SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------------------- --------------------
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
Indicate by checkmark whether the registrant: (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------- ---------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Outstanding at
Class June 30, 1999
- ------------------------------------------ --------------
Voting common stock 3,477,126.01
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
------------
5,308,866.59
============
Transitional Small Disclosure (check one): Yes [ ] No [ X ]
------- ---- ----
OUTSOURCING SOLUTIONS INC.
AND SUBSIDIARIES
TABLE OF CONTENTS
Part I. Financial Information Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 1999 (unaudited) and December 31, 1998.............. 3
Condensed Consolidated Statements of Operations for the three
and six months ended June 30, 1999 and 1998 (unaudited)...... 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1999 and 1998 (unaudited).......... 5
Notes to Condensed Consolidated Financial Statements
(unaudited).................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 12
Part II. Other Information............................................ 13
PAGE 3
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share amounts)
June 30, December 31,
1999 1998
Unaudited Audited
--------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,889 $ 8,814
Cash and cash equivalents held for clients 25,206 22,372
Current portion of purchased loans and accounts
receivable portfolios 30,202 35,057
Accounts receivable - trade, less allowance for
doubtful receivables of $614 and $1,309 45,165 40,724
Other current assets 9,209 8,777
-------- --------
Total current assets 116,671 115,744
PURCHASED LOANS AND ACCOUNTS RECEIVABLE PORTFOLIOS 8,902 20,436
PROPERTY AND EQUIPMENT, net 40,111 40,317
INTANGIBLE ASSETS, net 418,452 425,597
DEFERRED FINANCING COSTS, net 12,307 13,573
OTHER ASSETS 2,778 2,824
-------- --------
TOTAL $599,221 $618,491
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable - trade $ 8,036 $ 7,355
Collections due to clients 25,206 22,372
Accrued salaries, wages and benefits 13,190 13,274
Other current liabilities 46,171 55,071
Current portion of long-term debt 18,749 16,877
-------- --------
Total current liabilities 111,352 114,949
LONG-TERM DEBT 502,218 511,271
OTHER LONG-TERM LIABILITIES 21,743 22,303
STOCKHOLDERS' DEFICIT:
8% nonvoting cumulative redeemable exchangeable
preferred stock; authorized 1,250,000 and
1,000,000 shares, respectively; 1,052,745.42
and 973,322.32 shares, respectively, issued and
outstanding, at liquidation value of $12.50
per share 13,159 12,167
Voting common stock; $.01 par value; authorized
7,500,000 shares, 3,477,126.01 shares 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 (116,262) (109,210)
-------- --------
Total stockholders' deficit (36,092) (30,032)
-------- --------
TOTAL $599,221 $618,491
======== ========
The accompanying notes are an integral part of the
unaudited condensed consolidated financial statements.
PAGE 4
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
REVENUES $127,829 $123,905 $257,076 $238,731
EXPENSES:
Salaries and benefits 61,427 58,601 122,162 113,153
Service fees and other operating and administrative expenses 39,482 34,317 79,894 69,970
Amortization of loans and accounts receivable purchased 9,177 13,318 20,477 22,358
Amortization of goodwill and other intangibles 4,102 4,048 8,204 7,543
Depreciation expense 3,614 3,350 7,225 6,477
-------- -------- -------- --------
Total expenses 117,802 113,634 237,962 219,501
-------- -------- -------- --------
OPERATING INCOME 10,027 10,271 19,114 19,230
OTHER EXPENSE - - 76 -
INTEREST EXPENSE - Net 12,644 13,166 25,209 24,390
-------- -------- -------- --------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (2,617) (2,895) (6,171) (5,160)
PROVISION FOR INCOME TAXES 375 - 375 -
MINORITY INTEREST - - - 572
-------- -------- -------- --------
NET LOSS (2,992) (2,895) (6,546) (5,732)
PREFERRED STOCK DIVIDEND REQUIREMENTS - 243 506 477
-------- -------- -------- --------
NET LOSS TO COMMON STOCKHOLDERS $ (2,992) $(3,138) $(7,052) $ (6,209)
======== ======== ======== ========
The accompanying notes are an integral part of
the unaudited condensed consolidated financial statements.
