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, 1998
[ ] 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
Outsourcing Solutions Inc.
(Exact name of registrant as specified in its charter)
Delaware 58-2197161
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
390 South Woods Mill Road, Suite 350
Chesterfield, Missouri 63017
(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
None None
Securities registered pursuant to Section (g) of the Act:
None
(Title of each class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 if this chapter) 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 March 19, 1999, the following
shares of the Registrant's common stock were issued and outstanding:
Voting common stock 3,425,126.01
Class A convertible nonvoting common stock 391,740.58
Class B convertible nonvoting common stock 400,000.00
Class C convertible nonvoting common stock 1,040,000.00
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5,256,866.59
DOCUMENTS INCORPORATED BY REFERENCE: None
PART I
ITEM 1. BUSINESS
General
Outsourcing Solutions Inc., a Delaware Corporation (the "Company" or "OSI") was
formed on September 21, 1995 to build, through a combination of acquisitions and
sustained internal growth, one of the leading providers of accounts receivable
management services.
In September 1995, OSI initiated this strategy with the acquisition of
Atlanta-based Account Portfolios, L.P. ("API"), 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 ("Miller"), two industry leaders in providing contingent fee
services. Continental, which is headquartered in Seattle and operates in eight
western states, provides contingent fee services to a wide range of end markets,
with particular emphasis on public utilities and regional telecommunications.
Miller, based in Minneapolis, provides contingent fee services to the student
loan and bank credit card end markets.
In November 1996, OSI acquired Payco American Corporation ("Payco") with
corporate offices in Brookfield, Wisconsin. Originally founded as a contingent
fee service company, Payco has diversified into other outsourcing services such
as student loan billing, health care accounts receivable billing and management,
contract management of accounts receivable and teleservicing. Upon completion of
the Payco acquisition, the Company became one of the largest providers of
accounts receivable management services in the United States.
In October 1997, OSI acquired North Shore Agency, Inc. ("NSA"), a fee service
company headquartered in Long Island, New York. NSA specializes in "letter
series" collection services for direct marketers targeted at collecting small
balance debts. The majority of NSA's revenues are generated from traditional
contingent collections utilizing letters with the remaining revenues derived
from fixed fee letter services.
In November 1997, OSI acquired Accelerated Bureau of Collections, Inc. ("ABC").
ABC is a Denver-based national fee service company. ABC specializes in credit
card collections and derives approximately 25% of its revenues from early-out
programs with the remaining 75% of revenues derived from standard contingent fee
collections.
In January 1998, OSI acquired through a tender offer approximately 77% of the
outstanding shares of The Union Corporation's ("Union") common stock for $31.50
per share. In March 1998, the Company acquired the remaining outstanding shares
of Union when Union merged with a wholly-owned subsidiary of the Company.
Union was originally a conglomerate involved in businesses ranging from
electronic and industrial components to financial services. Today, Union is a
leading provider of a range of outsourcing services to both large and small
clients. Union provides contingent and fixed fee collection services and other
related outsourcing services. Union provides fee services through the following
wholly-owned subsidiaries: Allied Bond & Collection Agency, Inc. ("Allied"),
Capital Credit Corporation ("Capital Credit"), and Transworld Systems, Inc.
("Transworld"). Allied, headquartered in Trevose, Pennsylvania, provides
contingent and fixed fee collection services for large clients across a broad
spectrum of industries. Capital Credit, headquartered in Jacksonville, Florida,
also provides 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 the largest prepaid, fixed fee outsourcer of delinquent account
management services in the United States. Transworld's clients are primarily
small companies with low balance delinquent accounts. Transworld provides
clients with a two phase system. Phase I is a fixed fee, computer generated
"letter series". Phase II is a traditional contingent fee collection system
designed to collect those accounts that are not collected during Phase I. Union
provides related outsourcing services through its Interactive Performance, Inc.
("IPI") and High Performance Services, Inc. ("HPSI") subsidiaries. IPI,
headquartered in North Charleston, South Carolina, provides a range of credit
and receivables management outsourcing services primarily in the form of
teleservicing. IPI's services include inbound and outbound calling programs for
credit authorization, customer service, usage management and receivables
management. HPSI, headquartered in Jacksonville, Florida, provides services
similar to IPI for clients in the financial services industry.
Industry
As a result of the rapid growth of outstanding consumer credit and the
corresponding increase in delinquencies, credit grantors have increasingly
looked to third party service providers in managing the accounts receivable
process. In addition, rapid consolidation in the largest credit granting
industries, including banking, health care, telecommunications and utilities,
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. Nationwide, more than 6,000 companies provide debt
collection services, creating a highly fragmented industry. Due to this
fragmentation, the top 10 companies account for only 20% of industry revenues.
With this fragmentation, a corresponding trend in recent years is toward
industry consolidation.
The accounts receivable management industry has undergone rapid growth over the
past fifteen years. Two significant trends in the consumer credit industry are
primarily responsible for this industry growth. First, consumer debt (a leading
indicator of current and future business for accounts receivable management
companies) has increased dramatically in recent years. Between 1990 and 1998,
total consumer debt increased 67% from $3.6 trillion to almost $6.0 trillion.
Second, in an effort to focus on core business activities and to take advantage
of the economies of scale, better performance and lower cost structure offered
by accounts receivable management companies, many credit grantors have chosen to
outsource some or all aspects of the accounts receivable management process.
The customer base for the accounts receivable management industry is dominated
by credit issuers in four end-markets: banks/bankcard, health care, utilities
and telecommunications. Other significant sources of account placements for the
industry include retail, student loan agencies and oil companies. The Company
believes that the ongoing consolidation in the banking, utilities,
telecommunications and health care industries will create larger national
customers seeking to place accounts with accounts receivable management
companies that have the resources to offer national rather than local and
regional coverage. The accounts receivable management industry is closely
regulated by federal laws such as the Fair Debt Collection Practices Act
("FDCPA") and similar state laws.
Contingent fee services are the traditional services provided in the accounts
receivable management industry. Creditors typically place non-performing
accounts after they have been deemed non-collectible, usually when 90 to 120
days past due. The commission rate 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 lower the commission
rate. Creditors typically assign their charged-off receivables to contingent fee
servicers for a six to twelve 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, typically 120 to 270 days past due, that are being placed with
agencies for the first time and usually receive the lowest commission. Secondary
placements, accounts 270 to 360 days past due, have already been placed with a
contingent fee servicer and usually require a process including obtaining
judgments, asset searches, and other more rigorous legal remedies to obtain
repayment and, therefore, receive a higher commission. Tertiary placements,
accounts usually over 360 days past due, generally involve legal judgments, and
a successful collection receives the highest commission. Customers are
increasingly placing accounts with accounts receivable management companies
earlier in the collection cycle, often prior to the 120 days past due typical in
primary placements, either under a contingent fee or fixed fee arrangement.
While contingent fee servicing remains the most widely used method by creditors
in recovering non-performing accounts, portfolio purchasing has increasingly
become a popular alternative. Beginning in the 1980's, the Resolution Trust
Company and the Federal Deposit Insurance Company, under government mandate to
do so, 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. Management estimates
the total principal value of purchased portfolios at between $25.0 and $40.0
billion per year, and based on the Company's experience, the annual growth rate
of the portfolio purchasing market segment for the period 1990 to 1995 was
between 50% and 80%. The largest percentage of purchased portfolios originate
from the bank card receivable and retail markets and 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 combined with principle collection techniques are
employed to obtain payment of non-performing accounts.
Accounts receivable management companies have responded to the increasing need
of credit granting companies to outsource other related services as well. Due to
the rapid growth in consumer credit, credit grantors need assistance in managing
increasingly large and complex call centers and accounts receivable management
companies have stepped in to provide a variety of services. These services
include, among others, third-party billing services and customer teleservicing.
Accounts receivable management companies have found that their traditional
experience in managing a large staff in a telephone-based environment provides a
solid base for entering into these relatively new and rapidly growing market
segments.
The accounts receivable management industry has progressed in technological
sophistication over the past several years with the advancement of new
technology. Today, leading companies in this industry use proprietary databases,
automated predictive dialers, automatic call distributors and computerized skip
tracing capabilities to significantly increase the number of quality
interactions with debtors. This technological advancement is helping to
accelerate industry consolidation and facilitates providing related accounts
receivable management outsourcing services. The firms, which have the most
efficient operating system and can best use credit information, typically
collect more funds per account dollar and thus are awarded disproportionately
more new accounts.
Business Strategy
The Company's market position and breadth of services distinguishes it as one of
the leading providers of accounts receivable management services in the United
States. The Company's business strategy is to expand this position through the
following initiatives:
Full Service Providers/Cross-Selling Services to Existing Customers. The
Company is a full service firm which currently offers its customers a wide array
of accounts receivable management options beyond traditional contingent fee
services, including letter series and higher margin portfolio purchasing,
contract management of accounts receivable, billing and teleservicing. This
range of services allows the Company to cross-sell its offerings within its
existing customer base, as well as to potential customers in specifically
targeted industries.
Expansion of Customer Base. Two of the most important determinants in
selecting an accounts receivable management service provider are reputation and
experience. As the Company develops expertise and recognition with customers in
a particular industry, it markets that expertise to other credit grantors in the
industry. In addition, consolidation in the bank, retail, utility, student loan,
health care and telecommunications industries has created national customers who
are moving part or all of their accounts receivable collection management
business to national service providers. With the ability to offer its services
in all 50 states and experience in successfully managing a high volume of
placements on a national basis, the Company is well positioned to benefit from
this consolidation trend. The Company is also focused on increasing its business
with government agencies at the federal, state and local levels, many of which
have begun to outsource accounts receivable functions for items such as taxes
and student loans to private companies.
Leveraging Technology. The Company has invested aggressively in
technological innovations to enhance its competitive advantages over smaller
competitors. The Company has hardware and proprietary software, including
debtor-scoring models and debtor databases, which the Company believes, provides
it with a competitive advantage in pricing portfolios and collecting amounts
from debtors. In addition, the Company utilizes automated predictive dialers and
skip tracing databases in order to allow account representatives to work
accounts more efficiently. Through interface with creditor computer systems, the
Company can efficiently receive new account placements from customers daily and
provide frequent updates to customers on the status of accounts collections. As
the Company begins to provide more comprehensive outsourcing services, the
Company becomes more integrated with its customers' systems, making switching
vendors both costly and inefficient.
Growth Through Acquisitions. The Company has built its position through
strategic acquisitions of accounts receivable service providers in each of the
markets in which it participates. The Company plans to selectively pursue
additional acquisitions which complement its existing services or increase its
customer base.
Services
The Company is one of the largest providers of accounts receivable management
services in the United States. The Company, through its subsidiaries, offers its
customers contingent fee services, portfolio purchasing services and related
outsourcing services.
Contingent Fee Services. The Company is one of the largest providers of
contingent fee services in the United States. The Company offers a full range of
contingent fee services, including early-out programs and letter series, to all
consumer credit end-markets. The Company 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 64 call centers in 27 states and approximately 5,500 account
representatives, the Company has the ability to service large volume of accounts
with national coverage. In addition to traditional contingent fee services
involving the placement of accounts over 120 days delinquent, creditors have
begun to demand services in which accounts are outsourced earlier in the
collection cycle. The Company has responded to this trend by developing
"early-out" programs, whereby the Company receives placed accounts that are less
than 120 days past due and earns a fixed fee per placed account rather than a
percentage of realized collections. These programs require a greater degree of
technological integration between the Company and its customers, leading to
higher switching costs. The Company primarily services consumer creditors
although the Company has a growing presence in the commercial collection
business, offering contingent fee services to commercial creditors as well.
Portfolio Purchasing Services. The Company offers portfolio purchasing
services to a wide range of financial institutions, educational institutions and
retailers. The Company purchases large and diverse portfolios of non-performing
consumer receivables both on an individually negotiated basis as well as through
"forward flow" agreements. Under forward flow agreements, the Company agrees,
subject to due diligence, to purchase charged off receivables on a monthly
basis. Creditors selling portfolios to the Company 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.
The Company'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. Consumer loans
purchased include automobile receivables, mobile home receivables and commercial
real estate receivables. The Company's most recent portfolio acquisitions have
been primarily purchases pursuant to the Company's health club and bank card
forward flow agreements. The Company continues to pursue acquisitions of
portfolios in various industries for both individually negotiated and forward
flow purchases.
In late 1997, the Company established a sourcing relationship with Sherman
Financial Group, L.L.C. ("Sherman"). Sherman's focus was singularly on
developing a distressed debt business on behalf of the Company. The Company
benefited from Sherman's existing client relationships, industry marketing
expertise, pricing technology and negotiating expertise with illiquid products
in "one-off" transactions. In 1999, the Company will establish its own portfolio
purchasing unit to broaden coverage across industries. The unit will be located
in New York.
Related 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, the Company has developed a
number of other accounts receivable management services. The Company leverages
its operational expertise and call and data management technology by offering
the following services: (1) contract management, through which the Company
performs a range of accounts receivable management services at the customer's or
the Company's location, (2) student loan billing, whereby the Company provides
billing, due diligence and customer service services, (3) health care accounts
receivable management, whereby the Company assumes responsibility for managing
third-party billing, patient pay resolution, inbound and outbound patient
communication services and cash application functions, and (4) teleservicing,
whereby the company offers inbound and outbound calling programs to perform
sales, customer retention programs, market research and customer service.
Sales and Marketing
The Company has a sales force of approximately 100 sales representatives
providing comprehensive geographic coverage of the United States on a local,
regional and national basis. The Company also markets its services in Puerto
Rico, Canada and Mexico. Each of the operating companies, except TSI, maintains
its own sales force and have a marketing strategy closely tailored to the
credit-granting markets that it serves. TSI utilizes approximately 800
independent contractors to sell its prepaid letter series. The Company's primary
sales and marketing objective is to expand its customer base in those customer
industries in which it has a particular expertise and to target new customers in
high growth end markets. The Company, through its established operating company
brand names, emphasizes its industry experience and reputation - two key factors
considered by creditors when selecting an accounts receivable service provider.
Increasingly, the Company will focus on cross-selling its full range of
outsourcing services to its existing customers 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 by the corporate office in Chesterfield,
Missouri, which is also responsible for monitoring the sales performance of each
of the operating entities.
Customers
The Company's customer base includes a full range of local, regional and
national creditors. The Company's customers include American Express, AT&T,
Bally's, Citicorp, Columbia House, First USA, New Jersey Department of Treasury,
Sears, Sony, Time Warner, US West and various student loan guaranty agencies
(including the California Student Aid Commission, the Great Lakes Higher
Education Corporation and USA Group Guaranty Services Inc.). The Company's
largest customer accounted for less than 6% of 1998 revenues.
Employees
The company employs approximately 7,000 people, of which 5,500 are account
representatives, 100 are sales representative and 1,400 work in
corporate/supervisory and administrative functions. None of the Company's
employees are unionized, and the Company believes its relations with employees
are satisfactory.
The Company is 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 on Company procedures, information systems and regulations
regarding contact with debtors. The training includes technical topics, such as
use of on-line collection systems and skip-tracing techniques and tools, as well
as instruction regarding the Company's approach to the collection process and
listening, negotiation and problem-solving skills, all of which are essential to
efficient and effective collections.
Account representatives are then assigned to work groups for a training period.
