SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
-----------------------------------------
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 March 31, 2000
- ------------------------------------- --------------
Voting common stock 5,976,389.04
Non-voting common stock 480,321.30
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6,456,710.34
Transitional Small Disclosure (check one): Yes [ ] No [ X ]
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<PAGE>
PAGE 2
OUTSOURCING SOLUTIONS INC.
AND SUBSIDIARIES
TABLE OF CONTENTS
Part I. Financial Information Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 2000 (unaudited) and December 31, 1999............... 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2000 and 1999 (unaudited)......... 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2000 and 1999 (unaudited)......... 5
Notes to Condensed Consolidated Financial
Statements (unaudited)......................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 10
Part II. Other Information................................................ 11
<PAGE>
PAGE 3
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
Unaudited Audited
--------- ------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 16,834 $ 6,059
Cash and cash equivalents held for clients 26,946 22,521
Accounts receivable - trade, less allowance for 52,735 52,082
doubtful receivables of $466 and $529
Purchased loans and accounts receivable portfolios 34,920 39,947
Property and equipment, net 44,142 43,647
Intangible assets, net 406,504 410,471
Deferred financing costs, less accumulated
amortization of $1,026 and $248 26,447 27,224
Other assets 25,268 22,761
-------- --------
TOTAL $633,796 $624,712
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable - trade $ 9,634 $ 6,801
Collections due to clients 26,946 22,521
Accrued salaries, wages and benefits 15,288 17,009
Debt 526,489 518,307
Other liabilities 67,051 68,306
Commitments and contingencies - -
Mandatorily redeemable preferred stock;
redemption amount of $111,502 and $107,877 89,959 85,716
Stockholders' deficit:
Voting common stock; $.01 par value; authorized
15,000,000 shares, 9,054,638.11 shares issued 90 90
Non-voting common stock; $.01 par value;
authorized 2,000,000 shares,480,321.30 issued
and outstanding 5 5
Paid-in capital 196,339 196,339
Retained deficit (163,148) (155,525)
-------- --------
33,286 40,909
Common stock in treasury, at cost;
3,078,249.07 shares (134,857) (134,857)
-------- --------
Total stockholders' deficit (101,571) (93,948)
-------- --------
TOTAL $633,796 $624,712
======== ========
The accompanying notes are an integral part of the
unaudited condensed consolidated financial statements.
</TABLE>
<PAGE>
PAGE 4
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
-------- --------
<S> <C> <C>
REVENUES $133,250 $129,247
EXPENSES:
Salaries and benefits 66,006 60,735
Service fees and other operating
and administrative expenses 41,597 40,412
Amortization of purchased loans
and accounts receivable portfolios 6,676 11,300
Amortization of goodwill and other intangibles 3,970 4,102
Depreciation expense 4,013 3,611
-------- --------
Total expenses 122,262 120,160
-------- --------
OPERATING INCOME 10,988 9,087
OTHER EXPENSE - 76
INTEREST EXPENSE - Net 14,243 12,565
-------- --------
LOSS BEFORE INCOME TAXES (3,255) (3,554)
PROVISION FOR INCOME TAXES 125 -
-------- --------
NET LOSS (3,380) (3,554)
PREFERRED STOCK DIVIDEND REQUIREMENTS AND
ACCRETION OF SENIOR PREFERRED STOCK 4,243 506
-------- --------
NET LOSS TO COMMON STOCKHOLDERS $ (7,623) $ (4,060)
======== ========
The accompanying notes are an integral part of the
unaudited condensed consolidated financial statements.
