SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20429
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, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file Number 333-16867
Outsourcing Solutions Inc.
(Exact name of registrant as specified in its charter)
Delaware 58-2197161
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
390 South Woods Mill Road, Suite 350
Chesterfield, Missouri 63017
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (314) 576-0022
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
None None
Securities registered pursuant to Section (g) of the Act:
None
(Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 if this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant is not determinable, as the stock is not publicly traded.
APPLICABLE ONLY TO CORPORATE REGISTRANTS: As of March 17, 1998, the following
shares of the Registrant's common stock were issued and outstanding:
Voting common stock 3,425,126.01
Class A convertible nonvoting common stock 391,740.58
Class B convertible nonvoting common stock 400,000.00
Class C convertible nonvoting common stock 1,040,000.00
------------
5,256,866.59
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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.
In October 1997, OSI acquired North Shore Agency, Inc. ("NSA"), a fee service
company headquartered in Long Island, New York. NSA specializes in "letter
series" collection services for direct marketers targeted at collecting small
balance debts. The majority of NSA's revenues are generated from traditional
contingent collections utilizing letters with the remaining revenues derived
from fixed fee letter services.
In November 1997, OSI acquired Accelerated Bureau of Collections, Inc. ("ABC").
ABC is a Denver-based national fee service company. ABC specializes in credit
card collections and derives approximately 25% of its revenues from early-out
programs with the remaining 75% of revenues derived from standard contingent fee
collections.
In December 1997, the Company entered into a Share Purchase Agreement and Plan
of Merger (the "Merger Agreement") with 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, credit grantors have increasingly
looked to third party service providers in managing the accounts receivable
process. In addition, rapid consolidation in the largest credit granting
industries, including banking, health care, telecommunications and utilities,
has forced companies to focus on core business activities and to outsource
ancillary functions, including some or all aspects of the accounts receivable
management process. Contingent fee companies dominate the accounts receivable
management industry, with the American Collectors Association estimating that 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 $137 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, in an effort to focus on core business activities
and to take advantage of the economies of scale, better performance and lower
cost structure offered by accounts receivable management companies, many credit
grantors have chosen to outsource some or all aspects of the accounts receivable
management process.
The customer base for the accounts receivable management industry is dominated
by credit issuers in four end-markets: banks/bankcard, health care, utilities
and telecommunications. 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 include retail, student loan agencies and oil
companies. The Company believes that the ongoing consolidation in the banking,
utilities, telecommunications and health care industries will create larger
national customers seeking to place accounts with accounts receivable management
companies that have the resources to offer national rather than local and
regional coverage.
The accounts receivable management industry is closely regulated by federal laws
such as the Fair Debt Collection Practices Act ("FDCPA") and similar state laws.
Contingent fee services are the traditional services provided in the accounts
receivable management industry. Creditors typically place non-performing
accounts after they have been deemed non-collectible, usually when 90 to 120
days past due. The commission rate is generally based on the collectability of
the asset in terms of the costs, which the contingent fee servicer must incur to
effect repayment. The earlier the placement (i.e., the less elapsed time between
the past due date of the receivable and the date on which the debt is placed
with the contingent fee servicer), the higher the probability of recovering the
debt, and therefore the lower the cost to collect and the lower the commission
rate. Creditors typically assign their charged-off receivables to contingent fee
servicers for a six to twelve month cycle, and then reassign the receivables to
other servicers as the accounts become further past due. There are three main
types of placements in the contingent fee business, each representing a
different stage in the cycle of account collection. Primary placements are
accounts, typically 120 to 270 days past due, that are being placed with
agencies for the first time and usually receive the lowest commission. Secondary
placements, accounts 270 to 360 days past due, have already been placed with a
contingent fee servicer and usually require a process including obtaining
judgments, asset searches, and other more rigorous legal remedies to ensure
repayment and, therefore, receive a higher commission. Tertiary placements,
accounts usually over 360 days past due, involve legal judgments, and a
successful collection receives the highest commission. Customers are
increasingly placing accounts with accounts receivable management companies
earlier in the collection cycle, often prior to the 120 days past due typical in
primary placements, either under a contingent fee or fixed fee arrangement.
While contingent fee servicing remains the most widely used method by creditors
in recovering non-performing accounts, portfolio purchasing has increasingly
become a popular alternative. Beginning in the 1980's, the Resolution Trust
Company and the Federal Deposit Insurance Company, under government mandate to
do so, began to sell portfolios of non-performing loans. Spurred on by the
success of these organizations in a selling charged-off debt, other creditors
likewise began to sell portfolios of non-performing debt. Management estimates
the total principal value of purchased portfolios at between $2.5 and $5.5
billion per year, and based on the Company's experience, the annual growth rate
of the portfolio purchasing market segment for the period 1990 to 1995 was
between 50% and 80%. The largest percentage of purchased portfolios originate
from the bank card receivable and retail markets and are typically purchased at
a deep discount from the aggregate principal value of the accounts, with an
inverse correlation between purchase price and age of the delinquent accounts.
Once purchased, traditional 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 agencies 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 to
purchase charged off receivables on a monthly basis as they become past due.
Creditors selling portfolios to the Company realize a number of benefits,
including increased predictability of cash flow, reduction in monitoring and
administrative expenses and reallocation of assets from non-core business
functions to core business functions.
The Company's purchased portfolios consist primarily of consumer loans and
credit card receivables, student loan receivables and health club receivables,
including portfolios purchased under forward flow agreements. Consumer loans
purchased include automobile receivables, mobile home receivables and commercial
real estate receivables. The Company's most recent portfolio acquisitions have
been primarily purchases pursuant to the Company's health club and bank card
forward flow agreements. The Company continues to pursue acquisitions of
portfolios in various industries for individually negotiated purchases.
The Company has recently established a sourcing relationship with Sherman
Financial Group, L.L.C. ("Sherman"). Sherman's focus is singularly on developing
a distressed debt business on behalf of the Company. The Company expects 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, the Company has developed a number
of other accounts receivable management services. The Company leverages its
operational expertise and call and data management technology by offering the
following services: (1) contract management, through which the Company performs
a range of accounts receivable management services at the customer's location,
(2) student loan billing, whereby the Company provides billing, due diligence
and customer service services, (3) health care accounts receivable management,
whereby the Company assumes responsibility for managing third-party billing,
patient pay resolution, inbound and outbound patient communication services and
cash application functions, and (4) teleservicing, whereby the company offers
inbound and outbound calling programs to perform sales, customer retention
programs, market research and customer service.
Sales and Marketing
The Company has a sales force of approximately 130 sales representatives
providing comprehensive geographic coverage of the United States on a local,
regional and national basis. The Company also markets its services in Puerto
Rico and Mexico. Each of the operating companies maintain its own sales force
and have 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, emphasizes its industry
experience and reputation--two key factors considered by creditors when
selecting an accounts receivable service provider. Increasingly, the Company
will focus on cross-selling its full range of outsourcing services to its
existing customers and will use its product breadth as a key selling point in
creating new business. The Company's overall sales and marketing strategies are
coordinated by the corporate office Chesterfield, Missouri, which is also
responsible for monitoring the sales performance of each of the operating
entities.
Customers
The Company's customer base includes a full range of local, regional and
national creditors. The company's customers include American Express, 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). The
Company's largest customer accounted for less than 10% of 1997 revenues.
Employees
The company employs approximately 5,000 people, of which 4,100 are account
representatives, 130 are sales representative and 770 work in
corporate/supervisory and administrative functions. None of the Company's
employees are unionized, and the Company believes its relations with employees
are satisfactory.
The Company is committed to providing continuous training and performance
improvement plans to increase the productivity of its account representatives.
