SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 2042920549
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, 19971999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to
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Commission file Number 333-16867
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Outsourcing Solutions Inc.
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(Exact name of registrant as specified in its charter)
Delaware 58-2197161
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(State or other jurisdiction of (I.R.S. Employer
Identification Number)
incorporation or organization) Identification Number)
390 South Woods Mill Road, Suite 350
Chesterfield, Missouri 63017
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (314) 576-0022
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
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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
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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 17, 1998,30, 2000, the following
shares of the Registrant's common stock were issued and outstanding:
Voting common stock 3,425,126.01
Class A convertible nonvoting5,976,389.04
Non-voting common stock 391,740.58
Class B convertible nonvoting common stock 400,000.00
Class C convertible nonvoting common stock 1,040,000.00
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5,256,866.59
============480,321.30
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6,456,710.34
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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 Accounts Portfolios, L.P. ("API"), one of the largest purchasers
and managers 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 the contingent fee business.
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.States with 1999 revenues of approximately $504.4 million. The Company believes
that it differentiates itself from its competitors by providing a full range of
accounts receivable management services on a national basis that allow its
customers to outsource the management of the entire credit cycle. The breadth of
services the Company provides across all stages of the credit cycle allows
itself to cross-sell services to existing customers as well as to expand its
customer base by providing specific services to potential customers in targeted
industries. These services include collection services, portfolio purchasing
services and outsourcing services which accounted for approximately 72%, 16% and
12% of 1999 revenues, 73%, 17% and 10% of 1998 revenues and 67%, 25% and 8% of
1997 revenues, respectively.
- Collection services involve collecting on delinquent or charged-off
consumer accounts for a fixed percentage of realized collections or a
fixed fee per account.
- Portfolio purchasing services involve acquiring portfolios of
non-performing consumer receivables from credit grantors, servicing
such portfolios and retaining all amounts collected.
- Outsourcing services include contract management of accounts
receivable, billing and teleservicing.
The Company manages the marketing and execution of services within the
four stages of the credit cycle. In October 1997,the first stage of the credit cycle, OSI
acquired North Shore Agency, Inc. ("NSA"),provides customers with the ability to outsource services including credit
authorization, usage management and customer service. Dedicated call centers
provide "first party" services for its clients performing all operations in
their name. The second stage of the credit cycle is the management of
pre-uncollectable, or charge-off, delinquency situations. OSI provides clients
with fixed fee early-out programs based on either a fee service
company headquartered in Long Island, New York. NSA specializes in "letter
series"letter series or calling
program for accounts that are generally less than 180 days past due. In the
third stage of the credit cycle, the Company offers traditional contingent
collection services for direct marketers targeted at collecting small
balance debts.delinquent and charged-off receivables. In the fourth
and final stage of the credit cycle, OSI acts as a principal and purchases both
new and delinquent charged-off receivables from credit grantors.
The majority of NSA's revenuesaccounts receivable management industry is highly fragmented.
Nationwide, the Company estimates there are generated from traditional
contingent collections utilizing lettersapproximately 6,000 debt collection
service companies in the United States, with the remaining revenues derived
from fixed fee letter services.
In November 1997, OSI acquired Accelerated Bureau10 largest agencies currently
accounting for 20% of Collections,industry revenues. Competition is based largely on
recovery rates, industry experience and reputation and service fees. Large
volume credit grantors typically employ more than one accounts receivable
management company at one time, and often compare performance rates and
rebalance account placements towards higher performing servicers.
The customer base for the accounts receivable management industry is
generally concentrated by credit grantors in four end-markets: banks, health
care, utilities and telecommunications. Other significant sources of account
placements include retail, student loan and governmental agencies. The Company
believes that the ongoing consolidation in the banking, health care, utilities
and telecommunication industries will benefit them by creating larger national
customers seeking to place accounts with accounts receivable management
companies that offer national rather than local and regional coverage. The
Company's customers include a full range of local, regional and national credit
grantors. Our largest customer accounted for no more than 5% of 1999 revenues.
Outsourcing Solutions Inc. ("ABC").
ABC is, a Denver-based national fee service company. ABC specializesDelaware corporation, was formed in credit
card collections1995
to acquire Account Portfolios L.P., one of the largest purchasers and derives approximately 25%servicers
of non-performing accounts receivables portfolios. Since its formation, the
Company has completed six additional acquisitions and has established itself as
a leading industry consolidator. The Company has experienced significant growth
in their business through internal growth and acquisitions, with its revenues
increasing from early-out
programs with$29.6 million in 1995 to $504.4 million in 1999.
Industry
The accounts receivable management industry has experienced significant
growth over the remaining 75% of revenues derived from standard contingent fee
collections.
In December 1997, the Company entered into a Share Purchase Agreement and Plan
of Merger (the "Merger Agreement") withpast 15 years. The Union Corporation ("Union") pursuant
to which Union will become a wholly-owned subsidiary of the Company. The Company
expects to complete the transaction by April 1998.
Industry
As a result of the rapid growth of outstanding consumer credit
and the corresponding increase in delinquencies has resulted in credit grantors
have increasingly lookedlooking to third party service providers in managing the accounts
receivable process. In addition, rapidThe contingent fee collection industry, the Company's
largest business service, is estimated to be a $6.5 billion market growing at
approximately 8% to 10% per annum. The Company's other business services such as
portfolio purchasing and outsourcing services are estimated, in the aggregate,
to be an approximately $3.0 billion market. The Company believes the following
are the key trends in the accounts receivable management industry:
- Increase in Consumer Debt and Delinquencies. 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 $6.0 trillion. Furthermore, charged-off credit card debt
as a percentage of total outstanding consumer debt increased from 3%
in 1994 to 5.6% in 1998.
- Industry Consolidation. The American Collectors Association estimates
that in 1995 there were approximately 6,000 contingent fee companies
in the United States participating in an industry that generated over
$6.5 billion in contingent fee collection revenue in 1998. The
industry has undergone significant consolidation, with the top ten
contingent fee companies increasing their industry share to over 20%
in 1998. With over 6,000 debt collection companies in the United
States and given the financial and competitive constraints facing
these smaller companies and the limited number of liquidity options
for the owners of such businesses, the Company believes that the
industry will continue to experience consolidation. Well-capitalized
companies that offer national capabilities with a "full service"
approach to accounts receivable management are increasingly displacing
local and regional competitors.
- Customer Consolidation. The largest credit granting industries,
including banking, utilities, telecommunications and health care
telecommunicationsaccount for 80% of accounts placed for collection and utilities,are experiencing
rapid consolidation. This consolidation 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. Contingent fee companies dominate theAs a result, many regional customers are becoming national in
scope and are shifting account placements to accounts receivable
management industry,companies that have the ability to service a large volume
of placements on a national basis. The Company established
relationships with many of the American Collectors Association estimatingtarget industries' largest
consolidators, thereby improving its ability to capitalize on this
consolidation trend.
- Growth in Portfolio Sales. As one of the leading providers of
portfolio purchasing services, we have participated in the rapid and
consistent industry-wide increase in the amount of non-performing
consumer receivables sold by credit grantors. Portfolio sales offer
the credit grantor many 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. It is estimated that $10.1 billion of charged-off
credit card debt was acquired by portfolio purchasers in 1996 there were approximately 6,000 contingent fee agencies. The industry is
currently characterized by a high degree of fragmentation with a corresponding
trend in recent years toward consolidation. Over the past twenty years the
number of contingent fee providers has decreased by approximately twenty percent
and between 1992 and 1995, the ten largest contingent fee providers increased
their market share from 15% to over 42%.
The accounts receivable management industry has undergone rapid growth over the
past fifteen years. According to the industry research firm of M. Kaulkin &
Associates, account placements to servicers increased at a compounded annual
growth rate of 13.1% from 1980 to 1994 and are projected to continue to grow at
8.5% from 1994 to 2000. New placements in 1994, the last year for which data is
available, totaled $84.2 billion and are expected to grow to $137more
than $22.0 billion in 2000. According to the Nilson Report, a leading expert in payment systems, the
total amount of revenues generated by all contingent fee companies was
approximately $5.0 billion in 1995. 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 1995, total consumer debt increased 37% from $3.6 trillion to
almost $5.0 trillion. Second, in1999.
- Accelerated Trend toward Outsourcing. In an effort to focus on core
business activities and to take advantage of the economies of scale,
better performance and the lower cost structure offered by accounts receivable managementcollection
companies, many credit grantors have chosen to outsource some or all
aspects of the accounts receivable management process. The customer baseInstead of
waiting until receivables are 180 days past due (or later) to turn
over for credit collection, credit grantors are now involving
collection companies much earlier in the process. Increasingly, credit
grantors are looking to accounts receivable management industry is dominated
by credit issuersproviders for
assistance with billing, customer service and complete call center
outsourcing.
- Technological Sophistication. Leading companies in four end-markets: banks/bankcard, health care, utilities
and telecommunications. According to the American Collectors Association, these
four industries accounted for $66.7 billion in account placements in 1994, or
nearly 80% of the total placement volume. Other significant sources of account
placements for the industry are
increasingly using technology to improve their collection efforts.
These initiatives include retail, student loan agenciesinvestments in proprietary databases and
oil
companies.computerized calling and debtor location techniques.
Competitive Advantages
The Company believes that its strong market position, national presence
and breadth of services distinguishes itself as a leading provider of accounts
receivable management services in the ongoingUnited States. OSI believes its
competitive advantages include:
- Benefits of Scale. The benefits of scale in the accounts receivable
industry are significant on both revenues and cost. Scale makes it
possible for the Company to compete for larger blocks of revenue,
deliver more services over a wider geographic base, leverage its fixed
costs over a broader customer base and access capital at attractive
rates. As customers consolidate geographically and seek to reduce
suppliers, a national presence also provides an important competitive
advantage.
- "One-stop-shopping" for Receivables Management Services. OSI provides
a full array of receivables management services including front-end
credit service, pre charge-off delinquency management, contingent
collection services and portfolio purchasing. This allows the Company
to manage the entire credit cycle for its customers for all sizes of
debt and across multiple industries. The Company is one of the few
industry participants to provide this breadth of services on a
national basis.
- Broad Customer Base. OSI provides services to some of the largest and
fastest growing credit grantors in a wide range of industries. OSI's
broad customer base diversifies its revenue stream and provides the
Company with significant opportunities to cross-sell services. The
Company also has long-standing relationships with many of its
customers which provides a strong base of recurring revenues.
- Technology. The Company has made, and will continue to make,
significant investmentsin technology and know-how to enhance its
competitive advantage. The Company currently has over $53 million
invested in computer hardware and software. OSI believes that its
proprietary software, including debtor-scoring models, computerized
calling and debtor databases, provides them with a competitive
advantage in pricing portfolios, providing outsourcing services and
collecting delinquent accounts. The Company's systems interface with
those of its customers to receive new account placements daily and
provide frequent updates to customers on the status of collections.
OSI has become increasingly integrated with its customers' systems
resulting in high switching costs for its customers.
- Customer Service. OSI's broad range of services and focused customer
approach enables the Company to actively support and customize
services to its customers on a cost-effective basis. This service
philosophy has provided the foundation for the Company's reputation
and when combined with its industry experience is critical in the
clients' selection process.
Growth Strategies
The Company's strategy focuses on expanding its business and enhancing
profitability through the following initiatives:
- Cross Selling Services to Existing Customers. OSI offers its customers
a wide array of services including traditional fee services, portfolio
purchasing services, pre-charge-off programs, outsourcing of accounts
receivable management functions and teleservicing. This range of
services allows OSI to cross-sell offerings within its existing
customer base and to potential customers in specifically targeted
industries.
- Expansion of Customer Base.
- Existing Target End-Markets. Increasingly, credit grantors in the
public and private sectors who have typically maintained accounts
receivable departments within their organizations are turning to
outside accounts receivable management companies. In addition,
consolidation in the banking, retail, utilities, telecommunications andstudent loan,
health care and telecommunications industries will create largerhas created
national customers seeking to place accounts withwho are outsourcing a portion or all of their
accounts receivable management service needs to national
providers. As OSI enhances its expertise and reputation with
customers in a target end-markets the Company markets that
expertise to other credit grantors in that end-market. The
Company's relative size, our ability to provide services in all
50 states and experience in successfully managing a high volume
of placements on a national basis allows it to benefit from the
consolidation of these key industries.
- New Target Industries. OSI intends to capitalize on its expertise
and reputation to penetrate new end-markets. For example, the
Company will continue to focus on increasing its business
activities with governmental agencies at the federal, state and
local levels, which have begun to outsource tax, child support
collection and student loan accounts receivable functions to
private companies. In addition, the Company will focus on the
commercial market segment (collection of delinquent accounts owed
by businesses to other businesses) and healthcare segment of the
industry. Traditionally, the commercial market has been
underpenetrated by collection agencies given the need for
tailored collection methods which differ from those used in the
consumer market, while significant changes and cost reductions in
the healthcare market require specialized skills in the
collection of past due accounts.
- Disciplined Acquisitions. The Company has built its position as an
industry leader through strategic acquisitions of leading accounts
receivable service providers. By successfully integrating these
businesses, its management has demonstrated an ability to evaluate,
execute and integrate acquisitions. With over 6,000 contingent fee
accounts receivable collection companies in the United States, OSI
plans to pursue additional acquisitions that havecomplement its existing
services or expand its customer base and is continually reviewing
acquisition opportunities.
- Cost Reductions. The Company's management has adopted an aggressive
approach to cost management. The Company will continue to focus on
reducing its overall costs and improving operational efficiencies.
Acquisition and Integration History
In September 1995, the resourcesCompany was formed and acquired Atlanta-based
Account Portfolios, 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, two industry leaders in providing
contingent fee services. Continental, which was headquartered in Seattle and
operated in eight western states, provided contingent fee services to offer national rather than locala wide
range of end markets with particular emphasis on public utilities and regional
coverage.telecommunications. A. M. Miller, based in Minneapolis, provided contingent fee
services to the student loan and bank credit card end markets.
In November 1996, OSI acquired Payco American Corporation with corporate
offices in Brookfield, Wisconsin. Originally founded as a contingent fee service
company, Payco diversified into other outsourcing services such as student loan
billing, health care accounts receivable billing and management, and contract
management of accounts receivable and teleservicing.
In October 1997, OSI acquired the assets of North Shore Agency, Inc., a
fee service company headquartered in Westbury, New York. North Shore specialized
in "letter series" collection services for direct marketers targeted at
collecting small balance debts. The majority of North Shore's revenues were
generated from traditional contingent collections utilizing letters with the
remaining revenues derived from fixed fee letter services.
In November 1997, OSI acquired the assets of Accelerated Bureau of
Collections, Inc. Accelerated Bureau of Collections is a Denver-based national
fee service company. It specialized in credit card collection and derived
approximately 25% of its revenues from pre-charge-off programs with the
remaining 75% of revenues derived from standard contingent fee collections.
In March 1998, the Company completed the acquisition of The Union
Corporation ("Union"). Union was originally a conglomerate involved in
businesses ranging from electronic and industrial components to financial
services. Union was a leading provider of a range of outsourcing services to
both large and small clients. Union provided contingent and fixed fee collection
services and other related outsourcing services. Union provided fee services
through the following wholly-owned subsidiaries: Allied Bond & Collection
Agency, Inc., Capital Credit Corporation, and Transworld Systems, Inc. Allied,
headquartered in Trevose, Pennsylvania, provided contingent and fixed fee
collection services for large clients across a broad spectrum of industries.
Capital Credit, headquartered in Jacksonville, Florida also provided 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 one of the
largest prepaid, fixed fee provider of delinquent account management services in
the United States. Transworld's clients are primarily small companies with low
balance delinquent accounts. Union provided related outsourcing services through
its Interactive Performance, Inc. and High Performance Services, Inc.
subsidiaries. Interactive Performance headquartered in North Charleston, South
Carolina, provided a range of credit and receivables management outsourcing
services primarily in the form of teleservicing. Interactive Performance
services included inbound and outbound calling programs for credit
authorization, customer service, usage management and receivable management.
High Performance Services, headquartered in Jacksonville, Florida, provided
service similar to Interactive Performance for clients in the financial services
industry.
In 1999, as part of a strategy to increase the efficiency of its
operations by aligning the Company along business services and establishing call
centers of excellence by industry specialization and in order to market its
services under one OSI brand, the Company reorganized many of its acquired
subsidiaries. Account Portfolios changed its name to OSI Portfolio Services,
Inc. Payco American Corporation's largest debt collection subsidiary changed its
name to OSI Collection Services, Inc. and Continental, A.M. Miller, Accelerated
Bureau of Collections, Allied Bond & Collection Agency and Capital Credit merged
into OSI Collection Services. Interactive Performance changed its name to OSI
Outsourcing Services, Inc. and the Interactive Performance and High Performance
Services subsidiaries merged into OSI Outsourcing Services. The Company now
provides specialized services for the following industries: healthcare,
government, education, telecommunications/utilities, commercial, financial
services and bank card.
Recapitalization
On December 10, 1999, pursuant to a Stock Subscription and Redemption
Agreement, dated as of October 8, 1999, as amended (the "Recapitalization
Agreement"), by and among Madison Dearborn Capital Partners III, L.P. (together
with its affiliates, "MDP") the Company, and certain of the Company's
stockholders, optionholders and warrantholders: (i) the Company sold
5,323,561.08 shares of its common stock, par value $.01 per share, to certain
purchasers for an aggregate purchase price of $199.5 million; (ii) the Company
sold 100,000 shares of its Senior Mandatorily Redeemable Preferred Stock to
certain purchasers for an aggregate purchase price of $100 million; (iii) the
Company redeemed 4,792,307.20 shares of the Company's common stock (including
voting common stock, par value $.01 per share, Class A Convertible Nonvoting
Common Stock, par value $.01 per share, Class B Convertible Nonvoting Common
Stock, par value $.01 per share, Class C Convertible Nonvoting Common Stock, par
value $.01 per share and 1,114,319.33 shares of its preferred stock, no par
value) for an aggregate of $221.35 million (such transactions collectively
referred to herein as the "Recapitalization"). MDP now owns approximately 70.3%
of the outstanding common stock (75.9% of the outstanding voting common stock)
of the Company. Prior to the Recapitalization, the Company was controlled by
McCown DeLeeuw & Co., Inc., a private equity investment firm.
In connection with the Recapitalization, all members of the Company's
Board of Directors other than Timothy Beffa resigned and Paul Wood and Tim Hurd
were elected to serve as directors. In addition, the stockholders and
optionholders of the Company entered into a stockholders agreement (the
"Stockholders Agreement"). The Stockholders Agreement provides for the election
of individuals to the Board of Directors of the Company and includes
restrictions on the transfer of capital stock, and the provision of
registration, preemptive, tag along and drag along rights granted to the parties
thereto.
In conjunction with the Recapitalization, the Company also entered into
a Credit Agreement among the Company, DLJ Capital Funding, Inc., as Syndication
Agent, Harris Trust & Savings Bank, as Documentation Agent, Fleet National Bank,
N.A., as Administrative Agent and other Lenders who are parties thereto (the
"Credit Agreement"). The Credit Agreement provides for: (i) a $150 million Term
A Loan Facility; (ii) a $250 million Term B Loan Facility; and (iii) a $75
million Revolving Loan Facility. Borrowings under the Credit Agreement were used
to refinance the Company's existing credit agreement and will be used for other
working capital and general corporate purposes.
Services and Operations
The Company is one of the largest providers of accounts receivable
management industryservices in the United States. Through its subsidiaries, the Company
offers customers collection services, portfolio purchasing services and related
outsourcing services.
Collection Services
The Company is closely regulatedone of the largest providers of collection services in
the United States. The Company offers a full range of contingent fee services,
including pre-charge-off programs and letter series, to most 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
52 call centers in 26 states and approximately 5,500 account representatives,
the Company has the ability to service a 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 federal laws
such asdeveloping "early-out" programs, whereby
the Fair Debt Collection Practices Act ("FDCPA")Company receives placed accounts that are less than 120 days past due and
similar state laws.earn a fixed fee per placed account rather than a percentage of realized
collections. These programs require a greater degree of technological
integration between OSI 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.
Contingent fee services are the traditional services provided in the
accounts receivable management industry. CreditorsCredit grantors typically place
non-performing accounts after they have been deemed non-collectible, usually
when 90 to 120 days past due.due, agreeing to pay the servicer a commission level
calculated on the amount of collections actually made. At this point, the
receivables are usually still valued on the customer's balance sheet, albeit in
a form at least partially reserved against for possible noncollection. Customers
typically use multiple agencies on any given placement category, enabling them
to benchmark each agency's performance against the other. Placement is usually
for a fixed time frame, typically a year, at the end of which the agency returns
the uncollected receivables to the customer, which may then place them with an
alternative agency.
The commission rate for contingent fee services 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 ensureobtain 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.
Once the account has been placed with OSI, the fee service process
consists of (i) locating and contacting the debtor through mail, telephone, or
both, and (ii) persuading the debtor to settle his or her outstanding balance.
Work standards, or the method and order in which accounts are worked by OSI, are
specified by the customer, and contractually bind OSI. Some accounts may have
different work standards than others based on criteria such as account age or
balance. In addition, OSI must comply with the federal Fair Debt Collection
Practices Act and comparable state statutes, which restrict the methods it uses
to collect consumer debt.
The Company estimates the collectability of each placement using
sophisticated statistical scoring systems that are applied to each account. The
objective is to maximize revenues and to minimize expenses. For example, instead
of sending letters to the entire account base, a targeted telemarketing campaign
may be used to directly contact selected account groups, thus saving the costs
associated with an unnecessary broad-based mail campaign.
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:
- contract management, whereby the Company performs a range of accounts
receivable management services at the customer's or the Company's
location,
- student loan billing, whereby the Company provides billing, due
diligence and customer services,
- 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
- teleservicing whereby the Company offers inbound and outbound calling
programs to perform sales, customer retention programs, market
research and customer service.
