SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q10-Q/A
(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, 2001
--------------------------------
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
incorporation or organization) Identification Number)
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, 2001
- ----------------------- --------------
Senior common stock 489,795.93
Voting common stock 6,088,479.30
Non-voting common stock 480,321.30
------------
7,058,596.53
============
THE UNDERSIGNED REGISTRANT HEREBY AMENDS, AS AND TO THE EXTENT SET FORTH BELOW,
THE FOLLOWING ITEMS AND FINANCIAL STATEMENTS OF ITS QUARTERLY REPORT ON FORM
10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 FILED PURSUANT TO SECTION
13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934. EXCEPT FOR ITEMS 1 AND 2 OF
PART I AND ITEM 3 OF PART II, NO OTHER INFORMATION INCLUDED IN THE ORIGINAL
REPORT ON FORM 10-Q IS AMENDED BY THIS AMENDMENT.
OUTSOURCING SOLUTIONS INC.
AND SUBSIDIARIES
TABLE OF CONTENTS
Part I. Financial Information Page
----
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
JuneSeptember 30, 2001, as restated and
December 31, 2000...............................32000, as restated............................ 3
Condensed Consolidated Statements of
Operations for the three and sixnine months
ended June 30,September, 2001, as restated and 2000.............42000............... 4
Condensed Consolidated Statements of
Cash Flows for the sixnine months ended
JuneSeptember 30, 2001, as restated and 2000.......................52000.................. 5
Notes to Condensed Consolidated
Financial Statements..............6Statements...................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................................9Operations............ 14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.......13Risk........................................ 21
Part II. Other Information..................................................14Information.......................................... 22
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
JuneASSETS September 30, December 31,
2001 2000
------------- -------------
ASSETSAs Restated As Restated
(Notes 2 & 10) (Note 2)
-------------- ------------
Cash and cash equivalents $ 8,2606,425 $ 10,273
Cash and cash equivalents held for clients 23,20923,479 21,970
Accounts receivable - trade, less allowance
for 70,404 62,876
doubtful receivables of $324$340 and $447 68,654 61,325
Purchased loans and accounts receivable
portfolios 19,39020,492 24,690
Property and equipment, net 45,39045,737 46,601
Intangible assets, net 429,547426,065 417,084
Deferred financing costs, less accumulated
20,889 22,934
amortization of $6,745$7,857 and $4,538 19,777 22,934
Other assets 37,923 30,426
------- -------38,572 27,770
-------- --------
TOTAL $655,012 $636,854$649,201 $632,647
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable - trade $13,836 $14,446$ 14,371 $ 15,896
Collections due to clients 23,20923,479 21,970
Accrued salaries, wages and benefits 17,03916,326 15,195
Debt 534,841537,198 539,463
Other liabilities 74,79478,919 71,080
Commitments and contingencies (Note 23 and 4)5)
Mandatorily redeemable preferred stock;
redemption amount of $131,545$135,976 and $123,115 113,165118,244 103,455
Stockholders' deficit:
Senior common stock; $.01 par value;
authorized 900,000 shares, 489,795.93
issued in 2001 and outstanding 5 -
Voting common stock; $.01 par value;
authorized 20,000,000 shares,
9,166,728.37 shares issued 92 92
Non-voting common stock; $.01 par value;
authorized 2,000,000 shares, 480,321.30
issued and outstanding 5 5
Paid-in capital 223,277 200,537
Accumulated deficit (201,871) (192,715)(216,128) (198,372)
Accumulated other comprehensive income (6,621)loss (9,799) -
------- -------
14,887 7,919-------- --------
(2,548) 2,262
Notes receivable from management for
shares sold (1,902)(1,931) (1,817)
CommonVoting common stock in treasury, at cost;
3,078,249.07 shares (134,857) (134,857)
------- --------------- --------
Total stockholders' deficit (121,872) (128,755)
------- -------(139,336) (134,412)
-------- --------
TOTAL $655,012 $636,854$649,201 $632,647
======== ========
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands)
- --------------------------------------------------------------------------------
Three Months Ended SixNine Months Ended
JuneSeptember 30, JuneSeptember 30,
--------------------- ------------------------------------------------- ---------------------------
2001 2001
As Restated As Restated
(Notes 2 & 10) 2000 2001(Notes 2 & 10) 2000
REVENUES $ 157,433152,902 $ 137,373 $309,019 $270,623133,871 $ 461,921 $ 404,494
EXPENSES:
Salaries and benefits 80,566 66,598 154,890 132,60477,956 66,026 232,846 198,630
Service fees and other operating
and administrative expenses 48,015 43,414 95,634 85,01149,282 41,897 144,916 126,908
Amortization of purchased loans and
accounts receivable portfolios 5,012 8,109 11,991 14,7854,770 6,591 16,761 21,376
Amortization of goodwill and other
intangibles 4,161 3,979 8,213 7,9494,199 3,980 12,412 11,929
Depreciation expense 3,605 4,098 7,307 8,111
Nonrecurring3,532 3,956 10,839 12,067
Conversion, realignment and
relocation expenses - 1,0001,742 - 1,000
------- ------- ------- -------2,742
--------- --------- --------- ---------
Total expenses 141,359 127,198 278,035 249,460
------- ------- ------- -------139,739 124,192 417,774 373,652
--------- --------- --------- ---------
OPERATING INCOME 16,074 10,175 30,984 21,16313,163 9,679 44,147 30,842
INTEREST EXPENSE - Net 13,819 15,209 30,080 29,452
------- ------- ------- -------
INCOME (LOSS)16,499 15,377 46,579 44,829
--------- --------- --------- ---------
LOSS BEFORE INCOME TAXES 2,255 (5,034) 904 (8,289)(3,336) (5,698) (2,432) (13,987)
PROVISION FOR INCOME TAXES 175 169 350 294
------- ------- ------- -------185 65 535 359
--------- --------- --------- ---------
NET INCOME (LOSS) 2,080 (5,203) 554 (8,583)LOSS (3,521) (5,763) (2,967) (14,346)
PREFERRED STOCK DIVIDEND REQUIREMENTS
AND ACCRETION OF SENIOR PREFERRED STOCK 4,928 4,364 9,710 8,607
------- ------- ------- -------5,079 4,497 14,789 13,104
--------- --------- --------- ---------
NET LOSS TO COMMON STOCKHOLDERS $(2,848) $(9,567) $(9,156) $(17,190)
======== ======== ======= ========$ (8,600) $ (10,260) $ (17,756) $ (27,450)
========== ========== ========= =========
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------
SixNine Months Ended
JuneSeptember 30,
-----------------------------------------------
2001
As Restated
(Notes 2 & 10) 2000
OPERATING ACTIVITIES AND PORTFOLIO PURCHASING:
Net income (loss)loss $ 554(2,967) $ (8,583)(14,346)
Adjustments to reconcile net income (loss)loss to net cash from
operating activities and portfolio purchasing:
Depreciation and amortization 17,727 18,26829,132 27,308
Amortization of purchased loans and accounts receivable portfolios 11,991 14,78516,761 21,376
Non-cash compensation expense related to variable stock options 741 -
Change in assets and liabilities excluding the effects of acquisitions:
Purchases of loans and accounts receivable portfolios (6,691) (5,328)(12,563) (8,433)
Accounts receivable and other assets (11,572) (8,242)(14,496) (10,370)
Accounts payable, accrued expenses and other liabilities (1,943) (3,322)
--------(5,715) 3,957
--------- ---------
Net cash from operating activities and portfolio purchasing 10,807 7,578
------- --------10,893 19,492
--------- ---------
INVESTING ACTIVITIES:
Acquisition of property and equipment (5,657) (8,955)(9,493) (13,883)
Payment for acquisitions, net of cash acquired (21,254) -(21,653) (15,150)
Purchases of loans and accounts receivable portfolios for resale to FINCO (43,629) (54,306)(59,722) (70,721)
Sales of loans and accounts receivable portfolios to FINCO 43,629 54,30659,722 70,721
