EARN-OUT AGREEMENT
THIS EARN-OUT AGREEMENT ("Agreement") made as of October 8, 1997 by
and among NSA Acquisition Corporation, a New York corporation ("Buyer"),
Outsourcing Solutions Inc., a Delaware corporation ("OSI"), North Shore Agency,
Inc., a New York corporation ("North Shore"), Automated Mailing Services, Inc.,
a New York corporation ("AMS"), Mailguard Security Systems, Inc., a New York
Corporation ("Mailguard"), and DMM Consultants, a sole proprietorship of David
Klein ("DMM Consultants;" collectively, the "Sellers").
RECITALS
A. Pursuant to an asset purchase agreement among OSI, Buyer, Sellers
and certain other parties, dated October 8, 1997 (the "Purchase Agreement"),
Buyer acquired the assets of Sellers, effective this date.
B. Pursuant to Section 2.3 of the Purchase Agreement, payments under
this Earn-out Agreement shall be additional purchase price consideration for the
Assets (as defined in the Purchase Agreement) of Sellers.
C. All capitalized terms used herein which are defined in the Purchase
Agreement shall have the meanings herein as are ascribed to such terms in the
Purchase Agreement unless otherwise expressly provided for herein.
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, the parties hereto, intending to be legally bound, do
hereby agree as follows:
1. Definitions and Related Matters.
(a) "1997 Baseline EBITDA" shall mean $4,011,000.
(b) "Baseline EBITDA" shall mean $3,761,000.
(c) "Buyer Benefit Package" shall mean the employee benefits package
contemplated by Buyer to be offered to certain employees of Buyer on or after
January 1, 1998 in lieu of or in addition to certain employee benefits available
to such employees during their term of employment with Sellers; such additional
benefits may include the establishment of a bonus plan for certain employees, an
alternative medical coverage plan, a dental plan, an accidental death and
disability insurance program, a long term disability insurance program, a life
insurance program, an alternative 401(k) program, an employee assistance program
and a vision plan. The Buyer Benefit Package may also include the employment of
a human resources executive.
(d) "Earnings" shall mean earnings of Buyer for purposes of calculating the
Earn-out Payments. Earnings shall be determined for purposes of this Agreement
with the following considerations: (i) actual moving (non-capitalized) expenses
related to the relocation of Seller's operations during 1997 and/or 1998 shall
not be included as expenses for purposes of calculating Earnings up to a maximum
possible aggregate exclusion of $450,000 and (ii) no overhead expenses from OSI
shall be charged against the earnings of Buyer other than expenses related to
matters for which Buyer receives direct benefits. In addition, notwithstanding
the first sentence of this subsection 1(d), Earnings for the First Payment
Period (as defined below) shall be Earnings of North Shore, AMS, Mailguard and
North Shore Canada (collectively, the "North Shore Affiliated Group") for the
period from January 1, 1997 to the Closing Date (the "NSA Period") and Earnings
of Buyer for the period from the Closing Date through December 31, 1997; and
provided further that the Earnings of the North Shore Affiliated Group for the
NSA Period shall be adjusted as follows: (i) salary expense for Jerome Goodman
shall be reduced to an amount equal to the amount of such expense as if it were
incurred at the same rate as the salary expense to be incurred by Buyer with
respect to Jerome Goodman following the date hereof; (ii) fees paid to DMM
Consultants shall be reduced to $379,851; (iii) salary expense for Joan Goodman
shall be reduced to zero; (iv) automobile expenses shall be reduced by the
amount incurred for the Toyota "Four Runner" automobile; (v) salary expense for
maintenance personnel shall be reduced by $20,000; (vi) certain travel and
entertainment and other miscellaneous expenses incurred by members of the
Goodman family shall be reduced by an amount not to exceed $10,000; and (vii)
appropriate FICA and Medicare expenses shall be reduced as appropriate in
connection with the reductions referred to in clauses (i), (iii) and (v) of this
sentence.
(e) "Earn-out Payments" shall mean the payments made to Sellers pursuant to
Sections 2(a), 2(b) and 2(c).