Initially, the trainees only screen incoming calls. This allows less experienced
account representatives to communicate with debtors in a less confrontational
environment than may be experienced with outgoing calls. Additionally, the
trainees are assigned accounts, which based upon scoring by the Company'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. Nationwide, there are approximately 6,000 debt collection service
companies in the United States, with the 10 largest agencies currently
accounting for only 20% of industry revenues. Competition is based largely on
recovery rates, industry experience and reputation and service fees. Due to the
competition, the Company in 1998 experienced contingent fee rate pressure. Large
volume creditors typically employ more than one accounts receivable management
company at one time, and often compare performance rate and rebalance account
placements towards higher performing servicers. The largest competitors include
Deluxe Corporation, Equifax Corporation, G.C. Services and NCO Group.
In late 1998, the Company's primary competitor for purchased portfolios,
Commercial Financial Services, declared bankruptcy. Although the long-term
effects of this bankruptcy are uncertain, this development has increased the
Company's opportunities to purchase portfolios of debt.
Governmental Regulatory Matters
Certain of the Company's operations are subject to the FDCPA and comparable
statutes 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 the Company's policy to comply with
the provisions of the FDCPA, comparable state statutes and applicable licensing
requirements. The Company has established policies and procedures to reduce the
likelihood of violations of the FDCPA and related state statutes. For example,
all account representatives receive extensive training on these policies and
must pass a test on the FDCPA and the agents work in an open environment which
allows managers to monitor interaction with debtors.
In December 1998, Account Portfolios, Inc. and its subsidiary, Perimeter Credit
L.L.C., entered into a consent decree with the Federal Trade Commission ("FTC")
to resolve an FTC inquiry into whether the two companies violated certain
provisions of the FDCPA. Both companies cooperated fully with the FTC, did not
admit any wrongdoing and agreed to pay an amount not considered material to the
Company's financial position or results of operations.
Environmental Matters
Current operations of OSI and its subsidiaries do not involve activities
affecting the environment. However, Union is party to several pending
environmental proceedings involving the Environmental Protection Agency ("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 Union acquisition, OSI, 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 Union's liability 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, Union's involvement is
considered to be de minimus (i.e., a volumetric share of approximately 1% or
less) and in each of these cases Union 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
Union's projected liability, 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 ("ROD") on February 6, 1998.
According to the ROD, 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 is $18.2 million, which
represents 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 adequate reserves are maintained.
ITEM 2. PROPERTIES
As of December 31, 1998, the Company and its subsidiaries operated 73 facilities
in the U.S., all of which are leased, except for TSI's administrative and
certain collection offices, which are owned. The Company believes that such
facilities are suitable and adequate for its business. The Company's facilities
are strategically located across the U.S. to give effective broad geographic
coverage for customers and access to a number of labor markets.
ITEM 3. LEGAL PROCEEDINGS
At December 31, 1998, the Company was involved in a number of legal proceedings
and claims that were in the normal course of business and routine to the nature
of the Company's business. In addition, one of the OSI 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, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1998.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
No public market currently exists for the Common Stock.
As of March 19, 1999, there were approximately 20 holders of record of the
Common Stock.
The Company has not declared any cash dividends on 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 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 Second Amended and Restated Credit Agreement, dated as of
January 26, 1998, as amended, by and among the Company, the Lenders listed
therein, Goldman Sachs Credit Partners L.P. and the Chase Manhattan Bank, as
Co-Administrative Agents, Goldman Sachs Credit Partners L.P. and Chase
Securities, Inc., as Arranging Agents and Sun Trust Bank, Atlanta, as Collateral
Agent (the "Agreement") contains certain restrictions on the Company's ability
to declare or pay dividends on its capital stock. Both the Indenture and the
Agreement 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 OSI as of December 31, 1997 and 1998 and for the three
years ended December 31, 1998. The audited financial statements of OSI referred
to above are included elsewhere herein. The selected historical financial data
set forth below as of and for the year ended December 31, 1994 and as of
September 20, 1995 and for the period January 1, 1995 to September 20, 1995 have
been derived from the audited financial statements of API (as predecessor) not
included herein. The selected historical financial data set forth below as of
December 31, 1995 and for the period September 21, 1995 to December 31, 1995
have been derived from the audited financial statements of OSI not included
herein. 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 OSI included
elsewhere herein.
API (as predecessor) OSI (as successor)
-------------------------- -----------------------------------------
From
From September 21
Year Ended January 1 to To
December 31, September 20 December 31, Year Ended December 31,
------------ ------------ ------------ ---------------------------
1994 1995 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
($ in thousands)
Income Statement Data:
Operating revenue (a).............. $39,292 $21,293 $ 8,311 $106,331 $271,683 $479,400
Salaries and benefits.............. 2,646 4,471 2,079 46,997 133,364 230,114
Other operating expenses (b)....... 8,790 7,343 8,953 80,357 156,738 221,598
------- ------- ------- -------- -------- --------
Operating income (loss)............ 27,856 9,479 (2,721) (21,023) (18,419) 27,688
Interest expense, net.............. 2,599 495 1,361 12,131 28,791 50,627
Other expense...................... 166 - - - - -
------- ------- ------- -------- -------- --------
Income (loss) before taxes......... 25,091 8,984 (4,082) (33,154) (47,210) (22,939)
Provision for income taxes(benefit) - - (1,605) (11,757) 11,127 830
Minority interest.................. - - - - - 572
------- ------- ------- -------- -------- --------
Net income (loss).................. $25,091 $ 8,984 $(2,477) $(21,397) $(58,337) $(24,341)
======= ======= ======= ======== ======== ========
Balance Sheet Data (at end of period):
Working capital.................... $16,897 $3,809 $22,438 $38,080 $18,558 $ 795
Total assets....................... 22,941 11,272 85,652 355,207 381,690 618,491
Total debt......................... - - 36,462 247,616 324,966 528,148
Partners' capital/Stockholders equity
(deficit)....................... 22,162 10,559 42,448 51,598 (5,478) (30,032)
Other Financial Data:
Amortization of purchased portfolios $2,667 $2,308 $5,390 $27,317 $52,042(d) $ 50,703(e)
Other depreciation and amortization 102 167 331 18,281 33,574 30,007
Cash capital expenditures.......... 463 574 97 2,606 9,489 13,480
Portfolio purchases................ 6,800 5,502 903 10,373(f) 46,494 43,186
Cash flows from:
Operating activities............ 21,074 5,887 2,902 10,667 32,825 55,252
Investing activities............ (463) 1,259 (31,007) (200,435) (119,499) (227,805)
Financing activities............ (11,055) (20,587) 29,574 202,796 75,394 178,150
EBITDA (c)......................... 30,625 11,954 3,000 24,575 67,197 108,398
Adjusted EBITDA (c)................ 18,465 11,954 3,000 25,775 67,197 108,398
(a)1994 operating revenues include proceeds on sales of purchased portfolios of
$13,325. The related amortization on the portfolios sold included in other
operating expenses was $1,155. In addition, transaction costs of $1,165 were
incurred in connection with the sale and are included in other operating
expenses.
(b)Other operating expenses include telephone, postage, supplies, occupancy
costs, data processing costs, depreciation, amortization and miscellaneous
operating expenses.
(c)EBITDA is defined as income from continuing operations before interest,
other expense, taxes, depreciation and amortization. Adjusted EBITDA reflects
EBITDA as defined above adjusted for proceeds from portfolio sales, net of
transaction costs, of $12,160 in 1994, the non-recurring write-off of
acquired technology in process in connection with the Payco acquisition and
relocation expenses incurred by Continental of $1,000 and $200, respectively,
in the year ended December 31, 1996. 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.
(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 API. 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 corporation (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.
(f)In May 1996, a subsidiary of the Company acquired participation interests in
certain loan portfolios, representing the undivided ownership interests in
such portfolios which were originally sold pursuant to existing Participation
Agreements ("MLQ Interests") for aggregate consideration of $14,772. This
amount excludes the $14,772.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS
Results of Operations
Year ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues for the year ended December 31, 1998 were $479.4 million compared to
$271.7 million for the year ended December 31, 1997 - an increase of 76.5%. The
revenue increase of $207.7 million was due primarily to increased fee services
and portfolio revenues of $17.8 million - an increase of 7.7% over last year,
and $193.3 million from the acquisitions of Union, NSA and ABC offset by lower
existing business outsourcing revenue of $3.4 million. Revenues from fee
services were $334.0 million for the year ended December 31, 1998 compared to
$164.8 million for 1997. The increase in fee revenues was due to a 1.0% increase
in existing business and $167.9 million from the three acquisitions. In the
highly competitive contingent fee services business, during 1998 the Company
experienced pressure on their contingent fee rates coupled with lower bankcard
placements due to credit grantors selling them resulting in less than
anticipated growth in existing business. Revenue from purchased portfolio
services increased to $84.3 million for the year ended December 31, 1998
compared to $67.8 million in 1997 - up 24.3%. The increased revenue was
attributable to both higher collection revenue and strategic sales of
portfolios. The outsourcing revenue of $61.1 million compared favorably to prior
year of $39.1 million due primarily to the Union acquisition.
Operating Expenses for the year ended December 31, 1998 were $451.7 million
compared to $290.1 million for the year ended December 31, 1997 - an increase of
55.7%. Operating expenses, exclusive of amortization and depreciation charges,
were $371.0 million for the year ended December 31, 1998 compared to $204.5
million in 1997. The increase in operating expenses, exclusive of amortization
and depreciation charges, resulted from the expenses related to the increased
revenue and the three acquisitions. Exclusive of the three acquisitions'
operating expenses, operating expenses were up 4.4% over 1997. Of the $451.7
million in operating expenses for the year ended December 31, 1998, $80.7
million was attributable to amortization and depreciation charges compared to
$85.6 million in 1997. Of the $80.7 million for the year ended December 31,
1998, $50.7 million (including $3.0 million of additional amortization to reduce
its investment in a limited liability corporation - See Note 10 to the
Consolidated Financial Statements) was attributable to amortization of the
purchase price of purchased portfolios (compared to $52.0 million in 1997
including $10.0 million of additional amortization to reduce a portion of
purchased portfolios to their estimated fair value). Amortization of goodwill
and other intangibles of $15.7 million was less than $24.8 million in 1997 due
to no account placement amortization in 1998 ($16.7 million in 1997) since
account placement inventory was fully amortized as of December 31, 1997, offset
partially by additional amortization of goodwill related to the three
acquisitions. The increase in depreciation of $5.5 million from $8.8 million in
1997 to $14.3 million in 1998 was attributable primarily to the additional
depreciation related to the three acquisitions.
As a result of the above, the Company generated operating income of $27.7
million for the year ended December 31, 1998 compared to an operating loss of
$18.4 million for the year ended December 31, 1997.
Earnings before interest expense, taxes, depreciation and amortization (EBITDA)
for the year ended December 31, 1998 were $108.4 million compared to $67.2
million for 1997. The increase of $41.2 million consisted of $35.9 million as a
result of the three acquisitions and $5.3 million primarily from $14.4 million
increased revenue from operations unrelated to the acquisitions.
Net interest expense for the year ended December 31, 1998 was $50.6 million
compared to $28.8 million for 1997. The increase was primarily due to additional
indebtedness incurred to finance the Union, NSA and ABC acquisitions.
The provision for income taxes of $0.8 million was primarily provided for state
income taxes as the Company will have an obligation in some states for the year
ended December 31, 1998. In the fourth quarter of 1997, the Company recorded a
net valuation allowance 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 net
deferred tax assets will be realized. Recording the net valuation allowance
against the net deferred tax assets resulted in the 1997 provision for income
taxes of $11.1 million.
Minority interest in 1998 resulted from the Union acquisition. On January 23,
1998, the Company acquired approximately 77% of the outstanding a common stock
of Union through a tender offer. The acquisition of all remaining outstanding
common stock of Union was completed on March 31, 1998. The Company recognized
minority interest in earnings of Union during the period from January 23, 1998
to March 31, 1998.
Due to the factors stated above, the net loss for the year ended December 31,
1998 was $24.3 million compared to $58.3 million for the year ended December 31,
1997 - an improvement of $34.0 million.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues for the twelve months ended December 31, 1997 were $271.7 million
compared to $106.3 million for the year ended December 31, 1996. Revenues from
fee services were $164.8 million for the year ended December 31, 1997 compared
to $54.9 million in 1996. The increase in fee revenues was a result of the
acquisitions of Payco in November 1996, the acquisition of NSA in October 1997
and the acquisition of ABC in November 1997. Revenues generated from purchased
portfolios services increased to $67.8 million for the year ended December 31,
1997 compared to $45.6 million for the comparable period in 1996. The increase
in collections from purchased portfolios resulted primarily from an increase in
purchased portfolio levels and related collection efforts and to a lesser extent
from the Payco acquisition. Outsourcing services revenues of $39.1 million in
1997 compared favorably to 1996 outsourcing revenue of $5.8 million due to the
Payco acquisition.
Operating Expenses for the year ended December 31, 1997 were $290.1 million
compared to $127.4 million for 1996, an increase of $162.7 million. Operating
expenses, exclusive of amortization and depreciation charges, were $204.5
million for the year ended December 31, 1997 and $80.8 million for the
comparable period in 1996. Operating expenses increased as a result of the Payco
acquisition as well as the use of outside collection agencies to service a
portion of purchased portfolios. Of the $290.1 million in expenses for the year
ended December 31, 1997, $52.0 million (including $10.0 million of additional
amortization to reduce a portion of purchased portfolios to their estimated fair
value - See Note 14 to the Consolidated Financial Statements) was attributable
to amortization of the purchase price of purchased portfolios (compared to $27.3
million 1996), $16.7 million was attributable to amortization of account
inventory (compared to $12.3 million in 1996), $8.1 million was attributable to
amortization of goodwill associated with the acquisitions of API, Miller,
Continental, Payco, NSA and ABC (compared to $3.2 million in 1996), $8.8 million
was attributable to depreciation (compared to $2.8 million in 1996). The
increase in amortization and depreciation expense was the result of additional
goodwill and step-up in basis of fixed assets recorded in connection with the
Payco acquisition.
Operating Loss for the year ended December 31, 1997 was $18.4 million compared
to $21.0 million for the comparable period in 1996. The operating loss was a
result of increased amortization related to the step-up in basis of purchased
portfolios related to the API acquisition, goodwill and account placement
inventory related to the acquisition of Payco.
EBITDA for the year ended December 31, 1997 was $67.2 million compared to $24.6
million for the comparable period in 1996. The increase of $42.6 million in
EBITDA reflects additional revenues associated with the acquisitions of Payco,
NSA and ABC and additional portfolios at API, partially offset by the costs
associated with the use of outside collection agencies to service purchased
portfolios.
Net Interest Expense for the year ended December 31, 1997 was $28.8 million
compared to $12.1 million for the comparable period in 1996. The increase was
primarily due to increased debt incurred in 1997 to finance the acquisitions of
Payco, NSA and ABC and to finance additional purchased portfolio purchases.
Net Loss for the year ended December 31, 1997 was $58.3 million compared to
$21.4 million for the comparable period in 1996. The increase in net loss was
attributable to increased amortization expense from the step-up in basis of
acquired portfolios related to the API acquisition, goodwill and account
placement inventory recorded in connection with the acquisition of Payco, the
increase in interest expense related to the indebtedness incurred to finance the
Payco, NSA and ABC acquisitions and portfolio purchases and a provision for
income taxes of $11.1 million as a result of the Company recording a net
valuation allowance of $32.4 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 net deferred tax assets will be realized.