Other (3,025) (1,577)
------- --------(1,361)
--------- ---------
Net cash used by investing activities (29,936) (10,532)
------- --------(34,171) (30,394)
--------- ---------
FINANCING ACTIVITIES:
Borrowings under revolving credit agreement 160,800 174,650242,400 244,350
Repayments under revolving credit agreement (160,400) (165,650)(232,700) (227,850)
Repayments of debt (5,126) (1,705)(12,112) (2,512)
Proceeds from issuance of common stock 22,004 201401
Proceeds from term loans - 246
Deferred financing fees (162) -
-------- ------------------ ---------
Net cash from financing activities 17,116 7,496
------- --------19,430 14,635
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,013) 4,542(3,848) 3,733
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,273 6,059
------- ----------------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,2606,425 $ 10,601
======= ========9,792
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during period for interest $28,647 $ 27,621
======= ========38,634 $ 32,230
========= =========
Net cash paid during period for taxes $ 321413 $ 181
======= ========241
========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Accrued dividends on mandatorily redeemable preferred stock $ 8,43012,861 $ 7,366
======= ========11,235
========= =========
Accretion of mandatorily redeemable preferred stock $ 1,2801,928 $ 1,241
======= ========1,869
========= =========
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 except for share and per share amounts)
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NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in 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 in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring items) considered
necessary for a fair presentation have been included. Operating results for the
three and sixnine months ended JuneSeptember 30, 2001 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2001. 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, 2000.2000 and with the Company's
Form 10-K for the year ended December 31, 2001 (to be filed as soon as
practicable).
NOTE 2. RESTATEMENT OF FINANCIAL RESULTS
During the finalization of the Company's consolidated financial statements as of
and for the year ended December 31, 2001, it was determined that the
consolidated results reported in the Company's Form 10-K as of and for the year
ended December 31, 2000, as well as the unaudited consolidated quarterly results
reported in the Company's Report on Form 10-Q for the quarter ended September
30, 2001, would need to be restated for inaccurate financial reporting of
certain transactions at one of the Company's subsidiaries, North Shore Agency,
Inc. ("NSA"). The Board of Directors authorized the Audit and Compliance
Committee (the "Committee") to conduct an independent investigation, with the
assistance of special counsel retained by the Committee, to identify the causes
of these discrepancies and to make recommendations to ensure similar issues do
not recur in the future. The Committee retained Bryan Cave LLP as special
counsel, and Bryan Cave LLP engaged an independent accounting firm to assist in
the investigation. As a result of the investigation, it was determined that
certain assets were overstated (primarily accounts receivable and prepaid
postage) and trade accounts payable was understated at NSA due to the inaccurate
financial reporting of certain transactions.
As a result, the consolidated financial statements as of and for the year ended
December 31, 2000, as well as the unaudited consolidated quarterly results as of
and for the quarter ended September 30, 2001 have been restated. The
consolidated financial statements as of and for the year ended December 31, 2000
have been restated and provided in the Company's Form 10-K for the year ended
December 31, 2001 (to be filed as soon as practicable). The restated
consolidated financial results as of September 30, 2001 and December 31, 2000
and for the three and nine months ended September 30, 2001 have been included in
the consolidated financial statements included herein.
For the three and nine months ended September 30, 2001, the previously reported
unaudited consolidated financial statements included an understatement of
revenues by $1,879 and an understatement of operating expenses by $5,339. The
impact of the inaccurate financial reporting of certain transactions on
previously reported operating results for the three and nine months ended
September 30, 2001 was to overstate operating income by $3,460 and understate
net loss and net loss to common stockholders by $3,460.
A comparison of previously reported and restated unaudited, condensed
consolidated financial statements as of September 30, 2001 and for the three and
nine months ended September 30, 2001 are set forth in Note 10 to the unaudited,
condensed consolidated financial statements included herein.
NOTE 3. 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, hashave 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, 2001.
NOTE 3.4. PURCHASED LOANS AND ACCOUNTS RECEIVABLE PORTFOLIOS FINANCING
OSI Funding LLC ("FINCO") is a special-purpose finance company with the Company
having approximately 29% of the voting rights. An unrelated third party holds
the majority voting rights of FINCO and has decision-making authority over
FINCO's operations. The Company's investment in FINCO is accounted for under the
equity method. FINCO entered into a revolving warehouse financing arrangement
(the "Warehouse Facility") for up to $100,000 of funding capacity for the
purchase of loans and accounts receivable portfolios over its five year term
which expires in October 2003. In connection with the establishment of the
Warehouse Facility, FINCO entered into an agreement with a subsidiary of the
Company to provide certain administrative and collection services on a
contingent fee basis (i.e., fee is based on a percent of amount collected). The
Company believes the fee structure agreed to by FINCO is representative of a fee
structure that would exist with an unrelated party. The services provided by the
Company to FINCO are similar to those provided to unrelated parties. Revenue
from FINCO is generally recognized by the Company as collections are received.
All borrowings by FINCO under the Warehouse Facility are without recourse to the
Company.
The following summarizes the transactions between the Company and FINCO for the
periods ended JuneSeptember 30:
Three Months Ended SixNine Months Ended
JuneSeptember 30, JuneSeptember 30,
------------------------------------- -------------------
2001 2000 2001 2000
Sales of purchased loans
and accounts receivable
portfolios by the
Company to FINCO $27,007 $37,782 $43,629 $54,306$16,093 $16,415 $59,722 $70,721
Servicing fees paid by
FINCO to the Company $ 9,170 $ 5,032 $20,169 $ 9,3379,853 $10,319 $30,022 $19,656
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. As
such, the Company's Statements of Operations do not include revenues or expenses
related to these loans and accounts receivable portfolios. In conjunction with
sales of Receivablesan agreement to provide certain administrative and collection services to FINCO,
and the servicing agreement, the Company recorded servicing assets whichcan achieve a bonus fee if amounts in excess of the original
purchase price of a portfolio are being amortized overrecovered. Payment of any bonus is subject to
certain collateral and collection sharing requirements as outlined in the
servicing
agreement. The carrying value of such servicing assets,Receivables from FINCO, which are included in other assets in the
accompanying condensed consolidated balance sheet, was
$10,920were $15,524 at JuneSeptember 30,
2001 and waswere $5,612 at December 31, 2000.
