SECURITIES AND EXCHANGE COMMISSION
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 June September 30, 2000 -------------------
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 333-16867 ------------------- Outsourcing Solutions Inc. - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 58-2197161 - ------------------------------------ ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
390 South Woods Mill Road, Suite 350
Chesterfield, Missouri 63017 - ------------------------------------ ------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (314) 576-0022
Indicate by checkmark whether the registrant: (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
Indicate the number of shares outstanding of each of the issuer's classes of common stock as
of the latest practicable date.
Outstanding at
Class JuneSeptember 30, 2000
- --------------------------------- -------------
Voting common stock 6,024,428.076,077,804.10
Non-voting common stock 480,321.30
-------------
6,504,749.37
=============
Transitional Small Disclosure _______ (check one):Yes [ ] No [ X ]
-------- -------6,558,125.40
PAGE 2
OUTSOURCING SOLUTIONS INC.
AND SUBSIDIARIES
TABLE OF CONTENTS
Part I. Financial Information Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
JuneSeptember 30, 2000 (unaudited) and December 31, 1999................................. 31999.......................3
Condensed Consolidated Statements of Operations for the three and sixnine
months ended JuneSeptember 30, 2000 (unaudited) and 1999 (unaudited).................................. 4...........4
Condensed Consolidated Statements of Cash Flows for the sixnine
months ended JuneSeptember 30, 2000 (unaudited )and(unaudited) and 1999 (unaudited).................................................. 5...........5
Notes to Condensed Consolidated Financial Statements (unaudited)....................................................... 6...........6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................... 8Operations..................................................8
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 11Risk................11
Part II. Other Information................................................... 12Information......................................................13
PAGE 3
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In(In thousands, except share and per share amounts) - --------------------------------------------------------------------------------
June
September 30 December 31,
2000 1999
UnauditedAudited
------------ ------------
ASSETS
Cash and cash equivalents $ 10,6019,792 $ 6,059
Cash and cash equivalents held for clients 26,16724,272 22,521
Accounts receivable - trade, less allowance for 55,864 52,082
doubtful receivables of
$559$459 and $529 58,423 52,082
Purchased loans and accounts receivable portfolios 30,49027,004 39,947
Property and equipment, net 44,49145,503 43,647
Intangible assets, net 404,099419,204 410,471
Deferred financing costs, less accumulated 25,017 27,224
amortization of $2,456$3,560 and $248 23,913 27,224
Other assets 27,401 29,914 22,761
-------- --------
TOTAL $ 624,130638,025 $ 624,712
======== ================= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable - trade $ 8,9798,249 $ 6,801
Collections due to clients 26,16724,272 22,521
Accrued salaries, wages and benefits 12,98113,768 17,009
Debt 525,602537,541 518,307
Other liabilities 66,83474,415 68,306
Commitments and contingencies - -(Note 2)
Mandatorily redeemable preferred stock; redemption 94,323 85,716
amount of $115,243$119,112 98,820 85,716
and $107,877
Stockholders' deficit:
Voting common stock; $.01 par value; authorized 15,000,000 shares,
9,102,677.149,156,053.17 shares issued 9192 90
Non-voting common stock; $.01 par value; authorized 2,000,000 shares,
480,321.30 issued and outstanding 5 5
Paid-in capital 198,138200,137 196,339
RetainedAccumulated deficit (172,715) (155,525)
-------- --------
25,519 (182,975) (155,525)
17,259 40,909
Notes receivable from management for shares sold (1,418)(1,442) -
Common stock in treasury, at cost; 3,078,249.07 shares (134,857) (134,857)
-------- -------- (134,857) (134,857)
Total stockholders' deficit (110,756) (93,948)
-------- -------- (119,040) (93,948)
TOTAL $ 624,130638,025 $ 624,712
======== ================= =========
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(In thousands)
Three Months SixEnded Nine Months Ended
JuneSeptember 30, Ended JuneSeptember 30,
------------------ ------------------ September September
2000 1999 2000 1999
REVENUES $ 137,373133,871 $ 127,829122,987 $ 270,623404,494 $ 257,076380,063
EXPENSES:
Salaries and benefits 66,411 61,427 132,417 22,16266,026 60,076 198,443 182,238
Service fees and other operating 43,414 39,482 85,011 79,894
and administrative
expenses 41,897 37,440 126,908 117,334
Amortization of purchased loans and accounts
