SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20429
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 September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
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 150
Chesterfield, Missouri 63017
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (314) 576-0022
Check here whether the issuer (1) has filed all reports required to be
filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
As of September 30, 1997, the following shares of the Registrant's common
stock were issued and outstanding:
Voting common stock 3,425,126.01
Class A convertible nonvoting
common stock 391,740.58
Class B convertible nonvoting
common stock 400,000.00
Class C convertible nonvoting
common stock 1,040,000.00
5,256,866.59
Transitional Small Disclosure _______(check one): Yes [ ] No[X]
OUTSOURCING SOLUTIONS INC.
AND SUBSIDIARIES
INDEX
Part I. - Financial Information
Item 1. - Financial Statements
Consolidated Balance Sheets
September 30, 1997 (unaudited) and December 31, 1996. . . . . . . . . . . .. . . . . . . 3
Consolidated Statements of Operations for the three and nine
month periods ended September 30, 1997 and 1996 (unaudited). . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the nine
month periods ended September 30, 1997 and 1996 (unaudited). . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements (unaudited) . . . . . . . . . . . . . . . . . 6
Item 2. - Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Part II. - Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
1997 1996
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,883 $ 14,497
Cash and cash equivalents held for clients 19,241 20,255
Current portion of purchased loans and accounts receivable portfolios 47,913 42,481
Accounts receivable - trade, net of allowance for doubtful
receivables of $850 and $879, respectively 22,939 20,738
Deferred income taxes 8,196 2,617
Other current assets 4,156 3,736
Total current assets 111,328 104,324
PURCHASED LOANS AND ACCOUNTS RECEIVABLE PORTFOLIOS 23,868 25,519
PROPERTY AND EQUIPMENT - Net 27,300 36,168
GOODWILL - Less accumulated amortization of $7,095 and $2,986, respectively 170,364 152,707
OTHER INTANGIBLE ASSETS - Less accumulated amortization of $29,911 and $12,751, respectively 3,603 20,763
DEFERRED FINANCING COSTS - Less accumulated amortization of $1,463 and $337, respectively 11,761 12,563
DEFERRED INCOME TAXES 10,010 3,163
TOTAL $ 358,234 $355,207
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 4,233 $6,495
Collections due to clients 19,241 20,255
Accrued severence and office closing costs 9,855 11,938
Accrued compensation 8,735 9,574
Other current liabilities 1,200 4,289
Accrued expenses 16,523 3,378
Current portion of long-term debt 13,194 10,032
Total current liabilities 72,981 65,961
LONG-TERM DEBT 254,027 237,584
OTHER LONG-TERM LIABILITIES 50 64
STOCKHOLDERS' EQUITY:
8% nonvoting cumulative redeemable exchangeable preferred stock; authorized 1,000,000 shares,
935,886.85 and 865,280.01 shares, respectively, issued and outstanding, at liquidation value
of $12.50 per share 11,699 10,816
Voting common stock; $.01 par value; authorized 7,500,000 shares and 3,425,126.01
shares, issued and outstanding 35 35
Class A convertible nonvoting common stock; $.01 par value; authorized 7,500,000 shares,
391,740.58 shares issued and outstanding 4 4
Class B convertible nonvoting common stock; $.01 par value; authorized 500,000 shares,
400,000 shares issued and outstanding 4 4
Class C convertible nonvoting common stock; $.01 par value; authorized 1,500,000 shares,
1,040,000 shares issued and outstanding 10 10
Additional paid-in capital 65,658 65,658
Accumulated deficit (46,234) (24,929)
Total stockholders' equity 31,176 51,598
TOTAL $ 358,234 $ 355,207
See notes to the unaudited consolidated financial statements.