At JuneSeptember 30, 2001 and December 31, 2000, FINCO had unamortized Receivables
of $84,899$87,618 and $76,908, respectively. At JuneSeptember 30, 2001 and December 31,
2000, FINCO had outstanding borrowings of $74,000$66,706 and $67,636, respectively,
under its revolving warehouse financing arrangement.
Warehouse Facility. See Note 11.
FINCO's summarized results from operations for the periods ended JuneSeptember 30
are as follows:
Three Months Ended SixNine Months Ended
JuneSeptember 30, JuneSeptember 30,
-------------------- ------------------------------------------ ---------------------
2001 2000 2001 2000
Revenues $32,220 $14,581 $59,190 $26,902$24,775 $28,940 $83,965 $55,842
Income from operations 3,009 997 4,631 1,8631,999 1,126 6,630 2,989
Net income 1,977 303 2,437 564(loss) 1,156 (55) 3,593 509
NOTE 4:5: ACQUISITIONS
On March 12, 2001, the Company through a newly formed limited liability company,
Coast to Coast Consulting, LLC, acquired certain assets and assumed certain
liabilities of Coast to Coast Consulting, Inc. ("CCC"), a service company
providing highly skilled experts to health care clients to assist with their
on-site, back office functions such as billing, collections, special projects
and other areas. Total cash consideration for CCC was approximately $16,300$16,699
including transaction costs of $150. The acquisition contains a certain
contingent payment obligation based on the attainment of a certain financial
performance target over the next three years. The future contingent payment
obligation, if any, is expected to be accounted for as additional goodwill as
the payment is made.
On April 30, 2001, the Company through a newly formed limited liability company,
Pacific Software Consulting, LLC, acquired (i) certain assets and assumed
certain liabilities of Pacific Software Consulting, Inc. ("PSC"), a service
company providing highly skilled consultants to banks to assist in their back
office functions, and (ii) associated patentable property. Total cash
consideration for these acquisitions was approximately $4,954 including
transaction costs of $45. In connection with these acquisitions, the Company
agreed to certain contingent payment obligations based on the attainment of
certain financial performance targets through JuneSeptember 2002. The future
contingent payment obligations, if any, are expected to be accounted for as
additional goodwill as the payments are made.
The above acquisitions were accounted for under the purchase method. The excess
of cost over the fair value of net assets of businesses acquired is being
amortized on a straight-line basis over 30 years. The purchase price of the
acquisitions was financed under the Company's revolving credit facility. Results
of operations for the acquired businesses were included in the consolidated
financial statements from their respective acquisition dates.
NOTE 5:6: DERIVATIVES AND HEDGING ACTIVITIES
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 JuneSeptember 30, 2001, the Company had interest rate swap and collared swap
agreements outstanding in the notional amounts of $75,000 and $225,000,
respectively. At December 31, 2000, the Company had interest rate swap and
collared swap agreements outstanding in the notional amounts of $50,000 and
$150,000, respectively.
Since December 31, 2000, there have been no material
changesIn September 2001, the Company accelerated the call option of an interest rate
swap agreement maturing November 2006 relating to $50,000 nominal amount of its
11.0% senior subordinated notes and entered into a new interest rate swap
agreement maturing November 2006 relating to $75,000 nominal amount of its 11.0%
senior subordinated notes. Under this agreement, the Company pays floating three
month LIBOR plus 5.50%. The financial institution has the right to call the
agreement, at its discretion, after May 1, 2003. In addition, the Company
entered into an interest rate collared swap agreement maturing November 2006
relating to $75,000 nominal amount of its term debt. Under the agreement, the
Company pays floating three month LIBOR, capped at 6.75%, plus the applicable
margin as set forth in these agreements.the credit agreement. In the event, however, the three
month LIBOR drops below 2.50% from November 1, 2001 to April 30, 2002, 2.85%
from May 1, 2002 to April 30, 2003, or 4.10% from May 1, 2003 to November 1,
2006, the Company would be required to pay 5.50% plus the applicable margin,
until such time the three month LIBOR rises above the period floor, at which
time the rate returns to a variable rate.
On January 1, 2001, the Company implemented Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 137 and SFAS No. 138 (collectively, the
Statement). This Statement requires all derivatives to be recognized in the
balance sheet at fair value, with changes in that fair value to be recorded in
current earnings or deferred in other comprehensive income, depending on whether
the derivative instrument qualifies as a hedge and, if so, the nature of the
hedging activity. The Company's transition adjustment upon adoption of the
Statement required the recording of a liability of $3,691 with an offset of the
same amount to accumulated other comprehensive income. As of JuneSeptember 30, 2001,
the liability is $6,621$12,361 and is included in other liabilities and $9,799 is
included in accumulated other comprehensive income.income (loss). 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 and
loss. The Company's interest rate hedges are primarily classified as cash
flow hedges. For a cash flow hedge of an anticipated transaction, the
ineffective portion of the change in fair value of the derivative is recorded in
earnings as incurred, whereas the effective portion is deferred in accumulated
other comprehensive income (loss) on the balance sheet until the transaction is
realized, at which time any deferred hedging gains or losses are recorded in
earnings. During the quarter ended JuneSeptember 30, 2001, the Company recorded, as
part of interest expense, a gainloss of $518$2,562 due to the hedges' effectiveness.ineffectiveness.
For the sixnine months ended JuneSeptember 30, 2001, there was nothe net impact on interest expense.expense
is $2,562.
NOTE 6:7: COMPREHENSIVE INCOME (LOSS)
The components of total comprehensive income (loss) for the periods ended
JuneSeptember 30 are as follows:
Three Months Ended SixNine Months Ended
JuneSeptember 30, JuneSeptember 30,
-------------------- --------------------------------------------- ------------------------
2001 2001
As Restated As Restated
(Notes 2 & 10) 2000 2001(Notes 2 & 10) 2000
-------------- --------- -------------- ---------
Net income (loss) $ 2,080 $(5,203)(3,521) $ 554 $(8,583)(5,763) $ (2,967) $(14,346)
Other comprehensive
income item:
Net loss on cash flow
hedging instruments (83)(3,178) - (6,621)(9,799) -
------- ------- ------- --------------- -------- -------- --------
Total comprehensive
income (loss) $ 1,997 $(5,203) $(6,067) $(8,583)
======= ======= ======= =======(6,699) $ (5,763) $(12,766) $(14,346)
======== ======== ======== ========
NOTE 7:8: STOCKHOLDERS' DEFICIT
In April 2001, the Company completed a sale of 489,795.93 shares of senior
common stock for $24,000 ($22,004 after all related expenses) to a private
equity firm and to certain members of its existing private investor group,
including Madison Dearborn Capital Partners III, L.P., the Company's majority
stockholder.
