SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
[ ] 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 Identification Number)
incorporation or organization)
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant is not determinable, as the stock is not publicly traded.
APPLICABLE ONLY TO CORPORATE REGISTRANTS: As of April 10, 2002, the following
shares of the Registrant's common stock were issued and outstanding:
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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DOCUMENTS INCORPORATED BY REFERENCE: None.
PART I
ITEM 1. BUSINESS
General
Outsourcing Solutions Inc., a Delaware corporation, is one of the largest
providers of business process outsourcing (BPO) receivables services in the
United States with 2001 revenues of approximately $612.3 million. Unless
otherwise indicated by the context, the "Company" means Outsourcing Solutions
Inc. only and "OSI" means Outsourcing Solutions Inc. and consolidated
subsidiaries. The Company believes that it differentiates itself from its
competitors by using best-in-class people practices and business practices to
deliver a comprehensive range of accounts receivable management services on a
national basis that provide its clients the opportunity to outsource the
management of the entire credit-to-cash cycle, and thereby achieve maximum
recoveries, net of costs, or "net-back". The breadth of services OSI provides
across all stages of the credit-to-cash cycle allows it to cross-sell services
to existing clients as well as to expand its client base by providing specific
services to potential clients in targeted industries. These BPO services include
1) first-party outsourcing services, 2) portfolio purchasing services and 3)
recovery services, which accounted for approximately 53%, 15% and 32% of 2001
revenues, 46%, 16% and 38% of 2000 revenues and 41%, 16% and 43% of 1999
revenues, respectively.
o Outsourcing services include contract management of accounts receivable,
billing, teleservicing, letter series programs, banking and financial
services transaction processing and other services.
o Portfolio purchasing services involve acquiring portfolios of charged-off
consumer receivables from credit grantors or other owners, servicing such
portfolios and retaining all amounts collected and servicing client owned
portfolios for an agreed upon servicing fee.
o Recovery services involve collecting delinquent or charged-off consumer
accounts for a fixed percentage of realized collections or a fixed fee per
account.
OSI manages the marketing and execution of services within the four stages
of the credit-to-cash cycle. In the first stage of the cycle, OSI provides
clients with the ability to outsource functions including credit authorization,
usage management and client service. Dedicated call centers provide
"first-party" services for its clients performing all operations in their name.
The second stage of the cycle is the management of pre-uncollectable, or
charge-off, delinquency situations. OSI provides clients with fixed fee
early-out programs based on either a letter series or calling program for
accounts that are generally less than 180 days past due. In the third stage of
the cycle, OSI offers traditional contingent collection services for delinquent
and charged-off receivables. In the fourth and final stage of the credit cycle,
OSI acts as a principal and purchases both new and delinquent charged-off
receivables from credit grantors or other owners.
The accounts receivable management industry is highly fragmented. The
American Collectors Association estimates there are approximately 6,000 accounts
receivable firms in the United States, with the 10 largest agencies accounting
for approximately 33% of industry revenues. Competition is based largely on
recovery rates and service fees, industry experience and reputation.
Large-volume credit grantors typically employ more than one accounts receivable
management firm at a time, and often compare performance rates and rebalance
account placements towards higher-performing servicers.
The client base for the accounts receivable management industry is
generally concentrated by credit grantors in four end-markets: banks, health
care, utilities and telecommunications. Other significant sources of account
placements include retail, student loan and governmental agencies. The Company
believes that the ongoing consolidation in the banking, health care, utilities
and telecommunication industries, combined with continued growth in the demand
for business process outsourcing services will create larger national clients
seeking to place business with national rather than local/regional accounts
receivable services companies; as well as, companies that want to focus on their
core competencies and outsource essential but non-core functions. OSI's clients
include a full range of local, regional and national credit grantors. OSI's
largest client accounted for approximately 9% of 2001 consolidated revenues, 8%
of 2000 consolidated revenues and 5% of 1999 consolidated revenues.
The Company was formed in 1995 to acquire Account Portfolios L.P., one of
the largest purchasers and servicers of non-performing accounts receivables
portfolios. Since its formation, the Company has completed 10 additional
acquisitions and has established itself as a leading industry consolidator. OSI
has experienced significant growth in its business through acquisitions and
internal growth, with its revenues increasing from $29.6 million in 1995 to
$612.3 million in 2001.
Restatement of Financial Results
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations regarding the restated consolidated financial results for
all periods impacted by the restatement included herein.
Industry
The accounts receivable management industry has experienced significant
growth over the past 15 years. The rapid growth of outstanding consumer credit
and the corresponding increase in delinquencies and charge-offs have resulted in
credit grantors increasingly looking to outsourcing companies to manage the
accounts receivable process across the credit-to-cash cycle. The contingent fee
collection industry is estimated to be a $7.5 billion market growing at
approximately 8% to 10% per annum. OSI's other business services such as
portfolio purchasing and outsourcing services are estimated, in the aggregate,
to be approximately a $5.1 billion market. The outsourcing segment is
experiencing rapid growth with the overall business outsourcing market growing
by 25% annually. Annual revenues in the outsourcing market amount to $1.5
billion. The Company believes the following are the key trends in the business
process outsourcing of accounts receivable management industry:
o Increase in Consumer Debt and Delinquencies. Consumer debt, a leading
indicator of current and future business for accounts receivable management
companies, rose to $7.5 trillion in 2000 and continues to grow at an annual
rate of 14.6%. The percentage of household debt, including mortgages, to
disposable income increased almost 25% from 1990 to 2000. And toward the
end of 2000, 3.6% of consumer loans were delinquent. As a result, the
amount of delinquent consumer debt placed for collection increased 85% from
1990 to 2000, when it reached $135 billion. Overall, U.S. levels of
consumer debt and consumer debt placed for collection are at record levels
and are expected to increase in coming years.
o Increase in Commercial Debt and Delinquencies. Commercial debt climbed to
its highest level to date - $1.1 trillion in 2000, a 52% increase over 1995
and an 83% increase over 1975 debt levels. As with consumer debt,
commercial debt is expected to continue to rise over the next several
years.
o Industry Consolidation. The number of companies in the United States
participating in contingent fee collection has declined significantly the
past decade; and moreover, the revenue of the top 10 companies within the
industry climbed to $2.4 billion in 2000 from $910 million in 1990. OSI
believes that the industry will continue to experience consolidation,
reflecting financial and competitive constraints including limited
liquidity options facing the smaller companies. Companies that offer
national capabilities with a "full service" approach to accounts receivable
management are increasingly displacing local and regional competitors.
o Client Consolidation. The largest credit granting industries, including
banking, utilities, telecommunications and health care, account for 80% of
business placed with accounts receivables firms and are experiencing rapid
consolidation. This consolidation has forced companies to focus on core
business activities and to outsource ancillary functions, including some or
all aspects of the accounts receivable management process. As a result,
many regional clients are becoming national in scope and are shifting
business to accounts receivable management companies, which allows clients
to focus on their core business while at the same time benefiting from
leading best business practices in receivables management without capital
investment costs. Additionally, clients outsourcing their accounts
receivables functions gain flexibility and scalability to cover peaks in
demand. OSI has established relationships with many of the target
industries' largest consolidators, thereby improving its ability to
capitalize on this consolidation trend.
o Growth in Portfolio Sales. As a leading provider of portfolio purchasing
services, OSI has participated in the rapid and consistent industry-wide
increase in the amount of charged-off consumer receivables sold by credit
grantors. Portfolio sales offer the credit grantor many benefits, including
increased predictability of cash flow, reduction in monitoring and
administrative expenses and reallocation of assets from non-core business
functions to core business functions. It is estimated that $28.1 billion of
charged-off receivables were acquired by portfolio purchasers in 1999 and
more than $30 billion in 2001.
o Accelerated Trend Toward Outsourcing. Outsourcing in the U.S. is expected
to continue to grow at approximately 25% annually. In an effort to focus on
core business activities and to take advantage of economies of scale,
leading best practices, better performance and the lower cost structure
offered by accounts receivables services companies, many credit grantors
are choosing to outsource an increasing number of components in the
accounts receivable management process. Instead of waiting until
receivables are 90 to 180 days past due (or later) to pursue collection,
credit grantors are now involving collection accounts receivable companies
much earlier in the process. Increasingly, credit grantors are looking to
accounts receivable management providers for assistance with the entire
credit-to-cash cycle, including the outsourcing of billing, client service
and complete call center functions.
o Technological Sophistication. Leading companies in the industry are
increasingly using technology to improve their results. These initiatives
include investments in data warehousing, proprietary databases,
computerized calling systems, debtor location databases, web-based
reporting, and scoring and segmentation of receivables portfolios to
identify customized treatments and to maximize recoveries.
Competitive Advantages
OSI believes its strong market position, national presence, breadth of
services and industry best practices distinguish it as a leading provider of
accounts receivable management services in the United States. OSI believes its
competitive advantages include:
o Significant Benefits of Scale. The benefits of scale in the accounts
receivable industry are significant. OSI's size enables it to compete for
larger blocks of revenue, deliver more services over a wider geographic
base and leverage its fixed costs over a broader client base. As clients
consolidate geographically and seek to reduce suppliers, OSI's national
presence is also attractive.
o Singular Focus on Managing the Complete Credit-to-Cash Cycle. By focusing
on strategic receivables management, OSI offers a comprehensive spectrum of
services across the credit-to-cash cycle. Services range from client
acquisition to recovery of charge-offs to portfolio acquisition. By
integrating these services, OSI aims to provide for its clients accelerated
cash flow, lower operating costs and increased revenue.
o Industry Specialization. OSI provides services to some of the largest and
fastest growing credit grantors in a wide range of industries. OSI has
carved out recognizable market niches including bankcard, commercial,
communications, education, financial services, government and utilities.
This level of specialization allows the company to have a detailed
understanding of its clients, and not merely the language of the accounts
receivables management business. Regardless of the industry served, each
program is customized. OSI's broad client base diversifies its revenue
stream. OSI also has long standing relationships with many of its clients
which provides a strong base of recurring revenues and provides OSI with
significant opportunities to cross-sell services.
o Ongoing Investment in Technology. OSI has made, and intends to continue
making, investments in technology and know-how to enhance its competitive
advantage. OSI believes that its proprietary software, including
debtor-scoring models, computerized calling and debtor databases, provides
a competitive advantage in pricing portfolios, offering outsourcing
services and collecting delinquent accounts. OSI's systems interface with
those of its clients to receive new account placements daily and provide
frequent updates to clients on the status of collections. OSI has become
increasingly integrated with its clients' systems, resulting in efficiency
and lower costs. o Commitment to the Best People and the Best Practices.
OSI is committed to nurturing a culture of best people and best business
practices. From day one, associates are taught OSI's core values: respect
for individuals, client focus and team orientation. Associates' education
includes training on collection skills, compliance and work standards, and
specialized leadership programs--all of which lead to better results for
clients. Performance analysis and coaching programs also are in place. In
addition to its associate training, a wide range of best business practices
provides invaluable assistance to successful accounts receivable
management. This range includes a scoring and segmentation account ranking
system that enables clients to assess the likelihood of delinquent accounts
to on-line management of consumer accounts.
Growth Strategies
OSI's strategy focuses on expanding its business and enhancing
profitability through the following initiatives:
o Cross-Selling Services to Existing Clients. OSI offers its clients a
comprehensive array of services across the credit-to-cash cycle. These
services include: client acquisition/care, billing/client management,
delinquency management and recovery. This range of services allows OSI to
cross-sell offerings within its existing client base and to potential
clients in specifically targeted industries.
o Expansion of Client Base.
o Existing Target End-Markets. Increasingly, credit grantors in the
public and private sectors which have typically maintained accounts
receivable departments within their organizations are outsourcing
their accounts receivables functions. In addition, consolidation in
the banking, retail, utilities, student loan, health care and
telecommunications industries has created national clients that are
outsourcing more components of their accounts receivable management
needs to national providers. Healthcare and telecommunications
represent nearly 50% of the outsourcing market, estimated at
approximately $1.5 billion. Both of these industries continue to
undergo consolidation.
o New Target Industries. OSI intends to capitalize on its expertise and
reputation to penetrate new end-markets. For example, OSI plans to
continue to focus on increasing its business activities with
governmental agencies at the federal, state and local levels, which
have begun to outsource tax, child support collection and student loan
accounts receivable functions to private companies. In addition, OSI
plans to focus on the commercial market segment (collection of
delinquent accounts owed by businesses to other businesses) and health
care segment of the industry. The Company believes that the commercial
market traditionally has been under-served by accounts receivable
services firms, given the need for tailored collection methods which
differ from those used in the consumer market. In addition,
significant changes and cost reductions in the health care market
require specialized skills in the collection of past due accounts.
o Disciplined Acquisitions. The Company has built its position as an industry
leader through strategic acquisitions of leading accounts receivable
outsourcing service providers. By successfully integrating these
businesses, its management has demonstrated an ability to evaluate, execute
and integrate acquisitions. With more than 6,000 accounts receivable
companies in the United States, OSI plans to pursue additional acquisitions
that complement its existing services or expand its client base. The
Company is continually reviewing acquisition opportunities.
o Cost Reductions. OSI's management has adopted an aggressive approach to
cost management. OSI plans to continue reducing its overall costs and
improving operational efficiencies.
Acquisition and Integration History
In September 1995, OSI was formed and acquired Atlanta-based Account
Portfolios, one of the largest purchasers and servicers of non-performing
accounts receivable portfolios.
In January 1996, OSI acquired Continental Credit Services, Inc.
("Continental") and A.M. Miller Associates, two industry leaders in providing
contingent fee services. Continental, which was headquartered in Seattle and
operated in eight western states, provided contingent fee services to a wide
range of end-markets with particular emphasis on public utilities and regional
telecommunications. A.M. Miller, based in Minneapolis, provided contingent fee
services to the student loan and bank credit card end markets.
In November 1996, the Company acquired Payco American Corporation with
corporate offices in Brookfield, Wisconsin. Originally founded as a contingent
fee service company, Payco diversified into other outsourcing services such as
student loan billing, health care accounts receivable billing and management,
contract management of accounts receivable, and teleservicing.
In October 1997, OSI acquired the assets of North Shore Agency, Inc., a fee
service company headquartered in Westbury, New York. North Shore specialized in
"letter series" collection services for direct marketers targeted at collecting
small balance debts. The majority of North Shore's revenues were generated from
traditional contingent collections utilizing letters with the remaining revenues
derived from fixed fee letter services.
In November 1997, OSI acquired the assets of Accelerated Bureau of
Collections, Inc., a Denver-based national fee service company. It specialized
in credit card collection and derived approximately 25% of its revenues from
pre-charge-off programs with the remaining 75% of revenues derived from standard
contingent fee collections.
In March 1998, OSI completed the acquisition of The Union Corporation
("Union"). Union was originally a conglomerate involved in businesses ranging
from electronic and industrial components to financial services. Union was a
leading provider of a range of outsourcing services to both large and small
clients. Union provided contingent and fixed fee collection services and other
related outsourcing services. Union provided fee services through the following
wholly-owned subsidiaries: Allied Bond & Collection Agency, Inc., Capital Credit
Corporation, and Transworld Systems, Inc. Allied, headquartered in Trevose,
Pennsylvania, provided contingent and fixed fee collection services for large
clients across a broad spectrum of industries. Capital Credit, headquartered in
Jacksonville, Florida also provided contingent and fixed fee collection services
for large national clients primarily serving the bankcard, telecommunications,
travel and entertainment, and government sectors. Transworld, headquartered in
Rohnert Park, California, is one of the largest prepaid, fixed fee providers of
delinquent account management services in the United States. Transworld's
clients are primarily small companies with low balance delinquent accounts.
Union provided related outsourcing services through its Interactive Performance,
Inc. and High Performance Services, Inc. subsidiaries. Interactive Performance
headquartered in North Charleston, South Carolina, provided a range of credit
and receivables management outsourcing services primarily in the form of
teleservicing. Interactive Performance services included inbound and outbound
calling programs for credit authorization, client service, usage management and
receivable management. High Performance Services, headquartered in Jacksonville,
Florida, provided services similar to Interactive Performance for clients in the
financial services industry.
In 1999, as part of a strategy to increase the efficiency of its operations
by aligning OSI along business services and establishing call centers of
excellence by industry specialization and in order to market its services under
one OSI brand, the Company reorganized many of its acquired subsidiaries.
Account Portfolios changed its name to OSI Portfolio Services, Inc. Payco
American Corporation's largest debt collection subsidiary changed its name to
OSI Collection Services, Inc. and Continental, A.M. Miller, Accelerated Bureau
of Collections, Allied Bond & Collection Agency and Capital Credit merged into
OSI Collection Services. Interactive Performance changed its name to OSI
Outsourcing Services, Inc., and the Interactive Performance and High Performance
Services subsidiaries merged into OSI Outsourcing Services. OSI now provides
specialized services for the following industries: health care, government,
education, telecommunications/utilities, commercial, financial services and bank
card.
As part of its strategy to expand its outsourcing services, in September
2000, the Company through a newly formed limited liability company, RWC
Consulting Group, LLC, acquired certain assets and assumed certain liabilities
of RWC Consulting Group, Inc., a service company providing highly-skilled
consultants to banks to assist in their back office functions. In March 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., a service company providing highly skilled
experts to health care clients to assist with their on-site, back office
functions such as billing, collections, reimbursement, special projects and
other areas. In April 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., a service
company providing highly skilled consultants to banks to assist in their bank
office functions, and (ii) associated patentable property.
Recapitalization
On December 10, 1999, pursuant to a Stock Subscription and Redemption
Agreement, dated as of October 8, 1999, as amended (the "Recapitalization
Agreement"), by and among Madison Dearborn Capital Partners III, L.P. (together
with its affiliates, "MDP"), the Company, and certain of the Company's
stockholders, optionholders and warrantholders: (i) the Company sold
5,323,561.08 shares of its common stock, par value $.01 per share, to certain
purchasers for an aggregate purchase price of $199.5 million; (ii) the Company
sold 100,000 shares of its Senior Mandatorily Redeemable Preferred Stock to
certain purchasers for an aggregate purchase price of $100 million; (iii) the
Company redeemed 4,792,307.20 shares of the Company's common stock (including
voting common stock, par value $.01 per share, Class A Convertible Nonvoting
Common Stock, par value $.01 per share, Class B Convertible Nonvoting Common
Stock, par value $.01 per share, Class C Convertible Nonvoting Common Stock, par
value $.01 per share and 1,114,319.33 shares of its preferred stock, no par
value) for an aggregate of $221.35 million (such transactions collectively
referred to herein as the "Recapitalization"). Immediately after the
Recapitalization, MDP owned approximately 70.3% of the outstanding common stock
(75.9% of the outstanding voting common stock) of the Company. Prior to the
Recapitalization, the Company was controlled by McCown DeLeeuw & Co., Inc., a
private equity investment firm.
The stockholders and optionholders of the Company entered into a
stockholders agreement (the "Stockholders Agreement"). The Stockholders
Agreement provides for the election of individuals to the Board of Directors of
the Company and includes restrictions on the transfer of capital stock, and the
provision of registration, preemptive, tag along and drag along rights granted
to the parties thereto.
In conjunction with the Recapitalization, the Company also entered into a
Credit Agreement among the Company, DLJ Capital Funding, Inc., as Syndication
Agent, Harris Trust & Savings Bank, as Documentation Agent, Fleet National Bank,
N.A., as Administrative Agent and other Lenders who are parties thereto (the
"Credit Agreement"). The Credit Agreement provides for: (i) a $150 million Term
A Loan Facility; (ii) a $250 million Term B Loan Facility; and (iii) a $75
million Revolving Loan Facility. Borrowings under the Credit Agreement were used
to refinance the Company's existing credit agreement and have been and will
continue to be used for other working capital, acquisitions and general
corporate purposes.
Services and Operations
OSI is one of the largest providers of business process outsourcing (BPO)
receivables services in the United States. Through its subsidiaries, the
Company's BPO services include outsourcing services, portfolio purchasing
services and recovery services.
Outsourcing Services
As the volume of consumer credit has expanded across a number of
industries, credit grantors have begun demanding a wider range of outsourcing
services. In response, OSI has developed a number of other accounts receivable
management services. OSI leverages its call and data management technology and
operational expertise by offering the following services:
o Contract management, whereby OSI performs a range of accounts
receivable management services at the client's or OSI's location,
o Student loan billing, whereby OSI provides billing, due diligence and
client services,
o A series of letters whereby OSI mails letters for collection of
delinquent or charged-off consumer accounts, o Health care accounts
receivable management, whereby OSI assumes responsibility for managing
third-party billing, patient pay resolution, inbound and outbound patient
communication services and cash application functions, and
o Teleservicing whereby OSI offers inbound and outbound calling
programs, client retention programs, market research and client service.
In addition, OSI offers banking and financial services transaction
processing. The services provided assist OSI's clients in back-office functions
such as research and adjustment, reconcilement, charge-off recovery and other
areas.
For each client relationship, OSI works with the client to develop an
outsourcing strategy and customize services to meet the client's objectives,
which may include decreased expenses and more stabilized cash flows. Client
service and billing inquiry activities are ideal candidates for outsourcing
relationships for a number of reasons, including: (i) the need for technological
investments in automated call management systems, (ii) the activities that are
labor intensive, and (iii) the activity volumes are subject to fluctuations
which make it difficult to maintain stable employment levels and high
utilization of the required equipment. By offering outsourcing services to a
variety of clients, OSI is able to leverage its productive resources to greater
efficiency levels. In addition, OSI will continue to develop its expertise in
outsourcing service delivery, enhancing its creativity and effectiveness in
managing various inbound programs that a captive operation does not generally
have. This can translate into higher response rates and returns on investment
for the client.
Portfolio Purchasing Services
While contingent fee servicing remains the most widely used method by
credit grantors in recovering non-performing accounts, portfolio purchasing has
increasingly become a popular alternative. Beginning in the 1980's, the
Resolution Trust Corporation and the Federal Deposit Insurance Corporation,
under government mandate, began to sell portfolios of non-performing loans.
Spurred on by the success of these organizations in selling charged-off debt,
other creditors likewise began to sell portfolios of non-performing debt. OSI
estimates that the total principal value of purchased portfolios was more than
$30 billion in 2001. The majority of purchased portfolios originated from the
bank card receivable and retail markets. Such portfolios are typically purchased
at a deep discount from the aggregate principal value of the accounts, with an
inverse correlation between purchase price and age of the delinquent accounts.
Once purchased, traditional collection techniques are employed to obtain payment
of non-performing accounts.
OSI offers portfolio purchasing services to a wide range of financial
institutions, telecommunications and retailers. OSI purchases large and diverse
portfolios of charged-off consumer receivables both on an individually
negotiated basis as well as through "forward flow" agreements. Under forward
flow agreements, OSI agrees, subject to due diligence, to purchase charged-off
receivables on a monthly basis. Credit grantors selling portfolios to OSI
realize a number of benefits including increased predictability of cash flow,
reduction in monitoring and administrative expenses, and reallocation of assets
from non-core business functions to core business functions.
OSI's purchased portfolios consist primarily of consumer loans and credit
card receivables, student loan receivables and health club receivables including
portfolios purchased under forward flow agreements. OSI's most recent portfolio
acquisitions have been primarily health club and bank card purchases. OSI
continues to pursue acquisitions of portfolios in various industries for both
individually negotiated and forward flow purchases.
In order to fund an increased level of portfolio purchasing, in October
1998 the Company established a financing conduit, in association with MBIA
Insurance Corporation. The conduit is expected to provide OSI with significantly
increased purchasing capacity necessary to expand its portfolio purchasing
activities at a lower aggregate cost of capital. The transaction structure
involves off-balance sheet treatment for a significant portion of prospective
portfolio purchases and the related financing, while providing a consistent
servicing revenue stream. Although OSI places most of its portfolio purchases in
the conduit, in some cases OSI continues to place certain portfolio purchases on
its balance sheet. The revenue from owned portfolios is derived from gross
collections and offset by collection costs and portfolio amortizations.
