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 September 30, 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 September 30, 2001
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Senior common stock 489,795.93
Voting common stock 6,088,479.30
Non-voting common stock 480,321.30
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7,058,596.53
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PAGE 2
OUTSOURCING SOLUTIONS INC.
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AND SUBSIDIARIES
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TABLE OF CONTENTS
Part I. Financial Information Page
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
September 30, 2001 and December 31, 2000..........................3
Condensed Consolidated Statements of Operations for
the three and nine months ended September, 2001 and 2000..........4
Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 2001 and 2000.................5
Notes to Condensed Consolidated Financial Statements..............6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk........14
Part II. Other Information..............................................15
PAGE 3
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share amounts)
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ASSETS September 30, December 31,
2001 2000
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Cash and cash equivalents $ 6,425 $ 10,273
Cash and cash equivalents held for clients 23,479 21,970
Accounts receivable - trade, less allowance
for doubtful receivables of $340 and $447 74,141 62,876
Purchased loans and accounts receivable
portfolios 20,492 24,690
Property and equipment, net 45,737 46,601
Intangible assets, net 426,065 417,084
Deferred financing costs, less accumulated
amortization of $7,857 and $4,538 19,777 22,934
Other assets 42,202 30,426
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TOTAL $658,318 $636,854
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LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable - trade $ 14,371 $ 14,446
Collections due to clients 23,479 21,970
Accrued salaries, wages and benefits 16,326 15,195
Debt 537,198 539,463
Other liabilities 78,919 71,080
Commitments and contingencies (Note 2 and 4)
Mandatorily redeemable preferred stock;
redemption amount of $135,976 and $123,115 118,244 103,455
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 (207,011) (192,715)
Accumulated other comprehensive loss (9,799) -
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6,569 7,919
Notes receivable from management
for shares sold (1,931) (1,817)
Voting common stock in treasury,
at cost; 3,078,249.07 shares (134,857) (134,857)
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Total stockholders' deficit (130,219) (128,755)
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TOTAL $658,318 $636,854
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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 Nine Months Ended
September 30, September 30,
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2001 2000 2001 2000
REVENUES $ 151,023 $ 133,871 $460,042 $404,494
EXPENSES:
Salaries and benefits 77,956 66,026 232,846 198,630
Service fees and other operating and administrative
expenses 43,943 41,897 139,577 126,908
Amortization of purchased loans and accounts
receivable portfolios 4,770 6,591 16,761 21,376
Amortization of goodwill and other intangibles 4,199 3,980 12,412 11,929
Depreciation expense 3,532 3,956 10,839 12,067
Nonrecurring realignment expenses - 1,742 - 2,742
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Total expenses 134,400 124,192 412,435 373,652
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OPERATING INCOME 16,623 9,679 47,607 30,842
INTEREST EXPENSE - Net 16,499 15,377 46,579 44,829
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INCOME (LOSS) BEFORE INCOME TAXES 124 (5,698) 1,028 ( 13,987)
PROVISION FOR INCOME TAXES 185 65 535 359
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NET INCOME (LOSS) (61) (5,763) 493 ( 14,346)
PREFERRED STOCK DIVIDEND REQUIREMENTS AND ACCRETION
OF SENIOR PREFERRED STOCK 5,079 4,497 14,789 13,104
------- ------- ------- -------
NET LOSS TO COMMON STOCKHOLDERS $(5,140) $(10,260) $(14,296) $(27,450)
======== ========= ========= =========
The accompanying notes are an integral part of the
unaudited condensed consolidated financial statements.