NOTE 9: NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, Business Combinations. SFAS
No. 141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 and establishes specific criteria for
recognition of intangible assets separately from goodwill. For business
combinations initiated after June 30, 2001, SFAS No. 141 also requires that
unallocated negative goodwill be written off immediately as an extraordinary
gain. In addition, SFAS No. 141 requires reclassifying existing intangible
assets that have been reported as part of goodwill, and accounting for them
separately upon adoption of SFAS No. 142 if certain criteria are met. The
adoption of SFAS No. 141 did not have a material impact on the Company's
consolidated financial statements as the Company has no negative goodwill or
intangible assets that have been reported as part of goodwill.
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 eliminates the amortization of goodwill and instead
requires goodwill to be tested for impairment annually at the reporting unit
level. Also, specifically identifiable intangible assets are required to be
amortized over their useful lives and reviewed for impairment in accordance with
Statement of Financial Accounting Standard No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Under SFAS No. 142, if the
intangible asset has an indefinite useful life, it is not amortized until its
life is determined to be finite. The Company is required to adopt SFAS No. 142
on January 1, 2002. SFAS No. 142 provides a staggered timeline for completing
transitional impairment testing of goodwill and indefinite-lived intangible
assets. The Company does not have any indefinite-lived intangible assets. The
Company will be required to reassess the useful lives of intangible assets by
the end of the first quarter of 2002. The Company will be required to complete
the first step of the transitional goodwill impairment by the end of the second
quarter of 2002. If this first step indicates transitional goodwill impairment
may exist, the second step, which results in a final determination of goodwill
impairment, if any, must be completed no later than December 31, 2002. The
Company is currently evaluating the impact of SFAS No. 142 on its financial
statements. Goodwill, net of amortization, was $426,065 and $417,084 at
September 30, 2001 and December 31, 2000, respectively. Goodwill amortization
recorded for the quarter and nine months ended September 30, 2001 was $4,199 and
$12,412, respectively, compared to $3,980 and $11,929 for the respective periods
ended September 30, 2000. However, as previously noted, goodwill amortization
will cease as of January 1, 2002.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets, and is required
to be adopted on January 1, 2002. The Company does not expect SFAS No. 144 to
have a material impact on the Company's consolidated financial statements upon
adoption.
NOTE 10: RESTATEMENT
As described in Note 2, the September 30, 2001 unaudited condensed consolidated
balance sheet and the financial results for the three and nine months ended
September 30, 2001 have been restated. A comparison of previously reported and
restated condensed consolidated financial statements follows:
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30,
2001 September 30,
As Previously 2001
Reported As Restated
------------- -------------
ASSETS
Cash and cash equivalents $ 6,425 $ 6,425
Cash and cash equivalents held for clients 23,479 23,479
Accounts receivable - trade, less allowance
for doubtful receivables of $340 74,141 68,654
Purchased loans and accounts receivable
portfolios 20,492 20,492
Property and equipment, net 45,737 45,737
Intangible assets, net 426,065 426,065
Deferred financing costs, less accumulated
amortization of $7,857 19,777 19,777
Other assets 42,202 38,572
--------- ---------
TOTAL $ 658,318 $ 649,201
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable - trade $ 14,371 $ 14,371
Collections due to clients 23,479 23,479
Accrued salaries, wages and benefits 16,326 16,326
Debt 537,198 537,198
Other liabilities 78,919 78,919
Commitments and contingencies
Mandatory redeemable preferred stock;
redemption amount of $135,976 118,244 118,244
Stockholders' deficit:
Senior common stock; $.01 par value;
authorized 900,000 shares, 489,795.93
issued in 2001 and outstanding 5 5
Voting common stock; $.01 par value;
authorized 20,000,000 shares,
9,166,728.37 shares issued 92 92
Non-voting common stock; $.01 par value;
authorized 2,000,000 shares, 480,321.30
issued and outstanding 5 5
Paid-in capital 223,277 223,277
Accumulated deficit (207,011) (216,128)
Accumulated other comprehensive loss (9,799) (9,799)
--------- ---------
6,569 (2,548)
Notes receivable from management for
shares sold (1,931) (1,931)
Voting common stock in treasury, at cost;
3,078,249.07 shares (134,857) (134,857)
--------- ---------
Total stockholders' deficit (130,219) (139,336)
--------- ---------
TOTAL $ 658,318 $ 649,201
========= =========
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- --------------------------
2001 2001
As 2001 As 2001
Previously As Previously As
Reported Restated Reported Restated
REVENUES $151,023 $152,902 $460,042 $461,921
EXPENSES
Salaries and benefits 77,956 77,956 232,846 232,846
Service fees and other operating
and administrative expenses 43,943 49,282 139,577 144,916
Amortization of purchased loans
and accounts receivable portfolios 4,770 4,770 16,761 16,761
Amortization of goodwill and other intangibles 4,199 4,199 12,412 12,412
Depreciation expense 3,532 3,532 10,839 10,839
Nonrecurring realignment expenses - - - -
-------- -------- -------- --------
Total expenses 134,400 139,739 412,435 417,774
-------- -------- -------- --------
OPERATING INCOME 16,623 13,163 47,607 44,147
INTEREST EXPENSE - Net 16,499 16,499 46,579 46,579
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 124 (3,336) 1,028 (2,432)
PROVISION FOR INCOME TAXES 185 185 535 535
-------- -------- -------- --------
NET INCOME (LOSS) (61) (3,521) 493 (2,967)
PREFERRED STOCK DIVIDEND REQUIREMENTS AND
ACCRETION OF SENIOR PREFERRED STOCK 5,079 5,079 14,789 14,789
-------- -------- -------- --------
NET LOSS TO COMMON STOCKHOLDERS $ (5,140) $ (8,600) $(14,296) $(17,756)
======== ======== ======== ========
NOTE 11. SUBSEQUENT EVENT - DEBT
As a result of the restatement of financial results as discussed in Note 2, the
Company breached certain covenants, representations and warranties in each of
its bank credit facility (the "Credit Facility") and the Warehouse Facility. In
response, the Company and the lenders to the Credit Facility amended the
facility effective April 10, 2002. The amendment to the Credit Facility includes
provisions that amend the financial covenants, waive certain existing defaults
of covenants and breaches in representations and warranties, increase the
interest rate on borrowings pursuant to the facility (as discussed below), and,
during 2002, reduce the Company's availability under its Credit Facility by
$5,000, and limit capital expenditures, investments and acquisitions. In
connection with the amendment, the Company also issued 4,150 shares of its
Series B Junior Preferred Stock with attached warrants to acquire 42,347 shares
of the Company's Senior Common Stock to Madison Dearborn Capital Partners III,
L.P. and Madison Dearborn Special Equity III, L.P. for a total purchase price of
$4,150. The proceeds of this sale were used to repay the revolving facility in
the amount of $2,075 and the balance pro-rata to the Term A and B loans, as
provided in the Credit Facility. From April 10, 2002 until such time as the
Company delivers to the lenders a compliance certificate for the period ended
December 31, 2002, borrowings under the revolving facility and Term A Loan of
the Credit Facility will bear interest, at the Company's option, at (a) the
lender's prime rate, plus 2.75% or (b) the Eurodollar rate plus 3.75%.