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
REVENUES $ 67,537 $ 21,017 $ 197,663 $ 60,443
EXPENSES:
Salaries and benefits 32,218 8,896 97,018 23,060
Service fees and other operating and
administrative expenses 16,314 6,063 49,882 17,000
Amortization of loans and accounts
receivable purchased 13,138 7,868 31,174 20,586
Amortization of goodwill and other intangibles 5,293 3,028 21,269 6,046
Depreciation expense 2,558 320 7,615 876
Total expenses 69,521 26,175 206,958 67,568
OPERATING LOSS (1,984) (5,158) (9,295) (7,125)
INTEREST EXPENSE - Net 7,153 1,864 20,950 5,645
LOSS BEFORE INCOME TAXES (9,137) (7,022) (30,245) (12,770)
INCOME TAX BENEFIT (2,797) (1,892) (9,626) (4,424)
NET LOSS (6,340) (5,130) (20,619) (8,346)
PREFERRED STOCK DIVIDEND
REQUIREMENTS 266 200 686 613
NET LOSS TO COMMON STOCKHOLDERS $ (6,606) $ (5,330) $ (21,305) $ (8,959)
See notes to the unaudited consolidated financial statements.
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
OPERATING ACTIVITIES:
Net loss $(20,619) $(8,346)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 28,884 6,922
Amortization of loans and accounts receivable purchased 31,174 20,586
Deferred taxes (9,626) (4,444)
Change in assets and liabilities:
Accounts receivable - trade (2,201) (14)
Other current assets (420) -
Accounts payable, accrued expenses, and other current liabilities (10,773) (120)
Net cash provided by operating activities 16,419 14,584
INVESTING ACTIVITIES:
Payments for acquisitions - net of cash acquired - (35,096)
Payment of prior acquisition costs (1,200) (1,125)
Loans and accounts receivable purchased (34,955) (8,299)
Acquisition of property and equipment (5,729) (1,902)
Net cash used in investing activities (41,884) (46,422)
FINANCING ACTIVITIES:
Proceeds from term loans - 95,000
Repayments of term loans and capital lease obligations (7,225) (43,202)
Net proceeds from revolving credit facilities 27,400 5,210
Repayment of notes payable to stockholders - (35,012)
Other financing costs (324) (1,965)
Proceeds from issuance of stock - 14,975
Net cash provided by financing activities 19,851 35,006
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,614) 3,168
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 14,497 1,469
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,883 $ 4,637
See notes to the unaudited consolidated financial statements.
OUTSOURCING SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and nine month periods ended September 30, 1997 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1997. For purposes of comparability, certain prior
year's amounts have been reclassified to conform with the current year
presentation. For further information, refer to the Company's consolidated
financial statements and footnotes thereto for the year ended December 31,
1996.
NOTE 2 - ORGANIZATION
Pursuant to an Agreement and Plan of Merger, dated as of August 13, 1996
the Company acquired Payco American Corp (Payco) on November 6, 1996 in a
merger transaction for an aggregate cash consideration of approximately
$150.2 million. The assets and liabilities of Payco were recorded at their
estimated fair market value and an amount equal to the excess of the
purchase price over the fair value of assumed liabilities was allocated to
property and equipment, identifiable tangible and intangible assets and
goodwill. Goodwill is being amortized over 30 years. During the third
quarter the Company finalized the purchase price allocation related to the
acquisition of Payco. Based upon the final purchase price allocation,
adjustments were made in the third quarter to: reduce the recorded value
of fixed assets by $7.0 million, increase the liability for certain pre-
acquisition contingencies and planned exit costs incurred in conjunction
with the acquisition by $16.4 million, increase the deferred tax asset
created as a result of this adjustment by $2.8 million, and to record the
resulting increase in goodwill of $20.6 million. A summary of the cash and
non-cash components of the Payco acquisition after consideration of the
aforementioned adjustments is as follows:
Fair value of assets acquired, including
goodwill and transaction costs $ 228,222
Liabilities assumed (73,423)
Cash purchase price 154,799
Acquired cash (5,711)
Total cash paid, net of acquired cash $149,088
NOTE 3 - PURCHASED LOANS AND ACCOUNTS RECEIVABLE PORTFOLIOS AND
AMORTIZATION
During the three and nine month periods ended September 30, 1997 the
Company purchased $10.0 million and $35.0 million of loans and accounts
receivable portfolios, respectively. The costs of purchased portfolios are
generally amortized on an individual portfolio basis based on the ratio of
current collections to current and anticipated future collections for that
portfolio. Such portfolio cost is generally amortized over a three year
period from the date of purchase based upon amounts collected. In
addition, as a result of having over two years of collection experience and
data pertaining to certain purchased portfolios acquired in conjunction
with the acquisition of Account Portfolios, L.P. in September 1995, the
Company has commenced an in-depth analysis and evaluation of these
portfolios. This in-depth analysis of the purchased portfolios acquired in
September 1995 will include an evaluation of the achieved portfolio
amortization rates, historical and projected future costs to collect, as
well as, projected future collection levels including estimated terminal
values, if any. The Company expects to complete this in-depth evaluation
in the fourth quarter of fiscal 1997 and will determine the need to record
additional amortization of these purchased portfolios, if any.