Conversely, the off-balance sheet accounting treatment for portfolios sold into
the conduit creates service fee revenues which is a percentage of gross
collections, offset by collection costs but with no portfolio amortization. In
addition, from time to time, OSI may receive income from the conduit
representing excess collections above the original cost to purchase the
portfolio and related financing fees.
In 1999, OSI established its own portfolio purchasing valuation unit to
replace services previously provided by an independent portfolio valuation firm.
Recovery Services
OSI is one of the largest providers of collection services in the United
States. OSI offers a full range of contingent fee (percentage of realized
collections) services, including pre-charge-off programs, to most consumer
credit end-markets. OSI utilizes sophisticated management information systems
and vast experience with locating, contacting and effecting payment from
delinquent account holders in providing its core contingent fee services. With
35 call centers in 23 states and approximately 2,200 account representatives,
OSI has the ability to service a large volume of accounts with national
coverage. In addition to traditional contingent fee services involving the
placement of accounts, creditors have begun to demand services in which accounts
are outsourced earlier in the collection cycle. OSI has responded to this trend
by developing "early-out" programs, whereby OSI receives placed accounts that
are often less than 180 days past due and earn a fixed fee per placed account
rather than a percentage of realized collections. These programs require a
greater degree of technological integration between OSI and its clients, leading
to higher switching costs for OSI's clients. OSI primarily services consumer
creditors, although it also has a presence in the commercial collection
business, offering contingent fee services to commercial creditors.
Contingent fee services are the traditional services provided in the
accounts receivable management industry. Credit grantors typically place
non-performing accounts after they have been deemed non-collectible, usually 90
to 180 days past due, depending on the specific credit grantor policy, agreeing
to pay the servicer a commission level calculated on the amount of collections
actually made. At this point, the receivables are usually still valued on the
customer's balance sheet, albeit in a form at least partially reserved against
for possible noncollection. Clients typically use multiple agencies on any given
placement category, enabling them to benchmark each agency's performance against
other agencies. Placement is usually for a fixed time frame, typically a year,
at the end of which the agency returns the uncollected receivables to the
customer, which may then place them with an alternative agency.
The commission rate for contingent fee services is generally based on the
collectability of the asset in terms of the costs which the contingent fee
servicer must incur to effect repayment. The earlier the placement (i.e., the
less elapsed time between the past due date of the receivable and the date on
which the debt is placed with the contingent fee servicer), the higher the
probability of recovering the debt and, therefore, the lower the cost to collect
and the commission rate. Creditors typically assign their charged-off
receivables to contingent fee servicers for a six month cycle, and then reassign
the receivables to other servicers as the accounts become further past due.
There are three main types of placements in the contingent fee business, each
representing a different stage in the cycle of account collection. Primary
placements are accounts, usually 90 to 270 days past due, that are being placed
with agencies for the first time and usually receive the lowest commission.
Secondary placements, typically accounts 270 to 360 days past due, have already
been recalled from a primary collection agency. Tertiary placements are
typically accounts over 360 days past due which have been recalled from one or
more collection agencies. Due to the difficulty to collect accounts that are
more past due, commission rates for tertiary placements are generally higher
than secondary placements, which are usually higher than commission rates for
primary placements.
Once the account has been placed with OSI, the fee service process consists
of (i) locating and contacting the debtor through mail, telephone, or both, and
(ii) persuading the debtor to settle his or her outstanding balance. Work
standards, or the method and order in which accounts are worked by OSI, are
specified by the customer, and contractually bind OSI. Some accounts may have
different work standards than others based on criteria such as account age or
balance. In addition, OSI must comply with the federal Fair Debt Collection
Practices Act and comparable state statutes, which restrict the methods it uses
to collect consumer debt.
OSI attempts to estimate the collectability of most placements using
sophisticated recovery score models that estimate both probability of payment
and resulting amount of that payment. The objective is to maximize revenues and
minimize expenses by matching the appropriate work effort with the expected
yield of each individual account.
Financial Information about Industry and Geographic Segments
For detailed information concerning the Company's industry and geographic
segments, reference is made to Note 19 of the Financial Statements included
elsewhere in this Annual Report on Form 10-K.
Sales and Marketing
OSI has a sales force of approximately 90 sales representatives providing
comprehensive geographic coverage of the United States on a local, regional and
national basis, and, to a much lesser extent in, Puerto Rico, Canada and Mexico.
OSI, except its Transworld Systems subsidiary, maintains a sales force and has a
marketing strategy closely tailored to the credit-granting markets that it
serves. OSI's primary sales and marketing objective is to expand its client base
in those client industries in which it has a particular expertise and to target
new clients in high growth end-markets. OSI emphasizes its industry experience
and reputation - two key factors considered by creditors when selecting an
accounts receivable management provider. OSI believes it will increasingly focus
on cross-selling its full range of services to its existing clients and will use
its product breadth as a key selling point in creating new business. The
Company's overall sales and marketing strategies are coordinated at its
principal executive offices in Chesterfield, Missouri.
The marketing force is responsible both for identifying and cultivating
potential clients, as well as retaining or increasing market share with existing
clients. The marketing force is generally organized around specific industries
and is also trained to market the overall benefits of its services, providing a
cross-selling function for all its business units. Compensation plans for the
marketing force are incentive based, with professionals receiving a base salary
and incremental compensation based on performance. The Company's Transworld
Systems subsidiary has a sales force of over 700 independent contractors based
in 135 offices. Transworld Systems is the leading provider of profit recovery
services, targeting the small and medium size business segment. Their profit
recovery services offer a two phase process - a letter series and phone
recovery.
Clients
OSI's client base includes a broad range of local, regional and national
credit grantors. OSI's largest client accounted for approximately 9% of 2001
consolidated revenues, 8% of 2000 consolidated revenues and 5% of 1999
consolidated revenues.
Employees
OSI employs approximately 9,000 associates, of which 6,600 are account
representatives, 90 are sales representatives and 2,310 work in
corporate/supervisory and administrative functions. None of OSI's employees are
unionized, and OSI believes its relations with employees are satisfactory.
OSI is strongly committed to providing continuous training and performance
improvement plans to increase the productivity of its account representatives.
Account representatives receive extensive training, in a classroom environment
for several days; training is on OSI's procedures, information systems and
regulations regarding contact with consumers. The training includes technical
topics, such as use of on-line recovery systems and computerized calling
techniques, as well as instruction regarding OSI's approach to the recovery
process and listening, negotiation and problem-solving skills, all of which are
essential to efficient and effective collections. OSI has developed proprietary
operations processes on which most account representatives are trained.
Account representatives are assigned to work groups for a training period.
Initially, the trainees only screen incoming calls. This allows less experienced
account representatives to communicate in a less confrontational environment
than may be experienced with outgoing calls. Additionally, the trainees are
assigned accounts, which based upon scoring by OSI's information systems, have a
higher likelihood of collection. After the training period, the account
representatives begin working accounts directly.
Competition
The accounts receivable management industry is highly fragmented and
competitive. OSI estimates there are approximately 6,000 accounts receivable
firms in the United States, with the 10 largest agencies accounting for
approximately 33% of industry revenues. Within the collection and outsourcing
services of OSI's business, large volume credit grantors typically employ more
than one accounts receivable management company. Competition is based largely on
recovery rates, industry experience and reputation, and service fees. Within
this market, the Company's largest competitors include G.C. Services LP,
IntelliRisk Management Corp., NCO Group Inc., Nationwide Credit Inc. and Risk
Management Alternatives Inc.
The bidding process associated with the acquisition of purchased portfolios
has become more competitive as the number of participants in this business has
increased. OSI's largest competitors in this market include Asset Acceptance
Corp., ASTA Funding, Inc., Arrow Financial Services, L.L.C. and Calvary
Investments, L.L.C.
Environmental, Health & Safety Matters
Current operations of the Company and its subsidiaries do not involve
activities materially affecting the environment. However, The Union Corporation,
a subsidiary of the Company, is party to several pending environmental
proceedings involving the United States Environmental Protection Agency, or EPA,
and comparable state environmental agencies in Indiana, Maryland, Massachusetts,
New Jersey, Ohio, Pennsylvania, South Carolina and Virginia. All of these
matters relate to discontinued operations of former divisions or subsidiaries of
Union for which it has potential continuing responsibility. Upon completion of
the acquisition of Union, the Company, in consultation with both legal counsel
and environmental consultants, established reserves that it believes will be
adequate for the ultimate settlement of these environmental proceedings.
One group of Union's known environmental proceedings relates to Superfund
or other sites where liability of Union or one or more of its subisidairies
arises from arranging for the disposal of allegedly hazardous substances in the
ordinary course of prior business operations. In most of these "generator"
liability cases, involvement by Union or one or more of its subsidaries is
considered to be de minimus (i.e., a volumetric share of approximately 1% or
less) and in each of these cases Union or one or more of its subsidiaries is
only one of many potentially responsible parties. From the information currently
available, there are a sufficient number of other economically viable
participating parties so that the projected liability of Union or one or more of
its subsidiaries, although potentially joint and several, is consistent with its
allocable share of liability. At one "generator" liability site, Union's
involvement is potentially more significant because of the volume of waste
contributed in past years by a currently inactive subsidiary. Insufficient
information is available regarding the need for or extent and scope of any
remedial actions which may be required. Union has recorded what it believes to
be a reasonable estimate of its ultimate liability, based on current
information, for this site.
The second group of matters relates to environmental issues on properties
currently or formerly owned or operated by a subsidiary or division of Union.
These cases generally involve matters for which Union or an inactive subsidiary
is the sole or primary responsible party. In one case, the Metal Bank Cottman
Avenue site, the EPA issued a record of decision on February 6, 1998. According
to the record of decision, the cost to perform the remediation selected by the
EPA for the site is estimated by the EPA to be approximately $17.3 million. The
aggregate amount reserved by Union for this site was $18.2 million, which
represented Union's best estimate of the ultimate potential legal and consulting
costs for defending its legal and technical positions regarding remediation of
this site and its portion of the potential remediation costs that will
ultimately be incurred by it, based on current information. However, Union may
be exposed to additional substantial liability for this site as additional
information becomes available over the long-term. Actual remediation costs
cannot be computed until such remedial action is completed. Some of the other
sites involving Union or an inactive subsidiary are at a state where an
assessment of ultimate liability, if any, cannot reasonably be made at this
time.
It is Union's policy to comply fully with all laws regulating activities
affecting the environment and to meet its obligations in this area. In many
"generator" liability cases, reasonable cost estimates are available on which to
base reserves on Union's likely allocated share among viable parties. Where
insufficient information is available regarding projected remedial actions for
these "generator" liability cases, Union has recorded what it believes to be
reasonable estimates of its potential liabilities. Reserves for liability for
sites on which former operations were conducted are based on cost estimates of
remedial actions projected for these sites. OSI periodically reviews all known
environmental claims, where information is available, to provide reasonable
assurance that reserves are adequate.
Governmental Regulatory Matters
Certain of OSI's operations are subject to the Fair Debt Collection
Practices Act, or FDCPA, and comparable statutes existing in many states. Under
the FDCPA, a third-party collection agency is restricted in the methods it uses
to collect consumer debt. For example, a third-party collection agency (1) is
limited in communicating with persons other than the consumer about the
consumer's debt, (2) may not telephone at inconvenient hours, and (3) must
provide verification of the debt at the consumer's request. Requirements under
state collection agency statutes vary, with most requiring compliance similar to
that required under the FDCPA. In addition, most states and certain
municipalities require collection agencies to be licensed with the appropriate
authorities before collecting debts from debtors within those jurisdictions. It
is OSI's policy to comply with the provisions of the FDCPA, comparable state
statutes and applicable licensing requirements. OSI has established policies and
procedures to reduce the likelihood of violations of the FDCPA and related state
statutes. For example, all of OSI's account representatives receive extensive
training on these policies and must pass a test on the FDCPA, and OSI's agents
work in an open environment which allows managers to monitor interaction with
debtors.
From time to time, certain of the Company's subsidiaries have been subject
to consent decrees with various governmental agencies, none of which currently
has a material effect on the Company's consolidated financial condition, cash
flows or results of operations.
ITEM 2. PROPERTIES
As of December 31, 2001, OSI operated approximately 70 facilities in the
U.S., all of which are leased, except for three administrative and collection
offices operated by Transworld Systems, which are owned. OSI believes that such
facilities are suitable and adequate for its business. OSI's facilities are
strategically located across the U.S. to give effective broad geographic
coverage for clients and access to a number of labor markets.
ITEM 3. LEGAL PROCEEDINGS
At December 31, 2001, OSI was involved in a number of legal proceedings and
claims that were in the normal course of business and routine to the nature of
OSI's business, none of which are currently expected to have a material effect
on the Company's consolidated financial condition, cash flows or results of
operations. In addition, one of the Company's subsidiaries, Union, is party to
several pending environmental proceedings discussed elsewhere herein. 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 settlement of such suits are adequate at December
31, 2001.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
No public market currently exists for the Company's Senior Common Stock,
Voting Common Stock and Nonvoting Common Stock.
As of April 10, 2002, there were approximately 45 holders of record of the
Senior Common Stock, Voting Common Stock and Nonvoting Common Stock.
The Company has not declared any cash dividends on any of its common stock
since the Company's formation in September 1995. The Indenture (the
"Indenture"), dated as of November 6, 1996, by and among the Company, the
Guarantors (as defined therein) and Wilmington Trust Company, as Trustee, with
respect to the Company's 11% Series B Senior Subordinated Notes due 2006
contains restrictions on the Company's ability to declare or pay dividends on
its capital stock. Additionally, the Credit Agreement dated as of November 30,
1999 among the Company, the Lenders listed therein, Credit Suisse First Boston
(as successor in interest of DLJ Capital Funding, Inc.), as the Syndication
Agent, Harris Trust and Savings Bank, as the Documentation Agent, and Fleet
National Bank, as the Administrative Agent (the "Credit Agreement") contains
certain restrictions on the Company's ability to declare or pay dividends on its
capital stock. The Indenture, the Credit Agreement and the Certificate of
Designation of the powers and preferences and relative participating, optional
and other special rights of Class A 14% Senior Mandatorily Redeemable Preferred
Stock, Series A, and Class B 14% Senior Mandatorily Redeemable Preferred Stock,
Series A, and qualifications and limitations and restrictions thereof prohibit
the declaration or payment of any Common Stock dividends or the making of any
distribution by the Company or any subsidiary (other than dividends or
distributions payable in stock of the Company) other than dividends or
distributions payable to the Company.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data set forth below have been
derived from, and are qualified by reference to the audited Consolidated
Financial Statements of the Company for, and as of, each of the fiscal years in
the five year period ended December 31, 2001. The selected financial data set
forth below should be read in conjunction with, and are qualified by reference
to, "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and accompanying notes
thereto of the Company included elsewhere herein.
Year Ended December 31,
2000
1997 1998 1999 as Restated 2001
---- ---- ---- ----------- ----
($ In thousands)
Statement of Operations Data:
Operating revenue.............................. $271,683 $479,400 $504,425 $541,076 $612,346
Salaries and benefits.......................... 133,364 230,114 244,157 264,293 294,509
Other operating expenses (a)................... 156,738 221,598 224,616 237,434 267,610
Compensation expense related to redemption
of stock options.......................... - - - 187 -
Change in control bonuses, stock option
redemption and other bonuses.............. - - 10,487 - -
Conversion, realignment and
relocation expenses....................... - - 5,063 2,742 3,564
Recapitalization related costs................. - - 6,827 - -
-------- -------- --------
Operating income (loss)........................ (18,419) 27,688 13,275 36,420 46,663
Interest expense, net.......................... 28,791 50,627 52,265 60,934 59,449
-------- -------- -------- -------- --------
Loss before taxes.............................. (47,210) (22,939) (38,990) (24,514) (12,786)
Provision for income taxes (benefit)........... 11,127 830 759 594 569
Minority interest.............................. - 572 - - -
-------- -------- -------- --------- --------
Loss before extraordinary item................. $(58,337) $(24,341) $(39,749) $(25,108) $(13,355)
Extraordinary loss............................. - - 4,208 - -
-------- -------- -------- -------- --------
Net loss ..................................... $(58,337) $(24,341) $(43,957) $(25,108) $(13,355)
======== ======== ======== ======== ========
Balance Sheet Data (at end of year):
Total assets................................... $381,690 $618,491 $624,712 $632,647 $640,210
Total debt..................................... 324,966 528,148 518,307 539,463 539,020
Mandatorily redeemable preferred stock......... - - 85,716 (c) 103,455 123,482
Stockholders' deficit.......................... (5,478) (30,032) (93,948)(c) (134,412) (154,075)
Other Financial Data:
Amortization of purchased portfolios........... $52,042(d) $50,703(e) $38,722 $28,092 $26,930
Other depreciation and amortization............ 33,574 30,007 31,095 31,885 30,976
Cash capital expenditures...................... 9,489 13,480 18,437 18,398 14,159
On-balance sheet portfolio purchases........... 46,494 43,186 23,176 12,835 19,717
Cash flows from:
Operating activities and portfolio
purchasing............................ (13,669) 12,066 (3,652) 24,792 16,927
Investing activities...................... (73,005) (184,619) (21,549) (36,714) (38,837)
Financing activities...................... 75,394 178,150 22,446 16,136 21,172
EBITDA (b)..................................... 67,197 108,398 83,092 96,397 104,569
Adjusted EBITDA (b)............................ 67,197 108,398 105,469 99,326 108,874
(a) Other operating expenses include telephone, postage, supplies, occupancy
costs, data processing costs, depreciation, amortization and miscellaneous
operating expenses.
(b) EBITDA is defined as income from continuing operations before interest,
taxes, depreciation and amortization. Adjusted EBITDA reflects EBITDA as
defined above adjusted for the change in control bonuses, stock option
redemption and other bonuses; nonrecurring conversion, realignment and
relocation expenses; and recapitalization related expenses of $10,487,
$5,063 and $6,827, respectively, in the year ended December 31, 1999; the
compensation expense related to redemption of stock options and the
nonrecurring realignment expenses of $187 and $2,742, respectively, in the
year ended December 31, 2000; and the non-cash compensation expense related
to variable stock options of $741 and nonrecurring conversion, realignment
and relocation expenses at $3,564 in the year ended December 31, 2001.
EBITDA and Adjusted EBITDA are presented here, as management believes they
provide useful information regarding the Company's ability to service
and/or incur debt. EBITDA and Adjusted EBITDA should not be considered in
isolation or as substitutes for net income, cash flows from continuing
operations, or other consolidated income or cash flow data prepared in
accordance with generally accepted accounting principles or as measures of
a company's profitability or liquidity. EBITDA and Adjusted EBITDA may not
be comparable to other companies.
(c) In conjunction with the Company's Recapitalization in 1999, which is
discussed elsewhere herein, the Company issued 100,000 shares of its Senior
Mandatorily Redeemable Preferred Stock. See Note 3 to the consolidated
financial statements.
(d) In the fourth quarter of 1997, the Company completed an in-depth analysis
of the carrying value of the purchased portfolios acquired and valued in
conjunction with the Company's September 1995 acquisition of Account
Portfolios. As a result of this analysis, the Company recorded $10,000 of
additional amortization related to these purchased portfolios to reduce
their carrying value to their estimated net realizable value. This amount
includes the $10,000 of additional amortization.
(e) In the fourth quarter of 1998, the Company wrote down its investment in a
limited liability company (the "LLC") by $3,000 resulting from an analysis
of the carrying value of the purchased portfolios owned by the LLC. This
amount includes the $3,000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Restatement of Financial Results
During the finalization of the Company's consolidated financial statements
as of and for the year ended December 31, 2001, it was determined that the
consolidated results reported in the Company's Form 10-K as of and for the year
ended December 31, 2000, as well as the unaudited consolidated quarterly results
reported in the Company's Report on Form 10-Q for the quarter September 30,
2001, would need to be restated because of inaccurate financial reporting of
certain transactions at one of the Company's subsidiaries, North Shore Agency,
Inc. ("NSA"). The Board of Directors authorized the Audit and Compliance
Committee (the "Committee") to conduct an independent investigation, with the
assistance of special counsel retained by the Committee, to identify the causes
of these discrepancies and to make recommendations to ensure similar issues do
not recur in the future. The Committee retained Bryan Cave LLP as special
counsel, and Bryan Cave LLP engaged an independent accounting firm to assist in
the investigation. As a result of the investigation, it was determined that
certain assets were overstated (primarily accounts receivable and prepaid
postage) and trade accounts payable was understated at NSA due to the inaccurate
financial reporting of certain transactions.
As a result, the consolidated financial statements as of and for the year
ended December 31, 2000, as well as the unaudited consolidated quarterly results
as of and for the quarter September 30, 2001 have been restated. Comparisons of
previously reported and restated consolidated financial statements for all
periods impacted by the restatement, including annual consolidated financial
statements and unaudited quarterly financial data, are set forth in Notes 22 and
23 to the consolidated financial statements included herein.
For the year ended December 31, 2000, the previously reported consolidated
financial statements included an overstatement of revenues by approximately $1.6
million and an understatement of operating expenses by approximately $4.1
million. The impact of the inaccurate financial reporting of certain
transactions on previously reported operating results for the year ended
December 31, 2000 was to overstate operating income by approximately $5.7
million and understate net loss and net loss to common stockholders by
approximately $5.7 million.
The Company expects to file an amended quarterly report on Form 10-Q for
the quarter ended September 30, 2001 as soon as practicable.
Consolidated Operations - Year Ended December 31, 2001 Compared to Year Ended
December 31, 2000 (Restated)
Revenues for the year ended December 31, 2001 were $612.3 million compared to
$541.1 million for the year ended December 31, 2000 - an increase of 13.2%. The
revenue increase of $71.2 million was due to increased outsourcing and portfolio
services revenues offset by lower recovery services revenues. Revenues from
outsourcing services increased 32.1% to $323.8 million for the year ended
December 31, 2001 from $245.2 million for the comparable period in 2000. The
increased outsourcing services revenues of $78.6 million were due primarily to
new and increased existing business, increased collection letter products
business and the acquisitions of RWC Consulting Group ("RWC"), Coast to Coast
Consulting ("CCC"), and Pacific Software Consulting ("PSC") which were acquired
in September 2000, March 2001 and April 2001, respectively. Revenues from
portfolio services of $90.0 million compared favorably to $87.5 million due to
increased servicing fees as a result of increased collections from the higher
levels of off-balance sheet purchased loans and accounts receivable portfolios
during 1999, 2000 and 2001 offset partially by the continued negative effect on
revenues resulting from the shift to off-balance sheet purchased portfolios.
During the year ended December 31, 2001, the Company recorded servicing fees
from OSI Funding LLC ("FINCO"), the Company's off-balance sheet special purpose
finance company, of $37.0 million compared to servicing fees of $26.8 million
for 2000. Revenues from recovery services decreased 4.8% to $198.5 million for
the year ended December 31, 2001 from $208.4 million in 2000. The decreased
revenues were due primarily to lower bank card, student loan and
telecommunications business offset partially by increased government business.
The Company believes that its revenues and operating income for each of its
business segments were negatively affected by the September 11, 2001 terrorist
attacks.
Operating expenses, inclusive of salaries and benefits, service fees and
other operating and administrative expenses, were $504.2 million for the year
ended December 31, 2001 and $441.8 million for 2000 - an increase of 14.1%. The
increase in these operating expenses resulted primarily from the RWC, CCC and
PSC acquisitions, higher postage expense and the increased expenses associated
with the new and increased existing revenues of outsourcing services. Operating
expenses for the year ended December 31, 2001 included non-cash compensation
expense related to variable stock options of approximately $0.7 million. For the
year ended December 31, 2001, amortization and depreciation charges of $57.9
million were lower than the $60.0 million for 2000 by $2.1 million. The lower
amortization and depreciation charges resulted primarily from lower portfolio
amortization as a result of the shift towards off-balance sheet purchased
portfolios and lower depreciation resulting from lower current year capital
expenditures and mix of current and prior years' capital expenditures.