PAGE 11
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
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Nine Months Ended
September 30,
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2001 2000
OPERATING ACTIVITIES AND PORTFOLIO PURCHASING:
Net income (loss) $ 493 $(14,346)
Adjustments to reconcile net income (loss) to net cash from operating
activities and portfolio purchasing:
Depreciation and amortization 29,132 27,308
Amortization of purchased loans and accounts receivable portfolios 16,761 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 (12,563) (8,433)
Accounts receivable and other assets (19,406) (10,370)
Accounts payable, accrued expenses and other liabilities (4,265) 3,957
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Net cash from operating activities and portfolio purchasing 10,893 19,492
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INVESTING ACTIVITIES:
Acquisition of property and equipment (9,493) (13,883)
Payment for acquisitions, net of cash acquired (21,653) (15,150)
Purchases of loans and accounts receivable portfolios for resale to FINCO (59,722) (70,721)
Sales of loans and accounts receivable portfolios to FINCO 59,722 70,721
Other (3,025) (1,361)
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Net cash used by investing activities (34,171) (30,394)
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FINANCING ACTIVITIES:
Borrowings under revolving credit agreement 242,400 244,350
Repayments under revolving credit agreement (232,700) (227,850)
Repayments of debt (12,112) (2,512)
Proceeds from issuance of common stock 22,004 401
Proceeds from term loans - 246
Deferred financing fees (162) -
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Net cash from financing activities 19,430 14,635
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,848) 3,733
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,273 6,059
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,425 $ 9,792
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during period for interest $38,634 $ 32,230
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Net cash paid during period for taxes $ 413 $ 241
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SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Accrued dividends on mandatorily redeemable preferred stock $12,861 $ 11,235
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Accretion of mandatorily redeemable preferred stock $ 1,928 $ 1,869
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Notes receivable for common stock $ - $ 1,400
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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 nine months ended September 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.
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, have 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
September 30, 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 September 30:
Three Months Ended Nine Months Ended
September 30, September 30,
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2001 2000 2001 2000
Sales of purchased loans and
accounts receivable portfolios
by the Company to FINCO $16,093 $ 16,415 $ 59,722 $ 70,721
Servicing fees paid by
FINCO to the Company $ 9,853 $ 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. 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
$15,524 at September 30, 2001 and was $5,612 at December 31, 2000.
At September 30, 2001 and December 31, 2000, FINCO had unamortized Receivables
of $87,618 and $76,908, respectively. At September 30, 2001 and December 31,
2000, FINCO had outstanding borrowings of $66,706 and $67,636, respectively,
under its revolving warehouse financing arrangement.
FINCO's summarized results from operations for the periods ended September 30
are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
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2001 2000 2001 2000
Revenues $24,775 $28,940 $83,965 $55,842
Income from operations 1,999 1,126 6,630 2,989
Net income (loss) 1,156 (55) 3,593 509
NOTE 4: 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 $16,699
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 September 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: 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 September 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.
In 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 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 September 30, 2001,
the liability is $12,361 and is included in other liabilities and $9,799 is
included in accumulated other comprehensive 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
September 30, 2001, the Company recorded, as part of interest expense, a loss of
$2,562 due to the hedges' ineffectiveness. For the nine months ended September
30, 2001, the net impact on interest expense is $2,562.
NOTE 6: COMPREHENSIVE INCOME (LOSS)
The components of total comprehensive income (loss) for the periods ended
September 30 are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2001 2000 2001 2000
Net income (loss) $ (61) $(5,763) $ 493 $(14,346)
Other comprehensive income item:
Net loss on cash flow
hedging instruments (3,178) - (9,799) -
------- ------- ------- --------
Total comprehensive income (loss) $(3,239) $(5,763) $(9,306) $(14,346)
======== ======= ======= ========
NOTE 7: 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 8: NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), Business Combinations.
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after September 30, 2001 and establishes
specific criteria for recognition of intangible assets separately from goodwill.
For business combinations initiated after September 30, 2001, SFAS 141 also
requires that unallocated negative goodwill be written off immediately as an
extraordinary gain. Any unamortized deferred credit arising from a business
combination completed before July 1, 2001 will be recognized as the cumulative
effect of a change in accounting principle. The Company is currently evaluating
the impact of SFAS 141 on its financial statements.
Also in July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets. SFAS 142 eliminates
the amortization of goodwill and instead requires goodwill to be tested for
impairment annually at the reporting unit level. Also, intangible assets are
required to be amortized over their useful lives and reviewed for impairment in
accordance with Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. Under SFAS 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 on January 1, 2002, and earlier adoption is not permitted. The
Company is currently evaluating the impact of SFAS 142 on its financial
statements. Goodwill amortization recorded for the quarter and nine months ended
September 30, 2001 was $4.2 million and $12.4 million, respectively, compared to
$4.0 million and $11.9 million for the respective periods ended September 30,
2000.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144 ("SFAS 144"), Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS 144 addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. The Company is currently evaluating the impact
of SFAS 144 on its financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
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Three Months Ended Sept. 30, 2001 Compared to Three Months Ended Sept. 30, 2000
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Revenues for the three months ended September 30, 2001 were $151.0 million
compared to $133.9 million in the same period last year - an increase of 12.8%.
