Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
--------------------------FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JuneSeptember 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
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Commission file numberFile Number 333-16867
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Outsourcing Solutions Inc.
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(Exact name of registrant as specified in its charter)
Delaware 58-2197161
------------------------------------------ ------------------------ --------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)Number)
390 South Woods Mill Road, Suite 350
Chesterfield, Missouri 63017
------------------------------------------ ------------------------ --------------------------------------- ----------------------
(Address of principal executive offices)office) (Zip Code)
Registrant's telephone number, including area code: (314)576-0022
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Check here-------------
Indicate by checkmark whether the issuerregistrant: (1) has filed all reports required
to be filed by Sections 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
----- -----
As---- ----
Indicate the number of Juneshares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Outstanding at
Class September 30, 1998
the following shares of the Registrant's common stock were
issued and outstanding:- ------------------------------------------ ------------------
Voting common stock 3,477,126.01
Class A convertible nonvoting common stock 391,740.58
Class B convertible nonvoting common stock 400,000.00
Class C convertible nonvoting common stock 1,040,000.00
-------------------------
5,308,866.59
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Transitional Small Disclosure (check one): Yes [ ] No [ X ]
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PAGE 2
OUTSOURCING SOLUTIONS INC.
AND SUBSIDIARIES
INDEXTABLE OF CONTENTS
Part I. Financial Information Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
JuneSeptember 30, 1998 (unaudited) and December 31, 1997.......................................1997 ............. 3
Condensed Consolidated Statements of Operations for the
three and sixnine months ended JuneSeptember 30, 1998
and 1997 (unaudited)................ ............................................. 4
Condensed Consolidated Statements of Cash Flows for the
sixnine months ended JuneSeptember 30, 1998 and 1997 (unaudited).................................... ........ 5
Notes to Condensed Consolidated Financial Statements (unaudited).................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........Operations......................................... 9
Part II. Other Information.......................................... 12Information ................................................ 14
PAGE 3
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands except share and per share
amounts)
JuneSeptember 30, December 31,
1998 1997
Unaudited Audited
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 14,8189,356 $ 3,217
Cash and cash equivalents held for clients 27,21224,392 20,762
Current portion of purchased loans and accounts receivable portfolios 40,53741,063 42,915
Accounts receivable - trade, less allowance for doubtful 40,026 27,192
receivables of $1,385$1,276 and $438 39,220 27,192$538
Other current assets 7,5407,573 2,119
---------- ------------------ --------
Total current assets 129,327122,410 96,205
PURCHASED LOANS AND ACCOUNTS RECEIVABLE PORTFOLIOS 23,00924,769 19,537
PROPERTY AND EQUIPMENT, net 45,33445,323 32,563
INTANGIBLE ASSETS, net 426,581422,657 219,795
DEFERRED FINANCING COSTS, net 14,10013,452 12,517
OTHER ASSETS 453370 1,073
---------- ------------------ --------
TOTAL $ 638,804 $ 381,690
========== ==========$628,981 $381,690
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable - trade $ 7,3478,326 $ 6,977
Collections due to clients 27,21224,392 20,762
Accrued compensation 13,83415,610 8,332
Other current liabilities 50,79246,957 26,131
Current portion of long-term debt 16,71316,661 15,445
---------- ------------------ --------
Total current liabilities 115,898111,946 77,647
LONG-TERM DEBT 510,222512,068 309,521
OTHER LONG-TERM LIABILITIES 23,903 -23,160 --
STOCKHOLDERS' EQUITY (DEFICIT):
8% nonvoting cumulative redeemable exchangeable preferred stock; 12,167 11,699
authorized 1,000,000 shares, 973,322.32shares,973,322.32 and 935,886.85 shares,
respectively, issued and outstanding, at liquidation value of
$12.50 per share
12,167 11,699
Voting common stock; $.01 par value; authorized 7,500,000 shares, 35 35
3,477,126.01 shares issued and outstanding 35 35
Class A convertible nonvoting common stock; $.01 par value; 4 4
authorized 7,500,000 shares, 391,740.58 shares issued and outstanding 4 4
Class B convertible nonvoting common stock; $.01 par value; 4 4
