SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 333-16867
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Outsourcing Solutions Inc.
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(Exact name of registrant as specified in its charter)
Delaware 58-2197161
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
390 South Woods Mill Road, Suite 350
Chesterfield, Missouri 63017
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(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
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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 March 31, 2001
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Voting common stock 6,088,479.30
Non-voting common stock 480,321.30
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6,568,800.60
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PAGE 2
OUTSOURCING SOLUTIONS INC.
AND SUBSIDIARIES
TABLE OF CONTENTS
Part I. Financial Information Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 2001 (unaudited) and December 31, 2000 (unaudited).......3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2001 (unaudited) and 2000 (unaudited).......4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2001 (unaudited) and 2000 (unaudited).......5
Notes to Condensed Consolidated Financial Statements (unaudited)...6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk........11
Part II. Other Information....................................................12
PAGE 3
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
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March 31, December 31,
2001 2000
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ASSETS
Cash and cash equivalents $ 7,243 $ 10,273
Cash and cash equivalents held for clients 25,871 21,970
Accounts receivable - trade, less allowance
for doubtful receivables of $411 and $447 70,902 62,876
Purchased loans and accounts receivable portfolios 21,929 24,690
Property and equipment, net 45,414 46,601
Intangible assets, net 426,630 417,084
Deferred financing costs, less accumulated
amortization of $5,647 and $4,538 21,986 22,934
Other assets 33,958 30,426
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TOTAL $653,933 $636,854
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable - trade $14,649 $14,446
Collections due to clients 25,871 21,970
Accrued salaries, wages and benefits 14,765 15,195
Debt 551,796 539,463
Other liabilities 80,272 71,080
Commitments and contingencies (Note 2)
Mandatorily redeemable preferred stock; redemption
amount of $127,258 and $123,115 108,237 103,455
Stockholders' deficit:
Voting common stock; $.01 par value;
authorized 15,000,000 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 200,537 200,537
Accumulated deficit (199,023) (192,715)
Accumulated other comprehensive income (6,538) -
-------- --------
(4,927) 7,919
Notes receivable from management for shares sold (1,873) (1,817)
Common stock in treasury, at cost;
3,078,249.07 shares (134,857) (134,857)
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Total stockholders' deficit (141,657) (128,755)
-------- --------
TOTAL $653,933 $636,854
======== ========
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
PAGE 4
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands)
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Three Months Ended
March 31,
-------------------
2001 2000
REVENUES $151,586 $133,250
EXPENSES:
Salaries and benefits 74,324 66,006
Service fees and other operating
and administrative expenses 47,619 41,597
Amortization of purchased loans
and accounts receivable portfolios 6,979 6,676
Amortization of goodwill and
other intangibles 4,052 3,970
Depreciation expense 3,702 4,013
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Total expenses 136,676 122,262
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OPERATING INCOME 14,910 10,988
INTEREST EXPENSE - Net 16,261 14,243
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LOSS BEFORE INCOME TAXES (1,351) (3,255)
PROVISION FOR INCOME TAXES 175 125
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NET LOSS (1,526) (3,380)
PREFERRED STOCK DIVIDEND REQUIREMENTS
AND ACCRETION OF SENIOR PREFERRED STOCK 4,782 4,243
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NET LOSS TO COMMON STOCKHOLDERS $ (6,308) $(7,623)
======== =======
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
PAGE 5
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
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Three Months Ended
March 31,
-------------------
2001 2000
OPERATING ACTIVITIES AND PORTFOLIO PURCHASING:
Net loss $(1,526) $(3,380)
Adjustments to reconcile net loss to net cash from
operating activities and portfolio purchasing:
Depreciation and amortization 8,863 8,757
Amortization of purchased loans and accounts
receivable portfolios 6,979 6,676
Change in assets and liabilities:
Purchases of loans and accounts receivable
portfolios (4,218) (1,649)
Accounts receivable and other assets (9,168) (3,160)
Accounts payable, accrued expenses and
other liabilities 2,350 (143)
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Net cash from operating activities and
portfolio purchasing 3,280 7,101
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INVESTING ACTIVITIES:
Acquisition of property and equipment (2,181) (4,508)
Payment for acquisition, net of cash acquired (16,300) -
Purchases of loans and accounts receivable
portfolios for resale to FINCO (16,622) (16,524)
Sales of loans and accounts receivable
portfolios to FINCO 16,622 16,524
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Net cash from investing activities (18,481) (4,508)
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FINANCING ACTIVITIES:
Borrowings under revolving credit agreement 88,300 76,700
Repayments under revolving credit agreement (73,400) (67,700)
Repayments of debt (2,567) (818)
Deferred financing fees (162) -
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Net cash from financing activities 12,171 8,182
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,030) 10,775
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,273 6,059
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,243 $16,834
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during period for interest $11,942 $10,755
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Net cash paid (received) during period for taxes $ 112 $ (2)
======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Accrued dividends on mandatorily redeemable
preferred stock $ 4,143 $ 3,625
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Accretion of mandatorily redeemable preferred stock $ 639 $ 618
======= =======
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
PAGE 6
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted 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 months ended March 31, 2001 are not necessarily indicative of the results
that may be expected for the year ended 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.
