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, 2001
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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.
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(Exact name of registrant as specified in its charter)
Delaware 58-2197161
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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
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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, 2001
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Senior common stock 489,795.93
Voting common stock 6,088,479.30
Non-voting common stock 480,321.30
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7,058,596.53
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OUTSOURCING SOLUTIONS INC.
AND SUBSIDIARIES
TABLE OF CONTENTS
Part I. Financial Information Page
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
June 30, 2001 and December 31, 2000...............................3
Condensed Consolidated Statements of Operations for
the three and six months ended June 30, 2001 and 2000.............4
Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 2001 and 2000.......................5
Notes to Condensed Consolidated Financial Statements..............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.......13
Part II. Other Information..................................................14
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share amounts)
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June 30, December 31,
2001 2000
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ASSETS
Cash and cash equivalents $ 8,260 $ 10,273
Cash and cash equivalents held for clients 23,209 21,970
Accounts receivable - trade, less allowance for 70,404 62,876
doubtful receivables of $324 and $447
Purchased loans and accounts
receivable portfolios 19,390 24,690
Property and equipment, net 45,390 46,601
Intangible assets, net 429,547 417,084
Deferred financing costs, less accumulated 20,889 22,934
amortization of $6,745 and $4,538
Other assets 37,923 30,426
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TOTAL $655,012 $636,854
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LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable - trade $13,836 $14,446
Collections due to clients 23,209 21,970
Accrued salaries, wages and benefits 17,039 15,195
Debt 534,841 539,463
Other liabilities 74,794 71,080
Commitments and contingencies (Note 2 and 4)
Mandatorily redeemable preferred stock;
redemption amount of $131,545 and $123,115 113,165 103,455
Stockholders' deficit:
Senior common stock; $.01 par value;
authorized 900,000 shares, 489,795.93
issued in 2001 and outstanding 5 -
Voting common stock; $.01 par value;
authorized 20,000,000 shares, 9,166,728.37
shares issued 92 92
Non-voting common stock; $.01 par value;
authorized 2,000,000 shares, 480,321.30
issued and outstanding 5 5
Paid-in capital 223,277 200,537
Accumulated deficit (201,871) (192,715)
Accumulated other comprehensive income (6,621) -
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14,887 7,919
Notes receivable from management for
shares sold (1,902) (1,817)
Common stock in treasury, at cost;
3,078,249.07 shares (134,857) (134,857)
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Total stockholders' deficit (121,872) (128,755)
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TOTAL $655,012 $636,854
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The accompanying notes are an integral part of the
unaudited condensed consolidated financial statements.
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands)
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Three Months Ended Six Months Ended
June 30, June 30,
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2001 2000 2001 2000
REVENUES $ 157,433 $ 137,373 $309,019 $270,623
EXPENSES:
Salaries and benefits 80,566 66,598 154,890 132,604
Service fees and other operating and
administrative expenses 48,015 43,414 95,634 85,011
Amortization of purchased loans and accounts
receivable portfolios 5,012 8,109 11,991 14,785
Amortization of goodwill and other intangibles 4,161 3,979 8,213 7,949
Depreciation expense 3,605 4,098 7,307 8,111
Nonrecurring realignment expenses - 1,000 - 1,000
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Total expenses 141,359 127,198 278,035 249,460
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OPERATING INCOME 16,074 10,175 30,984 21,163
INTEREST EXPENSE - Net 13,819 15,209 30,080 29,452
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INCOME (LOSS) BEFORE INCOME TAXES 2,255 (5,034) 904 (8,289)
PROVISION FOR INCOME TAXES 175 169 350 294
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NET INCOME (LOSS) 2,080 (5,203) 554 (8,583)
PREFERRED STOCK DIVIDEND REQUIREMENTS AND ACCRETION
OF SENIOR PREFERRED STOCK 4,928 4,364 9,710 8,607
------- ------- ------- -------
NET LOSS TO COMMON STOCKHOLDERS $(2,848) $(9,567) $(9,156) $(17,190)
======== ======== ======= ========
The accompanying notes are an integral part of the
unaudited condensed consolidated financial statements.