authorized 500,000 shares, 400,000 shares issued and outstanding 4 4
Class C convertible nonvoting common stock; $.01 par value; 10 10
authorized 1,500,000 shares, 1,040,000 shares issued and outstanding
10 10
Paid-in capital 66,958 66,958
Retained deficit (90,397)(97,371) (84,188)
---------- ------------------ --------
Total stockholders' equity (deficit) (11,219)(18,193) (5,478)
---------- ------------------ --------
TOTAL $ 638,804 $ 381,690
========== ==========
See notes to$628,981 $381,690
======== ========
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
PAGE 4
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands)
Three Months Ended SixNine Months Ended
JuneSeptember 30, JuneSeptember 30
-------------------- ---------------------
1998 1997 1998 1997
REVENUES $123,905 $ 66,284 $238,731 $130,126$119,903 $67,537 $358,634 $197,663
EXPENSES:
Salaries and benefits 58,601 32,538 113,153 64,80058,050 32,218 171,203 97,018
Service fees and other operating and 35,130 16,314 105,100 49,882
administrative expenses 34,317 16,315 69,970 33,568
Amortization of loans and accounts 12,840 13,138 35,198 31,174
receivable purchased 13,318 9,490 22,358 18,036
Amortization of goodwill and other intangibles 4,048 7,965 7,543 15,9764,045 5,293 11,588 21,269
Depreciation expense 3,350 2,533 6,477 5,0573,486 2,558 9,963 7,615
------- ------- --------- ---------
--------- --------
Total expenses 113,634 68,841 219,501 137,437113,551 69,521 333,052 206,958
------- ------- --------- --------- --------- --------
OPERATING INCOME (LOSS) 10,271 (2,557) 19,230 (7,311)6,352 (1,984) 25,582 (9,295)
INTEREST EXPENSE - Net 13,166 7,274 24,390 13,79713,164 7,153 37,554 20,950
------- ------- --------- --------- --------- --------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (2,895) (9,831) (5,160) (21,108)(6,812) (9,137) (11,972) (30,245)
INCOME TAX BENEFIT - (3,333) - (6,829)-- (2,797) -- (9,626)
MINORITY INTEREST - --- -- 572 ---
------- ------- --------- ---------
--------- --------
NET LOSS (2,895) (6,498) (5,732) (14,279)(6,812) (6,340) (12,544) (20,619)
PREFERRED STOCK DIVIDEND REQUIREMENTS 243 225 477 420162 266 639 686
------- ------- --------- --------- --------- --------
NET LOSS TO COMMON STOCKHOLDERS $(6,974) $(6,606) $ (3,138)(13,183) $ (6,723) $ (6,209) $(14,699)(21,305)
======= ======= ========= =========
========= =========
See notes toThe accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
PAGE 5
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands except share amounts)
SixNine Months Ended
JuneSeptember 30,
---------------------------------------------------
1998 1997
OPERATING ACTIVITIES:
Net loss $ (5,732) $(14,279)$(12,544) $(20,619)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 15,400 21,94523,654 28,884
Amortization of loans and accounts receivable purchased 22,358 18,03635,198 31,174
Deferred taxes - (6,829)-- (9,626)
Minority interest 572 ---
Change in assets and liabilities:
Other current assets 6,490 (2,971)5,256 (2,621)
Accounts payable and other current liabilities (8,411) (10,053)
--------- ---------(10,122) (10,773)
-------- --------
Net cash provided by operating activities 30,677 5,849
--------- ---------42,014 16,419
-------- --------
INVESTING ACTIVITIES:
Payments for acquisitions, net of cash acquired (167,208) -(167,305) (1,200)
Purchase of loans and accounts receivable portfolios (23,258) (24,928)(38,030) (34,955)
Acquisition of property and equipment (7,145) (3,597)
--------- ---------(10,794) (5,729)
-------- --------
Net cash used in investing activities (197,611) (28,525)
--------- ---------(216,129) (41,884)
-------- --------
FINANCING ACTIVITIES:
Proceeds from term loans 225,469 21,450--
Borrowings under revolving credit agreement 116,500 5,000168,050 44,300
Repayments under revolving credit agreement (132,350) (5,000)(177,900) (16,900)
Repayments of debt (28,121) (4,816)(32,327) (7,225)
Deferred financing fees (2,963) (420)
---------- ---------(3,038) (324)
-------- --------
Net cash provided by financing activities 178,535 16,214
--------- ---------180,254 19,851
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,601 (6,462)6,139 (5,614)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,217 14,497
--------- ----------------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 14,8189,356 $ 8,035
========= =========8,883
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during period for interest $ 18,82328,407 $ 8,609
========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES - During
the six months ended June12,146
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES - During
the nine months ended September 30, 1998 and 1997, the Company paid preferred
stock dividends of $468 and $883, respectively, through the issuance of
37,435.47 shares and 70,606.84 shares of preferred stock, respectively.