Borrowings under the Term B Loan will bear interest, at the Company's option, at
(a) the lenders' prime rate plus 3.50% or (b) the Eurodollar rate plus 4.50%.
The amortization and maturity were not amended. Following this amendment, the
Company is in compliance with the Credit Facility and, subject to the Warehouse
Facility issues discussed below, expects to be in compliance throughout 2002.
The Company has also received a waiver from the lender under the Warehouse
Facility for certain breaches of covenants, representations and warranties with
respect to periods through year-end 2001. Since the Company, on an ongoing
basis, will continue to be in breach of certain financial covenants,
representations and warranties, it has initiated discussions with the lender
under the Warehouse Facility for the purpose of seeking to amend such facility
to cure such breaches, although there can be no assurance that the Company will
be successful in negotiating such an amendment. If the Company is unsuccessful
in negotiating such an amendment, notwithstanding the waiver received, the
Company may again breach certain covenants, representations and warranties in
the Warehouse Facility and there can be no assurances that the lender will
extend the waiver to cover such breaches. On an ongoing basis the Company has
also been engaged in discussions with certain other providers of similar
warehouse facilities. While there can be no assurances, the Company believes
that other warehouse facilities would be available on economic terms and in
amounts comparable to the company's existing Warehouse Facility which would
allow the Company to continue its business of purchasing of loans and accounts
receivable. In the event the Company is unable to amend the current Warehouse
Facility and it is terminated and the Company is unable to enter a replacement
warehouse facility, the Company would be in default of its Credit Facility.
Under the indenture governing the 11% Series B Senior Subordinated Notes, the
Company is furnishing Note holders with copies of the restated financial results
discussed in Note 2 and, therefore, has cured, within any applicable cure
period, any default that may have existed as a result of inaccuracies contained
in any previously furnished financial information.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Restatement of Financial Results
During the finalization of the Company's consolidated financial statements as of
and for the year ended December 31, 2001, it was determined that the
consolidated results reported in the Company's Form 10-K as of and for the year
ended December 31, 2000, as well as the unaudited consolidated quarterly results
reported in the Company's Report on Form 10-Q for the quarter ended September
30, 2001, would need to be restated for inaccurate financial reporting of
certain transactions at one of the Company's subsidiaries, North Shore Agency,
Inc. ("NSA"). The Board of Directors authorized the Audit and Compliance
Committee (the "Committee") to conduct an independent investigation, with the
assistance of special counsel retained by the Committee, to identify the causes
of these discrepancies and to make recommendations to ensure similar issues do
not recur in the future. The Committee retained Bryan Cave LLP as special
counsel, and Bryan Cave LLP engaged an independent accounting firm to assist in
the investigation. As a result of the investigation, it was determined that
certain assets were overstated (primarily accounts receivable and prepaid
postage) and trade accounts payable was understated at NSA due to the inaccurate
financial reporting of certain transactions.
As a result, the consolidated financial statements as of and for the year ended
December 31, 2000, as well as the unaudited consolidated quarterly results as of
and for the quarter ended September 30, 2001 have been restated. The
consolidated financial statements as of and for the year ended December 31, 2000
have been restated and provided in the Company's Form 10-K for the year ended
December 31, 2001 (to be filed as soon as practicable). The restated
consolidated financial results as of September 30, 2001 and December 31, 2000
and for the three and nine months ended September 30, 2001 have been included in
the consolidated financial statements included herein.
For the three and nine months ended September 30, 2001, the previously reported
unaudited consolidated financial statements included an understatement of
revenues by approximately $1.9 million and an understatement of operating
expenses by approximately $5.3 million. The impact of the inaccurate financial
reporting of certain transactions on previously reported operating results for
the nine months was to overstate operating income by approximately $3.4 million
and understate net loss and net loss to common stockholders by approximately
$3.4 million.
A comparison of previously reported and restated unaudited, condensed
consolidated financial statements as of September 30, 2001 and for the three and
nine months ended September 30, 2001 are set forth in Note 10 to the unaudited,
condensed consolidated financial statements included herein.
Results of Operations
Three Months Ended JuneSeptember 30, 2001 (Restated) Compared to Three Months Ended
JuneSeptember 30, 2000
- -------------------------------------------------------------------------------------------------------------------------------------------------------------
Revenues for the three months ended JuneSeptember 30, 2001 were $157.4$152.9 million
compared to $137.4$133.9 million in the same period last year - an increase of 14.6%14.2%.
The revenue increase of $20.0$19.0 million was due primarily to increased collection and
outsourcing services revenues offset partially by lower portfolio services
revenues. Revenues from outsourcingThe collection services revenues increased 99.3%4.1% to $43.2$88.6 million for
the three months ended JuneSeptember 30, 2001 from $21.7$85.1 million in 2000. The
increased revenues were due primarily to increased collection letter products
business offset partially by lower student loan business. Revenues from
outsourcing services increased 74.8% to $41.6 million for the three months ended
September 30, 2001 from $23.8 million for the comparable period in 2000. The
increased outsourcing services revenues of $21.5$17.8 million were due primarily to
new and increased existing business and the acquisitions of RWC Consulting Group
("RWC"), Coast to Coast Consulting ("CCC") and Pacific Software Consulting
("PSC"). Revenues from portfolio services of $21.7$22.7 million compared unfavorably
to $23.7$25.0 million in 2000 due primarily to the continued negative effect on
revenues resulting from the shift to off-balance sheet purchased portfolios and
lower strategic sales of portfolios partially offset by increased servicing fees
due to increased collections from the cumulative
increase inincreased level of off-balance sheet
purchased loans and accounts receivable portfolios during 1999, 2000 and 2001.
The collection servicesCompany believes that its revenues increased slightly,
0.5%, to $92.5 million forand operating income were negatively
affected by the three months ended June 30, 2001 from $92.0
million in 2000.terrorist attacks of September 11, 2001.
Operating expenses, inclusive of salaries and benefits, service fees and other
operating and administrative expenses, were $128.6$127.2 million for the three months
ended JuneSeptember 30, 2001 and $110.0$107.9 million for the comparable period in 2000 -
an increase of 16.9%17.9%. The increase in these operating expenses resulted
primarily from the RWC, CCC and PSC acquisitions, increased postage expense and
the increased expenses due to the increased revenues of outsourcing services.