(f) "EBITDA" shall mean Earnings before interest expense, taxes,
depreciation and amortization, each item determined in accordance with GAAP.
2. Payments.
(a) For the 12 month period ending December 31, 1997 (the "First Payment
Period"), Buyer will pay Sellers in cash an amount equal to 50% of the amount by
which EBITDA for the First Payment Period exceeds 1997 Baseline EBITDA.
(b) For each of the 12 month periods ending December 31, 1998 (the "Second
Payment Period") December 31, 1999 (the "Third Payment Period"), and December
31, 2000 (the "Fourth Payment Period"), Buyer will pay Sellers in cash an amount
equal to 50% of the amount by which EBITDA for the relevant Payment Period
exceeds Baseline EBITDA.
(c) In addition to the payments contemplated by Sections 2(a) and 2(b),
Buyer will pay Sellers an amount in cash depending on the EBITDA for the First
Payment Period as set forth in the following table:
EBITDA for First Payment Period Payment to Sellers
- ------------------------------- ------------------
Equals or exceeds 1997 EBITDA Baseline $1,500,000
$3,961,000 to $4,010,999 $1,250,000
$3,911,000 to $3,960,999 $1,000,000
$3,861,000 to $3,910,999 $750,000
$3,811,000 to $3,860,999 $500,000
$3,761,000 to $3,810,999 $250,000
$3,760,999 or below -0-
(d) With respect to the payment for each Payment Period, Buyer will pay
(and OSI will cause Buyer to pay) to Sellers a preliminary payment of the
aggregate Earn-out Payment due pursuant to Sections 2(a) and (b) for the
applicable Payment Period on the date Buyer submits its preliminary
determination to the Sellers pursuant to Section 3(a) ("Preliminary Payment
Date"). In addition, with respect to the First Payment Period, Buyer will pay
(and OSI will cause Buyer to pay) to Sellers a preliminary payment of the
Earn-out Payment due pursuant to Section 2(c) on the Preliminary Payment Date to
the extent OSI determines such payment is due to Sellers. Buyer shall pay any
additional payments required pursuant to Section 3(b) promptly following the
final and binding determination, pursuant to this Agreement, of the Earn-Out
Payments for the applicable Payment Period. To the extent the amount of the
Earn-Out Payment is less than the aggregate of preliminary payments previously
paid for the applicable Payment Period, Sellers shall refund the amount in
excess to Buyer promptly following the final and binding determination, pursuant
to this Agreement, of the applicable Earn-Out Payment.
(e) Payment of the Earn-Out Payments shall be distributed among Sellers in
accordance with Schedule 2.5 of the Purchase Agreement.
3. Determination of Earn-out Payments; Arbitration.
(a) The determination of the amount of the Earn-out Payments for any
Payment Period shall be determined by OSI promptly after the completion of the
applicable Payment Period. The determinations of the amount of the Earn-out
Payments shall be submitted to the Seller Group Representative within 75 days
after end of the applicable Payment Period; provided, however, the determination
of the amount of any Earn-out Payment for the First Payment Period shall be
submitted to the Seller Group Representative within 90 days after end of the
First Payment Period. After such submission and upon request of the Seller Group
Representative, OSI will provide the Seller Group Representative with reasonable
access to its records relating to the determination of the amount of Earn-Out
Payments. If the Seller Group Representative does not object to the
determination by OSI of the applicable Earn-out Payment by written notice of
objection (the "Notice of Objection") delivered to OSI within 20 business days
after receipt by Sellers of such determination, the proposed Earn-out Payment
shall be deemed final and binding.
