<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 31, 1997
REGISTRATION NO. 333-16867
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
OUTSOURCING SOLUTIONS INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7322 58-2197161
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
</TABLE>
------------------------
390 South Woods Mill Road
Suite 150
Chesterfield, Missouri 63017
(314) 576-0022
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------
MR. JAMES WHALEN
CHIEF FINANCIAL OFFICER
OUTSOURCING SOLUTIONS INC.
390 SOUTH WOODS MILL ROAD
SUITE 150
CHESTERFIELD, MISSOURI 63017
(314) 576-0022
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
Mr. David E. King Frank L. Schiff, Esq.
McCown De Leeuw & Co. White & Case
101 East 52nd Street 1155 Avenue of the Americas
31st Floor New York, New York 10036-2787
New York, New York 10022 (212) 819-8752
(212) 355-5500
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrants
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
OTHER REGISTRANTS
<TABLE>
<CAPTION>
PRIMARY STANDARD IRS ADDRESS, INCLUDING ZIP CODE
JURISDICTION INDUSTRIAL EMPLOYER AND TELEPHONE NUMBER
OF CLASSIFICATION CODE IDENTIFICATION INCLUDING AREA CODE, OF
NAME OF CORPORATION INCORPORATION NUMBER NUMBER PRINCIPAL EXECUTIVE OFFICE
- -------------------------------- -------------- ------------------- ------------- ----------------------------
<S> <C> <C> <C> <C>
CFC Services Corp. Delaware 7322 13-3866487 390 South Woods Mill Road
Suite 150
Chesterfield, Missouri 63017
(314) 576-0022
A.M. Miller & Associates, Inc. Minnesota 7322 41-1252001 3033 Excelsior Blvd.
Minneapolis, MN 55416
(612) 928-2000
The Continental Alliance, Inc. Washington 7322 91-1010031 4700 Carillon Point
(d/b/a Continental Credit Kirkland, WA 98083
Services, Inc.) (206) 822-8200
Alaska Financial Services, Inc. Alaska 7322 91-1329919 360 West Benson Blvd.
Anchorage, AK 99503
(907) 562-1600
Account Portfolios, Inc. Delaware 7322 51-0369045 3300 Northeast Expressway
Building #1, Suite M
Atlanta, GA 30341
(770) 451-4862
Account Portfolios G.P., Inc. Delaware 7322 51-0369044 3300 Northeast Expressway
Building #1, Suite M
Atlanta, GA 30341
(770) 451-4862
Account Portfolios, L.P. Georgia 7322 58-2195793 3300 Northeast Expressway
Building #1, Suite M
Atlanta, GA 30341
(770) 451-4862
Perimeter Credit, L.P. Georgia 7322 58-2197746 3300 Northeast Expressway
Building #1, Suite M
Atlanta, GA 30341
(770) 451-4862
Gulf State Credit, L.P. Georgia 7322 58-2197743 3300 Northeast Expressway
Building #1, Suite M
Atlanta, GA 30341
(770) 451-4862
Payco American Corporation Wisconsin 7322 39-1133219 180 North Executive Drive
Brookfield, WI 53005
(414) 784-9035
Payco-General American Credits, Delaware 7322 39-1314048 180 North Executive Drive
Inc. Brookfield, WI 53005
(414) 784-9035
National Account Systems, Inc. Delaware 7322 36-3006209 180 North Executive Drive
Brookfield, WI 53005
(414) 784-9035
University Accounting Service, Wisconsin 7322 39-1357406 180 North Executive Drive
Inc. Brookfield, WI 53005
(414) 784-9035
Asset Recovery & Management Wisconsin 7322 39-1686046 180 North Executive Drive
Corp. Brookfield, WI 53005
(414) 784-9035
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRIMARY STANDARD IRS ADDRESS, INCLUDING ZIP CODE
JURISDICTION INDUSTRIAL EMPLOYER AND TELEPHONE NUMBER
OF CLASSIFICATION CODE IDENTIFICATION INCLUDING AREA CODE, OF
NAME OF CORPORATION INCORPORATION NUMBER NUMBER PRINCIPAL EXECUTIVE OFFICE
- -------------------------------- -------------- ------------------- ------------- ----------------------------
Indiana Mutual Credit Indiana 7322 39-1924789 180 North Executive Drive
Association, Inc. Brookfield, WI 53005
(414) 784-9035
<S> <C> <C> <C> <C>
Furst and Furst, Inc. Wisconsin 7322 39-1758997 180 North Executive Drive
Brookfield, WI 53005
(414) 784-9035
Jennifer Loomis & Associates, Arizona 7322 95-3850888 180 North Executive Drive
Inc. Brookfield, WI 53005
(414) 784-9035
FM Services Corporation Arizona 7322 39-1702241 180 North Executive Drive
Brookfield, WI 53005
(414) 784-9035
Qualink, Inc. Wisconsin 7322 39-1758994 180 North Executive Drive
Brookfield, WI 53005
(414) 784-9035
Professional Recoveries Inc. Wisconsin 7322 39-1787937 180 North Executive Drive
Brookfield, WI 53005
(414) 784-9035
Payco American International Wisconsin 7322 39-1758995 180 North Executive Drive
Corp. Brookfield, WI 53005
(414) 784-9035
</TABLE>
<PAGE>
OUTSOURCING SOLUTIONS INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING
LOCATION IN PROSPECTUS OF
ITEMS OF FORM S-4
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<C> <S> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and Outside Front Cover Page; Cross Reference
Outside Front Cover Page of Prospectus..... Sheet; Inside Front Cover Page
2. Inside Front and Outside Back Cover Pages Inside Front Cover Page; Outside Back Cover
of Prospectus.............................. Page
3. Risk Factors, Ratio of Earnings to Fixed Prospectus Summary; Risk Factors; Unaudited
Charges and Other Information.............. Pro Forma Consolidated Financial Data;
Selected Historical Financial Data
(Outsourcing Solutions Inc.); Selected
Historical Financial Data (Payco American
Corporation)
4. Terms of the Transaction................... Prospectus Summary; The Exchange Offer;
Certain U.S. Federal Income Tax
Consequences; Description of Notes
5. Pro Forma Financial Information............ Prospectus Summary; Unaudited Pro Forma
Consolidated Financial Data
6. Material Contacts with the Company Being Not Applicable
Acquired...................................
7. Additional Information Required for Not Applicable
Reoffering by Persons and Parties Deemed to
be Underwriters............................
8. Interests of Named Experts and Counsel..... Not Applicable
9. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act
Liabilities................................
B. INFORMATION ABOUT THE
REGISTRANTS
10. Information with Respect to S-3 Not Applicable
Registrants................................
11. Incorporation of Certain Information by Not Applicable
Reference..................................
12. Information with Respect to S-2 or S-3 Not Applicable
Registrants................................
13. Incorporation of Certain Information by Not Applicable
Reference..................................
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
14. Information with Respect to Registrant Prospectus Summary; Capitalization;
Other Than S-2 or S-3 Registrants.......... Selected Historical Financial Data
(Outsourcing Solutions Inc.); Selected
Historical Consolidated Financial Data
(Payco American Corporation);
Management's Discussion and Analysis of
Financial Condition and Results of Opera-
tions; Business; Management; Certain
Relationships and Related Transactions;
Description of Notes; Description of New
Credit Facility; Other Indebtedness;
Financial Statements
C. INFORMATION ABOUT THE COMPANY BEING
ACQUIRED
15. Information with Respect to S-3 Not Applicable
Companies..................................
16. Information with Respect to S-2 or S-3 Not Applicable
Companies..................................
17. Information with Respect to Companies Other Not Applicable
Than S-2 or S-3 Companies..................
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or Not Applicable
Authorizations are to be Solicited.........
19. Information if Proxies, Consents or Management; Certain Relationships and
Authorizations are not to be Solicited or Related Transactions; Security Ownership
in an Exchange Offer.......................
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 31, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
OUTSOURCING SOLUTIONS INC.
OFFER TO EXCHANGE
11% SERIES B SENIOR SUBORDINATED NOTES DUE 2006
FOR ALL OUTSTANDING 11% SENIOR SUBORDINATED NOTES DUE 2006
THE EXCHANGE OFFER
WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1997, UNLESS EXTENDED
---------------------
Outsourcing Solutions Inc., a Delaware corporation (the "Company" or "OSI")
hereby offers, upon the terms and subject to conditions set forth in this
Prospectus (the "Prospectus") and the accompanying Letter of Transmittal (the
"Letter of Transmittal"; together with the Prospectus, the "Exchange Offer"), to
exchange up to an aggregate principal amount of $100,000,000 of its 11% Series B
Senior Subordinated Notes Due 2006 (the "New Notes") for up to an aggregate
principal amount of $100,000,000 of its outstanding 11% Senior Subordinated
Notes Due 2006 (the "Old Notes"). The proceeds from the issuance of the Old
Notes were used to fund a portion of the purchase price for the acquisition by
OSI of Payco American Corporation on November 6, 1996 (the "Payco Acquisition").
The terms of the New Notes are identical in all material respects to those of
the Old Notes, except for certain transfer restrictions, registration rights and
Liquidation Rights relating to the Old Notes. The New Notes will be issued
pursuant to, and entitled to the benefits of, the Indenture (as defined herein)
governing the Old Notes. The New Notes and the Old Notes are sometimes referred
to collectively as the "Notes."
Interest on the New Notes will be payable in cash on May 1 and November 1 of
each year, commencing May 1, 1997. The New Notes are redeemable at the option of
the Company, in whole or in part, from time to time on or after November 1,
2001, at the redemption prices set forth herein, together with accrued and
unpaid interest, if any, to the date of redemption. In addition, at any time or
from time to time, prior to November 1, 1999, up to 35% of the aggregate
principal amount of New Notes originally offered in the Offering will be
redeemable at the option of the Company from the net proceeds of public or
private sales of common stock of the Company, at a price of 111% of the
principal amount of the New Notes, together with accrued and unpaid interest, if
any, to the date of redemption; PROVIDED that at least 65% of the aggregate
principal amount of New Notes remains outstanding immediately after each such
redemption. Upon the occurrence of a Change of Control (as defined herein), each
Holder of New Notes may require the Company to repurchase all or a portion of
such Holder's New Notes at 101% of the aggregate principal amount of the New
Notes together with accrued and unpaid interest, if any, to the date of
repurchase. See "Description of Notes."
The New Notes will be general, unsecured obligations of the Company, will be
subordinated to all Senior Debt (as defined herein) of the Company, will rank
PARI PASSU with all senior subordinated debt of the Company and will be senior
in right of payment to all existing and future subordinated debt of the Company,
if any. The New Notes will be guaranteed, on a senior subordinated basis, by
each of the Company's current and future domestic Restricted Subsidiaries (as
defined herein). The claims of the Holders of New Notes will be subordinated to
the Senior Debt, which was $142.5 million as of December 31, 1996, $142.0
million of which was fully secured borrowings under the New Bank Credit Facility
(as defined herein). The claims of the Holders of New Notes will rank PARI PASSU
with approximately $5.0 million of indebtedness as of December 31, 1996. As of
December 31, 1996, the Company had no outstanding indebtedness which is
subordinated to the New Notes. See "Capitalization" and "Description of New Bank
Credit Facility; Other Indebtedness."
(continued on next page)
SEE "RISK FACTORS," COMMENCING ON PAGE 14, FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
(CONTINUED FROM COVER)
The Old Notes were originally issued and sold on November 6, 1996 in a
transaction not registered under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance upon the exemptions provided in Rule 144A,
Regulation D and Regulation S under the Securities Act. Accordingly, the Old
Notes may not be reoffered, resold or otherwise pledged, hypothecated or
transferred in the United States unless so registered or unless an applicable
exemption from the registration requirements of the Securities Act is available.
The Company will accept for exchange any and all Old Notes which are
properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time,
on , 1997, unless extended by the Company in its sole discretion (the
"Expiration Date"). The Expiration Date will not in any event be extended to a
date later than , 1997. Tenders of Old Notes may be withdrawn at any
time prior to 5:00 p.m., New York City time, on the Expiration Date. In the
event the Company terminates the Exchange Offer and does not accept for exchange
any Old Notes with respect to the Exchange Offer, the Company will promptly
return the Old Notes to the holders thereof. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange, but is otherwise subject to certain customary conditions. The Old
Notes may be tendered only in integral multiples of $1,000.
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Registration Rights Agreement dated
November 6, 1996 (the "Registration Rights Agreement") by and among the Company,
CFC Services Corp., A.M. Miller & Associates, Inc. The Continental Alliance,
Inc., Alaska Financial Services, Inc., Southwest Credit Services, Inc., Account
Portfolios, Inc., Account Portfolios G.P., Inc., Account Portfolios, L.P.,
Perimeter Credit, L.P., Gulf State Credit, L.P., Payco American Corporation,
Payco-General American Credits, Inc., National Account Systems, Inc., University
Accounting Service, Inc., Asset Recovery & Management Corp., Indiana Mutual
Credit Association, Inc., Furst and Furst, Inc., Jennifer Loomis & Associates,
Inc., FM Services Corporation, Qualink, Inc., Professional Recoveries Inc.,
Payco American International Corp. (the "Guarantors") and Goldman, Sachs & Co.
and Chase Securities Inc., as the initial purchasers (the "Initial Purchasers"),
with respect to the initial sale of the Old Notes. Based on interpretations by
the staff of the Securities and Exchange Commission (the "Commission") rendered
to third parties in similar transactions, the New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by respective holders thereof (other than any such holder
which is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act, without compliance with the registration and prospectus delivery
provisions of the Securities Act), provided that the New Notes are acquired in
the ordinary course of such holder's business and such holder has no arrangement
with any person to participate in the distribution of such New Notes and is not
engaged in and does not intend to engage in a distribution of the New Notes.
Each broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of the New Notes received in
exchange for Old Notes if such New Notes were acquired by such broker-dealer as
a result of market-making activities or other trading activities. The Company
has agreed that, for a period of 180 days after the Expiration Date, it will
make this Prospectus available to any broker-dealer for use in connection with
any such resale. See "Plan of Distribution."
There has not previously been any public market for the New Notes. The
Company does not intend to list the New Notes on any securities exchange or to
seek approval for quotation through any automated quotation system. There can be
no assurance that an active market for the New Notes will develop. To the extent
that an active market for the New Notes does develop, the market value of the
New
i
<PAGE>
Notes will depend on market conditions (such as yields on alternative
investments), general economic conditions, the Company's financial condition,
and other factors. Such conditions might cause the New Notes, to the extent that
they are actively traded, to trade at a significant discount from face value.
See "Risk Factors -- Absence of Public Market."
The Company will not receive any proceeds from the Exchange Offer. The
Company has agreed to pay the expenses incident to the Exchange Offer.
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THE PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE NEW NOTES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION TO SUCH PERSON.
------------------------
Until , 1997 (90 days after commencement of this offering), all
dealers effecting transactions in the New Notes, whether or not participating in
this offering, may be required to deliver a Prospectus.
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement on Form
S-4 (the "Registration Statement") under the Securities Act, with respect to the
New Notes. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement, certain items of which are contained in schedules and exhibits to the
Registration Statement as permitted by the rules and regulations of the
Commission. Items of information omitted from this Prospectus but contained in
the Registration Statement may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549 and at the following regional offices of
the Commission: Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; and 7 World Trade Center, 13th Floor, New York, New
York 10048. Copies of such material can be obtained by mail from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549 at prescribed rates. Electronic filings filed through the
Commission Electronic Data Gathering, Analysis and Retrieval system ("EDGAR")
are publicly available through the Commission's home page on the Internet at
http://www.sec.gov.
As a result of this offering, the Company will become subject to the
periodic reporting and other informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). In the event that the
Company ceases to be subject to the informational requirements of the Exchange
Act, the Company has agreed that, for so long as any of the Notes remain
outstanding, it will furnish to the holders of the Notes and, commencing after
the consummation of the Exchange Offer, file with the Commission (unless the
Commission will not accept such a filing) (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants and (ii) all
reports that would be required to be filed with the Commission on Form 8-K if
the Company were required to file such reports. See "Description of Notes --
Certain Covenants -- Reports."
ii
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL DATA, INCLUDING
THE FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS
PROSPECTUS. UNLESS OTHERWISE STATED IN THIS PROSPECTUS, REFERENCES TO (A) "OSI"
SHALL MEAN OUTSOURCING SOLUTIONS INC. (FORMERLY KNOWN AS OSI HOLDINGS CORP.), A
DELAWARE CORPORATION, AND ITS SUBSIDIARIES; (B) "PAYCO" SHALL MEAN THE FORMER
PAYCO AMERICAN CORPORATION, A WISCONSIN CORPORATION, AND ITS SUBSIDIARIES AND
(C) THE "COMPANY" SHALL MEAN OSI AND THE FORMER PAYCO AFTER GIVING EFFECT TO THE
PAYCO ACQUISITION.
THE COMPANY
The Company is one of the largest providers (in terms of account placements)
of accounts receivable management services in the United States and has created
a national organization offering a full array of contingent fee services,
portfolio purchasing services and other related outsourcing services to its
customers. The Company's strategy is to expand its leading market position
through the offering of a full array of accounts receivable management services
and by capitalizing on favorable industry trends. On a pro forma basis after
giving effect to the Transactions, the Company's three principal businesses--
contingent fee services, portfolio purchasing services and other related
outsourcing services-- accounted for approximately 48%, 43% and 9%,
respectively, of 1996 net revenue. For the year ended December 31, 1996, the
Company had, on a pro forma basis after giving effect to the Transactions (as
defined herein) net revenues of $257.1 million, Adjusted EBITDA (as defined
herein) of $57.5 million and a net loss of $38.0 million. See "Summary Unaudited
Pro Forma Consolidated Financial Data."
Contingent fee services are the traditional services provided in the
accounts receivable management industry. These services involve collecting on
delinquent consumer accounts placed with the contingent fee provider for a fixed
percentage of realized collections or a fixed fee per account. In contrast,
companies offering portfolio purchasing services typically acquire portfolios of
non-performing consumer receivables from credit grantors and service such
portfolios, retaining all amounts collected. Companies in the accounts
receivable management industry have also begun to utilize their existing
infrastructure by offering other related outsourcing services, such as contract
management of accounts receivable, billing and teleservicing.
Based on current industry trends, the Company believes that opportunities
for growth exist in each of its service areas. 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. With its broad service offering
and national scope, the Company believes that it is well positioned to
capitalize on these favorable industry trends.
The Company provides contingent fee services to a broad range of banks,
telecommunications companies, utilities, health care providers, educational
institutions, state and local governments and other creditors through its
network of offices located throughout the United States. The Company currently
offers contingent fee services to a total client base of over 5,000 customers
across its operating companies. Key customers include American Express,
Ameritech, AT&T, Bank One, The Chase Manhattan Bank, Citibank, Discover Card,
Sprint, US West, the Internal Revenue Service and various student loan guaranty
agencies. The Company employs sophisticated proprietary databases and
telecommunications hardware and software to effectively locate, and effect
payment from, account debtors. Although the majority of the Company's contingent
fee business involves servicing accounts that are 120 to 360 days past due,
customers are increasingly placing accounts with the Company earlier in the
collection
1
<PAGE>
cycle through the Company's early-out programs in an effort to further outsource
accounts receivable management functions.
The Company offers portfolio purchasing services to a diverse group of
entities, including banks, educational institutions, government agencies and
retailers. Portfolio purchasing is a growing segment of the accounts receivable
management industry due to a number of factors, including (i) the large and
increasing volume of charged-off consumer receivables, (ii) the emergence of
reputable and well-capitalized service providers such as the Company and (iii)
the desire of credit issuers to generate stable cash flows from non-performing
assets and to reallocate resources to core business functions. Through the use
of proprietary debtor-scoring models which allow the Company to approximate the
collection rates of a particular portfolio by sampling the individual accounts
in the portfolio, the Company has become a leader in this rapidly growing,
higher margin segment of the accounts receivable management industry. In
addition to purchasing portfolios of aged non-performing receivables, the
Company has entered into a "forward flow" agreement under which the Company
contractually purchases on an ongoing basis entire non-performing debt
portfolios as they are charged-off. As of December 31, 1996, the Company had
purchased 124 portfolios with an aggregate principal balance of approximately
$3.3 billion for an aggregate purchase price of approximately $159.6 million,
(including $49.2 million of step-up from the APLP acquisition).
The Company also offers its customers a wide range of other related
outsourcing services which include student loan billing, health care accounts
receivable billing and management, contract management of accounts receivable
and teleservicing. In offering these services, the Company is able to leverage
its investment and expertise in sophisticated call and data management
technology and allows its customers to concentrate internal resources on their
core operations.
The Company intends to continue to improve its results through the
rationalization of its operations. While various state collection agency laws
require the Company to be licensed in and maintain physical operations in
certain jurisdictions, the Company continues to examine consolidation of its
operations. As a result of this review, the Company identified and announced the
closing of twenty of its 58 offices (of which four were closed in 1996) and the
elimination of approximately 250 positions by July 1997. The Company has also
engaged advisors to review its corporate structure in light of state tax and
collection agency licensing considerations. Management believes that this review
may identify opportunities to simplify the Company's corporate structure and
greater streamline the Company's organization along business lines.
The Company, a corporation organized under the laws of the State of
Delaware, has its principal office located at 390 South Woods Mill Road, Suite
150, Chesterfield, Missouri 63017; its telephone number is (314) 576-0022.
INDUSTRY TRENDS
The Company believes the following trends are present in the accounts
receivable management industry:
INCREASE IN CONSUMER DEBT AND DELINQUENCIES. Consumer debt, a leading
indicator of current and future business for accounts receivable management
companies, has increased dramatically in recent years. Between 1990 and 1995,
total consumer debt increased 37% from $3.6 trillion in 1990 to almost $5.0
trillion. Furthermore, charged-off consumer debt has increased at an even
greater rate. The American Bankers Association has reported that credit card
delinquencies in the second quarter of 1996 reached an all-time high of 3.7% of
outstanding credit card balances. As a result of these trends, placements to
contingent fee companies have grown from approximately $60 billion in 1989 to
approximately $84 billion in 1994, a compound annual growth rate of 7.0%.
2
<PAGE>
INDUSTRY CONSOLIDATION. The American Collectors Association estimates that
in 1995 there were approximately 6,000 contingent fee companies in the United
States which, according to the Nilson Report, a leading expert in payment
systems, generated approximately $5.0 billion in revenues. The industry has
undergone significant consolidation, with the top ten contingent fee companies
increasing their industry share from 15% in 1992 to 42% in 1994.
Well-capitalized companies that offer national capabilities are increasingly
displacing local and regional competitors.
CUSTOMER CONSOLIDATION. The largest credit granting industries, including
banking, utilities, telecommunications, health care and retail, are experiencing
rapid consolidation. As a result, many regional companies are becoming national
in scope and are shifting account placements to accounts receivable management
companies that have the ability to service a large volume of placements on a
national basis.
GROWTH IN PORTFOLIO SALES. As a provider of portfolio purchasing services,
the Company has observed a rapid and consistent industry-wide increase in the
amount of non-performing consumer receivables sold by credit grantors. The
selling process offers the credit grantor many benefits, including increased
predictability of cash flow, reduction in monitoring and administrative expenses
and reallocation of assets from non-core business functions to core business
functions.
ACCELERATED TREND TOWARD OUTSOURCING. In an effort to focus on core
business activities and to take advantage of the economies of scale, better
performance and 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. Increasingly, credit grantors are
looking to accounts receivable management providers for assistance with billing,
customer service and complete call center outsourcing.
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 PROVIDER/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 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
that 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 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, the Company is well positioned to benefit from this consolidation
trend. The Company is also focused on increasing its business with governmental
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.
COST REDUCTIONS. The Company intends to continue to improve its financial
results through the rationalization of operations. In connection with the Payco
Acquisition, the Company expects to realize
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approximately $10.8 million of annualized cost savings through consolidation of
back office activities, branch system rationalization, the installation of a
centralized operating system and the realization of volume purchasing discounts.
See "Unaudited Pro Forma Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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 provide
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 account 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. Since its formation in September 1995, the
Company has acquired Account Portfolios, L.P. and its subsidiaries, a company
which focuses on purchasing portfolios of non-performing accounts, Continental
Credit Services, Inc. and related companies, a contingent fee service company
based in the Pacific Northwest, and A.M. Miller & Associates, Inc., which
provides contingent fee services primarily to the student loan and bank card
industries. With the acquisition of Payco, one of the oldest and most
established accounts receivable management companies in the country, the Company
solidified its market position and added to its competitive strength in other
related outsourcing services. The Company plans to selectively pursue additional
acquisitions which complement its existing services or increase its customer
base and intends to finance any such acquisitions with the unused commitment
under the Revolving Facility (as defined) and with internally generated funds.
See "Risk Factors--Risks Associated with Acquisition Strategy."
THE INVESTORS
The controlling stockholder of OSI is McCown De Leeuw & Co. ("McCown De
Leeuw"). McCown De Leeuw is a private investment firm which was organized to
"buy and build" middle market companies in partnership with management. McCown
De Leeuw has made 28 separate investments since 1983 and has made a number of
investments in businesses and markets related to those of the Company. Related
industry investments have included DIMAC Corporation, a full service provider of
direct marketing products and services and International Data Response
Corporation, a teleservicing company. Additional investors in OSI include MLQ
Investors, L.P. (an affiliate of Goldman, Sachs & Co.), Chase Equity Associates,
L.P. (an affiliate of Chase Securities Inc. and The Chase Manhattan Bank), The
Clipper Group and Company management. See "Security Ownership" and "Risk
Factors--Controlling Stockholder."
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PREVIOUS ACQUISITIONS
The Company was formed in September 1995 to build, through a combination of
acquisitions and sustained internal growth, one of the leading providers of
accounts receivable management services in the United States. In that same
month, the Company completed its first acquisition, Account Portfolios, L.P.
("APLP"), through its wholly owned subsidiary Account Portfolios, Inc. In
January 1996, the Company acquired Continental Credit Services, Inc.
("Continental") and A.M. Miller & Associates, Inc. ("Miller") through its wholly
owned subsidiary CFC Services Corp. In May 1996, the Company acquired
participation interests in certain portfolios of delinquent accounts held by MLQ
Investors, L.P., an affiliate of Goldman, Sachs & Co. (the "MLQ Interests"). The
acquisitions of APLP, Continental, Miller and the MLQ Interests are hereinafter
referred to as the "Previous Acquisitions." The Previous Acquisitions were
financed through a combination of investor equity, bank financing and seller
financing. With the acquisition of Payco, the Company became one of the largest
providers of accounts receivable management services in the United States.
The Company's business lines are organized as follows:
[LOGO]
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THE TRANSACTIONS
PAYCO ACQUISITION. Pursuant to an Agreement and Plan of Merger, dated as of
August 13, 1996 (the "Merger Agreement"), OSI acquired Payco on November 6, 1996
in a merger transaction for an aggregate cash consideration of approximately
$150.2 million.
REFINANCING. Concurrently with the offering by OSI of the Old Notes ("the
Offering") and the Payco Acquisition, the Company entered into the following
additional transactions (together with the Offering and the Payco Acquisition,
the "Transactions"): (i) the Company repaid a portion of its existing
indebtedness and terminated its existing credit agreements and (ii) the Company
executed the New Bank Credit Facility, which provides borrowing availability of
up to $200.0 million. The Company used the proceeds of the Offering along with
$142 million drawn under the Term Facilities and existing cash on hand to pay
the purchase price of the Payco Acquisition, to pay related fees and expenses
and to repay a portion of its existing indebtedness.
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THE EXCHANGE OFFER
<TABLE>
<S> <C>
The New Notes....................... The forms and terms of the New Notes are identical in
all material respects to the terms of the Old Notes
for which they may be exchanged pursuant to the
Exchange Offer, except for certain transfer
restrictions, registration rights and Liquidated
Damages provisions relating to the Old Notes
described below under "Description of Notes."
The Exchange Offer.................. The Company is offering to exchange up to
$100,000,000 aggregate principal amount of the New
Notes for up to $100,000,000 aggregate principal
amount of the Old Notes. Old Notes may be exchanged
only in integral multiples of $1,000.
Expiration Date; Withdrawal of The Exchange Offer will expire at 5:00 p.m., New York
Tender............................ City time, on , 1997, or such later date
and time to which it is extended by the Company (the
"Expiration Date"). The tender of Old Notes pursuant
to the Exchange Offer may be withdrawn at any time
prior to the Expiration Date. The Expiration Date
will not in any event be extended to a date later
than , 1997. Any Old Notes not accepted
for exchange for any reason will be returned without
expense to the tendering holder thereof as promptly
as practicable after the expiration or termination of
the Exchange Offer.
Certain Conditions to the Exchange
Offer............................. The Exchange Offer is subject to customary
conditions, which may be waived by the Company. See
"The Exchange Offer -- Certain Conditions to the
Exchange Offer."
Procedures for Tendering Old Each holder of Old Notes wishing to accept the
Notes............................. Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein and
therein, and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with such
Old Notes and any other required documentation to the
Exchange Agent (as defined) at the address set forth
herein. By executing the Letter of Transmittal, each
holder will represent to the Company that, among
other things, (i) any New Notes to be received by it
will be acquired in the ordinary course of its
business, (ii) it has no arrangement with any person
to participate in the distribution of the New Notes
and (iii) it is not an "affiliate," as defined in
Rule 405 of the Securities Act, of the Company or, if
it is an affiliate, it will comply with the
registration and prospectus delivery requirements of
the Securities Act to the extent applicable. Each
Holder whose Old Notes are held through DTC (as
defined) and wishes to participate in the Exchange
Offer may do so through DTC's Automated Tender Offer
Program
</TABLE>
7
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<TABLE>
<S> <C>
("ATOP") by which each tendering participant will
agree to be bound by the Letter of Transmittal.
Interest on the New Notes........... Interest on the New Notes will accrue from the date
of issuance (the "Issue Date") at the rate of 11% per
annum, and will be payable semi-annually in arrears
on each May 1 and November 1, commencing May 1, 1997.
Holders of the New Notes will also on May 1, 1997
receive an amount equal to the accrued interest on
the Old Notes. Interest on the Old Notes accepted for
exchange will cease to accrue upon issuance of the
New Notes.
Special Procedures for Beneficial
Owners............................ Any beneficial owner whose Old Notes are registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to
tender such Old Notes in the Exchange Offer should
contact such registered holder promptly and instruct
such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to
tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of
Transmittal and delivering his Old Notes, either make
appropriate arrangements to register ownership of the
Old Notes in such owner's name or obtain a properly
completed bond power from the registered holder. The
transfer of registered ownership may take
considerable time and may not be able to be completed
prior to the Expiration Date.
Guaranteed Delivery Procedure....... Holders of Notes who wish to tender their Old Notes
and whose Old Notes are not immediately available or
who cannot deliver their Old Notes, the Letter of
Transmittal or any other documents required by the
Letter of Transmittal to the Exchange Agent, prior to
the Expiration Date, must tender their Old Notes
according to the guaranteed delivery procedures set
forth in "The Exchange Offer -- Guaranteed Delivery
Procedures."
Registration Requirements........... The Company has agreed to use its best efforts to
consummate on or prior to 150 days after the date on
which the Exchange Offer Registration Statement is
filed with the Commission, the registered Exchange
Offer pursuant to which holders of the Old Notes will
be offered an opportunity to exchange their Old Notes
for the New Notes which will be issued without
legends restricting the transfer thereof. In the
event that applicable interpretations of the staff of
the Commission do not permit the Company to effect
the Exchange Offer or in certain other circumstances,
the Company has agreed to file a Shelf Registration
Statement covering resales of the Old Notes and to
use its best efforts to cause such Shelf Registration
Statement to be declared effective under the
Securities Act and, subject to certain exceptions,
keep such Shelf Registration Statement effective
until three years after the original issuance of the
</TABLE>
8
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<TABLE>
<S> <C>
Old Notes. If the Company fails to consummate the
Exchange Offer on or prior to 150 days after the date
on which the Exchange Offer Registration Statement is
filed with the Commission or, in the event that the
Company is not in compliance with certain obligations
under the Registration Rights Agreement, the Company
and the Guarantors shall be obligated to pay
liquidated damages to holders of the Old Notes. See
"Description of Notes -- Old Notes Registration
Rights; Liquidated Damages."
Certain Federal Income Tax
Considerations.................... For a discussion of certain federal income tax
considerations relating to the exchange of the New
Notes for the Old Notes, see "Certain U.S. Federal
Income Tax Considerations."
Use of Proceeds..................... There will be no proceeds to the Company from the
exchange of Notes pursuant to the Exchange Offer.
Exchange Agent...................... Wilmington Trust Company is the Exchange Agent. The
address and telephone number of the Exchange Agent
are set forth in "The Exchange Offer -- Exchange
Agent."
</TABLE>
TERMS OF THE NOTES
The form and terms of the New Notes are the same as the form and terms of
the Old Notes except that the New Notes are registered under the Securities Act
and, therefore, will not bear legends restricting the transfer thereof and will
not contain the registration rights and Liquidated Damages (as defined herein)
provisions relating to the Old Notes. See "Description of Notes."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by participants in the Exchange Offer.
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SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
THE COMPANY
The following summary unaudited pro forma consolidated financial data set
forth below give pro forma effect in the manner described under "Unaudited Pro
Forma Consolidated Financial Data" and the notes thereto to (i) the Payco
Acquisition, (ii) the offering by OSI of the Old Notes (the "Offering"), and
(iii) repayment of a portion of its existing indebtedness, termination of its
existing credit facilities and execution of the New Bank Credit Facility (the
"Refinancing") (the Payco Acquisition, the Offering and the Refinancing
collectively the "Transactions") and the acquisition of the MLQ Interests as if
the Transactions and the acquisition of the MLQ Interests had occurred on
January 1, 1996. The Statement of Operations Data and Other Financial Data and
Ratios for the year ended December 31, 1996 do not purport to represent what the
Company's results of operations actually would have been if the Transactions and
the acquisition of the MLQ Interests had actually occurred as of the date
indicated or what such results will be for any future periods. The final
allocation of the purchase price paid in the Payco Acquisition and the resulting
amortization expense in the Statement of Operations Data may differ somewhat
from the preliminary estimates for the reasons described in more detail in
"Unaudited Pro Forma Consolidated Financial Data." The information contained in
this table should be read in conjunction with "Selected Historical Financial
Data--OSI," "Selected Historical Financial Data--Payco," "Unaudited Pro Forma
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Consolidated Financial Statements of
OSI and accompanying notes thereto and the Consolidated Financial Statements of
Payco and accompanying notes thereto included elsewhere in this Prospectus.
10
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<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED
DECEMBER 31,
1996
--------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenue............................................................................... $ 257,064
Salaries and benefits........................................................................... 130,762
Other operating expenses(a)..................................................................... 158,447
--------------
Operating (loss) income......................................................................... (32,145)
Interest expense, net........................................................................... 25,977
Other income.................................................................................... (154)
--------------
Loss before taxes............................................................................... (57,968)
Income tax benefit.............................................................................. (19,927)
--------------
Net loss........................................................................................ $ (38,041)
--------------
--------------
Ratio of earnings to fixed charges(b)........................................................... --
OTHER FINANCIAL DATA AND RATIOS:
Amortization of purchased portfolios............................................................ $ 42,005
Other depreciation and amortization............................................................. 42,112
Data processing capital expenditures(c)......................................................... 10,175
Other cash capital expenditures................................................................. 5,957
Portfolio purchases............................................................................. 13,062(h)
Cash interest expense(d)........................................................................ 24,496
Total interest expense.......................................................................... 26,178
Cash flows provided by (used in):
Operating activities(e)....................................................................... 10,212
Investing activities(e)....................................................................... (205,181)
Financing activities(e)....................................................................... 194,429
EBITDA(f)....................................................................................... 51,972
Adjusted EBITDA(f)(g)........................................................................... 57,469
Adjusted EBITDA to cash interest expense........................................................ 2.3x
Adjusted EBITDA to total interest expense....................................................... 2.2x
</TABLE>
- ------------------------
(a) Other operating expenses include telephone, postage, supplies, occupancy
costs, data processing costs, depreciation, amortization, and miscellaneous
operating expenses.
(b) The ratio of earnings to fixed charges is computed by adding fixed charges
(excluding preferred stock dividends) to loss before taxes and dividing that
sum by the sum of fixed charges. Fixed charges consist of interest
(including amortization of debt issuance costs), a portion of rent expense
that management considers to be interest, and preferred stock dividends,
increased to reflect the pretax amounts which would be required to meet
dividend payments. Pro forma earnings for the year ended December 31, 1996
were insufficient to cover fixed charges by $59,351.
(c) Represents capital expenditures related to the new accounts receivable
management and student loan billing systems at Payco.
(d) Represents total interest expense less amortization of debt issuance costs.
(e) Pro forma cash flows from operating activities reflect the impact of the pro
forma adjustments on net income, depreciation and amortization. Pro forma
cash flows from investing activities are assumed to be unchanged from the
historic cash flows. Pro forma cash flows from financing activities reflect
the cash flows relating to the Transactions which occurred in November 1996.
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(f) EBITDA is defined as income from continuing operations before interest,
other income, taxes, depreciation and amortization.
Adjusted EBITDA reflects EBITDA as defined above adjusted for the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
--------------
<S> <C>
Non-recurring relocation expenses incurred by Continental (1)................................ $ 200
Duplicative and implementation systems
costs (2).................................................................................. 2,484
Non-recurring write-off of acquired technology in process (3)................................ 1,000
Non-recurring merger expenses incurred by Payco (4).......................................... 1,813
-------
$ 5,497
-------
-------
</TABLE>
- ------------------------
(1) Comprises moving costs, consulting fees, additional salaries and other
expenses relating to the relocation of Continental's main office in
Kirkland, WA.
(2) The adjustment reflects the additional costs of implementing new
computer systems at Payco and the duplicative costs of operating the old
systems concurrently. The duplicative costs eliminated include the cost
of the maintenance contract, software licenses and support staff relating
to the old systems. The implementation costs relate primarily to costs
which were incurred in rolling out the new accounts receivable management
system to Payco's branch offices.
(3) Represents in-process technology related to software development at
Payco that had not reached technological feasibility and had no
alternative future uses.
(4) Comprises legal and other professional fees incurred by Payco in
connection with the Payco Acquisition.
EBITDA and adjusted EBITDA are presented here because management believes
they provide useful information regarding the Company's ability to service
and/or incur debt and certain restrictive covenants in the New Bank Credit
Facility and in the Notes are based on this calculation. 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 a measures of a company's profitability or liquidity.
(g) The Unaudited Pro Forma Consolidated Statement of Operations does not
include the impact of cost savings of $10.8 million for the year ended
December 31, 1996 arising from the rationalization of operations through
consolidation of back office activities, branch system rationalization and
the installation of a centralized operating system. The effects of such cost
savings on pro forma Adjusted EBITDA are summarized as follows:
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<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
--------------
<S> <C>
Adjusted EBITDA.............................................................................. $ 57,469
Cost savings:
Corporate management (1)................................................................... 5,099
Branch locations (1)....................................................................... 3,744
Facility closure (2)....................................................................... 1,195
Other (3).................................................................................. 779
--------------
Adjusted EBITDA, as revised.................................................................. $ 68,286
--------------
--------------
Ratio of Adjusted EBITDA, as revised to cash interest expense................................ 2.8x
Ratio of Adjusted EBITDA, as revised to total interest expense............................... 2.6x
</TABLE>
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(1) Represents elimination of specific and identified job positions and
functions at the corporate and branch levels, including branch locations
to be closed.
(2) Represents net reductions in occupancy expenses resulting from the
planned closure of certain branch offices and the integration of their
business with existing locations.
(3) Represents business expenses of certain members of management whose
positions are being eliminated, the reduction in consulting fees paid to
current outside directors and other corporate charges being eliminated as
a result of the Payco Acquisition.
(h) Excludes the acquisition in May 1996 of the MLQ Interests for $14,772.
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RISK FACTORS
PROSPECTIVE PARTICIPANTS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN
ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS BEFORE
PARTICIPATING IN THE EXCHANGE OFFER.
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE INDEBTEDNESS
In connection with the Transactions, the Company incurred a significant
amount of indebtedness. As of December 31, 1996, the Company's indebtedness was
approximately $247.6 million and its stockholders' equity was $51.6 million.
After giving pro forma effect to the Transactions as if the same had occurred on
January 1, 1996, the Company's pro forma fixed charges for the year ended
December 31, 1996 would have exceeded its pro forma earnings for that period by
$59.4 million. In addition, subject to the restrictions in the New Bank Credit
Facility and the Indenture, the Company may incur additional indebtedness from
time to time.
The level of the Company's indebtedness could have important consequences to
Holders of the Notes, including: (i) a substantial portion of the Company's cash
flow from operations must be dedicated to debt service and will not be available
for other purposes; (ii) the Company's ability to obtain additional debt
financing in the future for working capital, capital expenditures or
acquisitions may be limited; (iii) the Company's level of indebtedness could
limit its flexibility in reacting to changes in the industry and economic
conditions generally; and (iv) of the Company's borrowings may be at variable
rates of interest, which could result in higher interest expense in the event of
increases in interest rates.
The Company's ability to make scheduled payments of principal of, to pay
interest on or to refinance its indebtedness (including the Notes) and to
satisfy its other debt obligations will depend upon its future operating
performance, which will be affected by general economic, financial, competitive,
legislative, regulatory, business and other factors beyond its control. The
Company anticipates that its operating cash flow, together with borrowings under
the New Bank Credit Facility, will be sufficient to meet its anticipated future
operating expenses and to service its debt requirements as they become due.
However, if the Company is unable to service its indebtedness it will be forced
to adopt an alternative strategy that may include actions such as reducing or
delaying capital expenditures, selling assets, restructuring or refinancing its
indebtedness, or seeking additional equity capital. There can be no assurance
that any of these strategies could be effected on satisfactory terms, if at all.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indenture restricts, among other things, the Company's ability to incur
additional indebtedness, incur liens, pay dividends or make other restricted
payments, enter into certain transactions with affiliates, impose restrictions
on the ability of a subsidiary to pay dividends or make certain payments to the
Company, merge or consolidate with any other person or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of the assets of
the Company. In addition, the New Bank Credit Facility contains other and more
restrictive covenants and prohibits the Company from prepaying its other
indebtedness (including the Notes). See "Description of Notes -- Certain
Covenants" and "Description of New Bank Credit Facility; Other Indebtedness."
The New Bank Credit Facility requires the Company to maintain specified
financial ratios and satisfy financial condition tests. The Company's ability to
meet those financial ratios and tests can be affected by events beyond its
control, and there can be no assurance that the Company will meet those tests. A
breach of any of these covenants could result in a default under the New Bank
Credit Facility and/or the Indenture. Upon the occurrence of an event of default
under the New Bank Credit Facility, the lenders could elect to declare all
amounts outstanding under the New Bank Credit Facility, together with accrued
interest, to be immediately due and payable. If the Company were unable to repay
those amounts, the lenders could proceed against the collateral
14
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granted to them to secure that indebtedness. If the lenders under the New Bank
Credit Facility accelerate the payment of the indebtedness, there can be no
assurance that the assets of the Company would be sufficient to repay in full
such indebtedness and the other indebtedness of the Company, including the
Notes. The Company is currently in compliance with the restrictions imposed by
the Indenture and the New Bank Credit Facility. Substantially all of the
Company's assets are pledged as security under the New Bank Credit Facility. See
"Description of New Bank Credit Facility; Other Indebtedness."
SUBORDINATION; ASSET ENCUMBRANCES.
The Notes are subordinated in right of payment to all existing and future
Senior Debt, including the principal of (and premium, if any) and interest on
and all other amounts due on or payable in connection with Senior Debt. As of
December 31, 1996, there was outstanding approximately $142.5 million of Senior
Debt, $142.0 million of which was fully secured borrowings under the New Bank
Credit Facility. By reason of such subordination, in the event of the
insolvency, liquidation, reorganization, dissolution or other winding-up of the
Company or upon a default in payment with respect to, or the acceleration of,
any Senior Debt, the holders of such Senior Debt and any other creditors who are
holders of Senior Debt and creditors of subsidiaries that are not Guarantors
must be paid in full before the Holders of the Notes may be paid. If the Company
incurs any additional PARI PASSU debt, the holders of such debt would be
entitled to share ratably with the Holders of the Notes in any proceeds
distributed in connection with any insolvency, liquidation, reorganization,
dissolution or other winding-up of the Company. This may have the effect of
reducing the amount of proceeds paid to Holders of the Notes. In addition, no
cash payments may be made with respect to the principal of (and premium, if any)
or interest on the Notes if a payment default exists with respect to Senior Debt
and, under certain circumstances, no payments may be made with respect to the
principal of (and premium, if any) or interest on the Notes for a period of up
to 179 days if a non-payment default exists with respect to Senior Debt. In
addition, the Indenture permits subsidiaries of the Company to incur debt under
certain circumstances. Any debt incurred by a subsidiary of the Company that is
not a Guarantor will be structurally senior to the Notes. As of December 31,
1996, no debt had been incurred by any subsidiary of the Company that is not a
Guarantor. See "Description of Notes."
The Company has granted to the lenders under the New Bank Credit Facility
security interests in substantially all of the current and future assets of the
Company, including a pledge of all of the issued and outstanding shares of
capital stock of all of the Company's subsidiaries owned by the Company and its
domestic subsidiaries. In addition, the Guarantors have granted to such lenders
security interests in all of the current and future assets of the Guarantors. In
the event of a default on secured indebtedness, including the guarantees of the
Guarantors under the New Bank Credit Facility (whether as a result of the
failure to comply with a payment or other covenant, a cross-default, or
otherwise), the parties granted such security interests will have a prior
secured claim on the capital stock of the Company and the assets of the Company
and the Guarantors. If such parties should attempt to foreclose on their
collateral, the Company's financial condition and the value of the Notes would
be materially adversely affected. See "Description of New Bank Credit Facility;
Other Indebtedness."
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HOLDING COMPANY STRUCTURE
The Company will conduct substantially all of its business through
subsidiaries and will have few operations of its own. The Company will be
dependent on the cash flow of its subsidiaries and distributions thereof from
its subsidiaries to the Company in order to meet its debt service obligations.
It is not expected that the Company will have any significant assets other than
the common stock of its subsidiaries.
COMPETITION
The Company is engaged in a highly fragmented and competitive industry. The
Company competes with many local, regional and national accounts receivable
management companies in the markets which it serves. Some of the Company's
principal competitors are less highly-leveraged than the Company and may have
greater financial and operating flexibility. See "Business--Competition."
RISKS ASSOCIATED WITH RATIONALIZATION OF OPERATIONS
The Company intends to improve its financial results through the
rationalization of operations. In connection with the Payco Acquisition, the
Company expects to reduce operating expenses through the consolidation of back
office activities, branch system rationalization, the installation of a
centralized operating system and the realization of volume purchasing discounts.
Although the Company believes that its strategies are reasonable, there can be
no assurance that it will be able to implement its plans without delay or that
it will not encounter unanticipated problems in connection with the
rationalization of operations or that, when implemented, its efforts will result
in the reduction of operating expenses that is currently anticipated. The
Company's plans will require substantial attention from members of the Company's
management, which will limit the amount of time such members have available to
devote to the Company's day-to-day operations.
RISKS ASSOCIATED WITH ACQUISITION STRATEGY
The Company plans to continue to pursue additional acquisitions which
complement its existing services or increase its customer base. There can be no
assurance, however, that the Company will be able to identify additional
acquisitions or that, if identified, any anticipated benefits will be realized
from such acquisitions. The availability of additional acquisition financing
cannot be assured and, depending on the terms of such additional acquisitions,
could be restricted by the terms of the New Bank Credit Facility and/or the
Indenture. The process of integrating acquired operations into the Company's
existing operations may result in unforeseen operating difficulties, may require
substantial attention from members of the Company's senior management and may
require significant financial resources that would otherwise be available for
the ongoing development or expansion of the Company's existing operations. In
addition, successful completion of an acquisition may depend on consents from
third parties, including regulatory authorities and private parties, which
consents are beyond the control of the Company. Possible future acquisitions by
the Company could result in the incurrence of additional debt, contingent
liabilities and amortization expenses related to goodwill and other intangible
assets, all of which could materially adversely affect the Company's financial
condition and operating results.
PAYMENT UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes may require
the Company to repurchase all or a portion of such Holder's Notes at 101% of the
principal amount of the Notes together with accrued and unpaid interest to the
date of repurchase. In addition, a Change of Control may constitute a default
under the New Bank Credit Facility. Unless waived or cured, any such default
could create a default under the Notes. If a Change of Control were to occur,
the Company may not have the financial resources to repay all of its obligations
under the New Bank Credit Facility, the Indenture and
16
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the other indebtedness that would become payable upon the occurrence of such
Change of Control. See "Description of Notes--Repurchase at the Option of
Holders--Change of Control."
IMPACT OF GOVERNMENTAL REGULATION
Certain of the Company's operations are subject to compliance with the
federal Fair Debt Collection Practices Act (the "FDCPA") and comparable statutes
in many states. Under the FDCPA, a third-party collection company is restricted
in the methods it uses in contacting consumer debtors and eliciting payments
with respect to placed accounts. Requirements under state collection agency
statutes vary, with most requiring compliance similar to that required under the
FDCPA. In addition, most states and some municipalities require collection
agencies to be licensed with the appropriate regulatory body before operating in
such jurisdictions. The Company believes that it is in substantial compliance
with the FDCPA and comparable state statutes and that it maintains licenses in
all jurisdictions in which its operations require it to be licensed. There can
be no assurance, however, that additional federal or state legislation will not
be enacted that would further restrict the methods used in collecting placed
accounts or require additional regulatory compliance.
LITIGATION
Due to the nature of its operations, the Company is regularly a defendant in
various legal proceedings involving claims for damages. The Company believes
that such proceedings constitute ordinary and routine litigation incidental to
its business. The costs associated with defending such lawsuits (including
payments made in connection with settlements and judgments) have not
historically had a material adverse effect on the Company's financial condition.
There can be no assurance that the costs associated with existing or future
claims against the Company will not have a material adverse effect on the
Company's financial condition. See "Business--Legal Proceedings."