</TABLE>
<PAGE>
PAGE 5
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
-------- --------
OPERATING ACTIVITIES AND PORTFOLIO PURCHASING:
<S> <C> <C>
Net loss $ (3,380) $ (3,554)
Adjustments to reconcile net loss to net cash
from operating activities and portfolio purchasing:
Depreciation and amortization 8,757 8,461
Amortization of purchased loans and
accounts receivable portfolios 6,676 11,300
Change in assets and liabilities:
Purchases of loans and accounts
receivable portfolios (1,649) (2,442)
Accounts receivable and other assets (3,160) (6,780)
Accounts payable, accrued expenses
and other liabilities (143) 2,634
-------- --------
Net cash from operating activities and
portfolio purchasing 7,101 9,619
-------- --------
INVESTING ACTIVITIES:
Acquisition of property and equipment (4,508) (3,395)
Purchases of loans and accounts receivable
portfolios for resale to FINCO (16,524) (17,658)
Sales of loans and accounts receivable
portfolios to FINCO 16,524 17,658
Other - 374
-------- --------
Net cash from investing activities (4,508) (3,021)
-------- --------
FINANCING ACTIVITIES:
Borrowings under revolving credit agreement 76,700 67,550
Repayments under revolving credit agreement (67,700) (66,050)
Repayments of debt (818) (4,263)
Deferred financing fees - (235)
-------- --------
Net cash from financing activities 8,182 (2,998)
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NET INCREASE IN CASH AND CASH EQUIVALENTS 10,775 3,600
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,059 8,814
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 16,834 $ 12,414
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during period for interest $ 10,755 $ 9,346
======== ========
Net cash received during period for taxes $ 2 $ 89
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Paid preferred stock dividends through issuance
of preferred stock $ - $ 992
======== ========
Accrued dividends on mandatorily redeemable
preferred stock $ 3,625 $ -
======== ========
Accretion of mandatorily redeemable preferred stock $ 618 $ -
======== ========
The accompanying notes are an integral part of the
unaudited condensed consolidated financial statements.
</TABLE>
<PAGE>
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
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, 2000 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2000. 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, 1999.
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. 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 March
31, 2000.
NOTE 3. PURCHASED LOANS AND ACCOUNTS RECEIVABLE PORTFOLIOS FINANCING
OSI Funding LLC ("FINCO") is a special-purpose finance company with the Company
owning approximately 78% of the financial interest but having only approximately
29% of the voting rights.
The following summarizes the transactions between the Company and FINCO for the
quarters ended March 31:
2000 1999
---- ----
Sales of purchased loans and accounts receivable
portfolios by the Company to FINCO $16,524 $17,658
Servicing fees paid by FINCO to the Company $4,305 $1,843
Sales of purchased loans and accounts receivable portfolios ("Receivables") 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. In
conjunction with sales of Receivables to FINCO and the servicing agreement, the
Company recorded servicing assets which are being amortized over the servicing
agreement. The carrying value of such servicing assets is $1,550 at March 31,
2000 and was $1,300 at December 31, 1999.
At March 31, 2000 and December 31, 1999, FINCO had unamortized Receivables of
$49,390 and $42,967, respectively. At March 31, 2000 and December 31, 1999,
FINCO had outstanding borrowings of $37,772 and $32,051, respectively, under its
revolving warehouse financing arrangement.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
- -------------------------------------------------------------------------------
Revenues for the three months ended March 31, 2000 were $133.3 million compared
to $129.2 million in the same period last year - an increase of 3.2%. The
revenue increase of $4.1 million was due primarily to increased collection and
outsourcing services revenues offset partially by lower portfolio services
revenues. Revenues from collection services were $96.7 million for the three
months ended March 31, 2000 compared to $93.7 million in the comparable period
in 1999. The increase in collection services revenue was primarily attributable
to increased letter series business. The outsourcing services revenue of $16.9
million compared favorably to $13.8 million in 1999 due to increased revenue
from new and existing business. Revenues from portfolio services decreased 9.2%
to $19.7 million for the three months ended March 31, 2000 from $21.7 million
for the comparable period in 1999. The decreased revenue was due to a shift from
on-balance sheet ownership of purchased loans and accounts receivable portfolios
to off-balance sheet resulting in lower revenues from on-balance sheet
portfolios offset by higher servicing fee revenues for the off-balance sheet
collections of FINCO portfolios. During the three months ended March 31, 2000,
the Company recorded revenue from FINCO servicing fees of $4.3 million on total
collections of $11.9 million compared to servicing fees of $1.8 million on total
collections of $4.7 million for the three months ended March 31, 1999. When
compared to the three months ended March 31, 1999, the total collections of both
on and off-balance sheet purchased portfolios increased from $19.3 million to
$25.7 million in 2000 - an increase of 33.2% or $6.4 million, resulting from an
increase in portfolio purchasing activities and improved liquidation rates.
Operating expenses, inclusive of salaries and benefits, service fees and other
operating and administrative expenses, were $107.6 million for the three months
ended March 31, 2000 and $101.1 million for the comparable period in 1999 - an
increase of 6.4%. The increase in these operating expenses resulted primarily
from higher collection-related expenses associated with the increased revenues
of collection and outsourcing services and increased collection expenses
associated with the increase in collections of on and off-balance sheet
purchased portfolios partially offset by lower consulting expenses. For the
three months ended March 31, 2000, amortization and depreciation charges of
$14.7 million were lower than the $19.0 million for the comparable period in
1999 - a decrease of 22.6%. The lower amortization and depreciation charges
resulted primarily from lower on-balance sheet portfolio amortization.