(b) If the Seller Group Representative delivers a Notice of Objection to
the determination of the Earn-out Payments within the appropriate time period,
such Notice of Objection to describe in reasonable detail each of Sellers'
proposed adjustments to the proposed determination of the Earn-out Payment, the
Seller Group Representative and OSI shall negotiate in good faith to resolve any
differences. If after 15 business days following such notice (the "Negotiation
Period") any of such objections have not been resolved (the "Disputed Matters"),
then such Disputed Matters shall be submitted to arbitration in Chicago,
Illinois. The arbitrator (the "Arbitrator") shall be Price Waterhouse LLP. Any
reference herein to the Arbitrator shall be deemed to include any member or
employee thereof (who is a certified public accountant) that such firm shall
designate as the Arbitrator on its behalf. The Arbitrator shall consider only
the Disputed Matters, and the arbitration shall be conducted in accordance with
the Commercial Rules of the American Arbitration Association then in effect. The
Arbitrator shall act promptly to resolve all Disputed Matters and its decision
with respect to all Disputed Matters shall be final and binding upon the parties
hereto and shall not be appealable to any court. The Arbitrator shall render an
opinion in writing setting forth the basis of its decision on the Disputed
Matters. Each party shall pay all costs and expenses incurred by such party
incident to the arbitration, provided the costs and expenses of the Arbitrator
shall be shared equally by Sellers and OSI. Any portion of the Earn-out Payment
that is affected by the Disputed Matter shall not be distributed until the
resolution of the Disputed Matter, and upon such resolution any increase in the
Earn-out Payment shall be distributed to Sellers.
4. Outsourcing Mail Volume. OSI shall use commercially reasonable
efforts to increase the EBITDA of Buyer by outsourcing mail processing volume
generated from OSI subsidiaries, taking into account reasonable economic and
logistical factors. Pricing for such outsourced mail volume shall be negotiated
between Sellers and OSI based on reasonably competitive alternatives available
to OSI. If the parties are unable to agree on pricing, performance or other
relevant terms, OSI shall be under no obligation to outsource mail volume to
Buyer pursuant to this section.
5. Management of Buyer.
(a) The operational aspects of the business of Buyer shall be conducted in
all material respects, taken as a whole, as Seller conducted the operational
aspects of the Business prior to the Closing Date; provided, however, that Buyer
(i) may implement the Buyer Benefit Package and (ii) may alter the operational
aspects of the business of Buyer if, in the reasonable view of the board of
directors of Buyer, operational aspects require revision in order to operate
such business in compliance with law. Notwithstanding clause (i) of the
preceding sentence, if the marginal expenses of the Buyer Benefit Package (i.e.,
expenses in excess of such category of expenses that would have been incurred by
the Business without implementation of the Buyer Benefit Package) exceed
$500,000 in any calendar year, Sellers shall have the right consider such
expenses a "Disputed Management Matter" (as defined in the next section) if such
expenses are unreasonable in light of the revenues being generated by the
Business in the applicable year.
(b) In the event Buyer takes actions contrary to provisions of Section
5(a), the Seller Group Representative shall promptly notify OSI in writing. Such
notice shall describe in reasonable detail the basis for the Seller Group
Representative's belief that the Buyer has taken action contrary to Section 5(a)
("Disputed Management Matters"). After delivery of such notice, the Seller Group
Person and OSI shall negotiate in good faith (i) to revise the Earn-Out
Agreement to appropriately reflect the then current operations of Buyer or (ii)
to agree that no such revisions are necessary or appropriate. Revisions to the
Earn-Out Agreement may include reducing Baseline EBITDA or adjusting the method
of determining EBITDA for any or all payment periods. If, after 15 business days
following such notice (the "Management Negotiation Period"), any of the Disputed
Management Matters have not been resolved, then the Disputed Management Matters
shall be submitted to arbitration in Chicago, Illinois. The arbitrator (the
"Arbiter") shall be a partner, member or employee within the consulting group of
Price Waterhouse LLP. The Arbiter shall consider only the Disputed Management
Matters, and the arbitration shall be conducted in accordance with the
commercial rules of the American Arbitration Association then in effect. In
making its determination, the Arbiter shall take into consideration, among other
factors, the effects of the amount and timing of any expenditures proposed by
Buyer on the Earn-out Payments. The Arbiter shall act promptly to resolve all
Disputed Management Matters (i) by revising the Earn-Out Agreement to
appropriately adjust for the Disputed Management Matters or (ii) by determining
that no revisions to the Earn-Out Agreement are necessary or appropriate. The
Arbiter's decision with respect to all Disputed Management Matters and the need
for any revisions to the Earn-Out Agreement shall be final and binding upon the
parties hereto and shall not be appealable to any court. Each party shall pay
all costs and expenses incurred by such party incident to the arbitration,
provided that the costs and expenses of the Arbiter shall be shared equally by
the Sellers and OSI. The provisions of this Section 5(b) shall be the sole
remedy of Seller in connection with any action taken by OSI or Buyer contrary to
Section 5(a).