NOTE 2. LITIGATION
From time to time, the Company and certain of its subsidiaries are subject to
various investigations, claims and legal proceedings covering a wide range of
matters that arise in the normal course of business and are routine to the
nature of the Company's businesses. In addition, as a result of the acquisition
of The Union Corporation, certain subsidiaries of the Company are a party to
several on-going environmental remediation investigations by federal and state
governmental agencies and clean-ups and, along with other companies, has been
named a "potentially responsible party" for certain waste disposal sites. While
the results of litigation cannot be predicted with certainty, the Company has
provided for the estimated uninsured amounts and costs to resolve the pending
suits and management, in consultation with legal counsel, believes that reserves
established for the ultimate resolution of pending matters are adequate at March
31, 2001.
NOTE 3. 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.
The following summarizes the transactions between the Company and FINCO for the
periods ended March 31:
2001 2000
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Sales of purchased loans and accounts receivable
portfolios by the Company to FINCO $16,622 $16,524
Servicing fees paid by FINCO to the Company $10,999 $4,305
Sales of purchased loans and accounts receivable portfolios ("Receivables") by
the Company to FINCO were in the same amount and occurred shortly after such
portfolios were acquired by the Company from the various unrelated sellers. In
conjunction with sales of Receivables to FINCO and the servicing agreement, the
Company recorded servicing assets which are being amortized over the servicing
agreement. The carrying value of such servicing assets, which are included in
other assets in the accompanying condensed consolidated balance sheet, was
$7,997 at March 31, 2001 and was $5,612 at December 31, 2000.
At March 31, 2001 and December 31, 2000, FINCO had unamortized Receivables of
$78,553 and $76,908, respectively. At March 31, 2001 and December 31, 2000,
FINCO had outstanding borrowings of $69,880 and $67,636, respectively, under its
revolving warehouse financing arrangement.
FINCO's summarized results from operations for the quarter ended March 31, 2001
are revenues of $26,970, income from operations of $1,622 and net income of
$460.
PAGE 7
NOTE 4: ACQUISITION
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
including transaction costs of $150. The purchase price was financed under the
Company's revolving credit facility. The acquisition was accounted for under the
purchase method and the excess of cost over the fair value of the net assets
acquired is amortized on a straight-line basis over 30 years. The acquisition
contains a certain contingent payment obligation based on the attainment of 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.
NOTE 5: DERIVATIVES AND HEDGING ACTIVITIES
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. 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 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 March 31,
2001, the Company recorded, as part of interest expense, a loss of $518 due to
the hedges' ineffectiveness.
NOTE 6: COMPREHENSIVE INCOME
The components of total comprehensive income for the periods ended March 31 are
as follows:
2001 2000
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Net loss $(1,526) $(3,380)
Other comprehensive income item:
Net loss on cash flow hedging instruments (6,538) -
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Total comprehensive income (loss) $(8,064) $(3,380)
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NOTE 7: SUBSEQUENT EVENT
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 from the sale were used to
repay debt under the Company's bank credit facility.
PAGE 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
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Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000
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Revenues for the three months ended March 31, 2001 were $151.6 million compared
to $133.3 million in the same period last year - an increase of 13.7%. The
revenue increase of $18.3 million was due to increased outsourcing and portfolio
services revenues offset partially by lower collection services revenues.
Revenues from outsourcing services increased 90.5% to $38.1 million for the
three months ended March 31, 2001 from $20.0 million for the comparable period
in 2000. The increased revenues of $18.1 million was due to new and increased
existing business of $13.4 million, and $4.7 million from the acquisitions of
RWC and CCC. Revenues from portfolio services of $21.8 million compared
favorably to $19.6 million in 2000 due primarily to increased collections from
the cumulative increase in purchased loans and accounts receivable portfolios
during 1999 and 2000. The collection services revenues decreased 2.1% to $91.7
million for the three months ended March 31, 2001 from $93.7 million in 2000.
The decreased revenues were due primarily to lower bank card and
telecommunications business offset partially by increased letter series
business.
Operating expenses, inclusive of salaries and benefits, service fees and other
operating and administrative expenses, were $122.0 million for the three months
ended March 31, 2001 and $107.6 million for the comparable period in 2000 - an
increase of 13.4%. The increase in these operating expenses resulted primarily
from the RWC and CCC acquisitions and the increased collection-related expenses
due to the increased revenues of outsourcing services. For the three months
ended March 31, 2001, amortization and depreciation charges of $14.7 million
were equal to the $14.7 million for the comparable period in 2000.
Earnings before interest expense, taxes, depreciation and amortization (EBITDA)
for the three months ended March 31, 2001 was $29.6 million compared to $25.7
million for the same period in 2000. The increase was primarily attributable to
the two acquisitions and the higher outsourcing and portfolio services revenues.
As a result of the above, the Company's operating income of $14.9 million for
the three months ended March 31, 2001 compared favorably to $11.0 million for
the same period in 2000.