Operating expenses for the three
months ended June 30, 2001 also included non-cash compensation expense related
to variable stock options of approximately $0.7 million. Included in operating
expenses for 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. For the three months ended JuneSeptember 30, 2001, amortization and depreciation
charges of $12.8$12.5 million were lower than the $16.2$14.5 million for the comparable
period in 2000 by $3.4$2.0 million. The lower amortization and depreciation charges
resulted primarily from lower portfolio amortization as a result of lower
strategic sales of portfolios and the shift towards off-balance sheet purchased
loans and accounts receivable portfolios.
In the three months ended JuneSeptember 30, 2000, the Company incurred nonrecurring
conversion, realignment and relocation expenses of $1.0$1.7 million which included
costs for closure of certain call centers, severance associated with these
office closures and certain other one-time costs.
Earnings before interest expense, taxes, depreciation and amortization (EBITDA)
for the three months ended JuneSeptember 30, 2001 was $28.9$25.7 million compared to
$26.4$24.2 million for the same period in 2000. The increase was primarily
attributable to the three acquisitions, and the higher outsourcing services revenues. Adding backrevenues
and the non-cash stock compensation expense, EBITDA was $29.6 million for the three
months ended June 30, 2001; this compared favorably to $27.5 million for the
same period in 2000 after adding back the nonrecurring charges of $1.7 million offset partially by a change
in revenue mix relating to its collection letter products from higher margin
contingent fee services to lower margin fixed fee services and the
additional compensationhigher postage
expense.
As a result of the above, the Company's operating income of $16.1$13.2 million for
the three months ended JuneSeptember 30, 2001 compared favorably to $10.2$9.7 million for
the same period in 2000.
Net interest expense for the three months ended JuneSeptember 30, 2001 was $13.8$16.5
million compared to $15.2$15.4 million for the comparable period in 2000. The
decreaseincrease was due primarily to additional interest expense of $2.6 million as a
result of the Company's interest rate hedges' ineffectiveness partially offset
by lower interest rates and lower amortization of deferred
financing fees.rates.
The provision for income taxes of $0.2 million was provided for certain state
and foreign income tax obligations. The net deferred tax assets at JuneSeptember 30,
2001 are fully offset by a valuation allowance. During the three months ended
JuneSeptember 30, 2001, the net deferred tax assets and the valuation allowance decreased by
$0.9 million. The decrease was caused by a reduction of deductible temporary
differences that exceededdid
not change from the taxable net operating loss generated during the
current period by $0.9 million.previous quarter. The Company generated a net taxable
operating loss for federal and certain state income tax purposes for which a
full valuation allowance was provided.
Due to the factors stated above, the Company had a net incomeloss for the three months
ended JuneSeptember 30, 2001 of $2.1$3.5 million which compared favorably to the net
loss of $5.2$5.8 million for the three months ended JuneSeptember 30, 2000.
SixNine Months Ended JuneSeptember 30, 2001 (Restated) Compared to SixNine Months Ended
JuneSeptember 30, 2000
- ---------------------------------------------------------------------------------------------------------------------------------------------------------
Revenues for the sixnine months ended JuneSeptember 30, 2001 were $309.0$461.9 million
compared to $270.6$404.5 million in the same period last year - an increase of 14.2%.14.2 %.
The revenue increase of $38.4$57.4 million was primarily due to increased outsourcing and portfolio
services revenues offset partially by lower collectionportfolio services revenues.
Revenues from outsourcing services increased 94.9%87.6% to $81.3$122.9 million for the
sixnine months ended JuneSeptember 30, 2001 from $41.7$65.5 million for the comparable
period in 2000. The increased outsourcing services revenues of $39.6$57.4 million
were due primarily to new and increased existing business ofand the acquisitions
of RWC, CCC and PSC. Revenues from portfolio services of $43.4$66.1 million compared
favorablyunfavorably to $43.2$68.2 million in 2000 due primarily to increased collections from the cumulative
increase in off-balance sheet purchased loans and accounts receivable portfolios
during 1999, 2000 and 2001 partially offset by the continued negative effect on
revenues resulting from the shift to off-balance sheet purchased portfolios.portfolios and
lower strategic portfolio sales partially offset by increased servicing fees due
to increased collections from the increased level of off-balance sheet purchased
loans and accounts receivable portfolios during 1999, 2000 and 2001. The
collection services revenues decreasedincreased slightly, 0.8%, to $184.3$272.9 million for the
sixnine months ended JuneSeptember 30, 2001 from $185.7$270.8 million in 2000. The decreasedincreased
revenues were due primarily to increased government and collection letter
products business offset by lower bank card, student loan and telecommunications
business
offset partiallybusiness. The Company believes that its revenues and operating income were
negatively affected by increased government and letter series business.the terrorist attacks of September 11, 2001.
Operating expenses, inclusive of salaries and benefits, service fees and other
operating and administrative expenses, were $250.5$377.8 million for the sixnine months
ended JuneSeptember 30, 2001 and $217.6$325.5 million for the comparable period in 2000 -
an increase of 15.1%16.1%. The increase in these operating expenses resulted
primarily from the RWC, CCC and PSC acquisitions, higher postage expense and the
increased expenses due to the increased revenues of outsourcing services.
Operating expenses for the sixnine months ended JuneSeptember 30, 2001 included
non-cash compensation expense related to variable stock options of approximately
$0.7 million. Included in operating expenses for 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. For
the sixnine months ended JuneSeptember 30, 2001, amortization and depreciation charges
of $27.5$40.0 million were lower than the $30.8$45.4 million for the comparable period in
2000 by $3.3$5.4 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.portfolios and lower
depreciation resulting from lower current year capital expenditures and mix of
current and prior years' capital expenditures.
In the sixnine months ended JuneSeptember 30, 2000, the Company incurred nonrecurring
conversion, realignment and relocation expenses of $1.0$2.7 million which included
costs for closure of certain call centers, severance associated with these call
centers and certain other one-time costs.
Earnings before interest expense, taxes, depreciation and amortization (EBITDA)
for the sixnine months ended JuneSeptember 30, 2001 was $58.5$84.2 million compared to $52.0$76.2
million for the same period in 2000. The increase was primarily attributable to
the three acquisitions, and the higher outsourcing services revenues.revenues and the 2000
nonrecurring charges of $2.7 million offset partially by higher postage expense.
Adding back the non-cash stock compensation expense, EBITDA was $59.2$84.9 million
for the sixnine months ended JuneSeptember 30, 2001; this compared favorably to $53.2$79.1
million for the same period in 2000 after adding back the nonrecurring charges
and the additional compensation expense.
As a result of the above, the Company's operating income of $31.0$44.1 million for
the sixnine months ended JuneSeptember 30, 2001 compared favorably to $21.2$30.8 million for
the same period in 2000.
Net interest expense for the sixnine months ended JuneSeptember 30, 2001 was $30.1$46.6
million compared to $29.5$44.8 million for the comparable period in 2000. The
increase was due primarily to higher debt balancesadditional interest expense of $2.6 million as a
result of the Company's interest rate hedges' ineffectiveness offset partially
by lower interest rates.