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
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Six Months Ended
June 30,
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2001 2000
OPERATING ACTIVITIES AND PORTFOLIO PURCHASING:
Net income (loss) $ 554 $ (8,583)
Adjustments to reconcile net income (loss) to net cash from operating
activities and portfolio purchasing:
Depreciation and amortization 17,727 18,268
Amortization of purchased loans and accounts receivable portfolios 11,991 14,785
Non-cash compensation expense related to variable stock options 741 -
Change in assets and liabilities excluding the effects of acquisitions:
Purchases of loans and accounts receivable portfolios (6,691) (5,328)
Accounts receivable and other assets (11,572) (8,242)
Accounts payable, accrued expenses and other liabilities (1,943) (3,322)
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Net cash from operating activities and portfolio purchasing 10,807 7,578
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INVESTING ACTIVITIES:
Acquisition of property and equipment (5,657) (8,955)
Payment for acquisitions, net of cash acquired (21,254) -
Purchases of loans and accounts receivable portfolios for resale to FINCO (43,629) (54,306)
Sales of loans and accounts receivable portfolios to FINCO 43,629 54,306
Other (3,025) (1,577)
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Net cash used by investing activities (29,936) (10,532)
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FINANCING ACTIVITIES:
Borrowings under revolving credit agreement 160,800 174,650
Repayments under revolving credit agreement (160,400) (165,650)
Repayments of debt (5,126) (1,705)
Proceeds from issuance of common stock 22,004 201
Deferred financing fees (162) -
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Net cash from financing activities 17,116 7,496
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,013) 4,542
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,273 6,059
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,260 $ 10,601
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during period for interest $28,647 $ 27,621
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Net cash paid during period for taxes $ 321 $ 181
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SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Accrued dividends on mandatorily redeemable preferred stock $ 8,430 $ 7,366
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Accretion of mandatorily redeemable preferred stock $ 1,280 $ 1,241
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Notes receivable for common stock $ - $ 1,400
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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 for share and per share amounts)
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NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States 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 accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring items) considered
necessary for a fair presentation have been included. Operating results for the
three and six months ended June 30, 2001 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2001. 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, 2000.
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 acquisition
of The Union Corporation, 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, 2001.
NOTE 3. PURCHASED LOANS AND ACCOUNTS RECEIVABLE PORTFOLIOS FINANCING
OSI Funding LLC ("FINCO") is a special-purpose finance company with the Company
having approximately 29% of the voting rights.
The following summarizes the transactions between the Company and FINCO for the
periods ended June 30:
Three Months Ended Six Months Ended
June 30, June 30,
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2001 2000 2001 2000
Sales of purchased loans and
accounts receivable portfolios
by the Company to FINCO $27,007 $37,782 $43,629 $54,306
Servicing fees paid by
FINCO to the Company $ 9,170 $ 5,032 $20,169 $ 9,337
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, which are included in
other assets in the accompanying condensed consolidated balance sheet, was
$10,920 at June 30, 2001 and was $5,612 at December 31, 2000.
At June 30, 2001 and December 31, 2000, FINCO had unamortized Receivables of
$84,899 and $76,908, respectively. At June 30, 2001 and December 31, 2000, FINCO
had outstanding borrowings of $74,000 and $67,636, respectively, under its
revolving warehouse financing arrangement.
FINCO's summarized results from operations for the periods ended June 30 are as
follows:
Three Months Ended Six Months Ended
June 30, June 30,
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2001 2000 2001 2000
Revenues $32,220 $14,581 $59,190 $26,902
Income from operations 3,009 997 4,631 1,863
Net income 1,977 303 2,437 564
NOTE 4: ACQUISITIONS
On March 12, 2001, the Company through a newly formed limited liability company,
Coast to Coast Consulting, LLC, acquired certain assets and assumed certain
liabilities of Coast to Coast Consulting, Inc. ("CCC"), a service company
providing highly skilled experts to health care clients to assist with their
on-site, back office functions such as billing, collections, special projects
and other areas. Total cash consideration for CCC was approximately $16,300
including transaction costs of $150. The acquisition contains a certain
contingent payment obligation based on the attainment of a certain financial
performance target over the next three years. The future contingent payment
obligation, if any, is expected to be accounted for as additional goodwill as
the payment is made.