PAGE 5
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands except share amounts)
Six Months Ended
June 30,
--------------------
1999 1998
OPERATING ACTIVITIES:
Net loss $(6,546) $ (5,732)
Adjustments to reconcile net loss to net cash
from operating activities:
Depreciation and amortization 16,943 15,400
Amortization of loans and accounts receivable
purchased 20,477 22,358
Other 76 -
Minority interest - 572
Change in assets and liabilities:
Other current assets (5,054) 6,490
Accounts payable and other liabilities (8,378) (8,411)
------- --------
Net cash from operating activities 17,518 30,677
------- --------
INVESTING ACTIVITIES:
Payments for acquisitions, net of cash acquired (877) (167,208)
Purchase of loans and accounts receivable portfolios (4,088) (23,258)
Acquisition of property and equipment (7,260) (7,145)
Other 318 -
------- --------
Net cash from investing activities (11,907) (197,611)
------- --------
FINANCING ACTIVITIES:
Proceeds from term loans - 225,469
Borrowings under revolving credit agreement 134,250 116,500
Repayments under revolving credit agreement (133,050) (132,350)
Repayments of debt (8,488) (28,121)
Deferred financing fees (248) (2,963)
------- --------
Net cash from financing activities (7,536) 178,535
------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,925) 11,601
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,814 3,217
------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,889 $ 14,818
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during period for interest $23,927 $ 18,823
======= ========
Net cash received during period for taxes $ 39 $ 7,841
======= ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES - During
the six months ended June 30, 1999 and 1998, the Company paid preferred stock
dividends of $992 and $468, respectively, through the issuance of 79,423.10
shares and 37,435.47 shares of preferred stock, respectively.
The accompanying notes are an integral part of the
unaudited condensed consolidated financial statements.
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands except share amounts)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six months ended June 30,
1999 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1999. For purposes of comparability, certain prior year
amounts have been reclassified to conform to current quarter presentation. These
Condensed Consolidated Financial Statements should be read in conjunction with
the Consolidated Financial Statements and notes thereto contained in the
Company's Form 10-K for the year ended December 31, 1998.
Comprehensive loss for the periods presented were equal to the Company's net
loss as the Company had no comprehensive income (loss) items.
NOTE 2. ACQUISITION
On January 23, 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 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 an amended credit agreement. 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
acquisition was accounted for under the purchase method of accounting. 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 goodwill will be amortized over 30 years using the
straight-line method. Union's consolidated operating results have been included
in the Company's consolidated results since January 23, 1998, recognizing the
minority interest through the completion date of the acquisition.
The unaudited proforma consolidated financial data presented below provides pro
forma effect of the Union acquisition as if such acquisition 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 acquisition
been consummated as of the beginning of each period presented, nor does the data
give effect to any transactions other than the acquisition.
For the three months For the six months
Ended June 30, Ended June 30,
---------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues $127,829 $123,905 $257,076 $246,085
======== ======== ======== ========
Net loss $(2,992) $(2,895) $(6,546) $(6,853)
======= ======= ======= =======
NOTE 3. DEBT
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 $1,775.
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.
NOTE 4. LITIGATION
From time to time, the Company and certain of its subsidiaries are subject to
various investigations, claims and legal proceedings covering a wide range of
matters that arise in the normal course of business and are routine to the
nature of the Company's businesses. In addition, as a result of the Union
acquisition, certain subsidiaries of the Company are a party to several on-going
environmental remediation investigations by federal and state governmental
agencies and clean-ups and, along with other companies, has been named a
"potentially responsible party" for certain waste disposal sites. While the
results of litigation cannot be predicted with certainty, the Company has
provided for the estimated uninsured amounts and costs to resolve the pending
suits and management, in consultation with legal counsel, believes that reserves
established for the ultimate resolution of pending matters are adequate at June
30, 1999.
NOTE 5. 8% NONVOTING CUMULATIVE REDEEMABLE EXCHANGEABLE PREFERRED STOCK
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.
NOTE 6. PURCHASED LOANS AND ACCOUNTS RECEIVABLE PORTFOLIOS FINANCING
The following summarizes the transactions between the Company and OSI Funding
Corp. ("FINCO"), a qualifying special-purpose, non-recourse finance company
formed in the fourth quarter of 1998, for the three and six months ended
June 30, 1999:
For the Three For the Six
Months Ended Months Ended
June 30, 1999 June 30, 1999
------------- -------------
Sales of purchased loans and
accounts receivable Portfolios
by the Company to FINCO $11,666 $29,324
Servicing fees paid by FINCO to
the Company $4,002 $5,845
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 June 30, 1999, FINCO had outstanding borrowings of $28,367.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Revenues for the three months ended June 30, 1999 were $127.8 million compared
to $123.9 million in the same period last year - an increase of 3.2%. The
revenue increase of $3.9 million was due to increased fee and outsourcing
services revenue offset partially by lower portfolio services revenue. Revenues
from fee services were $93.0 million for the three months ended June 30, 1999
compared to $91.3 million in the comparable period in 1998. The increase in fee
revenues was due to an increase in existing placements offset by the continued
pressure on contingent fee rates in the highly competitive business. The
outsourcing services revenue of $14.5 million compared favorably to prior year
of $11.2 million due to increased revenue from new and existing business.
