-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VmPvb1sAxKYB0SZ2EMjN1W/xOGaTOJOWktiLa7LX9CMA2bDzpWS8Y5cUD2Ct09Ai pRSYiVuOxH7H+U9OWjY1Tg== 0000950116-00-000623.txt : 20000328 0000950116-00-000623.hdr.sgml : 20000328 ACCESSION NUMBER: 0000950116-00-000623 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NCO GROUP INC CENTRAL INDEX KEY: 0001022608 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-CONSUMER CREDIT REPORTING, COLLECTION AGENCIES [7320] IRS NUMBER: 232858652 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21639 FILM NUMBER: 579136 BUSINESS ADDRESS: STREET 1: 515 PENNSYLVANIA AVE CITY: FT WASHINGTON STATE: PA ZIP: 19034 BUSINESS PHONE: 2157939300 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year ended December 31, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission File No. 0-21639 NCO GROUP, INC. --------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Pennsylvania 23-2858652 ------------ ---------- (State or Other Jurisdiction of (IRS Employer Identification No.) Incorporation or Organization) 515 Pennsylvania Ave. Ft. Washington, Pennsylvania 19034-3313 ---------------------------- ---------- (Address of principal (Zip Code) executive offices) Registrant's Telephone Number, Including Area Code (215) 793-9300 -------------- Securities Registered Pursuant to Section 12(b) of the Act: None ---- Securities Registered Pursuant to Section 12(g) of the Act: Common stock, no par value 25,547,398 --------------------------- ---------- (Title of Class) (Number of Shares Outstanding as of March 22, 2000) Indicate by check mark whether the Registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the Registrant is $600,726,000 (1) DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the Company's Proxy Statement to be filed in connection with its 1999 Annual Meeting of Shareholders are incorporated by reference in Part I and Part III of this Report. Other documents incorporated by reference are listed in the Exhibit Index. ----------------- (1) The aggregate dollar amount of the voting stock set forth equals the number of shares of the Company's common stock outstanding, reduced by the amount of common stock held by officers, directors and shareholders owning 10% or more of the Company's common stock, multiplied by $30.875, the last reported sale price for the Company's common stock on March 22, 2000. The information provided shall in no way be construed as an admission that any officer, director or 10% shareholder in the Company may be deemed an affiliate of the Company or that he is the beneficial owner of the shares reported as being held by him, and any such inference is hereby disclaimed. The information provided herein is included solely for record keeping purposes of the Securities and Exchange Commission. TABLE OF CONTENTS PART I
Page ---- Item 1. Business. 1 Item 2. Properties. 20 Item 3. Legal Proceedings. 20 Item 4. Submission of Matters to a Vote of Security Holders. 20 Item 4.1 Executive Officers of the Registrant who are not also Directors. 21 PART II Item 5. Market for Registrant's Common Equity and 23 Related Shareholder Matters. Item 6. Selected Financial Data. 25 Item 7. Management's Discussion and Analysis of Financial 26 Condition and Results of Operations. Item 7a Quantitative and Qualitative Disclosure about Market Risk. 35 Item 8. Financial Statements and Supplementary Data. 35 Item 9. Changes in and Disagreements with Accountants on Accounting and 35 Financial Disclosure. PART III Item 10. Directors and Executive Officers of the Registrant. 36 Item 11. Executive Compensation. 36 Item 12. Security Ownership of Certain Beneficial Owners and Management. 36 Item 13. Certain Relationships and Related Transactions. 36 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 37 Signatures 42 Index to Consolidated Financial Statements F-1
All share and per share data have been restated to reflect the three-for-two stock split of the Company's common stock paid in December 1997. PART I Forward-Looking Statements Certain statements included in this Annual Report on Form 10-K, other than historical facts, are forward-looking statements (as such term is defined in the Securities Exchange Act of 1934, and the regulations thereunder) which are intended to be covered by the safe harbors created thereby. Forward-looking statements include, without limitation, statements as to the Company's five-year growth strategy, statements as to the Company's objective to focus on internal growth, strategic acquisitions and alliances, and integration, the impact of acquisitions on the Company's earnings, the Company's ability to realize operating efficiencies in the integration of its acquisitions, trends in the Company's future operating performance, expected increases in operating efficiencies, anticipated trends in the accounts receivable management industry, year 2000 compliance, the effects of legal or governmental proceedings, the effects of changes in accounting pronouncements and statements as to the Company's or management's beliefs, expectations and opinions. Forward-looking statements are subject to risks and uncertainties and may be affected by various factors which may cause actual results to differ materially from those in the forward-looking statements. In addition to the factors discussed in this report, certain risks, uncertainties and other factors, including, without limitation, risks associated with growth and future acquisitions, the risk that the Company will not be able to realize operating efficiencies in the integration of its acquisitions, fluctuations in quarterly operating results, risks relating to the timing of contracts, risks related to year 2000 compliance and the other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission, including the Company's Registration Statement on Form S-3, filed on September 3, 1999, can cause actual results and developments to be materially different from those expressed or implied by such forward-looking statements. See Item 1. - "Business - Investment Considerations." Item 1. Business. -------- General NCO Group, Inc. ("NCO" or the "Company") provides a broad spectrum of accounts receivable management and outsourcing services to a wide range of businesses in national and international markets. The Company uses its technological and management expertise to build seamless partnerships with its clients, delivering customized solutions that improve client revenue, financial performance, and customer service. The Company provides these services through the use of advanced workstations, "thin client" network computing devices, and sophisticated call management systems comprised of predictive dialers, automated call distribution systems, digital switching and customized computer software. The Company provides these services on an international basis from 94 call centers located throughout North America and in the United Kingdom and Puerto Rico. The Company's clients are primarily in the financial services, healthcare, education, retail, commercial, utilities, government and telecommunications sectors. The Company's principal executive offices are located at 515 Pennsylvania Avenue, Fort Washington, Pennsylvania 19034, and its telephone number is (215) 793-9300. Through efficient utilization of technology and intensive management of human resources, the Company has achieved rapid growth in recent years. Since April 1994, the Company has completed eighteen acquisitions that have enabled it to increase the scale and scope of its services and establish itself as a dominant player in the accounts receivable management market. In addition, the Company has leveraged its sales infrastructure in order to take advantage of cross-selling opportunities by offering additional services to existing markets as well as establish a presence in certain new markets. -1- The following is a summary of the acquisitions completed by the Company since 1994 (dollars in thousands):
Revenue for the Date Value of Fiscal Year Prior Acquired Business Purchase Price to Acquisition ----------- ------------------------- ------------------- ------------------- Compass International Services 8/20/99 A/R Management and $ 104,100 $ 105,800(1) Corporation Telemarketing Co-Source Corporation 5/21/99 Commercial Receivables 124,600 61,100 Management JDR Holdings, Inc. 3/31/99 Technology-Based 103,100 51,000 Outsourcing , A/R Management and Telemarketing Medaphis Services Corporation 11/30/98 Healthcare Receivables 107,500(2) 96,700 Management MedSource, Inc. 7/1/98 Healthcare Receivables 35,700(3) 22,700 Management FCA International Ltd. 5/5/98 A/R Management 69,900 62,800 The Response Center 2/6/98 Market Research 15,000 8,000 Collections Division of American 1/1/98 A/R Management 1,700 1,700 Financial Enterprises, Inc. ADVANTAGE Financial 10/1/97 A/R Management 5,000 5,100 Services, Inc. Credit Acceptance Corporation 10/1/97 A/R Management 1,800 2,300 Collections Division of CRW 2/2/97 A/R Management 12,800 25,900 Financial, Inc. CMS A/R Services 1/31/97 A/R Management 5,100 6,800 Tele-Research Center, Inc. 1/30/97 Market Research and 2,200 1,800 Telemarketing Goodyear & Associates, Inc. 1/22/97 A/R Management 5,400 5,500 Management Adjustment 9/5/96 A/R Management 9,000 13,500 Bureau, Inc. Collections Division of Trans 1/3/96 A/R Management 4,800 7,000 Union Corporation Eastern Business Services, Inc. 8/1/95 A/R Management 2,000 2,000 B. Richard Miller, Inc. 4/29/94 A/R Management 1,400 1,300
(1) Pro Forma Revenue - Assumes the acquisitions completed by Compass International Services Corporation in 1998 and the sale of its Print and Mail Division were all completed on January 1, 1998. (2) Does not include an earn-out of up to $10.0 million that will be paid-out during 2000. (3) Includes $17.3 million of debt repaid by the Company. During 1999 and 1998, the Company completed several acquisitions that established NCO as a dominant service provider in many key markets such as healthcare and commercial. As a result, the Company was organized into market specific operating divisions that were responsible for all aspects of client sales and client service as well as operational delivery of services. During 1999, the operating divisions, which were each headed by a divisional chief executive officer, included Accounts Receivable Management Services, Healthcare Services, Technology-Based Outsourcing, Commercial Services, Market -2- Strategy and International Operations. As a result of the progress made to date in the integration and assimilation of the acquired companies, the Company reduced the number of operating divisions from six to four in order to focus on the operational delivery of services. The Company's focus on the operational delivery of services will allow it to take advantage of significant cross-selling opportunities and enhance the level of service provided to its clients. The new divisions will be Accounts Receivable Management Services (formerly Accounts Receivable Management, Commercial and Healthcare Bad Debt), Technology-Based Outsourcing (formerly Technology-Based Outsourcing and Healthcare Outsourcing), International Operations and Market Strategy. Each of these divisions will maintain industry specific functional groups including healthcare, commercial, banking, retail, education, utilities, telecommunications, and government. Services Accounts Receivable Management The Company provides a wide range of accounts receivable management services to its clients utilizing an extensive technological infrastructure. Although most of the Company's accounts receivable management services to date have focused on recovery of traditional delinquent accounts, the Company does engage in the recovery of current receivables and early stage delinquencies (generally, accounts which are 90 days or less past due). The Company generates approximately 60% of its revenue from the recovery of delinquent accounts receivable on a contingent fee basis. In addition, the Company generates revenue from fixed fees for certain accounts receivable management and other related services. The Company seeks to be a low cost provider and, as such, its contingent fees typically range from 15% to 35% of the amount recovered on behalf of the Company's clients. However, fees can range from 6% for the management of accounts placed early in the accounts receivable cycle to 50% for accounts that have been serviced extensively by the client or by third-party providers. The Company's average fee is approximately 25% across all industries, with the exception of healthcare. The nature of the collections business for the healthcare industry is very different from the remainder of the Company's business and, as a result, the average fee for the healthcare industry is approximately 15%. Accounts receivable management services typically include the following: Management Planning. The Company's approach to accounts receivable management for each client is determined by a number of factors including account size and demographics, the client's specific requirements and management's estimate of the collectability of the account. The Company has developed a library of standard processes for accounts receivable management, which is based upon its accumulated experience. The Company will integrate these processes with its client's requirements to create a customized recovery solution. In many instances, the approach will evolve and change as the relationship with the client develops and both parties evaluate the most effective means of recovering accounts receivable. The Company's standard approach, which may be tailored to the specialized requirements of its clients, defines and controls the steps that will be undertaken by the Company on behalf of the client and the manner in which data will be reported to the client. Through its systemized approach to accounts receivable management, the Company removes most decision making from the recovery staff and ensures uniform, cost-effective performance. Once the approach has been defined, the Company electronically or manually transfers pertinent client data into its information system. When the client's records have been established in the Company's system, the Company commences the recovery process. -3- Skiptracing. In cases where the customer's telephone number or address is unknown, the Company systematically searches the United States Post Office National Change of Address service, consumer data bases, electronic telephone directories, credit agency reports, tax assessor and voter registration records, motor vehicle registrations, military records, and other sources. The geographic expansion of banks, credit card companies, national and regional telecommunications companies, and managed healthcare providers along with the mobility of consumers has increased the demand for locating the client's customers. Once the Company has located the customer, the notification process can begin. Account Notification. The Company initiates the recovery process by forwarding an initial letter which is designed to seek payment of the amount due or open a dialogue with customers who cannot afford to pay at the current time. This letter also serves as an official notification to each customer of their rights as required by the federal Fair Debt Collection Practices Act. The Company continues the recovery process with a series of mail and telephone notifications. Telephone representatives remind the customer of their obligation, inform them that their account has been placed for collection with the Company and begin a dialogue to develop a payment program. Credit Reporting. At a client's request, the Company will electronically report delinquent accounts to one or more of the national credit bureaus where it will remain for a period of up to seven years. The denial of future credit often motivates the payment of all past due accounts. Payment Process. After the Company receives payment from the customer, it either remits the amount received net of its fee to the client or remits the entire amount received to the client and bills the client for its services. Activity Reports. Clients are provided with a system-generated set of standardized or customized reports that fully describe all account activity and current status. These reports are typically generated monthly, however, the information included in the report and the frequency that the reports are generated can be modified to meet the needs of the client. Quality Tracking. The Company emphasizes quality control throughout all phases of the accounts receivable management process. Some clients may specify an enhanced level of supervisory review and others may request customized quality reports. Large national credit grantors will typically have exacting performance standards which require sophisticated capabilities such as documented complaint tracking and specialized software to track quality metrics to facilitate the comparison of the Company's performance to that of its peers. -4- Delinquency Management The Company provides pre-charge-off delinquency management services that enable clients to manage their at-risk customers and quickly restore relationships to a current payment status. The Company mails reminder letters and makes first-party calls to the clients' customers, reminding of the past due balance and encouraging them to make immediate repayment using pay-by-phone direct debit checks or credit cards. Service includes responding to inbound calls, seven days a week. The Company uses its extensive database and predictive modeling techniques to the customer's profile, assigning more intense efforts to higher risk customers. Customer Service and Support The Company utilizes its communications and information system infrastructure to supplement or replace the customer service function of its clients. For example, the Company is currently engaged by a large regional utility company to provide customer service functions for a segment of the utility's customer base that is delinquent. For other clients, the Company provides a wide range of specialized services such as fraud-prevention, over-limit calling, inbound calling for customer credit application and approval processes, and general back office support. Customer contact can be provided through inbound or outbound calling, or customized web-enabled functions. Billing The Company complements existing service lines by offering adjunct billing services to clients as an outsourcing option. Additionally, the Company can assist healthcare clients in the billing and management of third party insurance. Market Strategy The Company has 1,000 workstations dedicated to its Market Strategy services. The Company has the capabilities to provide a high volume of outbound calling and can answer thousands of inbound calls daily. The Company offers shared and dedicated inbound service, as well as an integrated inbound/outbound option, its capabilities include patch through calling, recorded message transmission, and more. The Company's Market Strategy services include the following: Market Research. The Company provides full-service custom market research services to the telecommunications, financial services, utilities, healthcare, pharmaceutical and consumer products sectors. Its capabilities include problem conceptualization, program design, data gathering (by telephone, mail, and focus groups), as well as data tabulation, results analysis and consulting. Telemarketing. The Company provides telemarketing services for clients, including lead generation and qualification, and the booking of appointments for a client's sales representatives. Additional Services The Company selectively provides other related services which complement its traditional accounts receivable management business and which leverage its technological infrastructure. The Company believes that the following services will provide additional growth opportunities for the Company: Attorney Network Services. The Company will also coordinate litigation undertaken by a nationwide network of more than 150 law firms whose attorneys specialize in collection litigation. The Company's collection support staff manages the attorney relationships and facilitates the transfer of all necessary documentation. -5- ePayments. The Company can provide a virtual 24-hour payment center that is accessible by the use of telephones, personal computers or the Internet. Credit and Investigative Reporting Service. The Company develops the information needed to profile debtors and make decisions affecting extensions of credit. NCO Benefit Systems. The Company administers complaint COBRA administration services for human resource departments. Strategy In February 2000, the Company announced a five-year strategy for creating long-term shareholder value. The initiatives outlined below are designed to maintain the Company's market dominance as it transitions itself into a global provider of integrated accounts receivable management products. International Expansion Business process outsourcing is gaining widespread acceptance throughout Europe, Asia and the United Kingdom. The Company's international expansion strategy is designed to capitalize on each of these markets in the near term as outlined below, as well as continue to monitor all developing opportunities to determine the timing of entry into new markets. The Company operates in Canada and the United Kingdom through wholly owned subsidiaries under the trade name Financial Collection Agencies ("FCA"). FCA is the largest provider of consumer collection services in Canada and approximately the seventh largest provider of consumer collection services in the United Kingdom. The Company expects to further penetrate these markets through increased sales of strategic outsourcing services, additional bad debt purchases, and deployment of the Company's commercial sales model in order to further develop business-to-business opportunities. Additionally, the Company expects to pursue strategic alliances and partnerships and further explore acquisitions in these markets. The Company formed a strategic alliance with Alec Burlington N.V. in 1999 to provide the Company with an entree into the European market to service its U.S. clients. This alliance enhances the Company's service offerings as well as increases the awareness of NCO as a world-class provider of receivables management services. To date, the Company has signed two customer contracts as a result of this alliance. Strategic Acquisitions The Company's acquisition strategy has been an integral part of its development. Since mid-1999, the Company has been on an acquisition moratorium. This has enabled the Company to integrate and assimilate its most recent acquisitions. Post-moratorium, the Company will focus on strategic acquisitions that create long-term shareholder value by helping the Company to enhance its scope of services, build on its current market leadership position and help it to sustain its competitive advantage for the future. These acquisitions are expected to be funded primarily with stock. Additionally, the Company intends to maintain its policy of not pursuing transactions that are expected to be dilutive to its earnings per share. -6- Strategic Partnerships with Clients A significant amount of the Company's organic growth stems from the expansion of existing clients relationships. These relationships and the resultant opportunities continue to grow in both scale and complexity, however they are still primarily responsive to client requests. Over time, management believes these relationships must transition from the operational delivery of services to the strategic development of long-term, goal-oriented partnerships where NCO is sharing in the improved profitability and operational efficiencies created for its clients. The Company is currently in preliminary discussions with a number of larger clients to develop longer-term strategic relationships that will assist them in managing risk from an accounts receivable perspective. These discussions include e-commerce strategy, risk assessment and control, and customer care. Increased Penetration in the Bad Debt Purchase Marketplace Since 1996, the Company has purchased, collected and managed defaulted consumer receivables. The Company has achieved excellent returns on its purchased portfolios and has determined that it would be beneficial to expand this business segment. The Company believes that the appropriate market expansion strategy for this product is to develop partnerships with banks, commercial lenders and other investors who will provide a funding source for large-scale purchases of defaulted receivables. By utilizing such risk-sharing partnerships, the Company will gain access to capital and share in the upside, while limiting its exposure to credit risk. Currently, the Company's purchase portfolio exposure is limited by its credit agreement to a maximum of $25 million of unamortized purchase price. Technology The Company is in the process of completing a series of systems conversions that will reduce its infrastructure to three collection software applications running on one integrated platform. The Company's integrated information technologies will consist of one network across all Company facilities, one to two data centers, and one information technology department. Over the next three to five years, the Company will continue to migrate its system infrastructure toward the ultimate goal of one core enterprise application. The continuing integration of the Company's application software is critical to the tactical delivery of its services. However, the ongoing integration process towards one system cannot interfere with continued deployment of Universal Collector Interface ("UCI") thin client technology across industry sectors serviced by the Company or with the development and deployment of NCO's e-commerce strategy. UCI technology has already been deployed in the banking/retail and utilities/telecommunications sectors and will shortly be deployed in healthcare. The continued deployment of this "first-to-market" technology, in conjunction with the e-commerce strategy discussed below, should give NCO a sustainable, competitive advantage in technology and act as a barrier to entry by others in the large-scale outsourcing area. e-Commerce Strategy NCO's e-commerce initiatives are broken down into two distinct categories: operational and strategic. -7- From an operational viewpoint, the Internet creates a variety of opportunities for operational efficiencies that should lead to a competitive advantage in pricing and performance. Outlined below are several examples of the types of operational benefits the Company expects to derive from the Internet. o Increased client awareness and marketing opportunities through use of the Company's website o Improved client access through client-specific web pages that will facilitate: - Placement of accounts by clients - Reporting of payments and account activity - Online tracking of collection results - Online statistical modeling o Increased access to account information for consumers including online payment options such as Electronic Bill Presentment and Payment ("EBPP") o Improved data file exchange capabilities o Elimination of direct network connections through the use of Virtual Private Networks ("VPNs") for small NCO offices, NCO representatives working at client locations, and clients accessing NCO systems. o Elimination of large quantities of first class mail and replacement with email While the aforementioned initiatives present limitless opportunities for both immediate and long-term competitive advantages, the true benefit of the Internet to NCO will not be operational, but strategic. Most of the Company's clients will, over time, create web access and e-commerce strategies designed to meet the needs of their average customers. These sites will not be equipped to handle the specialized needs of their at-risk consumers. NCO, either through direct web access or through a link to the client's own website, intends to create client-specific, web-enabled customer care operational sites. These sites will allow delinquent and past due customers to