The accompanying notes are an integral part of $468 and $433, respectively, through the issuance of 37,435.47
shares and 34,611.20 shares of preferred stock, respectively.
See notes to the unaudited
condensed consolidated financial statements.
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 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 normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and sixnine months ended JuneSeptember
30, 1998 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1998. For purposes of comparability, certain prior
year and prior quarter amounts have been reclassified to conform withto current
quarter and year to date presentation. These Condensed Consolidated Financial
Statements should be read in conjunction with the Consolidated Financial
Statements and notes thereto contained in the Company's Form 10-K for the year
ended December 31, 1997.
NOTE 2. ACQUISITIONACQUISITIONS
On January 23, 1998, the Company acquired through a tender offer approximately
77% of the outstanding shares of The Union Corporation's ("Union") common stock
for $31.50 per share. The merger was completed onOn March 31, 1998.1998, the Company acquired the remaining
outstanding shares of Union when Union merged with a wholly-owned subsidiary of
the Company. The aggregate purchase price of the Union acquisition was
approximately $230,000 including transaction fees, assumed liabilities, and
certain adjustments to conform to the Company's accounting policies. The Company
financed the acquisition primarily with funds provided by the Second Amended and
Restated Credit Agreement (as defined herein). Union, through certain of its
subsidiaries, furnishes a broad range of credit and receivables management
outsourcing services as well as management and collection of accounts
receivable. The acquisition was accounted for under the purchase method of
accounting. Accordingly, the purchase price has been preliminarily allocated
based upon the estimated fair value of the net assets acquired. This treatment
resulted in approximately $214,025 of goodwill that will be amortized over 30
years using the straight-line method. Union's consolidated operating results
have been included in the Company's consolidated results since January 23, 1998,
recognizing the minority interest through the completion date of the
merger.acquisition.
The unaudited proforma consolidated financial data presented below gives effect
to the Union acquisition as well as the North Shore Agency and Accelerated
Bureau of Collections acquisitions that occurred in the fourth quarter of 1997,
as if such acquisitions had occurred as of the beginning of each period
presented. The pro forma adjustments are based upon available information and
certain assumptions that management believes are reasonable. The unaudited pro
forma consolidated financial data does not purport to represent what the
Company's financial position or results of operations would have been if
consummation of the acquisitions of Union, North Shore Agency and Accelerated
Bureau of Collections had occurred on the date indicated or what may be achieved
in the future. Except for the elimination of costs associated with duplicative
administrative functions and facilities based upon actions actually taken as of
the close of the transactions, anticipated cost savings have not been reflected
in this presentation. The unaudited pro forma consolidated financial data should
be read in conjunction with the historical consolidated financial statements and
accompanying notes for the Company, Union, North Shore Agency and Accelerated
Bureau of Collections.
For the three months For the six months
Ended June 30, Ended June 30,
1998 1997 1998 1997
Revenues $123,905 $114,220 $246,085 $228,321
======== ======== ======== ========
Net loss $(2,895) $(7,238) $(6,853) $(15,920)For the three months For the nine months
Ended September 30, Ended September 30,
--------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues $119,903 $115,663 $365,988 $343,984
======== ======== ======== ========
Net loss $(6,812) $(7,570) $(13,665) $(23,490)
======= ======= ======== ========
NOTE 3. DEBT
On January 26, 1998, the Company entered into a Second Amended and Restated
Credit Agreement ("Agreement") with a group of banks in part to fund the Union
acquisition. This Agreement amended the Company's existing credit agreement. The
Agreement consists of a $412,422 term loan facility and a $58,000 revolving
credit facility.
The term loan facility consists of a term loan of $62,500 ("Term Loan A"), a
term loan of $124,922 ("Term Loan B") and a term loan of $225,000 ("Term Loan
C"), which mature on October 15, 2001, 2003 and 2004, respectively. The Company
is required to make quarterly principal repayments on each term loan. Term Loan
A bears interest, at the Company's option, (a) at a base rate equal to the
greater of the federal funds rate plus 0.5% or the lender's customary base rate
plus 1.5% or (b) at the reserve adjusted Eurodollar rate plus 2.5%. Term Loans B
and C bear interest, at the Company's option, (a) at a base rate equal to the
greater of the federal funds rate plus 0.5% or the lender's customary base rate
plus 2.0% or (b) at the reserve adjusted Eurodollar rate plus 3.0%.