DEPENDENCE ON KEY MANAGEMENT
The Company's success will continue to depend to a significant extent on its
executive and other key management personnel. Although the Company has entered
into employment agreements with certain of its executive officers, there can be
no assurance that the Company will be able to retain its executive officers and
key personnel or attract additional qualified management in the future. In
addition, the success of the Company's acquisitions may depend, in part, on the
Company's ability to retain management personnel of the acquired companies.
Although the Company has previously been successful in retaining management
personnel of acquired companies, there can be no assurance that the Company will
be able to retain management personnel in connection with future acquisitions.
CONTROLLING STOCKHOLDER
Certain affiliates of McCown De Leeuw & Co. (the "MDC Entities") own 55.4%
of the outstanding voting stock of the Company. By virtue of such stock
ownership, the MDC Entities have the power to control all matters submitted to
stockholders of the Company and to elect all directors of the Company and its
subsidiaries. Directors and officers of the Company are associated with entities
which collectively control 93.9% of the Company's voting common stock. See
"Security Ownership."
FRAUDULENT TRANSFER STATUTES
Under applicable provisions of federal bankruptcy law and comparable
provisions of state and federal fraudulent conveyance laws, if it were found
that any Guarantor (a) had incurred such indebtedness represented by its
Guarantee or granted liens on its assets with an intent to hinder, delay or
defraud creditors or (b) had received less than reasonably equivalent value or
fair consideration for incurring such indebtedness or pledges and (i) was
insolvent or was rendered insolvent by reason of such
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<PAGE>
transactions, (ii) was engaged or about to engage in a business or transaction
for which its remaining assets constituted unreasonably small capital to carry
on its business or (iii) intended to incur, or believed that it would incur,
debts beyond its ability to pay such debts as they matured, the obligations of
such Guarantor under its Guarantee and liens on collateral granted by such
Guarantor could be avoided or claims in respect of such Guarantee and collateral
could be subordinated to all other debts of such Guarantor. A legal challenge of
a Guarantee or a lien on fraudulent conveyance grounds could, among other
things, focus on the benefits, if any, realized by a Guarantor as a result of
the issuance by the Company of the Notes. To the extent that a Guarantee or a
lien were held to be unenforceable as a fraudulent conveyance for any reason,
the holders of the Notes would cease to have any direct claim in respect of a
Guarantor and would be solely creditors of the Company, and would lose the
benefits of the collateral pledged by such Guarantor. In the event a Guarantee
and related liens were held to be subordinated, the claims of the holders of the
Notes would be subordinated to claims of other creditors of such Guarantor and
other creditors secured by the applicable collateral with respect thereto.
The measure of insolvency for purposes of determining whether a transfer is
avoidable as a fraudulent transfer varies depending upon the law of the
jurisdiction which is being applied. Generally, however, a debtor would be
considered insolvent if the sum of all its liabilities, including contingent
liabilities, were greater than the fair saleable value of its assets at a fair
valuation, or if the present fair saleable value of the debtor's assets were
less than the amount required to repay its probable liabilities on its existing
debts, including contingent liabilities, as they become absolute and matured.
There can be no assurance as to what standard a court would apply in order to
make such determination. In addition, the Company believes that none of the
Guarantors (i) is or will be insolvent, (ii) is or will be engaged in a business
or transaction for which its remaining assets constitute unreasonably small
capital, or (iii) intends or will intend to incur debt beyond its ability to
repay such debts as they mature.
Each of the Company and the Guarantors believes that it received equivalent
value at the time the indebtedness under the Notes and the Guarantees was
incurred. In addition, neither the Company nor any of the Guarantors believes
that it, after giving effect to the Transactions, (i) was or will be insolvent
or rendered insolvent, (ii) was or will be engaged in a business or transaction
for which its remaining assets constituted unreasonably small capital or (iii)
intends or intended to incur, or believes or believed that it will or would
incur, debts beyond its ability to pay such debts as they mature. These beliefs
are based on the Company's operating history and analysis of internal cash flow
projections and estimated values of assets and liabilities of the Company and
the Guarantors at the time of the offering of the Notes. Since each of the
components of the question of whether a Guarantee is a fraudulent conveyance is
inherently fact-based and fact-specific, there can be no assurance that a court
passing on such questions would agree with the Company. Neither counsel for the
Company nor counsel for the Initial Purchasers will express any opinion as to
federal or state laws relating to fraudulent transfers.
ABSENCE OF PUBLIC MARKET
There has not previously been any public market for the New Notes or the Old
Notes. There can be no assurance as to the liquidity of any markets that may
develop for the New Notes, the ability of holders to sell the New Notes, or the
price at which holders would be able to sell the New Notes. Future trading
prices of the New Notes will depend on many factors, including among other
things, prevailing interest rates, the Company's operating results and the
market for similar securities. Historically, the market for securities similar
to the New Notes, including non-investment grade debt, has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that any market for the New Notes, if such
market develops, will not be subject to similar disruptions.
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<PAGE>
USE OF PROCEEDS OF THE NEW NOTES
This Exchange Offer is intended to satisfy obligations of the Company under
the Registration Rights Agreement. The Company will not receive any proceeds
from the issuance of the New Notes offered hereby. In consideration for issuing
the New Notes as contemplated in this Prospectus, the Company will receive, in
exchange, Old Notes in like principal amount. The form and terms of the New
Notes are identical in all material respects to the form and terms of the Old
Notes, except as otherwise described herein under "The Exchange Offer--Terms of
the Exchange Offer." The Old Notes surrendered in exchange for the New Notes
will be retired and cancelled and cannot be reissued. Accordingly, issuance of
the New Notes will not result in any increase in the outstanding debt of the
Company.
CAPITALIZATION
The following table sets forth the capitalization of OSI at December 31,
1996. This table should be read in conjunction with "Selected Historical
Financial Data--OSI," included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------
<S> <C>
(DOLLARS IN THOUSANDS)
Cash and Cash Equivalents........................................... $ 14,497
----------
----------
New Bank Credit Facility(a)......................................... $ 142,000
Notes............................................................... 100,000
Existing Debt....................................................... 5,616
----------
Total Debt.......................................................... 247,616
Stockholders' Equity................................................ 51,598
----------
Total Capitalization................................................ $ 299,214
----------
----------
</TABLE>
- ------------------------
(a) The New Bank Credit Facility provides for senior secured term loans of
$142.0 million and a senior secured revolving credit facility of up to $58.0
million. No borrowings under the revolving credit facility were drawn at
December 31, 1996. For further details, see "Description of New Bank Credit
Facility; Other Indebtedness" included elsewhere in this Prospectus.
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<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
Pursuant to the Registration Rights Agreement by and among the Company, the
Guarantors and the Initial Purchasers, the Company has agreed (i) to file a
registration statement with respect to an offer to exchange the Old Notes for
senior debt securities of the Company with terms substantially identical to the
Old Notes (except that the New Notes will not contain terms with respect to
transfer restrictions, registration rights and Liquidated Damages) within 45
days after the date of original issuance of the Old Notes and (ii) to use best
efforts to cause such registration statement to become effective under the
Securities Act within 150 days after such filing date. In the event that
applicable law or interpretations of the staff of the Commission do not permit
the Company to effect the Exchange Offer, or if certain holders of the Old Notes
notify the Company that they are not permitted to participate in, or would not
receive freely tradeable New Notes pursuant to, the Exchange Offer, the Company
will use its best efforts to cause to become effective a shelf registration
statement (the "Shelf Registration Statement") with respect to the resale of the
Old Notes and to keep the Shelf Registration Statement effective until three
years after the original issuance of the Old Notes. In the event that the
Company is not in compliance with certain obligations under the Registration
Rights Agreement, the Company and the Guarantors shall be obligated to pay
Liquidated Damages to holders of the Old Notes. See "Description of Notes--Old
Notes Registration Rights; Liquidated Damages."
Each holder of the Old Notes who wishes to exchange such Old Notes for New
Notes in the Exchange Offer will be required to make certain representations,
including representations that (i) it is not an affiliate of the Company, (ii)
it is not engaged in, and does not intend to engage in, and has no arrangement
or understanding with any person to participate in, a distribution of the New
Notes to be issued in the Exchange Offer, and (iii) it is acquiring the New
Notes in its ordinary course of business.
RESALE OF NEW NOTES
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third-parties, the Company believes that, except as
described below, New Notes issued pursuant to the Exchange Offer in exchange for
Old Notes may be offered for resale, resold and otherwise transferred by any
holder thereof (other than a holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) without compliance with
the registration and prospectus delivery provisions of the Securities Act,
provided that such New Notes are acquired in the ordinary course of such
holder's business and such holder does not intend to participate and has no
arrangement or understanding with any person to participate in the distribution
of such New Notes. Any holder who tenders in the Exchange Offer with the
intention or for the purpose of participating in a distribution of the New Notes
cannot rely on such interpretation by the staff of the Commission and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction. Unless an
exemption from registration is otherwise available, any such resale transaction
should be covered by an effective registration statement containing the selling
security holder's information required by Item 507 of Regulation S-K under the
Securities Act. This Prospectus may be used for an offer to resell, resale or
other retransfer of New Notes only as specifically set forth herein. Each
broker-dealer that receives New Notes for its own account in exchange for Old
Notes, where such Old Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such New Notes. See
"Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept for exchange any and
all Old Notes properly tendered and not
20
<PAGE>
withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date. The
Company will issue $1,000 principal amount of New Notes in exchange for each
$1,000 principal amount of outstanding Old Notes surrendered pursuant to the
Exchange Offer. Old Notes may be tendered only in integral multiples of $1,000.
The form and terms of the New Notes will be the same as the form and terms
of the Old Notes except the New Notes will be registered under the Securities
Act and hence will not bear legends restricting the transfer thereof. The New
Notes will evidence the same debt as the Old Notes. The New Notes will be issued
under and entitled to the benefits of the Indenture, which also authorized the
issuance of the Old Notes, such that both series will be treated as a single
class of debt securities under the Indenture.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange.
As of the date of this Prospectus, $100 million aggregate principal amount
of the Old Notes are outstanding. This Prospectus, together with the Letter of
Transmittal, is being sent to all registered holders of Old Notes. There will be
no fixed record date for determining registered holders of Old Notes entitled to
participate in the Exchange Offer.
The Company intends to conduct the Exchange Offer in accordance with the
provisions of the Registration Rights Agreement and the applicable requirements
of the Exchange Act, and the rules and regulations of the Commission thereunder.
Old Notes which are not tendered for exchange in the Exchange Offer will remain
outstanding and continue to accrue interest and will be entitled to the rights
and benefits such holders have under the Indenture and the Registration Rights
Agreement.
The Company shall be deemed to have accepted for exchange properly tendered
Notes when, as and if the Company shall have given oral or written notice
thereof to the Exchange Agent and complied with the provisions of Section 3 of
the Registration Rights Agreement. The Exchange Agent will act as agent for the
tendering holders for the purposes of receiving the New Notes from the Company.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted for
exchange, upon the occurrence of any of the conditions specified below under "--
Certain Conditions to the Exchange Offer."
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes described below, in connection with the
Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time on
, 1997, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
holders of Old Notes an announcement thereof, each prior to 9:00 a.m., New York
City time, on the next business day after the then Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting for exchange any Old Notes, to extend the Exchange Offer or to
terminate the Exchange Offer if any of the conditions set forth below under
"--Certain Conditions to the Exchange Offer" shall not have been satisfied, by
giving oral or written notice of such delay, extension or termination to the
Exchange Agent or (ii) to amend the terms of the Exchange Offer in any manner.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
registered holders
21
<PAGE>
of Old Notes. If the Exchange Offer is amended in a manner determined by the
Company to constitute a material change, the Company will promptly disclose such
amendment by means of a prospectus supplement that will be distributed to the
registered holders, and the Company will extend the Exchange Offer, depending
upon the significance of the amendment and the manner of disclosure to the
registered holders, if the Exchange Offer would otherwise expire during such
period.
INTEREST ON THE NEW NOTES
The New Notes will bear interest at a rate of 11% per annum, payable
semi-annually, on May 1 and November 1 of each year, commencing May 1, 1997.
Holders of New Notes will receive interest on May 1, 1997 from the date of
initial issuance of the New Notes, plus an amount equal to the accrued interest
on the Old Notes. Interest on the Old Notes accepted for exchange will cease to
accrue upon issuance of the New Notes.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or exchange any New Notes for, any Old
Notes, and may terminate the Exchange Offer as provided herein before the
acceptance of any Old Notes for exchange, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the Company's reasonable judgment, might materially impair the
ability of the Company to proceed with the Exchange Offer; or
(b) any law, statute, rule or regulation is proposed, adopted or
enacted, or any existing law, statute, rule or regulation is interpreted by
the staff of the Commission, which, in the Company's reasonable judgment,
might materially impair the ability of the Company to proceed with the
Exchange Offer; or
(c) any governmental approval has not been obtained, which approval the
Company shall, in its reasonable discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Notes, by giving oral or
written notice of such extension to the holders thereof. During any such
extensions, all Old Notes previously tendered will remain subject to the
Exchange Offer and may be accepted for exchange by the Company. Any Old Notes
not accepted for exchange for any reason will be returned without expense to the
tendering holder thereof as promptly as practicable after the expiration or
termination of the Exchange Offer.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted for
exchange, upon the occurrence of any of the conditions of the Exchange Offer
specified above under "--Certain Conditions to the Exchange Offer." The Company
will give oral or written notice of any extension, amendment, non-acceptance or
termination to the holders of the Old Notes as promptly as practicable, such
notice in the case of any extension to be issued no later than 9:00 a.m., New
York City time, on the next business day after the previously scheduled
Expiration Date.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time.
22
<PAGE>
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes, if
at such time any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939 (the
"TIA").
PROCEDURES FOR TENDERING
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or facsimile thereof, have the signature thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile to the Exchange Agent prior
to 5:00 p.m., New York City time, on the Expiration Date or, in the alternative,
comply with DTC's ATOP procedures described below. In addition, either (i) Old
Notes must be received by the Exchange Agent along with the Letter of
Transmittal, or (ii) a timely confirmation of book-entry transfer (a "Book-Entry
Confirmation") of such Old Notes, if such procedure is available, into the
Exchange Agent's account at the Depository Trust Company (the "Book-Entry
Transfer Facility" or "DTC") pursuant to the procedure for book-entry transfer
described below or properly transmitted Agent's Message (as defined below) must
be received by the Exchange Agent prior to the Expiration Date, or (iii) the
holder must comply with the guaranteed delivery procedures described below. To
be tendered effectively, the Letter of Transmittal and other required documents
must be received by the Exchange Agent at the address set forth below under "The
Exchange Offer--Exchange Agent" prior to 5:00 p.m., New York City time, on the
Expiration Date.
The tender by a holder which is not withdrawn prior to the Expiration Date
will constitute an agreement between such holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES, THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE
HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR
OTHER NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to tender
should contact the registered holder promptly and instruct such registered
holder of Old Notes to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering such
owner's Old Notes, either make appropriate arrangements to register ownership of
the Old Notes in such owner's name or obtain a properly completed bond power
from the registered holder of Old Notes. The transfer of registered ownership
may take considerable time and may not be able to be completed prior to the
Expiration Date.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below, as the case be, must be guaranteed by an Eligible Institution (as defined
below) unless the Old Notes tendered pursuant thereto are tendered (i) by a
registered holder who has not completed the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantor must be a member firm of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor
23
<PAGE>
institution" within the meaning of Rule 17Ad-15 under the Exchange Act which is
a member of one of the recognized signature guarantee programs identified in the
Letter of Transmittal (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by a properly completed bond power, signed by such registered holder
as such registered holder's name appears on such Old Notes with the signature
thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
provide evidence satisfactory to the Company of their authority to so act must
be submitted with the Letter of Transmittal.
The Exchange Agent and DTC have confirmed that any financial institution
that is a participant in DTC's system may utilize DTC's ATOP to tender.
Accordingly, participants in DTC's ATOP may, in lieu of physically completing
and signing the Letter of Transmittal and delivering it to the Exchange Agent,
electronically transmit their acceptance of the Exchange Offer by causing the
Depositary to transfer the Old Notes to the Exchange Agent in accordance with
the Depositary's ATOP procedures for transfer. The Depositary will then send an
Agent's Message to the Exchange Agent.
The term "Agent's Message" means a message transmitted by DTC received by
the Exchange Agent and forming part of the Book-Entry Confirmation, which states
that the Depositary has received an express acknowledgement from a participant
in DTC's ATOP that is tendering Old Notes which are the subject of such book
entry confirmation, that such participant has received and agrees to be bound by
the terms of the Letter of Transmittal (or, in the case of an Agent's Message
relating to guaranteed delivery, that such participant has received and agrees
to be bound by the applicable Notice of Guaranteed Delivery), and that the
agreement may be enforced against such participant.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old Notes
will be determined by the Company in its sole discretion, which determination
will be final and binding. The Company reserves the absolute right to reject any
and all Old Notes not properly tendered or any Old Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Old Notes. The Company's
interpretation of the terms and conditions of the Exchange Offer (including the
instructions in the Letter of Transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Old Notes must be cured within such time as the Company shall determine.
Although the Company intends to notify holders of defects or irregularities with
respect to tenders of Old Notes, neither the Company, the Exchange Agent nor any
other person shall incur any liability for failure to give such notification.
Tenders of Old Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Notes received by the Exchange
Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holder, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of Old Notes or a timely Book-Entry Confirmation of such
Old Notes into the Exchange Agent's account at the Book-Entry Transfer Facility,
a properly completed and duly executed Letter of Transmittal and all other
required documents. If any tendered Old Notes are not accepted for exchange for
any reason set forth in the terms and conditions of the Exchange Offer or if Old
Notes are submitted for a greater principal amount than the holder desires to
exchange, such unaccepted or non-exchanged Old Notes will be returned without
expense to the tendering holder thereof (or, in the case of Old Notes tendered
by book-entry
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<PAGE>
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility
pursuant to the book-entry transfer procedures described below, such
non-exchanged Notes will be credited to an account maintained with such
Book-Entry Transfer Facility) as promptly as practicable after the expiration or
termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Notes may be effected through book-entry transfer at the Book-Entry
Transfer Facility, the Letter of Transmittal or facsimile thereof, with any
required signature guarantees and any other required documents, must, in any
case, be transmitted to and received by the Exchange Agent at the address set
forth below under "--Exchange Agent" on or prior to the Expiration Date or, if
the guaranteed delivery procedures described below are to be complied with,
within the time period provided under such procedures. Delivery of documents to
the Book-Entry Transfer Facility does not constitute delivery to the Exchange
Agent.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the registered number(s)
of such Old Notes and the principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within three
(3) New York Stock Exchange trading days after the Expiration Date, the
Letter of Transmittal (or facsimile thereof) together with the Old Notes or
a Book-Entry Confirmation, as the case may be, and any other documents
required by the Letter of Transmittal will be deposited by the Eligible
Institution with the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), or properly transmitted Agent's Message as well as all
tendered Notes in proper form for transfer or a Book-Entry Confirmation, as
the case may be, and all other documents required by the Letter of
Transmittal, are received by the Exchange Agent within three (3) New York
Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
For a withdrawal to be effective, (i) a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"--Exchange Agent" or (ii) holders must comply with the appropriate procedures
of DTC's ATOP system. Any such notice of withdrawal must specify the
25
<PAGE>
name of the person having tendered the Old Notes to be withdrawn, identify the
Old Notes to be withdrawn (including the principal amount of such Old Notes),
and (where certificates for Old Notes have been transmitted) specify the name in
which such Old Notes were registered, if different from that of the withdrawing
holder. If certificates for Old Notes have been delivered or otherwise
identified to the Exchange Agent, then, prior to the release of such
certificates the withdrawing holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such holder is an
Eligible Institution. If Old Notes have been tendered pursuant to the procedure
for book-entry transfer described above, any notice of withdrawal must specify
the name and number of the account at the Book-Entry Transfer Facility to be
credited with the withdrawn Old Notes and otherwise comply with the procedures
of such facility. All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by the Company,
whose determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for exchange for
purposes of the Exchange Offer. Any Old Notes which have been tendered for
exchange but which are not exchanged for any reason will be returned to the
holder thereof without cost to such holder (or, in the case of Old Notes
tendered by book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility pursuant to the book-entry transfer procedures
described above, such Old Notes will be credited to an account maintained with
such Book-Entry Transfer Facility for the Old Notes) as soon as practicable
after withdrawal, rejection of tender or termination of the Exchange Offer.
Properly withdrawn Old Notes may be retendered by following one of the
procedures described under "--Procedures for Tendering" above at any time on or
prior to the Expiration Date.
EXCHANGE AGENT
Wilmington Trust Company has been appointed as Exchange Agent of the
Exchange Offer. Questions and requests for assistance, requests for additional
copies of this Prospectus or of the Letter of Transmittal and requests for
Notice of Guaranteed Delivery should be directed to the Exchange Agent addressed
as follows:
<TABLE>
<S> <C>
BY REGISTERED OR CERTIFIED MAIL OR BY BY HAND:
OVERNIGHT COURIER:
Wilmington Trust Company Wilmington Trust Company
Corporate Trust Administration c/o Harris Trust Company of New York,
1100 North Market Street as Agent
Rodney Square North 75 Water Street
Wilmington, Delaware 19890-0001 New York, New York 10004
BY FACSIMILE:
Wilmington Trust Company
Corporate Trust Administration
Facsimile: (302) 651-1079
Confirm by Telephone: (302) 651-8864
</TABLE>
26
<PAGE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to broker-dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$400,000. Such expenses include registration fees, fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees and printing costs, and
related fees and expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Notes pursuant to the Exchange Offer. If, however, certificates representing
Old Notes for principal amounts not tendered or accepted for exchange are to be
delivered to, or are to be issued in the name of, any person other than the
registered holder of Notes tendered, or if tendered Notes are registered in the
name of any person other than the person signing the Letter of Transmittal, or
if a transfer tax is imposed for any reason other than the exchange of Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be payable
by the tendering holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with the Letter of Transmittal, the amount
of such transfer taxes will be billed directly to such tendering holder.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith, except that holders who instruct the
Company to register New Notes in the name of, or request that Old Notes not
tendered or not accepted in the Exchange Offer be returned to, a person other
than the registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes, as set forth (i) in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to the exemptions from, or
in transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws and (ii) otherwise set forth under
"Notice To Investors" in the Offering Circular dated October 31, 1996
distributed in connection with the Initial Offering. In general, the Old Notes
may not be offered or sold, unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register the Old Notes under the Securities
Act. Based on interpretations by the staff of the Commission, New Notes issued
pursuant to the Exchange Offer may be offered for resale, resold or otherwise
transferred by holders thereof (other than any such holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such New Notes are acquired in the ordinary
course of such holders' business and such holders have no arrangement or
understanding with respect to the distribution of the New Notes to be acquired
pursuant to the Exchange Offer. Any holder who tenders in the Exchange Offer for
the purpose of participating in a distribution of the New Notes (i) could not
rely on the applicable interpretations of the staff of the Commission and (ii)
must comply with the registration and prospectus delivery requirements of the
27
<PAGE>
Securities Act in connection with a secondary resale transaction. In addition,
to comply with the securities laws of certain jurisdictions, if applicable, the
New Notes may not be offered or sold unless they have been registered or such
securities laws have been complied with. The Company has agreed, pursuant to the
Registration Rights Agreement and subject to certain specified limitations
therein, to register or qualify the New Notes for offer or sale under the
securities or blue sky laws of such jurisdictions as any holder of the New Notes
may request in writing.
28
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following Unaudited Pro Forma Consolidated Statement of Operations for
the year ended December 31, 1996 gives effect to (i) the Payco Acquisition, (ii)
the offering by OSI of the Old Notes (the "Offering"), and (iii) repayment of a
portion of its existing indebtedness, termination of its existing credit
facilities and execution of the New Bank Credit Facility (the "Refinancing")
(the Payco Acquisition, the Offering and the Refinancing collectively the
"Transactions") and the acquisition of the MLQ Interests as if they had occurred
on January 1, 1996. The unaudited pro forma financial data are based on the
historical financial statements of OSI, the MLQ Interests and Payco and the
assumptions and adjustments described in the accompanying notes. The Unaudited
Pro Forma Consolidated Statement of Operations reflects the preliminary
allocation of the purchase price for the Payco Acquisition to the company's
tangible and intangible assets and liabilities. The final allocation of such
purchase price, and the resulting amortization expense in the accompanying
Unaudited Pro Forma Consolidated Statement of Operations, may differ somewhat
from the preliminary estimates due to the final allocation being based on
completed appraisal studies of the values of property, plant and equipment and
any identifiable intangible assets. The Unaudited Pro Forma Consolidated
Statement of Operations does not purport to represent what the Company's results
of operations actually would have been if the Transactions and the acquisition
of the MLQ Interests had occurred as of the date indicated or what such results
will be for any future periods.
The unaudited pro forma consolidated financial data are based upon
assumptions that the Company believes are reasonable and should be read in
conjunction with the Consolidated Financial Statements of OSI and the
accompanying notes thereto and the Consolidated Financial Statements of Payco
and the accompanying notes thereto included elsewhere in this Prospectus.
29
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MLQ MLQ PAYCO
OSI INTERESTS INTERESTS HISTORICAL TRANSACTION COMPANY
HISTORICAL(A) 1/1-5/10 ADJUSTMENTS 1/1-11/5 ADJUSTMENTS PRO FORMA
---------- -------- ----------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operating revenue.................................... $106,331 $2,119 $-- $ 148,614 $ -- $257,064
Salaries and benefits................................ 46,997 -- 83,765 -- 130,762
Other operating expenses(b).......................... 80,357 -- 1,757(c) 60,490 15,843(d) 158,447
---------- -------- ---------- ----------- ---------
Operating (loss) income.............................. (21,023) 2,119 4,359 (15,843) (32,145)
---------- -------- ---------- ----------- ---------
Interest expense, net................................ 12,131 -- 735 13,111(e) 25,977
Other expense (income)............................... -- -- (154) -- (154)
---------- -------- ---------- ----------- ---------
(Loss) income before taxes........................... (33,154) 2,119 3,778 (28,954) (57,968)
Income tax (benefit) expense......................... (11,757) -- 145(f) 2,374 (10,689)(f) (19,927)
---------- -------- ---------- ----------- ---------
Net (loss) income.................................... $(21,397) $2,119 $ 1,404 $(18,265) $(38,041)
---------- -------- ---------- ----------- ---------
---------- -------- ---------- ----------- ---------
OTHER FINANCIAL DATA AND RATIOS:
Amortization of purchased portfolios................. $27,317 $1,757(c) $ 12,931 $ -- $ 42,005
Other amortization and depreciation.................. 18,281 7,988 15,843(d) 42,112
Data processing capital expenditures(g).............. -- 10,175 -- 10,175
Other cash capital expenditures...................... 2,606 3,351 -- 5,957
Portfolio purchases.................................. 10,373(h) 2,689 -- 13,062
Cash interest expense(i)............................. 10,115 735 13,646(e) 24,496
Total interest expense............................... 12,332 735 13,111(e) 26,178
</TABLE>
See accompanying notes.
30
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
The Unaudited Pro Forma Consolidated Statement of Operations for the year
ended December 31, 1996 reflects the Transactions and the acquisition of the MLQ
Interests as if they had occurred on January 1, 1996.
(a) OSI was formed in September 1995 to pursue an acquisition strategy aimed at
creating the leading provider of accounts receivable management services in
the United States. In September 1995, OSI acquired APLP, a company which
focuses on purchasing portfolios of non-performing accounts. The historical
results of OSI include APLP from the date of its acquisition in September
1995 and the results of the subsequent acquisitions of Miller, Continental,
the MLQ Interests and Payco from their respective dates of acquisition.
Miller was acquired in January 1996. Miller provides contingent fee services
primarily to the student loan and bank card industries.
Continental was acquired in January 1996. Continental is a contingent fee
service company based in the Pacific Northwest.
In May 1996, OSI acquired the MLQ Interests.
In November 1996, OSI acquired Payco, one of the oldest and most established
accounts receivable management companies in the country.
(b) Other operating expenses include telephone, postage, supplies, occupancy
costs, data processing costs, depreciation, amortization, and miscellaneous
operating expenses.
(c) Represents amortization of the purchase price of the MLQ Interests based on
collections over a maximum of three years.
(d) Reflects the following adjustments:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
--------------
<S> <C>
Depreciation and amortization:
Additional depreciation (1)................................................................ $ 556
Amortization of covenants not to compete (2)............................................... 1,389
Amortization of increase in account inventory (3).......................................... 11,667
Additional goodwill amortization (4)....................................................... 2,231
--------------
$ 15,843
--------------
--------------
</TABLE>
(1) Additional depreciation represents depreciation of the $2.0 million
increase in fair value of software and computer systems over three years.
(2) Represents amortization of covenants not to compete of $3.8 million with
the Payco Chairman and other senior management over periods of one to
three years.
(3) Account inventory represents the $14.0 million value attributable to the
expected future revenues from existing placements at the date of the
acquisition of Payco less the direct costs of collection and is being
amortized over the one year average life of the placements.
(4) Goodwill represents the excess of purchase price for Payco over the fair
value of net assets acquired. Goodwill of $102.1 million is being
amortized over 30 years.
31
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
(e) Adjustments to interest expense based on the capitalization of the Company
following the Transactions are summarized in the table below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
--------------
<S> <C>
Interest expense on Notes.................................................................... $ 11,000
Interest expense on term loans under New Bank Credit Facility (1)............................ 11,558
Commitment fee for revolving credit facility under New Bank Credit Facility (2).............. 290
Elimination of historical cash interest expense.............................................. (9,202)
--------------
13,646
--------------
Amortization of debt issuance costs related to the Notes and the New Bank Credit Facility
(3)........................................................................................ 1,682
Elimination of historical amortization of debt issuance costs (4)............................ (2,217)
--------------
Net adjustment............................................................................... $ 13,111
--------------
--------------
</TABLE>
(1) The New Bank Credit Facility is comprised of (a) two $71.0 million term
loans which provide for quarterly amortization until final maturity in
five and seven years, respectively, and (b) a secured revolving credit
facility of up to $58.0 million, which is fully revolving until final
maturity in five years. One term loan bears interest, at the Company's
option, at (a) 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) the
reserve adjusted Eurodollar rate plus 2.5%. The second term loan bears
interest, at the Company's option, at (a) 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) the reserve adjusted Eurodollar rate plus
3.0%. Pro forma interest for the year ended December 31, 1996 has been
calculated based on a Eurodollar rate of 5.594% and average drawn down
balances based on scheduled repayments.
(2) The commitment fee on the unused portion of the revolving credit
facility is 0.5% per annum.
(3) Deferred financing costs are amortized over the life of the related
debt, five years and seven years for the first and second term loans,
respectively, and ten years for the Notes, using the effective interest
method.
(4) Includes $1,582 write-off of existing deferred financing costs in
connection with the Transactions.
A 0.125% change in each of the assumed interest rates applicable to the New
Bank Credit Facility would change aggregate pro forma interest expense by
$171 for the year ended December 31, 1996.
(f) The pro forma adjustments reflect the additional income tax provision
(benefit) as a result of the pro forma adjustments described in these
footnotes, except for certain goodwill amortization adjustments, at an
effective statutory tax rate of 40%.
(g) Represents capital expenditures related to the new accounts receivable
management and student loan billing systems at Payco.
(h) Excludes the acquisition in May 1996 of the MLQ Interests for $14,772.
(i) Represents total interest expense less amortization of debt issuance costs.
32
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA--OSI
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 year ended December 31, 1996 and (ii) the audited consolidated
financial statements of APLP (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 APLP referred to above are included elsewhere in this
Prospectus. The selected historical financial data set forth below as of
December 31, 1994 and for the years ended December 31, 1992 and 1993 have been
derived from the audited financial statements of APLP not included in this
Prospectus. 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 APLP and OSI
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
OSI (AS
APLP (AS PREDECESSOR) SUCCESSOR)
------------------------------------------------ ---------------
<S> <C> <C> <C> <C> <C>
FROM FROM
JANUARY 1 SEPTEMBER 21
YEAR ENDED DECEMBER 31, TO TO
------------------------------- SEPTEMBER 20, DECEMBER 31,
1992 1993 1994 1995 1995
--------- --------- --------- --------------- ---------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenue (a)............................ $ 13,241 $ 23,696 $ 39,282 $ 21,293 $ 8,311
Salaries and benefits............................ 418 1,596 2,636 4,471 2,552
Other operating expenses (b)(c).................. 11,138 10,692 8,790 7,343 8,480
--------- --------- --------- --------------- ---------------
Operating income (loss).......................... 1,685 11,408 27,856 9,479 (2,721)
Interest expense, net............................ 1,229 1,301 2,599 495 1,361
Other expense.................................... -- -- 166 -- --
--------- --------- --------- --------------- ---------------
Income (loss) before taxes....................... 456 10,107 25,091 8,984 (4,082)
Income tax benefit............................... -- -- -- -- (1,605)
--------- --------- --------- --------------- ---------------
Net income (loss) (c)............................ $ 456 $ 10,107 $ 25,091 $ 8,984 $ (2,477)
--------- --------- --------- --------------- ---------------
--------- --------- --------- --------------- ---------------
Ratio of earnings to fixed charges (d)........... 1.4x 8.1x 9.4x 9.8x --
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital.................................. $ 1,146 $ 5,622 $ 16,897 $ 3,809 $ 22,438
Total assets..................................... 7,656 8,945 22,941 11,272 85,652
Total debt....................................... 2,053 3,544 -- -- 36,462
Partners' capital/ Stockholders' equity.......... (258) 4,582 22,162 10,559 42,448
OTHER FINANCIAL DATA:
Amortization of purchased portfolios (c)......... $ 8,182 $ 6,013 $ 2,667 $ 2,308 $ 5,390
Other depreciation and amortization.............. 14 57 102 167 331
Cash capital expenditures........................ 143 222 463 574 97
Portfolio purchases.............................. 9,084 7,088 6,800 5,502 903
Cash flows provided by (used in):
Operating activities........................... 4,277 4,759 21,074 5,887 1,999
Investing activities........................... (143) (2,222) (463) 1,259 (30,104)
Financing activities........................... 1,013 (3,775) (11,055) (20,587) 29,574
EBITDA (e)....................................... 9,881 17,478 30,625 11,954 3,000
Adjusted EBITDA (e).............................. 9,881 15,609 18,465 11,954 3,000
<CAPTION>
<S> <C>
YEAR
ENDED
DECEMBER 31,
1996
--------------
<S> <C>
INCOME STATEMENT DATA:
Operating revenue (a)............................ $ 106,331
Salaries and benefits............................ 46,997
Other operating expenses (b)(c).................. 80,357
--------------
Operating income (loss).......................... (21,023)
Interest expense, net............................ 12,131
Other expense.................................... --
--------------
Income (loss) before taxes....................... (33,154)
Income tax benefit............................... (11,757)
--------------
Net income (loss) (c)............................ $ (21,397)
--------------
--------------
Ratio of earnings to fixed charges (d)........... --
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital.................................. $ 38,080
Total assets..................................... 355,207
Total debt....................................... 247,616
Partners' capital/ Stockholders' equity.......... 51,598
OTHER FINANCIAL DATA:
Amortization of purchased portfolios (c)......... $ 27,317
Other depreciation and amortization.............. 18,281
Cash capital expenditures........................ 2,606
Portfolio purchases.............................. 10,373(f)
Cash flows provided by (used in):
Operating activities........................... (2,978)
Investing activities........................... (186,790)
Financing activities........................... 202,796
EBITDA (e)....................................... 24,575
Adjusted EBITDA (e).............................. 25,775
</TABLE>
- ------------------------------
(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.
33
<PAGE>
(c) Effective January 1, 1994, APLP began amortizing on an individual portfolio
basis the cost of purchased receivables based on the ratio of current
collections to current and anticipated future collections for that portfolio
over a maximum period of three years. Prior to 1994, APLP amortized
purchased receivables under the cost recovery method. The change in method
was a result of APLP'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) The ratio of earnings to fixed charges is computed by adding fixed charges
(excluding preferred stock dividends) to income (loss) before taxes and
dividing that sum by the sum of fixed charges. Fixed charges consist of
interest (including amortization of debt issuance costs), a portion of rent
expense that management considers to be interest and preferred stock
dividends, increased to reflect the pretax amounts which would be required
to meet dividend payments. Historical OSI earnings for the period from
September 21, 1995 to December 31, 1995 and the year ended December 31, 1996
were insufficient to cover fixed charges by $4,455 and $34,537,
respectively.
(e) 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 because
management believes they provide useful information regarding the Company's
ability to service and/ or incur debt and certain restrictive covenants
contained in the New Bank Credit Facility and in the Notes are based on this
calculation. 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.
(f) Excludes the acquisition of the MLQ Interests for $14,772.
34
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA -- PAYCO
The following selected historical financial data for the years ended
December 31, 1994 and 1995 and the period January 1, 1996 to November 5, 1996
have been derived from, and are qualified by reference to, the audited financial
statements of Payco included elsewhere in this Prospectus. The selected
historical financial data set forth below as of November 5, 1996 and December
31, 1994 and for the years ended December 31, 1992 and 1993 have been derived
from the audited financial statements of Payco not included in this Prospectus.
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 of Payco and accompanying notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
<S> <C> <C> <C> <C>
1992 1993 1994 1995
---------- ---------- ---------- ----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenue................................................ $ 123,585 $ 150,795 $ 150,696 $ 175,560
Salaries and benefits............................................ 66,715 82,007 82,786 100,108
Other operating expenses(a)...................................... 51,059 61,281 59,445 65,536
---------- ---------- ---------- ----------
Operating income................................................. 5,811 7,507 8,465 9,916
Interest expense, net............................................ 94 268 148 770
Other expense (income)........................................... (65) (28) (68) (234)
---------- ---------- ---------- ----------
Income before taxes.............................................. 5,782 7,267 8,385 9,380
Income tax expense............................................... 2,494 3,266 3,826 4,130
---------- ---------- ---------- ----------
Net income....................................................... $ 3,288 $ 4,001 $ 4,559 $ 5,250
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Ratio of earnings to fixed charges (b)........................... 4.2x 4.2x 5.3x 4.5x
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital.................................................. $ 15,037 $ 22,077 $ 21,730 $ 13,267
Total assets..................................................... 73,232 79,081 87,498 103,675
Total debt....................................................... 4,102 2,566 6,672 14,428
Stockholders' equity............................................. 39,583 43,584 48,043 53,150
OTHER FINANCIAL DATA:
Amortization of purchased portfolios............................. $ 8,882 $ 11,832 $ 10,319 $ 12,365
Other depreciation and amortization.............................. 6,371 6,819 6,905 7,805
Data processing capital expenditures (c)......................... -- -- 990 10,076
Other capital expenditures....................................... 4,762 2,598 3,765 3,371
Portfolio purchases.............................................. 10,671 15,152 17,309 9,725
Cash flows provided by (used in):
Operating activities........................................... 18,726 22,912 19,598 20,284
Investing activities........................................... (21,648) (18,235) (26,751) (31,012)
Financing activities........................................... 3,526 (1,536) 4,006 7,613
EBITDA (d)....................................................... 21,064 26,158 25,689 30,086
Adjusted EBITDA (d).............................................. 21,064 26,158 25,689 32,058
<CAPTION>
<S> <C>
FROM JANUARY 1,
1996 TO NOVEMBER
5, 1996
------------------
<S> <C>
INCOME STATEMENT DATA:
Operating revenue................................................ $ 148,614
Salaries and benefits............................................ 83,765
Other operating expenses(a)...................................... 60,490
----------
Operating income................................................. 4,359
Interest expense, net............................................ 735
Other expense (income)........................................... (154)
----------
Income before taxes.............................................. 3,778
Income tax expense............................................... 2,374
----------
Net income....................................................... $ 1,404
----------
----------
Ratio of earnings to fixed charges (b)........................... 2.7x
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital.................................................. $ 11,705
Total assets..................................................... 97,715
Total debt....................................................... 5,887
Stockholders' equity............................................. 55,758
OTHER FINANCIAL DATA:
Amortization of purchased portfolios............................. $ 12,931
Other depreciation and amortization.............................. 7,988
Data processing capital expenditures (c)......................... 10,175
Other capital expenditures....................................... 3,351
Portfolio purchases.............................................. 2,689
Cash flows provided by (used in):
Operating activities........................................... 24,717
Investing activities........................................... (18,391)
Financing activities........................................... (8,367)
EBITDA (d)....................................................... 25,278
Adjusted EBITDA (d).............................................. 29,575
</TABLE>
- ------------------------
(a) Other operating expenses include telephone, postage, supplies, occupancy
costs, data processing costs, depreciation, amortization, and miscellaneous
operating expenses.
(b) The ratio of earnings to fixed charges is computed by adding fixed charges
to income before taxes and dividing that sum by the sum of fixed charges.
Fixed charges consist of interest and a portion of rent expense that
management considers to be interest.
(c) Represents capital expenditures related to the new collection and student
loan billing systems at Payco.
(d) EBITDA is defined as income from continuing operations before interest,
other income, taxes, depreciation and amortization. Adjusted EBITDA reflects
EBITDA as defined above adjusted for duplicative costs and implementation
associated with new computer systems of $1,972 and $2,484 in the year ended
December 31, 1995 and the period from January 1, 1996 to November 5, 1996,
respectively and non-recurring merger expenses of $1,813 in the period from
January 1, 1996 to November 5, 1996. EBITDA and adjusted EBITDA are
presented here because management believes they provide useful information
regarding Payco's ability to service and/or incur debt and certain
restrictive covenants contained in the New Bank Credit Facility and in the
Notes are based on this calculation. 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.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is one of the largest providers of accounts receivable
management services in the United States. Pursuant to the Merger Agreement, OSI
has acquired Payco in a merger transaction. In connection with the Payco
Acquisition, the Company expects to realize approximately $10.8 million of
initial annualized cost savings through facility consolidations, reductions in
headcount, reductions in operating expenses and purchasing efficiencies. In
addition, the Company has initiated a review of its combined operations and
expects to realize further cost savings as a result of that review. The Company
has accrued restructuring charges aggregating approximately $8.1 million in
connection with the Transactions, representing costs associated with closing
certain Payco offices, severance payments to employees to be terminated and fees
to be incurred in connection with the termination of certain contracts. The
Company believes that its future operating results may not be directly
comparable to historical operating results of either OSI or Payco due to the
Company's increased size, integration of the two businesses and related cost
savings. The Company records significant non-cash expenses as a result of
amortization of goodwill, acquired portfolios and account inventory recorded in
connection with the Company's acquisitions and the amortization of newly
purchased portfolios. In addition, depending upon the size of the purchased
portfolio being sold, future revenues and/or operating results may be materially
impacted by such sale. To the extent that any such portfolio is sold, the
Company would receive a lump sum payment for the portfolio and would not derive
continued revenues from such portfolio. For the year ended December 31, 1996, on
a pro forma basis, non-cash charges were $84.1 million and EBITDA was $52.0
million. Certain factors which have affected the operating results of the
Company are discussed below.
PREVIOUS ACQUISITIONS AND ACCOUNTING TREATMENT. OSI was formed in September
1995 in connection with the acquisition of APLP for a total purchase price of
approximately $80.0 million. The APLP acquisition was accounted for by the
purchase method and resulted in goodwill of approximately $18.0 million and a
step-up in the basis of purchased portfolios of approximately $60.1 million.
Goodwill is being amortized over 20 years. Purchased portfolios are amortized to
match the receipt of collections, however, in no circumstance does the
amortization period exceed three years. In January 1996, OSI acquired
Continental and Miller for a total purchase price of approximately $48.9
million. These acquisitions were accounted for by the purchase method and
resulted in goodwill of approximately $35.6 million, which is being amortized
over 30 years. Part of the purchase price was allocated to account inventory
which represents the value of expected future revenues from existing placements
at the date of acquisition by OSI less the direct costs of collection. The
amount allocated to account inventory was $3.0 million at Continental and $12.0
million at Miller and is being amortized over a period of 18 months, which
represents the average life of the placements. In May 1996, OSI acquired the MLQ
Interests for a purchase price of $14.8 million (including a $3.5 million note
payable). The acquisition of the MLQ Interests was treated as an acquisition of
portfolios and accounted for as set forth below.
PAYCO ACQUISITION. Like the Previous Acquisitions, the Payco Acquisition
was accounted for as a purchase of Payco by OSI for $150.2 million. As a result,
the assets and liabilities of Payco were recorded at their estimated fair market
value and an amount equal to the excess of the purchase price over the fair
value of assumed liabilities was allocated to property and equipment,
identifiable tangible and intangible assets and goodwill. Goodwill is amortized
over 30 years. The preliminary allocation reflected in the consolidated
financial statements for the year ended December 31, 1996 allocates $20.8
million of the excess to identifiable tangible and intangible assets (including
$2.0 million to property and equipment and $14.0 million to account inventory)
and $102.1 million to goodwill. Consequently, the post-Payco Acquisition
statements of operations will be affected by the amortization of such excess
purchase price. See "Unaudited Pro Forma Consolidated Financial Data."
36
<PAGE>
AMORTIZATION OF PORTFOLIOS. The costs of purchased portfolios are generally
amortized on an accelerated basis over a 36-month period. The amortization of
these costs, calculated on an individual portfolio basis, is based upon current
year revenue in proportion to the expected future revenue generated by the
portfolio over a maximum period of three years. The Company calculates the
amortization of purchased portfolios on a monthly basis. Quarterly, the Company
evaluates the recoverability of the costs of purchased portfolios and, based on
expected future revenue, assesses whether a change to the amortization schedule
is warranted.
CLASSIFICATION OF CERTAIN REVENUES. Payco has historically classified
revenues from certain non-traditional accounts receivable management projects
and other outsourcing activities as contingent fee revenues. In the future, OSI
will classify revenues from comparable services as outsourcing revenues.
Revenues from these services included in Payco contingent fee revenues were
$13.6 million, $19.8 million and $19.5 million for the years ended December 31,
1994 and 1995 and the period January 1, 1996 to November 5, 1996.
PRO FORMA FINANCIAL DATA
PRO FORMA STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996
The pro forma statements of operations reflect the Transactions and the
Previous Acquisitions as though each had taken place on January 1, 1996. The
following summarizes the impact of the pro forma adjustments on the statements
of operations. This summary should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--OSI Historical Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Payco Historical Financial Data" for a
detailed discussion of significant trends resulting from operations and
"Unaudited Pro Forma Consolidated Financial Data" for details of the assumptions
used in the pro forma adjustments. The pro forma statements of operations do not
reflect the impact of cost savings of $10.8 million in the year ended December
31, 1996 arising from the rationalization of operations through consolidation of
back office activities, branch system rationalization and the installation of a
centralized operating system. See "Prospectus Summary--Summary Unaudited Pro
Forma Consolidated Financial Data."
REVENUES reflect the Payco Acquisition and acquisition of the MLQ Interests.
There are no pro forma adjustments which have an impact on revenues.
OPERATING EXPENSES include increases in non-cash charges for amortization of
goodwill and other intangibles relating to the Payco Acquisition of $15.8
million, and increased amortization of purchased portfolios relating to the
acquisition of the MLQ Interests of $1.8 million in the year ended December 31,
1996.
INTEREST EXPENSE increased by $13.1 million in the year ended December 31,
1996 as a result of the indebtedness incurred to finance the Payco Acquisition.
HISTORICAL FINANCIAL DATA
OSI HISTORICAL FINANCIAL DATA -- RESULTS OF OPERATIONS
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 were $51.2 million for the twelve months ended December
31, 1996 compared to $0 in the comparable period in 1995. The increase in
contingent fee revenues was a result of the acquisitions of Miller, Continental
and Payco.
37
<PAGE>
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 outsourcing services
increased to $9.5 million for the twelve months ended December 31, 1996 compared
to $0 in the comparable period in 1995. The increase was all 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 in 1995), $2.7 million was attributable to amortization of
goodwill associated with the acquisitions of APLP, 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 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 on the acquisition of APLP.
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 but was
partially offset by the costs associated with hiring additional account
representatives at API. EBITDA is defined as income from continuing operations
before interest, other expense, taxes, depreciation and amortization. EBITDA is
presented here because management believes it provides useful information
regarding the Company's ability to service and/or incur debt and certain
restrictive covenants contained in the New Bank Credit Facility and in the Notes
are based on this calculation. EBITDA should not be considered in isolation or
as a substitute 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 a measure of a company's profitability or
liquidity.
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. This
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 APLP in September 1995.
NET (LOSS) INCOME for the twelve months ended December 31, 1996 was ($21.4)
milllion compared to $6.5 million for the comparable period in 1995. The
decrease in net income resulted primarily from increased amortization expense
from the step-up in the basis of acquired portfolios, goodwill and account
inventory recorded in connection with the acquisitions of APLP, Miller,
Continental and Payco and the increase in interest due to the indebtedness
incurred to finance those acquisitions.
38
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUES for the year ended December 31, 1995 were $29.6 million compared to
$39.3 million in the comparable period in 1994. In 1994, revenue of $13.3
million was recorded from a non-recurring sale of a previously-purchased
portfolio. Excluding the revenue from this sale, 1994 revenues were $26.0
million. Excluding the portfolio sale in 1994, revenues increased $3.6 million
from 1994 to 1995, an increase of 14%, reflecting the hiring of additional
account representatives and additional portfolio purchases.
OPERATING EXPENSES for the year ended December 31, 1995 were $22.8 million
compared to $11.4 million for the comparable period in 1994. Excluding expenses
related to the 1994 portfolio sale, 1994 expenses were $9.1 million. Excluding
the portfolio sale in 1994, operating expenses increased $13.7 million from 1994
to 1995. Cash operating expenses were $14.7 million in 1995 (compared to $8.7
million in 1994). The increase in cash operating expenses was the result of the
hiring of 192 additional account representatives, which increased the total
number of account representatives by 144%, and the opening of new API collection
facilities in San Antonio, Texas and Phoenix, Arizona. Of the $22.8 million in
expenses in 1995, $7.7 million was attributable to amortization of purchased
portfolios (compared to $2.7 million in 1994) and $0.5 million was attributable
to amortization of goodwill and depreciation (compared to $0.1 million in 1994).
These increases were due to amortization expense from the step-up in the basis
of purchased portfolios and the goodwill recorded in connection with the
acquisition of APLP.