receivable portfolios 8,109 9,177 14,785 20,4776,591 9,317 21,376 29,794
Amortization of goodwill and other intangibles 3,979 4,102 7,949 8,2043,980 4,112 11,929 12,316
Depreciation expense 4,098 3,614 8,111 7,2253,956 3,735 12,067 10,960
Nonrecurring realignment and
relocation expenses 1,0001,742 - 1,0002,742 -
Compensation expense related to redemption of stock
options - -187 - 187 -
-------- -------- -------- --------
Total expenses 127,198 117,802 249,460 237,962
-------- -------- -------- -------- 124,192 114,680 373,652 352,642
OPERATING INCOME 10,175 10,027 21,163 19,1149,679 8,307 30,842 27,421
OTHER EXPENSE - - - 76
INTEREST EXPENSE - Net 15,209 12,644 29,452 25,209
-------- -------- -------- -------- 15,377 13,005 44,829 38,214
LOSS BEFORE INCOME TAXES (5,034) (2,617) (8,289) (6,171)(5,698) (4,698) (13,987) (10,869)
PROVISION FOR INCOME TAXES 169 65 - 359 375 294 375
-------- -------- -------- --------
NET LOSS (5,203) (2,992) (8,583) (6,546)(5,763) (4,698) (14,346) (11,244)
PREFERRED STOCK DIVIDEND REQUIREMENTS AND ACCRETION
OF SENIOR PREFERRED STOCK 4,364 - 8,607 506
-------- -------- -------- -------- 4,497 527 13,104 1,033
NET LOSS TO COMMON STOCKHOLDERS $ (9,567)(10,260) $ (2,992)(5,225) $ (17,190)(27,450) $ (7,052)
======== ======== ======== ========(12,277)
========== ========== ========== ==========
The 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(In thousands) Six
Nine Months Ended
June September 30, --------------------
2000 1999
OPERATING ACTIVITIES AND PORTFOLIO PURCHASING:
Net loss $ (8,583)(14,346) $ (6,546)(11,244)
Adjustments to reconcile net loss to net cash from operating activities
and portfolio purchasing:
Depreciation and amortization 18,268 16,94327,308 25,645
Amortization of purchased loans and accounts 14,785 20,477
receivable portfolios 21,376 29,794
Change in assets and liabilities:
Purchases of loans and accounts receivable portfolios (5,328) (4,088)(8,433) (15,188)
Accounts receivable and other assets (8,242) (4,978)(10,370) (7,707)
Accounts payable, accrued expenses and other liabilities (3,322) (8,378)
------- ------- 3,957 (9,625)
Net cash from operating activities and portfolio purchasing 7,578 13,430
------- ------- 19,492 11,675
INVESTING ACTIVITIES:
Acquisition of property and equipment (8,955) (7,260)(13,883) (14,163)
Payment for acquisition, net of cash acquired (15,150) -
Purchases of loans and accounts receivable portfolios for resale to FINCO (54,306) (29,324)(70,721) (44,485)
Sales of loans and accounts receivable portfolios to FINCO 54,306 29,32470,721 44,485
Investment in FINCO - (2,500)
Other (1,577) (559)
------- ------- (1,361) (608)
Net cash from investing activities (10,532) (7,819)
------- ------- (30,394) (17,271)
FINANCING ACTIVITIES:
Borrowings under revolving credit agreement 174,650 134,250244,350 223,150
Repayments under revolving credit agreement (165,650) (133,050)(227,850) (208,750)
Repayments of debt (1,705) (8,488)(2,512) (12,607)
Proceeds from issuance of common stock 201401 -
Proceeds from term loans 246 -
Deferred financing fees - (248)
------- ------- (175)
Net cash from financing activitie 7,496 (7,536)
------- -------activities 14,635 1,618
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,542 (1,925)3,733 (3,978)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,059 8,814
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,6019,792 $ 6,889
======= =======4,836
========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during period for interest $ 27,62132,230 $ 23,927
======= =======33,264
========= ==========
Net cash paid (received) during period for taxes $ 181241 $ (39)
======= =======158
========= ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Paid preferred stock dividends through issuance of preferred stock $ - $ 992
======= =======1,519
========= ==========
Accrued dividends on mandatorily redeemable preferred stock $ 7,36611,235 $ -
======= ================ ==========
Accretion of mandatorily redeemable preferred stock $ 1,2411,869 $ -
======= ================ ==========
Notes receivable for common stock $ 1,400 $ -
======= ================ ==========
The accompanying notes are an integral part of 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 accounting principles generally accepted accounting principlesin the United States 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
accounting principles generally accepted accounting principlesin the United States for complete financial
statements. In the opinion of management, all adjustments (consisting of normal recurring
accruals)items) considered necessary for a fair presentation have been included. Operating results
for the three and sixnine months ended JuneSeptember 30, 2000 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2000. For purposes of
comparability, certain prior year amounts have been reclassified to conform to current
quarter 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, 1999.