Liquidity and Capital Resources
At December 31, 1998, the Company had cash and cash equivalents of $8.8 million.
The Company's credit agreement provides for a $58.0 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, 1998, the Company had outstanding $25.5 million under the revolving
credit facility leaving $30.9 million, after outstanding letters of credit,
available under the revolving credit facility.
Cash and Cash Equivalents increased from $3.2 million at December 31, 1997 to
$8.8 million at December 31, 1998 principally due to cash provided by operations
and financing activities of $55.2 million and $178.2 million, respectively,
offset by the use of $227.8 million for investing activities primarily for the
acquisition of Union, capital expenditures and the purchase of portfolios. The
cash provided by financing activities was primarily due to the $225.0 million
additional indebtedness to fund the Union acquisition. The Company also held
$22.4 million of cash for clients in restricted trust accounts at December 31,
1998.
Purchased Loans and Accounts Receivable Portfolios decreased from $62.5 million
at December 31, 1997 to $55.5 million at December 31, 1998 due primarily to
amortization of purchased portfolios of $50.7 million offset partially by new
portfolio purchases of $43.2 million. The amount of purchased loans and accounts
receivable portfolios which are projected to be collectible within one year
decreased from $42.9 million at December 31, 1997 to $35.1 million at December
31, 1998.
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, 1998 and December 31, 1997 by type of
receivable is shown below:
December 31, 1998 December 31, 1997
------------------------------------ ------------------------------------
Original Gross Original Gross
Principal Value Current Long-term Principal Value Current Long-term
--------------- ------- --------- --------------- ------- ---------
(in millions) (in thousands) (in millions) (in thousands)
Consumer loans...... $2,114 $ 5,871 $ 5,744 $2,039 $ 8,978 $ 4,948
Student loans....... 328 2,688 94 322 4,629 -
Credit cards........ 897 15,020 11,469 509 12,575 10,765
Health clubs........ 1,460 9,946 2,283 1,309 15,307 2,248
Commercial.......... 129 1,532 846 41 1,426 1,576
------ ------- ------- ------ ------- -------
$4,928 $35,057 $20,436 $4,220 $42,915 $19,537
====== ======= ======= ====== ======= =======
Net deferred taxes was an asset of $0.4 million at December 31, 1997. At
December 31, 1998, net deferred taxes was zero due to a net valuation allowance
of $68.3 million. The net deferred tax balances at December 31, 1998 and
December 31, 1997 relate principally to net operating loss carryforwards and
future temporary deductible differences. The realization of this asset is
dependent on generating sufficient taxable income prior to expiration of the
loss carryforwards in years through 2018. At December 31, 1998, the Company has
a cumulative net valuation allowance of $68.3 million to reflect management's
assessment, based on the weight of the available evidence of current and
projected of future book taxable income, that there is significant uncertainty
that any of the benefits from the net 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. During 1998, the Company has
significantly increased its total debt from $325.0 million at December 31, 1997
to $528.1 million at December 31, 1998. This increase in debt primarily resulted
from the acquisition of Union. Since the Company has a history of generating net
operating losses and has significantly increased its total interest expense to
be incurred, 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, could be increased in future years if estimates of future
taxable income during the carryforward period change.
The Company's current debt structure at December 31, 1998 consists of $422.1
million bank credit facility, $100.0 million 11% Senior Subordinated Notes (the
"Notes") and other indebtedness of $6.0 million. See Note 6 of the Consolidated
Financial Statements of OSI included elsewhere herein for a description of the
amended credit agreement, effective January 1998.
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
expense 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.
In the fourth quarter of 1998, a qualifying special-purpose finance company, OSI
Funding Corp., formed by the Company, entered into a revolving warehouse
financing arrangement for up to $100.0 million of funding capacity for the
purchase of loans and accounts receivable over its five year term. This
arrangement will provide the Company expanded portfolio purchasing capability in
a very opportunistic buying market.
Capital expenditures for the year ended December 31, 1998 were $13.5 million.
The Company expects to spend approximately $17.5 million on capital expenditures
(exclusive of any expenditures in connection with acquisitions) in 1999.
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, 1998, 1997 and 1996.
Year 2000
As the Year 2000 approaches, many corporate systems worldwide could malfunction
or produce incorrect results because they cannot process date-related
information properly. Dates play a key role in dependable functioning of the
software applications, software systems, information technology infrastructure,
and embedded technology (i.e., non-technical assets such as time clocks and
building services) the Company relies upon in day-to-day operations for
innumerable tasks. This includes any tasks requiring date-dependent arithmetic
calculations, sorting and sequencing data, and many other functions.
The Company identified this problem as a key focus during 1997 and as part of
any subsequent due-diligence procedures related to acquisitions completed during
1998. The Company has assessed the impact of Year 2000 issues on the processing
of date-related information for all of its information systems infrastructure
(e.g., production systems) and significant non-technical assets. As the new
millennium approaches, the Company has developed and implemented a Year 2000
program to deal with this important issue in an effective and timely manner.
This problem has received significant senior management attention and resources.
Management reviews have been held on this topic. During 1998 and 1999, the
Company's Board of Directors received and will continue to receive quarterly
presentations at each regular Board meeting regarding the Company's overall Year
2000 compliance status and readiness.
An independent consulting firm has been retained to provide independent
verification and testing of the production systems. Under the direction of the
Company's Senior Vice President and Chief Information Officer, the Company has
established a program management structure, a management process and methodology
and proactive client and vendor management strategies to manage the Year 2000
risk.
Because many of the Company's client relationships are supported through
computer-system interfaces, it is critical that the Company works proactively
with its clients to achieve Year 2000 compliance. The Company has established a
proactive client management strategy focused on enabling the Company to work
together with clients to assure Year 2000 compliance between respective computer
systems.
The implementation of the client management strategy was commenced in 1998.
Letters were sent to significant clients, inquiring about their Year 2000
compliance plans and status. The Company has established a follow-up process
with each key client, taking a proactive, customer-focused approach to achieving
Year 2000 compliance with its customers.
The Company has also communicated with its strategic suppliers and equipment
vendors, including suppliers of non-technical assets, seeking assurances that
they and their products will be Year 2000 ready. The Company's goal is to obtain
as much detailed information as possible about its strategic suppliers and
equipment vendors' Year 2000 plans to identify those companies which appear to
pose any significant risk of failure to perform their obligations to the Company
as a result of the Year 2000. The Company has compiled detailed information
regarding all of its strategic suppliers and equipment vendors. This will be an
ongoing process during the Year 2000 project. For those strategic suppliers and
equipment vendors whose response was not satisfactory, the Company has developed
contingency plans to ensure that sufficient alternative resources are available
to continue with business operations.
The target date for completion of all production systems and significant
non-production systems (e.g., predictive dialer systems, phone switches, wide
area network hardware), including non-technical assets, is May 1999. Testing is
well underway for all systems with completion anticipated to be no later than
mid-1999.
Spending for modifications and updates are being expensed as incurred and is not
expected to have a material impact on the results of operations or cash flows.
The cost of the Company's Year 2000 project is being funded from cash flows
generated from operations. The Company estimates that its total Year 2000
expenses will be in the range of $1.4 to $1.6 million. To date, the Company has
expended approximately $1.0 million, primarily for contract programmers and
consulting costs associated with the evaluation, assessment and remediation of
computer systems.
The Company is dependent upon its own internal computer technology and relies
upon the timely performance of its suppliers and customers and their systems. A
substantial part of the Company's day-to-day operations is dependent on power
and telecommunications services, for which alternative sources of services may
be limited. A large-scale Year 2000 failure could impair the Company's ability
to provide timely performance results required by the Company's customers,
thereby causing potential liability, lost revenues and additional expenses, the
amounts which have not been estimated. The Company's Year 2000 project seeks to
identify and minimize this risk and includes testing of its in-house
applications, purchased software and hardware to ensure that all such systems
will function before and after the Year 2000. The Company is continually
refining its understanding of the risk the Year 2000 poses to its strategic
suppliers and customers based upon information obtained through its surveys.
This refinement will continue through 1999.
The Company's Year 2000 project includes the development of contingency plans
for business critical systems, as well as for strategic suppliers and customers
to attempt to minimize disruption to its operations in the event of a Year 2000
failure. The Company will be formulating plans to address a variety of failure
scenarios, including failures of its in-house applications, as well as failures
of strategic suppliers and customers. The Company anticipates that it will
complete Year 2000 contingency planning by mid-1999.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, Accounting for Derivative Instruments and
Hedging Activities, which is effective for fiscal years beginning after June 15,
1999. The statement provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. The Company
has not determined the impact on the consolidated statement of operations and
consolidated balance sheet.
In March 1998, the AICPA issued Statement of Position No. 98-1 Accounting for
the Costs of Computer Systems Developed or Obtained for Internal Use ("SOP
98-1"), which is effective for fiscal years beginning after December 15, 1998.
SOP 98-1 provides guidelines for capitalization of developmental costs of
proprietary software and purchased software for internal use. The adoption of
SOP 98-1 is not expected to have a material impact on the consolidated statement
of operations and consolidated balance sheet.
Forward-Looking Statements
The following statements in this 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 cost and successful
implementation of the Company's Year 2000 initiatives, (2) statements concerning
the anticipated costs and outcome of legal proceedings and environmental
liabilities, (3) statements regarding anticipated changes in the Company's
opportunities in its industry, (4) statements regarding the Company's ability to
fund its future operating expenses and meet its debt service requirements as
they become due, (5) statements regarding the Company's expected capital
expenditures and facilities (6) any statements preceded by, followed by or that
include the word "believes," "expects," "anticipates," "intends," "should,"
"may," or similar expressions; and (7) other statements contained or
incorporated by reference in this document regarding matters that are not
historical facts.
Because such statements are subject to risks and uncertainties, actual results
may differ materially from those expressed or implied by such forward-looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to: (1) the demand for the Company's services, (2)
the demand for accounts receivable management generally, (3) general economic
conditions, (4) changes in interest rates, (5) competition, including but not
limited to pricing pressures, (6) changes in governmental regulations including,
but not limited to the federal Fair Debt Collection Practices Act and comparable
state statutes, (7) the status and effectiveness of the Company's Year 2000
efforts, (8) legal proceedings, (9) environmental investigations and clean up
efforts, (10) the Company's ability to rationalize operations of recent
acquisitions, and (11) 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.
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 credit
agreement, the Company will employ derivative financial instruments as part of
its risk management program. The Company's objective is to manage risks and
exposures of its debt and not to trade such instruments for profit or loss.
The Company uses interest rate cap, collar and 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 derivative
financial instruments and other 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 caps, swap and collars, 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
1999 2000 2001 2002 2003 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
Liabilities
Long-term debt, including current portion
Fixed rate .................................... - - - - - $100.0 $100.0 $95.3
Average interest rate.......................... 11.0% 11.0% 11.0% 11.0% 11.0% 11.0%
Variable rate ................................. $16.0 $19.8 $47.3 $51.0 $68.8 $219.2 $422.1 $422.1
Average interest rate ......................... (1) (1) (1) (1) (1) (1)
Interest Rate Derivative Financial Instruments Related to Debt
Interest Rate Caps
Notional amount ............................... $50.0 - - - - - $50.0 $.1
Strike rate ................................... 7.3% - - - - -
Forward rate .................................. (2) - - - - -
Interest Rate Swap
Pay Fixed/Receivable Variable ................. - - $32.0 - - - $32.0 $(.7)
Average pay rate .............................. 6.1% 6.1% 6.1% - - -
Average receive rate........................... (2) (2) (2) - - -
Interest Rate Collars
Notional amount ............................... - - $35.0 $33.0 - - $68.0 $(1.1)
Strike cap rate ............................... - - 6.5% 6.5% - -
Strike floor rate ............................. - - 5.6% 5.3% - -
Forward rate .................................. (2) (2) (2) (2) - -
(1) - Three month LIBOR (5.3% at December 31, 1998) plus weighted-average margin of 2.9%.
(2) - Three month LIBOR
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
- - ------------------------ --- -----------------------------------
Jeffrey E. Stiefler 52 Chairman of the Board of Directors
Timothy G. Beffa 48 Director, President and
Chief Executive Officer
David E. De Leeuw 54 Director
David E. King 40 Director, Secretary and Treasurer
Tyler T. Zachem 33 Director and Vice President
David G. Hanna 35 Director
Frank J. Hanna, III 37 Director
Nathan W. Pearson, Jr. 48 Director
Robert A. Marshall 58 Director
William B. Hewitt 60 Director
Courtney F. Jones 59 Director
Daniel J. Dolan 46 Executive Vice President and
Chief Financial Officer
Michael A. DiMarco 41 Executive Vice President -
President Fee Services
C. Bradford McLeod 50 Senior Vice President,
Human Resources
Patrick Carroll 56 Senior Vice President,
National Accounts
Jeffrey E. Stiefler (52), Chairman of the Board of Directors since January 10,
1996. Previously, Mr. Stiefler was President and Director of American Express
Company, where he had previously served in various capacities since 1983,
including President and Chief Executive Officer of IDS Financial Services. Prior
to joining the Company, Mr. Stiefler held various positions with the Meritor
Financial Group, including Chairman of the Meritor Savings Bank Florida and the
Meritor Savings Bank Washington D.C., and Citicorp, including Vice President and
Regional Business Manager of the New York Banking Division and Senior Vice
President and Regional Business Manager of Nationwide Financial Services. Mr.
Stiefler currently serves as a director of Safeskin Corporation and chairman and
Chief Executive Officer of International Data Response Corporation.
Timothy G. Beffa (48), 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. Mr. Beffa
currently serves as a director of DIMAC Holdings, Inc.
David E. De Leeuw (54), Director of the Company since September 21, 1995. Mr. De
Leeuw is a managing general partner of MDC Management Company III, L.P., which
is the general partner of McCown De Leeuw & Co. III, L.P. and McCown De Leeuw &
Co. III (Europe), L.P., a managing general partner of MDC Management Company
IIA, L.P., which is the general partner of McCown De Leeuw & Co. III (Asia),
L.P. and a member of Gamma Fund, LLC. Prior to founding McCown De Leeuw & Co.
with George E. McCown in 1984, Mr. De Leeuw was Manager of the Leveraged
Acquisition Unit and Vice President in the Capital Markets Group at Citibank,
N.A. Mr. De Leeuw also worked with W.R. Grace & Co. where he was Assistant
Treasurer and manager of Corporate Finance. Mr. De Leeuw began his career as an
investment banker with Paine Webber Incorporated. He currently serves as a
director of DIMAC Holdings, Inc., Aurora Foods Inc. and American Residential
Investment Trust.
David E. King (40), Secretary, Treasurer and Director of the Company since
September 21, 1995. Mr. King is a general partner of MDC Management Company III,
L.P., which is the general partner of McCown De Leeuw & Co. III, L.P., and
McCown De Leeuw & Co. Offshore (Europe) III, L.P. a general partner of MDC
Management Company IIIA, L.P., which is the general partner of McCown De Leeuw &
Co. III (Asia), L.P. and a member of Gamma Fund, LLC. Mr. King has been
associated with McCown De Leeuw & Co. since 1990. He currently serves as a
director of DIMAC Holdings, Inc., Fitness Holdings Inc., RSP Manufacturing
Corporation and Sarcom.