NOTE 4 - LIABILITIES RECOGNIZED IN CONJUNCTION WITH THE PAYCO ACQUISITION
At September 30, 1997 the company had a remaining liability provision in
the amount of $13,599 related to certain planned exit, employee termination
and relocation costs related to the integration of the Payco acquisition,
of which $9,755 is included in "Accrued severance and office closing costs"
and $5,944 is included in "Accrued expenses" in the accompanying
consolidated balance sheet.
Amounts funded related to liabilities provided related to the acquisition
of Payco were $2,842 for the quarter ended September 30, 1997. Of this
amount, $2,310 was for planned exit costs, $402 was for severance payments
and $130 was for relocation costs. Amounts funded to these liabilities
were $7,263 for the nine months ended September 30, 1997, of which $3,200
was for planned exit costs, $3,033 was for severance payments, and $1,030
was for relocation costs.
NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest during the periods ended September 30, 1997 and
1996 were $12,146 and $5,103, respectively.
During the nine months ended September 30, 1997 and 1996, the Company
issued 70,606.84 shares and 65,280 shares of preferred stock, respectively,
in satisfaction of preferred stock dividends of $883 and $816,
respectively.
During July 1997, a working capital adjustment resulting from the
acquisition of A. M. Miller & Associates in January 1996 was agreed to with
the seller which resulted in a reduction to the seller note (retroactively
effective June 30, 1997) in the amount of $571. As a result of this
adjustment, a reduction to goodwill in the amount of $221 was recorded.
NOTE 6 - SUBSEQUENT EVENTS
On October 8, 1997 the Company entered into an amended bank credit facility
("Amended Credit Facility") which amended and restated the bank credit
facility ("Credit Facility") entered into in November 1996. The Amended
Credit Facility allows for two borrowings up to an additional aggregate
amount of $55,000 of Tranche B Term Loans to be used for specific potential
acquisitions. The unfunded Tranche B Term Loan Commitment expires
immediately on November 10, 1997 if the acquisitions are not made on or
before that date. The maturity dates and interest rates under the Amended
Credit Facility remain unchanged from the Credit Facility, however
scheduled principal payments of Tranche B Term Loans increase effective
October 15, 1997 in the event additional borrowings are made to fund
acquisitions.
On October 9, 1997, the Company acquired North Shore Agency, Inc. (NSA) for
cash of $19,500 (before transaction costs of approximately $1,600). The
acquisition was funded with $22,000 of additional Tranche B Term Loans
provided under the Amended Credit Facility described above. The
acquisition will be accounted for as a purchase with the costs of the
acquisition to be allocated to the assets acquired and the liabilities
assumed based on their estimated fair values at the date of acquisition.