Comprehensive loss for the periods presented is equal to the Company's net loss as the
Company had no other comprehensive income (loss) items.
NOTE 2. LITIGATION
From time to time, the Company and 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 businesses. In
addition, as a result of the acquisition of The Union Corporation, certain subsidiaries of
the Company are 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. While the
results of litigation cannot be predicted with certainty, the Company has provided for the
estimated uninsured amounts and costs to resolve the pending suits and management, in
consultation with legal counsel, believes that reserves established for the ultimate
resolution of pending matters are adequate at JuneSeptember 30, 2000.
NOTE 3. PURCHASED LOANS AND ACCOUNTS RECEIVABLE PORTFOLIOS FINANCING
OSI Funding LLC ("FINCO") is a special-purpose finance company with the Company owning
approximately 78% of the financial interest but having only approximately 29% of the voting
rights.
The following summarizes the transactions between the Company and FINCO for the periods
ended JuneSeptember 30:
Three Months SixEnded Nine Months Ended
JuneSeptember 30, Ended JuneSeptember 30,
---------------- -----------------
2000 1999 2000 1999
Sales of purchased loans and accounts receivable
portfolios by the Company to FINCO $37,782 $11,666 $54,306 $29,324$ 16,415 $ 15,161 $ 70,721 $ 44,485
Servicing fees paid by FINCO to $5,032 $4,002 $9,337 $5,845
the Company $ 10,319 $ 3,913 $ 19,656 $ 9,758
Sales of purchased loans and accounts receivable portfolios ("Receivables") by the Company
to FINCO were in the same amount and occurred shortly after such portfolios were acquired by
the Company from the various unrelated sellers. In conjunction with sales of Receivables to
FINCO and the servicing agreement, the Company recorded servicing assets which are being
amortized over the servicing agreement. The carrying value of such servicing assets, is $2,450which
are included in other assets in the accompanying condensed consolidated balance sheet, was
$5,605 at JuneSeptember 30, 2000 and was $1,300 at December 31, 1999.
At JuneSeptember 30, 2000 and December 31, 1999, FINCO had unamortized Receivables of $77,548$73,776
and $42,967, respectively. At JuneSeptember 30, 2000 and December 31, 1999, FINCO had
outstanding borrowings of $64,766$61,533 and $32,051, respectively, under its revolving warehouse
financing arrangement.
NOTE 4: STOCKHOLDERS' DEFICIT
In the quarter ended June 30,ACQUISITION
On September 29, 2000, the Company issued 40,032.03 sharesthrough a newly formed limited liability company, RWC
Consulting Group, LLC, acquired certain assets and assumed certain liabilities of itsRWC
Consulting Group, Inc. ("RWC"), a service company providing highly-skilled consultants to
banks to assist in their back office functions. Total consideration for RWC includes cash
of approximately $15,150 including transaction costs of $150, voting common stock at prices approximatingworth
$2,000 (53,376.03 shares) and an 18% unsecured, subordinated note of $5,000 (interest
compounded annually and principal and interest due September 29, 2003). The cash portion of
the purchase price was financed under the Company's revolving credit facility. The
acquisition was accounted for under the purchase method and the excess of cost over the fair
value to certain members of
senior management in exchange for cash and interest bearing notes secured by the
shares along with certain personal assets of the membersnet assets acquired is amortized on a straight-line basis over 30 years. The
acquisition contains a certain contingent payment obligation based on the attainment of senior management.a
certain financial performance target over the next three years. The outstanding principal balances plus accrued interest of these notes amounted
to $1,418 at June 30, 2000 and are classifiedfuture contingent
payment obligation, if any, will be accounted for as a reduction of stockholders'
deficit. In addition,additional goodwill as the Company sold 8,007 shares of its voting common stock
at prices approximating fair value to certain directors of the Company.payment is
made.