OPERATING INCOME for the year ended December 31, 1995 was $6.8 million
compared to $27.9 million for the comparable period in 1994. Excluding amounts
relating to the 1994 portfolio sale, 1994 operating income was $16.9 million.
Excluding the portfolio sale in 1994, operating income decreased $10.1 million
from 1994 to 1995. This decrease reflects higher amortization of purchased
portfolios and goodwill from the acquisition of APLP of $5.3 million.
EBITDA for the year ended December 31, 1995 was $15.0 million compared to
$30.6 million for the comparable period in 1994. Excluding the 1994 portfolio
sale, EBITDA was $18.5 million. EBITDA decreased by $3.5 million, excluding the
1994 portfolio sale, due to the increase in the total number of account
representatives, the opening of new collections facilities in San Antonio and
Phoenix, costs associated with the acquisition of APLP and a shift in business
mix from portfolios wholly-owned by APLP in 1994 to portfolios purchased in
partnership with other entities in 1995.
INTEREST EXPENSE, NET for the year ended 1995 was $1.9 million, $0.7 million
lower than the comparable period in 1994, reflecting the reduction in contingent
interest paid in connection with a loan agreement. See "Financial
Statements--Outsourcing Solutions Inc. and Subsidiaries."
NET INCOME for the year ended December 31, 1995 was $6.5 million compared to
$25.1 million for the comparable period in 1994. Excluding amounts relating to
the 1994 portfolio sale, 1994 net income was $14.1 million. Excluding the 1994
portfolio sale, net income decreased by $7.6 million from 1994 to 1995. This
decline was primarily related to the increase in amortization of purchased
portfolios and goodwill recorded in connection with the acquisition of APLP, the
opening of the two new facilities and the hiring of additional account
representatives.
OSI HISTORICAL DATA--BALANCE SHEETS
DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995
CASH AND CASH EQUIVALENTS (including cash held for clients) increased from
$1.5 million at December 31, 1995 to $34.8 million at December 31, 1996
principally as a result of the acquisitions of Miller, Continental and Payco.
Cash at December 31, 1996 included $20.3 million of cash collected and not yet
remitted to clients which was held in restricted accounts at Miller, Continental
and Payco.
39
<PAGE>
LOANS AND ACCOUNTS RECEIVABLE PURCHASED increased from $65.1 at December 31,
1995 to $68.0 million at December 31, 1996 due to new portfolio purchases of
$10.4 million and the purchase of participating interests in certain loan
portfolios for $14.8 million in 1996 which were partially offset by higher
amortization of $19.2 million on the APLP portfolios. These APLP portfolios were
stepped up to fair value upon the acquisition of APLP by OSI in September 1995.
The amount of loans and accounts receivable purchased which were considered
collectible within one year increased from $23.5 million at December 31, 1995 to
$42.5 million at December 31, 1996 mainly due to the acquisition of the MLQ
Interests and the timing of cash collections based on the relative age and
length of ownership of the portfolios.
The loans and accounts receivable purchased consist primarily of consumer
loans and credit card receivables, student loan receivables and health club
receivables, including health club receivable portfolios purchased under a
forward flow agreement. Consumer loans purchased primarily consist of unsecured
term debt. A summary of loans and accounts receivable purchased at December 31,
1995 and December 31, 1996, showing cumulative original gross principal value by
type of receivable, is shown below (in millions):
<TABLE>
<CAPTION>
ORIGINAL GROSS
PRINCIPAL VALUE
------------------------------
DECEMBER 31, DECEMBER 31,
ASSET TYPE 1995 1996
- ---------------------------------------------------------------------------------- -------------- --------------
<S> <C> <C>
Consumer loans.................................................................... $ 1,852 $ 1,748
Student loans..................................................................... 322 322
Credit cards...................................................................... 7 100
Health clubs...................................................................... 955 954
------- -------
$ 3,136 $ 3,124
------- -------
------- -------
</TABLE>
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 a forward flow
agreement under which the Company agrees to purchase charged off health club
receivables on a monthly basis as they become past due.
ACCOUNTS RECEIVABLE TRADE, increased from $0.2 million at December 31, 1995
to $20.7 million at December 31, 1996 as a result of the acquisitions of Miller,
Continental and Payco. Remittances of the gross amount of collections are made
to clients with a corresponding receivable accrued for the Company's fees.
PROPERTY AND EQUIPMENT, NET increased from $1.1 million at December 31, 1995
to $36.5 million at December 31, 1996 as a result of the acquisitions of Miller,
Continental and Payco.
GOODWILL, NET increased from $17.7 million at December 31, 1995 to $152.8
million at December 31, 1996 due to the acquisitions of Miller, Continental and
Payco. Goodwill applicable to these acquisitions is being amortized over 30
years.
INTANGIBLE ASSETS, represent the value of existing placements at Miller
($12.0 million), Continental ($3.0 million) and Payco ($14.0 million), which are
amortized over the average life of the placements, estimated to be 18 months for
Miller and Continental and 12 months for Payco, and non-compete agreements at
Payco of $4.5 million, which are amortized over the life of the agreement.
DEFERRED FINANCING COSTS related to the refinancing of the Company in
November 1996 coinciding with the acquisition of Payco were $12.6 million as of
December 31, 1996. These costs are amortized over the life of the related debt.
Financing costs of $1.6 million related to the refinanced debt were written off
and are included in interest expense in 1996.
CURRENT LIABILITIES increased from $2.9 million to $66.0 million mainly due
to the acquisitions of Miller, Continental and Payco. The $63.1 million increase
primarily consists of $20.3 million of collections of cash due to clients, $8.7
million of accrued severance and office closing costs, $11.2 million of accrued
expenses, $10.0 million current portion of long-term debt and $12.9 million of
trade and other liabilities.
40
<PAGE>
THE LONG TERM PORTION OF NOTES PAYABLE increased from $36.5 million at
December 31, 1995 to $237.6 million at December 31, 1996 as a result of the
indebtedness incurred to finance the Miller, Continental, and Payco acquisitions
and the purchase of the MLQ Interests.
STOCKHOLDERS' EQUITY increased $9.2 million to $51.6 million, due primarily
to the $29.1 million capital contribution of affiliates of McCown De Leeuw and
the additional stock issued to the sellers in connection with the acquisitions
of Miller and Continental, partially offset by the net loss for the year of
$21.4 million.
PAYCO HISTORICAL FINANCIAL DATA -- RESULTS OF OPERATIONS
PERIOD ENDED NOVEMBER 5, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
TOTAL OPERATING REVENUE for the year ended December 31, 1995 was $175.6
million. Operating revenue for the period ended November 5, 1996 was $148.6
million. The table below presents Payco's revenue components.
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 5,
1995 1996
-------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Revenue:
Retail Collection............................................. $ 114,233 $ 92,244
Health Care Outsourcing....................................... 16,923 17,275
Commercial Collection......................................... 12,260 12,324
Accounts Receivable Purchases................................. 15,798 15,470
Billing....................................................... 8,804 7,243
Teleservicing................................................. 7,542 4,058
-------------- -------------
Total Operating Revenue....................................... $ 175,560 $ 148,614
-------------- -------------
-------------- -------------
</TABLE>
Retail revenue was down primarily due to the short period being compared to
a full year. Factors positively impacting retail revenue were new client sales,
including services to state governments, expanded services to utility customers
and expanded business with current clients in the student loan and credit card
industry. Factors that had a negative impact on retail collection revenue for
the period ended November 5, 1996 were changes in regulations that affect
certain collection procedures in the student loan industry, reduced revenue in
the credit card industry and Payco's effort to curtail the level of business
with less profitable clients. Effective contingency rates in certain industries
continue to be under pressure.
Health care outsourcing revenue increased modestly even though the reporting
periods are not comparable. Health care outsourcing revenue for the year ended
December 31, 1995 includes $2.0 million from Payco's contract with HBO & Company
which it commenced on September 1, 1995 as primary subcontractor in performing
business office management for Maricopa County Health Care Systems. For the
period ended November 5, 1996, revenue from this client was $4.1 million. In
addition revenue was favorably impacted by other new client sales.
Commercial revenue increased slightly even though the reporting periods are
not comparable primarily as a result of the acquisition in May 1995 of Grable
Greiner and Wolff, a commercial collection business located in Cleveland, Ohio.
Also positively affecting revenue was an outsourcing project with a major
delivery service. These positive items are offset by reduced revenue from the
Furst & Furst operation, a commercial company purchased in January 1995.
41
<PAGE>
Revenue from purchased accounts receivable portfolios was $15.5 million for
the period ended November 5, 1996. Included in 1996 revenue is $6.5 million as a
result of the sale on July 18, 1996 of approximately one-half the book value of
its purchased receivable portfolio. Corresponding amortization expense of $6.3
million was also recognized. Without this sale the 1996 revenue would have been
$9.0 million, significantly down from $15.8 million in the prior year. Payco
purchased portfolios at a cost of $9.7 million in 1995 vs. purchasing portfolios
at a cost of $2.7 million in 1996. This reduction in purchases had a negative
impact on the receivable purchasing revenue, net of the sale. The reduction of
purchases was primarily the result of a decrease of portfolios for sale through
the FDIC and RTC as well as an increase in the competitive environment for these
receivables which put pressure on the margins.
Billing revenue is down primarily due to the periods reported not being
comparable. Billing revenue is generated primarily from the student loan
industry. Payco continues to work on the development of a new system which when
implemented could lead to additional growth in this business.
The reduction in teleservicing revenue is primarily the result of Payco's
decision to exit the outbound telemarketing business effective January 1, 1997
and concentrate its resources on the higher margin inbound teleservicing area.
TOTAL OPERATING EXPENSES as a percent of revenue were 94.4% and 97.1% for
the calendar year ended 1995 and the period ended November 5, 1996. Factors that
contributed to the overall increase in total operating expense are discussed
below. Where expenses are expressed as a percentage of revenues, the revenue for
the period ended November 5, 1996 used to calculate the percentage excludes the
$6.5 million one time proceeds from the sale of half of the purchased receivable
portfolio.
With the exception of data processing costs all expense categories are down
primarily as a result of comparing a whole year of 1995 to a short period in
1996.
Salaries and benefits, Payco's largest expense, were $100.1 million or 57.0%
of revenue in 1995 and $83.8 million or 58.9% of revenue for the period ended
November 5, 1996. Additional compensation costs for development, installation
and training associated with the new computer systems had an impact on this
expense category in 1996.
Telephone expenses were $10.6 million or 6.0% of revenue in 1995 and $9.0
million or 6.3% of revenue for the period ended November 5, 1996.
Postage and supplies expenses was $10.8 million or 6.2% of revenue in 1995
and $9.0 million or 6.3% of revenue for the period ended November 5, 1996.
Occupancy costs, which include expense for leased office space, depreciation
of furniture and fixtures, amortization of leasehold improvements, and rental
and repair of office equipment were $9.0 million or 5.2% of revenue during 1995
and $7.4 million or 5.2% of revenue for the period ended November 5, 1996.
Data processing equipment costs were $8.4 million or 4.8% of revenue in 1995
and $9.5 million or 6.7% of revenue for the period ended November 5, 1996. The
increase in data processing equipment costs, even in light of the short period,
is attributable primarily to increased depreciation and maintenance charges as a
result of Payco's investment in the WIN system which began during the last half
of 1994. During 1995, Payco installed WIN in eight office locations, and in 1996
an additional nine offices were operating on the WIN system. The conversion of
additional offices is scheduled to continue into 1997. In 1994, Payco began to
upgrade its automated student loan billing system.
Amortization of acquisition costs includes the amortization of non-compete
agreements, debtor account inventory, goodwill and purchased accounts receivable
portfolios. Included in this category for 1995 is $12.4 million of amortization
on purchased portfolios compared to $12.9 million for the period ended November
5, 1996. During 1996 purchased accounts receivable portfolio amortization
included $6.3 million as a result of the sale of approximately one-half the book
value of portfolios on July 18, 1996.
42
<PAGE>
Remaining other operating costs, which includes costs for business
insurance, legal expenses, skip tracing and travel and entertainment costs were
$11.8 million or 6.7% of revenue for 1995 compared to $11.2 million or 7.9% of
revenue for the period ended November 5, 1996. Included in the 1995 other
expenses is a charge in the amount of $0.5 million to establish a reserve for
the remaining investment in Pay Tech, Inc., Payco's joint venture in Japan.
During 1996 other operating costs included $1.8 million of costs associated with
the sale of Payco to OSI on November 6, 1996.
EBITDA for the year ended December 31, 1995 was $30.1 million. EBITDA for
the period ended November 5, 1996 was $25.3 million. The decrease in EBITDA was
not only impacted by the short period but also the exit out of the outbound
telemarketing business and the costs associated with the acquisition of Payco by
OSI.
INTEREST EXPENSE is primarily the result of borrowing required by Payco to
fund the investment in computer hardware and software and its acquisition
program.
INCOME TAXES for the calendar year ended December 31, 1995 were at an
effective tax rate of 44.0%. The effective tax rate was 62.8% for the period
ended November 5, 1996. The effective tax rate fluctuates as a result of changes
in pre-tax income, nondeductible expense and changes in the mix of state income
tax rates. The effective tax rate for the period ended November 5, 1996 includes
15.6% as a result of nondeductible costs associated with the sale of Payco to
OSI on November 6, 1996.
NET INCOME in 1995 was $5.3 million, including a charge of $0.3 million,
after tax, for the reserve against Payco's investment in Japan. Net income for
the period ended November 5, 1996 was $1.4 million, including charges totaling
$1.8 million associated with the sale of Payco to OSI on November 6, 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
TOTAL OPERATING REVENUE for the year ended December 31, 1995 was $175.6
million, a 16.5% increase over the comparable period of 1994. Total operating
revenue exclusive of the effect of 1995 business acquisitions increased 9.6% for
the year ended December 31, 1995 compared to the year ended December 31, 1994.
The following table shows the components of revenue for the years ended December
31, 1994 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------
<S> <C> <C>
1994 1995
----------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Revenue:
Retail Collection................................................... $ 103,876 $ 114,233
Heath Care Outsourcing.............................................. 11,393 16,923
Commercial Collection............................................... 4,104 12,260
Accounts Receivable Purchases....................................... 13,128 15,798
Billing............................................................. 9,488 8,804
Teleservicing....................................................... 8,707 7,542
----------- -----------
Total Operating Revenue........................................... $ 150,696 $ 175,560
----------- -----------
----------- -----------
</TABLE>
Retail collection revenue increased 10.0% to $114.2 million during 1995,
compared to $103.9 million in 1994. Excluding revenue from the acquisition of
Continental Credit Adjustors ("CCA") made February 1, 1995, retail collection
revenue increased $7.5 million, or 7.2%. The primary factors leading to the
increase in retail collection revenue were new client sales, including services
to state governments, expanded services to utility customers and expanded
business with current clients in the student loan and credit card industry.
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Health care outsourcing revenue increased 48.5% in 1995 to $16.9 million
compared to 1994 primarily as the result of increased revenue as a result of
Payco's prime sub-contractor role for Maricopa County Health Care Systems which
began September 1, 1995. Medicaid billing revenue, a component of health care
outsourcing, increased 17.9% to $6.7 million, primarily as a result of new
client business.
Commercial collection revenue increased 198.7% to $12.3 million during the
year ended December 31, 1995 compared to 1994. This increase is primarily
attributable to the acquisition of Furst & Furst ("F&F") and GGW. Excluding
these acquisitions, commercial collection revenue increased 16.9%.
Revenue from purchased accounts receivable portfolios increased 20.3% to
$15.8 million in 1995, compared to $13.1 million in 1994. During 1995, Payco
purchased twelve accounts receivable portfolios at a cost of $9.7 million.
Billing revenue decreased 7.2% from $9.5 million in 1994 to $8.8 million in
1995. This decrease was due primarily to the loss of business from a major
client that declared bankruptcy. This client generated approximately $0.3
million of revenue in this category in 1995, compared to $1.3 million in 1994.
Billing revenue increased in the student loan area due to contract pricing
increases which were a result of new postal rates which became effective January
1, 1995.
Teleservicing revenue decreased 13.4%, from $8.7 million in 1994 to $7.5
million in 1995. This decrease is the result of planned termination of outbound
telemarketing service to clients that were not profitable. While telemarketing
revenue decreased during 1995, profit margins increased. Payco restructured its
outbound telemarketing operations at the end of 1995 by closing its Herndon,
Virginia site, expanding its Phoenix, Arizona operations and opening a new site
in Pittsburgh, Pennsylvania which handles primarily inbound teleservicing.
TOTAL OPERATING EXPENSES increased $23.4 million or 16.5%, to $165.6 million
in 1995, compared to $142.2 million in 1994. Business acquisitions which
occurred in 1995 accounted for $10.3 million of the increase between years.
Other factors that contributed to the overall increase in total operating
expense are the following:
SALARIES AND BENEFITS, Payco's largest expense, increased by 20.9% between
years to $100.1 million. During 1995, salaries and benefits expense included
$6.6 million due to the acquisitions of F&F, CCA, and GGW. Exclusive of the
effect of the 1995 business acquisitions, salaries and benefits increased 13.0%,
primarily as a result of increased staff required to support new business,
higher incentive compensation to the sales staff a result of the revenue
increases, and additional compensation costs for development, installation and
training associated with the WIN system.
OTHER OPERATING EXPENSES increased 10.2% in 1995 to $65.5 million compared
to $59.4 million in 1994. The significant items in other operating expenses are
telephone, postage and supplies, occupancy, data processing equipment, and
amortization of acquisition costs. These items are explained in detail as
follows.
Telephone expense decreased 2.1% to $10.6 million in 1995. Telephone expense
exclusive of 1995 business acquisitions decreased 6.3%. During the first half of
1994, Payco upgraded its telephone systems in certain locations through the
purchase of technologically advanced equipment at a cost of approximately $1.2
million. During the third quarter of 1994, Payco renegotiated its contracts for
long distance service and benefited from lower long distance rates beginning in
the fourth quarter of 1994. The decline in outbound telemarketing business also
decreased telephone costs during 1995.
Postage and supplies expense increased 20.8% between years to $10.8 million.
Postage and supplies expense, exclusive of the 1995 business acquisitions,
increased 12.2%. Postage alone increased 11.0% exclusive of 1995 business
acquisitions, primarily as a result of the January 1, 1995 postal rate increase.
Occupancy costs, which include expense for leased office space, depreciation
of furniture and fixtures, amortization of leasehold improvements, and rental
and repair of office equipment, increased
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8.0% between 1995 and 1994 to $9.1 million. Exclusive of the 1995 business
acquisitions, occupancy costs decreased 2.5%, primarily as a result of planned
office space reduction and renegotiated leases at certain locations.
Data processing equipment costs increased 14.4% to $8.4 million in 1995.
Exclusive of the effect of 1995 business acquisitions, these costs increased
10.5%. This increase is attributable primarily to increased depreciation and
maintenance charges as a result of Payco's investment in WIN which began during
the last half of 1994. During 1995, Payco installed WIN in eight office
locations, bringing total installation to ten. The conversion of additional
offices is scheduled to continue throughout 1996 and into 1997. In 1994, Payco
began to upgrade its automated student loan billing system.
Amortization of acquisition costs was $14.8 million in 1995, compared to
$12.5 million in 1994. This expense category includes the amortization of
non-compete agreements, debtor account inventory, goodwill and purchased
accounts receivable portfolios. Amortization expense associated with purchased
accounts receivable portfolios increased by $2.1 million between years to $12.4
million. This increase is due to increased collections on new and existing
portfolios.
Remaining other operating costs increased 4.1% between years to $11.8
million. Remaining other operating costs, exclusive of the 1995 business
acquisitions, decreased 1.3%. Remaining other operating costs include, among
other categories, business insurance, legal expenses, skip tracing costs and
travel and entertainment costs. In December of 1995, Payco established a $0.5
million reserve for its remaining investment in Pay Tech, Inc., Payco's joint
venture in Japan.
EBITDA increased for the year ended December 31, 1995 compared to the
comparable period of the prior year by $4.4 million primarily as a result of
1995 business acquisitions and increased collections on purchased account
portfolios.
INTEREST EXPENSE increased by $0.6 million primarily due to the increase in
average borrowings under Payco's line of credit, which were used primarily to
finance accounts receivable purchases, acquisition of new businesses and WIN
related purchases.
INCOME TAXES. The effective tax rate decreased between years from 45.6% to
44.0%. The effective tax rate fluctuates as a result of changes in pre-tax
income, nondeductible expense and changes in the mix of state income tax rates.
NET INCOME in 1995 was $5.3 million, including a charge of $0.3 million
after tax for the reserve against Payco's investment in Japan, compared to $4.6
million in 1994. The increase in net income is primarily attributable to
increased revenue during 1995, offset by the impact of increased interest
expense and income taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had cash and cash equivalents of $14.5
million. The Company derives substantially all of its cash flow from the
operations of its subsidiaries. Capital expenditures on a pro forma basis were
$15.2 million and $16.1 million for the years ended December 31, 1995 and 1996,
respectively. Portfolio purchases on a pro forma basis were $16.1 million and
$13.1 million for the years ended December 31, 1995 and 1996, respectively. The
Company had working capital of $38.1 million of December 31, 1996.
Of the $16.1 million of pro forma capital expenditures in 1996, $10.2
million is data processing capital expenditures (which are expenditures for the
new accounts receivable management and student loan billing systems at Payco)
and $5.9 million is for other capital expenditures, which include
telecommunications equipment, leasehold improvements, other computer equipment
and office furniture and equipment. The Company expects that data processing
capital expenditures will be $3.5 million in 1997 and $2.5 million in each of
1998 and 1999.
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<PAGE>
As a result of the Transactions the Company's total indebtedness increased
substantially. See "Risk Factors -- Substantial Leverage and Ability to Service
Indebtedness." The Company's debt structure consists of senior debt under the
New Bank Credit Facility of $142.0 million, indebtedness represented by the
Notes of $100.0 million and other indebtedness of $5.6 million. The Company is
capitalized with equity of $51.6 million. Under the New Bank Credit Facility,
the Company has the ability to borrow an additional $58.0 million for working
capital, general corporate purposes and acquisitions, subject to certain
conditions. See "Description of New Bank Credit Facility; Other Indebtedness."
The Indenture and the New 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. See
"Description of Notes" and "Description of New Bank Credit Facility; Other
Indebtedness."
The debt service costs associated with the borrowings under the New Bank
Credit Facility and the Notes will significantly increase liquidity
requirements. The Company anticipates that its operating cash flow together with
borrowings under the New Bank Credit Facility, will be sufficient to meet its
anticipated future operating expenses and to service its debt requirements as
they become due. Additionally, future purchases of account portfolios may
require significant 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. See "Risk Factors -- Substantial Leverage and Ability to Service
Indebtedness."
INFLATION
The Company believes that inflation has not had a material impact on its
results of operations for the three years ended December 31, 1996.
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<PAGE>
BUSINESS
INDUSTRY OVERVIEW
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
1995 there were approximately 6,000 contingent fee agencies. The industry is
currently characterized by a high degree of fragmentation and a corresponding
trend 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 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 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, 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 offer national rather than local and regional coverage.
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
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a contingent fee servicer and usually require a process including obtaining
judgments, assets 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 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 in 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 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
skiptracing 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 systems and can best use credit information typically
collect more funds per account dollar and thus are awarded disproportionately
more new accounts.
COMPANY HISTORY
OSI was formed in 1995 by McCown De Leeuw & Co., a private investment firm
specializing in buying and building middle market businesses. Since its
inception, OSI has pursued an acquisition strategy aimed at creating the leading
provider of accounts receivable management services in the United States. In
September 1995, OSI initiated this investment strategy with the acquisition of
APLP, one of the largest purchasers and managers of non-performing accounts
receivable portfolios. In January 1996, OSI acquired Continental and 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.
Pursuant to the Merger Agreement, OSI acquired Payco for an aggregate cash
consideration of approximately $150.2 million. Originally founded as a
contingent fee service company in 1959, Payco
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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. For the year ended December 31, 1996,
the Company had pro forma net revenues of $257.1 million and pro forma Adjusted
EBITDA of $57.5 million. See "Summary Unaudited Pro Forma Consolidated Financial
Data."
The Company intends to continue to improve its results through the
rationalization of its operations. While various state collection agency laws
require the Company to be licensed in and maintain physical operations in
certain jurisdictions, the Company continues to examine consolidation of its
operations. As a result of this review, the Company identified and announced the
closing of twenty of its 58 offices (of which four were closed in 1996) and the
elimination of approximately 250 positions by July 1997. The Company has also
engaged advisors to review its corporate structure in light of state tax and
collection agency licensing considerations. Management believes that this review
may identify opportunities to simplify the Company's corporate structure and
greater streamline the Company's organization along business lines.
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 PROVIDER/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 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
that 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 governmental 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.
COST REDUCTIONS. The Company intends to continue to improve its financial
results through the rationalization of operations. In connection with the Payco
Acquisition, the Company expects to realize approximately $10.8 million of
annualized cost savings through consolidation of back office activities, branch
system rationalization, the installation of a centralized operating system and
the realization of volume purchasing discounts. See "Unaudited Pro Forma
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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
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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 account 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. Since its formation in September 1995, the
Company has acquired APLP, a company which focuses on purchasing portfolios of
non-performing accounts, Continental, a contingent fee service company based in
the Pacific Northwest and Miller, which provides contingent fee services
primarily to companies in the student loan and bank card industries. With the
acquisition of Payco, one of the oldest and most established accounts receivable
management companies in the country, the Company has solidified its market
position and added to its competitive strength in other related outsourcing
services. The Company plans to selectively pursue additional acquisitions which
complement its existing services or increase its customer base and intends to
finance any such acquisitions with the unused commitment under the Revolving
Facility and with internally generated funds. See "Risk Factors -- Risks
Associated with Acquisition Strategy."
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, to all consumer credit
end-markets. The Company utilizes its sophisticated MIS and vast experience with
locating, contacting and effecting payment from delinquent account holders in
providing its core contingent fee services. With 44 call centers in 21 states
and approximately 3,600 account representatives, the Company has the ability to
service a large volume of accounts with national coverage. In addition to
traditional contingent fee services involving the placement of accounts over 120
days delinquent, creditors have begun to demand services in which accounts are
outsourced earlier in the collection cycle. The Company has responded to this
trend by developing "early-out" programs, whereby the Company receives placed
accounts that are less than 120 days past due and earns a fixed fee per placed
account rather than a percentage of realized collections. These programs require
a greater degree of technological integration between the Company and its
customers, leading to higher switching costs. The Company primarily services
consumer creditors although the Company maintains a growing presence in the
commercial collections business, offering contingent fee services to commercial
creditors as well. On a combined basis after giving effect to the Payco
Acquisition, contingent fee services (including both consumer and commercial
services) accounted for approximately 48% of the Company's pro forma revenues
for the year ended December 31, 1996.
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 greater
than 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
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increased predictability of cash flow, reduction in monitoring and
administrative expenses and reallocation of assets from non-core business
functions to core business functions. As of December 31, 1996, the Company had
purchased 124 portfolios with an aggregate principal balance of approximately
$3.3 billion for an aggregate purchase price of approximately $159.6 million,
(including $49.2 million of step-up from the APLP acquisition). On a combined
basis after giving effect to the Payco Acquisition, portfolio purchasing
accounted for approximately 43% of the Company's pro forma revenues for the year
ended December 31, 1996.
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 a forward flow agreement. 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 forward flow
agreement. The Company continues to pursue acquisitions of portfolios in various
industries for individually negotiated purchases.
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, (4) teleservicing, whereby the Company offers
inbound and outbound calling programs to perform sales, customer retention
programs, market research and customer service. On a combined basis after giving
effect to the Payco Acquisition, these outsourcing services accounted for
approximately 9% of the Company's pro forma revenues for the year ended December
31, 1996.
OPERATIONS
CONTINGENT FEE SERVICES. Once an account has been placed with the Company,
the collection process consists of (1) locating and contacting the debtor
through mail and telephone and (2) getting the debtor to settle his or her
outstanding balance. Work standards (the method and order in which accounts are
worked by the Company) may be specified by the credit issuer placing the
accounts, and the Company is contractually bound to follow these work standards.
Some accounts may have different work standards than others based on criteria
such as account age or balance. For example, some customers require letters and
telephone contacts for each debtor in the portfolio at regularly scheduled
intervals, while others give the Company more discretion in its collection
operations. In addition, the Company must comply with the federal Fair Debt
Collection Practices Act and comparable state statutes, which restrict the
methods it uses to collect consumer debt.
Productivity standards are established by the Company using sophisticated
statistical scoring models that are applied to each account. These scoring
systems are developed using historical collection patterns of similar accounts.
Once scored, the accounts are segmented into groups ranked by likelihood of
repayment. Each group requires a different strategy to effect payment. This
ranking process is critical as it greatly influences how profitably the accounts
are worked. The objective is to maximize collections and to minimize expenses.
For example, instead of sending letters to the entire account base, a targeted
telemarketing campaign may be used to directly contact selected account groups,
thus saving the costs associated with an unnecessary broad-based mail campaign.
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Once the work standards and productivity standards are established, this
information is stored in an account database. This database holds the
"inventory" of individual placed accounts and their respective work and
productivity standards. The accounts are distributed to account representatives
from the account database starting with the accounts with the highest likelihood
of repayment. Automated predictive dialers and skip tracing databases are
essential tools in the process of establishing contact with debtors. An
automated predictive dialer extracts telephone numbers from the account database
and makes a number of simultaneous calls based on account rankings. When the
dialer detects a response to a call, it signals an available account
representative and displays the appropriate data file on his or her screen. The
dialing rate automatically adjusts to the number of available account
representatives, creating significant cost efficiencies. Skip tracing databases
facilitate the location of debtors whose accounts have wrong addresses and phone
numbers. These databases contain a variety of information such as credit bureau
reports, credit/loan applications, change of address notices, etc., and are
continually updated with current addresses and phone numbers. Once an individual
has been contacted, the account representative is authorized to negotiate a
settlement in accordance with the work standards. According to the
characteristics of the account, such as the age of the paper and the stage of
placement, the settlement may include immediate payment, a mutually agreeable
payment plan, a reduction in accrued interest, and, least likely, a reduction in
principal.
In the normal course of business, legal action is sometimes required. The
Company's litigation process consists of various stages of escalating actions
against the debtor-defendant, with each stage providing greater motivation than
the last for payment in full. The stages consist of filing a suit, request for
production of documents, depositions and motion for summary judgment. Each is a
highly effective method of securing payment or a mutually agreeable payment
plan.
PORTFOLIO PURCHASING SERVICES. When considering the purchase of a new
portfolio, the Company systematically analyzes and values the portfolio based on
proprietary scoring models which evaluate the underlying accounts. The Company
requests extensive information on the portfolio accounts, including whether
payments have been made in the previous six months, the average age of the
debtors, the number and locatability of skipped accounts, the debtor income
range and geography, the average balance of other accounts and the age of the
obligation. The Company conducts a detailed audit of the portfolio during which
its auditors verify the accuracy of the characteristics of a statistically
representative sample of accounts. Based upon a comparison of these and other
portfolio characteristics with those of previously purchased portfolios, the
Company constructs a liquidation model which becomes the basis for valuing the
portfolio. The Company then submits a bid for the portfolio. Once the Company
has purchased a portfolio, it uses a methodology similar to that employed in
contingent fee servicing to collect on the accounts.
As the Company owns the non-performing accounts, it has broad flexibility in
its collection efforts. The Company can service the purchased portfolio over a
period of time of 3 to 5 years, which allows it to make repeated efforts to
locate debtors and request payment. Additionally, as the Company is not subject
to customer work standards, it can work accounts in any order or fashion which
it chooses and can work creatively with debtors to arrange for payment by
restructuring terms over an extended period of time. As the principal holder of
the debt, the Company also can offer debtors a reduction in accrued finance
charges, and in certain limited circumstances, reductions in principal balances,
in exchange for immediate payment.
A record of all contacts with debtors is maintained in the mainframe system.
Once a payment schedule has been established, the computer system monitors
subsequent payments by the debtor and notifies an account representative if
payment is not received within 2 days after a due date.
RELATED OUTSOURCING SERVICES. The Company leverages its operational
expertise and call and data management technology by offering a number of
related outsourcing services, including: (1) contract management, through which
the Company performs a range of accounts receivable management
52
<PAGE>
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.
TECHNOLOGY AND SYSTEMS
The Company utilizes a variety of management information and
telecommunications systems to enhance productivity in all areas of its business.
Each of the Company's four operating entities has developed its own accounts
receivable management operating systems tailored to the needs of the particular
customer base it serves. The Company's operating units use mainframe hardware
configurations to operate a combination of proprietary and
commercially-available software to prioritize account collections activity and
maximize account representative contacts. The majority of the Company's software
can be customized to accommodate specific work standards provided by the
Company's customers.
The Company believes that Payco's recently-developed World-class Integrated
Network ("WIN") system provides the Company with one of the most technically
advanced accounts receivable management systems in the industry. The WIN system,
which is currently being installed throughout the Payco operating facilities, is
a customized automated collections management system which integrates predictive
dialers and access to consumer databases into the operating system. The WIN
system enhances the Company's ability to service large customers by providing
the flexibility to distribute account information for national clients among the
Company's branches and then compile productivity results from each branch to
provide the customer with one consolidated report. Additionally, the WIN system
has customized modules which facilitate insurance billing services, early-out
programs and complete outsourcing of the accounts receivable management process.
In addition to the WIN system, API, Continental and Miller maintain
operating systems and software which place them each among the technological
leaders in the industry. At API, the Company utilizes proprietary debtor scoring
models to evaluate prospective portfolio purchases and to properly price bids.
The debtor scoring models analyze underlying portfolio accounts according to
certain statistical measures and calculate a value for the portfolio. The
Company's national data base, developed at Continental, aggregates information
regarding consumers from various sources and contains the names, addresses and
phone numbers for over 100 million people in the United States. The national
database provides a proprietary and cost-effective means of "skiptracing," or
locating account debtors. When used in connection with its account scoring
models, Continental can effectively estimate which accounts have the highest
probability of debtor contact and payment and focus its resources accordingly.
In addition, the Company uses sophisticated telecommunications equipment,
including automated predictive dialers. Predictive dialers extract telephone
numbers from an account database and place simultaneous calls based on account
rankings. Through interface with the Company's management information systems,
the predictive dialer signals an available account representative and displays
the relevant account information on his or her computer screen upon detecting a
response to a call. The system automatically adjusts the rate of call placement
based upon the number of available account representatives. Predictive dialers
significantly increase account representative productivity, allowing experienced
ones to complete 300 to 400 contacts in a single shift compared to 75 to 125
contacts a shift using conventional manual dialing.
The Company expects to benefit from migrating the most advanced and
effective technology of the Company among all of the Company's operating
entities. For example, the national database can be
53
<PAGE>
used by each operating company to enhance the probability of locating debtors
and effecting payment on accounts in a cost effective manner. Similarly, the
most effective debtor scoring models developed throughout the Company can be
shared with the other operating entities to improve the Company's statistical
analysis of accounts and increase the efficiency by determining how and when
accounts are worked.
SALES AND MARKETING
On a combined basis, 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. Each of the operating companies
maintains its own sales force and has 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
brandnames, emphasizes its industry experience and reputation, two key factors
considered by creditors when selecting an accounts receivable service provider.
Increasingly, the Company will focus on cross-selling its full range of
outsourcing services to its existing customers and will use its product breadth
as a key selling point in creating new business. The Company's overall sales and
marketing strategies are coordinated by the corporate office in Atlanta, 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, The Chase
Manhattan Bank, Citibank, Bank One, Discover Card, Ameritech, US West, AT&T,
Sprint, the Internal Revenue Service and various student loan guaranty agencies
(including the California Student Aid Commission, USA Group Guaranty Services
Inc. and the Great Lakes Higher Education Corporation). On a combined basis,
after giving effect to the Payco Acquisition, the Company's pro forma 1996
revenues were realized from the following customer industries:
<TABLE>
<CAPTION>
% OF 1996
CUSTOMER INDUSTRY PRO FORMA REVENUES
- --------------------------------------------------- -----------------------
<S> <C>
Education.......................................... 22.6%
Health Care........................................ 18.9
Retail............................................. 18.9
Banking/Credit Card................................ 14.9
Telecommunications/Utilities....................... 8.4
Government......................................... 5.9
Commercial......................................... 5.6
Other.............................................. 4.8
</TABLE>
On a combined basis, after giving pro forma effect to the Payco Acquisition,
the largest customer accounted for less than 10% of the Company's pro forma 1996
revenues, and the top ten customers represented 36% of the Company's pro forma
1996 revenues. With its extensive national coverage, the Company believes that
it is well-positioned to capitalize on the increased consolidation among the
largest credit-granting entities.
FACILITIES
On a combined basis, as of December 31, 1996, the Company operated 54
facilities in the U.S., all of which are leased. The Company's facilities are
strategically located across the U.S. to give effective broad geographic
coverage for customers.
54
<PAGE>
EMPLOYEES
On a combined basis, the Company employs approximately 4,100 people, of
which 3,600 are account representatives, 130 are sales representatives and 370
work in corporate/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.
The Company also has extensive training programs for managers and
supervisors. For example, to further improve the productivity and performance of
its account representatives, the Company identifies and shares "best practices"
company-wide. The Company believes its investment in training provides its
account representatives with the skills and tools to collect amounts on placed
and purchased accounts more efficiently.
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 rates and rebalance account placements
towards higher performing servicers. The largest competitors include Deluxe
Corporation, Equifax Corporation, FCA International, First Data Corporation,
G.C. Services and Union Corporation.
LEGAL PROCEEDINGS
The Company is a defendant in various legal proceedings involving claims for
damages which constitute ordinary routine litigation incidental to its business.
In addition, Payco and its wholly owned subsidiary Payco-General American
Credits, Inc. are party to a class-action lawsuit filed in July 1995 by Jimmy
Rogers, Lillian H. Rogers, Randy Humphrey, Nancy Humphrey, Carol Christopher,
David Clapper and Virginia Clapper, as individuals and as class representatives,
in the Circuit Court of Etowah County, Alabama. The suit alleges that
Payco-General American Credits, Inc., which was performing collection services
on behalf of co-defendant Transamerica Business Credit Corporation
("Transamerica") committed violations of the FDCPA and Alabama state law.
Plaintiffs demanded judgment against defendants for compensatory and punitive
damages in an amount deemed appropriate by a jury, plus interest and the costs
of the action. 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. On May 13, 1996, Transamerica entered into a
settlement with
55
<PAGE>
the settlement class subject to court approval for a sum of $2.0 million plus
$50,000 administrative fees, plus forgiveness of the debt of 1,818 debtors which
Transamerica estimated at approximately $1.3 million. On August 1, 1996, the
court approved the general settlement but reserved the right to approve
individual settlements. Transamerica advised the court that the benefit to the
class was $3.9 million which represents forgiveness of debt of $1.9 million
(instead of the $1.3 million forgiveness of debt noted above). Furthermore, on
August 1, 1996, the plaintiff's motion of certification of a class of 1,818
individuals to which letters were sent by Payco-General American Credits, Inc.
was conditionally granted. The parties to the lawsuit agreed to non-binding
mediation, which took place on January 20, 1997. No settlement was reached at
that mediation. The Company believes it has meritorious defenses to the
complaint and the cross-claim in this suit and believes that the outcome of this
litigation will not have a material adverse effect on the operations or the
financial condition of the Company.
In March 1995, Payco reached a settlement in its litigation with the Federal
Trade Commission (the "FTC"), which had been pending in federal court in
Wisconsin. In a complaint filed in August 1993, the FTC alleged that Payco had
violated the FDCPA. Payco vigorously defended the case, and asserted that any
violations of the Act were contrary to the policy and practice of Payco. The
case was resolved with a Consent Decree, in which Payco did not admit any
liability. Pursuant to the Consent Decree, Payco agreed to take additional steps
to ensure compliance with the Act and paid a penalty of $500,000. The Company
believes that compliance with provisions of the Consent Decree by Payco and its
subsidiaries will not materially effect the Company's financial condition or
ongoing operations.
APLP has been notified that the Atlanta office of the FTC is conducting an
informal inquiry to determine if APLP has violated any provision of the FDCPA.
The FTC has requested that APLP provide certain documents and other information
regarding APLP's forms, policies and practices, and APLP has complied with that
request. 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.
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 debt, may not telephone at
inconvenient hours and must provide verification of the debt at the consumer's
request. Requirements under state collection agency statutes vary, with most
requiring compliance similar to that required under the FDCPA. In addition, most
states and certain municipalities require collection agencies to be licensed
with the appropriate authorities before collecting debts from debtors within
those jurisdictions. It is the Company's policy to comply with the provisions of
the FDCPA, comparable state statutes and applicable licensing requirements. The
Company has established policies and procedures to reduce the likelihood of
violations of the FDCPA and related state statutes. 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.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
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 following the Payco Acquisition.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- ----------- -----------------------------------------------------
<S> <C> <C>
Jeffrey E. Stiefler.................................. 50 Chairman of the Board of Directors
Timothy G. Beffa..................................... 45 Director, President and Chief Executive Officer
David E. De Leeuw.................................... 52 Director
David E. King........................................ 37 Director, Secretary and Treasurer
Tyler T. Zachem...................................... 30 Director and Vice President
David G. Hanna....................................... 32 Director
Frank J. Hanna, III.................................. 34 Director
Peter C. Rosvall..................................... 45 Director and Executive Vice President
James F. Whalen...................................... 45 Executive Vice President and Chief Financial Officer
Dennis G. Punches.................................... 60 Director
</TABLE>
JEFFREY E. STIEFLER (50), Chairman of the Board of Directors since January
1996. From June 1993 to September 1995, 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 is an Operating Partner of McCown De
Leeuw & Co. Mr. Stiefler currently serves as a director of National Computer
Systems and chairman of International Data Response Corporation.
TIMOTHY G. BEFFA (45), President, Chief Executive Officer and Director of
the Company 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"), divisions of Heritage Media Corp. , and as a
director of DDI. From 1989 until August 1995, Mr. Beffa had 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 previously he had been Manager of Financial
Analysis.
DAVID E. DE LEEUW (52), Director of the Company since September 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. Offshore (Europe) III, L.P., a managing 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. He currently serves as a director
of Vans, Inc., DEC International Inc., Nimbus CD International, Inc., Tiara
Motorcoach Corporation and Papa Gino's Inc.
DAVID E. KING (37), Secretary, Treasurer and Director of the Company since
September 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 DEC
International Inc., International Data Response Corporation, Nimbus CD
International, Inc., ASC Network Corp. and Fitness Holdings Inc.
57
<PAGE>
TYLER T. ZACHEM (30), Vice President and Director of the Company since
September 1995. Mr. Zachem is a principal of MDC Management Company III, which
is the general partner of McCown De Leeuw & Co. III, L.P. and McCown De Leeuw &
Co. Offshore (Europe) III, 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 at McKinsey & Co. and McDonald & Company.
DAVID G. HANNA (32), Director of the Company since September 1995. Mr. Hanna
served as President of Account Portfolios, L.P. from November 1992 to September
1995 and as President of API from September 1995 to September 1996. From 1989 to
November 1992, Mr. Hanna served as President of the Governmental Division of
Nationwide Credit, Inc. David G. Hanna is the brother of Frank J. Hanna, III.
Mr. Hanna is currently a director of The Button Gwinnett Financial Corp.
FRANK J. HANNA, III (34), Director of the Company since September 1995. Mr.
Hanna founded Account Portfolios, L.P. in July 1989, and served as its Chief
Executive Officer until its acquisition by OSI in September 1995. From September
1995 to September 1996, Mr. Hanna served as Chief Executive Officer of API. 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.
PETER C. ROSVALL (45), Executive Vice President and Director of the Company
since January 1996. From June 1980 until its acquisition by OSI in January 1996,
Mr. Rosvall served as President of Continental Credit Services, Inc.
JAMES F. WHALEN (45), Executive Vice President and Chief Financial Officer
of the Company since November 1996. From January 1996 until November 1996, Mr.
Whalen served as Vice President of Business Operations for Dell Computer
Corporation ("Dell"). From March 1994 until January 1996, Mr. Whalen served as
controller of Dell. Prior to joining Dell, Mr. Whalen was controller of Protein
Technologies International, Inc., a wholly owned subsidiary of Ralston Purina,
from March 1990 until March 1994 and was Chief Financial Officer of Cincinnati
Microwave, Inc. from May 1985 until March 1990.
DENNIS G. PUNCHES (60), Director of the Company since November 1996. From
May 1988 to October 1988 and 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.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
or accrued for the year ended December 31, 1996 for the Chief Executive Officer
and the other most highly compensated executive officers of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND SALARY COMMON STOCK ALL OTHER
PRINCIPAL POSITION ($)(1) BONUS($) OPTIONS (#) COMPENSATION($)
- --------------------------------------------------- ------------ --------- --------------- ---------------------
<S> <C> <C> <C> <C>
Timothy G. Beffa................................... 103,846 200,000 131,421.66 --
James F. Whalen.................................... 20,532 100,000 50,000.00 --
Allen M. Capsuto................................... 188,461 175,000 46,088.67 --
David B. Kreiss.................................... 245,769 -- 57,610.83 --
Gregory M. Shelton................................. 143,365 -- 46,088.67 --
</TABLE>
- ------------------------
(1) Represents total salary paid by the Company in fiscal year 1996 based on
annual salaries of $300,000, $200,000, $200,000, $300,000 and $175,000 for
Messrs. Beffa, Whalen, Capsuto, Kreiss and Shelton, respectively.
58
<PAGE>
On October 23, 1996, Mr. Kreiss, formerly a director of the Company and
President and Chief Executive Officer of API, and Mr. Shelton, formerly
Executive Vice President of the Company, resigned from the Company. Mr. Capsuto,
formerly Senior Vice President--Finance and Chief Financial Officer, resigned
from the Company, effective on January 24, 1997.
On August 27, 1996, OSI entered into an 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 $300,000 and
received a bonus of $200,000 for fiscal year 1996. Commencing in fiscal year
1997, Mr. Beffa is eligible for an annual bonus of up to 100% 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 41,555.21 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 November 27, 1996, OSI entered into an employment agreement with James F.
Whalen. Pursuant to the employment agreement, Mr. Whalen serves as Chief
Financial Officer of the Company. Mr. Whalen receives an annual base salary of
$200,000 and received a bonus of $100,000 for fiscal year 1996. Commencing in
fiscal year 1997, Mr. Whalen is eligible for an annual bonus of up to fifty
percent of his annual base salary. Effective November 27, 1996, Mr. Whalen
received options to purchase 50,000 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.
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. No other director of OSI receives 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. Steifler received
options to purchase 23,044.33 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 be either 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, but excluding non-employee directors.
A total of 500,000 shares of common stock of the Company are reserved for
issuance under the Stock Option Plan. As of March 24, 1997, options to purchase
up to 246,021.20 shares of the Company's common stock are outstanding under the
Stock Option Plan.
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<PAGE>
SECURITY OWNERSHIP
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 899,891.21
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 3,425,126.01 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
warrantholders, 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 March 24, 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.
60
<PAGE>
<TABLE>
<CAPTION>
AMOUNT
AND NATURE OF PERCENT
NAME AND ADDRESS BENEFICIAL OF
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP CLASS(1)
- -------------------------- ---------------------------------------------------------- --------------- -----------
<S> <C> <C> <C>
Preferred Stock McCown De Leeuw & Co. III, L.P.(2)........................ 599,927.09 66.6%
McCown De Leeuw & Co. Offshore (Europe) III, L.P.(2)...... 599,927.09 66.6%
McCown De Leeuw & Co. III (Asia), L.P.(2)................. 599,927.09 66.6%
Gamma Fund LLC(2)......................................... 599,927.09 66.6%
Rainbow Trust One(3)...................................... 149,982.58 16.7%
Rainbow Trust Two(4)...................................... 149,981.54 16.7%
David E. De Leeuw(2)...................................... 599,927.09 66.6%
David E. King(2).......................................... 599,927.09 66.6%
Frank J. Hanna, III(3).................................... 149,982.58 16.7%
David G. Hanna(4)......................................... 149,981.54 16.7%
All directors and officers as a group(2)(3)(4)............ 899,981.21 100.0%
Voting Common Stock McCown De Leeuw & Co. III, L.P.(5)........................ 1,897,793.01 55.4%
McCown De Leeuw & Co. Offshore (Europe) III, L.P.(5)...... 1,897,793.01 55.4%
McCown De Leeuw & Co. III (Asia), L.P.(5)................. 1,897,793.01 55.4%
Gamma Fund LLC(5)......................................... 1,897,793.01 55.4%
Rainbow Trust One(3)...................................... 466,667.00 13.6%
Rainbow Trust Two(4)...................................... 466,666.00 13.6%
Peter C. Rosvall.......................................... 383,600.00 11.2%
David E. De Leeuw(5)...................................... 1,897,793.01 55.4%
David E. King(5).......................................... 1,897,793.01 55.4%
Frank J. Hanna,III(3)..................................... 466,667.00 13.6%
David G. Hanna(4)......................................... 466,666.00 13.6%
All directors and officers as a group(3)(4)(5)............ 3,214,726.01 93.9%
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 Common Chase Equity Associates, L.P.(7).......................... 400,000.00 100.0%
Stock All directors and officers as a group..................... 0.00 0.00%
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 0.00%
</TABLE>
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(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 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.
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(2) 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. Includes 532,435.29 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"), 44,994.54 shares held by McCown De Leeuw & Co.
Offshore (Europe) III, L.P., an investment partnership whose general partner
is MDC III, 10,498.72 shares held by McCown De Leeuw & Co. III (Asia), L.P.,
an investment partnership whose general partner is MDC Management Company
IIIA, L.P. ("MDC IIIA"), and 11,998.54 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 the 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. Offshore (Europe) III, 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 the
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. Dispositive decisions regarding the
Class A Non-Voting Common Stock are made by Mr. McCown and Mr. De Leeuw, as
Managing General Partners of MDC III, who together have more than the
required two-thirds-in-interest vote of the Managing General Partners
necessary to effect such decision on behalf of any such entity. Messrs.