Account representatives receive extensive training in a classroom environment
for several days on Company procedures, information systems and regulations
regarding contact with debtors. The training includes technical topics, such as
use of on-line collection systems and skip-tracing techniques and tools, as well
as instruction regarding the Company's approach to the collection process and
listening, negotiation and problem-solving skills, all of which are essential to
efficient and effective collections.
Account representatives are then assigned to work groups for a training period.
Initially, the trainees only screen incoming calls. This allows less experienced
account representatives to communicate with debtors in a less confrontational
environment than may be experienced with outgoing calls. Additionally, the
trainees are assigned accounts, which based upon scoring by the Company's
information systems, have a higher likelihood of collection. After the training
period, the account representatives begin working accounts directly.
Competition
The accounts receivable management industry is highly fragmented and
competitive. According to the American Collectors Association, there are
approximately 6,000 contingent fee service companies in the United States, with
the 15 largest agencies currently receiving 33% of all accounts placed with
outside collection agencies. 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. The largest competitors include Deluxe
Corporation, Equifax Corporation, FCA International and G.C. Services.
Governmental Regulatory Matters
Certain of the Company's operations are subject to compliance with the FDCPA and
comparable statutes in many states. Under the FDCPA, a third-party collection
agency is restricted in the methods it uses to collect consumer debt. For
example, a third-party collection agency 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 Bond & Collection Agency, Inc. ("Allied"), Capital Credit Corporation
("Capital Credit"), and Transworld Systems, Inc. ("Transworld"). Allied,
headquartered in Trevose, Pennsylvania, provides contingent and fixed fee
collection services for large clients across a broad spectrum of industries.
Capital Credit, headquartered in Jacksonville, Florida, also provides contingent
and fixed fee collection services for large national clients primarily serving
the bankcard, telecommunications, travel and entertainment and government
sectors. Transworld, headquartered in Rohnert Park, California, is the largest
prepaid, fixed fee outsourcer of delinquent account management services.
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.
Environmental Matters
Current operations of OSI and its subsidiaries do not involve activities
affecting the environment. However, Union is party to several pending
environmental proceedings involving the Environmental Protection Agency ("EPA")
and comparable state environmental agencies in Indiana, Maryland, Massachusetts,
New Jersey, Ohio, Pennsylvania, South Carolina, and Virginia. All of these
matters relate to discontinued operations of former divisions or subsidiaries of
Union for which it has potential continuing responsibility. Upon completion of
the Union acquisition, OSI will establish 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 with 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 findings 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 site on February 6, 1998 and,
notwithstanding the information contained in the findings submitted by Union,
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, the aggregate amounts reserved by Union for this site is $13.8
million, which represents Union's best estimate of the ultimate legal and
consulting costs for this site, costs to defend its aforementioned settlement
with the government regarding this site, and its portion of the remediation
costs that will ultimately be incurred by them, based on current information, if
Union's prior settlement with the government is not upheld in court. 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. 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 liabilities are not net of insurance or other expected
recoveries.
ITEM 2. PROPERTIES
As of December 31, 1997, the Company and its subsidiaries operated 65 facilities
in the U.S., all of which are leased. 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.
ITEM 3. LEGAL PROCEEDINGS
At December 31, 1997, 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. The Company has provided for the estimated uninsured
amounts and costs of defense for pending suits and management 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1997.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
No public market currently exists for the Common Stock.
As of March 17, 1998, there were approximately 21 holders of record of the
Common Stock.
The Company has not declared any cash dividends on its Common Stock since the
Company's formation in September 1995. The Indenture (the "Indenture"), dated as
of November 6, 1996, by and among the Company, the Guarantors (as defined
therein) and Wilmington Trust Company, as Trustee, with respect to the 11%
Series B Senior Subordinated Notes due 2006 contains restrictions on the
Company's ability to declare or pay dividends on its capital stock.
Additionally, the Second Amended and Restated Credit Agreement, dated as of
January 26, 1998 by and among the Company, the Lenders listed therein, Goldman
Sachs Credit Partners L.P. and the Chase Manhattan Bank, as Co-Administrative
Agents, Goldman Sachs Credit Partners L.P. and Chase Securities, Inc., as
Arranging Agents and SunTrust Bank, Atlanta, as Collateral Agent (the "Credit
Agreement") contains certain restrictions on the Company's ability to declare or
pay dividends on its capital stock. Both the Indenture and the Credit Agreement
prohibit the declaration or payment of any 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 and 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 for the period from September 21, 1995 to December
31, 1995 and the two 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. 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, 1994 and for the year ended December 31, 1993 have been derived
from the audited financial statements of API 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 (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
Income Statement Data:
Operating revenue (a).................... $23,696 $39,292 $21,293 $ 8,311 $106,331 $271,683
Salaries and benefits.................... 1,596 2,646 4,471 2,079 46,997 133,364
Other operating expenses (b)(c).......... 10,692 8,790 7,343 8,953 80,357 156,738
------- ------- ------- ------- -------- --------
Operating income (loss).................. 11,408 27,856 9,479 (2,721) (21,023) (18,419)
Interest expense, net.................... 1,301 2,599 495 1,361 12,131 28,791
Other expense............................ -- 166 -- -- -- --
------- ------- ------- ------- -------- --------
Income (loss) before taxes............... 10,107 25,091 8,894 (4,082) (33,154) (47,210)
Provision for income taxes (benefit)..... -- -- -- (1,605) (11,757) 11,127
------- ------- ------- ------- -------- --------
Net income (loss) (c).................... $10,107 $25,091 $ 8,984 $(2,477) $(21,397) $(58,337)
======= ======= ======= ======= ======== ========
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 22,941 11,272 85,652 355,207 381,690
Total debt............................... 3,544 -- -- 36,462 247,616 324,966
Partners' capital/Stockholders equity
(deficit)........................... 4,582 22,162 10,559 42,448 51,598 (5,478)
Other Financial Data:
Amortization of purchased portfolios (c). $6,013 $2,667 $2,308 $5,390 $27,317 $52,042 (e)
Other depreciation and amortization...... 57 102 167 331 18,281 33,574
Cash capital expenditures................ 222 463 574 97 2,606 9,489
Portfolio purchases...................... 7,088 6,800 5,502 903 10,373 (f) 46,494
Cash flows provided by (used in):
Operating activities................ 4,759 21,074 5,887 2,902 10,667 32,825
Investing activities................ (2,222) (463) 1,259 (31,007) (200,435) (119,499)
Financing activities................ (3,775) (11,055) (20,587) 29,574 202,796 75,394
EBITDA (d)............................... 17,478 30,625 11,954 3,000 24,575 67,197
Adjusted EBITDA (d)...................... 15,609 18,465 11,954 3,000 25,775 67,197
<FN>
(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 "MLQ Interests") for aggregate consideration
of $14,772. This amount excludes the $14,772.
</FN>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues for the year ended December 31, 1997 were $271.7 million, compared to
$106.3 million for the year ended December 31, 1996. Revenues from fee services
(including outsourcing) were $203.9 million for the year ended December 31, 1997
compared to $60.8 million in the comparable period in 1996. The increase in fee
revenues was a result of the acquisition of Payco in November 1996, the
acquisition of NSA in October 1997 and the acquisition of ABC in November 1997.
Revenues generated from the collection of purchased portfolios increased to
$67.8 million for the year ended December 31, 1997 compared to $45.5 million for
the comparable period in 1996. The increase in collections from purchased
portfolios results from primarily an increase in purchased portfolio levels and
related collection efforts and to a lesser extent from the Payco acquisition.
