SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
-------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 333-16867
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Outsourcing Solutions Inc.
- --------------------------------------------------------------------------------
(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
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (314) 576-0022
Indicate by checkmark whether the registrant: (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Outstanding at
Class September 30, 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
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5,308,866.59
============
Transitional Small Disclosure (check one): Yes[ ] No[ X ]
PAGE 2
OUTSOURCING SOLUTIONS INC.
AND SUBSIDIARIES
TABLE OF CONTENTS
Part I. Financial Information Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1999 (unaudited) and December 31, 1998........... 3
Condensed Consolidated Statements of Operations for the three
and nine months ended September 30, 1999 and 1998 (unaudited).. 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 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..... 14
Part II. Other Information.............................................. 14
PAGE 3
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share amounts)
- ------------------------------------------------
September 30, December 31,
1999 1998
Unaudited Audited
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,836 $ 8,814
Cash and cash equivalents held for clients 23,771 22,372
Current portion of purchased loans and
accounts receivable portfolios 29,772 35,057
Accounts receivable - trade, less allowance
for doubtful receivables of $706 and $1,309 46,415 40,724
Other current assets 10,754 8,777
--------- ---------
Total current assets 115,548 115,744
PURCHASED LOANS AND ACCOUNTS RECEIVABLE PORTFOLIOS 11,115 20,436
PROPERTY AND EQUIPMENT, net 43,279 40,317
INTANGIBLE ASSETS, net 414,388 425,597
DEFERRED FINANCING COSTS, net 11,379 13,573
OTHER ASSETS 5,212 2,824
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TOTAL $ 600,921 $ 618,491
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable - trade $ 6,740 $ 7,355
Collections due to clients 23,771 22,372
Accrued salaries, wages and benefits 13,134 13,274
Other current liabilities 46,416 55,071
Current portion of long-term debt 19,640 16,877
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Total current liabilities 109,701 114,949
LONG-TERM DEBT 510,408 511,271
OTHER LONG-TERM LIABILITIES 21,602 22,303
STOCKHOLDERS' DEFICIT:
8% nonvoting cumulative redeemable exchangeable 13,686 12,167
preferred stock; authorized 1,250,000 and
1,000,000 shares, respectively; 1,094,855.24
and 973,322.32 shares, respectively, issued
and outstanding, at liquidation value of
$12.50 per share
Voting common stock; $.01 par value; authorized 35 35
7,500,000 shares, 3,477,126.01 shares issued
and outstanding
Class A convertible nonvoting common stock; $.01 4 4
par value; authorized 7,500,000 shares,
391,740.58 shares issued and outstanding
Class B convertible nonvoting common stock; $.01 4 4
par value; authorized 500,000 shares, 400,000
shares issued and outstanding
Class C convertible nonvoting common stock; $.01 10 10
par value; authorized 1,500,000 shares,
1,040,000 shares issued and outstanding
Paid-in capital 66,958 66,958
Retained deficit (121,487) (109,210)
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Total stockholders' deficit (40,790) (30,032)
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TOTAL $ 600,921 $ 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)
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Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------
1999 1998 1999 1998
REVENUES $122,987 $119,903 $380,063 $358,634
EXPENSES:
Salaries and benefits 60,076 58,050 182,238 171,203
Service fees and other operating and administrative expenses 37,440 35,130 117,334 105,100
Amortization of loans and accounts receivable purchased 9,317 12,840 29,794 35,198
Amortization of goodwill and other intangibles 4,112 4,045 12,316 11,588
Depreciation expense 3,735 3,486 10,960 9,963
-------- -------- -------- --------
Total expenses 114,680 113,551 352,642 333,052
-------- -------- -------- --------
OPERATING INCOME 8,307 6,352 27,421 25,582
OTHER EXPENSE - - 76 -
INTEREST EXPENSE - Net 13,005 13,164 38,214 37,554
-------- -------- -------- --------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (4,698) (6,812) (10,869) (11,972)
PROVISION FOR INCOME TAXES - - 375 -
MINORITY INTEREST - - - 572
-------- -------- -------- --------
NET LOSS (4,698) (6,812) (11,244) (12,544)
PREFERRED STOCK DIVIDEND REQUIREMENTS 527 162 1,033 639
-------- -------- -------- --------
NET LOSS TO COMMON STOCKHOLDERS $ (5,225) $ (6,974) $(12,277) $(13,183)
======== ======== ======== ========