NOTE 5: NONRECURRING EXPENSES
In continuing the adopted strategy to align the Company along business services and
establish call centers of excellence, the Company incurred $1,000$1,742 and $2,742 of nonrecurring
realignment and relocation expenses in the three months and the nine months ended JuneSeptember 30, 2000.2000,
respectively. These expenses include costs resulting from closure of certain call centers,
severance associated with these office closures and certain other one-time costs.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of OperationsThree Months Ended JuneSeptember 30, 2000 Compared to Three Months Ended JuneSeptember 30, 1999
- -----------------------------------------------------------------------------
Revenues for the three months ended JuneSeptember 30, 2000 were $137.4$133.9 million compared to
$127.8$123.0 million in the same period last year - an increase of 7.5%8.8%. The revenue increase of
$9.6$10.9 million was due to increased collection, outsourcing and portfolio services revenues.
Revenues from collection services were $95.7$89.4 million for the three months ended JuneSeptember
30, 2000 compared to $93.0$88.2 million in the comparable period in 1999. The increase in
collection services revenue was primarily attributable to increased government and letter
series business. Partially offsetting this increase, however, was alower revenue from
telecommunications business and the continued weakness in the bankcard market, primarily driven by changes in the portfolio sales market. The
outsourcing services revenue of $18.1$19.5 million compared favorably to $14.5$15.1 million in 1999
due to increased revenue from new and existing business. Revenues from portfolio services
increased 16.3%26.9% to $23.6$25.0 million for the three months ended JuneSeptember 30, 2000 from $20.3$19.7
million for the comparable period in 1999. The increased revenue was primarily due to
higher servicing fee revenues for the off-balance sheet collections of FINCO portfolios and higher strategic sales of portfolios
partially offset by lower revenues from on-balance sheet portfolios resulting in the shift
from on-balance sheet ownership of purchased loans and accounts receivable portfolios to
off-balance sheet. During the three months ended JuneSeptember 30, 2000, the Company recorded
revenue from FINCO servicing fees of $5.0 million on total collections of $14.3$10.3 million compared to servicing fees of $4.0 million on total collections of $10.0$3.9
million for the three months ended JuneSeptember 30, 1999.
Operating expenses, inclusive of salaries and benefits, service fees and other operating and
administrative expenses, were $109.8$107.9 million for the three months ended JuneSeptember 30, 2000
and $100.9$97.5 million for the comparable period in 1999 - an increase of 8.8%10.7%. The increase in
these operating expenses resulted primarily from higher collection expenses, increased
collection-related expenses associated withdue to the increased revenues of collection and outsourcing
services and increased collection expenses associated with collections of on and off-balance
sheet purchased portfolios
partially offset by lower consulting expenses.portfolios. For the three months ended JuneSeptember 30, 2000, amortization and
depreciation charges of $16.2$14.5 million were lower than the $16.9$17.2 million for the comparable
period in 1999 by $0.7$2.7 million. The lower amortization and depreciation charges resulted
primarily from lower portfolio amortization as a result of the shift towards off-balance
sheet purchased loans and accounts receivable portfolios.
In continuing with the strategy to align the Company along business services and establish
call centers of excellence by industry specialization adopted in early 1999, the Company
incurred nonrecurring realignment and relocation expenses of $1.0$1.7 million which includes costs for closure
of certain call centers, severance associated with these office closures and certain other
one-time costs. These costs were recognized as incurred in 2000.
In the three months ended June 30, 2000, the Company incurred approximately $0.2
million of additional compensation expense resulting from the redemption of
vested stock options.
Earnings before interest expense, taxes, depreciation and amortization (EBITDA) for the
three months ended JuneSeptember 30, 2000 was $26.4$24.2 million. Adding back the nonrecurring
charges, and the additional compensation expense, EBITDA of $27.5$25.9 million for the three months ended JuneSeptember 30, 2000 compared
favorably to $26.9$25.5 million for the same period in 1999.
