SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20429
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
---------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------ -------------------
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 of 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
Check here whether the issuer (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 [ ]
As of March 31, 1998, the following shares of the Registrant's common stock were
issued and outstanding:
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]
<PAGE>
OUTSOURCING SOLUTIONS INC.
AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets March 31, 1998
(unaudited)and December 31, 1997............................3
Condensed Consolidated Statements of Operations for
the three months ended March 31, 1998 and
1997 (unaudited)............................................4
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 1998 and 1997
(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
Part II. Other Information...................................................10
<PAGE>
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share amounts)
- --------------------------------------------------------------------------------
March 31, December 31,
1998 1997
Unaudited Audited
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 14,936 $ 3,217
Cash and cash equivalents held for clients 26,735 20,762
Current portion of purchased loans and
accounts receivable portfolios 43,611 42,915
Accounts receivable - trade, less allowance
for doubtful receivables of $1,231 and 538 41,560 27,192
Other current assets 5,827 2,119
-------- --------
Total current assets 132,669 96,205
PURCHASED LOANS AND ACCOUNTS RECEIVABLE
PORTFOLIOS 25,375 19,537
PROPERTY AND EQUIPMENT, net 44,397 32,563
INTANGIBLE ASSETS, net 430,649 219,795
DEFERRED FINANCING COSTS, net 14,788 12,517
OTHER ASSETS 8,375 1,073
-------- ---------
TOTAL $656,253 $381,690
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable - trade $ 5,439 $ 6,977
Collections due to clients 26,735 20,762
Accrued compensation 16,008 8,332
Other current liabilities 56,436 26,131
Current portion of long-term debt 16,765 15,445
-------- --------
Total current liabilities 121,383 77,647
LONG-TERM DEBT 516,624 309,521
OTHER LONG-TERM LIABILITIES 26,327 -
STOCKHOLDERS' EQUITY (DEFICIT):
8%nonvoting cumulative redeemable exchange-
able 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 and 3,477,126.01
and 3,477,126.01 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 (87,259) (84,188)
-------- --------
Total stockholders' equity (deficit) (8,081) (5,478)
-------- --------
TOTAL $656,253 $381,690
======== =========
See notes to the unaudited condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
------------------
1998 1997
REVENUES $114,826 $63,842
EXPENSES:
Salaries and benefits 54,552 32,262
Service fees and other operating and administrative
expenses 35,653 17,253
Amortization of loans and accounts receivable purchased 9,040 8,546
Amortization of goodwill and other intangibles 3,495 8,011
Depreciation expense 3,127 2,524
-------- --------
Total expenses 105,867 68,596
-------- -------
OPERATING INCOME (LOSS) 8,959 (4,754)
INTEREST EXPENSE - Net 11,224 6,523
-------- -------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (2,265) (11,277)
INCOME TAX BENEFIT - (3,496)
MINORITY INTEREST 572 -
-------- -------
NET LOSS (2,837) (7,781)
PREFERRED STOCK DIVIDEND REQUIREMENTS 234 195
-------- -------
NET LOSS TO COMMON STOCKHOLDERS $(3,071) $(7,976)
======== ========
See notes to the unaudited condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands except share amounts)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
------------------
1998 1997
OPERATING ACTIVITIES:
Net loss $ (2,837) $ (7,781)
Adjustments to reconcile net loss to net cash provided
by (used in)operating activities:
Depreciation and amortization 7,286 11,039
Amortization of loans and accounts receivable purchased 9,040 8,546
Deferred taxes - (3,496)
Minority interest 572 -
Change in assets and liabilities:
Other current assets (949) (1,003)
Accounts payable and other current liabilities (4,309) (1,580)
--------- ---------
Net cash provided by operating activities 8,803 5,725
--------- ---------
INVESTING ACTIVITIES:
Payments for acquisitions, net of cash acquired (163,670) -
Purchase of loans and accounts receivable portfolios (15,574) (9,217)
Acquisition of property and equipment (2,856) (1,753)
--------- ---------
Net cash used in investing activities (182,100) (10,970)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from term loans 225,469 -
Borrowings under revolving credit agreement 73,400 5,000
Repayments under revolving credit agreement (87,000) -
Repayments of debt (23,918) (2,409)
Deferred financing fees (2,935) (210)
--------- ---------
Net cash provided by financing activities 185,016 2,381
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,719 (2,864)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,217 14,497
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 14,936 $ 11,633
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during period for interest $ 3,319 $ 2,356
========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES - During
the three months ended March 31, 1998 and 1997, the Company paid preferred stock
dividends of $468 and $433, respectively, through the issuance of 37,435.47
shares and 34,611.20 shares of preferred stock, respectively.