Revenues from purchased portfolio services decreased from $21.4 million for the
three months ended June 30, 1998 to $20.3 million for the three months ended
June 30, 1999. The decreased revenue was due primarily to the negative impact of
OSI Funding Corp. ("FINCO") (formed in the fourth quarter of 1998 for the
purpose of acquiring loans and accounts receivable portfolios) and lower
strategic sales of on-balance sheet portfolios. As a result of selling the
majority of the portfolio purchases to FINCO, portfolio services revenue was
negatively impacted by $6.3 million as the Company records only servicing fee
revenue on the FINCO collections of $10.0 million.
Operating expenses for the three months ended June 30, 1999 were $117.8 million
compared to $113.6 million for the comparable period in 1998. Operating
expenses, exclusive of amortization and depreciation charges, were $100.9
million for the three months ended June 30, 1999 and $92.9 million for the
comparable period in 1998 - an increase of 8.6%. The increase in operating
expenses, exclusive of amortization and depreciation charges, resulted primarily
from higher collection-related expenses associated with the increased revenues,
infrastructure costs as the Company aligns fee services by industry, and
unusually higher advertising and promotional expenses and increased consulting
expenses of approximately $1.0 million. Of the $117.8 million in operating
expenses for the three months ended June 30, 1999, $16.9 million was
attributable to amortization and depreciation charges compared to $20.7 million
for the same period last year - a decrease of 18.5%. The lower amortization and
depreciation charges resulted primarily from lower portfolio amortization as the
majority of portfolio purchases were sold to FINCO resulting in lower on-balance
sheet portfolios.
As a result of the above, the Company's operating income of $10.0 million for
the three months ended June 30, 1999 was slightly under $10.3 million for the
comparable period in 1998.
Earnings before interest expense, taxes, depreciation and amortization (EBITDA)
for the three months ended June 30, 1999 was $26.9 million compared to $31.0
million for the same period in 1998. The decrease of $4.1 million was
attributable to the higher operating expenses of $8.0 million and the negative
effect of portfolio services revenues offset partially by the increased revenue
of $10.2 million.
Net interest expense for the three months ended June 30, 1999 was $12.6 million
compared to $13.2 million for the comparable period in 1998. The decrease was
due to lower indebtedness and interest rates.
The provision for income taxes of $0.4 million was provided for state income
taxes as the Company has income tax obligations in various states.
Due to the factors stated above, the net loss for the three months ended June
30, 1999 of $3.0 million compared to the net loss of $2.9 million for the three
months ended June 30, 1998.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenues for the six months ended June 30, 1999 were $257.1 million compared to
$238.7 million in the same period last year - an increase of 7.7%. The revenue
increase of $18.4 million was due primarily to increased fee, outsourcing and
portfolio services revenues of $11.1 million - an increase of 4.7% over last
year, and $7.3 million from the acquisition of Union. Revenues from fee services
were $186.8 million for the six months ended June 30, 1999 compared to $177.7
million in the comparable period in 1998. The increase in fee revenues was due
to a 1.9% increase in existing business and $5.7 million from the Union
acquisition. The outsourcing services revenue of $28.4 million compared
favorably to prior year of $21.1 million due to increased revenue from new and
existing business of 26.6% and $1.6 million from the Union acquisition. Revenues
from purchased portfolio services increased to $41.9 million for the six months
ended June 30, 1999 compared to $39.9 million in 1998 - up 5.1%. The increased
revenue was attributable to strategic sales of on-balance sheet portfolios.
Gross collections from on-balance sheet and off-balance sheet receivables were
approximately $12.2 million higher than last year. However, due to recording
only a servicing fee for the off-balance sheet receivable collections of
portfolios sold to FINCO (Company revenue negatively impacted by approximately
$9.2 million), revenues from purchased portfolio services excluding the sales of
on-balance sheet portfolios were flat compared to last year.
Operating expenses for the six months ended June 30, 1999 were $238.0 million
compared to $219.5 million for the comparable period in 1998. Operating
expenses, exclusive of amortization and depreciation charges, were $202.1
million for the six months ended June 30, 1999 and $183.1 million for the
comparable period in 1998 an increase of 10.3%. The increase in operating
expenses, exclusive of amortization and depreciation charges, resulted primarily
from the Union acquisition, higher collection-related expenses associated with
the increased revenues, infrastructure costs as the Company aligns fee services
by industry, and unusually higher advertising and promotional expenses and
increased consulting expenses of approximately $2.0 million. Of the $238.0
million in operating expenses for the six months ended June 30, 1999, $35.9
million was attributable to amortization and depreciation charges compared to
$36.4 million for the same period last year - a decrease of 1.4%. The lower
amortization and depreciation charges resulted primarily from lower on-balance
sheet portfolio amortization offset partially by additional depreciation and
amortization of goodwill related to the Union acquisition.
