Rodino approval, approval and completion of the management
buyout of the Print and Mail division. Both transactions are currently expected
to close in the third quarter of 1999.
YEAR 2000
The Company has assembled a Year 2000 Task Force which continues
identifying and assessing potential operating and software problems related to
the "Year 2000" issue, both internally and externally. The Company's Year 2000
program is addressing both information technology and non-information
technology. The Company's Year 2000 Task Force has completed an inventory of the
hardware and software used in its operations, has prioritized the hardware and
software into "mission critical" and "non-mission critical" and has assessed the
Year 2000 readiness of all of the "mission-critical" and the majority of the
"non-mission critical" hardware and software inventoried. Based on this effort,
the Company has identified only non-material Year 2000 issues, all of which are
being remediated and will also be tested on or before September 30, 1999. Two of
the Company's acquisitions have non-compliant hardware and software, but the
hardware and software used by those acquisitions are in the process of being
replaced in the course of a broader upgrade which will bring them into
compliance. Additionally, the Company has communicated with landlords,
significant vendors and other critical service providers to determine if such
parties are year 2000 compliant or have effective plans in place to address the
year 2000 issue and to determine the extent of the Company's vulnerability to
the failure of such parties to remediate such issues. It has received responses
from many of these third parties and is awaiting responses and/or re-contacting
the non-responding third parties. None of the responses received to date have
identified any Year 2000 issues which are not on-track to be remediated well in
advance of the requisite date(s). The Company will continue to assess its risks
and develop appropriate contingency plans as needed if responses from landlords,
significant vendors and other critical service providers so warrant. The Company
does not believe that the costs of modifications, upgrades or replacements which
would not have been incurred but for the Year 2000 issue will be material.
The Company does not expect the impact of the Year 2000 to have a
material adverse impact on the Company's business or results of operations.
However, any failure to effectively complete the necessary changes to the
Company's financial and operating systems on a timely basis, or, the occurrence
of unanticipated or undiscovered Year 2000 compliance problems could have a
material adverse effect on the Company's business and results of operations. In
addition, there can be no assurance that Year 2000 non-compliance by any of the
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Company's clients or significant suppliers or vendors will not have a material
adverse effect on the Company's business or results of operations.
FORWARD-LOOKING INFORMATION-SAFE HARBOR STATEMENT
Certain statements contained in this discussion regarding future events
and financial performance are not based on historical facts and, as such,
constitute "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, that involve uncertainties and risk.
There can be no assurance that actual results will not differ materially from
the Company's expectations. Factors that could cause such differences include
the Company's ability to achieve expected growth in revenues, earnings and
operating efficiencies, year 2000 uncertainties and other risks described in the
Company's Form 10-K, as amended and Form S-1 filed with the Securities and
Exchange Commission at the time of the IPO.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risk (i.e. the risk of loss arising from adverse
changes in market rates and prices) to which the Company is exposed is interest
rates on debt.
At March 31, 1999, the Company had $13 million of debt subject to
variable interest rates. A one percent change in interest rates would impact
interest expense by $0.13 million with respect to the amount of debt that is
subject to variable interest rates.
The Company has entered into interest rate swap arrangements to reduce
the risk of increases in interest rates on $40 million of outstanding Revolver
debt through October 15, 2000. A one percent change in interest rates would have
affected interest expense by $0.4 million with respect to the amount of debt
covered by the interest rate swaps.
The Company does not hold or issue derivative financial instruments for
speculation or trading purposes.
Part II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 1997, Mid-Continent Agencies, Inc. (a Founding Company) and
its New York subsidiary filed a lawsuit in the State of New York, Supreme Court,
County of Erie (the "New York Supreme Court") against Vincent S. Burgio, Eric R.
Main and Michael Luksch (all of whom are former employees of Mid-Continent's
subsidiary), as well as Continental Commercial Group of New York, Inc. and L.A.
Commercial Group, Inc. The complaint alleges (i) breach of employment agreement;
(ii) breach of the duty of loyalty; (iii) interference with business
relationships; (iv) conversion of confidential information; and (v)
misappropriation of trade secrets, and seeks injunctive relief and unspecified
damages.