In each client relationship, the cornerstone of the outsourcing strategy
is to customize services to its customers on terms that will lead to substantial
and increased growth rates in revenues and profit margins for the client as well
as more stabilized cash flows. Customer service and billing inquiry activities
are ideal candidates for outsourcing relationships for a number of reasons,
including: (i) the need for technological investments in automated call
management systems, (ii) activities that are labor intensive, and (iii) activity
volumes that are subject to fluctuations which make it difficult to maintain
stable employment levels and high utilization of the required equipment. By
offering outsourcing services to a variety of clients, the Company will be able
to leverage its productive resources to greater efficiency levels. In addition,
the Company will continue to develop its expertise in outsourcing service
delivery, enhancing its creativity and effectiveness in managing various inbound
programs that a captive operation does not generally have. This can translate
into higher response rates and returns on investment for the client.
Portfolio Purchasing Services
While contingent fee servicing remains the most widely used method by
creditorscredit grantors 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 a selling charged-off debt,
other creditors likewise began to sell portfolios of non-performing debt. ManagementThe
Company's management estimates the total principal value of purchased portfolios
at between $2.5 and $5.5over $20 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%.year. The largest percentage of purchased portfolios
originateoriginated from the bank card receivable and retail markets and such portfolios
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 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 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 it sophisticated MIS and vast
experience with locating, contacting and effecting payment from delinquent
account holders in providing its core contingent fee services. With 53 call
centers in 25 states and approximately 4,100 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 it's 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
educational institutions, financial institutions, government agencieseducational 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. Most individually
negotiated transactions involve tertiary paper (i.e., accounts that are between
180 to 360 days past due). Under forward flow agreements, the Company agrees, subject to due
diligence, to purchase charged offcharged-off receivables on a monthly basis as they become past due.
Creditorsbasis. Credit
grantors 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'sOSI'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.
TheIn 1999, the Company has recentlyestablished its own portfolio purchasing valuation
unit to complement services previously provided by an independent portfolio
valuation firm.
In order to fund an increased level of portfolio purchasing, in October
1998 the Company established a sourcing relationshipfinancing conduit, in association with Sherman
Financial Group, L.L.C. ("Sherman"). Sherman's focusMBIA
Insurance Corporation. The conduit is singularly on developingexpected to provide OSI with significantly
increased purchasing capacity necessary to expand its portfolio purchasing
activities at a distressed debt business on behalflower aggregate cost of capital. The transaction structure
involves off-balance sheet treatment for a significant portion of prospective
portfolio purchases and the Company. The Company expectsrelated financing, while providing a consistent
servicing revenue stream and eventual access to benefit from Sherman's existing client relationships, industry marketing
expertise, pricing technology and negotiating expertise with illiquid products
in "one-off" transactions.
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,any portfolio residual. Although
the Company has developedplaces most of its portfolio purchases in the conduit, OSI will,
when required, continue to place certain portfolio purchases on its balance
sheet. The revenue from owned portfolios is derived from gross collections and
offset by collection costs and portfolio amortizations. Conversely, the
off-balance sheet accounting treatment for portfolios sold into the conduit
creates service fee revenues which is a numberpercentage of other accounts receivable management services. The Company leverages its
operational expertise and call and data management technologygross collections, offset
by offering the
following services: (1) contract management, through whichcollection costs but with no portfolio amortization. From time to time the
Company performs
a range of accounts receivable management services atmay receive income from the customer's location,
(2) student loan billing, wherebyconduit representing excess collections
above the Company provides billing, due diligencecost to purchase the portfolio, fund the acquisition and customerpay 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.fees.
Sales and Marketing
The Company has a sales force of approximately 130100 sales representatives
providing comprehensive geographic coverage of the United States on a local,
regional and national basis. The Company also markets its servicesbasis, and, to a much lesser extent in, Puerto Rico,
Canada and Mexico. Each of the operating companies maintainThe Company, except its ownTransworld Systems subsidiary,
maintains a sales force and havehas a marketing strategy closely tailored to the
credit-granting markets that it serves. 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,OSI emphasizes its industry experience and reputation--tworeputation - 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 officeat its principal executive offices in
Chesterfield, Missouri, whichMissouri.
The marketing force is responsible both for identifying and cultivating
potential customers, as well as retaining or increasing market share with
existing clients. The marketing force is generally organized around specific
industries and is also responsibletrained to market the overall benefits of its services,
providing a cross-selling function for monitoringall its business units. Compensation
plans for the marketing force are incentive based, with professionals receiving
a base salary and incremental compensation based on performance. For the
Company's Transworld Systems subsidiary, it has a sales performanceforce of each of the operating
entities.over 800
independent contractors based in 150 offices.
Customers
The Company's customer base includes a full range of local, regional and
national creditors. The company's customers include American Express, Citicorp,
Bally's, Time Warner, Discover Card, Ameritech, US West, AT&T, First USA,
Columbia House, New Jersey Department of Treasury, and various student loan
guaranty agencies (including the California Student Aid Commission, USA Group
Guaranty Services Inc. and the Great Lakes Higher Education Corporation).credit grantors. The Company's largest customer accounted for lessno more
than 10%5% of 19971999 revenues.
Employees
The companyCompany employs approximately 5,0007,000 people, of which 4,1005,500 are
account representatives, 130100 are sales representativerepresentatives and 7701,400 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 Companyits procedures, information systems
and regulations regarding contact with debtors. The training includes technical
topics, such as use of on-line collection systems and skip-tracingcomputerized calling
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. According to the American Collectors Association,Nationwide, there are approximately 6,000 contingent feedebt collection service
companies in the United States, with the 1510 largest agencies currently
receiving 33%accounting for only 20% of allindustry revenues. Within the collection and
outsourcing services of the Company's business, large volume credit grantors
typically employ more than one accounts placed with
outside collection agencies.receivable management company.
Competition is based largely on recovery rates, industry experience and
reputation, and service fees. 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. TheWithin this market, our largest competitors
include Deluxe Corporation, Dun & Bradstreet, Equifax Corporation, FCA InternationalG.C. Services
and G.C. Services.
Governmental Regulatory Matters
CertainNCO Group.
The bidding process associated with the acquisition of purchased
portfolios has become more competitive as the number of participants in this
business has increased. However, in late 1998, the Company's operations are subject to compliance with the FDCPAprimary competitor
for purchased portfolios, Commercial Financial Services, declared bankruptcy.
The Company's largest remaining competitors in this market include MCM Capital
Group Inc., Creditrust Corporation 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 is limited in communicating with
persons other than the consumer about 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 statues and applicable licensing requirements. The Company has established
policies and procedures to reduce the likelihood of violations of the FDCPA and
related state statutes. All account representatives receive extensive training
on these policies and must pass a test on the FDCPA. Each account
representative's desk has a list of suggested and prohibited language by the
telephone. The agents work in an open environment which allows managers to
monitor interaction with debtors, and the system automatically alerts managers
of potential problems if calls extend beyond a certain duration.
There have been no further developments in the Federal Trade Commission ("FTC")
inquiry at API. The FTC is conducting an informal inquiry to determine if API
has violated any provision of the FDCPA. The Company is fully cooperating with
the FTC and responding to any and all inquiries. The Company believes that the
ultimate resolution of the FTC's inquiry will not have a material adverse effect
on the financial position or results of operations of the Company.
Subsequent Event
On January 23, 1998, the Company acquired approximately 77% of the outstanding
shares of Union common stock for $31.50 per share. Pursuant to the Merger
Agreement, the Company agreed to acquire any of the remaining outstanding shares
of Union pursuant to a second-step merger in which holders of such shares will
receive $31.50 per share. The Company expects to complete the merger by April
1998. The aggregate purchase price of the common stock will be approximately
$192.0 million. The acquisition will be accounted for under the purchase
accounting method.
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 BondWest Capital Corporation.
Environmental, Health & 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.
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 to
telecommunications companies 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.
EnvironmentalSafety Matters
Current operations of OSI and its subsidiaries do not involve activities
materially affecting the environment. However, the Company's subsidiary, The
Union Corporation, is party to several pending environmental proceedings
involving the United States Environmental Protection Agency, ("EPA")or 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
acquisition of Union, acquisition, OSI, will establishin 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 such case, however, although
the affected subsidiary fully performed a settlement withMetal Bank
Cottman Avenue site, the federal
government, the government has subsequently reopened the matter. A group of
financially solvent responsible parties has completed an extensive investigation
of this Superfund site under a consent order with the EPA and submitted Remedial
Investigation and Feasibility Study Reports (the "Reports") to the EPA, which
outline a range of various remedial alternatives for the site. The EPA issued a proposed plan which was subject to public comments. Union's environmental
counsel retained several reputable environmental consulting firms to review and
evaluate the Reports and proposed plan. The findingsrecord of these experts indicated
that many of the assumptions, purported facts and conclusions contained in the
Reports and proposed plan are significantly flawed. These findings were
submitted to the EPA to challenge the perceived need for and the extent of the
proposed additional remediation. As previously reported by Union, a better
estimate of costs associated with any further remediation to be taken at the
site could not be made until a Record of Decision was issued by the EPA. The EPA
issued such Record of Decision for this sitedecision on February 6, 1998 and,
notwithstanding1998.
According to the information contained in the findings submitted by Union,record of decision, the cost to perform the remediation
selected by the EPA for the site is estimated by the EPA to be approximately
$17.3 million. Notwithstanding the
foregoing and Union's denial of liability because of the prior settlement with
the government, theThe aggregate amountsamount reserved by Union for this site is $13.8was $18.2
million, which representsrepresented Union's best estimate of the ultimate potential legal
and consulting costs for this site, costs to defenddefending its aforementioned settlement
with the governmentlegal and technical positions regarding
remediation of this site and its portion of the potential remediation costs that
will ultimately be incurred by them,it, based on current information, if
Union's prior settlement with the government is not upheld in court.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. AllOSI periodically reviews all known
environmental claims, are
periodically reviewed by Union, where information is available, to provide reasonable
assurance that adequate reserves are maintained. Reserves recorded
for environmental liabilitiesadequate.
Governmental Regulatory Matters
Certain of the Company's operations are subject to the Fair Debt
Collection Practices Act, or 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 nettelephone at inconvenient hours, and (3) must
provide verification of insurancethe 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 of the Company's account
representatives receive extensive training on these policies and must pass a
test on the FDCPA and the Company's agents work in an open environment which
allows managers to monitor interaction with debtors.
From time to time, certain of the Company's subsidiaries have been
subject to consent decrees with various governmental agencies, none of which
currently have a material effect on the Company's financial condition or
other expected
recoveries.operations.
ITEM 2. PROPERTIES
As of December 31, 1997,1999, the Company and its subsidiaries operated 6569
facilities in the U.S., all of which are leased.leased, except for three administrative
and collection offices operated by Transworld Systems, 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.customers and access to a number of
labor markets.
ITEM 3. LEGAL PROCEEDINGS
At December 31, 1997,1999, 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. TheIn 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 of defense forto 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, 1997.
Payco and its wholly owned subsidiary Payco-General American Credits, Inc. were
party to a class-action lawsuit filed in July 1995 in the Circuit Court of
Etowah County, Alabama. The suit alleged that Payco-General American Credits,
Inc., which was performing contingent fee services on behalf of co-defendant
Transamerica Business Credit Corporation ("Transamerica"), committed violations
of the federal FDCPA and Alabama state law. In January 1996, Transamerica filed
a cross-claim against Payco-General American Credits, Inc., seeking judgment
against Payco-General American Credits, Inc., for any liability, loss cost or
expense Transamerica has or will incur. Payco-General American Credits, Inc.,
has, in turn, filed a similar claim against Transamerica. Payco negotiated a
settlement with the plaintiff class, and on November 18, 1997, the Circuit Court
approved the class settlement. Under the class settlement, Payco agreed to pay
$1.3 million in cash to fund attorneys' fees to class counsel and to make credit
counseling services available to individual class members.
The Company believes that it has meritorious defenses to the cross-claim in the
Transamerica suit and believes that the outcome of that litigation will not have
a material adverse effect on the operations or the financial condition of the
Company.
In addition, Union is party to various legal proceedings and claims that were in
the normal course of business and routine to the nature of its business. Upon
completion of the Union acquisition, OSI will establish reserves that it
believes will be adequate for the ultimate settlement of these legal
proceedings.1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ThereThe following matters were no matters submitted to a vote of security holders
during the fourth quarter of the year ended December 31, 1997.
1999.
In November 1999, pursuant to written consent of shareholders of the
Company's voting common stock, the shareholders approved the amendment of the
Company's Certificate of Incorporation to (i) increase the total authorized
shares of the Voting Common Stock of the Company, (ii) increase the total
authorized shares of the Class B Non-Voting Common Stock of the Company and
(iii) provide for the authorization of 200,000 shares of other preferred stock.
These consents were executed by holders of a majority of the outstanding capital
stock of the Company.
In December 1999, pursuant to written consent of the holders of the
Company's outstanding 11% Senior Subordinated Notes due November 1, 2006, the
noteholders waived: (i) the Company's obligations under Section 4.15 of the
Indenture, including its obligations to make a Change of Control Offer in
connection with the Recapitalization; and (ii) the failure by the Company to
comply with certain technical requirements relating to the qualification and
operation of its financing subsidiary, OSI Funding Corp., as an Unrestricted
Subsidiary under the Indenture and any and all consequences arising therefrom
under the Indenture.
In December 1999, pursuant to written consent of shareholders of the
Company's voting common stock, the shareholders approved bonuses, option
acceleration and price amendments, and option grants to certain officers of the
Company. These consents were executed by holders of 3,462,726.01 shares of the
Company's voting common stock, 391,740.58 shares of the Company's Class A
non-voting common stock, 400,000 shares of the Company's Class B non-voting
common stock, and 1,040,000 shares of the Company's Class C non-voting common
stock.
In December 1999, pursuant to written consent of shareholders of the
Company's voting common stock, the shareholders approved the amendment and
restatement of the Company's Certificate of Incorporation to amend the
authorized capitalization of OSI, principally to (i) provide that voting common
stock will no longer have the ability to convert into non-voting common stock,
(ii) provide that there will be only one class of non-voting common stock and
(iii) eliminate reference to any specific series of preferred stock and instead
authorize preferred stock with rights, preferences and obligations that may be
established by the Board of Directors. Stockholders holding a majority of the
issued and outstanding shares of common stock of the Company and holders of a
majority of the issued and outstanding shares of each of the (i) preferred
stock, (ii) Class A non-voting common stock, (iii) Class B non-voting common
stock and (iv) Class C non-voting common stock executed these consents.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
No public market currently exists for the Common Stock.Company's Voting common stock
and Nonvoting common stock.
As of March 17, 1998,30, 2000, there were approximately 2130 holders of record of
the Common Stock.Voting common stock and Nonvoting common stock.
The Company has not declared any cash dividends on any of its Common Stockcommon
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 by andNovember 30, 1999 among
the Company, the Lenders listed therein, Goldman
Sachs Credit Partners L.P.DLJ Capital Funding, Inc., as the
Syndication Agent, Harris Trust and the Chase ManhattanSavings Bank, as Co-Administrative
Agents, Goldman Sachs Credit Partners L.P.the Documentation Agent,
and Chase Securities, Inc.,Fleet National Bank, as Arranging Agents and SunTrust Bank, Atlanta, as Collateralthe Administrative Agent (the "Credit Agreement")
contains certain restrictions on the Company's ability to declare or pay
dividends on its capital stock. BothThe Indenture, the IndentureCredit Agreement and the
Credit AgreementCertificate of Designation of the powers and preferences and relative
participating, optional and other special rights of Class A 14% Senior
Mandatorily Redeembale Preferred Stock, Series A, and Class B 14% Senior
Mandatorily Redeemable Preferred Stock, Series A, and qualifications and
limitations and restrictions thereof 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 under certain circumstances) or a
subsidiary andCompany) 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 (i) the audited Consolidated
Financial Statements of OSI as of December 31, 1998 and 1999 and for the period from September 21, 1995 to December
31, 1995 and the twothree
years ended December 31, 1997 and (ii) the audited
consolidated financial statements of API (as predecessor) for the year ended
December 31, 1994 and the period January 1, 1995 to September 20, 1995.1999. The audited financial statements of OSI and API referred
to above are included elsewhere herein. The selected historical financial data
set forth below as of December 31, 1994September 20, 1995 and for the year ended December 31, 1993period January 1, 1995 to
September 20, 1995 have been derived from the audited financial statements of
APIAccount Portfolios ("API") (as predecessor) not included herein. The selected
historical financial data set forth below as of December 31, 1995, 1996, and
1997 for the period September 21, 1995 to December 31, 1995 and for the year
ended December 31, 1996 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 API and OSI
included elsewhere herein.
API OSI
(as predecessor) OSI (as successor)
----------------------------------------- ----------------------------------------------------- ----------------------------------------------------------------
From
From September 21
January 1 to To
Year Ended December 31, September 20 December 31, Year Ended December 31,
----------------------- ------------- ------------ -----------------------
1993 1994------------ ------------------------------------------------
1995 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
($ in thousands)
Income Statement Data:
Income Statement Data:
Operating revenue (a).................... $23,696 $39,292 $21,293...................... $ 21,293 $ 8,311 $106,331 $271,683$ 106,331 $ 271,683 $ 479,400 $ 504,425
Salaries and benefits.................... 1,596 2,646benefits .................. 4,471 2,079 46,997 133,364 230,114 244,157
Other operating expenses (b)(c).......... 10,692 8,790(a) ........... 7,343 8,953 80,357 156,738 ------- ------- ------- ------- -------- --------221,598 224,616
Change in control bonuses, stock option
redemption and other bonuses ..... - - - - - 10,487
Nonrecurring conversion, realignment
and relocation expenses ......... - - - - - 5,063
Transaction related costs .............. - - - - - 6,827
--------- --------- --------- --------- --------- ---------
Operating income (loss).................. 11,408 27,856 ................ 9,479 (2,721) (21,023) (18,419) 27,688 13,275
Interest expense, net.................... 1,301 2,599net .................. 495 1,361 12,131 28,791 Other expense............................ -- 166 -- -- -- --
------- ------- ------- ------- -------- --------50,627 52,265
Income (loss) before taxes............... 10,107 25,091 8,894taxes ............. 8,984 (4,082) (33,154) (47,210) (22,939) (38,990)
Provision for income taxes (benefit)..... -- -- -- ... - (1,605) (11,757) 11,127 ------- ------- ------- ------- -------- --------830 759
Minority interest ...................... - - - - 572 -
--------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary item $ 8,984 $ (2,477) $ (21,397) $ (58,337) $ (24,341) $ (39,749)
Extraordinary loss ..................... - - - - - 4,208
--------- --------- --------- --------- --------- ---------
Net income (loss) (c).................... $10,107 $25,091...................... $ 8,984 $(2,477) $(21,397) $(58,337)
======= ======= ======= ======= ======== ========$ (2,477) $ (21,397) $ (58,337) $ (24,341) $ (43,957)
========= ========= ========= ========= ========= =========
Balance Sheet Data (at end of period):
Working capital.......................... $5,622 $16,897 $3,809 $22,438 $38,080 $18,558
Total assets............................. 8,945 22,941assets ........................... 11,272 85,652 355,207 381,690 618,491 624,712
Total debt............................... 3,544 -- --debt ............................. - 36,462 247,616 324,966 528,148 518,307
Mandatorily redeemable preferred stock . - - - - - 85,716
Partners' capital/Stockholders equity
(deficit)........................... 4,582 22,162 .......................... 10,559 42,448 51,598 (5,478) (30,032) (93,948)
Other Financial Data:
Amortization of purchased portfolios (c). $6,013 $2,667 $2,308 $5,390 $27,317 $52,042 (e)... $ 2,308 $ 5,390 $ 27,317 $52,042(c) $50,703(d) 38,722
Other depreciation and amortization...... 57 102amortization .... 167 331 18,281 33,574 30,007 31,095
Cash capital expenditures................ 222 463expenditures .............. 574 97 2,606 9,489 Portfolio purchases...................... 7,088 6,80013,480 18,437
On-balance sheet portfolio purchases ... 5,502 903 10,373 (f)10,373(e) 46,494 43,186 23,176
Cash flows provided by (used in):from:
Operating activities................ 4,759 21,074 5,887 2,902 10,667 32,825activities and
portfolio purchasing ......... 385 1,999 (2,978) (13,669) 12,066 (3,652)
Investing activities................ (2,222) (463) 1,259 (31,007) (200,435) (119,499)activities ............... 6,761 (30,104) (186,790) (73,005) (184,619) (21,549)
Financing activities................ (3,775) (11,055)activities ............... (20,587) 29,574 202,796 75,394 178,150 22,446
EBITDA (d)............................... 17,478 30,625(b) ............................. 11,954 3,000 24,575 67,197 108,398 83,092
Adjusted EBITDA (d)...................... 15,609 18,465(b) .................... 11,954 3,000 25,775 67,197
(a) 1993 and 1994 operating revenues include proceeds on sales of purchased
portfolios of $1,869 and $13,325, respectively. The related amortization on
the portfolios sold included in other operating expenses was $54 and
$1,155, respectively. In addition, transaction costs of $1,165 were
incurred in connection with the 1994 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) Effective January 1, 1994, API began amortizing on an individual portfolio
basis the cost of purchased receivables based on the ratio of current
collections to current anticipated future collections for that portfolio
over a maximum period of three years. Prior to 1994, API amortized
purchased receivables under the cost recovery method. The change in method
was a result of API's improved historical collection experience for similar
types of loan portfolios and its ability to estimate expected cash flow.
The effect of this change was accounted for prospectively as a change in
estimate and reduced amortization expense and increased net income by $962
in 1994.
(d) 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 $1,869 and $12,160 in 1993 and 1994,
respectively, and 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.
(e) 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.
(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 (the "MLQ108,398 105,469
- ------------------------------
(a) Other operating expenses include telephone, postage, supplies, occupancy
costs, data processing costs, depreciation, amortization and miscellaneous
operating expenses.