Tyler T. Zachem (33), Vice President and Director of the Company since September
21, 1995. Mr. Zachem is a special limited partner of MDC Management Company III,
which is the general partner of McCown De Leeuw & Co. III; and McCown De Leeuw &
Co. III (Europe), L.P., and a special limited partner of MDC Management Company
IIIA, L.P., which is the general partner of McCown De Leeuw & Co. III (Asia),
L.P. Mr. Zachem has been associated with McCown De Leeuw & Co. since July 1993.
Mr. Zachem previously worked as a consultant with McKinsey & Co. and as an
investment banker with McDonald & Company. He currently serves as a director of
RSP Manufacturing Corporation, The Brown Schools, Inc., Aurora Foods Inc. and
Papa Gino's Inc.
David G. Hanna (35), Director of the Company since September 21, 1995. Since
1992, Mr. Hanna has served as President of HBR Capital, Ltd., an investment
management company. Mr. Hanna is also President and Chairman of the Board of
CompuCredit Corporation and has served in such capacity since its inception in
1996. David G. Hanna is the brother of Frank J. Hanna, III.
Frank J. Hanna, III (37), Director of the Company since September 21, 1995.
Since 1992, Mr. Hanna has served as Chief Executive Officer of HBR Capital,
Ltd., an investment management company. Mr. Hanna also serves as a director of
Cerulean Companies, Inc. Frank J. Hanna, III is the brother of David G. Hanna.
Nathan W. Pearson, Jr. (48), Director of the Company since July 1997. Mr.
Pearson is an operating affiliate of McCown De Leeuw & Co. Mr. Pearson has been
affiliated with McCown De Leeuw since 1997. Since 1996, Mr. Pearson has been
Managing Director of Commonwealth Holdings, a private investment firm. From 1988
to 1995, Mr. Pearson was Executive Vice President and Chief Financial Officer of
Broadcasting Partners, Inc., a radio broadcasting leveraged buyout organization
and since 1995, Mr. Pearson has been a principal of investment and management of
Broadcasting Partners, Inc. Prior to joining Broadcasting Partners, Inc., Mr.
Pearson was a management consultant with McKinsey and Company from 1982 to 1988.
Robert A. Marshall (58), Director of the Company since February 1998. Mr.
Marshall is President and Chief Operating Officer of Arcadia Financial, Inc.
since February 1999. He is a director and has been a director of Arcadia
Financial, Ltd. since March 1997. Prior to joining Arcadia Financial, Ltd., Mr.
Marshall served as a consultant to the financial services industry. From 1989 to
January 1997, Mr. Marshall served in various leadership positions at Advanta
Corporation. He currently serves as a director of Trajecta Inc. and Chairman of
the Board of Impact Services, Inc.
William B. Hewitt (60), Director of the Company since February 1998. Mr. Hewitt
currently serves as a consultant to the Company since January 1998. From July
1997 to January 1998, Mr. Hewitt served as President and Chief Executive Officer
of Union and prior to that he served as President and Chief Operating Officer of
Union since May 1995. 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. are subsidiaries of Union.
Courtney F. Jones (59), Director of the Company since April 1998. He is Managing
Director in charge of the New World Banking Group of Bankers Trust. Mr. Jones
has been a director of RSP Manufacturing Corporation since March 1998, Medical
Manager Corporation since April 1997, and First Data Corporation since April
1992. He was a Managing Director in Merrill Lynch's Investment Banking Division
from July 1989 to December 1990. Prior thereto, he served as Chief Financial
Officer, Executive Vice President and a member of the Board of Directors for
Merrill Lynch & Co. Inc. from October 1985. From February 1982 to September
1985, Mr. Jones served as Treasurer and Secretary of the Finance Committee of
the Board of Directors of General Motors Corporation. He also was formerly a
director of General Motors Acceptance Corporation and General Motors Insurance
Company.
Daniel J. Dolan (46), Executive Vice President and Chief Financial Officer of
the Company since October 1997. Mr. Dolan has 23 years experience in public
accounting, the last 11 years as a partner of Ernst & Young LLP. Mr. Dolan
resigned from the Company effective February 28, 1999.
Michael A. DiMarco (41), Executive Vice President - President Fee Services of
the Company since September 1998. 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 National Car Rental, Inc.
C. Bradford McLeod (50), Senior Vice President, Human Resources of the Company
since September 1998. Mr. McLeod has over 20 years of diverse strategic human
resources experience. From 1997 until September 1998, Mr. McLeod served as Vice
President of Human Resources for LCC International, a supplier of products and
services to the wireless communications industry. From 1994 to 1997, he served
as Vice President of Human Resources for a $500 million division of Pulte Home
Corporation, the country largest builder of residential housing. Earlier in his
career, Mr. McLeod held senior human resources positions with Deloitte & Touche
LLP and Frito Lay, a division of PepsiCo.
Patrick Carroll (56), Senior Vice President, National Accounts since October
1996. From 1988 until October 1996, Mr. Carroll served as a director and
Executive Vice President of Sales and Marketing for Payco. Mr. Carroll joined
Payco in 1964 and served in both production and sales positions.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid or
accrued for by the Company on behalf of the Company's Chief Executive Officer
and the four other most highly compensated executive officers of the Company for
the years ended December 31, 1998, 1997 and 1996.
Summary Compensation Table
-------------------------------------------------------------------
Long Term
Other Annual Compensation All Other
Name and Salary Bonus Compensation Awards Compensation
Principal Position Year ($) ($) ($) Options (#) ($)
- - ------------------ ----- ------- ------ ------------ ------------- ------------
Timothy G. Beffa (1) 1998 350,000 405,300
President and CEO 1997 320,110 457,500 41,555
1996 103,846 200,000 131,421.66
Daniel J. Dolan (2) 1998 260,000 -(2) 6,384(3)
Executive Vice 1997 56,571 130,000 75,000
President and CFO
Patrick Carroll 1998 225,000 79,700 25,277(4)
Senior Vice President, 1997 186,875 60,000 25,000
National Accounts 1996 120,000 200,000 267,000(5)
Michael A. DiMarco(6) 1998 108,337 220,000 14,491(4)
Executive Vice
President - President
Fee Services
C. Bradford McLeod(7) 1998 52,390 95,000 15,848(4)
Senior Vice
President, Human
Resources
(1) 1996 compensation based on an annual salary of $300,000.
(2) Mr. Dolan resigned effective February 28, 1999. 1997 compensation based on
an annual salary of $260,000.
(3) Represents split dollar life insurance and long-term disability premiums
paid by the Company. Upon termination of split dollar life insurance
policy, residual cash surrender value (cash surrender value less premiums
paid) is returned to the executive officer.
(4) Payment of taxes by the Company for includable W-2 relocation expenses.
(5) Represents value of stock acquired in connection with the acquisition of
Payco by the Company
(6) Based on an annual salary of $325,000. Mr. DiMarco was hired in September
1998.
(7) Based on an annual salary of $175,000. Mr. McLeod was hired in September
1998.
Employment Agreements
On September 1, 1997, OSI entered into an amendment to the employment agreement
with Timothy G. Beffa. Pursuant to the employment agreement, Mr. Beffa serves as
Chief Executive Officer of the Company. On December 31 of each year, the term of
the employment agreement is automatically extended for an additional year unless
either party gives 30 days advance termination notice. If the Company terminates
Mr. Beffa's employment without "cause" (as defined in the agreement) or the
Company does not agree to extend the employment term upon the expiration
thereof, Mr. Beffa would be entitled to receive an amount equal to his total
cash compensation (base salary plus bonus) for the preceding year and continue
to receive medical and dental health benefits for one year. Mr. Beffa received
an annual salary of $350,000 and received a bonus of $405,300 for fiscal year
1998. Starting in fiscal year 1998, Mr. Beffa is eligible for an annual bonus of
up to 150% of his annual base salary. Effective October 9, 1996, Mr. Beffa
received options to purchase 131,421.66 shares of common stock of the Company,
which options vest eight years from date of grant or earlier upon the
satisfaction of certain performance targets and/or the occurrence of certain
liquidity events. Effective March 14, 1997, Mr. Beffa received additional
options to purchase up to 41,555 shares of common stock of the Company, which
also vest eight years from date of grant or earlier upon the satisfaction of
certain performance targets and/or the occurrence of certain liquidity events.
On October 16, 1997, OSI entered into an employment agreement with Daniel J.
Dolan. Pursuant to the employment agreement, Mr. Dolan served as Chief Financial
Officer of the Company. Mr. Dolan received an annual salary of $260,000 for
fiscal year 1998. Commencing in fiscal year 1998, Mr. Dolan was eligible for an
annual bonus with a target of 66-2/3% of his annual base salary. Effective
December 2, 1997, Mr. Dolan received options to purchase 75,000 shares of common
stock of the Company, such options vest eight years from date of grant or
earlier upon the satisfaction of certain performance targets and/or the
occurrence of certain liquidity events. Effective February 28, 1999, Mr. Dolan
resigned from the Company and, upon his resignation, forfeited the options to
acquire 75,000 shares. Although Mr. Dolan's employment agreement contained
severance provisions similar to those in Mr. Beffa's employment agreement, Mr.
Dolan will not receive severance payments because he voluntarily resigned.
On September 1, 1998, OSI entered into an employment agreement with Michael A.
DiMarco. Pursuant to the employment agreement, Mr. DiMarco serves as Executive
Vice President President Fee Services of the Company. On December 31 of each
year, the term of the employment agreement is automatically extended for an
additional year unless either party gives 30 days advance termination notice. If
the Company terminates Mr. DiMarco's employment without "cause" (as defined in
the agreement) or the Company does not agree to extend the employment term upon
the expiration thereof, Mr. DiMarco would be entitled to receive (i) an amount
equal to his salary for the preceding year, and (ii) medical and dental health
benefits for one year. The Company also agreed to reimburse Mr. DiMarco for
normal moving and relocation expenses to relocate his residence to St. Louis and
for income taxes payable for him as a result of such moving and relocation
expenses. In addition, the Company advanced Mr. DiMarco $117,000 to facilitate
his relocation. Mr. DiMarco receives an annual salary of $325,000 and received a
bonus of $220,000 for fiscal year 1998. Commencing in fiscal year 1999, Mr.
DiMarco is eligible for an annual bonus with a target of 67% of his annual base
salary.
On September 14, 1998, OSI entered into an employment agreement with C. Bradford
McLeod. Pursuant to the employment agreement, Mr. McLeod serves as Senior Vice
President, Human Resources of the Company. On December 31 of each year, the term
of the employment agreement is automatically extended for an additional year
unless either party gives 30 days advance termination notice. If the Company
terminates Mr. McLeod's employment without "cause" (as defined in the agreement)
or the Company does not agree to extend the employment term upon the expiration
thereof, Mr. McLeod would be entitled to receive (i) an amount equal to his
salary for the preceding year, (ii) medical and dental health benefits for one
year, and (iii) reasonable outplacement services for one year. If, within two
years of his employment with the Company, certain types of liquidity events
occur or if Mr. Beffa no longer serves as Chief Executive Officer of the
Company, Mr. McLeod would also be entitled to terminate his employment with the
Company and receive these severance benefits. The Company also agreed to
reimburse Mr. McLeod for normal moving and relocation expenses to relocate his
residence to St. Louis, for duplicate housing expenses for up to six months
after he purchased a residence in the St. Louis area, and for income taxes
payable for him as a result of such moving and relocation expenses. In addition,
the Company advanced Mr. McLeod $148,000 to facilitate his relocation. Mr.
McLeod receives an annual salary of $175,000 and received a bonus of $95,000 for
fiscal year 1998. Commencing in fiscal year 1999, Mr. McLeod is eligible for an
annual bonus with a target of 50% of his annual base salary.
Director Compensation
Non-employee directors of OSI receive $2,000 per regularly scheduled meeting of
the Board of Directors, $1,000 per special meeting of the Board of Directors and
$500 per committee meeting plus, in each case, reimbursement for travel and
out-of-pocket expenses incurred in connection with attendance at all such
meetings. Except as described below, no director of OSI receives any other
compensation from OSI for performance of services as a director of OSI (other
than reimbursement for travel and out-of-pocket expenses incurred in connection
with attendance at Board of Director meetings). Effective February 16, 1996, the
Company's Chairman of the Board, Mr. Stiefler, received options to purchase
23,044 shares of common stock of the Company, which options vest eight years
from date of grant or earlier upon the satisfaction of certain performance
targets and/or the occurrence of certain liquidity events. Mr. Stiefler receives
an annual salary of $150,000. Effective February 24, 1998, Mr. Hewitt and Mr.
Marshall each received options to purchase 3,000 shares of common stock of the
Company. Effective May 28, 1998, Mr. Jones received options to purchase 3,000
shares of common stock of the Company. These options time-vest over a three year
period.
Option Plans
The Company maintains a 1995 Stock Option and Stock Award Plan (the "Stock
Option Plan"). The Stock Option Plan is administered by the Compensation
Committee of the Board of Directors of the Company. Under the Stock Option Plan,
the Compensation Committee may grant or award (a) options to purchase stock of
the Company (which 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), (b) stock appreciation rights granted in
conjunction with stock options, (c) restricted stock, or (d) bonuses payable in
stock, to key salaried employees of the Company, including officers.
A total of 750,000 shares of common stock of the Company are reserved for
issuance under the Stock Option Plan. As of March 19, 1999, options to purchase
up to 483,820.66 shares of the Company's common stock are outstanding under the
Stock Option Plan.
During 1998, there were no stock option awards to, or stock option exercises by,
any of the Company's executive officers. As of March 19, 1999, the following
table sets forth options held by the current executive officers:
# of Options Exercisable Unexercisable
Timothy G. Beffa 172,976.66 34,595 138,381.66
President and CEO
Patrick Carroll 25,000 5,000 20,000
Senior Vice President,
National Accounts
There is no trading market for the Company's common stock.
Committee Report on Executive Compensation
The Compensation Committee recommends compensation arrangements for the
Company's executive officers and administers the Company's Stock Option Plan.
The Company's compensation program is designed to be competitive with companies
similar in structure and business to the Company.
The Company's executive compensation program is 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. Bonuses for 1998 were determined by the Compensation Committee in March
1999 and paid shortly thereafter. The amount of bonuses earned by the Company's
executive officers were determined by the Compensation Committee based upon the
performance of each executive during the year and the performance of the Company
against pre-established earnings before interest, taxes, depreciation and
amortization ("EBITDA") goals.
The Company has entered into an employment agreement with Timothy G. Beffa to
serve as President and Chief Executive Officer of OSI. Under the employment
agreement, Mr. Beffa's base salary for 1998 was $350,000 and his bonus target
potential was $525,000, 150% of his base salary. 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 OSI senior executives. For 1998, Mr. Beffa's
bonus was determined based upon the following two factors, which were weighted
as indicated: the Company's performance against pre-established EBITDA goals
(70%), and Mr. Beffa's attainment of pre-established objectives, based on
specific strategic initiatives to both build a suitable management
infrastructure and deliver on strategic growth initiatives (30%). Based on the
Company's EBITDA performance and Mr. Beffa's substantial obtainment of personal
objectives, Mr. Beffa's bonus for 1998 was $405,300--77.2% of his target bonus.