Net interest expense for the three months ended March 31, 2001 was $16.3 million
compared to $14.2 million for the comparable period in 2000. The increase was
due primarily to higher debt balances and interest rates and higher amortization
of deferred financing fees.
The provision for income taxes of $0.2 million was provided for certain state
and foreign income tax obligations. The Company generated a net 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 net loss for the three months ended March
31, 2001 of $1.5 million compared favorably to the net loss of $3.4 million for
the three months ended March 31, 2000.
Financial Condition, Liquidity and Capital Resources
- ----------------------------------------------------
At March 31, 2001, the Company had cash and cash equivalents of $7.2 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 March
31, 2001, the Company had $46.9 million outstanding under the revolving credit
facility leaving $21.3 million, after outstanding letters of credit, available
under the revolving credit facility.
Since December 31, 2000, cash and cash equivalents decreased $3.0 million
primarily due to cash utilized for the acquisition of CCC of $16.3 million, debt
repayments of $2.6 million and capital expenditures of $2.2 million offset by
cash from operating activities and portfolio purchasing of $3.3 million and
increased borrowings under the revolving credit facility of $14.9 million. The
Company also held $25.9 million of cash for clients in restricted trust accounts
at March 31, 2001.
In the quarter ended March 31, 2000, cash and cash equivalents increased $10.8
million primarily due to cash from operating activities and portfolio purchasing
of $7.1 million and net cash from financing activities of $8.2 million offset by
the use of cash of $4.5 million for capital expenditures.
For the first three months in 2001, the Company made capital expenditures of
$2.2 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.
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 from the sale were used to
repay debt under the Company's bank credit facility.
Forward-Looking Statements
- --------------------------
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 the Company's expected capital
expenditures and the funding thereof, (3) statements regarding the Company's
ability to fund its future operating expenses and meet its debt service
requirements as they become due, (4) any statements preceded by, followed by or
that include the word "believes," "expects," "anticipates," "intends," "should,"
"may," or similar expressions; and (5) other statements contained or
incorporated by reference in this document regarding matters that are not
historical facts.
Because such statements are subject to risks and uncertainties, actual results
may differ materially from those expressed or implied by such forward-looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to: (1) the demand for the Company's services, (2)
the demand for accounts receivable management generally, (3) general economic
conditions, (4) changes in interest rates, (5) competition, including but not
limited to pricing pressures, (6) changes in governmental regulations including,
but not limited to the federal Fair Debt Collection Practices Act and comparable
state statutes, (7) legal proceedings, (8) environmental investigations and
clean up efforts, (9) expected synergies, economies of scale and cost savings
from acquisitions by the Company not being fully realized or realized within the
expected time frames, (10) costs of operational difficulties related to
integrating the operations of acquired companies with the Company's operations
being greater than expected, (11) unanticipated realignment costs, (12) the
Company's ability to generate cash flow or obtain financing to fund its
operations, service its indebtedness and continue its growth and expand
successfully into new markets and services, and (13) factors discussed from time
to time in the Company's public filings.
These forward-looking statements speak only as of the date they were made. These
cautionary statements should be considered in connection with any written or
oral forward-looking statements that the Company may issue in the future. The
Company does not undertake any obligation to release publicly any revisions to
such forward-looking statements to reflect later events or circumstances or to
reflect the occurrence of unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to the risk of fluctuating interest rates in the normal
course of business. From time to time and as required by the Company's credit
agreement, the Company will employ derivative financial instruments as part of
its risk management program. The Company's objective is to manage risks and
exposures and not to trade such instruments for profit or loss.
At December 31, 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 changes in these agreements.
PAGE 12
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
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
Exhibit 2 Asset Purchase Agreement dated March 12, 2001 by
and among Outsourcing Solutions Inc., Coast to Coast
Consulting, LLC, PAE Leasing, LLC, Coast to Coast
Consulting, Incorporated, Pioneer Auto Enterprises,
Inc., C2C Management, LTD., and Robert Frasier.
Exhibit 4 Fourth Supplemental Indenture dated as of March 12,
2001 by and among the Company, the Additional
Guarantors and Wilmington Trust Company, as trustee.
Exhibit 10.1 First Amendment to Credit Agreement dated as of
January 10, 2001 among the Company, the Lenders listed
therein, DLJ Capital Funding, Inc., as the Syndication
Agent, and Fleet National Bank, as the Administrative
Agent.
Exhibit 10.2 Second Amendment to Credit Agreement dated as of
March 30, 2001 among the Company, the Lenders listed
therein, DLJ Capital Funding, Inc., as the Syndication
Agent, and Fleet National Bank, as the Administrative
Agent.
(b). Reports on Form 8-K
There were no reports on Form 8-K filed for the three-month period
ended March 31, 2001.
PAGE 13
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
------------------------------------
Timothy G. Beffa
President and Chief Executive Officer
/s/ Gary L. Weller
------------------------------------
Gary L. Weller
Executive Vice President
and Chief Financial Officer
Date: May 14, 2001