(b) EBITDA is defined as income from continuing operations before interest,
taxes, depreciation and amortization. Adjusted EBITDA reflects EBITDA as
defined above adjusted for 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 and the change in control
bonuses, stock option redemption and other bonuses; non-recurring
conversion, realignment and relocation expenses; and transaction related
expenses of $10,487, $5,063 and $6,827, respectively, in the year ended
December 31, 1999. 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.
(c) 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.
(d) 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.
(e) 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
RESULTS OF OPERATIONS
Results of Operations
YEAR ENDED DECEMBERYear Ended December 31, 1997 COMPARED TO YEAR ENDED DECEMBER1999 Compared to Year Ended December 31, 19961998
Revenues for the year ended December 31, 19971999 were $271.7$504.4 million
compared to $106.3$479.4 million for the year ended December 31, 1996.1998 - an increase of
5.2%. The revenue increase of $25.0 million was due primarily to increased
collection and outsourcing revenues of $19.7 million and $7.3 million from the
full year effect of the acquisition of Union in 1998. Revenues from collection
services were $362.9 million for the year ended December 31, 1999 compared to
$350.1 million for 1998. The increase in collection services revenue was due to
a 2.1% increase in existing business and $5.7 million from the Union
acquisition. The outsourcing services revenue of $61.1 million compared
favorably to $46.9 million for 1998 due to increased revenue from new and
existing business of 26.7% and $1.6 million from the Union acquisition. Revenues
from purchased portfolio services decreased 2.4% to $80.4 million for the year
ended December 31, 1999 from $82.4 million in 1998. The decreased revenue was
attributable to lower revenues from on-balance sheet portfolios and lower
strategic sales of portfolios offset by higher servicing fee revenues for the
off-balance sheet collections of portfolios which increased due to the formation
of the Company's special purpose finance company ("FINCO"). Prior to forming
FINCO, the Company would record as revenue the total collections on purchased
portfolios. Currently, for all purchased portfolios which are sold to and
financed by FINCO, the Company records as revenue a servicing fee on the total
collections of FINCO purchased portfolios. During the year ended December 31,
1999, the Company recorded revenue from FINCO servicing fees of $13.5 million on
total collections of $39.3 million compared to servicing fees of $0.8 million on
total collections of $1.9 million in 1998. When compared to the year ended
December 31, 1998, the total collections of both on and off-balance sheet
purchased portfolios increased from $65.1 million to $89.0 million in 1999 - an
increase of 36.7% or $23.9 million. The increased collections resulted primarily
from an increase in the total levels of purchased portfolios primarily as a
result of the increased buying capacity made available through FINCO.
Operating expenses, inclusive of salaries and benefits, service fees and
operating and administrative expenses, were $398.9 for the year ended December
31, 1999 and $371.0 million for the comparable period in 1998 - an increase of
7.5%. The increase in these operating expenses resulted primarily from the Union
acquisition, higher collection-related expenses associated with the increased
revenues of collection and outsourcing services, (including outsourcing)increased collection expenses
associated with the increase in collections of purchased portfolios, higher
infrastructure costs and increased advertising and promotional expenses and
consulting expenses. For the year ended December 31, 1999, amortization and
depreciation charges of $69.8 million compared to $80.7 million for 1998 - a
decrease of 13.5%. The lower amortization and depreciation charges resulted
primarily from lower on-balance sheet portfolio amortization offset partially by
additional depreciation and amortization of goodwill related to the Union
acquisition and depreciation of current year capital expenditures.
During the fourth quarter of 1998 and the first quarter of 1999, the
Company evaluated its business strategy for its operations. After the Company's
formation and seven acquisitions, the Company adopted a strategy to align the
Company along business services and establish call centers of excellence by
industry specialization. As a result, nonrecurring conversion, realignment and
relocation expenses include costs resulting from the temporary duplication of
operations, closure of certain call centers along with relocation of certain
employees, hiring and training of new employees, costs resulting from the
conversion of multiple collection operating systems to a one industry operating
system, and other one-time and redundant costs, which will be eliminated as the
realignment and integration plans are completed. These costs of $5.1 million
were $203.9recognized as incurred during 1999.
In connection with the Recapitalization, the Company incurred $10.5
million of additional compensation expense. This compensation expense consisted
primarily of expense relating to payment of cash for vested stock options and
the payment of change in control bonuses to certain officers in accordance with
terms of their employment agreements.
In addition, the Company incurred $6.8 million of transaction related
costs associated with the Recapitalization. These costs consisted primarily of
professional and advisory fees, and other expenses.
As a result of the above, the Company generated operating income of
$13.3 million for the year ended December 31, 1999. Adding back the nonrecurring
charges of $5.1 million, additional compensation expense of $10.5 million and
transaction related costs of $6.8 million, operating income was $35.7 million
for 1999 compared to $27.7 million for 1998.
Earnings before interest expense, taxes, depreciation and amortization
(EBITDA) for the year ended December 31, 1999 was $83.1 million. Adding back the
nonrecurring and transaction related expenses, EBITDA was $105.5 million for
1999 compared to $108.4 million for the year ended December 31, 1998. The
decrease was primarily attributable to the higher marketing costs associated
with branding initiatives, higher infrastructure and industry focused expenses
and the decreased portfolio service revenues resulting from the manner in which
revenues from off-balance sheet collections are recognized.
Net interest expense of $52.3 million for the year ended December 31,
1999 compared unfavorably to 1998 expense of $50.6 million due primarily to the
additional indebtedness incurred to finance the Union acquisition.
The provision for income taxes of $0.8 million was provided for state
and foreign income tax obligations, which the Company cannot offset currently by
net operating losses.
Minority interest in 1998 resulted from the Union acquisition. On
January 23, 1998, the Company acquired approximately 77% of the outstanding
common stock of Union through a tender offer. The acquisition of all remaining
outstanding common stock of Union was completed on March 31, 1998. The Company
recognized minority interest in earning of Union during the period from January
23, 1998 to March 31, 1998.
Due to the factors stated above, the loss before extraordinary item for
the year ended December 31, 1999 of $39.7 million compared unfavorably to $24.3
million in 1998.
The extraordinary item of $4.2 million, which was the write-off of
previously capitalized financing costs, resulted from the extinguishment of the
existing credit facility in conjunction with the establishment of a new credit
facility in the fourth quarter of 1999.
Primarily as a result of the nonrecurring and transaction related
expenses and the extraordinary item, net loss of $44.0 million for the year
ended December 31, 1999 compared unfavorably to the net loss of $24.3 million
for 1998.
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 compared- an increase of
76.5%. The revenue increase of $207.7 million was due primarily to $60.8increased
collection, outsourcing and portfolio services revenues of $14.4 million in the comparable period in 1996. The- an
increase in fee
revenues was a result of the acquisition of Payco in November 1996, the
acquisition of NSA in October5.3% over 1997, and the acquisition of ABC in November 1997.
Revenues generated$193.3 million from the acquisitions of Union,
NSA and ABC. Revenues from collection of purchased portfolios increased to
$67.8services were $350.1 million for the year
ended December 31, 19971998 compared to $45.5$180.9 million for 1997. The increase in
collection services revenues was due to a 1.0% increase in existing business and
$167.9 million from the three acquisitions. In the highly competitive collection
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 $82.4 million
for the comparable periodyear ended December 31, 1998 compared to $67.8 million in 1996.1997 - up
21.5%. The increase in collections from purchased
portfolios results fromincreased revenue was attributable to both higher collection revenue
and strategic sales of portfolios. The 1998 outsourcing revenue of $46.9 million
compared favorably to 1997 revenue of $23.0 million due primarily an increase in purchased portfolio levels and
related collection efforts and to a lesser extent from the PaycoUnion
acquisition.
Operating Expenses for the year ended December 31, 19971998 were $290.1$451.7
million compared to $127.4$290.1 million for the comparable period in 1996,year ended December 31, 1997 - an
increase of $162.7 million.55.7%. Operating expenses, exclusive of amortization and
depreciation charges, were $204.5$371.0 million for the year ended December 31, 19971998
compared to $204.5 million in 1997. The increase in operating expenses,
exclusive of amortization and $80.8
million fordepreciation charges, resulted from the comparable period in 1996. Operating expenses
related to the increased as a
resultrevenue and the three acquisitions. Exclusive of the
Payco acquisition as well as the use of outside collection
agencies to service a portion of purchased portfolios.three acquisitions' operating expenses, operating expenses were up 4.4% over
1997. Of the $290.1$451.7 million in operating expenses for the year ended December
31, 1997, $52.01998, $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 $10.0$3.0 million of additional
amortization to reduce its investment in a portion of purchased portfolios
to their estimated fair valuelimited liability corporation - See
Note 1211 to the Consolidated Financial Statements) was attributable to
amortization of the purchase price of purchased portfolios (compared to $27.3$52.0
million in 1996), $16.71997 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 attributable
to amortization of account inventory (compared to $12.3less than $24.8 million in
1996), $8.01997 due to no account placement amortization in 1998 ($16.7 million in 1997)
since account placement inventory was attributable tofully amortized as of December 31, 1997,
offset partially by additional amortization of goodwill associated withrelated to the acquisitions of API, Miller, Continental, Payco, NSA and ABC (compared to $3.2
million in 1996) and $8.8 million was attributable to depreciation (compared to
$2.8 million in 1996).three
acquisitions. The increase in amortization and depreciation expenseof $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 additional goodwill and step-up in basisthe above, the Company generated operating income of
fixed assets recorded
in connection with the Payco acquisition.
Operating Loss$27.7 million for the year ended December 31, 1997 was $18.4 million1998 compared to $21.0an operating loss
of $18.4 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.
Operating earningsyear ended December 31, 1997.
Earnings before interest expense, taxes, depreciation and amortization
(EBITDA) for the year ended December 31, 1997 was $67.21998 were $108.4 million compared to
$24.6$67.2 million for the comparable period in 1996.1997. The increase of $42.6$41.2 million in EBITDA reflects additional revenues associated withconsisted of $35.9 million
as a result of the acquisition of Payco,
NSAthree acquisitions and ABC and additional portfolios at API, partially offset by$5.3 million primarily from $14.4
million increased revenue from operations unrelated to the costs
associated with the use of outside collection agencies to service purchased
portfolios.
Interest Expense, netacquisitions.
Net interest expense for the year ended December 31, 19971998 was $28.8$50.6
million compared to $12.1$28.8 million for the comparable period in 1996.1997. The increase was primarily due to
increased debtadditional indebtedness incurred in 1997 to finance the acquisition of
Payco,Union, NSA and ABC and to finance additional purchased portfolio purchases.
Net Lossacquisitions.
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, 1997 was $58.3 million compared to
$21.4 million for1998. In the comparable period in 1996. The increase in net loss was
attributable to increased amortization expense from the step-up in basisfourth quarter 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 of1997, the Company
recordingrecorded 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. YEAR ENDED DECEMBERRecording 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, 1996 COMPARED TO YEAR ENDED DECEMBER1998. The Company
recognized minority interest in earnings of Union during the period from January
23, 1998 to March 31, 1995
Revenues1998.
Due to the factors stated above, the net loss for the twelve monthsyear ended
December 31, 1996 were $106.31998 was $24.3 million compared to $29.6 million in the comparable period for 1995. Revenues from
contingent fee services including outsourcing were $51.2$58.3 million for the twelve
monthsyear ended
December 31, 1996 compared to $0.0 in the comparable period in
1995. The increase in contingent fee revenues was a result1997 - an improvement of the acquisitions
of Miller, Continental and Payco. OSI is experiencing competitive pressure on
prices of contingent fee services. Revenues from purchased portfolios increased
to $45.5 million for the twelve months ended December 31, 1996 compared to $29.6
million for the comparable period in 1995. Purchased portfolio revenues
increased as a result of additional portfolio purchases, the hiring of
additional account representatives at API, facilitating the servicing of a
higher volume of accounts, as well as from the acquisition of the MLQ Interests
and Payco. Revenues from the outsourcing services increased to $9.5 million for
the twelve months ended December 31, 1996 compared to $0.0 in the comparable
period in 1995. The increase was due to the acquisition of Payco.
Operating Expenses for the twelve months ended December 31, 1996 were $127.4
million compared to $22.8 million for the comparable period in 1995, an increase
of $104.6$34.0 million. Cash operating expenses were $81.8 million for the twelve
months ended December 31, 1996 and $14.7 million for the comparable period in
1995. Cash expenses increased as a result of the Miller, Continental and Payco
acquisitions, the hiring of additional account representatives at API, the
opening of an API collection facility in St. Louis, Missouri, one-time costs
associated with the relocation of Continental's headquarters, and the addition
of corporate overhead of OSI. Of the $127.4 million in expenses for the twelve
months ended December 31, 1996, $27.3 million was attributable to amortization
of the purchase price of purchased portfolios (compared to $7.7 million in
1995), $12.3 million was attributable to amortization of account inventory
(compared to $0.0 in 1995), $2.7 million was attributable to amortization of
goodwill associated with the acquisitions of API, Miller, Continental and Payco
(compared to $0.3 million in 1995), $0.5 million was attributable to
amortization in non-compete agreements (compared to $0.0 in 1995) and $2.8
million was attributable to depreciation (compared to $0.2 million in 1995). The
increase in amortization expense was the result of additional goodwill recorded
in connection with the Miller, Continental and Payco acquisitions and the
step-up in basis of purchased portfolios related to the acquisition of API.
Operating (Loss) Income for the twelve months ended December 31, 1996 was
$(21.0) million compared to $6.8 million for the comparable period in 1995. The
operating loss was a result of increased amortization related to the step-up in
basis of purchased portfolios, goodwill and account inventory related to the
acquisitions of Miller, Continental and Payco.
EBITDA for the twelve months ended December 31, 1996 was $24.6 million compared
to $15.0 million for the comparable period in 1995. The increase of $9.6 million
in EBITDA reflects additional revenues associated with the acquisitions of
Miller, Continental, the MLQ Interests and Payco, partially offset by the costs
associated with hiring additional account representatives at API.
Interest Expense, net for the twelve months ended December 31, 1996 was $12.1
million compared to $1.9 million for the comparable period in 1995. The increase
was primarily due to indebtedness incurred to finance the acquisitions of
Miller, Continental, the MLQ Interests and Payco during 1996 and the acquisition
of API in September 1995.
Net (Loss) Income for the twelve months ended December 31, 1996 was ($21.4)
million compared to $6.5 million for the comparable period in 1995. The decrease
in net income results primarily from increased amortization expense from the
step-up in the basis of acquired portfolios, goodwill and account inventory
recorded in connection with the acquisition of API, Miller, Continental and
Payco and the increase in interest due to the indebtedness incurred to finance
those acquisitions.
Liquidity and Capital Resources
At December 31, 1997,1999, the Company had cash and cash equivalents of $3.2$6.1
million. At year end, the Company hadThe Company's credit agreement provides for a $58.0$75.0 million revolving
credit facility, which allows the Company to borrow for working capital, general
corporate purposes and acquisitions, subject to certain conditions. As of
December 31, 1997,1999, the Company had outstanding $31.9$13.0 million under the revolving
credit facility leaving $26.1$60.0 million, after outstanding letters of credit,
available under the revolving credit facility.
Cash and Cash Equivalentscash equivalents decreased from $14.5$8.8 million at December 31,
19961998 to $3.2$6.1 million at December 31, 19971999 principally due to the use of $119.5cash of
$21.5 million for investing activities primarily for the acquisition of NSAcapital expenditures and
ABC$3.7 million for operating activities and the
purchase of portfolios,portfolio purchasing offset by net
cash provided by operations andfrom financing activities of $32.8$22.5 million, and $75.4 million, respectively.which was due to the
Recapitalization of the Company on December 10, 1999. In connection with the
Recapitalization, the Company entered into a new credit facility. The proceeds
of the new credit facility were used to refinance the indebtedness outstanding
under the then existing credit facility on the date of the Recapitalization.
Further discussion of the Recapitalization is included in the Company's
financial statements included herein. The Company also held $20.8$22.5 million of
cash for clients in restricted trust accounts at December 31, 1997.1999.
Purchased Loans and Accounts Receivable Portfolios decreased from $68.0$55.5
million at December 31, 19961998 to $62.5$39.9 million at December 31, 19971999 due primarily
to new portfolio
purchases of $46.5 million during the year which were partially offset by amortization of purchased portfolios of $52.0$38.7 million including $10.0 millionoffset partially by new
on-balance sheet portfolio purchases of additional amortization as previously mentioned. The amount of purchased loans
and accounts receivable portfolios which are projected to be collectible within
one year increased slightly from $42.5 million at December 31, 1996 to $42.9
million at December 31, 1997.$23.2 million.
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, 19971999 and December 31, 19961998 by type of
receivable is shown below:
December 31, 19971999 December 31, 1996
--------------------------------------- -------------------------------------1998
------------------------------ --------------------------------
Original Gross Recorded Net Original Gross Recorded Net
Principal Value Current Long-termBook Value Principal Value Current Long-termBook Value
--------------- ------------ --------------- ------------
(in millions) (in thousands) (in millions) (in thousands)
Consumer loans............................ $2,039 $ 8,978 $ 4,948 $1,770 $ 7,445 $ 4,592loans..................... $2,958 $16,141 $2,114 $11,615
Student loans............................. 322 4,629 -- 322 7,456 4,699loans...................... 343 1,258 328 2,782
Credit cards.............................. 509 12,575 10,765 101 2,359 1,453cards....................... 958 11,837 897 26,489
Health clubs.............................. 1,309 15,307 2,248 954 23,364 13,865
Commercial................................ 41 1,426 1,576 41 1,857 910
------ ------- ------- ------ ------- -------
$4,220 $42,915 $19,537 $3,188 $42,481 $25,519
====== ======= ======= ====== ======= =======clubs....................... 1,565 9,060 1,460 12,229
Commercial......................... 129 1,651 129 2,378
-------- -------- -------- --------
$5,953 $39,947 $4,928 $55,493
======== ======== ======== ========
Most of the portfolio purchases involve tertiary paper (i.e., accounts more than
360 days past due which have been previously placed with a contingent fee
servicer) with the exception of portfolios purchased under forward flow
agreements under which the Company agrees to purchase subject to due diligence
charged off credit card and health club receivables on a monthly basis as they
become available.
DeferredNet deferred taxes decreased from an asset of $5.8 millionwas zero at December 31, 1996 to
an asset of $0.4 million at1998. At December 31, 1997.1999,
net deferred taxes was zero due to a net valuation allowance of $78.8 million.
The net deferred tax assetbalances at December 31, 19971999 and December 31, 1996 relates1998 relate
principally to net operating loss carryforwards.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
2012. During 1997,2019. At December 31, 1999, the Company recordedhas a cumulative net valuation allowance
of $32.4$78.8 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. For all federal tax years since the Company's
formation in September 1995, the Company has incurred net operating losses.
During 1997, the Company has significantly increased its total debt from $247.6
million at December 31, 1996 to $325.0 million at December 31, 1997. This
increase in debt primarily resulted from the acquisitions in 1997 of the net
assets of NSA and ABC. In addition, on January 26, 1998, the Company incurred
significant additional borrowings to finance its acquisition of approximately
77% of the shares of common stock of Union. Since the Company has a history of generating net operating losses and has significantly increased its totalis
expected to continue to incur significant 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, 19971999 consists of
a $219.3$413.0 million indebtedness under the bank credit facility, $100.0 million 11%
Senior Subordinated Notes ("Notes"(the "Notes") and other indebtedness of $5.7$5.3 million.
See Note 146 of the Consolidated Financial Statements of OSI included elsewhere
herein for a description of the amended
bank1999 credit agreement, effective January 1998, which provides additional
financing for the Union acquisition. Currently, the Company has borrowed $187.5
million to acquire approximately 80% of the shares of common stock of Union and
plans to borrow an additional $37.5 million to complete the Union acquisition.facility.
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
expenseexpenses and to meet its debt service requirements as they become due.
Additionally, future portfolio purchases may require signifi-cant financing or
investment. 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 October of 1998, a 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. In connection with the
Recapitalization, OSI Funding Corp. converted to a limited liability company and
is now OSI Funding LLC, with OSI owning approximately 78% of the financial
interest but having only approximately 29% of the voting rights. This
arrangement will provide the Company expanded portfolio purchasing capability in
a very opportunistic buying market.
Capital expenditures for the year ended December 31, 19971999 were $9.5$18.4
million. The Company expects to spend approximately $17.0$18.0 million on capital
expenditures (exclusive of any expenditures in connection with acquisitions) in
1998.2000. 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, 19961999, 1998 and 1997.
Year 2000
The company has numerous computer-basedCompany's business applications and infrastructure functioned
flawlessly upon the beginning of the New Year and experienced no significant
Year 2000 related glitches during the year's first full week of business
operations and have continued to perform since then.
Because many of the Company's client relationships are supported through
computer system interfaces, OSI worked proactively with clients to assure Year
2000 compliance between respective computer systems. It also secured assurances
from suppliers and vendors that their products would be Year 2000 ready.
Within OSI, the Company tested and confirmed that the full range of its
computer based production systems and collection applications. The
Company has evaluated its systems and applications to determine whether or not
those systemsinfrastructure were Year 2000 compliant.
Based upon its review,In addition to services typical of most companies, like phone systems, building
services, email and office equipment, OSI's compliance program focused
especially on customer interfaces and reporting, collection and financial
systems and predictive dialers.
Spending for Year 2000 modifications and updates were expensed as
incurred and did not have a material impact on the Company has
identified those systems which are not compliant and has implemented plans to
update those systems.results of operations or cash
flows. The cost of the effortcompany's Year 2000 project was funded from cash flows
generated from operations. The Company estimates that its total Year 2000
expenses were approximately $1.7 million.