Operating income of $10.2$9.7 million for the three months ended JuneSeptember 30, 2000 compared
favorably to last year's operating income of $10.0$8.3 million for the same period. Adding back
the nonrecurring charges of $1.0 million and the additional
compensation expense of approximately $0.2$1.7 million, operating income was $11.4 million for the three
months ended JuneSeptember 30, 2000 compared to $10.0$8.3 million for the same period in 1999 - an
increase of 14%37%. The shift to off-balance sheet ownership of portfolios has negatively
impacted EBITDA as revenue is recognized for off-balance sheet portfolios when servicing
fees (a certain percentage of collections) are earned whereas for on-balance sheet
portfolios the Company recognizes revenue when collections are received. Nevertheless,
operating income has been positively impacted by lower amortization as the Company amortizes
only on-balance sheet portfolios, which have become smaller.
Net interest expense for the three months ended JuneSeptember 30, 2000 was $15.2$15.4 million
compared to $12.6$13.0 million for the comparable period in 1999. The increase was due primarily
to higher interest rates and higher amortization of deferred financing fees.
The provision for income taxes of $0.2$0.1 million was provided for state and
foreign income tax
obligations, which the Company cannot offset currently by net operating losses.
Due to the factors stated above, the net loss for the three months ended JuneSeptember 30, 2000
of $5.2$5.8 million compared unfavorably to the net loss of $3.0$4.7 million for the three months
ended JuneSeptember 30, 1999.
SixNine Months Ended JuneSeptember 30, 2000 Compared to SixNine Months Ended JuneSeptember 30, 1999
- -------------------------------------------------------------------------
Revenues for the sixnine months ended JuneSeptember 30, 2000 were $270.6$404.5 million compared to $257.1$380.1
million in the same period last year - an increase of 5.3%6.4%. The revenue increase of $13.5$24.4
million was due to increased collection, outsourcing and portfolio services revenues.
Revenues from collection services were $192.4$281.9 million for the sixnine months ended JuneSeptember
30, 2000 compared to $186.8$275.0 million in the comparable period in 1999 due primarily to
increased governementgovernment and letter series business. Partially offsetting this increase, however, was abusiness partially offset by lower telecommunications
business and the continued weakness in the bankcard market, primarily driven by changes in the portfolio
sales market. The outsourcing services
revenue of $35.0$54.4 million compared favorably to $28.4$43.5 million in 1999 due to increased
revenue from new and existing business. Revenues from portfolio services increased to $43.2$68.2
million for the sixnine months ended JuneSeptember 30, 2000 from $41.9$61.6 million for the comparable
period in 1999. The increased revenues was due to higher servicing fee revenues for the
off-balance sheet collections of FINCO portfolios and higher strategic
sales of portfolios partially offset by lower revenues from
on-balance sheet portfolios resulting in the shift from on-balance sheet ownership of
purchasepurchased loans and accounts receivable portfolios to off-balance sheet. During the sixnine
months ended JuneSeptember 30, 2000, the Company recorded revenue from FINCO servicing fees of
$9.3 million on total collections of $26.2$19.7 million compared to servicing fees of $5.8 million on total collections of $14.7$9.8 million for the sixnine months ended JuneSeptember
30, 1999.
Operating expenses, inclusive of salaries and benefits, service fees and other operating and
administrative expenses, were $217.4$325.4 million for the sixnine months ended JuneSeptember 30, 2000
and $202.1$299.6 million for the comparable period in 1999 - an increase of 7.6%8.6%. The increase in
these operating expenses resulted primarily from higher collection expenses, increased
collection-related expenses associated withdue to the increased revenues of collection and outsourcing
services and increased collection expenses associated with the increase in collections of on
and off-balance sheet purchased portfolios partially offset by lower consulting expenses.
For the sixnine months ended JuneSeptember 30, 2000, amortization and depreciation charges of $30.8$45.4
million were lower than $35.9$53.1 million for the comparable period in 1999 - a decrease of
14.2%14.5%. The lower amortization and depreciation charges resulted primarily from lower
portfolio amortization as a result of the shift towards off-balance sheet purchased loans
and accounts receivable portfolios.
In continuing with the strategy to align the Company along business services and establish
call centers of excellence by industry specialization adopted in early 1999, the Company
incurred nonrecurring realignment and relocation expenses of $1.0$2.7 million which includes costs for closures
of certain call centers, severance associated with these office closures and certain other
one-time costs. These costs were recognized as incurred in 2000.
In the sixnine months ended JuneSeptember 30, 2000, the Company incurred approximately $0.2 million
of additional compensation expense resulting from the redemption of vested stock options.