The revenue increase of $17.1 million was due to increased collection and
outsourcing services revenues offset partially by lower portfolio services
revenues. The collection services revenues increased 1.9% to $86.7 million for
the three months ended September 30, 2001 from $85.1 million in 2000. The
increased revenues were due primarily to increased letter series 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 $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 $22.7 million compared unfavorably to $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 increased level of off-balance sheet purchased loans and
accounts receivable portfolios during 1999, 2000 and 2001. The Company believes
that its revenues and operating income were negatively affected by the terrorist
attacks of September 11, 2001.
Operating expenses, inclusive of salaries and benefits, service fees and other
operating and administrative expenses, were $121.9 million for the three months
ended September 30, 2001 and $107.9 million for the comparable period in 2000 -
an increase of 13.0%. The increase in these operating expenses resulted
primarily from the RWC, CCC and PSC acquisitions and the increased expenses due
to the increased revenues of outsourcing services. For the three months ended
September 30, 2001, amortization and depreciation charges of $12.5 million were
lower than the $14.5 million for the comparable period in 2000 by $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 September 30, 2000, the Company incurred nonrecurring
realignment expenses of $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 September 30, 2001 was $29.1 million compared to
$24.2 million for the same period in 2000. The increase was primarily
attributable to the three acquisitions, the higher outsourcing services revenues
and the 2000 nonrecurring charges of $1.7 million. EBITDA of $29.1 million for
the three months ended September 30, 2001 compared favorably to $25.9 million
for the same period in 2000 after adding back the nonrecurring charges.
As a result of the above, the Company's operating income of $16.6 million for
the three months ended September 30, 2001 compared favorably to $9.7 million for
the same period in 2000.
Net interest expense for the three months ended September 30, 2001 was $16.5
million compared to $15.4 million for the comparable period in 2000. The
increase 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. 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 September 30, 2001 are fully offset by a valuation allowance.
During the three months ended September 30, 2001, the net deferred tax assets
and the valuation allowance did not change from the 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 loss for the three months
ended September 30, 2001 of $0.1 million which compared favorably to the net
loss of $5.8 million for the three months ended September 30, 2000.
Nine Months Ended Sept. 30, 2001 Compared to Nine Months Ended Sept. 30, 2000
- -----------------------------------------------------------------------------
Revenues for the nine months ended September 30, 2001 were $460.0 million
compared to $404.5 million in the same period last year - an increase of 13.7 %.
The revenue increase of $55.5 million was primarily due to increased outsourcing
services revenues offset partially by lower portfolio services revenues.
Revenues from outsourcing services increased 87.6% to $122.9 million for the
nine months ended September 30, 2001 from $65.5 million for the comparable
period in 2000. The increased outsourcing services revenues of $57.4 million
were due primarily to new and increased existing business and the acquisitions
of RWC, CCC and PSC. Revenues from portfolio services of $66.1 million compared
unfavorably to $68.2 million in 2000 due to the continued negative effect on
revenues resulting from the shift to off-balance sheet purchased 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 increased slightly, 0.1%, to $271.0 million for the
nine months ended September 30, 2001 from $270.8 million in 2000. The increased
revenues were due primarily to increased government and letter series business
offset by lower bank card, student loan and telecommunications business. The
Company believes that its revenues and operating income were negatively affected
by the terrorist attacks of September 11, 2001.
Operating expenses, inclusive of salaries and benefits, service fees and other
operating and administrative expenses, were $372.4 million for the nine months
ended September 30, 2001 and $325.5 million for the comparable period in 2000 -
an increase of 14.4%. The increase in these operating expenses resulted
primarily from the RWC, CCC and PSC acquisitions and the increased expenses due
to the increased revenues of outsourcing services. Operating expenses for the
nine months ended September 30, 2001 included non-cash compensation expense
related to variable stock options of approximately $0.7 million. Included in
operating expenses for the nine months ended September 30, 2000, the Company
incurred approximately $0.2 million of additional compensation expense resulting
from the redemption of vested stock options. For the nine months ended September
30, 2001, amortization and depreciation charges of $40.0 million were lower than
the $45.4 million for the comparable period in 2000 by $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 and lower depreciation resulting from lower
current year capital expenditures and mix of current and prior years' capital
expenditures.