Compensation Committee
Mr. David E. King
Mr. Jeffery E. Stiefler
Mr. Tyler T. Zachem
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 19, 1999, the authorized capital stock of the Company consists of
(i) 1,250,000 shares of Preferred Stock, no par value (the "Preferred Stock"),
of which 973,322.32 shares are issued and outstanding, (ii) 7,500,000 shares of
Voting Common Stock, par value $.01 per share (the "Voting Common Stock"), of
which 3,477,126.01 are issued and outstanding, (iii) 7,500,000 shares of Class A
Non-Voting Common Stock, par value $.01 per share (the "Class A Non-Voting
Common Stock"), of which 391,740.58 are issued and outstanding, (iv) 500,000
shares of Class B Non-Voting Stock, par value $.01 per share (the "Class B
Non-Voting Common Stock"), of which 400,000 are issued and outstanding, and (v)
1,500,000 shares of Class C Non-Voting Common Stock, par value $.01 per share
(the "Class C Non-Voting Common Stock" and together with the Class A Non-Voting
Common Stock and the Class B Non-Voting Common Stock, the "Non-Voting Common
Stock," and together with the Voting Common Stock, the "Common Stock"), of which
1,040,000 are issued and outstanding. In addition, a total of 46,088.67 shares
of Voting Common Stock were issuable upon exercise of warrants held by certain
warrant holders, and up to 483,820.66 shares of Voting Common Stock were
issuable upon the exercise of certain management options.
Each Holder of Voting Common Stock has one vote for each share of Voting Common
Stock held by such holder on all matters to be voted upon by the stockholders of
the Company. The holders of Preferred Stock have no voting rights except as
expressly provided by law and the holders of Non-Voting Common Stock have no
voting rights other than the right to vote as a separate class on certain
matters that would adversely the rights of such holders. Each share of Preferred
Stock is convertible into one share of Common Stock at the holder's option at
any time after September 20, 1996. The Company may, at its sole option, upon
written notice to the holders of Preferred Stock, redeem any or all of the
shares of Preferred Stock outstanding for $12.50 per share plus cash equal to
all accrued and unpaid dividends through the redemption date, whether or not
such dividends have been authorized or declared. Each share of Voting Common
Stock is convertible into one share of Class A Non-Voting Common Stock at the
holder's option, and each share of Class A Non-Voting Common Stock is
convertible into one share of Voting Common Stock at the holder's option. Each
share of Class B Non-Voting Common Stock and Class C Non-Voting Common Stock is
convertible into one share of Voting Common Stock, at the holder's option, upon
the occurrence of certain "Conversion Events," as defined in the Company's
certificate of incorporation.
The following table sets forth the number and percentage of shares of each class
of the Company's capital stock beneficially owned as of March 19, 1999 by (i)
each person known to the Company to be the beneficial owner of more than 5% of
any class of the Company's equity securities, (ii) each of the Company's
directors and nominees, and (iii) all directors and executive officers of the
Company as a group.
Amount and
Nature of Percent
Beneficial of
Title of Class Name and Address Beneficial Owner Ownership Class(1)
Preferred Stock McCown De Leeuw & Co. III, L.P.(2) 674,836.42 66.6%
McCown De Leeuw & Co. III
(Europe), L.P.(2) 674,836.42 66.6%
McCown De Leeuw & Co. III
(Asia), L.P.(2) 674,836.42 66.6%
Gamma Fund LLC(2) 674,836.42 66.6%
Rainbow Trust One(3) 168,709.98 16.7%
Rainbow Trust Two(4) 168,708.81 16.7%
David E. De Leeuw(2) 674,836.42 66.6%
David E. King(2) 674,836.42 66.6%
Frank J. Hanna, III(3) 168,709.98 16.7%
David G. Hanna(4) 168,708.81 16.7%
All directors and officers as
a group(2)(3)(4) 1,012,255.21 100.0%
Voting Common Stock McCown De Leeuw & Co. III, L.P.(5) 1,897,793.01 54.6%
McCown De Leeuw & Co. Offshore III
(Europe), L.P.(5) 1,897,793.01 54.6%
McCown De Leeuw & Co. III
(Asia), L.P.(5) 1.897,793.01 54.6%
Gamma Fund LLC(5) 1,897,793.01 54.6%
Rainbow Trust One(3) 466,667.00 13.4%
Rainbow Trust Two(4) 466,666.00 13.4%
Peter C. Rosvall 383,600.00 11.0%
David E. De Leeuw(5) 1,897,793.01 54.6%
David E. King(5) 1,897,793.01 54.6%
Frank J. Hanna, III(3) 466,667.00 13.4%
David G. Hanna(4) 466,666.00 13.4%
Nathan W. Pearson 12,000.00 *
All directors and officers as
a group(3)(4)(5) 3,278,321.01 94.6%
Class A Non-Voting McCown De Leeuw & Co. III, L.P.(6) 391,740.58 100.0%
Common Stock David E. De Leeuw(6) 391,740.58 100.0%
David E. King(6) 391,740.58 100.0%
All directors and officers as
a group(6) 391,740.58 100.0%
Class B Non-Voting Chase Equity Associates, L.P.(7) 400,000.00 100.0%
Common Stock All directors and officers as a group 0.00 0.0%
Class C Non-Voting MLQ Investors, L.P.(8) 640,000.00 61.5%
Common Stock The Clipper Group(9) 400,000.00 38.5%
All directors and officers as a group 0.00 0.0%
* 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) Shares of Preferred Stock are convertible, at the holder's option, into an
identical number of shares of Common Stock at anytime after September 20,
1996. Includes 598,917.28 shares owned by McCown De Leeuw & Co. III, L.P.,
an investment partnership whose general partner is MDC Management Company
III, L.P. ("MDC III"), 50,612.76 shares held by McCown De Leeuw & Co. III
(Europe), L.P., an investment partnership whose general partner is MDC
III, 11,809.72 shares held by McCown De Leeuw & Co. III (Asia), an
investment partnership whose general partner is MDC Management Company
IIIA, L.P. ("MDC IIIA"), and 13,496.66 shares owned by Gamma Fund LLC, a
California limited liability company. The voting members of Gamma Fund LLC
are George E. McCown, David De Leeuw, David E. King, Robert B. Hellman,
Jr., Charles Ayres and Steven Zuckerman, who are also the only general
partners of MDC III and MDC IIIA. Dispositive decisions regarding the
Preferred Stock are made by Mr. McCown and Mr. De Leeuw, as Managing
General Partners of each of MDC III and MDC IIIA, who together have more
than the required two-thirds-in-interest vote of the Managing General
Partners necessary to effect such decision on behalf of any such entity.
Dispositive decisions regarding the Preferred Stock owned by Gamma Fund
LLC are made by a vote or consent of a majority in number of voting
members of Gamma Fund LLC. Messrs. McCown, De Leeuw, King, Hellman, Ayres
and Zuckerman have no direct ownership of any shares of Preferred Stock
and disclaim beneficial ownership of any shares of Preferred Stock except
to the extent of their proportionate partnership interests or membership
interests (in the case of Gamma Fund LLC). The address of all the
above-mentioned entities is c/o McCown De Leeuw & Co., 3000 Sand Hill
Road, Building 3, Suite 290, Menlo Park, California 94025.
(3) Shares of Preferred Stock are convertible, at the holder's option, into an
identical number of shares of Common Stock at any time after September 20,
1996. Frank J. Hanna, III, a director of the Company, is trustee of
Rainbow Trust One. The address of Rainbow Trust One is c/o HBR Capital,
Two Ravinia Drive, Suite 1750, Atlanta, Georgia 30346.
(4) Shares of Preferred Stock are convertible, at the holder's option, into an
identical number of shares of Common Stock at any time after September 20,
1996. David G. Hanna, a director of the Company, is trustee of Rainbow
Trust Two. The address of Rainbow Trust Two is c/o HBR Capital, Two
Ravinia Drive, Suite 1750, Atlanta, Georgia 30346.
(5) Includes 1,640,220.48 shares owned by McCown De Leeuw & Co. III, L.P., an
investment partnership whose general partner is MDC III, 171,715.02 shares
held by McCown De Leeuw & Co. III (Europe), L.P., an investment
partnership whose general partner is MDC III, 40,066.84 shares held by
McCown De Leeuw & Co. III (Asia), L.P., an investment partnership whose
general partner is MDC IIIA, and 45,790.67 shares owned by Gamma Fund LLC,
a California limited liability company. The voting members of Gamma Fund
LLC are George E. McCown, David De Leeuw, David E. King, Robert B.
Hellman, Jr., Charles Ayres and Steven Zuckerman, who are also the only
general partners of MDC III and MDC IIIA. Voting and dispositive decisions
regarding the Voting Common Stock are made by Mr. McCown and Mr. De Leeuw,
as Managing General Partners of each of MDC III and MDC IIIA, who together
have more than the required two-thirds-in-interest vote of the Managing
General Partners necessary to effect such decision on behalf of any such
entity. Voting and dispositive decisions regarding the Voting Common Stock
owned by Gamma Fund LLC are made by a vote or consent of a majority in
number of voting members of Gamma Fund LLC. Messrs. McCown, De Leeuw,
King, Hellman, Ayres and Zuckerman have no direct ownership of any shares
of Voting Common Stock and disclaim beneficial ownership of any shares of
Voting Common Stock except to the extent of their proportionate
partnership interests or membership interests (in the case of Gamma Fund
LLC).
(6) Shares of Class A Non-Voting Common Stock are convertible, at the holder's
option, into an identical number of shares of Voting Common Stock at the
holder's option. See "Security Ownership". The general partner of McCown
De Leeuw & Co. III, L.P. is MDC III. The only general partners of MDC III
are George E. McCown, David De Leeuw, David E. King, Robert B. Hellman,
Jr., Charles Ayres and Steven Zuckerman. Voting and dispositive decisions
regarding the Voting Common Stock are made by Mr. McCown and Mr. De Leeuw,
as Managing General Partners of each of MDC III and MDC III, who together
have more than the required two-thirds-in-interest vote of the Managing
General Partners necessary to effect such decision on behalf of any such
entity. Voting and dispositive decisions regarding the Voting Common Stock
owned by Gamma Fund LLC are made by a vote or consent of a majority in
number of voting members of Gamma Fund LLC. Messrs. McCown, De Leeuw,
King, Hellman, Ayres and Zuckerman have no direct ownership of any shares
of Class A Non-Voting Common Stock except to the extent of their
proportionate partnership. The address of each of the above mentioned
entities is c/o McCown De Leeuw & Co., 3000 Sand Hill Road, Build 3, Suite
290, Menlo Park, California 94025.
(7) Shares of Class B Non-Voting Common Stock are convertible, at the holder's
option, into an identical number of shares of Voting Common Stock upon the
occurrence of certain "Conversion Events," as defined in the Company's
certificate of incorporation. See "Security Ownership." The general
partner of Chase Equity Associates, L.P., is Chase Capital Partners. The
address of each of these entities is c/o Chase Capital Partners, 380
Madison Ave., 12th Floor, New York, New York 10017.
(8) Shares of Class C Non-Voting Common Stock are convertible, at the holder's
option, into an identical number of shares of Voting Common Stock upon the
occurrence of certain "Conversion Events," as defined in the Company's
certificate of incorporation. See "Security Ownership." The general
partner of MLQ Investors, L.P. is MLQ, Inc. The address of each of these
entities is c/o Goldman Sachs & Co., 85 Broad Street, New York, New York
10004.
(9) Shares of Class C Non-Voting Common Stock are convertible, at the holder's
option, into an identical number of shares of Voting Common Stock upon the
occurrence of certain "Conversion Events", as defined in the Company's
certificate of incorporation. See "Security Ownership." Consists of shares
held as follows: Clipper Capital Associates, L.P. ("CCA"), 9,268.50
shares; Clipper/Merchant Partners, L.P., 102,642.16 shares; Clipper Equity
Partners I, L.P., 90,168.81 shares; Clipper/Merban, L.P. ("Merban"),
120,225.07 shares; Clipper/European Re, L.P., 60,112.54 shares; and CS
First Boston Merchant Investments 1995/96, L.P. ("Merchant"), 17,582.92
shares. CCA is the general partner of all of the Clipper Group
partnerships other than Merchant. The general partner of CCA is Clipper
Capital Associates, Inc. ("CCI"), and Mr. Robert B. Calhoun, Jr. is the
sole stockholder and a director of CCI. Clipper Capital Partners, an
affiliate of Mr. Calhoun, has sole investment power with respect to the
shares beneficially owned by Merchant. As a result, each of Mr. Calhoun,
CCA and CCI is deemed to beneficially own all shares of Class C Non-Voting
Common Stock beneficially owned by the Clipper Group (other than
Merchant), and Mr. Calhoun is deemed to beneficially own the shares of
Class C Non-Voting Common Stock beneficially owned by Merchant. Merchant
Capital, Inc. ("Merchant Capital"), an affiliate of CS First Boston
Corporation, is the general partner of Merchant and the 99% limited
partner of Clipper/Merchant Partners, L.P. CS Holding, an affiliate of CS
First Boston Corporation, is the 99% limited partner of Merban. None of
Merchant, Merchant Capital, CS First Boston Corporation and CS Holding is
an affiliate of Clipper or CCA. The address for Merchant is 11 Madison
Avenue, 26th Floor, New York, NY 10010, the address for Clipper/European
Re, L.P. and Merban is c/o CITCO, De Ruyterkade, 62, P.O. Box 812,
Curacao, Netherlands Antilles, and the address for all other Clipper Group
entities is 11 Madison Avenue, 26th Floor, New York, NY 10010.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Acquisition Arrangements
OSI holds a minority interest in a limited liability corporation ("LLC") formed
for the purpose of acquiring an accounts receivable portfolio. The majority
interest in the LLC is held by MLQ Investors, L.P., one of the Company's
stockholders. The recorded value of the Company's investment in the LLC was
approximately $900,000 at December 31, 1998.
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"), an affiliate. Under the Advisory Services Agreement, MDC
Management provides consulting, financial, and managerial functions for a
$300,000 annual fee. 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 MDC Management authorized by a majority of the directors other
than those who are partners, principals or employees of MDC Management or any of
its affiliates. The Advisory Services Agreement may be amended by written
agreement of MDC Management 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 January 1998 upon closing of the acquisition of Union, MDC Management
received a one-time fee of $2.5 million for financial advice provided to OSI in
connection therewith.
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 Consulting
Agreement, Mr. Hewitt provides consulting assistance in the growing outsourcing
services of the Company at 80% of normal working hours. For the period ended
December 31, 1998, the Company paid Mr. Hewitt $727,500. In addition, Mr. Hewitt
received options to purchase 10,000 shares of common stock of the Company, which
options vest eight years from date of grant or earlier upon the satisfaction of
certain performance targets and/or the occurrence of certain liquidity events.
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 providing consulting services at a maximum
of 50 days (approximately 20% of normal working hours).
Following his resignation as Executive Vice President and Chief Financial
Officer, Daniel J. Dolan entered into a ten month Consulting Agreement with the
Company. Under the Consulting Agreement, Mr. Dolan provides consulting related
to financing and certain other business activities. For the ten months ending
December 31, 1999, the Company will pay Mr. Dolan $134,400.
Certain Interests of Shareholders
Goldman Sachs and its affiliates have certain interests in the Company in
addition to being an initial purchaser of the 11% Senior Subordinated Notes. In
1998, Goldman Sachs served as financial advisor to OSI in connection with the
acquisition of Union and received certain fees amounting to $500,000 and
reimbursement of expenses in connection therewith. Moreover, Goldman Sachs acted
as co-arranger and Goldman Sachs Credit Partners, L.P., an affiliate of Goldman
Sachs, acts as co-administrative agent and lender in connection with the credit
facility, and in 1998 OSI paid them approximately $100,000 in fees and
approximately $581,000 in interest in connection therewith. MLQ Investors, L.P.,
an affiliate of Goldman Sachs, owns a non-voting equity interest in the Company.
