SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
--------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 333-16867
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Outsourcing Solutions Inc.
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(Exact name of registrant as specified in its charter)
Delaware 58-2197161
- --------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
390 South Woods Mill Road, Suite 350
Chesterfield, Missouri 63017
- --------------------------------- ----------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (314) 576-0022
Indicate by checkmark whether the registrant: (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuers classes of
common stock as of the latest practicable date.
Outstanding at
Class March 31, 2002
- ----------------------- --------------
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
============
PAGE 2
OUTSOURCING SOLUTIONS INC.
AND SUBSIDIARIES
TABLE OF CONTENTS
Part I. Financial Information Page
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
March 31, 2002 and December 31, 2001.......................... 3
Condensed Consolidated Statements of Operations
for the three months ended March 31, 2002 and 2001............ 4
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2002 and 2001............ 5
Notes to Condensed Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................................... 16
Part II. Other Information............................................... 17
PAGE 3
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
ASSETS March 31, December 31,
2002 2001
------------ ------------
Cash and cash equivalents $21,661 $ 9,535
Cash and cash equivalents held for clients 30,018 25,920
Accounts receivable - trade, less allowance
for doubtful receivables of $1,074 and
$1,080 64,144 60,100
Purchased loans and accounts receivable
portfolios 23,034 17,477
Property and equipment, net 45,292 46,952
Goodwill, less accumulated amortization
of $70,824 422,064 421,871
Deferred financing costs, less accumulated
amortization of $10,135 and $8,844 18,982 18,665
Other assets 40,913 39,690
-------- --------
TOTAL $666,108 $640,210
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable - trade $18,313 $16,192
Collections due to clients 30,018 25,920
Accrued salaries, wages and benefits 16,548 13,325
Debt 549,509 539,020
Other liabilities 77,679 76,346
Commitments and contingencies (Notes 2 and 9)
Mandatorily redeemable preferred stock;
redemption amount of $145,305 and $140,560 128,886 123,482
Stockholders' deficit:
Senior common stock; $.01 par value;
authorized 900,000 shares,
489,795.93 issued and outstanding 5 5
Voting common stock; $.01 par value;
authorized 20,000,000 shares,
9,166,728.37 shares issued 92 92
Non-voting common stock; $.01 par value;
authorized 2,000,000 shares,
480,321.30 issued and outstanding 5 5
Paid-in capital 223,277 223,277
Accumulated deficit (234,743) (231,754)
Accumulated other comprehensive loss (6,635) (8,883)
Notes receivable from management
for shares sold (1,989) (1,960)
Voting common stock in treasury, at cost;
3,078,249.07 shares (134,857) (134,857)
-------- --------
Total stockholders' deficit (154,845) (154,075)
-------- --------
TOTAL $666,108 $640,210
======== ========
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
PAGE 4
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
--------------------
2002 2001
REVENUES $161,098 $151,586
EXPENSES:
Salaries and benefits 78,123 74,324
Service fees and other operating
and administrative expenses 54,062 47,619
Amortization of purchased loans and
accounts receivable portfolios 8,109 6,979
Amortization of goodwill and other
intangibles - 4,052
Depreciation expense 3,892 3,702
Conversion, realignment and relocation
expenses 2,500 -
-------- -------
Total expenses 146,686 136,676
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OPERATING INCOME 14,412 14,910
INTEREST EXPENSE - Net 11,822 16,261
-------- -------
INCOME (LOSS) BEFORE INCOME TAXES 2,590 (1,351)
PROVISION FOR INCOME TAXES 175 175
-------- -------
NET INCOME (LOSS) 2,415 (1,526)
PREFERRED STOCK DIVIDEND REQUIREMENTS AND
ACCRETION OF SENIOR PREFERRED STOCK 5,404 4,782
-------- -------
NET LOSS TO COMMON STOCKHOLDERS $ (2,989) $ (6,308)
======== ========
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
PAGE 5
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
--------------------
2002 2001
OPERATING ACTIVITIES AND PORTFOLIO PURCHASING:
Net income (loss) $ 2,415 $ (1,526)
Adjustments to reconcile net income (loss)
to net cash from operating activities
and portfolio purchasing:
Depreciation and amortization 4,686 8,863
Amortization of purchased loans and
accounts receivable portfolios 8,109 6,979
Change in assets and liabilities excluding
the effects of acquisitions:
Purchases of loans and accounts receivable
portfolios (13,666) (4,218)
Accounts receivable and other assets (5,661) (9,168)
Accounts payable, accrued expenses and
other liabilities 9,511 2,350
-------- --------
Net cash from operating activities
and portfolio purchasing 5,394 3,280
-------- --------
INVESTING ACTIVITIES:
Acquisition of property and equipment (2,379) (2,181)