Operating Expenses for the year ended December 31, 1997 were $290.1 million
compared to $127.4 million for the comparable period in 1996, an increase of
$162.7 million. Operating expenses, exclusive of amortization and depreciation
charges, were $204.5 million for the year ended December 31, 1997 and $80.8
million for the comparable period in 1996. Operating expenses increased as a
result of the Payco acquisition as well as the use of outside collection
agencies to service a portion of purchased portfolios. Of the $290.1 million in
expenses for the year ended December 31, 1997, $52.0 million (including $10.0
million of additional amortization to reduce a portion of purchased portfolios
to their estimated fair value - See Note 12 to the Consolidated Financial
Statements) was attributable to amortization of the purchase price of purchased
portfolios (compared to $27.3 million in 1996), $16.7 million was attributable
to amortization of account inventory (compared to $12.3 million in 1996), $8.0
million was attributable to amortization of goodwill associated with the
acquisitions of API, Miller, Continental, Payco, NSA and ABC (compared to $3.2
million in 1996) and $8.8 million was attributable to depreciation (compared to
$2.8 million in 1996). The increase in amortization and depreciation expense was
the result of additional goodwill and step-up in basis of fixed assets recorded
in connection with the Payco acquisition.
Operating Loss for the year ended December 31, 1997 was $18.4 million compared
to $21.0 million for the comparable period in 1996. The operating loss was a
result of increased amortization related to the step-up in basis of purchased
portfolios related to the API acquisition, goodwill and account placement
inventory related to the acquisition of Payco.
Operating earnings before interest expense, taxes, depreciation and amortization
(EBITDA) for the year ended December 31, 1997 was $67.2 million compared to
$24.6 million for the comparable period in 1996. The increase of $42.6 million
in EBITDA reflects additional revenues associated with the acquisition of Payco,
NSA and ABC and additional portfolios at API, partially offset by the costs
associated with the use of outside collection agencies to service purchased
portfolios.
Interest Expense, net for the year ended December 31, 1997 was $28.8 million
compared to $12.1 million for the comparable period in 1996. The increase was
primarily due to increased debt incurred in 1997 to finance the acquisition of
Payco, NSA and ABC and to finance additional purchased portfolio purchases.
Net Loss for the year ended December 31, 1997 was $58.3 million compared to
$21.4 million for the comparable period in 1996. The increase in net loss was
attributable to increased amortization expense from the step-up in basis of
acquired portfolios related to the API acquisition, goodwill and account
placement inventory recorded in connection with the acquisition of Payco, the
increase in interest expense related to the indebtedness incurred to finance the
Payco, NSA and ABC acquisitions and portfolio purchases and a provision for
income taxes of $11.1 million as a result of the Company recording a net
valuation allowance of $32.4 million to reflect management's assessment, based
on the weight of the available evidence of current and projected future book
taxable income, that there is significant uncertainty that any of the benefits
from the net deferred tax assets will be realized.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues for the twelve months ended December 31, 1996 were $106.3 million,
compared to $29.6 million in the comparable period for 1995. Revenues from
contingent fee services including outsourcing were $51.2 million for the twelve
months ended December 31, 1996 compared to $0.0 in the comparable period in
1995. The increase in contingent fee revenues was a result 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 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, the Company had cash and cash equivalents of $3.2 million.
At year end, the Company had a $58.0 million revolving credit facility, which
allows the Company to borrow for working capital, general corporate purposes and
acquisitions, subject to certain conditions. As of December 31, 1997, the
Company had outstanding $31.9 million under the revolving credit facility
leaving $26.1 million available under the revolving credit facility.
Cash and Cash Equivalents decreased from $14.5 million at December 31, 1996 to
$3.2 million at December 31, 1997 principally due to the use of $119.5 million
for investing activities primarily for the acquisition of NSA and ABC and the
purchase of portfolios, offset by cash provided by operations and financing
activities of $32.8 million and $75.4 million, respectively. The Company also
held $20.8 million of cash for clients in restricted trust accounts at December
31, 1997.
Purchased Loans and Accounts Receivable Portfolios decreased from $68.0 million
at December 31, 1996 to $62.5 million at December 31, 1997 due to new portfolio
purchases of $46.5 million during the year which were partially offset by
amortization of purchased portfolios of $52.0 million including $10.0 million 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.
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, 1997 and December 31, 1996 by type of
receivable is shown below:
December 31, 1997 December 31, 1996
--------------------------------------- -------------------------------------
Original Gross Original Gross
Principal Value Current Long-term Principal Value Current Long-term
(in millions) (in thousands) (in millions) (in thousands)
Consumer loans............................ $2,039 $ 8,978 $ 4,948 $1,770 $ 7,445 $ 4,592
Student loans............................. 322 4,629 -- 322 7,456 4,699
Credit cards.............................. 509 12,575 10,765 101 2,359 1,453
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
====== ======= ======= ====== ======= =======
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.
Deferred taxes decreased from an asset of $5.8 million at December 31, 1996 to
an asset of $0.4 million at December 31, 1997. The net deferred tax asset at
December 31, 1997 and December 31, 1996 relates principally to net operating
loss carryforwards. 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, the Company recorded 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. 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 total
interest expense to be incurred, management does not expect the Company to
generate taxable income in the foreseeable future sufficient to realize tax
benefits from the net operating loss carryforwards or the future reversal of the
net deductible temporary differences. The amount of the deferred tax assets
considered realizable, however, could be increased in future years if estimates
of future taxable income during the carryforward period change.
The Company's debt structure at December 31, 1997 consists of a $219.3 million
bank credit facility, $100.0 million 11% Senior Subordinated Notes ("Notes") and
other indebtedness of $5.7 million. See Note 14 of the Consolidated Financial
Statements of OSI included elsewhere herein for a description of the amended
bank 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.
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. The Company
anticipates that its operating cash flow together with availability under the
bank credit facility will be sufficient to fund its anticipated future operating
expense and to meet its debt service requirements as they become due.
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.
Capital expenditures for the year ended December 31, 1997 were $9.5 million. The
Company expects to spend approximately $17.0 million on capital expenditures
(exclusive of any expenditures in connection with acquisitions) in 1998.
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, 1996 and 1997.
Year 2000
The company has numerous computer-based systems and collection applications. The
Company has evaluated its systems and applications to determine whether or not
those systems were Year 2000 compliant. Based upon its review, the Company has
identified those systems which are not compliant and has implemented plans to
update those systems. The cost of the effort is currently not expected to be
material and will be expensed as incurred over the next two years.
Derivative Financial Instruments
From time to time, the Company may employ derivative financial instruments as of
its risk management program. The Company's objective is to manage risks and
exposures and not to trade such instruments for profit or loss.
Forward-Looking Statements
Except for the historical statements and discussions contained herein,
statements contained in this report constitute "forward-looking statements" as
defined 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 of the Company, that
could cause actual results 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, and the Company's ability to continue its growth and expand
successfully into new markets and services. The Company disclaims any intention
or obligation to update publicly or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Financial Statements and Supplementary Schedule
contained in Part IV hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors of the Company are elected annually by its shareholders to serve
during the ensuing year or until a successor is duly elected and qualified.
Executive officers of the Company are duly elected by its Board of Directors to
serve until their respective successors are elected and qualified. The following
table sets forth certain information with respect to the directors and executive
officers of the Company.
Name Age Position or Office
---- --- ------------------
Jeffrey E. Stiefler 52 Chairman of the Board of Directors
Timothy G. Beffa 47 Director, President and
Chief Executive Officer
David E. De Leeuw 53 Director
David E. King 39 Director, Secretary and Treasurer
Tyler T. Zachem 32 Director and Vice President
David G. Hanna 34 Director
Frank J. Hanna, III 36 Director
Dennis G. Punches 62 Director
Nathan W. Pearson, Jr. 46 Director
Daniel J. Dolan 45 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.
