-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A0UgJFwWNw9hHImX45oAdTuJ03DgZYFPHTaxVEvmVzGCAFPRC6+G0Ffjwd1Iizdz G7EUWbruDTHpxp0vzdsiRg== 0001027574-99-000005.txt : 19990510 0001027574-99-000005.hdr.sgml : 19990510 ACCESSION NUMBER: 0001027574-99-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990507 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OUTSOURCING SOLUTIONS INC CENTRAL INDEX KEY: 0001027574 STANDARD INDUSTRIAL CLASSIFICATION: 8741 IRS NUMBER: 582197161 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-16867 FILM NUMBER: 99584779 BUSINESS ADDRESS: STREET 1: 390 SOUTH WOODS MILL RD STREET 2: STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 BUSINESS PHONE: 3145760022 MAIL ADDRESS: STREET 1: 390 SOUTH WOODS MILL RD STREET 2: STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAYCO AMERICAN CORP CENTRAL INDEX KEY: 0000076741 STANDARD INDUSTRIAL CLASSIFICATION: 7320 IRS NUMBER: 391133219 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-05589 FILM NUMBER: 99584780 BUSINESS ADDRESS: STREET 1: 390 SOUTH WOODS MILL RD STREET 2: STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 BUSINESS PHONE: 3145760022 MAIL ADDRESS: STREET 1: 390 SOUTH WOODS MILL RD STREET 2: STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CFC SERVICES CORP CENTRAL INDEX KEY: 0001029300 STANDARD INDUSTRIAL CLASSIFICATION: 8741 IRS NUMBER: 133866487 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-16867-01 FILM NUMBER: 99584781 BUSINESS ADDRESS: STREET 1: 390 SOUTH WOODS MILL RD STREET 2: STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 BUSINESS PHONE: 3145760022 MAIL ADDRESS: STREET 1: 390 SOUTH WOODS MILL RD STREET 2: STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 FILER: COMPANY DATA: COMPANY CONFORMED NAME: A M MILLER & ASSOCIATES INC CENTRAL INDEX KEY: 0001029301 STANDARD INDUSTRIAL CLASSIFICATION: 8741 IRS NUMBER: 133866487 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-16867-02 FILM NUMBER: 99584782 BUSINESS ADDRESS: STREET 1: 390 SOUTH WOODS MILL RD STREET 2: STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 BUSINESS PHONE: 3145760022 MAIL ADDRESS: STREET 1: 390 SOUTH WOODS MILL RD STREET 2: STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONTINENTAL ALLIANCE INC CENTRAL INDEX KEY: 0001029303 STANDARD INDUSTRIAL CLASSIFICATION: 8741 IRS NUMBER: 133866487 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-16867-03 FILM NUMBER: 99584783 BUSINESS ADDRESS: STREET 1: 390 SOUTH WOODS MILL RD STREET 2: STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 BUSINESS PHONE: 3145760022 MAIL ADDRESS: STREET 1: 390 SOUTH WOODS MILL RD STREET 2: STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JENNIFER LOOMIS & ASSOCIATES INC CENTRAL INDEX KEY: 0001029387 STANDARD INDUSTRIAL CLASSIFICATION: 8741 IRS NUMBER: 953850888 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-16867-18 FILM NUMBER: 99584784 BUSINESS ADDRESS: STREET 1: 390 SOUTH WOODS MILL RD STREET 2: STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 BUSINESS PHONE: 3145760022 MAIL ADDRESS: STREET 1: 390 SOUTH WOODS MILL RD STREET 2: STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUALINK INC CENTRAL INDEX KEY: 0001029389 STANDARD INDUSTRIAL CLASSIFICATION: 8741 IRS NUMBER: 953850888 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-16867-20 FILM NUMBER: 99584785 BUSINESS ADDRESS: STREET 1: 390 SOUTH WOODS MILL RD STREET 2: STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 BUSINESS PHONE: 3145760022 MAIL ADDRESS: STREET 1: 390 SOUTH WOODS MILL RD STREET 2: STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROFESSIONAL RECOVERIES INC CENTRAL INDEX KEY: 0001029390 STANDARD INDUSTRIAL CLASSIFICATION: 8741 IRS NUMBER: 953850888 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-16867-21 FILM NUMBER: 99584786 BUSINESS ADDRESS: STREET 1: 390 SOUTH WOODS MILL RD STREET 2: STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 BUSINESS PHONE: 3145760022 MAIL ADDRESS: STREET 1: 390 SOUTH WOODS MILL RD STREET 2: STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAYCO AMERICAN INTERNATIONAL CORP CENTRAL INDEX KEY: 0001029391 STANDARD INDUSTRIAL CLASSIFICATION: 8741 IRS NUMBER: 953850888 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-16867-22 FILM NUMBER: 99584787 BUSINESS ADDRESS: STREET 1: 390 SOUTH WOODS MILL RD STREET 2: STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 BUSINESS PHONE: 3145760022 MAIL ADDRESS: STREET 1: 390 SOUTH WOODS MILL RD STREET 2: STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACCOUNT PORTFOLIOS GP INC CENTRAL INDEX KEY: 0001029715 STANDARD INDUSTRIAL CLASSIFICATION: 8741 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-16867-07 FILM NUMBER: 99584788 BUSINESS ADDRESS: STREET 1: 3300 NORTHEAST EXPRESSWAY STREET 2: BUILDING 1 STE M CITY: ATLANTA STATE: GA ZIP: 30341 BUSINESS PHONE: 7704514862 MAIL ADDRESS: STREET 1: 3300 NORTHEAST EXPRESSWAY STREET 2: BUILDING 1 STE M CITY: ATLANTA STATE: GA ZIP: 30341 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIED BOND & COLLECTION AGENCY INC CENTRAL INDEX KEY: 0001058618 STANDARD INDUSTRIAL CLASSIFICATION: IRS NUMBER: 223200628 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-16867-24 FILM NUMBER: 99584789 BUSINESS ADDRESS: STREET 1: 390 SOUTH WOODS MILL RD CITY: CHESTERFIELD STATE: MO ZIP: 63017 BUSINESS PHONE: 3145760022 MAIL ADDRESS: STREET 1: 390 SOUTH WOODS MILL RD STREET 2: STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN CHILD SUPPORT SERVICE BUREAU INC CENTRAL INDEX KEY: 0001058619 STANDARD INDUSTRIAL CLASSIFICATION: IRS NUMBER: 232807100 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-16867-25 FILM NUMBER: 99584790 BUSINESS ADDRESS: STREET 1: 390 SOUTH WOODS MILL RD STREET 2: STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 BUSINESS PHONE: 3145760022 MAIL ADDRESS: STREET 1: 390 SOUTH WOODS MILL RD CITY: CHESTERFIELD STATE: MO ZIP: 63017 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITAL CREDIT CORP CENTRAL INDEX KEY: 0001058620 STANDARD INDUSTRIAL CLASSIFICATION: IRS NUMBER: 232807100 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-16867-26 FILM NUMBER: 99584791 BUSINESS ADDRESS: STREET 1: 390 SOUTH WOODS MILL RD STREET 2: STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 BUSINESS PHONE: 3145760022 MAIL ADDRESS: STREET 1: 390 SOUTH WOODS MILL RD STREET 2: STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UCO MBA CORP CENTRAL INDEX KEY: 0001058632 STANDARD INDUSTRIAL CLASSIFICATION: IRS NUMBER: 231704744 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-16867-37 FILM NUMBER: 99584792 BUSINESS ADDRESS: STREET 1: 390 SOUTH WOODS MILL RD STREET 2: STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 BUSINESS PHONE: 3145760022 MAIL ADDRESS: STREET 1: 390 SOUTH WOODS MILL RD STREET 2: STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNION SPECIAL STEEL CASTING CORP CENTRAL INDEX KEY: 0001058633 STANDARD INDUSTRIAL CLASSIFICATION: IRS NUMBER: 251154811 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-15867-38 FILM NUMBER: 99584793 BUSINESS ADDRESS: STREET 1: 390 SOUTH WOODS MILL RD STREET 2: STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 BUSINESS PHONE: 3145760022 MAIL ADDRESS: STREET 1: 390 SOUTH WOODS MILL RD STREET 2: STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERACTIVE PERFORMANCE OF GEORGIA INC CENTRAL INDEX KEY: 0001067124 STANDARD INDUSTRIAL CLASSIFICATION: IRS NUMBER: 593487654 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-15867-41 FILM NUMBER: 99584794 BUSINESS ADDRESS: STREET 1: 390 SOUTH WOODS MILL RD STREET 2: STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 BUSINESS PHONE: 3145760022 MAIL ADDRESS: STREET 1: C/O OUTSOURCING SOLUTIONS INC STREET 2: 390 SOUTH WOODS MILL RD STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTH SHORE AGENCY INC CENTRAL INDEX KEY: 0001067125 STANDARD INDUSTRIAL CLASSIFICATION: IRS NUMBER: 113399772 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-15867-42 FILM NUMBER: 99584795 BUSINESS ADDRESS: STREET 1: 390 SOUTH WOODS MILL RD STREET 2: STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 BUSINESS PHONE: 3145760022 MAIL ADDRESS: STREET 1: C/O OUTSOURCING SOLUTIONS INC STREET 2: 390 SOUTH WOODS MILL RD STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACCELERATED BUREAU OF COLLECTIONS INC CENTRAL INDEX KEY: 0001067126 STANDARD INDUSTRIAL CLASSIFICATION: IRS NUMBER: 841438860 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-15867-43 FILM NUMBER: 99584796 BUSINESS ADDRESS: STREET 1: 390 SOUTH WOODS MILL RD STREET 2: STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 BUSINESS PHONE: 3145760022 MAIL ADDRESS: STREET 1: C/O OUTSOURCING SOLUTIONS INC STREET 2: 390 SOUTH WOODS MILL RD STE 350 CITY: CHESTERFIELD STATE: MO ZIP: 63017 10-K 1 1998 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------------- -------------------- Commission file Number 333-16867 Outsourcing Solutions Inc. (Exact name of registrant as specified in its charter) Delaware 58-2197161 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 390 South Woods Mill Road, Suite 350 Chesterfield, Missouri 63017 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (314) 576-0022 Securities registered pursuant to Section 12(b) of the Act: Title of each Class Name of each exchange on which registered None None Securities registered pursuant to Section (g) of the Act: None (Title of each class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 if this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant is not determinable, as the stock is not publicly traded. APPLICABLE ONLY TO CORPORATE REGISTRANTS: As of March 19, 1999, the following shares of the Registrant's common stock were issued and outstanding: Voting common stock 3,425,126.01 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 ------------ 5,256,866.59 DOCUMENTS INCORPORATED BY REFERENCE: None PART I ITEM 1. BUSINESS General Outsourcing Solutions Inc., a Delaware Corporation (the "Company" or "OSI") was formed on September 21, 1995 to build, through a combination of acquisitions and sustained internal growth, one of the leading providers of accounts receivable management services. In September 1995, OSI initiated this strategy with the acquisition of Atlanta-based Account Portfolios, L.P. ("API"), one of the largest purchasers and servicers of non-performing accounts receivable portfolios. In January 1996, OSI acquired Continental Credit Services, Inc. ("Continental") and A.M. Miller & Associates ("Miller"), two industry leaders in providing contingent fee services. Continental, which is headquartered in Seattle and operates in eight western states, provides contingent fee services to a wide range of end markets, with particular emphasis on public utilities and regional telecommunications. Miller, based in Minneapolis, provides contingent fee services to the student loan and bank credit card end markets. In November 1996, OSI acquired Payco American Corporation ("Payco") with corporate offices in Brookfield, Wisconsin. Originally founded as a contingent fee service company, Payco has diversified into other outsourcing services such as student loan billing, health care accounts receivable billing and management, contract management of accounts receivable and teleservicing. Upon completion of the Payco acquisition, the Company became one of the largest providers of accounts receivable management services in the United States. In October 1997, OSI acquired North Shore Agency, Inc. ("NSA"), a fee service company headquartered in Long Island, New York. NSA specializes in "letter series" collection services for direct marketers targeted at collecting small balance debts. The majority of NSA's revenues are generated from traditional contingent collections utilizing letters with the remaining revenues derived from fixed fee letter services. In November 1997, OSI acquired Accelerated Bureau of Collections, Inc. ("ABC"). ABC is a Denver-based national fee service company. ABC specializes in credit card collections and derives approximately 25% of its revenues from early-out programs with the remaining 75% of revenues derived from standard contingent fee collections. In January 1998, OSI acquired through a tender offer approximately 77% of the outstanding shares of The Union Corporation's ("Union") common stock for $31.50 per share. In March 1998, the Company acquired the remaining outstanding shares of Union when Union merged with a wholly-owned subsidiary of the Company. Union was originally a conglomerate involved in businesses ranging from electronic and industrial components to financial services. Today, Union is a leading provider of a range of outsourcing services to both large and small clients. Union provides contingent and fixed fee collection services and other related outsourcing services. Union provides fee services through the following wholly-owned subsidiaries: Allied Bond & Collection Agency, Inc. ("Allied"), Capital Credit Corporation ("Capital Credit"), and Transworld Systems, Inc. ("Transworld"). Allied, headquartered in Trevose, Pennsylvania, provides contingent and fixed fee collection services for large clients across a broad spectrum of industries. Capital Credit, headquartered in Jacksonville, Florida, also provides contingent and fixed fee collection services for large national clients primarily serving the bankcard, telecommunications, travel and entertainment and government sectors. Transworld, headquartered in Rohnert Park, California, is the largest prepaid, fixed fee outsourcer of delinquent account management services in the United States. Transworld's clients are primarily small companies with low balance delinquent accounts. Transworld provides clients with a two phase system. Phase I is a fixed fee, computer generated "letter series". Phase II is a traditional contingent fee collection system designed to collect those accounts that are not collected during Phase I. Union provides related outsourcing services through its Interactive Performance, Inc. ("IPI") and High Performance Services, Inc. ("HPSI") subsidiaries. IPI, headquartered in North Charleston, South Carolina, provides a range of credit and receivables management outsourcing services primarily in the form of teleservicing. IPI's services include inbound and outbound calling programs for credit authorization, customer service, usage management and receivables management. HPSI, headquartered in Jacksonville, Florida, provides services similar to IPI for clients in the financial services industry. Industry As a result of the rapid growth of outstanding consumer credit and the corresponding increase in delinquencies, credit grantors have increasingly looked to third party service providers in managing the accounts receivable process. In addition, rapid consolidation in the largest credit granting industries, including banking, health care, telecommunications and utilities, has forced companies to focus on core business activities and to outsource ancillary functions, including some or all aspects of the accounts receivable management process. Nationwide, more than 6,000 companies provide debt collection services, creating a highly fragmented industry. Due to this fragmentation, the top 10 companies account for only 20% of industry revenues. With this fragmentation, a corresponding trend in recent years is toward industry consolidation. The accounts receivable management industry has undergone rapid growth over the past fifteen years. Two significant trends in the consumer credit industry are primarily responsible for this industry growth. First, consumer debt (a leading indicator of current and future business for accounts receivable management companies) has increased dramatically in recent years. Between 1990 and 1998, total consumer debt increased 67% from $3.6 trillion to almost $6.0 trillion. Second, in an effort to focus on core business activities and to take advantage of the economies of scale, better performance and lower cost structure offered by accounts receivable management companies, many credit grantors have chosen to outsource some or all aspects of the accounts receivable management process. The customer base for the accounts receivable management industry is dominated by credit issuers in four end-markets: banks/bankcard, health care, utilities and telecommunications. Other significant sources of account placements for the industry include retail, student loan agencies and oil companies. The Company believes that the ongoing consolidation in the banking, utilities, telecommunications and health care industries will create larger national customers seeking to place accounts with accounts receivable management companies that have the resources to offer national rather than local and regional coverage. The accounts receivable management industry is closely regulated by federal laws such as the Fair Debt Collection Practices Act ("FDCPA") and similar state laws. Contingent fee services are the traditional services provided in the accounts receivable management industry. Creditors typically place non-performing accounts after they have been deemed non-collectible, usually when 90 to 120 days past due. The commission rate is generally based on the collectability of the asset in terms of the costs, which the contingent fee servicer must incur to effect repayment. The earlier the placement (i.e., the less elapsed time between the past due date of the receivable and the date on which the debt is placed with the contingent fee servicer), the higher the probability of recovering the debt, and therefore the lower the cost to collect and the lower the commission rate. Creditors typically assign their charged-off receivables to contingent fee servicers for a six to twelve month cycle, and then reassign the receivables to other servicers as the accounts become further past due. There are three main types of placements in the contingent fee business, each representing a different stage in the cycle of account collection. Primary placements are accounts, typically 120 to 270 days past due, that are being placed with agencies for the first time and usually receive the lowest commission. Secondary placements, accounts 270 to 360 days past due, have already been placed with a contingent fee servicer and usually require a process including obtaining judgments, asset searches, and other more rigorous legal remedies to obtain repayment and, therefore, receive a higher commission. Tertiary placements, accounts usually over 360 days past due, generally involve legal judgments, and a successful collection receives the highest commission. Customers are increasingly placing accounts with accounts receivable management companies earlier in the collection cycle, often prior to the 120 days past due typical in primary placements, either under a contingent fee or fixed fee arrangement. While contingent fee servicing remains the most widely used method by creditors in recovering non-performing accounts, portfolio purchasing has increasingly become a popular alternative. Beginning in the 1980's, the Resolution Trust Company and the Federal Deposit Insurance Company, under government mandate to do so, began to sell portfolios of non-performing loans. Spurred on by the success of these organizations in selling charged-off debt, other creditors likewise began to sell portfolios of non-performing debt. Management estimates the total principal value of purchased portfolios at between $25.0 and $40.0 billion per year, and based on the Company's experience, the annual growth rate of the portfolio purchasing market segment for the period 1990 to 1995 was between 50% and 80%. The largest percentage of purchased portfolios originate from the bank card receivable and retail markets and are typically purchased at a deep discount from the aggregate principal value of the accounts, with an inverse correlation between purchase price and age of the delinquent accounts. Once purchased, traditional combined with principle collection techniques are employed to obtain payment of non-performing accounts. Accounts receivable management companies have responded to the increasing need of credit granting companies to outsource other related services as well. Due to the rapid growth in consumer credit, credit grantors need assistance in managing increasingly large and complex call centers and accounts receivable management companies have stepped in to provide a variety of services. These services include, among others, third-party billing services and customer teleservicing. Accounts receivable management companies have found that their traditional experience in managing a large staff in a telephone-based environment provides a solid base for entering into these relatively new and rapidly growing market segments. The accounts receivable management industry has progressed in technological sophistication over the past several years with the advancement of new technology. Today, leading companies in this industry use proprietary databases, automated predictive dialers, automatic call distributors and computerized skip tracing capabilities to significantly increase the number of quality interactions with debtors. This technological advancement is helping to accelerate industry consolidation and facilitates providing related accounts receivable management outsourcing services. The firms, which have the most efficient operating system and can best use credit information, typically collect more funds per account dollar and thus are awarded disproportionately more new accounts. Business Strategy The Company's market position and breadth of services distinguishes it as one of the leading providers of accounts receivable management services in the United States. The Company's business strategy is to expand this position through the following initiatives: Full Service Providers/Cross-Selling Services to Existing Customers. The Company is a full service firm which currently offers its customers a wide array of accounts receivable management options beyond traditional contingent fee services, including letter series and higher margin portfolio purchasing, contract management of accounts receivable, billing and teleservicing. This range of services allows the Company to cross-sell its offerings within its existing customer base, as well as to potential customers in specifically targeted industries. Expansion of Customer Base. Two of the most important determinants in selecting an accounts receivable management service provider are reputation and experience. As the Company develops expertise and recognition with customers in a particular industry, it markets that expertise to other credit grantors in the industry. In addition, consolidation in the bank, retail, utility, student loan, health care and telecommunications industries has created national customers who are moving part or all of their accounts receivable collection management business to national service providers. With the ability to offer its services in all 50 states and experience in successfully managing a high volume of placements on a national basis, the Company is well positioned to benefit from this consolidation trend. The Company is also focused on increasing its business with government agencies at the federal, state and local levels, many of which have begun to outsource accounts receivable functions for items such as taxes and student loans to private companies. Leveraging Technology. The Company has invested aggressively in technological innovations to enhance its competitive advantages over smaller competitors. The Company has hardware and proprietary software, including debtor-scoring models and debtor databases, which the Company believes, provides it with a competitive advantage in pricing portfolios and collecting amounts from debtors. In addition, the Company utilizes automated predictive dialers and skip tracing databases in order to allow account representatives to work accounts more efficiently. Through interface with creditor computer systems, the Company can efficiently receive new account placements from customers daily and provide frequent updates to customers on the status of accounts collections. As the Company begins to provide more comprehensive outsourcing services, the Company becomes more integrated with its customers' systems, making switching vendors both costly and inefficient. Growth Through Acquisitions. The Company has built its position through strategic acquisitions of accounts receivable service providers in each of the markets in which it participates. The Company plans to selectively pursue additional acquisitions which complement its existing services or increase its customer base. Services The Company is one of the largest providers of accounts receivable management services in the United States. The Company, through its subsidiaries, offers its customers contingent fee services, portfolio purchasing services and related outsourcing services. Contingent Fee Services. The Company is one of the largest providers of contingent fee services in the United States. The Company offers a full range of contingent fee services, including early-out programs and letter series, to all consumer credit end-markets. The Company utilizes sophisticated management information systems and vast experience with locating, contacting and effecting payment from delinquent account holders in providing its core contingent fee services. With 64 call centers in 27 states and approximately 5,500 account representatives, the Company has the ability to service large volume of accounts with national coverage. In addition to traditional contingent fee services involving the placement of accounts over 120 days delinquent, creditors have begun to demand services in which accounts are outsourced earlier in the collection cycle. The Company has responded to this trend by developing "early-out" programs, whereby the Company receives placed accounts that are less than 120 days past due and earns a fixed fee per placed account rather than a percentage of realized collections. These programs require a greater degree of technological integration between the Company and its customers, leading to higher switching costs. The Company primarily services consumer creditors although the Company has a growing presence in the commercial collection business, offering contingent fee services to commercial creditors as well. Portfolio Purchasing Services. The Company offers portfolio purchasing services to a wide range of financial institutions, educational institutions and retailers. The Company purchases large and diverse portfolios of non-performing consumer receivables both on an individually negotiated basis as well as through "forward flow" agreements. Under forward flow agreements, the Company agrees, subject to due diligence, to purchase charged off receivables on a monthly basis. Creditors selling portfolios to the Company realize a number of benefits, including increased predictability of cash flow, reduction in monitoring and administrative expenses and reallocation of assets from non-core business functions to core business functions. The Company's purchased portfolios consist primarily of consumer loans and credit card receivables, student loan receivables and health club receivables, including portfolios purchased under forward flow agreements. Consumer loans purchased include automobile receivables, mobile home receivables and commercial real estate receivables. The Company's most recent portfolio acquisitions have been primarily purchases pursuant to the Company's health club and bank card forward flow agreements. The Company continues to pursue acquisitions of portfolios in various industries for both individually negotiated and forward flow purchases. In late 1997, the Company established a sourcing relationship with Sherman Financial Group, L.L.C. ("Sherman"). Sherman's focus was singularly on developing a distressed debt business on behalf of the Company. The Company benefited from Sherman's existing client relationships, industry marketing expertise, pricing technology and negotiating expertise with illiquid products in "one-off" transactions. In 1999, the Company will establish its own portfolio purchasing unit to broaden coverage across industries. The unit will be located in New York. Related Outsourcing Services. As the volume of consumer credit has expanded across a number of industries, credit grantors have begun demanding a wider range of outsourcing services. In response, the Company has developed a number of other accounts receivable management services. The Company leverages its operational expertise and call and data management technology by offering the following services: (1) contract management, through which the Company performs a range of accounts receivable management services at the customer's or the Company's location, (2) student loan billing, whereby the Company provides billing, due diligence and customer service services, (3) health care accounts receivable management, whereby the Company assumes responsibility for managing third-party billing, patient pay resolution, inbound and outbound patient communication services and cash application functions, and (4) teleservicing, whereby the company offers inbound and outbound calling programs to perform sales, customer retention programs, market research and customer service. Sales and Marketing The Company has a sales force of approximately 100 sales representatives providing comprehensive geographic coverage of the United States on a local, regional and national basis. The Company also markets its services in Puerto Rico, Canada and Mexico. Each of the operating companies, except TSI, maintains its own sales force and have a marketing strategy closely tailored to the credit-granting markets that it serves. TSI utilizes approximately 800 independent contractors to sell its prepaid letter series. The Company's primary sales and marketing objective is to expand its customer base in those customer industries in which it has a particular expertise and to target new customers in high growth end markets. The Company, through its established operating company brand names, emphasizes its industry experience and reputation - two key factors considered by creditors when selecting an accounts receivable service provider. Increasingly, the Company will focus on cross-selling its full range of outsourcing services to its existing customers and will use its product breadth as a key selling point in creating new business. The Company's overall sales and marketing strategies are coordinated by the corporate office in Chesterfield, Missouri, which is also responsible for monitoring the sales performance of each of the operating entities. Customers The Company's customer base includes a full range of local, regional and national creditors. The Company's customers include American Express, AT&T, Bally's, Citicorp, Columbia House, First USA, New Jersey Department of Treasury, Sears, Sony, Time Warner, US West and various student loan guaranty agencies (including the California Student Aid Commission, the Great Lakes Higher Education Corporation and USA Group Guaranty Services Inc.). The Company's largest customer accounted for less than 6% of 1998 revenues. Employees The company employs approximately 7,000 people, of which 5,500 are account representatives, 100 are sales representative and 1,400 work in corporate/supervisory and administrative functions. None of the Company's employees are unionized, and the Company believes its relations with employees are satisfactory. The Company is committed to providing continuous training and performance improvement plans to increase the productivity of its account representatives. Account representatives receive extensive training in a classroom environment for several days on Company procedures, information systems and regulations regarding contact with debtors. The training includes technical topics, such as use of on-line collection systems and skip-tracing techniques and tools, as well as instruction regarding the Company's approach to the collection process and listening, negotiation and problem-solving skills, all of which are essential to efficient and effective collections. Account representatives are then assigned to work groups for a training period. Initially, the trainees only screen incoming calls. This allows less experienced account representatives to communicate with debtors in a less confrontational environment than may be experienced with outgoing calls. Additionally, the trainees are assigned accounts, which based upon scoring by the Company's information systems, have a higher likelihood of collection. After the training period, the account representatives begin working accounts directly. Competition The accounts receivable management industry is highly fragmented and competitive. Nationwide, there are approximately 6,000 debt collection service companies in the United States, with the 10 largest agencies currently accounting for only 20% of industry revenues. Competition is based largely on recovery rates, industry experience and reputation and service fees. Due to the competition, the Company in 1998 experienced contingent fee rate pressure. Large volume creditors typically employ more than one accounts receivable management company at one time, and often compare performance rate and rebalance account placements towards higher performing servicers. The largest competitors include Deluxe Corporation, Equifax Corporation, G.C. Services and NCO Group. In late 1998, the Company's primary competitor for purchased portfolios, Commercial Financial Services, declared bankruptcy. Although the long-term effects of this bankruptcy are uncertain, this development has increased the Company's opportunities to purchase portfolios of debt. Governmental Regulatory Matters Certain of the Company's operations are subject to the FDCPA and comparable statutes in many states. Under the FDCPA, a third-party collection agency is restricted in the methods it uses to collect consumer debt. For example, a third-party collection agency (1) is limited in communicating with persons other than the consumer about the consumer's debt, (2) may not telephone at inconvenient hours, and (3) must provide verification of the debt at the consumer's request. Requirements under state collection agency statutes vary, with most requiring compliance similar to that required under the FDCPA. In addition, most states and certain municipalities require collection agencies to be licensed with the appropriate authorities before collecting debts from debtors within those jurisdictions. It is the Company's policy to comply with the provisions of the FDCPA, comparable state statutes and applicable licensing requirements. The Company has established policies and procedures to reduce the likelihood of violations of the FDCPA and related state statutes. For example, all account representatives receive extensive training on these policies and must pass a test on the FDCPA and the agents work in an open environment which allows managers to monitor interaction with debtors. In December 1998, Account Portfolios, Inc. and its subsidiary, Perimeter Credit L.L.C., entered into a consent decree with the Federal Trade Commission ("FTC") to resolve an FTC inquiry into whether the two companies violated certain provisions of the FDCPA. Both companies cooperated fully with the FTC, did not admit any wrongdoing and agreed to pay an amount not considered material to the Company's financial position or results of operations. Environmental Matters Current operations of OSI and its subsidiaries do not involve activities affecting the environment. However, Union is party to several pending environmental proceedings involving the Environmental Protection Agency ("EPA") and comparable state environmental agencies in Indiana, Maryland, Massachusetts, New Jersey, Ohio, Pennsylvania, South Carolina, and Virginia. All of these matters relate to discontinued operations of former divisions or subsidiaries of Union for which it has potential continuing responsibility. Upon completion of the Union acquisition, OSI, in consultation with both legal counsel and environmental consultants, established reserves that it believes will be adequate for the ultimate settlement of these environmental proceedings. One group of Union's known environmental proceedings relates to Superfund or other sites where Union's liability arises from arranging for the disposal of allegedly hazardous substances in the ordinary course of prior business operations. In most of these "generator" liability cases, Union's involvement is considered to be de minimus (i.e., a volumetric share of approximately 1% or less) and in each of these cases Union is only one of many potentially responsible parties. From the information currently available, there are a sufficient number of other economically viable participating parties so that Union's projected liability, although potentially joint and several, is consistent with its allocable share of liability. At one "generator" liability site, Union's involvement is potentially more significant because of the volume of waste contributed in past years by a currently inactive subsidiary. Insufficient information is available regarding the need for or extent and scope of any remedial actions which may be required. Union has recorded what it believes to be a reasonable estimate of its ultimate liability, based on current information, for this site. The second group of matters relates to environmental issues on properties currently or formerly owned or operated by a subsidiary or division of Union. These cases generally involve matters for which Union or an inactive subsidiary is the sole or primary responsible party. In one case, the Metal Bank Cottman Avenue site, the EPA issued a Record of Decision ("ROD") on February 6, 1998. According to the ROD, the cost to perform the remediation selected by the EPA for the site is estimated by the EPA to be approximately $17.3 million. The aggregate amount reserved by Union for this site is $18.2 million, which represents Union's best estimate of the ultimate potential legal and consulting costs for defending its legal and technical positions regarding remediation of this site and its portion of the potential remediation costs that will ultimately be incurred by it, based on current information. However, Union may be exposed to additional substantial liability for this site as additional information becomes available over the long-term. Actual remediation costs cannot be computed until such remedial action is completed. Some of the other sites involving Union or an inactive subsidiary are at a state where an assessment of ultimate liability, if any, cannot reasonably be made at this time. It is Union's policy to comply fully with all laws regulating activities affecting the environment and to meet its obligations in this area. In many "generator" liability cases, reasonable cost estimates are available on which to base reserves on Union's likely allocated share among viable parties. Where insufficient information is available regarding projected remedial actions for these "generator" liability cases, Union has recorded what it believes to be reasonable estimates of its potential liabilities. Reserves for liability for sites on which former operations were conducted are based on cost estimates of remedial actions projected for these sites. The Company periodically reviews all known environmental claims, where information is available, to provide reasonable assurance that adequate reserves are maintained. ITEM 2. PROPERTIES As of December 31, 1998, the Company and its subsidiaries operated 73 facilities in the U.S., all of which are leased, except for TSI's administrative and certain collection offices, which are owned. The Company believes that such facilities are suitable and adequate for its business. The Company's facilities are strategically located across the U.S. to give effective broad geographic coverage for customers and access to a number of labor markets. ITEM 3. LEGAL PROCEEDINGS At December 31, 1998, the Company was involved in a number of legal proceedings and claims that were in the normal course of business and routine to the nature of the Company's business. In addition, one of the OSI subsidiaries, Union, is party to several pending environmental proceedings discussed elsewhere herein. 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 settlement of such suits are adequate at December 31, 1998. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1998. PART II. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS No public market currently exists for the Common Stock. As of March 19, 1999, there were approximately 20 holders of record of the Common Stock. The Company has not declared any cash dividends on its Common Stock since the Company's formation in September 1995. The Indenture (the "Indenture"), dated as of November 6, 1996, by and among the Company, the Guarantors (as defined therein) and Wilmington Trust Company, as Trustee, with respect to the 11% Series B Senior Subordinated Notes due 2006 contains restrictions on the Company's ability to declare or pay dividends on its capital stock. Additionally, the Second Amended and Restated Credit Agreement, dated as of January 26, 1998, as amended, by and among the Company, the Lenders listed therein, Goldman Sachs Credit Partners L.P. and the Chase Manhattan Bank, as Co-Administrative Agents, Goldman Sachs Credit Partners L.P. and Chase Securities, Inc., as Arranging Agents and Sun Trust Bank, Atlanta, as Collateral Agent (the "Agreement") contains certain restrictions on the Company's ability to declare or pay dividends on its capital stock. Both the Indenture and the Agreement prohibit the declaration or payment of any Common Stock dividends or the making of any distribution by the Company or any subsidiary (other than dividends or distributions payable in stock of the Company) other than dividends or distributions payable to the Company. ITEM 6. SELECTED FINANCIAL DATA The following selected historical financial data set forth below have been derived from, and are qualified by reference to the audited Consolidated Financial Statements of OSI as of December 31, 1997 and 1998 and for the three years ended December 31, 1998. The audited financial statements of OSI referred to above are included elsewhere herein. The selected historical financial data set forth below as of and for the year ended December 31, 1994 and as of September 20, 1995 and for the period January 1, 1995 to September 20, 1995 have been derived from the audited financial statements of API (as predecessor) not included herein. The selected historical financial data set forth below as of December 31, 1995 and for the period September 21, 1995 to December 31, 1995 have been derived from the audited financial statements of OSI not included herein. The selected financial data set forth below should be read in conjunction with, and are qualified by reference to, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and accompanying notes thereto of OSI included elsewhere herein. API (as predecessor) OSI (as successor) -------------------------- ----------------------------------------- From From September 21 Year Ended January 1 to To December 31, September 20 December 31, Year Ended December 31, ------------ ------------ ------------ --------------------------- 1994 1995 1995 1996 1997 1998 ---- ---- ---- ---- ---- ---- ($ in thousands)