In the nine months ended September 30, 2000, the Company incurred nonrecurring
realignment expenses of $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 nine months ended September 30, 2001 was $87.6 million compared to $76.2
million for the same period in 2000. The increase was primarily attributable to
the three acquisitions, the higher outsourcing services revenues and the 2000
nonrecurring charges of $2.7 million. Adding back the non-cash stock
compensation expense, EBITDA was $88.3 million for the nine months ended
September 30, 2001; this compared favorably to $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 $47.6 million for
the nine months ended September 30, 2001 compared favorably to $30.8 million for
the same period in 2000.
Net interest expense for the nine months ended September 30, 2001 was $46.6
million compared to $44.8 million for the comparable period in 2000. The
increase was due primarily to additional interest expense of $2.6 million as a
result of the Company's interest rate hedges' ineffectiveness offset partially
by lower interest rates.
The provision for income taxes of $0.5 million was provided for certain state
and foreign income tax obligations. The net deferred tax assets at September 30,
2001 are fully offset by a valuation allowance. During the nine months ended
September 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 net 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 net income for the nine months
ended September 30, 2001 of $0.5 million which compared favorably to the net
loss of $14.3 million for the nine months ended September 30, 2000.
Financial Condition, Liquidity and Capital Resources
- ----------------------------------------------------
At September 30, 2001, the Company had cash and cash equivalents of $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
September 30, 2001, the Company had $41.7 million outstanding under the
revolving credit facility leaving $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 $3.8 million
primarily due to cash utilized for the CCC and PSC acquisitions of $21.7
million, debt repayments of $12.1 million, an earnout payment of $3.0 million
and capital expenditures of $9.5 million offset by cash from operating
activities and portfolio purchasing of $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 $23.5 million of
cash for clients in restricted trust accounts at September 30, 2001.
For the nine months ended September 30, 2000, cash and cash equivalents
increased $3.7 million primarily due to cash from operating activities and
portfolio purchasing of $19.5 million and net cash from financing activities of
$14.6 million, primarily borrowings under the revolving credit facility, offset
by the use of cash of $30.4 million primarily for capital 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 nine months in 2001, the Company made capital expenditures of $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.
Recent Accounting Pronouncements
- --------------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), Business Combinations.
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after September 30, 2001 and establishes
specific criteria for recognition of intangible assets separately from goodwill.
For business combinations initiated after September 30, 2001, SFAS 141 also
requires that unallocated negative goodwill be written off immediately as an
extraordinary gain. Any unamortized deferred credit arising from a business
combination completed before July 1, 2001 will be recognized as the cumulative
effect of a change in accounting principle. The Company is currently evaluating
the impact of SFAS 141 on its financial statements.
Also in July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets. SFAS 142 eliminates
the amortization of goodwill and instead requires goodwill to be tested for
impairment annually at the reporting unit level. Also, intangible assets are
required to be amortized over their useful lives and reviewed for impairment in
accordance with Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. Under SFAS 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 on January 1, 2002, and earlier adoption is not permitted. The
Company is currently evaluating the impact of SFAS 142 on its financial
statements. Goodwill amortization recorded for the quarter and nine months ended
September 30, 2001 was $4.2 million and $12.4 million, respectively, compared to
$4.0 million and $11.9 million for the respective periods ended September 30,
2000.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144 ("SFAS 144"), Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS 144 addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. The Company is currently evaluating the impact
of SFAS 144 on its financial statements.
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. In 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 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
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
None
(b). Reports on Form 8-K
There were no reports on Form 8-K filed for the three-month
period ended September 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
---------------------------------
Timothy G. Beffa
President and Chief Executive Officer
/s/ Gary L. Weller
---------------------------------
Gary L. Weller
Executive Vice President
and Chief Financial Officer
Date: November 14, 2001