On November 10, 1997, the Company acquired Accelerated Bureau of
Collections (ABC) for cash of $32,000 (before transaction costs of
approximately $1,160). The acquisition was funded with $33,000 of
additional Tranche B Term Loans provided under the Amended Credit Facility
described above. The acquisition will be accounted for as a purchase with
the costs of the acquisition to be allocated to the assets acquired and the
liabilities assumed based on their estimated fair values at the date of
acquisition.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended September 30, 1997 Compared to Three Months Ended
September 30, 1996
Revenues for the three months ended September 30, 1997 were $67.5 million,
compared to $21.0 million in the comparable period for 1996. Revenues from
contingent fee services were $48.5 million for the three months ended
September 30, 1997 compared to $8.7 million in the comparable period in
1996. The increase in contingent fee revenues was a result of the
acquisition of Payco in November 1996. Revenues generated from the
collection of purchased loans and accounts receivable portfolios (purchased
portfolios) increased to $19.0 million for the three months ended September
30, 1997 compared to $12.3 million for the comparable period in 1996. The
increase in collections from purchased portfolios resulted from both an
increase in purchased portfolio levels and related collection effort as
well as from the Payco acquisition. Revenues from outsourcing services
increased to $16.8 million for the three months ended September 30, 1997
compared to $0 in the comparable period in 1996. The increase was due to
the acquisition of Payco.
Operating Expenses for the three months ended September 30, 1997 were $69.5
million compared to $26.2 million for the comparable period in 1996, an
increase of $43.3 million. Operating expenses, exclusive of amortization
and depreciation charges, were $48.5 million for the three months ended
September 30, 1997 and $15.0 million for the comparable period in 1996.
Operating expenses increased primarily as a result of the Payco
acquisition. Of the $69.5 million in expenses for the three months ended
September 30, 1997, $13.1 million was attributable to amortization of the
purchase price of purchased portfolios (compared to $7.9 million in 1996),
$3.5 million was attributable to amortization of account inventory
(compared to $2.5 million in 1996), $1.8 million was attributable to
amortization of goodwill associated with the acquisitions of Account
Portfolios, L.P. (API), A.M. Miller & Associates, Inc. (Miller),
Continental Credit Services, Inc. (Continental) and Payco (compared to $0.5
million in 1996) and $2.6 million was attributable to depreciation
(compared to $0.3 million in 1996). The increase in amortization and
depreciation expense was the result of additional goodwill and step-up in
basis of fixed assets recorded in connection with the Payco acquisition.
Operating Loss for the three months ended September 30, 1997 was $2.0
million compared to $5.2 million for the comparable period in 1996. The
reduction in the operating loss was a result of increased revenues
attributable to the acquisition of Payco partially offset by increased
salaries and benefits, outside service fees and increased amortization
related to the step-up in basis of purchased portfolios, goodwill and
account inventory related to Payco.
Operating earnings before interest expense, taxes, depreciation and
amortization (EBITDA) for the three months ended September 30, 1997 was
$19.0 million compared to $6.1 million for the comparable period in 1996.
The increase of $12.9 million in EBITDA reflects additional revenues
associated with the acquisition of Payco and additional portfolios at API.
Interest Expense, net for the three months ended September 30, 1997 was
$7.2 million compared to $1.9 million for the comparable period in 1996.
The increase was primarily due to higher debt levels to finance the
acquisition of Payco and to finance additional purchased portfolio
purchases.
Net Loss for the three months ended September 30, 1997 was $6.3 million
compared to $5.1 million for the comparable period in 1996. The increase
in net loss resulted primarily from increased amortization expense from the
step-up in basis of acquired portfolios, goodwill and account inventory
recorded in connection with the acquisition of Payco and the increase in
interest expense related to the indebtedness incurred to finance the Payco
acquisition and purchased portfolio purchases.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996
Revenues for the nine months ended September 30, 1997 were $197.7 million,
compared to $60.4 million in the comparable period for 1996. Revenues from
contingent fee services were $145.5 million for the nine months ended
September 30, 1997 compared to $27.9 million in the comparable period in
1996. The increase in contingent fee revenues was a result of the
acquisition of Payco in November 1996. Revenues generated from the
collection of purchased portfolios increased to $52.1 million for the nine
months ended September 30, 1997 compared to $34.6 million for the
comparable period in 1996. The increase in collections from purchased
portfolios resulted from both an increase in purchased portfolio levels and
related collection effort as well as from the Payco acquisition. Revenues
from outsourcing services increased to $48.3 million for the nine months
ended September 30, 1997 compared to $0 in the comparable period in 1996.