For the year ended December 31, 2001, the Company incurred $3.6 million of
nonrecurring consolidation, realignment and relocation expenses. These expenses
include costs from consolidation of certain call centers, excess leased space,
closure of certain call centers, severance associated with these office
closures, asset write-offs and certain other one-time costs.
Earnings before interest expense, taxes, depreciation and amortization
(EBITDA) for the year ended December 31, 2001 was $104.6 million compared to
$96.4 million for 2000. The increase was primarily attributable to the effects
of the three acquisitions noted above and the higher new and existing
outsourcing services revenues offset partially by a change in revenue mix
relating to its collection letter products from higher margin contingent fee
services to lower margin fixed fee services and higher postage expense. Adding
back the non-cash stock compensation expense and the nonrecurring charges,
adjusted EBITDA was $108.9 million for the year ended December 31, 2001 compared
to $99.3 million after adding back the additional compensation expense and
nonrecurring charges for 2000.
As a result of the above, the Company's operating income of $46.7 million
for the year ended December 31, 2001 compared favorably to the $36.4 million for
2000 - an increase of 28.3%.
Net interest expense for the year ended December 31, 2001 of $59.4 million
compared favorably to $60.9 million in 2000 due primarily to lower interest
rates offset partially by additional interest expense of $3.1 million as a
result of the Company's interest rate hedges' ineffectiveness.
The provision for income taxes of $0.6 million was provided for certain
state and foreign income tax obligations. The net deferred tax assets at
December 31, 2001 are fully offset by a valuation allowance. For the year ended
December 31, 2001, the net deferred tax assets and the valuation allowance
increased by $6.1 million. The increase was caused by an increase of deductible
temporary differences and an additional taxable net operating loss generated
during the current period. The Company generated a net taxable operating loss
for federal and certain state income tax purposes for which a full valuation
allowance was provided against the related deferred tax asset.
Due to the factors stated above, the Company had a net loss for the year
ended December 31, 2001 of $13.4 million which compared favorably to the net
loss of $25.1 million for the year ended December 31, 2000.
Consolidated Operations - Year Ended December 31, 2000 (Restated) Compared to
Year Ended December 31, 1999
Revenues for the year ended December 31, 2000 were $541.1 million compared to
$504.4 million for the year ended December 31, 1999 - an increase of 7.3%. The
revenue increase of $36.7 million was due to increased outsourcing and portfolio
services revenues offset by lower recovery services revenues. The outsourcing
services revenue of $245.2 million compared favorably to $205.8 million in 1999
due to increased revenue of $18.3 million from new and existing business,
increased collection letter products business of $15.4 million and $5.7 million
from RWC, which was acquired in September 2000. Revenues from portfolio services
increased to $87.5 million for the year ended December 31, 2000 from $80.4
million for 1999. The increased revenues were due to higher servicing fee
revenues for the off-balance sheet collections of FINCO portfolios partially
offset by lower revenues from on-balance sheet portfolios resulting from the
shift from on-balance sheet ownership of purchased loans and accounts receivable
portfolios to off-balance sheet. During the year ended December 31, 2000, the
Company recorded revenue from FINCO servicing fees of $26.8 million compared to
servicing fees of $15.2 million for 1999. Revenues from recovery services of
$208.4 million for the year ended December 31, 2000 compared unfavorably to
$218.2 million in 1999 due to primarily to lower telecommunications business and
the continued weakness in the bank card market offset partially by increased
government business.
Operating expenses, inclusive of salaries and benefits, service fees and
other operating and administrative expenses, were $441.8 million for the year
ended December 31, 2000 and $398.9 million for 1999 - an increase of 10.8%. The
increase in these operating expenses resulted primarily from higher collection
expenses, higher postage expenses, increased collection-related expenses due to
the increased revenues of outsourcing services and increased collection expenses
associated with the increase in collections of on and off-balance sheet
purchased portfolios partially offset by lower consulting expenses. For the year
ended December 31, 2000, operating expenses included approximately $0.2 million
of additional compensation expense resulting from the redemption of vested stock
options. For the year ended December 31, 2000, amortization and depreciation
charges of $60.0 million were lower than $69.8 million for 1999 - a decrease of
14.0%. The lower amortization and depreciation charges resulted primarily from
lower portfolio amortization as a result of the shift towards off-balance sheet
purchased loans and accounts receivable portfolios.
In continuing with the strategy, adopted in early 1999, to align OSI along
business services and establish call centers of excellence by industry
specialization, the Company incurred nonrecurring realignment expenses of $2.7
million which includes cost for closures of certain call centers, severance
associated with these office closures and certain other one-time costs. These
costs were recognized as incurred in 2000.
During the fourth quarter of 1998 and the first quarter of 1999, OSI
evaluated its business strategy for its operations. After the Company's
formation and seven acquisitions, the Company adopted a strategy to align OSI
along business services and establish call centers of excellence by industry
specialization. As a result, nonrecurring conversion, realignment and relocation
expenses include costs resulting from the temporary duplication of operations,
closure of certain call centers along with relocation of certain employees,
hiring and training of new employees, costs resulting from the conversion of
multiple collection operating systems to a one industry operating system, and
other one-time and redundant costs, which will be eliminated as the realignment
and integration plans are completed. These costs of $5.1 million were recognized
as incurred during 1999.
In connection with the Recapitalization, the Company incurred $10.5 million
of additional compensation expense in 1999. This compensation expense consisted
primarily of expense relating to payment of cash for vested stock options and
the payment of change in control bonuses to certain officers in accordance with
terms of their employment agreements. In addition, the Company incurred $6.8
million of Recapitalization related costs in 1999. These costs consisted
primarily of professional and advisory fees, and other expenses.
Earnings before interest expenses, taxes, depreciation and amortization
("EBITDA") for the year ended December 31, 2000 was $96.4 million. Adding back
the nonrecurring charges and the additional compensation expense, adjusted
EBITDA was $99.3 million for the year ended December 31, 2000 compared to $105.5
million after adding back the nonrecurring and Recapitalization related expenses
for 1999. The decrease of $6.2 million was primarily attributable to the
increased collection expenses in relation to the revenue reported from the
collections of purchased portfolios and higher postage expenses partially offset
by the contribution from increased outsourcing services revenues and lower
consulting expenses.
While EBITDA was down due primarily to the off-balance sheet ownership of
the portfolios, depreciation and amortization also declined resulting in
operating income of $36.4 million. Adding back the nonrecurring charges of $2.7
million and the additional compensation expense of approximately $0.2 million,
operating income was $39.3 million for the year ended December 31, 2000 compared
to $35.7 million for 1999 after adding back the nonrecurring and
Recapitalization related expenses.
Net interest expense for the year ended December 31, 2000 of $60.9 million
compared unfavorably to $52.3 million in 1999 due primarily to higher interest
rates and higher amortization of deferred financing fees.
The provision for income taxes of $0.6 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 in 2000, for which a full
valuation allowance was provided against the related deferred tax asset.
The extraordinary loss of $4.2 million in 1999, the write-off of previously
capitalized financing costs, resulted from the extinguishment of the then
existing credit facility in conjunction with the establishment of a new bank
credit facility in the fourth quarter of 1999.
The net loss for the year ended December 31, 2000 of $25.1 million compared
favorably to the net loss of $44.0 million for 1999 due primarily to the
nonrecurring and Recapitalization related expenses and the extraordinary item in
1999.
Segment Operations
The following results of segment operations do not include the elimination
of intercompany revenue and the allocation of corporate and shared expenses.
See Note 19 in the Company's financial statements included herein for additional
information.
Outsourcing Services
Outsourcing services revenues of $339.3 million in 2001 increased 32.9% from
$255.3 million in 2000 (as restated) reflecting new and increased existing
business, increased collection letter products business and the acquisitions of
RWC, CCC and PSC. In 2000 (as restated), outsourcing revenues were $255.3
million representing a 20.4% increase over 1999 revenues of $212.0 million. The
increased revenue in 2000 (as restated) was due to new and existing business,
increased collection letter products business and the RWC acquisition. EBITDA
before corporate and shared expenses, but after amortization of purchased loans
and accounts receivable portfolios ("Adjusted Operating EBITDA") of $46.4
million in 2001 increased from $40.4 million in 2000 (as restated) due to
effects of the three acquisitions and the new and increased existing business
offset partially by a change in revenue mix relating to its collection letter
products from higher margin contingent fee services to lower margin fixed fee
services and higher postage expense. Adjusted Operating EBITDA of $40.4 million
in 2000 (as restated) increased 14.1% from $35.4 million in 1999. The increase
was due to the increased revenues and the RWC acquisition.
Portfolio Purchasing Services
Portfolio purchasing services reported a 3.4% increase in 2001 on revenues
of $96.0 million compared to $92.8 million in 2000. The increase was
attributable to increased servicing fees as a result of increased collections
from the increased level of off-balance sheet purchased loans and accounts
receivable portfolios during 1999, 2000 and 2001 offset partially by the
continued negative effect on revenues resulting from the shift to off-balance
sheet purchased portfolios. Revenues rose 8.2% in 2000 from $85.8 million in
1999 to $92.8 million, largely as a result of higher servicing fee revenues for
the off-balance sheet collections partially offset by lower revenues from on
balance-sheet portfolios, again, resulting from the shift from on-balance sheet
ownership of purchased loans and accounts receivable portfolios to off-balance
sheet. Adjusted Operating EBITDA increased to $16.7 million in 2001 from $13.4
million in 2000. The 24.6% increase was due to the increased servicing fee
revenues and lower portfolio amortization as a result of the shift towards
off-balance sheet purchased portfolios. For 2000, Adjusted Operating EBITDA was
$13.4 million compared to $10.2 million in 1999, an increase of 31.4% resulting
from the higher servicing fee revenues and lower portfolio amortization.
Recovery Services
Recovery services revenues decreased 4.8% in 2001 on revenue of $198.5
million compared to $208.4 million in 2000 and decreased 4.5% in 2000 to $208.4
million from $218.2 million in 1999. The decreases were primarily attributable
to lower bank card, student loan and telecommunications business offset
partially by increased government business. Largely as a result of the lower
revenues, Adjusted Operating EBITDA decreased from $53.2 million in 1999 to
$47.2 million in 2000 to $43.8 million in 2001 - a decrease of 7.2% in 2001 and
11.3% in 2000.
The Company believes that its revenues and Adjusted Operating EBITDA of
each business segment were negatively affected by the September 11, 2001
terrorist attacks.
Liquidity and Capital Resources
At December 31, 2001, the Company had cash and cash equivalents of $9.5
million. The Company's bank credit facility 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 December 31, 2001, the Company had outstanding $46.0 million
under the revolving credit facility leaving $20.4 million, after outstanding
letters of credit, available under the revolving credit facility.
Cash and cash equivalents decreased from $10.3 million at December 31, 2000
to $9.5 million at December 31, 2001 primarily due to cash utilized for the CCC
and PSC acquisitions of $21.7 million, debt repayments of $14.7 million, an
earnout payment of $3.0 million and capital expenditures of $14.2 million offset
by cash from operating activities and portfolio purchasing of $16.9 million,
borrowings under the credit facility of $14.0 million and net proceeds from the
issuance of Senior Common Stock of $22.0 million. The Company also held $25.9
million of cash for clients in restricted trust accounts at December 31, 2001.
Cash and cash equivalents increased from $6.1 million at December 31, 1999
to $10.3 million at December 31, 2000 principally due to cash from operating
activities and portfolio purchasing of $24.8 million and cash from financing
activities of $16.1 million primarily from the increase in the revolver of $19.0
million offset by the use of cash of $36.7 million primarily for capital
expenditures of $18.4 million and $16.7 million for the acquisition of certain
assets of RWC. In addition to the cash consideration for RWC of $16.7 million,
the purchase price included Voting Common Stock worth $2.0 million and a $5.0
million 18% unsecured, subordinated note (interest compounded annually and
principal and interest due September 29, 2003) along with a contingent payment
obligation due in three years. The Company also held $22.0 million of cash for
clients in restricted trust accounts at December 31, 2000.
Purchased Loans and Accounts Receivable Portfolios decreased from $24.7
million at December 31, 2000 to $17.5 million at December 31, 2001 due to the
amortization of purchased portfolios of $26.9 million offset by new on-balance
sheet portfolio purchases of $19.7 million. In addition, the Company purchased,
and sold to FINCO, loans and accounts receivable portfolios of $63.4 million and
$86.9 million during the year ended December 31, 2001 and 2000, respectively.
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, 2001 and December 31, 2000 by type of
receivable is shown below:
December 31, 2001 December 31, 2000
------------------------------ ------------------------------
Original Gross Recorded Net Original Gross Recorded Net
Principal Value Book Value Principal Value Book Value
--------------- -------------- --------------- -------------
(In millions) (In thousands) (In millions) (In thousands)
Consumer loans... $ 4,823 $ 6,829 $ 4,525 $ 9,477
Student loans.... 343 439 343 653
Credit cards..... 2,147 4,966 1,515 9,292
Health clubs..... 1,735 4,330 1,661 5,118
Commercial....... 668 913 129 150
------- ------- ------- -------
$ 9,716 $17,477 $ 8,173 $24,690
======= ======= ======= =======
Net deferred tax assets were zero at December 31, 2001 and 2000 due to a
valuation allowance of $100.7 million and $94.6 million, respectively. The
Company's deferred tax assets at December 31, 2001 and December 31, 2000 relate
principally to net operating loss carryforwards and future deductible
differences. The realization of these assets is dependent on generating
sufficient taxable income prior to expiration of the loss carryforwards in years
through 2021. At December 31, 2001, the Company has a cumulative valuation
allowance of $100.7 million to reflect management's assessment, based on the
weight of the available evidence of current and projected future book taxable
income, that there is significant uncertainty that any of the benefits from the
deferred tax assets will be realized. For all federal tax years since the
Company's formation in September 1995, the Company has incurred net operating
losses. Since the Company has a history of generating net operating losses and
is expected to continue to incur significant interest expense, management does
not expect the Company to generate taxable income in the foreseeable future
sufficient to realize tax benefits from the net operating loss carryforwards or
the future reversal of the net deductible temporary differences. The amount of
the deferred tax assets considered realizable, however, is subject to
reassessment in future years if estimates of future taxable income during the
carryforward period change.
The Company's current debt structure at December 31, 2001 consists of
$433.5 million indebtedness under the bank credit facility, $100.0 million 11%
Senior Subordinated Notes (the "Notes") and other indebtedness of $5.5 million.
See Note 6 of the Consolidated Financial Statements of the Company included
elsewhere herein for a description of the bank credit facility.
The Notes and the bank 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 facility and the Notes
significantly impact the Company's liquidity requirements. Additionally, future
portfolio purchases may require significant financing or investment. The Company
anticipates that its operating cash flow together with availability under the
bank credit facility will be sufficient to fund its anticipated future operating
expenses and to meet its debt service requirements as they become due. 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.
The Company's contractual obligations at December 31, 2001 are summarized
as follows (in thousands):
Less than 1-3 4-5 After 5
Total 1 year years years years
-------- --------- -------- -------- ---------
Long-Term Debt $538,590 $ 17,590 $279,250 $241,750 $ -
Capital Lease Obligations 478 238 240 - -
Operating Leases 91,170 20,149 46,832 12,164 12,025
-------- --------- -------- -------- ---------
Total Contractual Cash
Obligations $630,238 $ 37,977 $326,322 $253,914 $ 12,025
======== ========= ======== ======== =========
A subsidiary of the Company has several Portfolio Flow Purchase Agreements, no
longer than one year, whereby the subsidiary has a monthly commitment to
purchase nonperforming loans meeting certain criteria for an agreed upon price
subject to due diligence. The monthly obligations cannot be determined, however,
the bank credit facility limits total annual on-balance sheet portfolio
purchases to $20.0 million.
In October of 1998, a special-purpose finance company, OSI Funding Corp.,
formed by the Company, entered into a revolving warehouse financing arrangement
("Warehouse Facility") for up to $100.0 million of funding capacity for the
purchase of loans and accounts receivable over its five year term. In connection
with the Recapitalization, OSI Funding Corp. converted to a limited liability
company and is now OSI Funding LLC ("FINCO"), a bankruptcy remote,
non-consolidated subsidiary of the Company, with the Company owning
approximately 29% of the voting rights. An unrelated third party holds the
majority voting rights of FINCO and has decision-making authority over FINCO's
operations. The Company believes this arrangement will provide it with expanded
portfolio purchasing capability in a very opportunistic buying market at a lower
cost of capital. Sales of purchased loans and accounts receivable portfolios by
the Company to FINCO were in the same amount and occurred shortly after such
portfolios were acquired by the Company from various unrelated sellers. At
December 31, 2001 and 2000, FINCO had purchased loans and accounts receivable
portfolios of $75.9 million and $76.9 million, respectively. At December 31,
2001 and 2000, FINCO had outstanding commercial paper borrowings of $66.4
million and $67.6 million, respectively. These borrowings are without recourse
to the Company.
As noted above, FINCO is a special purpose and bankruptcy remote entity
that is not consolidated by the Company. The Company accounts for its investment
in FINCO under the equity method of accounting. The Company does not consolidate
FINCO because the unrelated third party investor in FINCO holds the majority
voting rights of FINCO, has decision-making authority over the operations of
FINCO, including the authority to make all decisions and to take all actions
with respect to the retention or removal of OSI as a provider of collection
services for FINCO's portfolios, and maintains a substantial equity investment
in FINCO. The FASB is currently reviewing the rules surrounding special purpose
entities. The FASB has issued a preliminary draft of proposed rules regarding
the consolidation of special purpose entities. The FASB expects to finalize this
project by August of 2002. If the Company were required to adopt the rules
prescribed in the current FASB project, it would be required to consolidate
FINCO. If required to consolidate FINCO, the Company could possibly be in
violation of its debt covenants and would be required to seek a waiver or amend
its debt agreements. The following provides summary financial information for
the Company assuming FINCO was consolidated, and compares that to similar
information currently reported by the Company with FINCO accounted for under the
equity method, at the end of each period presented:
2001 2000 (As Restated)
---------------------------- --------------------------
Equity Consolidation Equity Consolidation
Method Method Method Method
---------- ---------------- ---------- -------------
(In thousands)
Revenues $612,346 $678,868 $541,076 $590,827
Operating income 46,663 51,673 36,420 40,783
Net loss (13,355) (11,955) (25,108) (24,406)
EBITDA 104,569 171,091 96,397 146,148
Receivables 17,477 93,398 24,690 101,598
Total assets 640,210 708,388 632,647 701,040
Total debt 539,020 605,411 539,463 607,099
Stockholders'
(deficit) (154,075) (148,747) (134,412) (130,475)
As a result of the restatement of financial results as discussed in Note 2 of
the Company's financial statements included herein, the Company was in breach of
certain covenants, representations and warranties in each of its bank credit
facility and the Warehouse Facility. In response, the Company and the lenders to
the bank credit facility amended the facility effective April 10, 2002. The
amendment to the bank credit facility includes provisions that amend the
financial covenants, waive certain existing defaults of covenants and breaches
in representations and warranties, increase the interest rate on borrowings
pursuant to the facility (as discussed below), and, during 2002, reduce the
Company's availability under its bank credit facility by $5 million, and limit
capital expenditures, investments and acquisitions. In connection with the
amendment, the Company also issued 4,150 shares of its Series B Junior Preferred
Stock with attached warrants to acquire 42,347 shares of the Company's Senior
Common Stock to Madison Dearborn Capital Partners III, L.P. and Madison Dearborn
Special Equity III, L.P. for a total purchase price of $4.15 million. The
proceeds of this sale were used to repay the Revolving Facility in the amount of
$2.075 million and the balance pro-rata to the Term A and B loans, as provided
in the bank credit facility. From April 10, 2002 until such time as the Company
delivers to the lenders a compliance certificate for the period ended December
31, 2002, borrowings under the Revolving Facility and Term A Loan of the Credit
Facility will bear interest, at the Company's option, at (a) the lender's prime
rate, plus 2.75% or (b) the Eurodollar rate plus 3.75%. Borrowings under the
Term B Loan will bear interest, at the Company's option, at (a) the lenders'
prime rate plus 3.50% or (b) the Eurodollar rate plus 4.50%. The amortization
and maturity were not amended. Following this amendment, the Company is in
compliance with the Credit Facility and, subject to the Warehouse Facility
issues discussed below, expects to be in compliance throughout 2002.
The Company has also received a waiver from the lender under the Warehouse
Facility for certain breaches of covenants, representations and warranties with
respect to periods through year-end 2001. Since the Company, on an ongoing
basis, will continue to be in breach of certain financial covenants,
representations and warranties, it has initiated discussions with the lender
under the Warehouse Facility for the purpose of seeking to amend such facility
to cure such breaches, although there can be no assurances that the Company will
be successful in negotiating such an amendment. If the Company is unsuccessful
in negotiating such an amendment, notwithstanding the waiver received, the
Company may again breach certain covenants, representations and warranties in
the Warehouse Facility and there can be no assurances that the lender will
extend the waiver to cover such breaches. On an ongoing basis, the Company has
also been engaged in discussions with certain other providers of similar
warehouse facilities. While there can be no assurances, the Company believes
that other warehouse facilities would be available on economic terms and in
amounts comparable to the Company's existing Warehouse Facility which would
allow the Company to continue its business of purchasing of loans and accounts
receivable. In the event the Company is unable to amend the current Warehouse
Facility and it is terminated and the Company is unable to enter a replacement
warehouse facility, the Company would be in default of its Credit Facility.
Capital expenditures for the year ended December 31, 2001 were $14.2
million. The Company expects to spend approximately $10.0 million on capital
expenditures (exclusive of any expenditures in connection with acquisitions) in
2002. Historical expenditures have been, and future expenditures are anticipated
to be primarily for replacement and/or upgrading of telecommunications and data
processing equipment, leasehold improvements and continued expansion of the
Company's information services systems. Subject to compliance with the
provisions of its debt agreements, the Company expects to finance future capital
expenditures with cash flow from operations, borrowings and capital leases. The
Company will reduce its future capital expenditures to the extent it is unable
to fund its capital plan. The Company believes that its facilities will provide
sufficient capacity for increased revenues and will not require material
additional capital expenditures in the next several years.
Inflation
The Company believes that inflation has not had a material impact on its
results of operations for the years ended December 31, 2001, 2000 and 1999.
Critical Accounting Policies
The results of operations of the Company are prepared in accordance with
generally accepted accounting principles in the United States. The preparation
of these financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. On an
on-going basis, management evaluates its estimates and judgments, including
those related to bad debts, supplies inventories, purchased loans and accounts
receivable portfolios, intangible assets, income taxes, environmental exposures
and other contingencies and litigation. Management bases its assumptions on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Management believes the following critical accounting policies among
others, affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements.
o The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If
the financial condition of the Company's customers were to deteriorate,
resulting in impairment in their ability to make payments, additional
allowances may be required.
o The Company records a valuation allowance to reduce its deferred tax assets
to the amount that it believes is more likely than not to be realized.
Since the Company has a history of generating net operating losses,
management does not expect the Company to generate taxable income in the
foreseeable future sufficient to realize tax benefits from the net
operating loss carryforwards or the future reversal of the net deductible
temporary differences. The amount of the deferred tax assets considered
realizable, however, is subject to reassessment in future years if
estimates of future taxable income during the carryforward period change.