access their account information and to pay using a variety of different options. Additionally, clients will have access to a customer care specialist through interactive chat, email, or a telephonic call back and ultimately through a voice-over-internet connection. All aspects of a client-specific program will be handled in a "mass customization" mode, delivered using shared technology and human resources. This methodology is consistent with how the Company delivers service through its other business units. The ability to provide consumers of any size with web-enabled access for their at-risk (past due/delinquent) consumers may represent the most powerful opportunity for NCO in the 21st century. Profitability Initiatives Over the past six years, NCO has integrated its acquisitions, rationalized redundant staff, shut down over 25 facilities, converted computer systems and taken advantage of opportunities to leverage its economics of scale. Over the past year, the Company has begun exploring reengineering opportunities using technology, best practices and scale to leverage additional cost reductions. An example of one of the most recent successes is the deployment of automated cash application -8- equipment at the Fort Washington facility. This initiative has reduced staff by 25 full-time employees to date. Over the next several years, some of the Company's major initiatives will be in the following categories: o Standardization of all systems and practices. o Future consolidation of facilities. o Further automation of all clerical functions. o Use of statistical analysis to improve performance and reduce direct unit costs. o Reduction of debt. o Continued leveraging of the Company's purchasing power in every buying opportunity. Technology and Infrastructure The Company has made a substantial investment in its management systems such as "thin client" network computing devices, predictive dialers, automated call distribution systems, digital switching and customized computer software, including the Universal Collector Interface product. As a result, the Company believes it is able to address accounts receivable management and outsourcing activities more reliably and more efficiently than many other accounts receivable management companies. The Company's systems also permit network access to enable clients to electronically communicate with NCO and monitor operational activity on a real-time basis. NCO provides its accounts receivable management services through the operation of 93 state-of-the-art call centers that are electronically linked through an international wide area network. The Company has substantially completed with the migration of its international wide area network from an outsourced MCI Worldcom frame relay to an in-house AT&T private network. The change to the in-house AT&T private network will result in an increase in network speed and reliability. The migration is expected to be completed by the end of the second quarter of 2000. The Company currently utilizes three core computer platform systems. One system consists of multiple Unix-based NCR 4300/4400 series servers that are linked to over 2,000 workstations. The second system consists of multiple Unix-based Hewlett-Packard 9000 series servers that are linked to over 3,400 workstations. The third system, which consists of Compaq clustered servers, is linked to over 1,500 workstations. The Company has recently completed the total migration and retirement of the TANDEM system, which was the legacy system used by FCA International Ltd. Each of the system configurations maintain the necessary redundancy (a spare system can take over in the event of the failure of the primary system) and additional capacity for future growth. The Company's 6,900 workstations consist of personal computers, "thin client" network computing devices, and terminals that are linked via our international wide area network to the servers. NCO also utilizes a custom developed Universal Collector Interface ("UCI") product that leverages industry standard Visual Basic and thin client server technology in order to facilitate the critical process of "real-time" translation of account data from our clients' host systems to NCO's system. The UCI product set allows rapid ramp up of new client projects and the ability to work online with client host systems, while completely integrating and leveraging the power of NCO's base receivables management software infrastructure. Additionally, the UCI technology allows sophisticated reporting capabilities that are not always available on clients' host systems. The UCI product translates client account information into a standard presentation format that provides NCO account representatives with a common visual interface that links directly into disparate client host systems. Key benefits of UCI include dramatic reduction in project ramp up time, reduction in training costs, and an overall increase in account representative productivity. -9- The Company utilizes 35 predictive dialer locations with over 1,600 stations to address its low balance, high volume accounts. These systems scan the Company's databases and simultaneously initiate calls on all available telephone lines and determine if a live connection is made. Upon determining that a live connection has been made, the computer immediately switches the call to an available representative and instantaneously displays the associated account record on the representative's workstation. Calls that reach other signals, such as a busy signal, telephone company intercept or no answer, are tagged for statistical analysis and placed in priority recall queues or multiple-pass calling cycles. The system also automates virtually all record keeping and follow-up activities including letter and report generation. The Company's automated method of operations dramatically improves the productivity of the Company's collection staff. The Company employs a 200 person MIS staff led by a Chief Information Officer. The Company maintains disaster recovery contingency plans and has implemented procedures to protect against the loss of data resulting from power outages, fire and other casualties. The Company has implemented a security system to protect the integrity and confidentiality of its computer systems and data and maintains comprehensive business interruption and critical systems insurance on its telecommunications and computer systems. Sales and Marketing The Company's sales organization will be combined at the corporate level to address clients by need based upon their respective complexity, geography and industry. The shared sales resources will continue to support and facilitate interrelationships among the divisions and allow for continued leverage of operating efficiencies as well as provide cross-selling opportunities. The Company utilizes a focused and highly professional direct selling effort in which sales representatives personally cultivate relationships with prospects and existing clients. The Company's sales effort consists of a 60 person direct sales force and 300 telephone sales representatives for the commercial sector. Each sales representative is charged with identifying leads, qualifying prospects and closing sales. When appropriate, Company operating personnel will join in the sales effort to provide detailed information and advice regarding the Company's operational capabilities. Sales and operating personnel also work together to take advantage of potential cross-selling opportunities. The Company supplements its direct sales effort with print media and attendance at trade shows. The Company is currently developing a plan to apply the highly successful telemarketing sales model of the commercial sector to other sectors of its business. This telephone sales based model will provide a cost-effective way to market the Company's services to smaller, but valuable clients. Many of the Company's prospective clients issue requests-for-proposals ("RFPs") as part of the contract award process. The Company has a staff of technical writers for the purpose of preparing detailed, professional responses to RFPs. Quality Assurance and Client Service The Company's reputation for quality service is critical to acquiring and retaining clients. Therefore, the Company and its clients monitor the Company's representatives for strict compliance with the clients' specifications and the Company's policies. The Company regularly measures the quality of its services by capturing and reviewing such information as the amount of time spent talking with clients' customers, level of customer complaints and operating performance. In order to provide ongoing improvement to the Company's telephone representatives' performance and to assure compliance with the Company's policies and standards, quality assurance personnel monitor each telephone representative on a frequent basis and provide ongoing training to the representative based on this review. The Company's information systems enable it to provide clients with reports on a real-time basis as to the status of their accounts and clients can choose to network with the Company's computer system to access such information directly. -10- The Company maintains a client service department to promptly address client issues and questions and alert senior executives of potential problems that require their attention. In addition to addressing specific issues, a team of client service representatives will contact clients on a regular basis in order to establish a close rapport, determine the client's overall level of satisfaction and identify practical methods of improving their satisfaction. Client Relationships The Company's client base currently includes over 13,500 companies in the financial services, healthcare, education, retail, utilities, government and telecommunications sectors, and over 55,000 companies in the commercial sector. The Company's 10 largest clients in 1999 accounted for approximately 21.7% of the Company's revenue (19.3% on a pro forma basis, assuming all of the acquisitions completed during 1999 occurred on January 1, 1999). In 1999, no client accounted for more than 4.6% of total revenue (3.9% on a pro forma basis, assuming all of the acquisitions completed during 1999 occurred on January 1, 1999). In 1999, the Company derived 32.9% of its revenue from healthcare organizations, 25.8% from financial institutions (which includes banking and insurance sectors), 21.7% from retail and commercial entities, 6.2% from educational organizations, 5.7% from telecommunications companies, 5.5% from utilities, and 2.2% from government entities. The following table sets forth a list of certain of the Company's key clients:
Financial Services Healthcare Retail and Commercial - ------------------------------------- ------------------------------------- ----------------------------------- Capital One Financial Corporation Columbia/HCA Healthcare Corporation Airborne Freight Corporation Citicorp Business Services Dayton Hudson Corporation First Union National Bank, N.A. EMCARE, Inc. Emery Worldwide Banc of America Health Management Associates, Inc. Federal Express Corporation The Progressive Corporation Sears, Roebuck and Co. Education Telecommunications Utilities and Government - ------------------------------------- ------------------------------------- ----------------------------------- California Student Aid Bell Atlantic Corporation Consumer Energy Commission / ED Fund BellSouth Telecommunications, Inc. PECO Energy Company New York State Higher Education Frontier Cellular The City of Philadelphia, Water Service Corporation MCI WorldCom Revenue Bureau Pennsylvania Higher Education Sprint Corporation The United States Department of Assistance Agency Treasury Penn State University Virginia Power The United States Department of Education
The Company enters into contracts with most of its clients which define, among other things, fee arrangements, scope of services and termination provisions. Clients may usually terminate such contracts on 30 or 60 days notice. In the event of termination, however, clients typically do not withdraw accounts referred to the Company prior to the date of termination, thus providing the Company with an ongoing stream of revenue from such accounts which diminish over time. Under the terms of the Company's contracts, clients are not required to place accounts with the Company but do so on a discretionary basis. -11- Personnel and Training The Company's success in recruiting, hiring and training a large number of employees is critical to its ability to provide high quality accounts receivable management, customer support and teleservices programs to its clients. The Company seeks to hire personnel with previous experience in accounts receivable management or as a telephone representative. NCO generally offers competitive compensation and benefits and offers promotion opportunities within the Company. All Company personnel receive a comprehensive training course that consists of a combination of classroom and practical experience. Prior to customer contact, new employees receive one week of training in the Company's operating systems, procedures and telephone techniques and instruction in applicable federal and state regulatory requirements. Company personnel also receive a wide variety of continuing professional education consisting of both classroom and role playing sessions. As of December 31, 1999, the Company had a total of approximately 8,800 full-time employees and 1,200 part-time employees, of which 6,900 were telephone representatives. None of the Company's employees are represented by a labor union. The Company believes that its relations with its employees are good. Competition The accounts receivable management industry is highly competitive. The Company competes with approximately 6,500 providers, including large national corporations such as Outsourcing Solutions, Inc., GC Services, Inc., IntelliRisk Mangement Corporation, and CreditTrust, as well as many regional and local firms. Some of the Company's competitors may have greater resources, offer more diversified services and operate in broader geographic areas than the Company. In addition, the accounts receivable management services offered by the Company, are performed in-house by many companies. Moreover, many larger clients retain multiple accounts receivable management providers which exposes the Company to continuous competition in order to remain a preferred vendor. The Company believes that the primary competitive factors in obtaining and retaining clients are the ability to provide customized solutions to a client's requirements, personalized service, sophisticated call and information systems and price. Regulation The accounts receivable management industry is regulated both at the federal and state level. The federal Fair Debt Collection Practices Act (the "FDCPA") regulates any person who regularly collects or attempts to collect, directly or indirectly, consumer debts owed or asserted to be owed to another person. The FDCPA establishes specific guidelines and procedures which debt collectors must follow in communicating with consumer debtors, including the time, place and manner of such communications. Further, it prohibits harassment or abuse by debt collectors, including the threat of violence or criminal prosecution, obscene language or repeated telephone calls made with the intent to abuse or harass. The FDCPA also places restrictions on communications with individuals other than consumer debtors in connection with the collection of any consumer debt and sets forth specific procedures to be followed when communicating with such third parties for purposes of obtaining location information about the consumer. Additionally, the FDCPA contains various notice and disclosure requirements and prohibits unfair or misleading representations by debt collectors. The Company is also subject to the Fair Credit Reporting Act which regulates the consumer credit reporting industry and which may impose liability on the Company to the extent that the adverse credit information reported on a consumer to a credit bureau is false or inaccurate. The accounts receivable management business is also subject to state regulation. Some states require that the Company be licensed as a debt collection company. Management believes that the Company currently holds applicable licenses from all states where required. -12- With respect to the other teleservices offered by the Company, including telemarketing, the federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 (the "TCFAPA") broadly authorizes the Federal Trade Commission (the "FTC") to issue regulations prohibiting misrepresentations in telemarketing sales. The FTC's telemarketing sales rules prohibit misrepresentations of the cost, terms, restrictions, performance or duration of products or services offered by telephone solicitation and specifically address other perceived telemarketing abuses in the offering of prizes and the sale of business opportunities or investments. The federal Telephone Consumer Protection Act of 1991 (the "TCPA") limits the hours during which telemarketers may call consumers and prohibits the use of automated telephone dialing equipment to call certain telephone numbers. A number of states also regulate telemarketing. For example, some states have enacted restrictions similar to the federal TCPA. From time to time, Congress and the states consider legislation that would further regulate the Company's telemarketing operations and the Company cannot predict whether additional legislation will be enacted and, if enacted, what effect it would have on the telemarketing industry and the Company's business. The collection of accounts receivable by collection agencies in Canada is regulated at the provincial and territorial level in substantially the same fashion as is accomplished by federal and state laws in the United States. The manner in which the Company carries on the business of collecting accounts is subject, in all provinces and territories, to established rules of common law or civil law and statute. Such laws establish rules and procedures governing the tracing, contacting and dealing with debtors in relation to the collection of outstanding accounts. These rules and procedures prohibit debt collectors from engaging in intimidating, misleading and fraudulent behavior when attempting to recover outstanding debts. In Canada, the Company's collection operations are subject to licensing requirements and periodic audits by government agencies and other regulatory bodies. Generally, such licenses are subject to annual renewal. Management believes that the Company holds all necessary licenses in those provinces and territories that require them. If the Company engages in other teleservice activities in Canada, including telemarketing, there are several provincial and territorial consumer protection laws of more general application. This legislation defines and prohibits unfair practices by telemarketers, such as the use of undue pressure and the use of false, misleading or deceptive consumer representations. In addition, accounts receivable management and telemarketing industries are regulated in the United Kingdom, including a licensing requirement. If the Company expands its international operation, it may become subject to additional government control and regulation in other countries, which may be more onerous than those in the United States. Several of the industries served by the Company are also subject to varying degrees of government regulation. Although compliance with these regulations is generally the responsibility of the Company's clients, the Company could be subject to a variety of enforcement or private actions for its failure or the failure of its clients to comply with such regulations. -13- The Company devotes significant and continuous efforts, through training of personnel and monitoring of compliance, to ensure that it is in compliance with all federal and state regulatory requirements. The Company believes that it is in material compliance with all such regulatory requirements. Investment Considerations Certain statements included in this Annual Report on Form 10-K, other than historical facts, are forward-looking statements (as such term is defined in the Securities Exchange Act of 1934, and the regulations thereunder) which are intended to be covered by the safe harbors created thereby. Forward-looking statements include, without limitation, statements as to the Company's five-year growth strategy, statements as to the Company's objective to focus on internal growth, strategic acquisitions and alliances, and integration, the impact of acquisitions on the Company's earnings, the Company's ability to realize operating efficiencies in the integration of its acquisitions, trends in the Company's future operating performance, expected increases in operating efficiencies, anticipated trends in the accounts receivable management industry, year 2000 compliance, the effects of legal or governmental proceedings, the effects of changes in accounting pronouncements and statements as to the Company's or management's beliefs, expectations and opinions. Forward-looking statements are subject to risks and uncertainties and may be affected by various factors which may cause actual results to differ materially from those in the forward-looking statements. The factors discussed below, and elsewhere in this Annual Report on Form 10-K, could cause actual results and developments to be materially different from those expressed in or implied by such forward-looking statements. Accordingly, in addition to the other information contained, or incorporated by reference, in this Annual Report on Form 10-K, the following factors should be considered carefully in evaluating an investment in the Company's common stock. The businesses acquired by NCO in 1999 had combined pro forma revenues of $217.8 million in 1998 which was 121.7% of NCO's revenue of $179.0 million in 1998, prior to the restatement to reflect the JDR acquisition. If NCO is unable to successfully manage these new businesses, NCO may not realize the expected benefits from these acquisitions. The businesses acquired by NCO in 1999 had combined pro forma revenues of $217.8 million in 1998 compared to NCO's revenue of $179.0 million in 1998, prior to the restatement to reflect the JDR acquisition. If NCO is unable to successfully manage these new businesses and integrate them into NCO's operations, NCO may not be able to realize expected operating efficiencies, eliminate redundant costs or operate the businesses profitably. The integration of these businesses is subject to a number of risks, including risks that: o the conversion of the acquired companies' computer and operating systems to NCO's systems may take longer or cost more than expected; o NCO may be unable to retain clients or key employees of the acquired companies; and o the acquired companies might have additional liabilities that NCO did not anticipate at the time of the acquisitions. -14- Historically, NCO's growth strategy has included acquisitions. NCO recently announced that it would not make any acquisitions during the first half of 2000 to allow it to complete the integration of companies which have been acquired. After that period, NCO intends to consider acquisitions on an opportunistic basis. As a result of this change in growth strategy, NCO's future growth may be limited and the price of its stock may be adversely affected. Historically, NCO's growth strategy has included acquisitions. NCO recently announced that it would not make any acquisitions during the first half of 2000 to allow it to complete the integration of companies which have been acquired. Because of this change in its acquisition strategy, if NCO is unable to maintain its internal growth, it may not be able to meet or exceed historical levels of growth and earnings. As a result, NCO's stock price may be adversely affected. NCO's significant internal growth may be difficult to manage or to continue. If NCO is not able to manage or continue that growth, it could have a materially adverse effect on NCO's business, results of operations and financial condition. NCO has experienced significant internal growth over the past several years and intends to continue its internal growth. Future internal growth is subject to a number of risks, including the risks that: o NCO may not be able to develop and maintain new clients; o by focusing on new clients, NCO may lose existing clients through inattention or because NCO fails to maintain the quality of services it provides to its clients; and o NCO may have difficulty hiring, training and retaining new employees to handle the increased workload. NCO's internal growth has placed significant demands on NCO's administrative, operational and financial resources. To continue its future growth, NCO will also be required to improve its operational and financial systems and obtain additional management, operational and financial resources. These additional costs may outweigh the benefits NCO expects to obtain from internal growth. Goodwill represented 75.5% of NCO's total assets at December 31, 1999. If management has incorrectly overstated the permissible length of the amortization period for goodwill, earnings reported in periods immediately following the acquisition would be overstated. In later years, NCO would be burdened by a continuing charge against earnings. NCO's balance sheet includes amounts designated as "goodwill." Goodwill represents the excess of purchase price over the fair market value of the net assets of the acquired businesses based on their respective fair values at the date of acquisition. GAAP requires that this and all other intangible assets be amortized over the period benefited. Management has determined that period to range from 15 to 40 years based on the attributes of each acquisition. As of December 31, 1999, NCO's balance sheet included goodwill that represented 75.5% of total assets and 165.1% of shareholders' equity. If management has incorrectly overstated the permissible length of the amortization period for goodwill, earnings reported in periods immediately following the acquisition would be overstated. In later years, NCO would be burdened by a continuing charge against earnings without the associated benefit to income valued by management in arriving at the consideration paid for the business. Earnings in later years also could be significantly affected if management determined then that the remaining balance of goodwill was impaired. -15- Management has concluded that the anticipated future cash flows associated with intangible assets recognized in the acquisitions will continue indefinitely, and there is no persuasive evidence that any material portion will dissipate over a period shorter than the respective amortization period. The number of shares of NCO's common stock that was traded daily on the Nasdaq stock market during 1999 averaged less than 1.5% of the average outstanding common stock during 1999. As a result, he market price of NCO common stock may be volatile. As a result of NCO's low trading volume, the market price for NCO common stock may be volatile and may be affected by many factors, including the following: o announcements of fluctuations in NCO's or its competitors' operating results; o the timing and announcement of acquisitions by NCO or its competitors; and o government regulatory action. In addition, the stock market in recent years has experienced significant price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of companies. These broad fluctuations may materially adversely affect the market price of NCO common stock. As of March 22, 2000, approximately 86.7% of NCO's outstanding shares are available for resale in the public market without restriction. The sale of a large number of these shares could adversely affect NCO's stock price and could impair NCO's ability to raise capital through the sale of equity securities or make acquisitions for stock. Sales of NCO's common stock could adversely affect the market price of NCO's