McCown, De Leeuw, King,
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Hellman, Ayres and Zuckerman have no direct ownership of any shares of Class
A Non-Voting Common Stock and disclaim beneficial ownership of any shares of
Class A Non-Voting Common Stock except to the extent of their proportionate
partnership interests. The address of each of the above-mentioned entities
is c/o McCown De Leeuw & Co., 3000 Sand Hill Road, Building 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 indirect 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.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ACQUISITION ARRANGEMENTS
As a condition to entering into the Merger Agreement, the Company required
Payco to enter into covenant not-to-compete agreements and employment or
consulting agreements with certain of the executive officers and directors of
Payco, which agreements became effective upon consummation of the Merger, as
follows: (i) a consulting agreement with Dennis G. Punches, Chairman of the
Board of Payco prior to the Merger, in which he has agreed to make himself
available to consult with Payco for a period of three years after November 6,
1996 (the date on which the Merger was consummated) (the "Effective Time") and
providing for a payment to him of $150,000 at the conclusion of the three year
period plus reimbursement of expenses, (ii) a covenant not-to-compete agreement
with Dennis G. Punches which prohibits him from engaging in the accounts
receivable management business in North America (including Canada, Mexico and
Puerto Rico) and any other jurisdiction where Payco is doing business or
qualified to do business for a period of three years after the Effective Time in
consideration of a lump sum payment to him at the Effective Time of $3,000,000,
(iii) employment agreements with six other directors and executive officers of
Payco, namely Messrs. Neal R. Sparby, William W. Kagel, Alvin W. Keeley, Patrick
E. Carroll, David S. Patterson and James R. Bohmann, pursuant to which they will
be employed by Payco in their present capacities for a period of one year after
the Effective Time at salaries that range from $189,000 to $246,413, annually,
and which require payment of any bonus due and continued payment of base salary
for the remaining portion of such one year period (offset by remuneration from
other employment) if the employee is terminated without cause during the initial
one year term, and (iv) covenant not-to-compete agreements with the six
directors and executive officers of Payco referred to in clause (iii), above,
prohibiting them from engaging in the accounts receivable management business in
any jurisdiction where Payco is doing business or qualified to do business for a
period of one year after the Effective Time in consideration of lump sum
payments made to them upon the closing of the Payco Acquisition, ranging in
amount from $25,000 to $100,000. In addition, the Company required Payco to
enter into employment agreements on similar terms with two other executive
officers of Payco who are not directors and to enter into covenant
not-to-compete agreements with such officers and also with Joseph T. Treleven,
Director of Mergers/Acquisitions of Payco, pursuant to which he was paid
$200,000 and will be restricted from competing with Payco for a three year
period.
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.
Upon closing of the Transactions, MDC Management received a one-time fee of
$3,000,000 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 Notes. Goldman Sachs also served
as financial advisor to OSI in connection with the
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Payco Acquisition 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 the New Bank 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. See "Security Ownership."
In addition to acting as an Initial Purchaser of the 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 New Bank 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. See "Security Ownership."
ARRANGEMENTS WITH CERTAIN AFFILIATES
Payco leases its corporate headquarters in Brookfield, Wisconsin, its data
processing center in New Berlin, Wisconsin and the office space for three of its
collection operations from partnerships in which certain officers of Payco are
the principal partners. The terms of the leases provided for aggregate annual
payments of approximately $2.2 million, $2.4 million and $2.2 million for the
period January 1, 1996 to November 5, 1996 and the years ended December 31, 1995
and 1994. 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.
MASTER SERVICES AGREEMENT
APLP has 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 provides
certain management and investment services to APLP for a monthly fee of $50,000.
The Master Services Agreement expires on October 1, 1997 and is renewable
annually thereafter, unless terminated by either party. The Master Services
Agreement can be terminated upon mutual written agreement of the parties or by
one party after a breach by the other party that is not cured within 15 days of
the date of written notice by the non-breaching party. The Company believes that
the terms of and the fees paid for the professional services rendered are at
least as favorable to APLP as those which could be negotiated with a third
party.
Upon closing of the Transactions, HBR received a one-time fee of $600,000
for financial advisory services provided to OSI in connection therewith.
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DESCRIPTION OF NEW BANK CREDIT FACILITY; OTHER INDEBTEDNESS
NEW BANK CREDIT FACILITY. The Company has entered into a Credit Agreement
with Goldman Sachs Credit Partners L.P. ("GSCP"), an affiliate of Goldman Sachs,
The Chase Manhattan Bank ("Chase"), its affiliate Chase Securities Inc. ("Chase
Securities") and various lenders party thereto providing for (i) syndicated
senior secured term loan facilities aggregating $142.0 million (the "Term
Facilities") and (ii) a senior secured revolving credit facility of up to $58.0
million (the "Revolving Facility," and together with the Term Facilities, the
"Senior Facilities"). In connection with such financing, GSCP acted as
Syndication Agent, GSCP and Chase Securities acted as Co-Arrangers, and GSCP and
Chase act as Co-Administrative Agents.
The Term Facilities consist of (i) a Tranche A Term Loan of $71.0 million
and (ii) a Tranche B Term Loan of $71.0 million. The Term Facilities provide for
quarterly amortization until final maturity. The Tranche A Term Loan will mature
on October 15, 2001, and the Tranche B Term Loan will mature on October 15,
2003.
In addition, the Company will be required to make prepayments on the Senior
Facilities under certain circumstances, including upon certain asset sales and
issuance of equity securities. The Company will also be required to make
prepayments on the Senior Facilities in an amount equal to 50% of the Company's
Consolidated Excess Cash Flow (as defined therein) in 1998 and thereafter and
upon receipt of cash proceeds from property and casualty insurance or
condemnation awards. These mandatory prepayments will be applied to prepay the
Senior Facilities in the following order: first, to the Term Facilities, ratably
among each tranche, and second, to the permanent reduction of the Revolving
Facility. Subject to reduction in the event the Company meets leverage and
interest coverage tests, the Tranche A Term Loan 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 Chase's customary base rate, plus 1.5% or (b) at the reserve
adjusted Eurodollar rate plus 2.5%. The Tranche B Term Loan 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 Chase's customary base rate, plus 2.0% or (b) at the
reserve adjusted Eurodollar rate plus 3.0%. As shown in Note (e) to the Pro
Forma Consolidated Statement of Operations, interest expense, excluding
amortization of debt issuance costs, for the year ended December 31, 1995, on a
pro forma basis, on the $142.0 million of Term Facilities would have been $11.6
million based on scheduled repayments.
Subject to certain conditions, the Company has the ability to borrow an
additional $58.0 million for working capital, general corporate purposes and
acquisitions under the Revolving Facility.
The Revolving Facility has a term of five years and is fully revolving until
final maturity. Subject to reduction in the event the Company meets certain
leverage and interest coverage tests, 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 Chase's customary base rate, plus 1.5% or (b) at the
reserve adjusted Eurodollar rate plus 2.5%.
The Senior Facilities are guaranteed by all of the Company's present
wholly-owned domestic Subsidiaries and are secured by all of the stock of the
Company's present wholly-owned domestic Subsidiaries and by substantially all of
the Company's domestic property and assets. Any additional domestic subsidiaries
formed by the Company that become guarantors under the Senior Facilities will
also jointly and severally guarantee the Company's payment obligations on the
Notes on a senior subordinated basis and the Company will pledge the stock of
any such subsidiaries.
The Senior Facilities contain certain financial covenants, including, but
not limited to, covenants related to interest coverage, fixed charge coverage, a
leverage test and a limitation on capital expenditures. In addition, the Senior
Facilities contain other affirmative and negative covenants relating to (among
other things) liens, negative pledge, limitations on other debt, transactions
with affiliates, mergers and acquisitions, sales of assets, leases, portfolio
purchases, restricted junior payments,
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capital expenditures, guarantees and investments. The financial covenants
require the Company to maintain (i) a minimum interest coverage ratio (as
defined therein) of 2.25:1.00 until December 31, 1997, increasing to 2.50:1.00
thereafter until December 31, 1998, increasing to 2.75:1.00 thereafter until
December 31, 1999, and then increasing to 3.00:1.00 thereafter until
termination; (ii) a maximum leverage ratio (as defined therein) of 4.00:1.00
until December 31, 1977, decreasing to 3.75:1.00 thereafter until December 31,
1998, decreasing to 3.50:1.00 thereafter until December 31, 1999, decreasing to
3.25:1.00 thereafter until December 31, 2000, decreasing to 3.00:1.00 thereafter
until December 31, 2001, and then decreasing to 2.75:1.00 thereafter until
termination; (iii) a minimum fixed charge ratio (as defined therein) of not less
than 1.05:1.00; and (iv) a maximum consolidated maintenance capital expenditures
amount (as defined therein) of $3 million from November 6, 1996 through December
31, 1996, and $8 million for each calendar year thereafter. The Senior
Facilities contain customary events of default for highly-leveraged financings,
including certain changes in control of the Company.
The Senior Facilities allow the Company to use the Senior Facilities for
future acquisitions generally so long as (i) the Company is able to maintain its
interest coverage ratio at a level equal to the level referred to above for the
applicable period plus 0.25 pro forma for the acquisition; (ii) the Company is
able to maintain its leverage ratio at a level equal to the level referred to
above for the applicable period minus 0.25 pro forma for the transaction; (iii)
the aggregate amount expended for such acquisitions shall not exceed $30 million
during any successive 12-month period; and (iv) that portion of consolidated
EBITDA attributable to any assets acquired in the acquisition as projected by
the Company for the twelve-month period immediately following the date of such
acquisition, shall not exceed 20% of consolidated EBITDA for the four fiscal
quarter period most recently ended prior to the date of such acquisition.
OTHER INDEBTEDNESS. One note, in the principal amount of $5 million, which
bears interest at the rate of 9% per annum and is due on July 9, 2001, remains
outstanding as an obligation of the Company following the Payco Acquisition. The
note ranks PARI PASSU in right of payment with the Notes.
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DESCRIPTION OF NOTES
GENERAL
The New Notes will be issued, and the Old Notes were issued, under an
Indenture dated as of November 6, 1996 (the "Indenture") among the Company, the
Guarantors and Wilmington Trust Company, as trustee (the "Trustee"). For
purposes of the following summary, the Old Notes and the New Notes shall be
collectively referred to as the "Notes." The terms and conditions of the Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939 as in effect on the date of the
Indenture. The following statements are summaries of the provisions of the Notes
and the Indenture and do not purport to be complete. Such summaries make use of
certain terms defined in the Indenture and are qualified in their entirety by
express reference to the Indenture. The definitions of certain capitalized terms
used in the following summary are set forth below under "-- Certain
Definitions." A copy of the Indenture is filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The term "Company" as used in this
Description of Notes refers only to OSI and does not include any of its
subsidiaries.
The Notes are general unsecured obligations of the Company and are
subordinated in right of payment to all Senior Debt of the Company, whether
outstanding on the date of the Indenture or incurred thereafter. See
"-- Subordination." The Company's obligations under the Notes are
unconditionally guaranteed on an unsecured, senior subordinated basis, jointly
and severally, by each of the domestic Subsidiaries of the Company that are
Restricted Subsidiaries and each Subsidiary of the Company that becomes a
guarantor under the New Bank Credit Facility. See "-- Subsidiary Guarantees."
As of the date of the Indenture, all of the Company's Subsidiaries are
Restricted Subsidiaries. However, under certain circumstances, the Company will
be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the
restrictive covenants set forth in the Indenture.
The New Notes will be issued in fully registered form only, without coupons,
in denominations of $1,000 and integral multiples thereof. Initially, the
Trustee will act as paying agent and registrar for the Notes. The Notes may be
presented for registration of transfer and exchange at the offices of the
registrar, which initially will be the Trustee's corporate trust office. The
Company may change any paying agent and registrar without notice to holders of
the Notes (the "Holders"). The Company will pay principal (and premium, if any)
on the Notes at the Trustee's corporate office in New York, New York. At the
Company's option, interest may be paid at the Trustee's corporate trust office
or by check mailed to the registered addresses of the Holders. Any Old Notes
that remain outstanding after the completion of the Exchange Offer, together
with the New Notes issued in connection with the Exchange Offer, will be treated
as a single class of securities under the Indenture. See "The Exchange Offer"
and "Old Notes Registration Rights."
PRINCIPAL, MATURITY AND INTEREST
The Notes will be limited in aggregate principal amount to $100.0 million
and will mature on November 1, 2006. Interest on the Notes will accrue at the
rate of 11% per annum and will be payable in cash semi-annually in arrears on
May 1 and November 1, commencing on May 1, 1997, to Holders of record on the
immediately preceding April 15 and October 15. Interest on the Notes will accrue
from the most recent date to which interest has been paid or, if no interest has
been paid, from the date of original issuance. Interest will be computed on the
basis of a 360-day year comprised of twelve 30-day months. Principal, interest
and premium, if any, on the Notes will be payable at the office or agency of the
Company maintained for such purpose within the City and State of New York or, at
the option of the Company, payment of interest may be made by check mailed to
the Holders of the Notes at their respective addresses set forth in the register
of Holders of Notes; PROVIDED that all payments with respect to the Global Note
and definitive notes the Holders of which have given wire transfer instructions
to the
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Company is required to be made by wire transfer of immediately available funds
to the accounts specified by the Holders thereof. Until otherwise designated by
the Company, the Company's office or agency in New York will be the office of
the Trustee maintained for such purpose. The Notes will be issued in minimum
denominations of $1,000 and integral multiples thereof.
SETTLEMENT AND PAYMENT
Settlement for the Notes will be made in immediately available funds.
Payments by the Company in respect of the Notes (including principal, interest
and premium, if any) will be made in immediately available funds. The Notes are
expected to be eligible to trade in the PORTAL Market and to trade in the
Depositary's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in the Notes will, therefore, be required by the
Depositary to be settled in immediately available funds. No assurance can be
given as to the effect, if any, of such settlement arrangements on trading
activity in the Notes.
Because of time zone differences, the securities account of a Euroclear or
CEDEL participant purchasing an interest in the Global Note from a Participant
(as defined herein) in DTC will be credited, and any such crediting will be
reported to the relevant Euroclear or CEDEL participant, during the securities
settlement processing day (which must be a business day for Euroclear and CEDEL)
immediately following the settlement date of DTC. DTC has advised the Company
that cash received in Euroclear or CEDEL as a result of sales of interests in
the Global Note by or through a Euroclear or CEDEL participant to a Participant
in DTC will be received with value on the settlement date of DTC but will be
available in the relevant Euroclear or CEDEL cash account only as of the
business day for Euroclear or CEDEL following DTC's settlement date.
SUBORDINATION
The payment of principal of, interest, premium, if any, on, and all other
Obligations in respect of, the Notes is subordinated in right of payment, in
certain circumstances as set forth in the Indenture, to the prior payment in
full in cash or Cash Equivalents of all Senior Debt, whether outstanding on the
date of the Indenture or thereafter incurred.
The Indenture provides that, upon any distribution to creditors of the
Company in a liquidation or dissolution of the Company or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to the
Company or its property, an assignment for the benefit of creditors or any
marshaling of the Company's assets and liabilities, the holders of Senior Debt
will be entitled to receive payment in full in cash or Cash Equivalents of all
Obligations due in respect of such Senior Debt (including interest after the
commencement of any such proceeding at the rate specified in the documents
relating to the applicable Senior Debt, whether or not the claim for such
interest is allowed as a claim in such proceeding) before the Holders of Notes
will be entitled to receive any payment on account of any Obligations with
respect to the Notes, and until all Obligations with respect to Senior Debt are
paid in full in cash or Cash Equivalents, any distribution to which the Holders
of Notes would be entitled will be made to the holders of Senior Debt (except
that Holders of Notes may receive Permitted Junior Securities and payments made
from the trust described below under "-- Legal Defeasance and Covenant
Defeasance").
The Indenture also provides that the Company may not make any payment on
account of any Obligations in respect of the Notes (except in Permitted Junior
Securities or from the trust described below under "-- Legal Defeasance and
Covenant Defeasance") if (i) a default in the payment of the principal of,
premium, if any, or interest on Designated Senior Debt occurs and is continuing,
or any judicial proceeding is pending to determine whether any such default has
occurred, or (ii) any other default occurs and is continuing with respect to
Designated Senior Debt that permits, or would permit, with the passage of time
or the giving of notice or both, holders of the Designated Senior Debt as to
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which such default relates to accelerate its maturity and the Trustee receives a
notice of such default (a "Payment Blockage Notice") from the Company of the
holders of any Designated Senior Debt. Payments on the Notes may and shall be
resumed (a) in the case of a payment default, upon the date on which such
default is cured or waived or shall have ceased to exist, unless another
default, event of default or other event that would prohibit such payment shall
have occurred and be continuing, or all Obligations in respect of such
Designated Senior Debt shall have been paid in full in cash or Cash Equivalents
and (b) in case of a nonpayment default, the earlier of the date on which such
nonpayment default is cured or waived or 179 days after the date on which the
applicable Payment Blockage Notice is received by the Trustee. No new period of
payment blockage may be commenced unless and until 360 days have elapsed since
the first day of effectiveness of the immediately prior Payment Blockage Notice.
No nonpayment default that existed or was continuing on the date of delivery of
any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a
subsequent Payment Blockage Notice unless such default shall have been
subsequently cured or waived for a period of not less than 180 days.
The Indenture further requires that the Company promptly notify holders of
Senior Debt if payment of the Notes is accelerated because of an Event of
Default.
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency, Holders of Notes may recover less ratably than
creditors of the Company who are holders of Senior Debt. See "Risk Factors." The
principal amount of Senior Debt outstanding at December 31, 1996 was
approximately $142.5 million. The Indenture will limit, subject to certain
financial tests, the amount of additional Indebtedness, including Senior Debt,
that the Company and its Restricted Subsidiaries can incur. See "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Disqualified Stock."
The Notes rank PARI PASSU or senior in right of payment to all Subordinated
Indebtedness of the Company. On a pro forma basis, after giving effect to the
Transactions, the principal amount of Subordinated Indebtedness outstanding at
December 31, 1996 would have been approximately $5.0 million.
"DESIGNATED SENIOR DEBT" means (i) so long as the Senior Bank Debt is
outstanding, the Senior Bank Debt and (ii) at any time thereafter, any other
Senior Debt permitted under the Indenture the aggregate principal amount of
which is $25.0 million or more and that has been designated by the Company as
"Designated Senior Debt."
"PERMITTED JUNIOR SECURITIES" means equity securities of the Company or
debt securities of the Company that are subordinated in right of payment to all
Senior Debt and all securities issued in exchange for Senior Debt that may at
the time be outstanding, to substantially the same extent as, or to a greater
extent than, the Notes.
"SENIOR BANK DEBT" means all Obligations under or in respect of the New
Bank Credit Facility, together with any refunding, refinancing or replacement,
in whole or part, of such Indebtedness.
"SENIOR DEBT" means (i) the Senior Bank Debt and (ii) any other
Indebtedness permitted to be incurred by the Company under the terms of the
Indenture, unless the instrument under which such Indebtedness is incurred
expressly provides that it is on a parity with or subordinated in right of
payment to the Notes. Notwithstanding anything to the contrary in the foregoing,
Senior Debt will not include (1) any liability for federal, state, local or
other taxes owed or owing by the Company, (2) any Indebtedness of the Company to
any of its Restricted Subsidiaries or other Affiliates, (3) any trade payables,
(4) that portion of any Indebtedness that is incurred in violation of the
Indenture, (5) Indebtedness which, when incurred and without respect to any
election under Section 1111(b) of the Title 11, United States Code, is without
recourse to the Company, (6) Indebtedness evidenced by the Notes and (7) Capital
Stock.
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SUBSIDIARY GUARANTEES
The Company's payment obligations under the Notes are jointly and severally
guaranteed on a senior subordinated basis (the "Subsidiary Guarantees") by the
Guarantors. The Subsidiary Guarantee of each Guarantor is subordinated to the
prior payment in full of all Senior Debt of such Guarantor and the amounts for
which the Guarantors are liable under the guarantees issued from time to time
with respect to Senior Debt. The obligations of each Guarantor under its
Subsidiary Guarantee are limited so as not to constitute a fraudulent conveyance
under applicable law. See, however, "Risk Factors -- Fraudulent Conveyance
Issues."
The Indenture provides that, except for a merger of a Guarantor with and
into the Company or another Guarantor, no Guarantor may consolidate with or
merge with or into (whether or not such Guarantor is the surviving Person),
another corporation, Person or entity unless (i) subject to the provisions of
the following paragraph, the Person formed by or surviving any such
consolidation or merger (if other than such Guarantor) assumes all the
obligations of such Guarantor pursuant to a supplemental indenture in form and
substance reasonably satisfactory to the Trustee under the Notes and the
Indenture; (ii) immediately after giving effect to such transaction, no Default
or Event of Default exists; and (iii) the Company would be permitted to incur,
immediately after giving effect to such transaction, at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the covenant described below under the caption "-- Incurrence of
Indebtedness and Issuance of Disqualified Stock."
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other disposition, by
way of such a merger, consolidation or otherwise, of all of the capital stock of
such Guarantor) or the corporation acquiring the property (in the event of a
sale or other disposition of all of the assets of such Guarantor) will be
released and relieved of any obligations under its Subsidiary Guarantee;
provided that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Indenture. See "-- Repurchase
at the Option of Holders -- Asset Sales."
OPTIONAL REDEMPTION
Except as described below, the Notes are not redeemable at the Company's
option prior to November 1, 2001. From and after November 1, 2001, the Notes
will be subject to redemption at the option of the Company, in whole or in part,
upon not less than 30 nor more than 60 days' written notice, at the redemption
prices (expressed as percentages of principal amount) set forth below, plus
accrued and unpaid interest thereon to the applicable redemption date, if
redeemed during the twelve-month period beginning on November 1 of each of the
years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF
PRINCIPAL
YEAR AMOUNT
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
2001........................................................................................... 105.500%
2002........................................................................................... 103.667%
2003........................................................................................... 101.833%
2004 and thereafter............................................................................ 100.000%
</TABLE>
Prior to November 1, 1999, the Company may, at its option, on any one or
more occasions, redeem up to 35% of the aggregate principal amount of Notes
originally offered in the Offering at a redemption price equal to 111% of the
principal amount thereof, plus accrued and unpaid interest thereon to the
redemption date, with the net proceeds of a public or private sale of common
stock of the Company; PROVIDED that at least 65% of the original aggregate
principal amount of Notes remains outstanding
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immediately after the occurrence of each such redemption; and PROVIDED, FURTHER,
that any such redemption shall occur within 60 days of the date of the closing
of the corresponding sale of common stock of the Company.
SELECTION AND NOTICE
Notices of purchase or redemption shall be mailed by first class mail at
least 30 but not more than 60 days before the purchase or redemption date to
each Holder of Notes to be purchased or redeemed at such Holder's registered
address. If any Note is to be purchased or redeemed in part only, the notice of
purchase or redemption that relates to such Note shall state the portion of the
principal amount thereof to be purchased or redeemed. A new Note in principal
amount equal to the unpurchased or unredeemed portion thereof will be issued in
the name of the Holder thereof upon cancellation of the original Note. On and
after the purchase or redemption date, unless the Company defaults in payment of
the purchase or redemption price, interest ceases to accrue on Notes or portions
of Notes purchased or called for redemption.
MANDATORY REDEMPTION
Except as set forth below under "-- Repurchase at the Option of Holders,"
the Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash (the
"Change of Control Payment") equal to 101% of the aggregate principal amount
thereof plus accrued and unpaid interest and Liquidated Damages, if any, thereon
to the date of purchase. Within 30 days following any Change of Control, the
Company will mail a notice to each Holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
Notes pursuant to the procedures required by the Indenture and described in such
notice. The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes as a result of a Change of Control.
The Indenture provides that, prior to complying with the provisions of this
covenant, but in any event within 30 days following a Change of Control, the
Company will either repay in full in cash or Cash Equivalents all outstanding
amounts under the New Bank Credit Facility or offer to repay in full in cash or
Cash Equivalents all outstanding amounts under the New Bank Credit Facility and
repay the Obligations held by each lender under the New Bank Credit Facility who
has accepted such offer or obtain the requisite consents, if any, under the New
Bank Credit Facility to permit the repurchase of the Notes required by this
covenant.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee for cancellation the Notes so accepted together with an Officers'
Certificate stating the aggregate principal amount of Notes or portions thereof
being purchased by the Company. The Paying Agent will promptly mail to each
Holder of Notes so tendered the Change of Control Payment for such Notes, and
the
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Trustee will promptly authenticate and mail (or cause to be transferred by book
entry) to each Holder a new Note equal in principal amount to any unpurchased
portion of the Notes surrendered, if any; PROVIDED that each such new Note will
be in a principal amount of $1,000 or an integral multiple thereof. The Company
will publicly announce the results of the Change of Control Offer on or as soon
as practicable after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
The existence of a Holder's right to require the Company to repurchase such
Holder's Notes upon the occurrence of a Change of Control may deter a third
party from seeking to acquire the Company in a transaction that would constitute
a Change of Control.
ASSET SALES
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, cause, make or suffer to exist an Asset Sale
unless (i) the Company (or the Restricted Subsidiary, as the case may be)
receives consideration at the time of such Asset Sale at least equal to the Fair
Market Value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 85% of the
consideration therefor received by the Company or such Restricted Subsidiary is
in the form of cash or Cash Equivalents; PROVIDED that the amount of (x) any
liabilities (as shown on the Company's or such Subsidiary's most recent balance
sheet) of the Company or any Restricted Subsidiary (other than contingent
liabilities and liabilities that are by their terms subordinated to the Notes or
any guarantee thereof) that are assumed by the transferee of any such assets
pursuant to a customary novation agreement that releases the Company or such
Restricted Subsidiary from further liability and (y) any notes or other
obligations received by the Company or any such Restricted Subsidiary from such
transferee that are immediately converted by the Company or such Restricted
Subsidiary into cash (to the extent of the cash received), shall be deemed to be
cash for purposes of this provision.
Within 270 days after the Company's or any Restricted Subsidiary's receipt
of the Net Proceeds of any Asset Sale, the Company or such Restricted Subsidiary
may apply the Net Proceeds from such Asset Sale, at its option, (i) to
permanently reduce Obligations under the New Bank Credit Facility (and to
correspondingly reduce commitments with respect thereto) or other Senior Debt or
Pari Passu Indebtedness, (ii) to the acquisition of a controlling interest in
any one or more businesses, to the making of a capital expenditure or the
acquisition of Purchased Portfolios or other long-term assets, in each case,
that is engaged in or that is used or useful in a Principal Business and/or
(iii) to an investment in properties or assets that replace the properties and
assets that are the subject of such Asset Sale. Pending the final application of
any such Net Proceeds, the Company or such Restricted Subsidiary may temporarily
reduce Indebtedness under a revolving credit facility, if any, or otherwise
invest such Net Proceeds in Cash Equivalents. The Indenture provides that any
Net Proceeds from the Asset Sale that are not invested as provided and within
the time period set forth in the first sentence of this paragraph will be deemed
to constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds
exceeds $10.0 million, the Company will be required to make an offer to all
Holders of Notes (an "Asset Sale
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Offer") to purchase the maximum principal amount of Notes, that is an integral
multiple of $1,000, that may be purchased out of the Excess Proceeds at an offer
price in cash in an amount equal to 100% of the principal amount thereof, plus
accrued and unpaid interest and Liquidated Damages, if any, thereon to the date
fixed for the closing of such offer, in accordance with the procedures set forth
in the Indenture. The Company will commence an Asset Sale Offer with respect to
Excess Proceeds within ten business days after the date that the aggregate
amount of Excess Proceeds exceeds $10.0 million by mailing the notice required
pursuant to the terms of the Indenture, with a copy to the Trustee. To the
extent that the aggregate amount of Notes tendered pursuant to an Asset Sale
Offer is less than the Excess Proceeds, the Company may use any remaining Excess
Proceeds for any purpose not prohibited by the Indenture. If the aggregate
principal amount of Notes surrendered by Holders thereof exceeds the amount of
Excess Proceeds, the Trustee shall select the Notes to be purchased on a PRO
RATA basis. Upon completion of any such Asset Sale Offer, the amount of Excess
Proceeds shall be reset at zero.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes as a result of an Asset Sale.
The New Bank Credit Facility currently prohibits the Company from purchasing
any Notes, and also provides that certain change of control events with respect
to the Company would constitute a default thereunder. Any future credit
agreements or other agreements relating to Senior Debt to which the Company
becomes a party may contain similar restrictions and provisions. In the event a
Change of Control occurs or an Asset Sale Offer is required to be made at a time
when the Company is prohibited from purchasing Notes, the Company could seek the
consent of the lenders under the New Bank Credit Facility or such future
agreements relating to Senior Debt to the purchase of Notes or could attempt to
refinance the borrowings that contain such prohibition. If the Company does not
obtain such a consent or repay such borrowings, the Company will remain
prohibited from purchasing Notes. In such case, the Company's failure to
purchase tendered Notes would constitute an Event of Default under the
Indenture. In such circumstances, the subordination provisions in the Indenture
would restrict payments to the Holders of Notes.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution on account of the Company's
Equity Interests (other than dividends or distributions payable in Equity
Interests (other than Disqualified Stock) of the Company); (ii) purchase,
redeem, defease or otherwise acquire or retire for value any Equity Interests of
the Company or any direct or indirect parent of the Company; (iii) make any
principal payment on, or purchase, redeem, defease or otherwise acquire or
retire for value any Subordinated Indebtedness, except at final maturity; or
(iv) make any Restricted Investment (all such payments and other actions set
forth in clauses (i) through (iv) above being collectively referred to as
"Restricted Payments"), unless, at the time of and after giving effect to such
Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and
immediately after giving pro forma effect thereto as if such Restricted
Payment had been made at the beginning of the applicable four-quarter
period, have been permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in
the first paragraph of the
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covenant described below under the caption "-- Incurrence of Indebtedness
and Issuance of Disqualified Stock;" and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Restricted Subsidiaries
after the date of the Indenture (including Restricted Payments permitted by
clauses (i), (v) and (vii) of the next succeeding paragraph, but excluding
all other Restricted Payments permitted by the next succeeding paragraph),
is less than the sum of (i) 50% of the Consolidated Net Income of the
Company for the period (taken as one accounting period) from the beginning
of the first fiscal quarter commencing after the date of the Indenture to
the end of the Company's most recently ended fiscal quarter for which
internal financial statements are available at the time of such Restricted
Payment (or, if such Consolidated Net Income for such period is a deficit,
less 100% of such deficit), plus (ii) 100% of the aggregate net cash
proceeds received by the Company from the issue or sale since the date of
the Indenture of Equity Interests of the Company or of Disqualified Stock or
debt securities of the Company that have been converted into such Equity
Interests (other than Equity Interests, Disqualified Stock or convertible
debt securities of the Company sold to a Restricted Subsidiary of the
Company and other than Disqualified Stock or debt securities that have been
converted into Disqualified Stock), plus (iii) 100% of the aggregate amounts
contributed to the capital of the Company since the date of the Indenture,
plus (iv) to the extent that any Restricted Investment that was made after
the date of the Indenture was sold for cash, the lesser of (A) the cash
return of capital with respect to such Restricted Investment (less the cost
of disposition, if any) and (B) the initial amount of such Restricted
Investment, plus (v) without duplication, to the extent that any
Unrestricted Subsidiary is designated by the Company as a Restricted
Subsidiary, an amount equal to the lesser of (A) the net book value of the
Company's Investment in such Unrestricted Subsidiary at the time of such
designation and (B) the Fair Market Value of such Investment at the time of
such designation, plus (vi) 50% of any dividends received by the Company or
a Wholly Owned Restricted Subsidiary of the Company (except to the extent
that such dividends were already included in Consolidated Net Income) after
the date of the Indenture from an Unrestricted Subsidiary of the Company.
The foregoing provisions will not prohibit:
(i) the payment of any dividend or redemption payment within 60 days
after the date of declaration thereof, if at the date of declaration such
payment would have complied with the provisions of the Indenture;
(ii) the redemption, repurchase, retirement or other acquisition of any
Equity Interests of the Company or any Restricted Subsidiary or any
Subordinated Indebtedness of the Company in exchange for, or out of the
proceeds of, the substantially concurrent sale (other than to a Restricted
Subsidiary of the Company) of Equity Interests of the Company (other than
any Disqualified Stock); provided that the amount of any such net cash
proceeds that are utilized for any such redemption, repurchase, retirement
or other acquisition shall be excluded from clause (c)(ii) of the preceding
paragraph;
(iii) the defeasance, redemption, repurchase, retirement or other
acquisition of Subordinated Indebtedness with the net cash proceeds from an
incurrence of Permitted Refinancing Indebtedness;
(iv) the redemption, repurchase, retirement or other acquisition of
Subordinated Indebtedness; PROVIDED that the aggregate price paid for all
such redemptions, repurchases, retirements or other acquisitions since the
date of the Indenture does not exceed the consideration received by the
Company or any of its Restricted Subsidiaries from the incurrence of
Subordinated Indebtedness since the date of the Indenture; PROVIDED that the
amount of any such net cash proceeds that are utilized for any such
redemption, repurchase, retirement or other acquisition shall be excluded
from the immediately preceding clause (iii) and from clause (c)(ii) of the
preceding paragraph;
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(v) the repurchase, redemption, retirement or other acquisition for
value of any Equity Interests of the Company or any Restricted Subsidiary of
the Company held by any director, officer or employee of the Company or any
of its Restricted Subsidiaries pursuant to any employment agreement,
management equity subscription agreement or stock option agreement; PROVIDED
that the aggregate price paid for all such repurchased, redeemed, acquired
or retired Equity Interests shall not exceed the sum of $1.0 million in any
twelve-month period;
(vi) repurchases of Equity Interests deemed to occur upon exercise of
stock options if such Equity Interests represent a portion of the exercise
price of such options;
(vii) the payment of any dividend on, or the redemption of, the Company
Preferred Stock, in each case in accordance with the terms thereof as in
effect on the date of the Indenture; PROVIDED that the Fixed Charge Coverage
Ratio for the Company for the most recently ended four full fiscal quarters
for which internal financial statements are available immediately preceding
the date of such payment, redemption, repurchase, retirement or other
acquisition would have been at least 2.0 to 1.0 determined on a pro forma
basis, as if such payment, redemption, repurchase, retirement or other
acquisition, together with any other payments, redemptions, repurchases,
retirements and other acquisitions permitted by this clause (vii) occurring
during the preceding twelve-month period, had occurred at the beginning of
the applicable four-quarter period;
(viii) the redemption, repurchase, retirement or other acquisition of
Seller Paper; and
(ix) the making of other Restricted Payments not to exceed $10.0 million
in the aggregate.
PROVIDED, FURTHER, that at the time of, and after giving effect to, any
Restricted Payment permitted under clauses (iv), (v), (vii), (viii) or (ix)
above, no Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof; and PROVIDED FURTHER that for purposes of
determining the aggregate amount expended for Restricted Payments in accordance
with clause (c) of the immediately preceding paragraph, only the amounts
expended under clauses (i), (v) and (vii) shall be included.
As of the date of the Indenture, all of the Company's Subsidiaries were
Restricted Subsidiaries. The Company will not permit any Unrestricted Subsidiary
to become a Restricted Subsidiary except pursuant to the last sentence of the
definition of "Unrestricted Subsidiary." For purposes of designating any
Restricted Subsidiary as an Unrestricted Subsidiary, all outstanding Investments
by the Company and its Restricted Subsidiaries (except to the extent repaid) in
the Subsidiary so designated will be deemed to be Restricted Payments in an
amount equal to the Fair Market Value of such Investment at the time of such
designation. Such designation will only be permitted if a Restricted Payment in
such amount would be permitted at such time and if such Subsidiary otherwise
meets the definition of an Unrestricted Subsidiary. Unrestricted Subsidiaries
will not be subject to any of the restrictive covenants set forth in the
Indenture.
The amount of all Restricted Payments (other than cash) shall be the Fair
Market Value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee) on the date of the Restricted
Payment of the asset(s) proposed to be transferred by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant "Restricted Payments" were computed, which calculations
may be based upon the Company's latest available financial statements.
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INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF DISQUALIFIED STOCK
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur" and correlatively, an
"incurrence" of) any Indebtedness (including Acquired Debt) and that the Company
will not issue any Disqualified Stock and will not permit any of its
Subsidiaries to issue any shares of Preferred Stock; PROVIDED, HOWEVER, that the
Company may incur Indebtedness (including Acquired Debt) or issue shares of
Disqualified Stock if the Fixed Charge Coverage Ratio for the Company for the
most recently ended four full fiscal quarters for which internal financial
statements are available immediately preceding the date of such incurrence would
have been at least 2.0 to 1.0 determined on a pro forma basis (including a pro
forma application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred or the Disqualified Stock had been issued, as the
case may be, and the application of proceeds therefrom had occurred, at the
beginning of such four-quarter period.
The foregoing provisions will not apply to:
(a) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness under the New Bank Credit Facility and Guarantees thereof by
the Guarantors and the issuance of letters of credit thereunder (with
letters of credit being deemed to have a principal amount equal to the
maximum face amount thereunder) so long as, immediately after any such
incurrence, the aggregate principal amount outstanding under the New Bank
Credit Facility (together with any Permitted Refinancing Indebtedness
incurred to refund, replace or refinance any Indebtedness incurred pursuant
to the New Bank Credit Facility) does not exceed an amount equal to $ 200.0
million, less the aggregate amount of all principal repayments of term loans
(other than repayments that are immediately reborrowed) and permanent
commitment reductions with respect to revolving loans and letters of credit
under the New Bank Credit Facility (or any such Permitted Refinancing
Indebtedness) that have been made since the date of the Indenture;
(b) the incurrence by the Company or any of its Restricted Subsidiaries
of any Existing Indebtedness;
(c) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness represented by the Notes and the Subsidiary Guarantees;
(d) Guarantees by the Company or a Guarantor of Indebtedness incurred by
the Company or a Restricted Subsidiary of the Company so long as the
incurrence of such Indebtedness by the primary obligor thereon was permitted
under the terms of the Indenture;
(e) the incurrence by the Company or a Restricted Subsidiary of the
Company of intercompany Indebtedness between or among the Company and any of
its Restricted Subsidiaries; PROVIDED, HOWEVER, that (i) all such
intercompany Indebtedness is expressly subordinate to the prior payment in
full of all Obligations with respect to the Notes and the Guarantees and
(ii)(A) any subsequent issuance or transfer of Equity Interests that results
in any such intercompany Indebtedness being held by a Person other than the
Company or a Restricted Subsidiary and (B) any sale or transfer of any such
intercompany Indebtedness to a Person that is not either the Company or a
Restricted Subsidiary of the Company shall be deemed, in each case, to
constitute an incurrence of such Indebtedness by the Company or such
Restricted Subsidiary, as the case may be, that is not permitted by this
clause (e);
(f) the issuance by a Restricted Subsidiary of the Company of any
shares of Preferred Stock to the Company or any of its Restricted
Subsidiaries; PROVIDED, HOWEVER, that (i) all such Preferred Stock is
expressly subordinate to the prior payment in full of all Obligations with
respect to the Notes and the Guarantees and (ii)(A) any subsequent issuance
or transfer of Equity Interests that results in any such Preferred Stock
being held by a Person other than the Company or a Restricted Subsidiary
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and (B) any sale or transfer of any such shares of Preferred Stock to a
Person that is not either the Company or a Restricted Subsidiary of the
Company shall be deemed, in each case, to constitute an issuance of such
Preferred Stock by such Restricted Subsidiary that is not permitted by this
clause (f);
(g) Hedging Obligations that are incurred (1) for the purpose of fixing
or hedging interest rate risk with respect to any Indebtedness that is
permitted by the terms of the Indenture to be outstanding or (2) for the
purpose of fixing or hedging currency exchange rate risk with respect to any
currency exchanges;
(h) the incurrence of Acquired Debt of a Restricted Subsidiary in
connection with the acquisition of such Subsidiary in an aggregate principal
amount at any time outstanding (including any Permitted Refinancing
Indebtedness incurred to refund, replace or refinance any Acquired Debt
incurred pursuant to this clause (h)) not to exceed $25.0 million; PROVIDED
that such Indebtedness is not incurred in contemplation of such acquisition;
and PROVIDED FURTHER that the Company's Fixed Charge Coverage Ratio for the
most recently ended four full fiscal quarters for which internal financial
statements are available immediately preceding the date of such transaction
would have been at least 2.0 to 1.0 determined on a pro forma basis, as if
such transaction had occurred at the beginning of such four-quarter period
and such Indebtedness or Disqualified Stock had been included for all
purposes in such pro forma calculation;
(i) the incurrence by the Company or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are used to extend, refinance, renew, replace, defease or refund,
Indebtedness that was permitted by the Indenture to be incurred;
(j) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt; PROVIDED, HOWEVER, that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of the Company;
(k) Capital Lease Obligations and Purchase Money Indebtedness of the
Company or any of its Restricted Subsidiaries (including any Permitted
Refinancing Indebtedness incurred to refund, replace or refinance any
Capital Lease Obligations or Purchase Money Indebtedness incurred pursuant
to this clause (k)) not to exceed $5.0 million at any one time outstanding;
and
(l) additional Indebtedness of the Company or any of its Restricted
Subsidiaries (including any Permitted Refinancing Indebtedness incurred to
refund, replace or refinance any Indebtedness incurred pursuant to this
clause (l)) in an aggregate principal amount not to exceed $15.0 million at
any one time outstanding (which Indebtedness may, but need not, be incurred
under the New Bank Credit Facility).
ANTI-LAYERING
The Indenture provides that (i) the Company will not directly or indirectly
incur, create, issue, assume, guarantee or otherwise become liable for any
Indebtedness that is subordinate or junior in right of payment to any Senior
Debt and senior in any respect in right of payment to the Notes and (ii) no
Guarantor will incur, create, issue, assume, guarantee or otherwise become
liable for any Indebtedness that is subordinate or junior in right of payment to
its Senior Debt and senior in any respect in right of payment to the Subsidiary
Guarantees.
SALE AND LEASEBACK TRANSACTIONS
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, enter into any sale and leaseback transaction;
provided that the Company may enter into a sale and leaseback transaction if (i)
the Company could have (a) incurred Indebtedness in an amount equal
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to the Attributable Debt relating to such sale and leaseback transaction
pursuant to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described above under the caption "--Incurrence of
Indebtedness and Issuance of Disqualified Stock" and (b) incurred a Lien to
secure such Indebtedness pursuant to the covenant described above under the
caption "--Liens," (ii) the gross cash proceeds of such sale and leaseback
transaction are at least equal to the Fair Market Value (as determined in good
faith by the Board of Directors and set forth in an Officers' Certificate
delivered to the Trustee) of the property that is the subject of such sale and
leaseback transaction and (iii) the transfer of assets in such sale and
leaseback transaction is permitted by, and the Company applies the proceeds of
such transaction in compliance with, the covenant described above under the
caption "--Repurchase at the Option of Holders--Asset Sales."
LIENS
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or
suffer to exist any Lien that secures obligations under any Pari Passu
Indebtedness or Subordinated Indebtedness on any asset or property now owned or
hereafter acquired by the Company or any of its Restricted Subsidiaries, or any
income or profits therefrom or assign or convey any right to receive income
therefrom, unless the Notes are equally and ratably secured with the obligations
so secured or until such time as such obligations are no longer secured by a
Lien; PROVIDED, that in any case involving a Lien securing Subordinated
Indebtedness, such Lien is subordinated to the Lien securing the Notes on a
basis no less favorable than such Subordinated Indebtedness is subordinated to
the Notes.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (1) on
its Capital Stock or (2) with respect to any other interest or participation in,
or measured by, its profits, or (b) pay any indebtedness owed to the Company or
any of its Restricted Subsidiaries, (ii) make loans or advances to the Company
or any of its Restricted Subsidiaries or (iii) sell, lease or transfer any of
its properties or assets to the Company or any of its Restricted Subsidiaries,
except for such encumbrances or restrictions existing under or by reason of (a)
Existing Indebtedness as in effect on the date of the Indenture, (b) the New
Bank Credit Facility as in effect as of the date of the Indenture, and any
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings thereof, in whole or in part, PROVIDED
that such amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacement or refinancings are no more restrictive in
any material respect with respect to such dividend and other payment
restrictions than those contained in the New Bank Credit Facility as in effect
on the date of the Indenture, (c) the Indenture and the Notes, (d) applicable
law, (e) Indebtedness or Capital Stock of a Person acquired by the Company or
any of its Restricted Subsidiaries as in effect at the time of such acquisition
(except to the extent such Indebtedness was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person, or the property or assets of the Person, so acquired, PROVIDED that,
in the case of Indebtedness, such Indebtedness was permitted by the terms of the
Indenture to be incurred, (f) by reason of customary non-assignment provisions
in leases entered into in the ordinary course of business and consistent with
past practices, (g) purchase money obligations for property acquired in the
ordinary course of business that impose restrictions of the nature described in
clause (iii) above on the property so acquired, or (h) Permitted Refinancing
Indebtedness, PROVIDED that the restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are no more restrictive in any
material respect than those contained in the agreements governing the
Indebtedness being refinanced.
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ADDITIONAL SUBSIDIARY GUARANTEES
The Indenture provides that if (i) the Company acquires or creates any
additional Subsidiary that is a domestic Restricted Subsidiary or (ii) any
Restricted Subsidiary of the Company that is not a Guarantor guarantees any
Indebtedness of the Company other than the Notes, the Company will cause such
Restricted Subsidiary to (A) execute and deliver to the Trustee a supplemental
indenture in form and substance reasonably satisfactory to the Trustee pursuant
to which such Restricted Subsidiary shall unconditionally guarantee all of the
Company's obligations under the Notes on the terms set forth in such
supplemental indenture and (B) deliver to the Trustee an Opinion of Counsel
reasonably satisfactory to the Trustee that such supplemental indenture has been
duly executed and delivered by such Restricted Subsidiary.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture provides that the Company may not consolidate or merge with or
into (whether or not the Company is the surviving corporation), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia; (ii) the entity or Person formed
by or surviving any such consolidation or merger (if other than the Company) or
the entity or Person to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made assumes all the obligations of the
Company under the Notes and the Indenture pursuant to a supplemental indenture
in a form reasonably satisfactory to the Trustee; (iii) immediately after such
transaction no Default or Event of Default exists; and (iv) except in the case
of a merger of the Company with or into a Wholly Owned Restricted Subsidiary of
the Company, the Company or the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made (A) will have Consolidated Net Worth immediately after the transaction
equal to or greater than the Consolidated Net Worth of the Company immediately
prior to the transaction and (B) will, at the time of such transaction and after
giving pro forma effect thereto as if such transaction had occurred at the
beginning of the applicable four-quarter period, be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio
test set forth in the first paragraph of the covenant described above under the
caption "--Incurrence of Indebtedness and Issuance of Disqualified Stock."
Notwithstanding the foregoing, any Restricted Subsidiary may consolidate with,
merge into or transfer all or part of its properties and assets to the Company.
TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (i) such
Affiliate Transaction is on terms that are no less favorable to the Company or
the relevant Restricted Subsidiary than those that might reasonably have been
obtained in a comparable transaction by the Company or such Restricted
Subsidiary with an unrelated Person and (ii) the Company delivers to the Trustee
(a) with respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $1.0 million, a
resolution of the Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above and
that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series
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of related Affiliate Transactions involving aggregate consideration in excess of
$5.0 million, an opinion as to the fairness to the Holders of the Notes of such
Affiliate Transaction from a financial point of view issued by an accounting,
appraisal or investment banking firm of national standing.
The foregoing provisions will not apply to the following: (i) transactions
between or among the Company and/or any of its Restricted Subsidiaries; (ii)
Restricted Payments or Permitted Investments permitted by the provisions of the
Indenture described above under the caption entitled "--Restricted Payments;"
(iii) the payment of reasonable and customary regular fees and compensation to,
and indemnity provided on behalf of, officers, directors, employees or
consultants of the Company or any Restricted Subsidiary of the Company; (iv) the
payment of fees in an aggregate amount not to exceed $750,000 in any
twelve-month period pursuant to the Advisory Services Agreement; (v) any other
transactions pursuant to the Advisory Services Agreement or transactions
pursuant to the HBR Services Agreement, in each case, as in effect on the date
of the Indenture; and (vi) the payment of fees and expenses as set forth under
the caption "Use of Proceeds" in the Offering Circular dated October 31, 1996
distributed in connection with the Initial Offering.
LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF WHOLLY OWNED
RESTRICTED SUBSIDIARIES
The Indenture provides that the Company (i) will not, and will not permit
any Wholly Owned Restricted Subsidiary of the Company to, transfer, convey,
sell, lease or otherwise dispose of any Capital Stock of any Wholly Owned
Restricted Subsidiary of the Company to any Person (other than the Company or a
Wholly Owned Restricted Subsidiary of the Company), unless (a) such transfer,
conveyance, sale, lease or other disposition is of all the Capital Stock of such
Wholly Owned Restricted Subsidiary and (b) the cash Net Cash Proceeds from such
transfer, conveyance, sale, lease or other disposition are applied in accordance
with the covenant described above under the caption "--Repurchase at the Option
of Holders--Asset Sales," and (ii) will not permit any Wholly Owned Restricted
Subsidiary of the Company to issue any of its Equity Interests (other than, if
necessary, shares of its Capital Stock constituting directors' qualifying
shares) to any Person other than to the Company or a Wholly Owned Restricted
Subsidiary of the Company.
BUSINESS ACTIVITIES
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any business other than a Principal Business, except to such extent as
would not be material to the Company and its Restricted Subsidiaries, taken as a
whole.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Notes are outstanding, the Company will furnish to the Holders of
Notes (i) all quarterly and annual financial information that would be required
to be contained in a filing with the Commission on Forms 10-Q and 10-K if the
Company were required to file such Forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and, with respect
to the annual information only, a report thereon by the Company's certified
independent accountants and (ii) all current reports that would be required to
be filed with the Commission on Form 8-K if the Company were required to file
such reports. In addition, whether or not required by the rules and regulations
of the Commission, commencing immediately after the consummation of the Exchange
Offer contemplated by the Registration Rights Agreement, the Company will file a
copy of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request.