Should the Company determine that it would be able to realize its deferred
tax assets in the future in excess of its net recorded amount, an
adjustment to the deferred tax assets would increase income in the period
such determination was made. To the extent the valuation allowance for
deferred tax assets is attributable to net operating losses related to
acquisitions, realization of these deferred tax assets would result in the
reduction of goodwill recorded in connection with the acquisitions.
o The Company records purchased loans and accounts receivable portfolios
("Receivables") in the normal course of business at cost. These Receivables
are reflected in the Company's consolidated balance sheet. The Company
periodically reviews all Receivables to assess recoverability. Impairments
are recognized as increased amortization expense if the expected aggregate
discounted future net operating cash flows derived from the Receivables are
less than the aggregate carrying value. This requires management to
estimate the future operating cash flows that are expected to be generated
from the Receivables and to discount the future cash flows. The discount
rate is determined at the time of purchase as the calculated internal rate
of return used in determining the Receivables purchase price. To the extent
actual cash flows differ from these projections, the Company could be
required to record additional impairment charges in future periods.
o The Company amortizes on an individual portfolio basis the cost of the
Receivables based on the ratio of current collections for a portfolio to
current and anticipated future collections including any estimated terminal
value for that portfolio. This requires management to estimate both future
collections and terminal values for individual portfolios. To the extent
actual collections differ from those projections, amortization of the cost
of the Receivables is affected. To the extent future collections, including
estimated terminal value, are less than anticipated, increased amortization
will occur in future periods. To the extent future collections are greater
than anticipated, decreased amortization will occur in future periods.
o The Company annually reviews goodwill and other intangibles to assess
recoverability. Impairment charges are recognized in operations if the fair
value of the goodwill is less than its carrying value. The fair value of
the goodwill could change in the future, primarily based on the results of
the Company's operations. This could result in impairment charges to
operations in future periods. See also the following discussion of the
impact of a new accounting standard adopted by the Company on January 1,
2002, SFAS No. 142, "Goodwill and Other Intangible Assets."
o Certain subsidiaries of the Company are parties to several pending
environmental proceedings as a result of its acquisition of Union. These
proceedings involve the Environmental Protection Agency and comparable
state environmental agencies. In addition, the Company is involved in a
number of legal proceedings and claims that occur in the normal course of
business and are routine to the nature of the Company's business. The
results of the environmental and legal proceedings and claims cannot be
predicted with certainty. However, the Company has provided for the
estimated uninsured amounts and costs associated with proceedings and
claims and, in consultation with legal counsel, believe that reserves
established for the ultimate resolution of these mattes are adequate at
December 31, 2001. However, OSI may be exposed to additional substantial
liability for these proceedings and claims as additional information
becomes available in the future. This could result in charges to operations
in future periods.
Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations. SFAS No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001 and establishes
specific criteria for recognition of intangible assets separately from goodwill.
For business combinations initiated after June 30, 2001, SFAS No. 141 also
requires that unallocated negative goodwill be written off immediately as an
extraordinary gain. In addition, SFAS No. 141 requires reclassifying existing
intangible assets that have been reported as part of goodwill, and accounting
for them separately upon adoption of SFAS No. 142 if certain criteria are met.
The adoption of SFAS No. 141 will not have a material impact on the Company's
consolidated financial statements as the Company has no negative goodwill or
intangible assets that have been reported as part of goodwill.
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 eliminates the amortization of goodwill and instead
requires goodwill to be tested for impairment annually at the reporting unit
level. Also, specifically identifiable intangible assets are required to be
amortized over their useful lives and reviewed for impairment in accordance with
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
Under SFAS No. 142, if the intangible asset has an indefinite useful life, it is
not amortized until its life is determined to be finite. The Company is required
to adopt SFAS No. 142 on January 1, 2002. SFAS No. 142 provides a staggered
timeline for completing transitional impairment testing of goodwill and
indefinite-lived intangible assets. The Company does not have any
indefinite-lived intangible assets. The Company will be required to reassess the
useful lives of intangible assets by the end of the first quarter of 2002. The
Company will be required to complete the first step of the transitional goodwill
impairment test by the end of the second quarter of 2002. If this first step
indicates transitional goodwill impairment may exist, the second step, which
results in a final determination of goodwill impairment, if any, must be
completed no later than December 31, 2002. The Company is currently evaluating
the impact of SFAS No. 142 on its financial statements. Goodwill, net of
amortization, was $421.9 million and $417.1 million at December 31, 2001 and
2000, respectively. Goodwill amortization recorded for the year ended December
31, 2001 and 2000 was $16.6 million and $15.5 million, respectively. However, as
previously noted, goodwill amortization will cease as of January 1, 2002.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets,
and as required, was adopted, by the Company on January 1, 2002. The Company
does not expect SFAS No. 144 to have a material impact on the Company's
consolidated financial statements.
Forward-Looking Statements
The following statements in this entire document are or may constitute
forward-looking statements made in reliance upon the safe harbor of the Private
Securities Litigation Reform Act of 1995: (1) statements concerning the
anticipated costs and outcome of legal proceedings and environmental
liabilities, (2) statements regarding anticipated changes in the accounts
receivable management industry, including but not limited to debt levels,
delinquencies, industry consolidation, customer consolidation and outsourcing
trends, (3) statements regarding anticipated changes in the Company's
opportunities in its industry, including but not limited to acquisitions, (4)
statements regarding the Company's plans to reduce costs and improve operational
efficiencies, (5) statements regarding the Company's ability to fund its future
operating expenses and meet its debt service requirements as they become due,
(6) statements regarding the Company's expected capital expenditures and
facilities, (7) any statements preceded by, followed by or that include the word
"believes," "expects," "anticipates," "plans", "intends," "should," "may," or
similar expressions; and (8) other statements contained or incorporated by
reference in this document regarding matters that are not historical facts.
Because such statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially include, but are not limited to: (1) the demand for the Company's
services, (2) the demand for accounts receivable management and the availability
of portfolios to purchase generally, (3) general economic conditions, (4)
changes in interest rates, (5) competition, including but not limited to pricing
pressures, (6) changes in governmental regulations including, but not limited to
the federal Fair Debt Collection Practices Act and comparable state statutes,
(7) legal proceedings, (8) environmental investigations and clean up efforts,
(9) expected synergies, economies of scale and cost savings from recent
acquisitions by the Company not being fully realized or realized within the
expected time frames, (10) costs of operational difficulties, including but not
limited to those related to integrating the operations of recently acquired
companies with the Company's operations being greater than expected, (11)
unanticipated realignment costs, (12) the Company's ability to generate cash
flow or obtain financing to fund its operations, service its indebtedness and
continue its growth and expand successfully into new markets and services either
through acquisitions or internal growth, (13) the Company's ability to amend its
Warehouse Facility to cure breaches and defaults thereunder or to obtain
replacements thereof on acceptable economic terms, (14) changes in circumstances
or the effects of new accounting standards which may require the Company to
consolidate FINCO into its financial statements, and (15) factors discussed from
time to time in the Company's public filings.
These forward-looking statements speak only as of the date they were made.
These cautionary statements should be considered in connection with any written
or oral forward-looking statements that the Company may issue in the future. The
Company does not undertake any obligation to release publicly any revisions to
such forward-looking statements to reflect later events or circumstances or to
reflect the occurrence of unanticipated events.
ITEM 7A. 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
bank credit facility, the Company will employ derivative financial instruments
as part of its risk management program. The Company's objective is to manage
risks and exposures of its debt and not to trade such instruments for profit or
loss.
The Company uses interest rate swap and collared swap agreements to manage
the interest rate characteristics of its outstanding debt to a more desirable
fixed or variable rate basis or to limit the Company's exposure to rising
interest rates.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For debt
obligations, the table presents principal and cash flows and related
weighted-average interest rates by expected maturity dates. For interest rate
swap and collared swap agreements, the table presents notional amounts and
weighted-average interest rates.
Interest Rate Sensitivity
Principal (Notional) Amount by Expected Maturity
Average Interest Rate
(Dollars in millions)
Fair
2002 2003 2004 2005 2006 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
Liabilities
Long-term debt
Fixed rate - - - - $100.0 - $100.0 $80.0
Average interest rate 11.0% 11.0% 11.0% 11.0% 11.0%
Variable rate $17.5 $32.5 $40.0 $201.8 $141.7 - $433.5 $433.5
Average interest rate (1) (1) (1) (1) (1)
Interest Rate Derivative Financial Instruments Related to Debt
Interest Rate Swap
Notional amount - - - - $75.0 - $75.0 $0.2 (2)
Average pay rate (3) (3) (3) (3) (3)
Average receive rate 11.0% 11.0% 11.0% 11.0% 11.0%
Interest Rate Collared Swap
Notional amount - $150.0 - - - - $150.0 $(9.4)(2)
Strike cap rate 8.5% 8.5% - - - -
Strike floor rate 5.9% 5.9% - - - -
Strike swap rate 7.0% 7.0% - - - -
Forward rate (4) (4) - - - -
Interest Rate Collared Swap
Notional amount - - - - $75.0 - $75.0 $(2.6)(2)
Strike cap rate 6.75% 6.75% 6.75% 6.75% 6.75%
Strike floor rate (5) (5) (5) (5) (5)
Strike swap rate 5.5% 5.5% 5.5% 5.5% 5.5%
Forward rate (4) (4) (4) (4) (4)
(1) Three-month LIBOR (1.9% at December 31, 2001) plus weighted average margin
of 3.7%.
(2) Represents the fair value of the interest rate swap agreement based on the
receivable (payment) to exit the agreement at December 31, 2001.
(3) Three-month LIBOR plus margin of 5.5%.
(4) Three-month LIBOR.
(5) 2.5% from November 1, 2001 through April 30, 2002, 2.85% from May 1, 2002
through April 30, 2003 and 4.1% from May 1, 2003 through maturity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Financial Statements and Supplementary Schedule
contained in Part IV hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors of the Company are elected annually by its shareholders to serve
during the ensuing year or until a successor is duly elected and qualified.
Executive officers of the Company are duly elected by its Board of Directors to
serve until their respective successors are elected and qualified. The following
table sets forth certain information with respect to the directors and executive
officers of the Company.
Name Age Position or Office
- ---------------------- --- ----------------------------------------
Timothy G. Beffa 51 Director, President and
Chief Executive Officer
William B. Hewitt 63 Director
Timothy M. Hurd 32 Director and Vice President
Scott P. Marks, Jr. 56 Director
Jeff L. Ott 39 Director
Richard L. Thomas 71 Director
Paul R. Wood 48 Director and Vice President
Michael A. DiMarco 44 Executive Vice President -
President of Specialty Business
Bryan K. Faliero 36 Executive Vice President Operations
Michael B. Staed 55 Executive Vice President Sales -
Chief Sales and Marketing Officer
Gary L. Weller 41 Executive Vice President and
Chief Financial Officer
Timothy G. Beffa (51), President, Chief Executive Officer and Director of
Outsourcing Solutions Inc. since August 1996. From August 1995 until August
1996, Mr. Beffa served as President and Chief Operating Officer of DIMAC
Corporation ("DIMAC") and DIMAC DIRECT Inc. ("DDI") and a director of DDI. From
1989 until August 1995, Mr. Beffa served as a Vice President of DIMAC and as
Senior Vice President and Chief Financial Officer of DDI. Prior to joining
DIMAC, Mr. Beffa was Vice President of Administration and Controller for the
International Division of Pet Incorporated, a food and consumer products
company, where he previously had been Manager of Financial Analysis.
William B. Hewitt (63), Director of the Company since February 1998. Mr. Hewitt
has served as President and Chief Executive Officer of Sirius Ventures, Inc.
since February 1998. From July 1997 to January 1998, Mr. Hewitt served as
President and Chief Executive Officer of The Union Corporation ("Union") and
prior to that he served as President and Chief Operating Officer of Union since
May 1995. Prior to the Company's acquisition of Union, Mr. Hewitt also served as
Chairman and Chief Executive Officer of Capital Credit Corporation since
September 1991, Chairman and Chief Executive Officer of Interactive Performance,
Inc. since November 1995 and Chairman and Chief Executive Officer of High
Performance Services, Inc. since May 1996. Capital Credit Corporation,
Interactive Performance, Inc. and High Performance Services, Inc. were
subsidiaries of Union. He currently serves as a director of ZIBEX, Inc.
Timothy M. Hurd (32), Director and Vice President of the Company since December
1999. Mr. Hurd is a director of Madison Dearborn Partners. Prior to joining
Madison Dearborn Partners in 1995, Mr. Hurd was with Goldman Sachs & Co. from
1992 to 1994. He currently serves as a director of CapitalSource Holdings, LLC,
Pax Holding Corporation and PayPal, Inc.
Scott P. Marks, Jr. (56), Director of the Company since January 2000. Mr. Marks
is a private investor in Chicago, IL. Mr. Marks resigned from his post as Vice
Chairman and a member of the Board of Directors of First Chicago NBD Corporation
in December 1997, a post he had held since December 1995. Previously he was
Executive Vice President of First Chicago Corporation and managed their credit
card business for approximately 10 years. Mr. Marks serves as a director of ADA
Business Enterprises, the for-profit subsidiary of the American Dental
Association and Clark Polk Land LLC.
Jeff L. Ott (39), Director of the Company since April 2002. Mr. Ott is a general
partner of Gryphon GenPar II, LLC. Prior to joining Gryphon, Mr. Ott was a
managing director with DB Capital Partners, Inc. from April 1996 to May 2001.
Richard L. Thomas (71), Director of the Company since January 2000. Mr. Thomas
has been retired since May 1996. Prior to retiring, Mr. Thomas served as
Chairman of First Chicago NBD Corporation from December 1995 to May 1996. Prior
to that he served as Chairman of First Chicago Corporation from December 1991 to
December 1995. He currently serves as a director of Exelon, IMC Global Inc., The
PMI Group Inc., The Sabre Holding Corp. and Sara Lee Corporation.
Paul R. Wood (48), Director and Vice President of the Company since December
1999. Mr. Wood is a managing director of Madison Dearborn Partners. Prior to
co-founding Madison Dearborn Partners in 1993, Mr. Wood was with First Chicago
Venture Capital for nine years in various leadership positions. He currently
serves as a director of Hines Horticulture, Inc., Pax Holding Corporation and
CapitalSource Holdings, LLC.
Michael A. DiMarco (44), Executive Vice President - President of Specialty
Business since January 2001; Executive Vice President and President Collection
Services of the Company from September 1998 until December 2000. From 1991 until
September 1998, Mr. DiMarco was with Paging Network, Inc., a wireless
communications provider, serving in various leadership positions including
Senior Vice President of Operations and Executive Vice President of Sales. Prior
to that, he served in various senior leadership positions with the City of New
York, Hertz Rent-A-Car, Inc., ARA Services, Inc. and Capital Source Holdings,
LLC.
Bryan K. Faliero (36), Executive Vice President Operations since January 2001;
President Portfolio Services of the Company from October 1997 until December
2001. From June 1997 to September 1997, Mr. Faliero served as Vice President,
Business Analysis for the Company. Prior to joining the Company, he was an
associate with Booz Allen & Hamilton, a strategic consulting company based in
Chicago, concentrating on operations strategy and network rationalization.
Michael B. Staed (55), Executive Vice President Sales - Chief Sales and
Marketing Officer since January 2001; Senior Vice President and President
Outsourcing Services of the Company from July 1999 until December 2000. From May
1998 to June 1999, Mr. Staed served as Senior Vice President Marketing,
Outsourcing for the Company. Prior to joining the Company, he served as a
partner in the consulting division of Ernst & Young LLP for four years focusing
on the global telecommunications practice.
Gary L. Weller (41), Executive Vice President and Chief Financial Officer of the
Company since July 1999. From January 1998 to June 1999, Mr. Weller served as
Senior Vice President and Chief Financial Officer of Harbour Group Ltd., an
investment firm based in St. Louis. From June 1993 to December 1997, he served
as Executive Vice President and Chief Financial Officer of Greenfield
Industries, Inc.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
or accrued for by the Company on behalf of the Company's Chief Executive Officer
and the four other most highly compensated executive officers of the Company
(collectively, the "Named Officers") for the years ended December 31, 2001, 2000
and 1999.
Summary Compensation Table
Long Term
Other Annual Compensation All Other
Salary Bonus Compensation Awards Compensation
Name and ------------------
Principal Position Year ($) ($) ($) Options (#) ($)(1)
- ------------------ ----- ------- ------ ------------------ ------------------ -----------------
Timothy G. Beffa 2001 437,500 - 3,400
President and CEO 2000 371,250 375,000 30,000 3,400
1999 370,836 365,000 2,617
Michael A. DiMarco 2001 342,915 - 3,400
Executive Vice 2000 319,370 105,000 3,000 3,400
President - President 1999 325,000 100,000 42,373(2) 50,000 1,373,017
of Specialty Business
Bryan K. Faliero 2001 269,304 - 3,400
Executive Vice 2000 241,673 105,000 31,250 3,400
President Operations 1999 195,206 90,000 480,337
Mike B. Staed 2001 265,818 - 2,473
Executive Vice 2000 245,519 70,000 19,663 3,400
President Sales - 1999 228,337 70,000 16,000 947,505
Chief Sales an
Marketing Officer
Gary L. Weller 2001 292,508 - 3,400
Executive Vice 2000 269,884 120,000
President and CFO 1999(3) 134,512 310,000 50,000 10,459
(1) Amounts for 2001 and 2000 represent the Company's portion of the 401(k)
Plan contribution. In connection with the Recapitalization in 1999, Mr.
DiMarco, Mr. Faliero and Mr. Staed received change in control payments of
$1,356,875, $475,627 and $937,500, respectively. Remaining amounts in 1999
represent split dollar life insurance and long-term disability premiums
paid by the Company along with the Company's portion of the 401(k) Plan
contribution.
(2) Payment of taxes by the Company for includable W-2 relocation expenses.
(3) 1999 compensation based on an annual salary of $275,000. Mr. Weller was
hired in July 1999.
During the year ended December 31, 2001, there were no stock option grants
or exercises by the Named Officers. The following table sets forth options held
by the Named Officers at December 31, 2001.
AGGREGATED OPTION VALUES ON
DECEMBER 31, 2001
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at December 31, 2001 at December 31, 2001(1)
--------------------------- ---------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------------ ----------- ------------- ------------ -------------
Timothy G. Beffa 77,675 22,500 $2,647,863 $259,425
Michael A. DiMarco 50,750 2,250 $458,648 $25,943
Bryan K. Faliero 26,562.5 23,437.5 $540,078 $270,234
Michael B. Staed 29,915.75 14,747.25 $281,679 $170,036
Gary L. Weller 50,000 0 $450,000 0
(1) Based on a price per share of $49.00, the last price at which the Company
sold its common stock
Employment Agreements
OSI has entered into employment agreements with certain officers, including
each of the Named Officers. The employment agreements provide for initial base
salaries for Messrs. Beffa, DiMarco, Faliero, Staed and Weller of $375,000,
$325,000, $210,000, $250,000 and $275,000, respectively. Base salaries are
adjusted annually by the Compensation Committee of the Board of Directors. In
addition, the agreements provide that Mr. Beffa is eligible for an annual bonus
of up to 150% of his annual base salary and Messrs. DiMarco, Faliero, Staed and
Weller are eligible for target annual bonuses of 67%, 50%, 50% and 67%,
respectively.
On December 31 of each year, the term of each employment agreement is
automatically extended for an additional year unless the Company or the officer
gives 30 days advance termination notice. If (i) the Company terminates the
officer's employment without "cause" (as defined in the employment agreement),
(ii) the Company does not agree to extend the employment agreement upon the
expiration thereof, (iii) the officer terminates his employment because the
Company reduces his responsibilities or compensation in a manner which is
tantamount to termination of the officer's employment, or (iv) within two years
following a sale of the company (as defined in the employment agreement), the
officer resigns for "good reason" (as defined in the employment agreement), the
officer would be entitled to receive an amount equal to his total cash
compensation (base salary plus bonus, excluding, however, any change of control
bonus described below) for the preceding year and continue to receive medical
and dental health benefits for one year. If the officer's employment is
terminated by the Company "for cause", the officer is not be entitled to
severance compensation.
The employment agreements for Messrs. DiMarco, Faliero and Staed provide
that upon consummation of a sale of the Company (as defined in the employment
agreement), if the officer is employed by the Company immediately prior thereto,
he will be entitled to receive a payment from the Company in the amount of 250%
of his (i) then current base salary plus (ii) target annual bonus, reduced by
any gain for all of the options to purchase capital stock of the Company or
other equity compensation awards previously granted to the officer. Pursuant to
this provision, Messrs. DiMarco, Faliero and Staed received change in control
bonuses in 1999 upon consummation of the Recapitalization. The change in control
bonuses paid in 1999 and any future bonuses paid pursuant to this provision of
the employment agreements will be paid only if such bonus is previously approved
by a vote of more than seventy-five percent (75%) of the voting power of the
Company's outstanding stock immediately before any sale of the Company.
Director Compensation
Messrs. Hewitt, Marks and Thomas receive $2,000 per regularly scheduled
meeting of the Board of Directors. Effective May 31, 2000, Messrs. Hewitt, Marks
and Thomas each purchased 2,669 shares of the Company's voting common stock for
fair value, $37.47 per share. In conjunction with this stock purchase, each was
granted an option to purchase an additional 2,669 shares of the Company's voting
common stock at an exercise price of $37.47 per share. These options time-vest
over a three-year period and expire on the earlier of May 31, 2010 or the date
the director ceases to be a member of the Company's Board of Directors.
All directors receive reimbursement for travel and out-of-pocket expenses
incurred in connection with attendance at all such meetings. Except as described
above, no director of OSI receives any other compensation from OSI for
performance of services as a director of OSI or a member of any committee of the
Board of Directors.
Option Plans
The Company maintains the 1995 Stock Option and Stock Award Plan ("1995
Plan") and Outsourcing Solutions Inc. 2000 Equity Incentive Plan ("2000 Plan")
(collectively, the "Stock Option Plans"). The Stock Option Plans are
administered by the Compensation Committee of the Board of Directors of the
Company. Under the Stock Option Plans, the Compensation Committee may grant or
award (i) options to purchase stock of the Company, (ii) stock appreciation
rights granted in conjunction with stock options, (iii) restricted stock, or
(iv) bonuses payable in stock, to key salaried employees of the Company,
including officers, independent contractors of the Company and directors of the
Company. Options granted under the 1995 Plan may either be incentive stock
options ("ISOs"), within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended, or stock options other than ISOs ("NQSOs"), but all grants
under the 1995 Plan were NQSOs. The 2000 Plan authorizes the issuance of only
NQSOs.
A total of 1,150,000 shares of common stock of the Company are reserved for
issuance under the Stock Option Plans. As of March 28, 2002, options to purchase
up to 751,345 shares of the Company's common stock are outstanding under the
Stock Option Plans, which 475,447 shares are vested and exercisable.
Compensation Committee Interlocks and Insider Participation
Mr. Hurd serves as a member of the Company's Compensation Committee and as
a Vice President of the Company. Mr. Hurd is not, however, an employee of the
Company.
Board of Directors' Report on Executive Compensation
The Compensation Committee recommends compensation arrangements for the
Company's executive officers and administers the Company's Stock Option Plans.
The Company's compensation program was designed to be competitive with companies
similar in structure and business to the Company.
The Company's executive compensation program was structured to help the
Company achieve its business objectives by:
o Setting levels of compensation designed to attract and retain superior
executives in a highly competitive environment.
o Designing equity-related and other performance-based incentive compensation
programs to align the interests of management with the ongoing interests of
shareholders; and
o Providing incentive compensation that varies directly with both Company
financial performance and individual contributions to that performance.
The Company has used a combination of salary and incentive compensation,
including cash bonuses and equity-based incentives to achieve its compensation
goals. In accordance with the 2001 Management Incentive Plan, effective in April
2001, the Company selected executives and certain managers and other key
personnel to participate in the annual bonus program. It established target
awards for each participant, as a percent of his or her base salary. In
addition, corporate and individual business unit objectives were established for
revenue and adjusted earnings before interest, taxes, depreciation and
amortization ("EBITDA") and corporate leverage. These financial factors, along
with a component for accomplishment of individual goals, were assigned a
weighting for each participant, depending on his or her position within the
Company.