There was no net impact on interest expense as a result of the Company's hedging
activities.
The provision for income taxes of $0.4$0.5 million was provided for certain state
and foreign income tax obligations. The net deferred tax assets at JuneSeptember 30,
2001 are fully offset by a valuation allowance. During the sixnine months ended
JuneSeptember 30, 2001, the net deferred tax assets and the valuation allowance
decreased by $0.4 million. The decrease was caused by a reduction of deductible
temporary differences that exceeded the taxable newnet operating loss generated
during the current period by $0.4 million. The Company generated a net taxable
operating loss for federal and certain state income tax purposes for which a
full valuation allowance was provided.
Due to the factors stated above, the Company had a net incomeloss for the sixnine months
ended JuneSeptember 30, 2001 of $0.6$3.0 million which compared favorably to the net
loss of $8.6$14.3 million for the sixnine months ended JuneSeptember 30, 2000.
Financial Condition, Liquidity and Capital Resources
- ----------------------------------------------------
At JuneSeptember 30, 2001, the Company had cash and cash equivalents of $8.3$6.4
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, 2001, the Company had $32.4$41.7 million outstanding under the
revolving credit facility leaving $35.8$24.7 million, after outstanding letters of
credit, available under the revolving credit facility.
In April 2001, the Company completed a sale of $24.0 million of senior common
stock to a private equity firm and to certain members of its existing private
investor group, including Madison Dearborn Capital Partners III, L.P., the
Company's majority stockholder. The net proceeds of $22.0 million from the sale
were used to repay debt under the Company's bank credit facility.
Since December 31, 2000, cash and cash equivalents decreased $2.0$3.8 million
primarily due to cash utilized for the CCC and PSC acquisitions of $21.3$21.7
million, debt repayments of $5.1$12.1 million, an earnout payment of $3.0 million
and capital expenditures of $5.7$9.5 million offset by cash from operating
activities and portfolio purchasing of $10.8$10.9 million, borrowings under the
revolving credit facility of $9.7 million and net proceeds from the issuance of
senior common stock of $22.0 million. The Company also held $25.9$23.5 million of
cash for clients in restricted trust accounts at JuneSeptember 30, 2001.
For the sixnine months ended JuneSeptember 30, 2000, 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, primarily borrowings under the revolving credit facility, 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.
For the first sixnine months in 2001, the Company made capital expenditures of $5.7$9.5
million primarily for the replacement and upgrading of equipment, expansion of
facilities and expansion of the Company's information services systems. The
Company anticipates capital spending of approximately $13.8 million during 2001,
which the Company intends to fund from cash flow from operations and if
necessary, borrowings under the revolving credit facility.
As a result of the restatement of financial results as discussed above, the
Company breached certain covenants, representations and warranties in each of
its bank credit facility (the "Credit Facility") and the Warehouse Facility. In
response, the Company and the lenders to the Credit Facility amended the
facility effective April 10, 2002. The amendment to the Credit Facility includes
provisions that amend the financial covenants, waive certain existing defaults
of covenants and breaches in representations and warranties, increase the
interest rate on borrowings pursuant to the facility (as discussed below), and,
during 2002, reduce the Company's availability under its Credit Facility by
$5,000, and limit capital expenditures, investments and acquisitions. In
connection with the amendment, the Company also issued 4,150 shares of its
Series B Junior Preferred Stock with attached warrants to acquire 42,347 shares
of the Company's Senior Common Stock to Madison Dearborn Capital Partners III,
L.P. and Madison Dearborn Special Equity III, L.P. for a total purchase price of
$4,150. The proceeds of this sale were used to repay the revolving facility in
the amount of $2,075 and the balance pro-rata to the Term A and B loans, as
provided in the Credit Facility. From April 10, 2002 until such time as the
Company delivers to the lenders a compliance certificate for the period ended
December 31, 2002, borrowings under the revolving facility and Term A Loan of
the Credit Facility will bear interest, at the Company's option, at (a) the
lender's prime rate, plus 2.75% or (b) the Eurodollar rate plus 3.75%.
Borrowings under the Term B Loan will bear interest, at the Company's option, at
(a) the lenders' prime rate plus 3.50% or (b) the Eurodollar rate plus 4.50%.
The amortization and maturity were not amended. Following this amendment, the
Company is in compliance with the Credit Facility and, subject to the Warehouse
Facility issues discussed below, expects to be in compliance throughout 2002.
The Company has also received a waiver from the lender under the Warehouse
Facility for certain breaches of covenants, representations and warranties with
respect to periods through year-end 2001. Since the Company, on an ongoing
basis, will continue to be in breach of certain financial covenants,
representations and warranties, it has initiated discussions with the lender
under the Warehouse Facility for the purpose of seeking to amend such facility
to cure such breaches, although there can be no assurance that the Company will
be successful in negotiating such an amendment. If the Company is unsuccessful
in negotiating such an amendment, notwithstanding the waiver received, the
Company may again breach certain covenants, representations and warranties in
the Warehouse Facility and there can be no assurance that the lender will extend
the waiver to cover such breaches. On an ongoing basis the Company has also been
engaged in discussions with certain other providers of similar warehouse
facilities. While there can be no assurances, the Company believes that other
warehouse facilities would be available on economic terms and in amounts
comparable to the company's existing Warehouse Facility which would allow the
Company to continue its business of purchasing of loans and accounts receivable.
In the event the Company is unable to amend the current Warehouse Facility and
it is terminated and the Company is unable to enter a replacement warehouse
facility, the Company would be in default of its Credit Facility. Under the
indenture governing the 11% Series B Senior Subordinated Notes, the Company is
furnishing Note Holders with copies of the restated financial results discussed
in Note 2 and, therefore, has cured, within any applicable cure period, any
default that may have existed as a result of inaccuracies contained in any
previously furnished financial information.
Under the indenture governing the 11% Series B Senior Subordinated Notes, the
Company is furnishing Note holders with copies of the restated financial results
as discussed above and, therefore, has cured within any applicable cure period,
any default that may have existed as a result of inaccuracies contained in any
previously furnished financial information.
Recent Accounting Pronouncements
- --------------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, ("SFAS 141"), Business Combinations. SFAS
No. 141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 and establishes specific criteria for
recognition of intangible assets separately from goodwill. For business
combinations initiated after June 30, 2001, SFAS No. 141 also requires that
unallocated negative goodwill be written off immediately as an extraordinary
gain. Any unamortized deferred credit arising fromIn addition, SFAS No. 141 requires reclassifying existing intangible
assets that have been reported as part of goodwill, and accounting for them
separately upon adoption of SFAS No. 142 if certain criteria are met. The
adoption of SFAS No. 141 will not have a business combination
completed before July 1, 2001 will be recognizedmaterial impact on the Company's
consolidated financial statements as the cumulative effectCompany has no negative goodwill or
intangible assets that have been reported as part of a
change in accounting principle. The Company is currently evaluating the impact
of SFAS 141 on its financial statements.