Income Statement Data: Operating revenue (a).............. $39,292 $21,293 $ 8,311 $106,331 $271,683 $479,400 Salaries and benefits.............. 2,646 4,471 2,079 46,997 133,364 230,114 Other operating expenses (b)....... 8,790 7,343 8,953 80,357 156,738 221,598 ------- ------- ------- -------- -------- -------- Operating income (loss)............ 27,856 9,479 (2,721) (21,023) (18,419) 27,688 Interest expense, net.............. 2,599 495 1,361 12,131 28,791 50,627 Other expense...................... 166 - - - - - ------- ------- ------- -------- -------- -------- Income (loss) before taxes......... 25,091 8,984 (4,082) (33,154) (47,210) (22,939) Provision for income taxes(benefit) - - (1,605) (11,757) 11,127 830 Minority interest.................. - - - - - 572 ------- ------- ------- -------- -------- -------- Net income (loss).................. $25,091 $ 8,984 $(2,477) $(21,397) $(58,337) $(24,341) ======= ======= ======= ======== ======== ======== Balance Sheet Data (at end of period): Working capital.................... $16,897 $3,809 $22,438 $38,080 $18,558 $ 795 Total assets....................... 22,941 11,272 85,652 355,207 381,690 618,491 Total debt......................... - - 36,462 247,616 324,966 528,148 Partners' capital/Stockholders equity (deficit)....................... 22,162 10,559 42,448 51,598 (5,478) (30,032) Other Financial Data: Amortization of purchased portfolios $2,667 $2,308 $5,390 $27,317 $52,042(d) $ 50,703(e) Other depreciation and amortization 102 167 331 18,281 33,574 30,007 Cash capital expenditures.......... 463 574 97 2,606 9,489 13,480 Portfolio purchases................ 6,800 5,502 903 10,373(f) 46,494 43,186 Cash flows from: Operating activities............ 21,074 5,887 2,902 10,667 32,825 55,252 Investing activities............ (463) 1,259 (31,007) (200,435) (119,499) (227,805) Financing activities............ (11,055) (20,587) 29,574 202,796 75,394 178,150 EBITDA (c)......................... 30,625 11,954 3,000 24,575 67,197 108,398 Adjusted EBITDA (c)................ 18,465 11,954 3,000 25,775 67,197 108,398
(a)1994 operating revenues include proceeds on sales of purchased portfolios of $13,325. The related amortization on the portfolios sold included in other operating expenses was $1,155. In addition, transaction costs of $1,165 were incurred in connection with the sale and are included in other operating expenses. (b)Other operating expenses include telephone, postage, supplies, occupancy costs, data processing costs, depreciation, amortization and miscellaneous operating expenses. (c)EBITDA is defined as income from continuing operations before interest, other expense, taxes, depreciation and amortization. Adjusted EBITDA reflects EBITDA as defined above adjusted for proceeds from portfolio sales, net of transaction costs, of $12,160 in 1994, the non-recurring write-off of acquired technology in process in connection with the Payco acquisition and relocation expenses incurred by Continental of $1,000 and $200, respectively, in the year ended December 31, 1996. EBITDA and Adjusted EBITDA are presented here, as management believes they provide useful information regarding the Company's ability to service and/or incur debt. EBITDA and Adjusted EBITDA should not be considered in isolation or as substitutes for net income, cash flows from continuing operations, or other consolidated income or cash flow data prepared in accordance with generally accepted accounting principles or as measures of a company's profitability or liquidity. (d)In the fourth quarter of 1997, the Company completed an in-depth analysis of the carrying value of the purchased portfolios acquired and valued in conjunction with the Company's September 1995 acquisition of API. As a result of this analysis, the Company recorded $10,000 of additional amortization related to these purchased portfolios to reduce their carrying value to their estimated net realizable value. This amount includes the $10,000 of additional amortization. (e)In the fourth quarter of 1998, the Company wrote down its investment in a limited liability corporation (the "LLC") by $3,000 resulting from an analysis of the carrying value of the purchased portfolios owned by the LLC. This amount includes the $3,000. (f)In May 1996, a subsidiary of the Company acquired participation interests in certain loan portfolios, representing the undivided ownership interests in such portfolios which were originally sold pursuant to existing Participation Agreements ("MLQ Interests") for aggregate consideration of $14,772. This amount excludes the $14,772. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS Results of Operations Year ended December 31, 1998 Compared to Year Ended December 31, 1997 Revenues for the year ended December 31, 1998 were $479.4 million compared to $271.7 million for the year ended December 31, 1997 - an increase of 76.5%. The revenue increase of $207.7 million was due primarily to increased fee services and portfolio revenues of $17.8 million - an increase of 7.7% over last year, and $193.3 million from the acquisitions of Union, NSA and ABC offset by lower existing business outsourcing revenue of $3.4 million. Revenues from fee services were $334.0 million for the year ended December 31, 1998 compared to $164.8 million for 1997. The increase in fee revenues was due to a 1.0% increase in existing business and $167.9 million from the three acquisitions. In the highly competitive contingent fee services business, during 1998 the Company experienced pressure on their contingent fee rates coupled with lower bankcard placements due to credit grantors selling them resulting in less than anticipated growth in existing business. Revenue from purchased portfolio services increased to $84.3 million for the year ended December 31, 1998 compared to $67.8 million in 1997 - up 24.3%. The increased revenue was attributable to both higher collection revenue and strategic sales of portfolios. The outsourcing revenue of $61.1 million compared favorably to prior year of $39.1 million due primarily to the Union acquisition. Operating Expenses for the year ended December 31, 1998 were $451.7 million compared to $290.1 million for the year ended December 31, 1997 - an increase of 55.7%. Operating expenses, exclusive of amortization and depreciation charges, were $371.0 million for the year ended December 31, 1998 compared to $204.5 million in 1997. The increase in operating expenses, exclusive of amortization and depreciation charges, resulted from the expenses related to the increased revenue and the three acquisitions. Exclusive of the three acquisitions' operating expenses, operating expenses were up 4.4% over 1997. Of the $451.7 million in operating expenses for the year ended December 31, 1998, $80.7 million was attributable to amortization and depreciation charges compared to $85.6 million in 1997. Of the $80.7 million for the year ended December 31, 1998, $50.7 million (including $3.0 million of additional amortization to reduce its investment in a limited liability corporation - See Note 10 to the Consolidated Financial Statements) was attributable to amortization of the purchase price of purchased portfolios (compared to $52.0 million in 1997 including $10.0 million of additional amortization to reduce a portion of purchased portfolios to their estimated fair value). Amortization of goodwill and other intangibles of $15.7 million was less than $24.8 million in 1997 due to no account placement amortization in 1998 ($16.7 million in 1997) since account placement inventory was fully amortized as of December 31, 1997, offset partially by additional amortization of goodwill related to the three acquisitions. The increase in depreciation of $5.5 million from $8.8 million in 1997 to $14.3 million in 1998 was attributable primarily to the additional depreciation related to the three acquisitions. As a result of the above, the Company generated operating income of $27.7 million for the year ended December 31, 1998 compared to an operating loss of $18.4 million for the year ended December 31, 1997. Earnings before interest expense, taxes, depreciation and amortization (EBITDA) for the year ended December 31, 1998 were $108.4 million compared to $67.2 million for 1997. The increase of $41.2 million consisted of $35.9 million as a result of the three acquisitions and $5.3 million primarily from $14.4 million increased revenue from operations unrelated to the acquisitions. Net interest expense for the year ended December 31, 1998 was $50.6 million compared to $28.8 million for 1997. The increase was primarily due to additional indebtedness incurred to finance the Union, NSA and ABC acquisitions. The provision for income taxes of $0.8 million was primarily provided for state income taxes as the Company will have an obligation in some states for the year ended December 31, 1998. In the fourth quarter of 1997, the Company recorded a net valuation allowance to reflect management's assessment, based on the weight of the available evidence of current and projected future book taxable income, that there is significant uncertainty that any of the benefits from the net deferred tax assets will be realized. Recording the net valuation allowance against the net deferred tax assets resulted in the 1997 provision for income taxes of $11.1 million. Minority interest in 1998 resulted from the Union acquisition. On January 23, 1998, the Company acquired approximately 77% of the outstanding a 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 year ended December 31, 1998 was $24.3 million compared to $58.3 million for the year ended December 31, 1997 - an improvement of $34.0 million. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Revenues for the twelve months ended December 31, 1997 were $271.7 million compared to $106.3 million for the year ended December 31, 1996. Revenues from fee services were $164.8 million for the year ended December 31, 1997 compared to $54.9 million in 1996. The increase in fee revenues was a result of the acquisitions of Payco in November 1996, the acquisition of NSA in October 1997 and the acquisition of ABC in November 1997. Revenues generated from purchased portfolios services increased to $67.8 million for the year ended December 31, 1997 compared to $45.6 million for the comparable period in 1996. The increase in collections from purchased portfolios resulted primarily from an increase in purchased portfolio levels and related collection efforts and to a lesser extent from the Payco acquisition. Outsourcing services revenues of $39.1 million in 1997 compared favorably to 1996 outsourcing revenue of $5.8 million due to the Payco acquisition. Operating Expenses for the year ended December 31, 1997 were $290.1 million compared to $127.4 million for 1996, an increase of $162.7 million. Operating expenses, exclusive of amortization and depreciation charges, were $204.5 million for the year ended December 31, 1997 and $80.8 million for the comparable period in 1996. Operating expenses increased as a result of the Payco acquisition as well as the use of outside collection agencies to service a portion of purchased portfolios. Of the $290.1 million in expenses for the year ended December 31, 1997, $52.0 million (including $10.0 million of additional amortization to reduce a portion of purchased portfolios to their estimated fair value - See Note 14 to the Consolidated Financial Statements) was attributable to amortization of the purchase price of purchased portfolios (compared to $27.3 million 1996), $16.7 million was attributable to amortization of account inventory (compared to $12.3 million in 1996), $8.1 million was attributable to amortization of goodwill associated with the acquisitions of API, Miller, Continental, Payco, NSA and ABC (compared to $3.2 million in 1996), $8.8 million was attributable to depreciation (compared to $2.8 million in 1996). The increase in amortization and depreciation expense was the result of additional goodwill and step-up in basis of fixed assets recorded in connection with the Payco acquisition. Operating Loss for the year ended December 31, 1997 was $18.4 million compared to $21.0 million for the comparable period in 1996. The operating loss was a result of increased amortization related to the step-up in basis of purchased portfolios related to the API acquisition, goodwill and account placement inventory related to the acquisition of Payco. EBITDA for the year ended December 31, 1997 was $67.2 million compared to $24.6 million for the comparable period in 1996. The increase of $42.6 million in EBITDA reflects additional revenues associated with the acquisitions of Payco, NSA and ABC and additional portfolios at API, partially offset by the costs associated with the use of outside collection agencies to service purchased portfolios. Net Interest Expense for the year ended December 31, 1997 was $28.8 million compared to $12.1 million for the comparable period in 1996. The increase was primarily due to increased debt incurred in 1997 to finance the acquisitions of Payco, NSA and ABC and to finance additional purchased portfolio purchases. Net Loss for the year ended December 31, 1997 was $58.3 million compared to $21.4 million for the comparable period in 1996. The increase in net loss was attributable to increased amortization expense from the step-up in basis of acquired portfolios related to the API acquisition, goodwill and account placement inventory recorded in connection with the acquisition of Payco, the increase in interest expense related to the indebtedness incurred to finance the Payco, NSA and ABC acquisitions and portfolio purchases and a provision for income taxes of $11.1 million as a result of the Company recording a net valuation allowance of $32.4 million to reflect management's assessment, based on the weight of the available evidence of current and projected future book taxable income, that there is significant uncertainty that any of the benefits from the net deferred tax assets will be realized. Liquidity and Capital Resources At December 31, 1998, the Company had cash and cash equivalents of $8.8 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 December 31, 1998, the Company had outstanding $25.5 million under the revolving credit facility leaving $30.9 million, after outstanding letters of credit, available under the revolving credit facility. Cash and Cash Equivalents increased from $3.2 million at December 31, 1997 to $8.8 million at December 31, 1998 principally due to cash provided by operations and financing activities of $55.2 million and $178.2 million, respectively, offset by the use of $227.8 million for investing activities primarily for the acquisition of Union, capital expenditures and the purchase of portfolios. The cash provided by financing activities was primarily due to the $225.0 million additional indebtedness to fund the Union acquisition. The Company also held $22.4 million of cash for clients in restricted trust accounts at December 31, 1998. Purchased Loans and Accounts Receivable Portfolios decreased from $62.5 million at December 31, 1997 to $55.5 million at December 31, 1998 due primarily to amortization of purchased portfolios of $50.7 million offset partially by new portfolio purchases of $43.2 million. The amount of purchased loans and accounts receivable portfolios which are projected to be collectible within one year decreased from $42.9 million at December 31, 1997 to $35.1 million at December 31, 1998. The purchased loans and accounts receivable portfolios consist primarily of consumer loans and credit card receivables, commercial loans, student loan receivables and health club receivables. Consumer loans purchased primarily consist of unsecured term debt. A summary of purchased loans and accounts receivable portfolios at December 31, 1998 and December 31, 1997 by type of receivable is shown below: December 31, 1998 December 31, 1997 ------------------------------------ ------------------------------------ Original Gross Original Gross Principal Value Current Long-term Principal Value Current Long-term --------------- ------- --------- --------------- ------- --------- (in millions) (in thousands) (in millions) (in thousands) Consumer loans...... $2,114 $ 5,871 $ 5,744 $2,039 $ 8,978 $ 4,948 Student loans....... 328 2,688 94 322 4,629 - Credit cards........ 897 15,020 11,469 509 12,575 10,765 Health clubs........ 1,460 9,946 2,283 1,309 15,307 2,248 Commercial.......... 129 1,532 846 41 1,426 1,576 ------ ------- ------- ------ ------- ------- $4,928 $35,057 $20,436 $4,220 $42,915 $19,537 ====== ======= ======= ====== ======= =======
Net deferred taxes was an asset of $0.4 million at December 31, 1997. At December 31, 1998, net deferred taxes was zero due to a net valuation allowance of $68.3 million. The net deferred tax balances at December 31, 1998 and December 31, 1997 relate principally to net operating loss carryforwards and future temporary deductible differences. The realization of this asset is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards in years through 2018. At December 31, 1998, the Company has a cumulative net valuation allowance of $68.3 million to reflect management's assessment, based on the weight of the available evidence of current and projected of future book taxable income, that there is significant uncertainty that any of the benefits from the net deferred tax assets will be realized. For all federal tax years since the Company's formation in September 1995, the Company has incurred net operating losses. During 1998, the Company has significantly increased its total debt from $325.0 million at December 31, 1997 to $528.1 million at December 31, 1998. This increase in debt primarily resulted from the acquisition of Union. Since the Company has a history of generating net operating losses and has significantly increased its total interest expense to be incurred, management does not expect the Company to generate taxable income in the foreseeable future sufficient to realize tax benefits from the net operating loss carryforwards or the future reversal of the net deductible temporary differences. The amount of the deferred tax assets considered realizable, however, could be increased in future years if estimates of future taxable income during the carryforward period change. The Company's current debt structure at December 31, 1998 consists of $422.1 million bank credit facility, $100.0 million 11% Senior Subordinated Notes (the "Notes") and other indebtedness of $6.0 million. See Note 6 of the Consolidated Financial Statements of OSI included elsewhere herein for a description of the amended credit agreement, effective January 1998. The Notes and the bank credit facility contain financial and operating covenants and restrictions on the ability of the Company to incur indebtedness, make investments and take certain other corporate actions. The debt service requirements associated with the borrowings under the facility and the Notes significantly impact the Company's liquidity requirements. Additionally, future portfolio purchases may require significant financing or investment. The Company anticipates that its operating cash flow together with availability under the bank credit facility will be sufficient to fund its anticipated future operating expense and to meet its debt service requirements as they become due. However, actual capital requirements may change, particularly as a result of acquisitions the Company may make. The ability of the Company to meet its debt service obligations and reduce its total debt will be dependent, however, upon the future performance of the Company and its subsidiaries which, in turn, will be subject to general economic conditions and to financial, business and other factors including factors beyond the Company's control. In the fourth quarter of 1998, a qualifying special-purpose finance company, OSI Funding Corp., formed by the Company, entered into a revolving warehouse financing arrangement for up to $100.0 million of funding capacity for the purchase of loans and accounts receivable over its five year term. This arrangement will provide the Company expanded portfolio purchasing capability in a very opportunistic buying market. Capital expenditures for the year ended December 31, 1998 were $13.5 million. The Company expects to spend approximately $17.5 million on capital expenditures (exclusive of any expenditures in connection with acquisitions) in 1999. Historical expenditures have been, and future expenditures are anticipated to be primarily for replacement and/or upgrading of telecommunications and data processing equipment, leasehold improvements and continued expansion of the Company's information services systems. Subject to compliance with the provisions of its debt agreements, the Company expects to finance future capital expenditures with cash flow from operations, borrowings and capital leases. The Company will reduce its future capital expenditures to the extent it is unable to fund its capital plan. The Company believes that its facilities will provide sufficient capacity for increased revenues and will not require material additional capital expenditures in the next several years. Inflation The Company believes that inflation has not had a material impact on its results of operations for the years ended December 31, 1998, 1997 and 1996. Year 2000 As the Year 2000 approaches, many corporate systems worldwide could malfunction or produce incorrect results because they cannot process date-related information properly. Dates play a key role in dependable functioning of the software applications, software systems, information technology infrastructure, and embedded technology (i.e., non-technical assets such as time clocks and building services) the Company relies upon in day-to-day operations for innumerable tasks. This includes any tasks requiring date-dependent arithmetic calculations, sorting and sequencing data, and many other functions. The Company identified this problem as a key focus during 1997 and as part of any subsequent due-diligence procedures related to acquisitions completed during 1998. The Company has assessed the impact of Year 2000 issues on the processing of 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 presentations 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 was commenced in 1998. Letters were sent to significant clients, inquiring about their Year 2000 compliance plans and status. The Company has established a follow-up process with each key client, taking a proactive, customer-focused approach to achieving Year 2000 compliance with its customers. The Company has also communicated with its strategic suppliers and equipment vendors, including suppliers of non-technical assets, seeking assurances that they and their products will be Year 2000 ready. The Company's goal is to obtain as much detailed information as possible about its strategic suppliers and equipment vendors' Year 2000 plans to identify those companies which appear to pose any significant risk of failure to perform their obligations to the Company as a result of the Year 2000. The Company has compiled detailed information regarding all of its strategic suppliers and equipment vendors. This will be an ongoing process during the Year 2000 project. For those strategic suppliers and equipment vendors whose response was not satisfactory, the Company has developed contingency plans to ensure that sufficient alternative resources are available to continue with business operations. The target date for completion of all production systems and significant non-production systems (e.g., predictive dialer systems, phone switches, wide area network hardware), including non-technical assets, is May 1999. Testing is well underway for all systems with completion anticipated to be no later than mid-1999. Spending for modifications and updates are being expensed as incurred and is not expected 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 $1.4 to $1.6 million. To date, the Company has expended approximately $1.0 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 will be 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 mid-1999. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities, which is effective for fiscal years beginning after June 15, 1999. The statement provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. The Company has not determined the impact on the consolidated statement of operations and consolidated balance sheet. In March 1998, the AICPA issued Statement of Position No. 98-1 Accounting for the Costs of Computer Systems Developed or Obtained for Internal Use ("SOP 98-1"), which is effective for fiscal years beginning after December 15, 1998. SOP 98-1 provides guidelines for capitalization of developmental costs of proprietary software and purchased software for internal use. The adoption of SOP 98-1 is not expected to have a material impact on the consolidated statement of operations and consolidated balance sheet. Forward-Looking Statements The following statements in this document are or may constitute forward-looking statements made in reliance upon the safe harbor of the Private Securities Litigation Reform Act of 1995: (1) statements concerning the cost and successful implementation of the Company's Year 2000 initiatives, (2) statements concerning the anticipated costs and outcome of legal proceedings and environmental liabilities, (3) statements regarding anticipated changes in the Company's opportunities in its industry, (4) statements regarding the Company's ability to fund its future operating expenses and meet its debt service requirements as they become due, (5) statements regarding the Company's expected capital expenditures and facilities (6) any statements preceded by, followed by or that include the word "believes," "expects," "anticipates," "intends," "should," "may," or similar expressions; and (7) 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. 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 7A. 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 of its debt and not to trade such instruments for profit or loss. The Company uses interest rate cap, collar and swap agreements to manage the interest rate characteristics of its outstanding debt to a more desirable fixed or variable rate basis or to limit the Company's exposure to rising interest rates. The following table provides information about the Company's derivative financial instruments and other financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principal and cash flows and related weighted-average interest rates by expected maturity dates. For interest rate caps, swap and collars, the table presents notional amounts and weighted-average interest rates.
Interest Rate Sensitivity Principal (Notional) Amount by Expected Maturity Average Interest Rate (Dollars in millions) Fair 1999 2000 2001 2002 2003 Thereafter Total Value ---- ---- ---- ---- ---- ---------- ----- ----- Liabilities Long-term debt, including current portion Fixed rate .................................... - - - - - $100.0 $100.0 $95.3 Average interest rate.......................... 11.0% 11.0% 11.0% 11.0% 11.0% 11.0% Variable rate ................................. $16.0 $19.8 $47.3 $51.0 $68.8 $219.2 $422.1 $422.1 Average interest rate ......................... (1) (1) (1) (1) (1) (1) Interest Rate Derivative Financial Instruments Related to Debt Interest Rate Caps Notional amount ............................... $50.0 - - - - - $50.0 $.1 Strike rate ................................... 7.3% - - - - - Forward rate .................................. (2) - - - - - Interest Rate Swap Pay Fixed/Receivable Variable ................. - - $32.0 - - - $32.0 $(.7) Average pay rate .............................. 6.1% 6.1% 6.1% - - - Average receive rate........................... (2) (2) (2) - - - Interest Rate Collars Notional amount ............................... - - $35.0 $33.0 - - $68.0 $(1.1) Strike cap rate ............................... - - 6.5% 6.5% - - Strike floor rate ............................. - - 5.6% 5.3% - - Forward rate .................................. (2) (2) (2) (2) - - (1) - Three month LIBOR (5.3% at December 31, 1998) plus weighted-average margin of 2.9%. (2) - Three month LIBOR
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to the Financial Statements and Supplementary Schedule contained in Part IV hereof. ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. Directors and Executive Officers of the Registrant Directors of the Company are elected annually by its shareholders to serve during the ensuing year or until a successor is duly elected and qualified. Executive officers of the Company are duly elected by its Board of Directors to serve until their respective successors are elected and qualified. The following table sets forth certain information with respect to the directors and executive officers of the Company. Name Age Position or Office - - ------------------------ --- ----------------------------------- Jeffrey E. Stiefler 52 Chairman of the Board of Directors Timothy G. Beffa 48 Director, President and Chief Executive Officer David E. De Leeuw 54 Director David E. King 40 Director, Secretary and Treasurer Tyler T. Zachem 33 Director and Vice President David G. Hanna 35 Director Frank J. Hanna, III 37 Director Nathan W. Pearson, Jr. 48 Director Robert A. Marshall 58 Director William B. Hewitt 60 Director Courtney F. Jones 59 Director Daniel J. Dolan 46 Executive Vice President and Chief Financial Officer Michael A. DiMarco 41 Executive Vice President - President Fee Services C. Bradford McLeod 50 Senior Vice President, Human Resources Patrick Carroll 56 Senior Vice President, National Accounts Jeffrey E. Stiefler (52), Chairman of the Board of Directors since January 10, 1996. Previously, Mr. Stiefler was President and Director of American Express Company, where he had previously served in various capacities since 1983, including President and Chief Executive Officer of IDS Financial Services. Prior to joining the Company, Mr. Stiefler held various positions with the Meritor Financial Group, including Chairman of the Meritor Savings Bank Florida and the Meritor Savings Bank Washington D.C., and Citicorp, including Vice President and Regional Business Manager of the New York Banking Division and Senior Vice President and Regional Business Manager of Nationwide Financial Services. Mr. Stiefler currently serves as a director of Safeskin Corporation and chairman and Chief Executive Officer of International Data Response Corporation. Timothy G. Beffa (48), President, Chief Executive Officer and Director of Outsourcing Solutions Inc. since August 1996. From August 1995 until August 1996, Mr. Beffa served as President and Chief Operating Officer of DIMAC Corporation ("DIMAC") and DIMAC DIRECT Inc. ("DDI") and a director of DDI. From 1989 until August 1995, Mr. Beffa served as a Vice President of DIMAC and as Senior Vice President and Chief Financial Officer of DDI. Prior to joining DIMAC, Mr. Beffa was Vice President of Administration and Controller for the International Division of Pet Incorporated, a food and consumer products company, where he previously had been manager of Financial Analysis. Mr. Beffa currently serves as a director of DIMAC Holdings, Inc. David E. De Leeuw (54), Director of the Company since September 21, 1995. Mr. De Leeuw is a managing general partner of MDC Management Company III, L.P., which is the general partner of McCown De Leeuw & Co. III, L.P. and McCown De Leeuw & Co. III (Europe), L.P., a managing general partner of MDC Management Company IIA, L.P., which is the general partner of McCown De Leeuw & Co. III (Asia), L.P. and a member of Gamma Fund, LLC. Prior to founding McCown De Leeuw & Co. with George E. McCown in 1984, Mr. De Leeuw was Manager of the Leveraged Acquisition Unit and Vice President in the Capital Markets Group at Citibank, N.A. Mr. De Leeuw also worked with W.R. Grace & Co. where he was Assistant Treasurer and manager of Corporate Finance. Mr. De Leeuw began his career as an investment banker with Paine Webber Incorporated. He currently serves as a director of DIMAC Holdings, Inc., Aurora Foods Inc. and American Residential Investment Trust. David E. King (40), Secretary, Treasurer and Director of the Company since September 21, 1995. Mr. King is a general partner of MDC Management Company III, L.P., which is the general partner of McCown De Leeuw & Co. III, L.P., and McCown De Leeuw & Co. Offshore (Europe) III, L.P. a general partner of MDC Management Company IIIA, L.P., which is the general partner of McCown De Leeuw & Co. III (Asia), L.P. and a member of Gamma Fund, LLC. Mr. King has been associated with McCown De Leeuw & Co. since 1990. He currently serves as a director of DIMAC Holdings, Inc., Fitness Holdings Inc., RSP Manufacturing Corporation and Sarcom. Tyler T. Zachem (33), Vice President and Director of the Company since September 21, 1995. Mr. Zachem is a special limited partner of MDC Management Company III, which is the general partner of McCown De Leeuw & Co. III; and McCown De Leeuw & Co. III (Europe), L.P., and a special limited partner of MDC Management Company IIIA, L.P., which is the general partner of McCown De Leeuw & Co. III (Asia), L.P. Mr. Zachem has been associated with McCown De Leeuw & Co. since July 1993. Mr. Zachem previously worked as a consultant with McKinsey & Co. and as an investment banker with McDonald & Company. He currently serves as a director of RSP Manufacturing Corporation, The Brown Schools, Inc., Aurora Foods Inc. and Papa Gino's Inc. David G. Hanna (35), Director of the Company since September 21, 1995. Since 1992, Mr. Hanna has served as President of HBR Capital, Ltd., an investment management company. Mr. Hanna is also President and Chairman of the Board of CompuCredit Corporation and has served in such capacity since its inception in 1996. David G. Hanna is the brother of Frank J. Hanna, III. Frank J. Hanna, III (37), Director of the Company since September 21, 1995. Since 1992, Mr. Hanna has served as Chief Executive Officer of HBR Capital, Ltd., an investment management company. Mr. Hanna also serves as a director of Cerulean Companies, Inc. Frank J. Hanna, III is the brother of David G. Hanna. Nathan W. Pearson, Jr. (48), Director of the Company since July 1997. Mr. Pearson is an operating affiliate of McCown De Leeuw & Co. Mr. Pearson has been affiliated with McCown De Leeuw since 1997. Since 1996, Mr. Pearson has been Managing Director of Commonwealth Holdings, a private investment firm. From 1988 to 1995, Mr. Pearson was Executive Vice President and Chief Financial Officer of Broadcasting Partners, Inc., a radio broadcasting leveraged buyout organization and since 1995, Mr. Pearson has been a principal of investment and management of Broadcasting Partners, Inc. Prior to joining Broadcasting Partners, Inc., Mr. Pearson was a management consultant with McKinsey and Company from 1982 to 1988. Robert A. Marshall (58), Director of the Company since February 1998. Mr. Marshall is President and Chief Operating Officer of Arcadia Financial, Inc. since February 1999. He is a director and has been a director of Arcadia Financial, Ltd. since March 1997. Prior to joining Arcadia Financial, Ltd., Mr. Marshall served as a consultant to the financial services industry. From 1989 to January 1997, Mr. Marshall served in various leadership positions at Advanta Corporation. He currently serves as a director of Trajecta Inc. and Chairman of the Board of Impact Services, Inc. William B. Hewitt (60), Director of the Company since February 1998. Mr. Hewitt currently serves as a consultant to the Company since January 1998. From July 1997 to January 1998, Mr. Hewitt served as President and Chief Executive Officer of Union and prior to that he served as President and Chief Operating Officer of Union since May 1995. Mr. Hewitt also served as Chairman and Chief Executive Officer of Capital Credit Corporation since September 1991, Chairman and Chief Executive Officer of Interactive Performance, Inc. since November 1995 and Chairman and Chief Executive Officer of High Performance Services, Inc. since May 1996. Capital Credit Corporation, Interactive Performance, Inc. and High Performance Services, Inc. are subsidiaries of Union. Courtney F. Jones (59), Director of the Company since April 1998. He is Managing Director in charge of the New World Banking Group of Bankers Trust. Mr. Jones has been a director of RSP Manufacturing Corporation since March 1998, Medical Manager Corporation since April 1997, and First Data Corporation since April 1992. He was a Managing Director in Merrill Lynch's Investment Banking Division from July 1989 to December 1990. Prior thereto, he served as Chief Financial Officer, Executive Vice President and a member of the Board of Directors for Merrill Lynch & Co. Inc. from October 1985. From February 1982 to September 1985, Mr. Jones served as Treasurer and Secretary of the Finance Committee of the Board of Directors of General Motors Corporation. He also was formerly a director of General Motors Acceptance Corporation and General Motors Insurance Company. Daniel J. Dolan (46), Executive Vice President and Chief Financial Officer of the Company since October 1997. Mr. Dolan has 23 years experience in public accounting, the last 11 years as a partner of Ernst & Young LLP. Mr. Dolan resigned from the Company effective February 28, 1999. Michael A. DiMarco (41), Executive Vice President - President Fee Services of the Company since September 1998. From 1991 until September 1998, Mr. DiMarco was with Paging Network, Inc., a wireless communications provider, serving in various leadership positions including Senior Vice President of Operations and Executive Vice President of Sales. Prior to that, he served in various senior leadership positions with the City of New York, Hertz Rent-A-Car, Inc., ARA Services, Inc. and National Car Rental, Inc. C. Bradford McLeod (50), Senior Vice President, Human Resources of the Company since September 1998. Mr. McLeod has over 20 years of diverse strategic human resources experience. From 1997 until September 1998, Mr. McLeod served as Vice President of Human Resources for LCC International, a supplier of products and services to the wireless communications industry. From 1994 to 1997, he served as Vice President of Human Resources for a $500 million division of Pulte Home Corporation, the country largest builder of residential housing. Earlier in his career, Mr. McLeod held senior human resources positions with Deloitte & Touche LLP and Frito Lay, a division of PepsiCo. Patrick Carroll (56), Senior Vice President, National Accounts since October 1996. From 1988 until October 1996, Mr. Carroll served as a director and Executive Vice President of Sales and Marketing for Payco. Mr. Carroll joined Payco in 1964 and served in both production and sales positions. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth information concerning the compensation paid or accrued for by the Company on behalf of the Company's Chief Executive Officer and the four other most highly compensated executive officers of the Company for the years ended December 31, 1998, 1997 and 1996.