In February 2002, the head of each functional unit recommended the amount
of payout for individual performance based on an evaluation of each
participant's performance in 2001. Recommendations for the individual
performance component were reviewed and in some cases adjusted by the Chief
Executive Officer. Payout for revenue, EBITDA and leverage were determined based
on the Company's financial results for the year ended December 31, 2001. The
total amount of bonus payouts and individual payouts for each of the Company's
senior executives were presented to and approved by the Compensation Committee.
Based on the Company's revenue and EBITDA performance and year-end leverage,
none of the Named Officers received a bonus for 2001.
In June 1999, the Company entered into an amended and restated employment
agreement with Timothy G. Beffa to serve as President and Chief Executive
Officer of the Company. Under the employment agreement, Mr. Beffa's target
potential is 150% of his base salary. In March 2001, the Compensation Committee
increased Mr. Beffa's base salary from $390,000 to $450,000 and thus his target
potential to $675,000. These amounts were established by the Compensation
Committee after consideration of compensation paid to Chief Executive Officers
of comparative companies and the relationship of his compensation to that paid
to other Company senior executives. For 2001, Mr. Beffa's bonus was determined
based upon the following three factors, which were weighted as indicated: the
Company's performance against pre-established revenue and EBITDA goals (70%),
leverage goals (15%) and Mr. Beffa's attainment of pre-established objectives,
based on specific strategic initiatives to both build a suitable business
infrastructure and deliver on strategic growth initiatives (15%). Based on the
Company's revenue and EBITDA performance and year-end leverage, Mr. Beffa did
not receive a bonus for 2001.
Compensation Committee
Timothy M. Hurd
Paul R. Wood
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of April 10, 2002, the authorized capital stock of the Company consists
of (i) 900,000 shares of Senior Common Stock, par value $.01 per share, of which
489,795.93 are issued and outstanding, (ii) 15,000,000 shares of Voting Common
Stock, par value $.01 per share, of which 6,088,479.30 are issued and
outstanding, (iii) 2,000,000 shares of Non-Voting Common Stock, par value $.01
per share, of which 480,321.30 are issued and outstanding, (iv) 200,000 shares
of 14% Mandatorily Redeemable Senior Preferred Stock, no par value, of which
100,000 are issued and outstanding and (v) 50,000 shares of Junior Preferred
Stock, no par value, of which 11,150 are issued and outstanding.
The following table sets forth the number and percentage of shares of each
class of the Company's capital stock beneficially owned as of April 10, 2002 by
(i) each person known to the Company to be the beneficial owner of more than 5%
of any class of the Company's voting equity securities, (ii) each of the
Company's directors and nominees, (iii) each of the Named Officers, and (iv) all
directors and executive officers of the Company as a group.
Amount and
Nature of
Beneficial Percent of
Title of Class Name and Address Beneficial Owner Ownership Class (1)
- ------------------------ ------------------------------------------------ ---------------- -------------
Senior Common Stock Gryphon Partners II, L.P. (2) 800,320.13 90.7%
Gryphon Partners II-A, L.P. (2) 800,320.13 90.7%
Jeff L. Ott (2) 800,320.13 90.7%
Madison Dearborn Capital Partners III, L.P. (3) 17,346.94 3.6%
Madison Dearborn Special Equity III, L.P. (3) 17,346.94 3.6%
All directors and executive officers as a group 425,510.21 86.9%
Voting Common Stock Madison Dearborn Capital Partners III, L.P.(3) 4,536,367.84 74.5%
Madison Dearborn Special Equity III, L.P. (3) 4,536,367.84 74.5%
Special Advisors Fund I, L.L.C. (3) 4,536,367.84 74.5%
Timothy M. Hurd (3) 4,536,367.84 74.5%
Paul R. Wood (3) 4,536,367.84 74.5%
Timothy G. Beffa (4) 104,363.02 1.7%
Michael A. DiMarco (4) 57,750.00 *
Bryan K. Faliero (4) 36,570.00 *
Michael B. Staed (4) 35,253.35 *
Gary L. Weller (4) 63,344.01 1.0%
All directors and executive officers as a group 4,833,648.22 76.4%
Junior Preferred Stock Timothy G. Beffa 81.65 1.2%
Bryan K. Faliero 2.48 *
All directors and executive officers as a group 84.13 1.2%
Series B Junior Madison Dearborn Capital Partners III, L.P.(3) 4,150.00 100.0%
Preferred Stock Madison Dearborn Special Equity III, L.P. (3) 4,150.00 100.0%
* Represents less than one percent.
(1) The information as to beneficial ownership is based on statements furnished
to the Company by the beneficial owners. As used in this table, "beneficial
ownership" means the sole or shared power to vote, or direct the voting of
a security, or the sole or shared investment power with respect to a
security (i.e., the power to dispose of, or direct the disposition of a
security). A person is deemed as of any date to have "beneficial ownership"
of any security that such person has the right to acquire within 60 days
after such date. For purposes of computing the percentage of outstanding
shares held by each person named above, any security that such person has
the right to acquire within 60 days of the date of calculation is deemed to
be outstanding, but is not deemed to be outstanding for purposes of
computing the percentage ownership of any other person.
(2) Includes 381,340.41 shares owned by Gryphon Partners II, L.P. (""GPII") and
26,822.86 shares owned by Gryphon Partners II-A, L.P. ("GPII-A and together
with GPII, "Gryphon") with each entity managed by or affiliated with
Gryphon GenPar II, LLC. Mr. Ott is a general partner of Gryphon GenPar II,
LLC, general partner of GPII and GPII-A. Gryphon has the right but not the
obligation to purchase from the Company up to an aggregate of 392,156.86
shares of Senior common stock anytime prior to April 16, 2002. Gryphon
Partners II, L.P. and Gryphon Partners II-A, L.P. have pledged their shares
of the Company's common stock as security under the Company's Credit
Agreement. In addition, Gryphon Partners II, L.P. and Gryphon Partners
II-A, L.P. are parties to Amended and Restated Stockholders Agreement,
dated as of April 16, 2001, among the Company and substantially all of the
Company's stockholders, under which Madison Dearborn Capital Partners III,
L.P., as principal investor, may designate individuals to serve as
directors of the Company. The Amended and Restated Stockholders Agreement
also includes restrictions on the transfer of capital stock, and provides
for registration, preemptive, tag along and drag along rights granted to
the parties thereto, including Gryphon. Furthermore, the Company, Madison
Dearborn Capital Partners III, L.P. and Gryphon are parties to a Voting
Agreement pursuant to which Gryphon may designate one individual to be
elected to the Company's Board of Directors. The address of the Gryphon
entities is c/o Gryphon GenPar II, LLC, One Embarcadero Center, Suite 2750,
San Francisco, CA 94111.
(3) Includes (i) 16,970.13 shares of Senior Common Stock, 4,433,913.11 shares
of Voting Common Stock and 4,059.85 shares of Series B Junior Preferred
Stock owned by Madison Dearborn Capital Partners III, L.P., (ii) 376.81
shares of Senior Common Stock, 98,452.05 shares of Voting Common Stock and
90.15 shares of Series B Junior Preferred Stock owned by Madison Dearborn
Special Equity III, L.P., and (iii) 4,002.68 shares of Voting Common Stock
owned by Special Advisors Fund I, L.L.C. with each entity managed by or
affiliated with Madison Dearborn Partners, LLC. Messrs. Hurd and Wood are
managing directors of Madison Dearborn Partners, LLC. Madison Dearborn
Capital Partners III, L.P., Madison Dearborn Special Equity III, L.P. and
Special Advisors Fund I, L.L.C. have pledged their shares of the Company's
common stock as security under the Company's Credit Agreement. In addition,
under the Amended and Restated Stockholders Agreement, dated as of April
16, 2001, among the Company and substantially all of the Company's
stockholders, Madison Dearborn Capital Partners III, L.P., as principal
investor, may designate individuals to serve as directors of the Company.
The Amended and Restated Stockholders Agreement also includes restrictions
on the transfer of capital stock, and provides for registration,
preemptive, tag along and drag along rights granted to the parties thereto,
including Madison Dearborn Capital Partners III, L.P. and certain of its
affiliates. The address of all the above-mentioned entities is c/o Madison
Dearborn Partners, LLC, 3 First National Plaza, Suite 3800, Chicago, IL
60602.
(4) Includes vested options to acquire the following number of shares of the
Company's common stock: Mr. Beffa 77,675; Mr. DiMarco 50,750; Mr. Faliero
26,562.5; Mr. Staed 29,915.75 and Mr. Weller 50,000. The address of Messrs.
Beffa, DiMarco, Faliero, Staed and Weller is c/o Outsourcing Solutions
Inc., 390 South Woods Mill Rd., Suite 350, Chesterfield, MO 63017.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Advisory Services Agreement
On September 21, 1995 the Company entered into an Advisory Services
Agreement (the "Advisory Services Agreement") with MDC Management Company III,
L.P. ("MDC Management"), then an affiliate. Under the Advisory Services
Agreement, the Company received consulting, financial, and managerial functions
for a $300,000 annual fee. On December 10, 1999, in conjunction with the
Recapitalization, the Advisory Services Agreement was amended and assigned to
Madison Dearborn Partners, Inc. ("MDP"). As amended, the annual fee under the
Advisory Services Agreement is $500,000. The Advisory Services Agreement expires
September 21, 2005 and is renewable annually thereafter, unless terminated by
the Company. The Company may terminate the Advisory Services Agreement at any
time for cause by written notice to MDP authorized by a majority of the
directors other than those who are partners, principals or employees of MDP or
any of its affiliates. The Advisory Services Agreement may be amended by written
agreement of MDP and the Company. The Company believes that the terms of and
fees paid for the professional services rendered are at least as favorable to
the Company as those which could be negotiated with a third party. In 2001, the
Company paid $500,000 under the Advisory Services Agreement for MDP's
professional services.
Consulting Agreements
On January 26, 1998, the Company entered into a one-year Consulting
Agreement with William B. Hewitt, a director of the Company. Under the original
Consulting Agreement, Mr. Hewitt provided consulting assistance with the growing
outsourcing services of the Company at 80% of normal working hours. In addition,
Mr. Hewitt received options to purchase 10,000 shares of common stock of the
Company, which options in accordance with their terms became vested and
exercisable upon consummation of the Recapitalization. On January 25, 1999, the
Consulting Agreement was extended through March 31, 1999 and at the same time
the Consulting Agreement was renewed for the period April 1, 1999 through March
31, 2000, with the consulting services reduced to a maximum of 50 days
(approximately 20% of normal working hours). Beginning April 1, 2000, Mr. Hewitt
agreed to perform consulting services as mutually agreed from time to time. For
the year ended December 31, 2001, Mr. Hewitt did not perform any consulting
services under this arrangement.
Indebtedness of Management
During 2000, the Company issued 26,688.02, 10,008 and 13,344.01 shares of
its voting common stock at fair value to Messrs. Beffa, Faliero and Weller,
respectively in exchange for cash and interest bearing notes secured by the
shares along with certain personal assets. At December 31, 2001, the outstanding
indebtedness under the notes for Messrs. Beffa, Faliero and Weller was
approximately $1,114,000, $401,000 and $446,000, respectively, which includes
the outstanding principal balance and interest. The interest rate on Mr. Beffa's
and Mr. Weller's note is 6.71% per annum and on Mr. Faliero's note, the interest
rate is 6.01% per annum.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
See index on page 50 for a listing of consolidated financial
statements filed with this report.
2. Financial Statement Schedule
See index on page 50 for a listing of consolidated financial
statements schedule required to be filed by Item 8 of this Form 10-K.
3. Exhibits
Exhibit No.
2.1 StockSubscription and Redemption Agreement by and among Madison Dearborn
Capital Partners III, L.P., the Company and certain stockholders,
optionholders and warrantholders of the Company, dated as of October
8, 1999, as amended (incorporated herein by reference to Exhibit 2 of
the Company's Current Report on Form 8-K filed on December 23, 1999).
2.2 StockSubscription Agreement by and among Gryphon Partners II, L.P.,
Gryphon Partners II-A, L.P., Outsourcing Solutions Inc., and the
additional investors, dated April 3, 2001 (incorporated herein by
reference to Exhibit 2.2 of the Company's Form 10-Q for the period
ended June 30, 2001).
2.3 Assignment and Stock Purchase Agreement dated as of December 10, 1999
by and among Outsourcing Solutions Inc., Madison Dearborn Capital
Partners III, L.P., and certain other parties thereto (incorporated
herein by reference to Exhibit 2.5 of the Company's Form 10-K for the
period ended December 31, 1999).
2.4 Purchase Agreement dated as of December 10, 1999, by and among
Outsourcing Solutions Inc. and certain other parties thereto
(incorporated herein by reference to Exhibit 2.6 of the Company's Form
10-K for the period ended December 31, 1999).
2.5 Junior Preferred Stock Purchase Agreement, dated as of December 10,
1999, by and among Outsourcing Solutions Inc. and certain other
parties thereto (incorporated herein by reference to Exhibit 2.7 of
the Company's Form 10-K for the period ended December 31, 1999).
2.6 Unit Purchase Agreement, dated as of April 10, 2002, by and among the
Company and certain other parties thereto.
2.7 Consent Solicitation Statement, dated November 9, 1999, relating to
the Company's 11% Senior Subordinated Notes due November 1, 2006
(incorporated herein by reference to Exhibit 2.8 of the Company's Form
10-K for the period ended December 31, 1999).
2.8 Asset Purchase Agreement dated September 26, 2000 by and among
Outsourcing Solutions Inc., RWC Consulting Group, LLC, RWC Consulting
Group, Inc., and Robert W. Curtis, Jr. (incorporated herein by
reference to Exhibit 2 of the Company's Form 10-Q for the period ended
September 30, 2000).
2.9 Asset Purchase Agreement dated March 12, 2001 by and among Outsourcing
Solutions Inc., Coast to Coast Consulting, LLC, PAE Leasing, LLC,
Coast to Cost Consulting, Incorporated, Pioneer Auto Enterprises,
Inc., C2C Management, LTD., and Robert Fraiser (incorporated herein by
reference to Exhibit 2 of the Company's Form 10-Q for the period ended
March 31, 2001).
2.10 Asset Purchase Agreement and Patentable Property Purchase Agreement
dated April 30, 2001 by and among Outsourcing Solutions Inc., Pacific
Software Consulting, LLC, Pacific Software Consulting, Inc., and
Edward F. Lambert (incorporated herein by reference to Exhibit 2.1 of
the Company's Form 10-Q for the period ended June 30, 2001).
3.1 Fourth Amended and Restated Certificate of Incorporation of the
Company, as of April 16, 2001.
3.2 By-laws of the Company (incorporated herein by reference to Exhibit
3.2 of the Company's Form 10-K for the period ended December 31,
2000).
4.1 Indenture dated as of November 6, 1996 by and among the Company, the
Guarantors and Wilmington Trust Company (the "Indenture")
(incorporated herein by reference to Exhibit 4.1 of the Company's
Registration Statement on Form S-4 filed on November 26, 1996).
4.2 Specimen Certificate of 11% Senior Subordinated Note due 2006
(included in Exhibit 4.1 hereto) (incorporated herein by reference to
Exhibit 4.2 of the Company's Registration Statement on Form S-4 filed
on November 26, 1996).
4.3 Specimen Certificate of 11% Series B Senior Subordinated Note due 2006
(the "New Notes") (included in Exhibit 4.1 hereto) (incorporated
herein by reference to Exhibit 4.3 of the Company's Registration
Statement on Form S-4 filed on November 26, 1996).
4.4 Form of Guarantee of securities issued pursuant to the Indenture
(included in Exhibit 4.1 hereto) (incorporated herein by reference to
Exhibit 4.4 of the Company's Registration Statement on Form S-4 filed
on November 26, 1996).
4.5 First Supplemental Indenture dated as of March 31, 1998 by and among
the Company, the Additional Guarantors and Wilmington Trust Company
(incorporated herein by reference to Exhibit 4.5 of the Company's Form
10-K for the year ended December 31, 1998).
4.6 Second Supplemental Indenture dated as of July 16, 2000 by and among
the Company, the Additional Guarantors and Wilmington Trust Company,
as trustee (incorporated herein by reference to Exhibit 4.1 of the
Company's Form 10-Q for the period ended September 30, 2000).
4.7 Third Supplemental Indenture dated as of September 29, 2000 by and
among the Company, the Additional Guarantors and Wilmington Trust
Company, as trustee (incorporated herein by reference to Exhibit 4.2
of the Company's Form 10-Q for the period ended September 30, 2000).
4.8 Fourth Supplemental Indenture dated as of March 12, 2001 by and among
the Company, the Additional Guarantors and Wilmington Trust Company,
as trustee (incorporated herein by reference to Exhibit 4 of the
Company's Form 10-Q for the period ended March 31, 2001).
4.9 Fifth Supplemental Indenture dated as of April 30, 2001 by and among
the Company, the Additional Guarantor and Wilmington Trust Company, as
trustee (incorporated herein by reference to Exhibit 4 of the
Company's Form 10-Q for the period ended June 30, 2001).
4.10 Release of Subsidiary Guarantee of OSI Education Services, Inc.
(incorporated herein by reference to Exhibit 4.3 of the Company's Form
10-Q for the period ended September 30, 2000).
10.1 Amended and Restated Stockholders Agreement dated as of April 16, 2001
by and among the Company and various stockholders of the Company.
10.2 Advisory Services Agreement dated September 21, 1995 between the
Company and Madison Dearborn Partners, Inc., as assignee from MDC
Management Company III, L.P. as amended by Assignment Agreement dated
as of December 10, 1999 by and between Madison Dearborn Partners,
Inc., the Company and MDC Management Company III, L.P. (incorporated
herein by reference to Exhibit 10.2 of the Company's Form 10-K for the
period ended December 31, 1999).
10.3 Amended and Restated Registration Rights Agreement dated April 16,
2001, by and among Outsourcing Solutions Inc., Madison Dearborn
Partners III, L.P. and certain other parties thereto.
10.4 Registration Rights Agreement dated December 10, 1999, by and among
the Company and certain other parties thereto (incorporated herein by
reference to Exhibit 10.4 of the Company's Form 10-K for the period
ended December 31, 1999).
10.5 Voting Agreement.
10.6 Amended and Restated Employment Agreement dated as of June 4, 1999
between the Company and Timothy G. Beffa (incorporated herein by
reference to Exhibit 10.5 of the Company's Form 10-K for the period
ended December 31, 1999).
10.7 Amended and Restated Employment Agreement dated as of June 4, 1999
between the Company and Michael A. DiMarco (incorporated herein by
reference to Exhibit 10.6 of the Company's Form 10-K for the period
ended December 31, 1999).
10.8 Employment Agreement dated as of June 4, 1999 between the Company and
Bryan K. Faliero (incorporated herein by reference to Exhibit 10.7 of
the Company's Form 10-K for the period ended December 31, 1999).
10.9 Amended and Restated Employment Agreement dated as of June 4, 1999
between the Company and Michael B. Staed (incorporated herein by
reference to Exhibit 10.8 of the Company's Form 10-K for the period
ended December 31, 1999).
10.10 Employment Agreement dated July 5, 1999 between the Company and Gary
L. Weller (incorporated herein by reference to Exhibit 10.9 of the
Company's Form 10-K for the period ended December 31, 1999).
10.11 Consulting Agreement dated as of February 6, 1998 between the Company
and William B. Hewitt as amended January 25, 1999 (incorporated herein
by reference to Exhibit 10.6 of the Company's Form 10-K for the year
ended December 31, 1998).
10.12 1995 Stock Option and Stock Award Plan of the Company (incorporated
herein by reference to Exhibit 10.31 of the Company's Registration
Statement on Form S-4 filed on November 26, 1996).
10.13 First Amendment to 1995 Stock Option and Stock Award Plan of the
Company (incorporated herein by reference to Exhibit 10.13 of the
Company's Form 10-K for the year ended December 31, 1997).
10.14 Form of Non-Qualified Stock Option Award Agreement [B], as amended
(incorporated herein by reference to Exhibit 10.14 of the Company's
Form 10-K for the period ended December 31, 1999).
10.15 Form of Non-Qualified Stock Option Award Agreement [E] (incorporated
herein by reference to Exhibit 10.15 of the Company's Form 10-K for
the period ended December 31, 1999).
10.16 Outsourcing Solutions Inc. 2000 Equity Incentive Plan (incorporated
herein by reference to Exhibit 10.16 of the Company's Form 10-K for
the period ended December 31, 2000).
10.17 Form of Non-Qualified Stock Purchase and Option Award Agreement [F]
(incorporated herein by reference to Exhibit 10.4 of the Company's
Form 10-Q for the period ended June 30, 2000).
10.18 Form of Director Stock Purchase and Option Agreement (incorporated
herein by reference to Exhibit 10.3 of the Company's Form 10-Q for the
period ended June 30, 2000).
10.19 Management Stock Purchase Agreement, Non-Recourse Secured Promissory
Note and Management Stock Pledge Agreement dated as of April 19, 2000
between the Company and Timothy Beffa (incorporated herein by
reference to Exhibit 10.1 of the Company's Form 10-Q for the period
ended June 30, 2000).
10.20 Management Stock Purchase Agreement, Promissory Note and Management
Stock Pledge Agreement dated as of April 19, 2000 between the Company
and Gary Weller (incorporated herein by reference to Exhibit 10.2 of
the Company's Form 10-Q for the period ended June 30, 2000).
10.21 Management Stock Purchase Agreement, Promissory Note and Management
Stock Pledge Agreement dated as of November 1, 2000 between the
Company and Bryan Faliero (incorporated herein by reference to Exhibit
10.21 of the Company's Form 10-K for the period ended December 31,
2000).
10.22 2001 Management Incentive Plan (incorporated herein by reference to
Exhibit 10 of the Company's Form 10-Q for the period ended June 30,
2001).
10.23 Outsourcing Solutions Inc. Deferred Compensation Plan (incorporated
herein by reference to Exhibit 10.23 of the Company's Form 10-K for
the period ended December 31, 2000).
10.24 Earn-out Agreement dated October 8, 1997 by and among NSA Acquisition
Corporation, Outsourcing Solutions Inc., North Shore Agency, Inc.,
Automated Mailing Services, Inc., Mailguard Security Systems, Inc.,
and DMM Consultants (incorporated herein by reference to Exhibit 10.17
of the Company's Form 10-K for the year ended December 31,1997).
10.25 Credit Agreement dated as of November 30, 1999 among the Company, the
Lenders listed therein, DLJ Capital Funding, Inc., as the Syndication
Agent, and Fleet National Bank, as the Administrative Agent
(incorporated herein by reference to Exhibit 10.18 of the Company's
Form 10-K for the year ended December 31, 1999).
10.26 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 (incorporated herein by reference to Exhibit 10.1 of the
Company's Form 10-Q for the period ended March 31, 2001).
10.27 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 (incorporated herein by reference to Exhibit 10.2 of the
Company's Form 10-Q for the period ended March 31, 2001).
10.28 Third Amendment to Credit Agreement dated as of January 24, 2002 among
the Company, the Lenders listed therein, Credit Suisse First Boston
(as successor in interest of DLJ Capital Funding, Inc.), as the
Syndication Agent, and Fleet National Bank, as the Administrative
Agent.
10.29 Fourth Amendment to Credit Agreement dated as of April 8, 2002 among
the Company, the Lenders listed therein, Credit Suisse First Boston
(as successor in interest of DLJ Capital Funding, Inc.), as the
Syndication Agent, and Fleet National Bank, as the Administrative
Agent.