The increase was due to the acquisition of Payco.
Operating Expenses for the nine months ended September 30, 1997 were $207.0
million compared to $67.6 million for the comparable period in 1996, an
increase of $139.4 million. Operating expenses, exclusive of amortization
and depreciation charges, were $146.9 million for the nine months ended
September 30, 1997 and $40.1 million for the comparable period in 1996.
Operating expenses increased as a result of the Payco acquisition in
addition to the use of outside collection agencies to service purchased
portfolios. Of the $207.0 million in expenses for the nine months ended
September 30, 1997, $31.2 million was attributable to amortization of the
purchase price of purchased portfolios(compared to $20.6 million in 1996),
$15.5 million was attributable to amortization of account inventory
(compared to $4.4 million in 1996), $5.8 million was attributable to
amortization of goodwill associated with the acquisitions of API, Miller,
Continental and Payco (compared to $1.6 million in 1996) and $7.6 million
was attributable to depreciation (compared to $0.9 million in 1996). The
increase in amortization and depreciation expense was the result of
additional goodwill and step-up in basis of fixed assets recorded in
connection with the Payco acquisition.
Operating Loss for the nine months ended September 30, 1997 was $9.3
million compared to $7.1 million for the comparable period in 1996. The
operating loss was a result of increased amortization related to the step-
up in basis of purchased portfolios, goodwill and account inventory related
to the acquisition of Payco.
Operating earnings before interest expense, taxes, depreciation and
amortization (EBITDA) for the nine months ended September 30, 1997 was
$50.8 million compared to $20.4 million for the comparable period in 1996.
The increase of $30.4 million in EBITDA reflects additional revenues
associated with the acquisition of Payco and additional portfolios at API,
partially offset by the costs associated with the use of outside collection
agencies to service purchased portfolios.
Interest Expense, net for the nine months ended September 30, 1997 was
$21.0 million compared to $5.6 million for the comparable period in 1996.
The increase was primarily due to higher debt levels to finance the
acquisition of Payco and to finance additional purchased portfolio
purchases.
Net Loss for the nine months ended September 30, 1997 was $20.6 million
compared to $8.3 million for the comparable period in 1996. The increase
in net loss resulted primarily from increased amortization expense from the
step-up in basis of acquired portfolios, goodwill and account inventory
recorded in connection with the acquisition of Payco and the increase in
interest expense related to the indebtedness incurred to finance the Payco
acquisition and purchased portfolio purchases.
Financial Condition
September 30, 1997 Compared to December 31, 1996
Cash and Cash Equivalents decreased from $14.5 million at December 31, 1996
to $8.9 million at September 30, 1997 principally due to the use of $41.9
million for investing activities primarily for the purchase of portfolios,
offset by cash provided by operations and financing activities of $16.6
million and $19.7 million, respectively. The Company also held $19.2
million of cash for clients in restricted accounts at September 30, 1997.
Purchased Loans and Accounts Receivable Portfolios increased from $68.0
million at December 31, 1996 to $71.8 million at September 30, 1997 due to
new portfolio purchases of $35.0 million during the nine month period which
were partially offset by amortization of purchased portfolios of $31.2
million. The amount of purchased loans and accounts receivable portfolios
which were considered collectible within one year increased from $42.5
million at December 31, 1996 to $47.9 million at September 30, 1997 mainly
due to the timing of cash collections based on the relative age and length
of ownership of the portfolios.