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
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) legal proceedings, (8)
environmental investigations and clean up efforts, (9) expected synergies,
economies of scale and cost savings from recent acquisitions by the Company not
being fully realized or realized within the expected time frames, (10) costs of
operational difficulties related to integrating the operations of recently
acquired companies with the Company's operations being greater than expected,
(11) the Company's ability to generate cash flow or obtain financing to fund its
operations, service its indebtedness and continue its growth and expand
successfully into new markets and services, (12) the effectiveness of the
Company's Year 2000 efforts, and (13) factors discussed from time to time in the
Company's public filings.
These forward-looking statements speak only as of the date they were
made. These cautionary statements should be considered in connection with any
written or oral forward-looking statements that the Company may issue in the
future. The Company does not undertake any obligation to release publicly any
revisions to such forward-looking statements to reflect later events or
circumstances or to reflect the occurrence of unanticipated events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is currently not expectedsubject to be
material and will be expensed as incurred over the next two years.
Derivative Financial Instrumentsrisk 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 maywill 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.
Forward-Looking Statements
Except forThe Company uses interest rate cap, collar and swap agreements to manage
the historical statements and discussions contained herein,
statements contained in this report constitute "forward-looking statements" as
definedinterest 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. In connection with the Recapitalization resulting in the Securities Act of 1933 and the Securities Exchange Act of 1934,
as amended. These forward-looking statements rely on a number of assumptions
concerning future events, and are subject to a number of risks and uncertainties
and other factors, many of which are outside the control ofCompany
refinancing its then outstanding indebtedness, all interest agreements were
terminated. Therefore, at December 31, 1999, the Company had no outstanding
interest rate agreements. Pursuant to the Credit Agreement, the Company is
obligated to secure interest rate protection in the nominal amount of $150
million by July 2000.
The following table provides information about the Company's financial
instruments that could cause actual resultsare sensitive to differ materially from such statements.
Readers are cautioned not to put undue reliance on such forward-looking
statements, each of which speaks only as of the date hereof. Factors and
uncertainties that could affect the outcome of such forward-looking statements
include, among others, market and industry conditions, increased competition, changes in governmental regulations, general economic conditions, pricing
pressures,interest rates. For debt
obligations, the table presents principal and the Company's ability to continue its growthcash flows and expand
successfully into new markets and services. The Company disclaims any intention
or obligation to update publicly or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.related
weighted-average interest rates by expected maturity dates.
Interest Rate Sensitivity
Principal (Notional) Amount by Expected Maturity
Average Interest Rate
(Dollars in millions)
Fair
2000 2001 2002 2003 2004 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
Liabilities
Long-term debt, including current portion
Fixed rate - - - - - $100.0 $100.0 $97.0
Average interest rate 11.0% 11.0% 11.0% 11.0% 11.0% 11.0%
Variable rate $2.5 $10.0 $17.5 $32.5 $40.0 $310.5 $413.0 $413.0
Average interest rate (1) (1) (1) (1) (1) (1)
(1) - One month LIBOR (5.8% at December 31, 1999) plus weighted-average margin of 3.7%.
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 REGISTRANTDirectors 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 4749 Director, President and
Chief Executive Officer
David E. De Leeuw 53William B. Hewitt 61 Director
David E. King 39 Director, Secretary and Treasurer
Tyler T. Zachem 32Timothy M. Hurd 30 Director and Vice President
David G. Hanna 34Scott P. Marks, Jr. 54 Director
Frank J. Hanna, III 36Richard L. Thomas 69 Director
Dennis G. Punches 62 Director
Nathan W. Pearson, Jr.Paul R. Wood 46 Director Daniel J. Dolan 45and Vice President
Michael A. DiMarco 42 Executive Vice President -
President Fee Services
Bryan K. Faliero 34 President Portfolio Services
Michael B. Staed 53 Senior Vice President and
President Outsourcing Services
Gary L. Weller 39 Executive Vice President and
Chief Financial Officer
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 National Computer Systems and
chairman of International Data Response Corporation.
TIMOTHYTimothy G. BEFFA (47)Beffa (49), 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 as 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.
DAVID E. DE LEEUW (53)William B. Hewitt (61), Director of the Company since September 21, 1995.February 1998. 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. HeHewitt
currently serves as a director of Vans, Inc., AmeriComm Holdings, Inc., Nimbus CD International, Inc.,
Aurora Foods Inc. and American Residential Inventory Trust.
DAVID E. KING (39), Secretary, Treasurer and Director ofconsultant to 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 AmeriComm Holdings, Inc., International Data Response Corporation,
Fitness Holdings Inc., RSP Manufacturing Corporation and Sarcom.
TYLER T. ZACHEM (32), Vice President and Director of the Company since September
21, 1995. Mr. Zachem is a principal 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 principal 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. sinceJanuary 1998. From 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 (34), Director of the Company since September 21, 1995. From
November 1992 to September 1995, Mr. Hanna served as President of Account
Portfolios, L.P. From 1988 to November 1992, Mr. Hanna served as President of
the Governmental Division of Nationwide Credit, Inc., administering contracts
for government agencies including the Department of Education Student Loans
program. David G. Hanna is the brother of Frank J. Hanna, III.
FRANK J. HANNA, III (36), Director of the Company since September 21, 1995. Mr.
Hanna founded Account Portfolios, L.P. in July 1990, and served as its Chief
Executive Officer until its acquisition by OSI in September 1995. From February
19881997 to January 1990,1998, Mr. Hanna served as Group Vice President of Nationwide
Credit, Inc., a large accounts receivable management company. Frank J. Hanna III
is the brother of David G. Hanna. Mr. Hanna currently serves as a director of
Cerulean Companies, Inc.
DENNIS G. PUNCHES (62), Director of the Company since November 1996. From May
1988 to October 1988 and from January 1990 to November 1996, Mr. Punches served
as Chairman of the Board of Directors of Payco American Corporation. From
October 1988 to January 1990, Mr. Punches served as Co-Chairman of the Board of
Directors of Payco American Corporation. From 1969 to January 1990, Mr. PunchesHewitt served as President and Chief Executive Officer
of Payco American Corporation.
NATHAN W. PEARSON, JR. (46)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. were subsidiaries of Union.
Timothy M. Hurd (30), Director and Vice President of the Company since December
1999. Mr. Hurd is a director of Madison Dearborn Partners. Prior to joining
Madison Dearborn Partners, Mr. Hurd was with Goldman Sachs & Co. He currently
serves as a director of Woods Equipment Company, Inc. and PeopleFirst.com.
Scott P. Marks, Jr. (54), Director of the Company since July 1997.January 2000. Mr. PearsonMarks
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,investor in Chicago, IL. Mr. PearsonMarks resigned from his post as Vice
Chairman and a member of the Board of Directors of First Chicago NBD Corporation
in December, 1997, a post he had held since December, 1995. Previously he was
Executive Vice President of First Chicago Corporation and Chief Financial Officermanaged their
credit card business for approximately 10 years. Mr. Marks serves as a director
of BroadcastingADA Business Enterprises, the for-profit subsidiary of the American Dental
Association, Pascomar Inc. and Clark Polk Land LLC.
Richard L. Thomas (69), Director of the Company since January 2000. Mr. Thomas
has been retired since May 1996. Prior to retiring, Mr. Thomas served as
Chairman of First Chicago NBD Corporation from December 1995 to May 1996. Prior
to that he served as Chairman of First Chicago Corporation from December 1991 to
December 1995. He currently serves as a director of IMC Global Inc., The PMI
Group Inc., The Sabre Group, Sara Lee Corporation and Unicom Corporation.
Paul R. Wood (46), Director and Vice President of the Company since December
1999. Mr. Wood is a managing director of Madison Dearborn Partners. Prior to
co-founding Madison Dearborn Partners, L.L.C.Mr. Wood was with First Chicago Venture
Capital for nine years in various leadership positions. He currently serves as a
director of Hines Horticulture, Inc., Woods Equipment Company, Inc. and Eldorado
Bankshares, Inc.
Michael A. DiMarco (42), Executive Vice President and President Collection
Services of the Company since September 1998. From 1991 until September 1998,
Mr. DiMarco was with Paging Network, Inc., a radio broadcasting leveraged buyout
organizationwireless 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.
Bryan K. Faliero (34), President Portfolio Services of the Company since 1995,October
1997. From June 1997 to September 1997, Mr. Pearson has been a principal of investment and
management of Broadcasting Partners, L.L.C.Faliero served as Vice President,
Business Analysis for the Company. Prior to joining Broadcasting
Partners, L.L.C.the Company, he was an
associate with Booz Allen & Hamilton, a strategic consultancy based in Chicago,
concentrating on operations strategy and network rationalization.
Michael B. Staed (53), Senior Vice President and President Outsourcing Services
of the Company since July 1999. From May 1998 to June 1999, Mr. Pearson wasStaed served as
Senior Vice President Marketing, Outsourcing for the Company. Prior to joining
the Company, he served as a management consultant with McKinsey and
Company from 1982 to 1988.
DANIEL J. DOLAN (45)partner in the consulting division of Ernst & Young
LLP for four years focusing on the global telecommunications practice.
Gary L. Weller (39), Executive Vice President and Chief Financial Officer of the
Company since October 1997.July 1999. From January 1998 to June 1999, Mr. Dolan has 23 years experienceWeller served as
Senior Vice President and Chief Financial Officer of Harbour Group Ltd., an
investment firm based in public
accounting, the last 11 yearsSt. Louis. From June 1993 to December 1997, he served
as a partnerExecutive Vice President and Chief Financial Officer of Ernst & Young LLP.Greenfield
Industries, Inc.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
paid or accrued for by the Company for 1995, 1996 and 1997 on behalf of the Company's Chief Executive
Officer and the four other most highly compensated executive officers of the
Company for the yearyears ended December 31, 1999, 1998 and 1997.
Summary Compensation Table
-------------------------------------------------------------------------------------------------------------------------------------------------
Long Term
Compensation
Name and Other Annual CompensationAwards All Other
Name and Fiscal
Salary Bonus Compensation Awards----------- Compensation
Principal Position Year ($) ($) ($) Options (#) ($)(1)
- ------------------ ----- ------- ------ ------ ------ ------------ ------------ ------------------------------ --------------- --------------
Timothy G. Beffa(1)Beffa 1999 370,836 365,000 2,617
President and CEO 1998 350,000 405,300
1997 320,110 457,500 1996 103,846 200,000
Daniel J. Dolan (2)41,555
Michael A. DiMarco 1999 325,000 100,000 42,373(2) 50,000 1,373,017
Executive Vice 1997 56,571 130,0001998(3) 108,337 220,000 14,491(2)
President - President
Fee Services
Bryan K. Faliero 1999 195,206 90,000 480,337
President Portfolio 1998 159,373 83,800 4,272
Services 1997(4) 73,945 35,000 25,000 2,412
Mike B. Staed 1999 228,337 70,000 16,000 947,505
Senior Vice President 1998(5) 135,289 89,600 9,000
And President
Outsourcing Services
Gary L. Weller 1999(6) 134,512 310,000 50,000 10,459
Executive Vice
President and CFO
Patrick Carroll
Executive Vice 1997 186,875 60,000
President, Sales 1996 120,000 200,000 267,000(4)
Michael Meyer (3)
Vice President, Chief 1997 159,812 142,000
Information Officer
James F. Whalen (5)
Senior Vice President, 1997 192,044 100,000
Business Operations 1996 20,533 100,000
Analysts
(1) 1996- ------------------------------
(1) In connection with the Recapitalization, Mr. DiMarco, Mr. Faliero and Mr.
Staed received change in control payments of $1,356,875, $475,627 and
$937,500, respectively. Remaining amounts, if any, represent split dollar
life insurance and long-term disability premiums paid by the Company along
with the Company's portion of the 401(k) contribution. Upon termination of
split dollar life insurance policy, any residual cash surrender value (cash
surrender value less premiums paid) is paid to the executive officer.
(2) Payment of taxes by the Company for includable W-2 relocation expenses.
(3) 1998 compensation based on an annual salary of $300,000.
(2) Based on an annual salary of $260,000. Mr. Dolan was hired in October 1997.
(3) Based on an annual salary of $190,000. Mr. Meyer was hired in early March
1997.
(4) Represents value of stock acquired in connection with the acquisition of
Payco by the Company.
(5) 1996 compensation based on an annual salary of $200,000. Mr. Whalen
resigned effective November 30, 1997.
Employment Agreement
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. Mr. Beffa receives an annual salary of $350,000$325,000. Mr. DiMarco was
hired in September 1998.
(4) 1997 compensation based on an annual salary of $138,500. Mr. Faliero was
hired in June 1997.
(5) 1998 compensation based on an annual salary of $210,000. Mr. Staed was hired
in May 1998.
(6) 1999 compensation based on an annual salary of $275,000. Mr. Weller was
hired in July 1999.
The following table sets forth grants of stock options made during the
year ended December 31, 1999.
OPTION GRANTS IN 1999
Percent of
Number of Total Potential Realizable Value
Securities Options at Assumed Annual Rates of
Underlying Granted to Exercise Stock Price Appreciation
Options Employees or Base for Option Term
Name Granted In Fiscal Price Expiration ---------------------------
(#) Year ($/share) Date 5% 10%
- ----------------- ----------- ------------ ------------ ------------- ----------- ------------
Michael A. DiMarco 50,000 23% $40.00 June 3, 2009 $1,258,000 $3,187,500
Mike B. Staed 16,000 7% $40.00 June 3, 2009 $403,000 $1,020,000
Gary L. Weller 50,000 23% $40.00 July 16, 2009 $1,258,000 $3,187,500
The following table sets forth options exercised during the year ended
December 31, 1999 and receivedoptions held by the current executives at December 31,
1999.
AGGREGATED OPTION EXERCISES IN 1999 AND OPTION VALUES ON
DECEMBER 31, 1999
Shares Number of Securities Value of Unexercised
Acquired Underlying Unexercised In-the-Money Options at
on Value Options at December 31, 1999 December 31, 1999(1)
Exercise Realized ------------------------------ -----------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ----------------- ---------- ------------ ------------ -------------- ----------- --------------
Timothy G. Beffa 102,801.87 2,567,468 70,175 0 $1,752,270 0
Michael A. DiMarco - - 50,000 0 0 0
Bryan K. Faliero 6,250 77,968 18,750 0 $233,813 0
Michael B. Staed - - 25,000 0 0 0
Gary L. Weller - - 50,000 0 0 0
(1) Based on the price per share of $37.47 determined for the Recapitalization
which was completed on December 10, 1999.
The following table sets forth option repricings during the year ended
December 31, 1999. Because no public market currently exists for the Company's
common stock, the Compensation Committee of the Board of Directors must estimate
the fair market value of the stock to set the exercise price when granting stock
options. In June 1999, the Compensation Committee determined that it had
overestimated the fair market value of the Company's common stock, and had set
the exercise price for several stock option grants significantly above fair
market value. Therefore, it amended the stock option award agreements for
certain stock option grants, including a bonusgrant to one named executive officer,
so that the exercise price more closely approximated the fair market value of
$457,500the Company's common stock.
TEN-YEAR OPTION REPRICINGS
Number of Market Exercise
Securities Price of Price at
Underlying Stock at Time of Length of Original
Options Time of Repricing New Option Term
Repriced or Repricing or Exercise Remaining at Date of
Amended or Amendment Amendment Price Repricing or Amendment
Name Date (#) ($)(1) ($) ($) (Years)
- ------------------ ---------- ------------- ------------- ------------ -------- ----------------------
Michael B. Staed June 3, 1999 9,000 37.47 65.00 40.00 9
(1) Because there is no public market for fiscal year 1997.the Company's common stock, market
value at the time the options were repriced in June 1999 is not readily
determinable. Price shown is the per share price determined at the time of the
Recapitalization on December 10, 1999.
Employment Agreements
OSI has entered into employment agreements with certain officers,
including each of the named executive officers. The employment agreements
provide for initial base salaries for Messrs. Beffa, DiMarco, Faliero, Staed and
Weller of $375,000, $325,000, $210,000, $250,000 and $275,000, respectively. In
fiscal year
1998,addition, the agreements provide that Mr. Beffa is eligible for an annual bonus
of up to 150% of his annual base salary. Effective October 9, 1996, Mr. Beffa receivedsalary and Messrs. DiMarco, Faliero, Staed and
Weller are eligible for target annual bonuses of 67%, 50%, 50% and 67%,
respectively.
On December 31 of each year, the term of each employment agreement is
automatically extended for an additional year unless the Company or the officer
gives 30 days advance termination notice. If (i) the Company terminates the
officer's employment without "cause" (as defined in the employment agreement),
(ii) the Company does not agree to extend the employment agreement upon the
expiration thereof, (iii) the officer terminates his employment because the
Company reduces his responsibilities or compensation in a manner which is
tantamount to termination of the officer's employment, or (iv) within two years
following a sale of the company (as defined in the employment agreement), the
officer resigns for "good reason" (as defined in the employment agreement), the
officer would be entitled to receive an amount equal to his total cash
compensation (base salary plus bonus, excluding, however, any change of control
bonus described below) for the preceding year and continue to receive medical
and dental health benefits for one year. If the officer's employment is
terminated by the Company "for cause", the officer is not be entitled to
severance compensation.
The employment agreements for Messrs. DiMarco, Faliero and Staed provide
that upon consummation of a sale of the Company (as defined in the employment
agreement), if the officer is employed by the Company immediately prior thereto,
he will be entitled to receive a payment from the Company in the amount of 250%
of his (i) then current base salary plus (ii) target annual bonus, reduced by
any gain for all of the options to purchase 131,421.66 shares of commoncapital stock of the Company which options vestor
other equity compensation awards previously granted to the officer. Pursuant to
this provision, Messrs. DiMarco, Faliero and Staed received change in control
bonuses in 1999 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 stockconsummation of the Company, which
also vest upon the satisfactionRecapitalization. The change in control
bonuses paid in 1999 and any future bonuses paid pursuant to this provision 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 serves as Chief Financial
Officeragreements will be paid only if such bonus is previously approved
by a vote of more than seventy-five percent (75%) of the Company. Mr. Dolan receives an annual salary of $260,000 and
received a bonus of $130,000 for fiscal year 1997. Commencing in fiscal year
1998, Mr. Dolan is eligible for an annual bonus of up to 66-2/3% of his annual
base salary. Effective December 2, 1997, Mr. Dolan received options to purchase
75,000 shares of common stockvoting power of the
Company, such options vest uponCompany's outstanding stock immediately before any sale of the satisfaction of certain performance targets and/or the occurrence of certain
liquidity events.Company.
Director Compensation
Non-employee directors of OSI who are not affiliated with a stockholder
of the Company 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,meeting. All directors receive 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, Mr.
Stiefler, who served as the Company's Chairman of the Board prior to December
10, 1999 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 also received an annual salary of $150,000.
Effective December 10, 1999, in connection with the Recapitalization, Mr.
Stiefler resigned as Chairman of the Board. At that time, he exercised all of
his options and received cash of $575,530. In 1998, three other directors,
Messrs. Hewitt, Jones and Marshall, each received options to purchase 3,000
shares of common stock of the Company. These options time-vested over a three
year period. Effective December 10, 1999, in connection with the
Recapitalization, all of the Company's directors except Mr. Beffa resigned from
the Board of Directors. As a result, Messrs. Hewitt, Jones and Marshall each
forfeited their options to purchase 3,000 shares of common stock of the Company.
Mr. Hewitt was subsequently elected to the Board of Directors in February 2000.
Option PlansPlan
The Company maintains athe 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)(i) 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)(ii) stock appreciation rights granted in
conjunction with stock options, (c)(iii) restricted stock, or (d)(iv) bonuses payable
in stock, to key salaried employees of the Company, including officers,
as well as
to consultantsindependent contractors of the Company and non-employee directors.directors of the
Company.
A total of 750,000 shares of common stock of the Company are reserved
for issuance under the Stock Option Plan. As of March 17, 1998,24, 2000, options to
purchase up to 568,520.66442,925 shares of the Company's common stock are outstanding
under the Stock Option Plan.
AsPlan, all of March 17, 1998, the following table sets forth options held by the current
executive officers:
#which are vested and exercisable.
Board of Options Exercisable Unexercisable
------------ ----------- -------------
Timothy G. Beffa 172,976.66 13,142 159,834.66
President and CEO
Daniel J. Dolan 75,000 7,500 67,500
Executive Vice President
and CFO
Patrick Carroll 25,000 2,500 22,500
Executive Vice President,
Sales
Michael Meyer 25,000 2,500 22,500
Vice President, Chief
Information Officer
As of the date of this Report, the potential realizable value of each grant of
options is not applicable due to the lack of a public trading market for the
Company's common stock.
CommitteeDirectors' Report on Executive Compensation
The Compensation Committee currently consists of Mr. David E. DeLeeuw, Mr. David
E. King and Mr. Tyler T. Zachem.
The Compensation Committee recommends compensation arrangements for the
Company's executive officers and administers the Company's Stock Option Plan. In
conjunction with the Recapitalization, all members of the Compensation Committee
resigned from the Board of Directors, effective December 10, 1999. New members
of the Compensation Committee have not yet been elected by the Board. The
Company's 1999 compensation program iswas designed to be competitive with
companies similar in structure and business to the Company.
The Company's 1999 executive compensation program iswas 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 1999 were determined by certain members of the Board in March
2000 and paid shortly thereafter. The amount of bonuses earned by the Company's
executive officers were determined 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.
In June 1999, the Company entered into an amended and restated
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 1999 was $375,000 and his bonus target potential was $562,500, 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 1999, 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 1999 was $365,000--64.9% of his target bonus.
Board of Directors
------------------
Timothy G. Beffa
William B. Hewitt
Timothy M. Hurd
Scott P. Marks, Jr.