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EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on the
Notes (whether or not prohibited by the subordination provisions of the
Indenture); (ii) default in payment when due of the principal of or premium, if
any, on the Notes (whether or not prohibited by the subordination provisions of
the Indenture); (iii) failure by the Company for 30 days after notice from the
Trustee or the Holders of at least 25% in aggregate principal amount of the then
outstanding Notes to comply with the provisions described above under the
captions "--Change of Control," "--Restricted Payments," "--Incurrence of
Indebtedness and Issuance of Disqualified Stock" or "--Merger, Consolidation or
Sale of All Assets;" (iv) failure by the Company for 60 days after notice from
the Trustee or the Holders of at least 25% in aggregate principal amount of the
then outstanding Notes to comply with any of its other agreements in the
Indenture or the Notes; (v) default under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or evidenced
any Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any of its
Restricted Subsidiaries) whether such Indebtedness or guarantee now exists, or
is created after the date of the Indenture, which default results in the
acceleration of such Indebtedness prior to its express maturity and, in each
case, the principal amount of any such Indebtedness, together with the principal
amount of any other such Indebtedness the maturity of which has been so
accelerated, aggregates $10.0 million or more; (vi) failure by the Company or
any of its Restricted Subsidiaries to pay final judgments aggregating in excess
of $10.0 million, which judgments are not paid, discharged or stayed for a
period of 60 days; (vii) except as permitted by the Indenture, any Significant
Subsidiary Guarantee shall be held in any judicial proceeding to be
unenforceable or invalid or shall cease for any reason to be in full force and
effect (except by its terms) or any Guarantor, or any Person acting on behalf of
any Guarantor, shall deny or disaffirm its obligations under its Significant
Subsidiary Guarantee; and (viii) certain events of bankruptcy or insolvency with
respect to the Company or any of its Significant Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately; PROVIDED, HOWEVER, that so long
as the New Bank Credit Facility shall be in full force and effect, if an Event
of Default shall have occurred and be continuing (other than an Event of Default
under clause (viii) of the preceding paragraph with respect to the Company), any
such acceleration shall not be effective until the earlier to occur of (x) five
days following the delivery of a notice of such acceleration to the agent or
other representative of the lenders under the New Bank Credit Facility and (y)
acceleration of any Indebtedness under the New Bank Credit Facility.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency described in clause (viii) of the
preceding paragraph, with respect to the Company, any Significant Restricted
Subsidiary or any group of Restricted Subsidiaries that, taken together, would
constitute a Significant Restricted Subsidiary, all outstanding Notes will
become due and payable without further action or notice. Holders of the Notes
may not enforce the Indenture or the Notes except as provided in the Indenture.
Subject to certain limitations, Holders of a majority in principal amount of the
then outstanding Notes may direct the Trustee in its exercise of any trust or
power. The Trustee may withhold from Holders of the Notes notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in their interest.
The Indenture provides that, at any time after a declaration of acceleration
with respect to the Notes, the Holders of a majority in principal amount of the
Notes may rescind and cancel such declaration and its consequences (i) if the
recission would not conflict with any judgment or decree, (ii) if all existing
Events of Default have been cured or waived except nonpayment of principal or
interest that has become due solely because of the acceleration, (iii) if, to
the extent the payment of such interest is lawful, interest on overdue
installments of interest and overdue principal at a rate equal to 1% per annum
in excess of the rate borne by the Notes, which has become due otherwise than by
such declaration of acceleration,
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has been paid, (iv) if the Company has paid the Trustee its reasonable
compensation and reimbursed the Trustee for its expenses, disbursements and
advances and (v) if, in the event of the cure or waiver of an Event of Default
of the type described in clause (viii) of the description above of Events of
Default, the Trustee shall have received an Officer's Certificate and an opinion
of counsel that such Event of Default has been cured or waived. No such
rescission shall affect any subsequent Default or impair any right consequent
thereto.
The Holders of a majority in principal amount of the Notes may waive any
existing Default or Event of Default under the Indenture, and its consequences,
except a default in the payment of the principal of or interest on any Notes.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
November 1, 2001 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to November 1, 2001, then the
premium specified in the Indenture shall also become immediately due and payable
to the extent permitted by law upon the acceleration of the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or any Guarantor, as such, shall have any liability for any obligations of the
Company or the Guarantors under the Notes, the Subsidiary Guarantees, the
Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of Notes by accepting a Note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
on such Notes when such payments are due from the trust referred to below, (ii)
the Company's obligations with respect to the Notes concerning issuing temporary
Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described above under the caption "--Events of Default" will no longer
constitute an Event of Default with respect to the Notes.
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In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest on the outstanding Notes
on the stated maturity or on the applicable redemption date, as the case may be,
and the Company must specify whether the Notes are being defeased to maturity or
to a particular redemption date; (ii) in the case of Legal Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred; (iii) in the
case of Covenant Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders of the outstanding Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default or
Event of Default resulting from the borrowing of funds to be applied to such
deposit) or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 91st day after the date
of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in
a breach or violation of, or constitute a default under the New Bank Credit
Facility or any other material agreement or instrument (other than the
Indenture) to which the Company or any of its Restricted Subsidiaries is a party
or by which the Company or any of its Restricted Subsidiaries is bound; (vi) the
Company must have delivered to the Trustee an opinion of counsel to the effect
that after the 91st day following the deposit, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency, reorganization
or similar laws affecting creditors' rights generally; (vii) the Company must
deliver to the Trustee an Officers' Certificate stating that the deposit was not
made by the Company with the intent of preferring the Holders of Notes over the
other creditors of the Company with the intent of defeating, hindering, delaying
or defrauding creditors of the Company or others; and (viii) the Company must
deliver to the Trustee an Officers' Certificate and an opinion of counsel, each
stating that all conditions precedent provided for or relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
BOOK-ENTRY, DELIVERY AND FORM
The New Notes initally will be represented by one or more permanent global
certificate in definitive, fully registered form (the "Global Note"). The Global
Note will be deposited with, or on behalf of, The Depository Trust Company
("DTC") and registered in the name of a nominee of DTC.
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DEPOSITORY PROCEDURES
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic book-
entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly (collectively, the "Indirect
Participants"). Persons who are not Participants may beneficially own securities
held by or on behalf of DTC only through the Participants or the Indirect
Participants. The ownership interests and transfer of ownership interests of
each actual purchaser of each security held by or on behalf of DTC are recorded
on the records of the Participants and Indirect Participants.
DTC has also advised the Company that, pursuant to procedures established by
it, (i) upon deposit of the Global Note, DTC will credit the accounts of
Participants designated by the Exchange Agent with portions of the principal
amount of the Global Note and (ii) ownership of such interests in the Global
Note will be shown on, and the transfer of ownership thereof will be effected
only through, records maintained by DTC (with respect to the Participants) or by
the Participants and the Indirect Participants (with respect to other owners of
beneficial interests in the Global Note).
Investors in the Global Note may hold their interests therein directly
through DTC, if they are participants in such system, or indirectly through
organizations (including Euroclear and CEDEL) which are participants in such
system. Euroclear and CEDEL will hold interests in the Global Note on behalf of
their participants through customers' securities accounts in their respective
names on the books of their respective depositaries, which are Morgan Guaranty
Trust Company of New York, Brussels office, as operator of Euroclear, and
Citibank, N.A., as operator of CEDEL. The depositaries, in turn, will hold such
interests in the Global Note in customers' securities accounts in the
depositaries' names on the books of DTC. All interests in the Global Note,
including those held through Euroclear or CEDEL, may be subject to the
procedures and requirements of DTC. Those interests held through Euroclear or
CEDEL may also be subject to the procedures and requirements of such systems.
The laws of some states require that certain persons take physical delivery in
definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in the Global Note to such persons will be limited
to that extent. Because DTC can act only on behalf of Participants, which in
turn act on behalf of Indirect Participants and certain banks, the ability of a
person having beneficial interests in the Global Note to pledge such interests
to persons or entities that do not participate in the DTC system, or otherwise
take actions in respect of such interests, may be affected by the lack of a
physical certificate evidencing such interests. For certain other restrictions
on the transferability of the Notes, see "--Exchange of Book-Entry Notes for
Certificated Notes."
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTE WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of and premium and interest on the
Global Note registered in the name of DTC or its nominee will be payable by the
Trustee to DTC in its capacity as the registered Holder under the Indenture.
Under the terms of the Indenture, the Company and the Trustee will treat the
persons in whose names the Notes, including the Global Note, are registered as
the owners thereof for the purpose of receiving such payments and for any and
all other purposes whatsoever. Consequently, neither the Company, the Trustee
nor any agent of the Company or the Trustee has or will have any responsibility
or liability for (i) any aspect of DTC's records or any Participant's or
Indirect Participant's records relating to or payments made on account of
beneficial ownership interests in the Global Note or for maintaining,
supervising or reviewing any of DTC's records or any Participant's or Indirect
Participant's records relating to the beneficial ownership interests in the
Global Note or (ii) any other matter
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relating to the actions and practices of DTC or any of its Participants or
Indirect Participants. DTC has advised the Company that its current practice,
upon receipt of any payment in respect of securities such as the Notes
(including principal and interest), is to credit the accounts of the relevant
Participants with the payment on the payment date, in amounts proportionate to
their respective holdings in the principal amount of beneficial interests in the
relevant security as shown on the records of DTC unless DTC has reason to
believe it will not receive payment on such payment date. Payments by the
Participants and the Indirect Participants to the beneficial owners of Notes
will be governed by standing instructions and customary practices and will be
the responsibility of the Participants or the Indirect Participants and will not
be the responsibility of DTC, the Trustee or the Company. Neither the Company
nor the Trustee will be liable for any delay by DTC or any of its Participants
in identifying the beneficial owners of the Notes, and the Company and the
Trustee may conclusively rely on and will be protected in relying on
instructions from DTC or its nominee for all purposes.
Except for trades involving only Euroclear and CEDEL participants, interests
in the Global Note are expected to be eligible to trade in DTC's Same-Day Funds
Settlement System and secondary market trading activity in such interests will
therefore settle in immediately available funds, subject in all cases to the
rules and procedures of DTC and its participants. See "--Same-Day Settlement and
Payment."
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds, and transfers between
participants in Euroclear and CEDEL will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Cross-market transfers between the Participants in DTC, on the one hand, and
Euroclear or CEDEL participants, on the other hand, will be effected through DTC
in accordance with DTC's rules on behalf of Euroclear or CEDEL, as the case may
be, by its respective depositary; however such cross-market transactions will
require delivery of instructions to Euroclear or CEDEL, as the case may be, by
the counterparty in such system in accordance with the rules and procedures and
within the established deadlines (Brussels time) of such system. Euroclear or
CEDEL, as the case may be, will, if the transaction meets its settlement
requirements, deliver instructions to its respective depositary to take action
to effect final settlement on its behalf by delivering or receiving interests in
the Global Note in DTC, and making or receiving payment in accordance with
normal procedures for same-day funds settlement applicable to DTC. Euroclear
participants and CEDEL participants may not deliver instructions directly to the
depositaries for Euroclear or CEDEL.
Because of time zone differences, the securities account of a Euroclear or
CEDEL participant purchasing an interest in the Global Note from a Participant
in DTC will be credited, and any such crediting will be reported to the relevant
Euroclear or CEDEL participant, during the securities settlement processing day
(which must be a business day for Euroclear and CEDEL) immediately following the
settlement date of DTC. DTC has advised the Company that cash received in
Euroclear or CEDEL as a result of sales of interests in the Global Note by or
through a Euroclear or CEDEL participant to a Participant in DTC will be
received with value on the settlement date of DTC but will be available in the
relevant Euroclear or CEDEL cash account only as of the business day for
Euroclear or CEDEL following DTC's settlement date.
DTC has advised the Company that it will take any action permitted to be
taken by a Holder of Notes only at the direction of one or more Participants to
whose account with DTC interests in the Global Note are credited and only in
respect of such portion of the aggregate principal amount of the Notes as to
which such Participant or Participants has or have given such direction.
However, if there is an Event of Default under the Notes, DTC reserves the right
to exchange the Global Note for legended Notes in certificated form, and to
distribute such Notes to its Participants.
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The information in this section concerning DTC, Euroclear and CEDEL and
their book-entry systems has been obtained from sources that the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures to
facilitate transfers of interests in the Global Note among participants in DTC,
Euroclear and CEDEL, they are under no obligation to perform or to continue to
perform such procedures, and such procedures may be discontinued at any time.
Neither the Company nor the Trustee will have any responsibility for the
performance by DTC, Euroclear or CEDEL or their respective participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
EXCHANGE OF BOOK-ENTRY NOTE FOR CERTIFICATED NOTES
The Global Note is exchangeable for definitive Notes in registered
certificated form if (i) DTC (x) notifies the Company that it is unwilling or
unable to continue as depositary for the Global Note and the Company thereupon
fails to appoint a successor depositary or (y) has ceased to be a clearing
agency registered under the Exchange Act, (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of the
Notes in certificated form or (iii) there shall have occurred and be continuing
an Event of Default or any event which after notice or lapse of time or both
would be an Event of Default with respect to the Notes. In addition, beneficial
interests in the Global Note may be exchanged for certificated Notes upon
request but only upon at least 20 days prior written notice given to the Trustee
by or on behalf of DTC in accordance with its customary procedures. In all
cases, certificated Notes delivered in exchange for the Global Note or
beneficial interests therein will be registered in the names, and issued in any
approved denominations, requested by or on behalf of the depositary (in
accordance with its customary procedures).
OLD NOTES REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company, the Guarantors and the Initial Purchasers entered into the
Registration Rights Agreement on November 6, 1996 (the "Closing Date"). Pursuant
to the Registration Rights Agreement, the Company agreed to file with the
Commission, on or prior to 45 days after the Closing Date, the Exchange Offer
Registration Statement on the appropriate form under the Securities Act with
respect to the New Notes. Upon the effectiveness of the Exchange Offer
Registration Statement, pursuant to the Exchange Offer, the Company will offer
to the Holders of Transfer Restricted Securities (as defined below) who are able
to make certain representations the opportunity to exchange their Transfer
Restricted Securities for New Notes. If (i) the Company is not required to file
the Exchange Offer Registration Statement or permitted to consummate the
Exchange Offer because the Exchange Offer is not permitted by applicable law or
Commission policy or (ii) any Holder of Transfer Restricted Securities notifies
the Company on or prior to the 20th business day following consummation of the
Exchange Offer that it (A) is prohibited by law or Commission policy from
participating in the Exchange Offer or (B) may not resell the New Notes acquired
by it in the Exchange Offer to the public without delivering a prospectus and
the prospectus contained in the Exchange Offer Registration Statement is not
appropriate or available for such resales or (C) is a broker-dealer and owns New
Notes acquired directly from the Company or an affiliate of the Company, the
Company will file with the Commission a Shelf Registration Statement to cover
resales of the Notes by the Holders thereof who satisfy certain conditions
relating to the provision of information in connection with the Shelf
Registration Statement. The Company will use its best efforts to cause the
applicable registration statement to be declared effective as promptly as
possible by the Commission. For purposes of the foregoing, "Transfer Restricted
Securities" means each Old Note until (i) the date on which such Note has been
exchanged by a person other than a broker-dealer for a New Note in the Exchange
Offer, (ii) following the exchange by a broker-dealer in the Exchange Offer of a
Old Note for a New Note, the date on which such New Note is sold to a purchaser
who receives from such broker-dealer on or prior to the date of such sale a copy
of the prospectus contained in the Exchange Offer Registration Statement, (iii)
the date on which such Old Note has been
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effectively registered under the Securities Act and disposed of in accordance
with the Shelf Registration Statement or (iv) the date on which such Note is
distributed to the public pursuant to Rule 144 under the Securities Act.
Notwithstanding the foregoing, subject to the limitations contained in the
Registration Rights Agreement, at any time after Consummation (as defined in the
Registration Rights Agreement) of the Exchange Offer, the Company may allow the
Shelf Registration Statement to cease to be effective and usable if (i) the
Board of Directors of the Company determines in good faith that such action is
in the best interests of the Company, and the Company notifies the Holders
within a certain period of time after the Board of Directors of the Company
makes such determination or (ii) the prospectus contained in the Shelf
Registration Statement contains an untrue statement of a material fact or omits
to state a material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading; PROVIDED
that the period referred to in the Registration Rights Agreement during which
the Shelf Registration Statement is required to be effective and usable will be
extended by the number of days during which such registration statement was not
effective or usable pursuant to the foregoing provisions.
The Registration Rights Agreement provides that (i) the Company will file an
Exchange Offer Registration Statement with the Commission on or prior to 45 days
after the Closing Date, (ii) the Company will use its best efforts to have the
Exchange Offer Registration Statement declared effective by the Commission on or
prior to 150 days after the date on which such Exchange Offer Registration
Statement is filed with the Commission (which 150-day period shall be extended
for a number of days equal to the number of business days, if any, that the
Commission is officially closed during such period), (iii) unless the Exchange
Offer would not be permitted by applicable law or Commission policy, the Company
will commence the Exchange Offer and use its best efforts to issue on or prior
to 30 days after the date on which the Exchange Offer Registration Statement was
declared effective by the Commission, New Notes in exchange for all Old Notes
tendered prior thereto in the Exchange Offer and (iv) if obligated to file the
Shelf Registration Statement, the Company will use its best efforts to file the
Shelf Registration Statement with the Commission on or prior to 45 days after
such filing obligation arises and to cause the Shelf Registration Statement to
be declared effective by the Commission on or prior to 150 days after such
filing obligation arises. If (a) the Company fails to file either of the
Registration Statements required by the Registration Rights Agreement on or
before the date specified for such filing, (b) either of such Registration
Statements is not declared effective by the Commission on or prior to the date
specified for such effectiveness (the "Effectiveness Target Date"), (c) the
Company fails to consummate the Exchange Offer within 30 days of the
Effectiveness Target Date with respect to the Exchange Offer Registration
Statement, or (d) subject to the last sentence of the preceding paragraph, the
Shelf Registration Statement or the Exchange Offer Registration Statement is
declared effective but thereafter ceases to be effective or usable in connection
with resales of Transfer Restricted Securities during the periods specified in
the Registration Rights Agreement (each such event referred to in clauses (a)
through (d) above a "Registration Default"), then, subject to the last sentence
of the preceding paragraph, the Company will pay Liquidated Damages to each
Holder of Transfer Restricted Securities, with respect to the first 90-day
period immediately following the occurrence of such Registration Default, in an
amount equal to $0.05 per week per $1,000 in principal amount of Notes
constituting Transfer Restricted Securities held by such Holder. The amount of
the Liquidated Damages will increase by an additional $0.05 per week per $1,000
in principal amount of Notes constituting Transfer Restricted Securities with
respect to each subsequent 90-day period until all Registration Defaults have
been cured, up to a maximum amount of Liquidated Damages of $0.50 per week per
$1,000 in principal amount of Notes constituting Transfer Restricted Securities.
All accrued Liquidated Damages will be paid by the Company in cash on each
Damages Payment Date to the Global Note Holder (and any Holder of Certificated
Securities who has given wire transfer instructions to the Company prior to the
Damages Payment Date) by wire transfer of immediately available funds and to all
other Holders of Certificated Securities by mailing checks to their registered
addresses. Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease.
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Holders of Old Notes will be required to make certain representations to the
Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information to
be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set forth
in the Registration Rights Agreement in order to have their Notes included in
the Shelf Registration Statement and benefit from the provisions regarding
Liquidated Damages set forth above.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which will be available upon request to the Company.
Except as described below under "-- Amendment, Supplement and Waiver," the
Old Notes and the New Notes will be considered collectively to be a single class
for all purposes under the Indenture, including, without limitation, waivers,
amendments, redemptions and repurchase offers, and for purposes of this
"Description of Notes" (except under this caption, "-- Old Notes Registration
Rights; Liquidated Damages") all reference herein to "Notes" shall be deemed to
refer collectively to the Old Notes and any New Notes, unless the context
otherwise requires.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender offer
or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described above under the caption
"-- Repurchase at the Option of Holders"), (iii) reduce the rate of or change
the time for payment of interest on any Note, (iv) waive a Default or Event of
Default in the payment of principal of or premium, if any, or interest on the
Notes (except a rescission of acceleration of the Notes by the Holders of at
least a majority in aggregate principal amount of the Notes and a waiver of the
payment default that resulted from such acceleration), (v) make any Note payable
in money other than that stated in the Notes, (vi) make any change in the
provisions of the Indenture relating to waivers of past Defaults or the rights
of Holders of Notes to receive payments of principal of or premium, if any, or
interest on the Notes, (vii) waive a redemption payment with respect to any Note
(other than a payment required by one of the covenants described above under the
caption "-- Repurchase at the Option of Holders") or (viii) make any change in
the foregoing amendment and waiver provisions. In addition, any amendment to the
provisions of Article 10 of the Indenture (which relate to subordination) will
require the consent of the Holders of at least 75% in aggregate principal amount
of the Notes then outstanding if such amendment would adversely affect the
rights of Holders of Notes.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to Holders of Notes in the case of a
merger or consolidation, to make any change that would provide any additional
rights or benefits to the Holders of Notes or that does not adversely affect the
legal rights under the Indenture of any such Holder, or to comply with
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the Trust Indenture Act.
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CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder, unless such Holder shall have offered to the Trustee
security and indemnity satisfactory to it against any loss, liability or
expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture
without charge by writing to Outsourcing Solutions Inc., 390 South Woods Mill
Road, Suite 150, Chesterfield, Missouri 63017; Attention: Chief Financial
Officer.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"ACQUIRED DEBT" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Restricted Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Restricted Subsidiary of such specified Person, and (ii) Indebtedness secured by
a Lien encumbering any asset acquired by such specified Person.
"ADVISORY SERVICES AGREEMENT" means the Advisory Services Agreement, dated
as of September 21, 1995, between the Company and MDC Management Company III,
L.P. as amended from time to time.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; PROVIDED that (i)
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control and (ii)(a) Goldman, Sachs & Co. and its Affiliates,
including, without limitation, Goldman Sachs Credit Partners L.P., (b) Chase
Securities Inc. and its Affiliates, including, without limitation, The Chase
Manhattan Bank and Chase Equity Associates, L.P., and (c) Clipper Capital
Associates, L.P. and its Affiliates, in each case, shall not be deemed to be
Affiliates of the Company solely by virtue of clause (i) of this proviso.
"ASSET SALE" means:
(i) the sale, conveyance, transfer or other disposition (whether in a
single transaction or a series of related transactions) of property or
assets (including by way of a sale and leaseback) of the
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Company or any Restricted Subsidiary to any Person other than the Company or
any Restricted Subsidiary of the Company (each referred to in this
definition as a "disposition") or
(ii) the issuance or sale of Equity Interests of any Restricted
Subsidiary to any Person other than the Company or any Restricted Subsidiary
of the Company (whether in a single transaction or a series of related
transactions), in each case, other than:
(a) a disposition of Cash Equivalents or goods held for sale in the
ordinary course of business or obsolete equipment in the ordinary course of
business of the Company or the applicable Restricted Subsidiary;
(b) the disposition of all or substantially all of the assets of the
Company in a manner permitted pursuant to the provisions described above
under the caption "-- Merger, Consolidation or Sale of Assets" or any
disposition that constitutes a Change of Control pursuant to the Indenture;
(c) any disposition that is a Restricted Payment or Permitted Investment
that is permitted under the covenant described above under the caption
"-- Restricted Payments;" and
(d) any disposition, or related series of dispositions, of assets with
an aggregate Fair Market Value of less than $1.0 million.
"ATTRIBUTABLE DEBT" means in respect of a sale and leaseback transaction
means, at the time of determination, the present value (discounted at the rate
of interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"BOARD OF DIRECTORS" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"CASH EQUIVALENTS" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than one
year from the date of acquisition, (iii) certificates of deposit and eurodollar
time deposits with maturities of one year or less from the date of acquisition,
bankers' acceptances with maturities not exceeding one year and overnight bank
deposits, in each case with any domestic commercial bank having capital and
surplus in excess of $500.0 million and a Thomson Bank Watch Rating of "B" or
better, (iv) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (ii) and (iii) above
entered into with any financial institution meeting the qualifications specified
in clause (iii) above and (v) commercial paper rated A-1 or higher by Standard &
Poor's Corporation or P-1 by Moody's Investors Service, Inc. and in each case
maturing within one year after the date of acquisition.
"CHANGE OF CONTROL" means the occurrence of any of the following:
(i) the sale, lease or transfer, in one or a series of related
transactions (other than by merger or consolidation), of all or
substantially all of the assets of the Company and its Restricted
Subsidiaries, taken as a whole, to any "person" (as such term is used in
Section 13(d)(3) of the Exchange Act) (other than the Principals or their
Related Parties);
(ii) the adoption of a plan relating to the liquidation or dissolution
of the Company;
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(iii) the acquisition by any Person or group (within the meaning of
Section 13(d)(3) or 14(d)(2) of the Exchange Act) (other than the Principals
and their Related Parties) of a direct or indirect interest in more than 35%
of the voting power of the voting stock of the Company by way of merger or
consolidation or otherwise; or
(iv) a majority of the members of the Board of Directors of the Company
cease to be Continuing Directors.
"COMPANY PREFERRED STOCK" means the $10.8 million in aggregate liquidation
preference of the 8.0% Preferred Stock of the Company outstanding on the date of
the Indenture.
"CONSOLIDATED CASH FLOW" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with
all Asset Sales (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries for such period, to the
extent that such provision for taxes was deducted in computing such Consolidated
Net Income, plus (iii) consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued and whether or
not capitalized (including, without limitation, amortization of original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations), to the extent that any such expense was deducted in
computing such Consolidated Net Income, plus (iv) any Consolidated Non-Cash
Charges that were deducted in computing such Consolidated Net Income, less (v)
the aggregate amount of contingent and "earnout" payments in respect of any
Permitted Business acquired by the Company or any Restricted Subsidiary of the
Company that are paid in cash during such period and less (vi) any non-cash
items increasing Consolidated Net Income for such period.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
PROVIDED that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Restricted
Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to that Restricted Subsidiary or its
stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded, (iv) the cumulative effect of a change in accounting principles
shall be excluded and (v) the Net Income of any Unrestricted Subsidiary shall be
excluded, whether or not distributed to the Company or one of its Subsidiaries.
"CONSOLIDATED NET WORTH" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date (provided that the
Consolidated Net Worth of any Person shall exclude the effect of non-cash
charges relating to the acceleration of stock options or similar securities of
such Person or another Person with which such Person is merged or consolidated)
plus (ii) the respective amounts reported on such Person's balance sheet as of
such date with respect to any series of Preferred Stock (other than Disqualified
Stock) that by its terms is not entitled to the payment of dividends unless such
dividends may be declared and paid only out of net earnings in respect of the
year of such declaration and payment, but only to the extent of any cash
received by such Person upon issuance of such preferred
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stock, less (x) all write-ups (other than write-ups resulting from foreign
currency translations and write-ups of tangible assets of a going concern
business made within 12 months after the acquisition of such business)
subsequent to the date of the Indenture in the book value of any asset owned by
such Person or a consolidated Subsidiary of such Person, (y) all investments as
of such date in unconsolidated Subsidiaries and in Persons that are not
Subsidiaries (except, in each case, Permitted Investments), and (z) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"CONSOLIDATED NON-CASH CHARGES" means, with respect to any Person, for any
period, the aggregate depreciation and amortization (including (a) amortization
of goodwill, (b) amortization of Purchased Portfolios, (c) amortization of
amounts reflected on the Company's combined consolidated balance sheet as of the
date of the Indenture related to "in-process technology," (e) any incremental
increase in amortization of account inventory resulting from write-ups of such
inventory in connection with the purchase accounting treatment of an acquisition
and (f) amortization of other intangibles and other non-cash charges (excluding
any such intangible and non-cash charge to the extent that it represents an
accrual of or reserve for cash charges in any future period (other than any
non-cash charge relating to the Payco Acquisition or the rationalization of
operations in connection with the Payco Acquisition incurred within 12 months
after the date of the Indenture) or amortization of a prepaid cash expense that
was paid in a prior period) of such Person and its Restricted Subsidiaries for
such period, in each case, determined on a consolidated basis in accordance with
GAAP.
"CONTINUING DIRECTORS" means, as of any date of determination, any member of
the Board of Directors who (i) was a member of such Board of Directors on the
date of the Indenture or (ii) was nominated for election or elected to such
Board of Directors with, or whose election to such Board of Directors was
approved by, the affirmative vote of a majority of the Continuing Directors who
were members of such Board of Directors at the time of such nomination or
election.
"DEFAULT" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"DISQUALIFIED STOCK" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the Holder thereof, in whole or in part, on or prior to the date
that is 91 days after the date on which the Notes mature.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EXISTING INDEBTEDNESS" means Indebtedness of the Company and its Restricted
Subsidiaries (other than Indebtedness under the New Bank Credit Facility) in
existence on the date of the Indenture, until such amounts are repaid.
"FAIR MARKET VALUE" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, in cash,
between an informed and willing seller and an informed and willing and able
buyer, neither of whom is under undue pressure or compulsion to complete the
transaction. Fair Market Value shall be determined by the Board of Directors of
the Company acting reasonably and in good faith and shall be evidenced by a
Board Resolution delivered to the Trustee; PROVIDED, HOWEVER, that, in the case
of any determination of Fair Market Value for purposes of the covenant described
under the caption "-- Restricted Payments," if the aggregate Fair Market Value
could be reasonably likely to exceed $5.0 million, the Fair Market Value shall
be determined by an accounting, appraisal or investment banking firm of
nationally recognized standing that is, in the reasonable and good faith
judgment of the Board of Directors of the Company, qualified to perform the task
for which such firm has been engaged.
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"FIXED CHARGES" means, with respect to any Person for any period, the sum of
(i) the consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued (including, without
limitation, amortization of original issue discount, non-cash interest payments,
the interest component of any deferred payment obligations, the interest
component of all payments associated with Capital Lease Obligations, imputed
interest with respect to Attributable Debt, commissions, discounts and other
fees and charges incurred in respect of letter of credit or bankers' acceptance
financings, and net payments (if any) pursuant to Hedging Obligations, BUT
excluding amortization of those deferred financing costs reflected on the
Company's combined consolidated balance sheet as of the date of the Indenture)
and (ii) the consolidated interest expense of such Person and its Restricted
Subsidiaries that was capitalized during such period, and (iii) any interest
expense on Indebtedness of another Person that is Guaranteed by such Person or
one of its Restricted Subsidiaries or secured by a Lien on assets of such Person
or one of its Restricted Subsidiaries (whether or not such Guarantee or Lien is
called upon) and (iv) the product of (a) all cash dividend payments (and
non-cash dividend payments in the case of a Person that is a Restricted
Subsidiary) on any series of Preferred Stock of such Person, times (b) a
fraction, the numerator of which is one and the denominator of which is one
minus the then current effective federal, state and local statutory tax rate of
such Person, expressed as a decimal, in each case, on a consolidated basis and
in accordance with GAAP.
"FIXED CHARGE COVERAGE RATIO" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
Company or any of its Restricted Subsidiaries incurs, assumes, Guarantees or
redeems any Indebtedness (other than revolving credit borrowings) or issues
Preferred Stock subsequent to the commencement of the period for which the Fixed
Charge Coverage Ratio is being calculated but prior to the date on which the
event for which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, Guarantee or redemption
of Indebtedness, or such issuance or redemption of Preferred Stock, as if the
same had occurred at the beginning of the applicable four-quarter reference
period. In addition, for purposes of making the computation referred to above,
(i) acquisitions that have been made by the Company or any of its Restricted
Subsidiaries, including through mergers or consolidations and including any
related financing transactions, during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date
shall be deemed to have occurred on the first day of the four-quarter reference
period and Consolidated Cash Flow for such reference period shall be calculated
giving pro forma effect (excluding any pro forma increase in revenues but
including any pro forma expense and cost reductions calculated on a basis
consistent with Regulation S-X under the Securities Act) to such acquisition and
without giving effect to clause (iii) of the proviso set forth in the definition
of Consolidated Net Income, and (ii) the Consolidated Cash Flow attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, calculated giving pro
forma effect to such disposition, shall be excluded, and (iii) the Fixed Charges
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of prior to the Calculation Date, shall be
excluded, but only to the extent that the obligations giving rise to such Fixed
Charges will not be obligations of the referent Person or any of its Restricted
Subsidiaries following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation,
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letters of credit and reimbursement agreements in respect thereof), of all or
any part of any Indebtedness.
"HBR SERVICES AGREEMENT" means the Master Services Agreement, dated as of
October 1, 1992, by and between Account Portfolios, L.P. and HBR Capital, Ltd.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under (i) currency exchange or interest rate swap agreements,
currency exchange or interest rate cap agreements and currency exchange or
interest rate collar agreements and (ii) other agreements or arrangements
designed to protect such Person against fluctuations in currency exchange or
interest rates.
"HOLDER" means a holder of any of the Notes.
"INDEBTEDNESS" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property (other than contingent or "earnout" payment
obligations) or representing any Hedging Obligations, except any such balance
that constitutes an accrued expense or trade payable, if and to the extent any
of the foregoing indebtedness (other than letters of credit and Hedging
Obligations) would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, as well as all indebtedness of others secured
by a Lien on any asset of such Person (whether or not such indebtedness is
assumed by such Person) and, to the extent not otherwise included, the Guarantee
by such Person of any indebtedness of any other Person.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Subsidiary of the Company sells or otherwise disposes of
any Equity Interests of any direct or indirect Restricted Subsidiary of the
Company such that, after giving effect to any such sale or disposition, such
Person is no longer a Subsidiary of the Company, the Company shall be deemed to
have made an Investment on the date of any such sale or disposition equal to the
Fair Market Value of the Equity Interests of such Subsidiary not sold or
disposed of.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction).
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of Preferred Stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but
not loss), together with any related provision for taxes on such extraordinary
or nonrecurring gain (but not loss).
"NET PROCEEDS" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the
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direct costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and brokerage and sales commissions) and
any relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied to
the repayment of Indebtedness (other than Senior Bank Debt) secured by a Lien on
the asset or assets that were the subject of such Asset Sale and any reserve for
adjustment in respect of the sale price of such asset or assets established in
accordance with GAAP.
"NEW BANK CREDIT FACILITY" means that certain credit facility dated as of
November 6, 1996, by and among the Company, 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 the financial
institutions party thereto, including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection therewith, and in
each case as amended (including any amendment and restatement thereof),
modified, renewed, refunded, replaced or refinanced from time to time, including
any agreement extending the maturity of, refinancing, replacing or otherwise
restructuring (including increasing the amount of available borrowings
thereunder (provided that such increase in borrowings is permitted by the
covenant described under the caption "-- Incurrence of Indebtedness and Issuance
of Disqualified Stock") or adding Subsidiaries of the Company as additional
borrowers or guarantors thereunder) all or any portion of the Indebtedness under
such agreement or any successor or replacement agreement and whether by the same
or any other agent, lender or group of lenders.
"NON-RECOURSE DEBT" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender; and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity; and (iii) as to which the lenders have been notified in
writing that they will not have any recourse to the stock or assets of the
Company or any of its Restricted Subsidiaries.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"OFFICER'S CERTIFICATE" means a certificate signed on behalf of the Company
by the principal executive officer, the principal financial officer, the
treasurer or the principal accounting officer of the Company, that meets the
requirements set forth in the Indenture.
"PARI PASSU INDEBTEDNESS" means Indebtedness that ranks PARI PASSU in right
of payment to the Notes.
"PERMITTED INVESTMENTS" means (a) any Investment in the Company or in a
Restricted Subsidiary of the Company; (b) any Investment in cash and Cash
Equivalents; (c) any Investment by the Company or any Restricted Subsidiary of
the Company in a Person, if as a result of such Investment (A) such Person
becomes a Restricted Subsidiary of the Company or (B) such Person, in one
transaction or a series of related transactions, is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Restricted Subsidiary of the
Company; (d) any Restricted Investment made as a result of the receipt of
consideration not constituting cash or Cash Equivalents from an Asset Sale that
was made pursuant to and in compliance with the covenant described above under
the caption "-- Repurchase at the Option of Holders -- Asset Sales;" (e) any
Investment existing on the date of the Indenture; (f) any Investment by
Restricted Subsidiaries in other Restricted Subsidiaries and Investments by
Subsidiaries that are not Restricted Subsidiaries in other Subsidiaries that are
not Restricted Subsidiaries; (g) any Investment acquired by the Company or
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any of its Restricted Subsidiaries (A) in exchange for any other Investment or
receivable held by the Company or any such Restricted Subsidiary in connection
with or as a result of a bankruptcy, workout, reorganization or recapitalization
of the issuer of such other Investment or receivable or (B) as a result of a
foreclosure by the Company or any of its Restricted Subsidiaries with respect to
any secured Investment or other transfer of title with respect to any secured
Investment in default; (h) Hedging Obligations; (i) any acquisition of assets,
Equity Interests or other securities by the Company for consideration consisting
of common Equity Interests of the Company; (j) any acquisition by the Company or
any of its Subsidiaries of Purchased Portfolios; (k) loans and advances to
officers, directors and employees for business-related travel expenses, moving
expenses and other similar expenses, in each case, incurred in the ordinary
course of business; (l) Investments the payment for which consists exclusively
of Equity Interests (exclusive of Disqualified Stock) of the Company and (m)
Investments in Unrestricted Subsidiaries or Persons other than Subsidiaries not
to exceed $5.0 million, in the aggregate, at any time outstanding (measured as
of the date made and without giving effect to subsequent changes in value).
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries;
PROVIDED that: (i) the principal amount (or accreted value, if applicable) of
such Permitted Refinancing Indebtedness does not exceed the principal amount (or
accreted value, if applicable) of the Indebtedness so extended, refinanced,
renewed, replaced, defeased or refunded (plus the amount of any premium required
to be paid in connection therewith and plus reasonable expenses incurred in
connection therewith); (ii) such Permitted Refinancing Indebtedness has a final
maturity date later than the final maturity date of, and has a Weighted Average
Life to Maturity equal to or greater than the Weighted Average Life to Maturity
of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the Notes,
such Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to, the Notes on
terms at least as favorable to the Holders of Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by
the Company or by the Restricted Subsidiary who is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"PREFERRED STOCK" means any Equity Interest with preferential right of
payment of dividends or upon liquidation, dissolution, or winding up.
"PRINCIPAL BUSINESS" means the accounts receivable management and
outsourcing business and lines of businesses and services that are related to or
complementary to the foregoing.
"PRINCIPALS" means each of the general partners of MDC Management Company
III, L.P., MDC Management Company IIIE, L.P. and MDC Management Company IIIA,
L.P. and any Person controlled by one or more of such general partners.
"PURCHASE MONEY INDEBTEDNESS" means Indebtedness the net proceeds of which
are used for the purchase of property or assets acquired in the ordinary course
of business by the Person incurring such Indebtedness.
"PURCHASED PORTFOLIOS" means account receivable portfolios purchased by the
Company or any of its Subsidiaries in the ordinary course of business.
"RELATED PARTIES" means any Person controlled by the Principals, including
any partnership of which the Principals or their Affiliates is the general
partner.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
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"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referent
Person that is not (i) an Unrestricted Subsidiary or (ii) a direct or indirect
Subsidiary of an Unrestricted Subsidiary; PROVIDED, HOWEVER, that upon the
occurrence of any Unrestricted Subsidiary ceasing to be an Unrestricted
Subsidiary, such Subsidiary shall be included in the definition of Restricted
Subsidiary.
"SELLER PAPER" means Indebtedness of the Company or a Restricted Subsidiary
of the Company that is outstanding on the date of the Indenture and that was
issued in connection with an acquisition of a business or assets in respect of
the balance deferred and unpaid of the purchase price of any property, the
aggregate principal amount of which, as of the date of the Indenture, does not
exceed $11.0 million.
"SIGNIFICANT SUBSIDIARY" means any Restricted Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Act, as such Regulation is in effect on the date
hereof.
"SIGNIFICANT SUBSIDIARY GUARANTEE" means the Subsidiary Guarantee of a
Significant Subsidiary.
"SUBORDINATED INDEBTEDNESS" means any Indebtedness of the Company or any of
its Restricted Subsidiaries which is expressly by its terms subordinated in
right of payment to any other Indebtedness.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution;
but only to the extent that such Subsidiary: (a) has no Indebtedness other than
Non-Recourse Debt; (b) is not party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary of the Company
unless the terms of any such agreement, contract, arrangement or understanding
are no less favorable to the Company or such Restricted Subsidiary than those
that might be obtained at the time from Persons who are not Affiliates of the
Company; (c) is a Person with respect to which neither the Company nor any of
its Restricted Subsidiaries has any direct or indirect obligation (x) to
subscribe for additional Equity Interests or (y) to maintain or preserve such
Person's financial condition or to cause such Person to achieve any specified
levels of operating results; (d) has not guaranteed or otherwise directly or
indirectly provided credit support for any Indebtedness of the Company or any of
its Restricted Subsidiaries; and (e) has at least one director on its board of
directors that is not a director or executive officer of the Company or any of
its Restricted Subsidiaries and has at least one executive officer that is not a
director or executive officer of the Company or any of its Restricted
Subsidiaries. Any such designation by the Board of Directors shall be evidenced
to the Trustee by filing with the Trustee a certified copy of the Board
Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions and was
permitted by the covenant described above under the caption "-- Certain
Covenants -- Restricted Payments." If, at any time, any Unrestricted Subsidiary
would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it
shall thereafter cease to be an Unrestricted Subsidiary for purposes of the
Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred
by a Restricted Subsidiary of the Company as of such date (and, if such
Indebtedness is not permitted to be incurred as of such date under the covenant
described above under the caption "-- Incurrence of Indebtedness and Issuance of
Disqualified Stock," the Company shall be in default of such covenant). The
Board of Directors of the Company may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; PROVIDED that such designation shall
be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the
Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such
designation shall only be
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permitted if (i) such Indebtedness is permitted to be incurred by the covenant
described above under the caption "-- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Disqualified Stock," and (ii) no Default or Event
of Default would be in existence following such designation.
"VOTING STOCK" means, with respect to any Person, any class or series of
capital stock of such Person that is ordinarily entitled to vote in the election
of directors thereof at a meeting of stockholders called for such purpose,
without the occurrence of any additional event or contingency.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" is any Wholly Owned Subsidiary that is
a Restricted Subsidiary.
"WHOLLY OWNED SUBSIDIARY" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiaries of such Person.
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CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The following summary of the material anticipated federal income tax
consequences of the issuance of New Notes and the Exchange Offer is based upon
the provisions of the Internal Revenue Code of 1986, as amended, the final,
temporary and proposed regulations promulgated thereunder, and administrative
rulings and judicial decisions now in effect, all of which are subject to change
(possibly with retroactive effect) or different interpretations. The following
summary is based on an opinion of White & Case, special counsel to the Company,
which is not binding on the Internal Revenue Service ("IRS") and there can be no
assurance that the IRS will take a similar view with respect to the tax
consequences described below. No ruling has been or will be requested by the
Company from the IRS on any tax matters relating to the New Notes or the
Exchange Offer. This discussion does not purport to address all of the possible
federal income tax consequences or any state, local or foreign tax consequences
of the acquisition, ownership and disposition of the Old Notes, the New Notes or
the Exchange Offer. It is limited to investors who will hold the Old Notes and
the New Notes as capital assets and does not address the federal income tax
consequences that may be relevant to particular investors in light of their
unique circumstances or to certain types of investors (such as dealers in
securities, insurance companies, financial institutions, foreign corporations,
partnerships, trusts, nonresident individuals, and tax-exempt entities) who may
be subject to special treatment under federal income tax laws.
INDEBTEDNESS
The Old Notes and the New Notes should be treated as indebtedness of the
Company. In the unlikely event the Old Notes or the New Notes were treated as
equity, the amount treated as a distribution on any such Old Note or New Note
would first be taxable to the holder as dividend income to the extent of the
Company's current and accumulated earnings and profits, and would next be
treated as a return of capital to the extent of the holder's tax basis in the
Old Notes or New Notes, with any remaining amount treated as a gain from the
sale of an Old Note or a New Note. In addition, in the event of equity
treatment, amounts received in retirement of an Old Note or a New Note might in
certain circumstances be treated as a dividend, and the Company could not deduct
amounts paid as interest on such Old Notes or New Notes. The remainder of this
discussion assumes that the Old Notes and the New Notes will constitute
indebtedness.
EXCHANGE OFFER
The exchange of the Old Notes for New Notes pursuant to the Exchange Offer
should not be treated as an "exchange" because the New Notes should not be
considered to differ materially in kind or extent from the Old Notes. Rather,
the New Notes received by a holder of the Old Notes should be treated as a
continuation of the Old Notes in the hands of such holder. As a result, there
should be no federal income tax consequences to holders exchanging the Old Notes
for the New Notes pursuant to the Exchange Offer, and the holding period of New
Notes in the hands of a holder should include the holding period of the Old
Notes exchanged into such New Notes.
INTEREST
A holder of an Old Note or a New Note will be required to report stated
interest on the Old Note and the New Note as interest income in accordance with
the holder's method of accounting for tax purposes. Because the Old Notes were
issued at par there is no original issue discount pursuant to the de minimis
exception to the "original issue discount" rules.
TAX BASIS IN OLD NOTES AND NEW NOTES
A holder's tax basis in an Old Note will generally be the holder's purchase
price for the Old Note. If a holder of an Old Note exchanges the Old Note for a
New Note pursuant to the Exchange Offer, the tax
100
<PAGE>
basis of the New Note immediately after such exchange should equal the holder's
tax basis in the Old Note immediately prior to the exchange.
DISPOSITION OF OLD NOTES OR NEW NOTES
The sale, exchange, redemption or other disposition of an Old Note or a New
Note, except in the case of an exchange pursuant to the Exchange Offer (see the
above discussion), generally will be a taxable event. A holder generally will
recognize gain or loss equal to the difference between (i) the amount of cash
plus the fair market value of any property received upon such sale, exchange,
redemption or other taxable disposition of the Old Note or the New Note (except
to the extent attributable to accrued interest) and (ii) the holder's adjusted
tax basis in such debt instrument. Such gain or loss will be capital gain or
loss, and will be long term if the Old Notes or the New Notes have been held for
more than one year at the time of the sale or other disposition.
PURCHASERS OF OLD NOTES AT OTHER THAN ORIGINAL ISSUANCE PRICE
The foregoing does not discuss special rules which may affect the treatment
of purchasers that acquired Old Notes other than at par, including those
provisions of the Internal Revenue Code relating to the treatment of "market
discount," and "amortizable bond premium." Any such purchaser should consult its
tax advisor as to the consequences to him of the acquisition, ownership, and
disposition of Old Notes.
BACKUP WITHHOLDING
Unless a holder provides its correct taxpayer identification number
(employer identification number or social security number) to the Company and
certifies that such number is correct, generally under the federal income tax
backup withholding rules, 31% of (1) the interest paid on the Old Notes and the
New Notes, and (2) proceeds of sale of the Old Notes and the New Notes, must be
withheld and remitted to the United States Treasury. Therefore, each holder
should complete and sign the Substitute Form W-9 included so as to provide the
information and certification necessary to avoid backup withholding. However,
certain holders (including, among others, certain foreign individuals) are not
subject to these backup withholding and reporting requirements. For a foreign
individual holder to qualify as an exempt foreign recipient, that holder must
submit a statement, signed under penalties of perjury, attesting to that
individual's exempt foreign status. Such statements can be obtained from the
Company. For further information concerning backup withholding and instructions
for completing the Substitute Form W-9 (including how to obtain a taxpayer
identification number if you do not have one and how to complete the Substitute
Form W-9 if the Old Notes are held in more than one name), contact the Company's
Chief Financial Officer, 390 South Woods Mill Road, Suite 150, Chesterfield,
Missouri 63017 or telephone number (314) 576-0022.
Backup withholding is not an additional federal income tax. Rather, the
federal income tax liability of a person subject to backup withholding will be
reduced by the amount of tax withheld. If backup withholding results in an
overpayment of taxes, a refund may be obtained from the IRS.
PLAN OF DISTRIBUTION
Based on interpretations by the Commission set forth in no-action letters
issued to third parties, the Company believes that New Notes issued pursuant to
the Exchange Offer in exchange for the Old Notes may be offered for resale,
resold and otherwise transferred by holders thereof (other than any holder which
is (i) an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act, (ii) a broker-dealer who acquired Notes directly from the
Company or (iii) broker-dealers who acquired Notes as a result of market-making
or other trading activities) without compliance with the registration and
prospectus delivery provisions of the Securities Act provided that such New
Notes are acquired in the
101
<PAGE>
ordinary course of such holders' business, and such holders are not engaged in,
and do not intend to engage in, and have no arrangement or understanding with
any person to participate in, a distribution of such New Notes; provided that
broker-dealers ("Participating Broker-Dealers") receiving New Notes in the
Exchange Offer will be subject to a prospectus delivery requirement with respect
to resales of such New Notes. To date, the Commission has taken the position
that Participating Broker-Dealers may fulfill their prospectus delivery
requirements with respect to transactions involving an exchange of securities
such as the exchange pursuant to the Exchange Offer (other than a resale of an
unsold allotment from the sale of the Old Notes to the Initial Purchasers) with
the Prospectus, contained in the Exchange Offer Registration Statement. Pursuant
to the Registration Rights Agreement, the Company has agreed to permit
Participating Broker-Dealers and other persons, if any, subject to similar
prospectus delivery requirements to use this Prospectus in connection with the
resale of such New Notes. The Company and the Guarantors have agreed that, for a
period of 180 days after the Expiration Date, they will make this Prospectus,
and any amendment or supplement to this Prospectus, available to any
broker-dealer that requests such documents in the Letter of Transmittal.
Each holder of the Old Notes who wishes to exchange its Old Notes for New
Notes in the Exchange Offer will be required to make certain representations to
the Company as set forth in "The Exchange Offer--Terms and Conditions of the
Letter of Transmittal." In addition, each holder who is a broker-dealer and who
receives New Notes for its own account in exchange for Old Notes that were
acquired by it as a result of market-making activities or other trading
activities, will be required to acknowledge that it will deliver a prospectus in
connection with any resale by it of such New Notes.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incidental to the Exchange Offer
other than commissions and concessions of any brokers or dealers and will
indemnify holders of the Old Notes (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act, as set
forth in the Registration Rights Agreement.
102
<PAGE>
EXPERTS
The consolidated financial statements of Outsourcing Solutions Inc. as of
December 31, 1995 and 1996 and for the period September 21, 1995 to December 31,
1995 and the year ended December 31, 1996 included in this Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and have been so included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
The Payco consolidated balance sheets as of December 31, 1995, and the
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the years in the two year period ended December 31, 1995 have
been included in this Prospectus in reliance on the report of Arthur Andersen
LLP, independent auditors, appearing elsewhere herein.