The purchased loans and accounts receivable portfolios consist primarily of
consumer loans and credit card receivables, commercial loans, student loan
receivables and health club receivables. Consumer loans purchased
primarily consist of unsecured term debt. A summary of purchased loans and
accounts receivable portfolios at December 31, 1996 and September 30, 1997
by type of receivable is shown below:
December 31, 1996 September 30, 1997
Original Gross Original Gross
Principal Value Current Long-term Principal Value Current Long-term
(in millions) (in thousands) (in millions) (in thousands)
Consumer loans . . . . . . $1,770 $ 7,445 $ 4,592 $2,051 $11,419 $3,803
Student loans . . . . . . . . 322 7,456 4,699 322 7,462 -
Credit cards . . . . . . . . . 101 2,359 1,453 470 7,073 9,451
Health clubs . . . . . . . . . 954 23,364 13,865 1,271 19,416 8,489
Commercial . . . . . . . . . 41 1,857 910 17 2,543 2,125
$3,188 $42,481 $25,519 $4,131 $47,913 $23,868
Most of the portfolio purchases involve tertiary paper (i.e. accounts more
than 360 days past due which have been previously placed with a contingent
fee servicer) with the exception of portfolios purchased under forward flow
agreements under which the Company agrees to purchase charged off credit
card and health club receivables on a monthly basis as they become due.
Deferred Taxes increased from an asset of $5.8 million at December 31, 1996
to an asset of $15.7 million at September 30, 1997. The net deferred tax
asset at September 30, 1997 and December 31, 1996 relates principally to
net operating loss carryforwards. The realization of this asset is
dependent on generating sufficient taxable income prior to expiration of
the loss carryforwards in years through 2012. Management has analyzed the
potential sources of taxable income available to realize the deferred tax
asset. The principal assumptions underlying management's current
determination that the asset will be realized and there is no need for a
valuation allowance are that the earning history of the acquired operations
will continue (no improvement has been assumed). The more significant non-
recurring and unusual items reflected in operating results are additional
amortization of purchased loans and receivable portfolios resulting from
the step up in recorded value to fair value, amortization of account
inventory, additional financing costs expensed in connection with the
refinancing, and other one time expenses. Currently this level of
amortization is not expected to continue beyond fiscal 1998. In addition,
the Company during the fourth quarter of fiscal 1997 will be finalizing its
operating business plan for fiscal 1998 and beyond including potential
acquisitions, if any, and the impact on the Company's operations and
capital structure. As a result of this planning process, the Company will
continue to assess the realization of the net deferred tax asset as well as
the need for a valuation allowance, if any.
The Long Term Portion of Notes Payable increased from $237.6 million at
December 31, 1996 to $254.0 million at September 30, 1997. The increase
was primarily due to revolver borrowings of $27.4 million used to finance
purchased portfolio acquisitions which was offset by principal payments and
reductions of principal of $7.2 million and the increase in the current
portion of long-term debt of $3.2 million.
Stockholders' Equity decreased from $51.6 million at December 31, 1996 to
$31.2 million at September 30, 1997 due to the net loss to common
stockholders incurred for the nine month period of $21.3 million, partially
offset by an increase in preferred stock of $0.9 million.
Liquidity and Capital Resources
As of September 30, 1997, the Company had cash and cash equivalents of $8.9
million. The Company derives substantially all of its cash flow from the
operations of its subsidiaries. Capital expenditures were $5.7 million for
the nine month period ended September 30, 1997. Portfolio purchases were
$35.0 million for the nine month period ended September 30, 1997. The
Company had working capital of $38.5 million at September 30, 1997.
Of the $5.7 million of capital expenditures for the nine months ended
September 30, 1997, $3.9 million represents data processing capital
expenditures and $1.8 million was for other capital expenditures, which
include telecommunications equipment, leasehold improvements, other
computer equipment and office furniture and equipment.
The Company's debt structure consists of senior debt under the Bank Credit
Facility (the Credit Facility) of $139.6 million, indebtedness represented
by 11% Senior Subordinated Notes (The Senior Notes) of $100.0 million and
other indebtedness of $4.4 million. Under the Credit Facility, the Company
has the ability to borrow an additional $30.6 million (net of outstanding
revolver borrowings of $27.4 million at September 30, 1997) for working
capital, general corporate purposes and acquisitions, subject to certain
conditions. See Note 6 to the unaudited consolidated financial statements
for a description of the amended bank credit facility effective October 8,
1997 which provides additional financing for the NSA and ABC acquisitions.
The Senior Notes and the Credit Facility contain financial and operating
covenants and restrictions on the ability of the Company to incur
indebtedness, make investments and take certain other corporate actions.