The revolving credit facility has a term of five years and is fully revolving
until October 15, 2001. The revolving credit facility bears interest, at the
Company's option, (a) at a base rate equal to the greater of the federal funds
rate plus 0.5% or the lender's customary base rate plus 1.5% or (b) at the
reserve adjusted Eurodollar rate plus 2.5%.
The obligations of the Company under the Agreement isare guaranteed by all of the
Company's present domestic subsidiaries and isare secured by all of the stock of
the Company's present domestic subsidiaries and by substantially all of the
Company's domestic property assets. The Agreement contains certain covenants,
the more significant of which limit dividends, asset sales, acquisitions and
additional indebtedness, as well as requires the Company to satisfy certain
financial performance ratios.
On April 17, 1998 and May 27, 1998, as required by the Agreement, the Company
entered into interest rate collar agreements with a notional principal value of
$35,000 and $33,000, respectively, for the purpose of managing interest rate
risk on a portion of floating-rate long-term debt. The collar agreements fix the
interest rate on certain variable-rate debt to a range of 6.50% to 8.58%. The
contracts have a maturity date of April 17, 2001 and February 27, 2001,
respectively. The Company is exposed to credit loss in the event of
nonperformance by counterparties to the collar agreements.
NOTE 4. LITIGATION
The Company isand certain of its subsidiaries are subject to various
investigations, claims and legal proceedings covering a wide range of matters
that arise in the normal course of business and are routine to the nature of the
Company's business.businesses. In addition, as a result of the Union acquisition,
subsidiaries of the Company isare a party to several on-going environmental
remediation investigations by federal and state governmental agencies and
clean-ups and, along with other companies, has been named a "potentially
responsible party" for certain waste disposal sites. Each of these matters is
subject to various uncertainties, and it is possible that some of these matters
will be decided unfavorably against the Company. The Company has established,
with input from environmental and legal experts, accruals for matters that are
in its view probable and reasonably estimable. Based on information presently
available, management believes that existing accruals are sufficient to satisfy
any known environmental liabilities.
NOTE 5. COMPREHENSIVE INCOME
Effective January 1,NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Company adoptedFinancial Accounting Standards Board issued the Statement of
Financial Accounting StandardsStandard No. 130, "Reporting Comprehensive Income,133, "Accounting for Derivative Instruments
and Hedging Activities," which established standardsis effective for the reporting and display of comprehensive income and its components.fiscal periods beginning after
June 15, 1999. The adoption of this statement didis not affectexpected to have a material
effect on the Company's consolidated financial statements for the three month and six month periods ended June 30, 1998 and
1997. Comprehensive loss for the three month and six month periods ended June
30, 1998 and 1997 were equal to the Company's net loss.statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Three Months Ended JuneSeptember 30, 1998 Compared to Three Months
Ended JuneSeptember 30, 1997
Revenues for the three months ended JuneSeptember 30, 1998 were $123.9$119.9 million
compared with $66.3$67.5 million in the same period last year - an increase of 86.9%77.5%.
The revenue increase of $57.6$52.4 million was primarily due to increased fee services and
portfolio sales revenues of $5.3 million - an increase of 7.9% over last year,
and $52.3 million from the acquisitions of
Union, North Shore Agency and Accelerated Bureau of Collections. Revenues from
fee services were $87.7$84.7 million for the three months ended JuneSeptember 30, 1998
compared to $38.8$39.0 million in the comparable period in 1997. The increase in fee
revenues of 116.9% was primarily due to a 7.2%
increase in existing business and $46.1 million from the three acquisitions. Revenues from
purchased portfolios increased 1.3% to $21.3$19.3 million for the quarter ended
JuneSeptember 30, 1998 compared to $17.5$18.9 million in 1997 - an increase of 22.1%.
The increased revenue resulteddue primarily from both higher collection revenue and
strategic sales of portfolios. The outsourcing revenue of $14.9$15.9 million compared
favorably to prior year of $10.0$9.6 million due primarily to the Union acquisition.