common stock and could impair NCO's future ability to raise capital through the sale of equity securities or make acquisitions for stock. As of March 22, 2000, there were 25,547,398 shares of NCO common stock outstanding. Of these shares, approximately 22,145,154 shares, or 86.7% of the total outstanding shares, are available for resale in the public market without restriction. Approximately 3,402,244 shares of NCO common stock, or 13.3% of the total outstanding shares, are held by affiliates of NCO. Generally, NCO affiliates may either sell their shares under a registration statement or in compliance with the volume limitations and other requirements imposed by Rule 144 adopted by the SEC. In addition, as of March 22, 2000, NCO has the authority to issue up to approximately 3,997,000 shares of its common stock under its stock option plans. NCO also has outstanding warrants to purchase 397,000 shares of its common stock. -16- NCO may experience variations from quarter to quarter in operating results and net income which could adversely affect the price of NCO common stock. Factors which could cause quarterly fluctuations include the following: o the timing of NCO's clients' accounts receivable management programs and the commencement of new contracts; o customer contracts may require NCO to incur costs in periods prior to recognizing revenue under those contracts; o the effect of the change of business mix on profit margins; o the timing of additional selling, general and administrative expenses to support new business; o the costs and timing of completion and integration of acquisitions. o NCO's business tends to be slower in the third and fourth quarters of the year due to the summer and holiday seasons. NCO's business is dependent on clients in the healthcare and financial services sectors. If either of these sectors performs poorly or if there are any trends in these sectors to reduce or eliminate the use of third-party accounts receivable management services provided by companies like NCO, it could have a materially adverse effect on NCO's business, financial condition and results of operations. For the year ended December 31, 1999, NCO derived approximately 32.9% of its revenue from clients in the healthcare sector and approximately 25.8% of its revenue from clients in the financial services sector. If either of these sectors performs poorly, clients in these sectors may have fewer or smaller accounts to refer to NCO or they may elect to perform accounts receivable management services in-house. If there are any trends in either of these sectors to reduce or eliminate the use of third-party accounts receivable management services, the volume of referrals to NCO would decrease. Most of NCO's contracts do not require clients to place accounts with NCO, may be terminated on 30 or 60 days notice and are on a contingent fee basis. Accordingly, NCO can not predict whether existing clients will continue to use NCO's services at historical levels, if at all. Under the terms of most of NCO's contracts, clients are not required to give accounts to NCO for collection and usually have the right to terminate NCO's services on 30 or 60 days notice. In addition, most of these contracts provide that NCO is entitled to be paid only when it collects accounts. Accordingly, NCO can not predict whether existing clients will continue to use NCO's services at historical levels, if at all. -17- NCO competes with approximately 6,500 providers in the accounts receivable management industry. This competition could have a materially adverse effect on NCO's future financial results. NCO competes with approximately 6,500 providers in providing accounts receivable management services. NCO is a national provider of accounts receivable management services. NCO competes with other large national corporations such as Outsourcing Solutions, Inc., GC Services, Inc., IntelliRisk Management Corporation and CrediTrust, as well as many regional and local firms. NCO may lose existing or prospective business to competitors that have greater resources, offer more diversified services or operate in broader geographic areas than NCO. NCO may also lose business to regional or local firms who are able to use their proximity to or contacts at local clients as a marketing advantage. Because of the large numbers of providers, in the future NCO may have to reduce its collection fees to remain competitive. Many larger clients retain multiple accounts receivable management providers which exposes NCO to continuous competition in order to remain a preferred vendor. If NCO is not able to respond to technological changes in telecommunications and computer systems in a timely manner, it may not be able to remain competitive. NCO's success depends in large part on its sophisticated telecommunications and computer systems. NCO uses these systems to identify and contact large numbers of account debtors and to record the results of the collection effort. If NCO is not able to respond to technological changes in telecommunications and computer systems in a timely manner, it may not be able to remain competitive. NCO has made a significant investment in technology to remain competitive and anticipates that it will be necessary to continue to do so in the future. Computer and telecommunication technologies are changing rapidly and are characterized by short product life cycles, so that NCO must anticipate technological developments. If NCO is not successful in anticipating, managing or adopting any technological changes on a timely basis or if NCO does not have the capital resources available to invest in new technologies, its business would be materially adversely affected. If NCO's telecommunications and computer systems fail or become unavailable, it could have a materially adverse effect on NCO's business. As noted above, NCO's business is highly dependent on its telecommunications and computer systems. These systems could be interrupted by natural disasters, power losses, or similar events. NCO's business also is materially dependent on service provided by various local and long distance telephone companies. If NCO's equipment or systems cease to work or become unavailable, or if there is any significant interruption in telephone services, NCO may be prevented from providing services. Because NCO generally recognizes income only as accounts are collected, any failure or interruption of services would mean that NCO would continue to incur payroll and other expenses without any corresponding income. -18- NCO's success depends on its senior management team and if it is not able to retain them, it could have a materially adverse effect on NCO. NCO is highly dependent upon the continued services and experience of its senior management team, including Michael J. Barrist, Chairman of the Board, President and Chief Executive Officer. NCO depends on the services of Mr. Barrist and the other members of NCO's senior management team to, among other things: o successfully integrate the operations of NCO with acquired companies; o continue NCO's acquisition and growth strategies; and o maintain and develop NCO's client relationships. NCO is dependent on its employees and a higher turnover rate would materially adversely affect NCO. The accounts receivable management industry is very dependent upon employees and experiences high turnover rate. Many of NCO's employees receive modest hourly wages and a portion of these employees are employed on a part-time basis. A higher turnover rate among NCO's employees would increase NCO's recruiting and training costs and could materially adversely impact the quality of services NCO provides to its clients. If NCO were unable to recruit and retain a sufficient number of employees, it would be forced to limit its growth or possibly curtail its operations. Growth in NCO's business will require it to recruit and train qualified personnel at an accelerated rate from time to time. NCO cannot assure you that it will be able to continue to hire, train and retain a sufficient number of qualified employees. Additionally, an increase in hourly wages, costs of employee benefits or employment taxes also could materially adversely affect NCO. "Anti-takeover" provisions may make it more difficult for a third party to acquire control of NCO, even if the change in control would be beneficial to shareholders. NCO is a Pennsylvania corporation. Anti-takeover provisions in Pennsylvania law and NCO's charter and bylaws could make it more difficult for a third party to acquire control of NCO. These provisions could adversely affect the market price of NCO common stock and could reduce the amount that shareholders might receive if NCO is sold. For example, NCO's charter provides that NCO's board of directors may issue preferred stock without shareholder approval. In addition, NCO's bylaws provide for a classified board, with each board member serving a staggered three-year term. Directors may be removed only for cause and only with the approval of the holders of at least 65% of NCO's common stock. If NCO fails to comply with government regulation of accounts receivable management and telemarketing industries, it could result in the suspension or termination of NCO's ability to conduct business which would have a materially adverse effect on NCO. -19- The accounts receivable management and telemarketing industries are regulated under various United States federal and state, Canadian and United Kingdom laws and regulations. Many states, as well as Canada and the United Kingdom, require that NCO be licensed as a debt collection company. If NCO fails to comply with applicable laws and regulations, it could result in the suspension or termination of NCO's ability to conduct accounts receivable management or telemarketing services which would have a materially adverse effect on NCO. In addition, new federal, state or foreign laws or regulations, or changes in the ways these rules or laws are interpreted or enforced, could limit the activities of NCO in the future or significantly increase the cost of regulatory compliance. If NCO expands its international operations, it may become subject to additional government controls and regulations in other countries, which may be stricter or more burdensome than those in the United States. Several of the industries served by NCO are also subject to varying degrees of government regulation. Although NCO's clients are generally responsible for complying with these regulations, NCO could be subject to a variety of enforcement or private actions for its failure or the failure of its clients to comply with these regulations. Item 2. Properties. ---------- The Company offices currently leases 93 offices throughout North America, three offices in the United Kingdom and one office in Puerto Rico. The leases of these facilities expire between 2000 and 2013, and most contain renewal options. The Company believes that its facilities are adequate for its current operations, but additional facilities may be required to support growth. The Company believes that suitable additional or alternative space will be available as needed on commercially reasonable terms. In addition, the Company intends to close or consolidate certain offices acquired in the MedSource Corporation, Medaphis Services Corporation, Co-Source Corporation and Compass International Services Corporation acquisitions. Item 3. Legal Proceedings. ----------------- The Company is involved in legal proceedings from time to time in the ordinary course of its business. Management believes that none of these legal proceedings will have a materially adverse effect on the financial condition or results of operations of the Company. Item 4. Submission of Matters to a Vote of Security Holders. ---------------------------------------------------- None. -20- Item 4.1 Executive Officers of the Registrant who are not Directors. -----------------------------------------------------------
Name Age Position - -------------------------------------------------- -------- ------------------------------------------------ Robert Di Sante........................ 48 Executive Vice President and Divisional Chief Executive Officer, International Operations Stephen W. Elliott..................... 38 Executive Vice President, Information Technology and Chief Information Officer Joshua Gindin, Esq..................... 43 Executive Vice President and General Counsel Joseph C. McGowan...................... 47 Executive Vice President and Divisional Chief Executive Officer, Accounts Receivable Management Services Louis A. Molettiere.................... 56 Executive Vice President and Chief Operating Officer Richard Raquet......................... 38 Executive Vice President and Divisional Chief Executive Officer, Marketing Strategy Paul E. Weitzel, Jr.................... 41 Executive Vice President, Corporate Development Steven L. Winokur...................... 40 Executive Vice President, Finance; Chief Financial Officer; and Treasurer
Robert Di Sante, Executive Vice President and Divisional Chief Executive Officer, International Operations, joined the Company through the acquisition of FCA International Ltd. in May 1998. Prior to joining the Company, Mr. Di Sante was Executive Vice President, Finance and Corporate Services of FCA International Ltd. Mr. Di Sante is a chartered accountant. Stephen W. Elliott, Executive Vice President, Information Technology and Chief Information Officer, joined the Company in 1996 after having provided consulting services to the Company for the year prior to his arrival. Prior to joining the Company, Mr. Elliott was employed by Electronic Data Systems, a computer services company for almost 10 years, most recently as Senior Account Manager. Joshua Gindin, Esq., Executive Vice President and General Counsel, joined the Company in May 1998. Prior to joining the Company, Mr. Gindin was a partner in the law firm of Kessler & Gindin which served as legal counsel to the Company since 1986. -21- Joseph C. McGowan, Executive Vice President and Divisional Chief Executive Officer, Accounts Receivable Management Services, joined the Company in 1990. Prior to joining the Company, Mr. McGowan was Assistant Manager of the Collections Department at Philadelphia Gas Works, a public utility, since 1975. Louis A. Molettiere, Executive Vice President and Chief Operating Officer, joined the Company through the acquisition of the Co-Source Corporation in May 1999. Prior to joining the Company, Mr. Molettiere was Vice President of Marketing of Milliken & Michaels, a subsidiary of Co-Source Corporation, since 1993. Prior to joining Milliken & Michaels, Mr. Molettiere was with AT&T for twenty-two years, most recently as General Marketing Manager - National and Major Markets. Richard Raquet, Executive Vice President and Divisional Chief Executive Officer, Market Strategy, joined the Company through the acquisition of The Response Center in February 1998. Prior to joining the Company, Mr. Raquet was Chief Operating Officer of The Response Center. Paul E. Weitzel, Jr., Executive Vice President, Corporate Development, joined the Company through the acquisition of MedSource, Inc. in July 1998. Prior to joining the Company, Mr. Weitzel was Chairman and Chief Executive Officer of MedSource, Inc. since 1997. Prior to joining MedSource, Inc., Mr. Weitzel was with MedQuist, Inc. for four years, most recently as President and Chief Executive Officer. Mr. Weitzel is a certified public accountant. Steven L. Winokur, Executive Vice President, Finance; Chief Financial Officer; and Treasurer, joined the Company in December 1995. Prior to that, Mr. Winokur acted as a part-time consultant to the Company since 1986. From February 1992 to December 1995, Mr. Winokur was the principal of Winokur & Associates, a certified public accounting firm. From March 1981 to February 1992, Mr. Winokur was with Gross & Company, a certified public accounting firm, where he most recently served as Administrative Partner. Mr. Winokur is a certified public accountant. -22- PART II Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters. The Company's common stock is listed on the Nasdaq National Market under the symbol "NCOG." The following table sets forth, for the fiscal quarters indicated, the high and low closing sale prices for the common stock, as reported by Nasdaq. High Low ---- --- 1998 First Quarter $ 29.25 $ 21.87 Second Quarter 28.00 20.50 Third Quarter 28.50 17.63 Fourth Quarter 45.00 23.50 1999 First Quarter $ 43.75 $ 28.81 Second Quarter 38.00 25.75 Third Quarter 49.88 36.38 Fourth Quarter 52.75 25.88 As of March 22, 2000, the Company's common stock was held by approximately 85 holders of record. Based on information obtained from the Company's transfer agent, the Company believes that the number of beneficial owners of its common stock is in excess of 5,245. Dividend Policy The Company does not anticipate paying cash dividends on its common stock in the foreseeable future. In addition, the Company's revolving credit agreement prohibits the Company from paying cash dividends without the lender's prior consent. The Company currently intends to retain future earnings to finance its operations and fund the growth of its business. Any payment of future dividends will be at the discretion of the Board of Directors of the Company and will depend upon, among other things, the Company's earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends and other factors that the Company's Board of Directors deems relevant. Sales of Unregistered Securities during 1999 Set forth below is information concerning certain issuances of common stock during 1999 which were not registered under the Securities Act and which have not been previously reported. From January to December 1999, the Company granted options to certain executive officers and key employees under the 1996 Stock Option Plan on the dates and at the exercise prices set forth below. Generally, options will become exercisable in equal one-third installments beginning on the first anniversary of the date of grant. All of the options were issued in connection with such employee's employment with the Company and no cash or other consideration was received by the -23- Company in exchange for the grant of such options. The grants of the options were not registered under the Securities Act because there was no "sale" of the options; however, the stock issued upon the exercise of the options has been registered on Form S-8. Date Issued Options Granted Exercise Price ----------- --------------- -------------- March 1999 68,000 $37.00 April 1999 10,000 $33.13 May 1999 101,000 $32.13 June 1999 12,000 $31.90 August 1999 13,000 $43.81 December 1999 1,074,000 $29.94 In May 1999, the Company issued options in accordance with the 1996 Non-Employee Director Stock Option Plan to purchase 3,000 shares of common stock to each of Eric S. Siegel and Alan F. Wise and 15,000 shares of common stock to Stuart Wolf. These options were granted at an exercise price of $33.00 per share. The grants of the options were not registered under the Securities Act because there was no "sale" of the options; however, the stock issued upon the exercise of the options has been registered on Form S-8. -24- Item 6. Selected Financial Data. ------------------------ SELECTED FINANCIAL DATA (Amounts in thousands, except per share data)
For the years ended December 31, --------------------------------------------------------------------------- 1995 1996 1997 1998 1999 ----------- ------------ ------------ ------------ ------------ C> Statement of Income Data: Revenue $ 12,733 $ 30,760 $ 108,073 $ 229,952 $ 492,354 Operating costs and expenses: Payroll and related expenses 6,797 14,651 56,949 119,314 257,877 Selling, general and administrative expenses 4,042 10,032 36,372 66,588 135,508 Depreciation and amortization expense 348 1,254 4,564 9,851 23,311 Non-recurring acquisition costs - - - - 4,601 ----------- ------------ ------------ ------------ ------------ Income from operations 1,546 4,823 10,188 34,199 71,057 Other income (expense) (180) (576) (797) (2,723) (17,997) ----------- ------------ ------------ ------------ ------------ Income before provision for income taxes 1,366 4,247 9,391 31,476 53,060 Income tax expense (1) - 613 4,800 13,131 23,694 ----------- ------------ ------------ ------------ ------------ Net income 1,366 3,634 4,591 18,345 29,366 Accretion of preferred stock to redemption value - - (1,617) (1,604) (377) ----------- ------------ ------------ ------------ ------------ Net income applicable to common shareholders $ 1,366 $ 3,634 $ 2,974 $ 16,741 $ 28,989 =========== ============ ============ ============ ============ Pro forma income tax expense (1) 546 1,093 ----------- ------------ Pro forma net income (1) $ 820 $ 2,541 =========== ============ Net income per share: Basic $ 0.19 $ 0.48 $ 0.22 $ 0.91 $ 1.27 =========== ============ ============ ============ ============ Diluted $ 0.19 $ 0.48 $ 0.20 $ 0.85 $ 1.22 =========== ============ ============ ============ ============ Pro forma net income per share: Basic (1) $ 0.12 $ 0.34 =========== ============ Diluted (1) $ 0.12 $ 0.34 =========== ============ Weighted average shares outstanding: Basic 7,093 (2) 7,630 (2) 13,736 18,324 22,873 =========== ============ ============ ============ ============ Diluted 7,093 (2) 7,658 (2) 14,808 19,758 23,799 =========== ============ ============ ============ ============ December 31, --------------------------------------------------------------------------- 1995 1996 1997 1998 1999 ----------- ------------ ------------ ------------ ------------ Balance Sheet Data: Cash and cash equivalents $ 805 $ 12,059 $ 30,379 $ 23,560 $ 52,380 Working capital 812 13,629 38,223 35,515 77,625 Total assets 6,644 35,826 131,492 414,809 797,940 Long-term debt, net of current portion 2,593 1,478 15,211 143,910 323,949 Shareholders' equity 2,051 30,648 94,336 199,465 364,888
(1) The Company was taxed as an S corporation prior to September 3, 1996. Accordingly, income tax expense and net income have been provided on a pro forma basis as if the Company had been subject to income taxes in all periods presented. (2) Assumes that the Company issued 374,637 shares of common stock at $8.67 per share to fund the distribution of undistributed S corporation earnings of $3.2 million through September 3, 1996, the termination date of the Company's S corporation status, to existing shareholders of the Company. -25- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations The following table sets forth historical income statement data as a percentage of revenue:
Years Ended December 31, -------------------------------------------------------- 1995 1996 1997 1998 1999 ------- -------- --------- --------- --------- Revenue 100.0% 100.0% 100.0% 100.0% 100.0% Operating costs and expenses: Payroll and related expenses 53.4 47.6 52.7 51.9 52.4 Selling, general and administrative expenses 31.7 32.6 33.7 28.9 27.5 Depreciation and amortization expense 2.7 4.1 4.2 4.3 4.7 Non-recurring acquisition costs - - - - 0.9 ------- -------- --------- --------- --------- Total operating costs and expenses 87.8 84.3 90.6 85.1 85.5 ------- -------- --------- --------- --------- Income from operations 12.2 15.7 9.4 14.9 14.5 Other income (expense) (1.4) (1.9) (0.7) (1.2) (3.7) ------- -------- --------- --------- --------- Income before provision for income taxes 10.8 13.8 8.7 13.7 10.8 Income tax expense(1) 4.3 5.5 4.4 5.7 4.8 ------- -------- --------- --------- --------- Net income 6.5% 8.3% 4.3% 8.0% 6.0% ======= ======== ========= ========= =========
(1) The Company was taxed as an S Corporation prior to September 3, 1996. Accordingly, income tax expense and net income have been provided on a pro forma basis as if the Company had been subject to income taxes in all periods presented. Year ended December 31, 1999 Compared to Year ended December 31, 1998 Revenue. Revenue increased $262.4 million, or 114.1%, to $492.4 million in 1999, from $230.0 million in 1998. $50.7 million of the increase was attributable the addition of new clients and growth in business from existing clients. The $50.7 million increase includes $11.9 million attributable to JDR Holdings, Inc. ("JDR"), which was acquired on March 31, 1999 and was accounted for under the pooling-of-interests method of accounting. The remainder of the increase was attributable to the following: $33.6 million from the acquisition of Compass International Services Corporation ("Compass") on August 20, 1999; $44.2 million from the acquisition of Co-Source Corporation ("Co-Source") on May 21, 1999; $101.4 million from the acquisition of Medaphis Services Corporation ("MSC") on November 30, 1998; $12.3 million from the acquisition of MedSource, Inc. ("MedSource") on July 1, 1998; and $20.2 million from the acquisition of FCA International Ltd. ("FCA") on May 5, 1998. Payroll and related expenses. Payroll and related expenses increased $138.6 million to $257.9 million in 1999, from $119.3 million in 1998, and increased as a percentage of revenue to 52.4% from 51.9%. Payroll and related expenses increased as a percentage of revenue primarily as a result of some of the recent acquisitions having a higher cost structure than the remainder of the Company. In addition, a portion of this increase was attributable to increases in the size of the Market Strategy and the Commercial Services divisions, which have higher payroll cost structures than the remainder of the Company. However, the higher payroll structures of the Commercial Services and Market Strategy divisions were offset by their lower selling, general and administrative cost structures. Payroll and related expenses as a percentage of revenue are expected to decrease by continuing to integrate the recent acquisitions and by spreading the Company's payroll costs over a larger revenue base. -26- Selling, general and administrative expenses. Selling, general and administrative expenses increased $68.9 million to $135.5 million in 1999 from $66.6 million in 1998. Selling, general and administrative expenses decreased as a percentage of revenue to 27.5% from 28.9%. This decrease resulted from the Company realizing operating efficiencies and by spreading selling, general and administrative expenses over a larger revenue base. In addition, a portion of this decrease can be attributed to increases in the size of the Market Strategy and the Commercial Services divisions, which have lower selling, general and administrative cost structures than the remainder of the Company. Depreciation and amortization. Depreciation and amortization increased to $23.3 million in 1999 from $9.9 million in 1998. Of this increase, $1.7 million was attributable to the Compass acquisition, $2.2 million was attributable to the Co-Source acquisition, $4.0 million was attributable to the MSC acquisition, $940,000 was attributable to the MedSource acquisition, and $1.8 million was attributable to the FCA acquisition. The remaining $2.8 million consisted of depreciation resulting from capital expenditures made in the ordinary course of business during 1999. These capital expenditures included purchases associated with the Company's planned migration towards a single, integrated information technologies platform, the expansion of the Company's infrastructure to handle future growth, and the Company's year 2000 compliance program. Non-recurring acquisition costs. In the first quarter of 1999, the Company incurred $4.6 million of non-recurring acquisition costs in connection with the acquisition of JDR. These costs consisted primarily of investment banking fees, legal and accounting fees, and printing costs. Other income (expense). Interest and investment income increased $230,000 to $1.4 million for 1999 over the comparable period in 1998. This increase was primarily attributable to an increase in operating funds and funds held on behalf of clients. Interest expense increased to $19.4 million in 1999 from $3.9 million in 1998. The increase was partially attributable to a full year of interest expense from the Company financing a portion of the July 1998 acquisition of MedSource and all of the November 1998 acquisition