See notes to the unaudited condensed consolidated financial statements.
<PAGE>
OUTSOURCING SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands)
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 months ended March 31, 1998 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. For purposes of comparability, certain prior year
amounts have been reclassified to conform with current year 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, 1997.
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. The merger was completed on March 31, 1998. The aggregate
purchase price of the Union acquisition was approximately $230,000 including
transaction fees, assumed liabilities, and certain adjustments to conform to the
Company's accounting policies. The Company financed the acquisition with funds
provided by the Second Amended and Restated Credit Agreement (as defined
herein). Union furnishes a broad range of credit and receivables management
outsourcing services and management and collection of accounts receivable. The
acquisition was accounted for under the purchase method of accounting.
Accordingly, the purchase price has been preliminarily allocated based upon the
estimated fair value of the assets acquired. This treatment resulted in
approximately $213,600 of goodwill that will be amortized over 30 years using
the straight-line method. Union's 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 merger.
The unaudited pro forma consolidated financial data presented below gives effect
to the Union acquisition and the North Shore Agency and Accelerated Bureau of
Collections acquisitions that occurred in the fourth quarter of 1997, as if such
acquisitions had occurred as of January 1, 1997. The pro forma adjustments are
based upon available information and certain assumptions that management
believes are reasonable. The unaudited pro forma consolidated financial data do
not purport to represent what the Company's financial position or results of
operations would have been if consummation of the acquisitions of Union, North
Shore Agency and Accelerated Bureau of Collections had occurred on the date
indicated or which may be achieved in the future. Except for the elimination of
costs associated with duplicative administrative functions and facilities based
upon actions actually taken as of the close of the transaction, anticipated cost
savings have not been reflected in this presentation. The unaudited pro forma
consolidated financial data should be read in conjunction with the historical
consolidated financial statements and accompanying notes for Company, Union
(filed separately), North Shore Agency and Accelerated Bureau of Collections.
For the three months
Ended March 31,
------------------------
1998 1997
---- ----
Revenues $122,180 $114,101
========= =========
Net loss $ (3,958) $ (8,682)
========= =========
NOTE 3. DEBT
On January 26, 1998, the Company entered into a Second Amended and Restated
Credit Agreement ("Agreement"). This Agreement amended the existing credit
agreement. The Agreement consists of $412,422 term loan facility and a $58,000
revolving credit facility.
The term loan facility consists of a term loan of $62,500 ("Term Loan A"), a
term loan of $124,922 ("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 Loans B
and 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 has a term of five years and is fully revolving until
October 15, 2001. The revolving credit 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%.
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 requiring the Company to satisfy certain financial performance
ratios.
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.
NOTE 4. LITIGATION
The Company is 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 business. In addition, as a result of
the Union acquisition, the Company is a party to several environmental
remediation investigations and clean-ups and, along with other companies, has
been named a "potentially responsible party" for certain waste disposal sites.
Each of these matters is subject to various uncertainties, and it is possible
that some of these matters will be decided unfavorably against the Company. The
Company has established, with input from environmental and legal experts,
accruals for matters that are in its view probable and reasonably estimable.
Based on information presently available and expert input provided, management
believes that existing accruals are sufficient to satisfy any known
environmental liabilities.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Revenues for the three months ended March 31, 1998 were $114.8 million compared
with $63.8 million in the same period last year - an increase of 79.9%. The
revenue increase of $51.0 million was due to increased fee services and
portfolio collection revenues of $3.9 million - an increase of 6.1% over last
year, and $47.1 million from the acquisitions of Union, North Shore Agency and
Accelerated Bureau of Collections. Revenues from fee services were $87.8 million
for the three months ended March 31, 1998 compared to $44.1 million in the
comparable period in 1997. The increase in fee revenues was due to a 3.5%
increase in existing business and $42.2 million from the three acquisitions.
Revenues from purchased portfolios increased to $18.5 million for the quarter
ended March 31, 1998 compared to $15.7 million in 1997 - up 17.8%. The increased
revenue resulted from additional portfolio purchases and higher strategic sales
of portfolios. The outsourcing revenue of $8.5 million compared favorably to
prior year of $4.0 million due to the Union acquisition.
Operating expenses for the three months ended March 31, 1998 were $105.9 million
compared to $68.6 million for the comparable period in 1997 - an increase of
$37.3 million. Operating expenses, exclusive of amortization and depreciation
charges, were $90.2 million for the three months ended March 31, 1998 and $49.5
million for the comparable period in 1997. The increase in operating expenses,
exclusive of amortization and depreciation charges, resulted primarily from the
three acquisitions as well as higher collection-related expenses due to the
increased revenue. Of the $105.9 million in operating expenses for the three
months ended March 31, 1998, $15.7 million was attributable to amortization and
depreciation charges compared to $19.1 million for the same period last year.