TIMOTHY G. BEFFA (47), 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), Director of the Company since September 21, 1995. Mr. De
Leeuw is a managing general partner of MDC Management Company III, L.P., which
is the general partner of McCown De Leeuw & Co. III, L.P. and McCown De Leeuw &
Co. III (Europe), L.P., a managing general partner of MDC Management company
IIA, L.P., which is the general partner of McCown De Leeuw & Co. III (Asia),
L.P. and a member of Gamma Fund, LLC. Prior to founding McCown De Leeuw & Co.
with George E. McCown in 1984, Mr. De Leeuw was Manager of the Leveraged
Acquisition Unit and Vice President in the Capital Markets Group at Citibank,
N.A. Mr. De Leeuw also worked with W.R. Grace & Co. where he was Assistant
Treasurer and manager of Corporate Finance. Mr. De Leeuw began his career as an
investment banker with Paine Webber Incorporated. He currently serves as a
director of 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 of the Company since
September 21, 1995. Mr. King is a general partner of MDC management Company III,
L.P., which is the general partner of McCown De Leeuw & Co. III, L.P., and
McCown De Leeuw & Co. Offshore (Europe) III, L.P. a general partner of MDC
Management Company IIIA, L.P., which is the general partner of McCown De Leeuw &
Co. III (Asia), L.P. and a member of Gamma Fund, LLC. Mr. King has been
associated with McCown De Leeuw & Co. since 1990. He currently serves as a
director of 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. since July 1993. Mr. Zachem
previously worked as a consultant with McKinsey & Co. and as an investment
banker with McDonald & Company. He currently serves as a director of RSP
Manufacturing Corporation, The Brown Schools, Inc., Aurora Foods Inc. and Papa
Gino's Inc.
DAVID G. HANNA (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
1988 to January 1990, 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. Punches
served as President and Chief Executive Officer of Payco American Corporation.
NATHAN W. PEARSON, JR. (46), Director of the Company since July 1997. Mr.
Pearson is an operating affiliate of McCown De Leeuw & Co. Mr. Pearson has been
affiliated with McCown De Leeuw since 1997. Since 1996, Mr. Pearson has been
Managing Director of Commonwealth Holdings, a private investment firm. From 1988
to 1995, Mr. Pearson was Executive Vice President and Chief Financial Officer of
Broadcasting Partners, L.L.C., a radio broadcasting leveraged buyout
organization and since 1995, Mr. Pearson has been a principal of investment and
management of Broadcasting Partners, L.L.C. Prior to joining Broadcasting
Partners, L.L.C., Mr. Pearson was a management consultant with McKinsey and
Company from 1982 to 1988.
DANIEL J. DOLAN (45), Executive Vice President and Chief Financial Officer of
the Company since October 1997. Mr. Dolan has 23 years experience in public
accounting, the last 11 years as a partner of Ernst & Young LLP.
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 year ended December 31, 1997.
Summary Compensation Table
-----------------------------------------------------------------------------
Long Term
Other Annual Compensation All Other
Name and Fiscal Salary Bonus Compensation Awards Compensation
Principal Position Year ($) ($) ($) (#) ($)
- ------------------ ------ ------ ------ ------------ ------------ ------------
Timothy G. Beffa(1)
President and CEO 1997 320,110 457,500
1996 103,846 200,000
Daniel J. Dolan (2)
Executive Vice 1997 56,571 130,000
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
<FN>
(1) 1996 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.
</FN>
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 and received a bonus of $457,500 for fiscal year 1997. In fiscal year
1998, Mr. Beffa is eligible for an annual bonus of up to 150% of his annual base
salary. Effective October 9, 1996, Mr. Beffa received options to purchase
131,421.66 shares of common stock of the Company, which options vest upon the
satisfaction of certain performance targets and/or the occurrence of certain
liquidity events. Effective March 14, 1997, Mr. Beffa received additional
options to purchase up to 41,555 shares of common stock of the Company, which
also vest upon the satisfaction of certain performance targets and/or the
occurrence of certain liquidity events.
On October 16, 1997, OSI entered into an employment agreement with Daniel J.
Dolan. Pursuant to the employment agreement, Mr. Dolan serves as Chief Financial
Officer 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 stock of the Company, such options vest upon the
satisfaction of certain performance targets and/or the occurrence of certain
liquidity events.
Director Compensation
Non-employee directors of OSI receive $2,000 per regularly scheduled meeting of
the Board of Directors, $1,000 per special meeting of the Board of Directors and
$500 per committee meeting plus, in each case, reimbursement for travel and
out-of-pocket expenses incurred in connection with attendance at all such
meetings. Except as described below, no director of OSI receives any other
compensation from OSI for performance of services as a director of OSI (other
than reimbursement for travel and out-of-pocket expenses incurred in connection
with attendance at Board of Director meetings). Effective February 16, 1996, Mr.
Stiefler received options to purchase 23,044 shares of common stock of the
Company, which options vest upon the satisfaction of certain performance targets
and/or the occurrence of certain liquidity events.
Option Plans
The Company maintains a 1995 Stock Option and Stock Award Plan (the "Stock
Option Plan"). The Stock Option Plan is administered by the Compensation
Committee of the Board of Directors of the Company. Under the Stock Option Plan,
the Compensation Committee may grant or award (a) options to purchase stock of
the Company (which may either be incentive stock options ("ISOs"), within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or
stock options other than ISOs), (b) stock appreciation rights granted in
conjunction with stock options, (c) restricted stock, or (d) bonuses payable in
stock, to key salaried employees of the Company, including officers, as well as
to consultants of the Company, and non-employee directors.
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, options to purchase
up to 568,520.66 shares of the Company's common stock are outstanding under the
Stock Option Plan.
As of March 17, 1998, the following table sets forth options held by the current
executive officers:
# 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.
Committee 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.
The Company's compensation program is designed to be competitive with companies
similar in structure and business to the Company.
The Company's executive compensation program is structured to help the Company
achieve its business objectives by:
o Setting levels of compensation designed to attract and retain superior
executives in a highly competitive environment.
o Designing equity-related and other performance-based incentive compensation
programs to align the interests of management with the ongoing interests of
shareholders; and
o Providing incentive compensation that varies directly with both Company
financial performance and individual contributions to that performance.
The Company has used a combination of salary and incentive compensation,
including cash bonuses and equity-based incentives to achieve its compensation
goals.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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) 7,500,000 shares of Voting Common Stock,
par value $.01 per share (the "Voting Common Stock"), of which 3,477,126.01 are
issued and outstanding, (iii) 7,500,000 shares of Class A Non-Voting Common
Stock, par value $.01 per share (the "Class A Non-Voting Common Stock"), of
which 391,740.58 are issued and outstanding, (iv) 500,000 shares of Class B
Non-Voting Stock, par value $.01 per share (the "Class B Non-Voting Common
Stock"), of which 400,000 are issued and outstanding, and (v) 1,500,000 shares
of Class C Non-Voting Common Stock, par value $.01 per share (the "Class C
Non-Voting Common Stock" and together with the Class A Non-Voting Common Stock
and the Class B Non-Voting Common Stock, the "Non-Voting Common Stock," and
together with the Voting Common Stock, the "Common Stock"), of which 1,040,000
are issued and outstanding. In addition, a total of 46,088.67 shares of Voting
Common Stock were issuable upon exercise of warrants held by certain warrant
holders, and up to 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, 1997 by (i)
each person known to the Company to be the beneficial owner of more than 5% of
any class of the Company's equity securities, (ii) each of the Company's
directors and nominees, and (iii) all directors and executive officers of the
Company as a group.