of MSC with borrowings of $25.5 million and $107.5 million, respectively, under the revolving credit facility. In addition, the Company financed the May 1999 acquisition of Co-Source with borrowings of $122.7 million under a revolving credit facility. A portion of the increase was attributable to borrowings under a revolving credit facility of $29.5 million that were used to repay debt that was assumed as a result of the Compass acquisition. Income tax expense. Income tax expense for 1999 increased to $23.7 million, or 44.7% of income before taxes, from $13.1 million, or 41.7% of income before taxes, for 1998. The increase in the effective tax rate was partially attributable to the impact of the non-deductible goodwill related to certain acquisitions. In addition, the increase was also attributable to the non-deductible portion of the $4.6 million of non-recurring acquisition costs incurred during the first quarter of 1999 in connection with the acquisition of JDR. -27- Net income. Net income in 1999 increased 60.1% to $29.4 million from $18.3 million in 1998. Included in net income for 1999 were $3.7 million of expenses attributable to non-recurring acquisition costs, net of taxes. Without these costs, net income would have been $33.1 million, or $1.39 per share on a diluted basis, an increase of $14.7 million, or 80.2%, over 1998. Accretion of preferred stock to redemption value. The accretion of preferred stock to redemption value relates to JDR's preferred stock that was outstanding prior to its exchange for NCO common stock on March 31, 1999. This non-cash accretion represents the periodic amortization of the difference between the original carrying amount and the mandatory redemption amount. Year ended December 31, 1998 Compared to Year ended December 31, 1997 Revenue. Revenue increased $121.9 million, or 112.8%, to $230.0 million in 1998 from $108.1 million in 1997. Of this increase, $28.2 million was attributable to a full year of revenue from JDR as compared to revenue in 1997 for the period from May 29, 1997 to December 31, 1997. The partial year of revenue in 1997 resulted from the recapitalization completed by JDR on May 29, 1997 which resulted in a new basis of accounting. In addition, $8.5 million was attributable to the acquisition of MSC, completed in November 1998, $12.3 million was attributable to the acquisition of MedSource, completed in July 1998, $35.3 million was attributable to the acquisition of FCA, completed in May 1998, $8.9 million was attributable to the acquisitions of the Collections Division of American Financial Enterprises, Inc. ("AFECD") and The Response Center ("TRC"), completed in the first quarter of 1998, and $4.3 million was attributable to the acquisitions of ADVANTAGE Financial Services, Inc. ("AFS") and Credit Acceptance Corp. ("CAC"), completed in the fourth quarter of 1997. The addition of new clients and growth in business from existing clients represented $24.4 million of the increase in revenue. Payroll and related expenses. Payroll and related expenses increased $62.4 million to $119.3 million in 1998 from $56.9 million in 1997, and decreased as a percentage of revenue to 51.9% from 52.7%. Payroll and related expenses decreased as a percentage of revenue primarily as a result of JDR's increased productivity and greater efficiencies achieved as a result of the acquisitions completed by JDR and the absorption of management and administrative costs over a larger revenue base. In addition, a portion of this decrease was the result of lower payroll costs related to MedSource and by spreading the cost of management and administrative personnel over a larger revenue base. The decrease was partially offset by higher payroll costs related to FCA and the Market Strategy Division. Selling, general and administrative expenses. Selling, general and administrative expenses increased $30.2 million to $66.6 million in 1998 from $36.4 million in 1997. Selling, general and administrative expenses decreased as a percentage of revenue to 28.9% from 33.7%. This decrease resulted from the Company realizing operating efficiencies and by spreading selling, general and administrative expenses over a larger revenue base. In addition, a portion of this decrease can be attributed to the increase in the size of the Market Strategy division since it has a lower selling, general and administrative cost structure than the remainder of the Company. Depreciation and amortization. Depreciation and amortization increased to $9.9 million in 1998 from $4.6 million in 1997. Of this increase, $999,000 was attributable to the recapitalization completed by JDR in May 1997, $335,000 was attributable to the MSC acquisition, $849,000 was attributable to the MedSource acquisition, $1.3 million was attributable to the FCA acquisition, -28- $653,000 was attributable to the acquisitions of AFECD and TRC, completed in the first quarter of 1998, and $367,000 was attributable to the acquisitions of AFS and CAC, completed in the fourth quarter of 1997. The remaining $797,000 consisted of depreciation resulting from capital expenditures incurred in the ordinary course of business. Other income (expense). Interest and investment income increased $110,000 to $1.1 million in 1998 from the comparable period in 1997. This increase was primarily attributable to an increase in operating funds and funds held on behalf of clients. Interest expense increased to $3.9 million for 1998 from $1.8 million in 1997. The increase was partially attributable to the Company financing the May 1998 acquisition of FCA with $74.0 million of borrowings under its revolving credit facility. In June 1998, the $74.0 million from the revolving credit facility was repaid with a portion of the proceeds from the Company's public offering completed in June 1998. In addition, the Company financed $25.5 million of the MedSource acquisition with borrowings under the revolving credit facility. The Company also financed the November 1998 acquisition of MSC with $107.5 million of borrowings under its revolving credit facility. Income tax expense. Income tax expense for 1998 increased to $13.1 million, or 41.7% of income before taxes, from $4.8 million, or 51.1% of income before taxes, for 1997. Income taxes were computed after giving effect to non-deductible goodwill expenses resulting from certain acquired companies. The decrease in the effective tax rate resulted from JDR having a loss in 1997 for federal income tax purposes, for which no tax benefit was realized during 1997. This decrease was partially offset by the full-year impact of the non-deductible goodwill related to certain acquisitions completed during 1997 and the impact of the non-deductible goodwill related to certain acquisitions completed during 1998. Net income. Net income in 1998 increased to $18.3 million from $4.6 million in 1997, a 299.6% increase. Accretion of preferred stock to redemption value. The accretion of preferred stock to redemption value relates to JDR's preferred stock that was outstanding prior to its exchange for NCO common stock on March 31, 1999. This non-cash accretion represents the periodic amortization of the difference between the original carrying amount and the mandatory redemption amount. Quarterly Results (Unaudited) The following table sets forth selected historical financial data for the calendar quarters of 1998 and 1999. This quarterly information is unaudited, but has been prepared on a basis consistent with the Company's audited financial statements presented elsewhere herein and, in management's opinion, -29- includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the quarters presented. The operating results for any quarter are not necessarily indicative of results for any future period.
Quarters Ended --------------------------------------------------------------------------------------------------------- 1998 1999 ------------------------------------------------- ----------------------------------------------------- Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 ---------- ---------- ---------- ---------- ---------- ---------- ----------- ----------- (Dollars in thousands) Revenue $40,606 $ 51,935 $ 63,585 $ 73,826 $ 95,864 $ 110,704 $ 136,078 $ 149,708 Income from operations 5,987 8,518 8,920 10,774 8,869 16,889 21,122 24,177 Net income 3,720 4,651 4,380 5,594 2,506 7,521 8,902 10,437 Net income per share: Basic $ 0.22 $ 0.26 $ 0.19 $ 0.26 $ 0.10 $ 0.35 $ 0.38 $ 0.41 Diluted $ 0.20 $ 0.24 $ 0.17 $ 0.24 $ 0.10 $ 0.34 $ 0.37 $ 0.40 As a percentage of revenue: Income from operations 14.7% 16.4% 14.0% 14.6% 9.3% 15.3% 15.5% 16.1% Net income 9.2% 8.9% 6.9% 7.6% 2.6% 6.8% 6.5% 7.0%
The Company has experienced and expects to continue to experience quarterly variations in operating results as a result of many factors, including the costs and timing of completion and integration of acquisitions, the timing of clients' accounts receivable management programs, the commencement of new contracts, the termination of existing contracts, the costs to support growth by acquisition or otherwise, the integration of acquisitions, the effect of the change of business mix on margins, and the timing of additional selling, general and administrative expenses to support new business. Additionally, the Company's planned operating expenditures are based on revenue forecasts, and, if revenues are below expectations in any given quarter, operating results would likely be materially adversely affected. While the effects of seasonality on the Company's business historically have been obscured by its rapid growth, the Company's business tends to be slower in the third and fourth quarters of the year due to the summer and holiday seasons. Liquidity and Capital Resources Since 1996, the Company's primary sources of cash have been bank borrowings, public offerings, and cash flows from operations. Cash has been used for acquisitions, purchases of equipment, and working capital to support the Company's growth. In July 1997, the Company completed a public offering (the "1997 Offering"), selling 2,166,000 shares of common stock and received net proceeds of approximately $40.4 million. In June 1998, the Company completed a public offering (the "1998 Offering"), selling 4,000,000 shares of common stock and received net proceeds of approximately $81.7 million. In July 1998, the Company sold 469,000 shares of common stock in connection with the underwriters' exercise of the over-allotment option granted in connection with the 1998 Offering. The Company received net proceeds of approximately $9.6 million. -30- Cash provided by operating activities was $43.5 million in 1999 and $23.4 million in 1998. The increase in cash provided by operations was primarily due to the increase in net income to $29.4 million in 1999 from $18.3 million in 1998 and the increase in non-cash charges, primarily depreciation and amortization, to $23.3 million in 1999 from $9.9 million in 1998. In addition, a portion of the increase was the result of deferred taxes that were recorded as a result of acquisition accounting. A portion of these increases was offset by the $17.5 million increase in accounts receivable and the $5.3 million decrease in accounts payable and accrued expenses. Cash provided by operating activities was $23.4 million in 1998 and $5.4 million in 1997. The increase in cash provided by operations was primarily due to the increase in net income to $18.3 million in 1998 compared to $4.6 million in 1997 and the increase in non-cash charges, primarily depreciation and amortization, to $9.9 million in 1998, compared to $4.6 million in 1997. In addition, the increase was also attributable to a $3.1 million increase in deferred taxes in 1998, compared to a $1.8 million increase in 1997. These increases were partially offset by a $10.8 million increase in accounts receivable in 1998, compared to a $4.6 million increase in 1997. Cash used in investing activities was $164.9 million in 1999, compared to $233.1 million for 1998. The decrease was due primarily to cash paid in 1998 to acquire TRC, FCA, MedSource, and MSC. The Company financed these acquisitions with the proceeds from the 1998 Offering and borrowings under the Company's revolving credit agreement. This increase was partially offset by the Company financing the May 1999 acquisition of Co-Source with borrowings under the Company's revolving credit facility. Cash used in investing activities was $233.1 million in 1998, compared to $30.2 million in 1997. The increase was due primarily to the acquisitions of FCA, MedSource, and MSC. The Company financed these acquisitions with the proceeds from the 1998 Offering and borrowings under the Company's revolving credit agreement. In addition to equipment financed under operating leases, capital expenditures were $29.6 million, $10.3 million, and $4.8 million in 1999, 1998, and 1997, respectively. Cash provided by financing activities was $150.0 million in 1999, compared to $203.0 million in 1998. During 1999, the Company's primary source of cash from financing activities was borrowings under the revolving credit facility that were used to repay the existing debt under the JDR credit facility and to finance the acquisition of Co-Source. Net proceeds of $91.3 million from the 1998 Offering and net borrowings of $135.6 million were the Company's primary sources of cash from financing activities in 1998, which were used for the acquisitions of FCA, MedSource and MSC. Cash provided by financing activities was $203.0 million in 1998, compared to $43.2 million in 1997. Net proceeds of $91.3 million from the 1998 Offering and net borrowings of $135.6 million were the Company's primary sources of cash from financing activities, which were used for acquisitions. In May 1999, the Company's credit agreement with Mellon Bank, N.A., for itself and as administrative agent for other participating lenders, was amended to, among other things, increase the Company's credit facility to provide for borrowings up to $350.0 million, structured as a $350.0 million revolving credit facility. At the option of the Company, the borrowings bear interest at a rate equal to either Mellon Bank's prime rate plus a margin ranging from 0.25% to 0.50% depending on the Company's consolidated funded debt to EBITDA ratio (Mellon Bank's prime rate was 8.50% on December 31, 1999) or LIBOR plus a margin ranging from 1.25% to 2.25% depending on the Company's consolidated funded debt to EBITDA ratio (LIBOR was 5.83% on December 31, 1999). Borrowings are collateralized by substantially all the assets of the Company. The balance under the revolving credit facility will be due upon the expiration of the five-year term. The credit agreement contains certain financial covenants such as maintaining net worth and funded debt to EBITDA requirements and includes restrictions on, among other things, acquisitions, capital expenditures, and distributions to shareholders. -31- The Company believes that funds generated from operations, together with existing cash and available borrowings under its credit agreement will be sufficient to finance its current operations, planned capital expenditure requirements, and internal growth at least through the next twelve months. However, the Company could require additional debt or equity financing if it were to make any other significant acquisitions for cash during that period. Market Risk The Company is exposed to various types of market risk in the normal course of business, including the impact of interest rate changes, foreign currency exchange rate fluctuations, and changes in corporate tax rates. The Company employs risk management strategies that may include the use of derivatives such as interest rate swap agreements, interest rate ceilings and floors, and foreign currency forwards and options to manage these exposures. The Company does not hold derivatives for trading purposes. Goodwill The Company's balance sheet includes amounts designated as "goodwill." Goodwill represents the excess of purchase price over the fair market value of the net assets of the acquired businesses, based on their respective fair values at the date of acquisition. GAAP requires that this and all other intangible assets be amortized over the period benefited. Management has determined that period to range from 15 to 40 years based on the attributes of each acquisition. As of December 31, 1999, the Company's balance sheet included goodwill that represented approximately 75.5% of total assets and 165.1% of shareholders' equity. If management has incorrectly overstated the permissible length of the amortization period for goodwill, earnings reported in periods immediately following the acquisition would be overstated. In later years, NCO would be burdened by a continuing charge against earnings without the associated benefit to income valued by management in arriving at the consideration paid for the business. Earnings in later years also could be significantly affected if management determined then that the remaining balance of goodwill was impaired. Management has concluded that the anticipated future cash flows associated with intangible assets recognized in the acquisitions will continue indefinitely, and there is no persuasive evidence that any material portion will dissipate over a period shorter than the respective amortization period. Year 2000 System Modifications NCO completed a program to evaluate and address the impact of the year 2000 on its information technology systems in order to ensure that its network and software would successfully manage and manipulate data involving the transition of dates from the year 1999 to the year 2000 without functional or data abnormality and without inaccurate results related to such data. This program included steps to: (a) identify software that required date code remediation; (b) establish timelines for availability of corrective software releases; (c) implement the fix to a test environment and test the remediated product; (d) integrate the updated software to NCO's production environment; (e) communicate and work with clients to implement year 2000 compliant data exchange formats; and (f) provide management with assurance of a seamless transition to the year 2000. As a result, the Company did not experience any significant disruptions of its information technology systems as the dates were transitioned from the year 1999 to the year 2000. -32- NCO also completed a program to evaluate and address the impact of year 2000 on its non-information technology systems, which include the Company's telecommunications systems, business machines, and building and premises systems. This program included steps to: (a) review existing systems to identify potential issues; (b) review these issues with major external suppliers; and (c) develop a contingency plan. As a result, the Company did not experience any significant disruptions of its non-information technology systems as the dates were transitioned from year the 1999 to year the 2000. During 1998 and 1999, the Company incurred total pre-tax expenses of approximately $224,000 and $1.6 million, respectively, in connection with the year 2000 compliance program. These amounts do not include expenses incurred by companies prior to their acquisition by the Company. These costs are associated with both internal and external staffing resources for the necessary planning, coordination, remediation, testing, and other expenses to prepare its systems for the year 2000. However, a portion of these expenses were not incremental, but rather represented a redeployment of existing information technology resources. The Company's software was provided by third-party vendors, and the third-party vendors incorporated the necessary modifications as part of their normal systems maintenance. The majority of the costs were incurred through the modification and testing of electronic data interchange formats with the Company's clients and the testing of modifications performed by its third-party vendors. The cost of planning and initial remediation incurred to date has not been significant. For the year 2000, the Company expects to incur total pre-tax expenses of approximately $180,000. These costs are associated with both internal and external staffing resources for the necessary testing to verify that the Company's systems are properly transitioning dates from year 1999 to year 2000. The Company has not experienced, and does not expect to experience, any material adverse impacts on its business or results of operations as a result of the transition of dates from year the 1999 to the year 2000. No assurance can be given, however, that unanticipated or undiscovered year 2000 compliance problems will not have a material, adverse effect on the Company's business or results of operations. In addition, if the Company's clients or significant suppliers and contractors did not successfully achieve year 2000 compliance, the Company's business and results of operations could be adversely affected, resulting from, among other things, the Company's inability to properly exchange and/or receive data with its clients. Recent Accounting Pronouncements: In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which was subsequently amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" (collectively "SFAS No. 133"). SFAS No. 133 is effective for the fiscal years beginning after June 15, 2000 and requires that an entity recognize all derivative instruments as either assets or liabilities on its balance sheet at their fair values. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction, and, if it is, the type of hedge transaction. The Company will adopt SFAS No. 133 by the first quarter of 2001. Due to the Company's limited use of derivative instruments, SFAS No. 133 is not expected to have a material impact on the consolidated results of operations, financial condition, or cash flows of the Company. -33- Forward-Looking Statements Certain statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as elsewhere in this Annual Report on Form 10-K, other than historical facts, are forward-looking statements (as such term is defined in the Securities Exchange Act of 1934, and the regulations thereunder) which are intended to be covered by the safe harbors created thereby. Forward-looking statements include, without limitation, statements as to the Company's five-year growth strategy, statements as to the Company's objective to focus on internal growth, strategic acquisitions and alliances, and integration, the impact of acquisitions on the Company's earnings, the Company's ability to realize operating efficiencies in the integration of its acquisitions, trends in the Company's future operating performance, expected increases in operating efficiencies, anticipated trends in the accounts receivable management industry, year 2000 compliance, the effects of legal or governmental proceedings, the effects of changes in accounting pronouncements and statements as to the Company's or management's beliefs, expectations and opinions. Forward-looking statements are subject to risks and uncertainties and may be affected by various factors which may cause actual results to differ materially from those in the forward-looking statements. In addition to the factors discussed in this report, certain risks, uncertainties and other factors, including, without limitation, risks associated with growth and future acquisitions, the risk that the Company will not be able to realize operating efficiencies in the integration of its acquisitions, fluctuations in quarterly operating results, risks relating to the timing of contracts, risks related to year 2000 compliance and the other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission, including the Company's Registration Statement on Form S-3, filed on September 3, 1999, can cause actual results and developments to be materially different from those expressed or implied by such forward-looking statements. See Item 1. -- "Business -- Investment Considerations." -34- Item 7a. Quantitative and Qualitative Disclosures about Market Risk. ----------------------------------------------------------- Included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of this Report on Form 10-K. Item 8. Financial Statements and Supplementary Data. -------------------------------------------- The financial statements, financial statement schedules and related documents that are filed with this Report are listed in Item 14(a) of this Report on Form 10-K and begin on page F-1. Item 9. Changes in and Disagreements with Accountants on Accounting and --------------------------------------------------------------- Financial Disclosure. --------------------- None. -35- PART III Item 10. Directors and Executive Officers of the Registrant. --------------------------------------------------- Incorporated by reference from the Company's Proxy Statement relating to the 2000 Annual Meeting of Shareholders to be filed in accordance with General Instruction G(3) to Form 10-K, except information concerning certain executive officers of the Company which is set forth in Section 4.1 of this Annual Report on Form 10-K. Item 11. Executive Compensation. ---------------------- Incorporated by reference from the Company's Proxy Statement relating to the 2000 Annual Meeting of Shareholders to be filed in accordance with General Instruction G(3) to Form 10-K. Item 12. Security Ownership of Certain Beneficial Owners and Management. --------------------------------------------------------------- Incorporated by reference from the Company's Proxy Statement relating to the 2000 Annual Meeting of Shareholders to be filed in accordance with General Instruction G(3) to Form 10-K. Item 13. Certain Relationships and Related Transactions. ----------------------------------------------- Incorporated by reference from the Company's Proxy Statement relating to the 2000 Annual Meeting of Shareholders to be filed in accordance with General Instruction G(3) to Form 10-K. -36- PART IV Item 14. Exhibits, Financial Statements and Reports on Form 8-K. ------------------------------------------------------ (a). Documents filed as part of this report: 1. List of Consolidated Financial Statements. The following consolidated financial statements and the accompanying notes of NCO Group, Inc., have been included in this Report on Form 10-K beginning on page F-1: Report of Independent Accountants Consolidated Balance Sheets as of December 31, 1998 and 1999 Consolidated Statements of Income for each of the three years in the period ended December 31, 1999 Consolidated Statements of Redeemable Preferred Stock and Shareholders' Equity for each of the three years in the period ended December 31, 1999 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1999 Notes to Consolidated Financial Statements 2. List of Financial Statement Schedules. The following financial statement schedule of NCO Group, Inc., has been included in this Report on Form 10-K beginning on page S-1: II - Valuation and Qualifying Accounts All other financial statement schedules are omitted because the required information is not present or not present in amounts sufficient to require submission of the schedule or because the information required is included in the respective financial statements or notes thereto contained herein. 3. List of Exhibits filed in accordance with Item 601 of Regulation S-K. The following exhibits are incorporated by reference in, or filed with, this Report on Form 10-K. Management contracts and compensatory plans, contracts and arrangements are indicated by "*":
Exhibit No. Description - -------------------- ---------------------------------------------------------------------------------------- 2.1(4) Asset Acquisition Agreement by and among The Response Center Division of TeleSpectrum Worldwide, Inc., and NCO dated January 16, 1998. NCO will furnish to the Securities and Exchange Commission a copy of any omitted schedules upon request. 2.2(6) Agreement dated March 24, 1998 among the Company, FCA and Fairfax concerning the FCA Tender Offer. NCO will furnish to the Securities and Exchange Commission a copy of any omitted schedules upon request.