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)
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Nine Months Ended
September 30,
-------------------
1999 1998
OPERATING ACTIVITIES:
Net loss $(11,244) $(12,544)
Adjustments to reconcile net loss to net cash
from operating activities:
Depreciation and amortization 25,645 23,654
Amortization of loans and accounts receivable 29,794 35,198
purchased
Other 76 -
Minority interest - 572
Change in assets and liabilities:
Other current assets (7,783) 5,256
Accounts payable and other liabilities (9,625) (10,122)
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Net cash from operating activities 26,863 42,014
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INVESTING ACTIVITIES:
Payments for acquisitions, net of cash acquired (877) (167,305)
Purchase of loans and accounts receivable portfolios (15,188) (38,030)
Acquisition of property and equipment (14,163) (10,794)
Investment in non-consolidated subsidiary (2,500) -
Other 269 -
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Net cash from investing activities (32,459) (216,129)
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FINANCING ACTIVITIES:
Proceeds from term loans - 225,469
Borrowings under revolving credit agreement 223,150 168,050
Repayments under revolving credit agreement (208,750) (177,900)
Repayments of debt (12,607) (32,327)
Deferred financing fees (175) (3,038)
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Net cash from financing activities 1,618 180,254
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,978) 6,139
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,814 3,217
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,836 $ 9,356
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during period for interest $ 33,264 $ 28,407
======== ========
Net cash paid (received) during period for taxes $ 158 $ (8,011)
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES - During
the nine months ended September 30, 1999 and 1998, the Company paid preferred
stock dividends of $1,519 and $468, respectively, through the issuance of
121,532.92 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 nine months ended September
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. 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, furnished 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 is being 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
proforma 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 nine months
ended September 30,
--------------------------------
1999 1998
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Revenues $ 380,063 $ 365,988
========= =========
Net loss $( 11,244) $ (13,665)
========= =========
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 $2,025.
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 except for OSI Funding Corp. as discussed in Note 6 below. The
Agreement contains certain covenants the more significant of which limit cash
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
September 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
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. Servicing revenue
from FINCO is recognized by the company as collections are received.
The following summarizes the transactions between the Company and FINCO for the
three and nine months ended September 30, 1999:
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1999 1999
--------------- -------------
Sales of purchased loans and accounts
receivable portfolios by the Company to FINCO $15,161 $44,485
Servicing fees paid by FINCO to the Company $3,913 $9,758
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 September 30, 1999, FINCO had outstanding borrowings of $35,287.
NOTE 7. SUBSEQUENT EVENT
The Company, Madison Dearborn Capital Partners III, L.P. ("MDP"), and certain of
the Company's stockholders, optionholders and warrantholders have entered into a
Stock Subscription and Redemption Agreement, dated as of October 8, 1999,
pursuant to which MDP will acquire a controlling interest in OSI for
approximately $790 million and most of the currently outstanding capital stock
of OSI will be redeemed (the "Recapitalization"). The Recapitalization is
expected to be completed by December 31, 1999. The Company is pursuing a consent
solicitation from the holders of its existing $100,000 11% Senior Subordinated
Notes to obtain a waiver of the Change of Control provision of the Indenture in
connection with the transaction.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Three Months Ended September 30, 1999 Compared to Three Months Ended
September 30, 1998
- --------------------------------------------------------------------
Revenues for the three months ended September 30, 1999 were $123.0 million
compared to $119.9 million in the same period last year - an increase of 2.6%.