Operating expenses for the three months ended JuneSeptember 30, 1998 were $113.6
million compared to $68.8$69.5 million for the comparable period in 1997 - an
increase of $44.8$44.1 million. Operating expenses, exclusive of amortization and
depreciation charges, were $92.9$93.2 million for the three months ended JuneSeptember
30, 1998 and $48.9$48.5 million for the comparable period in 1997. The increase in
operating expenses, exclusive of amortization and depreciation charges, resulted
from the three acquisitions. Of the $113.6 million in operating expenses for the
three months ended JuneSeptember 30, 1998, $20.7$20.4 million was attributable to
amortization and depreciation charges compared to $19.9$21.0 million for the same
period last year. The higherlower amortization and depreciation charges were due to increased portfolio
amortization resulting from increased portfolio revenue as well as increased
depreciation and amortization of goodwill related to the three acquisitions
offset partially by no
account placement inventory amortization in 1998 ($3.5 million in 1997) since
account placement inventory was fully amortized as of December 31, 1997.1997 offset
partially by depreciation and amortization of goodwill related to the three
acquisitions.
As a result of the above, the Company generated operating income of $10.3$6.4 million
for the three months ended JuneSeptember 30, 1998 compared to an operating loss of
$2.5$2.0 million for the comparable period in 1997.
Earnings before interest expense, taxes, depreciation and amortization (EBITDA)
for the quarter ended JuneSeptember 30, 1998 was $31.0$26.7 million compared to $17.4$19.1
million for the same period in 1997. The increase of $13.6$7.6 million consisted of $8.9 million as a result ofwas
attributable to the three acquisitions and $4.7 million primarily from the increased fee and
portfolio revenues of $5.3 million.
Interestacquisitions.
Net interest expense net for the three months ended JuneSeptember 30, 1998 was $13.2
million compared to $7.3$7.2 million for the comparable period in 1997. The increase
was primarily due to additional indebtedness incurred to finance the Union,
North Shore Agency and Accelerated Bureau of Collections acquisitions.
Consistent with management's assessment made in the fourth quarter of 1997, the
potential tax benefits generated by additional net operating loss carryovers or
the future reversal of the net deductible temporary differences for the three
months ended JuneSeptember 30, 1998 were fully offset by valuation allowancesallowance of $1.2$2.7
million.
Due to the factors stated above and the fact that the Company recorded a $2.8
million tax benefit in the third quarter of 1997, the net loss for the quarter
ended JuneSeptember 30, 1998 was $2.9$6.8 million compared to $6.5$6.3 million for the
comparable period in 1997
- - an improvement of $3.6 million.
Six1997.
Nine Months Ended JuneSeptember 30, 1998 Compared to SixNine Months
Ended JuneSeptember 30, 1997
Revenues for the sixnine months ended JuneSeptember 30, 1998 were $238.7$358.6 million
compared with $130.1$197.7 million in the same period last year - an increase of
83.5%81.4%. The revenue increase of $108.6$160.9 million was due primarily to increased fee
services and portfolio sales revenues of $9.2$11.6 million - an increase of 7.0%5.9% over last
year, and $99.4$152.3 million from the acquisitions of Union, North Shore Agency and
Accelerated Bureau of Collections.Collections offset by lower outsourcing revenue of $3.0
million. Revenues from fee services were $170.5$255.2 million for the sixnine months
ended JuneSeptember 30, 1998 compared to $77.2$116.2 million in the comparable period in
1997. The increase in fee revenues was due to a 6.5%4.0% increase in existing
business and $88.3$134.3 million from the three acquisitions. Revenues from purchased
portfolios increased to $39.8$59.1 million for the sixnine months ended JuneSeptember 30,
1998 compared to $33.2$52.1 million in 1997 - up 20.2%13.3%. The increased revenue
resulted primarily from both higher collection revenue and strategic sales of portfolios. The outsourcing revenue
of $28.4$44.3 million compared favorably to prior year of $19.7$29.4 million due primarily
to the Union acquisition.
Operating expenses for the sixnine months ended JuneSeptember 30, 1998 were $219.5$333.1
million compared to $137.4$207.0 million for the comparable period in 1997. Operating
expenses, exclusive of amortization and depreciation charges, were $183.1$276.3
million for the sixnine months ended JuneSeptember 30, 1998 and $98.4$146.9 million for the
comparable period in 1997.1997 - an increase of 88.1%. The increase in operating
expenses, exclusive of amortization and depreciation charges, resulted primarily
from the three acquisitions as well as higher collection-related expenses
due toassociated with the increased revenues. Of the $219.5$333.1 million in operating
expenses for the sixnine months ended JuneSeptember 30, 1998, $36.4$56.8 million was
attributable to amortization and depreciation charges compared to $39.1$60.1 million
for the same period last year. The lower amortization and depreciation charges
resulted from no account placement inventory amortization in 1998 ($12.115.6 million
in 1997) since account placement inventory was fully amortized as of December
31, 1997, offset partially by additional depreciation and amortization of
goodwill related to the three acquisitions and increased portfolio amortization
resulting from increased portfolio revenue.