Amount and
Nature of Percent
Beneficial of
Title of Class Name and Address Beneficial Owner Ownership Class(1)
- -------------- --------------------------------- ---------- --------
Preferred Stock McCown De Leeuw & Co. III, L.P.(2) 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.
<FN>
(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.
</FN>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Acquisition Arrangements
OSI invested $5 million for 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 of one of
the Company's stockholders.
Advisory Services Agreement
On September 21, 1995 the Company entered into an Advisory Services Agreement
(the "Advisory Services Agreement") with MDC Management Company III, L.P. ("MDC
Management"), an affiliate. Under the Advisory Services Agreement, MDC
Management provides consulting, financial, and managerial functions for a
$300,000 annual fee. The Advisory Services Agreement expires September 21, 2005
and is renewable annually thereafter, unless terminated by the Company. The
Company may terminate the Advisory Services Agreement at any time for cause by
written notice to MDC Management authorized by a majority of the directors other
than those who are partners, principals or employees of MDC Management or any of
its affiliates. The Advisory Services Agreement may be amended by written
agreement of MDC Management and the Company. The Company believes that the terms
of and fees paid for the professional services rendered are at least as
favorable to the Company as those which could be negotiated with a third party.
In 1996 upon closing of the acquisition of Payco, the offering by OSI of the 11%
Senior Subordinated Notes and the $200 million credit facility, MDC Management
received a one-time fee of $3 million for financial advisory services provided
to OSI in connection therewith. In 1998 upon closing of the acquisition of
Union, MDC Management received a one-time fee of $2.5 million for financial
advisory services provided to OSI in connection therewith.
Certain Interests of Initial Purchasers
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, acts as
co-administrative agent and lender in connection with its credit facility and
receives certain fees and reimbursement of expenses in connection therewith. MLQ
Investors, L.P., an affiliate of Goldman Sachs, owns a non-voting equity
interest in the Company.
In addition to acting as an initial purchaser of the 11% Senior Subordinated
Notes, Chase Securities Inc. ("Chase Securities") and its affiliates have
certain other relationships with the Company. Chase Securities acted as
co-arranging agent and The Chase Manhattan Bank, an affiliate of Chase
Securities, acts as co-administrative agent and a lender under the credit
facility and each receives customary fees and reimbursement of expenses in
connection therewith. Additionally, Chase Equity Associates, L.P. an affiliate
of Chase Securities, owns a non-voting equity interest in the Company.
Arrangement with Certain Affiliates
Payco leases its corporate headquarters in Brookfield, Wisconsin, its data
processing center in New Berlin, Wisconsin and the office space for three of its
collection operations from partnerships in which certain officers of Payco are
the principal partners. 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, 1997 and was not renewed.
The Company believed that 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 OSI in connection
therewith.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
See index on page 38 for a listing of consolidated financial
statements filed with this report.
2. Financial Statement Schedule
See index on page 38 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.
2.6 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.
2.7 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.
2.8 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.
*3.1 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.
*3.2 By-laws of the Company
*4.1 Indenture dated as of November 6, 1996 by and among the Company, the
Guarantors and Wilmington Trust Company (the "Indenture").
*4.2 Specimen Certificate of 11% Senior Subordinated Note due 2006
(included in Exhibit 4.1 hereto).
*4.3 Specimen Certificate of 11% Series B Senior Subordinated Note due 2006
(the "New Notes") (included in Exhibit 4.1 hereto).
*4.4 Form of Guarantee of securities issued pursuant to the Indenture
(included in Exhibit 4.1 hereto).
*10.1 Amended and Restated Stockholders Agreement dated as of February 16,
1996 by and among the Company and various stockholders of the Company.
*10.2 Advisory Services Agreement dated September 21, 1995 between the
Company and 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 to the date hereof.
*10.4 Lease Agreement between Payco American Corporation and 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 Corporation 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 Amended Employment Agreement dated as of August 27, 1997 between the
Company and Timothy G. Beffa.
*10.9 Consulting Agreement dated as of August 13, 1996 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 to Alan M. Miller.
*10.12 1995 Stock Option and Stock Award Plan of the Company.
10.13 First Amendment to 1995 Stock Option and Stock Award Plan of the
Company
*10.14 Form of Non-Qualified Stock Option Award Agreement [A]
*10.15 Form of Non-Qualified Stock Option Award Agreement [B]
10.16 Lease Agreement dated June 1, 1997 between Justus Realty Limited
Partnership and Accelerated Bureau of Collections Inc.
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.
10.18 Second Amended and Restated Credit Agreement dated as of January 26,
1998 by and among the Company, the Lenders listed therein, Goldman
Sachs Credit Partners L.P. and The Chase Manhattan Bank, as
Co-Administrative Agents, Goldman Sachs Credit Partners L.P. and Chase
Securities, Inc., as Arranging Agents and Suntrust Bank, Atlanta, as
Collateral Agent.
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
During the quarter, the following report on Form 8-K was filed:
Report on Form 8-K under Item 5 dated December 22, 1997 announcing the
Company's tender offer for The Union Corporation.
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. Dolan
Executive Vice President and
Chief Financial Officer
DATE: March 31, 1998
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, Jr.
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........................ 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, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the two years in the period ended December 31, 1997 and for
the period from September 21, 1995 (date of inception) to December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Outsourcing Solutions Inc. and
subsidiaries as of December 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1997 and for the period from September 21, 1995 to December 31,
1995 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
St. Louis, Missouri
February 13, 1998
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS EXCEPT SHARE 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 $355,207
======== ========
See notes to consolidated financial statements.
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
1996 AND FOR THE PERIOD SEPTEMBER 21, 1995 (DATE OF INCEPTION) 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 $(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 31,1997 AND 1996 AND FOR THE PERIOD SEPTEMBER 21,1995 (DATE OF
INCEPTION) TO DECEMBER 31,1995 (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
NON-VOTING
CUMULATIVE
REDEEMABLE
EXCHANGEABLE COMMON STOCK
PREFERRED VOT- CLASS CLASS CLASS PAID-IN RETAINED
STOCK ING A B C CAPITAL DEFICIT TOTAL
BALANCE, SEPTEMBER 21,1995 $ - $ - $ - $ - $ - $ - $ - $ -
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
Payment of preferred stock dividends
through issuance of 70,606.84
shares of preferred stock and
recorded preferred stock dividend
requirements of $1 per share 883 (922) (39)
Net loss - - - - - - (58,337) (58,337)
--------- --------- --------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31,1997 $ 11,699 $35 $ 4 $ 4 $ 10 $ 66,958 $(84,188) $ (5,479)
========= ========= ========= ========= ========= ========= ========= =========
See notes to consolidated financial statements.
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
1996 AND FOR THE PERIOD SEPTEMBER 21, 1995 (DATE OF INCEPTION) TO DECEMBER 31,
1995 (In thousands)
1997 1996 1995
OPERATING ACTIVITIES:
Net loss $ (58,337) $ (21,397) $ (2,477)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 35,613 18,618 331
Amortization of purchased loans and accounts receivable portfolios 52,042 27,317 5,390
Deferred taxes 10,877 (11,757) (1,605)
Other 48 - -
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:
Purchase of loans and accounts receivable portfolios (46,494) (13,645) (903)
Payments for acquisitions, net of cash acquired (62,913) (184,184) (30,007)
Acquisition of property and equipment (9,489) (2,606) (97)
Other (603) - -
-------------- -------------- --------------
Net cash used in investing activities (119,499) (200,435) (31,007)
-------------- -------------- --------------
FINANCING ACTIVITIES:
Proceeds from term loans 55,000 337,000 -
Borrowings under revolving credit agreement 66,150 - -
Repayments under revolving credit agreement (34,300) - -
Repayments of debt (9,763) (136,615) (576)
Deferred financing fees (1,993) (12,563) -
Proceeds from issuance of common stock 300 14,974 30,150
-------------- -------------- --------------
Net cash provided by financing activities 75,394 202,796 29,574
-------------- -------------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (11,280) 13,028 1,469
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 14,497 1,469 -
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,217 $ 14,497 $ 1,469
============== ============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid during period for interest $ 26,372 $ 7,655 $ 543
============== ============== ==============
See notes to consolidated financial statements.