As a result of the above, the Company generated operating income of $19.1
million for the six months ended June 30, 1999 compared to $19.2 million for the
comparable period in 1998.
Earnings before interest expense, taxes, depreciation and amortization (EBITDA)
for the six months ended June 30, 1999 was $55.0 million compared to $55.6
million for the same period in 1998. The decrease was primarily attributable to
the higher branding and industry focused expenses and the negative effect of
portfolio services revenues. The Company's increased revenue was not enough to
offset those expenses and the negative effect of portfolio services revenues.
Net interest expense for the six months ended June 30, 1999 was $25.2 million
compared to $24.4 million for the comparable period in 1998. The increase was
primarily due to the additional indebtedness incurred to finance the Union
acquisition.
The provision for income taxes of $0.4 million was provided for state income
taxes as the Company has income tax obligations in various states.
Minority interest in 1998 resulted from the Union acquisition. On January 23,
1998, the Company acquired approximately 77% of the outstanding 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 six months ended June 30,
1999 of $6.5 million compared unfavorably to the net loss of $5.7 million for
the six months ended June 30, 1998.
Financial Condition, Liquidity and Capital Resources
At June 30, 1999, the Company had cash and cash equivalents of $6.9 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 June
30, 1999, the Company had outstanding $26.7 million under the revolving credit
facility leaving $29.5 million, after outstanding letters of credit, available
under the revolving credit facility.
Since December 31, 1998, cash and cash equivalents decreased $1.9 million
primarily due to cash utilized for the net repayment of debt of $7.3 million,
purchases of loans and accounts receivable portfolios of $4.1 million and
capital expenditures of $7.3 million offset by cash from operations of $17.5
million. The Company also held $25.2 million of cash for clients in restricted
trust accounts at June 30, 1999.
For the first six months in 1999, the Company made capital expenditures of $7.3
million primarily for the replacement and upgrading of equipment and expansion
of the Company's information services systems. The Company anticipates spending
approximately $18.0 million for capital expenditures in 1999.
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
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
reports 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 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 September 1999.
Testing is well underway for all systems with completion anticipated to be no
later than September 1999.
Spending for modifications and updates are being expensed as incurred and is not
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 $1.5 to $1.6 million. To date, the Company has expended
approximately $1.5 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 is currently in the process of 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 October
1999.
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 the Company's expected capital
expenditures, (4) any statements preceded by, followed by or that include the
word "believes," "expects," "anticipates," "intends," "should," "may," or
similar expressions; and (5) other statements contained or incorporated by
reference in this document regarding matters that are not historical facts.
Because such statements are subject to risks and uncertainties, actual results
may differ materially from those expressed or implied by such forward-looking
statements. Factors that could cause actual result 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to the risk of fluctuating interest rates in the normal
course of business. From time to time and as required by the Company's credit
agreement, the Company will employ derivative financial instruments as part of
its risk management program. The Company's objective is to manage risks and
exposures and not to trade such instruments for profit or loss.
Since December 31, 1998 (the most recent completed fiscal year), there have been
no material changes in the reported market risks.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company and certain of its subsidiaries are involved in
various investigations, claims and legal proceedings covering a wide range of
matters that arise in the normal course of business and are routine to the
nature of the Company's business. Other information with respect to legal
proceedings appears in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
In June 1999, pursuant to written consent of shareholders of the Company's
voting common stock, the following persons were elected to serve as directors of
the Company until the next annual meeting of shareholders, such persons
constituting all directors of the Company: Timothy G. Beffa, David E. De Leeuw,
David G. Hanna, Frank J. Hanna, III, Courtney F. Jones, Robert A. Marshall,
William B. Hewitt, David E. King, George E. McCown, Nathan W. Pearson Jr., and
Jeffrey E. Stiefler. These consents were executed by holders of 1,897,793.01
shares of the Company's voting common stock.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
Exhibit 10.1 Fourth Amendment to the Second Amended and Restated
Credit Agreement, dated June 30, 1999.
Exhibit 27 Financial Data Schedule (Unaudited)
(b). Reports on Form 8-K
There were no reports on Form 8-K filed for the three-month period
ended June 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OUTSOURCING SOLUTIONS INC.
(Registrant)
/s/ Timothy G. Beffa
------------------------------------------------------
Timothy G. Beffa
President and Chief Executive Officer
/s/ Gary L. Weller
------------------------------------------------------
Gary L. Weller
Executive Vice President and
Chief Financial Officer
/s/ Daniel T. Pijut
-----------------------------------------------------
Daniel T. Pijut
Vice President, Corporate Controller
and Chief Accounting Officer
Date: August 16, 1999