Summary Compensation Table ------------------------------------------------------------------- Long Term Other Annual Compensation All Other Name and Salary Bonus Compensation Awards Compensation Principal Position Year ($) ($) ($) Options (#) ($) - - ------------------ ----- ------- ------ ------------ ------------- ------------ Timothy G. Beffa (1) 1998 350,000 405,300 President and CEO 1997 320,110 457,500 41,555 1996 103,846 200,000 131,421.66 Daniel J. Dolan (2) 1998 260,000 -(2) 6,384(3) Executive Vice 1997 56,571 130,000 75,000 President and CFO Patrick Carroll 1998 225,000 79,700 25,277(4) Senior Vice President, 1997 186,875 60,000 25,000 National Accounts 1996 120,000 200,000 267,000(5) Michael A. DiMarco(6) 1998 108,337 220,000 14,491(4) Executive Vice President - President Fee Services C. Bradford McLeod(7) 1998 52,390 95,000 15,848(4) Senior Vice President, Human Resources
(1) 1996 compensation based on an annual salary of $300,000. (2) Mr. Dolan resigned effective February 28, 1999. 1997 compensation based on an annual salary of $260,000. (3) Represents split dollar life insurance and long-term disability premiums paid by the Company. Upon termination of split dollar life insurance policy, residual cash surrender value (cash surrender value less premiums paid) is returned to the executive officer. (4) Payment of taxes by the Company for includable W-2 relocation expenses. (5) Represents value of stock acquired in connection with the acquisition of Payco by the Company (6) Based on an annual salary of $325,000. Mr. DiMarco was hired in September 1998. (7) Based on an annual salary of $175,000. Mr. McLeod was hired in September 1998. Employment Agreements On September 1, 1997, OSI entered into an amendment to the employment agreement with Timothy G. Beffa. Pursuant to the employment agreement, Mr. Beffa serves as Chief Executive Officer of the Company. On December 31 of each year, the term of the employment agreement is automatically extended for an additional year unless either party gives 30 days advance termination notice. If the Company terminates Mr. Beffa's employment without "cause" (as defined in the agreement) or the Company does not agree to extend the employment term upon the expiration thereof, Mr. Beffa would be entitled to receive an amount equal to his total cash compensation (base salary plus bonus) for the preceding year and continue to receive medical and dental health benefits for one year. Mr. Beffa received an annual salary of $350,000 and received a bonus of $405,300 for fiscal year 1998. Starting in fiscal year 1998, Mr. Beffa is eligible for an annual bonus of up to 150% of his annual base salary. Effective October 9, 1996, Mr. Beffa received options to purchase 131,421.66 shares of common stock of the Company, which options vest eight years from date of grant or earlier upon the satisfaction of certain performance targets and/or the occurrence of certain liquidity events. Effective March 14, 1997, Mr. Beffa received additional options to purchase up to 41,555 shares of common stock of the Company, which also vest eight years from date of grant or earlier upon the satisfaction of certain performance targets and/or the occurrence of certain liquidity events. On October 16, 1997, OSI entered into an employment agreement with Daniel J. Dolan. Pursuant to the employment agreement, Mr. Dolan served as Chief Financial Officer of the Company. Mr. Dolan received an annual salary of $260,000 for fiscal year 1998. Commencing in fiscal year 1998, Mr. Dolan was eligible for an annual bonus with a target of 66-2/3% of his annual base salary. Effective December 2, 1997, Mr. Dolan received options to purchase 75,000 shares of common stock of the Company, such options vest eight years from date of grant or earlier upon the satisfaction of certain performance targets and/or the occurrence of certain liquidity events. Effective February 28, 1999, Mr. Dolan resigned from the Company and, upon his resignation, forfeited the options to acquire 75,000 shares. Although Mr. Dolan's employment agreement contained severance provisions similar to those in Mr. Beffa's employment agreement, Mr. Dolan will not receive severance payments because he voluntarily resigned. On September 1, 1998, OSI entered into an employment agreement with Michael A. DiMarco. Pursuant to the employment agreement, Mr. DiMarco serves as Executive Vice President President Fee Services of the Company. On December 31 of each year, the term of the employment agreement is automatically extended for an additional year unless either party gives 30 days advance termination notice. If the Company terminates Mr. DiMarco's employment without "cause" (as defined in the agreement) or the Company does not agree to extend the employment term upon the expiration thereof, Mr. DiMarco would be entitled to receive (i) an amount equal to his salary for the preceding year, and (ii) medical and dental health benefits for one year. The Company also agreed to reimburse Mr. DiMarco for normal moving and relocation expenses to relocate his residence to St. Louis and for income taxes payable for him as a result of such moving and relocation expenses. In addition, the Company advanced Mr. DiMarco $117,000 to facilitate his relocation. Mr. DiMarco receives an annual salary of $325,000 and received a bonus of $220,000 for fiscal year 1998. Commencing in fiscal year 1999, Mr. DiMarco is eligible for an annual bonus with a target of 67% of his annual base salary. On September 14, 1998, OSI entered into an employment agreement with C. Bradford McLeod. Pursuant to the employment agreement, Mr. McLeod serves as Senior Vice President, Human Resources of the Company. On December 31 of each year, the term of the employment agreement is automatically extended for an additional year unless either party gives 30 days advance termination notice. If the Company terminates Mr. McLeod's employment without "cause" (as defined in the agreement) or the Company does not agree to extend the employment term upon the expiration thereof, Mr. McLeod would be entitled to receive (i) an amount equal to his salary for the preceding year, (ii) medical and dental health benefits for one year, and (iii) reasonable outplacement services for one year. If, within two years of his employment with the Company, certain types of liquidity events occur or if Mr. Beffa no longer serves as Chief Executive Officer of the Company, Mr. McLeod would also be entitled to terminate his employment with the Company and receive these severance benefits. The Company also agreed to reimburse Mr. McLeod for normal moving and relocation expenses to relocate his residence to St. Louis, for duplicate housing expenses for up to six months after he purchased a residence in the St. Louis area, and for income taxes payable for him as a result of such moving and relocation expenses. In addition, the Company advanced Mr. McLeod $148,000 to facilitate his relocation. Mr. McLeod receives an annual salary of $175,000 and received a bonus of $95,000 for fiscal year 1998. Commencing in fiscal year 1999, Mr. McLeod is eligible for an annual bonus with a target of 50% of his annual base salary. Director Compensation Non-employee directors of OSI receive $2,000 per regularly scheduled meeting of the Board of Directors, $1,000 per special meeting of the Board of Directors and $500 per committee meeting plus, in each case, reimbursement for travel and out-of-pocket expenses incurred in connection with attendance at all such meetings. Except as described below, no director of OSI receives any other compensation from OSI for performance of services as a director of OSI (other than reimbursement for travel and out-of-pocket expenses incurred in connection with attendance at Board of Director meetings). Effective February 16, 1996, the Company's Chairman of the Board, Mr. Stiefler, received options to purchase 23,044 shares of common stock of the Company, which options vest eight years from date of grant or earlier upon the satisfaction of certain performance targets and/or the occurrence of certain liquidity events. Mr. Stiefler receives an annual salary of $150,000. Effective February 24, 1998, Mr. Hewitt and Mr. Marshall each received options to purchase 3,000 shares of common stock of the Company. Effective May 28, 1998, Mr. Jones received options to purchase 3,000 shares of common stock of the Company. These options time-vest over a three year period. Option Plans The Company maintains a 1995 Stock Option and Stock Award Plan (the "Stock Option Plan"). The Stock Option Plan is administered by the Compensation Committee of the Board of Directors of the Company. Under the Stock Option Plan, the Compensation Committee may grant or award (a) options to purchase stock of the Company (which may either be incentive stock options ("ISOs"), within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or stock options other than ISOs), (b) stock appreciation rights granted in conjunction with stock options, (c) restricted stock, or (d) bonuses payable in stock, to key salaried employees of the Company, including officers. A total of 750,000 shares of common stock of the Company are reserved for issuance under the Stock Option Plan. As of March 19, 1999, options to purchase up to 483,820.66 shares of the Company's common stock are outstanding under the Stock Option Plan. During 1998, there were no stock option awards to, or stock option exercises by, any of the Company's executive officers. As of March 19, 1999, the following table sets forth options held by the current executive officers: # of Options Exercisable Unexercisable Timothy G. Beffa 172,976.66 34,595 138,381.66 President and CEO Patrick Carroll 25,000 5,000 20,000 Senior Vice President, National Accounts There is no trading market for the Company's common stock. Committee Report on Executive Compensation The Compensation Committee recommends compensation arrangements for the Company's executive officers and administers the Company's Stock Option Plan. The Company's compensation program is designed to be competitive with companies similar in structure and business to the Company. The Company's executive compensation program is structured to help the Company achieve its business objectives by: o Setting levels of compensation designed to attract and retain superior executives in a highly competitive environment. o Designing equity-related and other performance-based incentive compensation programs to align the interests of management with the ongoing interests of shareholders; and o Providing incentive compensation that varies directly with both Company financial performance and individual contributions to that performance. The Company has used a combination of salary and incentive compensation, including cash bonuses and equity-based incentives to achieve its compensation goals. Bonuses for 1998 were determined by the Compensation Committee in March 1999 and paid shortly thereafter. The amount of bonuses earned by the Company's executive officers were determined by the Compensation Committee based upon the performance of each executive during the year and the performance of the Company against pre-established earnings before interest, taxes, depreciation and amortization ("EBITDA") goals. The Company has entered into an employment agreement with Timothy G. Beffa to serve as President and Chief Executive Officer of OSI. Under the employment agreement, Mr. Beffa's base salary for 1998 was $350,000 and his bonus target potential was $525,000, 150% of his base salary. These amounts were established by the Compensation Committee after consideration of compensation paid to Chief Executive Officers of comparative companies and the relationship of his compensation to that paid to other OSI senior executives. For 1998, Mr. Beffa's bonus was determined based upon the following two factors, which were weighted as indicated: the Company's performance against pre-established EBITDA goals (70%), and Mr. Beffa's attainment of pre-established objectives, based on specific strategic initiatives to both build a suitable management infrastructure and deliver on strategic growth initiatives (30%). Based on the Company's EBITDA performance and Mr. Beffa's substantial obtainment of personal objectives, Mr. Beffa's bonus for 1998 was $405,300--77.2% of his target bonus. Compensation Committee Mr. David E. King Mr. Jeffery E. Stiefler Mr. Tyler T. Zachem ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of March 19, 1999, the authorized capital stock of the Company consists of (i) 1,250,000 shares of Preferred Stock, no par value (the "Preferred Stock"), of which 973,322.32 shares are issued and outstanding, (ii) 7,500,000 shares of Voting Common Stock, par value $.01 per share (the "Voting Common Stock"), of which 3,477,126.01 are issued and outstanding, (iii) 7,500,000 shares of Class A Non-Voting Common Stock, par value $.01 per share (the "Class A Non-Voting Common Stock"), of which 391,740.58 are issued and outstanding, (iv) 500,000 shares of Class B Non-Voting Stock, par value $.01 per share (the "Class B Non-Voting Common Stock"), of which 400,000 are issued and outstanding, and (v) 1,500,000 shares of Class C Non-Voting Common Stock, par value $.01 per share (the "Class C Non-Voting Common Stock" and together with the Class A Non-Voting Common Stock and the Class B Non-Voting Common Stock, the "Non-Voting Common Stock," and together with the Voting Common Stock, the "Common Stock"), of which 1,040,000 are issued and outstanding. In addition, a total of 46,088.67 shares of Voting Common Stock were issuable upon exercise of warrants held by certain warrant holders, and up to 483,820.66 shares of Voting Common Stock were issuable upon the exercise of certain management options. Each Holder of Voting Common Stock has one vote for each share of Voting Common Stock held by such holder on all matters to be voted upon by the stockholders of the Company. The holders of Preferred Stock have no voting rights except as expressly provided by law and the holders of Non-Voting Common Stock have no voting rights other than the right to vote as a separate class on certain matters that would adversely the rights of such holders. Each share of Preferred Stock is convertible into one share of Common Stock at the holder's option at any time after September 20, 1996. The Company may, at its sole option, upon written notice to the holders of Preferred Stock, redeem any or all of the shares of Preferred Stock outstanding for $12.50 per share plus cash equal to all accrued and unpaid dividends through the redemption date, whether or not such dividends have been authorized or declared. Each share of Voting Common Stock is convertible into one share of Class A Non-Voting Common Stock at the holder's option, and each share of Class A Non-Voting Common Stock is convertible into one share of Voting Common Stock at the holder's option. Each share of Class B Non-Voting Common Stock and Class C Non-Voting Common Stock is convertible into one share of Voting Common Stock, at the holder's option, upon the occurrence of certain "Conversion Events," as defined in the Company's certificate of incorporation. The following table sets forth the number and percentage of shares of each class of the Company's capital stock beneficially owned as of March 19, 1999 by (i) each person known to the Company to be the beneficial owner of more than 5% of any class of the Company's equity securities, (ii) each of the Company's directors and nominees, and (iii) all directors and executive officers of the Company as a group. Amount and Nature of Percent Beneficial of Title of Class Name and Address Beneficial Owner Ownership Class(1) Preferred Stock McCown De Leeuw & Co. III, L.P.(2) 674,836.42 66.6% McCown De Leeuw & Co. III (Europe), L.P.(2) 674,836.42 66.6% McCown De Leeuw & Co. III (Asia), L.P.(2) 674,836.42 66.6% Gamma Fund LLC(2) 674,836.42 66.6% Rainbow Trust One(3) 168,709.98 16.7% Rainbow Trust Two(4) 168,708.81 16.7% David E. De Leeuw(2) 674,836.42 66.6% David E. King(2) 674,836.42 66.6% Frank J. Hanna, III(3) 168,709.98 16.7% David G. Hanna(4) 168,708.81 16.7% All directors and officers as a group(2)(3)(4) 1,012,255.21 100.0% Voting Common Stock McCown De Leeuw & Co. III, L.P.(5) 1,897,793.01 54.6% McCown De Leeuw & Co. Offshore III (Europe), L.P.(5) 1,897,793.01 54.6% McCown De Leeuw & Co. III (Asia), L.P.(5) 1.897,793.01 54.6% Gamma Fund LLC(5) 1,897,793.01 54.6% Rainbow Trust One(3) 466,667.00 13.4% Rainbow Trust Two(4) 466,666.00 13.4% Peter C. Rosvall 383,600.00 11.0% David E. De Leeuw(5) 1,897,793.01 54.6% David E. King(5) 1,897,793.01 54.6% Frank J. Hanna, III(3) 466,667.00 13.4% David G. Hanna(4) 466,666.00 13.4% Nathan W. Pearson 12,000.00 * All directors and officers as a group(3)(4)(5) 3,278,321.01 94.6% Class A Non-Voting McCown De Leeuw & Co. III, L.P.(6) 391,740.58 100.0% Common Stock David E. De Leeuw(6) 391,740.58 100.0% David E. King(6) 391,740.58 100.0% All directors and officers as a group(6) 391,740.58 100.0% Class B Non-Voting Chase Equity Associates, L.P.(7) 400,000.00 100.0% Common Stock All directors and officers as a group 0.00 0.0% Class C Non-Voting MLQ Investors, L.P.(8) 640,000.00 61.5% Common Stock The Clipper Group(9) 400,000.00 38.5% All directors and officers as a group 0.00 0.0% * Represents less than one percent. (1) The information as to beneficial ownership is based on statements furnished to the Company by the beneficial owners. As used in this table, "beneficial ownership" means the sole or shared power to vote, or direct the voting of a security, or the sole or shared investment power with respect to a security (i.e., the power to dispose of, or direct the disposition of a security). A person is deemed as of any date to have "beneficial ownership" of any security that such person has the right to acquire within 60 days after such date. For purposes of computing the percentage of outstanding shares held by each person named above, any security that such person has the right to acquire within 60 days of the date of calculation is deemed to be outstanding, but is not deemed to be outstanding for purposes of computing the percentage ownership of any other person. (2) Shares of Preferred Stock are convertible, at the holder's option, into an identical number of shares of Common Stock at anytime after September 20, 1996. Includes 598,917.28 shares owned by McCown De Leeuw & Co. III, L.P., an investment partnership whose general partner is MDC Management Company III, L.P. ("MDC III"), 50,612.76 shares held by McCown De Leeuw & Co. III (Europe), L.P., an investment partnership whose general partner is MDC III, 11,809.72 shares held by McCown De Leeuw & Co. III (Asia), an investment partnership whose general partner is MDC Management Company IIIA, L.P. ("MDC IIIA"), and 13,496.66 shares owned by Gamma Fund LLC, a California limited liability company. The voting members of Gamma Fund LLC are George E. McCown, David De Leeuw, David E. King, Robert B. Hellman, Jr., Charles Ayres and Steven Zuckerman, who are also the only general partners of MDC III and MDC IIIA. Dispositive decisions regarding the Preferred Stock are made by Mr. McCown and Mr. De Leeuw, as Managing General Partners of each of MDC III and MDC IIIA, who together have more than the required two-thirds-in-interest vote of the Managing General Partners necessary to effect such decision on behalf of any such entity. Dispositive decisions regarding the Preferred Stock owned by Gamma Fund LLC are made by a vote or consent of a majority in number of voting members of Gamma Fund LLC. Messrs. McCown, De Leeuw, King, Hellman, Ayres and Zuckerman have no direct ownership of any shares of Preferred Stock and disclaim beneficial ownership of any shares of Preferred Stock except to the extent of their proportionate partnership interests or membership interests (in the case of Gamma Fund LLC). The address of all the above-mentioned entities is c/o McCown De Leeuw & Co., 3000 Sand Hill Road, Building 3, Suite 290, Menlo Park, California 94025. (3) Shares of Preferred Stock are convertible, at the holder's option, into an identical number of shares of Common Stock at any time after September 20, 1996. Frank J. Hanna, III, a director of the Company, is trustee of Rainbow Trust One. The address of Rainbow Trust One is c/o HBR Capital, Two Ravinia Drive, Suite 1750, Atlanta, Georgia 30346. (4) Shares of Preferred Stock are convertible, at the holder's option, into an identical number of shares of Common Stock at any time after September 20, 1996. David G. Hanna, a director of the Company, is trustee of Rainbow Trust Two. The address of Rainbow Trust Two is c/o HBR Capital, Two Ravinia Drive, Suite 1750, Atlanta, Georgia 30346. (5) Includes 1,640,220.48 shares owned by McCown De Leeuw & Co. III, L.P., an investment partnership whose general partner is MDC III, 171,715.02 shares held by McCown De Leeuw & Co. III (Europe), L.P., an investment partnership whose general partner is MDC III, 40,066.84 shares held by McCown De Leeuw & Co. III (Asia), L.P., an investment partnership whose general partner is MDC IIIA, and 45,790.67 shares owned by Gamma Fund LLC, a California limited liability company. The voting members of Gamma Fund LLC are George E. McCown, David De Leeuw, David E. King, Robert B. Hellman, Jr., Charles Ayres and Steven Zuckerman, who are also the only general partners of MDC III and MDC IIIA. Voting and dispositive decisions regarding the Voting Common Stock are made by Mr. McCown and Mr. De Leeuw, as Managing General Partners of each of MDC III and MDC IIIA, who together have more than the required two-thirds-in-interest vote of the Managing General Partners necessary to effect such decision on behalf of any such entity. Voting and dispositive decisions regarding the Voting Common Stock owned by Gamma Fund LLC are made by a vote or consent of a majority in number of voting members of Gamma Fund LLC. Messrs. McCown, De Leeuw, King, Hellman, Ayres and Zuckerman have no direct ownership of any shares of Voting Common Stock and disclaim beneficial ownership of any shares of Voting Common Stock except to the extent of their proportionate partnership interests or membership interests (in the case of Gamma Fund LLC). (6) Shares of Class A Non-Voting Common Stock are convertible, at the holder's option, into an identical number of shares of Voting Common Stock at the holder's option. See "Security Ownership". The general partner of McCown De Leeuw & Co. III, L.P. is MDC III. The only general partners of MDC III are George E. McCown, David De Leeuw, David E. King, Robert B. Hellman, Jr., Charles Ayres and Steven Zuckerman. Voting and dispositive decisions regarding the Voting Common Stock are made by Mr. McCown and Mr. De Leeuw, as Managing General Partners of each of MDC III and MDC III, who together have more than the required two-thirds-in-interest vote of the Managing General Partners necessary to effect such decision on behalf of any such entity. Voting and dispositive decisions regarding the Voting Common Stock owned by Gamma Fund LLC are made by a vote or consent of a majority in number of voting members of Gamma Fund LLC. Messrs. McCown, De Leeuw, King, Hellman, Ayres and Zuckerman have no direct ownership of any shares of Class A Non-Voting Common Stock except to the extent of their proportionate partnership. The address of each of the above mentioned entities is c/o McCown De Leeuw & Co., 3000 Sand Hill Road, Build 3, Suite 290, Menlo Park, California 94025. (7) Shares of Class B Non-Voting Common Stock are convertible, at the holder's option, into an identical number of shares of Voting Common Stock upon the occurrence of certain "Conversion Events," as defined in the Company's certificate of incorporation. See "Security Ownership." The general partner of Chase Equity Associates, L.P., is Chase Capital Partners. The address of each of these entities is c/o Chase Capital Partners, 380 Madison Ave., 12th Floor, New York, New York 10017. (8) Shares of Class C Non-Voting Common Stock are convertible, at the holder's option, into an identical number of shares of Voting Common Stock upon the occurrence of certain "Conversion Events," as defined in the Company's certificate of incorporation. See "Security Ownership." The general partner of MLQ Investors, L.P. is MLQ, Inc. The address of each of these entities is c/o Goldman Sachs & Co., 85 Broad Street, New York, New York 10004. (9) Shares of Class C Non-Voting Common Stock are convertible, at the holder's option, into an identical number of shares of Voting Common Stock upon the occurrence of certain "Conversion Events", as defined in the Company's certificate of incorporation. See "Security Ownership." Consists of shares held as follows: Clipper Capital Associates, L.P. ("CCA"), 9,268.50 shares; Clipper/Merchant Partners, L.P., 102,642.16 shares; Clipper Equity Partners I, L.P., 90,168.81 shares; Clipper/Merban, L.P. ("Merban"), 120,225.07 shares; Clipper/European Re, L.P., 60,112.54 shares; and CS First Boston Merchant Investments 1995/96, L.P. ("Merchant"), 17,582.92 shares. CCA is the general partner of all of the Clipper Group partnerships other than Merchant. The general partner of CCA is Clipper Capital Associates, Inc. ("CCI"), and Mr. Robert B. Calhoun, Jr. is the sole stockholder and a director of CCI. Clipper Capital Partners, an affiliate of Mr. Calhoun, has sole investment power with respect to the shares beneficially owned by Merchant. As a result, each of Mr. Calhoun, CCA and CCI is deemed to beneficially own all shares of Class C Non-Voting Common Stock beneficially owned by the Clipper Group (other than Merchant), and Mr. Calhoun is deemed to beneficially own the shares of Class C Non-Voting Common Stock beneficially owned by Merchant. Merchant Capital, Inc. ("Merchant Capital"), an affiliate of CS First Boston Corporation, is the general partner of Merchant and the 99% limited partner of Clipper/Merchant Partners, L.P. CS Holding, an affiliate of CS First Boston Corporation, is the 99% limited partner of Merban. None of Merchant, Merchant Capital, CS First Boston Corporation and CS Holding is an affiliate of Clipper or CCA. The address for Merchant is 11 Madison Avenue, 26th Floor, New York, NY 10010, the address for Clipper/European Re, L.P. and Merban is c/o CITCO, De Ruyterkade, 62, P.O. Box 812, Curacao, Netherlands Antilles, and the address for all other Clipper Group entities is 11 Madison Avenue, 26th Floor, New York, NY 10010. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Acquisition Arrangements OSI holds a minority interest in a limited liability corporation ("LLC") formed for the purpose of acquiring an accounts receivable portfolio. The majority interest in the LLC is held by MLQ Investors, L.P., one of the Company's stockholders. The recorded value of the Company's investment in the LLC was approximately $900,000 at December 31, 1998. Advisory Services Agreement On September 21, 1995 the Company entered into an Advisory Services Agreement (the "Advisory Services Agreement") with MDC Management Company III, L.P. ("MDC Management"), an affiliate. Under the Advisory Services Agreement, MDC Management provides consulting, financial, and managerial functions for a $300,000 annual fee. The Advisory Services Agreement expires September 21, 2005 and is renewable annually thereafter, unless terminated by the Company. The Company may terminate the Advisory Services Agreement at any time for cause by written notice to MDC Management authorized by a majority of the directors other than those who are partners, principals or employees of MDC Management or any of its affiliates. The Advisory Services Agreement may be amended by written agreement of MDC Management and the Company. The Company believes that the terms of and fees paid for the professional services rendered are at least as favorable to the Company as those which could be negotiated with a third party. In January 1998 upon closing of the acquisition of Union, MDC Management received a one-time fee of $2.5 million for financial advice provided to OSI in connection therewith. Consulting Agreements On January 26, 1998, the Company entered into a one-year Consulting Agreement with William B. Hewitt, a director of the Company. Under the Consulting Agreement, Mr. Hewitt provides consulting assistance in the growing outsourcing services of the Company at 80% of normal working hours. For the period ended December 31, 1998, the Company paid Mr. Hewitt $727,500. In addition, Mr. Hewitt received options to purchase 10,000 shares of common stock of the Company, which options vest eight years from date of grant or earlier upon the satisfaction of certain performance targets and/or the occurrence of certain liquidity events. On January 25, 1999, the Consulting Agreement was extended through March 31, 1999 and at the same time the Consulting Agreement was renewed for the period April 1, 1999 through March 31, 2000 providing consulting services at a maximum of 50 days (approximately 20% of normal working hours). Following his resignation as Executive Vice President and Chief Financial Officer, Daniel J. Dolan entered into a ten month Consulting Agreement with the Company. Under the Consulting Agreement, Mr. Dolan provides consulting related to financing and certain other business activities. For the ten months ending December 31, 1999, the Company will pay Mr. Dolan $134,400. Certain Interests of Shareholders Goldman Sachs and its affiliates have certain interests in the Company in addition to being an initial purchaser of the 11% Senior Subordinated Notes. In 1998, Goldman Sachs served as financial advisor to OSI in connection with the acquisition of Union and received certain fees amounting to $500,000 and reimbursement of expenses in connection therewith. Moreover, Goldman Sachs acted as co-arranger and Goldman Sachs Credit Partners, L.P., an affiliate of Goldman Sachs, acts as co-administrative agent and lender in connection with the credit facility, and in 1998 OSI paid them approximately $100,000 in fees and approximately $581,000 in interest in connection therewith. MLQ Investors, L.P., an affiliate of Goldman Sachs, owns a non-voting equity interest in the Company. In addition to acting as an initial purchaser of the 11% Senior Subordinated Notes, Chase Securities Inc. ("Chase Securities") and its affiliates have certain other relationships with the Company. Chase Securities acted as co-arranging agent and The Chase Manhattan Bank, an affiliate of Chase Securities, acts as co-administrative agent and a lender under the credit facility and in 1998 OSI paid them approximately $247,000 in fees and approximately $1,150,000 in interest in connection therewith. Additionally, Chase Equity Associates, L.P. an affiliate of Chase Securities, owns a non-voting equity interest in the Company. Arrangements with Certain Affiliates Payco leases its corporate headquarters in Brookfield, Wisconsin, its data processing center in New Berlin, Wisconsin and the office space for three of its collection operations from partnerships in which certain officers of Payco and Dennis G. Punches, a former director of the Company, are the principal partners. The terms of the leases provided for aggregate annual payments of approximately $1.9 million and $1.8 million for the years ended December 31, 1998 and 1997, respectively. Such lease amounts are subject to an escalation adjustment, not to exceed 5% annually. All operating and maintenance costs associated with these buildings are paid by Payco. The Company believes that the terms of these leases are at least as favorable as could have been obtained in arms-length negotiations with an unaffiliated lessor. Effective November 30, 1998, the above mentioned director resigned from the Board of Directors of the Company. Indebtedness of Management During 1998, the Company advanced $117,000 and $148,000 to Michael A. DiMarco, Executive Vice President and President Fee Services and C. Bradford McLeod, Senior Vice President, Human Resources, respectively, to facilitate their relocation to the St. Louis area from Texas and Virginia, respectively. The advances were non-interest bearing. Both advances were repaid in full in March 1999. PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements See index on page 42 for a listing of consolidated financial statements filed with this report. 2. Financial Statement Schedule See index on page 42 for a listing of consolidated financial statements schedule required to be filed by Item 8 of this Form 10-K. 3. Exhibits Exhibit No. 2.1 Asset Purchase Agreement dated October 8, 1997 by and among NSA Acquisition Corporation, Outsourcing Solutions Inc., North Shore Agency, Inc., Automated Mailing Services, Inc., Mailguard Security System, Inc., DMM Consultants and Certain Stockholders (incorporated herein by reference to Exhibit 2.6 of the Company's Form 10-K for the year ended December 31, 1997). 2.2 Asset Purchase Agreement dated November 10, 1997 by and among Outsourcing Solutions Inc., ABC Acquisition Company, Accelerated Bureau of Collections Inc., Accelerated Bureau of Collections of Ohio, Inc., Accelerated Bureau of Collections of Virginia Inc., Accelerated Bureau of Collections of Massachusetts, Inc., Travis J. Justus, and Linda Brown (incorporated herein by reference to Exhibit 2.7 of the Company's Form 10-K for the year ended December 31, 1997). 2.3 Share Purchase Agreement and Plan of Merger dated as of December 22, 1997 by and among Outsourcing Solutions Inc., Sherman Acquisition Corporation and The Union Corporation (incorporated herein by reference to Exhibit 2.8 of the Company's Form 10-K for the year ended December 31, 1997). 3.1 Restated Certificate of Incorporation of the Company, as of January 13,1999. 3.2 By-laws of the Company (incorporated herein by reference to Exhibit 3.2 of the Company's Registration Statement on Form S-4 filed on November 26, 1996). 4.1 Indenture dated as of November 6, 1996 by and among the Company, the Guarantors and Wilmington Trust Company (the "Indenture") (incorporated herein by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-4 filed on November 26, 1996). 4.2 Specimen Certificate of 11% Senior Subordinated Note due 2006 (included in Exhibit 4.1 hereto) (incorporated herein by reference to Exhibit 4.2 of the Company's Registration Statement on Form S-4 filed on November 26, 1996). 4.3 Specimen Certificate of 11% Series B Senior Subordinated Note due 2006 (the "New Notes") (included in Exhibit 4.1 hereto) (incorporated herein by reference to Exhibit 4.3 of the Company's Registration Statement on Form S-4 filed on November 26, 1996). 4.4 Form of Guarantee of securities issued pursuant to the Indenture (included in Exhibit 4.1 hereto) (incorporated herein by reference to Exhibit 4.4 of the Company's Registration Statement on Form S-4 filed on November 26, 1996). 4.5 First Supplemental Indenture dated as of March 31, 1998 by and among the Company, the Additional Guarantors and Wilmington Trust Company. 10.1 Amended and Restated Stockholders Agreement dated as of February 16, 1996 by and among the Company and various stockholders of the Company (incorporated herein by reference to Exhibit 10.1 of the Company's Registration Statement on Form S-4 filed on November 26, 1996). 10.2 Advisory Services Agreement dated September 21, 1995 between the Company and MDC Management Company III, L.P (incorporated herein by reference to Exhibit 10.2 of the Company's Registration Statement on Form S-4 filed on November 26, 1996). 10.3 Amended Employment Agreement dated as of August 27, 1997 between the Company and Timothy G. Beffa (incorporated herein by reference to Exhibit 10.5 of the Company's Form 10-Q for the quarter ended September 30, 1997). 10.4 Employment Agreement dated October 16, 1997 between the company and Daniel J. Dolan (incorporated herein by reference to Exhibit 10.10 of the Company's Form 10-K for the year ended December 31, 1997). 10.5 Consulting Agreement dated as of March 1, 1999 between the Company and Daniel J. Dolan. 10.6 Consulting Agreement dated as of February 6, 1998 between the Company and William B. Hewitt as amended January 25, 1999. 10.7 Employment Agreement dated as of September 1, 1998 between the Company and Michael A. DiMarco. 10.8 Employment Agreement dated as of September 14, 1998 between the Company and C. Bradford McLeod. 10.9 1995 Stock Option and Stock Award Plan of the Company (incorporated herein by reference to Exhibit 10.31 of the Company's Registration Statement on Form S-4 filed on November 26, 1996). 10.10 First Amendment to 1995 Stock Option and Stock Award Plan of the Company (incorporated herein by reference to Exhibit 10.13 of the Company's Form 10-K for the year ended December 31, 1997). 10.11 Form of Non-Qualified Stock Option Award Agreement [A] (incorporated herein by reference to Exhibit 10.32 of the Company's Registration Statement on Form S-4 filed on November 26, 1996). 