The consolidated financial statements of Payco American Corporation for the
period January 1, 1996 to November 5, 1996 included in this Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and have been so included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements of Account Portfolios, L.P. for the
year ended December 31, 1994 and for the period from January 1, 1995 to
September 20, 1995 included in this Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein,
and have been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The A.M. Miller & Associates, Inc. balance sheet as of December 31, 1995 and
the statements of income and retained earnings and of cash flows for the year
ended December 31, 1995 have been included in this Prospectus in reliance on the
report of Schweitzer Rubin Karon & Bremer, independent auditors, appearing
elsewhere herein.
The combined financial statements of Continental Credit Services, Inc. and
related companies as of September 30, 1995 and for the year ended September 30,
1995 included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
LEGAL MATTERS
The validity of the issuance of securities offered hereby will be passed
upon for the Company by White & Case, New York, New York.
103
<PAGE>
INDEX TO FINANCIAL STATEMENTS
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report............................................................................... F-3
Consolidated Balance Sheets at December 31, 1995 and 1996.................................................. F-4
Consolidated Statements of Operations for the period from September 21, 1995 to
December 31, 1995 and for the year ended December 31, 1996............................................... F-5
Consolidated Statements of Stockholders' Equity for the period from
September 21, 1995 to December 31, 1995 and for the year ended December 31, 1996......................... F-6
Consolidated Statements of Cash Flows for the period from September 21, 1995 to
December 31, 1995 and for the year ended December 31, 1996............................................... F-7
Notes to Consolidated Financial Statements................................................................. F-8
</TABLE>
PAYCO AMERICAN CORPORATION AND SUBSIDIARIES
<TABLE>
<S> <C>
Report of Independent Public Accountants............................................. F-21
Independent Auditors' Report......................................................... F-22
Consolidated Balance Sheet at December 31, 1995...................................... F-23
Consolidated Statements of Income for the years ended December 31, 1994 and 1995 and
the period from January 1, 1996 to November 5, 1996................................ F-25
Consolidated Statements of Shareholders' Investment for the years ended
December 31, 1994 and 1995 and the period from January 1, 1996 to
November 5, 1996................................................................... F-26
Consolidated Statements of Cash Flows for the years ended December 31, 1994 and 1995
and the period from January 1, 1996 to November 5, 1996............................ F-27
Notes to Consolidated Financial Statements........................................... F-28
</TABLE>
ACCOUNT PORTFOLIOS, L.P. AND SUBSIDIARIES
<TABLE>
<S> <C>
Independent Auditors' Report......................................................... F-39
Consolidated Statements of Operations for the year ended December 31, 1994 and for
the period from January 1, 1995 to September 20, 1995.............................. F-40
Consolidated Statements of Partners' Capital for the year ended December 31, 1994 and
for the period from January 1, 1995 to September 20, 1995.......................... F-41
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-42
Notes to Consolidated Financial Statements........................................... F-43
</TABLE>
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
A.M. MILLER & ASSOCIATES, INC.
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditor's Report............................................................................... F-48
Balance Sheet at December 31, 1995......................................................................... F-49
Statement of Income and Retained Earnings for the year ended December 31, 1995............................. F-50
Statement of Cash Flows for the year ended December 31, 1995............................................... F-51
Notes to Financial Statements.............................................................................. F-52
</TABLE>
CONTINENTAL CREDIT SERVICES, INC. AND RELATED COMPANIES
<TABLE>
<S> <C>
Independent Auditors' Report......................................................... F-58
Combined Balance Sheet at September 30, 1995......................................... F-59
Combined Statement of Income and Retained Earnings for the
year ended September 30, 1995...................................................... F-60
Combined Statement of Cash Flows for the year ended September 30, 1995............... F-61
Notes to Combined Financial Statements............................................... F-62
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Stockholders of Outsourcing Solutions Inc.:
We have audited the accompanying consolidated balance sheets of Outsourcing
Solutions Inc. (the "Company") and its subsidiaries as of December 31, 1995 and
1996 and the related consolidated statements of operations, stockholders'
equity, and cash flows for the period from September 21, 1995 (date of
inception) to December 31, 1995 and for the year ended December 31, 1996. 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 the Company and its
subsidiaries as of December 31, 1995 and 1996 and the results of their
operations and their cash flows for the period from September 21, 1995 to
December 31, 1995 and for the year ended December 31, 1996 in conformity with
generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
- -------------------------------
Deloitte & Touche LLP
St. Louis, Missouri
February 27, 1997
F-3
<PAGE>
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<S> <C> <C>
ASSETS 1995 1996
CURRENT ASSETS:
Cash and cash equivalents.............................................................. $ 1,469 $ 14,497
Cash and cash equivalents held for clients............................................. -- 20,255
Current portion of loans and accounts receivable purchased............................. 23,513 42,481
Accounts receivable--trade, net of allowance for doubtful receivables of $879 in
1996................................................................................. 216 20,738
Deferred income taxes (Note 7)......................................................... -- 2,617
Other current assets................................................................... 90 3,453
--------- -----------
Total current assets................................................................. 25,288 104,041
LOANS AND ACCOUNTS RECEIVABLE PURCHASED.................................................. 41,550 25,519
PROPERTY AND EQUIPMENT--Net (Note 3)..................................................... 1,099 36,451
GOODWILL--Less accumulated amortization of $250 and $2,925, respectively................. 17,715 152,768
INTANGIBLE ASSETS--Less accumulated amortization of $12,812 (Note 4)..................... -- 20,702
DEFERRED FINANCING COSTS--Less accumulated amortization of $337.......................... -- 12,563
DEFERRED INCOME TAXES.................................................................... -- 3,163
--------- -----------
TOTAL.................................................................................... $ 85,652 $ 355,207
--------- -----------
--------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable--trade................................................................ $ 842 $ 6,495
Collections due to clients............................................................. -- 20,255
Accrued severance and office closing costs............................................. -- 8,716
Accrued compensation................................................................... 126 9,574
Other current liabilities.............................................................. 225 7,511
Accrued expenses....................................................................... 1,657 3,378
Current portion of long-term debt (Note 5)............................................. -- 10,032
--------- -----------
Total current liabilities............................................................ 2,850 65,961
LONG-TERM DEBT (Note 5).................................................................. 36,462 237,584
DEFERRED INCOME TAXES (Note 7)........................................................... 3,892 --
OTHER LONG-TERM LIABILITIES.............................................................. -- 64
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY (Note 6):
8% nonvoting cumulative redeemable exchangeable preferred stock; authorized 1,000,000
shares, 800,000.01 and 865,280.01 shares, respectively, issued and outstanding, at
liquidation value of $12.50 per share................................................ 10,000 10,816
Voting common stock; $.01 par value; authorized 5,600,000 and 7,500,000 shares,
2,812,000 and 3,425,126.01 shares, respectively, issued and outstanding.............. 28 35
Class A convertible nonvoting common stock; $.01 par value; authorized 7,500,000
shares, 391,740.58 shares issued and outstanding..................................... -- 4
Class B convertible nonvoting common stock; $.01 par value; authorized 500,000 shares,
400,000 shares issued and outstanding................................................ -- 4
Class C convertible nonvoting common stock; $.01 par value; authorized 1,500,000
shares, 1,040,000 shares issued and outstanding...................................... -- 10
Additional paid-in capital............................................................. 35,122 65,658
Accumulated deficit.................................................................... (2,702) (24,929)
--------- -----------
Total stockholders' equity........................................................... 42,448 51,598
--------- -----------
TOTAL.................................................................................... $ 85,652 $ 355,207
--------- -----------
--------- -----------
</TABLE>
F-4
<PAGE>
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM SEPTEMBER 21, 1995 (DATE OF INCEPTION)
TO DECEMBER 31, 1995 AND YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
REVENUES................................................................................. $ 8,311 $ 106,331
EXPENSES:
Salaries and benefits.................................................................. 2,079 46,997
Service fees and other operating and administrative expenses........................... 3,232 33,759
Amortization of loans and accounts receivable purchased................................ 5,390 27,317
Amortization of goodwill and other intangibles......................................... 250 15,452
Depreciation expense................................................................... 81 2,829
Purchased research and development..................................................... 1,000
--------- ------------
Total expenses..................................................................... 11,032 127,354
--------- ------------
OPERATING LOSS........................................................................... (2,721) (21,023)
INTEREST EXPENSE -- Net.................................................................. 1,361 12,131
--------- ------------
LOSS BEFORE INCOME TAXES................................................................. (4,082) (33,154)
INCOME TAX BENEFIT (Note 7).............................................................. (1,605) (11,757)
--------- ------------
NET LOSS................................................................................. (2,477) (21,397)
PREFERRED STOCK DIVIDEND REQUIREMENTS.................................................... 225 830
--------- ------------
NET LOSS TO COMMON STOCKHOLDERS.......................................................... $ (2,702) $ (22,227)
--------- ------------
--------- ------------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD FROM SEPTEMBER 21, 1995 (DATE OF INCEPTION)
TO DECEMBER 31, 1995 AND YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NON-VOTING
CUMULATIVE
REDEEMABLE
EXCHANGEABLE COMMON STOCK ADDITIONAL
PREFERRED -------------------------------------------------- PAID-IN ACCUMULATED
STOCK VOTING CLASS A CLASS B CLASS C CAPITAL DEFICIT
-------------- ----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 21,
1995........................ $ -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of 800,000.01 shares
of preferred stock.......... 10,000 -- -- -- -- -- --
Issuance of 2,812,000 shares
of common stock............. -- 28 -- -- -- 35,122 --
Preferred stock dividend
requirements of $0.28 per
share....................... -- -- -- -- -- -- (225)
Net loss..................... -- -- -- -- -- -- (2,477)
-------------- --- --- --- --- ----------- -------------
Balance at December 31,
1995........................ 10,000 28 -- -- -- 35,122 (2,702)
Issuance of 118,866.59
shares of common stock in
exchange for notes
payable to
stockholders............. -- 2 -- -- -- 1,484 --
Issuance of 2,326,000
shares of common stock... -- 7 10 -- 6 29,052 --
Conversion of common
stock.................... -- (2) (6) 4 4 -- --
Payment of preferred stock
dividends through
issuance of 65,280 shares
of preferred stock and
recorded preferred stock
dividend requirements of
$1 per share............. 816 -- -- -- -- -- (830)
Net loss................... -- -- -- -- -- -- (21,397)
-------------- --- --- --- --- ----------- -------------
Balance at December 31,
1996........................ $ 10,816 $ 35 $ 4 $ 4 $ 10 $ 65,658 $ (24,929)
-------------- --- --- --- --- ----------- -------------
-------------- --- --- --- --- ----------- -------------
<CAPTION>
TOTAL
---------
<S> <C>
Balance at September 21,
1995........................ $ --
Issuance of 800,000.01 shares
of preferred stock.......... 10,000
Issuance of 2,812,000 shares
of common stock............. 35,150
Preferred stock dividend
requirements of $0.28 per
share....................... (225)
Net loss..................... (2,477)
---------
Balance at December 31,
1995........................ 42,448
Issuance of 118,866.59
shares of common stock in
exchange for notes
payable to
stockholders............. 1,486
Issuance of 2,326,000
shares of common stock... 29,075
Conversion of common
stock.................... --
Payment of preferred stock
dividends through
issuance of 65,280 shares
of preferred stock and
recorded preferred stock
dividend requirements of
$1 per share............. (14)
Net loss................... (21,397)
---------
Balance at December 31,
1996........................ $ 51,598
---------
---------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM SEPTEMBER 21, 1995 (DATE OF INCEPTION)
TO DECEMBER 31, 1995 AND YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................................................... $ (2,477) $ (21,397)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization............................................................. 331 18,618
Amortization of loans and accounts receivable purchased................................... 5,390 27,317
Deferred taxes............................................................................ (1,605) (11,757)
Change in assets and liabilities:
Loans and accounts receivable purchased................................................. (903) (13,645)
Other current assets.................................................................... (233) (578)
Accounts payable, accrued expenses, and other current liabilities....................... 1,496 (1,536)
--------- ---------
Net cash provided by (used in) operating activities................................... 1,999 (2,978)
--------- ---------
INVESTING ACTIVITIES:
Payment for acquisitions--net of cash acquired.............................................. (30,007) (184,184)
Acquisition of property and equipment....................................................... (97) (2,606)
--------- ---------
Net cash used in investing activities................................................. (30,104) (186,790)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from term loans.................................................................... -- 337,000
Repayment of debt........................................................................... (576) (136,615)
Deferred financing fees..................................................................... -- (12,563)
Proceeds from issuance of common stock...................................................... 30,150 14,974
--------- ---------
Net cash provided by financing activities............................................. 29,574 202,796
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS..................................................... 1,469 13,028
CASH AND CASH EQUIVALENTS--BEGINNING OF PERIOD................................................ -- 1,469
--------- ---------
CASH AND CASH EQUIVALENTS--END OF PERIOD...................................................... $ 1,469 $ 14,497
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION--
Cash paid during period for interest........................................................ $ 543 $ 7,655
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
</TABLE>
<TABLE>
<S> <C>
In connection with the September 1995 acquisition of Account Portfolios, L.P., the Company issued
933,333 shares of common stock, 266,657 shares of 8% Non-voting Cumulative Redeemable Exchangeable
Preferred Stock and 10% notes payable totaling $35,000. The notes were reduced by $100 as a result
of a purchase price adjustment. In November 1995, accrued interest in the amount of $688 was
capitalized into the principal of the notes.
In January 1996, notes payable to certain stockholders, plus accrued interest thereon, totaling
$1,486 were contributed to capital in exchange for 118,866.59 shares of voting common stock.
In connection with the January 1996 acquisition of A.M. Miller & Associates, Inc., the Company issued
80,000 shares of voting common stock valued at $1,000 and a $5,000 9% unsecured note payable.
Subsequent to the transaction date, an additional 8,000 shares of voting common stock valued at
$100 were issued to satisfy a liability of the acquired company.
In connection with the January 1996 acquisition of Continental Credit Services, Inc., the Company
issued 400,000 shares of voting common stock valued at $5,000 and a $3,000 10% unsecured note
payable.
In connection with the May 1996 purchase of participation interests in certain loan portfolios, the
Company issued 640,000 shares of Class C non-voting common stock valued at $8,000 and a $3,500 10%
unsecured note payable.
During the year ended December 31, 1996, the Company paid preferred stock dividends of $816 through
the issuance of 65,280 shares of preferred stock.
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE PERIOD FROM SEPTEMBER 21, 1995 (DATE OF INCEPTION)
TO DECEMBER 31, 1995 AND YEAR ENDED DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION POLICY--The consolidated financial statements include the
accounts of Outsourcing Solutions Inc. ("OSI") and all of its subsidiaries
(collectively, the "Company"). 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 consists of certain restricted
accounts which are used to maintain cash collected and held on behalf of the
Company's clients.
LOANS AND ACCOUNTS RECEIVABLE PURCHASED--Loans and accounts receivable
purchased ("Receivables") in connection with the acquisitions on September 21,
1995 and November 6, 1996 are recorded at the present value of estimated future
cash flows. Receivables purchased in the normal course of business are recorded
at cost. The Company periodically reviews all Receivables to assess
recoverability. Impairments will be recognized in operations when the expected
future operating cash flows derived from the Receivables (undiscounted and
without interest charges) are less than their carrying value.
REVENUE RECOGNITION--Collections on Receivables are recorded as revenue when
received. Revenue from loan servicing is recorded as such services are provided.
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 for that portfolio. Such portfolio cost is
generally amortized over a three year period from the date of purchase.
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.
GOODWILL AND 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 when the expected future operating cash flow (undiscounted and
without interest charges) derived from such intangible assets is 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
financial statements.
DEFERRED FINANCING COSTS--Costs incurred to obtain financing are capitalized
and amortized over the term of the underlying debt using the effective interest
method.
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.
F-8
<PAGE>
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THE PERIOD FROM SEPTEMBER 21, 1995 (DATE OF INCEPTION)
TO DECEMBER 31, 1995 AND YEAR ENDED DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS--Effective January 1, 1996, the Company
adopted SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, which requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. SFAS No. 121 also requires
that long-lived assets and certain identifiable intangibles to be disposed of be
reported at the lower of carrying amount or fair value less cost to sell. The
adoption of SFAS No. 121 did not have a material effect on the Company's
financial condition or results of operations.
Effective January 1, 1996 the Company adopted SFAS No. 123, ACCOUNTING OF
STOCK-BASED COMPENSATION. The adoption of the new recognition provisions for
stock-based compensation expense included in SFAS No. 123 was optional; however,
the pro forma effects on net income had the new recognition provisions been
elected is required to be disclosed in the financial statements. The Company
will continue to follow the requirements of APB No. 25 ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, in accounting for employee stock options; therefore, there
is no impact on the Company's financial position or results of operations from
the adoption of this statement.
2. ORGANIZATION
Outsourcing Solutions Inc., formerly known as OSI Holdings Corp., was formed
on September 21, 1995 with a growth strategy focused on consolidation and
regionalization of accounts receivable management services. The Company
purchases portfolios of nonperforming loans and accounts receivable, services
loans and provides contract management of accounts receivable. The Company's
customers are mainly in the educational, utilities, telecommunications, retail,
healthcare and financial institution industries. The markets for the Company's
services are the United States, Puerto Rico and Mexico.
Pursuant to a Purchase Agreement dated September 21, 1995 (the "Purchase
Agreement"), OSI, a Delaware corporation, acquired the Class A limited
partnership interests in Account Portfolios, L.P. ("APLP") for 933,333 shares of
OSI Voting Common Stock and 266,667 shares of OSI 8% Nonvoting Cumulative
Redeemable Exchangeable Preferred Stock (see Note 6). OSI contributed the Class
A partnership interests, valued at $15.0 million, to Account Portfolios, Inc.
("AP, Inc."), a subsidiary of OSI. AP, Inc. acquired the Class B limited
partnership interests in APLP for cash of approximately $28.8 million and notes
of $35.0 million (see Note 5). Account Portfolios, G.P., Inc. ("APGP, Inc."),
another subsidiary of OSI, acquired the general partnership interests of APLP
and its subsidiaries for cash of approximately $1.2 million. The total value of
this transaction was $80.0 million. The acquisition has been accounted for using
the purchase method. Accordingly, the costs of the acquisition were allocated to
the assets acquired and liabilities assumed based upon their estimated fair
values at the date of acquisition.
On January 10, 1996, the Company acquired A. M. Miller & Associates, Inc.
("Miller") for cash of $26.1 million (after a working capital adjustment),
80,000 shares of Voting Common Stock (valued at $1.0 million) and a 9%
unsecured, subordinated promissory note in an aggregate amount of $5.0 million
due July 9, 2001. Also, in a separate transaction on January 10, 1996, the
Company acquired Continental Credit Services, Inc. ("Continental") for cash of
$11.6 million (after a working capital adjustment), 400,000 shares of Voting
Common Stock (valued at $5.0 million) and a 10% unsecured, subordinated
promissory note in an aggregate amount of $3.0 million due July 10, 2001.
F-9
<PAGE>
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THE PERIOD FROM SEPTEMBER 21, 1995 (DATE OF INCEPTION)
TO DECEMBER 31, 1995 AND YEAR ENDED DECEMBER 31, 1996
2. ORGANIZATION (CONTINUED)
Both acquisitions were accounted for as purchases and the costs of the
acquisitions were allocated to the assets acquired and the liabilities assumed
based on their estimated fair values at the date of the acquisitions. The
purchase prices and value assigned to the common stock were determined in fully
negotiated arms length transactions based upon a multiple of sustainable cash
flows of Miller and Continental and the return on investment required by McCown
De Leeuw & Co., a professional private equity investor and the founding
shareholder of the Company, and its co-investors. All activity subsequent to the
acquisitions has been reported in the consolidated financial statements of the
Company.
OSI acquired Payco American Corporation ("Payco") on November 6, 1996 in a
merger transaction for an aggregate cash consideration of approximately $154.8
million. The transaction was accounted for as a purchase and the costs of the
acquisition was allocated to the assets acquired and the liabilities assumed
based on their estimated fair values at the date of the acquisition.
OSI allocated $2.5 million of the purchase price to in-process technology
that had not reached technological feasibility and had no alternative future
uses, which the Company expensed at the date of the acquisition.
On May 17, 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, for aggregate consideration of approximately $14.8
million ("MLQ Interests"). The consideration consisted of 640,000 shares of
Class C Nonvoting Common Stock of the Company (valued at $8 million), a 10%
unsecured $3.5 million promissory note due September 1, 2000, and cash of
approximately $3.3 million. The purchase price and value assigned to the common
stock was determined in a fully negotiated arms length transaction based upon
expected future cash flows of the loan portfolios and the return on investment
required by McCown De Leeuw & Co. and its co-investors.
A summary of the cash and non-cash components of the acquisitions is as
follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
---------- ---------------------------------------------------
APLP MILLER CONTINENTAL PAYCO MLQ INTERESTS
---------- --------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Fair value of assets acquired, including goodwill and
transaction costs................................... $ 81,218 $ 35,358 $ 22,973 $ 211,838 $ 14,772
Liabilities assumed................................... (693) (3,631) (2,218) (57,039) --
---------- --------- ----------- ----------- --------------
Total cost of the acquisition......................... 80,525 31,727 20,755 154,799 14,772
Notes payable issued.................................. (35,000) (5,000) (3,000) -- (3,500)
Common stock issued................................... (15,000) (1,000) (5,000) -- (8,000)
Working capital adjustments........................... -- 370 (1,198) -- --
---------- --------- ----------- ----------- --------------
Total cash paid....................................... 30,525 26,097 11,557 154,799 3,272
Acquired cash......................................... (518) (1,107) (1,451) (5,711) --
---------- --------- ----------- ----------- --------------
Total cash paid, net of acquired cash................. $ 30,007 $ 24,990 $ 10,106 $ 149,088 $ 3,272
---------- --------- ----------- ----------- --------------
---------- --------- ----------- ----------- --------------
</TABLE>
The results of the acquired companies are included in the accompanying
financial statements since their respective dates of acquisition. All of the
acquired companies provide accounts receivable management services.
F-10
<PAGE>
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THE PERIOD FROM SEPTEMBER 21, 1995 (DATE OF INCEPTION)
TO DECEMBER 31, 1995 AND YEAR ENDED DECEMBER 31, 1996
2. ORGANIZATION (CONTINUED)
The following unaudited summarized pro forma information has been prepared
as if the acquisitions had occurred on September 21, 1995 (date of inception)
and January 1, 1996 (in thousands):
<TABLE>
<CAPTION>
1995 1996
--------- -----------
<S> <C> <C>
Net revenues......................................................... $ 62,873 $ 257,064
--------- -----------
--------- -----------
Net loss............................................................. $ 8,177 $ 38,041
--------- -----------
--------- -----------
</TABLE>
The pro forma consolidated results of operations do not purport to be
indicative of the actual results that would have occurred had the acquisitions
been consummated for the periods presented or of future operations of the
combined companies under the ownership and operation of the Company.
3. PROPERTY AND EQUIPMENT
Property and equipment, which is recorded at cost, consists of the following
(in thousands):
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Furniture and fixtures.................................................. $ 187 $ 3,591
Data processing equipment............................................... 547 19,647
Telephone equipment..................................................... 420 3,670
Leasehold improvements.................................................. 21 1,090
Computer software....................................................... 5 11,310
--------- ---------
1,180 39,308
Less accumulated depreciation........................................... (81) (2,857)
--------- ---------
$ 1,099 $ 36,451
--------- ---------
--------- ---------
</TABLE>
4. OTHER INTANGIBLE ASSETS
Intangible assets other than goodwill is comprised of the following at
December 31 (in thousands):
<TABLE>
<CAPTION>
1996
---------
<S> <C>
Value of favorable contracts and commitments....................................... $ 29,000
Covenants not to compete........................................................... 4,514
---------
Total.......................................................................... 33,514
Less--accumulated amortization..................................................... (12,812)
---------
Intangible assets--net............................................................. $ 20,702
---------
---------
</TABLE>
F-11
<PAGE>
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THE PERIOD FROM SEPTEMBER 21, 1995 (DATE OF INCEPTION)
TO DECEMBER 31, 1995 AND YEAR ENDED DECEMBER 31, 1996
5. FINANCING ARRANGEMENTS
Long-term debt is comprised of the following at December 31 (in thousands):
<TABLE>
<S> <C> <C>
Term Loan A Credit Facility............................................. $ -- $ 71,000
Term Loan B Credit Facility............................................. -- 71,000
11% Senior Subordinated Notes........................................... -- 100,000
Notes payable to stockholders........................................... 36,462 5,000
Other................................................................... -- 616
--------- ---------
Total debt.......................................................... 36,462 247,616
Less current portion of long-term debt.................................. -- 10,032
--------- ---------
Long-term debt...................................................... $ 36,462 $ 237,584
--------- ---------
--------- ---------
</TABLE>
A subsidiary of the Company entered into a two-year Master Loan Agreement
with a financial services corporation on May 14, 1992 (the "Master 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 Master Agreement, after payment of principal, noncontingent
interest, and return of the Company's investment in certain portfolios, the
Company is required to pay an additional percentage of all future collections
less service fees (as defined) in such portfolios as contingent interest to the
lender. The Company paid contingent interest of $301,000 and $1,198,000 under
the Master Agreement for the period from September 21, 1995 to December 31, 1995
and for the year ended December 31, 1996, respectively, which was charged to
interest expense. There were no principal amounts outstanding under the Master
Agreement as of December 31, 1995 or 1996.
In connection with the purchase of APLP discussed in Note 2, the Company,
pursuant to a Loan and Security Agreement dated September 21, 1995 (the
"Agreement"), issued two promissory notes to stockholders (the "Notes") for an
aggregate amount of $35.0 million. On November 30, 1995, in accordance with the
loan agreement, accrued interest in the amount of $688,000 was capitalized into
the principal of the Notes. The Notes bore interest at 10% per year and were to
be due in full on December 31, 1998. Additional interest equal to 5% was to
accrue on all amounts outstanding under the Agreement beginning on March 21,
1996 and semi-annually thereafter through March 21, 1998. On March 21, 1996, the
notes were refinanced with the proceeds of a new bank agreement (see below).
The Company also executed promissory notes for an aggregate amount of
$1,450,000 to four stockholders of the Company for transaction costs incurred in
connection with the purchase of APLP. Each note bore interest at 8% per year,
payable semi-annually beginning December 31, 1995, and was due on September 21,
2005. On January 10, 1996, pursuant to an Exchange Agreement with each of the
four noteholders, the promissory notes, plus accrued interest thereon, totaling
$1,485,832 was contributed to capital of the Company in exchange for 118,866.59
shares of Voting Common Stock of the Company.
On January 10, 1996, the Company executed notes payable to the former
stockholders of the acquired companies, Miller and Continental. The $5.0 million
note payable bears interest at 9%, payable quarterly through July 2001. The $3.0
million note payable bore interest at 10% and was payable semi-annually through
July 2001. The $3.0 million note payable was repaid in connection with the
November 1996 private placement and execution of the new bank credit facility
(see below).
F-12
<PAGE>
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THE PERIOD FROM SEPTEMBER 21, 1995 (DATE OF INCEPTION)
TO DECEMBER 31, 1995 AND YEAR ENDED DECEMBER 31, 1996
5. FINANCING ARRANGEMENTS (CONTINUED)
The acquisitions of Miller and Continental were funded with proceeds from a
$50.0 million Credit Agreement (the "Credit Agreement"), dated January 10,
1996.The Credit Agreement was comprised of a term loan facility of $30.0
million, a revolving loan facility of $5.0 million and an acquisition loan
facility of $15 million. The interest rate on each facility was determined, at
the option of the Company, based upon either the London Interbank Offered Rate
("LIBOR") plus 2.75% to 3.25% or the Base Rate, as defined, plus 1.5% to 2.0%,
depending on the facility. The Credit Agreement was repaid in connection with
the November 1996 private placement and execution of the new bank credit
facility (see below).
On March 21, 1996, the Company signed an agreement with a syndicate of banks
(the "Bank Agreement") to provide financing required to refinance the Notes,
provide for future acquisitions, and finance the ongoing working capital
requirements of the Company. The Bank Agreement was comprised of a term loan
facility of $34.0 million (increased by $3.5 million pursuant to the First
Amendment to the Credit Agreement dated May 17, 1996) and a revolving credit
facility of $10.0 million. The Company borrowed $34.0 million under the term
loan facility and $0.7 million under the revolving credit facility and repaid
the Notes and certain other liabilities of the Company. The Bank Agreement
provided for quarterly principal payments beginning June 30, 1996. Additionally,
the Company was required to make semi-annual prepayments beginning August 31,
1996 based upon a formula of Excess Cash Flow, as defined. The interest rate on
both the term loan and revolving credit facilities was determined at the
Company's option, based on either LIBOR adjusted by a range of 1% to 2.5% based
on certain financial ratios, or the Base Rate, as defined, less .25%. The Bank
Agreement was terminated in connection with the November 1996 private placement
and execution of the new bank credit facility (see below).
The acquisition of Payco was financed with proceeds from a private placement
of $100.0 million 11% Senior Subordinated Notes due 2006 (the "Old Notes") and a
new bank credit facility ("Credit Facility") which provides borrowing
availability up to $200.0 million. In connection with the private placement and
execution of the Credit Facility, the Company repaid a portion of its existing
indebtedness and terminated its existing credit agreements.
Interest on the Old Notes is payable semi-annually on May 1 and November 1
of each year, commencing on May 1, 1997. The Old 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
Old Notes are not redeemable at the Company's option prior to November 1, 2001.
From and after November 1, 2001, the Old Notes are subject to redemption at the
Company's option based on specified percentages of the principal of the Old
Notes. Prior to November 1, 1999, the Company may, at its option, redeem up to
35% of the aggregate principal amount of Old Notes originally offered at 111% of
the principal amount thereof, plus accrued and unpaid interest, with the net
proceeds of a public or private sale of common stock of the Company, subject to
certain provisions of the related indenture. Upon the occurrence of a change in
control, as defined, the holders of the Old Notes have the right to require the
Company to repurchase the Old Notes at 101% of the principal amount plus accrued
and unpaid interest. The Old Notes contain certain restrictive covenants,
including limitations on asset sales, additional indebtedness, mergers and
certain restricted payments.
The Credit Facility consists of a $142.0 million term loan facility and a
$58.0 million Revolving Credit Facility (the "Revolving Facility"). The term
loan facility consists of two individual $71.0 million term loans, ("Term Loan
A" and "Term Loan B"), which mature on December 15, 2001 and 2003, respectively.
F-13
<PAGE>
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THE PERIOD FROM SEPTEMBER 21, 1995 (DATE OF INCEPTION)
TO DECEMBER 31, 1995 AND YEAR ENDED DECEMBER 31, 1996
5. FINANCING ARRANGEMENTS (CONTINUED)
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
final maturity. 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%. Certain financial conditions must be maintained to
utilize the Revolving Facility. At December 31, 1996, no principal was
outstanding under the Revolving Facility.
The Credit 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 and assets. The Credit Facility contains certain financial covenants,
including, but not limited to, covenants related to interest coverage, fixed
charge coverage, a leverage test and a limitation on capital expenditures.
In connection with the Payco acquisition and the private placement discussed
above, the Company incurred one-time fees totaling $3.6 million to certain
related parties for financial advisory services provided to the Company in
connection with these transactions.
The Company is filing a registration statement relating to an offer to
exchange the Old Notes for the Company's 11% Series B Senior Subordinated Notes
due 2006 (the "New Notes"). The Old Notes are, and the New Notes will be, 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 Credit Facility (the
"Restricted Subsidiaries").
The Restricted Subsidiaries are wholly-owned by the Company and constitute
all of the direct and indirect subsidiaries of the Company except for three
subsidiaries that are individually, and in the aggregate, inconsequential. The
Company is a holding company with no independent operations and no significant
assets other than the common stock of its 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.
F-14
<PAGE>
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THE PERIOD FROM SEPTEMBER 21, 1995 (DATE OF INCEPTION)
TO DECEMBER 31, 1995 AND YEAR ENDED DECEMBER 31, 1996
5. FINANCING ARRANGEMENTS (CONTINUED)
Summarized combined financial information of the Restricted Subsidiaries is
shown below (in thousands):
<TABLE>
<CAPTION>
1995 1996
----------- ------------
<S> <C> <C>
Current assets..................................................... $ 25,267 $ 96,146
----------- ------------
----------- ------------
Noncurrent assets.................................................. $ 60,364 $ 238,003
----------- ------------
----------- ------------
Current liabilities................................................ $ 2,365 $ 47,909
----------- ------------
----------- ------------
Noncurrent liabilities............................................. $ 39,288 $ 5,461
----------- ------------
----------- ------------
Operating revenue.................................................. $ 8,311 $ 106,331
----------- ------------
----------- ------------
Loss from operations............................................... $ (2,335) $ (15,325)
----------- ------------
----------- ------------
Net loss........................................................... $ (2,217) $ (15,928)
----------- ------------
----------- ------------
</TABLE>
The future maturities of long-term debt, at December 31, 1996 are as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
- --------------------------------------------------------------------------------- -----------
<S> <C>
1997............................................................................. $ 10,032
1998............................................................................. 14,334
1999............................................................................. 14,250
2000............................................................................. 18,000
2001 and thereafter.............................................................. 191,000
-----------
Total future maturities of long-term debt...................................... $ 247,616
-----------
-----------
</TABLE>
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, pay dividends in additional Preferred Shares. The Company
may also, 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.
Each holder of Preferred Shares shall have the right, at their option, at any
time after September 20, 1996, 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.
F-15
<PAGE>
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THE PERIOD FROM SEPTEMBER 21, 1995 (DATE OF INCEPTION)
TO DECEMBER 31, 1995 AND YEAR ENDED DECEMBER 31, 1996
6. STOCKHOLDERS' EQUITY (CONTINUED)
On January 9, 1996, the Board of Directors of the Company approved an
amendment to the Certificate of Incorporation which authorized the Company to
issue up to 7,500,000 shares of Voting Common Stock and up to 7,500,000 shares
of Class A Nonvoting Common Stock. On February 15, 1996, the Board of Directors
further amended its Certificate of Incorporation to authorize the Company to
issue up to 500,000 shares of Class B Nonvoting Common Stock and up to 1,500,000
shares of Class C Nonvoting Common Stock. Voting Common Stock can be converted
into Class A Nonvoting Common Stock (and vice versa) upon written notice to the
Company. The Class B and Class C Nonvoting Common Stock are both convertible
into Voting Common Stock of the Company upon the occurrence of certain
regulatory or liquidity events.
On February 15, 1996, the Board of Directors of the Company approved,
pursuant to a stock purchase agreement, the conversion of 200,000 shares of
Voting Common Stock and 600,000 shares of Class A Nonvoting Common Stock by
certain existing stockholders to 800,000 shares of nonvoting common stock
consisting of 400,000 shares each of Class B and Class C Nonvoting Common Stock.
These 800,000 shares of nonvoting common stock were sold to two equity investors
for a total of $10 million.
On May 17, 1996, a subsidiary of the Company acquired the MLQ Interests for
aggregate consideration of approximately $14.8 million. The consideration
consisted of 640,000 shares of Class C Nonvoting Common Stock of the Company
(valued at $8 million), a 10% unsecured $3.5 million promissory note due
September 1, 2000, and cash of approximately $3.3 million. The purchase price
and value assigned to the common stock was determined in a fully negotiated arms
length transaction based upon expected future cash flows of the loan portfolios
and the return on investment required by McCown De Leeuw & Co. and its
co-investors.
7. INCOME TAXES
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 on loans and accounts
receivable purchased, amortization methods on other intangible assets and
depreciation methods on fixed assets.
F-16
<PAGE>
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THE PERIOD FROM SEPTEMBER 21, 1995 (DATE OF INCEPTION)
TO DECEMBER 31, 1995 AND YEAR ENDED DECEMBER 31, 1996
7. INCOME TAXES (CONTINUED)
Income tax benefit for the period September 21, 1995 to December 31, 1995
and for the year ended December 31, 1996 is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C>
Current:
Federal............................................................. $ -- $ --
State............................................................... -- --
--------- ----------
Total current..................................................... -- --
Deferred:
Federal............................................................. (1,437) (10,250)
State............................................................... (168) (1,507)
--------- ----------
Total deferred.................................................... (1,605) (11,757)
--------- ----------
Total income taxes................................................ $ (1,605) $ (11,757)
--------- ----------
--------- ----------
</TABLE>
Deferred income taxes at December 31 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C>
Deferred tax liabilities:
Loans and accounts receivable....................................... $ (4,288) $ (4,087)
Property and equipment.............................................. (54) (2,375)
Intangible assets................................................... -- (764)
--------- ----------
Gross deferred tax liabilities.................................... (4,342) (7,226)
--------- ----------
Deferred tax assets:
Net operating loss carryforwards.................................... 376 6,302
Accrued liabilities................................................. 74 5,957
Other............................................................... -- 747
--------- ----------
Gross deferred tax assets......................................... 450 13,006
--------- ----------
Net deferred tax (liability) asset................................ $ (3,892) $ 5,780
--------- ----------
--------- ----------
</TABLE>
The net deferred tax (liability) asset is reflected in the accompanying
financial statements as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C>
Current assets........................................................ $ -- $ 2,617
Long-term assets...................................................... -- 3,163
Long-term liabilities................................................. (3,892) --
--------- ----------
Net deferred tax liability (asset)................................ $ (3,892) $ 5,780
--------- ----------
--------- ----------
</TABLE>
F-17
<PAGE>
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THE PERIOD FROM SEPTEMBER 21, 1995 (DATE OF INCEPTION)
TO DECEMBER 31, 1995 AND YEAR ENDED DECEMBER 31, 1996
Income tax benefit for the period September 21, 1995 to December 31, 1995
and for the year ended December 31, 1996 computed using the U.S. federal
statutory rate is reconciled to the reported tax provision as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C>
Federal statutory income tax rate..................................... $ (1,388) $ (11,272)
State income taxes (net of federal tax benefit)....................... (111) (1,521)
Nondeductible amortization............................................ 85 879
Other................................................................. (191) 157
--------- ----------
$ (1,605) $ (11,757)
--------- ----------
--------- ----------
</TABLE>
The Company has net operating loss carryforwards of approximately $16.0
million. Such net operating loss carryforwards for federal income taxes expire
through the year 2011. Realization is dependent on generating sufficient taxable
income prior to expiration of the loss carryforwards. Although realization is
not assured, management believes it is more likely than not that all of the
deferred tax asset will be realized. Therefore, at December 31, 1996, no
valuation allowance for the deferred tax assets was recorded.
8. RELATED PARTY TRANSACTIONS
The Company has an agreement with an affiliate of certain Company
stockholders to provide management and investment services for a monthly fee of
$50,000. The Company recorded management fees to this entity of $150,000 and
$600,000 for the period from September 21, 1995 to December 31, 1995 and during
the year ended December 31, 1996, respectively.
Subject to the agreements executed in connection with the acquisitions
discussed in Note 2, the Company has paid to certain Company stockholders
transaction costs and advisory fees. Such costs totaled $1.5 million and $5.5
million for the period from September 21, 1995 to December 31, 1995 and for the
year ended December 31, 1996, respectively.
Various 1996 financing arrangements discussed in Note 5 were obtained with
certain Company stockholders. Interest expense totaled $2.9 million for the year
ended December 31, 1996.
9. STOCK OPTION AND AWARD PLAN
The Company has established the OSI Holdings Corp. 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 reserves 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.
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
F-18
<PAGE>
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THE PERIOD FROM SEPTEMBER 21, 1995 (DATE OF INCEPTION)
TO DECEMBER 31, 1995 AND YEAR ENDED DECEMBER 31, 1996
9. STOCK OPTION AND AWARD PLAN (CONTINUED)
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 a four year period.
A summary of the 1995 Stock Option and Stock Award Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
VALUE EXERCISE PRICE
SHARES PER SHARE PER SHARE
--------- ---------------- ------------------
<S> <C> <C> <C>
Options outstanding at December 31, 1995....................... None
Granted...................................................... 395,809 $12.50-$21.00 $ 13.57
Forfeited.................................................... 149,788 $12.50 12.50
---------
Options outstanding at December 31, 1996....................... 246,021 14.23
---------
---------
</TABLE>
At December 31, 1996 58,234 shares were available for future grant. On
February 26, 1997, the Board of Directors approved to increase the reserve of
Voting Common Shares to 500,000 and granted an additional 185,000 options at
$25.00 per share.
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 123, the Company has estimated the fair
value of its option grants since January 1, 1996. The fair value calculation was
made with estimated values for the risk free rate of 7%, dividend yield of 0%,
vesting period of four years with no forefeitures and an expected life of 10
years. Given that the Company is not publicly traded, the stock price volatility
is assumed to be zero. The pro forma compensation effects of this calculation
were insignificant and therefore have not been disclosed.
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, 1996.
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 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 Company recorded consulting expenses to this individual of
$183,000 during the period from September 21, 1995 to December 31, 1995 and
$309,000 during the year ended December 31, 1996.
A subsidiary of the Company has entered into a Portfolio Flow Purchase
Agreement whereby the subsidiary has a monthly commitment to purchase
nonperforming loans meeting certain criteria for an
F-19
<PAGE>
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THE PERIOD FROM SEPTEMBER 21, 1995 (DATE OF INCEPTION)
TO DECEMBER 31, 1995 AND YEAR ENDED DECEMBER 31, 1996
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
agreed upon price up to a total purchase price of $1.0 million per month. The
purchases under the Portfolio Flow Purchase Agreement were $903,000 for the
period September 21, 1995 to December 31, 1995 and $5,986,000 for the year ended
December 31, 1996.
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 shown below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- -----------------------------------------------------------------------------------
<S> <C>
1997............................................................................... $ 8,108
1998............................................................................... 6,848
1999............................................................................... 6,361
2000............................................................................... 4,449
2001 and thereafter................................................................ 11,632
---------
Total lease payments............................................................. $ 37,398
---------
---------
</TABLE>
Rent expense under operating leases was $150,000 for the period from
September 21, 1995 to December 31, 1995 and $3.6 million for the year ended
December 31, 1996.
11. LITIGATION
At December 31, 1996, the Company was involved in a number of legal
proceedings and claims that were routine to the nature of the accounts
receivable management business. The Company has provided for the estimated
uninsured amounts and costs of defense against these pending suits and believes
that reserves it has established for ultimate settlement are adequate at
December 31, 1996.
Reliance National Insurance Co. Ltd. ("RNIC"), a wholly-owned subsidiary in
Bermuda, provides professional liability insurance coverage for the Company. As
of December 31, 1996, RNIC had recorded reserves totaling $800,000 for future
reported and unreported claims.
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,
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, 1995 and 1996.
F-20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Payco American Corporation
We have audited the accompanying consolidated balance sheets of Payco
American Corporation (a Wisconsin corporation) and subsidiaries as of December
31, 1995, and the related consolidated statements of income, shareholders'
investment, and cash flows for the years ended December 31, 1994 and 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Payco
American Corporation and subsidiaries as of December 31, 1995, and the results
of their operations and their cash flows for the years ended December 31, 1994
and 1995, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
----------------------------------------
Arthur Andersen LLP
Milwaukee, Wisconsin
February 9, 1996
F-21
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholders of
Payco American Corporation:
We have audited the accompanying consolidated statements of income,
shareholders' investment and cash flows of Payco American Corporation (the
"Company") for the period from January 1, 1996 to November 5, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit 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 consolidated statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial consolidated
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 audit provides a
reasonable basis for our opinion.
In our opinion, such 1996 consolidated financial statements present fairly,
in all material respects, the results of operations and cash flows of the
Company for the period from January 1, 1996 to November 5, 1996, in conformity
with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
- -------------------------------
Deloitte & Touche LLP
St. Louis, MO
February 27, 1997
F-22
<PAGE>
PAYCO AMERICAN CORPORATION
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1995
--------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents....................................................................... $ 7,752
Cash and Cash Equivalents Held for Clients...................................................... 20,233
Accounts Receivable--Trade,
Net of Allowances of $604..................................................................... 21,013
Accounts Receivable--Purchased.................................................................. 11,012
Prepaid Expenses................................................................................ 1,527
Deferred Income Taxes........................................................................... 1,087
--------------
Total Current Assets.......................................................................... 62,624
PROPERTY AND EQUIPMENT:
Data Processing Equipment....................................................................... 45,373
Furniture and Equipment......................................................................... 12,793
Leasehold Improvements.......................................................................... 3,513
Property Held under Capital Leases.............................................................. 634
--------------
62,313
Less Accumulated Depreciation and Amortization.................................................. 39,450
--------------
Net Property and Equipment........................................................................ 22,863
ACCOUNTS RECEIVABLE--PURCHASED.................................................................... 4,338
OTHER LONG-TERM RECEIVABLES....................................................................... 519
NON-COMPETE COVENANTS, NET........................................................................ 1,151
GOODWILL, NET..................................................................................... 11,661
DEFERRED INCOME TAXES............................................................................. 238
OTHER ASSETS...................................................................................... 281
--------------
$ 103,675
--------------
--------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-23
<PAGE>
PAYCO AMERICAN CORPORATION
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1995
--------------
<S> <C>
LIABILITIES & SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Collections Due to Clients...................................................................... $ 20,233
Accounts Payable................................................................................ 5,441
Short-Term Borrowings........................................................................... 13,034
Other Notes Payable............................................................................. 1,000
Obligations under Capital Leases................................................................ 60
Accrued Liabilities--
Salaries and Benefits......................................................................... 6,493
Taxes, Other Than Income...................................................................... 1,224
Other......................................................................................... 1,705
Deferred Revenue................................................................................ 118
Accrued Income Taxes............................................................................ 49
--------------
Total Current Liabilities................................................................... 49,357
OTHER LONG-TERM LIABILITIES....................................................................... 834
LONG-TERM DEBT.................................................................................... 334
COMMITMENTS AND CONTINGENCIES (Note 11)
SHAREHOLDERS' INVESTMENT:
Preferred Stock, No Par Value--Authorized 500,000 Shares, None Issued........................... --
Common Stock, $0.10 Par Value--Authorized 50,000,000 Shares, Issued & Outstanding 10,155,085
Shares........................................................................................ 1,016
Additional Paid-in Capital...................................................................... 2,020
Cumulative Translation Adjustments.............................................................. (24)
Stock Options Issuable.......................................................................... 148
Retained Earnings............................................................................... 49,990
--------------
Total Shareholders' Investment.............................................................. 53,150
--------------
$ 103,675
--------------
--------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-24
<PAGE>
PAYCO AMERICAN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 5, 1996
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1996
TO
1994 1995 NOVEMBER 5, 1996
-------------- -------------- ------------------
<S> <C> <C> <C>
OPERATING REVENUE............................................ $ 150,696 $ 175,560 $ 148,614
OPERATING EXPENSES:
Salaries and Benefits...................................... 82,786 100,108 83,765
Telephone.................................................. 10,846 10,619 8,973
Postage and Supplies....................................... 8,962 10,824 8,956
Occupancy Costs............................................ 8,381 9,053 7,418
Data Processing Equipment.................................. 7,353 8,415 9,462
Amortization of Acquisition Costs.......................... 12,543 14,803 14,459
Other Operating Costs...................................... 11,360 11,822 11,222
-------------- -------------- ------------------
Total Operating Expenses................................. 142,231 165,644 144,255
-------------- -------------- ------------------
Income from Operations....................................... 8,465 9,916 4,359
OTHER INCOME, Primarily from
Short-Term Investments..................................... 68 234 154
INTEREST EXPENSE............................................. 148 770 735
-------------- -------------- ------------------
Income Before Income Taxes................................... 8,385 9,380 3,778
PROVISION FOR INCOME TAXES................................... 3,826 4,130 2,374
-------------- -------------- ------------------
NET INCOME................................................... $ 4,559 $ 5,250 1,404
-------------- -------------- ------------------
-------------- -------------- ------------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-25
<PAGE>
PAYCO AMERICAN CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 5, 1996
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE
------------------------ PAID-IN TRANSLATION STOCK OPTIONS RETAINED
SHARES AMOUNT CAPITAL ADJUSTMENTS ISSUABLE EARNINGS
------------- --------- ----------- --------------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE
January 1, 1994........................... 10,075,886 $ 1,008 $ 1,084 $ -- $ 1,311 $ 40,181
Currency Translation Adjustment........... -- -- -- (51) -- --
Net Income................................ -- -- -- -- -- 4,559
Exercise of Stock Options................. 52,617 5 553 -- (607) --
------------- --------- ----------- ----- -------------- ---------
BALANCE
December 31, 1994......................... 10,128,503 1,013 1,637 (51) 704 44,740
Currency Translation Adjustment........... -- -- -- 27 -- --
Net Income................................ -- -- -- -- -- 5,250
Exercise of Stock Options................. 26,582 3 383 -- (556) --
------------- --------- ----------- ----- -------------- ---------
BALANCE
December 31, 1995......................... 10,155,085 1,016 2,020 (24) 148 49,990
Net Income................................ -- -- -- -- -- 1,404
Exercise of Stock Options................. -- -- 1,204 -- -- --
------------- --------- ----------- ----- -------------- ---------
BALANCE
November 5, 1996.......................... 10,155,085 $ 1,016 $ 3,224 $ (24) $ 148 $ 51,394
------------- --------- ----------- ----- -------------- ---------
------------- --------- ----------- ----- -------------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-26
<PAGE>
PAYCO AMERICAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE PERIOD FROM
JANUARY 1, 1996 TO NOVEMBER 5, 1996
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1996
TO NOVEMBER 5,
1994 1995 1996
---------- ---------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income........................................................... $ 4,559 $ 5,250 $ 1,404
Adjustments to Reconcile Net Income to Net Cash Provided by Operating
Activities:
Amortization of Acquisition Costs.................................... 12,543 14,803 14,459
Depreciation and Amortization........................................ 4,681 5,367 6,460
Deferred Income Taxes................................................ (465) (201) 899
Net Changes in Assets and Liabilities:
Accounts Receivable--Trade......................................... (2,262) (5,472) 3,979
Prepaid Expenses................................................... (119) (361) 498
Accounts Payable................................................... 839 (54) (959)
Accrued Liabilities................................................ 835 954 (1,249)
Deferred Revenue................................................... (46) (74) 164
Accrued Income Taxes............................................... (967) 72 (938)
---------- ---------- --------
Net Cash Provided by Operating Activities.......................... 19,598 20,284 24,717
---------- ---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures, Net of Retirements............................. (4,755) (13,447) (13,526)
Purchase of Accounts Receivable...................................... (17,309) (9,725) (2,689)
Purchase of Other Businesses, Net.................................... (4,333) (8,160) (2,695)
Long-Term Notes Receivable........................................... (354) 320 519
---------- ---------- --------
Net Cash Used in Investing Activities.............................. (26,751) (31,012) (18,391)
---------- ---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Proceeds (Payments) from Short-Term Borrowings................... 4,200 6,834 (7,243)
Net Proceeds (Payments) from Other Notes Payable..................... -- 1,000 (1,250)
Payments Under Capital Lease Obligations............................. (119) (78) (48)
Other Long-Term Debt and Other....................................... (26) 27 174
Net Payments from Exercise of Stock Options.......................... (49) (170) --
---------- ---------- --------
Net Cash Provided by (Used in) Financing Activities................ 4,006 7,613 (8,367)
---------- ---------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS............................ (3,147) (3,115) (2,041)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..................... 14,014 10,867 7,752
---------- ---------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................... $ 10,867 $ 7,752 $ 5,711
---------- ---------- --------
---------- ---------- --------
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash Paid For:
Income Taxes, Net of Refunds....................................... $ 5,374 $ 4,361 $ 2,413
Interest........................................................... 216 691 880
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-27
<PAGE>
PAYCO AMERICAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 5, 1996
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Payco American Corporation and its subsidiaries (the Company) provide the
following outsource services: consumer debt collection; commercial debt
collection; student loan billing; contract management of accounts receivable;
health care accounts receivable billing and management; precollection programs;
and inbound and outbound calling programs. The Company also purchases and
manages portfolios of discounted accounts receivable. The markets for the
Company's services are the United States, Puerto Rico and Mexico.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Payco American
Corporation and its majority-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
REVENUE RECOGNITION
Collection revenue is recognized at a commission rate when a collection
payment is received. Revenue is recognized on purchased accounts receivable
portfolios when payments are collected. Revenue on all other services provided
by the Company is recognized as the service is performed.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Maintenance and repairs are
expensed as incurred. When assets are retired or otherwise disposed of in the
normal course of business, the cost and related accumulated depreciation are
removed from the accounts, and resulting gains or losses are included in the
Consolidated Statements of Income. The Company provides for depreciation and
amortization by the straight-line method over the estimated useful lives as
follows:
<TABLE>
<S> <C>
Data Processing Equipment....................................... 3-8 years
Telephone Equipment............................................. 3-7 years
Office Furniture & Other........................................ 3-10 years
</TABLE>
Leasehold improvements are amortized over the term of the related leases.