In February 1998, the defendants in the above-described lawsuit filed
two lawsuits in the New York Supreme Court. The first lawsuit, filed by Mr.
Burgio, names as defendants Mid-Continent, its New York subsidiary, and William
Vallecorse, an employee of the subsidiary, and alleges (i) breach of contract;
(ii) breach of contract and constructive discharge; (iii) fraud; (iv) tortious
interference with employment contract; and (v) unjust
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enrichment. The complaint seeks aggregate damages in excess of $1.3
million. The second lawsuit, filed by Messrs. Burgio, Main and Luksch, names as
defendants Mid-Continent, its New York subsidiary, Les J. Kirschbaum, Mr.
Vallecourse and Michelle Helmer (an employee of the New York subsidiary),
alleges defamation of Messrs. Burgio, Main and Luksch and seeks aggregate
compensatory damages of $1.5 million in addition to punitive damages. The
Company believes that the allegations against it and its co-defendants are
without merit, however, because this litigation is still at an early state, its
outcome cannot be predicted. The cases remain in the discovery stage. The former
stockholders of Mid-Continent Agencies, Inc. agreed, in the purchase agreement
whereby Compass agreed to purchase Mid-Continent, to indemnify the Company for
losses and damages, if any, arising from these lawsuits.
In October 1998, a subsidiary of one of the Founding Companies, Bomar
Credit Corporation, and Compass Receivable Management Corporation, a subsidiary
of the Company, received a Civil Investigative Demand from the Federal Trade
Commission's ("FTC") Chicago Regional Office requesting various categories of
information relating to compliance with the Fair Debt Collection Practices Act.
The Company is cooperating fully with the FTC's request. The Company, along with
counsel, has reviewed the requests, but since the matter is still in the very
early state, an assessment of its duration and outcome, and associated liability
and expense, if any, cannot reasonably be made at this time. However, there can
be no assurances that future developments relating to this matter will not have
a material adverse impact on the Company's business, financial condition or
results of operations.
The Company is not involved in any other legal proceedings material to
the business, financial condition or results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 31, 1999, Compass issued 105,256 shares of common stock to
each of the Steven B. McCormick Trust, the David P. McCormick Trust, and the
Mark E. McCormick Trust pursuant to earn out provisions contained in the
acquisition agreement related to the Company's acquisition of Professional
American Collections, Inc. The shares were valued at a price of $4.03 per share.
This value represents the $5.88 closing price of the common stock on March 30,
1999, as discounted to reflect the remaining one and 3/4-year restriction on
transferability of the shares as provided in the acquisition agreement.
On March 31, 1999, Compass issued 142,680 shares of common stock to
David D. Schultz and 142,679 shares of common stock to Patricia A. Nowak
pursuant to earn out provisions contained in the acquisition agreement related
to the Company's acquisition of Nationwide Debt Recovery, Ltd. The shares were
valued at $4.30 per share. This value represents the $5.88 closing price of the
common stock on March 30, 1999, as discounted to reflect the remaining
approximate one and 1/2-year restriction on transferability of the shares as
provided in the acquisition agreement.
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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
2.1 Agreement and Plan of Merger dated May 12, 1999 among
the Company, NCO Group, Inc. and Cardinal Acquisition
Corporation. Registrant agrees to furnish
supplementally to the Commission, upon request, a
copy of any omitted schedule.
2.2 Stock Purchase Agreement dated May 12, 1999 between
the Company and Swiss-Irish Enterprises, Inc.
Registrant agrees to furnish supplementally to the
Commission, upon request, a copy of any omitted
schedule.
2.3 Letter Agreement dated May 12, 1999 among the
Company and Kenneth W. Murphy.
10.1 Fourth Amendment dated March 30, 1999 to the Credit
Agreement dated March 17, 1998 among the Company and
Various Financial Institutions
10.2 Letter agreement between the Company and Leeds
Hackett dated March 9, 1999.
10.3 Agreement and Release between the Company and Leeds
Hackett dated April 13, 1999.
B. FORM 8-K
No reports on Form 8-K were filed during the period.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 13, 1999 COMPASS INTERNATIONAL SERVICES
CORPORATION
By: /s/ MAHMUD U. HAQ
Mahmud U. Haq
Chief Executive Officer
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