As a result of the above, the Company generated operating income of $19.2$25.6
million for the sixnine months ended JuneSeptember 30, 1998 compared to an operating
loss of $7.3$9.3 million for the comparable period in 1997.
Earnings before interest expense, taxes, depreciation and amortization (EBITDA)
for the sixnine months ended JuneSeptember 30, 1998 was $55.6$82.3 million compared to $31.7$50.8
million for the same period in 1997. The increase of $23.9$31.5 million consisted of
$17.6$25.9 million as a result of the three acquisitions and $6.3$5.6 million primarily
from the increased fee and portfolio revenuesrevenue from operations unrelated to the acquisitions of $9.2$8.6
million.
InterestNet interest expense net for the sixnine months ended JuneSeptember 30, 1998 was $24.4$37.6
million compared to $13.8$21.0 million for the comparable period in 1997. The
increase was primarily due to additional indebtedness incurred to finance the
Union, North Shore Agency and Accelerated Bureau of Collections acquisitions.
Consistent with management's assessment made in the fourth quarter of 1997, the
potential tax benefits generated by additional net operating loss carryovers or
the future reversal of the net deductible temporary differences for the sixnine
months ended JuneSeptember 30, 1998 were fully offset by valuation allowancesallowance of $2.1$4.8
million.
Minority interest in earnings in 1998 resulted from the Union acquisition. On
January 23, 1998, the Company acquired approximately 77% of the outstanding
common stock of Union through a tender offer. The purchaseacquisition of all remaining
outstanding common stock of Union was completed on March 31, 1998. The Company
recognized minority interest in earnings of Union during the period from January
23, 1998 to March 31, 1998.
Due to the factors stated above, the net loss for the sixnine months ended
JuneSeptember 30, 1998 was $5.7$12.5 million compared to $14.3$20.6 million for the
comparable period in 1997 - an improvement of $8.6$8.1 million.
Financial Condition, Liquidity and Capital Resources
At JuneSeptember 30, 1998, the Company had cash and cash equivalents of $14.8$9.4
million. In addition, the Company has a $58.0 million revolving credit facility,
which allows the Company to borrow for working capital, general corporate
purposes and acquisitions, subject to certain conditions. As of JuneSeptember 30,
1998, the Company had outstanding $16.0$22.0 million under the revolving credit
facility leaving $40.4$34.4 million, after outstanding letters of credit, available
under the revolving credit facility.
Since December 31, 1997, cash and cash equivalents increased $11.6$6.1 million
primarily due to cash provided by operations and financing activities of $30.7$42.0
million and $178.5$180.3 million, respectively, offset primarily by cash utilized for
the Union acquisition of $164.7 million, purchases of loans and accounts
receivable portfolios of $23.3$38.0 million and capital expenditures of $7.1$10.8
million. The Company also held $27.2$24.4 million of cash for clients in restricted
trust accounts at JuneSeptember 30, 1998.
For the first sixnine months in 1998, the Company made capital expenditures of
$7.1$10.8 million primarily for the replacement and upgrading of equipment and
expansion of the Company's information services systems. The Company anticipates
spending approximately $18.0 million for 1998.
AllOn October 29, 1998, the Company executed a warehouse financing arrangement that
provides the Company with up to $100 million of off-balance sheet funding
capacity for the purchase of account receivable portfolios over its five year
term. Proceeds from this arrangement, funded by an insurance company sponsored
commercial paper conduit, will allow the Company to finance substantially all of
its portfolio purchasing activities without additional borrowings from its bank
credit facility. Pursuant to this financing arrangement, the Company's Second
Amended and Restated Credit Agreement was amended to limit borrowing available
for future account portfolio purchases and to permit an initial investment in a
new wholly-owned, non-consolidated bankruptcy-remote subsidiary.