21 Subsidiaries of registrant.
(b) Reports on Form 8-K
There were no reports on Form 8-K for the three-month period ended December
31, 2001.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/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: April 15, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/Timothy G. Beffa President and Chief Executive April 15, 2002
- ------------------------
Timothy G. Beffa Officer, Director
/s/William B. Hewitt Director April 15, 2002
- ------------------------
William B. Hewitt
/s/Timothy M. Hurd Director and Vice President April 15, 2002
- ------------------------
Timothy M. Hurd
/s/Scott P. Marks, Jr. Director April 15, 2002
- ------------------------
Scott P. Marks, Jr.
/s/Jeff L. Ott Director April 15, 2002
- ------------------------
Jeff L. Ott
/s/Richard L. Thomas Director April 15, 2002
- ------------------------
Richard L. Thomas
/s/Paul R. Wood Director and Vice President April 15, 2002
- ------------------------
Paul R. Wood
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENT
SCHEDULE
Page
----
Consolidated Financial Statements
Outsourcing Solutions Inc. and Subsidiaries
Reports of Independent Accountants................................... F-1
Consolidated Balance Sheets at December 31, 2001 and 2000............ F-3
Consolidated Statements of Operations for the years
ended December 31, 2001, 2000 and 1999........................... F-4
Consolidated Statements of Stockholders' Deficit for the
years ended December 31, 2001, 2000 and 1999..................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999................................. F-7
Notes to Consolidated Financial Statements........................... F-9
Consolidated Financial Statement Schedule
Report of Independent Accountants......................................... F-34
Schedule II - Valuation and Qualifying Accounts and Reserves.............. F-35
Report of Independent Accountants
To the Stockholders and Board of Directors of Outsourcing Solutions Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 44, present fairly, in all material
respects, the financial position of Outsourcing Solutions Inc. and its
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America. In addition, in our opinion, the financial
statement schedule listed in the index appearing under Item 14(a)(2) on page 44
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. The consolidated financial statements of the
Company for the year ended December 31, 1999 were audited by other independent
accountants whose report dated March 28, 2000 expressed an unqualified opinion
on those statements.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
March 22, 2002,
except for Notes 2, 22 and 24 which are as of April 12, 2002
Report of Independent Accountants
To the Stockholders of Outsourcing Solutions Inc.:
We have audited the consolidated statements of operations, stockholders'
(deficit) and cash flows of Outsourcing Solutions Inc. and subsidiaries for the
year ended December 31, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements of Outsourcing Solutions
Inc. and subsidiaries present fairly, in all material respects, the consolidated
results of their operations and their cash flows for the year ended December 31,
1999 in conformity with accounting principles generally accepted in the United
States of America.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
St. Louis, Missouri
March 28, 2000
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2001 AND 2000 (As Restated)
(In thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
ASSETS 2000
As Restated
2001 (Notes 2 & 22)
---- --------------
Cash and cash equivalents $ 9,535 $ 10,273
Cash and cash equivalents held for clients 25,920 21,970
Accounts receivable - trade, less allowance
for doubtful receivables of $1,080 and $447 60,100 61,325
Purchased loans and accounts receivable
portfolios 17,477 24,690
Property and equipment, net 46,952 46,601
Goodwill, less accumulated amortization of
$70,824 and $54,218 421,871 417,084
Deferred financing costs, less accumulated
amortization of $8,844 and $4,538 18,665 22,934
Other assets 39,690 27,770
-------- --------
TOTAL $640,210 $632,647
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable - trade $ 16,192 $ 15,896
Collections due to clients 25,920 21,970
Accrued salaries, wages and benefits 13,325 15,195
Debt 539,020 539,463
Other liabilities 76,346 71,080
Commitments and contingencies
(Notes 3, 13 and 14)
Mandatorily redeemable preferred stock;
redemption amount $140,560 and $123,115 123,482 103,455
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 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 223,277 200,537
Accumulated deficit (231,754) (198,372)
Accumulated other comprehensive loss (8,883) -
Notes receivable from management for
shares sold (1,960) (1,817)
Common stock in treasury, at cost;
3,078,249.07 shares (134,857) (134,857)
-------- --------
Total stockholders' deficit (154,075) (134,412)
--------- --------
TOTAL $640,210 $632,647
======== ========
The accompanying notes are an integral part of these
financial statements.
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 (As Restated) and 1999
(In thousands)
- --------------------------------------------------------------------------------
2000
As Restated
2001 (Notes 2 & 22) 1999
---- -------------- ----
REVENUES $ 612,346 $ 541,076 $ 504,425
EXPENSES:
Salaries and benefits 294,509 264,293 244,157
Service fees and other operating and administrative expenses 209,704 177,457 154,799
Amortization of purchased loans and accounts receivable portfolios 26,930 28,092 38,722
Amortization of goodwill and other intangibles 16,606 16,082 16,229
Depreciation expense 14,370 15,803 14,866
Compensation expense related to redemption of stock options - 187 -
Conversion, realignment and relocation expenses 3,564 2,742 5,063
Change in control bonuses, stock option redemption and other bonuses - - 10,487
Recapitalization related costs - - 6,827
--------- --------- ---------
Total expenses 565,683 504,656 491,150
--------- --------- ---------
OPERATING INCOME 46,663 36,420 13,275
INTEREST EXPENSE - Net 59,449 60,934 52,265
--------- --------- ---------
LOSS BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM (12,786) (24,514) (38,990)
PROVISION FOR INCOME TAXES 569 594 759
--------- --------- ---------
LOSS BEFORE EXTRAORDINARY ITEM (13,355) (25,108) (39,749)
EXTRAORDINARY LOSS ON EXTINGUISHMENT OF DEBT - - 4,208
--------- --------- ---------
NET LOSS (13,355) (25,108) (43,957)
PREFERRED STOCK DIVIDEND REQUIREMENTS AND
ACCRETION OF SENIOR PREFERRED STOCK 20,027 17,739 2,358
--------- --------- ---------
NET LOSS TO COMMON STOCKHOLDERS $ (33,382) $ (42,847) $ (46,315)
========== ========= =========
The accompanying notes are an integral part of these
financial statements.
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 (As Restated) and 1999
(In thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Common Stock
Non-Voting -------------------------------
Cumulative Non- Accumulated
Redeemable Voting Other
Preferred Non- Classes Paid-in Accumulated Comprehensive Notes Treasury
Stock Senior Voting Voting A, B & C Capital Deficit Income Receivable Stock Total
---------- ------ ------ ------ -------- ------- ----------- ------------- ---------- ------- ---------
BALANCE
JANUARY 1,1999 $12,167 $ - $ 35 $ - $ 18 $66,958 $(109,210) $ - $ - $ - $(30,032)
Payment of preferred
stock dividends through
issuance of
140,997.01 shares of
preferred
stock and recorded
preferred stock dividend
requirements of
$1 per share 1,762 - - - - - (1,276) - - - 486
Issuance of
186,791.67 common
shares in exchange
for MDP's
investment in
FINCO - - 2 - - 6,998 - - - - 7,000
Issuance of
5,273,037.98 voting
and 480,321.30
non-voting common
shares - - 52 5 - 215,546 - - - - 215,603
Repurchase of
common stock
and redemption of
preferred,
non-voting common,
stock options and
warrants (13,929) - 1 - (18) (93,163) - - - (115,391) (222,500)
Recapitalization
fees & expenses - - - - - - - - - (19,466) (19,466)
Accrued dividends
on mandatorily
redeemable
preferred stock - - - - - - (877) - - - (877)
Accretion of
mandatorily
redeemable
preferred stock - - - - - - (205) - - - (205)
Net loss - - - - - - (43,957) - - - (43,957)
------ ----- ------ ------ ------ ------- -------- ------- ------ ------ ------
BALANCE, DECEMBER
31, 1999 - - 90 5 - 196,339 (155,525) - - (134,857) (93,948)
Issuance of
62,050.23 voting
common
shares - - 1 - - 2,324 - - - - 2,325
Issuance of
50,040.03 voting
common
shares in exchange
for cash and notes
receivable - - 1 - - 1,874 - - (1,774) - 101
(continued)
The accompanying notes are an integral part of
these financial statements.
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 (As Restated) and 1999
(In thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Common Stock
---------------------------------
Non-voting
Cumulative Non-
Redeemable voting Accumulated
Preferred Classes Paid-in Accumulated Comprehensive Notes Treasury
Stock Senior Voting Voting A, B & C Capital Deficit Income(Loss) Receivable Stock Total
---------- ------ ------ ------ -------- ------- ------------ ------------ ---------- -------- -----
Accrued
interest on
notes
receivable - - - - - - - - (43) - (43)
Accrued
dividends on
mandatorily
redeemable
preferred stock - - - - - - (15,238) - - - (15,238)
Accretion of
mandatorily
redeemable
preferred stock - - - - - - (2,501) - - - (2,501)
Net loss As
Restated
(Notes 2 & 22) - - - - - - (25,108) - - - (25,108)
------- ----- ------ ------ ------- ------ ------- ------- ------- ------ -------
BALANCE,
DECEMBER 31,
2000 As
Restated
(Notes 2 & 22) - - 92 5 - 200,537 (198,372) - (1,817) (134,857) (134,412)
Issuance of
489,795.93 of
senior
common shares - 5 - - - 21,999 - - - - 22,004
Fair market
value
adjustments on
derivatives
(see Note 16) - - - - - - - (8,883) - - (8,883)
Non-cash
variable stock
options
compensation - - - - - 741 - - - - 741
Accrued
interest on
notes
receivable - - - - - - - - (143) - (143)
Accrued
dividends on
mandatorily
redeemable
preferred stock - - - - - - (17,445) - - - (17,445)
Accretion of
mandatorily
redeemable
preferred stock - - - - - - (2,582) - - - (2,582)
Net loss - - - - - - (13,355) - - - (13,355)
------ ----- ------ ------ ------- -------- ---------- ------- ------- -------- ---------
BALANCE,
DECEMBER 31,
2001 $ - $ 5 $ 92 $ 5 $ - $223,277 $(231,754) $(8,883) $(1,960) $(134,857) $(154,075)
====== ===== ====== ====== ======= ======== ========= ======= ======= ========== =========
The accompanying notes are an integral part of these
financial statements.
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 (As Restated) AND 1999
(In thousands)
- --------------------------------------------------------------------------------
2000
As Restated
2001 (Notes 2 & 22) 1999
---- --------------- ----
OPERATING ACTIVITIES AND PORTFOLIO PURCHASING:
Net loss $ (13,355) $ (25,108) $ (43,957)
Adjustments to reconcile net loss to net cash from operating activities and
portfolio
purchasing:
Depreciation and amortization 38,458 36,300 34,477
Amortization of purchased loans and accounts receivable portfolios 26,930 28,092 38,722
Extraordinary loss on extinguishment of debt - - 4,208
Compensation expense related to redemption of stock options and - - 4,635
repriced options
Other non-cash charges 1,968 - -
Change in assets and liabilities:
Purchases of loans and accounts receivable portfolios (19,717) (12,835) (23,176)
Other assets (8,429) (11,127) (13,245)
Accounts payable and other liabilities (8,928) 9,470 (5,316)
--------- --------- ---------
Net cash from operating activities and portfolio purchasing 16,927 24,792 (3,652)
--------- --------- ---------
INVESTING ACTIVITIES:
Payments for acquisitions, net of cash acquired (24,678) (18,316) (877)
Investment in FINCO - - (2,500)
Acquisition of property and equipment (14,159) (18,398) (18,437)
Purchases of loans and accounts receivable portfolios for resale to FINCO (63,399) (86,910) (56,664)
Sales of loans and accounts receivable portfolios to FINCO 63,399 86,910 56,664
Other - 265
--------- --------- ---------
Net cash from investing activities (38,837) (36,714) (21,549)
--------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from term loans - 150 400,000
Borrowings under revolving credit agreement 341,600 341,950 289,700
Repayments under revolving credit agreement (327,600) (322,950) (302,200)
Repayments of debt (14,670) (3,315) (397,448)
Deferred financing fees (162) (125) (21,242)
Proceeds from issuance of preferred and common stock 22,004 426 300,237
Repurchase of preferred stock, common stock and warrants - - (223,208)
Redemption of stock options - - (3,927)
Recapitalization fees - - (19,466)
--------- --------- ---------
Net cash from financing activities 21,172 16,136 22,446
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (738) 4,214 (2,755)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 10,273 6,059 8,814
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 9,535 $ 10,273 $ 6,059
========= ========= =========
(continued)
The accompanying notes are an integral part of these
financial statements.
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 (As Restated) AND 1999
(In thousands)
- --------------------------------------------------------------------------------
2000
As Restated
2001 (Notes 2 & 22) 1999
---- -------------- ----
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during year for interest $ 54,057 $ 49,151 $ 51,232
======== ======== ========
Net cash paid during year for taxes $ 469 $ 2 $ 306
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF
NON-CASH INFORMATION:
Investment in FINCO through exchange of
common stock with MDP $ - $ - $ 7,000
======== ======== ========
Accrued dividends on mandatorily
redeemable preferred stock $ 17,445 $ 15,238 $ 877
======== ======== ========
Accretion of mandatorily redeemable
preferred stock $ 2,582 $ 2,501 $ 205
======== ======== ========
Notes receivable for common stock $ - $ 1,774 $ -
======== ======== ========
Capital lease obligations incurred for
the purchase of new equipment $ 227 $ 320 $ -
======== ======== ========
Issuance of voting common stock in
partial payment of asset acquisition $ - $ 2,000 $ -
======== ======== ========
Notes payable in partial payment of
asset acquisition $ - $ 5,000 $ -
======== ======== ========
The accompanying notes are an integral part of these
financial statements.
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
(In thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - The Company is one of the largest providers of business process
outsourcing receivables services in the United States. The Company purchases and
collects portfolios of charged-off loans and accounts receivable for the
Company's own account, services accounts receivable placements on a contingent
and fixed fee basis and provides contract management of accounts receivable. The
Company's customers are mainly in the educational, utilities,
telecommunications, retail, healthcare and financial services industries. The
markets for the Company's services currently are the United States, Puerto Rico,
Canada and Mexico.
Consolidation Policy - The consolidated financial statements include the
accounts of Outsourcing Solutions Inc. ("the Company") and all of its
majority-owned subsidiaries (collectively, "OSI"). Ownership in entities of less
than 50% are accounted for under the equity method. All significant intercompany
accounts and transactions have been eliminated.
Cash and Cash Equivalents - Cash and cash equivalents consist of cash, money
market investments, and overnight deposits with original maturities of less than
three months. Cash equivalents are valued at cost, which approximates market.
Cash and cash equivalents held for clients consist of certain restricted
accounts which are used to maintain cash collected and held on behalf of OSI's
clients.
Purchased Loans and Accounts Receivable Portfolios - Purchased loans and
accounts receivable portfolios ("Receivables") acquired in the normal course of
business are recorded at cost. The Company periodically reviews all Receivables
to assess recoverability. Impairments are recognized in operations if the
expected aggregate discounted future net operating cash flows derived from the
portfolios are less than the aggregate carrying value. No impairments have been
recorded for the year ended December 31, 2001, 2000 and 1999, respectively.
The Company amortizes on an individual portfolio basis the cost of the
Receivables based on the ratio of current collections for a portfolio to current
and anticipated future collections including any terminal value for that
portfolio. Such portfolio cost is amortized over the expected collection period
as collections are received which, depending on the individual portfolio,
generally ranges from 3 to 5 years.
Revenue Recognition - Collections on Receivables owned are recorded as revenue
when cash is collected. Proceeds from strategic sales of Receivables owned are
generally recognized as revenue when received. Revenue from collections and
outsourcing services is recorded as such services are provided. Certain
collection services are provided on a contingent fee basis. For these services,
revenue is recognized when cash is collected. Deferred revenue in the
accompanying balance sheet primarily relates to certain prepaid fees for letter
services which are recognized when the letter services are provided.
Property and Equipment - Property and equipment is recorded at cost.
Depreciation is computed on the straight-line method based on the estimated
useful lives (3 years to 30 years) of the related assets. Leasehold improvements
are amortized over the term of the related lease. The Company annually reviews
property and equipment to assess recoverability. Impairments are recognized in
operations if the estimated future undiscounted cash flows derived from such
property and equipment are less than its carrying value. Management believes
there is no impairment of property and equipment at December 31, 2001.
Intangible Assets - The excess of cost over the fair value of net assets of
businesses acquired (goodwill) is amortized on a straight-line basis over 20 to
30 years. Other identifiable intangible assets are primarily comprised of the
fair value of existing account placements acquired in connection with certain
business combinations and non-compete agreements. These assets are short-lived
and are being amortized over the assets' periods of recoverability, which are
estimated to be 1 to 3 years. The Company annually reviews goodwill and other
intangibles to assess recoverability. Impairments are recognized in operations
if the estimated future operating cash flows (undiscounted and without interest
charges) derived from such intangible assets are less than its carrying value.
At December 31, 2001, the Company believes that no impairment in the carrying
value of goodwill or intangibles exists.
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 eliminates the amortization of goodwill and instead
requires goodwill to be tested for impairment annually at the reporting unit
level. Also, specifically identifiable intangible assets are required to be
amortized over their useful lives and reviewed for impairment in accordance with
Statement of Financial Accounting Standard No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Under SFAS No. 142, if the
intangible asset has an indefinite useful life, it is not amortized until its
life is determined to be finite. The Company is required to adopt SFAS No. 142
on January 1, 2002. SFAS No. 142 provides a staggered timeline for completing
transitional impairment testing of goodwill and indefinite-lived intangible
assets. The Company does not have any indefinite-lived intangible assets. The
Company will be required to reassess the useful lives of intangible assets by
the end of the first quarter of 2002. The Company will be required to complete
the first step of the transitional goodwill impairment by the end of the second
quarter of 2002. If this first step indicates transitional goodwill impairment
may exist, the second step, which results in a final determination of goodwill
impairment, if any, must be completed no later than December 31, 2002. The
Company is currently evaluating the impact of SFAS No. 142 on its financial
statements. Goodwill, net of amortization, was $421,871 and $417,084 at December
31, 2001 and 2000, respectively. Goodwill amortization recorded for the year
ended December 31, 2001 and 2000 was $16,606 and $15,484, respectively. However,
as previously noted, goodwill amortization will cease as of January 1, 2002.
Deferred Financing Costs - Deferred financing costs are being amortized over the
terms of the related debt agreements.
Income Taxes - The Company accounts for income taxes using an asset and
liability approach. The Company recognizes the amount of taxes payable or
refundable for the current year and deferred tax liabilities and assets for the
expected future tax consequences of events that have been recognized in the
consolidated financial statements. The Company evaluates the recoverability of
deferred tax assets and establishes a valuation allowance to reduce the deferred
tax assets to an amount that is more likely than not to be realized.
Environmental Costs - All of the Company's environmental proceedings relate to
discontinued operations of subsidiaries or former divisions of The Union
Corporation (See Notes 7 and 14). Costs incurred to investigate and remediate
contaminated sites are charged against the environmental reserves established in
conjunction with the Union acquisition.
Stock-Based Compensation - The Company accounts for its stock-based compensation
plans using the intrinsic value method prescribed by Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123,
Accounting for Stock-Based Compensation, requires that companies using the
intrinsic value method make pro forma disclosures of net income as if the fair
value-based method of accounting had been applied. See Note 12 for the fair
value disclosures required under SFAS No. 123.
Accounting Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Earnings Per Share - SFAS No. 128, Earnings per Share, is applicable to
companies who have publicly traded equity securities. As such, SFAS No. 128 is
not currently applicable to the Company and, accordingly, earnings per share
information is not presented.
Business Combinations - In July 2001, the FASB issued SFAS No. 141, Business
Combinations. SFAS No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001 and establishes
specific criteria for recognition of intangible assets separately from goodwill.
For business combinations initiated after June 30, 2001, SFAS No. 141 also
requires that unallocated negative goodwill be written off immediately as an
extraordinary gain. In addition, SFAS No. 141 requires reclassifying existing
intangible assets that have been reported as part of goodwill, and accounting
for them separately upon adoption of SFAS No. 142 if certain criteria are met.
The adoption of SFAS No. 141 did not have a material impact on the Company's
consolidated financial statements as the Company has no negative goodwill or
intangible assets that have been reported as part of goodwill.
Impairment or Disposal of Long-Lived Assets - In October 2001, the FASB issued
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
SFAS No. 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets, and is required to be adopted on January 1, 2002.
The Company does not expect SFAS No. 144 to have a material impact on the
Company's consolidated financial statements upon adoption.
2. RESTATEMENT OF FINANCIAL RESULTS
During the finalization of the Company's consolidated financial statements as of
and for the year ended December 31, 2001, it was determined that the
consolidated results reported in the Company's Form 10-K as of and for the year
ended December 31, 2000, as well as the unaudited consolidated quarterly results
reported in the Company's Report on Form 10-Q for the quarter ended September
30, 2001, would need to be restated for inaccurate financial reporting of
certain transactions at one of the Company's subsidiaries, North Shore Agency,
Inc. ("NSA"). The Board of Directors authorized the Audit and Compliance
Committee (the "Committee") to conduct an independent investigation, with the
assistance of special counsel retained by the Committee, to identify the causes
of these discrepancies and to make recommendations to ensure similar issues do
not recur in the future. The Committee retained Bryan Cave LLP as special
counsel, and Bryan Cave LLP engaged an independent accounting firm to assist in
the investigation. As a result of the investigation, it was determined that
certain assets were overstated (primarily accounts receivable and prepaid
postage) and trade accounts payable was understated at NSA due to the inaccurate
financial reporting of certain transactions.
As a result, the consolidated financial statements as of and for the year ended
December 31, 2000, as well as the unaudited consolidated quarterly results as of
and for the quarter ended September 30, 2001 have been restated. Comparisons of
previously reported and restated consolidated financial statements for all
periods impacted by the restatement, including annual consolidated financial
statements and unaudited quarterly financial data, are set forth in Notes 22 and
23 to the consolidated financial statements included herein.
For the year ended December 31, 2000, the previously reported consolidated
financial statements included an overstatement of revenues by $1,551 and an
understatement of operating expenses by $4,106. The impact of the inaccurate
financial reporting of certain transactions on previously reported operating
results for the year ended December 31, 2000 was to overstate operating income
by $5,657 and understate net loss and net loss to common stockholders by $5,657.
3. RECAPITALIZATION AND RECENT ACQUISITIONS
In December 1999, the Company was recapitalized in a transaction with Madison
Dearborn Capital Partners III, L.P. ("MDP") and certain of the Company's
stockholders, optionholders and warrant holders pursuant to which MDP acquired
75.9% of OSI's common stock. In conjunction with the Recapitalization, most of
the then outstanding capital stock of OSI was redeemed, the Company refinanced
its credit facility and issued $107,000 of preferred stock. The total implied
value of the Company based on the Recapitalization was approximately $790,000.
The Recapitalization had no impact on the historical basis of the Company's
assets and liabilities.
In accordance with the terms of the Recapitalization, the holders of
approximately 85.6% of shares of the Company's common stock outstanding
immediately prior to the Recapitalization received $37.47 in cash in exchange
for each of these shares. In addition, the holders of the Company's preferred
stock, non-voting common stock, warrants and stock options received $37.47 in
cash in exchange for each of these instruments. In accordance with the terms of
the Recapitalizations, all outstanding stock options that had not vested at the
date of the Recaptialization became immediately vested. Immediately following
the Recapitalization, continuing shareholders (14.4% before the
Recapitalization) owned approximately 8.5% of the outstanding shares of the
Company's voting common stock.
In connection with the Recapitalization, the Company entered into a new credit
facility providing for term loans of $400,000 and revolving loans of up to
$75,000 (see Note 6). The proceeds of the initial borrowings under the new
credit facility and the issuance of approximately $300,000 of the Company's
preferred and common stock were used to finance the payments of cash to
cash-electing shareholders, to pay the holders of stock options and stock
warrants exercised or canceled, as applicable, in connection with the
Recapitalization, to repay the Company's existing credit facility and to pay
expenses incurred in connection with the Recapitalization.