On April 30, 2001, the Company through a newly formed limited liability company,
Pacific Software Consulting, LLC, acquired (i) certain assets and assumed
certain liabilities of Pacific Software Consulting, Inc. ("PSC"), a service
company providing highly skilled consultants to banks to assist in their back
office functions, and (ii) associated patentable property. Total cash
consideration for these acquisitions was approximately $4,954 including
transaction costs of $45. In connection with these acquisitions, the Company
agreed to certain contingent payment obligations based on the attainment of
certain financial performance targets through June 2002. The future contingent
payment obligations, if any, are expected to be accounted for as additional
goodwill as the payments are made.
The above acquisitions were accounted for under the purchase method. The excess
of cost over the fair value of net assets of businesses acquired is being
amortized on a straight-line basis over 30 years. The purchase price of the
acquisitions was financed under the Company's revolving credit facility. Results
of operations for the acquired businesses were included in the consolidated
financial statements from their respective acquisition dates.
NOTE 5: DERIVATIVES AND HEDGING ACTIVITIES
At June 30, 2001 and December 31, 2000, the Company had interest rate swap and
collared swap agreements outstanding in the notional amounts of $50,000 and
$150,000, respectively. Since December 31, 2000, there have been no material
changes in these agreements.
On January 1, 2001, the Company implemented Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 137 and SFAS No. 138 (collectively, the
Statement). This Statement requires all derivatives to be recognized in the
balance sheet at fair value, with changes in that fair value to be recorded in
current earnings or deferred in other comprehensive income, depending on whether
the derivative instrument qualifies as a hedge and, if so, the nature of the
hedging activity. The Company's transition adjustment upon adoption of the
Statement required the recording of a liability of $3,691 with an offset of the
same amount to accumulated other comprehensive income. As of June 30, 2001, the
liability is $6,621 and is included in other liabilities and accumulated other
comprehensive income. 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 and
loss. The Company's interest rate hedges are primarily classified as cash flow
hedges. For a cash flow hedge of an anticipated transaction, the ineffective
portion of the change in fair value of the derivative is recorded in earnings as
incurred, whereas the effective portion is deferred in accumulated other
comprehensive income on the balance sheet until the transaction is realized, at
which time any deferred hedging gains or losses are recorded in earnings. During
the quarter ended June 30, 2001, the Company recorded, as part of interest
expense, a gain of $518 due to the hedges' effectiveness. For the six months
ended June 30, 2001, there was no net impact on interest expense.
NOTE 6: COMPREHENSIVE INCOME
The components of total comprehensive income for the periods ended June 30 are
as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2001 2000 2001 2000
Net income (loss) $ 2,080 $(5,203) $ 554 $(8,583)
Other comprehensive income item:
Net loss on cash flow
hedging instruments (83) - (6,621) -
------- ------- ------- -------
Total comprehensive income (loss) $ 1,997 $(5,203) $(6,067) $(8,583)
======= ======= ======= =======
NOTE 7: STOCKHOLDERS' DEFICIT
In April 2001, the Company completed a sale of 489,795.93 shares of senior
common stock for $24,000 ($22,004 after all related expenses) to a private
equity firm and to certain members of its existing private investor group,
including Madison Dearborn Capital Partners III, L.P., the Company's majority
stockholder.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000
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Revenues for the three months ended June 30, 2001 were $157.4 million compared
to $137.4 million in the same period last year - an increase of 14.6%. The
revenue increase of $20.0 million was due primarily to increased outsourcing
services revenues offset partially by lower portfolio services revenues.
Revenues from outsourcing services increased 99.3% to $43.2 million for the
three months ended June 30, 2001 from $21.7 million for the comparable period in
2000. The increased outsourcing services revenues of $21.5 million were due
primarily to new and increased existing business and the acquisitions of RWC
Consulting Group ("RWC"), Coast to Coast Consulting ("CCC") and Pacific Software
Consulting ("PSC"). Revenues from portfolio services of $21.7 million compared
unfavorably to $23.7 million in 2000 due primarily to the continued negative
effect on revenues resulting from the shift to off-balance sheet purchased
portfolios partially offset by increased collections from the cumulative
increase in off-balance sheet purchased loans and accounts receivable portfolios
during 1999, 2000 and 2001. The collection services revenues increased slightly,
0.5%, to $92.5 million for the three months ended June 30, 2001 from $92.0
million in 2000.