-37-
Exhibit No. Description - -------------------- ---------------------------------------------------------------------------------------- 2.3(8) Stock Purchase Agreement dated May 4, 1998 among the Company, MedSource, Whitney Subordinated Debt fund, L.P., Whitney Equity Partners, L.P., C.B. Hellman, Jr., Mark Gorman, John O'Hara and HealthCare Business Management, Ltd. NCO will furnish to the Securities and Exchange Commission a copy of any omitted schedules upon request. 2.4(10) Amended and Restated Stock Purchase Agreement by and between NCO and Medaphis Services Corporation dated as of October 15, 1998 as amended and restated on November 30, 1998. NCO will furnish to the Securities and Exchange Commission a copy of any omitted schedules upon request. 2.5(11) Agreement and Plan of Reorganization, dated November 2, 1998, among JDR Holdings, Inc., NCO Group, inc. and JDR Acquisition Inc. NCO will furnish to the Securities and Exchange Commission a copy of any omitted schedules upon request. 2.6(11) Agreement and Plan of Merger, dated November 2, 1998, among JDR Holdings, Inc., NCO Group, Inc. and JDR Acquisition Inc. NCO will furnish to the Securities and Exchange Commission a copy of any omitted schedules upon request. 2.7(13) Stock Purchase Agreement dated April 17, 1999 among Co-Source Corporation, its shareholders and optionholders, H.I.G.-DCI Investments, L.P. and NCO Group, Inc. NCO will furnish to the Securities and Exchange Commission a copy of any omitted schedules upon request. 2.8(14) Agreement and Plan of Merger, dated May 12, 1999, by and among Compass International Services Corporation, NCO Group, Inc. and Cardinal Acquisition Corporation. NCO will furnish to the Securities and Exchange Commission a copy of any omitted schedules upon request. 3.1(1) The Company's amended and restated Articles of Incorporation. 3.2(7) Amendment to Amended and Restated Articles of Incorporation. 3.3(1) The Company's amended and restated Bylaws. 4.1(1) Specimen of Common Stock Certificate. 4.2(13) Form of warrant to purchase NCO Group, Inc. common stock. *10.1(1) Employment Agreement, dated September 1, 1996, between the Company and Bernard R. Miller. *10.2(15) Addendum, dated January 1, 1999, to the Employment Agreement, dated September 1, 1996, between the Company and Bernard R. Miller. *10.3(1) Employment Agreement, dated September 1, 1996, between the Company and Michael J. Barrist.
-38-
Exhibit No. Description - -------------------- ---------------------------------------------------------------------------------------- *10.4(15) Addendum, dated January 1, 1999, to the Employment Agreement, dated September 1, 1996, between the Company and Michael J. Barrist. *10.5(1) Employment Agreement, dated September 1, 1996, between the Company and Charles C. Piola, Jr. *10.6(15) Addendum, dated May 1, 1998, to the Employment Agreement, dated September 1, 1996, between the Company and Charles C. Piola, Jr. *10.7(1) Employment Agreement, dated September 1, 1996, between the Company and Joseph C. McGowan. *10.8(15) Addendum, dated January 1, 1999, to the Employment Agreement, dated September 1, 1996, between the Company and Joseph C. McGowan. *10.9(1) Employment Agreement, dated September 1, 1996, between the Company and Steven L. Winokur. *10.10(15) Addendum, dated January 1, 1999, to the Employment Agreement, dated September 1, 1996, between the Company and Steven L. Winokur. *10.11(1) Amended and Restated 1995 Stock Option Plan. *10.12(9) 1996 Stock Option Plan, as amended. *10.13(9) 1996 Non-Employee Director Stock Option Plan, as amended. 10.14(1) Distribution and Tax Indemnification Agreement 10.15(1) Irrevocable Proxy Agreement by and between Michael J. Barrist and Annette H. Barrist. 10.16(2) Non-negotiable Subordinated Convertible Promissory Note dated January 22, 1997, made by the Company in the principal amount of $900,000, as partial payment of the purchase price for the acquisition of Goodyear & Associates, Inc. 10.17(3) Non-Transferable Common Stock Purchase Warrant dated February 2, 1997 issued to CRW Financial, Inc. 10.18(3) Registration Rights Agreement dated February 2, 1997 between NCO and CRW Financial, Inc. 10.19(6) Lease dated March 18, 1997 between Indiana Avenue Associates, L.P. and the Company related to the lease of Fort Washington corporate headquarters. 10.20 Fifth Amended and Restated Credit Agreement dated as of December 31, 1999 by and among NCO Group, Inc., as Borrower, Mellon Bank, N.A., as Administrative Agent and a Lender, and the Financial Institutions identified therein as Lenders and such other Agents as may be appointed from time to time. NCO will furnish to the Securities and Exchange Commission a copy of any omitted schedules upon request. 10.21(7) Executive Salary Continuation Agreement.
-39-
Exhibit No. Description - -------------------- ---------------------------------------------------------------------------------------- 10.22(15) Transfer Agreement dated January 26, 1998 among NCO, CRW Financial, Inc. and Swiss Bank Corporation. *10.23(12) Compass International Services Corporation Employee Incentive Compensation Plan *10.24(16) JDR 1997 Option Plan *10.25 Employment Agreement, dated March 31, 1999, between the Company and David E. D'Anna. *10.26 Employment Agreement, dated May 2, 1998, between the Company and Paul E. Weitzel, Jr. *10.27 Addendum, dated January 1, 1999, to the Employment Agreement, dated May 2, 1998, between the Company and Paul E. Weitzel, Jr. *10.28 Employment Agreement, dated June 1, 1998, between the Company and Robert Di Sante. *10.29 Employment Agreement, dated February 12, 1998, between the Company and Richard Raquet. *10.30 Addendum, dated June 25, 1999, to the Employment Agreement, dated February 12, 1998, between the Company and Richard Raquet. 21.1(11) Subsidiaries of the Registrant. 23.1 Consent of PricewaterhouseCoopers LLP. 23.2 Consent of Arthur Andersen LLP. 27.1 Financial Data Schedules.
- ------------------------------ (1) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-11745), as amended, filed with the Securities Exchange Commission on September 11, 1996. (2) Incorporated by reference to the Company's Current Report on Form 8-K (File No. 0-21639) filed with the Securities Exchange Commission on February 6, 1997. (3) Incorporated by reference to the Company's Current Report on Form 8-K/A (File No. 0-21639) filed with the Securities Exchange Commission on February 18, 1997. (4) Incorporated by reference to the Company's Current Report on Form 8-K (File No. 0-21639) filed with the Securities Exchange Commission on February 25, 1998. (5) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-21639), as amended, filed with the Securities Exchange Commission on March 31, 1998. -40- (6) Incorporated by reference to the Company's Current Report on Form 8-K (File No. 0-21639) filed with the Securities Exchange Commission on May 4, 1998. (7) Incorporated by reference to the Company's Quarterly Report on Form 10-K for the quarter ended March 31, 1998 (File No. 0-21639), filed with the Securities Exchange Commission on May 4, 1998. (8) Incorporated by reference to the Company's Registration Statement on Form S-3 (Registration No. 333-51787), as amended, filed with the Securities Exchange Commission on May 8, 1998. (9) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (File No. 0-21639), filed with the Securities Exchange Commission on August 14, 1998. (10) Incorporated by reference to the Company's Current Report on Form 8-K (File No. 0-21639) filed with the Securities Exchange Commission on December 15, 1998. (11) Incorporated by reference to the Company's Registration Statement on Form S-4 (Registration No. 333-73087), as amended, filed with the Securities Exchange Commission on February 26, 1998. (12) Incorporated by reference to Compass International Service Corporation's Registration Statement on Form S-1 (Registration No. 333-50021), as amended, filed with the Securities Exchange Commission on April 13, 1998. (13) Incorporated by reference to the Company's Current Report on Form 8-K/A (File No. 0-21639) filed with the Securities Exchange Commission on August 4, 1999. (14) Incorporated by reference to the Company's Proxy/Registration Statement on Form-S-4 (Registration No. 333-83229) filed with the Securities Exchange Commission on July 20, 1999. (15) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (File No. 0-21639), as amended, filed with the Securities Exchange Commission on March 31, 1999. (16) Incorporated by reference to the Company's Current Report on Form 8-K (File No. 0-21639) filed with the Securities Exchange Commission on April 15, 1999. (b). Reports on Form 8-K None - not applicable -41- SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. NCO GROUP, INC. Date: March 24, 2000 By: /s/ Michael J. Barrist ----------------------- Michael J. Barrist, Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant in the capacities and on the date indicated.
SIGNATURE TITLE(S) DATE --------- -------- ------ /s/ Michael J. Barrist Chairman of the Board, President and Chief March 24, 2000 - ------------------------------- Executive Officer (principal executive Michael J. Barrist officer) /s/ Steven L. Winokur Executive Vice President, Finance; Chief March 24, 2000 - ----------------------------- Financial Officer; and Treasurer (principal Steven L. Winokur financial and accounting officer) /s/ David E. D'Anna Executive Vice President; Divisional Chief March 24, 2000 - ---------------------------- Executive Officer, Technology-Based David E. D'Anna Outsourcing Services; and Director /s/ Charles C. Piola, Jr. Director March 24, 2000 - ------------------------- Charles C. Piola, Jr. /s/ Eric S. Siegel Director March 24, 2000 - --------------------------------- Eric S. Siegel /s/ Allen F. Wise Director March 24, 2000 - ----------------------------- Allen F. Wise /s/ Stuart Wolf Director March 24, 2000 - ------------------------------- Stuart Wolf
-42- INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements: Report of Independent Accountants...............................................................................F-2 Consolidated Balance Sheets as of December 31, 1998 and 1999 ...................................................F-4 Consolidated Statements of Income for each of the three years in the period ended December 31, 1999......................................................................F-5 Consolidated Statements of Redeemable Preferred Stock and Shareholders' Equity for each of the three years in the period ended December 31, 1999......................................................................F-6 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1999......................................................................F-7 Notes to Consolidated Financial Statements......................................................................F-8 Financial Statement Schedules: For the years ended December 31, 1997, 1998 and 1999: II - Valuation and Qualifying Accounts......................................................................S-1
F-1 Report of Independent Accountants To the Board of Directors and Shareholders of NCO Group, Inc.: In our opinion, based on our audits and the report of other auditors, the consolidated financial statements listed in the index appearing under Item 14(a)(1) present fairly, in all material respects, the financial position of NCO Group, Inc. and its subsidiaries at December 31, 1998 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. The consolidated financial statements and the financial statement schedule give retroactive effect to the merger of JDR Holdings, Inc. on March 31, 1999 in a transaction accounted for as a pooling of interests, as described in Note 3 to the consolidated financial statements. We did not audit the financial statements of JDR Holdings, Inc., which statements reflect total assets of $35,145,119 as of December 31, 1998 and total revenues of $22,788,523 and $50,976,251 for the period from May 29, 1997 to December 31, 1997 and for the year ended December 31, 1998, respectively. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for JDR Holdings, Inc., is based solely on the report of the other auditors. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP - ------------------------------- PricewaterhouseCoopers LLP Philadelphia, PA February 16, 2000 F-2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To JDR Holdings, Inc.: We have audited the accompanying consolidated balance sheets of JDR Holdings, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1998, and the related consolidated statements of operations, redeemable preferred and common stock and stockholders' equity (deficit), and cash flows for the period from May 29, 1997 to December 31, 1997 and for the year ended December 31, 1998. 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 financial statements referred to above present fairly, in all material respects, the financial position of JDR Holdings, Inc. and subsidiaries as of December 31, 1997 and 1998, and the results of their operations and their cash flows for the period from May 29, 1997 to December 31, 1997 and for the year ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP ----------------------- Philadelphia, Pa., January 29, 1999 F-3 Part 1 - Financial Information Item 1 - Financial Statements NCO GROUP, INC. Consolidated Balance Sheets (Amounts in thousands)
December 31, ----------------------------- ASSETS 1998 1999 --------- --------- Current assets: Cash and cash equivalents $ 23,560 $ 52,380 Accounts receivable, trade, net of allowance for doubtful accounts of $3,998 and $6,425, respectively 54,443 82,207 Purchased accounts receivable 1,597 6,719 Deferred taxes 1,348 2,965 Other current assets 2,930 5,890 --------- --------- Total current assets 83,878 150,161 Funds held on behalf of clients Property and equipment, net 27,062 56,823 Other assets: Intangibles, net of accumulated amortization 297,347 584,702 Other assets 6,522 6,254 --------- --------- Total other assets 303,869 590,956 --------- --------- Total assets $ 414,809 $ 797,940 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term debt, current portion $ 8,288 $ 1,672 Corporate taxes payable 7,737 11,490 Accounts payable 8,485 9,284 Accrued expenses 13,346 34,447 Accrued compensation and related expenses 10,507 15,643 --------- --------- Total current liabilities 48,363 72,536 Funds held on behalf of clients Long-term liabilities: Long-term debt, net of current portion 143,910 323,949 Deferred taxes 6,832 25,747 Other long-term liabilities 4,357 10,820 Redeemable preferred stock 11,882 - Commitments and contingencies Shareholders' equity: Preferred stock 1,853 - Common stock, no par value, 37,500 shares authorized, 20,100 and 25,533 shares issued, respectively, and 19,744 and 25,533 shares outstanding, respectively 177,835 313,558 Unexercised warrants 5,450 1,043 Treasury stock, at cost (4,108) - Foreign currency translation adjustment (2,169) 694 Retained earnings 20,604 49,593 --------- --------- Total shareholders' equity 199,465 364,888 --------- --------- Total liabilities and shareholders' equity $ 414,809 $ 797,940 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-4 NCO GROUP, INC. Consolidated Statements of Income (Amounts in thousands, except per share data)
For the Years Ended December 31, ------------------------------------------------- 1997 1998 1999 --------- --------- --------- Revenue $ 108,073 $ 229,952 $ 492,354 Operating costs and expenses: Payroll and related expenses 56,949 119,314 257,877 Selling, general and administrative expenses 36,372 66,588 135,508 Depreciation and amortization expense 4,564 9,851 23,311 Non-recurring acquisition costs - - 4,601 --------- --------- --------- Total operating costs and expenses 97,885 195,753 421,297 --------- --------- --------- Income from operations 10,188 34,199 71,057 Other income (expense): Interest and investment income 1,025 1,135 1,365 Interest expense (1,781) (3,858) (19,362) Other income (expense) (41) - - --------- --------- --------- Total other income (expense) (797) (2,723) (17,997) --------- --------- --------- Income before provision for income taxes 9,391 31,476 53,060 Income tax expense 4,800 13,131 23,694 --------- --------- --------- Net income 4,591 18,345 29,366 Accretion of preferred stock to redemption value (1,617) (1,604) (377) --------- --------- --------- Net income applicable to common shareholders $ 2,974 $ 16,741 $ 28,989 ========= ========== ========== Net income per share: Basic $ 0.22 $ 0.91 $ 1.27 Diluted $ 0.20 $ 0.85 $ 1.22 Weighted average shares outstanding: Basic 13,736 18,324 22,873 Diluted 14,808 19,758 23,799
The accompanying notes are an integral part of these consolidated financial statements. F-5 NCO GROUP, INC. Consolidated Statements of Redeemable Preferred Stock and Shareholders' Equity For the Years Ended December 31, 1997, 1998 and 1999 (Amounts in thousands)
Shareholders' Equity ------------------------------------------------- Redeemable Preferred Stock Preferred Stock Common Stock -------------------------- --------------------- ---------------------- Number of Number of Number of Shares Amount Shares Amount Shares Amount ------ ------ ------ ------ ------ ------ Balance, January 1, 1997 - $ - - $ - 10,070 $ 29,363 Capital contribution 13 157 - - 590 (3,137) Issuance of common stock - - - - 3,146 50,886 Issuance of series C preferred, voting common and nonvoting common in connection with acquisitions - - 146 1,686 1,455 16,799 Reclass of carryover basis adjustment - - - - - (11,065) Conversion of loan into and sale of preferred stock 434 8,934 - - - - Issuance of warrants in conjunction with the issuances of common stock and debt - (4,126) - - - - Issuance of warrants in conjunction with acquisitions - - - - - - Exercise of nonvoting common options - - - - 36 418 Redemption of nonvoting common - - - - (36) - Redemption of nonvoting common and issuance of nonvoting common in private placement - - - - 16 - Accretion of preferred to redemption value 4 1,557 3 60 - - Net income - - - - - - --------- -------- --------- ------- --------- --------- Balance, December 31, 1997 451 6,522 149 1,746 15,277 83,264 Issuance of common stock - - - - 4,802 93,884 Exercise of voting and nonvoting common conversion options 334 3,863 - - (334) - Accretion of preferred to redemption value - 1,497 - 107 - - Common stock options granted to consultant - - - - - 687 Redemption of nonvoting common - - - - (1) - Comprehensive income: Net income - - - - - - Other comprehensive income: Foreign currency translation adjustment - - - - - - Total comprehensive income --------- -------- --------- ------- --------- --------- Balance, December 31, 1998 785 11,882 149 1,853 19,744 177,835 Issuance of common stock - - - - 4,747 125,719 Issuance of warrants in conjunction with acquisitions - - - - - - Accretion of preferred to redemption value 93 349 15 28 - - Exchange of redeemable preferred stock for common stock (878) (12,231) - - 878 12,231 Exchange of convertible preferred stock for common stock - - (164) (1,881) 164 1,881 Retirement of treasury stock - - - - - (4,108) Comprehensive income: Net income - - - - - - Other comprehensive income: Foreign currency translation adjustment - - - - - - Total comprehensive income --------- -------- --------- ------- --------- --------- Balance, December 31, 1999 - $ - - $ - 25,533 $ 313,558 ========= ======== ========= ======= ========= =========
(RESTUBBED TABLE)
Shareholders' Equity --------------------------------------------------------------- Treasury Stock Carryover ------------------------ Unexercised Basis Number of Warrants Adjustment Shares Amount -------- ---------- ------ ------ Balance, January 1, 1997 $ 396 $ - - $ - Capital contribution - - - - Issuance of common stock (149) - - - Issuance of series C preferred, voting common and nonvoting common in connection with acquisitions - (11,065) - - Reclass of carryover basis adjustment - 11,065 - - Conversion of loan into and sale of preferred stock - - - - Issuance of warrants in conjunction with the issuances of common stock and debt 4,575 - - - Issuance of warrants in conjunction with acquisitions 875 - - - Exercise of nonvoting common options - - - - Redemption of nonvoting common - - 36 (418) Redemption of nonvoting common and issuance of nonvoting common in private placement - - (16) 184 Accretion of preferred to redemption value - - - - Net income - - - - ------- -------- --------- ------- Balance, December 31, 1997 5,697 - 20 (234) Issuance of common stock (247) - - - Exercise of voting and nonvoting common conversion options - - 335 (3,863) Accretion of preferred to redemption value - - - - Common stock options granted to consultant - - - - Redemption of nonvoting common - - 1 (11) Comprehensive income: Net income - - - - Other comprehensive income: Foreign currency translation adjustment - - - - Total comprehensive income ------- -------- --------- ------- Balance, December 31, 1998 5,450 - 356 (4,108) Issuance of common stock (6,332) - - - Issuance of warrants in conjunction with acquisitions 1,925 - - - Accretion of preferred to redemption value - - - - Exchange of redeemable preferred stock for common stock - - - - Exchange of convertible preferred stock for common stock - - - - Retirement of treasury stock - - (356) 4,108 Comprehensive income: Net income - - - - Other comprehensive income: Foreign currency translation adjustment - - - - Total comprehensive income ------- -------- --------- ------- Balance, December 31, 1999 $ 1,043 $ - - $ - ======= ======== ========= =======
(RESTUBBED TABLE)
Shareholders' Equity -------------------------------------------------------------- Accumulated Other Comprehensive Retained Comprehensive Income Earnings Income Total ------ -------- ------ ----- Balance, January 1, 1997 $ - $ 889 $ 30,648 Capital contribution - - (3,137) Issuance of common stock - - 50,737 Issuance of series C preferred, voting common and nonvoting common in connection with acquisitions - - 7,420 Reclass of carryover basis adjustment - - - Conversion of loan into and sale of preferred stock - - - Issuance of warrants in conjunction with the issuances of common stock and debt - - 4,575 Issuance of warrants in conjunction with acquisitions - - 875 Exercise of nonvoting common options - - 418 Redemption of nonvoting common - - (418) Redemption of nonvoting common and issuance of nonvoting common in private placement - - 184 Accretion of preferred to redemption value - (1,617) (1,557) Net income - 4,591 4,591 ------- ------- --------- Balance, December 31, 1997 - 3,863 94,336 Issuance of common stock - - 93,637 Exercise of voting and nonvoting common conversion options - - (3,863) Accretion of preferred to redemption value - (1,604) (1,497) Common stock options granted to consultant - - 687 Redemption of nonvoting common - - (11) Comprehensive income: Net income - 18,345 $ 18,345 18,345 Other comprehensive income: Foreign currency translation adjustment (2,169) - (2,169) (2,169) --------- Total comprehensive income $ 16,176 ------- ------- ========= --------- Balance, December 31, 1998 (2,169) 20,604 199,465 Issuance of common stock - - 119,387 Issuance of warrants in conjunction with acquisitions - - 1,925 Accretion of preferred to redemption value - (377) (349) Exchange of redeemable preferred stock for common stock - - 12,231 Exchange of convertible preferred stock for common stock - - - Retirement of treasury stock - - - Comprehensive income: Net income - 29,366 $ 29,366 29,366 Other comprehensive income: Foreign currency translation adjustment 2,863 - 2,863 2,863 --------- Total comprehensive income $ 32,229 ------- ------- ========= --------- Balance, December 31, 1999 $ 694 $49,593 $ 364,888 ======= ======= =========