10.12 Form of Non-Qualified Stock Option Award Agreement [B] (incorporated herein by reference to Exhibit 10.33 of the Company's Registration Statement on Form S-4 filed on November 26, 1996). 10.13 Form of Non-Qualified Stock Option Award Agreement [C]. 10.14 Form of Non-Qualified Stock Option Award Agreement [D]. 10.15 1998 Incentive Compensation Program. 10.16 Earn-out Agreement dated October 8, 1997 by and among NSA Acquisition Corporation, Outsourcing Solutions Inc., North Shore Agency, Inc., Automated Mailing Services, Inc., Mailguard Security Systems, Inc., and DMM Consultants (incorporated herein by reference to Exhibit 10.17 of the Company's Form 10-K for the year ended December 31,1997). 10.17 Second Amended and Restated Credit Agreement dated as of January 26, 1998 by and among the Company, the Lenders listed therein, Goldman Sachs Credit Partners L.P. and The Chase Manhattan Bank, as Co-Administrative Agents, Goldman Sachs Credit Partners L.P. and Chase Securities, Inc., as Arranging Agents and Suntrust Bank, Atlanta, as Collateral Agent (incorporated herein by reference to Exhibit 10.18 of the Company's Form 10-K for the year ended December 31, 1997). 10.18 First Amendment to the Second Amended and Restated Credit Agreement, dated as March 31, 1998 (incorporated herein by reference to Exhibit 10.1 of the Company's Form 10-Q for the quarter ended September 30, 1998) 10.19 Second Amendment to the Second Amended and Restated Credit Agreement, dated as August 5, 1998 (incorporated herein by reference to Exhibit 10.2 of the Company's Form 10-Q for the quarter ended September 30, 1998) 10.20 Third Amendment to the Second Amended and Restated Credit Agreement, dated as September 23, 1998 (incorporated herein by reference to Exhibit 10.3 of the Company's Form 10-Q for the quarter ended September 30, 1998) 21 Subsidiaries of registrant. 27 Financial Data Schedule. (b) Reports on Form 8-K There were no reports on Form 8-K filed for the three-month period ended December 31, 1998. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. /s/Timothy G. Beffa ------------------------------------- Timothy G. Beffa President and Chief Executive Officer /s/Daniel T. Pijut ------------------------------------- Daniel T. Pijut Vice President, Corporate Controller And Chief Accounting Officer DATE: March 30, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/Jeffrey E. Stiefler Chairman of the Board of Directors March 19, 1999 - - ------------------------ Jeffrey E. Stiefler /s/Timothy G. Beffa President and Chief Executive March 30, 1999 - - ------------------------ Officer, Director Timothy G. Beffa /s/David E. De Leeuw Director March 23, 1999 - - ------------------------ David E. De Leeuw /s/David E. King Secretary and Treasurer, Director March 19, 1999 - - ------------------------ David E. King /s/Tyler T. Zachem Vice President and Director March 22, 1999 - - ------------------------ Tyler T. Zachem /s/David G. Hanna Director March 30, 1999 - - ------------------------ David G. Hanna /s/Frank J. Hanna, III Director March 30, 1999 - - ------------------------ Frank J. Hanna, III /s/Nathan W. Pearson, Jr. Director March 20, 1999 - - ------------------------ Nathan W. Pearson, Jr. /s/Robert A. Marshall Director March 22, 1999 - - ------------------------ Robert A. Marshall /s/William B. Hewitt Director March 23, 1999 - - ------------------------ William B. Hewitt /s/Courtney F. Jones Director March 20, 1999 - - ------------------------ Courtney F. Jones INDEX TO CONSOLIDATED FINANCIAL STATEMENS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE Page Consolidated Financial Statements Outsourcing Solutions Inc. and Subsidiaries Independent Auditors' Report.................................... F-1 Consolidated Balance Sheets at December 31, 1998 and 1997....... F-2 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996............................. F-3 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1998, 1997 and 1996............. F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996............................. F-5 Notes to Consolidated Financial Statements...................... F-6 Consolidated Financial Statement Schedule Independent Auditors' Report....................................... F-22 Schedule II - Valuation and Qualifying Accounts and Reserves....... F-23 INDEPENDENT AUDITORS' REPORT To the Stockholders of Outsourcing Solutions Inc.: We have audited the accompanying consolidated balance sheets of Outsourcing Solutions Inc. and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Outsourcing Solutions Inc. and subsidiaries as of December 31, 1998 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP - - ------------------------- Deloitte & Touche LLP St. Louis, Missouri March 4, 1999 OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997 (In thousands except share and per share amounts) ASSETS 1998 1997 ---- ---- CURRENT ASSETS: Cash and cash equivalents $ 8,814 $ 3,217 Cash and cash equivalents held for clients 22,372 20,762 Current portion of purchased loans and accounts receivable portfolios 35,057 42,915 Accounts receivable - trade, less allowance for doubtful receivables of $1,309 and $538 40,724 27,192 Other current assets 8,777 2,119 -------- -------- Total current assets 115,744 96,205 PURCHASED LOANS AND ACCOUNTS RECEIVABLE PORTFOLIOS 20,436 19,537 PROPERTY AND EQUIPMENT, net 40,317 32,563 INTANGIBLE ASSETS, net 425,597 219,795 DEFERRED FINANCING COSTS, less accumulated 13,573 12,517 amortization of $5,203 and $2,376 OTHER ASSETS 2,824 693 DEFERRED INCOME TAXES - 380 -------- -------- TOTAL $618,491 $381,690 ======== ======== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts payable - trade $ 7,355 $ 6,977 Collections due to clients 22,372 20,762 Accrued salaries, wages and benefits 13,274 8,332 Other current liabilities 55,071 26,131 Current portion of long-term debt 16,877 15,445 -------- -------- Total current liabilities 114,949 77,647 LONG-TERM DEBT 511,271 309,521 OTHER LONG-TERM LIABILITIES 22,303 - COMMITMENTS AND CONTINGENCIES - - STOCKHOLDERS' DEFICIT: 8% nonvoting cumulative redeemable exchangeable 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, 3,477,126.01 and 3,425,126.01 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 (109,210) (84,188) -------- -------- Total stockholders' deficit (30,032) (5,478) -------- --------- TOTAL $618,491 $381,690 ======== ======== See notes to consolidated financial statements OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (In thousands) - - -------------------------------------------------------------------------------- 1998 1997 1996 REVENUES $479,400 $271,683 $106,331 EXPENSES: Salaries and benefits 230,114 133,364 46,997 Service fees and other operating and administrative expenses 140,888 71,122 33,759 Amortization of purchased loans and accounts 50,703 52,042 27,317 receivable portfolios Amortization of goodwill and other intangibles 15,725 24,749 15,452 Depreciation expense 14,282 8,825 2,829 Purchased in-process research and development - - 1,000 -------- -------- -------- Total expenses 451,712 290,102 127,354 -------- -------- -------- OPERATING INCOME (LOSS) 27,688 (18,419) (21,023) INTEREST EXPENSE - Net 50,627 28,791 12,131 -------- -------- -------- LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (22,939) (47,210) (33,154) PROVISION FOR INCOME TAXES (BENEFIT) 830 11,127 (11,757) MINORITY INTEREST 572 - - -------- -------- -------- NET LOSS (24,341) (58,337) (21,397) PREFERRED STOCK DIVIDEND REQUIREMENTS 681 922 830 -------- -------- -------- NET LOSS TO COMMON STOCKHOLDERS $(25,022) $(59,259) $(22,227) ======== ======== ======== See notes to consolidated financial statements. OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (In thousands except share and per share amounts) - - ----------------------------------------------------------------------------------
Non-Voting Cumulative Redeemable Exchangeable Common Stock ------------------------- Preferred Vot- Class Class Class Paid-In Retained Stock ing A B C Capital Deficit Total BALANCE, JANUARY 1, 1996 $10,000 $28 $ - $ - $ - $35,122 $ (2,702) $ 42,448 Issuance of 118,866.59 shares of common stock in exchange for notes payable to stockholders - 2 - - - 1,484 - 1,486 Issuance of 2,326,000 shares of common stock - 7 10 - 6 29,052 - 29,075 Conversion of common stock - (2) (6) 4 4 - - - Payment of preferred stock dividends through issuance of 65,280 shares of preferred stock and recorded preferred stock dividend requirements of $1 per share 816 - - - - - (830) (14) Net loss - - - - - - (21,397) (21,397) ------- --- --- --- --- ------- --------- -------- BALANCE, DECEMBER 31, 1996 10,816 35 4 4 10 65,658 (24,929) 51,598 Issuance of 52,000 shares of common stock - - - - - 1,300 - 1,300 Payment of preferred stock dividends through issuance of 70,606.84 shares of preferred stock and recorded preferred stock dividend requirements of $1 per share 883 (922) (39) Net loss - - - - - - (58,337) (58,337) ------- --- --- --- --- ------- --------- -------- BALANCE, DECEMBER 31, 1997 11,699 35 4 4 10 66,958 (84,188) (5,478) Payment of preferred stock dividends through issuance of 37,435.47 shares of preferred stock and recorded preferred stock dividend requirements of $1 per share 468 (681) (213) Net loss - - - - - - (24,341) (24,341) ------- --- --- --- --- ------- --------- -------- BALANCE, DECEMBER 31, 1998 $12,167 $35 $ 4 $ 4 $10 $66,958 $(109,210) $(30,032) ======= === === === === ======= ========= ========
See notes to consolidated financial statements. OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (In thousands) - - --------------------------------------------------------------------------------------- 1998 1997 1996
OPERATING ACTIVITIES: Net loss $(24,341) $(58,337) $(21,397) Adjustments to reconcile net loss to net cash from operating activities: Depreciation and amortization 32,833 35,613 18,618 Amortization of purchased loans and accounts 50,703 52,042 27,317 receivable portfolios Deferred taxes 380 10,877 (11,757) Minority interest 572 - - Other 99 48 - Change in assets and liabilities: Other current assets 2,795 147 (578) Accounts payable and other current liabilities (7,789) (7,565) (1,536) -------- -------- -------- Net cash from operating activities 55,252 32,825 10,667 -------- -------- -------- INVESTING ACTIVITIES: Purchase of loans and accounts receivable portfolios (43,186) (46,494) (13,645) Payments for acquisitions, net of cash acquired (168,900) (62,913) (184,184) Investment in non-consolidated subsidiary (2,500) - - Acquisition of property and equipment (13,480) (9,489) (2,606) Other 261 (603) - -------- -------- -------- Net cash from investing activities (227,805) (119,499) (200,435) -------- -------- -------- FINANCING ACTIVITIES: Proceeds from term loans 225,000 55,000 337,000 Borrowings under revolving credit agreement 230,000 66,150 - Repayments under revolving credit agreement (236,350) (34,300) - Repayments of debt (36,618) (9,763) (136,615) Deferred financing fees (3,882) (1,993) (12,563) Proceeds from issuance of common stock - 300 14,974 -------- -------- -------- Net cash from financing activities 178,150 75,394 202,796 -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,597 (11,280) 13,028 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,217 14,497 1,469 -------- -------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 8,814 $ 3,217 $ 14,497 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - Cash paid during period for interest $ 43,923 $ 26,372 $ 7,655 ======== ======== ========
See notes to consolidated financial statements. Outsourcing Solutions Inc. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share and per share amounts) - - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation Policy - Outsourcing Solutions Inc. is one of the largest providers of accounts receivable management services in the United States. The consolidated financial statements include the accounts of Outsourcing Solutions Inc. ("OSI") and all of its majority-owned subsidiaries (collectively, the "Company"). Ownership in entities of less than 50% are accounted for under the equity method. All significant intercompany accounts and transactions have been eliminated. Cash and Cash Equivalents - Cash and cash equivalents consist of cash, money market investments, and overnight deposits. Cash equivalents are valued at cost, which approximates market. Cash held for clients consist of certain restricted accounts which are used to maintain cash collected and held on behalf of the Company's clients. Purchased Loans and Accounts Receivable Portfolios - Purchased loans and accounts receivable portfolios ("Receivables") acquired in connection with acquisitions in September 1995 and November 1996 were recorded at the present value of estimated future net cash flows. Receivables purchased in the normal course of business are recorded at cost. The Company periodically reviews all Receivables to assess recoverability. Impairments are recognized in operations if the market pricing or the expected discounted future net operating cash flows derived from the individual portfolios are less than their respective carrying value (see Note 14). The Company amortizes on an individual portfolio basis the cost of the Receivables based on the ratio of current collections for a portfolio to current and anticipated future collections including any terminal value for that portfolio. Such portfolio cost is amortized over the expected collection period as collections are received which, depending on the individual portfolio, generally ranges from 3 to 5 years. Revenue Recognition - Collections on Purchased loans and accounts receivable portfolios owned are generally recorded as revenue when received. Revenue from accounts receivable management services is recorded as such services are provided. Deferred revenue in the accompanying balance sheet primarily relates to certain prepaid letter services which are generally recognized as earned as services are provided. Property and Equipment - Property and equipment are recorded at cost. Depreciation is computed on the straight-line method based on the estimated useful lives (3 years to 30 years) of the related assets. Leasehold improvements are amortized over the term of the related lease. Intangible Assets - The excess of cost over the fair value of net assets of businesses acquired is amortized on a straight-line basis over 20 to 30 years. Other identifiable intangible assets are primarily comprised of the fair value of existing account placements acquired in connection with certain business combinations and non-compete agreements. These assets are short-lived and are being amortized over the assets' periods of recoverability, which are estimated to be 1 to 3 years. The Company periodically reviews goodwill and other intangibles to assess recoverability. Impairments will be recognized in operations if the expected future operating cash flows (undiscounted and without interest charges) derived from such intangible assets are less than its carrying value. Income Taxes - The Company accounts for income taxes using an asset and liability approach. The Company recognizes the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for expected future tax consequences of events that have been recognized in the consolidated financial statements. Stock-Based Compensation - The Company accounts for its stock-based compensation plan using the intrinsic value method prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees. Statement of Financial Accounting Standard ("SFAS") No. 123, Accounting for Stock-Based Compensation, requires that companies using the intrinsic value method make pro forma disclosures of net income as if the fair value-based method of accounting had been applied. See Note 11 for the fair value disclosures required under SFAS No. 123. Comprehensive Income - Effective January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income, which established standards for the reporting and display of comprehensive income and its components. The adoption of this statement did not affect the Company's consolidated financial statements for the three years in the period ended December 31, 1998. Comprehensive loss for the three years in the period ended December 31, 1998 were equal to the Company's net loss. Accounting For Transfers of Financial Assets - In 1996, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. These standards are based on consistent application of a financial-components approach that focuses on control. Under this approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The Company adopted SFAS No. 125 for the year ended December 31, 1997. The adoption of SFAS No. 125 did not have a material effect on the 1997 financial statements, as the Company had no transfers during the year ended December 31, 1997. However, commencing in the fourth quarter of 1998, the Company sold concurrent with its purchase of certain loans and accounts receivable portfolios to a qualifying special-purpose entity (QSPE). Such QSPE, OSI Funding Corporation (FINCO), is a nonconsolidated, bankruptcy-remote, wholly-owned subsidiary of the Company (see Note 17). Segment Information - SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, established standards for the way that public business enterprises report information about operating segments in annual financial statements and also established standards for related disclosures about products and services, geographic areas and major customers. Management has considered the requirements of SFAS No. 131 and, as discussed in Note 16, believes the Company operates in one business segment. Accounting Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Earnings Per Share - In February 1997, the FASB issued SFAS No. 128, Earnings per Share, which required adoption in the quarter ended December 31, 1997, and prohibited early compliance. SFAS No. 128 simplified the calculation of earnings per share and is applicable only to public companies. Under generally accepted accounting principles and Securities and Exchange Commission ("SEC") disclosure requirements, SFAS No. 128 is not currently applicable to the Company and, accordingly, earnings per share is not presented. New Accounting Pronouncements - In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which is effective for fiscal years beginning after June 15, 1999. The statement provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. The Company has not determined the impact on the consolidated statement of operations and consolidated balance sheet. In March 1998, the AICPA issued Statement of Position No. 98-1, Accounting for the Costs of Computer Systems Developed or Obtained for Internal Use ("SOP 98-1"), which is effective for fiscal years beginning after December 15, 1998. SOP 98-1 provides guidelines for capitalization of developmental costs of proprietary software and purchased software for internal use. The adoption of SOP 98-1 is not expected to have a material impact on the consolidated statement of operations and consolidated balance sheet. Reclassifications - Certain amounts in prior periods have been reclassified to conform to the current year presentation. 2. ORGANIZATION & ACQUISITIONS OSI was formed on September 21, 1995 to build, through a combination of acquisitions and sustained internal growth, one of the leading providers of accounts receivable management services. The Company purchases and collects portfolios of non-performing loans and accounts receivable for the Company's own account, services accounts receivable placements on a contingent and fixed fee basis and provides contract management of accounts receivable. The Company's customers are mainly in the educational, utilities, telecommunications, retail, healthcare and financial services industries. The markets for the Company's services currently are the United States, Puerto Rico, Canada and Mexico. In September 1995, the Company acquired Account Portfolios, L.P. ("API"), a partnership which purchased and managed large portfolios of non-performing consumer loans and accounts receivable, for cash of $30,000, common stock of $15,000 and notes of $35,000, which were subsequently paid in March 1996. In January 1996, the Company acquired A.M. Miller & Associates and Continental Credit Services, Inc., accounts receivable and fee services companies, for total cash consideration of $38,500 including transaction costs of $3,600, common stock of $6,000, a 9% unsecured, subordinated note of $5,000 (interest payable quarterly and principal due January 2001) and a 10% unsecured, subordinated note of $3,000, which was subsequently paid in November 1996. In November 1996, the Company acquired all of the outstanding common stock of Payco American Corporation ("Payco"), an accounts receivable management company primarily focused on healthcare, education and bank/credit cards, in a merger transaction for cash of approximately $154,800 including transaction costs of $4,600. 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 $123,000. In addition, the Company allocated $1,000 of the purchase price to in-process research and development that had not reached technological feasibility and had no alternative future uses, which accordingly was expensed at the date of the acquisition. In October and November 1997, the Company acquired The North Shore Agency, Inc. ("NSA"), a fee service company specializing in letter series collection services, and Accelerated Bureau of Collections, Inc. ("ABC"), a fee service company specializing in credit card collections, for total cash consideration of approximately $53,800 including transaction costs of $1,173 and common stock of $1,000. One of the acquisitions contains certain contingent payment obligations, $1,656 through December 31, 1998, based on the attainment by the newly formed subsidiary of certain financial performance targets over each of the next three years. Future contingent payment obligations, if any, will be accounted for as additional goodwill as the payments are made. In January 1998, the Company acquired through a tender offer approximately 77% of the outstanding shares of The Union Corporation's ("Union") common stock for $31.50 per share. On March 31, 1998, the Company acquired the remaining outstanding shares of Union when Union merged with a wholly-owned subsidiary of the Company. The aggregate cash 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 the amended credit agreement (see Note 6). Union, through certain of its subsidiaries, furnishes a broad range of credit and receivables management outsourcing services as well as management and collection of accounts receivable. The 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 above acquisitions were accounted for as purchases. The excess of cost over the fair value of net assets of businesses acquired is amortized on a straight-line basis over 20 to 30 years. Results of operations were included in the consolidated financial statements from their respective acquisition dates. In May 1996, a subsidiary of the Company acquired participation interests in certain loan portfolios for cash of $3,300, Class C Nonvoting common stock of $8,000 and a 10% unsecured promissory note of $3,500, which was subsequently paid in November 1996. The unaudited pro forma consolidated financial data presented below provides pro forma effect of the NSA, ABC and Union acquisitions as if such acquisitions 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 acquisitions been consummated as of the beginning of each period presented, nor does the data give effect to any transactions other than the acquisitions. Pro Forma 1998 1997 Net revenues $486,754 $455,700 ======== ======== Net loss $(25,015) $(64,703) ======== ======== 3. PROPERTY AND EQUIPMENT Property and equipment, which is recorded at cost, consists of the following at December 31: 1998 1997 Land $ 2,109 $ - Buildings 1,891 - Furniture and fixtures 6,574 4,478 Machinery and equipment 2,479 716 Telephone equipment 8,659 5,956 Leasehold improvements 4,068 1,599 Computer hardware and software 40,785 31,946 ------- ------- 66,565 44,695 Less accumulated depreciation (26,248) (12,132) ------- ------- $40,317 $32,563 ======= ======= 4. INTANGIBLE ASSETS Intangible assets consist of the following at December 31: 1998 1997 Goodwill $447,774 $226,770 Value of favorable contracts and placements 29,000 29,000 Covenants not to compete 5,021 4,498 -------- -------- 481,795 260,268 Less accumulated amortization (56,198) (40,473) -------- -------- $425,597 $219,795 ======== ======== 5. OTHER CURRENT LIABILITIES Other current liabilities consist of the following at December 31: 1998 1997 Accrued severance, relocation and office closing costs $ 5,554 $ 6,487 Accrued interest 6,851 2,974 Deferred revenue 11,285 - Environmental reserves 3,800 - Other 27,581 16,670 ------- ------- $55,071 $26,131 ======= ======= 6. DEBT Long-term debt consists of the following at December 31: 1998 1997 Term Loan A Credit Facility $ 49,250 $ 62,500 Term Loan B Credit Facility 123,137 124,922 Term Loan C Credit Facility 224,250 - Revolving Credit Facility 25,500 31,850 11% Series B Senior Subordinated Notes 100,000 100,000 Note payable to stockholder (See Note 2) 4,429 4,429 Other (including capital leases) 1,582 1,265 -------- -------- Total debt 528,148 324,966 Less current portion of long-term debt 16,877 15,445 -------- -------- Long-term debt $511,271 $309,521 ======== ======== On April 28, 1997, the Company registered $100,000 of 11% Series B Senior Subordinated Notes (the "Notes"), with the SEC to exchange for the then existing unregistered $100,000 of 11% Senior Subordinated Notes (the "Private Placement"). The exchange offer was completed by May 29, 1997. Interest on the Notes is payable semi-annually on May 1 and November 1 of each year. The Notes are general unsecured obligations of the Company and are subordinated in right of payment to all senior debt of the Company presently outstanding and incurred in the future. The Notes contain certain restrictive covenants the more significant of which are limitations on asset sales, additional indebtedness, mergers and certain restricted payments, including dividends. In January 1998, the Company finalized the Second Amended and Restated Credit Agreement for $466,663 (the "Agreement") with a group of banks to fund the Union acquisition and refinance existing outstanding indebtedness. The Agreement, as amended, consists of a $408,663 term loan facility and a $58,000 Revolving Credit Facility (the "Revolving Facility"). The term loan facility consists of a term loan of $59,187 ("Term Loan A"), a term loan of $124,476 ("Term Loan B") and a term loan of $225,000 ("Term Loan C"), which mature on October 15, 2001, 2003 and 2004, respectively. The Company is required to make quarterly principal repayments on each term loan. Term Loan A bears interest, at the Company's option, (a) at a base rate equal to the greater of the federal funds rate plus 0.5% or the lender's customary base rate, plus 1.5% or (b) at the reserve adjusted Eurodollar rate plus 2.5%. Term Loan B and Term Loan C bear interest, at the Company's option, (a) at a base rate equal to the greater of the federal funds rate plus 0.5% or the lender's customary base rate, plus 2.0% or (b) at the reserve adjusted Eurodollar rate plus 3.0%. The Revolving Facility originally had a term of five years and is fully revolving until October 15, 2001. The Revolving Facility bears interest, at the Company's option, (a) at a base rate equal to the greater of the federal funds rate plus 0.5% or the lender's customary base rate, plus 1.5% or (b) at the reserve adjusted Eurodollar rate plus 2.5%. Also, outstanding under the Revolving Facility are letters of credit of $1,656; expiring within a year. The three month LIBOR rate (Eurodollar rate) at December 31, 1998 and 1997 was 5.3% and 5.7%, respectively. In September 1998, the Company amended the Agreement to permit an initial investment in FINCO (see Note 17.) The Agreement is guaranteed by all of the Company's present domestic subsidiaries and is secured by all of the stock of the Company's present domestic subsidiaries and by substantially all of the Company's domestic property assets. The Agreement contains certain covenants the more significant of which limit dividends, asset sales, acquisitions and additional indebtedness, as well as requires the Company to satisfy certain financial performance ratios. The Notes are fully and unconditionally guaranteed on a joint and several basis by each of the Company's current domestic subsidiaries and any additional domestic subsidiaries formed by the Company that become guarantors under the Agreement (the "Restricted Subsidiaries"). The Restricted Subsidiaries are wholly-owned by the Company and constitute all of the direct and indirect subsidiaries of the Company except for three subsidiaries that are individually, and in the aggregate inconsequential. The Company is a holding company with no separate operations, although it incurs some expenses on behalf of its operating subsidiaries. The Company has no significant assets or liabilities other than the common stock of its subsidiaries, debt, related deferred financing costs and accrued expenses relating to expenses paid on behalf of its operating subsidiaries. The aggregate assets, liabilities, results of operations and stockholders' equity of the Restricted Subsidiaries are substantially equivalent to those of the Company on a consolidated basis and the separate financial statements of each of the Restricted Subsidiaries are not presented because management has determined that they would not be material to investors. Summarized combined financial information of the Restricted Subsidiaries is shown below: 1998 1997 ---- ---- Current assets $114,369 $ 96,133 ======== ========= Noncurrent assets $487,381 $ 272,730 ======== ========= Current liabilities $50,086 $ 57,169 ======= ========= Noncurrent liabilities $23,207 $ 5,284 ======= ========= Operating revenue $479,400 $ 271,683 ======== ========= Income (Loss) from operations $39,418 $ (14,679) ======= ========= Net income (loss) $21,189 $ (23,857) ======= ========= Maturities of long-term debt and capital leases at December 31, 1998 are as follows: Capital Debt Leases 1999 $ 16,182 $ 759 2000 19,904 620 2001 51,713 37 2002 50,968 - 2003 68,815 - Thereafter 319,250 - -------- ------ Total Payments 526,832 1,416 Less amounts representing interest 100 ------ Present value of minimum lease payments 1,316 Less current portion 16,182 695 -------- ------ $510,650 $ 621 ======== ====== During 1997, the Company entered into interest rate cap agreements with a notional principal value of $50,000 to reduce the impact of increases in interest rates on its floating-rate long-term debt. At December 31, 1997, the Company had three interest rate cap agreements outstanding. The agreements effectively entitle the Company to receive from a bank the amount, if any, by which the Company's interest payments on specified principal of its floating-rate term loans for a specified period exceed 10%. The amounts paid for these agreements of $243 are included in deferred financing costs and are being amortized to interest expense over the terms of the various agreements through November 1999. 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. On April 17, 1998 and May 27, 1998, as required by the Agreement, the Company entered into interest rate collar agreements with a notional principal value of $35,000 and $33,000, respectively, for the purpose of managing interest rate risk on a portion of floating-rate long-term debt. The collar agreements fix the interest rate on certain variable-rate debt to a range of 8.58% to 9.5%. The contracts have a maturity date of April 17, 2001 and August 27, 2002, respectively. The Company is exposed to credit loss in the event of nonperformance by counterparties to the collar agreements. 7. OTHER LONG-TERM LIABILITIES Other long-term liabilities at December 31,1998 include approximately $18,900 for environmental proceedings as a result of the Union acquisition. Other current liabilities include approximately $3,800 resulting in a total liability of approximately $22,700, on an undiscounted basis, for the Union environmental proceedings. The Company is party to several pending environmental proceedings involving the Environmental Protection Agency and comparable state environmental agencies. All of these matters related to discontinued operations of former divisions or subsidiaries of Union for which it has potential continuing responsibility. Management, in consultation with both legal counsel and environmental consultants, has established the aforementioned liabilities that it believes are adequate for the ultimate resolution of these environmental proceedings. However, the Company may be exposed to additional substantial liability for these proceedings as additional information becomes available over the long-term. 8. STOCKHOLDERS' EQUITY AND WARRANTS On September 21, 1995, the Company issued 800,000.01 shares of 8% Nonvoting Cumulative Redeemable Exchangeable Preferred Stock ("Preferred Shares"). The liquidation value of each Preferred Share is $12.50 plus accrued and unpaid dividends. Dividends, as may be declared by the Company's Board of Directors, are cumulative at an annual rate of 8% of the liquidation value and are payable in equal semi-annual installments of $.50 per preferred share on the dividend payment date, as defined in the Certificate of Incorporation. The Company may, at its sole option and upon written notice to preferred shareholders, redeem all or any portion of the outstanding Preferred Shares for $12.50 per share plus cash equal to all accrued and unpaid dividends, through the redemption date, whether or not such dividends have been authorized or declared. Pursuant to the Company's financing arrangements, the payment of dividends and/or the repurchase of Preferred Shares is prohibited until the Company attains certain covenants. The Company may, at its sole option, pay dividends in the form of additional Preferred Shares. Each holder of Preferred Shares has the right, at their option, to exchange any or all of their Preferred Shares for the same number of shares of Voting Common Stock ("Voting Common Shares"). The Company must reserve, out of its authorized but unissued Voting Common Shares, the appropriate number of Voting Common Shares to affect the exchange of all outstanding Preferred Shares. Upon the exchange of any Preferred Shares, such Preferred Shares are to be retired and not reissued. Warrants outstanding at December 31, 1998 are 46,088.67. Each warrant entitles the holder to purchase one share of Voting Common Stock, $.01 par value, at $12.50 per share. The warrants are exercisable at the option of the holder and expire on January 10, 2006. 