Operating expenses, inclusive of salaries and benefits, service fees and other
operating and administrative expenses, were $128.6 million for the three months
ended June 30, 2001 and $110.0 million for the comparable period in 2000 - an
increase of 16.9%. The increase in these operating expenses resulted primarily
from the RWC, CCC and PSC acquisitions and the increased expenses due to the
increased revenues of outsourcing services. Operating expenses for the three
months ended June 30, 2001 also included non-cash compensation expense related
to variable stock options of approximately $0.7 million. Included in operating
expenses for the three months ended June 30, 2000, the Company incurred
approximately $0.2 million of additional compensation expense resulting from the
redemption of vested stock options. For the three months ended June 30, 2001,
amortization and depreciation charges of $12.8 million were lower than the $16.2
million for the comparable period in 2000 by $3.4 million. The lower
amortization and depreciation charges resulted primarily from lower portfolio
amortization as a result of lower strategic sales of portfolios and the shift
towards off-balance sheet purchased loans and accounts receivable portfolios.
In the three months ended June 30, 2000, the Company incurred nonrecurring
realignment expenses of $1.0 million which included costs for closure of certain
call centers, severance associated with these office closures and certain other
one-time costs.
Earnings before interest expense, taxes, depreciation and amortization (EBITDA)
for the three months ended June 30, 2001 was $28.9 million compared to $26.4
million for the same period in 2000. The increase was primarily attributable to
the three acquisitions and the higher outsourcing services revenues. Adding back
the non-cash stock compensation expense, EBITDA was $29.6 million for the three
months ended June 30, 2001; this compared favorably to $27.5 million for the
same period in 2000 after adding back the nonrecurring charges and the
additional compensation expense.
As a result of the above, the Company's operating income of $16.1 million for
the three months ended June 30, 2001 compared favorably to $10.2 million for the
same period in 2000.
Net interest expense for the three months ended June 30, 2001 was $13.8 million
compared to $15.2 million for the comparable period in 2000. The decrease was
due primarily to lower interest rates and lower amortization of deferred
financing fees.
The provision for income taxes of $0.2 million was provided for certain state
and foreign income tax obligations. The net deferred tax assets at June 30, 2001
are fully offset by a valuation allowance. During the three months ended June
30, 2001, the net deferred tax assets and the valuation allowance decreased by
$0.9 million. The decrease was caused by a reduction of deductible temporary
differences that exceeded the taxable net operating loss generated during the
current period by $0.9 million. The Company generated a net taxable operating
loss for federal and certain state income tax purposes for which a full
valuation allowance was provided.
Due to the factors stated above, the Company had net income for the three months
ended June 30, 2001 of $2.1 million which compared favorably to the net loss of
$5.2 million for the three months ended June 30, 2000.
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
- -------------------------------------------------------------------------
Revenues for the six months ended June 30, 2001 were $309.0 million compared to
$270.6 million in the same period last year - an increase of 14.2%. The revenue
increase of $38.4 million was due to increased outsourcing and portfolio
services revenues offset partially by lower collection services revenues.
Revenues from outsourcing services increased 94.9% to $81.3 million for the six
months ended June 30, 2001 from $41.7 million for the comparable period in 2000.
The increased outsourcing services revenues of $39.6 million were due primarily
to new and increased existing business of the acquisitions of RWC, CCC and PSC.
Revenues from portfolio services of $43.4 million compared favorably to $43.2
million in 2000 due primarily to increased collections from the cumulative
increase in off-balance sheet purchased loans and accounts receivable portfolios
during 1999, 2000 and 2001 partially offset by the continued negative effect on
revenues resulting from the shift to off-balance sheet purchased portfolios. The
collection services revenues decreased 0.8% to $184.3 million for the six months
ended June 30, 2001 from $185.7 million in 2000. The decreased revenues were due
primarily to lower bank card, student loan and telecommunications business
offset partially by increased government and letter series business.
