Earn-out Agreement

EARN-OUT AGREEMENT


THIS EARN-OUT AGREEMENT ("Agreement") made as of October 8, 1997 by and among NSA Acquisition Corporation, a New York corporation ("Buyer"), Outsourcing Solutions Inc., a Delaware corporation ("OSI"), North Shore Agency, Inc., a New York corporation ("North Shore"), Automated Mailing Services, Inc., a New York corporation ("AMS"), Mailguard Security Systems, Inc., a New York Corporation ("Mailguard"), and DMM Consultants, a sole proprietorship of David Klein ("DMM Consultants;" collectively, the "Sellers").


RECITALS


A. Pursuant to an asset purchase agreement among OSI, Buyer, Sellers and certain other parties, dated October 8, 1997 (the "Purchase Agreement"), Buyer acquired the assets of Sellers, effective this date.


B. Pursuant to Section 2.3 of the Purchase Agreement, payments under this Earn-out Agreement shall be additional purchase price consideration for the Assets (as defined in the Purchase Agreement) of Sellers.


C. All capitalized terms used herein which are defined in the Purchase Agreement shall have the meanings herein as are ascribed to such terms in the Purchase Agreement unless otherwise expressly provided for herein.


NOW THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the parties hereto, intending to be legally bound, do hereby agree as follows:


1. Definitions and Related Matters.


(a) "1997 Baseline EBITDA" shall mean $4,011,000.


(b) "Baseline EBITDA" shall mean $3,761,000.


(c) "Buyer Benefit Package" shall mean the employee benefits package contemplated by Buyer to be offered to certain employees of Buyer on or after January 1, 1998 in lieu of or in addition to certain employee benefits available to such employees during their term of employment with Sellers; such additional benefits may include the establishment of a bonus plan for certain employees, an alternative medical coverage plan, a dental plan, an accidental death and disability insurance program, a long term disability insurance program, a life insurance program, an alternative 401(k) program, an employee assistance program and a vision plan. The Buyer Benefit Package may also include the employment of a human resources executive.


(d) "Earnings" shall mean earnings of Buyer for purposes of calculating the Earn-out Payments. Earnings shall be determined for purposes of this Agreement with the following considerations: (i) actual moving (non-capitalized) expenses related to the relocation of Seller's operations during 1997 and/or 1998 shall not be included as expenses for purposes of calculating Earnings up to a maximum possible aggregate exclusion of $450,000 and (ii) no overhead expenses from OSI shall be charged against the earnings of Buyer other than expenses related to matters for which Buyer receives direct benefits. In addition, notwithstanding the first sentence of this subsection 1(d), Earnings for the First Payment Period (as defined below) shall be Earnings of North Shore, AMS, Mailguard and North Shore Canada (collectively, the "North Shore Affiliated Group") for the period from January 1, 1997 to the Closing Date (the "NSA Period") and Earnings of Buyer for the period from the Closing Date through December 31, 1997; and provided further that the Earnings of the North Shore Affiliated Group for the NSA Period shall be adjusted as follows: (i) salary expense for Jerome Goodman shall be reduced to an amount equal to the amount of such expense as if it were incurred at the same rate as the salary expense to be incurred by Buyer with respect to Jerome Goodman following the date hereof; (ii) fees paid to DMM Consultants shall be reduced to $379,851; (iii) salary expense for Joan Goodman shall be reduced to zero; (iv) automobile expenses shall be reduced by the amount incurred for the Toyota "Four Runner" automobile; (v) salary expense for maintenance personnel shall be reduced by $20,000; (vi) certain travel and entertainment and other miscellaneous expenses incurred by members of the Goodman family shall be reduced by an amount not to exceed $10,000; and (vii) appropriate FICA and Medicare expenses shall be reduced as appropriate in connection with the reductions referred to in clauses (i), (iii) and (v) of this sentence.


(e) "Earn-out Payments" shall mean the payments made to Sellers pursuant to Sections 2(a), 2(b) and 2(c).


(f) "EBITDA" shall mean Earnings before interest expense, taxes, depreciation and amortization, each item determined in accordance with GAAP.


2. Payments.


(a) For the 12 month period ending December 31, 1997 (the "First Payment Period"), Buyer will pay Sellers in cash an amount equal to 50% of the amount by which EBITDA for the First Payment Period exceeds 1997 Baseline EBITDA.


(b) For each of the 12 month periods ending December 31, 1998 (the "Second Payment Period") December 31, 1999 (the "Third Payment Period"), and December 31, 2000 (the "Fourth Payment Period"), Buyer will pay Sellers in cash an amount equal to 50% of the amount by which EBITDA for the relevant Payment Period exceeds Baseline EBITDA.


(c) In addition to the payments contemplated by Sections 2(a) and 2(b), Buyer will pay Sellers an amount in cash depending on the EBITDA for the First Payment Period as set forth in the following table:


EBITDA for First Payment Period Payment to Sellers - ------------------------------- ------------------ Equals or exceeds 1997 EBITDA Baseline $1,500,000 $3,961,000 to $4,010,999 $1,250,000 $3,911,000 to $3,960,999 $1,000,000 $3,861,000 to $3,910,999 $750,000 $3,811,000 to $3,860,999 $500,000 $3,761,000 to $3,810,999 $250,000 $3,760,999 or below -0-


(d) With respect to the payment for each Payment Period, Buyer will pay (and OSI will cause Buyer to pay) to Sellers a preliminary payment of the aggregate Earn-out Payment due pursuant to Sections 2(a) and (b) for the applicable ...