Payment for acquisitions, net of cash acquired - (16,300)
Purchases of loans and accounts receivable
portfolios for resale to FINCO - (16,622)
Sales of loans and accounts receivable
portfolios to FINCO - 16,622
Other 15 -
-------- --------
Net cash used by investing activities (2,364) (18,481)
-------- --------
FINANCING ACTIVITIES:
Borrowings under revolving credit agreement 48,000 88,300
Repayments under revolving credit agreement (33,000) (73,400)
Repayments of debt (4,421) (2,567)
Deferred financing fees (1,483) (162)
-------- --------
Net cash from financing activities 9,096 12,171
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,126 (3,030)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,535 10,273
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 21,661 $ 7,243
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during period for interest $ 8,905 $ 11,942
======== ========
Net cash paid during period for taxes $ 144 $ 112
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Accrued dividends on mandatorily redeemable
preferred stock $ 4,745 $ 4,143
======== ========
Accretion of mandatorily redeemable
preferred stock $ 659 $ 639
======== ========
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
PAGE 6
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except for share and per share amounts)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring items) considered
necessary for a fair presentation have been included. Operating results for the
three months ended March 31, 2002 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2002. These Condensed
Consolidated Financial Statements should be read in conjunction with the
Consolidated Financial Statements and notes thereto contained in the Company's
Form 10-K for the year ended December 31, 2001.
NOTE 2. LITIGATION
From time to time, the Company and certain of its subsidiaries are subject to
various investigations, claims and legal proceedings covering a wide range of
matters that arise in the normal course of business and are routine to the
nature of the Company's businesses. In addition, as a result of the acquisition
in a prior year of The Union Corporation, certain subsidiaries of the Company
are a party to several on-going environmental remediation investigations by
federal and state governmental agencies and clean-ups and, along with other
companies, have been named a "potentially responsible party" for certain waste
disposal sites. While the results of litigation cannot be predicted with
certainty, the Company has provided for the estimated uninsured amounts and
costs to resolve the pending suits and management, in consultation with legal
counsel, believes that reserves established for the ultimate resolution of
pending matters are adequate at March 31, 2002.
NOTE 3. PURCHASED LOANS AND ACCOUNTS RECEIVABLE PORTFOLIOS FINANCING
OSI Funding LLC ("FINCO") is a special-purpose finance company with the Company
having approximately 29% of the voting rights. An unrelated third party holds
the majority voting rights of FINCO and has decision-making authority over
FINCO's operations. The Company's investment in FINCO is accounted for under the
equity method. FINCO entered into a revolving warehouse financing arrangement
(the "Warehouse Facility") for up to $100,000 of funding capacity for the
purchase of loans and accounts receivable portfolios, principally bankcard
receivables, over its five year term which expires in October 2003. In
connection with the establishment of the Warehouse Facility, FINCO entered into
an agreement with a subsidiary of the Company to provide certain administrative
and collection services on a contingent fee basis (i.e., fee is based on a
percent of amount collected). The Company believes the fee structure agreed to
by FINCO is representative of a fee structure that would exist with an unrelated
party. The services provided by the Company to FINCO are similar to those
provided to unrelated parties. Revenue from FINCO is generally recognized by the
Company as collections are received. All borrowings by FINCO under the Warehouse
Facility are without recourse to the Company.
The following summarizes the transactions between the Company and FINCO for the
period ended March 31:
2002 2001
Sales of purchased loans and accounts receivable
portfolios by the Company to FINCO $ - $16,622
Servicing fees paid by FINCO to the Company $ 8,707 $10,999
Sales of purchased loans and accounts receivable portfolios ("Receivables") by
the Company to FINCO, when such Receivables are financed by the Warehouse
Facility, 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 is subject to
certain collateral and collection sharing requirements as outlined in the
agreement. Receivables from FINCO, which are included in other assets in the
accompanying condensed consolidated balance sheet, were $16,384 at March 31,
2002 and $17,014 at December 31, 2001.
At March 31, 2002 and December 31, 2001, FINCO had unamortized Receivables of
$57,579 and $75,921, respectively. At March 31, 2002 and December 31, 2001,
FINCO had outstanding borrowings of $56,056 and $66,391, respectively, under its
Warehouse Facility. See Note 10.