GOODWILL AND ACQUISITION COSTS
Goodwill represents the excess of purchase price over the fair market value
of net assets of acquired businesses. Goodwill is amortized on a straight-line
basis principally over 20 years. Accumulated amortization at December 31, 1995
totalled $1.8 million.
Non-compete covenants are recorded at cost and are amortized on a
straight-line basis over the term of the covenant, typically three to five
years. Accumulated amortization at December 31, 1995 totalled $6.3 million.
F-28
<PAGE>
PAYCO AMERICAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 5, 1996
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company maintains separate accounting for all material acquisitions.
Cash flows from these acquisitions are reviewed periodically. Impairments of
related goodwill will be recognized through charges to operations when expected
cash flow derived from these acquisitions is less than their carrying value.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 (SFAS 121). "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This standard, which must be adopted in 1996, requires long-lived impaired
assets still in use to be carried at fair value and all long-lived assets to be
disposed of to be reported at the lower of carrying amount or fair value less
cost to sell.
SFAS 121 prescribes a cash flow test for recoverability whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. For purposes of SFAS 121, assets include certain identifiable
intangibles, goodwill, property and equipment.
SFAS 121 did not have a material impact on the Consolidated Financial
Statements.
ACCOUNTS RECEIVABLE-PURCHASED
Purchased accounts receivable portfolios are recorded at cost and amortized,
based upon a percentage of expected collections, over the life of the individual
portfolios. The amortization rates are reviewed periodically and adjusted, based
on the projected overall collection performance of each portfolio. Although the
contractual lives of certain purchased receivables is 20 years, management
expects to recover its portfolio costs over four years.
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition
and Disclosure" (collectively "SFAS No. 114") became applicable to the Company
in 1995. Specifically, the provisions of SFAS No. 114 would apply to the
purchased accounts receivable discussed in footnote 5. However, the Company
believes that its purchased accounts receivable represent small balance
homogeneous credits related to credit card, consumer installment, business and
business real estate lending. These credits are specifically excluded from the
disclosures and accounting required by SFAS No. 114.
CASH AND CASH EQUIVALENTS
Short-term investments, which consist of certificates of deposit, government
instruments and commercial paper, are included in Cash and Cash Equivalents on
the Consolidated Balance Sheet. Short-term investments at December 31, 1995 were
$2.1 million. The Company considers all highly liquid investments with an
original maturity of less than 90 days to be cash equivalents for cash flow
purposes.
INCOME TAXES
Deferred tax liabilities and assets are determined based on the difference
between the financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
F-29
<PAGE>
PAYCO AMERICAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 5, 1996
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
Foreign currency assets and liabilities are translated into United States
dollars at end of period rates of exchange, and income and expense accounts are
translated at the weighted average rates of exchange for the period. Resulting
translation adjustments are a separate component of Shareholders' Investment.
ACCOUNTS RECEIVABLE--TRADE
The Company reviews its outstanding receivables on a periodic basis and
charges-off accounts when they are deemed uncollectible.
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 the estimates.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to presentation
for 1996.
2. SUBSEQUENT EVENTS
On November 6, 1996 the Company was acquired by Outsourcing Solutions Inc.
("OSI") in a merger transaction for an aggregate cash consideration of
approximately $150.2 million. The acquisition was financed by OSI with proceeds
from a private placement of $100.0 million 11% Senior Subordinated Notes due
2006 (the "Old Notes") and a new bank credit facility. The acquisition was
treated as a purchase.
OSI filed a registration statement relating to an offer to exchange the Old
Notes for OSI's 11% Series B Senior Subordinated Notes due 2006 (the "New
Notes"). The Old Notes are, and the New Notes will be, fully and unconditionally
guaranteed on a joint and several basis by each of OSI's current domestic
subsidiaries, including the Company, and any additional domestic subsidiaries
formed by OSI that become guarantors under the bank credit facility (the
"Restricted Subsidiaries").
The Restricted Subsidiaries are wholly owned by OSI and constitute all of
the direct and indirect subsidiaries of OSI, including the Company, except for
three subsidiaries that are individually, and in the aggregate, insignificant.
F-30
<PAGE>
PAYCO AMERICAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 5, 1996
2. SUBSEQUENT EVENTS (CONTINUED)
Summarized combined financial information of the Restricted Subsidiaries
included in the consolidated financial statements of the Company is shown below
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1995
--------------
<S> <C>
Current assets................................................................ $ 60,461
--------------
--------------
Noncurrent assets............................................................. 40,831
--------------
--------------
Current liabilities........................................................... 48,314
--------------
--------------
Noncurrent liabilities........................................................ 850
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED JANUARY 1, 1996
DECEMBER 31, TO NOVEMBER 5,
------------------------ ----------------
1994 1995 1996
----------- ----------- ----------------
<S> <C> <C> <C>
Operating revenue................................. $ 148,883 $ 174,136 $ 147,461
----------- ----------- ----------------
----------- ----------- ----------------
Income from operations............................ 9,138 10,195 4,606
----------- ----------- ----------------
----------- ----------- ----------------
Net income........................................ 5,247 5,412 1,651
----------- ----------- ----------------
----------- ----------- ----------------
</TABLE>
3. 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,
1995 are as follows. The carrying amount of cash and cash equivalents, notes
payable and long-term debt approximate the fair value. The fair values of the
notes payable and debt were determined based on current market rates offered on
notes and debt with similar terms and maturities. Purchased accounts receivable
balances were determined based on a discounted cash flow analysis. The discount
rate was based on an acceptable rate of return adjusted for the risk inherent in
the purchased accounts receivable portfolios. The estimated fair value of
purchased receivables was $17.8 million at December 31, 1995.
F-31
<PAGE>
PAYCO AMERICAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 5, 1996
4. INCOME TAXES
The provision for income taxes for the two years ended December 31, 1995 and
for the period from January 1, 1996 to November 5, 1996 consists of the
following:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1996
TO NOVEMBER 5,
1994 1995 1996
--------- --------- ----------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Current:
Federal.............................................. $ 3,336 $ 3,412 $ 1,180
State and Foreign.................................... 955 919 295
--------- --------- -------
Total Current.......................................... 4,291 4,331 1,475
Total Deferred......................................... (465) (201) 899
--------- --------- -------
Total Provision........................................ $ 3,826 $ 4,130 $ 2,374
--------- --------- -------
--------- --------- -------
</TABLE>
The following is a reconciliation of the statutory Federal rate to the
effective tax rate applicable to the Company's consolidated income before taxes:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1996
TO NOVEMBER 5,
1994 1995 1996
--------- --------- -------------------
<S> <C> <C> <C>
Federal Statutory Rate.................................. 34.0% 34.0% 34.0%
State and Foreign Taxes
Net of Federal Benefit................................ 7.6 5.8 8.0
Costs related to sale of Company........................ -- -- 15.6
Other................................................... 4.1 4.2 5.2
--- --- ---
Effective Tax Rate...................................... 45.7% 44.0% 62.8%
--- --- ---
--- --- ---
</TABLE>
F-32
<PAGE>
PAYCO AMERICAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 5, 1996
4. INCOME TAXES (CONTINUED)
The components of the net deferred tax asset (liability) as of December 31,
1995 were as follows:
<TABLE>
<CAPTION>
1995
----------------------
<S> <C>
(DOLLARS IN THOUSANDS)
Deferred Tax Assets:
Related to Intangible Assets.................................. $ 1,155
Deferred Compensation......................................... 408
Accruals and Reserves Not Currently Deductible For Tax
Purposes.................................................... 1,256
-------
Total Deferred Tax Assets..................................... 2,819
Deferred Tax Liabilities:
Related to Fixed Assets....................................... (1,366)
Other......................................................... (128)
-------
Total Deferred Tax Liabilities................................ (1,494)
-------
Net Deferred Tax Asset........................................ $ 1,325
-------
-------
</TABLE>
The net deferred tax asset is classified in the December 31, 1995
Consolidated Balance Sheet as follows:
<TABLE>
<CAPTION>
1995
----------------------
<S> <C>
(DOLLARS IN THOUSANDS)
Non-current Deferred Income Tax Asset.............................. $ 238
Current Deferred Income Tax Asset.................................. 1,087
Non-current Deferred Income Tax Liability.......................... --
-------
Net Deferred Tax Asset............................................. $ 1,325
-------
-------
</TABLE>
5. EMPLOYEE BENEFIT PLANS
The Company maintains a separate profit sharing/401(k) savings plan.
Effective January 1, 1994, the Company amended the profit sharing/401(k) savings
plan to add a provision to allow for partial matching of employee contributions
by the Company. All employees who participate in the savings feature of the plan
are eligible for the discretionary employer matching contributions. For each
dollar an employee contributes up to 4% of compensation, the Company contributed
20% in 1994, 25% in 1995 and 20% in the period from January 1, 1996 to November
5, 1996. During 1994, 1995 and the period from January 1, 1996 to November 5,
1996 the charge to operations for matching contributions was $159,000, $196,000
and $158,000, respectively.
The Company also maintained an employee Stock Ownership Plan (ESOP).
Effective January 1, 1995, the ESOP was merged into the profit sharing/401(k)
savings plan. In conjunction with the merger of the plans, the new combined
plan, the Payco American Retirement Plan, was amended to provide the employee
with the ability to continue to purchase the Company's common stock through the
401(k) savings feature of the plan. No discretionary contribution was made to
the ESOP during 1994. All ESOP shares have been allocated to participant
accounts. As a result of the purchase of the Company by
F-33
<PAGE>
PAYCO AMERICAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 5, 1996
5. EMPLOYEE BENEFIT PLANS (CONTINUED)
Outsourcing Solutions Inc. (OSI) (See Note 2) all Company common stock shares
held by the plan were sold for $14.00 per share.
In addition to the plans described above, the Company has another defined
contribution pension plan which covers employees hired in connection with a 1995
acquisition. The cost of this plan was $25,000 in 1995 and $50,000 for the
period from January 1, 1996 to November 5, 1996.
The Company does not provide post-retirement health or life insurance
benefits or post-employment benefits to employees.
6. ACCOUNTS RECEIVABLE PURCHASED
In November, 1990, the Company began purchasing discounted accounts
receivable portfolios. Revenue recognized on cash collected from these
portfolios totalled $13.1 million, $15.8 million and $15.5 million during 1994,
1995 and the period from January 1, 1996 to November 5, 1996, respectively.
Amortization costs associated with these revenues totalled $10.3 million, $12.4
million and $12.9 million during 1994 and 1995 and the period from January 1,
1996 to November 5, 1996, respectively. Included in the revenue and amortization
for the period from January 1, 1996 to November 5, 1996 is $6.5 million and $6.3
million, respectively as a result of the July 18, 1996 sale of approximately one
half of the book value of accounts receivable portfolios.
7. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable consist of amounts due from clients which can be
summarized into "Group Concentrations of Credit Risk" as defined in SFAS No.
105. As of December 31, 1995, 35% and 17% of Payco's accounts receivable were
from clients in the health care and education industries, respectively, and 19%
from utility clients.
8. PURCHASE OF OTHER BUSINESSES
On February 1, 1994 the Company purchased certain assets of Indiana Mutual
Credit Association, Inc. (IMC) at a cost of $3 million, plus certain payments
contingent on performance. IMC provides accounts receivable management services
primarily to the medical marketplace through its office in Indianapolis,
Indiana.
On January 1, 1995, the Company purchased certain assets of Furst and Furst
(F&F). F&F provides accounts receivable management services to commercial
clients through offices in Illinois, New Jersey and California. On February 1,
1995 the Company purchased the collection business of Continental Credit
Adjustors (CCA). CCA is located in Houston, Texas and provides primarily medical
and retail collection services to Texas clients. On May 1, 1995, the Company
purchased the collection business of Grable, Greiner & Wolff, (GGW). GGW
provides accounts receivable management services to commercial and retail
clients and is located in Beachwood, Ohio. A total of $7.9 million ($3.5 million
for F&F, $1.4 million for CCA and $3.0 million for GGW) was paid for these
companies via cash and a note payable. In addition, the purchase agreements
require certain future contingent payments which, if paid out, will be accounted
for as additional purchase price.
F-34
<PAGE>
PAYCO AMERICAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 5, 1996
8. PURCHASE OF OTHER BUSINESSES (CONTINUED)
The contingent payments are based on the excess of GGW's and CCA's income
before tax over a contractually agreed upon level. F&F contingent payments are
based on achieving certain revenue targets over a contractually agreed upon
base. There is no limit on the two years of contingent payments for CCA, a limit
of $0.2 million per year for each of five years on the F&F contingent payments
and a limit of $1.2 million per year for two years on the GGW contingent
payments. In the period from January 1, 1996 to November 5, 1996, contingent
payments were $2.7 million. The company estimates that total contingent payments
will be $1.2 million in 1997 and zero thereafter.
The pro forma impact on the results of operations of the Company, had the
acquisitions been made as of the beginning of the year purchased, would not have
been material. All activity subsequent to the acquisitions has been reported in
the consolidated financial statements of the Company.
9. STOCK PLANS
The Board of Directors has approved various stock option plans for certain
employees and officers. The stock options have been granted at market prices.
Under a stock option plan established in 1988, the Board of Directors granted
options to purchase up to 500,000 shares of common stock. The award of such
options was dependent upon meeting certain performance goals over the three-year
period ended December 31, 1991. Under the 1988 plan, options to purchase 306,367
shares of common stock have been awarded to management. At November 5, 1996,
17,022 options were outstanding.
The following table summarizes stock option activity in 1994, 1995 and the
period from January 1, 1996 to November 5, 1996 and options outstanding as of
November 5, 1996.
Stock option activity was as follows:
<TABLE>
<CAPTION>
OPTIONS OPTION OPTIONS EXERCISED OPTIONS
PERIOD ENDED AWARDED PRICE OR FORFEITED EXERCISABLE
- ----------------------------------------------------------- ----------- ----------- ------------------ ------------
<S> <C> <C> <C> <C>
December 31, 1994.......................................... -- -- 96,477 468,619
December 31, 1995.......................................... -- -- 88,335 573,456
November 5, 1996........................................... 37,550 $ 8.25 8,679 602,327
</TABLE>
As of November 5, 1996, options outstanding were as follows:
<TABLE>
<CAPTION>
OPTIONS
OUTSTANDING EXERCISE PRICE EXPIRATION
- ----------------- --------------- -------------
<S> <C> <C>
17,022 $ 4.38 1996
135,000 $ 12.25 1999
282,667 $ 7.81 1999
130,088 $ 7.50 2002
37,550 $ 8.25 2006
</TABLE>
As a result of the sale of the Company to OSI on November 6, 1996 (see Note
2) all stock options became fully exercisable. Option holders received $14.00
for each share on November 6, 1996. The pro forma compensation effects
calculated pursuant to Statement of Financial Accounting Standards
F-35
<PAGE>
PAYCO AMERICAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 5, 1996
9. STOCK PLANS (CONTINUED)
No. 123, "Accounting for Stock-based Compensation", were insignificant and
therefore have not been disclosed.
The Company also maintains a common stock equivalent plan. Under this plan
certain management employees were granted, at the discretion of the Board of
Directors, units that are valued at the market price of the Company's common
stock. Employees vest in these units over the sixth to tenth year of service
subsequent to the award. The units are to be paid out at the Board's discretion
in common stock or cash. Participants can make an election to defer receipt of
the value of the units until termination of their employment. In the absence of
such election, participants are paid 20% of the value on the 6th through 10th
anniversary dates of the grant. As of November 5, 1996, there were 130,088
outstanding units awarded under the plan. On May 19, 1992, participants
representing 160,831 units in the common stock equivalent plan agreed to cap the
value of units awarded to a maximum value of $12.63 per unit. In exchange for
this agreement, the Board of Directors granted each participant an equivalent
number of options to purchase shares of the Company's common stock at the then
current market price of $12.63. This agreement was amended on May 20, 1993, to
cap the value of units awarded to a maximum value of $7.50 per unit in exchange
for a reduction of their option price to $7.50. Of the 160,831 options granted
under this agreement, 3,213, 8,066 and 9,418 were forfeited in 1994, 1995 and
the period from January 1, 1996 to November 5, 1996, respectively. At November
5, 1996, 130,088 units were outstanding.
The Company realized compensation expense related to the common stock
equivalent plan of $53,000, $67,000 and $50,000 for the years ended 1994 and
1995 and the period from January 1, 1996 to November 5, 1996, respectively. As a
result of the sale of the Company to OSI on November 6, 1996 (see Note 2),
option unit holders received a total of $1,007,710. The pro forma compensation
effects calculated pursuant to Statement of Financial Accounting Standards No.
123, "Accounting for Stock-based Compensation", were insignificant and therefore
have not been disclosed.
10. LINE OF CREDIT
The Company has a $25.0 million short-term borrowing agreement with its
primary lender. The agreement allows the Company to borrow funds under a line of
credit agreement or through the issuance of commercial paper. All loans made to
the Company by its lender under the line of credit are payable upon demand and
are evidenced by a single promissory note. The Company is not required to
maintain compensating balances, and there are no restrictive covenants under the
agreement. As of November 5, 1996, the Company had $19.2 million available to
borrow. Funds borrowed were used primarily to finance the Company's acquisitions
and for capital expenditures related to the Company's World-class Integrated
Network (WIN) collection system. The maximum interest rate at December 31, 1995
and November 5, 1996 was 5.95% and 8.5%, respectively.
The Company borrows funds under its line of credit as needed and repays the
notes as funds become available from operations. As a result of the sale of the
Company to OSI on November 6, 1996 (see Note 2), the line of credit was repaid
and terminated. The following table provides supplemental
F-36
<PAGE>
PAYCO AMERICAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 5, 1996
10. LINE OF CREDIT (CONTINUED)
information for the years ended December 31, 1994 and 1995 and the period from
January 1, 1996 to November 5, 1996:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
AVERAGE INTEREST
INTEREST AMOUNTS OUTSTANDING RATE
ENDING RATE AT ------------------------ DURING THE
PERIOD ENDED BALANCE PERIOD END MAXIMUM AVERAGE(1) PERIOD(2)
- -------------------------------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
December 31, 1994............... $ 6,200 6.98% $ 6,200 $ 2,176 5.80%
December 31, 1995............... $ 13,034 5.88% $ 15,800 $ 10,793 6.25%
November 5, 1996................ $ 5,791 5.74% $ 19,514 $ 14,641 5.02%
</TABLE>
- ------------------------
(1) Average amounts outstanding during the period were computed on daily
outstanding balances.
(2) Weighted average interest rates during the period were computed by dividing
actual interest expense by the average amounts outstanding.
11. COMMITMENTS AND CONTINGENCIES
LEASES
The Company is obligated under operating leases for certain office space and
equipment for various periods through 2007.
These operating leases are due in approximate amounts as shown below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, OPERATING
- ---------------------------------------------------------------------- ----------------------
<S> <C>
(DOLLARS IN THOUSANDS)
1996 (1).............................................................. $ 874
1997.................................................................. 5,160
1998.................................................................. 4,354
1999.................................................................. 3,937
2000.................................................................. 2,353
2001 and subsequent................................................... 2,009
</TABLE>
- ------------------------
(1) Short period from November 6, 1996 to December 31, 1996.
Certain of the leases for office space require the Company to pay, as
additional rent, any allocable increases in real estate taxes and other expenses
over a specified base rent. Total rental expense was $5.4 million, $5.8 million
and $4.7 million for 1994, 1995 and the period from January 1, 1996 to November
5, 1996, respectively.
F-37
<PAGE>
PAYCO AMERICAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 5, 1996
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company leases its corporate headquarters, data processing center and
the office space for three of its collection operations from partnerships in
which certain officers and directors of the Company are the principal partners.
The terms of the leases provided for aggregate annual payments of approximately
$2.2 million, $2.4 million and $1.8 million for 1994, 1995 and the period from
January 1, 1996 to November 5, 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 the Company.
OPERATING REVENUE
In 1994, 1995 and the period from January 1, 1996 to November 5, 1996, no
single client contributed 10% or more to operating revenue.
OTHER CONTINGENCIES
On August 2, 1993 a complaint was filed by the Department of Justice on
behalf of the Federal Trade Commission against the Company based on alleged
violations of the Federal Fair Debt Collection Practices Act. On March 8, 1995,
the Company reached a settlement regarding this matter. The case was resolved
with a consent decree in which the Company did not admit any liability and paid
a $500,000 civil penalty. The Company had previously established a reserve
adequate to cover the settlement.
On July 20, 1995 a lawsuit was filed in Etowah County, Alabama, naming Payco
and a division of Transamerica Business Credit Corporation (Transamerica) as
defendants. The suit alleges various violations of law with respect to the
Company's collection practices on accounts placed by a division of Transamerica.
The matter was conditionally approved as a class action on August 1, 1996. On
August 1, 1996 the court approved a general settlement between Transamerica and
the class in the amount of approximately $3.9 million. In addition, Transamerica
has filed a cross claim against the Company and the Company has filed a similar
claim against Transamerica. The parties had agreed to non-binding mediation,
which took place on January 20, 1997. No settlement was reached. The range of
possible loss in this matter is not determinable at this time. The Company
believes it has meritorious defense against the allegations.
At November 5, 1996, the Company was involved in a number of legal
proceedings and claims that were routine to the nature of the collection
business. The Company has provided for the estimated uninsured amounts and costs
of defense against these pending suits through charges to operations and
believes that reserves it has established for ultimate settlement are adequate
at November 5, 1996.
Reliance National Insurance Co. Ltd. (RNIC), a wholly-owned subsidiary in
Bermuda, provides professional liability insurance coverage for the Company. As
of November 5, 1996, RNIC had recorded reserves totaling $1.0 million for future
reported and unreported claims.
F-38
<PAGE>
INDEPENDENT AUDITORS' REPORT
Partners of Account Portfolios, L.P.:
We have audited the accompanying consolidated statements of operations,
partners' capital, and cash flows of Account Portfolios, L.P. (a Georgia Limited
Partnership, the "Partnership") for the year ended December 31, 1994 and for the
period from January 1, 1995 to September 20, 1995. 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 results of operations and cash flows of the
Partnership and its Subsidiaries for the year ended December 31, 1994 and for
the period from January 1, 1995 to September 20, 1995 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)
F-39
<PAGE>
ACCOUNT PORTFOLIOS, L.P.
(A GEORGIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994 AND FOR THE
PERIOD FROM JANUARY 1, 1995 TO SEPTEMBER 20, 1995
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1, 1995
DECEMBER 31, TO SEPTEMBER 20,
1994 1995
-------------- -----------------
<S> <C> <C>
REVENUES....................................................................... $ 39,292 $ 21,293
EXPENSES:
Amortization of loans and accounts receivable................................ 2,667 2,308
Service fees and other operating and administrative expenses................. 6,131 8,595
Professional fees............................................................ 2,638 911
-------------- --------
OPERATING INCOME............................................................... 27,856 9,479
OTHER INCOME (EXPENSE):
Interest expense............................................................. (2,941) (955)
Interest income.............................................................. 342 460
Other expense................................................................ (166) --
-------------- --------
NET INCOME..................................................................... $ 25,091 $ 8,984
-------------- --------
-------------- --------
</TABLE>
See notes to consolidated financial statements.
F-40
<PAGE>
ACCOUNT PORTFOLIOS, L.P.
(A GEORGIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
YEAR ENDED DECEMBER 31, 1994
AND FOR THE PERIOD FROM JANUARY 1, 1995 TO SEPTEMBER 20, 1995
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
----------- --------- ---------
<S> <C> <C> <C>
Balance at December 31, 1993.................................... $ 46 $ 4,536 $ 4,582
Distributions to partners..................................... (75) (7,436) (7,511)
Net income.................................................... 251 24,840 25,091
----- --------- ---------
Balance at 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 at September 20, 1995................................... $ 106 $ 10,453 $ 10,559
----- --------- ---------
----- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-41
<PAGE>
ACCOUNT PORTFOLIOS, L.P.
(A GEORGIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1994
AND FOR THE PERIOD FROM JANUARY 1, 1995 TO SEPTEMBER 20, 1995
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
YEAR ENDED 1995
DECEMBER TO SEPTEMBER
31, 20,
1994 1995
----------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income................................................... $ 25,091 $ 8,984
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation expense....................................... 102 167
Amortization of loans and accounts receivable.............. 2,667 2,308
Loss on withdrawal from long-term investment............... 166 --
Change in assets and liabilities:
Loans and accounts receivable purchased.................. (6,800) (5,502)
Accounts receivable--trade............................... (93) 90
Other current assets..................................... (19) (94)
Accounts payable, accrued expenses and other current
liabilities............................................ (40) (66)
----------- --------------
Net cash provided by operating activities.............. 21,074 5,887
----------- --------------
INVESTING ACTIVITIES:
Acquisition of property and equipment........................ (463) (574)
Proceeds from sale of long-term investment................... -- 1,883
----------- --------------
Net cash (used in) provided by investing activities.... (463) 1,259
----------- --------------
FINANCING ACTIVITIES:
Payments on debt............................................. (3,544) --
Contributions from partners.................................. -- 135
Distributions to partners.................................... (7,511) (20,722)
----------- --------------
Net cash used in financing activities.................. (11,055) (20,587)
----------- --------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS............................................. 9,556 (13,441)
CASH AND CASH EQUIVALENTS, Beginning of period................. 4,442 13,998
----------- --------------
CASH AND CASH EQUIVALENTS, End of period....................... $ 13,998 $ 557
----------- --------------
----------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during period for interest......................... $ 2,920 $ 967
----------- --------------
----------- --------------
</TABLE>
See notes to consolidated financial statements.
F-42
<PAGE>
ACCOUNT PORTFOLIOS, L.P.
(A GEORGIA LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1994
AND FOR THE PERIOD FROM JANUARY 1, 1995 TO SEPTEMBER 20, 1995
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 1994 and 1995, 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. The effect of this change was accounted for
prospectively as a change in estimate and reduced amortization expense and
increased net income by $962,000 in 1994.
The Partnership periodically reviews all Receivables to assess
recoverability. Impairments will be recognized in operations when the present
value of expected future operating cash flows derived from the Receivables are
less than their carrying value.
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:
F-43
<PAGE>
ACCOUNT PORTFOLIOS, L.P.
(A GEORGIA LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1994
AND FOR THE PERIOD FROM JANUARY 1, 1995 TO SEPTEMBER 20, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- 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.
- Second, to any Partner who has a negative capital account at the time of
disposition.
- 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.
PROPERTY AND EQUIPMENT--Property and equipment is 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. 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.
3. 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 December 31, 1994
and September 20, 1995. 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 $2,940,593 and $955,290 under the Loan Agreement for
the year ended December 31, 1994 and for the period from January 1, 1995 to
September 20, 1995, respectively, which was charged to interest expense.
F-44
<PAGE>
ACCOUNT PORTFOLIOS, L.P.
(A GEORGIA LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1994
AND FOR THE PERIOD FROM JANUARY 1, 1995 TO SEPTEMBER 20, 1995
3. NOTE PAYABLE (CONTINUED)
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 December 31, 1994 and September 20,
1995 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.
4. 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 $600,000 and $450,000 for the year ended December 31, 1994 and
for the period from January 1, 1995 to September 20, 1995, respectively.
5. 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 year ended December 31, 1994
and for the period from January 1, 1995 to September 20, 1995, 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.
6. 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 acquisition of
loan portfolios. Such fees are based on the portfolio purchase price and future
collections. The Partnership recorded consulting expenses of $2,279,000 and
$556,000 during the year ended December 31, 1994 and the period from January 1,
1995 to September 20, 1995, respectively.
In September 1994, the Partnership entered into 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 year
ended December 31, 1994 and for the period from January 1, 1995 to September 20,
1995, respectively.
F-45
<PAGE>
ACCOUNT PORTFOLIOS, L.P.
(A GEORGIA LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1994
AND FOR THE PERIOD FROM JANUARY 1, 1995 TO SEPTEMBER 20, 1995
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 $1,156,485 and
$2,515,480 for the year ended December 31, 1994 and for the period from January
1, 1995 to September 20, 1995, 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):
<TABLE>
<S> <C>
1995............................................................... $ 108
1996............................................................... 422
1997............................................................... 316
1998............................................................... 251
1999 and thereafter................................................ 349
---------
$ 1,446
---------
---------
</TABLE>
Rent expense under operating leases was $118,806 and $200,680 for the year
ended December 31, 1994 and for the period from January 1, 1995 to September 20,
1995, 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.
7. SUBSEQUENT EVENTS
Pursuant to a Purchase Agreement dated September 21, 1995 (the "Purchase
Agreement"), OSI Holdings Corp. (the "Company"), currently known as Outsourcing
Solutions Inc., a Delaware corporation, exchanged 933,333 shares of the
Company's common stock and 266,667 shares of the Company's 8% Non-Voting
Cumulative Redeemable Exchangeable Preferred Stock for 100% of the Class A
limited partnership interests in Account Portfolios, L.P. The Company
contributed the Class A partnership interests, valued at $15,000,000, to Account
Portfolios, Inc. ("AP, Inc."), a subsidiary of the Company. AP, Inc. acquired
100% of 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 100% of
the general partnership interests in the Partnership and its subsidiaries for
cash of approximately $1.2 million. The total value of this transaction was
$80.0 million.
In November 1996 the Company issued $100.0 million 11% Senior Subordinated
Notes due 2006 (the "Old Notes") and entered into a new bank credit facility.
The Company initially filed a registration statement dated November 26, 1996
relating to an offer to exchange the Old Notes for the Company's
F-46
<PAGE>
ACCOUNT PORTFOLIOS, L.P.
(A GEORGIA LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1994
AND FOR THE PERIOD FROM JANUARY 1, 1995 TO SEPTEMBER 20, 1995
7. SUBSEQUENT EVENTS (CONTINUED)
11% Series B Senior Subordinated Notes due 2006 (the "New Notes"). The Old Notes
are, and the New Notes will be, fully and unconditionally guaranteed on a joint
and several basis by each of the Company's current domestic subsidiaries,
including the Partnership, and any additional domestic subsidiaries formed by
the Company that become guarantors under the bank credit facility.
F-47
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
A.M. Miller & Associates, Inc.
Minneapolis, Minnesota
We have audited the accompanying balance sheet of A.M. Miller & Associates, Inc.
(A Minnesota S Corporation) as of December 31, 1995 and the related statements
of income, retained earnings, and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of A.M. Miller & Associates, Inc.
as of December 31, 1995, and the results of its operations and its cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
SCHWEITZER RUBIN KARON & BREMER
Certified Public Accountants
Minneapolis, Minnesota
January 17, 1996 (except for Note 12,
as to which the date is
November 26, 1996)
MEMBER OF INDEPENDENT ACCOUNTANTS INTERNATIONAL WITH CORRESPONDENCE OFFICES IN
PRINCIPAL CITIES OF THE WORLD
F-48
<PAGE>
A.M. MILLER & ASSOCIATES, INC.
BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash (Note 2)................................................................................... $ 2,904,695
Commissions receivable.......................................................................... 2,197,544
Miscellaneous accounts receivable............................................................... 98,963
Prepaid expenses................................................................................ 31,117
--------------
Total current assets........................................................................ 5,232,319
--------------
PROPERTY AND EQUIPMENT (Note 3)................................................................... 1,370,898
--------------
OTHER ASSETS:
Deposits........................................................................................ 1,857
Software, less accumulated amortization of $41,396.............................................. 256,605
--------------
Total other assets.......................................................................... 258,462
--------------
Total assets................................................................................ $ 6,861,679
--------------
--------------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Notes payable (Note 4).......................................................................... $ 400,000
Current maturities of long-term debt (Note 5)................................................... 205,151
Payables:
Clients....................................................................................... 1,417,653
Trade......................................................................................... 579,734
Accrued expenses (Notes 8 and 9)................................................................ 1,975,524
--------------
Total current liabilities................................................................... 4,578,062
--------------
LONG-TERM DEBT, less current maturities (Note 5).................................................. 657,915
--------------
COMMITMENTS AND CONTINGENCIES (Note 6 and 7)
STOCKHOLDER'S EQUITY:
Common stock, par value $1 per share; 1,000 shares authorized: issued and outstanding........... 1,000
Additional paid-in capital...................................................................... 803,000
Retained earnings............................................................................... 821,702
--------------
Total stockholder's equity.................................................................. 1,625,702
--------------
Total liabilities and stockholder's equity.................................................. $ 6,861,679
--------------
--------------
</TABLE>
See notes to financial statements.
F-49
<PAGE>
A.M. MILLER & ASSOCIATES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
<S> <C>
REVENUES:
Collection................................................................................. $ 19,412,323
Performance incentive...................................................................... 206,649
Service revenue............................................................................ 15,234
-------------------
Total revenues......................................................................... 19,634,206
-------------------
COSTS AND EXPENSES:
Collection costs........................................................................... 8,881,652
Sales expenses............................................................................. 508,878
General and administrative expenses........................................................ 6,253,822
Other expenses............................................................................. 177,638
-------------------
Total costs and expenses............................................................... 15,821,990
-------------------
NET INCOME................................................................................... 3,812,216
BEGINNING RETAINED EARNINGS.................................................................. 1,541,772
LESS S CORPORATION DIVIDEND DISTRIBUTIONS.................................................... (4,532,286)
-------------------
ENDING RETAINED EARNINGS..................................................................... $ 821,702
-------------------
-------------------
</TABLE>
See notes to financial statements.
F-50
<PAGE>
A.M. MILLER & ASSOCIATES, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers.................................................................... $ 18,704,511
Cash paid to suppliers and employees............................................................ (14,049,318)
Interest paid................................................................................... (60,031)
--------------
Net cash provided by operating activities................................................... 4,595,162
--------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.............................................................. (514,876)
Proceeds received from sale of property and equipment........................................... 30,000
--------------
Net cash used in investing activities....................................................... (484,876)
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on note payable....................................................... 400,000
Principal payments on long-term debt, including capital lease obligations....................... (229,071)
Proceeds from long-term borrowings.............................................................. 300,000
Proceeds from capital contribution.............................................................. 800,000
Cash distributions to stockholder............................................................... (4,766,329)
--------------
Net cash used in financing activities....................................................... (3,495,400)
--------------
Net increase in cash.............................................................................. 614,886
Cash:
Beginning....................................................................................... 2,289,809
--------------
Ending.......................................................................................... $ 2,904,695
--------------
--------------
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net income...................................................................................... $ 3,812,216
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization............................................................... 362,265
(Gain) loss on sale of property and equipment............................................... 67,403
Increase in:
Commissions receivable.................................................................... (1,117,373)
Miscellaneous accounts receivable......................................................... (31,239)
Other..................................................................................... (527)
Increase in:
Payables:
Clients................................................................................. 218,917
Trade................................................................................... 217,133
Accrued expenses........................................................................ 1,066,367
--------------
Net cash provided by operating activities................................................... $ 4,595,162
--------------
--------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCIAL ACTIVITIES:
Property and equipment acquired through acquisition of debt..................................... $ 470,108
Miscellaneous receivable offset against distributions to stockholder............................ 60,957
</TABLE>
See notes to financial statements.
F-51
<PAGE>
A.M. MILLER & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS:
A.M. Miller and Associates, Inc. (the Company) provides collection and
related financial services throughout the United States.
SIGNIFICANT ACCOUNTING POLICIES OF THE COMPANY ARE SUMMARIZED BELOW:
INCOME TAX STATUS:
The Company, with consent of its stockholder, has elected to be taxed under
sections of the federal and state income tax laws, which provide that, in lieu
of corporation income taxes, the stockholder separately accounts for his prorata
shares of the Company's items of income, deductions, losses and credits.
Therefore, these statements do not include any provision for corporation income
taxes (refunds) other than state minimum taxes imposed on S corporations.
PROPERTY AND EQUIPMENT:
Property and equipment is carried at cost. Maintenance, repairs and renewals
are expended as incurred. When assets are retired or otherwise disposed of in
the normal course of business, the cost and related accumulated depreciation are
removed from the accounts and resulting gains or losses are included in the
Statements of Income.
DEPRECIATION AND AMORTIZATION:
The cost of property and equipment is depreciated on the straight-line
method over the estimated useful lives. Leasehold improvements are amortized on
the straight-line method over the base life of the lease and estimated useful
lives.
It is the Company's policy to include amortization expense on assets
acquired under capital lease with depreciation expense on owned assets.
ESTIMATE USEFUL LIVES ARE AS FOLLOWS:
<TABLE>
<CAPTION>
YEARS
-----------
<S> <C>
Furniture & Fixtures.................................................................. 0-7
Office equipment...................................................................... 5-7
Computer equipment.................................................................... 5-7
Leasehold improvements................................................................ 7
Transportation equipment.............................................................. 5-7
</TABLE>
Depreciation expense charged to operations for the year ended December 31,
1995 amounted to $329,954.
ACCOUNTS RECEIVABLE:
The Company has not provided an evaluation allowance on accounts receivable.
Management believes that, based on historical analysis of accounts written-off,
an allowance account would be immaterial in relation to total accounts
receivable.
F-52
<PAGE>
A.M. MILLER & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPUTER SOFTWARE:
The Company has elected to amortize major additions of computer software
over a 60 to 84 month period. Amortization of software charged to operations for
the year ended December 31, 1995 amounted to $32,311.
2. CASH
Included in the cash amounts are $1,731,363 at December 31, 1995 from the
Company's trust accounts. Such cash is held on behalf of clients and therefore
restricted as to its use in the amount of $1,417,653 at December 31, 1995.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
Furniture and fixtures......................................................... $ 585,372
Office equipment............................................................... 96,597
Computer equipment, including equipment acquired under capital leases of
$470,108..................................................................... 896,421
Leasehold improvements......................................................... 143,117
Transportation equipment....................................................... 356,632
-------------
Total cost..................................................................... 2,078,139
Less accumulated depreciation and amortization, including accumulated
amortization on equipment acquired under capital leases of $39,176........... 707,241
-------------
Total property and equipment................................................... $ 1,370,898
-------------
-------------
</TABLE>
4. NOTES PAYABLE
Notes payable consisted of the following as of December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
Note payable, advanced under working capital line-of-credit, with interest
payable monthly at 1.0% in excess of the prime rate (effective rate of 9.50%
at December 31, 1995), expiring May 1996, and collateralized by equipment,
accounts receivable, intangible assets, and guaranteed by the shareholder of
the Company. The total credit line available is $1,000,000................... $ 400,000
</TABLE>
F-53
<PAGE>
A.M. MILLER & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
5. LONG-TERM DEBT
Long-term debt consisted of the following as of December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
Note payable to bank, with monthly interest payments of $11,307 including
interest at 1.5% in excess of the prime rate (effective rate of 8.5% at
December 31, 1995), principal due January 31, 1997, and collateralized by
equipment, accounts receivable, intangible assets, and guaranteed by the
shareholder of the Company................................................... $ 300,000
Note payable to bank in monthly installments of $2,179 including interest at
1.5% in excess of the prime rate (effective rate of 10.0% at December 31,
1995) maturing January 1996, and collateralized by equipment, accounts
receivable, intangible assets, and guaranteed by the shareholder of the
Company...................................................................... 5,463
Note payable to bank in monthly principal installments of $13,250 plus interest
at 1.5% in excess of the prime rate (effective rate of 10.0% at December 31,
1995), maturing September 1996, and collateralized by equipment, accounts
receivable, intangible assets, and guaranteed by the shareholder of the
Company...................................................................... 119,000
Liability under capitalized lease, see below................................... 438,603
-------------
Total long-term debt........................................................... 863,066
Less current maturities........................................................ 205,151
-------------
Total long-term maturities..................................................... $ 657,915
-------------
-------------
</TABLE>
The approximate future maturities of long-term debt, excluding capital lease
obligations at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- --------------------------------------------------------------------------------- -----------
<S> <C>
1996............................................................................. $ 124,463
1997............................................................................. 300,000
-----------
Total future maturities of long-term debt........................................ $ 424,463
-----------
-----------
</TABLE>
F-54
<PAGE>
A.M. MILLER & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
5. LONG-TERM DEBT (CONTINUED)
The Company leased computer equipment under capital lease obligations at
December 31, 1995. The minimum payments under the capitalized leases as of
December 31, 1995, are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- --------------------------------------------------------------------------------- -----------
<S> <C>
1996............................................................................. $ 117,565
1997............................................................................. 117,565
1998............................................................................. 117,565
1999............................................................................. 117,565
2000............................................................................. 68,579
-----------
Total minimum lease payments..................................................... 538,839
Less amount representing interest................................................ 100,236
-----------
Present value of net minimum lease payments...................................... $ 438,603
-----------
-----------
</TABLE>
6. LEASE COMMITMENTS
The Company has entered into master lease agreements for office and parking
space. Under the terms of these leases, the Company is obligated to a monthly
lease of $70,000 until May 31, 1996. The Company is also obligated to pay
monthly its share of increases in real estate taxes and operating costs over and
above the base rent.
The Company leases telephone equipment used in its operations. The current
annual rental expense for the equipment is $73,168.
The minimum rental for future periods is as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- --------------------------------------------------------------------------------- -----------
<S> <C>
1996............................................................................. $ 425,453
1997............................................................................. 73,168
1998............................................................................. 73,168
1999............................................................................. 73,168
2000............................................................................. 12,194
-----------
Total minimum rentals............................................................ $ 657,151
-----------
-----------
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
The Company is subject to certain claims and litigation arising out of
routine business operations. Management believes that it has valid defenses in
regards to these claims and that the maximum exposure under such claims would
not exceed $100,000.
The Company has contracted with a software provider to develop software to
support the operations of the business. Of the original contract of $510,000,
the Company has paid $255,000. The Company will be liable for the balance upon
completion of various stages to the software program.
F-55
<PAGE>
A.M. MILLER & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
8. EXECUTIVE AND MANAGEMENT INCENTIVE COMPENSATION PLAN
The Company has an Executive and Management Incentive Compensation Plan
under which employees are paid bonuses equal to a specified percentage of income
before bonuses and taxes on income. These bonuses totaled $574,468 for the year
ended December 31, 1995. During 1995 the Company also declared bonuses totaling
$705,000 to key personnel of the Company. These bonuses are included in accrued
expenses on the balance sheets.
9. MAJOR CLIENTS
Major clients are clients that account for over 10% of revenues. The
following revenues and balances represent major client activity as a percentage
of total revenues and commissions receivable:
<TABLE>
<CAPTION>
REVENUES COMMISSIONS
--------------------- RECEIVABLES
TYPE OF YEAR ENDED ---------------------
CUSTOMER CUSTOMER DECEMBER 31, 1995 DECEMBER 31, 1995
- --------------- ----------------------------------------------------------- --------------------- ---------------------
<S> <C> <C> <C>
A State agency granting student loans. 24.5% 53.1%
B Not-for-profit organization granting student loans. 18.0% 0.0%
C Commercial credit card servicing agency. 10.4% 0.0%
--- ---
52.9% 53.1%
--- ---
--- ---
</TABLE>
The Company provides collection services to various commercial, governmental
and not-for-profit entities, principally in the areas of student loan and credit
card collection. The Company remits collections to its customers either net of
its collection commission or without deducting its commissions. For those
customers where the Company remits net of commissions, there is no credit risk.
For customers whose remitted collections are without deducting commissions, the
Company does not require collateral. In the normal course of business, the
Company is holding collected funds for customers generally exceeding the
commissions receivable, thereby reducing any credit risk.
10. FINANCIAL INSTRUMENTS
FAIR VALUE CONSIDERATIONS:
Substantially all of the Company's financial instruments are carried at fair
value or at amounts that approximate fair value.
SHORT-TERM ASSETS AND LIABILITIES:
Cash and receivables, notes and payables carrying amounts approximate the
fair value of those financial instruments because of the short maturity of those
instruments.
LONG-TERM DEBT:
The carrying value of the Company's long-term debt approximates the fair
value of the debt based on the current rates offered the Company for debt of the
same remaining maturities.
F-56
<PAGE>
A.M. MILLER & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
11. DIVIDEND DISTRIBUTION
During December 1995, a $60,957 note receivable due October 1, 1996 from a
company controlled by the Company's principal shareholder was distributed to the
shareholder as a non-cash S-Corporation dividend distribution.
12. SUBSEQUENT EVENTS
In January 1996 the Company was acquired by OSI Holdings Corp., currently
known as Outsourcing Solutions Inc., ("OSI") for cash of $23.7 million (after a
working capital adjustment), 80,000 shares of voting common stock (valued at
$1.0 million) and a 9% unsecured promissory note in an aggregate amount of $5.0
million due July 10, 2001.
In November 1996 OSI issued $100.0 million 11% Senior Subordinated Notes due
2006 ("the Old Notes") and entered into a new bank credit facility. The Company
initially filed a registration statement dated November 26, 1996 relating to an
offer to exchange the Old notes for OSI's 11% Series B Senior Subordinated Notes
due 2006 (the "New Notes"). The Old Notes are, and the New Notes will be, fully
and unconditionally guaranteed on a joint and several basis by each of OSI's
current domestic subsidiaries, including the Company, and any additional
domestic subsidiaries formed by OSI that become guarantors under the bank credit
facility.
F-57
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the stockholders of
Continental Credit Services, Inc.
Alaska Financial Services, Inc.
Credit Control Corporation
Southwest Credit Services, Inc.
Central Credit Services, Inc.
We have audited the accompanying combined balance sheet of Continental
Credit Services, Inc. and related companies as of September 30, 1995, and the
related combined statements of income and retained earnings and of cash flows
for the year then ended. The combined financial statements include the accounts
of Continental Credit Services, Inc. and four related companies: Alaska
Financial Services, Inc.; Credit Control Corporation; Southwest Credit Services,
Inc.; and Central Credit Services, Inc. These companies are under common
ownership and common management. These financial statements are the
responsibility of the companies' management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the combined financial position of Continental Credit Services, Inc.
and related companies at September 30, 1995, and the combined results of their
operations and their combined cash flows for the year then ended in conformity
with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
Deloitte & Touche LLP
Seattle, Washington
January 2, 1996
(November 26, 1996 as to Note 11)
F-58
<PAGE>
CONTINENTAL CREDIT SERVICES, INC.
AND RELATED COMPANIES
COMBINED BALANCE SHEET
SEPTEMBER 30, 1995
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................... $2,380,651
Trade accounts receivable.................................................... 684,716
Accounts receivable from related parties..................................... 47,763
Demand loans................................................................. 1,125,720
Prepaid expenses and other................................................... 40,857
----------
Total current assets..................................................... 4,279,707
PROPERTY AND EQUIPMENT:
Office equipment............................................................. 2,691,332
Furniture and fixtures....................................................... 457,628
Transportation equipment..................................................... 100,489
Leasehold improvements....................................................... 104,692
----------
3,354,141
Less accumulated depreciation................................................ 1,863,043
----------
Total property and equipment............................................. 1,491,098
OTHER ASSETS:
Cash surrender value of officer's life insurance............................. 168,850
Land held for investment..................................................... 132,902
Other........................................................................ 165,957
----------
Total other assets....................................................... 467,709
----------
TOTAL.......................................................................... $6,238,514
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................. $ 580,253
Accounts payable to related party............................................ 6,096
Salaries and wages payable................................................... 231,009
Payroll and business taxes payable........................................... 101,168
Accrued vacation and sick leave.............................................. 139,539
Accrued expenses............................................................. 44,350
Note payable................................................................. 100,000
Notes payable to related party............................................... 314,067
Current portion of long-term debt............................................ 130,538
----------
Total current liabilities................................................ 1,647,020
LONG-TERM DEBT, net of current portion......................................... 407,851
COMMITMENTS (Note 5)
STOCKHOLDERS' EQUITY:
Common stock................................................................. 63,467
Treasury stock............................................................... (142,500)
Retained earnings............................................................ 4,262,676
----------
Total stockholders' equity............................................... 4,183,643
----------
TOTAL.......................................................................... $6,238,514
----------
----------
</TABLE>
See notes to combined financial statements.