9. INCOME TAXES Major components of the Company's income tax provision (benefit) are as follows: 1998 1997 1996 ---- ---- ---- Current: Federal $ - $ - $ - State 450 250 - ------ ------- -------- Total current 450 250 - ------ ------- -------- Deferred: Federal - 9,513 (10,250) State 380 1,364 (1,507) ------ ------- ------- Total deferred 380 10,877 (11,757) ------ ------- -------- Provision for income taxes (benefit) $ 830 $11,127 $(11,757) ====== ======= ======== Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes. The Company's deferred income taxes result primarily from differences in loans and accounts receivable purchased, amortization methods on other intangible assets and depreciation methods on fixed assets. Net deferred tax assets consist of the following at December 31: 1998 1997 Deferred tax assets: Net operating loss carryforwards $41,143 $12,759 Accrued liabilities 18,001 5,882 Loans and account receivable 3,670 6,737 Property and equipment 1,311 724 Intangible assets 4,192 4,557 Other - 2,153 ------- ------- Total deferred tax assets 68,317 32,812 Less valuation allowance (68,317) (32,432) ------- ------- Net deferred tax assets $ - $ 380 ======= ======= The valuation allowance was $68,317 and $32,432 at December 31, 1998 and 1997, respectively. The Company has determined the valuation allowance based upon the weight of available evidence regarding future taxable income consistent with the principles of SFAS No. 109, Accounting for Income Taxes. Of the $35,885 increase in the valuation allowance during 1998, $24,611 relates to deferred tax assets recorded in connection with the acquisition of Union and $800 relates to the 1997 acquisitions of NSA and ABC. The valuation allowance also includes $6,400 related to deferred tax assets recorded prior to 1998 in connection with acquisitions in years before 1998. Future realization of these deferred tax assets would result in the reduction of goodwill recorded in connection with the acquisitions. During 1998, the Company received net cash from income taxes of $12,424. The Company has net operating loss carryforwards of $87,397 as of December 31, 1998 available to offset future taxable income of the consolidated group of corporations. In addition, the Company acquired a net operating loss carryforward of $3,800 with the acquisition of Union that is subject to special tax law restrictions that limit its potential benefit. These loss carryforwards expire between 2010 and 2018. During 1998, the Company has significantly increased its total debt from $324,966 at December 31, 1997 to $528,148 at December 31, 1998. This increase in debt primarily resulted from the acquisition of Union. Since the Company has a history of generating net operating losses and has significantly increased its total interest expense to be incurred, management does not expect the Company to generate taxable income in the foreseeable future sufficient to realize tax benefits from the net operating loss carryforwards or the future reversal of the net deductible temporary differences. The amount of the deferred tax assets considered realizable, however, could be increased in future years if estimates of future taxable income during the carryforward period change. A reconciliation of the Company's reported income tax provision to the U.S. federal statutory rate is as follows: 1998 1997 1996 ---- ---- ---- Federal taxes at statutory rate $ (7,994) $(16,052) $(11,272) State income taxes (net of federal tax benefits) 18 (2,092) (1,521) Nondeductible amortization 3,414 1,406 879 Other 249 (4,567) 157 Deferred tax valuation allowance 5,143 32,432 - -------- -------- --------- Provision for income taxes (benefit) $ 830 $ 11,127 $(11,757) ======== ======== ======== 10. RELATED PARTY TRANSACTIONS The Company had an agreement with an affiliate of certain Company stockholders to provide management and investment services for a monthly fee of $50. The Company recorded management fees to this entity of $450 and $600 for the years ended December 31, 1997 and 1996. The agreement was terminated September 30, 1997. Subject to the agreements executed in connection with the various acquisitions, the Private Placement discussed in Note 6 and certain management and advisory agreements, the Company has paid to certain Company stockholders transaction costs and advisory fees. Such costs were $3,466, $1,600 and $9,100 for the years ended December 31, 1998, 1997 and 1996, respectively. Under various financing arrangements associated with the Company's acquisitions and the Agreement, the Company incurred interest expense of $2,333, $3,317 and $2,900 for the years ended December 31, 1998, 1997 and 1996, respectively, to certain Company stockholders of which one is a financial institution and is co-administrative agent of the Company's Agreement. In December 1997, the Company invested $5,000 for a minority interest in a limited liability corporation (the "LLC") for the purpose of acquiring purchased loan and accounts receivable portfolios. The majority interest in the LLC is held by an affiliate of one of the Company's stockholders. In the fourth quarter of 1998, the Company wrote down its investment in the LLC by $3,000 which is included in amortization expense in the accompanying consolidated statement of operations. The write down resulted from an analysis of the carrying value of the purchased portfolios owned by the LLC. In December 1998, the Company entered into an agreement with the majority owner of the LLC to settle all outstanding disputes relating to the sourcing and collection of certain purchased loan and accounts receivable portfolios. As part of the settlement, the Company was paid $3,000 which was recorded in revenue in the accompanying consolidated statement of operations. 11. STOCK OPTION AND AWARD PLAN The Company has established the Outsourcing Solutions Inc. 1995 Stock Option and Stock Award Plan (the "Plan"). The Plan is a stock award and incentive plan which permits the issuance of options, stock appreciation rights ("SARs") in tandem with such options, restricted stock, and other stock-based awards to selected employees of and consultants to the Company. The Plan reserved 304,255 Voting Common Shares for grants and provides that the term of each award, not to exceed ten years, be determined by the Compensation Committee of the Board of Directors (the "Committee") charged with administering the Plan. In February 1997, the Board of Directors approved an increase to the reserve of Voting Common Shares to 500,000 with an additional approval to 750,000 in December 1997. Under the terms of the Plan, options granted may be either nonqualified or incentive stock options and the exercise price may not be less than the fair market value of a Voting Common Share, as determined by the Committee, on the date of grant. SARs granted in tandem with an option shall be exercisable only to the extent the underlying option is exercisable and the grant price shall be equal to the exercise price of the underlying option. The awarded stock options vest over various periods and vesting may be accelerated upon the satisfaction of certain performance targets and/or the occurrence of certain liquidity events. The options shall expire ten years after date of grant. A summary of the 1995 Stock Option and Stock Award Plan is as follows: Weighted Average Number Exercise Price of Shares Per Share -------------- ---------------- Outstanding at January 1, 1996 - $ - Granted 395,809 13.57 Forfeited (149,788) 12.50 -------- Outstanding at December 31, 1996 246,021 14.23 Granted 397,500 27.99 Forfeited (75,000) 22.33 --------- Outstanding at December 31, 1997 568,521 22.78 Granted 64,300 58.83 Forfeited (54,000) 35.19 -------- Outstanding at December 31, 1998 578,821 25.63 ======== Reserved for future option grants 171,179 Exercisable shares at December 31, 1998, 1997 and 1996 were 105,784, 49,647 and zero, respectively. A summary of stock options outstanding at December 31, 1998 is as follows: Options Outstanding Options Exercisable --------------------------------------- ------------------- Weighted Average Number Remaining Exercise Number Exercise Exercise Price Outstanding Contractual Life Price Exercisable Price -------------- ----------- ---------------- -------- ----------- -------- $12.50 196,021 7.7 years $12.50 39,204 $12.50 $25.00 295,800 8.3 years $25.00 57,880 $25.00 $50.00 44,500 9.1 years $50.00 4,450 $50.00 $65.00 42,500 9.4 years $65.00 4,250 $65.00 ------- ------- $12.50-$65.00 578,821 8.8 years $25.63 105,784 $23.03 ======= ======= The Company accounts for the Plan in accordance with APB Opinion No. 25, under which no compensation cost has been recognized for stock option awards. As required by SFAS No. 123, the Company has estimated the fair value of its option grants since January 1, 1996. The fair value for these options was estimated at the date of the grant based on the following weighted average assumptions: 1998 1997 1996 ---- ---- ---- Risk free rate 5.0% 5.44% 6.33% Expected dividend yield of stock 0% 0% 0% Expected volatility of stock 0% 0% 0% Expected life of option (years) 10.0 10.0 10.0 Given that the Company is not publicly traded, the expected stock price volatility is assumed to be zero. The weighted fair values of options granted during 1998, 1997 and 1996 were $23.14, $12.29 and $6.67, respectively. The Company's pro forma information is as follows: 1998 1997 1996 ---- ---- ---- Net loss: As reported $(24,341) $(58,337) $(21,397) Pro forma (25,742) (59,570) (21,758) In addition, the Committee may grant restricted stock to participants of the Plan at no cost. Other than the restrictions which limit the sale and transfer of these shares, recipients of restricted stock awards are entitled to vote shares of restricted stock and dividends paid on such stock. No restricted stock has been granted at December 31, 1998. 12. COMMITMENTS AND CONTINGENCIES From time to time, the Company enters into servicing agreements with companies which service loans for others. The servicers handle the collection efforts on certain nonperforming loans and accounts receivable on the Company's behalf. Payments to the servicers vary depending on the servicing contract. Current contracts expire on the anniversary date of such contracts but are automatically renewable at the option of the Company. A subsidiary of the Company has several Portfolio Flow Purchase Agreements, no longer than one year, whereby the subsidiary has a monthly commitment to purchase nonperforming loans meeting certain criteria for an agreed upon price subject to due diligence. The purchases under the Portfolio Flow Purchase Agreements were $25,521, $20,661 and $5,986, for the years ended December 31, 1998, 1997 and 1996, respectively. The Company leases certain office space and computer equipment under non-cancelable operating leases. These non-cancelable operating leases, with terms in excess of one year, are due in approximate amounts as follows: Amount ------ 1999 $16,242 2000 14,002 2001 12,485 2002 10,838 2003 3,795 Thereafter 8,262 ------- Total lease payments $65,624 ======= Rent expense under operating leases was $15,800, $8,100 and $3,600 for the years ended December 31, 1998, 1997 and 1996, respectively. 13. LITIGATION At December 31, 1998, the Company was involved in a number of legal proceedings and claims that were in the normal course of business and routine to the nature of the Company's business. 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 December 31, 1998. 14. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values and the methods and assumptions used to estimate the fair values of the financial instruments of the Company as of December 31, 1998 and 1997 are as follows. The carrying amount of cash and cash equivalents and long-term debt except the Notes, approximate the fair value. The approximate fair value of the Notes at December 31, 1998 and 1997 was $95,300 and $100,000, respectively. The fair value of the long-term debt was determined based on current market rates offered on notes and debt with similar terms and maturities. The fair value of the interest rate caps, swap and collars, based on quoted market prices, at December 31, 1998 was $109, $(720) and $(1,054), respectively. At December 31, 1997, the fair value of the interest caps at December 31, 1997 was $193. The fair value of Receivables was determined based on both market pricing and discounted expected cash flows. The discount rate was based on an acceptable rate of return adjusted for the risk inherent in the Receivable portfolios. The estimated fair value of Receivables approximated its carrying value at December 31, 1998 and 1997. In December 1997, the Company completed an in-depth analysis of the carrying value of the purchased portfolios acquired in September 1995 in conjunction with the Company's acquisition of API. This analysis included an evaluation of achieved portfolio amortization rates, historical and estimated future costs to collect, as well as projected total future collection levels. As a result of this analysis, the Company recorded $10,000 of additional amortization in December 1997 relating to these purchased portfolios to reduce their carrying value to estimated fair value. 15. EMPLOYEE BENEFIT PLAN At December 31, 1997, the Company had five defined contribution plans. During 1998, the Company combined four of these defined contribution plans into a new defined contribution plan sponsored by the Company. At December 31, 1998, the Company has five defined contribution plans, four of which it acquired through the Union acquisition, which provide retirement benefits to the majority of all full time employees. The Company matches a portion of employee contributions to the plans. Company contributions to these plans, charged to expense, were $1,570, $276 and $98 for the years ended December 31, 1998, 1997 and 1996, respectively. 16. ENTERPRISE WIDE DISCLOSURE The Company operates in one business segment. As a strategic receivables management company, the primary services of the Company consist of fee services, portfolio purchasing services and outsourcing services. In addition, the Company derives substantially all of its revenues from domestic customers. The following table presents the Company's revenue by type of service for the year ended December 31: 1998 1997 1996 ---- ---- ---- Fee services $333,969 $164,796 $ 54,901 Portfolio purchasing services 84,315 67,809 45,581 Outsourcing services 61,116 39,078 5,849 -------- -------- -------- Total $479,400 $271,683 $106,331 ======== ======== ======== 17. 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. The Company believes the servicing fees will provide adequate compensation to the Company for performing the servicing, resulting in a servicing asset that was not considered material. Servicing revenue from FINCO will be recognized by the Company as collections are received. In connection with establishment of FINCO, the Company's amended credit agreement (see Note 6) was amended to permit an initial investment in FINCO of $2,500 with an additional investment of $2,500 at such time after December 31, 1998 as FINCO's borrowings exceed $25,000. All borrowings by FINCO under the Warehouse Facility are without recourse to the Company. The following summarizes the transaction between the Company and FINCO for the year ended December 31, 1998: Sales of purchased loans and accounts receivables portfolios by the Company to FINCO $9,134 Investment in FINCO by the Company $2,500 Servicing fees paid by FINCO to the Company $792 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 December 31, 1998, FINCO had outstanding borrowings of $6,482 under the Warehouse Facility. 18. SUBSEQUENT EVENT 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. * * * * * * INDEPENDENT AUDITORS' REPORT To the Stockholders of Outsourcing Solutions Inc.: We have audited the consolidated financial statements of Outsourcing Solutions Inc. and it subsidiaries as of December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, and have issued our report thereon dated March 4, 1999; such consolidated financial statements and report is included elsewhere in this Form 10-K. Our audits also included the consolidated financial statement schedule of Outsourcing Solutions Inc. and its subsidiaries, listed in the accompanying index at Item 14(a)2. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Deloitte & Touche LLP St. Louis, Missouri March 4, 1999 Outsourcing Solutions Inc. and Subsidiaries Schedule II Valuation and Qualifying Accounts and Reserves For the year ended December 31, 1998, 1997 and 1996 (in thousands) Column A Column B Column C Column D Column E - - ---------------------- -------- -------------------------- ---------- -------- Additions -------------------------- (B) @ beg. Charged Deductions Balance of Charged to to Other (Please @ end of Description Period Expense Accounts (A) explain) Period - - ---------------------- ------- ---------- ------------ ----------- -------- Allowance for doubtful accounts: 1998 538 108 798 135 1,309 ==== ==== ==== ==== ===== 1997 641 367 - 470 538 ==== ==== == ==== === 1996 - 117 671 147 641 == ==== ==== ==== === (A) For 1998, Union balance at date of acquisition. For 1996, Payco balance at date of acquisition. (B) Accounts receivable write-offs and adjustments, net of recoveries. EX-3.(I) 2 CERTIFICATE OF INCORPORATION THIRD AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF OUTSOURCING SOLUTIONS INC. Outsourcing Solutions Inc., a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: 1. The name of the corporation is Outsourcing Solutions Inc. (the "Corporation"). The Corporation was originally incorporated as OSI Holdings Corp. in the State of Delaware on the 21st day of September, 1995 pursuant to a Certificate of Incorporation filed with the Secretary of State of the State of Delaware on that date. 2. This Third Amended and Restated Certificate of Incorporation amends and restates the Amended and Restated Certificate of Incorporation of the Corporation filed with the Secretary of State of the State of Delaware on February 15, 1996, as amended on October 11, 1996. This Third Amended and Restated Certificate of Incorporation has been adopted by the Corporation and by its stockholders pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware. 3. On December 7, 1998, Directors of the Corporation duly adopted resolutions authorizing the following amendment and restatement of the Certificate of Incorporation of the Corporation, declaring such amendment and restatement to be advisable and in the best interests of the Corporation and its stockholders and authorizing the appropriate officers to solicit written consents of the stockholders of the Corporation in accordance with the provisions of Section 228 of the General Corporation Law of the State of Delaware. Thereafter, pursuant to resolutions of the Board of Directors, in lieu of a meeting and vote of holders of the Corporation's common stock and preferred stock, stockholders holding a majority of the issued and outstanding shares of common stock of the Corporation and holders of a majority of the issued and outstanding shares of preferred stock of the Corporation adopted the following amendment and restatement of the Certificate of Incorporation of the Corporation and the nonconsenting stockholders were promptly notified of such adoption in accordance with the provisions of Section 228 of the General Corporation Law of the State of Delaware. 4. The text of Certificate of Incorporation, is hereby restated and amended to read in its entirety as follows: FIRST: The name of the Corporation is Outsourcing Solutions Inc. SECOND: The registered office of the Corporation in the State of Delaware is 1013 Centre Road, Wilmington, Delaware 19805, County of New Castle. The name of its registered agent in the State of Delaware at such address is The Prentice-Hall Corporation System, Inc. THIRD: The purpose of the Corporation is to engage, directly or indirectly, in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware as from time to time in effect. FOURTH: The total number of shares which the Corporation shall have the authority to issue is 18,250,000 shares of capital stock as follows: 1,250,000 shares of Preferred Stock, no par value (the "Preferred Stock"), 7,500,000 shares of Voting Common Stock, par value $.01 per share (the "Voting Common Stock"), 7,500,000 shares of Class A Non-Voting Common Stock, par value $.01 per share (the "Class A Non-Voting Common Stock"), 500,000 shares of Class B Non-Voting Stock, par value $.01 per share (the "Class B Non-Voting Common Stock") and 1,500,000 shares of Class C Non-Voting Common Stock, par value $.01 per share (the "Class C Non-Voting Common Stock", and together with the Class A Non-Voting Common Stock and the Class B Non-Voting Common Stock, the "Non-Voting Common Stock", and the Non-Voting Common Stock, together with the Voting Common Stock, the "Common Stock"). The Preferred Stock shall be designated "8% Non-Voting Cumulative Redeemable Exchangeable Preferred Stock." Each share of Preferred Stock is hereafter referred to as a "Preferred Share" and collectively as "Preferred Shares". Each share of Voting Common Stock is hereafter referred to as a "Voting Common Share" and collectively as "Voting Common Shares". Each share of Class A Non-Voting Common Stock is hereafter referred to as a "Class A Non-Voting Common Share" and collectively as "Class A Non-Voting Common Shares". Each share of Class B Non-Voting Common Stock is hereafter referred to as a "Class B Non-Voting Common Share" and collectively as "Class B Non-Voting Common Shares". Each share of Class C Non-Voting Common Stock is hereafter referred to as a "Class C Non-Voting Common Share" and collectively as "Class C Non-Voting Common Shares". Each share of Non-Voting Common Stock is hereafter referred to as a "Non-Voting Common Share" and collectively as "Non-Voting Common Shares". The Voting Common Shares and Non-Voting Common Shares are hereafter collectively referred to as "Common Shares". The voting powers, designations, preferences and relative participating, optional or other special rights, and qualifications, or restrictions thereof, of each of the above classes of capital stock are as follows: A. Preferred Stock. 1. Voting Rights The record holders of the issued and outstanding shares of Preferred Stock shall have no voting rights, unless (and then only to the extent) otherwise expressly provided by law. 2. Dividend Rights (a) The record holders shall be entitled to receive in preference to all other shareholders, when, as and if declared by the Corporation's Board of Directors or a duly authorized committee thereof, out of funds legally available for the payment thereof, fully cumulative dividends at the annual rate of eight percent (8%) of the Liquidation Preference (as defined below in Section 3), such dividends to be payable in equal semi-annual installments of Fifty Cents ($.50) per Preferred Share on the day immediately succeeding the last day of a Payment Period (as such term is defined below in paragraph (e) of this Section 2) (except that if any such date is a Saturday, Sunday or legal holiday, then such dividends shall be payable on the next day that is not a Saturday, Sunday or legal holiday) (each a "Dividend Payment Date"); provided, however, the Corporation may, at its sole option, pay any dividends due on each Dividend Payment Date in additional shares of Preferred Stock (such dividends paid in kind being herein referred to as "PIK Dividends"). (b) PIK Dividends shall be paid by delivering to the record holders of Preferred Stock a number of shares of Preferred Stock determined by dividing the amount of the PIK Dividend Payment which otherwise would be payable on the Dividend Payment Date to each respective holder in cash (rounded to the nearest whole cent) by the Liquidation Preference per share. The issuance of any such PIK Dividend in such amount shall constitute full payment of such dividend. Fractional shares of Preferred Stock payable as PIK Dividends shall be paid in cash by the Corporation. Any additional shares of Preferred Stock issued pursuant to this section shall be subject in all respects, except as to issue date and the date from which dividends accrue and cumulate as set forth below, to the same terms as the shares of Preferred Stock originally issued hereunder. (c) Dividends shall accrue (whether or not declared by the Board of Directors) during each Payment Period and be fully cumulative from the first day of each Payment Period to the last day of such Payment Period. In the case of Preferred Shares issued and/or accumulated as a PIK Dividend, dividends shall accrue (whether or not declared by the Board of Directors) and be fully cumulative from the Dividend Payment Date in respect of which such shares were issued as a dividend. Dividends shall be paid to the holders of record of Preferred Shares at the close of business on the date specified by the Board of Directors of the Corporation or a duly authorized committee thereof at the time such dividend is declared in accordance with the Delaware General Corporation Law (each of such dates being a "Record Date"). A Record Date shall not be more than sixty (60) days prior to the applicable Dividend Payment Date. All dividends (whether payable in cash or in whole or in part in PIK Dividends) paid pursuant to this paragraph shall be paid in equal pro rata proportions of such cash and/or PIK Dividends to the holders entitled thereto, except with respect to cash payable in lieu of PIK Dividends otherwise payable in fractional shares as described above. (d) The Corporation shall not (i) declare, pay or set aside for payment any dividend or other distribution in respect of its Junior Stock (as defined below), or (ii) call for redemption, redeem, purchase or otherwise acquire for any consideration any shares of its Junior Stock, unless, so long as any Preferred Shares are outstanding, all dividends accrued and unpaid with respect to the Preferred Shares for all Dividend Payment Periods ending on or prior to the date of payment of such dividends or other distributions on or redemptions of Junior Stock shall have been authorized, declared and paid and all obligations of the Corporation to purchase Preferred Shares pursuant to this paragraph have been fully satisfied. "Junior Stock" means Common Stock and any other series of preferred stock of the Corporation which ranks junior to or on a parity with the Preferred Shares. (e) The term "Payment Period" shall mean the six-month period commencing on September 21, 1995 and each six-month period thereafter during which any Preferred Shares are issued and outstanding. 3. Rights on Liquidation and Ranking In the event of the liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary (each a "Liquidation"), each holder of a Preferred Share shall be entitled to receive with respect to such Preferred Share, before any distribution is made to or set aside for the holders of Junior Stock out of the assets of the Corporation, whether such assets are stated capital or surplus of any nature, an amount equal to Twelve Dollars and Fifty Cents ($12.50) per Preferred Share (the "Liquidation Preference"), plus all dividends accrued and unpaid on such Preferred Share on the date of final distribution to such holder, whether or not authorized or declared, before any assets shall be distributed to the holders of Junior Stock. If the assets of the Corporation available for distribution to holders shall be insufficient to permit the payment in full of the amount due the holders pursuant to this Paragraph 3, all assets of the Corporation available for distribution to holders shall be distributed pari passu among the holders. The fair market value of any assets of the Corporation and the proportion of cash and other assets distributed by the Corporation to the holders shall be reasonably determined in good faith by a vote of the Board of Directors of the Corporation. Except as provided in this paragraph, the holders of Preferred Shares shall not be entitled to any distribution in the event of a Liquidation. For the purposes of this paragraph, neither the consolidation or merger of the Corporation into or with another corporation, nor the sale of all or substantially all of the assets of the Corporation to another corporation or any other entity shall be deemed a liquidation, dissolution or winding-up of the affairs of the Corporation. 4. Redemption Rights (a) To the extent that the Corporation shall have funds legally available therefor, the Corporation may, at its option, at any time and from time to time, redeem all or any portion of the outstanding Preferred Shares (each a "Redemption") for a sum equal to Twelve Dollars and Fifty Cents ($12.50) per Preferred Share plus an amount in cash equal to all accrued and unpaid dividends on such shares through the date fixed by the Board of Directors for such redemption (a "Redemption Date"), whether or not authorized and declared (such sum being referred to as the "Redemption Price"). (b) Notice of Redemption. Not more than sixty (60) nor less than ten (10) days prior to the Redemption Date, the Corporation shall give written notice ("Redemption Notice") of a Redemption specifying the date of such Redemption, to each holder of Preferred Shares to be redeemed at its address as it appears on the stock records of the Corporation by deposit thereof in first class U.S. mail, postage prepaid. The Corporation shall transfer to an account designated by each holder of a Preferred Share to be redeemed the Redemption Price thereof by wire transfer in immediately available funds upon receipt by the Corporation at its principal office of a certificate representing the applicable Preferred Share (or, at the option of such holder, an affidavit of lost certificate and indemnity therefor) duly endorsed in blank for transfer to the Corporation. (c) Selection of Shares. The Corporation shall select the Preferred Shares to be redeemed in any Redemption in which not all Preferred Shares are able to be redeemed pursuant to this paragraph so that the Preferred Shares of each holder selected for Redemption shall bear the same proportion to the total Preferred Shares owned by that holder as the proportion of all Preferred Shares selected for Redemption bears to the total of all then outstanding Preferred Shares, but adjusted as determined by the Board of Directors to avoid the redemption of fractional Preferred Shares. Notice having been given as provided above, if, on the date fixed for Redemption, funds necessary for the redemption shall be available therefor and shall have been irrevocably deposited or set aside in trust for the holders of the Preferred Shares, then, notwithstanding that the certificates representing any shares so called for redemption shall not have been surrendered, dividends with respect to the shares so called shall cease to accrue after the date fixed for redemption, such shares will no longer be deemed outstanding, the holders thereof shall cease to be stockholders of the Corporation and all rights whatsoever with respect to the shares so called for redemption (except the right of the holders to receive the Redemption Price without interest upon surrender of their certificates therefor) shall terminate. If funds legally available for such purpose are not sufficient for redemption of the Preferred Shares to be redeemed pursuant to a Redemption, then the certificates representing such shares shall be deemed not to be surrendered, such shares shall remain outstanding and the rights of holders of shares of Preferred Stock thereafter shall continue to be only those of a holder of Preferred Shares. Should any Preferred Shares required to be redeemed under the terms of any redemption not be redeemed solely by reason of limitations imposed by law, the applicable Preferred Shares shall be redeemed on the earliest possible date thereafter that the applicable Preferred Shares may be redeemed to the maximum extent permitted by law. Except as set forth above, the Board of Directors shall prescribe the manner in which any Redemption shall be effected. 5. Exchange of Preferred Stock. (a) Each holder of Preferred Shares shall have the right, at its option, at any time after September 20, 1996, to exchange any or all of the Preferred Shares held by them for the same number of Common Shares. Each exchange of Preferred Shares for Common Shares shall be effected by the surrender of the certificates representing the shares to be exchanged at the principal office of the Corporation at any time during normal business hours, together with a written notice by the holder of such Preferred Shares, stating that such holder desires to exchange the Preferred Shares, or a stated number of Preferred Shares, represented by such certificate or certificates into Common Shares. Such exchange will be deemed to have been effected as of the close of business on the date on which the certificate or certificates representing the Preferred Shares to be exchanged have been surrendered at the principal office of the Corporation, and at such time the rights of the holders of the exchanged Preferred Shares will cease and the person or persons in whose name or names the certificate or certificates for Common Shares are to be issued upon such exchange will be deemed to have become the holder or holders of record of the shares of Common Stock represented thereby. Promptly after such surrender and the receipt of such written notice, the Corporation will issue and deliver in accordance with the surrendering holder's instructions (a) the certificate or certificates for the Common Shares issuable upon such exchange and (b) a certificate representing any Preferred Shares which were represented by the certificate or certificates delivered to the Corporation in connection with such exchange but which were not exchanged. (b) The Corporation shall at all times reserve and keep available, out of its authorized but unissued capital stock, solely for the purpose of effecting the exchange of the Preferred Stock, a full number of shares of Common Stock then issuable upon the exchange of all outstanding Preferred Stock. Upon the exchange of any Preferred Shares, such Preferred Shares shall be retired and shall not be reissued. 6. Ranking of Stock of the Corporation. Any stock of any class or classes of the Corporation shall be deemed to rank: (a) On a parity with the Preferred Shares, either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share or sinking fund provisions, if any, are different from those of the Preferred Shares, if the holders of such stock shall be entitled to the receipt of dividends or of amounts distributable upon Liquidation in proportion to their respective dividend rates or liquidation prices, without preference or priority, one over the other, as between the holders of such stock and the holders of the Preferred Stock; and (b) Junior to the Preferred Shares, either as to dividends or upon liquidation, if such class shall be Common Stock or if the holders of the Preferred Stock shall be entitled to receipt of dividends or of amounts distributable upon Liquidation or upon redemption, as the case may be, in preference or priority to the holders of shares of such class or classes. 7. Transfers of Preferred Shares. The Preferred Shares may not be sold, assigned or transferred by the holders without the prior written consent of the Corporation and each holder of Preferred Shares, and by acceptance of any Preferred Shares, the holder agrees not to sell, assign or transfer such shares without such consent. B. Common Stock. 1. Dividend Rights. Subject to the preferential rights of the Preferred Shares, the Board of Directors of the Corporation may, in its discretion, out of funds legally available for the payment of dividends and at such times and in such manner as determined by the Board of Directors, declare and pay dividends on the Common Shares of the Corporation. No dividend (other than a dividend in capital stock ranking on a parity with the Common Shares or cash in lieu of fractional shares with respect to such stock dividend) shall be declared or paid on any share or shares of any class of stock or series thereof ranking on a parity with the Common Shares in respect of payment of dividends for any dividend period unless there shall have been declared, for the same dividend period, like proportionate dividends on all shares of Common Shares then outstanding. As and when dividends are declared or paid thereon, whether in cash, property or securities of the Corporation, the holders of the Voting Common Shares and of the Non-Voting Common Shares will be entitled to share ratably, on a share for share basis, in such dividends, provided, that (i) if dividends are declared which are payable in Voting Common Shares or Non-Voting Common Shares, dividends will be declared which are payable at the same rate on both classes of stock and the dividends payable in Voting Common Shares will be payable to holders of such shares and the dividends payable in Non-Voting Common Shares will be payable to holders of such shares and (ii) if the dividends consist of other voting securities of the Corporation, (a) the Corporation will make available to each holder of Class A Non-Voting Common Shares, at such holder's request, dividends consisting of non-voting securities of the Corporation which are otherwise identical to the voting securities and which are convertible into or exchangeable for such voting securities on the same terms as the Class A Non-Voting Common Shares are convertible into Voting Common Shares, (b) the Corporation will make available to each holder of Class B Non-Voting Common Shares, at such holder's request, dividends consisting of non-voting securities of the Corporation which are otherwise identical to the voting securities and which are convertible into or exchangeable for such voting securities on the same terms as the Class B Non-Voting Common Shares are convertible into Voting Common Shares, and (c) the Corporation will make available to each holder of Class C Non-Voting Common Shares, at such holder's request, dividends consisting of non-voting securities of the Corporation which are otherwise identical to the voting securities and which are convertible into or exchangeable for such voting securities on the same terms as the Class C Non-Voting Common Shares are convertible into Voting Common Shares. 2. Rights on Liquidation. In the event of any liquidation, dissolution, distribution of assets or winding up of the Corporation, whether voluntary or involuntary (collectively, a "Liquidation"), after payment or provision for payment of the debts and other liabilities of the Corporation and the setting aside for payment of any preferential amount due to the holders of any other class or series of stock (including, without limitation, the holders of Preferred Shares), the holders of Common Shares (including, without limitation, the Voting Common Shares and the Non-Voting Common Shares) and any other class of stock or series thereof ranking on a parity with the Common Shares in respect of distributions on Liquidation shall be entitled to receive ratably on a share for share basis, any or all assets remaining to be paid or distributed. 