Earnings before interest expenses, taxes, depreciation and amortization (EBITDA) for the
sixnine months ended JuneSeptember 30, 2000 was $52.0$76.2 million. Adding back the nonrecurring
charges and the additional compensation expense, EBITDA was $53.2$79.1 million for the sixnine
months ended JuneSeptember 30, 2000 compared to $55.0$80.5 million for the same period in 1999. The
decrease of $1.8$1.4 million was primarily attributable to the increased collection expenses in
relation to the revenue reported from the collections of purchased portfolios partially
offset by the contribution from increased collection and outsourcing services revenues and
lower consulting expenses.
While EBITDA was down slightly due to the off-balance sheet ownership of the portfolios,
depreciation and amortization also declined resulting in operating income of $21.2$30.8 million.
Adding back the nonrecurring charges of $1.0$2.7 million and the additional compensation expense
of approximately $0.2 million, operating income was $22.4$33.7 million for the sixnine months ended
JuneSeptember 30, 2000 compared to $19.1$27.4 million for the same period in 1999.
Net interest expense for the sixnine months ended JuneSeptember 30, 2000 of $29.5$44.8 million compared
unfavorably to $25.2$38.2 million for the same period in 1999 due primarily to higher interest
rates and higher amortization of deferred financing fees.
The provision for income taxes of $0.3$0.4 million was provided for state and foreign income tax
obligations, which the Company cannot offset currently by net operating losses.
Due to the factors stated above, the net loss for the sixnine months ended JuneSeptember 30, 2000
of $8.6$14.3 million compared unfavorably to the net loss of $6.5$11.2 million for the sixnine months
ended JuneSeptember 30, 1999.
Financial Condition, Liquidity and Capital Resources
At JuneSeptember 30, 2000, the Company had cash and cash equivalents of $10.6$9.8 million. The
Company's credit agreement provides for a $75.0 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, 2000, the Company had
$22.0$29.5 million outstanding under the revolving credit facility leaving $48.8$39.0 million, after
outstanding letters of credit, available under the revolving credit facility.
Since December 31, 1999, cash and cash equivalents increased $4.5$3.7 million primarily due to
cash from operating activities and portfolio purchasing of $7.6$19.5 million and net cash from
financing activities of $7.5$14.6 million offset by the use of cash of $10.5$30.4 million primarily
for capital expenditures.expenditures of $13.9 million and $15.2 million for the acquisition of certain
assets of RWC. In addition to the cash consideration of $15.2 million, the purchase price
included voting common stock worth $2.0 million and a $5.0 million 18% unsecured,
subordinated note along with a contingent payment obligation. The Company also held $26.2
million of cash for clients in restricted trust accounts at JuneSeptember 30, 2000.
At September 30, 1999, the Company had cash and cash equivalents of $4.8 million. Since
December 31, 1998, cash and cash equivalents decreased $4.0 million primarily due to cash
utilized for the net repayment of debt of $12.6 million and capital expenditures of $14.2
million offset by cash from operating activities and portfolio purchasing of $11.7 million
and increased borrowings under the revolving credit facility of $14.4 million.
For the first sixnine months in 2000, the Company made capital expenditures of $9.0$13.9 million
primarily for the replacement and upgrading of equipment, expansion of facilities and
expansion and conversion of the Company's information services systems. The Company
anticipates capital spending of approximately $18.0 million during 2000, which the Company
intends to fund from cash flow from operations and if necessary, borrowings under the
revolving credit facility.
See Item 3. "QuantitativeRecent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and
Qualitative Disclosures About Market Risk"Hedging Activities, which was amended by SFAS No. 138, Accounting for Derivative Instruments
and Hedging Activities, which is effective for fiscal years beginning after June 15, 2000.
In September 1999, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities - a replacement of FASB Statement No.
125, which is effective for the Company's derivative activities duringfiscal year 2001. The Company has determined that
these statements along with SAB No. 101, Revenue Recognition in Financial Statements, will
not have a material impact on the quarter ended June 30, 2000.
consolidated statement of operations and consolidated
balance sheet.