The debt service requirements associated with the borrowings under the
Credit Facility and the Senior Notes significantly impact the Company's
liquidity requirements. The Company anticipates that its operating cash
flow together with borrowings under the Credit Facility will be sufficient
to meet its anticipated future operating expenses and to meet its debt
service requirements as they become due. Additionally, future portfolio
purchases may require significant financing or investment. However, actual
capital requirements may change, particularly as a result of acquisitions
the Company may make. The ability of the Company to meet its debt service
obligations and reduce its total debt will be dependent, however, upon the
future performance of the Company and its subsidiaries which, in turn, will
be subject to general economic conditions and to financial, business and
other factors including factors beyond the Company's control.
Inflation
The Company believes that inflation has not had a material impact on its
results of operations for the three and nine month periods ended September
30, 1997.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As described in the Company's March 31, 1997 10-Q filing, Payco and its
wholly owned subsidiary Payco-General American Credits, Inc. ("Payco") are
party to a class action lawsuit filed in July 1996 by Jimmy Rogers, Lillian
H. Rogers, Randy Humphrey, Nancy Humphrey, Carl Christopher, David Clapper
and Virginia Clapper, as individuals and as class representatives, in the
Circuit Court of Etowah County, Alabama. On September 16, 1997, the
Circuit Court entered an order certifying the case as a class action.
Following this certification order, Payco applied to the Alabama Supreme
Court for a writ of mandamus to enjoin the case from proceeding as a class
action and for an emergency stay of the Circuit Court proceedings. The
Alabama Supreme Court granted the emergency stay and ordered a response to
the application for a writ of mandamus. Payco subsequently negotiated a
settlement with the plaintiff class, and the Alabama Supreme Court lifted
the emergency stay for the purpose of allowing the Circuit Court to
consider approval of this class settlement. The Circuit Court has
preliminarily approved the class settlement and set a hearing on final
approval for November 18, 1997. Under the class settlement, Payco agreed
in principle to pay an amount in cash to individual class members that
submit a claim under procedures described in the settlement papers; to make
credit counseling services available to individual class members; and to
pay attorneys' fees to class counsel. The amount the Company has agreed to
pay is not material to the operations or financial condition of the
Company. Transamerica Business Credit Corporation ("TBCC"), however, has
opposed the class settlement and moved the Alabama Supreme Court for leave
to continue discovery on TBCC's cross-claims against Payco. The Company
believes that it has meritorious defenses to the cross-claim in this suit
and believes that the outcome of this litigation will not have a material
adverse effect on the operations or the financial condition of the Company.
There have been no further developments in the FTC inquiry at API.
ITEM 2. CHANGES IN SECURITIES
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Purchase Agreement dated October 31, 1996 by and among
the Company, CFC Services Corp., A.M. Miller &
Associates, Inc., Continental Credit Services, Inc.,
Alaska Financial Services, Inc., Southwest Credit
Services, Inc., Account Portfolios, Inc., Account
Portfolios G.P., Inc., Account Portfolios, L.P.,
Perimeter Credit, L.P., Gulf State Credit, L.P. and
Goldman Sachs & Co. and Chase Securities Inc.
(incorporated by reference to the Company's Registration
Statement on Form S-4 as filed on December 5, 1996).
2.2 Agreement and Plan of Merger dated as of August 13, 1996
by and among the Company, Boxer Acquisition Corp. and
Payco American Corporation (incorporated by reference to
the Company's Registration Statement on Form S-4 as filed
with the Commission on December 5, 1996).
2.3 Purchase Agreement dated as of September 21, 1995 by and
among the Company, Account Portfolios, Inc., Account
Portfolios G.P., Inc., AP Management, Inc., GSC
Management, Inc., Perimeter Credit Management
Corporation, Account Portfolios Trust One and Account
Portfolios Trust Two (incorporated by reference to the
Company's Registration Statement on Form S-4 as filed
with the Commission on December 5, 1996).