3. Voting Rights. Except as may be otherwise required by law, all voting rights shall be vested in the Voting Common Shares and each holder of Voting Common Shares shall have one vote in respect of each Voting Common Share held by such holder on all matters to be voted upon by the stockholders of the Corporation. The holders of the Non-Voting Shares will have no right to vote on any matters to be voted on by the stockholders of the Corporation; provided, that the holders of the Non-Voting Common Shares shall have the right to vote as a separate class on (i) any merger, consolidation, recapitalization or reconsolidation of the Corporation that would adversely affect the rights and preferences of the Non-Voting Common Shares in a manner which does not affect all holders of Common Shares equally, (ii) any amendment to this Amended and Restated Certificate of Incorporation or the By-Laws of this Corporation, as such may be amended from time to time, that would adversely affect the rights and preferences of the holders of Non-Voting Common Shares in a manner which does not affect all holders of Common Shares equally and (iii) any other matter on which the Non-Voting Common Shares are required to vote as a class pursuant to the General Corporation Law of the State of Delaware. 4. Conversion. (a) Conversion of Class A Non-Voting Common Shares; Voting Common Shares. Each record holder of Voting Common Shares is entitled to convert any or all of such holder's Voting Common Shares into the same number of Non-Voting Common Shares and each record holder of Class A Non-Voting Common Shares is entitled to convert any or all of such holder's Class A Non-Voting Common Shares into the same number of Voting Common Shares or other Non-Voting Common Shares, in each case upon one (1) business day's written notice to the Corporation by any such record holder specifying the number of Class A Non-Voting Common Shares to be so converted. Upon receipt of such notice, the Corporation shall take all such action as is necessary to effect such conversion in a timely manner. Notwithstanding the failure of the Corporation to take any action required by the preceding sentence, the conversion shall be deemed effective at 5:00 p.m. Atlanta, Georgia time on the business day following the giving of such notice and the Voting Shares or Class A Non-Voting Shares so converted will be deemed to be in all respects Non-Voting Shares or Voting Shares, as the case may be, of the Corporation with all privileges appurtenant thereto. (b) Conversion of Class B Non-Voting Stock. (i) In connection with the occurrence (or the expected occurrence) of any Class B Conversion Event (as defined below), each holder of Class B Non-Voting Common Shares shall be entitled to convert into an equal number of shares of Voting Common Shares any or all of the shares of such holder's Class B Non-Voting Common Shares being distributed, disposed of or sold by such holder in such Class B Conversion Event. (ii) For purposes of this Section 4(b), "Class B Conversion Event" shall mean (A) any public offering or public sale of the Common Stock of the Corporation (including a public offering registered under the Securities Act of 1933 (the "1933 Act") or a public sale pursuant to Rule 144 of the Securities and Exchange Commission or any similar rule then in force); (B) any sale of Class B Non-Voting Common Shares to a person or a group of persons (within the meaning of the Securities Exchange Act of 1934, as amended (the "1934 Act") or the Bank Holding Company Act of 1956, as amended (the "BHC Act")), provided that (1) such sale does not constitute more than two percent (2%) of any class of voting securities of the Corporation and (2) such person or group of persons does not own, control or have the right to acquire five percent (5%) or more of any class of voting securities of the Corporation as a result of such sale; (C) any sale of Class B Non-Voting Shares to a person or group of persons by a holder of Class B Non-Voting Common Shares if such person or group of persons already owns or has negotiated to purchase at least a majority of the Common Stock without reliance on such sale; or (D) a sale of the securities of the Corporation by the MDC Entities (as such term is defined below) pursuant to the provisions of Section 2.3 of the Amended and Restated Stockholders Agreement, dated as of February 16, 1996, by and among the Corporation and the stockholders party thereto. Notwithstanding anything in the foregoing to the contrary, no sale which would otherwise constitute a Class B Conversion Event pursuant to this clause (D) shall constitute a Class B Conversion Event if such sale is to the MDC Entities and their Related Persons or if any sale of the Class B Non-Voting Shares in connection with such sale violates any applicable laws or regulations, including, without limitation, Section 4 of the BHC Act and any regulations or orders issued by the Board of Governors of the Federal Reserve System thereunder. For purposes of this paragraph, the term (1) "MDC Entities" shall mean, collectively, McCown De Leeuw & Co. III, L.P., a California limited partnership, McCown De Leeuw & Co. Offshore (Europe) III, L.P., a Bermuda limited partnership, McCown De Leeuw & Co. III (Asia), L.P., a Bermuda limited partnership, and Gamma Fund, LLC, a California limited liability company, (2) "Related Person" shall mean with respect to any person which is a partnership, any partnership with the same controlling general partner as such person and any of the partners of such person which receive capital stock of the Corporation upon a distribution to any such partners by any such person, and with respect to any person which is a corporation or limited liability company, any Affiliate of such person so long as such Affiliate is a partnership, a corporation, a limited liability company or a trust and (3) "Affiliate" shall mean, with respect to any person, any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person. (iii) Each holder of Class B Non-Voting Common Shares shall be entitled to convert shares of Class B Non-Voting Common Stock into an equal number of shares of Voting Common Stock in connection with any Class B Conversion Event if such holder reasonably believes that such Class B Conversion Event shall be consummated, and a written request for conversion from any holder of Class B Non-Voting Common Shares to the Corporation stating such holder's reasonable belief that a Class B Conversion Event shall occur shall be conclusive and shall obligate the Corporation to effect such conversion in a timely manner so as to enable each such holder to participate in such Class B Conversion Event. The Corporation shall not cancel the Class B Non-Voting Common Shares so converted before the tenth day following such Class B Conversion Event and shall reserve such shares until such tenth day for reissuance in compliance with the next sentence. If any Class B Non-Voting Common Shares are converted into Voting Common Shares in connection with a Class B Conversion Event and such Voting Common Shares are not actually distributed, disposed of or sold in such Class B Conversion Event, such Voting Common Shares shall be promptly converted back into the same number of Class B Non-Voting Common Shares. (c) Conversion of Class C Non-Voting Common Stock. (i) In connection with the occurrence (or the expected occurrence of any Class C Conversion Event, each holder of Class C Non-Voting Common Shares shall be entitled to convert into an equal number of shares of Voting Common Stock any or all of the shares of such holder's Class C Non-Voting Common Stock being distributed, disposed of or sold by such holder in connection with such Class C Conversion Event. (ii) For purposes of this Section 4(c), a "Class C Conversion Event" shall mean (a) any public offering or public sale of the Common Stock of the Corporation (including a public offering registered under the 1933 Act or a public sale pursuant to Rule 144 of the Securities and Exchange Commission or any similar rule then in force), (b) any sale of the securities of the Corporation to a person or group of persons (within the meaning of the 1934 Act, if, after such sale, such person or group of persons in the aggregate would own or control securities which possess in the aggregate the ordinary voting power to elect a majority of the Corporation's directors, provided that such sale has been approved by the Corporation's Board of Directors or a committee thereof, (c) a merger, consolidation or similar transaction involving the Corporation if, after such transaction, a person or group of persons (within the meaning of the 1934 Act) would own or control securities which possess in the aggregate the ordinary voting power to elect a majority of the surviving corporation's directors, provided that such transaction has been approved by the Corporation's Board of Directors or a committee thereof, and (d) a sale of the securities of the Corporation by the MDC Entities (as such term is defined in clause (b)(ii) above pursuant to the provisions of Section 2.3 of the Amended and Restated Stockholders Agreement, dated as of February 16, 1996, by and among the Corporation and the stockholders party thereto. Notwithstanding anything in the foregoing to the contrary, no sale which would otherwise constitute a Class C Conversion Event pursuant to clauses (b), (c) or (d) above shall constitute a Class C Conversion Event if such sale is to the MDC Entities and their Related Persons. For purposes of this paragraph, the term (A) "person" shall include any natural person and any corporation, partnership, joint venture, trust, unincorporated organization and any other entity or organization, (B) "Related Person" shall have the meaning assigned to such term in clause (b)(ii) above, and (C) "Affiliate" shall have the meaning assigned to such term in clause (b)(ii) above. (iii) Each holder of Class C Non-Voting Common Shares shall be entitled to convert shares of Class C Non-Voting Common Stock into an equal number of shares of Voting Common Stock in connection with any Class C Conversion Event if such holder reasonably believes that such Class C Conversion Event shall be consummated, and a written request for conversion from any holder of Class C Non-Voting Common Stock to the Corporation stating such holder's reasonable belief that a Class C Conversion Event shall occur shall be conclusive and shall obligate the Corporation to effect such conversion in a timely manner so as to enable each such holder to participate in a Class C Conversion Event. The Corporation shall not cancel the shares of Class C Non-Voting Common Stock so converted before the tenth day following such Class C Conversion Event and shall reserve such shares until such tenth day for reissuance in compliance with the next sentence. If any Class C Non-Voting Common Shares are converted into Voting Common Stock in connection with a Class C Conversion Event and such shares of Voting Common Stock are not actually distributed, disposed of or sold in such Class C Conversion Event, such shares of Voting Common Stock shall be promptly converted back into the same number of shares of Class C Non-Voting Common Stock. (d) Conversion Procedure. (i) Unless otherwise provided herein, each conversion of shares of one class of Common Stock into shares of the other class of Common Stock will be effected by the surrender of the certificate or certificates representing the Common Shares to be converted at the principal office of the Corporation at any time during normal business hours, together with a written notice by the holder of such Common Shares stating that such holder desires to convert such Common Shares, or a stated number of such Common Shares, represented by such certificate(s) into shares of the other class of Common Shares. Unless otherwise provided herein, each conversion will be deemed to have been effected as of the close of business on the date on which such certificate(s) have been surrendered and such notice has been received, and at such time the rights of the holder of the converted Voting Common Shares or Non-Voting Common Shares, as the case may be, as such holder will cease and the person or persons in whose name or names the certificate(s) for Non-Voting Common Shares or Voting Common Shares are to be issued upon such conversion will be deemed to have become the holder or holders of record of the Non-Voting Common Shares or Voting Common Shares represented thereby. (ii) Promptly after the surrender of certificates and the receipt of written notice, the Corporation will issue and deliver in accordance with the surrendering holder's instructions (a) the certificate(s) for the Voting Common Shares or Non-Voting Common Shares issuable upon such conversion and (b) a certificate representing any Voting Common Shares or Non-Voting Common Shares that was represented by the certificate(s) delivered to the Corporation in connection with such conversion but that was not converted. (iii) The issuance of certificates for Voting Common Shares upon conversion of Non-Voting Common Shares and for Non-Voting Common Shares upon conversion of Voting Common Shares will be made without charge to the holders of such shares for any issuance tax in respect thereof or other cost incurred by the Corporation in connection with such conversion and the related issuance of Voting Common Shares or Non-Voting Common Shares, as the case may be. (iv) The Corporation will at all times reserve and keep available out of its authorized but unissued Voting Common Shares and Class A Non-Voting Common Shares, solely for the purpose of issuance upon the conversion of the Voting Common Shares and the Class A Non-Voting Common Shares, respectively, such number of Voting Common Shares and Class A Non-Voting Common Shares as are issuable upon the conversion of all outstanding Voting Common Shares and Class A Non-Voting Common Shares, respectively. All Common Shares which are so issuable will, when issued, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges. The Corporation will take all such actions as may be necessary to assure that all such Common Shares may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which Common Shares may be listed (except for official notices of issuance which will be immediately transmitted by the Corporation upon issuance). (v) The Corporation will not close its books against the transfer of Common Shares in any manner which would interfere with the timely conversion of any Common Shares. 5. Stock Splits. If the Corporation in any manner subdivides or combines the outstanding shares of one class of Common Shares, the outstanding shares of the other class of Common Shares will be proportionately subdivided or combined in a similar manner. 6. Notices. All notices referred to in this Article FOURTH shall be in writing, shall be delivered personally, by facsimile or by first class mail, postage prepaid, and shall be deemed to have been given when so delivered or mailed to the Corporation at its principal office and to any stockholder at such holder's address as it appears in the stock records of the Corporation (unless otherwise specified in a written notice to the Corporation by such holder). 7. Amendment and Waiver. No amendment or waiver of any provision of paragraph 4 of this Article FOURTH, Section (B) or of this paragraph 7 shall be effective without the prior approval of both the holders of a majority of the Voting Common Shares then outstanding, voting as a separate class, and the holders of a majority of the affected class or classes of Non-Voting Common Shares then outstanding, each voting as a separate class. FIFTH: The name and mailing address of the incorporator is as follows: Name Mailing Address James M. Cahillane 1155 Avenue of the Americas New York, New York 10036 SIXTH: The business of the Corporation shall be managed under the direction of the Board of Directors except as otherwise provided by law. The number of Directors of the Corporation shall be fixed from time to time by, or in the manner provided in, the By-Laws. Election of Directors need not be by written ballot unless the By-Laws of the Corporation shall so provide. SEVENTH: The Board of Directors may make, alter or repeal the By-Laws of the Corporation except as otherwise provided in the By-Laws adopted by the Corporation's stockholders. EIGHTH: The Directors of the Corporation shall be protected from personal liability, through indemnification or otherwise, to the fullest extent permitted under the General Corporation Law of the State of Delaware as from time to time in effect. 1. A Director of the Corporation shall under no circumstances have any personal liability to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a Director except for those breaches and acts or omissions with respect to which the General Corporation Law of the State of Delaware, as from time to time amended, expressly provides that this provision shall not eliminate or limit such personal liability of Directors. Neither the modification or repeal of this paragraph 1 of Article EIGHTH nor any amendment to said General Corporation Law that does not have retroactive application shall limit the right of Directors hereunder to exculpation from personal liability for any act or omission occurring prior to such amendment, modification or repeal. 2. The Corporation shall indemnify each Director and Officer of the Corporation to the fullest extent permitted by applicable law, except as may be otherwise provided in the Corporation's By-Laws, and in furtherance hereof the Board of Directors is expressly authorized to amend the Corporation's By-Laws from time to time to give full effect hereto, notwithstanding possible self interest of the Directors in the action being taken. Neither the modification or repeal of this paragraph 2 of Article EIGHTH nor any amendment to the General Corporation Law of the State of Delaware that does not have retroactive application shall limit the right of Directors and Officers to indemnification hereunder with respect to any act or omission occurring prior to such modification, amendment or repeal. NINTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. IN WITNESS WHEREOF, said Outsourcing Solutions Inc. has caused this Amended and Restated Certificate of Incorporation of Outsourcing Solutions Inc. to be executed by its officer thereunto duly authorized this __th day of _____________, 1998. OUTSOURCING SOLUTIONS INC. By: /s/ David E. King Name: David E. King Title: Secretary EX-4 3 EXHIBIT 4.5 - FIRST SUPPLEMENTAL INDENTURE FIRST SUPPLEMENTAL INDENTURE, dated as of March 31, 1998 (the "Supplemental Indenture") between Outsourcing Solutions, Inc., a corporation organized under the laws of the State of Delaware (the "Company"), North Shore Agency Inc., a New York corporation ("NSA"), Accelerated Bureau of Collections, Inc., a Colorado corporation ("ABC"), Sherman Acquisition Corporation, a Delaware corporation ("Sherman"), The Union Corporation, a Delaware corporation ("Union"), Allied Bond & Collection Agency, Inc., a Delaware corporation ("Allied Bond"), American Child Support Service Bureau, Inc., a Pennsylvania corporation ("American Child"), Capital Credit Corporation, a Delaware corporation ("CCC"), High Performance Services, Inc., a Delaware corporation ("HPSI"), High Performance Services of Florida, Inc., a Delaware corporation ("HPSI Florida"), Interactive Performance, Inc., a Delaware corporation ("IPI"), Interactive Performance of Florida, Inc., a Delaware corporation ("IPFL"), Interactive Performance of Georgia, Inc., a Delaware corporation ("IPGA"), Transworld Systems Inc., a California corporation ("TSI"), UCO Properties, Inc., a Delaware corporation ("UCO Properties"), Union Financial Services Group, Inc. , a Nevada corporation ("UCOFS"), American Recovery Company, Inc., a Maryland corporation ("ARC"), C.S.N. Corp., a Illinois corporation ("CSN"), General Connector Corporation, a Massachusetts corporation ("GCC"), U.C.O.-M.B.A. Corporation, a Pennsylvania corporation ("UCOMBA"), Union Specialty Steel Casting Corporation, a Pennsylvania corporation ("Union Steel"), Perimeter Credit, L.L.C., a Delaware limited liability company ("Perimeter") and Gulf State Credit, L.L.C., a Delaware limited liability company ("Gulf State"), (each individually, an "Additional Guarantor" and collectively, the "Additional Guarantors") (as defined below) and Wilmington Trust Company (the "Trustee"), as Trustee under the Indenture (as defined below). Capitalized terms used and not defined herein shall have the same meanings given in the Indenture unless otherwise indicated. WHEREAS, the Company, the Guarantors listed therein and the Trustee are parties to that certain Indenture dated as of November 6, 1996 (the "Indenture") pursuant to which the Company issued its 11% Senior Subordinated Notes 2006 (the "Notes") and the Guarantors guaranteed the obligations of the Company under the Indenture and the Notes; WHEREAS, pursuant to Section 4.18 of the Indenture, if the Company acquires or creates any additional subsidiary which is a domestic Restricted Subsidiary, each such subsidiary shall execute and deliver a supplemental indenture pursuant to which such subsidiary shall unconditionally guaranty the Company's obligations under the Notes; WHEREAS, each of the Additional Guarantors is a domestic Restricted Subsidiary of the Company; WHEREAS, the Company and the Trustee desire to have each of the Additional Guarantors enter into this Supplemental Indenture and agree to guaranty the obligations of the Company under the Indenture and the Notes and each Additional Guarantor desires to enter into the Supplemental Indenture and to guaranty the obligations of the Company under the Indenture and the Notes as of such date; WHEREAS, Section 9.1 of the Indenture provides that the Company, the Guarantors and the Trustee may, without the written consent of the holders of the outstanding Notes, amend the Indenture as provided herein; WHEREAS, by entering into this Supplemental Indenture, the Company, and the Trustee have consented to amend the Indenture in accordance with the terms and conditions herein; and WHEREAS, each Guarantor hereby acknowledges and consents to amend the Indenture in accordance with the terms and conditions herein; WHEREAS, all acts and things prescribed by the Articles of Incorporation and the By-laws (each as now in effect) of each Additional Guarantor necessary to make this Supplemental Indenture a valid instrument legally binding on the Additional Guarantor for the purposes herein expressed, in accordance with its terms, have been duly done and performed; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Company, the Additional Guarantors and the Trustee hereby agree for the benefit of each other and the equal and ratable benefit of the holders of the Notes as follows: 1. Additional Guarantors as Guarantors. As of the date hereof and pursuant to this Indenture Supplement, each Additional Guarantor shall become a Guarantor under clause (ii) of the definition of Guarantor in the Indenture in accordance with the terms and conditions of the Indenture and shall assume all rights and obligations of a Guarantor thereunder. 2. Compliance with and Fulfillment of Condition of Section 4.18. The execution and delivery of this Supplemental Indenture by each Additional Guarantor (along with such documentation relating thereto as the Trustee shall require, including, without limitation, an Opinion of Counsel as to the enforceability of the Supplemental Indenture and an Officer's Certificate) fulfills the obligations of the Company under Section 4.18 of the Indenture. 3. Construction. For all purposes of this Supplemental Indenture, except as otherwise herein expressly provided or unless the context otherwise requires: (i) the terms and expressions used herein shall have the same meanings as corresponding terms and expressions used in the Indenture; and (ii) the words "herein," "hereof" and "hereby" and other words of similar import used in this Supplemental Indenture refer to this Supplemental Indenture as a whole and not to any particular Section hereof. 4. Trustee Acceptance. The Trustee accepts the amendment of the Indenture effected by this Supplemental Indenture, as hereby amended, but only upon the terms and conditions set forth in the Indenture, as hereby amended, including the terms and provisions defining and limiting the liabilities and responsibilities of the Trustee in the performance of its duties and obligations under the Indenture, as hereby amended. Without limiting the generality of the foregoing, the Trustee has no responsibility for the correctness of the recitals of fact herein contained which shall be taken as the statements of each of the Company and each Additional Guarantor, respectively, and makes no representations as to the validity or enforceability against any of the Company or the Additional Guarantors. 5. Indenture Ratified. Except as expressly amended hereby, the Indenture is in all respects ratified and confirmed and all the terms, conditions and provisions thereof shall remain in full force and effect. 6. Holders Bound. This Supplemental Indenture shall form a part of the Indenture for all purposes, and every holder of the Notes heretofore or hereafter authenticated and delivered shall be bound hereby. 7. Successors and Assigns. This Supplemental Indenture shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 8. Counterparts. This Supplemental Indenture may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, and all of such counterparts shall together constitute one and the same instrument. 9. Governing Law. This Supplemental Indenture shall be governed by and construed in accordance with the internal laws of the State of New York without giving effect to principles of conflicts of laws. IN WITNESS WHEREOF, the Company, the Additional Guarantors and the Trustee have caused this Supplemental Indenture to be duly executed as of the date first above written. COMPANY: OUTSOURCING SOLUTIONS INC. By: /s/ Timothy G. Beffa Title: President ADDITIONAL GUARANTORS: NORTH SHORE AGENCY, INC. By: /s/ Timothy G. Beffa Title: Vice President ACCELERATED BUREAU OF COLLECTIONS, INC. By: /s/ Timothy G. Beffa Title: Vice President SHERMAN ACQUISITION CORPORATION By: /s/ Timothy G. Beffa Title: President THE UNION CORPORATION By: /s/ Timothy G. Beffa Title: President ALLIED BOND & COLLECTION AGENCY, INC. By: /s/ Richard C. Hoffman Title: Assistant Secretary AMERICAN CHILD SUPPORT SERVICE BUREAU, INC. By: /s/ Richard C. Hoffman Title: Assistant Secretary CAPITAL CREDIT CORPORATION By: /s/ Timothy G. Beffa Title: Chief Executive Officer HIGH PERFORMANCE SERVICES, INC. By: /s/ Timothy G. Beffa Title: President HIGH PERFORMANCE SERVICES OF FLORIDA, INC. By: /s/ Timothy G. Beffa Title: President INTERACTIVE PERFORMANCE, INC. By: /s/ Timothy G. Beffa Title: Chairman of the Board INTERACTIVE PERFORMANCE SERVICES OF FLORIDA, INC. By: /s/ Timothy G. Beffa Title: President INTERACTIVE PERFORMANCE SERVICES OF GEORGIA, INC. By: /s/ William B. Hewitt Title: President TRANSWORLD SYSTEMS INC. By: /s/ Richard C. Hoffman Title: Assistant Secretary UCO PROPERTIES, INC. By: /s/ Timothy G. Beffa Title: President UNION FINANCIAL SERVICES GROUP, INC. By: /s/ Timothy G. Beffa Title: Vice President AMERICAN RECOVERY COMPANY, INC. By: /s/ Timothy G. Beffa Title: President C.S.N. CORP. By: /s/ Timothy G. Beffa Title: President GENERAL CONNECTOR CORPORATION By: /s/ Timothy G. Beffa Title: President U.C.O.-M.B.A. CORPORATION By: /s/ Timothy G. Beffa Title: President UNION SPECIALTY STEEL CASTING CORPORATION By: /s/ Timothy G. Beffa Title: President PERIMETER CREDIT, L.L.C. By Account Portfolios Inc., as Sole Member By: /s/ Timothy G. Beffa Title: Chairman of the Board GULF STATE CREDIT, L.L.C. By Account Portfolios, Inc., as Sole Member By: /s/ Timothy G. Beffa Title: Chairman of the Board TRUSTEE: WILMINGTON TRUST COMPANY By: /s/ Bruce L. Bisson Title: Vice President ACKNOWLEDGED AND CONSENTED: CFC SERVICES CORP. By: /s/ Timothy G. Beffa Title: President A.M. MILLER & ASSOCIATES, INC. By: /s/ Timothy G. Beffa Title: Treasurer THE CONTINENTAL ALLIANCE, INC. By: /s/ Richard C. Hoffman Title: Assistant Secretary ALASKA FINANCIAL SERVICES, INC. By: /s/ Richard C. Hoffman Title: Assistant Secretary ACCOUNT PORTFOLIOS, INC. By: /s/ Timothy G. Beffa Title: Chairman of the Board PAYCO AMERICAN CORPORATION By: /s/ Timothy G. Beffa Title: President PAYCO-GENERAL AMERICAN CREDITS, INC. By: /s/ Timothy G. Beffa Title: Vice President NATIONAL ACCOUNT SYSTEMS, INC. By: /s/ Timothy G. Beffa Title: Vice President UNIVERSITY ACCOUNTING SERVICE, INC. By: /s/ Timothy G. Beffa Title: Vice President ASSET RECOVERY & MANAGEMENT CORP. By: /s/ Timothy G. Beffa Title: Vice President INDIANA MUTUAL CREDIT ASSOCIATION, INC. By: /s/ Timothy G. Beffa Title: Vice President FURST AND FURST, INC. By: /s/ Timothy G. Beffa Title: Vice President JENNIFER LOOMIS & ASSOCIATES, INC. By: /s/ Timothy G. Beffa Title: Vice President FM SERVICES CORPORATION By: /s/ Timothy G. Beffa Title: Vice President QUALINK, INC. By: /s/ Timothy G. Beffa Title: Vice President PROFESSIONAL RECOVERIES INC. By: /s/ Timothy G. Beffa Title: Vice President PAYCO AMERICAN INTERNATIONAL CORP. By: /s/ Timothy G. Beffa Title: Vice President GUARANTEE ___________________________________ (the "Guarantor") has unconditionally guaranteed on a senior basis (the "Guarantee") that the Principal of, interest and Additional Interest, if any, on and any Additional Amounts, if any, with respect to the Security upon which this notation is endorsed, will be duly and punctually paid in full when due, whether at maturity, by acceleration or otherwise, and interest on overdue Principal, and (to the extent permitted by law) interest on any interest or Additional Interest, if any, on or Additional Amounts, if any, with respect to the Securities and all other Obligations of the Company to the Holders or the Trustee under the Securities or the Indenture (including fees, expenses or other Obligations) will be promptly paid in full or performed. The obligations of the Guarantor to the Holders of Securities and to the Trustee pursuant to the Guarantee and the Indenture and the Supplemental Indenture are expressly set forth, and are senior obligations of each such Guarantor to the extent and in the manner provided, in Article X of the Indenture, and reference is made to such Indenture for the precise terms of the Guarantee therein made. A trustee, director, officer, employee, stockholder or incorporator, as such of the Guarantor shall not have any liability for any obligations of the Guarantor under the Securities, the Indenture, the Supplemental Indenture or the Guarantee or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Guarantee. All capitalized terms used but not defined herein shall have the meaning ascribed to them in the Security upon which this notation is endorsed. As used herein the "First Supplemental Indenture" means the First Supplemental Indenture, dated as of March 31, 1998, among the Company, the Original Guarantors (as defined therein), the Additional Guarantors (as defined therein) and the Trustee. The Guarantee shall not be valid or obligatory for any purpose until the certificate of authentication on the Securities upon which the Guarantee is noted shall have been executed by the Trustee under the Indenture and the First Supplemental Indenture by the manual signature of one of its authorized officers. Guarantor: By: --------------------------- Name: Title: EX-10 4 EXHIBIT 10.5 - CONSULTING AGREEMENT CONSULTING AGREEMENT This Consulting Agreement (the "Agreement") is made as of the 1st day of March, 1999 between Daniel J. Dolan ("Dolan") and Outsourcing Solutions Inc. ("OSI"). WHEREAS, prior to his resignation, Dolan served as Executive Vice President and Chief Financial Officer of OSI and, in that capacity, served in an integral role with respect to OSI's financing and certain other business activities (the "Activities"); and WHEREAS, OSI wishes to retain Dolan to continue to provide certain advice to OSI from time to time in connection with the Activities, and Dolan has agreed to provide such services. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the parties agree as follows: 1. Services Provided. Dolan shall provide up to 400 hours of advice relative to the Activities to OSI as requested by OSI. Such services shall be performed at such times as are mutually acceptable to both parties. 2. Duration of Contract. This Agreement shall be effective on the date hereof, and shall continue until December 31, 1999. 3. Compensation. (a) Fees. For services provided hereunder, Dolan shall be paid a fee of $134,400 in advance. (b) Expenses. For travel incurred at OSI's direction, OSI will reimburse Dolan his actual reasonable expenses for meals and incidentals, plus the actual reasonable cost of transportation and lodging. (c) Requests for reimbursement of expenses shall be directed to Daniel T. Pijut. OSI shall promptly pay all such requests for reimbursement. 4. Nature of Relationship. Dolan is retained by OSI as an independent contractor. Dolan shall not enter into any agreement nor incur any obligations on OSI's behalf, nor commit OSI in any manner, without OSI's prior written consent. 5. Agreement and Amendment. This Agreement constitutes the parties' entire agreement and supersedes any other oral or written agreements or understandings between the parties regarding the subject matter hereof. This Agreement may only be modified by a writing, signed by both parties. 6. Applicable Law. This Agreement shall be construed under the laws of Missouri. IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have hereunto executed this Agreement as of the day and year first written above. DANIEL J. DOLAN /s/Daniel J. Dolan ------------------------------ OUTSOURCING SOLUTIONS INC. /s/Timothy G. Beffa ------------------------------ Timothy G. Beffa President and Chief Executive Officer EX-10 5 EXHIBIT 10.6 - CONSULTING AGREEMENT February 6, 1998 Mr. William B. Hewitt President & CEO The Union Corporation 211 King Street, Suite 100 Charleston, South Carolina 29401 Dear Bill: The purpose of this letter is to outline the mutual understandings we have developed regarding your ongoing association with OSI. o You will join the OSI Board of Directors as the non-executive Vice Chairman. You will receive the standard non-employee Board member compensation, which will consist of $2,000 per meeting and participation in the Director's option plan. This plan will provide you options for 3,000 shares of OSI stock at an exercise price of $50. These shares will time-vest over three years. o We will engage you as a consultant to OSI with your primary responsibility to assist in growing the outsourcing business of OSI. The terms of this consulting agreement will be as follows: - The initial term of the agreement will be for one year, effective January 26, 1998. The expectation is that you will devote approximately 80% of normal working hours to OSI activities. Renewal terms will be at the mutual consent of OSI and you. Compensation will be at the rate of $5,000 per day, or approximately $1.0 million at the 80% time assumption. - You will have the opportunity to participate in the OSI stock option program with an initial grant of 10,000 options at an exercise price of $50. Vesting of these shares are subject to various performance and liquidity criteria which will be outlined in the option agreement. Bill, I think this outlines the general areas that have been agreed to. Obviously, the option programs and consulting agreement will be given to you for final review and signing. I sincerely look forward to working with you and gaining your help in continuing to build OSI into a great company. Sincerely, /s/ Tim Beffa Tim Beffa TGB/sw EX-10 6 EXHIBIT 10.7 - EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT This Agreement is made as of the 1st day of September, 1998 between Outsourcing Solutions Inc., a Delaware corporation, with offices at 390 South Woods Mill Road, Suite 350, Chesterfield, Missouri 63017 (the "Company"), and Michael A. DiMarco, an individual residing in the State of Missouri (the "Employee"). RECITALS WHEREAS, the Company desires to secure the services and employment of the Employee on behalf of the Company, and the Employee desires to enter into employment with the Company, upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein, the parties hereto, each intending to be legally bound hereby, agree as follows: 1. Employment. The Company hereby employs the Employee as Executive Vice President--President of Fee Services of the Company, and the Employee accepts such employment for the term of the employment specified in Section 3 below. During the Employment Term (as defined below), the Employee shall serve as the Executive Vice President--President of Fee Services of the Company, performing such duties as shall be reasonably required of such an employee of the Company, and shall have such other powers and perform such other additional executive duties as may from time to time be assigned to him by the Board of Directors of the Company. The Employee's primary place of employment shall be St. Louis, Missouri. 