Forward-Looking Statements
The following statements in this document are or may constitute forward-looking statements
made in reliance upon the safe harbor of the Private Securities Litigation Reform Act of
1995: (1) statements concerning the anticipated costs and outcome of legal proceedings and
environmental liabilities, (2) statements regarding the Company's expected capital
expenditures and the funding thereof, (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 may differ
materially from those expressed or implied by such forward-looking statements. Factors that
could cause actual results to differ materially include, but are not limited to: (1) the
demand for the Company's services, (2) the demand for accounts receivable management
generally, (3) general economic conditions, (4) changes in interest rates, (5) competition,
including but not limited to pricing pressures, (6) changes in governmental regulations
including, but not limited to the federal Fair Debt Collection Practices Act and comparable
state statutes, (7) legal proceedings, (8) environmental investigations and clean up
efforts, (9) expected synergies, economies of scale and cost savings from acquisitions by
the Company not being fully realized or realized within the expected time frames, (10) costs
of operational difficulties related to integrating the operations of acquired companies with
the Company's operations being greater than expected, (11) unanticipated realignment
costs, (12) 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, and (12)(13) factors discussed from time to time in the Company's
public filings.
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 does not undertake any
obligation to release publicly any revisions to such forward-looking statements to reflect
later events or circumstances or to reflect the occurrence of unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to the risk of fluctuating interest rates in the normal course of
business. From time to time and as required by the Company's credit agreement, the Company
will employ derivative financial instruments as part of its risk management program. The
Company's objective is to manage risks and exposures and not to trade such instruments for
profit or loss.
At December 31, 1999 (the most recent completed fiscal year), the Company had no outstanding
interest rate agreements. Pursuant to the Company's credit agreement, the Company was
obligated to secure interest rate protection in the nominal amount of $150.0 million by July
2000. In June 2000, the Company entered into interest rate collared swap agreements with
several financial institutions for interest rate protection on the $150.0 million. Since
June 30, 2000, there have been no material changes in these agreements.
In October 2000, the Company entered into an interest rate swap agreement maturing November
2006 relating to $50.0 million nominal amount of its 11.0% senior subordinated notes. Under
the agreements,agreement, the Company pays floating threeone month LIBOR between 5.90%plus 3.51%, capped at 11.0% until
November 2002 and 8.50% in addition15.0% thereafter. The financial institution has the right to call the
applicable margin as set forth in the credit agreement. In the event,
however, the three month LIBOR drops below 5.9%, the Company would be required
to pay 7.0% plus the applicable margin, until such time the three month LIBOR
rises above 5.90%,agreement, at which time the rate returns to a variable rate.its discretion, after November 2001.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company and certain of its subsidiaries are involved in 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.
Other information with respect to legal proceedings appears in the Company's Annual Report
on Form 10-K for the year ended December 31, 1999.
Item 2. Changes in Securities
See Note 4 of the Condensed Consolidated Financial Statements included elsewhere
herein.
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 Management Stock2 Asset Purchase Agreement Non-recourse
Secured Promissory Notedated September 26, 2000 by and Management Stock Pledge
Agreementamong
Outsourcing Solutions Inc., RWC Consulting Group, LLC, RWC
Consulting Group, Inc., and Robert W. Curtis, Jr.
Exhibit 3 By-laws of the Company.
Exhibit 4.1 Second Supplemental Indenture dated as of April 19,July 16, 2000 betweenby and
among the Company, the Additional Guarantors and Timothy Beffa.Wilmington Trust
Company, as trustee.
Exhibit 10.2 Management Stock Purchase Agreement, Promissory Note
and Management Stock Pledge Agreement4.2 Third Supplemental Indenture dated as of April 19,September 29, 2000 betweenby and
among the Company, the Additional Guarantors and Gary Weller.Wilmington Trust
Company, as trustee.
Exhibit 10.3 Form4.3 Release of Director Stock Purchase and Option Agreement.
Exhibit 10.4 FormSubsidiary Guarantee of Non-Qualified Stock Option Award Agreement [F]OSI Education Services, Inc.
Exhibit 27 Financial Data Schedule (Unaudited)
(b). Reports on Form 8-K
During the quarter, the following report on Form 8-K was filed:
ReportThere were no reports on Form 8-K filed Junefor the three-month period ended
September 30, 20002000.
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//s/ Timothy G. Beffa ------------------------------------
Timothy G. Beffa
President and Chief Executive Officer
/s//s/ Gary L. Weller ------------------------------------
Gary L. Weller
Executive Vice President
and Chief Financial Officer
Date: August 11,November 13, 2000