The revenue increase of $3.1 million was due to increased collection and
outsourcing services revenue offset partially by lower portfolio services
revenue, which resulted from the establishment of OSI Funding Corp. ("FINCO"), a
qualifying special-purpose non-recourse financing company, as discussed below.
Revenues from collection services were $88.2 million for the three months ended
September 30, 1999 compared to $87.4 million in the comparable period in 1998.
The increase in collection services revenues was due to an increase in existing
net placements offset by the continued pressure on contingent fee rates in the
highly competitive business. The outsourcing services revenue of $15.1 million
compared favorably to prior year of $12.6 million due to increased revenue from
new and existing business. Revenues from portfolio services decreased from $19.9
million for the three months ended September 30, 1998 to $19.7 million for the
three months ended September 30, 1999. The decreased revenue was due primarily
to the negative revenue effect of FINCO, which was formed in the fourth quarter
of 1998 for the purpose of financing acquired loans and accounts receivable
portfolios. Prior to forming FINCO, the Company would record as revenue the
total collections on purchased portfolios. Currently, for all purchased
portfolios which are sold to and financed by FINCO, the Company records as
revenue a servicing fee on the total collections of FINCO purchased portfolios.
During the quarter ended September 30, 1999, the Company recorded revenue from
FINCO servicing fees of $3.9 million on total collections of $10.7 million. When
compared to the three months ended September 30, 1998, the total collections of
both on and off-balance sheet purchased portfolios, increased from $19.9 million
in 1998 to $26.5 million in 1999, an increase of 33% or $6.6 million. The
increased collections resulted primarily from an increase in the total levels of
purchased portfolios primarily as a result of the increased buying capacity made
available through FINCO. If all portfolios purchased by FINCO were accounted for
on-balance sheet, the Company would have reported revenues, including total
collections of portfolios, of $129.8 million, as compared to $119.9 million in
1998, an 8.3% increase.
Operating expenses, exclusive of amortization and depreciation charges, were
$97.5 million for the three months ended September 30, 1999 and $93.2 million
for the comparable period in 1998 - an increase of 4.7%. The increase in
operating expenses, exclusive of amortization and depreciation charges, resulted
primarily from higher collection-related expenses associated with the increased
revenues of collection and outsourcing services, increased collection-related
expenses associated with the increase in collections of purchased portfolios,
infrastructure costs as the Company aligns collection services by industry and
related increases in advertising and promotional expenses. For the three months
ended September 30, 1999, amortization and depreciation charges of $17.2 million
compared to $20.4 million for the same period last year - a decrease of 15.7%.
The lower amortization charges resulted primarily from lower on-balance sheet
portfolio amortization as the majority of portfolio purchases were sold to
FINCO. On portfolios owned by FINCO, the Company does not record amortization
expense.
As a result of the above, the Company's operating income of $8.3 million for the
three months ended September 30, 1999 compared favorably to $6.4 for the same
period in 1998.
Earnings before interest expense, taxes, depreciation and amortization (EBITDA)
for the three months ended September 30, 1999 was $25.5 million compared to
$26.7 million for the same period in 1998. The decrease of $1.2 million was
attributable to the decrease in portfolio services resulting from the manner in
which revenues from off-balance sheet collections are recognized and the higher
operating expenses.
Net interest expense for the three months ended September 30, 1999 was $13.0
million compared to $13.2 million for the comparable period in 1998. The
decrease was due primarily to lower interest rates.
Due to the factors stated above, the net loss for the three months ended
September 30, 1999 of $4.7 million compared to the net loss of $6.8 million for
the three months ended September 30, 1998.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998
- ------------------------------------------------------------------
Revenues for the nine months ended September 30, 1999 were $380.1 million
compared to $358.6 million in the same period last year - an increase of 6.0%.