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION POLICY - 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 EQUIVALENTS - Cash and cash equivalents consist of cash,
money market investments, and overnight deposits. Cash equivalents are
valued at cost, which approximates market. Cash held for clients consist of
certain restricted accounts which are used to maintain cash collected and
held on behalf of the Company's clients.
PURCHASED LOANS AND ACCOUNTS RECEIVABLE PORTFOLIOS - Purchased loans and
accounts receivable portfolios ("Receivables") acquired in connection with
acquisitions in September 1995 and November 1996 were recorded at the
present value of estimated future net cash flows. Receivables purchased in
the normal course of business are recorded at cost. The Company
periodically reviews all Receivables to assess recoverability. Impairments
are recognized in operations if the expected discounted future net
operating cash flows derived from the individual portfolios are less than
their respective carrying value (see Note 12).
The Company amortizes on an individual portfolio basis the cost of the
Receivables based on the ratio of current collections for a portfolio to
current and anticipated future collections including any terminal value for
that portfolio. Such portfolio cost is amortized over the expected
collection period as collections are received which, depending on the
individual portfolio, generally ranges from 3 to 5 years.
REVENUE RECOGNITION - Collections on Receivables are generally recorded as
revenue when received. Revenue from loan servicing is recorded as such
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 10 years) of the related assets. Leasehold
improvements are amortized over the term of the related lease.
INTANGIBLE ASSETS - The excess of cost over the fair value of net assets of
businesses acquired is amortized on a straight-line basis over 20 to 30
years. Other identifiable intangible assets are primarily comprised of the
fair value of existing account placements acquired in connection with
business combinations and non-compete agreements. These assets are
short-lived and are being amortized over the assets' periods of
recoverability, which are estimated to be 1 to 3 years. The Company
periodically reviews goodwill and other intangibles to assess
recoverability. Impairments will be recognized in operations if the
expected future operating cash flows (undiscounted and without interest
charges) derived from such intangible assets are less than its carrying
value.
INCOME TAXES - The Company accounts for income taxes using an asset and
liability approach. The Company recognizes the amount of taxes payable or
refundable for the current year and deferred tax liabilities and assets for
expected future tax consequences of events that have been recognized in the
consolidated financial statements.
DEFERRED FINANCING COSTS - Costs incurred to obtain financing are
capitalized and amortized over the term of the underlying debt using the
straight line method.
STOCK-BASED COMPENSATION - The Company accounts for its stock-based
compensation plan using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
Statement of Financial Accounting Standard (SFAS) No. 123, Accounting for
Stock-Based Compensation, requires that companies using the intrinsic value
method make pro forma disclosures of net income as if the fair value-based
method of accounting had been applied. See Note 9 for the fair value
disclosures required under SFAS No. 123.
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 PRONOUNCEMENTS - 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 simplifies the calculation of earnings per
share and is applicable only to public companies. Under generally accepted
accounting principles' and Securities and Exchange Commission's 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.
RECLASSIFICATIONS - Certain amounts in prior periods have been reclassified
to conform to the current year presentation.
2. ORGANIZATION & ACQUISITIONS
OSI was formed on September 21, 1995 to build, through a combination of
acquisitions and sustained internal growth, one of the leading providers of
accounts receivable management services. The Company purchases and collects
portfolios of non-performing loans and accounts receivable for the
Company's own account, services accounts receivable placements on a
contingent and fixed fee basis and provides contract management of accounts
receivable. The Company's customers are mainly in the educational,
utilities, telecommunications, retail, healthcare and financial services
industries. The markets for the Company's services currently are the United
States, Puerto Rico and Mexico.
In September 1995, the Company acquired Account Portfolios, L.P. ("API"), a
partnership in the business of purchasing and managing large portfolios of
non-performing consumer loans and accounts receivable, for cash of $30,000,
common stock of $15,000 and notes of $35,000, which were subsequently paid
in March 1996.
In January 1996, the Company acquired A.M. Miller & Associates and
Continental Credit Services, Inc., accounts receivable and fee services
companies, for total cash consideration of $38,500 including transaction
costs of $3,600, common stock of $6,000, a 9% unsecured, subordinated note
of $5,000 and a 10% unsecured, subordinated note of $3,000, which was
subsequently paid in November 1996.
In November 1996, the Company acquired all of the outstanding common stock
of Payco American Corporation ("Payco"), an accounts receivable management
company primarily focused on healthcare, education and bank/credit cards,
in a merger transaction for cash of approximately $154,800 including
transaction costs of $4,600. The Company allocated the total purchase price
including additional liabilities reserves to the fair value of the net
assets acquired resulting in goodwill of approximately $123,000. In
addition, the Company allocated $1,000 of the purchase price to in-process
research and development that had not reached technological feasibility and
had no alternative future uses, which accordingly was expensed at the date
of the acquisition.
In October and November 1997, the Company acquired The North Shore Agency,
Inc. ("NSA"), a fee service company specializing in letter series
collection services, and Accelerated Bureau of Collections, Inc. ("ABC"), a
fee service company specializing in credit card collections, for total cash
consideration of approximately $53,800 including transaction costs of
$1,173 and common stock of $1,000. One of the acquisitions contains certain
contingent payment obligations, $1,520 through December 31, 1997, based on
the attainment by the newly formed subsidiary of certain financial
performance targets over each of the next three years. Future contingent
payment obligations, if any, will be accounted for as additional goodwill
as the payments are made.
The above acquisitions were accounted for as purchases. The excess of cost
over the fair value of net assets of businesses acquired is amortized on a
straight-line basis over 20 to 30 years. Results of operations were
included in the consolidated financial statements from their respective
acquisition dates.
In May 1996, a subsidiary of the Company acquired participation interests
in certain loan portfolios for cash of $3,300, Class C Nonvoting common
stock of $8,000 and a 10% unsecured promissory note of $3,500, which was
subsequently paid in November 1996.
The unaudited pro forma consolidated financial data presented below
provides pro forma effect of the acquisitions as if such acquisitions had
occurred as of January 1, 1996. The unaudited results have been prepared
for comparative purposes only and do not necessarily reflect the results of
operations of the Company that actually would have occurred had the
acquisitions been consummated as of January 1, 1996, nor does the data give
effect to any transactions other than the acquisitions.