Richard L. Thomas
Paul R. Wood
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
TheAs of March 30, 2000, the authorized capital stock of the Company
consists of (i) 1,000,000 shares of
Preferred Stock, no par value (the "Preferred Stock"), of which 935,886.85
shares are issued and outstanding, (ii) 7,500,00015,000,000 shares of Voting Common Stock, par value $.01 per
share, (the "Voting Common Stock"), of which 3,477,126.015,976,389.04 are issued and outstanding, (iii) 7,500,000(ii) 2,000,000 shares
of Class A Non-Voting Common Stock, par value $.01 per share, (the "Class A Non-Voting Common Stock"), of which 391,740.58480,321.30 are
issued and outstanding, (iv) 500,000(iii) 200,000 shares of Class B
Non-Voting14% Mandatorily Redeemable
Senior Preferred Stock, no par value, $.01 per share (the "Class B Non-Voting Common
Stock"), of which 400,000100,000 are issued and
outstanding and (v) 1,500,000(iv) 50,000 shares of Class C Non-Voting CommonJunior Preferred Stock, no 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 1,040,0007,000 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 246,021.20 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 December 31, 1997March 30,
2000 by (i) each person known to the Company to be the beneficial owner of more
than 5% of any class of the Company's voting 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) 623,924.21 66.6%
McCown De Leeuw & Co. III
(Europe), L.P.(2) 623,924.21 66.6%
McCown De Leeuw & Co. III (Asia), L.P.(2) 623,924.21 66.6%
Gamma Fund LLC(2) 623,924.21 66.6%
Rainbow Trust One(3) 155,981.86 16.7%
Rainbow Trust Two(4) 155,980.78 16.7%
David E. De Leeuw(2) 623,924.21 66.6%
David E. King(2) 623,924.21 66.6%
Frank J. Hanna, III(3) 155,981.86 16.7%
David G. Hanna(4) 155,980.78 16.7%
All directors and officers as a group(2)(3)(4) 935,886.85 100.0%
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) 3,238,726.01 92.8%
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%
* 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 553,732.69 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"), 46,794.35 shares held by McCown De Leeuw & Co. III
(Europe), L.P., an investment partnership whose general partner is MDC III,
10,918.75 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 12,478.42 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 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
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.
Amount and
Nature of Percent
Name and Address Beneficial of Class
Title of Class Beneficial Owner Ownership (1)
- -------------------- ---------------------------- -------------- ---------
Voting Common Stock Madison Dearborn Capital 4,536,367.84 75.9%
Partners III, L.P.(2)
Madison Dearborn Special 4,536,367.84 75.9%
Equity III, L.P. (2)
Special Advisors
Fund I, L.L.C.(2) 4,536,367.84 75.9%
Timothy M. Hurd(2) 4,536,367.84 75.9%
Paul R. Wood(2) 4,536,367.84 75.9%
Timothy G. Beffa(3) 70,175.00 1.2%
Michael A. DiMarco(3) 57,000.00 *
Bryan K. Faliero(3) 18,750.00 *
Michael B. Staed(3) 30,337.60 *
Gary L. Weller(3) 50,000.00 *
All directors and officers 4,762,630.44 76.9%
as a group
Junior Preferred Timothy G. Beffa 81.65 1.2%
Stock Bryan K. Faliero 2.48 *
All directors and officers 84.13 1.2%
as a group
* 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) Includes 4,433,913.11 shares owned by Madison Dearborn Capital Partners
III, L.P., 98,452.05 shares owned by Madison Dearborn Special Equity
III, L.P. and 4,002.68 shares owned by Special Advisors Fund I, L.L.C.
with each entity managed by or affiliated with Madison Dearborn
Partners, LLC. Messrs. Hurd and Wood are a director and a managing
director, respectively, of Madison Dearborn Partners, LLC. Madison
Dearborn Capital Partners III, L.P., Madison Dearborn Special Equity
III, L.P. and Special Advisors Fund I, L.L.C. have pledged their shares
of the Company's common stock as security under the Company's Credit
Agreement. In addition, under the Stockholders Agreement, dated as of
December 10, 1999, among the Company and substantially all of the
Company's stockholders, Madison Dearborn Capital Partners III, L.P., as
principal investor, may designate individuals to serve as directors of
the Company. The Stockholders Agreement also includes restrictions on
the transfer of capital stock, and provides for registration,
preemptive, tag along and drag along rights granted to the parties
thereto, including Madison Dearborn Capital Partners III, L.P. and
certain of its affiliates. The address of all the above-mentioned
entities is c/o Madison Dearborn Partners, LLC, 3 First National Plaza,
Suite 3800, Chicago, IL 60602.
(3) Includes vested options to acquire the following number of shares of the
Company's common stock: Mr. Beffa 70,175; Mr. DiMarco 50,000; Mr.Faliero
18,750; Mr. Staed 25,000 and Mr. Weller 50,000. The address of Messrs.
Beffa, DiMarco, Staed and Weller is c/o Outsourcing Solutions Inc., 390
South Woods Mill Rd., Suite 350, Chesterfield, MO 63017. Mr. Faliero's
address is c/o OSI Portfolio Services, Inc., 2425 Commerce Ave.,
Building 1, Suite 100, Duluth, GA 30096.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Acquisition Arrangements
OSI invested $5 million forholds 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 an affiliate ofMLQ Investors, L.P., one of the
Company's stockholders. The recorded value of the Company's investment in the
LLC was approximately $520,000 at December 31, 1999.
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"), then an affiliate. Under the Advisory Services
Agreement, MDC
Management providesthe Company received consulting, financial, and managerial functions
for a $300,000 annual fee. In 1999, the Company paid MDC Management $275,000
under the Advisory Services Agreement. On December 10, 1999, in conjunction with
the Recapitalization, the Advisory Services Agreement was amended and assigned
to Madison Dearborn Partners, Inc. ("MDP"). As amended, the annual fee under the
Advisory Services Agreement is $500,000. 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 ManagementMDP authorized by a majority of the
directors other than those who are partners, principals or employees of MDC ManagementMDP or
any of its affiliates. The Advisory Services Agreement may be amended by written
agreement of MDC ManagementMDP 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 1996December 1999 upon closing of the acquisition of Payco, the offering by OSI of the 11%
Senior Subordinated Notes and the $200 million credit facility, MDC ManagementRecapitalization, MDP received a
one-time fee of $3$8.0 million for financial advisory servicesadvice provided to OSI in connection
therewith.
InConsulting Agreements
On January 26, 1998, upon closingthe Company entered into a one-year Consulting
Agreement with William B. Hewitt, a director of the acquisitionCompany. Under the original
Consulting Agreement, Mr. Hewitt provided consulting assistance with the growing
outsourcing services of Union, MDC Managementthe Company at 80% of normal working hours. In addition,
Mr. Hewitt received options to purchase 10,000 shares of common stock of the
Company, which options in accordance with their terms became vested and
exercisable upon consummation of the Recapitalization. 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, with the consulting services reduced to a one-time feemaximum of $2.5 million for financial
advisory services provided to OSI in connection therewith.50 days
(approximately 20% of normal working hours). For the year ended December 31,
1999, the Company paid Mr. Hewitt $427,500.
Certain Interests of Initial PurchasersShareholders
Goldman Sachs and its affiliates have certain interests in the Company
in addition to being an initial purchaser of the 11% Senior Subordinated Notes.
Goldman Sachs also served as financial advisor to OSI in connection with the
acquisitions of Payco and Union and received certain fees 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, actsacted as co-administrative agent and lender in
connection with itsthe then existing credit facility, and receives certain fees and reimbursement of expensesin 1999 OSI paid them
approximately $706,000 in interest in connection therewith. MLQ Investors, L.P.,
an affiliate of Goldman Sachs, owns a non-votingan 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 then existing
credit facility and each receives customaryin 1999 OSI paid them approximately $150,000 in fees and
reimbursement of expensesapproximately $1,526,000 in interest in connection therewith. Additionally,
Chase Equity Associates, L.P. an affiliate of Chase Securities, owns a non-votingan equity
interest in the Company.
Arrangement with Certain Affiliates
Payco leases its corporate headquarters in Brookfield, Wisconsin, its data
processing center in New Berlin, WisconsinIndebtedness of Management
During 1998, the Company advanced $117,000 to Michael A. DiMarco,
Executive Vice President and President Fee Services to facilitate his relocation
to the office space for three of its
collection operationsSt. Louis area from partnerships in which certain officers of Payco are
the principal partners.Texas. The terms of the leases provided for aggregate annual
payments of approximately $1.8 million and $2.2 million for the years ended
December 31, 1997 and 1996, 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.
ABC leases its headquarters in Englewood, Colorado from a partnership in which
certain officers of ABC are the principal partners. The terms of the lease
provided for aggregate annual payments of $336,000. All operating and
maintenance costs associated with this building are paid by ABC. The Company
believes that the terms of this lease are at least as favorable as could have
been obtained in arms-length negotiations with an unaffiliated lessor.
Master Services Agreement
API had entered into a Master Services Agreement (the "Master Services
Agreement") with HBR Capital, Ltd. ("HBR"), which is wholly owned by David G.
Hanna and Frank J. Hanna, III. Under the Master Services Agreement, HBR provided
certain management and investment services to API for a monthly fee of $50,000.
The Master Services Agreement expired on October 1, 1997advance was non-interest bearing and was
not renewed.
The Company believed thatrepaid in terms of and the fees paid for the professional
services rendered were at least as favorable to API as those which could have
been negotiated with a third party.
In 1997 upon closing of the acquisitions of NSA and ABC, HBR received a one-time
fee of $600,000 for financial advisory services provided to OSIfull in connection
therewith.
March 1999.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
See index on page 3841 for a listing of consolidated financial
statements filed with this report.
2. Financial Statement Schedule
See index on page 3841 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 Agreement and Plan of Merger dated as of August 13, 1996 by and among
the Company, Boxer Acquisition Corp. and Payco American Corporation.
*2.2 Purchase Agreement dated as of September 21, 1995 by and among the
Company, Account Portfolios, Inc., Account Portfolios G.P., Inc., AP
Management, Inc., GSC management, Inc., Perimeter Credit Management
Corporation, Account Portfolios Trust One and Account Portfolios Trust
Two.
*2.3 Stock Purchase Agreement dated as of January 10, 1996 by and among the
Company, The Continental Alliance, Inc. and Peter C. Rosvall.
*2.4 Stock Purchase Agreement dated as of December 13, 1995 by and among
the Company, Outsourcing Solutions Inc., A.M. Miller & Associates,
Inc. and Alan M. Miller.
*2.5 Purchase and Inducement Agreement dated as of May 17, 1996 by and
among the Company, Account Portfolios, Inc., Account Portfolios, L.P.,
Gulf State Credit, L.P., Perimeter Credit, L.P., MLQ Investors, L.P.
and Goldman, Sachs & Co.
2.62.1 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.
2.7Stockholders (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.
2.8Brown (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.
*3.1Corporation (incorporated herein by
reference to Exhibit 2.8 of the Company's Form 10-K for the year ended
December 31, 1997).
2.4 Stock Subscription and Redemption Agreement by and among Madison
Dearborn Capital Partners III, L.P., the Company and certain
stockholders, optionholders and warrantholders of the Company, dated
as of October 8, 1999, as amended (incorporated herein by reference to
Exhibit 2 of the Company's Current Report on Form 8-K filed on
December 23, 1999).
2.5 Assignment and Stock Purchase Agreement dated as of December 10, 1999
by and among Outsourcing Solutions Inc., Madison Dearborn Capital
Partners III, L.P., and certain other parties thereto.
2.6 Purchase Agreement dated as of December 10, 1999, by and among
Outsourcing Solutions Inc. and certain other parties thereto.
2.7 Junior Preferred Stock Purchase Agreement, dated as of December 10,
1999, by and among Outsourcing Solutions Inc. and certain other
parties thereto.
2.8 Consent Solicitation Statement, dated November 9, 1999, relating to
the Company's 11% Senior Subordinated Notes due November 1, 2006.
3.1 Fourth Amended and Restated Certificate of Incorporation of the
Company, as amended to date, filed
with the Secretary of State of the State of Delaware on September 21,
1995.
*3.2December 3, 1999.
3.2 By-laws of the Company *4.1(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).
*4.24.2 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).
*4.34.3 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).
*4.44.4 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).
*10.1 Amended4.5 First Supplemental Indenture dated as of March 31, 1998 by and Restatedamong
the Company, the Additional Guarantors and Wilmington Trust Company
(incorporated herein by reference to Exhibit 4.5 of the Company's
Form 10-K for the year ended December 31, 1998).
10.1 Stockholders Agreement dated as of February 16,
1996December 10, 1999 by and among the
Company and various stockholders of the Company.
*10.2Company (incorporated herein
by reference to Exhibit 10 of the Company's Current Report on Form 8-K
filed on December 23, 1999).
10.2 Advisory Services Agreement dated September 21, 1995 between the
Company and Madison Dearborn Partners, Inc., as assignee from MDC
Management Company III, L.P. *10.3 Lease Agreement between Payco American Corporation and the Brookfield
Investment Company dated July 12, 1979, as amended toby Assignment Agreement dated
as of December 10, 1999 by and between Madison Dearborn Partners,
Inc., the date hereof.
*10.4 LeaseCompany and MDC Management Company III, L.P.
10.3 Registration Rights Agreement between Payco American Corporationdated December 10, 1999, by and among
Outsourcing Solutions Inc., Madison Dearborn Partners III, L.P. and
certain other parties thereto.
10.4 Registration Rights Agreement dated December 10, 1999, by and among
the Perncom
Investment Company dated April 27, 1984, as amended to the date
hereof.
*10.5 Lease Agreement between Payco American Corporation and the Westlake
Investment Corporation dated June 1, 1984, as amended to the date
hereof.
*10.6 Lease Agreement between Payco American Corporationcertain other parties thereto.
10.5 Amended and the Dublin
Investment Company dated July 14, 1986, as amended to the date hereof.
*10.7 Lease Agreement between Payco American Corporation and the Hacienda
Investment Company dated October 14, 1986, as amended to the date
hereof.
**10.8 AmendedRestated Employment Agreement dated as of August 27, 1997June 4, 1999
between the Company and Timothy G. Beffa.
*10.910.6 Amended and Restated Employment Agreement dated as of June 4, 1999
between the Company and Michael A. DiMarco.
10.7 Employment Agreement dated as of June 4, 1999 between the Company and
Bryan K. Faliero.
10.8 Amended and Restated Employment Agreement dated as of June 4, 1999
between the Company and Michael B. Staed.
10.9 Employment Agreement dated July 5, 1999 between the Company and Gary
L. Weller.
10.10 Consulting Agreement dated as of August 13, 1996February 6, 1998 between Payco
American Corporation and Dennis G. Punches.
10.10 Employment Agreement dated October 16, 1997 between Outsourcing
Solutions Inc. and Daniel J. Dolan.
*10.11 9% Non-Negotiable Junior Subordinated Note dated January 10, 1996
issued by the Company
and William B. Hewitt as amended January 25, 1999 (incorporated herein
by reference to Alan M. Miller.
*10.12Exhibit 10.6 of the Company's Form 10-K for the year
ended December 31, 1998).
10.11 1995 Stock Option and Stock Award Plan of the Company.
10.13Company (incorporated
herein by reference to Exhibit 10.31 of the Company's Registration
Statement on Form S-4 filed on November 26, 1996).
10.12 First Amendment to 1995 Stock Option and Stock Award Plan of the
Company *10.14(incorporated herein by reference to Exhibit 10.13 of the
Company's Form 10-K for the year ended December 31, 1997).
10.13 Form of Non-Qualified Stock Option Award Agreement [A]
*10.15[B], as amended.
10.14 Form of Non-Qualified Stock Option Award Agreement [B][C], as amended.
10.15 Form of Non-Qualified Stock Option Award Agreement [E].
10.16 Lease Agreement dated June 1, 1997 between Justus Realty Limited
Partnership and Accelerated Bureau1998 Incentive Compensation Program (incorporated herein by reference
to Exhibit 10.15 of Collections Inc.the Company's Form 10-K for the year ended
December 31, 1998).
10.17 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.Consultants (incorporated herein by reference to Exhibit 10.17
of the Company's Form 10-K for the year ended December 31,1997).
10.18 Second Amended and Restated Credit Agreement dated as of January 26,
1998 by andNovember 30, 1999 among the Company, the
Lenders listed therein, Goldman
Sachs Credit Partners L.P.DLJ Capital Funding, Inc., as the Syndication
Agent, and The Chase ManhattanFleet National Bank, as Co-Administrative Agents, Goldman Sachs Credit Partners L.P. and Chase
Securities, Inc., as Arranging Agents and Suntrust Bank, Atlanta, as
Collateralthe Administrative Agent.
21 Subsidiaries of registrant.
27 Financial Data Schedule.
_________________
* Previously filed with OSI's Registration Statement on Form S-4 filed with
Securities and Exchange Commission on November 26, 1996.
** Previously filed with OSI's Form 10-Q for the period ended September 30,
1997 with the Securities and Exchange Commission on November 14, 1997.
(b) Reports on Form 8-K
DuringFor the quarter,three months ended December 31, 1999, the following reportreports on Form 8-K
waswere filed:
Report on Form 8-K under Item 5 datedfiled October 29, 1999.
Report on Form 8-K filed December 22, 1997 announcing the
Company's tender offer for The Union Corporation.23, 1999.
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 J. Dolan
------------------
Daniel J. DolanGary L. Weller
------------------------------------
Gary L. Weller
Executive Vice President and
Chief Financial Officer
DATE: March 31, 199829, 2000
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 30, 1998
- ------------------------------------
Jeffrey E. Stiefler
/s/ Timothy G. Beffa President and Chief Executive March 30, 1998
- ------------------------------------
Timothy G. Beffa Officer, Director
/s/ David E. De Leeuw Director March 23, 1998
- ------------------------------------
David E. De Leeuw
/s/ David E. King Secretary and Treasurer, Director March 30, 1998
- ------------------------------------
David E. King
/s/ Tyler T. Zachem Vice President and Director March 30, 1998
- ------------------------------------
Tyler T. Zachem
/s/ David G. Hanna Director March 30, 1998
- ------------------------------------
David G. Hanna
/s/ Frank J. Hanna, III Director March 24, 1998
- ------------------------------------
Frank J. Hanna, III
/s/ Dennis G. Punches Director March 26, 1998
- ------------------------------------
Dennis G. Punches
/s/ Nathan W. Pearson, Jr Director March 23, 1998
- ------------------------------------
Nathan W. Pearson,Signature Title Date
/s/Timothy G. Beffa President and Chief Executive March 29, 2000
- --------------------------- Officer, Director
Timothy G. Beffa
/s/William B. Hewitt Director March 29, 2000
- ---------------------------
William B. Hewitt
/s/Timothy M. Hurd Director and Vice President March 28, 2000
- ---------------------------
Timothy M. Hurd
/s/Scott P. Marks, Jr.
Director March 29, 2000
- ---------------------------
Scott P. Marks, Jr.
/s/Richard L. Thomas Director March 22, 2000
- ---------------------------
Richard L. Thomas
/s/Paul R. Wood Director and Vice President March 29, 2000
- ---------------------------
Paul R. Wood
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 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, 1997 and 1996.................................... F-2
Consolidated Statements of Operations for the years ended December 31, 1997
and 1996 and for the period September 21, 1995 to December 31, 1995...................... F-3
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1997 and 1996 and for the period September 21, 1995 to
December 31, 1995........................................................................ F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1997
and 1996 and for the period September 21, 1995 to December 31, 1995...................... F-5
Notes to Consolidated Financial Statements................................................... F-6
Account Portfolios, L.P. and Subsidiaries
Independent Auditors' Report................................................................. F-21
Consolidated Balance Sheets at December 31, 1994 and September 20, 1995...................... F-22
Consolidated Statements of Operations for the year ended December 31, 1994
and for the period from January 1, 1995 to September 20, 1995............................ F-23
Consolidated Statements of Partners' Capital for the year ended December 31,
1994 and for the period for January 1, 1995 to September 20, 1995........................Page
----
Consolidated Financial Statements
Outsourcing Solutions Inc. and Subsidiaries
Independent Auditors' Report.................................... F-1
Consolidated Balance Sheets at December 31,
1999 and 1998.............................................. F-2
Consolidated Statements of Operations for the
years ended December 31, 1999, 1998 and 1997............... F-3
Consolidated Statements of Stockholders' Equity
(Deficit) for the years ended
December 31, 1999, 1998 and 1997........................... F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997..................... F-5
Notes to Consolidated Financial Statements...................... F-6
Consolidated Financial Statement Schedule
Independent Auditors' Report...................................... F-23
Schedule II - Valuation and Qualifying Accounts and Reserves...... F-24
Consolidated Statements of Cash Flows for the year ended December 31,1994
and for the period from January 1, 1995 to September 20, 1995............................ F-25
Notes to Consolidated Financial Statements................................................... F-26
Consolidated Financial Statement Schedule
Independent Auditors' Report..................................................................... F-31
Schedule II - Valuation and Qualifying Accounts and Reserves...................................... F-32
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, 19971999 and 19961998, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the twothree years in the period ended December 31,
1997 and for
the period from September 21, 1995 (date of inception) to December 31, 1995.1999. 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 auditing standards generally accepted
auditing
standards.in the United States of America. 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, 19971999 and 19961998 and the results of their
operations and their cash flows for each of the twothree years in the period ended
December 31, 1997 and for the period from September 21, 1995 to December 31,
19951999 in conformity with accounting principles generally accepted accounting principles.in
the United States of America.