As a result of the above, the Company's operating income of $11.0 million for
the three months ended March 31, 2000 compared favorably to $9.1 million for the
same period in 1999.
Earnings before interest expense, taxes, depreciation and amortization (EBITDA)
for the three months ended March 31, 2000 decreased to $25.7 million from $28.1
million for the same period in 1999. The decrease of $2.4 million was primarily
attributable to the lower portfolio services revenues and the manner in which
revenues from off-balance sheet collections are recognized partially offset by
the contribution from increased collection and outsourcing services revenues and
lower consulting expenses.
Net interest expense for the three months ended March 31, 2000 was $14.2 million
compared to $12.6 million for the comparable period in 1999. The increase was
due primarily to higher interest rates.
The provision for income taxes of $0.1 million was provided for state income tax
obligations, which the Company cannot offset currently by net operating losses.
Due to the factors stated above, the net loss for the three months ended March
31, 2000 of $3.4 million compared favorably to the net loss of $3.6 million for
the three months ended March 31, 1999.
Financial Condition, Liquidity and Capital Resources
- ----------------------------------------------------
At March 31, 2000, the Company had cash and cash equivalents of $16.8 million.
The Company's credit agreement provides for a $75.0 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, 2000, the Company had $22.0 million outstanding under the revolving credit
facility leaving $50.2 million, after outstanding letters of credit, available
under the revolving credit facility.
Since December 31, 1999, cash and cash equivalents increased $10.8 million
primarily due to cash from operating activities and portfolio purchasing of $7.1
million and net cash from financing activities of $8.2 million offset by the use
of cash of $4.5 million for capital expenditures. The Company also held $26.9
million of cash for clients in restricted trust accounts at March 31, 2000.
For the first three months in 2000, the Company made capital expenditures of
$4.5 million primarily for the replacement and upgrading of equipment, expansion
of facilities and expansion and conversion of the Company's information services
systems. The Company anticipates spending approximately $18.0 million during
2000.
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 anticipated costs
and outcome of legal proceedings and environmental liabilities, (2) statements
regarding the Company's expected capital expenditures, (3) any statements
preceded by, followed by or that include the word "believes," "expects,"
"anticipates," "intends," "should," "may," or similar expressions; and (4) 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) legal proceedings, (8) environmental investigations and
clean up efforts, (9) expected synergies, economies of scale and cost savings
from acquisitions by the Company not being fully realized or realized within the
expected time frames, (10) costs of operational difficulties related to
integrating the operations of acquired companies with the Company's operations
being greater than expected, (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, and (12)
factors discussed from time to time in the Company's public filings.
These forward-looking statements speak only as of the date they were made. These
cautionary statements should be considered in connection with any written or
oral forward-looking statements that the Company may issue in the future. The
Company does not undertake any obligation to release publicly any revisions to
such forward-looking statements to reflect later events or circumstances or to
reflect the occurrence of unanticipated events.
<PAGE>
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, 1999 (the most recent completed fiscal year), the Company
continued to have no outstanding interest rate agreements. Pursuant to the
Company's credit agreement, the Company is obligated to secure interest rate
protection in the nominal amount of $150.0 million by July 2000.
<PAGE>
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, 1999.
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 Date Schedule (Unaudited)
(b). Reports on Form 8-K
There were no reports on Form 8-K filed for the three-month period
ended March 31, 2000.
<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/ Gary L. Weller
--------------------------------------
Gary L. Weller
Executive Vice President
and Chief Financial Officer
Date: May 12, 2000
<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, 2000 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<CIK> 0001027574
<NAME> Outsourcing Solutions Inc. and Subsidiaries
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 43,780
<SECURITIES> 0
<RECEIVABLES> 52,201
<ALLOWANCES> 466
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 88,674
<DEPRECIATION> 44,532
<TOTAL-ASSETS> 633,796
<CURRENT-LIABILITIES> 0
<BONDS> 0
89,959
0
<COMMON> 95
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 633,796
<SALES> 0
<TOTAL-REVENUES> 133,250
<CGS> 0
<TOTAL-COSTS> 122,262
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,243
<INCOME-PRETAX> (3,255)
<INCOME-TAX> 125
<INCOME-CONTINUING> (3,380)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,380)
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</TABLE>