Operating expenses, inclusive of salaries and benefits, service fees and other
operating and administrative expenses, were $250.5 million for the six months
ended June 30, 2001 and $217.6 million for the comparable period in 2000 - an
increase of 15.1%. The increase in these operating expenses resulted primarily
from the RWC, CCC and PSC acquisitions and the increased expenses due to the
increased revenues of outsourcing services. Operating expenses for the six
months ended June 30, 2001 included non-cash compensation expense related to
variable stock options of approximately $0.7 million. Included in operating
expenses for the six months ended June 30, 2000, the Company incurred
approximately $0.2 million of additional compensation expense resulting from the
redemption of vested stock options. For the six months ended June 30, 2001,
amortization and depreciation charges of $27.5 million were lower than the $30.8
million for the comparable period in 2000 by $3.3 million. The lower
amortization and depreciation charges resulted primarily from lower portfolio
amortization as a result of the shift towards off-balance sheet purchased loans
and accounts receivable portfolios.
In the six months ended June 30, 2000, the Company incurred nonrecurring
realignment expenses of $1.0 million which included costs for closure of certain
call centers, severance associated with these call centers and certain other
one-time costs.
Earnings before interest expense, taxes, depreciation and amortization (EBITDA)
for the six months ended June 30, 2001 was $58.5 million compared to $52.0
million for the same period in 2000. The increase was primarily attributable to
the three acquisitions and the higher outsourcing services revenues. Adding back
the non-cash stock compensation expense, EBITDA was $59.2 million for the six
months ended June 30, 2001; this compared favorably to $53.2 million for the
same period in 2000 after adding back the nonrecurring charges and the
additional compensation expense.
As a result of the above, the Company's operating income of $31.0 million for
the six months ended June 30, 2001 compared favorably to $21.2 million for the
same period in 2000.
Net interest expense for the six months ended June 30, 2001 was $30.1 million
compared to $29.5 million for the comparable period in 2000. The increase was
due primarily to higher debt balances offset partially by lower interest rates.
There was no net impact on interest expense as a result of the Company's hedging
activities.
The provision for income taxes of $0.4 million was provided for certain state
and foreign income tax obligations. The net deferred tax assets at June 30, 2001
are fully offset by a valuation allowance. During the six months ended June 30,
2001, the net deferred tax assets and the valuation allowance decreased by $0.4
million. The decrease was caused by a reduction of deductible temporary
differences that exceeded the taxable new operating loss generated during the
current period by $0.4 million. The Company generated a net taxable operating
loss for federal and certain state income tax purposes for which a full
valuation allowance was provided.
Due to the factors stated above, the Company had net income for the six months
ended June 30, 2001 of $0.6 million which compared favorably to the net loss of
$8.6 million for the six months ended June 30, 2000.
Financial Condition, Liquidity and Capital Resources
- ----------------------------------------------------
At June 30, 2001, the Company had cash and cash equivalents of $8.3 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 June
30, 2001, the Company had $32.4 million outstanding under the revolving credit
facility leaving $35.8 million, after outstanding letters of credit, available
under the revolving credit facility.
In April 2001, the Company completed a sale of $24.0 million of senior common
stock to a private equity firm and to certain members of its existing private
investor group, including Madison Dearborn Capital Partners III, L.P., the
Company's majority stockholder. The net proceeds of $22.0 million from the sale
were used to repay debt under the Company's bank credit facility.
Since December 31, 2000, cash and cash equivalents decreased $2.0 million
primarily due to cash utilized for the CCC and PSC acquisitions of $21.3
million, debt repayments of $5.1 million, an earnout payment of $3.0 million and
capital expenditures of $5.7 million offset by cash from operating activities
and portfolio purchasing of $10.8 million and net proceeds from the issuance of
senior common stock of $22.0 million. The Company also held $25.9 million of
cash for clients in restricted trust accounts at June 30, 2001.
For the six months ended June 30, 2000, cash and cash equivalents increased $4.5
million primarily due to cash from operating activities and portfolio purchasing
of $7.6 million and net cash from financing activities of $7.5 million,
primarily borrowings under the revolving credit facility, offset by the use of
cash of $10.5 million primarily for capital expenditures.