In addition to acting as an initial purchaser of the 11% Senior Subordinated
Notes, Chase Securities Inc. ("Chase Securities") and its affiliates have
certain other relationships with the Company. Chase Securities acted as
co-arranging agent and The Chase Manhattan Bank, an affiliate of Chase
Securities, acts as co-administrative agent and a lender under the credit
facility and in 1998 OSI paid them approximately $247,000 in fees and
approximately $1,150,000 in interest in connection therewith. Additionally,
Chase Equity Associates, L.P. an affiliate of Chase Securities, owns a
non-voting equity interest in the Company.
Arrangements with Certain Affiliates
Payco leases its corporate headquarters in Brookfield, Wisconsin, its data
processing center in New Berlin, Wisconsin and the office space for three of its
collection operations from partnerships in which certain officers of Payco and
Dennis G. Punches, a former director of the Company, are the principal partners.
The terms of the leases provided for aggregate annual payments of approximately
$1.9 million and $1.8 million for the years ended December 31, 1998 and 1997,
respectively. Such lease amounts are subject to an escalation adjustment, not to
exceed 5% annually. All operating and maintenance costs associated with these
buildings are paid by Payco. The Company believes that the terms of these leases
are at least as favorable as could have been obtained in arms-length
negotiations with an unaffiliated lessor. Effective November 30, 1998, the above
mentioned director resigned from the Board of Directors of the Company.
Indebtedness of Management
During 1998, the Company advanced $117,000 and $148,000 to Michael A. DiMarco,
Executive Vice President and President Fee Services and C. Bradford McLeod,
Senior Vice President, Human Resources, respectively, to facilitate their
relocation to the St. Louis area from Texas and Virginia, respectively. The
advances were non-interest bearing. Both advances were repaid in full in March
1999.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
See index on page 42 for a listing of consolidated financial statements
filed with this report.
2. Financial Statement Schedule
See index on page 42 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 Asset Purchase Agreement dated October 8, 1997 by and among NSA
Acquisition Corporation, Outsourcing Solutions Inc., North Shore
Agency, Inc., Automated Mailing Services, Inc., Mailguard Security
System, Inc., DMM Consultants and Certain Stockholders (incorporated
herein by reference to Exhibit 2.6 of the Company's Form 10-K for the
year ended December 31, 1997).
2.2 Asset Purchase Agreement dated November 10, 1997 by and among
Outsourcing Solutions Inc., ABC Acquisition Company, Accelerated
Bureau of Collections Inc., Accelerated Bureau of Collections of
Ohio, Inc., Accelerated Bureau of Collections of Virginia Inc.,
Accelerated Bureau of Collections of Massachusetts, Inc., Travis J.
Justus, and Linda Brown (incorporated herein by reference to Exhibit
2.7 of the Company's Form 10-K for the year ended December 31, 1997).
2.3 Share Purchase Agreement and Plan of Merger dated as of December 22,
1997 by and among Outsourcing Solutions Inc., Sherman Acquisition
Corporation and The Union Corporation (incorporated herein by
reference to Exhibit 2.8 of the Company's Form 10-K for the year
ended December 31, 1997).
3.1 Restated Certificate of Incorporation of the Company, as of January
13,1999. 3.2 By-laws of the Company (incorporated herein by reference
to Exhibit 3.2 of the Company's Registration Statement on Form S-4
filed on November 26, 1996).
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.
10.1 Amended and Restated Stockholders Agreement dated as of February 16,
1996 by and among the Company and various stockholders of the Company
(incorporated herein by reference to Exhibit 10.1 of the Company's
Registration Statement on Form S-4 filed on November 26, 1996).
10.2 Advisory Services Agreement dated September 21, 1995 between the
Company and MDC Management Company III, L.P (incorporated herein by
reference to Exhibit 10.2 of the Company's Registration Statement on
Form S-4 filed on November 26, 1996).
10.3 Amended Employment Agreement dated as of August 27, 1997 between the
Company and Timothy G. Beffa (incorporated herein by reference to
Exhibit 10.5 of the Company's Form 10-Q for the quarter ended
September 30, 1997).
10.4 Employment Agreement dated October 16, 1997 between the company and
Daniel J. Dolan (incorporated herein by reference to Exhibit 10.10 of
the Company's Form 10-K for the year ended December 31, 1997).
10.5 Consulting Agreement dated as of March 1, 1999 between the Company
and Daniel J. Dolan.
10.6 Consulting Agreement dated as of February 6, 1998 between the Company
and William B. Hewitt as amended January 25, 1999.
10.7 Employment Agreement dated as of September 1, 1998 between the
Company and Michael A. DiMarco.
10.8 Employment Agreement dated as of September 14, 1998 between the
Company and C. Bradford McLeod.
10.9 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).
10.10 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).
10.11 Form of Non-Qualified Stock Option Award Agreement [A] (incorporated
herein by reference to Exhibit 10.32 of the Company's Registration
Statement on Form S-4 filed on November 26, 1996).
10.12 Form of Non-Qualified Stock Option Award Agreement [B] (incorporated
herein by reference to Exhibit 10.33 of the Company's Registration
Statement on Form S-4 filed on November 26, 1996).
10.13 Form of Non-Qualified Stock Option Award Agreement [C].
10.14 Form of Non-Qualified Stock Option Award Agreement [D].
10.15 1998 Incentive Compensation Program.
10.16 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).
10.17 Second Amended and Restated Credit Agreement dated as of January 26,
1998 by and among the Company, the Lenders listed therein, Goldman
Sachs Credit Partners L.P. and The Chase Manhattan Bank, as
Co-Administrative Agents, Goldman Sachs Credit Partners L.P. and
Chase Securities, Inc., as Arranging Agents and Suntrust Bank,
Atlanta, as Collateral Agent (incorporated herein by reference to
Exhibit 10.18 of the Company's Form 10-K for the year ended December
31, 1997).
10.18 First Amendment to the Second Amended and Restated Credit Agreement,
dated as March 31, 1998 (incorporated herein by reference to Exhibit
10.1 of the Company's Form 10-Q for the quarter ended September 30,
1998)
10.19 Second Amendment to the Second Amended and Restated Credit Agreement,
dated as August 5, 1998 (incorporated herein by reference to Exhibit
10.2 of the Company's Form 10-Q for the quarter ended September 30,
1998)
10.20 Third Amendment to the Second Amended and Restated Credit Agreement,
dated as September 23, 1998 (incorporated herein by reference to
Exhibit 10.3 of the Company's Form 10-Q for the quarter ended
September 30, 1998)
21 Subsidiaries of registrant.
27 Financial Data Schedule.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three-month period ended
December 31, 1998.
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/Daniel T. Pijut
-------------------------------------
Daniel T. Pijut
Vice President, Corporate Controller
And Chief Accounting Officer
DATE: March 30, 1999
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/Jeffrey E. Stiefler Chairman of the Board of Directors March 19, 1999
- - ------------------------
Jeffrey E. Stiefler
/s/Timothy G. Beffa President and Chief Executive March 30, 1999
- - ------------------------ Officer, Director
Timothy G. Beffa
/s/David E. De Leeuw Director March 23, 1999
- - ------------------------
David E. De Leeuw
/s/David E. King Secretary and Treasurer, Director March 19, 1999
- - ------------------------
David E. King
/s/Tyler T. Zachem Vice President and Director March 22, 1999
- - ------------------------
Tyler T. Zachem
/s/David G. Hanna Director March 30, 1999
- - ------------------------
David G. Hanna
/s/Frank J. Hanna, III Director March 30, 1999
- - ------------------------
Frank J. Hanna, III
/s/Nathan W. Pearson, Jr. Director March 20, 1999
- - ------------------------
Nathan W. Pearson, Jr.
/s/Robert A. Marshall Director March 22, 1999
- - ------------------------
Robert A. Marshall
/s/William B. Hewitt Director March 23, 1999
- - ------------------------
William B. Hewitt
/s/Courtney F. Jones Director March 20, 1999
- - ------------------------
Courtney F. Jones
INDEX TO CONSOLIDATED FINANCIAL STATEMENS AND CONSOLIDATED FINANCIAL
STATEMENT SCHEDULE
Page
Consolidated Financial Statements
Outsourcing Solutions Inc. and Subsidiaries
Independent Auditors' Report.................................... F-1
Consolidated Balance Sheets at December 31, 1998 and 1997....... F-2
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996............................. F-3
Consolidated Statements of Stockholders' Equity (Deficit) for
the years ended December 31, 1998, 1997 and 1996............. F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996............................. F-5
Notes to Consolidated Financial Statements...................... F-6
Consolidated Financial Statement Schedule
Independent Auditors' Report....................................... F-22
Schedule II - Valuation and Qualifying Accounts and Reserves....... F-23
INDEPENDENT AUDITORS' REPORT
To the Stockholders of Outsourcing Solutions Inc.:
We have audited the accompanying consolidated balance sheets of Outsourcing
Solutions Inc. and subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1998. 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 in accordance with generally accepted auditing
standards. 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 audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Outsourcing Solutions Inc. and
subsidiaries as of December 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
- - -------------------------
Deloitte & Touche LLP
St. Louis, Missouri
March 4, 1999
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(In thousands except share and per share amounts)
ASSETS 1998 1997
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 8,814 $ 3,217
Cash and cash equivalents held for clients 22,372 20,762
Current portion of purchased loans and accounts
receivable portfolios 35,057 42,915
Accounts receivable - trade, less allowance for
doubtful receivables of $1,309 and $538 40,724 27,192
Other current assets 8,777 2,119
-------- --------
Total current assets 115,744 96,205
PURCHASED LOANS AND ACCOUNTS RECEIVABLE PORTFOLIOS 20,436 19,537
PROPERTY AND EQUIPMENT, net 40,317 32,563
INTANGIBLE ASSETS, net 425,597 219,795
DEFERRED FINANCING COSTS, less accumulated 13,573 12,517
amortization of $5,203 and $2,376
OTHER ASSETS 2,824 693
DEFERRED INCOME TAXES - 380
-------- --------
TOTAL $618,491 $381,690
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable - trade $ 7,355 $ 6,977
Collections due to clients 22,372 20,762
Accrued salaries, wages and benefits 13,274 8,332
Other current liabilities 55,071 26,131
Current portion of long-term debt 16,877 15,445
-------- --------
Total current liabilities 114,949 77,647
LONG-TERM DEBT 511,271 309,521
OTHER LONG-TERM LIABILITIES 22,303 -
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' DEFICIT:
8% nonvoting cumulative redeemable exchangeable
preferred stock; authorized 1,000,000 shares,
973,322.32 and 935,886.85 shares, respectively,
issued and outstanding, at liquidation value
of $12.50 per share 12,167 11,699
Voting common stock; $.01 par value; authorized
7,500,000 shares, 3,477,126.01 and 3,425,126.01
shares, respectively, issued and outstanding 35 35
Class A convertible nonvoting common stock; $.01 par
value; authorized 7,500,000 shares,
391,740.58 shares issued and outstanding 4 4
Class B convertible nonvoting common stock; $.01 par
value; authorized 500,000 shares,
400,000 shares issued and outstanding 4 4
Class C convertible nonvoting common stock; $.01 par
value; authorized 1,500,000 shares,
1,040,000 shares issued and outstanding 10 10
Paid-in capital 66,958 66,958
Retained deficit (109,210) (84,188)
-------- --------
Total stockholders' deficit (30,032) (5,478)
-------- ---------
TOTAL $618,491 $381,690
======== ========
See notes to consolidated financial statements
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands)
- - --------------------------------------------------------------------------------
1998 1997 1996
REVENUES $479,400 $271,683 $106,331
EXPENSES:
Salaries and benefits 230,114 133,364 46,997
Service fees and other operating
and administrative expenses 140,888 71,122 33,759
Amortization of purchased loans and accounts 50,703 52,042 27,317
receivable portfolios
Amortization of goodwill and other intangibles 15,725 24,749 15,452
Depreciation expense 14,282 8,825 2,829
Purchased in-process research and development - - 1,000
-------- -------- --------
Total expenses 451,712 290,102 127,354
-------- -------- --------
OPERATING INCOME (LOSS) 27,688 (18,419) (21,023)
INTEREST EXPENSE - Net 50,627 28,791 12,131
-------- -------- --------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (22,939) (47,210) (33,154)
PROVISION FOR INCOME TAXES (BENEFIT) 830 11,127 (11,757)
MINORITY INTEREST 572 - -
-------- -------- --------
NET LOSS (24,341) (58,337) (21,397)
PREFERRED STOCK DIVIDEND REQUIREMENTS 681 922 830
-------- -------- --------
NET LOSS TO COMMON STOCKHOLDERS $(25,022) $(59,259) $(22,227)
======== ======== ========
See notes to consolidated financial statements.
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996 (In thousands except share and per share amounts)
- - ----------------------------------------------------------------------------------
Non-Voting
Cumulative
Redeemable
Exchangeable Common Stock
-------------------------
Preferred Vot- Class Class Class Paid-In Retained
Stock ing A B C Capital Deficit Total
BALANCE, JANUARY 1, 1996 $10,000 $28 $ - $ - $ - $35,122 $ (2,702) $ 42,448
Issuance of 118,866.59
shares of common stock
in exchange for notes
payable to stockholders - 2 - - - 1,484 - 1,486
Issuance of 2,326,000
shares of common stock - 7 10 - 6 29,052 - 29,075
Conversion of common stock - (2) (6) 4 4 - - -
Payment of preferred
stock dividends through
issuance of 65,280
shares of preferred
stock and recorded
preferred stock
dividend requirements
of $1 per share 816 - - - - - (830) (14)
Net loss - - - - - - (21,397) (21,397)
------- --- --- --- --- ------- --------- --------
BALANCE, DECEMBER 31, 1996 10,816 35 4 4 10 65,658 (24,929) 51,598
Issuance of 52,000
shares of common stock - - - - - 1,300 - 1,300
Payment of preferred
stock dividends through
issuance of 70,606.84
shares of preferred
stock and recorded
preferred stock
dividend requirements
of $1 per share 883 (922) (39)
Net loss - - - - - - (58,337) (58,337)
------- --- --- --- --- ------- --------- --------
BALANCE, DECEMBER 31, 1997 11,699 35 4 4 10 66,958 (84,188) (5,478)
Payment of preferred
stock dividends through
issuance of 37,435.47
shares of preferred
stock and recorded
preferred stock dividend
requirements of $1
per share 468 (681) (213)
Net loss - - - - - - (24,341) (24,341)
------- --- --- --- --- ------- --------- --------
BALANCE, DECEMBER 31, 1998 $12,167 $35 $ 4 $ 4 $10 $66,958 $(109,210) $(30,032)
======= === === === === ======= ========= ========
See notes to consolidated financial statements.