FINCO's summarized results from operations for the periods ended March 31 are as
follows:
2002 2001
Revenues $28,735 $26,970
Income from operations 1,940 1,622
Net income 1,469 460
NOTE 4. DERIVATIVES AND HEDGING ACTIVITIES
The Company is subject to the risk of fluctuating interest rates in the normal
course of business. The Company's interest rate hedges are primarily classified
as cash flow hedges. For a cash flow hedge of an anticipated transaction, the
ineffective portion of the change in fair value of the derivative is recorded in
earnings as incurred, whereas the effective portion is deferred in accumulated
other comprehensive income (loss) on the balance sheet until the transaction is
realized, at which time any deferred hedging gains or losses are recorded in
earnings. During the quarters ended March 31, 2002 and 2001, the Company
recorded, as part of interest expense, a gain of $372 and a loss of $518,
respectively, due to the impact of the interest rate hedges. At March 31, 2002
and December 31, 2001, the related liability (included in other liabilities) is
$9,314 and $11,934, respectively. At March 31, 2002 and December 31, 2001, the
amount included in accumulated other comprehensive income (loss) is $6,635 and
$8,883, respectively.
NOTE 5. COMPREHENSIVE INCOME (LOSS)
The components of total comprehensive income (loss) for the periods ended March
31 are as follows:
2002 2001
Net income (loss) $ 2,415 $(1,526)
Other comprehensive income item:
Net income (loss) on cash flow hedging instruments 2,248 (6,538)
------- -------
Total comprehensive income (loss) $ 4,663 $(8,064)
======= =======
NOTE 6. CONVERSION, REALIGNMENT AND RELOCATION EXPENSES
For the three months ended March 31, 2002, the Company incurred $2,500 of
nonrecurring consolidation, realignment and relocation expenses. These expenses
include costs resulting from closure of certain call centers, severance
associated with these office closures, severance as a result of cost reductions
and certain other one-time costs including certain investigative costs resulting
from the inaccurate financial reporting of certain transactions during and prior
to 2001 at one of the Company's subsidiaries, North Shore Agency, Inc. See
further discussion in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001. Accrued costs at March 31, 2002 were $1,901, all of
which should be substantially settled during 2002.
NOTE 7. GOODWILL
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. SFAS No. 142
eliminates the amortization of goodwill and instead requires goodwill be tested
for impairment at least annually. Intangible assets deemed to have an indefinite
life under SFAS No. 142 are no longer amortized, but instead reviewed at least
annually for impairment. Intangible assets with finite lives are amortized over
the useful life.
As required by SFAS No. 142, the results prior to 2002 were not restated in the
condensed consolidated statements of operations. A reconciliation between net
income (loss) reported by the Company and the net income (loss) as adjusted to
reflect the impact of SFAS No. 142 for the periods ended March 31 is as follows:
2002 2001
Net income (loss), as reported $ 2,415 $(1,526)
Goodwill amortization - 4,052
------- -------
Adjusted net income $ 2,415 $ 2,526
======= =======
NOTE 8. 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 all of its revenues from domestic customers.
The chief operating decision maker evaluates performance of the segments based
on Adjusted Operating Earnings (Operating income before depreciation,
amortization, corporate and shared expenses and conversion, realignment and
relocation expenses, but after amortization of purchased loans and accounts
receivable portfolios). Adjusted Operating Earnings 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 following table presents certain data by business segment for the periods
ended March 31:
Revenues 2002 2001
Outsourcing services $ 90,365 $ 80,503
Portfolio purchasing services 25,432 23,402
Recovery services 51,376 52,902
Eliminations (6,075) (5,221)
-------- --------
Total revenues $161,098 $151,586
======== ========
Adjusted Operating Earnings
Outsourcing services $ 12,844 $ 13,419
Portfolio purchasing services 2,219 3,877
Recovery services 13,820 13,185
-------- --------
Total adjusted operating earnings $ 28,883 $ 30,481
======== ========
NOTE 9. 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 $8,105 and $882, which excludes
amounts purchased and subsequently sold to FINCO (see Note 3), for the quarters
ended March 31, 2002 and 2001, respectively.
NOTE 10. SUBSEQUENT EVENT
During the finalization of the Company's consolidated financial statements as of
and for the year ended December 31, 2001, the Company identified 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. Consequently, the Company breached certain covenants,
representations and warranties of its bank credit facility (the "Credit
Facility") and Warehouse Facility.
The Company and the lenders to the Credit Facility amended the facility
effective April 10, 2002. The amendment to the Credit Facility included
provisions that amended the financial covenants, waived certain defaults of
covenants and breaches in representations and warranties, increased the interest
rate on borrowings pursuant to the facility (as discussed below), and, during
2002, reduced the Company's availability under its Credit Facility by $5,000,
and limited 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 lender's 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 received a waiver from the lender under the Warehouse Facility
for certain breaches of covenants, representations and warranties with respect
to periods through the quarter ended March 31, 2002. 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.