F-59
<PAGE>
CONTINENTAL CREDIT SERVICES, INC.
AND RELATED COMPANIES
COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS
YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
FEE INCOME.................................................................... $14,870,832
<S> <C>
OPERATING EXPENSES............................................................ 12,635,090
-----------
Income from operations.................................................. 2,235,742
OTHER INCOME (EXPENSE):
Interest income............................................................. 244,957
Other income, net........................................................... 12,530
Interest expense............................................................ (165,259)
-----------
92,228
-----------
Net income.............................................................. 2,327,970
RETAINED EARNINGS:
October 1................................................................... 3,566,153
Less distributions.......................................................... (1,631,447)
-----------
September 30................................................................ $ 4,262,676
-----------
-----------
</TABLE>
See notes to combined financial statements.
F-60
<PAGE>
CONTINENTAL CREDIT SERVICES, INC.
AND RELATED COMPANIES
COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<S> <C>
OPERATING ACTIVITIES:
Net income................................................................... $ 2,327,970
Adjustments to reconcile net income to net cash provided by operating
activities:................................................................
Depreciation............................................................... 526,540
Loss on sale of assets..................................................... 4,197
Cash provided (used) by changes in operating assets and liabilities:
Accounts receivable...................................................... (138,948)
Prepaid expenses and other............................................... (12,017)
Accounts payable......................................................... 319,812
Litigation settlement payable............................................ (100,000)
Salaries and wages payable............................................... 23,907
Payroll and business taxes payable....................................... (70)
Accrued vacation and sick leave.......................................... 26,669
Accrued expenses and other............................................... (90,463)
-----------
Net cash provided by operating activities.................................... 2,887,597
INVESTING ACTIVITIES:
Loans........................................................................ (1,797,171)
Loan repayments.............................................................. 757,965
Purchase of property and equipment........................................... (544,160)
Decrease in cash surrender value of officer's life insurance................. 468
-----------
Net cash used by investing activities........................................ (1,582,898)
FINANCING ACTIVITIES:
Debt borrowings.............................................................. 109,841
Debt repayments.............................................................. (106,571)
Purchase of common stock..................................................... (35,000)
Distributions................................................................ (1,631,447)
-----------
Net cash used by financing activities........................................ (1,663,177)
-----------
NET DECREASE IN CASH........................................................... (358,478)
CASH:
Beginning of year............................................................ 2,739,129
-----------
End of year.................................................................. $ 2,380,651
-----------
-----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest expense incurred and paid during the year........................... $ 154,600
NONCASH FINANCING AND INVESTING TRANSACTIONS:
Purchase of common stock and sale of life insurance policy through issuance
of note payable............................................................ 79,000
</TABLE>
See notes to combined financial statements.
F-61
<PAGE>
CONTINENTAL CREDIT SERVICES, INC.
AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED SEPTEMBER 30, 1995
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS: The accompanying combined financial statements
include the accounts of Continental Credit Services, Inc.; Alaska Financial
Services, Inc.; Credit Control Corporation; Southwest Credit Services, Inc.; and
Central Credit Services, Inc. (collectively, the Company). Their operations
consist of full service collection agencies in eight western states, with
offices in 11 cities. The sole stockholder of Continental Credit Services, Inc.;
Credit Control Corporation; and Central Credit Services, Inc. is a 50%
stockholder in the remaining two companies, and is the president of each of
these companies. On October 1, 1995, Continental Credit Services, Inc. merged
with Credit Control Corporation.
The financial statements of these companies have been combined in
recognition of a pending sale of the companies (Note 10). The financial
statements do not include certain other related businesses which are also owned
and controlled by the sole stockholder indicated above.
All significant intercompany accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTS: For purposes of the statement of cash flows, the
Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
Included in the cash balance are amounts due to clients totalling
approximately $480,000.
BAD DEBT EXPENSE: Uncollectible trade accounts receivable are charged
directly against earnings when they are determined to be uncollectible, and no
allowance for doubtful accounts is considered necessary as of September 30,
1995.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost.
Depreciation is provided using straight-line and accelerated methods over the
estimated useful lives of the assets which generally range from five to seven
years. Maintenance and repairs are charged to operating expenses. Costs of
significant improvements and renewals are capitalized.
FEDERAL INCOME TAXES: The stockholders of Continental Credit Services,
Inc.; Alaska Financial Services, Inc.; and Credit Control Corporation have
elected to be taxed as S corporations. In lieu of corporation income taxes, the
stockholders of the S corporations are taxed on the companies' taxable income.
Therefore, no provision or liability for federal and state income taxes for
these companies is included in the financial statements. No provision or
liability for federal and state taxes is included for the remaining two
companies due to current year operating losses and utilization of net operating
loss carryforwards. Such companies also have remaining net operating loss
carryforwards of $184,000. The future utilization of the net operating loss
carryforwards could be limited in the event of the pending sale of such
companies.
F-62
<PAGE>
CONTINENTAL CREDIT SERVICES, INC.
AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED SEPTEMBER 30, 1995
NOTE 2: DEMAND LOANS
The Company makes short-term (generally six to nine months) loans to a
mortgage company for investment purposes. The loans are personally guaranteed by
the sole stockholder of Continental Credit Services, Inc.
No allowance for loan losses is considered necessary as of September 30,
1995.
NOTE 3: PENSION AND PROFIT SHARING PLANS
The Company provides a qualified profit sharing plan and trust for
substantially all employees, whereby the Company contributes annually out of
corporate profits. Contribution amounts are at the discretion of the Board of
Directors and are limited to a maximum of 15% of eligible participants' total
compensation. The Company did not make a contribution for the year ended
September 30, 1995.
The Company also maintains a 401(k) voluntary salary reduction pension plan
(Note 9). The Company matches up to 50% of employee contributions, ranging from
a minimum of 2% to a maximum of 4% of total compensation. The Company's matching
portion of the contributions for the year ended September 30, 1995, was $33,132,
all of which had been paid by September 30, 1995.
NOTE 4: NOTES PAYABLE AND LONG-TERM DEBT
Note payable to bank bears interest at 2% over the bank's prime rate and is
due in April 1996. The note is guaranteed by a stockholder of Alaska Financial
Services, Inc. and is secured by accounts receivable and other assets of Alaska
Financial Services, Inc. which aggregate approximately $690,000.
Notes payable to related party bear interest at 9% per annum and have no
maturity date.
Long-term debt at September 30, 1995, consisted of the following:
<TABLE>
<CAPTION>
Note payable to bank in monthly installments of $11,166,
including interest at 7.5%, secured by all assets of
Continental Credit Services, Inc. totalling $5,400,000 at
September 30, 1995, due May 5, 1999. The note is guaranteed by
Continental's sole stockholder................................. $ 427,626
<S> <C>
Note payable to stockholder, interest at 7% per annum, annual
interest only payments until maturity on July 1, 1999.......... 79,000
Capital lease obligation, payable in monthly installments of
$2,100, including imputed interest at 8%....................... 31,763
Less current portion............................................. (130,538)
---------
$ 407,851
---------
---------
</TABLE>
The provisions of the bank loan contain various covenants pertaining to
maintenance of working capital and the liabilities to tangible net worth ratio.
The Company was in compliance with such covenants as of September 30, 1995.
F-63
<PAGE>
CONTINENTAL CREDIT SERVICES, INC.
AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED SEPTEMBER 30, 1995
NOTE 4: NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
Remaining annual maturities of long-term debt as of September 30, 1995, are
as follows:
<TABLE>
<S> <C>
1996............................................................. $ 130,538
1997............................................................. 121,527
1998............................................................. 122,595
1999............................................................. 163,729
---------
$ 538,389
---------
---------
</TABLE>
NOTE 5: LEASE COMMITMENTS
The Company leases certain building facilities under noncancellable
operating leases. Future minimum annual commitments with lease terms in excess
of one year are as follows:
<TABLE>
<S> <C>
1996............................................................. $ 478,231
1997............................................................. 221,396
1998............................................................. 138,641
---------
$ 838,268
---------
---------
</TABLE>
Total rent expense, including common area maintenance, for all facilities
for the year ended September 30, 1995, was $738,447.
NOTE 6: EQUITY
The following schedule details the equity accounts by company at September
30, 1995:
<TABLE>
<CAPTION>
CONTINENTAL ALASKA SOUTHWEST CENTRAL
CREDIT FINANCIAL CREDIT CREDIT CREDIT
SERVICES, SERVICES, SERVICES, SERVICES, CONTROL
INC. INC. INC. INC. CORPORATION TOTAL
------------- ------------- ------------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Common stock-Par value, $1;
authorized, 50,000 shares per
company:
Issued and outstanding......... $ 3,467 $ 15,000 $ 15,000 $ 15,000 $ 15,000 $ 63,467
Treasury stock................... (7,500) (135,000) (142,500)
Retained earnings (deficit)...... 4,086,576 440,266 (32,905) (212,555) (18,706) 4,262,676
------------- ------------- ------------- ------------- ------------ ----------
Total stockholder's equity
(deficit)...................... $ 4,090,043 $ 455,266 $ (17,905) $(205,055) $ (138,706) $4,183,643
------------- ------------- ------------- ------------- ------------ ----------
------------- ------------- ------------- ------------- ------------ ----------
</TABLE>
F-64
<PAGE>
CONTINENTAL CREDIT SERVICES, INC.
AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED SEPTEMBER 30, 1995
NOTE 7: RELATED PARTY TRANSACTIONS
The companies organized as S corporations provide compensation and other
related expenses to stockholders who are officers of such companies. The cost of
the compensation and related expenses is included in operating expenses.
The following is a description of other related parties and transactions:
- Eastside Executive Services, Inc. (EES) is a corporation located in
Kirkland, Washington in which the sole stockholder of Continental Credit
Services, Inc. is a 50% stockholder. EES is set up to provide secretarial
services to other businesses. EES rents part of its phone system from the
Company. The Company bills EES for a monthly phone equipment rental charge
plus EES' share of the monthly phone bill. Phone equipment rental income
for the year ended September 30, 1995, was $103,859 and is offset against
telephone expense. At September 30, 1995, the Company owed EES $33,639. In
December 1995, the sole stockholder of Continental Credit Services, Inc.
sold his investment in EES.
- Continental Business Systems (CBS) is a sole proprietorship owned by the
sole stockholder of Continental Credit Services, Inc. CBS distributes
computers and related equipment. The Company has purchased a small amount
of its computer equipment from CBS. The Company owed CBS $6,096 at
September 30, 1995, for money deposited into the Company's bank account.
- Professional Collection Agencies, Inc. (PCA) is a collection agency
located in Seattle, Washington, in which the sole stockholder of
Continental Credit Services, Inc. is a 50% stockholder. The Company
provides computer software programming maintenance to PCA. Total income
earned for the year ended September 30, 1995, was $875. PCA owed the
Company $14,123 at September 30, 1995.
NOTE 8: CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
The Company maintains the majority of its cash accounts in a large regional
commercial bank. The total cash balances are secured by the Federal Deposit
Insurance Corporation (FDIC) up to $100,000. Total bank balances in excess of
FDIC coverage were $1,509,000 at September 30, 1995.
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of trade accounts receivable and demand
loans. Concentrations of credit risk with respect to trade receivables include
concentrations with two major customers who individually generate 23% and 20% of
revenues. The accounts receivable from one of these customers represents
approximately 45% of the trade accounts receivable balance at September 30,
1995. The remaining customer base includes a large number of customers disbursed
across different geographic areas. The demand loans are unsecured loans to a
mortgage company located in Western Washington.
F-65
<PAGE>
CONTINENTAL CREDIT SERVICES, INC.
AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED SEPTEMBER 30, 1995
NOTE 9: CONTINGENCY
Management has recently determined that the Company may be in violation of
certain requirements with respect to the Company's 401(k) plan including
Internal Revenue Service discrimination testing rules. Noncompliance with the
discrimination testing rules could result in a loss of the tax-exempt status of
the plan trust, Management is currently investigating this matter to determine
the extent of such potential noncompliance as well as the options available to
the Company to rectify the matter. Management has not recorded any provision for
possible costs associated with the resolution of this matter as they are unable
to estimate the impact to the Company or the probable outcome of this matter.
NOTE 10: SALE OF COMPANY
The stockholders of the Company have reached an agreement in principle to
sell 100% of its common stock to an unrelated party. The transaction is
anticipated to close in January 1996.
NOTE 11: SUBSEQUENT EVENTS
In January 1996 the Company was acquired by OSI Holdings Corp., currently
known as Outsourcing Solutions Inc., ("OSI") for cash of $11.2 million (after a
working capital adjustment), 400,000 shares of voting common stock (valued at
$5.0 million) and a 10% unsecured, subordinated promissory note in an aggregate
amount $3.0 million due July 9, 2001.
In November 1996 OSI issued $100.0 million 11% Senior Subordinated Notes due
2006 ("the Old Notes") and entered into a new bank credit facility. OSI
initially filed a registration statement dated November 26, 1996 relating to an
offer to exchange the Old Notes for OSI's 11% Series B Senior subordinated Notes
due 2006 (the "New Notes"). The Old Notes are, and the New Notes will be, fully
and unconditionally guaranteed on a joint and several basis by each of OSI's
current domestic subsidiaries, including the Company, and any additional
domestic subsidiaries formed by OSI that become guarantors under the bank credit
facility.
F-66
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information........................... ii
Prospectus Summary.............................. 1
Risk Factors.................................... 14
Use of Proceeds of the New Notes................ 19
Capitalization.................................. 19
The Exchange Offer.............................. 20
Unaudited Pro Forma Consolidated Financial
Data.......................................... 29
Selected Historical Financial Data--OSI......... 33
Selected Historical Financial Data-- Payco...... 35
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 36
Business........................................ 47
Management...................................... 57
Security Ownership.............................. 60
Certain Relationships and Related
Transactions.................................. 64
Description of New Bank Credit Facility; Other
Indebtedness.................................. 66
Description of Notes............................ 68
Certain U.S. Federal Income Tax Consequences.... 100
Plan of Distribution............................ 101
Experts......................................... 104
Legal Matters................................... 104
Index to Consolidated Financial Statements...... F-1
</TABLE>
OUTSOURCING
SOLUTIONS INC.
OFFER TO EXCHANGE
11% SERIES B SENIOR
SUBORDINATED NOTES DUE 2006
FOR ALL OUTSTANDING
11% SENIOR SUBORDINATED
NOTES DUE 2006
-------------
PROSPECTUS
-------------
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Certificate of Incorporation of the Company provides that no director
shall be personally liable to the Corporation or its stockholders for monetary
damages for any breach of fiduciary duty by such director as a director except
for those breaches and acts or omissions with respect to which the General
Corporation Law of the State of Delaware expressly provides that the Certificate
of Incorporation shall not eliminate or limit such personal liability of
directors.
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may indemnify directors and officers as well as other
employees and individuals against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation, a
"derivative action") if they acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, if they had no reasonable
cause to believe their conduct was unlawful. A similar standard is applicable in
the case of derivative actions, except that indemnification only extends to
expenses (including attorneys' fees) incurred in connection with the defense or
settlement of such actions, and the statute requires court approval before there
can be any indemnification where the person seeking indemnification has been
found liable to the corporation. The statute provides that it is not exclusive
of other indemnification that may be granted by a corporation's bylaws,
disinterested director vote, stockholder vote, agreement or otherwise.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------
<C> <S>
* 1.1 Purchase Agreement dated October 31, 1996 by and among the Company, CFC Services Corp., A.M.
Miller & Associates, Inc., Continental Credit Services, Inc., Alaska Financial Services, Inc.,
Southwest Credit Services, Inc., Account Portfolios, Inc., Account Portfolios G.P., Inc.,
Account Portfolios, L.P., Perimeter Credit, L.P., Gulf State Credit, L.P. and Goldman, Sachs &
Co. and Chase Securities Inc.
* 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 Incorporated, 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.
* 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.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------
* 4.1 Indenture dated as of November 6, 1996 by and among the Company, the Guarantors and Wilmington
Trust Company (the "Indenture").
<C> <S>
* 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).
* 4.5 Registration Rights Agreement dated as of November 6, 1996 by and among the Company, CFC Services
Corp., A.M. Miller & Associates, Inc., The Continental Alliance, Inc., Alaska Financial
Services, Inc., Southwest Credit Services, Inc., Account Portfolios, Inc., Account Portfolios
G.P., Inc., Account Portfolios, L.P., Perimeter Credit, L.P., Gulf State Credit, L.P., Payco
American Corporation, Payco-General American Credits, Inc., National Account Systems, Inc.,
University Accounting Service, Inc., Asset Recovery & Management Corp., Indiana Mutual Credit
Association, Inc., Furst and Furst, Inc., Jennifer Loomis & Associates, Inc., FM Services
Corporation, Qualink, Inc., Professional Recoveries Inc., Payco American International Corp.,
Goldman, Sachs & Co. and Chase Securities Inc.
* 5.1 Opinion of White & Case regarding the legality of the New Notes.
* 8.1 Opinion of White & Case regarding certain tax matters.
* 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 Master Services Agreement dated as of October 1, 1992 between Account Portfolios, L.P. and HBR
Capital, Ltd.
* 10.4 Lease Agreement between Payco American Corporation and the Brookfield Investment Company dated
July 12, 1979, as amended to the date hereof.
* 10.5 Lease Agreement between Payco American Corporation and the Percom Investment Company dated April
27, 1984, as amended to the date hereof.
* 10.6 Lease Agreement between Payco American Corporation and the Westlake Investment Corporation dated
June 1, 1984, as amended to the date hereof.
* 10.7 Lease Agreement between Payco American Corporation and the Dublin Investment Company dated July
14, 1986, as amended to the date hereof.
* 10.8 Lease Agreement between Payco American Corporation and the Hacienda Investment Company dated
October 14, 1986, as amended to the date hereof.
* 10.9 Employment Agreement dated as of August 27, 1996 between the Company and Timothy G. Beffa.
* 10.10 Employment Agreement dated as of January 12, 1996 between the Company and Allen M. Capsuto.
* 10.11 Consulting Agreement dated as of August 13, 1996 between Payco American Corporation and Dennis G.
Punches.
* 10.12 Employment Agreement dated as of August 13, 1996 between Payco American Corporation and James
Bohmann.
* 10.13 Employment Agreement dated as of August 13, 1996 between Payco American Corporation and Patrick
Carroll.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------
* 10.14 Employment Agreement dated as of August 13, 1996 between Payco American Corporation and William
Kagel.
<C> <S>
* 10.15 Employment Agreement dated as of August 13, 1996 between Payco American Corporation and Alvin
Keeley.
* 10.16 Employment Agreement dated as of August 13, 1996 between Payco American Corporation and Susan
Mathison.
* 10.17 Employment Agreement dated as of August 13, 1996 between Payco American Corporation and David
Patterson.
* 10.18 Employment Agreement dated as of August 13, 1996 between Payco American Corporation and Neal
Sparby.
* 10.19 Employment Agreement dated as of August 13, 1996 between Payco American Corporation and John
Stetzenbach.
* 10.20 Covenant Not-to-Compete Agreement dated as of August 13, 1996 between Payco American Corporation
and Dennis G. Punches.
* 10.21 Covenant Not-to-Compete Agreement dated as of August 13, 1996 between Payco American Corporation
and James Bohmann.
* 10.22 Covenant Not-to-Compete Agreement dated as of August 13, 1996 between Payco American Corporation
and Patrick Carroll.
* 10.23 Covenant Not-to-Compete Agreement dated as of August 13, 1996 between Payco American Corporation
and William Kagel.
* 10.24 Covenant Not-to-Compete Agreement dated as of August 13, 1996 between Payco American Corporation
and Alvin Keeley.
* 10.25 Covenant Not-to-Compete Agreement dated as of August 13, 1996 between Payco American Corporation
and Susan Mathison.
* 10.26 Covenant Not-to-Compete Agreement dated as of August 13, 1996 between Payco American Corporation
and David Patterson.
* 10.27 Covenant Not-to-Compete Agreement dated as of August 13, 1996 between Payco American Corporation
and Neal Sparby.
* 10.28 Covenant Not-to-Compete Agreement dated as of August 13, 1996 between Payco American Corporation
and John Stetzenbach.
* 10.29 Covenant Not-to-Compete Agreement dated as of August 13, 1996 between Payco American Corporation
and Joseph Treleven.
* 10.30 9% Non-Negotiable Junior Subordinated Note dated January 10, 1996 issued by the Company to Alan M.
Miller.
* 10.31 1995 Stock Option and Stock Award Plan of the Company.
* 10.32 Form of Non-Qualified Stock Option Award Agreement [A].
* 10.33 Form of Non-Qualified Stock Option Award Agreement [B].
* 10.34 Credit Agreement dated as of November 6, 1996 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 and Exhibits thereto.
* 10.35 Employment Agreement dated as of November 27, 1996 between the Company and James F. Whalen.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------
12.1 Statement re computation of ratios.
<C> <S>
* 21.1 Subsidiaries of Registrant.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Arthur Andersen LLP.
23.4 Consent of Schweitzer Rubin Karon & Bremer.
* 23.5 Consent of White & Case (contained in the opinion filed as Exhibit 5.1 hereto).
* 23.6 Consent of White & Case (contained in Exhibit 8.1 hereto).
23.7 Consent of Deloitte & Touche LLP.
23.8 Consent of Deloitte & Touche LLP.
* 24.1 Power of Attorney (see pages II-5 through II-27).
* 25.1 Statement of eligibility of trustee.
* 99.1 Form of Letter of Transmittal for New Notes.
* 99.2 Form of Notice of Guaranteed Delivery for New Notes.
* 99.3 Letter to Brokers.
* 99.4 Letter to Clients.
* 99.5 Instruction to Registered Holder and/or Book Entry Transfer Participant from Beneficial Owner.
* 99.6 Guidelines for Certification of Taxpayer Identification Number on substitute Form W-9.
</TABLE>
- ------------------------
*Previously filed.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrants hereby undertake that insofar as
indemnification for liabilities arising under the Securities Act of 1933, as
amended (the "Act") may be permitted to directors, officers and controlling
persons of the Registrants pursuant to the foregoing provisions, or otherwise,
the Registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim of
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by its is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(b) The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into this prospectus pursuant to
Item 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 3 to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on March 31, 1997.
<TABLE>
<S> <C> <C>
OUTSOURCING SOLUTIONS INC.
By: /s/ TYLER T. ZACHEM
------------------------------------------
Tyler T. Zachem
VICE PRESIDENT
AND DIRECTOR
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 3
to this Registration Statement has been signed by the following persons in the
capacities indicated on March 31, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
*
-------------------------------------------- Director, President and Chief Executive Officer
Timothy G. Beffa (Principal Executive Officer)
*
-------------------------------------------- Chief Financial Officer
James Whalen (Principal Financial and Accounting Officer)
*
-------------------------------------------- Chairman of the Board of Directors
Jeffrey E. Stiefler
*
-------------------------------------------- Director
David E. De Leeuw
*
-------------------------------------------- Director, Secretary and Treasurer
David E. King
/S/ TYLER T. ZACHEM
-------------------------------------------- Director and Vice President
Tyler T. Zachem
*
-------------------------------------------- Director
David G. Hanna
*
-------------------------------------------- Director
Frank J. Hanna, III
*
-------------------------------------------- Director and Executive Vice President
Peter C. Rosvall
*
-------------------------------------------- Director
Dennis G. Punches
</TABLE>
*By: /s/ TYLER T. ZACHEM
-------------------------
Tyler T. Zachem
ATTORNEY-IN-FACT
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 3 to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on March 31, 1997.
CFC SERVICES CORP.
By: /s/ TYLER T. ZACHEM
-----------------------------------
Tyler T. Zachem
VICE PRESIDENT AND DIRECTOR
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 3
to this Registration Statement has been signed by the following persons in the
capacities indicated on March 31, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Director, President and Treasurer
* (Principal Executive Officer and
-------------------------------------------- Principal Financial and
Timothy G. Beffa Accounting Officer)
*
-------------------------------------------- Director, Vice President
David E. King and Secretary
/S/ TYLER T. ZACHEM
-------------------------------------------- Director and Vice President
Tyler T. Zachem
</TABLE>
*By: /s/ TYLER T. ZACHEM
-------------------------
Tyler T. Zachem
ATTORNEY-IN-FACT
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 3 to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York on March 31, 1997.
<TABLE>
<S> <C> <C>
A.M. MILLER & ASSOCIATES, INC.
By: /s/ TYLER T. ZACHEM
------------------------------------------
Tyler T. Zachem
ASSISTANT SECRETARY AND DIRECTOR
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 3
to this Registration Statement has been signed by the following persons in the
capacities indicated on March 31, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
*
-------------------------------------------- President and Chief Operating Officer
David M. Burton (Principal Executive Officer)
*
-------------------------------------------- Director and Treasurer
Timothy G. Beffa (Principal Financial and Accounting Officer)
*
-------------------------------------------- Director and Vice President
David E. King
/S/ TYLER T. ZACHEM
-------------------------------------------- Director and Assistant Secretary
Tyler T. Zachem
</TABLE>
*By: /s/ TYLER T. ZACHEM
-------------------------
Tyler T. Zachem
ATTORNEY-IN-FACT
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 3 to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York on March 31, 1997.
<TABLE>
<S> <C> <C>
THE CONTINENTAL ALLIANCE, INC.
By: /s/ TYLER T. ZACHEM
------------------------------------------
Tyler T. Zachem
VICE PRESIDENT, ASSISTANT TREASURER AND
DIRECTOR
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 3
to this Registration Statement has been signed by the following persons in the
capacities indicated on March 31, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
*
-------------------------------------------- President and Secretary
Peter C. Rosvall (Principal Executive Officer)
* Treasurer
-------------------------------------------- (Principal Financial and Accounting
Dorrise Kalbfleisch Officer
/S/ TYLER T. ZACHEM
-------------------------------------------- Director, Vice President and
Tyler T. Zachem Assistant Treasurer
*
-------------------------------------------- Director and Assistant Secretary
David E. King
*
-------------------------------------------- Director and Vice President
Timothy G. Beffa
</TABLE>
*By: /s/ TYLER T. ZACHEM
-------------------------
Tyler T. Zachem
ATTORNEY-IN-FACT
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 3 to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York on March 31, 1997.
<TABLE>
<S> <C> <C>
ALASKA FINANCIAL SERVICES, INC.
By: /s/ TYLER T. ZACHEM
------------------------------------------
Tyler T. Zachem
VICE PRESIDENT, ASSISTANT TREASURER
AND DIRECTOR
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 3
to this Registration Statement has been signed by the following persons in the
capacities indicated on March 31, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
*
-------------------------------------------- President
Peter C. Rosvall (Principal Executive Officer)
*
-------------------------------------------- Secretary and Treasurer
Willard L. Fancher (Principal Financial and Accounting Officer)
/S/ TYLER T. ZACHEM
-------------------------------------------- Director, Vice President and
Tyler T. Zachem Assistant Treasurer
*
-------------------------------------------- Director and Assistant Secretary
David E. King
*
-------------------------------------------- Director and Vice President
Timothy G. Beffa
</TABLE>
*By: /s/ TYLER T. ZACHEM
-------------------------
Tyler T. Zachem
ATTORNEY-IN-FACT
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 3 to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York on March 31, 1997.
<TABLE>
<S> <C> <C>
ACCOUNT PORTFOLIOS, INC.
By: /s/ TYLER T. ZACHEM
------------------------------------------
Tyler T. Zachem
SECRETARY AND DIRECTOR
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 3
to this Registration Statement has been signed by the following persons in the
capacities indicated on March 31, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
*
-------------------------------------------- President
James R. Paxton (Principal Executive Officer)
*
-------------------------------------------- Director, Vice President and Treasurer
David E. King (Principal Financial and Accounting Officer)
*
-------------------------------------------- Director and Chairman
Timothy G. Beffa
/S/ TYLER T. ZACHEM
-------------------------------------------- Director and Secretary
Tyler T. Zachem
</TABLE>
*By: /s/ TYLER T. ZACHEM
-------------------------
Tyler T. Zachem
ATTORNEY-IN-FACT
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 3 to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York on March 31, 1997.
<TABLE>
<S> <C> <C>
ACCOUNT PORTFOLIOS G.P., INC.
By: /s/ TYLER T. ZACHEM
------------------------------------------
Tyler T. Zachem
SECRETARY AND DIRECTOR
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 3
to this Registration Statement has been signed by the following persons in the
capacities indicated on March 31, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
*
-------------------------------------------- President
James R. Paxton (Principal Executive Officer)
*
-------------------------------------------- Director, Vice President and Treasurer
David E. King (Principal Financial and Accounting Officer)
/S/ TYLER T. ZACHEM
-------------------------------------------- Director and Secretary
Tyler T. Zachem
*
-------------------------------------------- Director and Chairman
Timothy G. Beffa
</TABLE>
*By: /s/ TYLER T. ZACHEM
-------------------------
Tyler T. Zachem
ATTORNEY-IN-FACT
II-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 3 to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York on March 31, 1997.
<TABLE>
<S> <C> <C>
ACCOUNT PORTFOLIOS, L.P.
By: Account Portfolios G.P., Inc.
as its General Partner
</TABLE>
<TABLE>
<S> <C> <C>
By: /s/ TYLER T. ZACHEM
-------------------------------------
Tyler T. Zachem
SECRETARY AND DIRECTOR
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 3
to this Registration Statement has been signed by the following persons in the
capacities indicated on March 31, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
*
-------------------------------------------- Director
Timothy G. Beffa
*
-------------------------------------------- Director
David E. King
/S/ TYLER T. ZACHEM
-------------------------------------------- Director
Tyler T. Zachem
</TABLE>
*By: /s/ TYLER T. ZACHEM
-------------------------
Tyler T. Zachem
ATTORNEY-IN-FACT
II-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 3 to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York on March 31, 1997.
<TABLE>
<S> <C> <C>
PERIMETER CREDIT, L.P.
By: Account Portfolios G.P., Inc.
as its General Partner
</TABLE>
<TABLE>
<S> <C> <C>
By: /s/ TYLER T. ZACHEM
-------------------------------------
Tyler T. Zachem
SECRETARY AND DIRECTOR
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 3
to this Registration Statement has been signed by the following persons in the
capacities indicated on March 31, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
*
-------------------------------------------- Director
Timothy G. Beffa
*
-------------------------------------------- Director
David E. King
/S/ TYLER T. ZACHEM
-------------------------------------------- Director
Tyler T. Zachem
</TABLE>
*By: /s/ TYLER T. ZACHEM
-------------------------
Tyler T. Zachem
ATTORNEY-IN-FACT
II-13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 3 to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York on March 31, 1997.
<TABLE>
<S> <C> <C>
GULF STATE CREDIT, L.P.
By: Account Portfolios G.P., Inc.
as its General Partner
By: /s/ TYLER T. ZACHEM
-----------------------------------------
Tyler T. Zachem
SECRETARY AND DIRECTOR
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 3
to this Registration Statement has been signed by the following persons in the
capacities indicated on March 31, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
*
-------------------------------------------- Director
Timothy G. Beffa
*
-------------------------------------------- Director
David E. King
/S/ TYLER T. ZACHEM
-------------------------------------------- Director
Tyler T. Zachem
</TABLE>
*By: /s/ TYLER T. ZACHEM
-------------------------
Tyler T. Zachem
ATTORNEY-IN-FACT
II-14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 3 to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York on March 31, 1997.
<TABLE>
<S> <C> <C>
PAYCO AMERICAN CORPORATION
By: /s/ TYLER T. ZACHEM
------------------------------------------
Tyler T. Zachem
ASSISTANT SECRETARY
AND DIRECTOR
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 3
to this Registration Statement has been signed by the following persons in the
capacities indicated on March 31, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
*
-------------------------------------------- Director, President and Chief Executive Officer
Timothy G. Beffa (Principal Executive Officer)
*
-------------------------------------------- Executive Vice President and Treasurer
James R. Bohmann (Principal Financial and Accounting Officer)
*
-------------------------------------------- Senior Vice President and Secretary
John Stetzenbach
*
-------------------------------------------- Director and Vice President
David E. King
/S/ TYLER T. ZACHEM
-------------------------------------------- Director and Assistant Secretary
Tyler T. Zachem
</TABLE>
*By: /s/ TYLER T. ZACHEM
-------------------------
Tyler T. Zachem
ATTORNEY-IN-FACT
II-15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 3 to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Brookfield, State of Wisconsin on March 31, 1997.
<TABLE>
<S> <C> <C>
PAYCO-GENERAL AMERICAN CREDITS, INC.
By: *
------------------------------------------
Timothy G. Beffa
VICE PRESIDENT AND DIRECTOR
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 3
to this Registration Statement has been signed by the following persons in the
capacities indicated on March 31, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
* President and Treasurer
-------------------------------------------- (Principal Executive Officer and
William W. Kagel Principal Financial and Accounting Officer)
*
-------------------------------------------- Vice President and Secretary
James R. Bohmann
*
-------------------------------------------- Director and Vice President
Timothy G. Beffa
*
-------------------------------------------- Director
David E. King
/S/ TYLER T. ZACHEM
-------------------------------------------- Director
Tyler T. Zachem
</TABLE>
*By: /s/ TYLER T. ZACHEM
-------------------------
Tyler T. Zachem
ATTORNEY-IN-FACT
II-16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 3 to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Brookfield, State of Wisconsin on March 31, 1997.
<TABLE>
<S> <C> <C>
NATIONAL ACCOUNT SYSTEMS, INC.
By: *
------------------------------------------
Timothy G. Beffa
VICE PRESIDENT AND DIRECTOR
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 3
to this Registration Statement has been signed by the following persons in the
capacities indicated on March 31, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
* President and Treasurer
-------------------------------------------- (Principal Executive Officer and
William W. Kagel Principal Financial and Accounting Officer)
*
-------------------------------------------- Vice President and Secretary
James R. Bohmann
*
-------------------------------------------- Director and Vice President
Timothy G. Beffa
*
-------------------------------------------- Director
David E. King
/S/ TYLER T. ZACHEM
-------------------------------------------- Director
Tyler T. Zachem
</TABLE>
*By: /s/ TYLER T. ZACHEM
-------------------------
Tyler T. Zachem
ATTORNEY-IN-FACT
II-17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 3 to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Brookfield, State of Wisconsin on March 31, 1997.
<TABLE>
<S> <C> <C>
UNIVERSITY ACCOUNTING SERVICE, INC.
By: *
------------------------------------------
Timothy G. Beffa
VICE PRESIDENT AND DIRECTOR
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 3
to this Registration Statement has been signed by the following persons in the
capacities indicated on March 31, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
* President and Treasurer
-------------------------------------------- (Principal Executive Officer and
William W. Kagel Principal Financial and Accounting Officer)
*
-------------------------------------------- Vice President and Secretary
James R. Bohmann
*
-------------------------------------------- Director and Vice President
Timothy G. Beffa
*
-------------------------------------------- Director
David E. King
/S/ TYLER T. ZACHEM
-------------------------------------------- Director
Tyler T. Zachem
</TABLE>
*By: /s/ TYLER T. ZACHEM
-------------------------
Tyler T. Zachem
ATTORNEY-IN-FACT
II-18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 3 to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Brookfield, State of Wisconsin on March 31, 1997.
<TABLE>
<S> <C> <C>
ASSET RECOVERY & MANAGEMENT CORP.
By: *
------------------------------------------
Timothy G. Beffa
VICE PRESIDENT AND DIRECTOR
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 3
to this Registration Statement has been signed by the following persons in the
capacities indicated on March 31, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
* President and Treasurer
-------------------------------------------- (Principal Executive Officer and
William W. Kagel Principal Financial and Accounting Officer)
*
-------------------------------------------- Vice President and Secretary
James R. Bohmann
*
-------------------------------------------- Director and Vice President
Timothy G. Beffa
*
-------------------------------------------- Director
David E. King
/S/ TYLER T. ZACHEM
-------------------------------------------- Director
Tyler T. Zachem
</TABLE>
*By: /s/ TYLER T. ZACHEM
-------------------------
Tyler T. Zachem
ATTORNEY-IN-FACT
II-19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 3 to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Brookfield, State of Wisconsin on March 31, 1997.
<TABLE>
<S> <C> <C>
INDIANA MUTUAL CREDIT ASSOCIATION, INC.
By: *
------------------------------------------
Timothy G. Beffa
VICE PRESIDENT AND DIRECTOR
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 3
to this Registration Statement has been signed by the following persons in the
capacities indicated on March 31, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
* President and Treasurer
-------------------------------------------- (Principal Executive Officer and
William W. Kagel Principal Financial and Accounting Officer)
*
-------------------------------------------- Vice President and Secretary
James R. Bohmann
*
-------------------------------------------- Director and Vice President
Timothy G. Beffa
*
-------------------------------------------- Director
David E. King
/S/ TYLER T. ZACHEM
-------------------------------------------- Director
Tyler T. Zachem
</TABLE>
*By: /s/ TYLER T. ZACHEM
-------------------------
Tyler T. Zachem
ATTORNEY-IN-FACT
II-20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 3 to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Brookfield, State of Wisconsin on March 31, 1997.
<TABLE>
<S> <C> <C>
FURST AND FURST, INC.
By: *
------------------------------------------
Timothy G. Beffa
VICE PRESIDENT AND DIRECTOR
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 3
to this Registration Statement has been signed by the following persons in the
capacities indicated on March 31, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
* President and Treasurer
-------------------------------------------- (Principal Executive Officer and
William W. Kagel Principal Financial and Accounting Officer)
*
-------------------------------------------- Vice President and Secretary
James R. Bohmann
*
-------------------------------------------- Director and Vice President
Timothy G. Beffa
*
-------------------------------------------- Director
David E. King
/S/ TYLER T. ZACHEM
-------------------------------------------- Director
Tyler T. Zachem
</TABLE>
*By: /s/ TYLER T. ZACHEM
-------------------------
Tyler T. Zachem
ATTORNEY-IN-FACT
II-21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 3 to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Brookfield, State of Wisconsin on March 31, 1997.
<TABLE>
<S> <C> <C>
JENNIFER LOOMIS & ASSOCIATES, INC.
By: *
------------------------------------------
Timothy G. Beffa
VICE PRESIDENT AND DIRECTOR
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 3
to this Registration Statement has been signed by the following persons in the
capacities indicated on March 31, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
* President and Treasurer
-------------------------------------------- (Principal Executive Officer and
William W. Kagel Principal Financial and Accounting Officer)
*
-------------------------------------------- Vice President and Secretary
James R. Bohmann
*
-------------------------------------------- Director and Vice President
Timothy G. Beffa
*
-------------------------------------------- Director
David E. King
/S/ TYLER T. ZACHEM
-------------------------------------------- Director
Tyler T. Zachem
</TABLE>
*By: /s/ TYLER T. ZACHEM
-------------------------
Tyler T. Zachem
ATTORNEY-IN-FACT
II-22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 3 to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Brookfield, State of Wisconsin on March 31, 1997.
<TABLE>
<S> <C> <C>
FM SERVICES CORPORATION
By: *
------------------------------------------
Timothy G. Beffa
VICE PRESIDENT AND DIRECTOR
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 3
to this Registration Statement has been signed by the following persons in the
capacities indicated on March 31, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
* President and Treasurer
-------------------------------------------- (Principal Executive Officer and
William W. Kagel Principal Financial and Accounting Officer)
*
-------------------------------------------- Vice President and Secretary
James R. Bohmann
*
-------------------------------------------- Director and Vice President
Timothy G. Beffa
*
-------------------------------------------- Director
David E. King
/S/ TYLER T. ZACHEM
-------------------------------------------- Director
Tyler T. Zachem
</TABLE>
*By: /s/ TYLER T. ZACHEM
-------------------------
Tyler T. Zachem
ATTORNEY-IN-FACT
II-23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 3 to this Registration Statement to be signed on
its behalf by theundersigned, thereunto duly authorized, in the City of
Brookfield, State of Wisconsin on March 31, 1997.
<TABLE>
<S> <C> <C>
QUALINK, INC.
By: *
------------------------------------------
Timothy G. Beffa
VICE PRESIDENT AND DIRECTOR
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 3
to this Registration Statement has been signed by the following persons in the
capacities indicated on March 31, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
* President and Treasurer
-------------------------------------------- (Principal Executive Officer and
William W. Kagel Principal Financial and Accounting Officer)
*
-------------------------------------------- Vice President and Secretary
James R. Bohmann
*
-------------------------------------------- Director and Vice President
Timothy G. Beffa
*
-------------------------------------------- Director
David E. King
/S/ TYLER T. ZACHEM
-------------------------------------------- Director
Tyler T. Zachem
</TABLE>
*By: /s/ TYLER T. ZACHEM
-------------------------
Tyler T. Zachem
ATTORNEY-IN-FACT
II-24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 3 to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Brookfield, State of Wisconsin on March 31, 1997.
<TABLE>
<S> <C> <C>
PROFESSIONAL RECOVERIES INC.
By: *
------------------------------------------
Timothy G. Beffa
VICE PRESIDENT AND DIRECTOR
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 3
to this Registration Statement has been signed by the following persons in the
capacities indicated on March 31, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
* President and Treasurer
-------------------------------------------- (Principal Executive Officer
William W. Kagel and Principal Financial and Accounting Officer)
*
-------------------------------------------- Vice President and Secretary
James R. Bohmann
*
-------------------------------------------- Director and Vice President
Timothy G. Beffa
*
-------------------------------------------- Director
David E. King
/S/ TYLER T. ZACHEM
-------------------------------------------- Director
Tyler T. Zachem
</TABLE>
*By: /s/ TYLER T. ZACHEM
-------------------------
Tyler T. Zachem
ATTORNEY-IN-FACT
II-25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 3 to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Brookfield, State of Wisconsin on March 31, 1997.
<TABLE>
<S> <C> <C>
PAYCO AMERICAN INTERNATIONAL CORP.
By: *
------------------------------------------
Timothy G. Beffa
Vice President and Director
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 3
to this Registration Statement has been signed by the following persons in the
capacities indicated on March 31, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
* President and Treasurer
-------------------------------------------- (Principal Executive Officer and
William W. Kagel Principal Financial and Accounting Officer)
*
-------------------------------------------- Vice President and Secretary
James R. Bohmann
*
-------------------------------------------- Director and Vice President
Timothy G. Beffa
*
-------------------------------------------- Director
David E. King
/S/ TYLER T. ZACHEM
-------------------------------------------- Director
Tyler T. Zachem
</TABLE>
*By: /s/ TYLER T. ZACHEM
-------------------------
Tyler T. Zachem
ATTORNEY-IN-FACT
II-26
<PAGE>
OUTSOURCING SOLUTIONS INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS OF DOLLARS EXCEPT RATIO DATA)
EXHIBIT 12.1
<TABLE>
<CAPTION>
APLP OSI
----------------------------------------------- --------------
FROM FROM
JANUARY 1, SEPTEMBER 21,
YEAR ENDED DECEMBER 31, TO TO
------------------------------- SEPTEMBER 20, DECEMBER 31,
1992 1993 1994 1995 1995
--------- --------- --------- -------------- --------------
<S> <C> <C> <C> <C> <C>
SELECTED HISTORICAL FINANCIAL DATA--OSI:
Earnings were calculated as follows:
Income (loss) before taxes.............................. $ 456 $ 10,107 $ 25,091 $ 8,984 $ (4,082)
Add: Fixed charges...................................... 1,232 1,421 2,981 1,022 1,415
--------- --------- --------- -------------- --------------
Earnings................................................ $ 1,688 $ 11,528 $ 28,072 $ 10,006 $ (2,667)
--------- --------- --------- -------------- --------------
--------- --------- --------- -------------- --------------
Fixed charges were calculated as follows:
Interest expense(a)..................................... $ 1,229 $ 1,388 $ 2,941 $ 955 $ 1,365
Portion of rentals attributable to interest............. 3 33 40 67 50
--------- --------- --------- -------------- --------------
1,232 1,421 2,981 1,022 1,415
Preferred stock dividends(b)............................ -- -- -- -- 373
--------- --------- --------- -------------- --------------
Fixed charges........................................... $ 1,232 $ 1,421 $ 2,981 $ 1,022 $ 1,788
--------- --------- --------- -------------- --------------
--------- --------- --------- -------------- --------------
Ratio of earnings to fixed charges...................... 1.4x 8.1x 9.4x 9.8x --
--------- --------- --------- -------------- --------------
--------- --------- --------- -------------- --------------
Deficiency.............................................. $ (4,455)
--------------
--------------
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
--------------
<S> <C>
SELECTED HISTORICAL FINANCIAL DATA--OSI:
Earnings were calculated as follows:
Income (loss) before taxes.............................. $ (33,154)
Add: Fixed charges...................................... 13,527
--------------
Earnings................................................ $ (19,627)
--------------
--------------
Fixed charges were calculated as follows:
Interest expense(a)..................................... $ 12,332
Portion of rentals attributable to interest............. 1,195
--------------
13,527
Preferred stock dividends(b)............................ 1,383
--------------
Fixed charges........................................... $ 14,910
--------------
--------------
Ratio of earnings to fixed charges...................... --
--------------
--------------
Deficiency.............................................. $ (34,537)
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1992 1993 1994 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
SELECTED HISTORICAL FINANCIAL DATA--PAYCO:
Earnings were calculated as follows:
Income before taxes.......................................................... $ 5,782 $ 7,267 $ 8,385 $ 9,380
Add: Fixed charges........................................................... 1,796 2,289 1,948 2,692
--------- --------- --------- ---------
Earnings..................................................................... $ 7,578 $ 9,556 $ 10,333 $ 12,072
--------- --------- --------- ---------
--------- --------- --------- ---------
Fixed charges were calculated as follows:
Interest expense............................................................. $ 94 $ 268 $ 148 $ 770
Portion of rentals attributable to interest.................................. 1,702 2,021 1,800 1,922
--------- --------- --------- ---------
Fixed charges................................................................ $ 1,796 $ 2,289 $ 1,948 $ 2,692
--------- --------- --------- ---------
--------- --------- --------- ---------
Ratio of earnings to fixed charges........................................... 4.2x 4.2x 5.3x 4.5x
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
FROM JANUARY 1,
TO NOVEMBER 5,
1996
-----------------
<S> <C>
SELECTED HISTORICAL FINANCIAL DATA--PAYCO:
Earnings were calculated as follows:
Income before taxes.......................................................... $ 3,778
Add: Fixed charges........................................................... 2,274
-------
Earnings..................................................................... $ 6,052
-------
-------
Fixed charges were calculated as follows:
Interest expense............................................................. $ 735
Portion of rentals attributable to interest.................................. 1,539
-------
Fixed charges................................................................ $ 2,274
-------
-------
Ratio of earnings to fixed charges........................................... 2.7x
-------
-------
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED
DECEMBER 31,
1996
--------------
<S> <C>
COMPANY PRO FORMA:
Earnings were calculated as follows:
Loss before taxes................................................................................................. $ (57,968)
Add: Fixed charges................................................................................................ 28,912
--------------
Earnings.......................................................................................................... $ (29,056)
--------------
--------------
Fixed charges were calculated as follows:
Interest expense(a)............................................................................................... $ 26,178
Portion of rentals attributable to interest....................................................................... 2,734
--------------
28,912
Preferred stock dividends(b)...................................................................................... 1,383
--------------
Fixed charges..................................................................................................... $ 30,295
--------------
--------------
Ratio of earnings to fixed charges................................................................................ --
--------------
--------------
Deficiency........................................................................................................ $ (59,351)
--------------
--------------
</TABLE>
- ------------------------------
(a) Interest expense includes amortization of debt issuance costs.
(b) Preferred stock dividends have been increased to reflect the pretax amounts
which would be required to meet dividend payments.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT:
We consent to the use in this Amendment No. 3 to Registration Statement No.
333-16867 of Outsourcing Solutions Inc. on Form S-4 of our report dated
February 27, 1997 (relating to the financial statements of Outsourcing
Solutions Inc.), appearing in the Prospectus which is part of this
Registration Statement, and to the reference to us under the heading
"Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
St. Louis, Missouri
March 28, 1997
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT:
We consent to the use in this Amendment No. 3 to Registration Statement No.
333-16867 of Outsourcing Solutions Inc. on Form S-4 of our report dated August
9, 1996 (November 26, 1996 as to Note 7) (relating to the financial statements
of Account Portfolios, L.P.), appearing in the Prospectus which is part of this
Registration Statement, and to the reference to us under the heading "Experts"
in such Prospectus.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
March 28, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
-----------------------
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
March 28, 1997
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT CERTIFIED ACCOUNTANTS
We have issued our report dated January 17, 1996 (except for Note 12, as
to which the date is November 26, 1996), accompanying the financial statements
of A.M. Miller & Associates, Inc. for the year ended December 31, 1995. We
hereby consent to the inclusion of the above-mentioned report in this
registration statement on Form S-4 of Outsourcing Solutions Inc. We also
consent to the reference to our firm under the caption "Experts".
/s/ Schweitzer Rubin Karon & Bremer
-----------------------------------
SCHWEITZER RUBIN KARON & BREMER
Certified Public Accountants
March 28, 1997
Minneapolis, Minnesota
<PAGE>
EXHIBIT 23.7
INDEPENDENT AUDITORS' CONSENT:
We consent to the use in this Amendment No. 3 to Registration Statement No.
333-16867 of Outsourcing Solutions Inc. on Form S-4 of our report dated
February 27, 1997 (relating to the financial statements of Payco American
Corporation), appearing in the Prospectus which is part of this Registration
Statement, and to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
St. Louis, Missouri
March 28, 1997
<PAGE>
EXHIBIT 23.8
INDEPENDENT AUDITORS' CONSENT:
We consent to the use in this Amendment No. 3 to Registration Statement No.
333-16867 of Outsourcing Solutions Inc. on Form S-4 of our report dated
January 2, 1996 (November 26, 1996 as to Note 11) (relating to the financial
statements of Continental Credit Services, Inc. and related companies),
appearing in the Prospectus which is part of this Registration Statement, and to
the reference to us under the heading "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Seattle, Washington
March 28, 1997