2.4 Stock Purchase Agreement dated as of January 10, 1996 by
and among the Company, The Continental Alliance, Inc. and
Peter C. Rosvall (incorporated by reference to the
Company's Registration Statement on Form S-4 as filed
with the Commission on December 5, 1996).
2.5 Stock Purchase Agreement dated as of December 13, 1995 by
and among the Company, Outsourcing Solutions
Incorporated, A.M. Miller & Associates, Inc. and Alan M.
Miller (incorporated by reference to the Company's
Registration Statement on Form S-4 as filed with the
Commission on December 5, 1996).
2.6 Purchase and Inducement Agreement dated as of May 17,
1996 by and among the Company, Account Portfolios, Inc.,
Account Portfolios, L.P., Gulf State Credit, L.P.,
Perimeter Credit, L.P., MLQ Investors, L.P. and Goldman,
Sachs & Co (incorporated by reference to the Company's
Registration Statement on Form S-4 as filed with the
Commission on December 5, 1996).
3.1 Certificate of Incorporation of the Company, as amended
to date, filed with the Secretary of State of the State
of Delaware on September 21, 1995 (incorporated by
reference to the Company's Registration Statement on Form
S-4 as filed with the Commission on December 5, 1996).
3.2 By-laws of the Company (incorporated by reference to the
Company's Registration Statement on Form S-4 as filed
with the Commission on December 5, 1996).
4.1 Indenture dated as of November 6, 1996 by and among the
Company, the Guarantors and Wilmington Trust Company (the
"Indenture") (incorporated by reference to the Company's
Registration Statement on Form S-4 as filed with the
Commission on December 5, 1996).
4.2 Specimen Certificate of 11% Senior Subordinated Note due
2006 (included in Exhibit 4.1 hereto) (incorporated by
reference to the Company's Registration Statement on Form
S-4 as filed with the Commission on December 5, 1996).
4.3 Specimen Certificate of 11% Series B Subordinated Note
due 2006 (the "New Notes") (included in Exhibit 4.1
hereto) (incorporated by reference to the Company's
Registration Statement on Form S-4 as filed with the
Commission on December 5, 1996).
4.4 Form of Guarantee of securities issued pursuant to the
Indenture (included in Exhibit 4.1 hereto) (incorporated
by reference to the Company's Registration Statement on
Form S-4 as filed with the Commission on December 5,
1996).
10.1 Amended and Restated Stockholders Agreement dated as of
February 16, 1996 by and among the Company and various
stockholders of the Company (incorporated by reference to
the Company's Registration Statement on Form S-4 as filed
with the Commission on December 5, 1996).
10.2 Advisory Services Agreement dated September 21, 1995
between the Company and MDC Management Company III, L.P.
(incorporated by reference to the Company's Registration
Statement on Form S-4 as filed with the Commission on
December 5, 1996)
10.3 Master Services Agreement dated as of October 1, 1992
between Account Portfolios L.P. and HBR Capital, Ltd.
(incorporated by reference to the Company's Registration
Statement on Form S-4 as filed with the Commission on
December 5, 1996).
10.4 Amended Credit Agreement dated as of October 8, 1997 by
and among the Company, the Lenders listed therein,
Goldman Sachs Credit Partners L.P. and the Chase
Manhattan Bank, as Co-Administrative Agents, Goldman
Sachs Credit Partners L.P. and Chase Securities, Inc., as
Arranging Agents and Suntrust Bank, Atlanta as Collateral
Agent and Exhibits thereto.
10.5 Amended Employment Agreement dated as of August 27, 1997
between the Company and Timothy G. Beffa
27. Financial Data Schedule (Unaudited)
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three month period
ended September 30, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to signed on its behalf by the
undersigned thereunto duly authorized.
OUTSOURCING SOLUTIONS INC.
(Registrant)
Date: November 14, 1997 /s/ DANIEL J. DOLAN
---------------------------------------------
Daniel J. Dolan
Executive Vice President
and Chief Financial Officer
/s/ TIMOTHY G. BEFFA
---------------------------------------------
Timothy G. Beffa
President and Chief Executive Officer