Year 2000
As the Year 2000 approaches, many corporate systems worldwide could malfunction
or produce incorrect results because they cannot process date-related
information properly. Dates play a key role in dependable functioning of the
software applications, software systems, information technology infrastructure,
and embedded technology (i.e., non-technical assets such as time clocks and
building services) the Company relies upon in day-to-day operations for
innumerable tasks. This includes any tasks requiring date-dependent arithmetic
calculations, sorting and sequencing data, and many other functions.
The Company identified this problem as a key focus during 1997 and as part of
any subsequent due-diligence procedures related to acquisitions completed during
1998. The Company has assessed the impact of Year 2000 issues on the processing
of date-related information for all of its information systems infrastructure
(e.g., production systems) and significant non-technical assets. As the new
millennium approaches, the Company has developed and implemented a Year 2000
program to deal with this important issue in an effective and timely manner.
This problem has received significant senior management attention and resources.
Management reviews have been held on this topic. During 1998 and 1999, the
Company's Board of Directors has requested and will continue to receive
quarterly presentations at each regular Board meeting regarding the Company's
overall Year 2000 compliance status and readiness.
An independent consulting firm has been retained to provide independent
verification and testing of the production systems. Under the direction of the
Company's Senior Vice President and Chief Information Officer, the Company has
established a program management structure, a management process and methodology
and proactive client and vendor management strategies to manage the Year 2000
risk.
Because many of the Company's client relationships are supported through
computer-system interfaces, it is critical that the Company works proactively
with its clients to achieve Year 2000 compliance. The Company has established a
proactive client management strategy focused on enabling the Company to work
together with clients to assure Year 2000 compliance between respective computer
systems.
The implementation of the client management strategy has commenced in 1998.
Letters have been sent to significant clients, inquiring about their Year 2000
compliance plans and status. The Company is working to establish a follow-up
process with each key client, taking a proactive, customer-focused approach to
achieving Year 2000 compliance with its customers.
The Company has also communicated with its strategic suppliers and equipment
vendors, including suppliers of non-technical assets, seeking assurances that
they and their products will be Year 2000 ready. The Company's goal is to obtain
as much detailed information as possible about its strategic suppliers and
equipment vendors' Year 2000 plans to identify those companies which appear to
pose any significant risk of failure to perform their obligations to the Company
as a result of the Year 2000. The Company expects to have compiled detailed
information regarding all of its strategic suppliers and equipment vendors by
December 1998. This will be an ongoing process during the Year 2000 project. For
those strategic suppliers and equipment vendors that do not respond as to their
status or their response is not satisfactory, the Company intends to develop
contingency plans to ensure that sufficient alternative resources are available
to continue with business operations.
The target date for completion of all production systems and significant
non-production systems (e.g., predictive dialer systems, phone switches, wide
area network hardware), including non-technical assets, is March, 1999, with
testing to begin during the first quarter of 1999 with completion no later than
mid-1999.
Spending for modifications and updates are being expensed as incurred and is not
expected to have a material impact on the results of operations or cash flows.
The cost of the Company's Year 2000 project is being funded from cash flows
generated from operations. The Company estimates that its total Year 2000
expenses will be in the range of $1.2 to $1.5 million. To date, the Company has
expended approximately $0.8 million, primarily for contract programmers and
consulting costs associated with the evaluation, assessment and remediation of
computer systems.
The Company is dependent upon its own internal computer technology and relies
upon the timely performance of its suppliers and customers and their systems. A
substantial part of the Company's day-to-day operations is dependent on power
and telecommunications services, for which alternative sources of services may
be limited. A large-scale Year 2000 failure could impair the Company's ability
to provide timely performance results required by the Company's customers,
thereby causing potential liability, lost revenues and additional expenses, the
amounts which have not been estimated. The Company's Year 2000 project seeks to
identify and minimize this risk and includes testing of its in-house
applications, purchased software and hardware to ensure that all such systems
will function before and after the Year 2000. The Company is continually
refining its understanding of the risk the Year 2000 poses to its strategic
suppliers and customers based upon information obtained through its surveys.
This refinement will continue through the rest of 1998 and into 1999.
The Company's Year 2000 project includes the development of contingency plans
for business critical systems, as well as for strategic suppliers and customers
to attempt to minimize disruption to its operations in the event of a Year 2000
failure. The Company will be formulating plans to address a variety of failure
scenarios, including failures of its in-house applications, as well as failures
of strategic suppliers and customers. The Company anticipates that it will
complete Year 2000 contingency planning by mid-1999.