2. Performance. The Employee will serve the Company faithfully and to the best of his ability and will devote substantially all of his time, energy, experience and talents during regular business hours and as otherwise reasonably necessary to such employment, to the exclusion of all other business activities. 3. Employment Term. The employment term shall begin on the date of this Agreement and continue until December 31, 1999, unless earlier terminated pursuant to Section 7 below (the "Employment Term"); provided, that on December 31, 1999 and on each anniversary thereafter, the Employment Term shall be automatically extended for an additional twelve month period unless 30 days prior to such anniversary date either the Company or the Employee shall give written notice of termination of the Agreement, in which case the Agreement will terminate at the end of the then existing Employment Term. 4. Compensation. (a) Salary. During the Employment Term, the Company shall pay the Employee a base salary, payable in equal semimonthly installments, subject to withholding and other applicable taxes, at an annual rate of Three Hundred Twenty Five Thousand Dollars ($325,000.00). (b) Bonus. For the period commencing on the date of this Agreement and ending on December 31, 1998, the Employee shall receive a bonus of no less than $220,000 and the Company shall pay the Employee such guaranteed amount, subject to withholding and other applicable taxes, on or before March 15, 1999. Commencing on January 1, 1999, the Employee shall be eligible for a target annual bonus of 67% of his base salary. Annual bonuses (other than the guaranteed portion of the 1998 bonus) shall be based on the satisfaction of performance targets established by the Board of Directors on or before December 31 of each year for the next succeeding year. (c) Medical and Dental Health, Life and Disability Insurance Benefits. During the Employment Term, the Employee shall be entitled to medical and dental health, life insurance and disability insurance benefits in accordance with the Company's established practices with respect to its key employees. (d) Vacation; Sick Leave. During the Employment Term, the Employee shall be entitled to vacation and sick leave in accordance with the Company's established practices with respect to its key employees. 5. Expenses. (a) The Employee shall be reimbursed by the Company for all reasonable expenses incurred by him in connection with the performance of his duties hereunder in accordance with policies established by the Board from time to time and upon receipt of appropriate documentation. (b) The Employee shall be reimbursed by the Company for normal moving and relocation expenses incurred by Employee to move his residence to the St. Louis metropolitan area, including reasonable and customary real estate commission, closing costs and discount points and reasonable expenses for temporary living, return home travel and family travel to St. Louis for house purchasing purposes. If requested by Employee, Company shall provide an advance of $115,000 to facilitate Employee's relocation, to be repaid to the Company no later than 48 hours following the closing of the sale of Employee's current residence in Fairview, Texas. 6. Secret Processes and Confidential Information. For the Employment Term and thereafter, (a) the Employee will not divulge, transmit or otherwise disclose (except as legally compelled by court order, and then only to the extent required, after prompt notice to the Company of any such order), directly or indirectly, other than in the regular and proper course of business of the Company, any confidential knowledge or information with respect to the operations or finances of the Company or with respect to confidential or secret processes, services, techniques, customers or plans with respect to the Company and (b) the Employee will not use, directly or indirectly, any confidential information for the benefit of anyone other than the Company; provided, however, that the Employee has no obligation, express or implied, to refrain from using or disclosing to others any such knowledge or information which is or hereafter shall become available to the public other than through disclosure by the Employee. All new processes, techniques, know-how, inventions, plans, products, patents and devices developed, made or invented by the Employee, alone or with others, while an employee of the Company, shall be and become the sole property of the Company, unless released in writing by the Company, and the Employee hereby assigns any and all rights therein or thereto to the Company. During the term of this Agreement and thereafter, Employee shall not take any action to disparage or criticize to any third parties any of the services of the Company or to commit any other action that injures or hinders the business relationships of the Company. During the term of this Agreement and for two years thereafter, Employee shall not employ, solicit for employment or otherwise contract for the services of any employee of the Company or any of its Affiliates (as defined below) at the time of this Agreement or who shall subsequently become an employee of the Company or any of its Affiliates, provided that Employee shall not be prohibited from such solicitation or employment if such employee (a) initiated discussions with Employee without any direct or indirect solicitation from Employee, (b) responded to a general public solicitation, or (c) has terminated employment with the Company prior to commencement of discussions with Employee. All files, records, documents, memorandums, notes or other documents relating to the business of Company, whether prepared by Employee or otherwise coming into his possession in the course of the performance of his services under this Agreement, shall be the exclusive property of Company and shall be delivered to Company and not retained by Employee upon termination of this Agreement for any reason whatsoever. 7. Termination. The employment of the Employee hereunder may be terminated at any time by the Company with or without "cause". For purposes of this Agreement, "cause" shall mean: (i) embezzlement, theft or other misappropriation of any property of the Company or any subsidiary, (ii) gross or willful misconduct resulting in substantial loss to the Company or any subsidiary or substantial damage to the reputation of the Company or any subsidiary, (iii) any act involving moral turpitude which results in a conviction for a felony involving moral turpitude, fraud or misrepresentation, (iv) gross neglect of his assigned duties to the Company or any subsidiary, (v) gross breach of his fiduciary obligations to the Company or any subsidiary, or (vi) any chemical dependence which materially affects the performance of his duties and responsibilities to the Company or any subsidiary; provided that in the case of the misconduct set forth in clauses (iv) and (vi) above, such misconduct shall continue for a period of 30 days following written notice thereof by the Company to the Employee. 8. Severance. If (a) the Employee's employment is terminated by the Company without "cause" or (b) the Company does not agree to extend the Employment Term upon the expiration thereof, the Employee shall be entitled to (i) receive an amount equal to his base salary for the year preceding the Employee's termination, payable, at the Company's option, in a lump sum on the date of termination or ratably over the one year period following the date of termination (the "Severance Period"), and (ii) continue to receive the medical and dental health benefits referred to in Section 4(c) during the Severance Period; provided, however, if either such event occurs prior to the extension of the initial Employment Term, Employee shall be entitled to (i) $325,000, payable in a lump sum on the date of termination, and (ii) continue to receive the medical and dental health benefits referred to in Section 4(c) during the Severance Period. If the Employee's employment is terminated by the Company "for cause", the Employee shall not be entitled to severance compensation. The Employee covenants and agrees that he will not, during the one year period following the termination of the Employee's employment by the Company, within any jurisdiction or marketing area in which the Company or any of its Affiliates (as defined below) is doing business or is qualified to do business, directly or indirectly own, manage, operate, control, be employed by or participate in the ownership, management, operation or control of, or be connected in any manner with, any business of the type and character engaged in and competitive with that conducted by the Company or any of its Affiliates at the time of such termination; provided, however, that ownership of securities of 2% or less of any class of securities of a public company shall not be considered to be competition with the Company or any of its Affiliates. For the purposes of this Section 8, the term "Affiliate" shall mean, with respect to the Company, any person or entity which, directly or indirectly, owns or is owned by, or is under common ownership with, the Company. The term "own" (including, with correlative meanings, "owned by" and "under common ownership with") shall mean the ownership of 50% or more of the voting securities (or their equivalent) of a particular entity. 9. Notice. Any notices required or permitted hereunder shall be in writing and shall be deemed to have been given when personally delivered or when mailed, certified or registered mail, postage prepaid, to the following addresses: If to the Employee: Michael A. DiMarco 247 Doulton Place Town and Country, Missouri 63141 If to the Company: Outsourcing Solutions Inc. 390 South Woods Mill Road, Suite 350 Chesterfield, Missouri 63017 Attn: President With a copy to: McCown De Leeuw & Co. 101 East 52nd Street 31st Floor New York, New York 10022 Attention: David E. King 10. General. (a) Governing Law; Jurisdiction. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Missouri applicable to contracts executed and to be performed entirely within said State. Any judicial proceeding brought against any of the parties to this Agreement or any dispute arising out of this Agreement or any matter related hereto may be brought in the courts of the State of Missouri or in the United States District Court for the Eastern District of Missouri, and, by execution and delivery of this Agreement, each of the parties to this Agreement accepts the jurisdiction of said courts, and irrevocably agrees to be bound by any judgment rendered thereby in connection with this Agreement. The foregoing consent to jurisdiction shall not be deemed to confer rights on any person other than the respective parties to this Agreement. (b) Assignability. The Employee may not assign his interest in or delegate his duties under this Agreement. Notwithstanding anything else in this Agreement to the contrary, the Company may assign this Agreement to and all rights hereunder shall inure to the benefit of any person, firm or corporation succeeding to all or substantially all of the business or assets of the Company by purchase, merger or consolidation. (c) Enforcement Costs. In the event that either the Company or the Employee initiates an action or claim to enforce any provision or term of this Agreement, the costs and expenses (including attorney's fees) of the prevailing party shall be paid by the other party, such party to be deemed to have prevailed if such action or claim is concluded pursuant to a court order or final judgment which is not subject to appeal, a settlement agreement or dismissal of the principle claims. (d) Binding Effect. This Agreement is for the employment of Employee, personally, and for the services to be rendered by him must be rendered by him and no other person. This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns. (e) Entire Agreement; Modification. This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and may not be modified or amended in any way except in writing by the parties hereto. (f) Duration. Notwithstanding the term of employment hereunder, this Agreement shall continue for so long as any obligations remain under this Agreement. (g) Survival. The covenants set forth in Sections 6 and 8 of this Agreement shall survive and shall continue to be binding upon Employee notwithstanding the termination of this Agreement for any reason whatsoever. The covenants set forth in Sections 6 and 8 of this Agreement shall be deemed and construed as separate agreements independent of any other provision of this Agreement. The existence of any claim or cause of action by Employee against Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by Company of any or all covenants. It is expressly agreed that the remedy at law for the breach or any such covenant is inadequate and that injunctive relief shall be available to prevent the breach or any threatened breach thereof. IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have hereunto executed this Agreement the day and year first written above. OUTSOURCING SOLUTIONS INC. By /s/Timothy G. Beffa ---------------------------------- Timothy G. Beffa, President and Chief Executive Officer EMPLOYEE /s/Michael A. DiMarco ---------------------------------- Michael A. DiMarco EX-10 7 EXHIBIT 10.8 - EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT This Agreement is made as of the 14th day of September, 1998 between Outsourcing Solutions Inc., a Delaware corporation, with offices at 390 South Woods Mill Road, Suite 350, Chesterfield, Missouri 63017 (the "Company"), and C. Bradford McLeod, an individual residing in the State of Missouri (the "Employee"). RECITALS WHEREAS, the Company desires to secure the services and employment of the Employee on behalf of the Company, and the Employee desires to enter into employment with the Company, upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein, the parties hereto, each intending to be legally bound hereby, agree as follows: 1. Employment. The Company hereby employs the Employee as Senior Vice President--Human Resources of the Company, and the Employee accepts such employment for the term of the employment specified in Section 3 below. During the Employment Term (as defined below), the Employee shall serve as the Senior Vice President--Human Resources of the Company, performing such duties as shall be reasonably required of such an employee of the Company, and shall have such other powers and perform such other additional executive duties as may from time to time be assigned to him by the Board of Directors of the Company. The Employee's primary place of employment shall be St. Louis, Missouri. 2. Performance. The Employee will serve the Company faithfully and to the best of his ability and will devote substantially all of his time, energy, experience and talents during regular business hours and as otherwise reasonably necessary to such employment, to the exclusion of all other business activities. 3. Employment Term. The employment term shall begin on the date of this Agreement and continue until December 31, 1999, unless earlier terminated pursuant to Section 7 below (the "Employment Term"); provided, that on December 31, 1999 and on each anniversary thereafter, the Employment Term shall be automatically extended for an additional twelve month period unless 30 days prior to such anniversary date either the Company or the Employee shall give written notice of termination of the Agreement, in which case the Agreement will terminate at the end of the then existing Employment Term. 4. Compensation. (a) Salary. During the Employment Term, the Company shall pay the Employee a base salary, payable in equal semimonthly installments, subject to withholding and other applicable taxes, at an annual rate of One Hundred Seventy Five Thousand Dollars ($175,000.00). (b) Bonus. The Company shall pay the Employee a signing bonus, subject to withholding and other applicable taxes, of $70,000, payable on or before September 15, 1998. For the period commencing on the date of this Agreement and ending on December 31, 1998, the Employee shall be eligible for an annual bonus of up to 50% of his base salary, pro rated to reflect the partial year, on or before March 15, 1999. Commencing on January 1, 1999, the Employee shall be eligible for an annual bonus of up to 50% of his base salary. Annual bonuses shall be based on the satisfaction of performance targets established by the Board of Directors on or before December 31 of each year for the next succeeding year. (c) Medical and Dental Health, Life and Disability Insurance Benefits. During the Employment Term, the Employee shall be entitled to medical and dental health, life insurance and disability insurance benefits in accordance with the Company's established practices with respect to its key employees. (d) Vacation; Sick Leave. During the Employment Term, the Employee shall be entitled to vacation and sick leave in accordance with the Company's established practices with respect to its key employees. 5. Expenses. (a) The Employee shall be reimbursed by the Company for all reasonable expenses incurred by him in connection with the performance of his duties hereunder in accordance with policies established by the Board from time to time and upon receipt of appropriate documentation. (b) The Employee shall be reimbursed by the Company for normal moving and relocation expenses incurred by Employee to move his residence to the St. Louis metropolitan area, including reasonable and customary real estate commission, closing costs and discount points and reasonable expenses for temporary living, return home travel and family travel to St. Louis for house purchasing purposes. Company shall reimburse Employee an amount equal to any loss sustained by him on the sale of his current residence, up to $50,000. If requested by Employee, Company shall provide an advance of $225,000 to facilitate Employee's relocation, to be repaid to the Company no later than 48 hours following the closing of the sale of Employee's current residence in Oak Hill, Virginia. Company shall reimburse Employee for duplicate housing expenses for up to six months following the closing of the purchase of Employee's residence in the St. Louis metropolitan area. Employee shall receive a lump sum payment in an amount sufficient to reimburse him for income taxes payable by him as a result of such moving and relocation expenses and the payment received under this Section 5(b). 6. Secret Processes and Confidential Information. For the Employment Term and thereafter, (a) the Employee will not divulge, transmit or otherwise disclose (except as legally compelled by court order, and then only to the extent required, after prompt notice to the Company of any such order), directly or indirectly, other than in the regular and proper course of business of the Company, any confidential knowledge or information with respect to the operations or finances of the Company or with respect to confidential or secret processes, services, techniques, customers or plans with respect to the Company and (b) the Employee will not use, directly or indirectly, any confidential information for the benefit of anyone other than the Company; provided, however, that the Employee has no obligation, express or implied, to refrain from using or disclosing to others any such knowledge or information which is or hereafter shall become available to the public other than through disclosure by the Employee. All new processes, techniques, know-how, inventions, plans, products, patents and devices developed, made or invented by the Employee, alone or with others, while an employee of the Company, shall be and become the sole property of the Company, unless released in writing by the Company, and the Employee hereby assigns any and all rights therein or thereto to the Company. During the term of this Agreement and thereafter, Employee shall not take any action to disparage or criticize to any third parties any of the services of the Company or to commit any other action that injures or hinders the business relationships of the Company. During the term of this Agreement and thereafter, Employee shall not employ, solicit for employment or otherwise contract for the services of any employee of the Company or any of its Affiliates (as defined below) at the time of this Agreement or who shall subsequently become an employee of the Company or any of its Affiliates, provided that Employee shall not be prohibited from such solicitation or employment if such employee (a) initiated discussions with Employee without any direct or indirect solicitation from Employee, (b) responded to a general public solicitation, or (c) has terminated employment with the Company prior to commencement of discussions with Employee. All files, records, documents, memorandums, notes or other documents relating to the business of Company, whether prepared by Employee or otherwise coming into his possession in the course of the performance of his services under this Agreement, shall be the exclusive property of Company and shall be delivered to Company and not retained by Employee upon termination of this Agreement for any reason whatsoever. 7. Termination. The employment of the Employee hereunder may be terminated at any time by the Company with or without "cause". For purposes of this Agreement, "cause" shall mean: (i) embezzlement, theft or other misappropriation of any property of the Company or any subsidiary, (ii) gross or willful misconduct resulting in substantial loss to the Company or any subsidiary or substantial damage to the reputation of the Company or any subsidiary, (iii) any act involving moral turpitude which results in a conviction for a felony involving moral turpitude, fraud or misrepresentation, (iv) gross neglect of his assigned duties to the Company or any subsidiary, (v) gross breach of his fiduciary obligations to the Company or any subsidiary, or (vi) any chemical dependence which materially affects the performance of his duties and responsibilities to the Company or any subsidiary; provided that in the case of the misconduct set forth in clauses (iv) and (vi) above, such misconduct shall continue for a period of 30 days following written notice thereof by the Company to the Employee. 8. Severance. (a) If Employee's employment is terminated by the Company without "cause," the Company does not agree to extend the Employment Term upon the expiration thereof, or Employee terminates his employment because the Company reduces his responsibilities or compensation in a manner which is tantamount to termination of Employee's employment, Employee shall be entitled to (i) receive an amount equal to his base salary for the year preceding the date of the Employee's termination or the date on which the Employment Term expires, as the case may be, such amount to be payable, at the Company's option, in a lump sum on the date of termination or the date on which the Employment Term expires, as the case may be, or ratably over the one year period following the date of termination or expiration (the "Severance Period"), (ii) continue to receive the medical and dental health benefits referred to in Section 4(c) during the Severance Period, and (iii) reasonable outplacement services during the Severance Period provided by an outplacement firm designated by Employee; provided, however, if any such event occurs prior to the extension of the initial Employment Term, Employee shall be entitled to (i) $175,000, payable, in a lump sum on the date of termination, (ii) continue to receive the medical and dental health benefits referred to in Section 4(c) during the Severance Period, and (iii) reasonable outplacement services during the Severance Period provided by an outplacement firm designated by Employee. (b) If, prior to September 14, 2000, there is a Sale of the Business (as defined in Section 2.4 of the Amended and Restated Stockholders Agreement dated as of February 16, 1996 by and among the Company and various stockholders of the Company) or Timothy G. Beffa no longer serves as Chief Executive Officer of the Company, then Employee may elect to terminate his employment with the Company and he shall be entitled to the severance set forth in Section 8(a) and relocation assistance to the Washington D.C. metropolitan area, equivalent to the assistance set forth in Section 5(b); provided, however, Employee may elect to relocate to an area other than Washington D.C., in which case such assistance shall be no greater than the assistance that would have been provided to relocate Employee to Washington D.C. (c) If the Employee's employment is terminated by the Company "for cause", the Employee shall not be entitled to severance compensation. (d) The Employee covenants and agrees that he will not, during the one year period following the termination of the Employee's employment by the Company, within any jurisdiction or marketing area in which the Company or any of its Affiliates (as defined below)is doing business or is qualified to do business, directly or indirectly own, manage, operate, control, be employed by or participate in the ownership, management, operation or control of, or be connected in any manner with, any business of the type and character engaged in and competitive with that conducted by the Company or any of its Affiliates at the time of such termination; provided, however, that ownership of securities of 2% or less of any class of securities of a public company shall not be considered to be competition with the Company or any of its Affiliates. For the purposes of this Section 8, the term "Affiliate" shall mean, with respect to the Company, any person or entity which, directly or indirectly, owns or is owned by, or is under common ownership with, the Company. The term "own" (including, with correlative meanings, "owned by" and "under common ownership with") shall mean the ownership of 50% or more of the voting securities (or their equivalent) of a particular entity. 9. Notice. Any notices required or permitted hereunder shall be in writing and shall be deemed to have been given when personally delivered or when mailed, certified or registered mail, postage prepaid, to the following addresses: If to the Employee: C. Bradford McLeod 14256 Manderleigh Woods Drive Town and Country, Missouri 63017 If to the Company: Outsourcing Solutions Inc. 390 South Woods Mill Road, Suite 350 Chesterfield, Missouri 63017 Attn: President With a copy to: McCown De Leeuw & Co. 101 East 52nd Street 31st Floor New York, New York 10022 Attention: David E. King 10. General. (a) Governing Law; Jurisdiction. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Missouri applicable to contracts executed and to be performed entirely within said State. Any judicial proceeding brought against any of the parties to this Agreement or any dispute arising out of this Agreement or any matter related hereto may be brought in the courts of the State of Missouri or in the United States District Court for the Eastern District of Missouri, and, by execution and delivery of this Agreement, each of the parties to this Agreement accepts the jurisdiction of said courts, and irrevocably agrees to be bound by any judgment rendered thereby in connection with this Agreement. The foregoing consent to jurisdiction shall not be deemed to confer rights on any person other than the respective parties to this Agreement. (b) Assignability. The Employee may not assign his interest in or delegate his duties under this Agreement. Notwithstanding anything else in this Agreement to the contrary, the Company may assign this Agreement to and all rights hereunder shall inure to the benefit of any person, firm or corporation succeeding to all or substantially all of the business or assets of the Company by purchase, merger or consolidation. (c) Enforcement Costs. In the event that either the Company or the Employee initiates an action or claim to enforce any provision or term of this Agreement, the costs and expenses (including attorney's fees) of the prevailing party shall be paid by the other party, such party to be deemed to have prevailed if such action or claim is concluded pursuant to a court order or final judgment which is not subject to appeal, a settlement agreement or dismissal of the principle claims. (d) Binding Effect. This Agreement is for the employment of Employee, personally, and for the services to be rendered by him must be rendered by him and no other person. This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns. (e) Entire Agreement; Modification. This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and may not be modified or amended in any way except in writing by the parties hereto. (f) Duration. Notwithstanding the term of employment hereunder, this Agreement shall continue for so long as any obligations remain under this Agreement. (g) Survival. The covenants set forth in Sections 6 and 8 of this Agreement shall survive and shall continue to be binding upon Employee notwithstanding the termination of this Agreement for any reason whatsoever. The covenants set forth in Sections 6 and 8 of this Agreement shall be deemed and construed as separate agreements independent of any other provision of this Agreement. The existence of any claim or cause of action by Employee against Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by Company of any or all covenants. It is expressly agreed that the remedy at law for the breach or any such covenant is inadequate and that injunctive relief shall be available to prevent the breach or any threatened breach thereof. IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have hereunto executed this Agreement the day and year first written above. OUTSOURCING SOLUTIONS INC. By: /s/ Timothy G. Beffa ---------------------------------- Timothy G. Beffa, President and Chief Executive Officer EMPLOYEE /s/ C. Bradford McLeod ---------------------------------- C. Bradford McLeod EX-10 8 EXHIBIT 10.13 - NON-QUAL. STOCK OPTION AGRMT OUTSOURCING SOLUTIONS INC. NON-QUALIFIED STOCK OPTION AWARD AGREEMENT [C] This Agreement (the "Agreement"), dated [ ] , 1996, is made between Outsourcing Solutions Inc. (the "Company") and Timothy G. Beffa (the "Optionee"). All capitalized terms that are not defined herein shall have the meaning as defined in the Outsourcing Solutions Inc. 1995 Stock Option and Stock Award Plan, as amended (the "Plan"). References to "he," "him," and "his" shall mean the feminine form of such terms, when applicable. W I T N E S S E T H : 1. Grant of Option. Pursuant to the provisions of the Plan, the Company hereby grants to the Optionee, subject to the terms and conditions of the Plan and subject further to the terms and conditions herein set forth, the right and option to purchase from the Company, all or any part of an aggregate of 41,555.21 shares of $0.01 par value common stock of the Company (the "Stock") at a per share purchase price equal to $12.50 (the "Option"), such Option to be exercisable as hereinafter provided. The Option shall not be treated as an incentive stock option as defined in Section 422 of the Internal Revenue Code of 1986, as amended. 