During 1999, the Company recorded $57,880 in fees and expenses associated with
the Recapitalization. The total fees and expenses consisted of: (i) fees and
expenses related to the debt and equity transactions, including bank commitment
fees and underwriting commissions; (ii) professional and advisory fees and
expenses; (iii) compensation expense relating to the payment of cash for vested
stock options and the payment of change in control bonuses to certain officers
in accordance with the terms of their respective employment agreements; and (iv)
other miscellaneous fees and expenses. The fees and expenses that could be
specifically identified as relating to the issuance of debt were capitalized and
are being amortized over the life of the debt as interest expense. The fees and
expenses that could be specifically identified as relating to the equity
transactions were charged directly to equity. Other transaction fees were
allocated between debt and equity based on the Company's estimate of the effort
spent in the activity giving rise to the fee or expense. The allocation of fees
and expenses to the debt, equity, compensation expense and Recapitalization
related costs is as follows:
Compensation Recapitalization
Debt Equity Expense Related Costs Total
------- ------- ------------ ---------------- -------
Direct costs $20,205 $18,571 $10,487 $ 6,827 $56,090
Allocated costs 895 895 - - 1,790
------- ------- ------- ------- -------
Total 21,100 $19,466 $10,487 $ 6,827 $57,880
======= ======= ======= ======= =======
In September 2000, the Company through a newly formed limited liability company,
RWC Consulting Group, LLC, acquired certain assets and assumed certain
liabilities of RWC Consulting Group, Inc. ("RWC"), a service company providing
highly-skilled consultants to banks to assist in their back office functions.
Total consideration for RWC included cash of approximately $16,968 including
transaction costs of $225, voting common stock worth $2,000 (53,376.03 shares)
and an 18% unsecured, subordinated note of $5,000 (interest compounded annually
and principal and interest due September 29, 2003). The acquisition contains a
contingent payment obligation based on the attainment of a financial performance
target over the next three years. The future contingent payment obligation, if
any, will be accounted for as additional goodwill at such time the Company
determines it is probable that the contingent payment will be made.
In March 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 contingent
payment obligation based on the attainment of a financial performance target
over the next three years. The future contingent payment obligation, if any, is
expected to be accounted for as additional goodwill at such time as the Company
determines it is probable that the contingent payment will be made.
In April 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 of
accounting. The excess of cost over the fair value of the net assets acquired
was $39,488. The cash 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 Company's consolidated financial statements at
their respective acquisition dates. No amounts have been recorded to date
relative to the contingent purchase price provisions for the respective
acquisitions noted above.
The unaudited pro forma consolidated financial data shown below presents the
consolidated financial data as if the RWC, CCC and PSC acquisitions had occurred
as of the beginning of each period presented. The unaudited results have been
prepared for comparative purposes only and do not necessarily reflect the
results of operations of the Company that actually would have occurred had the
acquisitions been consummated as of the beginning of each period presented, nor
does the data give effect to any transactions other than the acquisitions.
Unaudited
Pro Forma
-----------------------------
2001 2000
Net revenues $617,400 $579,306
======== ========
Net loss $(13,047) $(15,210)
======== ========
4. PROPERTY AND EQUIPMENT
Property and equipment, which is recorded at cost, consists of the following at
December 31:
2001 2000
---- ----
Land $ 2,109 $ 2,109
Buildings 1,917 1,917
Furniture and fixtures 13,391 10,603
Machinery and equipment 5,223 4,176
Telephone equipment 15,951 13,066
Leasehold improvements 9,685 9,056
Computer hardware and software 64,663 57,710
--------- ---------
112,939 98,637
Less accumulated depreciation (65,987) (52,036)
---------- ---------
$ 46,952 $ 46,601
========= =========
5. OTHER ASSETS
Other assets consist of the following at December 31:
2000
As Restated
2001 (Notes 2 & 22)
---- --------------
Investment in FINCO $ 12,000 $ 12,000
Receivable from FINCO 17,014 5,612
Other (primarily supplies
inventory and prepaid assets) 10,676 10,158
--------- ---------
$ 39,690 $ 27,770
========= =========
6. DEBT
Debt consists of the following at December 31:
2001 2000
---- ----
Term Loan Facility $ 387,500 $ 397,500
Revolving Credit Facility 46,000 32,000
11% Series B Senior Subordinated Notes 100,000 100,000
18% Note payable to stockholder
(See Note 3) 5,000 5,000
9% Note payable to stockholder - 4,429
Other (including capital leases) 520 534
--------- ---------
Total debt $ 539,020 $ 539,463
========= =========
On April 28, 1997, the Company registered $100,000 of 11% Series B Senior
Subordinated Notes (the "Notes") which mature on November 1, 2006. The Notes
were exchanged for the then existing unregistered $100,000 of 11% Senior
Subordinated Notes. The exchange offer was completed by May 29, 1997. Interest
on the Notes is payable semi-annually on May 1 and November 1 of each year. The
Notes are general unsecured obligations of the Company and are subordinated in
right of payment to all senior debt of the Company presently outstanding and
incurred in the future. The Notes contain certain restrictive covenants the more
significant of which are limitations on asset sales, additional indebtedness,
mergers and certain restricted payments, including dividends. Under the
Indenture governing the Notes, the Company is obligated to furnish holders of
the Notes with financial information that would be required to be contained in
filings with the Securities and Exchange Commission. The Company is furnishing
Note holders with copies of the restated financial results discussed in Note 2
and, therefore, has cured, within any applicable cure period, any default that
may have existed as a result of inaccuracies contained in any previously
furnished financial information.
In connection with the Recapitalization, the Company entered into a new credit
facility providing up to $475,000 of senior bank financing ("Credit Facility").
The proceeds of the Credit Facility were used to refinance $439,602 of
indebtedness outstanding on the date of the Recapitalization which resulted in
an extraordinary loss of $4,208 from the write-off of previously capitalized
deferred financing fees. No income tax benefit was recorded with respect to this
write-off. In addition, the Credit Facility will be used to provide for the
Company's working capital requirements and any future acquisitions.
The Credit Facility consists of a $400,000 term loan facility and a $75,000
revolving credit facility (the "Revolving Facility"). The term loan facility
consists of a term loan of $150,000 ("Term Loan A") and a term loan of $250,000
("Term Loan B"), which mature on December 10, 2005 and June 10, 2006,
respectively. The Company is required to make quarterly principal repayments on
each term loan beginning January 15, 2000 for Term Loan B and January 15, 2001
for Term Loan A. Term Loan A bears interest, at the Company's option, (a) at a
base rate equal to the greater of the federal funds rate plus 0.5% or the
lender's prime rate, plus 2.25% or (b) at the reserve adjusted Eurodollar rate
plus 3.25%. Term Loan B bears interest, at the Company's option, (a) at a base
rate equal to the greater of the federal funds rate plus 0.5% or the lender's
prime rate, plus 3.0% or (b) at the reserve adjusted Eurodollar rate plus 4.0%.
As of December 31, 2001 and 2000, the interest rate for Term Loan A was 5.68%
and 10.05%, respectively. As of December 31, 2001 and 2000, the interest rate
for Term Loan B was 6.43% and 10.80%, respectively. See Note 24 for an
explanation of interest rate adjustments for 2002 and thereafter.
The Revolving Facility has a term of six years and is fully revolving until
December 10, 2005. The Revolving Facility bears interest, at the Company's
option, (a) at a base rate equal to the greater of the federal funds rate plus
0.5% or the lender's prime rate, plus 2.25% or (b) at the reserve adjusted
Eurodollar rate plus 3.25%. The average interest rate was 5.83% and 10.04% at
December 31, 2001 and 2000, respectively. Also outstanding under the Revolving
Facility are letters of credit of $8,571, which expire at various dates within
the next year. After outstanding letters of credit, the Company had $20,429
available under the Revolving Facility at December 31, 2001.
The Credit Facility is guaranteed by substantially all of the Company's present
domestic subsidiaries and is secured by substantially all of the stock of the
Company's present domestic subsidiaries, by substantially all of the Company's
domestic property assets and by certain shares of the Company's Voting Common
Stock. The Credit Facility contains certain covenants the more significant of
which limit dividends, asset sales, acquisitions and additional indebtedness, as
well as requires the Company to satisfy certain financial performance ratios. As
discussed in Note 24, the Company amended its Credit Facility to obtain waivers
for the certain events of non-compliance since December 31, 2000 and further
amended certain of the financial performance ratios.
The Notes are fully and unconditionally guaranteed on a joint and several basis
by each of the Company's current domestic subsidiaries, with the exception of
OSI Education Services Inc., and any additional domestic subsidiaries formed by
the Company that become guarantors under the Credit Facility (the "Restricted
Subsidiaries").
The Restricted Subsidiaries are wholly-owned by the Company and constitute all
of the direct and indirect subsidiaries of the Company except for certain
subsidiaries that are individually, and in the aggregate inconsequential. The
Company is a holding company with no separate operations, although it incurs
some expenses. The Company has no significant assets or liabilities other than
the common stock of its subsidiaries, debt, related deferred financing costs and
accrued expenses. The aggregate assets, liabilities, results of operations and
stockholders' equity of the Restricted Subsidiaries are substantially equivalent
to those of the Company on a consolidated basis and the separate financial
statements of each of the Restricted Subsidiaries are not presented because
management has determined that they would not be material to investors.
Summarized combined financial information of the Restricted Subsidiaries is
shown below:
2000
As Restated
2001 (Notes 2 & 22)
---- --------------
Total assets $600,688 $591,559
======== ========
Total liabilities $149,642 $163,960
======== ========
Operating revenue $579,314 $532,642
======== ========
Income from operations $ 46,010 $ 44,978
======== ========
Net income $ 4,958 $ 8,777
======== ========
Maturities of debt and capital leases at December 31, 2001 are as follows:
Capital
Debt Leases
---- -------
2002 $ 17,590 $ 238
2003 37,500 195
2004 40,000 45
2005 201,750 -
2006 241,750 -
Thereafter - -
---------- -------
Total Payments $ 538,590 478
==========
Less amounts representing interest 48
-------
Present value of minimum lease payments $ 430
=======
7. OTHER LIABILITIES
Other liabilities consist of the following at December 31:
2001 2000
---- ----
Accrued acquisition related office closure
costs, over-market leases and other costs $ 3,676 $ 5,665
Accrued interest 9,764 11,854
Deferred revenue 10,264 10,424
Environmental reserves 19,698 21,078
Derivative hedge liability 11,934 -
Other 21,010 22,059
-------- --------
$ 76,346 $ 71,080
======== ========
The environmental reserves, on an undiscounted basis, at December 31, 2001 and
2000 are for environmental proceedings as a result of the Union acquisition.
Union and certain of its subsidiaries are parties to several pending
environmental proceedings involving the United States Environmental Protection
Agency and comparable state environmental agencies. All of these matters related
to discontinued operations of former divisions or subsidiaries of Union for
which they have potential continuing responsibility. Management, in consultation
with both legal counsel and environmental consultants, has established the
aforementioned liabilities that it believes are adequate for the ultimate
resolution of these environmental proceedings. However, Union or its
subsidiaries may be exposed to additional substantial liability for these
proceedings as additional information becomes available over the long-term. See
Note 14.
8. MANDATORILY REDEEMABLE PREFERRED STOCK
Mandatorily redeemable preferred stock consists of the following at December 31:
14% Senior
Mandatorily Junior
Redeemable Preferred
Preferred Stock Stock Total
---------------- ----------- ------------
Balance at December 31, 1999 $ 78,695 $ 7,021 $ 85,716
Accrued dividends 14,887 351 15,238
Accretion of preferred stock 2,501 - 2,501
----------- -------- ---------
Balance at December 31, 2000 $ 96,083 $ 7,372 $ 103,455
Accrued dividends 17,076 369 17,445
Accretion of preferred stock 2,582 - 2,582
----------- -------- ---------
Balance at December 31, 2001 $ 115,741 $ 7,741 $ 123,482
=========== ======== =========
On December 10, 1999, in connection with the Recapitalization, the Board of
Directors authorized 50,000 shares of Class A 14% Senior Mandatorily Redeemable
Preferred Stock, no par value and 150,000 shares of Class B 14% Senior
Mandatorily Redeemable Preferred Stock, no par value. Furthermore, the Company
issued 25,000 shares of Class A 14% Senior Mandatorily Redeemable Preferred
Stock, ("Class A"), Series A, no par value and 75,000 shares of Class B 14%
Senior Mandatorily Redeemable Preferred Stock, ("Class B"), Series A, no par
value; collectively referred to as Senior Preferred Stock; along with 596,913.07
shares of the Company's common stock, valued at $37.47 per share, for $100,000.
The Company may issue up to one additional series of each Class A and Class B
solely to the existing holders in exchange for shares of Class A, Series A or
Class B, Series A. The liquidation value of each share of Senior Preferred Stock
is $1,000 plus accrued and unpaid dividends. Dividends, as may be declared by
the Company's Board of Directors, are cumulative at an annual rate of 14% of the
liquidation value and are payable quarterly. The Company may, at its option and
upon written notice to preferred shareholders, redeem all or any portion of the
outstanding Senior Preferred Stock on a pro-rata basis at the redemption prices
in cash at a stated percentage of the liquidation value plus all accrued and
unpaid dividends. The redemption prices for Class A are 110%, 114%, 107%, 103.5%
and 100% of the liquidation value for the period December 15, 1999 through June
15, 2001, June 16, 2001 through December 14, 2003, December 15, 2003 through
December 14, 2004, December 15, 2004 through December 14, 2005 and December 15,
2005 and thereafter, respectively. The redemption price for Class B is 100% of
the liquidation value. However, on December 10, 2007, the Company must redeem
all of the shares of the Senior Preferred Stock then outstanding at a redemption
price equal to 100% of the liquidation value per share plus accrued and unpaid
dividends. Pursuant to the Company's financing arrangements, the payment of
dividends and/or the repurchase of shares of Senior Preferred Stock is allowed
as long as no default on the financing arrangements shall have occurred. The 14%
Senior Mandatorily Redeemable Preferred Stock was recorded at $77,634 to take
into account common stock issued in conjunction with the sale of the Senior
Preferred Stock and will accrete to $100,000 by December 10, 2007 using the
interest rate method.
On December 10, 1999, in connection with the Recapitalization, the Company
authorized 50,000 shares and issued 7,000 shares of Junior Preferred Stock
("Junior Preferred Shares"). The liquidation value of each Junior Preferred
Share is $1,000 plus accrued and unpaid dividends. Dividends, as may be declared
by the Company's Board of Directors, are cumulative at an annual rate of 5% of
the liquidation value until December 10, 2003 and then at an annual rate of 8%
thereafter and are payable annually; however the dividend rate will increase to
20% upon consummation of certain events. The Company will pay dividends in the
form of additional Junior Preferred Shares. The Company may, at its sole option
and upon written notice, redeem, subject to limitations, all or any portion of
the outstanding Junior Preferred Shares for $1,000 per share plus all accrued
and unpaid dividends, through the redemption date, whether or not such dividends
have been authorized or declared. However, on January 10, 2008, the Company must
redeem all of the shares of the Junior Preferred Stock then outstanding at a
redemption price equal to $1,000 per share plus accrued and unpaid dividends as
long as all of the shares of the Senior Preferred Stock have been redeemed. Upon
consummation of a primary public offering having an aggregate offering value of
at least $50,000, each holder of Junior Preferred Shares shall have the right to
convert all, but not less than all, into shares of voting common stock based
upon the public offering price.
9. STOCKHOLDERS' EQUITY AND WARRANTS
Each share of Non-Voting Common Stock is convertible at the shareholders option
into an equal number of shares of Voting Common Stock subject to the
requirements set forth in the Company's Certificate of Incorporation.
In connection with the Recapitalization, all warrants (46,088.67) then
outstanding were exchanged for cash with each holder receiving cash for the
difference between $37.47 per share and their exercise price of $12.50.
Consequently, there are no warrants outstanding at December 31, 2001 and 2000.
In 2000, the Company issued 50,040.03 shares of its Voting Common Stock at
prices approximating fair value to certain members of senior management in
exchange for cash and interest bearing notes secured by the shares along with
certain personal assets of the members of senior management. The outstanding
principal balances plus accrued interest of these notes amounted to $1,960 and
$1,817 at December 31, 2001 and 2000, respectively, and are classified as an
increase to stockholders' deficit.
In 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 MDP,
the Company's majority stockholder.
10. INCOME TAXES
Major components of the Company's income tax provision are as follows:
2001 2000 1999
---- ---- ----
Current:
Federal $ - $ - $ -
State 500 400 550
Foreign 69 194 209
--------- --------- ---------
Total current 569 594 759
--------- --------- ---------
Deferred:
Federal - - -
State - - -
Foreign - - -
--------- --------- ---------
Total deferred - - -
--------- --------- ---------
Provision for income taxes $ 569 $ 594 $ 759
========= ========= =========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax reporting purposes. The Company's
deferred income taxes result primarily from net operating loss carryforwards,
differences in loans and accounts receivable purchased, amortization methods on
other intangible assets and depreciation methods on fixed assets.
Net deferred tax assets consist of the following at December 31:
2000
As Restated
2001 (Notes 2 & 22)
---- --------------
Deferred tax assets:
Net operating loss carryforwards $ 77,662 $ 68,473
Accrued liabilities 16,044 15,894
Loans and accounts receivable (1,084) (1,176)
Property and equipment (993) 392
Intangible assets (1,963) 1,236
Tax credit carryforwards 10,625 8,375
Other 414 1,402
---------- ----------
Total deferred tax assets 100,705 94,596
Less valuation allowance (100,705) (94,596)
---------- ----------
Net deferred tax assets $ - $ -
========== ==========
The valuation allowance was $100,705 and $94,596 at December 31, 2001 and 2000,
respectively. The Company has determined the valuation allowance based upon the
weight of available evidence regarding future taxable income consistent with the
principles of SFAS No. 109, Accounting for Income Taxes. The increases in the
valuation allowance during 2001, 2000 and 1999 were primarily the result of net
changes in temporary differences, and an increase in the net operating loss and
tax credit carryforwards. The valuation allowance also includes amounts related
to previous acquisitions from years before 2001. Future realization of these
deferred tax assets would result in the reduction of goodwill recorded in
connection with the acquisitions.
The Company has federal net operating loss carryforwards of $177,699 as of
December 31, 2001 available to offset future taxable income of the consolidated
group of corporations. Since the Recapitalization transaction on December 10,
1999 constituted a change of ownership for tax purposes, tax law imposes a
limitation on the future use of the Company's net operating loss carryforwards
generated through the date of the change in ownership. The annual limit is equal
to the long-term tax-exempt bond rate times the fair imputed value of the
Company's stock immediately before the change in ownership. In addition, the
Company acquired a net operating loss carryforward of $3,800 with the
acquisition of Union that is subject to special tax law restrictions that limit
its potential benefit. These loss carryforwards expire between 2010 and 2021.
The Company also has available federal tax credit carryforwards of approximately
$778 which expire between 2003 and 2014 and federal minimum tax credit
carryforwards of approximately $759 which may be carried forward indefinitely.
The Company has various state tax credit carryforwards of approximately $8,993
with various expiration dates primarily from South Carolina, Alabama, Georgia
and Pennsylvania for new job creation and new capital investment.
Since the Company has a history of generating net operating losses, management
does not expect the Company to generate taxable income in the foreseeable future
sufficient to realize tax benefits from the net operating loss carryforwards or
the future reversal of the net deductible temporary differences. The amount of
the deferred tax assets considered realizable, however, is subject to
reassessment in future years if estimates of future taxable income during the
carryforward period change.
A reconciliation of the Company's reported income tax provision to the U.S.
federal statutory rate is as follows:
2000
As Restated
2001 (Notes 2 & 22) 1999
---- -------------- ----
Federal tax benefits
at statutory rate $ (4,347) $ (8,335) $ (13,257)
State income taxes
(net of federal tax benefits) (7,011) (9,816) (874)
Nondeductible amortization 3,551 3,546 3,753
Other 2,068 (825) 2,371
Foreign 199 194 -
Deferred tax valuation allowance 6,109 15,830 8,766
-------- ------- ---------
Provision for income taxes $ 569 $ 594 $ 759
======== ======= =========
11. RELATED PARTY TRANSACTIONS
In connection with the agreements executed in connection with the
Recapitalization discussed in Note 3, the Company paid transaction costs and
advisory fees to certain Company stockholders. Such costs were $17,092 for the
year ended December 31, 1999.
Under an Advisory Services Agreement, the Company expensed $500 in 2001 and 2000
for professional services rendered by MDP, the majority stockholder of the
Company.
Under various financing arrangements associated with the Company's Credit
Facility, the Company incurred interest expense of $2,981, $2,358 and $3,376 for
the years ended December 31, 2001, 2000 and 1999, respectively, to certain
Company stockholders of which one is a financial institution and was
co-administrative agent of the Company's prior credit facility.
12. STOCK OPTION AND AWARD PLANS
Under terms of the Company's stock option plans, selected employees, directors
and certain consultants may be granted options and other awards. The plans are
stock award and incentive plans which permit the issuance of options, stock
appreciation rights ("SARs") in tandem with such options, restricted stock, and
other stock-based awards. The plans reserved 1,150,000 Voting Common Shares for
grants and provides that the term of each award, not to exceed ten years, be
determined by the Compensation Committee of the Board of Directors (the
"Committee") charged with administering the plan.
Under the terms of certain plans, options granted may be either nonqualified or
incentive stock options and the exercise price generally may not be less than
the fair market value of a Voting Common Share, as determined by the Committee,
on the date of grant. SARs granted in tandem with an option shall be exercisable
only to the extent the underlying option is exercisable and the grant price
shall be equal to the exercise price of the underlying option. As of December
31, 2001, no SARs have been granted. The awarded stock options vest over periods
ranging from three to four years and vesting may be accelerated upon the
occurrence of a change in control as defined in the plans. The options expire
ten years after date of grant.
In June 1999, 25,500 options were repriced from a grant price of $40.00 to
$25.00. In addition, 58,500 options were repriced from a grant price of $65.00
or $50.00 to $40.00. Simultaneously, the vesting provisions of certain options
were modified to provide for pro rata vesting over a specified number of years.
Accordingly, compensation expense of $708 was recognized during 1999 as a result
of these modifications of certain options and is reflected in the accompanying
statement of operations. In addition, in connection with the Recapitalization,
certain options were exercised and the holders of such options received a cash
payment equal to the exercise price of such options and $37.47, the price per
share at which the Recapitalization was consummated.
A summary of the plans activity is as follows:
Number of Shares Weighted Average
of Stock Subject Exercise Price
to Options Per Share
---------------- ----------------
Outstanding at January 1, 1999 578,821 25.63
Granted 214,000 40.00
Forfeited (104,500) 28.52
Exercised (245,396) 18.59
--------
Outstanding at December 31, 1999 442,925 31.69
Granted 305,420 37.47
Forfeited (38,000) 40.00
Exercised (5,000) 25.00
--------
Outstanding at December 31, 2000 705,345 33.79
Granted 52,000 49.00
Forfeited (4,500) 37.47
Exercised (1,500) 37.47
--------
Outstanding at December 31, 2001 751,345 34.82
========
Exercisable shares at December 31, 2001, 2000 and 1999 were 475,447, 399,925 and
442,925, respectively.