PRO FORMA
1997 1996
Net revenues $313,219 $299,542
========= =========
Net loss $(58,005) $(39,945)
========= =========
3. PROPERTY AND EQUIPMENT
Property and equipment, which is recorded at cost, consists of the
following at December 31:
1997 1996
Furniture and fixtures $ 4,478 $ 3,591
Machinery and equipment 716 -
Data processing equipment 21,452 19,647
Telephone equipment 5,956 3,670
Leasehold improvements 1,599 1,090
Computer software 10,494 11,310
-------- --------
44,695 39,308
Less accumulated depreciation (12,132) (2,857)
-------- --------
$32,563 $36,451
======== ========
4. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31:
1997 1996
Goodwill $226,770 $155,693
Value of favorable contracts and placements 29,000 29,000
Covenants not to compete 4,498 4,514
--------- ---------
260,268 189,207
(40,473) (15,737)
--------- ---------
Less accumulated amortization $219,795 $173,470
======== ========
5. DEBT
Long-term debt consists of the following at December 31:
1997 1996
Term Loan A Credit Facility $ 62,500 $ 71,000
Term Loan B Credit Facility 124,922 71,000
Revolving Credit Facility 31,850 -
11% Senior Subordinated Notes - 100,000
11% Series B Senior Subordinated Notes 100,000 -
Note payable to stockholder 4,429 5,000
Other 1,265 616
-------- --------
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, the Company issued $100,000 of 11% unregistered Senior
Subordinated Notes (the "Notes") in conjunction with the acquisition of
Payco. 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,
with the Securities and Exchange Commission to exchange for the existing
Notes. The exchange offer was completed by May 29, 1997.
In November 1996, the Company entered into a new $200,000 financing
commitment ("Credit Facility") from a group of banks to finance a portion
of the Payco acquisition and refinance existing outstanding indebtedness.
The Credit Facility was subsequently amended with the Amended and Restated
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 term loan facility and a
$58,000 Revolving Credit Facility (the "Revolving Facility"). The term loan
facility consists of a term loan of $64,627 ("Term Loan A") and a term loan
of $125,250 ("Term Loan B"), which mature on October 15, 2001 and 2003,
respectively. The Company is required to make quarterly principal
repayments on each term loan. Term Loan A bears interest, at the Company's
option, (a) at a base rate equal to the greater of the federal funds rate
plus 0.5% or the lender's customary base rate, plus 1.5% or (b) at the
reserve adjusted Eurodollar rate plus 2.5%. Term Loan B bears interest, at
the Company's option, (a) at a base rate equal to the greater of the
federal funds rate plus 0.5% or the lender's customary base rate, plus 2.0%
or (b) at the reserve adjusted Eurodollar rate plus 3.0%.
The Revolving Facility has a term of five years and is fully revolving
until October 15, 2001. The Revolving Facility bears interest, at the
Company's option, (a) at a base rate equal to the greater of the federal
funds rate plus 0.5% or the lender's customary base rate, plus 1.5% or (b)
at the reserve adjusted Eurodollar rate plus 2.5%.
The Amended Facility is guaranteed by all of the Company's present domestic
subsidiaries and is secured by all of the stock of the Company's present
domestic subsidiaries and by substantially all of the Company's domestic
property assets. The Amended 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 Amended 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 three
subsidiaries that are individually, and in the aggregate inconsequential.
The Company is a holding company with no separate operations, although it
incurs some expenses on behalf of its operating subsidiaries. The Company
has no significant assets or liabilities other than the common stock of its
subsidiaries, debt, related deferred financing costs and accrued expenses
relating to expenses paid on behalf of its operating subsidiaries. The
aggregate assets, liabilities, results of operations and stockholders'
equity of the Restricted Subsidiaries are substantially equivalent to those
of the Company on a consolidated basis and the separate financial
statements of each of the Restricted Subsidiaries are not presented because
management has determined that they would not be material to investors.
Summarized combined financial information of the Restricted Subsidiaries is
shown below:
1997 1996
Current assets $ 96,133 $ 96,146
========== ==========
Noncurrent assets $ 272,730 $ 238,003
========== ==========
Current liabilities $ 57,169 $ 47,909
========== ==========
Noncurrent liabilities $ 5,284 $ 5,461
========== ==========
Operating revenue $ 271,683 $ 106,331
========== ==========
Loss from operations $ (14,679) $ (15,325)
========== ==========
Net loss $ (23,857) $ (15,143)
========== ==========
Maturities of long-term debt and capital leases at December 31, 1997 are as
follows:
Debt Capital
Leases
--------- ---------
1998 $ 15,035 $ 504
1999 15,117 463
2000 18,783 333
2001 57,062 13
2002 49,922 -
Thereafter 167,867 -
--------- ---------
Total payments 323,786 1,313
Less amounts representing interest 133
---------
Present value of minimum lease payments 1,180
Less current portion 15,035 410
========= =========
$308,751 $ 770
========= =========
During 1997, the Company entered into interest rate cap agreements to
reduce the impact of increases in interest rates on its floating-rate
long-term debt. At December 31, 1997, the Company had three interest rate
cap agreements outstanding. The agreements effectively entitle the Company
to receive from a bank the amount, if any, by which the Company's interest
payments on specified principal of its floating-rate term loans for a
specified period exceed 10%. The amounts paid for these agreements of $243
are included in deferred financing costs and are being amortized to
interest expense over the terms of the various agreements through November
1999.
6. STOCKHOLDERS' EQUITY
On September 21, 1995, the Company issued 800,000.01 shares of 8% Nonvoting
Cumulative Redeemable Exchangeable Preferred Stock ("Preferred Shares").
The liquidation value of each Preferred Share is $12.50 plus accrued and
unpaid dividends. Dividends, as may be declared by the Company's Board of
Directors, are cumulative at an annual rate of 8% of the liquidation value
and are payable in equal semi-annual installments of $.50 per preferred
share on the dividend payment date, as defined in the Certificate of
Incorporation. The Company may, at its sole option and upon written notice
to preferred shareholders, redeem all or any portion of the outstanding
Preferred Shares for $12.50 per share plus cash equal to all accrued and
unpaid dividends, through the redemption date, whether or not such
dividends have been authorized or declared. Pursuant to the Company's
financing arrangements, the payment of dividends and/or the repurchase of
Preferred Shares is prohibited until the Company attains certain covenants.
The Company may, at its sole option, pay dividends in the form of
additional Preferred Shares. Each holder of Preferred Shares has the right,
at their option, to exchange any or all of their Preferred Shares for the
same number of shares of Voting Common Stock ("Voting Common Shares"). The
Company must reserve, out of its authorized but unissued Voting Common
Shares, the appropriate number of Voting Common Shares to affect the
exchange of all outstanding Preferred Shares. Upon the exchange of any
Preferred Shares, such Preferred Shares are to be retired and not reissued.
7. INCOME TAXES
Major components of the Company's income tax provision (benefit) are as
follows:
1997 1996 1995
Current:
Federal $ - $ - $ -
State 250 - -
-------- -------- --------
Total current 250 - -
-------- -------- --------
Deferred:
Federal 9,513 (10,250) (1,437)
State 1,364 (1,507) (168)
-------- --------- --------
Total deferred 10,877 (11,757) (1,605)
-------- --------- --------
Provision for income taxes (benefit) $ 11,127 $(11,757) $(1,605)
======== ========= ========
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 the
deferred tax assets and liabilities at December 31, 1997 and 1996 are as
follows:
1997 1996
Deferred tax assets:
Net operating loss carryforwards $ 12,759 $ 6,302
Accrued liabilities 5,882 5,957
Other 2,153 747
--------- ---------
Gross deferred tax assets 20,794 13,006
Deferred tax liabilities:
Loans and account receivable 6,737 (4,087)
Property and equipment 724 (2,375)
Intangible assets 4,557 (764)
---------- ---------
Gross deferred tax liabilities 12,018 (7,226)
Total deferred tax assets 32,812 5,780
Less valuation allowance (32,432) -
========== =========
Net deferred tax assets $ 380 $ 5,780
========== =========
During 1997, the Company recorded a net valuation allowance of $32,432 to
reflect management's assessment, based on the weight of the available
evidence of current and projected of future book taxable income, that there
is significant uncertainty that any of the benefits from the net deferred
tax assets will be realized. For all federal tax years since the Company's
formation in September of 1995, the Company has incurred net operating
losses.