2. Terms and Conditions. It is understood and agreed that the Option evidenced hereby is subject to the following terms and conditions: (a) Expiration Date. The Option shall expire ten (10) years after the date indicated above. (b) Exercise of Option. Subject to the other terms of this Agreement and the Plan, the Option may be exercised on or after the date which is eight years from the date hereof; provided, however, that notwithstanding any other provision of this Agreement, the Option shall only be cumulatively exercisable with respect to an aggregate number of shares of Stock equal to 2.5% of the number of shares of Stock, if any, issued by the Company from time to time, prior to the expiration date of the Option, upon conversion by the holders thereof of the Company's Preferred Stock and provided further that, subject to the preceding clause, such Option shall become exercisable (i) with respect to fifty percent (50%) of the shares of Stock subject to the Option on or after the satisfaction by the Company of such reasonable performance targets as are established in good faith by the Committee or the Board in writing on or before December 31 of each year for the next succeeding year, as set forth in a resolution of the Committee or the Board (as applicable), as to that percentage of the total shares of Stock covered by this Option set forth on Schedule I attached hereto and (ii) with respect to the remaining fifty percent (50%) of the shares of Stock subject to the Option upon the occurrence of a Liquidation Event, as defined on Schedule I attached hereto, subject to the achievement by the Company of internal rate of return targets as set forth on such Schedule I, plus any shares of Stock as to which the Option could have been exercised prior to satisfaction of such conditions in (i) and/or (ii) in a particular year (if any) but was not so exercised. Notwithstanding the foregoing, the Option shall become fully exercisable as to those shares of Stock referred in clause (i) above immediately upon the occurrence of a Change in Control (as defined in Section 3 below). Any exercise of all or any part of this Option shall be accompanied by a written notice to the Company specifying the number of shares of Stock as to which the Option is being exercised. Notation of any partial exercise shall be made by the Company on Schedule II attached hereto. (c) Consideration. At the time of any exercise of the Option, the purchase price of the shares of Stock as to which the Option shall be exercised shall be paid to the Company (i) in cash, (ii) with Stock already owned for at least eight months by the Optionee having a total fair market value, as determined in accordance with Section 6(a) of the Plan ("Fair Market Value"), equal to the purchase price of such Stock, or (iii) a combination of cash and Stock (such Stock having already been owned for at least eight months by the Optionee) having a total Fair Market Value, as so determined, equal to the purchase price of such Stock. (d) Exercise Upon Death, Disability or Termination of Employment. (i) In the event of the death of the Optionee while an employee of the Company or a subsidiary of the Company, the Option, to the extent such Option would be exercisable in accordance with Section 2(b) hereof as of the date of his death, may be immediately exercised after his death by the legal representative of the Optionee's estate or by the legatee of the Optionee under his last will for a period of two years from the date of his death or until the expiration of the stated period of the Option, whichever period is the shorter. (ii) If the Optionee's employment with the Company or a subsidiary of the Company shall terminate by reason of permanent disability (as defined in the last sentence of this Section 2(d)(ii)), his Option, to the extent exercisable in accordance with Section 2(b) hereof as of the date of such termination, may be immediately exercised after such termination of employment but may not be exercised after the expiration of the period of one year from the date of such termination of employment or of the stated period of the Option, whichever period is the shorter; provided, however, that if the Optionee dies within a period of one year from the date of such termination of employment, any unexercised Option, to the extent exercisable in accordance with Section 2(b) hereof as of the date of such termination, may be exercised after his death by the legal representative of his estate or by the legatee of the Optionee under his last will until the expiration of the period of two years from the date of his death or of the stated period of the Option, whichever period is the shorter. For purposes of this Agreement, "permanent disability" shall mean an inability (as determined by the Committee) to perform duties and services as an employee of the Company or a subsidiary of the Company by reason of a medically determinable physical or mental impairment, supported by medical evidence, which can be expected to last for a continuous period of not less than eight (8) months. (iii) If (A) the Company or a subsidiary of the Company terminates the Optionee's employment with the Company or such subsidiary and such termination is not "for cause" (as defined in Section 2.5(d) of the Stockholders Agreement, dated as of September 21, 1995, as amended and restated on January 10, 1996 and on February 16, 1996 and as may be further amended from time to time, by and among Outsourcing Solutions Inc., the MDC Entities (as defined therein), APT (as defined therein), the Management Stockholders (as defined therein) and the Non-Management Stockholders (as defined therein) (as amended, the "Stockholders Agreement")) or (B) the Optionee terminates employment with the Company or such subsidiary for "good reason" (as defined in Section 2.5(c) of the Stockholders Agreement), the Optionee's Option, to the extent such Option would have been exercisable in accordance with Section 2(b) hereof as of the date of such termination, may thereafter be immediately exercised but may not be exercised after the expiration of the period of one year from the date of such termination of employment or of the stated period of the Option, whichever period is the shorter; provided, however, that if the Optionee dies within a period one year from the date of such termination of employment, any unexercised Option, to the extent such Option would have been exercisable in accordance with Section 2(b) hereof as of the date of such termination, may thereafter be exercised by the legal representative of his estate or by the legatee of the Optionee under his last will until the expiration of the period of two years from the date of his death or of the stated period of the Option, whichever period is the shorter. (iv) If the Optionee's employment with the Company or a subsidiary of the Company is terminated by reason of the Optionee's retirement after attaining both five (5) years of continuous service with the Company or a subsidiary of the Company and 59 1/2 years of age, to the extent exercisable in accordance with Section 2(b) hereof as of the date of such termination, such Option may thereafter be immediately exercised but may not be exercised after the expiration of the period of two (2) years from the date of such termination of employment or of the stated period of the Option, whichever period is the shorter; provided, however, that if the Optionee dies within a period of two (2) years from the date of such termination of employment, any unexercised Option, to the extent exercisable in accordance with Section 2(b) hereof as of the date of such termination, may thereafter be exercised by the legal representative of his estate or by the legatee of the Optionee under his last will until the expiration of the period of two years from the date of his death or of the stated period of the Option, whichever period is the shorter. (v) If the Optionee's employment is terminated by the Company or a subsidiary of the Company "for cause" (as defined in Section 2.5(d) of the Stockholders Agreement) or if the Optionee's employment is terminated for any reason not described in this Section 2(d), the Optionee's Option shall terminate on the date of such termination. (e) Nontransferability. This Option shall not be transferable other than by will or by the laws of descent and distribution. (f) Withholding Taxes. If required by applicable law, the Optionee shall be required to pay withholding taxes, if any, to the Company in cash at the time of receipt of Stock upon the exercise of all or any part of this Option; provided, however, tax withholding obligations may be met by the withholding of Stock otherwise deliverable to the Optionee pursuant to procedures approved by the Committee; provided further, however, the amount of Stock so withheld shall not exceed the minimum required withholding obligation. In no event shall Stock be delivered to any Optionee until he has paid to the Company in cash the amount of tax required to be withheld by the Company under applicable law, if any, or has elected to have such tax withholding obligations, if any, met by the withholding of Stock in accordance with procedures approved by the Committee. (g) No Rights as Stockholder. The Optionee shall have no dividend rights or any other rights as a stockholder with respect to any shares of Stock subject to the Option until he has given written notice of exercise of the Option and paid in full for such shares. (h) No Right to Continued Employment. This Option shall not confer upon the Optionee any right with respect to continuance of employment by the Company or a subsidiary of the Company, nor shall it interfere in any way with the right of the Company or such a subsidiary to terminate his employment at any time. (i) Inconsistency with Plan. Notwithstanding any provision herein to the contrary, this Option provides the Optionee with no greater rights or claims than are specifically provided for under the Plan. If and to the extent that any provision contained herein is inconsistent with the Plan, the Plan shall govern. (j) Compliance with Laws, Regulations, Stockholders Agreement, Etc. This Option and the obligation of the Company to sell and deliver shares of Stock hereunder, shall be subject to (i) all applicable federal and state laws, rules and regulations, (ii) any registration, qualification, approvals or other requirements imposed by any government or regulatory agency or body which the Committee shall, in its sole discretion, determine to be necessary or applicable and (iii) the terms of the Stockholders Agreement in all respects. Moreover, this Option may not be exercised if its exercise, or the receipt of shares of Stock pursuant thereto, would be contrary to applicable law. 3. Change in Control. For purposes of this Agreement, a "Change in Control" shall be deemed to have occurred if a "Sale of the Business," as defined in and contemplated by Section 2.4 of the Stockholders Agreement shall have occurred. 4. Investment Representation. If at the time of exercise of all or part of this Option the Stock is not registered under the Securities Act of 1933, as amended (the "Securities Act"), and/or there is no current prospectus in effect under the Securities Act with respect to the Stock, the Optionee shall execute, prior to the issuance of any shares of Stock to the Optionee by the Company, an agreement (in such form as the Committee may specify) in which the Optionee represents and warrants that the Optionee is purchasing or acquiring the shares acquired under this Agreement for the Optionee's own account, for investment only and not with a view to the resale or distribution thereof, and represents and agrees that any subsequent offer for sale or distribution of any of such shares shall be made only pursuant to either (i) a registration statement on an appropriate form under the Securities Act, which registration statement has become effective and is current with regard to the shares being offered or sold, or (ii) a specific exemption from the registration requirements of the Securities Act, but in claiming such exemption the Optionee shall, prior to any offer for sale or sale of such shares, obtain a prior favorable written opinion, in form and substance satisfactory to the Committee, from counsel for or approved by the Committee, as to the applicability of such exemption thereto. 5. Disposition of Stock. Any shares of Stock received by the Optionee upon exercise of this Option (or any interest or right in such shares) cannot be sold, assigned, pledged or transferred in any manner except as permitted by the Stockholders Agreement. 6. Optionee Bound by Plan; Stockholders Agreement. The Optionee hereby acknowledges receipt of a copy of the Plan and the Stockholders Agreement and agrees to be bound by all of the terms and provisions thereof, including the terms and provisions adopted after the granting of this Option but prior to the complete exercise hereof, subject to the last paragraph of Section 16 of the Plan as in effect on the date hereof. 7. Notices. Any notice hereunder to the Company shall be addressed to it at c/o McCown De Leeuw & Co., 101 East 52nd Street, 31st Floor, New York, New York 10022, Attention: David King, and any notice hereunder to the Optionee shall be addressed to him at 2015 Kings Pointe Drive, St. Louis, Missouri 63005, subject to the right of either party to designate at any time hereafter in writing some other address. 8. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. 9. Counterparts. This Agreement has been executed in two counterparts each of which shall constitute one and the same instrument. IN WITNESS WHEREOF, Outsourcing Solutions Inc. has caused this Agreement to be executed by an appropriate officer and the Optionee has executed this Agreement, both on the day and year first above written. OUTSOURCING SOLUTIONS INC. By: --------------------------------- Title: ------------------------------ OPTIONEE ________________________(L.S.) SCHEDULE I Subject to paragraph (b) of Section 2 of the Agreement, the Option will vest and become exercisable in accordance with paragraph (1) below with respect to fifty percent (50%) of the shares of Stock subject to the Option and the Option will vest and become exercisable in accordance with paragraph (2) below with respect to the remaining fifty percent (50%) of the shares of Stock subject to the Option. (1) With respect to 50% of the shares of Stock subject to the Option: Subject to the achievement of annual performance targets established by the Board of Directors of the Company (the "Board") or the Committee (as defined in the Agreement) in consultation with management, this portion of the Option will vest evenly on an annual basis over five (5) years beginning on the date of the Agreement, i.e., with respect to 20% of the total number of shares subject to this portion of the Option in each year (the "Annual Option Allocation"). 50% of the Annual Option Allocation not vested in any year would be subject to catch-up vesting in the immediately following year, based upon the achievement of the performance targets applicable to such immediately following year, and to the extent such Annual Option Allocation does not vest in such immediately following year, it shall be forfeited and the Option shall never be exercisable with respect to the shares covered by such unvested portion of such Annual Option Allocation; provided, however, that, notwithstanding the foregoing, the Option may become exercisable with respect to such shares to the extent otherwise provided in paragraph (b) of Section 2 of the Agreement. (2) With respect to 50% of the shares of Stock subject to the Option: This portion of the Option will vest upon the occurrence of a "Liquidation Event" (as defined below), subject to the achievement by the Company of McCown De Leeuw & Co. ("MDC") internal rate of return ("IRR") targets according to the schedule set forth below : ================================================================================ Year ------------------------------------------------------------------- 1 2 3 4 5 ------------------------------------------------------------------- 25.00% 0.00% 0.00% 0.00% 20.00% 40.00% ------------------------------------------------------------------- 30.00% 0.00% 0.00% 20.00% 40.00% 60.00% ------------------------------------------------------------------- MDC IRR* 35.00% 0.00% 20.00% 40.00% 60.00% 80.00% ------------------------------------------------------------------- 40.00% 20.00% 40.00% 60.00% 80.00% 100.00% ------------------------------------------------------------------- 45.00% 40.00% 60.00% 80.00% 100.00% ------------------------------------------------------------------- 50.00% 60.00% 80.00% 100.00% ------------------------------------------------------------------- 55.00% 60.00% 100.00% ------------------------------------------------------------------- 75.00% 80.00% ------------------------------------------------------------------- 100.00% 100.00% =================================================================== *After giving effect to exercise of management options. =================================================================== For purposes of this Agreement, "Liquidation Event" shall mean a sale by MDC of any of its shares of common stock of the Company to an unaffiliated third party (including, without limitation, in a public offering). Upon a Liquidation Event in which MDC sells less than all of its shares of common stock of the Company, this portion of the Option will partially vest and become exercisable, in accordance with the foregoing schedule, on a ratable basis based upon the proportion of MDC shares sold in the Liquidation Event relative to the total number of shares owned by MDC immediately prior to the Liquidation Event. SCHEDULE II NOTATIONS AS TO PARTIAL EXERCISE - - --------------- --------------- ---------------- ---------------- -------------- Number of Balance of Date of Purchased Shares on Authorized Notation Exercise Shares Option Signature Date - - --------------- --------------- ---------------- ---------------- -------------- - - --------------- --------------- ---------------- ---------------- -------------- - - --------------- --------------- ---------------- ---------------- -------------- - - --------------- --------------- ---------------- ---------------- -------------- - - --------------- --------------- ---------------- ---------------- -------------- - - --------------- --------------- ---------------- ---------------- -------------- - - --------------- --------------- ---------------- ---------------- -------------- - - --------------- --------------- ---------------- ---------------- -------------- - - --------------- --------------- ---------------- ---------------- -------------- EX-10 9 EXHIBIT 10.14 - FORM OF NON-QUALIFIED STOCK OPTION OUTSOURCING SOLUTIONS INC. DIRECTOR STOCK OPTION AWARD AGREEMENT [D] This Agreement (this "Agreement"), dated as of , 199x (the "Agreement Date"), is made between Outsourcing Solutions Inc. (the "Company") and _________ (the "Optionee"). All capitalized terms that are not defined herein shall have the meaning as defined in the Outsourcing Solutions Inc. 1995 Stock Option and Stock Award Plan, as amended (the "Plan"). W I T N E S S E T H : 1. Grant of Option. Pursuant to the provisions of the Plan, the Company hereby grants to the Optionee, subject to the terms and conditions of the Plan and subject further to the terms and conditions herein set forth, the right and option to purchase from the Company all or any part of an aggregate of xxxxx shares of the $0.01 par value common stock of the Company (the "Common Stock") at a per share purchase price equal to $25.00 (the "Option"), such Option to be exercisable as hereinafter provided. The Option shall not be treated as an incentive stock option as defined in Section 422 of the Internal Revenue Code of 1986, as amended. 2. Terms and Conditions. It is understood and agreed that the Option evidenced hereby is subject to the following terms and conditions: (a)Expiration Date. The Option shall expire ten (10) years after the Agreement Date. (b)Exercise of Option. (i)(1) Subject to the other terms of this Agreement and the Plan, the Option may be exercised on or after the dates indicated below as to that percentage of the total shares of Common Stock covered by the Option set forth opposite each such date, plus any shares of Common Stock as to which the Option could have been exercised previously, but was not so exercised: Agreement Date and applicable anniversary of Agreement Date Percentage Agreement Date 28% One-year anniversary 24% Two-year anniversary 24% Three-year anniversary 24% (ii)(2)Notwithstanding the foregoing provisions of Section 2(b)(i)(1) hereof, but otherwise subject to the other terms of this Agreement and the Plan, immediately prior to a "Sale of the Business," as defined in and contemplated by Section 2.4 of the Stockholders Agreement, dated as of September 21, 1995, as amended and restated on January 10, 1996 and February 16, 1996, and as may be further amended from time to time, by and among OSI Holdings Corp., the MDC Entities, APT, the Management Stockholders and the Non-Management Stockholders (all as defined therein) (the "Stockholders Agreement"), the Option shall become fully exercisable with respect to the total shares of Common Stock subject to the Option for which the Option was not previously exercised. (iii) The Option shall terminate upon the termination, for any reason, of the Optionee's directorship with the Company, and no shares of Common Stock may thereafter be purchased under the Option, except, subject to expiration of the Option pursuant to Section 2(a) hereof, as follows: (1) Upon retirement of the Optionee as a director of the Company after five (5) years of service, the Option shall, to the extent exercisable in accordance with Section 2(b)(i) hereof on the date of such retirement, remain exercisable, in whole or in part, for a period of three (3) years following such retirement. (2) Upon termination of service as a director of the Company by reason of death, the Option shall, to the extent exercisable in accordance with Section 2(b)(i) hereof as of the date of such death, remain exercisable, in whole or in part, for a period of two (2) years after the date of the Optionee's death, by his heir, the legal representative of his estate or by the legatee of the Optionee under his last will. (3) Upon termination of service as a director of the Company by reason of disability (as defined in the last sentence of this Section 2(b)(iii)(3)) the Option shall, to the extent exercisable in accordance with Section 2(b)(i) hereof as of the date of such termination, remain exercisable, in whole or in part, for a period of one (1) year after such termination. For purposes of this Agreement, "disability" shall mean an inability (as determined by the other members of the Board) to perform duties and services as a director of the Company by reason of a medically determinable physical or mental impairment, supported by medical evidence, which can be expected to last for a continuous period of not less than eight (8) months. (4) If the Optionee dies after termination of service as a director of the Company under paragraph (1) or (3) of this Section 2(b)(iii) above during the three or one year period specified, respectively, in such paragraphs, the Option shall, to the extent exercisable in accordance with such applicable paragraph (1) or (3) as of the date of the Optionee's death, remain exercisable, in whole or in part, for a period of two (2) years after the date of his death, by the Optionee's heir, the legal representative of his estate or by the legatee of the Optionee under his last will. (iv) Any exercise of all or any part of the Option shall be accompanied by a written notice to the Company specifying the number of shares of Common Stock as to which the Option is being exercised. Upon the valid exercise of all or any part of the Option, a certificate (or certificates) for the number of shares of Common Stock with respect to which the Option is exercised shall be issued in the name of the Optionee or other person entitled to exercise the Option, subject to the other terms and conditions of this Agreement and the Plan. Notation of any partial exercise shall be made by the Company on Schedule 1 attached hereto. (c) Consideration. At the time of any exercise of the Option, the purchase price of the shares of Common Stock as to which the Option shall be exercised shall be paid to the Company: (i) in United States dollars by personal check, bank draft or money order, or (ii) if permitted by applicable law, by tendering to the Company Common Stock, duly endorsed for transfer to the Company, already owned for at least six (6) months prior to the tender thereof by the person exercising the Option, which may include shares received as the result of a prior exercise of an Option, having a Fair Market Value on the date of such exercise of the Option equal to the cash exercise price applicable to such shares of Common Stock, or (iii) by a combination of the consideration provided for in the foregoing clauses (i) and (ii) above having a total Fair Market Value on the date of such exercise of the Option equal to the purchase price of such shares of Common Stock. (d) Nontransferability. The Option shall not be transferable other than by will or by the laws of descent and distribution and shall be exercisable during the Optionee's lifetime only by him. (e) Withholding Taxes. At the time of receipt of Common Stock upon the exercise of all or any part of the Option, the Optionee shall be required to pay to the Company in cash any taxes of any kind required by law to be withheld with respect to such Common Stock. In no event shall Common Stock be delivered to any person exercising the Option until such person has paid to the Company in cash, or made arrangements satisfactory to the Company regarding the payment of, the amount of any taxes of any kind required by law to be withheld with respect to the Common Stock subject to the Option, and the Company shall have the right to deduct any such taxes from any payment of any kind otherwise due to the Optionee. (f) No Rights as Shareholder. Neither the Optionee nor any other person shall become the beneficial owner of the shares of Common Stock subject to the Option, nor have any rights to dividends or other rights as a shareholder with respect to any such shares, until the Optionee has exercised the Option in accordance with the provisions hereof and of the Plan. (g) No Right to Continued Directorship. The Option shall not confer upon the Optionee any right to be retained in the service of the Company as a director or otherwise. (h) Inconsistency with Plan. Notwithstanding any provision herein to the contrary, the Option provides the Optionee with no greater rights or claims than are specifically provided for under the Plan. If and to the extent that any provision contained herein is inconsistent with the Plan, the Plan shall govern. (i) Compliance with Laws, Regulations, Stockholders Agreement, Etc. The Option and the obligation of the Company to sell and deliver shares of Common Stock hereunder shall be subject in all respects to (A) all applicable Federal and state laws, rules and regulations, (B) any registration, qualification, approvals or other requirements imposed by any government or regulatory agency or body which the Committee shall, in its sole discretion, determine to be necessary or applicable and (C) the applicable terms of the Stockholders Agreement in all respects. Moreover, the Option may not be exercised if its exercise, or the receipt of shares of Common Stock pursuant thereto, would be contrary to applicable law. 3. Investment Representation. If at the time of exercise of all or part of the Option the Common Stock is not registered under the Securities Act of 1933, as amended (the "Securities Act"), and/or there is no current prospectus in effect under the Securities Act with respect to the Common Stock, the Optionee shall execute, prior to the issuance of any shares of Common Stock to the Optionee by the Company, an agreement (in such form as the Committee may specify) in which the Optionee represents and warrants that the Optionee is purchasing or acquiring the shares acquired under this Agreement for the Optionee's own account, for investment only and not with a view to the resale or distribution thereof, and represents and agrees that any subsequent offer for sale or distribution of any of such shares shall be made only pursuant to either (i) a registration statement on an appropriate form under the Securities Act, which registration statement has become effective and is current with regard to the shares being offered or sold, or (ii) a specific exemption from the registration requirements of the Securities Act, but in claiming such exemption the Optionee shall, prior to any offer for sale or sale of such shares, obtain a prior favorable written opinion, in form and substance satisfactory to the Committee, from counsel for or approved by the Committee, as to the applicability of such exemption thereto. 4. Disposition of Common Stock. Any shares of Common Stock received by the Optionee upon exercise of the Option (or any interest or right in such shares) cannot be sold, assigned, pledged or transferred in any manner except as permitted by the Stockholders Agreement. 5. Optionee Bound by Plan and Stockholders Agreement. The Optionee hereby acknowledges receipt of a copy of the Plan and the Stockholders Agreement and agrees to be bound by all of the terms and provisions thereof and the terms and provisions adopted after the granting of the Option but prior to the complete exercise hereof, subject to the last paragraph of Section 16 of the Plan as in effect on the date hereof. 6. Notices. Any notice hereunder to the Company shall be addressed to it at 390 South Woods Mill Road, Suite 150, Chesterfield, Missouri 63017, Attention: Chief Financial Officer, and any notice hereunder to the Optionee shall be addressed to him at Commonwealth Holdings, Inc., 444 Madison Avenue, Suite 703, New York, New York 10022, subject to the right of either party to designate at any time hereafter in writing some other address. 7. Governing Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware applicable to contracts executed and to be performed entirely within said state. 8. Severability. If any of the provisions of this Agreement should be deemed unenforceable, the remaining provisions shall remain in full force and effect. 9. Modification. This Agreement may not be modified or amended, nor may any provision hereof be waived, in any way except in writing signed by the parties hereto. 10. Counterparts. This Agreement has been executed in two counterparts each of which shall constitute one and the same instrument. IN WITNESS WHEREOF, Outsourcing Solutions Inc. has caused this Agreement to be executed by an appropriate officer and the Optionee has executed this Agreement, both on the day and year first above written. OUTSOURCING SOLUTIONS INC. By --------------------------------- Name: Title: _______________________________(L.S.) Optionee SCHEDULE 1 NOTATIONS AS TO PARTIAL EXERCISE - - ----------------- -------------- --------------- --------------- --------------- Number of Balance of Date of Purchased Shares on Authorized Notation Exercise Shares Option Signature Date - - ----------------- -------------- --------------- --------------- --------------- - - ----------------- -------------- --------------- --------------- --------------- - - ----------------- -------------- --------------- --------------- --------------- - - ----------------- -------------- --------------- --------------- --------------- - - ----------------- -------------- --------------- --------------- --------------- - - ----------------- -------------- --------------- --------------- --------------- - - ----------------- -------------- --------------- --------------- --------------- - - ----------------- -------------- --------------- --------------- --------------- - - ----------------- -------------- --------------- --------------- --------------- - - ----------------- -------------- --------------- --------------- --------------- EX-10 10 EXHIBIT 10.15 - INCENTIVE COMPENSATION PROGRAM OUTSOURCING SOLUTIONS INC. Bonus Incentive Compensation Plan Description and Payout Guidelines I. Purpose Outsourcing Solutions Inc. (the Company) has created this Bonus Incentive Compensation Plan to provide significant cash incentives for executives, managers, and other key personnel to attain the Company's EBITDA objectives. The Plan is intended to provide financial recognition for the results these individuals achieve in exercising their judgement, initiative, and effort. II. Effective Date This Plan is effective January 1, 1998 and is intended to run annually thereafter, concurrent with the Company's fiscal year (January 1 - December 31). III. Participation Participation in the Plan is limited to executives, managers and equivalent, and key professional personnel. Each year, senior management of the Company will recommend to the CEO the participants for that year. Once eligible, persons not employed in a designated position for a full calendar year will be eligible for incentive payments on a prorata basis for their period of participation. A person must be employed by September 30 in order to receive a prorata incentive payment for the calendar year. An individual must be on the payroll at December 31 in order to be eligible to receive an incentive payment for that year. Participants who terminate employment after December 31 but prior to the date when payouts are made will not receive an incentive payment except at the discretion of the CEO. Participants whose employment is terminated during the year as a result of retirement, disability, or death will be eligible for a prorata incentive payment. An employee is eligible to participate in only one Company incentive compensation plan at a time. Individuals participating in commission plans, override plans, or branch productivity plans are not eligible to participate in this Plan. Participants in this Plan are not eligible to participate in any other incentive plan. IV. Target Bonus Incentive Compensation Awards Target awards represent the percent of base salary at December 31 that would be paid when Consolidated Corporate, Business Unit, and Individual objectives are completely fulfilled. While these a wards may be adjusted when actual performance varies from planned performance, in no case may the adjustment exceed 150% of target. No awards will be paid when the Company's consolidated actual performance is 80% or less of the budgeted plan. Unbudgeted acquisition impact on target performance will be measured at a rate of 50% of incrementa EBITDA. Acquisition impac on targets will generally affect only the Consolidated Corporate Portion of the award. Acquisition impact will affect the Business Unit targets if the acquired entity becomes a part of the Business Unit. V. Performance Criteria A. Corporate Criteria: Represent X percent of total target award and will be determined on the percentage attainment of approved Consolidated Corporate EBITDA objectives. Actual vs. Plan* Corporate Performance Adjustment Factor Less than 80% of Consolidated 0% Nocorporate, business unit, or individual bonuses will be paid 80% 70% of corporate target bonus 90% 85% of corporate target bonus 100% 100% of corporate target bonus 110% 125% of corporate target bonus 120% or above 150% of corporate target bonus *Interpolated based on actual results; e.g., 98% actual performance vs. plan yields 97% of corporate target bonus. B. Business Unit Criteria: Represent Y percent of total target award and will be determined on the percentage attainment of approved business unit EBITDA objectives. Actual vs. Plan* Business Unit Performance Adjustment Factor Less than 80% 0% No business unit bonus will be paid 80% 70% of business unit target bonus 90% 85% of business unit target bonus 100% 100% of business unit target bonus 110% 125% of business unit target bonus 120% and above 150% of business unit target bonus *Interpolated based on actual results; e.g., 98% actual performance vs. plan yields 97% of business unit target bonus. C. Individual Criteria: Represent Z percent of total target award and will be determined based on the attainment of individual objectives as judged by each participant's supervisor. Individual objectives will be weighted, with the total weight equal to 100% of the individual portion (Z) of the total target award. No corporate, business unit, or individual bonuses will be paid if actual Consolidated Corporate EBITDA is less than 80% of plan. D. Computation Examples: Assume: Vice President eligible for 20% target based on 40% corporate, 40% business unit and 20% individual: Base Salary: $80,000 Target Award: 20% of base or $16,000 Corporate portion: 40% of $16,000 or $6,400 Business unit portion: 40% of $16,000 or $6,400 Individual portion: 20% of $16,000 or $3,200 Minimum award: 0% Maximum award: 30% or $24,000 1. Performance Situation #1: Corporate performance 90% of plan, payout (85% x 6,400): $ 5,440 Business unit performance 100% of plan, payout (100% x 6,400): $ 6,400 Individual performance judged 110% of plan, payout (125% x 3,200): $ 4,000 ------- $15,840 ======= 2. Performance Situation #2: Corporate performance 110% of plan, payout (125% x 6,400): $ 8,000 Business unit performance 100% of plan, payout (100% x 6,400): $ 6,400 Individual performance judged 90% of plan, payout (85% x 3,200): $ 2,720 ------- $17,120 ======= 3. Performance Situation #3: Corporate performance 100% of plan, payout (100% x 6,400): $ 6,400 Business unit performance 90% of plan, payout (85% x 6,400): $ 5,440 Individual performance judged 75% of plan, payout (0% x 3,200): $ 0 ------- $11,840 ======= VI. Bonus Incentive Compensation Pool A Bonus Incentive Compensation Pool will be accrued annually and will be allocated among participants based on a combination of corporate, business unit, and individual performance. The size of the pool will be determined annually based on Company and Business Unit performance against targets and the base salaries of the participants of the Plan. VII. Plan Administration Participation: In December of each year Management will compile a list of all employees eligible for the following year and submit it for review and approval by the CEO. Payouts: Payouts will be made in a single lump sum by March 31 of the following the year in which bonuses were earned. VIII. Management Rights This Plan replaces all prior bonus incentive compensation plans. Outsourcing Solutions Inc. reserves the right to alter, amend, suspend, or terminate this Plan prospectively (and any other variable compensation plan) at any time without notice and without any future liability. Designation of job classification, salary grade, or an individual neither guarantees the individual a right to a bonus nor a right to continued employment. The payout guidelines and formulas described in Section V herein, as well as actual payouts recommended, may be adjusted, modified, or revised at any time at the discretion of the CEO subject to approval of the Board of Directors. An employee who is included in this Plan may be given certain individual performance objectives to achieve in order in qualifying for any bonus payment. Such objectives, and the standards by which achievement is measured, may vary from job-to-job, and will be determined at the start of each calendar year through discussions between the employee's supervisor and the employee, and must be approved by the supervisor's supervisor. Approved individual performance objectives must be submitted in writing to the CEO for approval no later than January 31 of the calendar year for which they apply. Such individual performance objectives may be reviewed and modified by meeting and co-signed agreement of the employee and the employee's supervisor at any time during the calendar year. EX-21 11 SUBSIDIARIES OF THE REGISTRANT SUBSIDIARIES OF THE REGISTRANT Exhibit 21 The following is a list of the Company's subsidiaries and jurisdictions of incorporation as of March 19, 1999, except for unnamed subsidiaries which, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. Name of Subsidiary Jurisdiction of Incorporation or Organization CFC Services Corp. Delaware A.M. Miller & Associates, Inc. Minnesota The Continental Alliance, Inc. Washington (d/b/a Continental Credit Services, Inc.) Account Portfolios, Inc. Delaware Perimeter Credit, L.L.C. Delaware Gulf State Credit, L.L.C. Delaware Payco American Corporation Wisconsin Payco-General American Credits, Inc. Delaware National Account Systems, Inc. Delaware University Accounting Service, Inc. Wisconsin Asset Recovery & Management Corp. Wisconsin Indiana Mutual Credit Association, Inc. Indiana Jennifer Loomis & Associates, Inc. Arizona Qualink, Inc. Wisconsin Grable, Greiner & Wolff, Inc. Wisconsin Professional Recoveries Inc. Wisconsin Payco American International Corp. Wisconsin Federal Collection Bureau, S.A. de C.V. Mexico North Shore Agency Inc. New York North Shore Agency Collection Corporation, Canada Canada Accelerated Bureau of Collections Inc. Colorado The Union Corporation Delaware Allied Bond & Collection Agency, Inc. Delaware American Child Support Service Bureau, Inc. Pennsylvania Capital Credit Corporation Delaware Interactive Performance, Inc. Delaware High Performance Services, Inc. Delaware High Performance Service of Florida, Inc. Delaware Interactive Performance of Florida, Inc. Delaware Interactive Performance of Georgia Delaware Transworld Systems, Inc. California OSI Funding Corp. Delaware EX-27 12 FDS -- FOR 1998 10-K
5 Note: This schedule contains summary financial information extracted from the Form 10-K for the Year Ended December 31, 1998 and is qualified in its entirety by reference to such financial statements. 0001027574 Outsourcing Solutions Inc. and Subsidiaries 1,000 Year DEC-31-1998 JAN-01-1998 DEC-31-1998 31,186 0 42,033 1,309 35,057 115,744 66,565 26,248 618,491 114,949 0 0 12,167 53 0 618,491 0 479,400 0 451,712 0 0 50,627 (22,939) 830 (23,769) 0 0 (572) (24,341) 0 0
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