The revenue increase of $21.5 million was due primarily to increased collection,
outsourcing and portfolio services revenues of $14.2 million - an increase of
3.8% over last year, and $7.3 million from the acquisition of Union. Revenues
from collection services were $275.0 million for the nine months ended September
30, 1999 compared to $265.1 million in the comparable period in 1998. The
increase in collection services revenues was due to a 1.6% increase in existing
business and $5.7 million from the Union acquisition. The outsourcing services
revenue of $43.5 million compared favorably to prior year of $33.7 million due
to increased revenue from new and existing business of 24.3% and $1.6 million
from the Union acquisition. Revenues from purchased portfolio services increased
to $61.6 million for the nine months ended September 30, 1999 compared to $59.8
million in 1998 - up 2.8%. The increased revenue was attributable to the
servicing fee for the off-balance sheet receivable collections of portfolios
which increased due to the formation of FINCO, offset by lower revenues from
on-balance sheet portfolios. Prior to forming FINCO, the Company would record as
revenue the total collections on purchased portfolios. Currently, for all
purchased portfolios which are sold to and financed by FINCO, the Company
records as revenue a servicing fee on the total collections of FINCO purchased
portfolios. During the nine months ended September 30, 1999, the Company
recorded revenue from FINCO servicing fees of $9.8 million on total collections
of $25.9 million. When compared to the nine months ended September 30, 1998, the
total collections of both on and off-balance sheet purchased portfolios
increased from $59.8 million in 1998 to $77.7 million in 1999, an increase of
29.9% or $17.9 million. The increased collections resulted primarily from an
increase in the total levels of purchased portfolios primarily as a result of
the increased buying capacity made available through FINCO. If all portfolios
purchased by FINCO were accounted for on-balance sheet, the Company would have
reported revenues, including total collections of portfolios, of $396.2 million
as compared to $358.6 million, an increase of 10.0%.
Operating expenses, exclusive of amortization and depreciation charges, were
$299.6 million for the nine months ended September 30, 1999 and $276.3 million
for the comparable period in 1998 - an increase of 8.4%. 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 of collection and outsourcing services,
increased collection-related expenses associated with the increase in
collections of purchased portfolios, infrastructure costs as the Company aligns
collection services by industry, and related increases in advertising and
promotional expenses and consulting expenses of approximately $2.4 million.
For the nine months ended September 30, 1999, amortization and depreciation
charges of $53.0 compared to $56.8 million for the same period last year - a
decrease of 6.5%. 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 and depreciation of current year capital expenditures. On portfolios
owned by FINCO, the Company does not record amortization expense.
As a result of the above, the Company generated operating income of $27.4
million for the nine months ended September 30, 1999 compared to $25.6 million
for the comparable period in 1998.
Earnings before interest expense, taxes, depreciation and amortization (EBITDA)
for the nine months ended September 30, 1999 was $80.5 million compared to $82.3
million for the same period in 1998. The decrease was primarily attributable to
the higher branding and industry focused expenses and the decreased portfolio
services revenues resulting from the manner in which revenues from off-balance
sheet collections are recognized.
Net interest expense for the nine months ended September 30, 1999 was $38.2
million compared to $37.6 million for the comparable period in 1998. The
increase was primarily due to the additional indebtedness incurred to finance
the Union acquisition offset partially by lower 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.
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 nine months ended
September 30, 1999 of $11.2 million compared favorably to the net loss of $12.5
million for the nine months ended September 30, 1998.
Financial Condition, Liquidity and Capital Resources
- ----------------------------------------------------
At September 30, 1999, the Company had cash and cash equivalents of $4.8
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
September 30, 1999, the Company had outstanding $39.9 million under the
revolving credit facility leaving $16.1 million, after outstanding letters of
credit, available under the revolving credit facility.