At December 31, 1997 for income tax purposes, the Company has the following
net operating loss carryforwards:
Amount Expiration
------ ----------
1997 $19,600 2012
1996 3,950 2011
1995 9,200 2010
During 1997, 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 1997 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 the acquisition of The Union Corporation. 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. RELATED PARTY TRANSACTIONS
The Company had an agreement with an affiliate of certain Company
stockholders to provide management and investment services for a monthly
fee of $50. The Company recorded management fees to this entity of $450,
$600, and $150 for the years ended December 31, 1997 and 1996 and for the
period September 21, 1995 to December 31, 1995, respectively. The agreement
was terminated September 30, 1997.
Subject to the agreements executed in connection with the acquisitions and
the private placement discussed in Note 2, the Company has paid to certain
Company stockholders transaction costs and advisory fees. Such costs were
$1,600, $9,100 and $1,500 for the years ended December 31, 1997 and 1996
and for the period September 21, 1995 to December 31, 1995, respectively.
Under various financing arrangements associated with the Company's
acquisitions and Amended Facility, the Company incurred interest expense of
$3,317 and $2,900 for the years ended December 31, 1997 and 1996,
respectively, to certain Company stockholders of which one is a financial
institution and is co-administrative agent of the Company's Amended
Facility.
During December 1997, the Company invested $5,000 for 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 of one of the Company's stockholders. The LLC
is managed by the Company and had insignificant activity for 1997.
9. STOCK OPTION AND AWARD PLAN
The Company has established the Outsourcing Solutions Inc. 1995 Stock
Option and Stock Award Plan (the "Plan"). The Plan is a stock award and
incentive plan which permits the issuance of options, stock appreciation
rights ("SARs") in tandem with such options, restricted stock, and other
stock-based awards to selected employees of and consultants to the Company.
The Plan reserved 304,255 Voting Common Shares for grants and provides that
the term of each award, not to exceed ten years, be determined by the
Compensation Committee of the Board of Directors (the "Committee") charged
with administering the Plan. In February 1997, the Board of Directors
approved an increase to the reserve of Voting Common Shares to 500,000 with
an additional approval to 750,000 in December 1997.
Under the terms of the Plan, options granted may be either nonqualified or
incentive stock options and the exercise price may not be less than the
fair market value of a Voting Common Share, as determined by the Committee,
on the date of grant. SARs granted in tandem with an option shall be
exercisable only to the extent the underlying option is exercisable and the
grant price shall be equal to the exercise price of the underlying option.
The awarded stock options vest over various periods and vesting may be
accelerated upon the satisfaction of certain performance targets and/or the
occurrence of certain liquidity events. The options shall expire ten years
after date of grant.
A summary of the 1995 Stock Option and Stock Award Plan is as follows:
Number Weighted Average
of Exercise Price
Shares Per Share
---------- ----------------
Outstanding at December 31, 1995 - $ -
Granted 395,809 13.57
Forfeited (149,788) 12.50
----------
Outstanding at December 31, 1996 246,021 14.23
Granted 397,500 27.99
Forfeited (75,000) 22.33
==========
Outstanding at December 31, 1997 568,521 22.78
==========
Reserved for future option grants 181,479
==========
At December 31, 1997, 49,647 shares were exercisable with an exercise price
range of $12.50 to $25.00 and the weighted average remaining contractual
life for the options outstanding was 9.0 years.
The Company accounts for the Plan in accordance with Accounting Principles
Board Opinion No. 25, under which no compensation cost has been recognized
for stock option awards. As required by SFAS No. 123, the Company has
estimated the fair value of its option grants since January 1, 1996. The
fair value for these options was estimated at the date of the grant based
on the following weighted average assumptions:
1997 1996
Risk free rate 5.44% 6.33%
Expected dividend yield of stock 0% 0%
Expected volatility of stock 0% 0%
Expected life of option (years) 10.0 10.0
Given that the Company is not publicly traded, the expected stock price
volatility is assumed to be zero. The weighted fair values of options
granted during 1997 and 1996 were $12.29 and $6.67, respectively. The
Company's pro forma information is as follows:
1997 1996
Net loss:
As reported $(58,337) $(21,397)
Pro forma (59,570) (21,758)
-------------------------------------------------------------------
In addition, the Committee may grant restricted stock to participants of
the Plan at no cost. Other than the restrictions which limit the sale and
transfer of these shares, recipients of restricted stock awards are
entitled to vote shares of restricted stock and dividends paid on such
stock. No restricted stock has been granted at December 31, 1997.
10. 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 two Portfolio Flow Purchase Agreements
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 and $903 for the years ended December 31, 1997 and 1996 and
for the period September 21, 1995 to December 31, 1995, respectively.
The Company leases certain office space and computer equipment under
operating leases. These operating leases, with terms in excess of one year,
are due in approximate amounts as follows:
Amount
------
1998 $ 8,744
1999 8,019
2000 5,971
2001 4,322
2002 2,903
Thereafter 4,849
------
Total lease payments $34,808
Rent expense under operating leases was $8,100, $3,600 and $150 for the
years ended December 31, 1997 and 1996 and for the period September 21,
1995 to December 31, 1995, respectively.
11. LITIGATION
At December 31, 1997, 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. The Company has provided
for the estimated uninsured amounts and costs of defense for pending suits
and management believes that reserves established for ultimate settlement
are adequate at December 31, 1997.
12. 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, 1997 and 1996 are as follows. The carrying amount of cash and cash
equivalents and long-term debt approximate the fair value. 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 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, 1997 and 1996.
In December 1997, the Company completed an in-depth analysis of the
carrying value of the purchased portfolios acquired in September 1995 in
conjunction with the Company's acquisition of API. This analysis included
an evaluation of achieved portfolio amortization rates, historical and
estimated future costs to collect, as well as projected total future
collection levels. As a result of this analysis, the Company recorded
$10,000 of additional amortization relating to these purchased portfolios
to reduce their carrying value to estimated fair value.
13. EMPLOYEE BENEFIT PLAN
The Company has five defined contribution plans 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 and $98 for the years ended
December 31, 1997 and 1996, respectively.
Effective January 1, 1998, three of these defined contribution plans were
combined into a new defined contribution plan sponsored by the Company. The
Company also anticipates to combine the other defined contribution plans
into the new defined contribution plan during 1998.
14. SUBSEQUENT EVENTS
On January 23, 1998, the Company acquired approximately 77% of the
outstanding shares of 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
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 $192,000.
Also in January 1998, the Company finalized an amended $470,422 credit
agreement ("Agreement") with a group of banks to fund the Union
acquisition. The Agreement consists of $412,422 of Term Loans A, B 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 and for the year ended
December 31, 1994. These financial statements are the responsibility 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 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 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 fees and other operating 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.
INDEPENDENT AUDITORS' REPORT
To the Stockholders of Outsourcing Solutions Inc.:
We have audited the consolidated financial statements of Outsourcing Solutions
Inc. and its subsidiaries as of December 31, 1997 and 1996, and for each of the
two years in the period ended December 31, 1997 and for the period from
September 21, 1995 (date of inception) to December 31, 1995, and have issued our
report thereon dated February 13, 1998; such 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 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, 1998
Outsourcing Solutions Inc. and Subsidiaries Schedule II
Valuation and Qualifying Accounts and Reserves
For the year ended December 31, 1997 and 1996
and the period ended December 31, 1995
(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 - - - - -
==== ==== ==== ==== ====
<FN>
(A) Payco balance at date of acquisition.
(B) Accounts receivable write-offs and adjustments, net of recoveries.
</FN>