6. General.
(a) Captions. The captions herein have been inserted solely for convenience
of reference and in no way define, limit or describe the scope or substance of
any provision of this Agreement.
(b) Amendments and Status as Parties. This Agreement may be amended only by
a writing signed by OSI, Buyer and Sellers
(c) Waivers. Neither this Agreement nor any term or condition hereof or
right hereunder may be waived or shall be deemed to have been waived or modified
in whole or in part by any party or by the forbearance of any party to exercise
any of its rights hereunder, except by written instrument executed by or on
behalf of that party.
(d) Assignment. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and may not be assigned by Sellers without the
consent of OSI, except that each Seller may assign its rights to the Earn-out
Payments to its shareholders.
(e) Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, and all of which together shall constitute
one and the same instrument.
(f) Entire Agreement. This Agreement constitutes the entire agreement of
the parties hereto relating to the subject matter hereof, and the parties hereto
have made no agreements, representations or warranties relating to the subject
matter of this Agreement that are not set forth herein.
(g) Governing Law. The execution, interpretation and performance of this
Agreement shall be governed by the internal laws of the state of New York
without giving effect to principles of conflicts of law.
(h) Merger, Consolidation, Etc. In the event Buyer merges or consolidates
with another entity, or all or substantially all of Buyer's assets are acquired
by another corporation, prior to the payment of Earn-out Payments for the Fourth
Payment Period, OSI and Buyer shall cause the surviving or acquiring entity to
assume the obligations of Buyer under this Agreement and to account for payments
under this Agreement consistent with the practices of Buyer prior to such
acquisition, merger or consolidation.
(i) Notices. All notices, requests, demands and other communications
hereunder shall be deemed to have been duly given if the same shall be in
writing and shall be delivered (i) personally, (ii) by registered or certified
mail, postage prepaid, (iii) by facsimile transmission or (iv) by overnight
delivery service and addressed as set forth below:
If to Buyer or OSI:
Outsourcing Solutions Inc.
390 South Woods Mill Road
St. Louis, MO 63017
Attention: Timothy G. Beffa
Fax: 314-576-1867
If to the Seller Group Representative or Sellers:
Jerome Goodman
North Shore Agency, Inc.
117 Cuttermill Road
Great Neck, NY 11021
Fax: (516)466-9391
copy to:
Pryor, Cashman, Sherman & Flynn
410 Park Avenue
New York, NY 10022
Attention: Eric B. Woldenberg
Fax: (212) 326-0806
Any such notice shall be effective upon receipt. Any party may change the
address to which notices are to be addressed by giving the other parties notice
in the manner herein set forth.
THIS AGREEMENT CONTAINS ARBITRATION PROVISIONS WHICH MAY BE ENFORCED BY THE
PARTIES HERETO.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first above written.
NSA ACQUISITION CORPORATION
By: /s/ Peter D. Waldstein
-------------------------------
Peter D. Waldstein
Vice President
OUTSOURCING SOLUTIONS INC.
By: /s/ Timothy G. Beffa
------------------------------
Timothy G. Beffa
President and Chief Executive
Officer
North Shore Agency, Inc.
By: /s/ Jerome Goodman
-------------------------------
Jerome Goodman
President
Automated Mailing Services, Inc..
By: /s/ Jerome Goodman
-------------------------------
Jerome Goodman
President
Mailguard Security Systems, Inc.
By: /s/ Jerome Goodman
-------------------------------
Jerome Goodman
President
/s/ David Klein
- ----------------------------------
David Klein, as sole proprietor
of DMM Consultants