The following statements in this document other than historical facts are or may constitute forward-looking
statements made in reliance upon the safe harbor of the Private Securities
Litigation Reform Act of 1995. There can be no assurances that1995: (1) statements concerning the cost and successful
implementation of the Company's Year 2000 initiatives, (2) statements concerning
the anticipated costs and outcome of legal proceedings and environmental
liabilities, (3) any statements preceded by, followed by or that include the
word "believes," "expects," "anticipates," "intends," "should," "may," or
similar expressions; and (4) other statements contained or incorporated by
reference in this document regarding matters that are not historical facts.
Because such statements are subject to risks and uncertainties, actual results
will bemay differ materially consistent withfrom those expressed or implied by such forward-looking
information.statements. Factors and uncertainties that could affectcause actual results to differ materially
include, but are not limited to: (1) the outcome of such
forward-looking statements include, among others, market and industrydemand for the Company's services, (2)
the demand for accounts receivable management generally, (3) general economic
conditions, increased(4) changes in interest rates, (5) competition, including but not
limited to pricing pressures, (6) changes in governmental regulations general
economic conditions, pricing pressures,including,
but not limited to the federal Fair Debt Collection Practices Act and comparable
state statutes, (7) the status and effectiveness of the Company's Year 2000
efforts, (8) legal proceedings, (9) environmental investigations and clean up
efforts, (10) the Company's ability to rationalize operations of recent
acquisitions, and (11) the Company's ability to generate cash flow or obtain
financing to fund its operations, service its indebtedness and continue its
growth and expand successfully into new markets and services.
These forward-looking statements speak only as of the date they were made. These
cautionary statements should be considered in connection with any written or
oral forward-looking statements that the Company may issue in the future. The
Company disclaimsdoes not undertake any intention or obligation to updaterelease publicly or revise any revisions to
such forward-looking statements whether as a result of new information, futureto reflect later events or otherwise.circumstances or to
reflect the occurrence of unanticipated events.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to various investigations, claims and legal proceedings
covering a wide range of matters that arise in the normal course of business and
are routine to the nature of the Company's business. As describedOther information with
respect to legal proceedings appears in the Company's March 31, 1997 10-Q andAnnual Report on Form 10-K
for the year ended December 31, 1997, 10-K
filings, Transamerica Business Credit Corporation ("Transamerica") filed a
cross-claim againstand the Company's wholly-owned subsidiary, Payco-General
American Credits, Inc. seeking judgment against themQuarterly Reports on
Form 10-Q for any liability, loss
cost or expense Transamerica has or will occur in connection with alleged
violations of the Fair Debt Collection Practices Actquarters ended March 31, 1998 and Alabama State law by
Payco-General American Credits, Inc. in performing collection services on behalf
of Transamerica. Payco-General American Credits, Inc. in turn, filed a similar
claim against Transamerica. On July 1, 1998, Payco-General American Credits,
Inc. and Transamerica entered into a settlement agreement whereby each party
released the other from any claims and pursuant to which Payco-General American
Credits, Inc. paid $1.5 million.June 30, 1998.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
Exhibit 10.1 First Amendment to the Second Amended and Restated
Credit Agreement, dated as of March 31, 1998
Exhibit 10.2 Second Amendment to the Second Amended and Restated
Credit Agreement, dated as of August 5, 1998
Exhibit 10.3 Third Amendment to the Second Amended and Restated
Credit Agreement, dated as of September 23, 1998
Exhibit 10.4 Employment Agreement dated as of March 1,
1997 between Outsourcing Solutions Inc. and Michael Meyer
Exhibit 27 Financial Date Schedule (Unaudited)
(b). Reports on Form 8-K
Form 8-K/A filed April 8, 1998 amending theThere were no reports on Form 8-K filed February 6,for the three-month period
ended September 30, 1998. The Form 8-K/A amended Item 7 and included pro
forma financial information reflecting the Union acquisition.
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.
OUTSOURCING SOLUTIONS INC.
(Registrant)
/s/ TIMOTHY G. BEFFA
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Timothy G. Beffa
President and Chief Executive Officer
/s/ DANIEL J. DOLAN
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Daniel J. Dolan
Executive Vice President
and Chief Financial Officer
/s/ DANIEL T. PIJUT
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Daniel T. Pijut
Vice President, Corporate Controller
and Chief Accounting Officer
Date: AugustNovember 13, 1998