Also ingoodwill.
In July 2001, the FASB issued Statement of Financial Accounting StandardsSFAS No. 142, ("SFAS 142"), Goodwill and Other Intangible
Assets. SFAS No. 142 eliminates the amortization of goodwill and instead
requires goodwill to be tested for impairment annually at the reporting unit
level. Also, specifically identifiable intangible assets are required to be
amortized over their useful lives and reviewed for impairment in accordance with
Statement of Financial Accounting StandardsSFAS No. 121,144, Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of.Assets.
Under SFAS No. 142, if the intangible asset has an indefinite useful life, it is
not amortized until its life is determined to be finite. The Company is required
to adopt SFAS No. 142 on January 1, 2002,2002. SFAS No. 142 provides a staggered
timeline for completing transitional impairment testing of goodwill and
earlier adoption isindefinite-lived intangible assets. The Company does not permitted.have any
indefinite-lived intangible assets. The Company will be required to reassess the
useful lives of intangible assets by the end of the first quarter of 2002. The
Company will be required to complete the first step of the transitional goodwill
impairment test by the end of the second quarter of 2002. If this first step
indicates transitional goodwill impairment may exist, the second step, which
results in a final determination of goodwill impairment, if any, must be
completed no later than December 31, 2002. The Company is currently evaluating
the impact of SFAS No. 142 on its financial statements. Goodwill, net of
amortization, was $426.1 million and $417.1 million at September 30, 2001 and
December 31, 2000, respectively. Goodwill amortization recorded for the quarter
and sixnine months ended JuneSeptember 30, 2001 was $4.2 million and $8.2$12.4 million,
respectively, compared toand $4.0 million and $7.9$11.9 million for the respective periods
ending Juneended September 30, 2000. However, as previously noted, goodwill amortization
will cease as of January 1, 2002.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets, and as required,
was adopted, by the Company on January 1, 2002. The Company does not expect SFAS
No. 144 to have a material impact on the Company's consolidated financial
statements.
Forward-Looking Statements
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The following statements in this entire 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 anticipated changes in the accounts
receivable management industry, including but not limited to debt levels,
delinquencies, industry consolidation, customer consolidation and outsourcing
trends, (3) statements regarding anticipated changes in the Company's
expected capital
expendituresopportunities in its industry, including but not limited to acquisitions, (4)
statements regarding the Company's plans to reduce costs and the funding thereof, (3)improve operational
efficiencies, (5) statements regarding the Company's ability to fund its future
operating expenses and meet its debt service requirements as they become due,
(4)(6) statements regarding the Company's expected capital expenditures and
facilities, (7) any statements preceded by, followed by or that include the word
"believes," "expects," "anticipates," "plans", "intends," "should," "may," or
similar expressions; and (5)(8) 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 and the availability of portfolios
to purchase 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 recent acquisitions by the
Company not being fully realized or realized within the expected time frames,
(10) costs of operational difficulties, including but not limited to those
related to integrating the operations of recently 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 either through acquisitions or
internal growth, (13) the Company's ability to amend its Warehouse Facility to
cure breaches and (13)defaults thereunder or to obtain replacements thereof on
acceptable economic terms, (14) changes in circumstances or the effects of new
accounting standards which may require the Company to consolidate FINCO into its
financial statements, and (15) 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, 2000 (the most recent completed fiscal year), the Company had
interest rate swap and collared swap agreements outstanding. Since December 31,
2000, there have been no material changesIn September 2001,
the Company accelerated the call option of an interest rate swap agreement
maturing November 2006 relating to $50.0 million nominal amount of its 11.0%
senior subordinated notes and entered into a new interest rate swap agreement
maturing November 2006 relating to $75.0 million nominal amount of its 11.0%
senior subordinated notes. Under this agreement, the Company pays floating three
month LIBOR plus 5.50% . The financial institution has the right to call the
agreement, at its discretion, after May 1, 2003. In addition, the Company
entered into an interest rate collared swap agreement maturing November 2006
relating to $75.0 million nominal amount of its term debt. Under the agreement,
the Company pays floating three month LIBOR, capped at 6.75%, plus the
applicable margin as set forth in these agreements.the credit agreement. In the event, however,
the three month LIBOR drops below 2.50% from November 1, 2001 to April 30, 2002,
2.85% from May 1, 2002 to April 30, 2003, or 4.10% from May 1, 2003 to November
1, 2006, the Company would be required to pay 5.50% plus the applicable margin,
until such time the three month LIBOR rises above the period floor, at which
time the rate returns to a variable rate.
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,
2000.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
See Note 711 of the Condensed Consolidated Financial Statements
included elsewhere herein. The net proceeds from the sale of senior common
stock (see Item 4 below) were used to repay debt.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of security holders
during the quarter ended June 30, 2001:
(1) On April 2, 2001, pursuant to written consent of the shareholders
of the Company's voting common stock, the shareholders approved
an amendment of the Company's Certificate of Incorporation to
provide for the authorization of 900,000 shares of Senior Common
Stock and to set forth the voting powers, designations,
preferences and other rights, qualifications and restrictions of
such Senior Common Stock.
(2) On April 16,2001, pursuant to written consent of the shareholders
of the Company's voting common stock, the shareholders (i)
increased the size of the Company's Board of Directors to seven
persons, and (ii) elected the following persons as directors of
the Company to hold office until the next annual meeting of the
shareholders of the Company and until their successors shall have
been elected and shall have qualified: R. David Andrews, Timothy
Beffa, William Hewitt, Timothy Hurd, Scott Marks, Jr., Richard
Thomas and Paul Wood.
Both of these shareholder consents were executed by holders of
4,536,367.84 shares of the Company's voting common stock.None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
Exhibit 2.1 Asset Purchase Agreement and Patentable Property
Purchase Agreement dated April 30, 2001 by and among
Outsourcing Solutions Inc., Pacific Software
Consulting, LLC, Pacific Software Consulting, Inc.,
and Edward F. Lambert.
Exhibit 2.2 Stock Subscription Agreement by and among Gryphon
Partners II, L.P., Gryphon Partners II-A, L.P.,
Outsourcing Solutions Inc., and the additional
investors, dated April 3, 2001.
Exhibit 3 Fourth Amended and Restated Certificate of
Incorporation of the Company, as amended by the
Certificate of Amendment dated as of April 16, 2001.
Exhibit 4 Fifth Supplemental Indenture dated as of April 30,
2001 by and among the Company, the Additional
Guarantor and Wilmington Trust Company, as trustee.
Exhibit 10 2001 Management Incentive Plan.None
(b). Reports on Form 8-K
There were no reports on Form 8-K filed for the three-month
period ended JuneSeptember 30, 2001.
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/ Gary L. Weller
------------------------------------------------------------------------
Gary L. Weller
Executive Vice President and
Chief Financial Officer
Date: August 14, 2001April 15, 2002