PAGE 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
For discussion of the Company's critical accounting policies, see the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.
Results of Operations
- ---------------------
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
- -------------------------------------------------------------------------------
Consolidated revenues for the three months ended March 31, 2002 were $161.1
million, an increase of $9.5 million or 6.3% from $151.6 million for the three
months ended March 31, 2001. Revenues by segment are as follows and do not
include the elimination of intercompany revenue (in millions):
Three Months Ended
----------------------------------
March 31, 2002 March 31, 2001
-------------- --------------
Outsourcing services $ 90.4 $ 80.5
Portfolio purchasing services 25.4 23.4
Recovery services 51.4 52.9
Eliminations (6.1) (5.2)
------ ------
$161.1 $151.6
====== ======
Outsourcing services' revenues of $90.4 million for the three months ended March
31, 2002 increased 12.3% from $80.5 million in 2001. The higher revenues
resulted primarily from new business, increased collection letter products
business and the effects of the acquisition of Coast to Coast Consulting ("CCC")
which was acquired mid-March 2001 offset partially by lower back office services
revenue.
Revenues from the Company's portfolio purchasing segment were up $2.0 million,
or 8.5%, to $25.4 million for the three months ended March 31, 2002 from $23.4
million in 2001. The increased revenue was primarily attributable to higher
strategic sales of purchased portfolios.
Recovery services' revenues decreased by 2.8% for the three months ended March
31, 2002 on revenue of $51.4 million compared to $52.9 million in 2001 primarily
as a result of lower student loan revenue.
Consolidated operating expenses, inclusive of salaries and benefits, service
fees and other operating and administrative expenses, were $132.2 million for
the three months ended March 31, 2002 compared to $122.0 million in 2001, an
increase of 8.4%. The increase in these operating expenses resulted primarily
from the increased collection-related expenses due to the new outsourcing
services revenues, the acquisition of CCC and higher postage expenses. For the
three months ended March 31, 2002, amortization and depreciation charges of
$12.0 million were lower than the $14.7 million for the comparable period in
2001. The lower amortization and depreciation charges were due primarily to the
cessation of goodwill amortization of $4.1 million in 2001, offset partially by
higher amortization of purchased loans and accounts receivable portfolios due to
higher strategic sales of purchased portfolios.
Outsourcing services' operating income before depreciation, amortization,
corporate and shared expenses and conversion, realignment and relocation
expenses but after amortization of purchased loans and accounts receivable
portfolios ("Adjusted Operating Earnings") was $12.8 million for the three
months ended March 31, 2002 compared to $13.4 million in 2001. The 4.5% decrease
primarily resulted from lower back office services revenue and higher postage
expense offset partially by the new business revenue.
Adjusted Operating Earnings for portfolio purchasing services was $2.2 million
for the three months ended March 31, 2002 compared to $3.9 million in 2001. The
decrease of $1.7 million was primarily attributable to the increased
amortization of purchased loans and accounts receivable portfolios as a result
of the higher strategic sales of purchased portfolios.
Recovery services' Adjusted Operating Earnings of $13.8 million for the three
months ended March 31, 2002 compared favorably to prior year of $13.2 million.
The favorable variance was primarily due to improved margins in the government
and healthcare industry groups offset partially by the lower student loan
revenue.
For the three months ended March 31, 2002, the Company incurred $2.5 million of
nonrecurring consolidation, realignment and relocation expenses. These expenses
include costs resulting from closure of certain call centers, severance
associated with these office closures, severance as a result of cost reductions
and certain other one-time costs including certain investigative costs resulting
from the inaccurate financial reporting of certain transactions during and prior
to 2001 at one of the Company's subsidiaries, North Shore Agency, Inc. See
further discussion in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001.
The Company's earnings before interest expense, taxes, depreciation and
amortization ("EBITDA") for the three months ended March 31, 2002 was $26.4
million compared to $29.6 million for the same period in 2001. The decrease was
primarily attributable to the lower outsourcing services' Adjusted Operating
Earnings and the nonrecurring charges of $2.5 million. Adding back the
nonrecurring charges of $2.5 million, EBITDA was $28.9 million compared to $29.6
million in 2001.
As a result of the above, the Company's operating income of $14.4 million for
the three months ended March 31, 2002 compared unfavorably to $14.9 million for
the same period in 2001.