/s/ Deloitte & Touche LLP
- -------------------------------------------------
Deloitte & Touche LLP
St. Louis, Missouri
February 13, 1998March 28, 2000
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 19971999 AND 1996
(IN THOUSANDS EXCEPT SHARE1998
(In thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
ASSETS 1999 1998
---- ----
Cash and cash equivalents $ 6,059 $ 8,814
Cash and cash equivalents held for clients 22,521 22,372
Accounts receivable - trade, less allowance
for doubtful receivables of $529 and $1,309 52,082 40,724
Purchased loans and accounts receivable portfolios 39,947 55,493
Property and equipment, net 43,647 40,317
Intangible assets, net 410,471 425,597
Deferred financing costs, less accumulated
amortization of $248 and $5,203 27,224 13,573
Other assets 22,761 11,601
-------- --------
TOTAL $624,712 $618,491
======== ========
LIABILITIES AND PER SHARE AMOUNTS)
ASSETS 1997 1996
---- ----
CURRENT ASSETS
Cash and cash equivalents $ 3,217 $ 14,497
Cash and cash equivalents held for clients 20,762 20,255
Current portion of purchased loans and accounts receivable portfolios 42,915 42,481
Accounts receivable - trade, less allowance for doubtful receivables of $538 and $641 27,192 20,738
Deferred income taxes - 2,617
Other current assets 2,119 3,453
-------- --------
Total current assets 96,205 104,041
PURCHASED LOANS AND ACCOUNTS RECEIVABLE PORTFOLIOS 19,537 25,519
PROPERTY AND EQUIPMENT, net 32,563 36,451
INTANGIBLE ASSETS, net 219,795 173,470
DEFERRED FINANCING COSTS, less accumulated amortization of $2,376 and $337 12,517 12,563
OTHER ASSETS 693 -
DEFERRED INCOME TAXES 380 3,163
-------- --------
TOTAL $381,690 $355,207
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable - trade $ 6,977 $ 6,495
Collections due to clients 20,762 20,255
Accrued severance and office closing costs 6,487 7,558
Accrued compensation 8,332 9,574
Other current liabilities 19,644 12,047
Current portion of long-term debt 15,445 10,032
-------- --------
Total current liabilities 77,647 65,961
LONG-TERM DEBT 309,521 237,584
OTHER LONG-TERM LIABILITIES - 64
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY (DEFICIT):
8% nonvoting cumulative redeemable exchangeable preferred stock, authorized 1,000,000 11,699 10,816
shares, 935,886.85 and 865,280.01 shares, respectively, issued and outstanding, at
liquidation value of $12.50 per share
Voting common stock; $.01 par value; authorized 7,500,000 shares, 3,477,126.01 and 35 35
3,425,126.01 shares, respectively, issued and outstanding
Class A convertible nonvoting common stock; $.01 par value; authorized 7,500,000 4 4
shares, 391,740.58 shares issued and outstanding
Class B convertible nonvoting common stock; $.01 par value; authorized 500,000 4 4
shares, 40,000 shares issued and outstanding
Class C convertible nonvoting common stock; $.01 par value; authorized 1,500,000 10 10
shares, 1,040,000 shares issued and outstanding
Paid-in capital 66,958 65,658
Retained capital (84,188) (24,929)
-------- --------
Total Stockholders' equity (deficit) (5,478) 51,598
-------- --------
TOTAL $381,690 $355,207STOCKHOLDERS' DEFICIT
Accounts payable - trade $ 6,801 $ 7,355
Collections due to clients 22,521 22,372
Accrued salaries, wages and benefits 17,009 13,274
Debt 518,307 528,148
Other liabilities 68,306 77,374
Commitments and contingencies - -
Mandatorily redeemable preferred stock;
redemption amount $107,877 85,716 -
Stockholders deficit:
8% nonvoting cumulative redeemable exchangeable
preferred stock; authorized 1,250,000 shares,
973,322.32 issued and outstanding in 1998,
at liquidiation value of $12.50 per share - 12,167
Voting common stock; $.01 par value;
authorized 15,000,000 shares, 9,054,638.11
shares issued in 1999 and 3,477,126.01
shares issued and outstanding in 1998 90 35
Non-voting common stock; $.01 par value;
authorized 2,000,000 shares, 480,321.30
issued and outstanding in 1999 5 -
Class A convertible nonvoting common stock;
$.01 par value; authorized 7,500,000 shares,
391,740.58 shares issued and outstanding in 1998 - 4
Class B convertible nonvoting common stock;
$.01 par value; authorized 500,000 shares,
400,000 shares issued and outstanding in 1998 - 4
Class C convertible nonvoting common stock;
$.01 par value; authorized 1,500,000 shares,
1,040,000 shares issued and outstanding in 1998 - 10
Paid-in capital 196,339 66,958
Retained deficit (155,525) (109,210)
-------- --------
40,909 (30,032)
Common stock in treasury, at cost;
3,078,249.07 shares in 1999 (134,857) -
-------- --------
Total stockholders' deficit (93,948) (30,032)
-------- --------
TOTAL $624,712 $618,491
======== ========
See notes to consolidated financial statements.
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In thousands)
- --------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
REVENUES $ 504,425 $ 479,400 $271,683
EXPENSES:
Salaries and benefits 244,157 230,114 133,364
Service fees and other operating and
administrative expenses 154,799 140,888 71,122
Amortization of purchased loans
and accounts receivable portfolios 38,722 50,703 52,042
Amortization of goodwill and
other intangibles 16,229 15,725 24,749
Depreciation expense 14,866 14,282 8,825
Nonrecurring conversion, realignment
and relocation expenses 5,063 - -
Change in control bonuses, stock
option redemption and other bonuses 10,487 - -
Transaction related costs 6,827 - -
--------- -------- --------
Total expenses 491,150 451,712 290,102
--------- --------- --------
OPERATING INCOME (LOSS) 13,275 27,688 (18,419)
INTEREST EXPENSE - Net 52,265 50,627 28,791
--------- --------- --------
LOSS BEFORE INCOME TAXES, MINORITY
INTEREST AND 1996EXTRAORDINARY ITEM (38,990) (22,939) (47,210)
PROVISION FOR INCOME TAXES 759 830 11,127
MINORITY INTEREST - 572 -
--------- --------- --------
LOSS BEFORE EXTRAORDINARY ITEM (39,749) (24,341) (58,337)
EXTRAORDINARY LOSS ON EXTINGUISHMENT
OF DEBT, NET OF INCOME TAXES OF $0. 4,208 - -
--------- --------- --------
NET LOSS (43,957) (24,341) (58,337)
PREFERRED STOCK DIVIDEND REQUIREMENTS AND
FOR THE PERIOD SEPTEMBER 21, 1995 (DATEACCRETION OF INCEPTION)SENIOR PREFERRED STOCK 2,358 681 922
--------- --------- --------
NET LOSS TO DECEMBER 31,
1995 (IN THOUSANDS)
1997 1996 1995
---- ---- ----
REVENUES $271,683 $106,331 $ 8,311
EXPENSES:
Salaries and benefits 133,364 46,997 2,079
Service fees and other operating and administrative expenses 71,122 33,759 3,232
Amortization of purchased loans and accounts receivable 52,042 27,317 5,390
portfolios
Amortization of goodwill and other intangibles 24,749 15,452 250
Depreciation expense 8,825 2,829 81
Purchased in-process research and development - 1,000 -
--------- --------- --------
Total expenses 290,102 127,354 11,032
--------- --------- --------
OPERATING LOSS (18,419) (21,023) (2,721)
INTEREST EXPENSE - Net 28,791 12,131 1,361
--------- --------- --------
LOSS BEFORE INCOME TAXES (47,210) (33,154) (4,082)
PROVISION FOR INCOME TAXES (BENEFIT) 11,127 (11,757) (1,605)
--------- --------- --------
NET LOSS (58,337) (21,397) (2,477)
PREFERRED STOCK DIVIDEND REQUIREMENTS 922 830 225
--------- --------- --------
NET LOSS TO COMMON STOCKHOLDERS $ (46,315) $(25,022) $(59,259) $(22,227) $(2,702)
=========
========= ========
========
See notes to consolidated financial statements.
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31,199731, 1999, 1998 AND 1996 AND FOR THE PERIOD SEPTEMBER 21,1995 (DATE OF
INCEPTION) TO DECEMBER 31,1995 (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)1997
(In thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
NON-VOTING
CUMULATIVE
REDEEMABLE
EXCHANGEABLE COMMON STOCK
PREFERRED VOT- CLASS CLASS CLASS PAID-IN RETAINED
STOCK INGNon-voting Common Stock
Cumulative -------------------------------
Redeemable Non-voting
Preferred Classes Paid-in Retained Treasury
Stock Voting Non-voting A,B C CAPITAL DEFICIT TOTAL&C Capital Deficit Stock Total
--------- -------- --------- --------- --------- ---------- --------- --------
BALANCE, SEPTEMBER 21,1995JANUARY 1, 1997 $ 10,816 $ 35 $ - $ 18 $ 65,658 $ (24,929) - $ - $ - $ - $ - $ - $ -
Issuance of 800,000.01 shares
of preferred stock 10,000 - - - - - - 10,000
Issuance of 2,812,000 shares
of common stock - 28 - - - 35,122 - 35,150
Preferred stock dividend
requirements of
$0.28 per share - - - - - - (225) (225)
Net loss - - - - - - (2,477) (2,477)
--------- --------- --------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1995 $ 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 65,290
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 - 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)
(58,337)-------- -------- ------- -------- --------- --------- ---------- --------
BALANCE, DECEMBER 31, 1997 11,699 35 - 18 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 - 18 66,958 (109,210) - (30,032)
Payment of preferred stock
dividends through issuance of
140,997.01 shares of
preferred stock and recorded
preferred stock dividend
requirements of $1 per share 1,762 - - - - (1,276) - 486
Issuance of 186,791.67 common
shares in exchange for MDP's
investment in FINCO - 2 - - 6,998 - - 7,000
Issuance of 5,273,037.98 voting
and 480,321.30 non-voting
common shares - 52 5 - 215,546 - - 215,603
Repurchase of common stock
and redemption of preferred,
non-voting common, stock
options and warrants (13,929) 1 - (18) (93,163) - (115,391) (222,500)
Recapitalization fees and
expenses - - - - - (19,466) (19,466)
Accrued dividends on
mandatorily redeemable
preferred stock - - - - - (877) - (877)
Accretion of mandatorily
redeemable preferred stock - - - - - (205) - (205)
Net loss - - - - - (43,957) - (43,957)
-------- -------- ------- -------- --------- --------- --------- ------------------- --------
BALANCE, DECEMBER 31,199731, 1999 $ 11,699 $35- $ 490 $ 45 $ 10- $ 66,958 $(84,188)196,339 $(155,525) $ (5,479)(134,857) $(93,948)
======== ======== ======= ======== ========= ========= ========= ========= ========= ========= ========= =========
========== ========
See notes to consolidated financial statements.
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 19971999, 1998 AND 1996 AND FOR THE PERIOD SEPTEMBER 21, 1995 (DATE OF INCEPTION) TO DECEMBER 31,
19951997
(In thousands)
- -------------------------------------------------------------------------------------------------------
1999 1998 1997
1996 1995---- ---- ----
OPERATING ACTIVITIES AND PORTFOLIO PURCHASING:
OPERATING ACTIVITIES:
Net loss $ (58,337) $ (21,397) $ (2,477)$(43,957) $(24,341) $(58,337)
Adjustments to reconcile net loss to net
cash provided by (used in)from operating activities:activities and portfolio
purchasing:
Depreciation and amortization 34,477 32,833 35,613 18,618 331
Amortization of purchased loans and
accounts receivable portfolios 38,722 50,703 52,042
27,317 5,390Extraordinary loss on extinguishment of debt 4,208 - -
Compensation expense related to redemption
of stock options and repriced options 4,635 - -
Deferred taxes - 380 10,877
(11,757) (1,605)
Other 48Minority interest - 572 -
Change in assets and liabilities:
Other current assets 147 (578) (233)
Accounts payable and other current liabilities (7,565) (1,536) 1,496
-------------- -------------- --------------
Net cash provided by operating activities 32,825 10,667 2,902
-------------- -------------- --------------
INVESTING ACTIVITIES:
PurchasePurchases of loans and accounts receivable portfolios (23,176) (43,186) (46,494)
(13,645) (903)Other assets (13,245) 2,894 195
Accounts payable and other liabilities (5,316) (7,789) (7,565)
-------- -------- --------
Net cash from operating activities
and portfolio purchasing (3,652) 12,066 (13,669)
-------- -------- --------
INVESTING ACTIVITIES:
Payments for acquisitions, net of cash acquired (877) (168,900) (62,913)
(184,184) (30,007)Investment in FINCO (2,500) (2,500) -
Acquisition of property and equipment (18,437) (13,480) (9,489)
(2,606) (97)Purchases of loans and accounts receivable portfolios
for resale toFINCO (56,664) (9,134) -
Sales of loans and accounts receivable portfolios to FINCO 56,664 9,134 -
Other 265 261 (603)
- -
-------------- -------------- ---------------------- -------- --------
Net cash used infrom investing activities (119,499) (200,435) (31,007)
-------------- -------------- --------------(21,549) (184,619) (73,005)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from term loans 400,000 225,000 55,000 337,000 -
Borrowings under revolving credit agreement 289,700 230,000 66,150 - -
Repayments under revolving credit agreement (302,200) (236,350) (34,300) - -
Repayments of debt (397,448) (36,618) (9,763) (136,615) (576)
Deferred financing fees (21,242) (3,882) (1,993) (12,563) -
Proceeds from issuance of preferred and common stock 300,237 - 300
14,974 30,150
-------------- -------------- --------------Repurchase of preferred stock, common stock and warrants (223,208) - -
Redemption of stock options (3,927) - -
Recapitalization fees (19,466) - -
-------- -------- --------
Net cash provided byfrom financing activities 22,446 178,150 75,394
202,796 29,574
-------------- -------------- ---------------------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,755) 5,597 (11,280) 13,028 1,469
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIODYEAR 8,814 3,217 14,497
1,469 -
-------------- -------------- ---------------------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIODYEAR $ 6,059 $ 8,814 $ 3,217
$ 14,497 $ 1,469
============== ============== ====================== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid during periodyear for interest $ 51,232 $ 43,923 $ 26,372
======== ======== ========
Net cash paid (received) during year for taxes $ 7,655306 $(10,995) $ 543
============== ============== ==============23
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW INFORMATION
Investment in FINCO through exchange of common stock with MDP $ 7,000 $ - $ -
======== ========= ========
See notes to consolidated financial statements.
OUTSOURCING SOLUTIONS INC.Outsourcing Solutions Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)(In thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION POLICYConsolidation 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 either under the equity or
proportionate consolidation method. All significant intercompany
accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTSCash 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 PORTFOLIOSPurchased 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 expected aggregate discounted future
net operating cash flows derived from the individual portfolios are less than their respectivethe
aggregate carrying value (see Note 12)15).
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 RECOGNITIONRevenue Recognition - Collections on Receivables owned are generally
recorded as revenue when received. Proceeds from strategic sales of
Receivables owned are recognized as revenue when received. Revenue from
loan servicingcollections and outsourcing services is recorded as such services are
provided. PROPERTY AND EQUIPMENTDeferred 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 1030 years) of the related assets. Leasehold
improvements are amortized over the term of the related lease.
INTANGIBLE ASSETSIntangible 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 TAXESDeferred Financing Costs - Deferred financing costs are being amortized
over the terms of the related debt agreements.
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. DEFERRED FINANCING COSTSThe Company evaluates the recoverability
of deferred tax assets and establishes a valuation allowance to reduce the
deferred tax assets to an amount that is more likely than not to be
realized.
Environmental Costs - All of the Company's environmental proceedings relate
to discontinued operations of former divisions or subsidiaries of The Union
Corporation. Costs incurred to obtain financinginvestigate and remediate contaminated sites
are capitalized and amortized overcharged to the term ofenvironmental reserves established in conjunction with
the underlying debt using the
straight line method.
STOCK-BASED COMPENSATIONUnion acquisition.
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)("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 912 for the
fair value disclosures required under SFAS No. 123.
ACCOUNTING ESTIMATESComprehensive 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,
1999. Comprehensive loss for the three years in the period ended December
31, 1999 was equal to the Company's net loss.
Accounting For Transfers of Financial Assets - SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, 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 began selling, concurrent with its
purchase, certain Receivables to a special-purpose entity, OSI Funding LLC
(FINCO) (see Note 18).
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 17, believes the Company operates in one business
segment.
New Derivatives and Hedging Accounting Standard - In June 1998, SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, was
issued, which is required to be adopted no later than January 1, 2001. 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.
Accounting for the Costs of Computer Systems Developed or Obtained for
Internal Use - Statement of Position ("SOP") No. 98-1, Accounting for the
Costs of Computer Systems Developed or Obtained for Internal Use, provides
guidelines for capitalization of developmental costs of proprietary
software and purchased software for internal use. The adoption of SOP No.
98-1 did not have a material impact on the consolidated statement of
operations and consolidated balance sheet.
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.
NEW ACCOUNTING PRONOUNCEMENTSEarnings Per Share - In February 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 128, Earnings per Share, which
requires adoption in the quarter ended December 31, 1997, and prohibits
early compliance. SFAS No. 128 simplifiessimplified the
calculation of earnings per share and is applicable only to public
companies. Under generally accepted
accounting principles' andthe Securities and Exchange Commission'sCommission ("SEC") disclosure
requirements, SFAS No. 128 is not currently applicable to the Company and,
accordingly, earnings per share is not presented.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which is effective for fiscal years beginning after December 15, 1997. SFAS
No. 130 establishes standards for reporting and display of comprehensive
income and its components in financial statements.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information, which is effective for fiscal years
beginning after December 15, 1997. The statement changes the method of
determining segments from that currently required and requires the
reporting of certain information about segments. The Company has not
determined how its segments will be reported, or whether and to what extent
segment information will be presented.
RECLASSIFICATIONSReclassifications - Certain amounts in prior periods have been reclassified
to conform to the current year presentation.presentation, including changing the balance
sheet presentation from classified to unclassified.
2. ORGANIZATION, ACQUISITIONS & ACQUISITIONSRECAPITALIZATION
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 1999, the Company reorganized
many of its acquired subsidiaries. Account Portfolios, Inc. ("API") changed
its name to OSI Portfolio Services, Inc. Payco American Corporation's
("Payco") largest debt collection subsidiary changed its name to OSI
Collection Services, Inc. and Continental Credit Services, Inc.
("Continental"), A.M. Miller & Associates ("AMM"), Accelerated Bureau of
Collections, Inc. ("ABC"), and former subsidiaries of The Union Corporation
("Union"), Allied Bond & Collection Agency and Capital Credit, merged into
OSI Collection Services. Former Union subsidiary, Interactive Performance
changed its name to OSI Outsourcing Services, Inc. and the Interactive
Performance and High Perfomance services subsidiaries merged into OSI
Outsourcing 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"),API, a partnership in the business of purchasingwhich purchased
and managingmanaged 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 & AssociatesAMM 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 July 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 assets of The North
Shore Agency, Inc. ("NSA"), a fee service company specializing in letter
series collection services, and Accelerated Bureau of Collections, Inc. ("ABC"),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,
$1,520$2,533 through December 31, 1997,1999, based on the attainment by the newly
formed subsidiary of certain financial performance targets over each of the
next threetwo 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 Union's 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 an
amended credit agreement . 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,On December 10, 1999, the Company consummated a subsidiarytransaction with Madison
Dearborn Capital Partners III, L.P. ("MDP") and certain of the CompanyCompany's
stockholders, optionholders and warrantholders pursuant to which MDP
acquired participation interests
in certain loan portfolios for cash75.9% of $3,300, Class C NonvotingOSI's common stock, most of $8,000the then outstanding capital
stock of OSI was redeemed, refinanced its credit facility and issued
$107,000 of preferred stock (the "Recapitalization"). Total value of the
Recapitalization was approximately $790,000.
The Recapitalization has been accounted for as a 10% unsecured promissoryrecapitalization which had
no impact on the historical basis of assets and liabilities.
In accordance with the terms of the Recapitalization, the holders of
approximately 85.6% of shares of the Company's common stock outstanding
immediately prior to the Recapitalization received $37.47 in cash in
exchange for each of these shares. In addition, the holders of the
Company's preferred stock, non-voting common stock, warrants and exercised
stock options, which pursuant to the Recapitalization all outstanding
options became vested, received $37.47 in cash in exchange for each of
these instruments. Immediately following the Recapitalization, continuing
shareholders owned approximately 8.5% of the outstanding shares of the
Company's common stock.
In connection with the Recapitalization, the Company entered into a new
credit facility providing for term loans of $400,000 and revolving loans of
up to $75,000 (see Note 6). The proceeds of the initial borrowings under
the new credit facility and the issuance of approximately $300,000 of the
Company's preferred and common stock have been used to finance the payments
of cash to cash-electing shareholders, to pay the holders of stock options
and stock warrants exercised or canceled, as applicable, in connection with
the Recapitalization, to repay the Company's existing credit facility and
to pay expenses incurred in connection with the Recapitalization.
The Company incurred various costs aggregating approximately $36,780 in
connection with consummating the Recapitalization. These costs consisted
primarily of compensation costs, professional and advisory fees, and other
expenses. The compensation costs of $10,487 consists primarily of expense
relating to the payment of cash for vested stock options and the payment of
change in control bonuses to certain officers in accordance with the terms
of their respective employment agreements. Of the other transaction related
costs, which includes professional and advisory fees, and other expenses,
the Company expensed $6,827 and recorded $19,466 as an additional cost of
the repurchase of common stock in 1999. In addition to these expenses, the
Company also incurred approximately $21,100 of capitalized debt issuance
costs, which include the consent payment to existing note holders,
associated with the Recapitalization financing. These costs will be charged
to interest expense over the terms of $3,500, which was
subsequently paid in November 1996.the related debt instruments.
The unaudited pro forma consolidated financial data presented below
provides pro forma effect of the acquisitionsUnion acquisition, the Recapitalization
and the debt extinguishment as if such acquisitionstransactions had occurred as of January 1, 1996.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 acquisitionsacquisition, the Recapitalization and the debt extinguishment been
consummated as of January 1, 1996,the beginning of each period presented, nor does the data
give effect to any transactions other than the acquisitions.
PRO FORMA
1997 1996acquisition, the
Recapitalization and the debt extinguishment.