For the first six months in 2001, the Company made capital expenditures of $5.7
million primarily for the replacement and upgrading of equipment, expansion of
facilities and expansion of the Company's information services systems. The
Company anticipates capital spending of approximately $13.8 million during 2001,
which the Company intends to fund from cash flow from operations and if
necessary, borrowings under the revolving credit facility.
Recent Accounting Pronouncements
- --------------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), Business Combinations.
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001 and establishes specific
criteria for recognition of intangible assets separately from goodwill. For
business combinations initiated after June 30, 2001, SFAS 141 also requires that
unallocated negative goodwill be written off immediately as an extraordinary
gain. Any unamortized deferred credit arising from a business combination
completed before July 1, 2001 will be recognized as the cumulative effect of a
change in accounting principle. The Company is currently evaluating the impact
of SFAS 141 on its financial statements.
Also in July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets. SFAS 142 eliminates
the amortization of goodwill and instead requires goodwill to be tested for
impairment annually at the reporting unit level. Also, intangible assets are
required to be amortized over their useful lives and reviewed for impairment in
accordance with Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. Under SFAS 142, if the intangible asset has an indefinite useful life, it is
not amortized until its life is determined to be finite. The Company is required
to adopt SFAS on January 1, 2002, and earlier adoption is not permitted. The
Company is currently evaluating the impact of SFAS 142 on its financial
statements. Goodwill amortization recorded for the quarter and six months ended
June 30, 2001 was $4.2 million and $8.2 million, respectively, compared to $4.0
million and $7.9 million for the respective periods ending June 30, 2000.
Forward-Looking Statements
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The following statements in this entire 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 and the funding thereof, (3) statements regarding the Company's
ability to fund its future operating expenses and meet its debt service
requirements as they become due, (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 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) unanticipated realignment costs, (12) 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 (13) 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.
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.
At December 31, 2000 (the most recent completed fiscal year), the Company had
interest rate swap and collared swap agreements outstanding. Since December 31,
2000, there have been no material changes in these agreements.
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,
2000.
Item 2. Changes in Securities
See Note 7 of the Condensed Consolidated Financial Statements included
elsewhere herein. The net proceeds from the sale of senior common
stock (see Item 4 below) were used to repay debt.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of security holders
during the quarter ended June 30, 2001:
(1) On April 2, 2001, pursuant to written consent of the shareholders
of the Company's voting common stock, the shareholders approved
an amendment of the Company's Certificate of Incorporation to
provide for the authorization of 900,000 shares of Senior Common
Stock and to set forth the voting powers, designations,
preferences and other rights, qualifications and restrictions of
such Senior Common Stock.
(2) On April 16,2001, pursuant to written consent of the shareholders
of the Company's voting common stock, the shareholders (i)
increased the size of the Company's Board of Directors to seven
persons, and (ii) elected the following persons as directors of
the Company to hold office until the next annual meeting of the
shareholders of the Company and until their successors shall have
been elected and shall have qualified: R. David Andrews, Timothy
Beffa, William Hewitt, Timothy Hurd, Scott Marks, Jr., Richard
Thomas and Paul Wood.
Both of these shareholder consents were executed by holders of
4,536,367.84 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 2.1 Asset Purchase Agreement and Patentable Property
Purchase Agreement dated April 30, 2001 by and among
Outsourcing Solutions Inc., Pacific Software
Consulting, LLC, Pacific Software Consulting, Inc.,
and Edward F. Lambert.
Exhibit 2.2 Stock Subscription Agreement by and among Gryphon
Partners II, L.P., Gryphon Partners II-A, L.P.,
Outsourcing Solutions Inc., and the additional
investors, dated April 3, 2001.
Exhibit 3 Fourth Amended and Restated Certificate of
Incorporation of the Company, as amended by the
Certificate of Amendment dated as of April 16, 2001.
Exhibit 4 Fifth Supplemental Indenture dated as of April 30,
2001 by and among the Company, the Additional
Guarantor and Wilmington Trust Company, as trustee.
Exhibit 10 2001 Management Incentive Plan.
(b). Reports on Form 8-K
There were no reports on Form 8-K filed for the three-month
period ended June 30, 2001.
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
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Timothy G. Beffa
President and Chief Executive Officer
/s/ Gary L. Weller
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Gary L. Weller
Executive Vice President
and Chief Financial Officer
Date: August 14, 2001