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands)
- - ---------------------------------------------------------------------------------------
1998 1997 1996
OPERATING ACTIVITIES:
Net loss $(24,341) $(58,337) $(21,397)
Adjustments to reconcile net loss to net cash from
operating activities:
Depreciation and amortization 32,833 35,613 18,618
Amortization of purchased loans and accounts 50,703 52,042 27,317
receivable portfolios
Deferred taxes 380 10,877 (11,757)
Minority interest 572 - -
Other 99 48 -
Change in assets and liabilities:
Other current assets 2,795 147 (578)
Accounts payable and other current liabilities (7,789) (7,565) (1,536)
-------- -------- --------
Net cash from operating activities 55,252 32,825 10,667
-------- -------- --------
INVESTING ACTIVITIES:
Purchase of loans and accounts receivable portfolios (43,186) (46,494) (13,645)
Payments for acquisitions, net of cash acquired (168,900) (62,913) (184,184)
Investment in non-consolidated subsidiary (2,500) - -
Acquisition of property and equipment (13,480) (9,489) (2,606)
Other 261 (603) -
-------- -------- --------
Net cash from investing activities (227,805) (119,499) (200,435)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from term loans 225,000 55,000 337,000
Borrowings under revolving credit agreement 230,000 66,150 -
Repayments under revolving credit agreement (236,350) (34,300) -
Repayments of debt (36,618) (9,763) (136,615)
Deferred financing fees (3,882) (1,993) (12,563)
Proceeds from issuance of common stock - 300 14,974
-------- -------- --------
Net cash from financing activities 178,150 75,394 202,796
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,597 (11,280) 13,028
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,217 14,497 1,469
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 8,814 $ 3,217 $ 14,497
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid during period for interest $ 43,923 $ 26,372 $ 7,655
======== ======== ========
See notes to consolidated financial statements.
Outsourcing Solutions Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share amounts)
- - --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy - Outsourcing Solutions Inc. is one of the largest
providers of accounts receivable management services in the United States.
The consolidated financial statements include the accounts of Outsourcing
Solutions Inc. ("OSI") and all of its majority-owned subsidiaries
(collectively, the "Company"). 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. Cash equivalents are valued at
cost, which approximates market. Cash held for clients consist of certain
restricted accounts which are used to maintain cash collected and held on
behalf of the Company's clients.
Purchased Loans and Accounts Receivable Portfolios - Purchased loans and
accounts receivable portfolios ("Receivables") acquired in connection with
acquisitions in September 1995 and November 1996 were recorded at the
present value of estimated future net cash flows. Receivables purchased 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 market pricing or the expected discounted future net
operating cash flows derived from the individual portfolios are less than
their respective carrying value (see Note 14).
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 Purchased loans and accounts receivable
portfolios owned are generally recorded as revenue when received. Revenue
from accounts receivable management services is recorded as such services
are provided. Deferred revenue in the accompanying balance sheet primarily
relates to certain prepaid letter services which are generally recognized as
earned as services are provided.
Property and Equipment - Property and equipment are 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.
Intangible Assets - The excess of cost over the fair value of net assets of
businesses acquired 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
periodically reviews goodwill and other intangibles to assess
recoverability. Impairments will be recognized in operations if the expected
future operating cash flows (undiscounted and without interest charges)
derived from such intangible assets are less than its carrying value.
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
expected future tax consequences of events that have been recognized in the
consolidated financial statements.
Stock-Based Compensation - The Company accounts for its stock-based
compensation plan using the intrinsic value method prescribed by Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees. Statement of Financial Accounting Standard ("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 11 for the
fair value disclosures required under SFAS No. 123.
Comprehensive Income - Effective January 1, 1998, the Company adopted SFAS
No. 130, Reporting Comprehensive Income, which established standards for the
reporting and display of comprehensive income and its components. The
adoption of this statement did not affect the Company's consolidated
financial statements for the three years in the period ended December 31,
1998. Comprehensive loss for the three years in the period ended December
31, 1998 were equal to the Company's net loss.
Accounting For Transfers of Financial Assets - In 1996, the Financial
Accounting Standards Board (the "FASB") issued SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. This Statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities. These standards are based on consistent application of a
financial-components approach that focuses on control. Under this approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This Statement provides
consistent standards for distinguishing transfers of financial assets that
are sales from transfers that are secured borrowings. The Company adopted
SFAS No. 125 for the year ended December 31, 1997. The adoption of SFAS No.
125 did not have a material effect on the 1997 financial statements, as the
Company had no transfers during the year ended December 31, 1997. However,
commencing in the fourth quarter of 1998, the Company sold concurrent with
its purchase of certain loans and accounts receivable portfolios to a
qualifying special-purpose entity (QSPE). Such QSPE, OSI Funding Corporation
(FINCO), is a nonconsolidated, bankruptcy-remote, wholly-owned subsidiary of
the Company (see Note 17).
Segment Information - SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, established standards for the way that
public business enterprises report information about operating segments in
annual financial statements and also established standards for related
disclosures about products and services, geographic areas and major
customers. Management has considered the requirements of SFAS No. 131 and,
as discussed in Note 16, believes the Company operates in one business
segment.
Accounting Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles 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 - In February 1997, the FASB issued SFAS No. 128,
Earnings per Share, which required adoption in the quarter ended December
31, 1997, and prohibited early compliance. SFAS No. 128 simplified the
calculation of earnings per share and is applicable only to public
companies. Under generally accepted accounting principles and Securities and
Exchange Commission ("SEC") disclosure requirements, SFAS No. 128 is not
currently applicable to the Company and, accordingly, earnings per share is
not presented.
New Accounting Pronouncements - In June 1998, the FASB issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is
effective for fiscal years beginning after June 15, 1999. The statement
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. The Company has not
determined the impact on the consolidated statement of operations and
consolidated balance sheet.
In March 1998, the AICPA issued Statement of Position No. 98-1, Accounting
for the Costs of Computer Systems Developed or Obtained for Internal Use
("SOP 98-1"), which is effective for fiscal years beginning after December
15, 1998. SOP 98-1 provides guidelines for capitalization of developmental
costs of proprietary software and purchased software for internal use. The
adoption of SOP 98-1 is not expected to have a material impact on the
consolidated statement of operations and consolidated balance sheet.
Reclassifications - Certain amounts in prior periods have been reclassified
to conform to the current year presentation.
2. ORGANIZATION & ACQUISITIONS
OSI was formed on September 21, 1995 to build, through a combination of
acquisitions and sustained internal growth, one of the leading providers of
accounts receivable management services. The Company purchases and collects
portfolios of non-performing 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.
In September 1995, the Company acquired Account Portfolios, L.P. ("API"), a
partnership which purchased and managed large portfolios of non-performing
consumer loans and accounts receivable, for cash of $30,000, common stock of
$15,000 and notes of $35,000, which were subsequently paid in March 1996.
In January 1996, the Company acquired A.M. Miller & Associates and
Continental Credit Services, Inc., accounts receivable and fee services
companies, for total cash consideration of $38,500 including transaction
costs of $3,600, common stock of $6,000, a 9% unsecured, subordinated note
of $5,000 (interest payable quarterly and principal due January 2001) and a
10% unsecured, subordinated note of $3,000, which was subsequently paid in
November 1996.
In November 1996, the Company acquired all of the outstanding common stock
of Payco American Corporation ("Payco"), an accounts receivable management
company primarily focused on healthcare, education and bank/credit cards, in
a merger transaction for cash of approximately $154,800 including
transaction costs of $4,600. The Company allocated the total purchase price
including additional liabilities reserves to the fair value of the net
assets acquired resulting in goodwill of approximately $123,000. In
addition, the Company allocated $1,000 of the purchase price to in-process
research and development that had not reached technological feasibility and
had no alternative future uses, which accordingly was expensed at the date
of the acquisition.
In October and November 1997, the Company acquired The North Shore Agency,
Inc. ("NSA"), a fee service company specializing in letter series collection
services, and Accelerated Bureau of Collections, Inc. ("ABC"), a fee service
company specializing in credit card collections, for total cash
consideration of approximately $53,800 including transaction costs of $1,173
and common stock of $1,000. One of the acquisitions contains certain
contingent payment obligations, $1,656 through December 31, 1998, based on
the attainment by the newly formed subsidiary of certain financial
performance targets over each of the next three years. Future contingent
payment obligations, if any, will be accounted for as additional goodwill as
the payments are made.
In January 1998, the Company acquired through a tender offer approximately
77% of the outstanding shares of The Union Corporation's ("Union") common
stock for $31.50 per share. On March 31, 1998, the Company acquired the
remaining outstanding shares of Union when Union merged with a wholly-owned
subsidiary of the Company. The aggregate cash purchase price of the Union
acquisition was approximately $220,000 including transaction costs of
$10,900 and assumed liabilities. The Company financed the acquisition
primarily with funds provided by the amended credit agreement (see Note 6).
Union, through certain of its subsidiaries, furnishes a broad range of
credit and receivables management outsourcing services as well as management
and collection of accounts receivable. The Company allocated the total
purchase price including additional liabilities reserves to the fair value
of the net assets acquired resulting in goodwill of approximately $219,000.
The above acquisitions were accounted for as purchases. The excess of cost
over the fair value of net assets of businesses acquired is amortized on a
straight-line basis over 20 to 30 years. Results of operations were included
in the consolidated financial statements from their respective acquisition
dates.
In May 1996, a subsidiary of the Company acquired participation interests in
certain loan portfolios for cash of $3,300, Class C Nonvoting common stock
of $8,000 and a 10% unsecured promissory note of $3,500, which was
subsequently paid in November 1996.
The unaudited pro forma consolidated financial data presented below provides
pro forma effect of the NSA, ABC and Union acquisitions as if such
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.
Pro Forma
1998 1997
Net revenues $486,754 $455,700
======== ========
Net loss $(25,015) $(64,703)
======== ========
3. PROPERTY AND EQUIPMENT
Property and equipment, which is recorded at cost, consists of the following
at December 31:
1998 1997
Land $ 2,109 $ -
Buildings 1,891 -
Furniture and fixtures 6,574 4,478
Machinery and equipment 2,479 716
Telephone equipment 8,659 5,956
Leasehold improvements 4,068 1,599
Computer hardware and software 40,785 31,946
------- -------
66,565 44,695
Less accumulated depreciation (26,248) (12,132)
------- -------
$40,317 $32,563
======= =======
4. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31:
1998 1997
Goodwill $447,774 $226,770
Value of favorable contracts and placements 29,000 29,000
Covenants not to compete 5,021 4,498
-------- --------
481,795 260,268
Less accumulated amortization (56,198) (40,473)
-------- --------
$425,597 $219,795
======== ========
5. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following at December 31:
1998 1997
Accrued severance, relocation and office
closing costs $ 5,554 $ 6,487
Accrued interest 6,851 2,974
Deferred revenue 11,285 -
Environmental reserves 3,800 -
Other 27,581 16,670
------- -------
$55,071 $26,131
======= =======
6. DEBT
Long-term debt consists of the following at December 31:
1998 1997
Term Loan A Credit Facility $ 49,250 $ 62,500
Term Loan B Credit Facility 123,137 124,922
Term Loan C Credit Facility 224,250 -
Revolving Credit Facility 25,500 31,850
11% Series B Senior Subordinated Notes 100,000 100,000
Note payable to stockholder (See Note 2) 4,429 4,429
Other (including capital leases) 1,582 1,265
-------- --------
Total debt 528,148 324,966
Less current portion of long-term debt 16,877 15,445
-------- --------
Long-term debt $511,271 $309,521
======== ========
On April 28, 1997, the Company registered $100,000 of 11% Series B Senior
Subordinated Notes (the "Notes"), with the SEC to exchange for the then
existing unregistered $100,000 of 11% Senior Subordinated Notes (the
"Private Placement"). 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.
In January 1998, the Company finalized the Second Amended and Restated
Credit Agreement for $466,663 (the "Agreement") with a group of banks to
fund the Union acquisition and refinance existing outstanding indebtedness.
The Agreement, as amended, consists of a $408,663 term loan facility and a
$58,000 Revolving Credit Facility (the "Revolving Facility"). The term loan
facility consists of a term loan of $59,187 ("Term Loan A"), a term loan of
$124,476 ("Term Loan B") and a term loan of $225,000 ("Term Loan C"), which
mature on October 15, 2001, 2003 and 2004, respectively. The Company is
required to make quarterly principal repayments on each term loan. 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 customary base
rate, plus 1.5% or (b) at the reserve adjusted Eurodollar rate plus 2.5%.
Term Loan B and Term Loan C bear 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 customary base rate, plus 2.0% or (b) at the reserve adjusted
Eurodollar rate plus 3.0%.
The Revolving Facility originally had a term of five years and is fully
revolving until October 15, 2001. 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 customary base rate, plus 1.5% or (b)
at the reserve adjusted Eurodollar rate plus 2.5%. Also, outstanding under
the Revolving Facility are letters of credit of $1,656; expiring within a
year.
The three month LIBOR rate (Eurodollar rate) at December 31, 1998 and 1997
was 5.3% and 5.7%, respectively.
In September 1998, the Company amended the Agreement to permit an initial
investment in FINCO (see Note 17.)
The Agreement is guaranteed by all of the Company's present domestic
subsidiaries and is secured by all of the stock of the Company's present
domestic subsidiaries and by substantially all of the Company's domestic
property assets. The Agreement 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.
The Notes are fully and unconditionally guaranteed on a joint and several
basis by each of the Company's current domestic subsidiaries and any
additional domestic subsidiaries formed by the Company that become
guarantors under the Agreement (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 three
subsidiaries that are individually, and in the aggregate inconsequential.
The Company is a holding company with no separate operations, although it
incurs some expenses on behalf of its operating subsidiaries. The Company
has no significant assets or liabilities other than the common stock of its
subsidiaries, debt, related deferred financing costs and accrued expenses
relating to expenses paid on behalf of its operating subsidiaries. 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:
1998 1997
---- ----
Current assets $114,369 $ 96,133
======== =========
Noncurrent assets $487,381 $ 272,730
======== =========
Current liabilities $50,086 $ 57,169
======= =========
Noncurrent liabilities $23,207 $ 5,284
======= =========
Operating revenue $479,400 $ 271,683
======== =========
Income (Loss) from operations $39,418 $ (14,679)
======= =========
Net income (loss) $21,189 $ (23,857)
======= =========
Maturities of long-term debt and capital leases at December 31, 1998 are as
follows:
Capital
Debt Leases
1999 $ 16,182 $ 759
2000 19,904 620
2001 51,713 37
2002 50,968 -
2003 68,815 -
Thereafter 319,250 -
-------- ------
Total Payments 526,832 1,416
Less amounts representing interest 100
------
Present value of minimum lease payments 1,316
Less current portion 16,182 695
-------- ------
$510,650 $ 621
======== ======
During 1997, the Company entered into interest rate cap agreements with a
notional principal value of $50,000 to reduce the impact of increases in
interest rates on its floating-rate long-term debt. At December 31, 1997,
the Company had three interest rate cap agreements outstanding. The
agreements effectively entitle the Company to receive from a bank the
amount, if any, by which the Company's interest payments on specified
principal of its floating-rate term loans for a specified period exceed 10%.
The amounts paid for these agreements of $243 are included in deferred
financing costs and are being amortized to interest expense over the terms
of the various agreements through November 1999.
On March 31, 1998, as required by the Agreement, the Company entered into an
interest rate swap agreement with a notional principal value of $32,000 for
the purpose of managing interest rate risk on a portion of floating-rate
long-term debt. The swap agreement fixes the interest rate on certain
variable-rate debt at a rate of 9.105%. The contract has a maturity date of
March 31, 2001. The Company's credit exposure on the swap is limited to the
value of the swap, if such swap is in a favorable position to the Company.