Pro Forma
1999 1998
---- ----
Net revenues $313,219 $299,542
========= =========$504,425 $486,754
======== ========
Net loss $(58,005) $(39,945)
========= =========$(23,865) $(26,445)
======== ========
3. PROPERTY AND EQUIPMENT
Property and equipment, which is recorded at cost, consists of the
following at December 31:
1997 19961999 1998
---- ----
Land $ 2,109 $ 2,109
Buildings 1,912 1,891
Furniture and fixtures $ 4,478 $ 3,5917,964 6,574
Machinery and equipment 716 -
Data processing equipment 21,452 19,6473,016 2,479
Telephone equipment 5,956 3,6709,826 8,659
Leasehold improvements 1,599 1,0905,590 4,068
Computer hardware and software 10,494 11,31053,843 40,785
-------- --------
44,695 39,30884,260 66,565
Less accumulated depreciation (12,132) (2,857)(40,613) (26,248)
-------- --------
$32,563 $36,451$ 43,647 $ 40,317
======== ========
4. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31:
1997 19961999 1998
---- ----
Goodwill $226,770 $155,693$ 448,651 $ 447,774
Value of favorable contracts and placements 29,000 29,000
Covenants not to compete 4,498 4,5145,053 5,021
--------- ---------
260,268 189,207
(40,473) (15,737)
--------- ---------482,704 481,795
Less accumulated amortization $219,795 $173,470(72,233) (56,198)
--------- ---------
$ 410,471 $ 425,597
========= =========
5. OTHER ASSETS
Other assets consist of the following at December 31:
1999 1998
---- ----
Investment in FINCO $ 12,000 $ 2,500
Prepaid postage 3,326 1,007
Other 7,435 8,094
-------- --------
$ 22,761 $ 11,601
======== ========
5.6. DEBT
Long-term debtDebt consists of the following at December 31:
1997 1996
Term Loan A1999 1998
---- ----
New Credit Facility $ 62,500400,000 $ 71,000
Term Loan B-
Prior Credit Facility 124,922 71,000- 396,637
Revolving Credit Facility 31,850 -
11% Senior Subordinated Notes - 100,00013,000 25,500
11% Series B Senior Subordinated Notes 100,000 -100,000
Note payable to stockholder (See Note 2) 4,429 5,0004,429
Other 1,265 616
-------- --------(including capital leases) 878 1,582
--------- ---------
Total debt 324,966 247,616
Less current portion of long-term debt 15,445 10,032
-------- --------
Long-term debt $309,521 $237,584
======== ========
In November 1996,$ 518,307 $ 528,148
========= =========
On April 28, 1997, the Company issuedregistered $100,000 of 11% unregisteredSeries B Senior
Subordinated Notes (the "Notes") in conjunctionwhich mature on November 1, 2006, with the
acquisitionSEC to exchange for the then existing unregistered $100,000 of Payco.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.
On April 28, 1997, the Company registered $100,000 of 11% Series B Senior
Subordinated Notes (Senior Notes), with no material alteration in terms,payments, including dividends.
In connection with the Securities and Exchange Commission to exchange for the existing
Notes. The exchange offer was completed by May 29, 1997.
In November 1996,Recapitalization, the Company entered into a new
$200,000credit facility providing up to $475,000 of senior bank financing commitment ("New
Credit Facility") from a group of banks to finance a portion. The proceeds of the Payco acquisition and refinance existing outstanding indebtedness.
TheNew Credit Facility was subsequently amended withwere used to
refinance $419,818 of indebtedness outstanding on the Amendeddate of the
Recapitalization which resulted in an extraordinary loss of $4,208 from the
write-off of previously capitalized deferred financing fees. In addition,
the New Credit Facility will be used to provide for the Company's working
capital requirements and Restatedfuture acquisitions, if any.
The New Credit Agreement ("Amended Facility") in October 1997 to finance the NSA
and ABC acquisitions (see Note 4).
The Amended Facility consists of a $189,877$400,000 term loan facility and a
$58,000 Revolving Credit Facility$75,000 revolving credit facility (the "Revolving Facility"). The term loan
facility consists of a term loan of $64,627$150,000 ("Term Loan A") and a term
loan of $125,250$250,000 ("Term Loan B"), which mature on October 15, 2001December 10, 2005 and
2003,June 10, 2006, respectively. The Company is required to make quarterly
principal repayments on each term loan.loan beginning January 15, 2000 for Term
Loan B and January 15, 2001 for Term Loan A. 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 baseprime rate, plus 1.5%2.25% or (b)
at the reserve adjusted Eurodollar rate plus 2.5%3.25%. Term Loan B 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 baseprime rate, plus 2.0%3.0%
or (b) at the reserve adjusted Eurodollar rate plus 3.0%4.0%.
The Revolving Facility has a term of fivesix years and is fully revolving until
October 15, 2001.December 10, 2005. 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 baseprime rate, plus 1.5%2.25% or (b) at the reserve
adjusted Eurodollar rate plus 2.5%3.25%. Also, outstanding under the Revolving
Facility are letters of credit of $1,989 expiring within a year.
The one month LIBOR rate (Eurodollar rate) at December 31, 1999 was 5.8%.
The Amendedthree month LIBOR rate (Eurodollar rate) at December 31, 1998 was 5.3%.
The New Credit Facility is guaranteed by substantially all of the Company's
present domestic subsidiaries and is secured by substantially all of the
stock of the Company's present domestic subsidiaries and by substantially
all of the Company's domestic property assets. The AmendedNew Credit Facility
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 Senior 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 AmendedNew Credit Facility (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
threecertain 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.expenses. 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.expenses.
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:
1997 1996
Current1999 1998
---- ----
Total assets $584,184 $595,925
======== ========
Total liabilities $123,551 $ 96,133 $ 96,146
========== ==========
Noncurrent assets $ 272,730 $ 238,003
========== ==========
Current liabilities $ 57,169 $ 47,909
========== ==========
Noncurrent liabilities $ 5,284 $ 5,461
========== ==========78,252
======== ========
Operating revenue $ 271,683 $ 106,331
========== ==========
Loss$504,425 $479,400
======== ========
Income from operations $ (14,679)42,669 $ (15,325)
========== ==========39,418
======== ========
Net lossincome $ (23,857)11,861 $ (15,143)
========== ==========21,189
======== ========
Maturities of long-term debt and capital leases at December 31, 19971999 are as follows:
Capital
Debt Capital
Leases
--------- ---------
1998---- -------
2000 $ 15,0352,619 $ 504
1999 15,117 463
2000 18,783 333675
2001 57,062 1314,429 95
2002 49,92217,500 19
2003 32,500 -
2004 40,000 -
Thereafter 167,867410,500 -
--------- -----------------
Total payments 323,786 1,313Payments 517,548 789
Less amounts representing interest 133
---------30
--------
Present value of minimum lease payments 1,180
Less current portion 15,035 410$ 759
--------- ========
$ 517,548
=========
7. OTHER LIABILITIES
Other liabilities consist of the following at December 31:
1999 1998
---- ----
Accrued acquisition related office closure
costs, over-market leases and other costs $ 7,402 $ 12,103
Accrued interest 4,494 6,851
Deferred revenue 10,242 11,285
Environmental reserves 22,218 22,726
Other 23,950 24,409
--------- ---------
$ 68,306 $ 77,374
========= =========
$308,751The environmental reserves, on an undiscounted basis, at December 31, 1999
and 1998 are for environmental proceedings as a result of the Union
acquisition. 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. MANDATORILY REDEEMABLE PREFERRED STOCK
Mandatorily redeemable preferred stock consists of the following at
December 31, 1999:
14% Senior
Mandatorily
Redeemable Junior
Preferred Preferred
Stock Stock Total
------------ --------- ---------
Balance at December 31, 1998 $ 770- $ - $ -
Issuance of stock 77,634 7,000 84,634
Accrued dividends 856 21 877
Accretion of preferred stock 205 - 205
--------- --------- ---------
Balance at December 31, 1999 $ 78,695 $ 7,021 $ 85,716
========= ========= During 1997,=========
On December 10, 1999, in connection with the Company entered into interest rate cap agreements to
reduceRecapitalization, the impactBoard 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 principalDirectors authorized 50,000 shares of its floating-rate term loans for a
specified period exceed 10%. The amounts paid for these agreementsClass A 14% Senior Mandatorily
Redeemable Preferred Stock, no par value and 150,000 shares 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.
6. STOCKHOLDERS' EQUITY
On September 21, 1995,Class B 14%
Senior Mandatorily Redeemable Preferred Stock, no par value. Furthermore,
the Company issued 800,000.0125,000 shares of 8% Nonvoting
Cumulative Redeemable ExchangeableClass A 14% Senior Mandatorily
redeemable Preferred Stock, ("Class A"), Series A, no par value and 75,000
shares of Class B 14% Senior Mandatorily Redeemable Preferred Shares"Stock,
("Class B")., Series A, no par value; collectively referred to as Senior
Preferred Stock; along with 596,913.07 shares of the Company's common stock
for $100,000. The Company may issue up to one additional series of each
Class A and Class B solely to the existing holders in exchange for shares
of Class A, Series A or Class B, Series A. The liquidation value of each
share of Senior Preferred ShareStock is $12.50$1,000 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%14% 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.quarterly. The Company may, at its sole option and upon written
notice to preferred shareholders, redeem all or any portion of the
outstanding Senior Preferred Stock on a pro-rata basis at the redemption
prices in cash at a stated percentage of the liquidation value plus cash
equal to all accrued and unpaid dividends. The redemption prices for Class
A are 110%, 114%, 107%, 103.5% and 100% of the liquidation value for the
period December 15, 1999 through June 15, 2001, June 16, 2001 through
December 14, 2003, December 15, 2003 through December 14, 2004, December
15, 2004 through December 14, 2005 and December 15, 2005 and thereafter,
respectively. The redemption price for Class B is 100% of the liquidation
value. However, on December 10, 2007, the Company must redeem all of the
shares of the Senior Preferred Stock then outstanding at a redemption price
equal to 100% of the liquidation value per share plus accrued and unpaid
dividends. Pursuant to the Company's financing arrangements, the payment of
dividends and/or the repurchase of shares of Senior Preferred Stock is
allowed as long as no default on the financing arrangements shall have
occurred. The 14% Senior Mandatorily Redeemable Preferred Stock was
recorded at $77,634 to take into account common stock issued in conjunction
with the sale of the Senior Preferred Stock and will accrete to $100,000 by
December 10, 2007 using the interest rate method.
On December 10, 1999, in connection with the Recapitalization, the Company
authorized 50,000 shares and issued 7,000 shares of Junior Preferred Stock
("Junior Preferred Shares"). The liquidation value of each Junior Preferred
Share is $1,000 plus accrued and unpaid dividends. Dividends, as may be
declared by the Company's Board of Directors, are cumulative at an annual
rate of 5% of the liquidation value until December 10, 2003 and then at an
annual rate of 8% thereafter and are payable annually; however the dividend
rate will increase to 20% upon consummation of certain events. The Company
will pay dividends in the form of additional Junior Preferred Shares. The
Company may, at its sole option and upon written notice, redeem, subject to
limitations, all or any portion of the outstanding Junior Preferred Shares
for $12.50$1,000 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. PursuantHowever, on January 10, 2008, the Company must
redeem all of the shares of the Junior Preferred Stock then outstanding at
a redemption price equal to $1,000 per share plus accrued and unpaid
dividends as long as all of the Company's
financing arrangements,shares of the paymentSenior Preferred Stock have
been redeemed. Upon consummation of dividends and/or the repurchasea primary public offering having an
aggregate offering value of at least $50,000, each holder of Junior
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 hasshall have the right to convert all, but not less than
all, into shares of voting common stock based upon the public offering
price.
9. STOCKHOLDERS' EQUITY AND WARRANTS
Each share of Non-voting common stock is convertible at theirthe shareholders
option to exchange any or all of their Preferred Shares for the
sameinto an equal number of shares of Voting Common Stock ("Voting Common Shares"). The
Company must reserve, outcommon stock subject to the
requirements set forth in the Company's Certificate of its authorized but unissued Voting Common
Shares,Incorporation.
In connection with the appropriate numberRecapitalization, all warrants (46,088.67) then
outstanding were exchanged for cash with each holder receiving cash for the
differential between $37.47 per share and their exercise price of Voting Common Shares to affect the
exchange of all$12.50.
Consequently, there are no warrants outstanding Preferred Shares. Upon the exchange of any
Preferred Shares, such Preferred Shares are to be retired and not reissued.
7.at December 31,1999.
10. INCOME TAXES
Major components of the Company's income tax provision (benefit) are as follows:
1999 1998 1997
1996 1995---- ---- ----
Current:
Federal $ - $ - $ -
State 550 450 250
Foreign 209 - -
-------- -------- --------------- ------- -------
Total current 759 450 250
------- ------- -------
Deferred:
Federal - - -------- -------- --------
Deferred:
Federal 9,513
(10,250) (1,437)
State - 380 1,364
(1,507) (168)
-------- --------- --------Foreign - - -
------- ------- -------
Total deferred - 380 10,877
(11,757) (1,605)
-------- --------- --------------- ------- -------
Provision for income taxes (benefit) $ 11,127 $(11,757) $(1,605)
======== ========= ========759 $ 830 $11,127
======= ======= =======
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.
The tax effects
of the temporary differences that give rise to significant portions of theNet deferred tax assets and liabilitiesconsist of the following at December 31, 1997 and 1996 are as
follows:
1997 199631:
1999 1998
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 12,75952,302 $ 6,30241,143
Accrued liabilities 5,882 5,957
Other 2,153 747
--------- ---------
Gross deferred tax assets 20,794 13,006
Deferred tax liabilities:16,812 18,001
Loans and accountaccounts receivable 6,737 (4,087)1,382 3,670
Property and equipment 724 (2,375)1,028 1,311
Intangible assets 4,557 (764)
---------- ---------
Gross deferred tax liabilities 12,018 (7,226)3,824 4,192
Tax credit carry forwards 3,418 -
-------- --------
Total deferred tax assets 32,812 5,78078,766 68,317
Less valuation allowance (32,432) -
========== =========(78,766) (68,317)
-------- --------
Net deferred tax assets $ 380- $ 5,780
========== =========
During 1997, the Company recorded a net-
======== ========
The valuation allowance of $32,432 to
reflect management's assessment,was $78,766 and $68,317 at December 31, 1999 and
1998, respectively. The Company has determined the valuation allowance
based onupon the weight of the available evidence of current and projected ofregarding future book taxable income
that there
is significant uncertainty that anyconsistent with the principles of SFAS No. 109, Accounting for Income
Taxes. The $10,449 increase in the benefits fromvaluation allowance during 1999 was the
result of net changes in temporary differences, and an increase in the net
operating loss and tax credit carryforwards. The valuation allowance also
includes amounts related to previous acquisitions from years before 1999.
Future realization of these deferred tax assets will be realized. For all federal tax years sincewould result in the
Company's
formationreduction of goodwill recorded in September of 1995,connection with the acquisitions.
The Company has incurred net operating
losses.
At December 31, 1997 for income tax purposes, the Company has the followingfederal net operating loss carryforwards:
Amount Expiration
------ ----------
1997 $19,600 2012
1996 3,950 2011
1995 9,200 2010
During 1997,carryforwards of $127,347 as of
December 31, 1999 available to offset future taxable income of the
consolidated group of corporations. Since the Recapitalization transaction
on December 10, 1999 constituted a change of ownership, tax law imposes a
limitation on the future use of the Company's net operating loss
carryforwards generated through the date of the change in ownership. The
annual limit is equal to the long-term tax-exempt bond rate times the fair
imputed value of the Company's stock immediately before the change in
ownership. In addition, the Company has significantly increased its total debt from
$247,616 at December 31, 1996 to $324,966 at December 31, 1997. This
increase in debt primarily resulted from the acquisitions in 1997acquired a net operating loss carry
forward of the
net assets of NSA and ABC. In addition, on January 26, 1998 and as more
fully described in Note 14, the Company incurred significant additional
borrowings to finance$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 2019. The Union Corporation.Company also has available
federal tax credit carryforwards of approximately $616 which expire between
2003 and 2012, federal minimum tax credit carryforwards of approximately
$759 which may be carried forward indefinitely and various state tax credit
carryforwards of approximately $2,043 with various expiration dates.
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.
Net deferred tax assets are reflected in the accompanying consolidated
financial statements as follows:
1997 1996
Current assets:
Deferred tax assets $ 11,698 $
Less valuation allowance (11,698) -
--------- ---------
Net current deferred tax assets - 2,617
--------- ---------
Long-term assets:
Deferred tax assets 21,114 3,163
Less valuation allowance (20,734) -
--------- ---------
Net long-term deferred tax assets 380 3,163
--------- ---------
Net deferred tax assets $ 380 $
========= =========
A reconciliation of the Company's reported income tax provision to the U.S.
federal statutory rate is as follows:
1997 1996 1995
Federal taxes at statutory rate $(16,052) $(11,272) $ (1,388)
State income taxes (net of federal tax benefits) (2,092) (1,521) (111)
Nondeductible amortization 1,406 879 85
Other (4,567) 157 (191)
Deferred tax valuation allowance 32,432 - -
--------- --------- ---------
Provision for income taxes (benefit) $ 11,127 $(11,757) $ (1,605)
========= ========= =========
8.1999 1998 1997
---- ---- ----
Federal taxes at statutory rate $(13,257) $(7,994) $(16,052)
State income taxes (net of federal
tax benefits) (874) 18 (2,092)
Foreign income taxes - - -
Nondeductible amortization 3,753 3,414 1,406
Other 2,371 249 (4,567)
Deferred tax valuation allowance 8,766 5,143 32,432
-------- ------- --------
Provision for income taxes $ 759 $ 830 $ 11,127
======== ======= ========
11. RELATED PARTY TRANSACTIONS
In connection with the agreements executed in connection with the
Recapitalization discussed in Note 2, the Company paid transaction costs
and advisory fees to certain Company stockholders. Such costs were $17,092
for the year end December 31, 1999.
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 $600, and $150 for
the yearsyear ended December 31, 1997 and 1996 and for the
period September 21, 1995 to December 31, 1995, respectively.1997. The agreement was terminated September
30, 1997.
Subject to the agreements executed in connection with the various
acquisitions, and
the private placementPrivate Placement discussed in Note 2,6 and certain
management and advisory agreements, the Company has paid to certain Company
stockholders transaction costs and advisory fees. Such costs were $1,600, $9,100zero,
$3,466 and $1,500$1,600 for the years ended December 31, 19971999, 1998 and 1996
and for the period September 21, 1995 to December 31, 1995,1997,
respectively.
Under various financing arrangements associated with the Company's
acquisitions and Amended Facility,credit facility, the Company incurred interest expense of
$3,317$3,376, $2,333 and $2,900$3,317 for the years ended December 31, 19971999, 1998 and
1996,1997, respectively, to certain Company stockholders of which one is a
financial institution and iswas co-administrative agent of the Company's
Amended
Facility.
Duringprior credit facility.
In December 1997, the Company invested $5,000 for a minority interest in a
limited liability corporation ("LLC"(the "LLC") formed for the purpose of acquiring
anpurchased loan and accounts receivable portfolio.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 LLC
is managedwrite 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 had insignificant activity for 1997.
9.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.
12. 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 generally 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. As of December 31, 1999, no SARs have been granted. The
awarded stock options vest over various periodsthree to four years and vesting may be
accelerated upon the satisfaction of certain performance targets and/or the
occurrence of certain liquidity events.a change in control as defined in the
Plan. The options shall expire ten years after date of grant.
In June, 1999, 25,500 options were repriced from a grant price of $40.00 to
$25.00. In addition, 58,500 options were repriced from a grant price of
$65.00 or $50.00 to $40.00. Simultaneously, the vesting provisions of
certain options were modified to provide for prorata vesting over a
specified number of years. Accordingly, compensation expense was recognized
during 1999 as a result of these modifications of certain options. In
addition, in connection with the Recapitalization, certain options
exercised and the holders of such options received a cash payment equal to
the exercise price of such options and $37.47, the price per share at which
the Recapitalization was consummated.
A summary of the 1995 Stock Option and Stock Award Plan is as follows:
Number of
Shares of Weighted Average
ofStock Subject Exercise Price
Sharesto Options Per Share
------------------------ ----------------
Outstanding at December 31, 1995 - $ -
Granted 395,809 13.57
Forfeited (149,788) 12.50
----------
Outstanding at December 31, 1996January 1, 1997 246,021 14.23$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
Granted 214,000 40.00
Forfeited (104,500) 28.52
Exercised (245,396) 18.59
----------
Outstanding at December 31, 1999 442,925 31.69
==========
Reserved for future option grants 181,479
==========
At307,075
Exercisable shares at December 31, 1999, 1998 and 1997 were 442,925,
105,784 and 49,647, shares were exercisable with an exercise price
rangerespectively.
A summary of $12.50 to $25.00 and the weighted average remaining contractual
life for thestock options outstanding was 9.0 years.at December 31, 1999 is as follows:
Options Outstanding Options Exercisable
-------------------------------- ----------------------
Weighted
Average
Remaining
Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
-------------- ----------- ----------- -------- ----------- --------
$12.50 70,175 6.7 years $12.50 70,175 $12.50
$25.00 116,750 7.6 years $25.00 116,750 $25.00
$40.00 256,000 9.1 years $40.00 256,000 $40.00
------- -------
$12.50-$40.00 442,925 8.6 years $31.69 442,925 $31.69
======= =======
The Company accounts for the Plan in accordance with Accounting Principles
BoardAPB Opinion No. 25,
under which no compensation cost has been recognized for the majority of
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:
1999 1998 1997
1996---- ---- ----
Risk free rate 5.0% 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 Given that10.0
Since the CompanyCompany's common stock is not publicly traded, the expected stock
price volatility is assumed to be zero. The weighted fair values of options
granted during 1999, 1998 and 1997 were $15.74, $23.14, and 1996 were $12.29, and $6.67,
respectively. The Company's pro forma information is as follows:
1999 1998 1997
1996---- ---- ----
Net loss:
As reported $(43,957) $(24,341) $(58,337) $(21,397)
Pro forma (45,436) (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 atas of December 31, 1997.
10.1999.
13. 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.