Net interest expense for the three months ended March 31, 2002 was $11.8 million
compared to $16.3 million for the comparable period in 2001. The decrease was
due primarily to lower interest rates and the favorable impact of the Company's
interest rate hedges.
The provision for income taxes of $0.2 million was provided for certain state
and foreign income tax obligations. The net deferred tax assets at March 31,
2002 are fully offset by a valuation allowance. The Company generated a net
taxable operating loss for federal and certain state income tax purposes for
which a full valuation allowance was provided.
Due to the factors stated above, the Company had net income for the three months
ended March 31, 2002 of $2.4 million which compared favorably to the net loss of
$1.5 million for the three months ended March 31, 2001.
Financial Condition, Liquidity and Capital Resources
- ----------------------------------------------------
At March 31, 2002, the Company had cash and cash equivalents of $21.7 million.
The Company's credit agreement currently provides for a $70.0 million revolving
credit facility, which allows the Company to borrow for working capital and
general corporate purposes, subject to certain conditions. As of March 31, 2002,
the Company had $61.0 million outstanding under the revolving credit facility
leaving zero, after outstanding letters of credit, available under the revolving
credit facility. Certain amounts of the cash and cash equivalents of $21.7
million will be used against the revolving credit facility which will create
availability under the revolving credit facility along with cash flow from
operations to fund working capital and general corporate purposes.
Since December 31, 2001, cash and cash equivalents increased $12.1 million
primarily due to cash from operating activities and portfolio purchasing of $5.4
million and borrowings under the revolving credit facility of $15.0 million
offset by cash utilized for debt repayments of $4.4 million, payment of deferred
financing fees of $1.5 million and capital expenditures of $2.4 million. The
Company also held $30.0 million of cash and cash equivalents for clients in
restricted trust accounts at March 31, 2002.
In the quarter ended March 31, 2001, cash and cash equivalents decreased $3.0
million primarily due to cash utilized for the acquisition of CCC of $16.3
million, debt repayments of $2.6 million and capital expenditures of $2.2
million offset by cash from operating activities and portfolio purchasing of
$3.3 million and increased borrowings under the revolving credit facility of
$14.9 million.
For the first three months in 2002, the Company made capital expenditures of
$2.4 million primarily for the replacement and upgrading of equipment, expansion
of facilities and expansion of the Company's information services systems. The
Company anticipates total capital spending of approximately $10.0 million during
2002. 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.
During the finalization of the Company's consolidated financial statements as of
and for the year ended December 31, 2001, the Company identified 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. Consequently, the Company breached certain covenants,
representations and warranties of its bank credit facility (the "Credit
Facility") and Warehouse Facility. See further discussion in the Company's
Annual Report of Form 10-K for the year ended December 31, 2001.
The Company and the lenders to the Credit Facility amended the facility
effective April 10, 2002. The amendment to the Credit Facility included
provisions that amended the financial covenants, waived certain defaults of
covenants and breaches in representations and warranties, increased the interest
rate on borrowings pursuant to the facility (as discussed below), and, during
2002, reduced the Company's availability under its Credit Facility by $5,000,
and limited 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 lender's 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 received a waiver from the lender under the Warehouse Facility
for certain breaches of covenants, representations and warranties with respect
to periods through the quarter ended March 31, 2002. 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.
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.
PAGE 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to the risk of fluctuating interest rates in the normal
course of business. From time to time and as required by the Company's Credit
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 for profit or loss.
At December 31, 2001 (the most recent completed fiscal year), the Company had
interest rate swap and collared swap agreements outstanding. Since December 31,
2001, there have been no material changes in these agreements.
PAGE 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company and certain of its subsidiaries are
involved in various investigations, claims and legal proceedings
covering a wide range of matters that arise in the normal course of
business and are routine to the nature of the Company's business.
Other information with respect to legal proceedings appears in the
Company's Annual Report on Form 10-K for the year ended December 31,
2001.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
See Note 6 of the Consolidated Financial Statements and notes thereto
contained in the Company's Form 10-K for the year ended December 31,
2001.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
Exhibit 2 Unit Purchase Agreement, dated as of April 10, 2002, by
and among the Company and certain other parties
thereto.
(b). Reports on Form 8-K
During the quarter, the following on Form 8-K was filed:
Report on Form 8-K filed March 21, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OUTSOURCING SOLUTIONS INC.
(Registrant)
/s/ Timothy G. Beffa
-------------------------------------
Timothy G. Beffa
President and Chief Executive Officer
/s/ Gary L. Weller
-------------------------------------
Gary L. Weller
Executive Vice President
and Chief Financial Officer
Date: May 15, 2002