The lower amortization and depreciation charges were due to no account inventory
amortization in 1998 since account inventory was fully amortized at December 31,
1997 offset partially by increased depreciation and amortization of goodwill
related to the three acquisitions.
As a result of the above, the Company generated operating income of $9.0 million
for the three months ended March 31, 1998 compared to an operating loss of $4.8
million for the comparable period in 1997.
Earnings before interest expense, taxes, depreciation and amortization (EBITDA)
for the quarter ended March 31, 1998 was $24.6 million compared to $14.3 million
in 1997. The increase of $10.3 million consisted of $9.1 million as a result of
the three acquisitions and $1.2 million from the increased revenue of $3.9
million - a 30.8% margin.
Interest expense, net for the three months ended March 31, 1998 was $11.2
million compared to $6.5 million for the comparable period in 1997. The increase
was primarily due to additional indebtedness incurred to finance the Union,
North Shore Agency and Accelerated Bureau of Collections acquisitions.
Consistent with management's assessment made in the fourth quarter of 1997, the
potential tax benefits generated by additional net operating loss carryovers or
the future reversal of the net deductible temporary differences for the three
months ended March 31, 1998 were fully offset by valuation allowances of $0.9
million.
Minority interest in earnings in 1998 resulted from the Union acquisition. On
January 23, 1998, the Company acquired through a tender offer approximately 77%
of the outstanding common stock of Union. The purchase of all 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 quarter ended March 31,
1998 was $2.8 million compared to $7.8 million for the comparable period in 1997
- - an improvement of $5.0 million.
Financial Condition, Liquidity and Capital Resources
At March 31, 1998, the Company had cash and cash equivalents of $14.9 million.
The Company has 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 March 31, 1998, the Company
had outstanding $18.3 million under the revolving credit facility leaving $38.7
million, after outstanding letters of credit, available under the revolving
credit facility.
Since December 31, 1997, cash and cash equivalents increased $11.7 million
primarily due to cash provided by operations and financing activities of $8.8
million and $185.0 million, respectively, offset by cash utilized for the Union
acquisition of $163.7 million and purchases of loans and accounts receivable
portfolios of $15.6 million. The Company also held $26.7 million of cash for
clients in restricted trust accounts at March 31, 1998.
For the first three months in 1998, the Company made capital expenditures of
$2.9 million primarily for the replacement and upgrading of equipment and
expansion of the Company's information services systems. The Company anticipates
spending approximately $17.0 million during 1998.
All of the statements in this document other than historical facts are
forward-looking statements made in reliance upon the safe harbor of the Private
Securities Litigation Reform Act of 1995. There can be no assurances that the
Company's actual results will be materially consistent with such forward-looking
information. Factors and uncertainties that could affect the outcome of such
forward-looking statements include, among others, market and industry
conditions, increased competition, changes in governmental regulations, general
economic conditions, pricing pressures, and the Company's ability to continue
its growth and expand successfully into new markets and services. The Company
disclaims any intention or obligation to update publicly or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is 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 business. In addition, as a result of
the Union acquisition, the Company is a party to several environmental
remediation investigations and clean-ups and, along with other companies, has
been named a "potentially responsible party" for certain waste disposal sites.
Each of these matters is subject to various uncertainties, and it is possible
that some of these matters will be decided unfavorably against the Company. The
Company has established accruals for such environmental matters that are in its
view probable and reasonably estimable.
Based on information presently available, management believes that existing
accruals are sufficient to satisfy any known environmental liabilities.
Further, any additional liability that may ultimately result from the
resolution of these matters is not expected to have a material effect on the
Company's business, financial condition or results of operations. Additionally,
there have been no material developments in proceedings since previously
reported in the Company's Form 10-K for the year ended December 31, 1997.
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
Exhibit 27 Financial Data Schedule (Unaudited)
(b) Reports on Form 8-K
During the quarter, the following reports on Form 8-K were filed:
Report on Form 8-K filed February 6, 1998.
Report on Form 8-K/A filed April 8, 1998.
<PAGE>
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/ DANIEL J. DOLAN
-----------------------------------------------
Daniel J. Dolan
Executive Vice President and Chief Financial Officer
Date: May 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Note: This schedule contains summary financial information extracted from the
Form 10-Q for the Quarter Ended March 31, 1998 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<CIK> 0001027574
<NAME> Outsourcing Solutions Inc.
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