Since December 31, 1998, cash and cash equivalents decreased $4.0 million
primarily due to cash utilized for the net repayment of debt of $12.6 million,
purchases of loans and accounts receivable portfolios of $15.2 million and
capital expenditures of $14.2 million offset by cash from operations of $26.9
million and increased borrowings under the revolving credit facility of $14.4
million. The Company also held $23.8 million of cash for clients in restricted
trust accounts at September 30, 1999.
For the first nine months in 1999, the Company made capital expenditures of
$14.2 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.
The Company, Madison Dearborn Capital Partners III, L.P. ("MDP"), and certain of
the Company's stockholders, optionholders and warrantholders have entered into a
Stock Subscription and Redemption Agreement, dated as of October 8, 1999,
pursuant to which MDP will acquire a controlling interest in OSI for
approximately $790 million and most of the currently outstanding capital stock
of OSI will be redeemed (the "Recapitalization"). The Recapitalization is
expected to be completed by December 31, 1999.
The Recapitalization will be funded through an equity contribution of
approximately $211 million from MDP and existing shareholders, $100 million from
issuance of redeemable preferred shares and borrowings under a new senior credit
facility of $475 million to replace the existing senior credit facility.
The Company's existing $100 million 11% Senior Subordinated Notes will remain
outstanding if the requisite consents are obtained from the holders thereof. On
November 10, 1999, the Company began soliciting consents to the waiver of
certain of the Company's obligations under the Indenture, including its
obligation to make a change of control offer in connection with the
Recapitalization and its failure to comply with certain technical requirements
relating to the qualification and operation of FINCO as an unrestricted
subsidiary under the Indenture as discussed below.
Since the formation of FINCO, the Company has treated FINCO as an unrestricted
subsidiary under the Indenture. However, it has recently come to the attention
of the Company that, at the time of formation of FINCO, the Company failed to
take certain ministerial actions to satisfy the technical requirements under the
Indenture for the designation of FINCO as an unrestricted subsidiary, despite
the fact that it could have been designated as such at the time.
Management believes that its failure to properly qualify and operate FINCO as an
unrestricted subsidiary under the Indenture is a technicality and that
substantively FINCO should be treated as qualifying as an unrestricted
subsidiary since its formation. If FINCO were not to be treated as having been
an unrestricted subsidiary since its formation, the Company and FINCO would not
be in compliance with certain restrictive covenants of the Indenture. In order
to remove any doubt as to the status of FINCO, the Company began the consent
solicitation as previously mentioned. Based on preliminary discussions with
certain holders of its 11% Senior Subordinated Notes, management believes the
consents will be obtained.
Year 2000
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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 was 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 November 1999.
Testing is substantially complete for all systems with final completion
anticipated to be no later than November 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 $1.6 to $1.7 million. To date, the Company has expended
approximately $1.6 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 November
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 regarding
the completion of the Recapitalization and obtaining consents to the waiver of
certain of the Company's obligations under the Indenture, including its
obligation to make a change of control offer in connection with the
Recapitalization and its failure to comply with certain technical requirements
relating to the qualification and operation of FINCO, (3) statements concerning
the anticipated costs and outcome of legal proceedings and environmental
liabilities, (4) statements regarding the Company's expected capital
expenditures, (5) any statements preceded by, followed by or that include the
word "believes," "expects," "anticipates," "intends," "should," "may," or
similar expressions; and (6) 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, (12) the failure
of the holders of the Company's 11% Senior Subordinated Notes to consent to the
waiver of certain obligations under the Indenture, and (13) the failure of any
parts to consumate the Recapitalization transactions.
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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
10.1 Amended and Restated Employment Agreement dated as of June 4,
1999 by and between the Company and Timothy G. Beffa.
10.2 Amended and Restated Employment Agreement dated as of June 4,
1999 by and between the Company and Michael A. DiMarco.
10.3 Amended and Restated Employment Agreement dated as of June 4,
1999 by and between the Company and C. Bradford McLeod.
10.4 Form of Non-Qualified Stock Option Award Agreement [E].
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 September 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: November 15, 1999