The Company has a business alliance agreement with a partnership which
provides for the payment of fees for services performed in connection with
the acquisition of loan portfolios. Such fees include a monthly retainer
and commission based on the Company's ultimate financial return on each
purchased portfolio. The Company recorded fee expense to this partnership
of $170 for 1997.
A subsidiary of the Company has twoseveral 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 $20,661, $5,986$33,303 which includes amounts purchased and
$903subsequently sold to FINCO (see Note 18), $25,521 and $20,661 for the years
ended December 31, 19971999, 1998 and 1996 and
for the period September 21, 1995 to December 31, 1995,1997, 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
------
1998--------
2000 $ 8,744
1999 8,019
2000 5,97116,329
2001 4,32214,019
2002 2,90310,551
2003 8,033
2004 6,668
Thereafter 4,849
------18,004
--------
Total lease payments $34,808$ 73,604
========
Rent expense under operating leases was $8,100, $3,600$16,974, $15,800 and $150$8,100 for the
years ended December 31, 1999, 1998 and 1997, and 1996 and for the period September 21,
1995 to December 31, 1995, respectively.
11.14. LITIGATION
At December 31, 1997,1999, 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. TheWhile the results of
litigation cannot be predicted with certainty, the Company has provided for
the estimated uninsured amounts and costs of defense forto resolve the pending suits and
management, in consultation with legal counsel, believes that reserves
established for the ultimate settlementresolution of pending matters are adequate at
December 31, 1997.
12.1999.
15. 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, 19971999 and 19961998 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, 1999 and
1998 was $97,000 and $95,300, 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 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, 19971999 and 1996.1998.
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.its Receivables. 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 portfoliosthe Receivables acquired in
September 1995 in conjunction with the Company's acquisition of API, to
reduce their carrying value to estimated fair value.
13.16. EMPLOYEE BENEFIT PLAN
ThePLANS
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, 1999 and 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 $276$1,654, $1,570 and $98$276 for the years
ended December 31, 1999, 1998 and 1997, respectively.
17. ENTERPRISE WIDE DISCLOSURE
The Company operates in one business segment. As a strategic receivables
management company, the primary services of the Company consist of
collection services, portfolio purchasing services and 1996, respectively.
Effective January 1,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:
1999 1998 three of these defined contribution plans were
combined1997
---- ---- ----
Collection services $ 362,964 $ 350,080 $ 180,871
Portfolio purchasing services 80,391 82,399 67,809
Outsourcing services 61,070 46,921 23,003
--------- --------- ---------
Total $ 504,425 $ 479,400 $ 271,683
========= ========= =========
18. PURCHASED LOANS AND ACCOUNTS RECEIVABLE PORTFOLIOS FINANCING
In October 1998, a special-purpose finance company, OSI Funding Corp.,
formed by the Company, entered into a new defined contribution plan sponsoredrevolving 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 Recapitalization, OSI Funding
Corp. converted to a limited liability company and is now OSI Funding LLC
("FINCO"), with OSI owning approximately 78% of the financial interest but
having only approximately 29% of the voting rights. In connection with the
establishment of the Warehouse Facility, FINCO entered into a servicing
agreement with a subsidiary of the Company to provide certain
administrative and collection services on a contingent fee basis (i.e., fee
is based on a percent of amount collected) at prevailing market rates based
on the nature and age of outstanding balances to be collected. Servicing
revenue from FINCO is recognized by the Company as collections are
received. All borrowings by FINCO under the Warehouse Facility are without
recourse to the Company.
The Company also anticipates to combinefollowing summarizes the other defined contribution plans
into the new defined contribution plan during 1998.
14. SUBSEQUENT EVENTS
On January 23, 1998,transactions between the Company and FINCO the
the year ended December 31:
1999 1998
---- ----
Sales of purchased loans and accounts receivables
portfolios by the Company to FINCO $56,664 $9,134
Servicing fees paid by FINCO to the Company $13,481 $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 approximately 77%by the Company from the various unrelated sellers. In
conjunction with sales of Receivables to FINCO and the outstanding shares ofservicing agreement,
the Company recorded servicing assets which are being amortized over the
servicing agreement. The Union Corporation's ("Union") common stock for
$31.50 per share. The Company agreed to acquire any of the remaining
outstanding shares of Union pursuant to a second-step merger in which
holderscarrying value of such shares will receive $31.50 per share. The Company expects
to completeservicing assets is $1,300
at December 31, 1999 and was not considered material at December 31, 1998.
At December 31, 1999 and 1998, FINCO had purchased loans and accounts
receivable portfolios of $42,967 and $8,361, respectively. At December 31,
1999 and 1998, FINCO had outstanding borrowings of $32,051 and $6,482,
respectively, under the merger by April 1998. The aggregate purchase price ofWarehouse Facility.
19. NONRECURRING EXPENSES
After the common stock will be approximately $192,000.
Also in January 1998,Company's formation and seven acquisitions, the Company finalized an amended $470,422 credit
agreement ("Agreement") withadopted a
groupstrategy to align the Company along business services and establish call
centers of banks to fundexcellence. As a result, the Union
acquisition. The Agreement consistsCompany incurred $5,063 of
$412,422 of Term Loans A, Bnonrecurring conversion, realignment and C
due through October 2004 and a $58,000 Revolving Credit Facility due
October 2001. Interest rates on borrowings under the Agreement are based on
the Eurodollar rate or other alternatives plus a margin of 3.0% or lower.
The Agreement amended the Amended Facility.
Union reported revenues of $121,709 and net income of $8,096 for their
fiscal year ended June 30, 1997. Union also reported total assets of
$126,019 and stockholders' equity of $71,612 at June 30, 1997.
INDEPENDENT AUDITORS' REPORT
Partners of Account Portfolios, L.P.:
We have audited the accompanying consolidated balance sheets of Account
Portfolios, L.P (a Georgia Limited Partnership, the "Partnership") and its
subsidiaries as of September 20, 1995 and December 31, 1994 and the related
consolidated statements of operations, partners' capital, and cash flows for the
period from January 1, 1995 to September 20, 1995 andrelocation expenses for the year
ended December 31, 1994.1999. These financial statements areexpenses include costs resulting from the
responsibilitytemporary duplication of the
Partnership'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 planoperations, closure of certain call centers,
hiring and perform the audit to obtain
reasonable assurance about whether the financial statements are freetraining 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 positionnew employees, costs of the Partnership and its
subsidiaries as of September 20, 1995 and December 31, 1994 and the results of
their operations and their cash flows for the period from January 1, 1995 to
September 20, 1995 and for the year ended December 31, 1994 in conformity with
generally accepted accounting principles.
/s/Deloitte & Touche LLP
- ------------------------------
Deloitte & Touche LLP
Atlanta, Georgia
August 9, 1996
(November 26, 1996 as to Note 7)
ACCOUNT PORTFOLIOS, L.P.
(A GEORGIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
SEPTEMBER 20, DECEMBER 31,
ASSETS 1995 1994
CURRENT ASSETS:
Cash and cash equivalents $ 557 $ 13,998
Loans and accounts receivable purchased 3,788 1,672
Accounts receivable - trade 3 93
Investment in partnership 1,833
Other current assets 174 80
-------- --------
Total current assets 4,522 17,676
LOANS AND ACCOUNTS RECEIVABLE PURCHASED 5,667 4,589
PROPERTY AND EQUIPMENT - Net 1,083 676
-------- --------
Total assets $ 11,272 $ 22,941
======== ========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable - trade $ 164 $ 331
Accrued consulting fees 145 289
Accrued salaries and wages 304 51
Accrued vacation 57 31
Other current liabilities 43 77
-------- --------
Total current liabilities 713 779
PARTNERS' CAPITAL 10,559 22,162
-------- --------
Total liabilities and partners' capital $ 11,272 $ 22,941
======== ========
See notes to consolidated financial statements.
ACCOUNT PORTFOLIOS, L.P.
(A GEORGIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
PERIOD FROM
JANUARY 1, 1995 YEAR ENDED
TO SEPTEMBER 20, DECEMBER 31,
1995 1994
REVENUES $ 21,293 $ 39,292
EXPENSES:
Amortization of loans and accounts receivable 2,308 2,667
Service feesconverting collection
operating systems, and other operatingone-time and administrative expenses 8,595 6,131
Professional fees 911 2,638
-------- --------
OPERATING INCOME 9,479 27,856
OTHER INCOME (EXPENSE):
Interest expense (955) (2,941)
Interest income 460 342
Other expense (166)
-------- --------
NET INCOME $ 8,984 $ 25,091
======== ========
See notes to consolidated financial statements.
ACCOUNT PORTFOLIOS, L.P.
(A GEORGIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS OF DOLLARS)
GENERAL LIMITED
PARTNER PARTNERS TOTAL
BALANCE - January 1, 1994 $ 46 $ 4,536 $ 4,582
Distributions to partners (75) (7,436) (7,511)
Net income 251 24,840 25,091
------ -------- --------
BALANCE - December 31, 1994 222 21,940 22,162
Contributions by partners 1 134 135
Distributions to partners (207) (20,515) (20,722)
Net income 90 8,894 8,984
------ -------- --------
BALANCE - September 20, 1995 $ 106 $ 10,453 $ 10,559
====== ======== ========
See notes to consolidated financial statements.
ACCOUNT PORTFOLIOS, L.P.
(A GEORGIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
PERIOD FROM
JANUARY 1, 1995 YEAR ENDED
TO SEPTEMBER 20, DECEMBER 31,
1995 1994
OPERATING ACTIVITIES:
Net income $ 8,984 $ 25,091
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 167 102
Amortization of loans and accounts receivable 2,308 2,667
Loss on withdrawal from long-term investment 166
Change in assets and liabilities:
Accounts receivable - trade 90 (93)
Loans and accounts receivable purchased (5,502) (6,800)
Other current assets (94) (19)
Accounts payable, accrued expenses, and
other current liabilities (66) (40)
-------- --------
Net cash provided by operating activities 5,887 21,074
INVESTING ACTIVITIES:
Acquisition of fixed assets (574) (463)
Proceeds from sale of long-term investment 1,833
--------
Net cash provided by (used in) investing 1,259 (463)
activities
FINANCING ACTIVITIES:
Payments on debt (3,544)
Contributions from partners 135
Distributions to partners (20,722) (7,511)
-------- --------
Net cash used in financing activities (20,587) (11,055)
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (13,441) 9,556
CASH AND CASH EQUIVALENTS:
Beginning of period 13,998 4,442
-------- --------
End of period $ 557 $ 13,998
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during period for interest $ 967 $ 2,920
======== ========
See notes to consolidated financial statements.
ACCOUNT PORTFOLIOS, L.P.
(A GEORGIA LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 20, 1995 AND DECEMBER 31, 1994 AND
FOR THE PERIOD FROM JANUARY 1, 1995 TO SEPTEMBER 20, 1995
AND YEAR ENDED DECEMBER 31, 1994
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Account Portfolios, L.P. (a Georgia Limited Partnership, the
"Partnership") is a limited partnership organized for the purpose of
purchasing portfolios of nonperforming loans and accounts receivable
("Receivables"). The Receivables are purchased by the Partnership without
recourse to the seller. The Partnership Agreement ("Agreement") provides
that the Partnership shall continue in existence until December 31, 2050
unless sooner terminated, liquidated, or dissolved by law or by terms
within the Agreement. The shareholders of the General Partner are also
trustees of the Limited Partners.
Use of 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.
Consolidation Policy - During 1995 and 1994, the Partnership invested in
various subsidiaries which purchased portfolios of nonperforming
Receivables. The consolidated financial statements include the Partnership
and all of its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Revenue Recognition - Collection on Receivables are recorded as revenue
when received. Revenue from loan servicing is recorded as such services are
provided. Fees, paid on the closing of each portfolio of purchased
Receivables, are capitalized and included in the amortization of the
portfolio. Effective January 1, 1994, the Partnership began amortizing 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 for that portfolio. If not amortized earlier, a
Receivable portfolio's loan cost becomes fully amortized by the end of
three years from date of purchase. Prior to 1994, the Partnership amortized
purchased loan costs under the cost recovery method. The change in method
was a result of the Partnership's improved historical collection experience
for similar types of loan portfolios and its ability to estimate expected
cash flow. This change was accounted for prospectively as a change in
estimate and the effect was to reduce amortization expense and increase net
income by $962,000 in 1994.
Allocation of Net Earnings (Loss) - Income, losses, and the net cash from
operations of the Partnership are allocated 1% to the General Partner and
99% to the Limited Partners. Net cash from operations is defined as cash
flow from operations less amounts used to pay or establish reserves for all
Partnership expenses, debt payments, capital improvements, replacements,
and contingencies as determined by the General Partner.
In the event of the sale of Partnership property, profits or losses are
allocated to the Partners as follows:
o First, to the Partners so as to take account of any variation between
the adjusted basis of the property and its initial gross asset value.
o Second, to any Partner who has a negative capital account at the time
of disposition.
o Third, to all Partners in accordance with their interests in the
income and losses of the Partnership as set forth in the Agreement.
Cash and Cash Equivalents - Cash and cash equivalents consist of cash,
money market investments, and overnight deposits. The Partnership considers
all other highly liquid temporary cash investments with low interest rate
risk to be cash equivalents. Cash equivalents are valued at cost, which
approximates market.
Fixed Assets - Fixed assets are recorded at cost. Depreciation is computed
on the straight-line method based on the estimated useful lives of the
related assets.
Income Taxes - No provision for income taxes is made in the financial
statements of the Partnership. Taxable income or loss of the Partnership is
reported in the income tax returns of its partners.
2. PROPERTY AND EQUIPMENT
Property and equipment, which is recorded at cost, consists of the
following at September 20, 1995 and December 31, 1994 (in thousands):
1995 1994
Furniture and fixtures $ 201 $ 111
Data processing equipment 688 377
Telephone equipment 496 347
Leasehold improvements 30 13
Computer software 7
------
1,422 848
Less accumulated depreciation (339) (172)
------ ------
Fixed assets, net $1,083 $ 676
====== ======
3. INVESTMENT IN PARTNERSHIP
At December 31, 1994, the investment in partnership consisted of the
Partnership's limited partner investment in a private investment limited
partnership whose emphasis is on capital appreciation through investments.
A $2.0 million capital contribution was made on December 30, 1993 and was
recorded at cost. The Partnership withdrew its investment during the year
ended December 31, 1994 and received 80% of the total anticipated
distribution in January 1995. The remaining 20% was distributed to the
Partnership in 1995 upon completion of the audit of the private investment
limited partnership. Estimated losses of $166,473 on this investment were
included in 1994 other expense.
4. NOTE PAYABLE
The Partnership entered into a two-year Master Loan Agreement with Cargill
Financial Services Corporation ("Cargill") on May 14, 1992 ("the Loan
Agreement") which allowed it to borrow up to $50.0 million for the purchase
of portfolios of nonperforming loans and accounts receivable approved by
both parties. Under the terms of the Loan Agreement, interest accrues at a
rate of prime plus 7% and all borrowings are payable in 24 months. There
were no principal amounts outstanding under the Loan Agreement as of
September 20, 1995 and December 31, 1994. Borrowings were collateralized by
current and future loans purchased under the Loan Agreement.
Under the terms of the Loan Agreement, after payment of principal,
noncontingent interest, and return of the Partnership's investment, the
Partnership is required to pay an additional 20% of all future collections
less service fees (as defined) as contingent interest to the lender. The
Partnership paid contingent interest of $955,290 and $2,940,593 under the
Loan Agreement for the period from January 1, 1995 to September 20, 1995
and for the year ended December 31, 1994, respectively, which was charged
to interest expense.
The Partnership was obligated to pay a fee to an investment bank on all
amounts borrowed from Cargill up to total borrowings of $50.0 million.
There are no outstanding borrowings from Cargill as of September 20, 1995
and December 31, 1994 and all related consulting fees have been paid. The
Partnership recorded consulting fees relating to the Cargill borrowing of
$198,730 for the year ended December 31, 1994. No consulting fees were paid
during the period from January 1, 1995 to September 20, 1995.
5. RELATED PARTY TRANSACTIONS
On October 1, 1992, the Partnership entered into a management and
investment services agreement with a related party. The agreement provides
for the payment by the Partnership of monthly management fees of $75,000
through March 1993 and monthly fees of $50,000 thereafter. The Partnership
recorded management fees to this entity of $450,000 and $600,000 for the
period from January 1, 1995 to September 20, 1995 and the year ended
December 31, 1994, respectively.
6. EMPLOYEE BENEFIT PLAN
The Partnership adopted a 401(k) profit sharing plan and trust (the "Plan")
on March 1, 1994 which covers all full-time employees who have completed
three months of service. Employees may contribute up to 15% of their annual
compensation and employer contributions are discretionary. The Partnership
did not make any contributions to the Plan during the period from January
1, 1995 to September 20, 1995 and for the year ended December 31, 1994,
respectively. Effective December 22, 1995, the Partnership terminated the
Plan. Participants in the Plan were given the option to roll over their
account balance into another qualified plan or to receive a lump-sum
distribution to the Plan.
7. COMMITMENTS AND CONTINGENCIES
From time to time, the Partnership 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 Partnership's behalf. Payments to the servicers vary depending on
the servicing contract. Current contracts expire in 1995 but are
automatically renewable at the option of the Partnership.
The Partnership has a consulting agreement with an individual which
provides for the payment of fees for services performed in connection with
the acquisition of loan portfolios. Such fees are based on the portfolio
purchase price and future collections. The Partnership recorded consulting
expenses of $556,000 and $2,279,000 during the period from January 1, 1995
to September 20, 1995 and for the year ended December 31, 1994,
respectively.
The Partnership has a three-year employment agreement with an employee
which provides for the payment of additional compensation based on future
collections of loan portfolios identified by the employee. No additional
compensation was paid to this individual during the period from January 1,
1995 to September 20, 1995 and for the year ended December 31, 1994,
respectively.
During August 1994, a subsidiary of the Partnership entered into a two-year
Portfolio Flow Purchase Agreement whereby the subsidiary has a monthly
commitment to purchase nonperforming loans meeting certain criteria for an
agreed upon price up to a total purchase price of $1,000,000 per month .
The purchases under the Portfolio Flow Purchase Agreement were $2,515,480
and $1,156,485 for the period from January 1, 1995 to September 20, 1995
and for the year ended December 31, 1994, respectively. The subsidiary also
entered into certain Participation Agreements whereby from time to time it
may sell (at its sole discretion) undivided interests in the loan
portfolios purchased under the Portfolio Flow Purchase Agreement. The
subsidiary records the loan portfolios purchased net of the participation
interests sold.
The Partnership is obligated under operating lease agreements with terms in
excess of one year as follows (in thousands):
1995 $ 108
1996 422
1997 316
1998 251
1999 and thereafter 349
-------
$ 1,446
=======
Rent expense under operating leases was $200,680 and $118,806 for the
period from January 1, 1995 to September 20, 1995 and for the year ended
December 31, 1994, respectively.
The Partnership is a party to certain legal matters arising in the ordinary
course of business. In the opinion of management, none of these matters are
expected to have a material effect on the financial position or results of
operations of the Partnership.
8. SUBSEQUENT EVENTS
Pursuant to a Purchase Agreement dated September 21, 1995 (the "Purchase
Agreement"), OSI Holdings Corp. (the "Company"), a Delaware corporation,
acquired the Class A limited partnership interests in Account Portfolios,
L.P. for 933,333 shares of the Company common stock and 266,667 shares of
the Company 8% Non-Voting Cumulative Redeemable Exchangeable Preferred
Stock. The Company contributed the Class A partnership interests, valued at
$15.0 million, to Account Portfolios, Inc. ("AP, Inc."), a subsidiary of
the Company. AP, Inc. acquired the Class B limited partnership interests in
the Partnership for cash of approximately $28.8 million and notes of $35.0
million. Account Portfolios, G.P., Inc. ("APGP, Inc."), another subsidiary
of the Company, acquired the general partnership interests of the
Partnership and its subsidiaries for cash of approximately $1.2 million.
The total value of this transaction was $80.0 million.redundant costs.
INDEPENDENT AUDITORS'AUDITORS REPORT
To the Stockholders of Outsourcing Solutions Inc.:
We have audited the consolidated financial statements of Outsourcing Solutions
Inc. and itsit subsidiaries as of December 31, 19971999 and 1996,1998, and for each of the
twothree years in the period ended December 31, 1997 and for the period from
September 21, 1995 (date of inception) to December 31, 1995,1999, and have issued our report
thereon dated February 13, 1998;March 28, 2000; 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
February 13, 1998March 28, 2000
Schedule II
Outsourcing Solutions Inc. and Subsidiaries Schedule II
Valuation and Qualifying Accounts and Reserves
For the year ended December 31, 19971999, 1998 and 1996
and the period ended December 31, 19951997
(in thousands)
Column A Column B Column C Column D Column E
-------- --------- ---------------------------- -------- --------
Additions (B)
----------------------------
Balance Charged to Deductions Balance
@ beg. of Charged to Other (Please @ end of
Description Period Expense Accounts (A) explain) Period
----------- --------- ---------- ------------ ---------- --------
Allowance for doubtful accounts:
1997 641 367 - 470 538
==== ==== ==== ==== ====
1996 - 117 671 147 641
==== ==== ==== ==== ====
1995 - - - - -
==== ==== ==== ==== ====
(A) PaycoColumn A Column B Column C Column D Column E
- -------------------- --------- ----------------------- ---------- ----------
Additions (B)
Balance -----------------------
@ beg. Charged Charged to Deductions Balance @
of to Other (Please end of
Description Period Expenses Accounts (A) explain) Period
- ------------------------------ -------- ------------ ---------- ---------
Allowance for doubtful
accounts:
1999 1,309 651 - 1,431 529
====== ==== ==== ====== ======
1998 538 108 798 135 1,309
====== ==== ==== ====== ======
1997 641 367 - 470 538
====== ==== ==== ====== ======
(A) For 1998, Union balance at date of acquisition.
(B) Accounts receivable write-offs and adjustments, net of recoveries.