A summary of stock options outstanding at December 31, 2001 is as follows:
Options Outstanding Options Exercisable
---------------------------------------- ----------------------
Weighted
Average
Exercise Number Remaining Exercise Number Exercise
Price Outstanding Contractual Life Price Exercisable Price
- -------------- ----------- ---------------- --------- ----------- ---------
$12.50 70,175 4.7 years $12.50 70,175 $12.50
$25.00 111,750 5.6 years $25.00 111,750 $25.00
$37.47 299,420 8.6 years $37.47 75,522 $37.47
$40.00 218,000 7.1 years $40.00 218,000 $40.00
$49.00 52,000 9.9 years $49.00 - -
------- -------
$12.50-$49.00 751,345 6.9 years $34.82 475,447 $32.01
======= =======
The Company accounts for the stock option plans in accordance with APB Opinion
No. 25, under which no compensation cost has been recognized for the majority of
stock option awards. As required by SFAS No. 123, the Company has estimated the
fair value of its option grants since January 1, 1996. The fair value for these
options was estimated at the date of the grant based on the following weighted
average assumptions:
2001 2000 1999
---- ---- ----
Risk free rate 3.59% 5.06% 5.0%
Expected dividend yield of stock 0% 0% 0%
Expected volatility of stock 0% 0% 0%
Expected life of option (years) 10.0 10.0 10.0
Since the Company's common stock is not publicly traded, the expected stock
price volatility is assumed to be zero. The weighted fair values of options
granted during 2001, 2000 and 1999 were $15.23, $14.83 and $15.74, respectively.
The Company's pro forma information is as follows:
2000
As Restated
2001 (Notes 2 & 22) 1999
---- -------------- ----
Net loss:
As reported $(13,355) $(25,108) $(43,957)
Pro forma (14,712) (26,493) (45,436)
In addition, the Committee may grant restricted stock to participants of the
plans at no cost. Other than the restrictions which limit the sale and transfer
of these shares, recipients of restricted stock awards are entitled to vote
shares of restricted stock and dividends paid on such stock. No restricted stock
has been granted as of December 31, 2001.
13. COMMITMENTS AND CONTINGENCIES
From time to time, the Company enters into servicing agreements with companies
which service loans for others. The servicers handle the collection efforts on
certain nonperforming loans and accounts receivable on the Company's behalf.
Payments to the servicers vary depending on the servicing contract. Current
contracts expire on the anniversary date of such contracts but are automatically
renewable at the option of the Company.
A subsidiary of the Company has several Portfolio Flow Purchase Agreements,
whereby the subsidiary has a monthly commitment to purchase nonperforming loans
meeting certain criteria for an agreed upon price subject to due diligence. The
duration of these agreements do not extend beyond one year. The purchases under
the Portfolio Flow Purchase Agreements were $23,890, $16,371 and $33,303, which
excludes amounts purchased and subsequently sold to FINCO (see Note 20), for the
years ended December 31, 2001, 2000 and 1999, respectively.
The Company leases certain office space and computer equipment under
non-cancelable operating leases. These non-cancelable operating leases, with
terms in excess of one year, are due in approximate amounts as follows:
Amount
--------
2002 $ 20,149
2003 17,198
2004 15,465
2005 14,169
2006 12,164
Thereafter 12,025
--------
Total lease payments $ 91,170
========
Rent expense under operating leases was $19,288, $18,372 and $16,974 for the
years ended December 31, 2001, 2000 and 1999, respectively.
14. LITIGATION AND ENVIRONMENTAL
At December 31, 2001, the Company and certain of its subsidiaries were involved
in a number of legal proceedings and claims that occurred in the normal course
of business and are routine to the nature of the Company's business. 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
December 31, 2001.
Current operations of the Company and its subsidiaries do not involve activities
materially affecting the environment. However, The Union Corporation, a
subsidiary of the Company, and certain of its subsidiaries are parties to
several pending environmental proceedings involving the United States
Environmental Protection Agency, or EPA, and comparable state environmental
agencies in Indiana, Maryland, Massachusetts, New Jersey, Ohio, Pennsylvania,
South Carolina and Virginia. All of these matters relate to discontinued
operations of subsidiaries or former divisions of Union for which it has
potential continuing responsibility. Upon completion of the acquisition of
Union, the Company, in consultation with both legal counsel and environmental
consultants, established reserves that it believes will be adequate for the
ultimate settlement of these environmental proceedings.
One group of Union's known environmental proceedings relates to Superfund or
other sites where liability of Union or one or more of its subsidiaries arises
from arranging for the disposal of allegedly hazardous substances in the
ordinary course of prior business operations. In most of these "generator"
liability cases, involvement by Union or one or more of its subsidaries is
considered to be de minimus (i.e., a volumetric share of approximately 1% or
less) and in each of these cases Union or one or more of its subsidiaries is
only one of many potentially responsible parties. From the information currently
available, there are a sufficient number of other economically viable
participating parties so that the projected liability of Union or one or more of
its subsidiaries, although potentially joint and several, is consistent with its
allocable share of liability. At one "generator" liability site, Union's
involvement is potentially more significant because of the volume of waste
contributed in past years by a currently inactive subsidiary. Insufficient
information is available regarding the need for or extent and scope of any
remedial actions which may be required. Union has recorded what it believes to
be a reasonable estimate of its ultimate liability, based on current
information, for this site.
The second group of matters relates to environmental issues on properties
currently or formerly owned or operated by a subsidiary or division of Union.
These cases generally involve matters for which Union or an inactive subsidiary
is the sole or primary responsible party. In one case, the Metal Bank Cottman
Avenue site, the EPA issued a record of decision on February 6, 1998. According
to the record of decision, the cost to perform the remediation selected by the
EPA for the site is estimated by the EPA to be approximately $17.3 million. The
aggregate amount reserved by Union for this site was $18.2 million, which
represented Union's best estimate of the ultimate potential legal and consulting
costs for defending its legal and technical positions regarding remediation of
this site and its portion of the potential remediation costs that will
ultimately be incurred by it, based on current information. However, Union may
be exposed to additional substantial liability for this site as additional
information becomes available over the long-term. Actual remediation costs
cannot be computed until such remedial action is completed. Some of the other
sites involving Union or an inactive subsidiary are at a state where an
assessment of ultimate liability, if any, cannot reasonably be made at this
time.
It is Union's policy to comply fully with all laws regulating activities
affecting the environment and to meet its obligations in this area. In many
"generator" liability cases, reasonable cost estimates are available on which to
base reserves on Union's likely allocated share among viable parties. Where
insufficient information is available regarding projected remedial actions for
these "generator" liability cases, Union has recorded what it believes to be
reasonable estimates of its potential liabilities. Reserves for liability for
sites on which former operations were conducted are based on cost estimates of
remedial actions projected for these sites. The Company periodically reviews all
known environmental claims, where information is available, to provide
reasonable assurance that reserves are adequate.
15. 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
Facility, 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.
At December 31, 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.
Under the interest rate collared swap agreements maturing June 2003 relating to
$150,000 nominal amount of its term debt, the Company pays three month LIBOR
between 5.90% and 8.50% in addition to the applicable margin as set forth in the
Credit Facility. In the event, however, the three month LIBOR falls below 5.90%,
the Company would be required to pay 7.0% plus the applicable margin, until such
time the three month LIBOR rises above 5.90%, at which time the rate returns to
a variable rate.
In September 2001, the Company accelerated the call option of an interest rate
swap agreement maturing November 2006 relating to $50,000 notional amount of its
11.0% senior subordinated notes and entered into a new interest rate swap
agreement maturing November 2006 relating to $75,000 notional 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 notional 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 Facility. 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.
The three month LIBOR rate (Euro dollar rate) at December 31, 2001 and 2000 was
1.9% and 6.6%, respectively.
On January 1, 2001, the Company implemented 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. As noted above, 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
Facility, the Company will employ derivative financial instruments as part of
its risk management program. 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. 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 (loss).
As of December 31, 2001, this liability is $11,934 and is included in other
liabilities and $8,883 is included in accumulated other comprehensive income
(loss). During the year ended December 31, 2001, the Company recorded, as
additional interest expense, $3,051 due to the hedges' ineffectiveness.
16. COMPREHENSIVE INCOME (LOSS)
The components of total comprehensive income (loss) for the year ended December
31 are as follows:
2000
As Restated
2001 (Notes 2 & 22) 1999
---- -------------- ----
Net income (loss): $(13,355) $(25,108) $(43,957)
Other comprehensive income item:
Cumulative effect of adoption
of the Statement (3,691) - -
Fair market value adjustments
on derivatives (5,192) - -
-------- -------- --------
Total comprehensive income (loss) $(22,238) $(25,108) $(43,957)
======== ======== ========
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values and the methods and assumptions used to estimate the
fair values of the financial instruments of the Company as of December 31, 2001
and 2000 are as follows. The carrying amount of cash and cash equivalents and
long-term debt except the Notes, approximates the fair value. The approximate
fair value of the Notes at December 31, 2001 and 2000 was $80,000 and $80,000,
respectively. The fair value of the long-term debt was determined based on
current market rates offered on notes and debt with similar terms and
maturities. The fair value of Receivables was determined based on both market
pricing and discounted expected cash flows. The discount rate was based on an
acceptable rate of return adjusted for the risk inherent in the Receivable
portfolios. The estimated fair value of Receivables approximated their carrying
value at December 31, 2001 and 2000.
18. EMPLOYEE BENEFIT PLANS
At December 31, 2001, the Company has two defined contribution plans, one of
which it acquired through the Union acquisition, which provides retirement
benefits to the majority of all full time employees. The Company matches a
portion of employee contributions to the plans. Company contributions to these
plans, charged to expense, were $1,913, $1,652 and $1,654 for the years ended
December 31, 2001, 2000 and 1999, respectively.
In November 2000, the Company established a deferred compensation plan for
selected employees who, due to Internal Revenue Service guidelines, cannot take
full advantage of the contributory plan. This plan, which is not required to be
funded, allows eligible employees to defer portions of their current
compensation. To support the deferred compensation plan, the Company has elected
to purchase Company-owned life insurance, which is included in other assets, was
$943 and $175 at December 31, 2001 and 2000, respectively. The cash surrender
value of the Company-owned life insurance and the deferred compensation
liability, which is included in other liabilities, was $829 and $160 at December
31, 2001 and 2000, respectively.
19. SEGMENT INFORMATION
The Company has three reportable segments, Outsourcing Services, Portfolio
Services and Recovery Services. The Outsourcing Services segment provides
services such as contract management of accounts receivable, billing and
teleservicing services, letter series programs and banking and financial
services transaction processing. Portfolio Services involve acquiring portfolios
of charged-off consumer receivables from credit grantors or other owners,
servicing such portfolios and retaining all amounts collected and servicing
customer owned portfolios for an agreed upon servicing fee. The Recovery
Services segment collects delinquent or charged-off consumer accounts for a
fixed percentage of realized collections or a fixed fee per account. The Company
derives substantially of its revenues from domestic customers.
The chief operating decision maker evaluates performance of the segments based
on Adjusted Operating EBITDA (Earnings before interest expense, taxes,
depreciation, amortization and corporate and shared expenses, but after
amortization of purchased loans and accounts receivable portfolios). Adjusted
Operating EBITDA includes only the costs directly attributable to the operations
of the individual segment. Eliminations represent intercompany revenue. Assets
are not identified by the individual segments and, therefore, are not reported
by segment.
The accounting policies for the Company's segments are consistent with the
corporate accounting policies outlined in Note 1 to the accompanying financial
statements.
The following table presents certain data by business segment:
2000
As Restated
Revenues 2001 (Notes 2 & 22) 1999
-------- ---- -------------- ----
Outsourcing Services $339,298 $255,269 $212,039
Portfolio Purchasing Services 96,044 92,779 85,815
Recovery Services 198,482 208,406 218,177
Eliminations (21,478) (15,378) (11,606)
-------- -------- --------
Total Revenues $612,346 $541,076 $504,425
======== ======== ========
Adjusted Operating EBITDA
Outsourcing Services $ 46,426 $ 40,434 $ 35,447
Portfolio Purchasing Services 16,717 13,432 10,152
Recovery Services 43,785 47,182 53,239
-------- -------- --------
Total Adjusted Operating EBITDA $106,928 $101,048 $ 98,838
======== ======== ========
20. PURCHASED LOANS AND ACCOUNTS RECEIVABLE PORTFOLIOS FINANCING
In October 1998, a special-purpose finance company, OSI Funding Corp., formed by
the Company, entered into a revolving warehouse financing arrangement (the
"Warehouse Facility") for up to $100,000 of funding capacity for the purchase of
loans and accounts receivable portfolios over its five year term which expires
in October 2003. In connection with the Recapitalization, OSI Funding Corp.
converted to a limited liability company and is now OSI Funding LLC ("FINCO"),
with OSI owning approximately 29% of the voting rights. An unrelated third party
holds the majority voting rights of FINCO and has decision-making authority over
FINCO's operations. The Company's investment in FINCO is accounted for under the
equity method. In connection with the establishment of the Warehouse Facility,
FINCO entered into an agreement with a subsidiary of the Company to provide
certain administrative and collection services on a contingent fee basis (i.e.,
fee is based on a percent of amount collected). The Company believes the fee
structure agreed to by FINCO is representative of a fee structure that would
exist with an unrelated party. The services provided by the Company to FINCO are
similar to those provided to unrelated parties. Revenue from FINCO is generally
recognized by the Company as collections are received. All borrowings by FINCO
under the Warehouse Facility are without recourse to the Company.
The following summarizes the transactions between the Company and FINCO for the
year ended December 31:
2001 2000
---- ----
Sales of purchased loans and accounts receivables
portfolios by the Company to FINCO $63,399 $86,910
Fees paid by FINCO to the Company $37,026 $26,827
Sales of purchased loans and accounts receivable portfolios by the Company to
FINCO were in the same amount and occurred shortly after such portfolios were
acquired by the Company from the various unrelated sellers. As such, the
Company's Statements of Operations do not include revenues or expenses related
to these loans and accounts receivable portfolios. In conjunction with an
agreement to provide certain administrative and collection services to FINCO,
the Company can achieve a bonus fee if amounts in excess of the original
purchase price of a portfolio are recovered. Payment of any bonus fee is subject
to certain collateral and collection sharing requirements as outlined in the
agreement. Receivables from FINCO were $17,014 and $5,612 at December 31, 2001
and 2000, respectively.
At December 31, 2001 and 2000, FINCO had purchased loans and accounts receivable
portfolios of $75,921 and $76,908, respectively. At December 31, 2001 and 2000,
FINCO had outstanding borrowings of $66,391 and $67,636, respectively, under the
Warehouse Facility.
FINCO's summarized results from operations for the years ended December 31, 2001
and 2000 are as follows:
2001 2000
---- ----
Net revenues $103,548 $ 76,578
Income from operations 5,010 4,363
Net income 1,400 702
21. CONVERSION, REALIGNMENT AND RELOCATION EXPENSES
After the Company's formation in 1995 and seven acquisitions, the Company
adopted a strategy to align OSI along business services and establish call
centers of excellence. As a result, the Company incurred $5,063 of nonrecurring
conversion, realignment and relocation expenses for the year ended December 31,
1999. These expenses include costs resulting from the temporary duplication of
operations, closure of certain call centers, costs of converting collection
operating systems, and other one-time and redundant costs. No accrued amounts
remained relative to these expenses at December 31, 1999.
In continuing the above strategy, the Company incurred $2,742 of nonrecurring
realignment expenses for the year ended December 31, 2000. These expenses
include costs resulting from closure of certain call centers, severance
associated with these office closures and certain other one-time costs. All cash
requirements relative to this charge were settled by December 31, 2000.
For the year ended December 31, 2001, the Company incurred $3,564 of
nonrecurring consolidation, realignment and relocation expenses. These expenses
include costs from consolidation of certain call centers, severance associated
with these office closures, asset write-offs and certain other one-time costs.
Accrued costs at December 31, 2001 were $451, all of which should be
substantially settled in 2002.
22. RESTATEMENT
As described in Note 2, the December 31, 2000 consolidated financial statements
have been restated. A comparison of previously reported and restated
consolidated financial statements follows:
Consolidated Balance Sheets
- --------------------------- December 31,
2000 As December 31,
Previously 2000 As
Reported Restated
------------ ------------
ASSETS
Cash and cash equivalents $ 10,273 $ 10,273
Cash and cash equivalents held for clients 21,970 21,970
Accounts receivable - trade, less allowance
for doubtful receivables of $447 62,876 61,325
Purchased loans and accounts receivable
portfolios 24,690 24,690
Property and equipment, net 46,601 46,601
Intangible assets, less accumulated
amortization of $54,218 417,084 417,084
Deferred financing costs, less accumulated
amortization of $4,538 22,934 22,934
Other assets 30,426 27,770
-------- --------
TOTAL $636,854 $632,647
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable - trade $ 14,446 $ 15,896
Collections due to clients 21,970 21,970
Accrued salaries, wages and benefits 15,195 15,195
Debt 539,463 539,463
Other liabilities 71,080 71,080
Commitments and contingencies - -
Mandatorily redeemable preferred stock;
redemption amount $123,115 103,455 103,455
Stockholders' deficit:
Voting common stock; $.01 par value;
authorized 15,000,000 shares, 9,166,728.7
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 (192,715) (198,372)
Notes receivable from management for
shares sold (1,817) (1,817)
Common stock in treasury, at cost;
3,078,249.07 shares (134,857) (134,857)
-------- --------
Total stockholders' deficit (128,755) (134,412)
-------- --------
TOTAL $636,854 $632,647
======== ========
Statements of Operations For the Year Ended
- ------------------------ ------------------------------
December 31,
2000 As December 31,
Previously 2000 As
Reported Restated
------------ ------------
REVENUES $ 542,627 $ 541,076
EXPENSES:
Salaries and benefits 264,293 264,293
Service fees and other operating
and administrative expenses 173,351 177,457
Amortization of purchased loans
and accounts receivable portfolios 28,092 28,092
Amortization of goodwill and other
intangibles 16,082 16,082
Depreciation expense 15,803 15,803
Compensation expense related to
redemption of stock options 187 187
Conversion, realignment and relocation
expenses 2,742 2,742
---------- ----------
Total expenses 500,550 504,656
---------- ----------
OPERATING INCOME 42,077 36,420
INTEREST EXPENSE - Net 60,934 60,934
---------- ----------
LOSS BEFORE INCOME TAXES (18,857) (24,514)
PROVISION FOR INCOME TAXES 594 594
---------- ----------
NET LOSS (19,451) (25,108)
PREFERRED STOCK DIVIDEND REQUIREMENTS AND
ACCRETION OF SENIOR PREFERRED STOCK 17,739 17,739
---------- ----------
NET LOSS TO COMMON STOCKHOLDERS $ (37,190) $ (42,847)
========== ==========
23. QUARTERLY FINANCIAL DATA (unaudited)
As described in Note 2, the unaudited quarterly information for the three months
ended December 31, 2000 and September 30, 2001 have been restated.
Unaudited quarterly financial data for the years ended December 31, 2001 and
2000 are as follows:
Third as
Previously Third as
2001 First Second Reported Restated Fourth
Revenues $151,586 $157,433 $151,023 $152,902 $150,425
Operating income 14,910 16,074 16,623 13,163 2,516
Net income (loss) (1,526) 2,080 (61) (3,521) (10,388)
Fourth as
Previously Fourth as
2000 First Second Third Reported Restated
Revenues $133,250 $137,373 $133,871 $138,133 $136,582
Operating income 10,988 10,175 9,679 11,235 5,578
Net loss (3,380) (5,203) (5,763) (5,105) (10,762)
The fourth quarter of 2001 includes a charge for conversion, realignment and
relocation expenses of $3,564. See Note 21.
24. SUBSEQUENT EVENT-DEBT
As a result of the restatement of financial results as discussed in Note 2, the
Company breached certain covenants, representations and warranties in each of
its Credit Facility and the Warehouse Facility. In response, the Company and the
lenders to the Credit Facility amended the facility effective April 10, 2002.
The amendment to the Credit Facility includes provisions that amend the
financial covenants, waive certain existing defaults of covenants and breaches
in representations and warranties, increase the interest rate on borrowings
pursuant to the facility (as discussed below), and, during 2002, reduce the
Company's availability under its Credit Facility by $5,000, and limit capital
expenditures, investments and acquisitions. In connection with the amendment,
the Company also issued 4,150 shares of its Series B Junior Preferred Stock with
attached warrants to acquire 42,347 shares of the Company's Senior Common Stock
to Madison Dearborn Capital Partners III, L.P. and Madison Dearborn Special
Equity III, L.P. for a total purchase price of $4,150. The proceeds of this sale
were used to repay the Revolving Facility in the amount of $2,075 and the
balance pro-rata to the Term A and B loans, as provided in the Credit Facility.
From April 10, 2002 until such time as the Company delivers to the lenders a
compliance certificate for the period ended December 31, 2002, borrowings under
the Revolving Facility and Term A Loan of the Credit Facility will bear
interest, at the Company's option at (a), the lender's prime rate, plus 2.75% or
at (b) the Eurodollar rate plus 3.75%. Borrowings under the Term B Loan will
bear interest, at the Company's option, at (a) the lenders' prime rate plus
3.50% or (b) the Eurodollar rate plus 4.50%. The amortization and maturity were
not amended. Following this amendment, the Company is in compliance with the
Credit Facility and, subject to the Warehouse Facility issues discussed below,
expects to be in compliance throughout 2002.
The Company has also received a waiver from the lender under the Warehouse
Facility for certain breaches of covenants, representations and warranties with
respect to periods through year-end 2001. Since the Company, on an ongoing,
basis will continue to be in breach of certain financial covenants,
representations and warranties, it has initiated discussions with the lender
under the Warehouse Facility for the purpose of seeking to amend such facility
to cure such breaches, although there can be no assurance that the Company will
be successful in negotiating such an amendment. If the Company is unsuccessful
in negotiating such an amendment, notwithstanding the waiver received, the
Company may again breach certain covenants, representations and warranties in
the Warehouse Facility and there can be no assurances that the lender will
extend the waiver to cover such breaches. On an ongoing basis, the Company has
also been engaged in discussions with certain other providers of similar
warehouse facilities. While there can be no assurances, the Company believes
that other warehouse facilities would be available on economic terms and in
amounts comparable to the Company's existing Warehouse Facility which would
allow the Company to continue its business of purchasing of loans and accounts
receivable. In the event the Company is unable to amend the current warehouse
facility and it is terminated and the Company is unable to enter a replacement
warehouse facility, the Company would be in default of its Credit Facility.
INDEPENDENT AUDITORS' REPORT
To the Stockholders of Outsourcing Solutions Inc.:
We have audited the consolidated financial statements of Outsourcing Solutions
Inc. and its subsidiaries for the year ended December 31, 1999, and have issued
our report thereon dated March 28, 2000; such consolidated financial statements
and report is included elsewhere in this Form 10-K. Our audit also included the
consolidated financial statement schedule of Outsourcing Solutions Inc. and its
subsidaries for the year ended December 31, 1999, listed in the accompanying
index at Item 14(a)2. This consolidated financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audit. In our opinion, such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
set forth therein.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
St. Louis, Missouri
March 28, 2000
Outsourcing Solutions Inc. and Subsidiaries Schedule II
Valuation and Qualifying Accounts and Reserves
For the year ended December 31, 2001, 2000 and 1999
(In thousands)
Column A Column B Column C Column D Column E
- ------------- --------- ---------------------- ------------ --------
Additions
----------------------
Balance Charged Charged Deductions Balance
@ beg. of to to Other (Please @ end of
Description Period Expenses Accounts explain) Period
- ------------- --------- ---------- --------- ----------- --------
Allowance for
doubtful accounts:
2001 $ 447 $ 1,289 - $ 656 (A) $ 1,080
======== ======== ======== ======== ========
2000 $ 529 $ 671 - $ 753 (A) $ 447
======== ======== ======== ======== ========
1999 $ 1,309 $ 651 - $ 1,431 (A) $ 529
======== ======== ======== ======== ========
Environmental
reserves:
2001 $ 21,078 - - $ 1,380 (B) $ 19,698
======== ======== ======== ======== ========
2000 $ 22,218 - - $ 1,140 (B) $ 21,078
======== ======== ======== ======== ========
1999 $ 22,726 - - $ 508 (B) $ 22,218
======== ======== ======== ======== ========
(A) Accounts receivable write-offs and adjustments, net of recoveries.
(B) Payments for environmental matters.