On April 17, 1998 and May 27, 1998, as required by the Agreement, the
Company entered into interest rate collar agreements with a notional
principal value of $35,000 and $33,000, respectively, for the purpose of
managing interest rate risk on a portion of floating-rate long-term debt.
The collar agreements fix the interest rate on certain variable-rate debt to
a range of 8.58% to 9.5%. The contracts have a maturity date of April 17,
2001 and August 27, 2002, respectively. The Company is exposed to credit
loss in the event of nonperformance by counterparties to the collar
agreements.
7. OTHER LONG-TERM LIABILITIES
Other long-term liabilities at December 31,1998 include approximately
$18,900 for environmental proceedings as a result of the Union acquisition.
Other current liabilities include approximately $3,800 resulting in a total
liability of approximately $22,700, on an undiscounted basis, for the Union
environmental proceedings. The Company is party to several pending
environmental proceedings involving the 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 it has 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, the
Company may be exposed to additional substantial liability for these
proceedings as additional information becomes available over the long-term.
8. STOCKHOLDERS' EQUITY AND WARRANTS
On September 21, 1995, the Company issued 800,000.01 shares of 8% Nonvoting
Cumulative Redeemable Exchangeable Preferred Stock ("Preferred Shares"). The
liquidation value of each Preferred Share is $12.50 plus accrued and unpaid
dividends. Dividends, as may be declared by the Company's Board of
Directors, are cumulative at an annual rate of 8% of the liquidation value
and are payable in equal semi-annual installments of $.50 per preferred
share on the dividend payment date, as defined in the Certificate of
Incorporation. The Company may, at its sole option and upon written notice
to preferred shareholders, redeem all or any portion of the outstanding
Preferred Shares for $12.50 per share plus cash equal to all accrued and
unpaid dividends, through the redemption date, whether or not such dividends
have been authorized or declared. Pursuant to the Company's financing
arrangements, the payment of dividends and/or the repurchase of Preferred
Shares is prohibited until the Company attains certain covenants. The
Company may, at its sole option, pay dividends in the form of additional
Preferred Shares. Each holder of Preferred Shares has the right, at their
option, to exchange any or all of their Preferred Shares for the same number
of shares of Voting Common Stock ("Voting Common Shares"). The Company must
reserve, out of its authorized but unissued Voting Common Shares, the
appropriate number of Voting Common Shares to affect the exchange of all
outstanding Preferred Shares. Upon the exchange of any Preferred Shares,
such Preferred Shares are to be retired and not reissued.
Warrants outstanding at December 31, 1998 are 46,088.67. Each warrant
entitles the holder to purchase one share of Voting Common Stock, $.01 par
value, at $12.50 per share. The warrants are exercisable at the option of
the holder and expire on January 10, 2006.
9. INCOME TAXES
Major components of the Company's income tax provision (benefit) are as
follows:
1998 1997 1996
---- ---- ----
Current:
Federal $ - $ - $ -
State 450 250 -
------ ------- --------
Total current 450 250 -
------ ------- --------
Deferred:
Federal - 9,513 (10,250)
State 380 1,364 (1,507)
------ ------- -------
Total deferred 380 10,877 (11,757)
------ ------- --------
Provision for income taxes (benefit) $ 830 $11,127 $(11,757)
====== ======= ========
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 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:
1998 1997
Deferred tax assets:
Net operating loss carryforwards $41,143 $12,759
Accrued liabilities 18,001 5,882
Loans and account receivable 3,670 6,737
Property and equipment 1,311 724
Intangible assets 4,192 4,557
Other - 2,153
------- -------
Total deferred tax assets 68,317 32,812
Less valuation allowance (68,317) (32,432)
------- -------
Net deferred tax assets $ - $ 380
======= =======
The valuation allowance was $68,317 and $32,432 at December 31, 1998 and
1997, 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.
Of the $35,885 increase in the valuation allowance during 1998, $24,611
relates to deferred tax assets recorded in connection with the acquisition
of Union and $800 relates to the 1997 acquisitions of NSA and ABC. The
valuation allowance also includes $6,400 related to deferred tax assets
recorded prior to 1998 in connection with acquisitions in years before 1998.
Future realization of these deferred tax assets would result in the
reduction of goodwill recorded in connection with the acquisitions. During
1998, the Company received net cash from income taxes of $12,424.
The Company has net operating loss carryforwards of $87,397 as of December
31, 1998 available to offset future taxable income of the consolidated group
of corporations. 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 2018.
During 1998, the Company has significantly increased its total debt from
$324,966 at December 31, 1997 to $528,148 at December 31, 1998. This
increase in debt primarily resulted from the acquisition of Union. Since the
Company has a history of generating net operating losses and has
significantly increased its total interest expense to be incurred,
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, could be increased 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:
1998 1997 1996
---- ---- ----
Federal taxes at statutory rate $ (7,994) $(16,052) $(11,272)
State income taxes (net of
federal tax benefits) 18 (2,092) (1,521)
Nondeductible amortization 3,414 1,406 879
Other 249 (4,567) 157
Deferred tax valuation allowance 5,143 32,432 -
-------- -------- ---------
Provision for income taxes (benefit) $ 830 $ 11,127 $(11,757)
======== ======== ========
10. RELATED PARTY TRANSACTIONS
The Company had an agreement with an affiliate of certain Company
stockholders to provide management and investment services for a monthly fee
of $50. The Company recorded management fees to this entity of $450 and $600
for the years ended December 31, 1997 and 1996. The agreement was terminated
September 30, 1997.
Subject to the agreements executed in connection with the various
acquisitions, the Private Placement discussed in Note 6 and certain
management and advisory agreements, the Company has paid to certain Company
stockholders transaction costs and advisory fees. Such costs were $3,466,
$1,600 and $9,100 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Under various financing arrangements associated with the Company's
acquisitions and the Agreement, the Company incurred interest expense of
$2,333, $3,317 and $2,900 for the years ended December 31, 1998, 1997 and
1996, respectively, to certain Company stockholders of which one is a
financial institution and is co-administrative agent of the Company's
Agreement.
In December 1997, the Company invested $5,000 for a minority interest in a
limited liability corporation (the "LLC") for the purpose of acquiring
purchased loan and accounts receivable portfolios. The majority interest in
the LLC is held by an affiliate of one of the Company's stockholders. In the
fourth quarter of 1998, the Company wrote down its investment in the LLC by
$3,000 which is included in amortization expense in the accompanying
consolidated statement of operations. The write down resulted from an
analysis of the carrying value of the purchased portfolios owned by the LLC.
In December 1998, the Company entered into an agreement with the majority
owner of the LLC to settle all outstanding disputes relating to the sourcing
and collection of certain purchased loan and accounts receivable portfolios.
As part of the settlement, the Company was paid $3,000 which was recorded in
revenue in the accompanying consolidated statement of operations.
11. STOCK OPTION AND AWARD PLAN
The Company has established the Outsourcing Solutions Inc. 1995 Stock Option
and Stock Award Plan (the "Plan"). The Plan is a stock award and incentive
plan which permits the issuance of options, stock appreciation rights
("SARs") in tandem with such options, restricted stock, and other
stock-based awards to selected employees of and consultants to the Company.
The Plan reserved 304,255 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. In February 1997, the Board of Directors
approved an increase to the reserve of Voting Common Shares to 500,000 with
an additional approval to 750,000 in December 1997.
Under the terms of the Plan, options granted may be either nonqualified or
incentive stock options and the exercise price 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.
The awarded stock options vest over various periods and vesting may be
accelerated upon the satisfaction of certain performance targets and/or the
occurrence of certain liquidity events. The options shall expire ten years
after date of grant.
A summary of the 1995 Stock Option and Stock Award Plan is as follows:
Weighted
Average
Number Exercise Price
of Shares Per Share
-------------- ----------------
Outstanding at January 1, 1996 - $ -
Granted 395,809 13.57
Forfeited (149,788) 12.50
--------
Outstanding at December 31, 1996 246,021 14.23
Granted 397,500 27.99
Forfeited (75,000) 22.33
---------
Outstanding at December 31, 1997 568,521 22.78
Granted 64,300 58.83
Forfeited (54,000) 35.19
--------
Outstanding at December 31, 1998 578,821 25.63
========
Reserved for future option grants 171,179
Exercisable shares at December 31, 1998, 1997 and 1996 were 105,784, 49,647
and zero, respectively.
A summary of stock options outstanding at December 31, 1998 is as follows:
Options Outstanding Options Exercisable
--------------------------------------- -------------------
Weighted
Average
Number Remaining Exercise Number Exercise
Exercise Price Outstanding Contractual Life Price Exercisable Price
-------------- ----------- ---------------- -------- ----------- --------
$12.50 196,021 7.7 years $12.50 39,204 $12.50
$25.00 295,800 8.3 years $25.00 57,880 $25.00
$50.00 44,500 9.1 years $50.00 4,450 $50.00
$65.00 42,500 9.4 years $65.00 4,250 $65.00
------- -------
$12.50-$65.00 578,821 8.8 years $25.63 105,784 $23.03
======= =======
The Company accounts for the Plan in accordance with APB Opinion No. 25,
under which no compensation cost has been recognized for 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:
1998 1997 1996
---- ---- ----
Risk free rate 5.0% 5.44% 6.33%
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
Given that the Company is not publicly traded, the expected stock price
volatility is assumed to be zero. The weighted fair values of options
granted during 1998, 1997 and 1996 were $23.14, $12.29 and $6.67,
respectively. The Company's pro forma information is as follows:
1998 1997 1996
---- ---- ----
Net loss:
As reported $(24,341) $(58,337) $(21,397)
Pro forma (25,742) (59,570) (21,758)
In addition, the Committee may grant restricted stock to participants of the
Plan 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 at December 31, 1998.
12. 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,
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 purchases under the Portfolio Flow
Purchase Agreements were $25,521, $20,661 and $5,986, for the years ended
December 31, 1998, 1997 and 1996, 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
------
1999 $16,242
2000 14,002
2001 12,485
2002 10,838
2003 3,795
Thereafter 8,262
-------
Total lease payments $65,624
=======
Rent expense under operating leases was $15,800, $8,100 and $3,600 for the
years ended December 31, 1998, 1997 and 1996, respectively.
13. LITIGATION
At December 31, 1998, the Company was involved in a number of legal
proceedings and claims that were in the normal course of business and
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, 1998.
14. 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, 1998 and 1997 are as follows. The carrying amount of cash and cash
equivalents and long-term debt except the Notes, approximate the fair value.
The approximate fair value of the Notes at December 31, 1998 and 1997 was
$95,300 and $100,000, 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 the interest rate caps, swap
and collars, based on quoted market prices, at December 31, 1998 was $109,
$(720) and $(1,054), respectively. At December 31, 1997, the fair value of
the interest caps at December 31, 1997 was $193. 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 its carrying value at
December 31, 1998 and 1997.
In December 1997, the Company completed an in-depth analysis of the carrying
value of the purchased portfolios acquired in September 1995 in conjunction
with the Company's acquisition of API. This analysis included an evaluation
of achieved portfolio amortization rates, historical and estimated future
costs to collect, as well as projected total future collection levels. As a
result of this analysis, the Company recorded $10,000 of additional
amortization in December 1997 relating to these purchased portfolios to
reduce their carrying value to estimated fair value.
15. EMPLOYEE BENEFIT PLAN
At December 31, 1997, the Company had five defined contribution plans.
During 1998, the Company combined four of these defined contribution plans
into a new defined contribution plan sponsored by the Company. At December
31, 1998, the Company has five defined contribution plans, four of which it
acquired through the Union acquisition, which provide 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 $1,570, $276 and $98 for the years ended December
31, 1998, 1997 and 1996, respectively.
16. ENTERPRISE WIDE DISCLOSURE
The Company operates in one business segment. As a strategic receivables
management company, the primary services of the Company consist of fee
services, portfolio purchasing services and outsourcing services. In
addition, the Company derives substantially all of its revenues from
domestic customers.
The following table presents the Company's revenue by type of service for
the year ended December 31:
1998 1997 1996
---- ---- ----
Fee services $333,969 $164,796 $ 54,901
Portfolio purchasing services 84,315 67,809 45,581
Outsourcing services 61,116 39,078 5,849
-------- -------- --------
Total $479,400 $271,683 $106,331
======== ======== ========
17. PURCHASED LOANS AND ACCOUNTS RECEIVABLE PORTFOLIOS FINANCING
In October 1998, a qualifying special-purpose finance company, OSI Funding
Corp. ("FINCO"), 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. In connection with the establishment of
the Warehouse Facility, FINCO entered into a servicing 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) at prevailing market rates based on the nature and age of
outstanding balances to be collected. The Company believes the servicing
fees will provide adequate compensation to the Company for performing the
servicing, resulting in a servicing asset that was not considered material.
Servicing revenue from FINCO will be recognized by the Company as
collections are received.
In connection with establishment of FINCO, the Company's amended credit
agreement (see Note 6) was amended to permit an initial investment in FINCO
of $2,500 with an additional investment of $2,500 at such time after
December 31, 1998 as FINCO's borrowings exceed $25,000. All borrowings by
FINCO under the Warehouse Facility are without recourse to the Company. The
following summarizes the transaction between the Company and FINCO for the
year ended December 31, 1998:
Sales of purchased loans and accounts receivables
portfolios by the Company to FINCO $9,134
Investment in FINCO by the Company $2,500
Servicing fees paid by FINCO to the Company $792
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.
Accordingly, no gain or loss was recorded by the Company on the sales to
FINCO.
At December 31, 1998, FINCO had outstanding borrowings of $6,482 under the
Warehouse Facility.
18. SUBSEQUENT EVENT
In January 1999, the Company increased its authorized 8% Nonvoting
Cumulative Redeemable Exchangeable Preferred Stock from 1,000,000 shares to
1,250,000 shares.
* * * * * *
INDEPENDENT AUDITORS' REPORT
To the Stockholders of Outsourcing Solutions Inc.:
We have audited the consolidated financial statements of Outsourcing Solutions
Inc. and it subsidiaries as of December 31, 1998 and 1997, and for each of the
three years in the period ended December 31, 1998, and have issued our report
thereon dated March 4, 1999; such consolidated financial statements and report
is included elsewhere in this Form 10-K. Our audits also included the
consolidated financial statement schedule of Outsourcing Solutions Inc. and its
subsidiaries, 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 audits. 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 the information set forth therein.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
St. Louis, Missouri
March 4, 1999
Outsourcing Solutions Inc. and Subsidiaries Schedule II
Valuation and Qualifying Accounts and Reserves
For the year ended December 31, 1998, 1997
and 1996
(in thousands)
Column A Column B Column C Column D Column E
- - ---------------------- -------- -------------------------- ---------- --------
Additions
-------------------------- (B)
@ beg. Charged Deductions Balance
of Charged to to Other (Please @ end of
Description Period Expense Accounts (A) explain) Period
- - ---------------------- ------- ---------- ------------ ----------- --------
Allowance for doubtful
accounts:
1998 538 108 798 135 1,309
==== ==== ==== ==== =====
1997 641 367 - 470 538
==== ==== == ==== ===
1996 - 117 671 147 641
== ==== ==== ==== ===
(A) For 1998, Union balance at date of acquisition. For 1996, Payco balance at
date of acquisition.
(B) Accounts receivable write-offs and adjustments, net of recoveries.