The accompanying notes are an integral part of these consolidated financial statements. F-6 NCO GROUP, INC Consolidated Statements of Cash Flows (Amounts in thousands)
For the Years Ended December 31, ------------------------------------------------ 1997 1998 1999 -------- -------- -------- Cash flows from operating activities: Net income $ 4,591 $ 18,345 $ 29,366 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,140 3,945 8,808 Amortization of intangibles 2,424 5,906 14,503 Write-off of defered financing costs - - 353 Loss on disposal of fixed assets 41 - - Provision for doubtful accounts 356 1,187 2,629 Compensation expense on stock options granted 418 686 34 Changes in assets and liabilities, net of acquisitions: Accounts receivable, trade (4,565) (10,767) (17,536) Purchased accounts receivable - 115 (5,122) Deferred taxes 1,781 3,090 16,980 Other assets (1,728) (698) (1,279) Accounts payable and accrued expenses (140) 1,483 (5,348) Corporate taxes payable 68 59 (1,644) Other long-term liabilities - - 1,711 -------- -------- -------- Net cash provided by operating activities 5,386 23,351 43,455 Cash flows from investing activities: Purchase of property and equipment (4,849) (10,292) (29,631) Net cash paid for acquisitions (25,399) (222,843) (135,237) -------- -------- -------- Net cash used in investing activities (30,248) (233,135) (164,868) Cash flows from financing activities: Repayment of notes payable (7,012) (1,256) (1,574) Repayment of acquired notes payable - (21,919) (42,000) Borrowings under revolving credit agreement 32,686 94,789 190,715 Repayment of borrowings under revolving credit agreement (18,165) (84,193) (4,000) Borrowings under term loan - 125,000 - Payment of fees to acquire new debt (401) (3,015) (3,565) Issuance of common stock, net 40,428 93,637 10,079 Proceeds from issuance of preferred and common stock and exercise of common stock options 1,068 - - Redemption of common stock (5,931) (11) - Payment of dividends (188) - - Capital contributions 697 - - -------- -------- -------- Net cash provided by financing activities 43,182 203,032 149,655 Effect of exchange rate on cash - (67) 578 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 18,320 (6,819) 28,820 Cash and cash equivalents at beginning of period 12,059 30,379 23,560 -------- -------- -------- Cash and cash equivalents at end of period $ 30,379 $ 23,560 $ 52,380 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-7 NCO GROUP, INC. Notes to Consolidated Financial Statements 1. Nature of operations: NCO Group, Inc. (the "Company") is a leading provider of accounts receivable management and other outsourced revenue cycle management services. The Company's client base is comprised of companies located throughout North America and in the United Kingdom and Puerto Rico in the financial services, healthcare, retail, commercial, education, utilities, government, and telecommunications sectors. 2. Summary of significant accounting policies: Principles of Consolidation: The consolidated financial statements include the accounts of NCO Group, Inc. and its wholly-owned subsidiaries after elimination of significant intercompany accounts and transactions. Revenue Recognition: The Company generates revenues from contingent fees and contractual services. Contingent fee revenue is recognized upon collection of funds on behalf of clients. Contractual services revenue is recognized as services are performed. Credit Policy: The Company has two types of arrangements under which it collects its contingent fee revenue. For certain clients, the Company remits funds collected on behalf of the client net of the related contingent fees while, for other clients, the Company remits gross funds collected on behalf of clients and bills the client separately for its contingent fees. Management carefully monitors its client relationships in order to minimize its credit risk and generally does not require collateral. In many cases, in the event of collection delays from clients, management may, at its discretion, change from the gross remittance method to the net remittance method. Cash and Cash Equivalents: The Company considers all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents. These financial instruments potentially subject the Company to concentrations of credit risk. Property and Equipment: Property and equipment is stated at cost, less accumulated depreciation. Depreciation is provided over the estimated useful life of each class of assets using the straight-line method. Expenditures for maintenance and repairs are charged to expense as incurred. Renewals and betterments are capitalized. When property is sold or retired, the cost and related accumulated depreciation are removed from the balance sheet and any gain or loss on the transaction is included in the statement of income. Effective January 1, 1999, the Company adopted Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 identified the characteristics of internal use software and established guidelines for identifying which costs must be expensed as incurred and which costs must be capitalized. F-8 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 2. Summary of significant accounting policies (continued): Property and Equipment (continued: The Company reviews long-lived assets and certain identifiable intangibles for impairment, based on the estimated future cash flows, whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Intangibles: Intangibles consists primarily of goodwill and deferred financing costs. Goodwill represents the excess of purchase price over the fair market value of the net assets of the acquired businesses based on their respective fair values at the date of acquisition. Goodwill is amortized on a straight-line basis over 15 to 40 years. For certain acquisitions, such allocations have been based on estimates that may be revised at a later date. The Company reviews the recoverability of its goodwill whenever events or changes in circumstances indicate that the carrying amount of the goodwill may not be recoverable. In making such a determination with respect to goodwill, the Company evaluates the operating results of the underlying business that gave rise to such amount. Deferred financing costs relate to debt issuance costs incurred, which are capitalized and amortized over the term of the debt. Accumulated amortization at December 31, 1998 and 1999 totaled $9.1 million and $24.1 million, respectively. Income Taxes: The Company accounts for income taxes using an asset and liability approach. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting basis and the tax basis of assets and liabilities. Income taxes were computed after giving effect to the non-deductible portion of goodwill expenses attributable to certain acquisitions and non-recurring acquisition costs attributable to the acquisition of JDR Holdings, Inc. ("JDR") on March 31, 1999. Foreign Currency Translation: The Company has foreign subsidiaries whose local currency has been determined to be the functional currency. For these foreign subsidiaries, the assets and liabilities have been translated using the current exchange rates, and the income and expenses have been translated using historical exchange rates. The adjustments resulting from translation have been recorded as a separate component of shareholders' equity and are not included in determining consolidated net income. Estimates Utilized in the Preparation of Financial Statements: 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. Comprehensive Income: Comprehensive income consists of net income from operations plus certain changes in assets and liabilities that are not included in net income but are reported as a separate component of shareholders' equity under generally accepted accounting principles. F-9 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 2. Summary of significant accounting policies (continued): Reclassifications: Certain amounts for December 31, 1997 and 1998, and for the years then ended have been reclassified for comparative purposes. 3. Acquisitions: Pooling-of-Interests Transaction: On March 31, 1999, the Company acquired all of the outstanding shares of JDR Holdings, Inc. ("JDR") for approximately 3.4 million shares of NCO common stock. The transaction was accounted for as a pooling-of-interests and a tax-free reorganization. Accordingly, the historical financial information of the Company has been restated to include the historical information of JDR. The following reconciles the amounts originally reported for revenue, net income applicable to common shareholders, and diluted net income per common share for the years ended December 31, 1997 and 1998 to the restated amounts and discloses the amount of revenue and net income applicable to common shareholders separately for each company for the period prior to the acquisition for the year ended December 31, 1999 (amounts in thousands, except per share data):
1997 1998 1999 --------- --------- --------- Revenue: NCO (as originally reported for 1997 and 1998) $ 85,284 $ 178,976 $ 477,877 JDR (for the period prior to the acquisition for 1999) (1) 22,789 50,976 14,477 --------- --------- --------- Combined $ 108,073 $ 229,952 $ 492,354 ========= ========= ========= Net income applicable to common shareholders: NCO (as originally reported for 1997 and 1998) $ 7,074 $ 14,716 $ 32,105 JDR (for the period prior to the acquisition for 1999) (1) (4,100) 2,025 578 Non-recurring acquisition costs, net of taxes - - (3,694) --------- --------- --------- Combined $ 2,974 $ 16,741 $ 28,989 ========= ========= ========= Diluted net income per share: NCO (as originally reported) $ 0.57 $ 0.89 JDR (1) (0.37) (0.04) --------- --------- Combined $ 0.20 $ 0.85 ========= =========
(1) On May 29, 1997, JDR completed a recapitalization, which established a new basis of accounting (see Note 9). As a result, the results of JDR for the year ended December 31, 1997 represent the period from May 29, 1997 to December 31, 1997. For the year ended December 31, 1999, the Company incurred $4.6 million of non-recurring acquisition costs in connection with the JDR acquisition. These costs consisted primarily of investment banking fees, legal and accounting fees, and printing costs. F-10 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 3. Acquisitions (continued): Purchase Transactions: All of the following acquisitions have been accounted for under the purchase method of accounting. As part of the purchase accounting, the Company recorded accruals for acquisition related expenses. These accruals included professional fees related to the acquisition, termination costs related to certain redundant personnel immediately eliminated at the time of the acquisitions, and certain future rental obligations attributable to facilities which were closed at the time of the acquisitions. On January 1, 1998, the Company purchased the net assets of the Collections Division of American Financial Enterprises, Inc. for $1.7 million in cash. The Company recognized goodwill of $2.2 million and is amortizing the goodwill on a straight-line basis over 25 years. On February 6, 1998, the Company purchased the net assets of The Response Center, which was an operating division of TeleSpectrum Worldwide, Inc., for $15.0 million in cash. The Company recognized goodwill of $14.3 million and is amortizing the goodwill on a straight-line basis over 25 years. On May 5, 1998, the Company purchased all of the outstanding common shares of FCA International Ltd. ("FCA") for $69.9 million in cash. The Company recognized goodwill of $93.2 million and is amortizing the goodwill on a straight-line basis over 40 years. Included in this goodwill is an accrual of $15.2 million for acquisition related expenses. As of December 31, 1999, there was $3.6 million remaining from this accrual for acquisition related expenses. On July 1, 1998, the Company purchased all of the outstanding stock of MedSource, Inc. for $18.4 million in cash. In connection with the acquisition, the Company repaid debt of $17.3 million. The Company recognized goodwill of $37.2 million and is amortizing the goodwill on a straight-line basis over 25 years. Included in this goodwill is an accrual of $5.8 million for acquisition related expenses. As of December 31, 1999, there was $551,000 remaining from this accrual for acquisition related expenses. On November 30, 1998, the Company acquired all of the outstanding stock of Medaphis Services Corporation ("MSC"), a wholly owned subsidiary of Medaphis Corporation, for $107.5 million in cash, plus an earn-out of up to $10.0 million based on MSC achieving certain operational targets during 1999. The Company recognized goodwill of $115.7 million and is amortizing the goodwill on a straight-line basis over 40 years. Included in this goodwill is an accrual of $3.3 million for acquisition related expenses. As of December 31, 1999, there was $2.5 million remaining from this accrual for acquisition related expenses. F-11 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 3. Acquisitions (continued): Purchase Transactions (continued): On May 21, 1999, the Company acquired all of the outstanding stock of Co-Source Corporation ("Co-Source") for approximately $122.7 million in cash plus a warrant to purchase 250,000 shares of NCO common stock. The purchase price was valued at approximately $124.6 million. The Company recognized goodwill of $128.6 million and is amortizing the goodwill on a straight-line basis over 40 years. Included in this goodwill is an accrual of $2.2 million for acquisition related expenses. As of December 31, 1999, there was $800,000 remaining from this accrual for acquisition related expenses. The allocation of the fair market value to the acquired assets and liabilities of Co-Source was based on preliminary estimates and may be subject to change. On August 20, 1999, the Company acquired all of the outstanding shares of Compass International Services Corporation ("Compass") for approximately 3.3 million shares of NCO common stock. In connection with the acquisition, the Company assumed outstanding stock options to purchase approximately 200,000 shares of NCO common stock. The purchase price was valued at approximately $104.1 million. The Company recognized goodwill of $139.1 million and is amortizing the goodwill on a straight-line basis over 40 years. Included in this goodwill is an accrual of $12.5 million for acquisition related expenses. As of December 31, 1999, there was $3.6 million remaining from this accrual for acquisition related expenses. The allocation of the fair market value to the acquired assets and liabilities of Compass was based on preliminary estimates and may be subject to change. The following summarizes the unaudited pro forma results of operations for the years ended December 31, 1998 and 1999, assuming the above acquisitions had occurred as of the beginning of the respective periods. The pro forma information is provided for informational purposes only. It is based on historical information and does not necessarily reflect the actual results that would have occurred, nor is it indicative of future results of operations of the consolidated entities: 1998 1999 --------- --------- (Unaudited) Revenue $ 519,874 $ 581,987 Net income $ 13,253 $ 27,387 Earnings per share - basic $ 0.48 $ 1.10 Earnings per share - diluted $ 0.45 $ 1.06 4. Funds held on behalf of clients: In the course of the Company's regular business activities as an accounts receivable management company, the Company receives clients' funds arising from the collection of accounts placed with the Company. These funds are placed in segregated cash accounts and are generally remitted to clients within 30 days. Funds held on behalf of clients of $32.2 million and $47.7 million at December 31, 1998 and 1999, respectively, have been shown net of their offsetting liability for financial statement presentation. F-12 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 5. Property and equipment: At December 31, 1998 and 1999, property and equipment, at cost, consisted of the following:
Estimated Useful Life 1998 1999 -------------- ------------ ------------ Computer equipment 5 years $ 23,794,000 $ 47,423,000 Furniture and fixtures 5 to 10 years 6,250,000 9,325,000 Computer software developed for internal use 5 years - 8,750,000 Leasehold improvements 5 to 12 years 1,908,000 4,471,000 Leased assets 2 to 5 years 1,983,000 2,465,000 ------------ ------------ 33,935,000 72,434,000 Less accumulated depreciation 6,873,000 15,611,000 ------------ ------------ $ 27,062,000 $ 56,823,000 ============ ============
Depreciation charged to operations amounted to $2.1 million, $3.9 million and $8.8 million for the years ended 1997, 1998, and 1999, respectively. 6. Long-term debt:
1998 1999 ------------- ------------- Revolving credit loan $ 11,035,000 $ 322,750,000 Term loan; 7.37%, payable in quarterly installments, ranging from $3.0 to $5.3 million, through November 2003 when the remaining balance becomes payable 125,000,000 - JDR revolving credit agreement 12,500,000 - Subordinated seller notes payable; interest rates ranging from 7.16% to 8.00%, $750,000 due May 2000 through August 2000 and $130,000 due May 2001 - 880,000 Subordinated seller note payable; 8.00%, due February 2002, converted to common stock at $14.12 per share on February 15, 1999 900,000 - Subordinated seller notes payable; 8.00%, due January 1999 500,000 - Other 36,000 - Capital leases 2,227,000 1,991,000 Less current portion (8,288,000) (1,672,000) ------------- ------------- $ 143,910,000 $ 323,949,000 ============= =============
F-13 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 6. Long-term debt (continued): The following summarizes the Company's required debt payments for the next five years: 2000 $ 1,672,000 2001 680,000 2002 261,000 2003 97,000 2004 322,911,000 In May 1999, the Company's credit agreement with Mellon Bank, N.A. ("Mellon Bank"), for itself and as administrative agent for other participating lenders, was amended to, among other things, increase the Company's credit facility to provide for borrowings up to $350.0 million, structured as a $350.0 million revolving credit facility. Prior to this amendment, the credit facility was structured as a $125.0 million term loan and a $75.0 million revolving credit facility. At the option of NCO, the borrowings bear interest at a rate equal to either Mellon Bank's prime rate plus a margin ranging from 0.25% to 0.50% that is determined quarterly based upon the Company's consolidated funded debt to EBITDA ratio (Mellon Bank's prime rate was 8.50% at December 31, 1999), or LIBOR plus a margin ranging from 1.25% to 2.25% depending on the Company's consolidated funded debt to EBITDA ratio (LIBOR was 5.83% at December 31, 1999). Borrowings are collateralized by substantially all the assets of the Company. The balance under the revolving credit facility will be due upon the expiration of the five-year term. The credit agreement contains certain financial covenants such as maintaining net worth and funded debt to EBITDA requirements and includes restrictions on, among other things, acquisitions, capital expenditures, and distributions to shareholders. Mellon Bank received warrants to purchase an aggregate of 361,000 shares of the Company's common stock for establishing the credit facility initially in 1995 and for subsequent amendments to increase the Company's borrowing capacity under the credit facility. In July 1997, the bank exercised and sold 225,000 warrants for common stock. The remainder of the warrants were exercised in January 1998. As of December 31, 1998, JDR had $12.5 million of borrowings outstanding against its revolving credit facility (the "JDR Credit Facility"). On March 31, 1999, the Company repaid the outstanding balance on the JDR Credit Facility with borrowings from its revolving credit agreement with Mellon Bank and cancelled the JDR Credit Facility. Deferred financing costs of $353,000 were written-off on March 31, 1999 as a result of the cancellation of the JDR Credit Facility. Under the terms of the JDR Credit Facility, JDR could borrow up to $20.0 million. Advances under the JDR Credit Facility bore interest at optional borrowing rates of either the then current prime rate plus a margin that ranged from 0.50% to 1.50 % or LIBOR, plus a margin that ranged from 2.00% to 3.00%, depending on certain conditions specified in the JDR Credit Facility agreement. JDR also paid a commitment fee of 0.375% on the unused borrowing capacity. Borrowings under the JDR Credit Facility were collateralized by substantially all of the assets of JDR. On May 29, 1997, JDR entered into a credit agreement (the "JDR Bridge Loan") whereby JDR borrowed $11.0 million to redeem common stock owned by two stockholders and repay all outstanding indebtedness of JDR. Borrowings under the JDR Bridge Loan bore interest at 10%. On May 30, 1997, $8.3 million of borrowings under the JDR Bridge Loan were converted into redeemable preferred stock (see Notes 9 and 10) and $2.7 million was repaid with borrowings under the JDR Credit Facility. In connection with the JDR Bridge Loan, JDR recorded debt issuance costs of $185,000, which were fully amortized upon conversion and repayment of the JDR Bridge Loan. In connection with the JDR Credit Facility, the lender purchased 18,000 shares of JDR Redeemable Series A and 11,000 shares of JDR Series B Preferred for $603,000 (see Notes 9 and 10). At December 31, 1999, the Company had unused letters of credit of $1.7 million. F-14 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 6. Long-term debt (continued): On February 15, 1999, the $900,000 convertible note issued in connection with the 1997 acquisition of Goodyear & Associates, Inc. ("Goodyear") was converted into 64,000 shares of NCO common stock. The Company leases certain equipment under agreements which are classified as capital leases. The equipment leases have original terms ranging from 24 to 120 months and have purchase options at the end of the original lease term. 7. Operating leases: The Company leases certain equipment and real estate facilities under non-cancelable operating leases. Future minimum payments, by year and in the aggregate, under non-cancelable operating leases with initial or remaining terms of one year or more consisted of the following at December 31, 1999: 2000 $ 17,928,000 2001 14,491,000 2002 9,709,000 2003 7,084,000 2004 5,517,000 Thereafter 10,853,000 ------------ $ 65,582,000 ============ Rent expense was $3.7 million, $7.8 million and $15.0 million for the years ended December 31, 1997, 1998, and 1999, respectively. The total amount of base rent payments is being charged to expense on the straight-line method over the term of the lease. 8. Income taxes: A summary of the components of the tax provision at December 31, 1997, 1998, and 1999 is as follows:
1997 1998 1999 ------------ ------------ ------------ Currently payable: Federal $ 2,233,000 $ 7,699,000 $ 9,574,000 State 484,000 1,355,000 576,000 Foreign - 331,000 500,000 Deferred: Federal 1,752,000 3,035,000 10,699,000 State 29,000 711,000 2,345,000 Valuation allowance 302,000 - - ----------- ------------ ------------ Provision for income taxes $ 4,800,000 $ 13,131,000 $ 23,694,000 =========== ============ ============
Deferred tax assets (liabilities) at December 31, 1998 and 1999 consisted of the following:
1998 1999 ------------ ------------- Deferred tax assets: Net operating loss carryforwards $ 569,000 $ - Contractual revenue recognition - - Accrued expenses 1,056,000 2,965,000 ------------ ------------- 1,625,000 2,965,000 Deferred tax liabilities: Amortization 4,999,000 21,310,000 Depreciation 1,735,000 4,437,000 Cash basis of accounting 375,000 - ------------ ------------- 7,109,000 25,747,000 ------------ ------------- Net deferred tax liability $ (5,484,000) $ (22,782,000) ============ =============
F-15 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 8. Income taxes (continued): A reconciliation of the U.S. statutory income tax rate to the effective rate (excluding the effect of the change in tax status) is as follows:
1997 1998 1999 -------- --------- --------- U.S. statutory income tax rate 34% 35% 35% Non-deductible goodwill and other expenses 3% 2% 6% State taxes, net of federal 5% 6% 4% Utilization of net operating loss carryforwards - (1%) - JDR operating losses not tax deductible 9% - - -------- --------- --------- Effective tax rate 51% 42% 45% ======== ========= =========
9. JDR Recapitalization: On May 29 and 30, 1997, JDR completed a series of transactions that substantially changed its size and capital structure. These transactions, which are described further below, included the repayment of outstanding debt, the repurchase of all capital stock held by two former institutional investors, certain executive officers of JDR and an individual investor, the issuance of new preferred shares, the purchase of several companies that were previously partially-owned by JDR's majority stockholder and President, and a recapitalization of JDR. After the repurchase of capital stock, JDR's President became the only holder of Voting Common ("JDR's Sole Stockholder"). At that point, the Sole Stockholder's basis in his investment was "pushed down" to the JDR's books, as required by Staff Accounting Bulletin No. 54. This established a new basis of accounting for JDR on May 29, 1997 and NCO's financial statements, therefore, include the period from that date to the Company's fiscal year end, December 31, 1997. On May 29, 1997, JDR amended and restated its certificate of incorporation to authorize the issuance of 17,955,000 shares of stock, consisting of: (i) 9,794,000 shares of common stock ("JDR Common") consisting of 4,897,000 shares of voting common stock ("Voting Common") and 4,897,000 shares of nonvoting common stock ("Nonvoting Common"); and (ii) 8,161,000 shares of preferred stock ("Preferred"), of which 417,000 shares were designated as Redeemable Series A Preferred stock, no par value ("Redeemable Series A"), 555,000 shares were designated as Convertible Series A Preferred stock, no par value ("Series A Preferred"), 204,000 were designated as Convertible Series B Preferred stock, no par value ("Series B Preferred") and 237,000 were designated as Convertible Series C Preferred stock, no par value ("Series C Preferred") (see Notes 10 and 11). Also on May 29, 1997, JDR received a bridge loan of $11.0 million (see Note 6), the proceeds of which were used to repay $5.4 million of outstanding long-term debt, to pay debt issuance costs of $185,000 (see Note 6) and to repurchase for $5.4 million all of the Voting Common held by shareholders other than JDR's Sole Stockholder and certain shares of Redeemable Series A and Series B Preferred stock. This transaction resulted in the push down of JDR's Sole Stockholder's basis in his investment in JDR's stock onto JDR's books. The establishment of this new basis of accounting resulted in JDR recording an increase in equity of $6.7 million, which represented the difference between JDR's net book value at May 29, 1997 and JDR's Sole Stockholder's accounting basis. The entire amount of the increase in equity was allocated to goodwill, which is being amortized over 40 years on a straight-line basis. F-16 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 9. JDR Recapitalization (continued):
The repurchase and exchange of stock included the following: Repurchase of 401,000 shares of Voting Common $ 4,624,000 Repurchase of 92,000 shares of Redeemable Series A and Series B Preferred stock plus accrued dividends of $165,000 802,000 Exchange of 40,000 shares of Redeemable Series A and Series B Preferred stock, plus accrued dividends of $23,000 for 13,000 shares of Series A Preferred 146,000 Exchange of 129,000 shares of Voting Common for 129,000 shares of Nonvoting Common 1,493,000 Exchange of 1,000 shares of Voting Common for 1,000 shares of Series B Preferred 11,000 ----------- Total value of shares repurchased and exchanged $ 7,076,000 ===========
On May 30, 1997, JDR issued preferred stock to two new institutional investors (see Note 10) as follows:
Issued 271,000 shares of Redeemable Series A $ 7,050,000 Issued 38,000 shares of Series A Preferred 439,000 Issued 125,000 shares of Series B Preferred 1,445,000 ----------- $ 8,934,000 ===========
10. Redeemable preferred stock: All of the Redeemable Series A Preferred stock, the Convertible Series A Preferred stock and the Convertible Series B Preferred stock was exchanged for NCO common stock on March 31, 1999.
December 31, 1998 ----------------- Redeemable Series A Preferred stock, no par value, 417,000 shares authorized, 271,000 shares issued and outstanding $ 5,394,000 Convertible Series A Preferred stock, no par value, 555,000 shares authorized, 365,000 shares issued and outstanding 4,601,000 Convertible Series B Preferred stock, no par value, 204,000 shares authorized, 149,000 shares issued and outstanding 1,887,000 ------------ $ 11,882,000 ============
JDR issued 271,000 shares of Redeemable Series A stock to repay $6.6 million of borrowings under the JDR Bridge Loan (see Notes 6 and 9) and for cash proceeds of $476,000. The Redeemable Series A stock required a dividend (payable in kind) of 7.0% per year. The holders of the Redeemable Series A stock could have redeemed these shares for their liquidation value beginning on May 30, 2003. JDR would have been obligated to redeem these shares on May 30, 2004. The Redeemable Series A stock had limited voting rights, was senior to the Series C Preferred stock and common stock. JDR issued 38,000 shares of Series A Preferred stock to repay $439,000 of borrowings under the JDR Bridge Loan (see Notes 6 and 9). In addition, JDR issued 13,000 shares of Series A Preferred stock in exchange for certain Redeemable Series A and Series B Preferred stock. The Series A Preferred required a dividend (payable in kind) of 6.0% per year. The holders of the Series A Preferred stock could have converted their shares at any time into voting common stock. In addition, the holders of the Series A Preferred stock could have redeemed their shares for their liquidation value beginning on May 30, 2002. The Series A Preferred stock had limited voting rights, was senior to the Series C Preferred stock and common stock. F-17 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 10. Redeemable preferred stock (continued): JDR issued 125,000 shares of Series B Preferred stock to repay $1.3 million of borrowings under the JDR Bridge Loan (see Notes 6 and 9) and for cash proceeds of $127,000. The Series B Preferred stock required a dividend (payable in kind) of 6.0% per year. The holders of the Series B Preferred stock could have converted their shares at any time into nonvoting common stock. In addition, the holders of the Series B Preferred stock could have redeemed these shares for their liquidation value beginning on May 30, 2002. The Series B Preferred stock had limited voting rights, was senior to the Series C Preferred stock and common stock. 11. Shareholders' equity: Preferred Stock At December 31, 1998, JDR had 237,000 shares designated as Series C Preferred stock, of which 149,000 shares were issued and outstanding. The Series C Preferred stock required a dividend (payable in kind) of 6.0% per year. JDR could have redeemed the Series C Preferred, at any time, for its liquidation value. The holders of the Series C Preferred stock could have converted their shares at any time after May 30, 2000, or at the time any shares of Series A Preferred stock or Series B Preferred stock were converted into common stock, into nonvoting common stock. The Series C Preferred stock had a liquidation value of $1.9 million, including dividends of $167,000, at December 31, 1998. All of the Series C Preferred stock was converted into NCO common stock on March 31, 1999. Common Stock In December 1997, the Company effected a three-for-two stock split and increased the authorized shares of common stock to 37,500,000. All per share and related amounts have been adjusted to reflect the stock exchange and stock splits. In July 1997, the Company completed a public offering, selling 2,166,000 shares of common stock at a price to the public of $19.67 per share. The Company received net proceeds, after underwriting discounts and expenses, of approximately $40.4 million. In June 1998, the Company completed a public offering, selling 4,469,000 shares of common stock (469,000 of which were over-allotment shares exercised in July 1998) at a price to the public of $21.50 per share. The Company received net proceeds, after underwriting discounts and expenses, of approximately $91.3 million. Nonvoting Common Stock At December 31, 1998, JDR had 4,897,000 shares of nonvoting common stock authorized, of which 1,088,000 shares were issued and 1,044,000 shares were outstanding. All of the nonvoting common stock was exchanged for NCO common stock on March 31, 1999. Common Stock Warrants On May 30, 1997, JDR issued warrants to purchase 621,000 shares of nonvoting common stock at a nominal value in connection with the sale of capital stock and the JDR Credit Facility (see Note 8). All of the warrants were exercised and exchanged for NCO common stock on March 31, 1999. On May 21, 1999, NCO issued warrants to purchase 250,000 shares of NCO common stock in connection with the acquisition of Co-Source. During 1999, warrants to issue 228,000 shares of NCO common stock were exercised. The holders of the warrants elected to use the option of forfeiting a portion of their warrants to cover the exercise price. These exercises resulted in the net issuance of 67,000 shares of NCO common stock. Warrants to purchase 22,000 shares of NCO common stock were still were outstanding as of December 31, 1999. F-18 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 11. Shareholders' equity (continued): Treasury Stock JDR had 44,000 shares of nonvoting common stock and 312,000 shares of voting common stock in Treasury at December 31, 1998. All of the treasury shares were retired on March 31, 1999. 12. Earnings per share: Basic earnings per share were computed by dividing the net income for the years ended December 31, 1997, 1998, and 1999 by the weighted average number of shares outstanding. Diluted earnings per share were computed by dividing the net income, adjusted for the effects of interest expense attributable to convertible debt, for the years ended December 31, 1997, 1998, and 1999, by the weighted average number of shares outstanding, including common equivalent shares. All outstanding options, warrants and convertible securities have been utilized in calculating diluted net income per share only when their effect would be dilutive. The reconciliation of basic to diluted earnings per share ("EPS") consists of the following (amounts in thousands, except EPS amounts):
1997 1998 1999 -------------------- ------------------ -------------------- Shares EPS Shares EPS Shares EPS --------- --------- -------- -------- --------- --------- Basic 13,736 $ 0.22 18,324 $ 0.91 22,873 $ 1.27 Dilutive effect of warrants 459 (0.01) 725 (0.03) 206 (0.01) Dilutive effect of options 491 (0.01) 615 (0.03) 712 (0.04) Other 122 - 94 - 8 - ------ ------ ------ ------ ------ ------ Diluted 14,808 $ 0.20 19,758 $ 0.85 23,799 $ 1.22 ====== ====== ====== ====== ====== ======
13. Stock options: In June 1995, the Company adopted the 1995 Stock Option Plan (the "1995 Plan"). In September 1996, the Company adopted the 1996 Stock Option Plan (the "1996 Plan") and the 1996 Non-Employee Director Stock Option Plan (the "Director Plan"). The 1995 Plan and 1996 Plan, as amended, authorized 333,000 and 2,717,000 shares, respectively, of incentive or non-qualified stock options. The Director Plan, as amended, authorized 150,000 shares. The vesting periods for the outstanding options under the 1995 Plan, the 1996 Plan, and the Director Plan are three years, three years and one year, respectively. The maximum exercise period is ten years after the date of grant. F-19 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 13. Stock options (continued): In June 1997, JDR established the JDR Holdings, Inc. 1997 Stock Option Plan (the "JDR Plan") and reserved 69,000 shares of common stock. All options that were issued and outstanding under the JDR Plan as of March 31, 1999 became fully vested as a result of the acquisition of JDR by NCO. The options expire no later than ten years from the date of grant. On August 20, 1999, as part of the acquisition of Compass, NCO assumed the Compass Employee Incentive Compensation Plan (the "Compass Plan"). The Compass Plan authorized up to 475,000 shares of non-qualified stock options. The vesting periods for the outstanding options under the Compass Plan are one to three years. The maximum exercise period is ten years after the date of grant. A summary of stock option activity of the 1995 Plan, the 1996 Plan, the Director Plan, the JDR Plan and the Compass Plan is as follows:
Weighted Average Number of Exercise Price Options Per Share ------------- --------------- Outstanding at January 1, 1997 658,000 $ 6.80 Granted 493,000 21.21 Exercised (50,000) 4.20 Forfeited (36,000) 10.72 ----------- ------- Outstanding at December 31, 1997 1,065,000 13.95 Granted 776,000 27.32 Exercised (230,000) 5.98 Forfeited (32,000) 19.78 ----------- ------- Outstanding at December 31, 1998 1,579,000 21.44 Granted 1,497,000 32.58 Exercised (441,000) 16.89 Forfeited (24,000) 26.76 ----------- ------- Outstanding at December 31, 1999 2,611,000 $ 28.27 =========== ======= Stock options exercisable at December 31, 1999 695,000 $ 25.55 =========== =======
F-20 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 13. Stock options (continued): The following table summarizes information about fixed stock options outstanding as of December 31, 1999:
Stock Options Outstanding Stock Options Exercisable ------------------------------------------------- ----------------------------- Weighted Weighted Weighted Range of Average Average Average Exercise Prices Shares Remaining Life Exercise Price Shares Exercise Price --------------------- ------------ ----------------- --------------- ----------- --------------- $ 1.82 to $19.42 311,000 7.08 years $ 13.55 246,000 $ 12.72 $21.00 to $24.75 497,000 8.33 years 22.51 194,000 23.14 $28.44 to $29.94 1,170,000 9.84 years 29.83 27,000 29.14 $30.75 to $37.00 449,000 9.11 years 33.70 89,000 33.70 $43.81 to $61.09 184,000 8.36 years 45.47 139,000 45.80 --------- ---------- ------- ------- ------- 2,611,000 9.00 years $ 28.27 695,000 $ 25.55 ========= ========== ======= ======= =======
The Company applies APB Opinion 25 and related interpretations in accounting for its stock option plans and, accordingly, does not recognize compensation cost based on the fair value of the options granted at grant date. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date, net income and earnings per share for 1997, 1998, and 1999 would have been reduced to the unaudited, pro forma amounts indicated in the following table:
1997 1998 1999 ------------ ------------ ------------ Net income - as reported $ 4,591,000 $ 18,345,000 $ 29,366,000 Net income - pro forma $ 4,115,000 $ 17,264,000 $ 27,050,000 Net income per share: Basic - as reported $ 0.22 $ 0.91 $ 1.27 Basic - pro forma $ 0.18 $ 0.85 $ 1.17 Diluted - as reported $ 0.20 $ 0.85 $ 1.22 Diluted - pro forma $ 0.17 $ 0.79 $ 1.12
The estimated weighted average, grant-date fair values of the options granted during the years ended December 31, 1997, 1998, and 1999 were $6.53, $9.86, and $12.43, respectively. All options granted were at the market price of the stock on the grant date. For valuation purposes, the Company utilized the Black-Scholes option pricing model using the following assumptions on a weighted average basis:
1997 1998 1999 ---------- ---------- ---------- Risk-free interest rate 6.19% 4.98% 5.73% Expected life in years 3.25 3.25 3.25 Volatility factor 40.42% 43.38% 44.04% Dividend yield None None None Forfeiture rate 5.00% 5.00% 5.00%
F-21 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 13. Stock options (continued): For valuation purposes, JDR utilized the Black-Scholes option pricing model using the following assumptions on a weighted average basis for the options granted under the JDR Plan: dividend yield of 0%, expected volatility of 0%, risk-free interest rate of 6.6%, and an expected life of ten years. At December 31, 1998, the Company had 36,000 options outstanding to purchase JDR Nonvoting Common stock at $0.02 per share. On March 31, 1999, the 36,000 outstanding options to purchase JDR Nonvoting Common stock at $0.02 per share were converted into 36,000 options to purchase NCO common stock at $0.02 per share. During 1999, 22,000 of these options were exercised to purchase NCO common stock. At December 31, 1999, the Company had 14,000 options outstanding to purchase NCO common stock at $0.02 per share. On July 1997, a consultant, who also served as a director of JDR, received options to purchase 228,000 shares of JDR Nonvoting Common stock at $11.54 per share. The original vesting schedule of these options was 58% on January 1, 1998 and 14% on January 1, 1999, 2000 and 2001. The Company recorded the $961,000 value as expense as the options vested. For the year ended December 31, 1998 and the first quarter of 1999, the Company recorded $686,000 and $34,000, respectively, as consulting expense for these options. The remaining value of the options was recorded when the they became fully vested upon the completion of the acquisition of JDR on March 31, 1999. 14. Derivative financial instruments: The Company selectively uses derivative financial instruments to manage interest costs and minimize currency exchange risk. The Company does not hold derivatives for trading purposes. While these derivative financial instruments are subject to fluctuations in value, these fluctuations are generally offset by the value of the underlying exposures being hedged. The Company minimizes the risk of credit loss by entering into these agreements with major financial institutions that have high credit ratings. Interest Rate Collar and Interest Rate Swap Agreements: During 1998 and 1999, the Company entered into interest rate collar agreements and an interest rate swap agreement to reduce the impact of changes in interest rates on portions of the debt borrowed from its revolving credit facility. As of December 31, 1999, the Company was party to three interest rate collar agreements that consisted of a rate ceiling and floor that is based on different notional amounts. The first interest rate collar agreement consisted of a ceiling portion with a rate of 7.75%, covering a notional amount of $30.0 million, and a floor portion with a rate of 4.75%, covering a notional amount of $15.0 million. This interest rate collar agreement expires in September of 2001. The other two interest rate collar agreements consisted of a ceiling portion with a rate of 7.50%, covering a total notional amount of $120.0 million, and a floor portion with a rate of 5.50%, covering a total notional amount of $120.0 million. These interest rate collar agreements expire in October of 2001. The notional amounts of these interest rate collar agreements are used to measure the interest to be paid or received and do not represent the amount of exposure due to credit loss. The net cash amounts paid or received on the interest rate collar agreements are accrued and recognized as an adjustment to interest expense. The interest rate swap agreement, which expired in June 1999, exchanged the floating rate on the Company's outstanding debt from its revolving credit facility for a fixed interest rate of 5.12%. This agreement covered a notional amount of approximately $136.0 million. Foreign Exchange Contracts: As part of the acquisition of FCA International Ltd. ("FCA"), the Company obtained forward exchange contracts which where entered into by FCA. These forward exchange contracts were used by the Company to minimize the impact of currency fluctuations on transactions, cash flows and firm commitments. The Company had approximately $3.4 million of contracts outstanding at December 31, 1998. These contracts were for the purchase of Canadian dollars and matured within one to 30 months. In April 1999, the Company elected to finalize its forward position under these contracts at a cost of approximately $148,000. F-22 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 15. Fair value of financial instruments: The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value: Cash and Cash Equivalents: The carrying amount reported in the balance sheet approximates fair value because of the short maturity of these instruments. Debt: The Company's non-seller-financed debt is primarily variable in nature and based on the prime rate, and, accordingly, the carrying amount of debt instruments approximates fair value. The stated interest rates of the Company's non-convertible seller-financed notes approximate market rates for debt with similar terms and maturities, and, accordingly, the carrying amounts approximates fair value. The Company's seller-financed debt from the Goodyear acquisition consisted of a note payable, which contained a conversion option, which allowed the holder to convert the debt into 64,000 shares of common stock at a price of $14.12 per share on February 15, 1999. Accordingly, the fair value of the debt as of December 31, 1998 was calculated using the closing market price of NCO's common stock on February 15, 1999. Interest Rate Instruments: While it is not the Company's intention to terminate any of the interest rate instruments, the fair value of the instruments was estimated by obtaining quotes from brokers that represented amounts the Company would have received or paid if the agreements were terminated at December 31, 1998 and 1999. These fair values indicated that the gains or losses that would have resulted from the termination of the interest rate swap agreement and the interest rate collar agreement at December 31, 1998 and 1999 would have not been material. Foreign Exchange Contracts: The fair value of foreign exchange contracts at December 31, 1998 was not material. F-23 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 15. Fair value of financial instruments (continued): The estimated fair value of the Company's financial instruments are as follows at December 31:
1998 1999 -------------------------------- -------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------------- -------------- -------------- -------------- Financial assets: Cash and cash equivalents $ 23,560,000 $ 23,560,000 $ 52,380,000 $ 52,380,000 Financial liabilities: Non-seller financed debt 148,535,000 148,535,000 322,750,000 322,750,000 Subordinated seller notes payable 500,000 500,000 880,000 880,000 Subordinated seller notes payable, convertible 900,000 2,176,000 - - Non-interest bearing note payable 36,000 36,000 - -
16. Supplemental cash flow information: The following are supplemental disclosures of cash flow information:
1997 1998 1999 -------------- --------------- ---------------- Cash paid for interest $ 1,570,000 $ 2,905,000 $ 7,923,000 Cash paid for income taxes 4,181,000 5,726,000 24,331,000 Non-cash investing and financing activities: Fair value of assets acquired 12,320,000 47,872,000 28,368,000 Liabilities assumed from acquisitions 7,019,000 46,730,000 53,713,000 Fair value of contributed capital - 3,834,000 - Property acquired under capital leases 967,000 138,000 - Value of fixed assets traded for new fixed assets 238,000 - - Convertible note payable, issued for acquisition 900,000 - - Notes payable, issued for acquisitions 1,000,000 - - Convertible note payable, converted to common stock 1,000,000 - 900,000 Common stock issued for acquisitions 9,310,000 - 101,526,000 Common stock options issued for acquisitions - - 2,562,000 Redemption of redeemable preferred stock for common stock - - 12,231,000 Warrant issued 5,450,000 - 1,925,000 Warrants exercised 149,000 247,000 6,332,000
F-24 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 17. Employee benefit plans: The Company has a savings plan under Section 401(k) of the Internal Revenue Code (the "Plan"). The Plan allows all eligible employees to defer up to 15% of their income on a pretax basis through contributions to the Plan. The Company will provide a matching contribution of 25% of an employee's contribution, subject to a maximum of 1.5% of an employee's base salary. The charges to operations for the matching contributions were $220,000, $755,000 and $1,407,000, for 1997, 1998, and 1999, respectively. 18. Commitments and contingencies: The Company is party, from time to time, to various legal proceedings incidental to its business. In the opinion of management none of these items individually or in the aggregate would have a significant effect on the financial position, result of operations, cash flows, or liquidity of the Company. 19. Segment reporting: The Company is organized into market specific operating divisions that are responsible for all aspects of client sales, client service, and operational delivery of services. The accounting policies of the segments are the same as those described in Note 2, "Summary of significant accounting policies." Segment data includes a charge allocating corporate overhead costs to each of the operating segments based on revenue and employee headcount. During 1999, the operating divisions, which were each headed by a divisional chief executive officer, included Accounts Receivable Management Services, Healthcare Services, Technology-Based Outsourcing, Commercial Services, Market Strategy and International Operations. The Accounts Receivable Management Services division provides accounts receivable management services to consumer and commercial accounts for all market segments, serving clients of all sizes in local, regional and national markets. The Healthcare Services division primarily focuses on providing comprehensive outsourcing services for the hospital market. In addition, the Healthcare Services division provides accounts receivable management programs for physician groups and allied health service providers. During the first quarter of 2000, the accounts receivable management services portion of the Healthcare Services division was merged into the Accounts Receivable Management Services division, and the pre-delinquency services portion of the Healthcare Services division was merged into the Technology-Based Outsourcing division. With the March 1999 acquisition of JDR, the Technology-Based Outsourcing division was created. This division continues the growth of the client relationship beyond bad debt recovery and delinquency management, delivering cost-effective receivables and customer relationship management solutions to all market segments, serving clients of all sizes in local, regional and national markets. With the May 1999 acquisition of Co-Source, the Commercial Services division was created. The Commercial Services division focuses on providing accounts receivable management and collection services to the commercial market. During the first quarter of 2000, the Commercial Services division was merged into the Accounts Receivable Management Services division. The Market Strategy division provides full-service, custom market research services to the telecommunications, financial services, utilities, healthcare, pharmaceutical, and consumer products sectors. In addition, the Market Strategy division provides telemarketing services for clients, including lead generation and qualification, and the booking of appointments for a client's sales representatives. F-25 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 19. Segment reporting (continued): With the May 1998 acquisition of FCA, the International Operations division was created. The International Operations division provides accounts receivable management services across Canada and the United Kingdom. The following tables represent the revenue, payroll and related expenses, selling, general and administrative expenses, and earnings before interest, taxes, depreciation, and amortization ("EBITDA") for each segment for the years ended December 31, 1997, 1998 and 1999. EBITDA is used by the Company's management to measure the segments' operating performance and is not intended to report the segments' operating results in conformity with generally accepted accounting principles.
For the year ended December 31, 1997 (Amounts in thousands) ------------------------------------------------------------------------ Payroll and Selling General Related and Admin. Revenue Expenses Expenses EBITDA ---------------- ----------------- ----------------- --------------- A/R Management $ 81,942 $ 40,550 $ 28,318 $ 13,074 Tech-Based Outsourcing 17,778 10,945 6,165 668 Market Strategy 8,353 5,454 1,889 1,010 --------- -------- -------- -------- Total $ 108,073 $ 56,949 $ 36,372 $ 14,752 ========= ======== ======== ========
For the year ended December 31, 1998 (Amounts in thousands) ------------------------------------------------------------------------ Payroll and Selling General Related and Admin. Revenue Expenses Expenses EBITDA ---------------- ----------------- ----------------- --------------- A/R Management $ 127,419 $ 63,023 $ 38,649 $ 25,747 Healthcare Services 20,442 9,930 5,978 4,534 Tech-Based Outsourcing 43,530 22,932 11,893 8,705 Market Strategy 20,005 12,527 5,210 2,268 International Operations 18,556 10,902 4,858 2,796 --------- --------- -------- -------- Total $ 229,952 $ 119,314 $ 66,588 $ 44,050 ========= ========= ======== ========
For the year ended December 31, 1999 (Amounts in thousands) --------------------------------------------------------------------------- Selling Non- Payroll and General and Recurring Related Admin. Acquisition Revenue Expenses Expenses Costs EBITDA -------------- ------------- --------------- ------------- ------------ A/R Management $ 175,225 $ 85,563 $ 50,401 $ - $ 39,261 Healthcare Services 136,375 72,037 39,410 - 24,928 Tech-Based Outsourcing 63,118 32,994 16,964 - 13,160 Commercial Services 54,553 29,673 12,705 - 12,175 Market Strategy 32,043 20,011 7,397 - 4,635 International Operations 31,040 17,599 8,631 - 4,810 Other - - - 4,601 (4,601) ---------- --------- --------- ------- -------- Total $ 492,354 $ 257,877 $ 135,508 $ 4,601 $ 94,368 ========= ========= ========= ======= ========
F-26 NCO GROUP, INC. Notes to Consolidated Financial Statements (Continued) 20. Recent accounting pronouncements: In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which was subsequently amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" (collectively "SFAS No. 133"). SFAS No. 133 is effective for the fiscal years beginning after June 15, 2000 and requires that an entity recognize all derivative instruments as either assets or liabilities on its balance sheet at their fair values. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction, and, if it is, the type of hedge transaction. The Company will adopt SFAS No. 133 by the first quarter of 2001. Due to the Company's limited use of derivative instruments, SFAS No. 133 is not expected to have a material impact on the consolidated results of operations, financial condition, or cash flows of the Company. F-27 NCO GROUP, INC. Schedule II - Valuation of Qualifying Accounts
Additions ------------------------- Balance at Charged to Charged to Balance at beginning costs and other end of year expenses accounts (1) Deductions (2) year ----------- ----------- ------------- --------------- ------------- Year ended December 31, 1997: Allowance for doubtful accounts $ 79,000 665,000 350,000 (376,000) 718,000 Year ended December 31, 1998: Allowance for doubtful accounts 718,000 2,652,000 2,122,000 (1,494,000) 3,998,000 Year ended December 31, 1999: Allowance for doubtful accounts 3,998,000 2,629,000 1,500,000 (1,702,000) 6,425,000
(1) Allowance for doubtful accounts of acquired companies. (2) Uncollectible accounts written off, net of recoveries. S-1 EX-10.20 2 EXHIBIT 10.20 ================================================================================ FIFTH AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF DECEMBER 31, 1999 by and among NCO GROUP, INC., as Borrower and THE FINANCIAL INSTITUTIONS identified herein as Lenders and MELLON BANK, N.A., as Administrative Agent and SUCH MANAGING AGENTS, CO-AGENTS AND OTHER AGENTS AS MAY BE APPOINTED FROM TIME TO TIME HEREAFTER ================================================================================ TABLE OF CONTENTS
Page ---- ARTICLE I Credit Facility.......................................................................................2 1.1 Commitment To Lend.............................................................................2 1.2 [Intentionally omitted]........................................................................2 1.3 Manner Of Borrowing............................................................................2 1.4 Repayments.....................................................................................3 1.5 Voluntary Prepayments..........................................................................4 1.6 Payments By The Borrower In General............................................................4 1.7 Reductions Of RC Commitment....................................................................6 1.8 Interest.......................................................................................7 1.9 Fees...........................................................................................8 1.10 Computation Of Interest And Fees..............................................................10 1.11 Promissory Notes; Records Of Account..........................................................10 1.12 Pro Rata Treatment............................................................................10 1.13 Taxes On Payments.............................................................................10 1.14 Registered Notes And Loans....................................................................12 1.15 Issuance Of Letters Of Credit................................................................13 ARTICLE II Yield Protection and Breakage Indemnity.............................................................18 2.1 Mandatory Suspension And Conversion Of LIBO Rate Loans........................................18 2.2 Regulatory Changes............................................................................19 2.3 Capital And Reserve Requirements..............................................................20 2.4 Breakage......................................................................................20 2.5 Determinations................................................................................20 2.6 Replacement Of Lenders........................................................................21 2.7 Change Of Lending Office......................................................................21 ARTICLE III Conditions to Effectiveness of Agreement and Fundings..............................................22 3.1 Conditions To Initial Loans...................................................................22 3.2 Conditions To All Loans.......................................................................25 ARTICLE IV Representations and Warranties......................................................................26 4.1 Representations And Warranties................................................................26 4.2 Representations And Warranties Absolute.......................................................31 ARTICLE V Affirmative Covenants................................................................................31 5.1 Basic Reporting Requirements..................................................................31 5.2 Insurance.....................................................................................34 5.3 Payment Of Taxes And Other Potential Charges And Priority Claims..............................35 5.4 Preservation Of Corporate Status..............................................................35 5.5 Governmental Approvals And Filings............................................................35 5.6 Maintenance Of Properties.....................................................................36 5.7 Avoidance Of Other Conflicts..................................................................36
5.8 Financial Accounting Practices................................................................36 5.9 Use Of Proceeds...............................................................................36 5.10 Continuation Of Or Change In Business.........................................................36 5.11 Consolidated Tax Return.......................................................................36 5.12 Fiscal Year...................................................................................36 5.13 Bank Accounts.................................................................................37 5.14 Submission Of Collateral Documents............................................................37 5.15 Collection Of Accounts........................................................................37 5.16 Subsidiaries As Guarantors....................................................................37 5.17 Update Of Schedules...........................................................................37 5.18 Compliance With Laws..........................................................................37 5.19 Keyman Life Insurance.........................................................................38 ARTICLE VI Negative Covenants..................................................................................38 6.1 Financial Covenants...........................................................................38 6.2 Liens.........................................................................................39 6.3 Indebtedness..................................................................................39 6.4 Guaranties, Indemnities, Etc..................................................................40 6.5 Loans, Advances And Investments...............................................................41 6.6 Dividends And Related Distributions...........................................................41 6.7 Sale-Leasebacks...............................................................................41 6.8 Leases........................................................................................42 6.9 Mergers, Acquisitions, Etc....................................................................42 6.10 Dispositions Of Properties....................................................................42 6.11 Issuance Of Stock.............................................................................43 6.12 Dealings With Affiliates......................................................................43 6.13 Acquired Delinquent Pools Of Accounts.........................................................43 6.14 Capital Expenditures..........................................................................44 6.15 Limitations On Modification Of Certain Agreements And Instruments.............................44 6.16 Limitation On Payments Of Purchase Money Indebtedness.........................................44 6.17 Limitation On Other Restrictions On Liens.....................................................44 6.18 Limitation On Other Restrictions On Amendment Of The Loan Documents, Etc......................44 ARTICLE VII Defaults...........................................................................................45 7.1 Events Of Default.............................................................................45 7.2 Consequences Of An Event Of Default...........................................................47 7.3 Application Of Proceeds.......................................................................48 ARTICLE VIII The Administrative Agent..........................................................................49 8.1 Appointment...................................................................................49 8.2 General Nature Of Administrative Agent's Duties...............................................49 8.3 Exercise Of Powers............................................................................50 8.4 General Exculpatory Provisions................................................................50 8.5 Administration By The Administrative Agent....................................................51 8.6 Lenders Not Relying On Administrative Agent Or Other Lenders..................................52
ii
8.7 Indemnification...............................................................................52 8.8 Administrative Agent's Records................................................................52 8.9 Successor Administrative Agent................................................................53 8.10 Additional Agents............................................................................53 8.11 Calculations..................................................................................54 8.12 Administrative Agent In Its Individual Capacity...............................................54 ARTICLE IX Special Inter-Obligor Provisions....................................................................54 9.1 Acknowledgements of Synergies and Inter-dependence............................................54 9.2 Certain Inter-Obligor Agreements..............................................................55 9.3 Borrower's Records............................................................................55 ARTICLE X Definitions, Construction............................................................................56 10.1 Certain Definitions...........................................................................56 10.2 Construction..................................................................................73 10.3 Accounting Principles.........................................................................74 ARTICLE XI Miscellaneous.......................................................................................74 11.1 Notices.......................................................................................74 11.2 Prior Understandings; Entire Agreement........................................................75 11.3 Severability..................................................................................75 11.4 Descriptive Headings..........................................................................75 11.5 Governing Law.................................................................................75 11.6 Non-Merger Of Remedies........................................................................75 11.7 No Implied Waiver; Cumulative Remedies........................................................76 11.8 Amendments; Waivers...........................................................................76 11.9 Successors And Assigns........................................................................77 11.10 Counterparts; Photocopied Or Telecopied Signature Pages.......................................79 11.11 Maximum Lawful Interest Rate..................................................................79 11.12 Indemnification...............................................................................79 11.13 Expenses......................................................................................80 11.14 Maximum Amount Of Joint And Several Liability.................................................81 11.15 Authorization Of NCO Group By Other Obligors..................................................81 11.16 Certain Waivers By Borrower...................................................................82 11.17 Set-Off.......................................................................................82 11.18 Sharing Of Collections........................................................................82 11.19 Other Loan Documents..........................................................................83 11.20 Certain Borrower Acknowledgements.............................................................83 11.21 Consent To Jurisdiction, Service And Venue; Waiver Of Jury Trial; Damages.....................83 11.22 Most Favored Borrower.........................................................................84
iii Exhibits - -------- A Form of RC Note B Form of Borrowing Notice C Form of Prepayment Notice D Form of LIBO Rate Selection Notice E Form of Amended and Restated Security Agreement F Form of Amended and Restated Stock Pledge G Form of Subsidiary Guaranty H Form of Certificate of Pro Forma Covenant Compliance I Form of Quarterly Compliance Certificate J Form of Seller Subordination Agreement K Form of Seller Subordination Agreement (for seller notes aggregating less than $2,000,000 in original principal amount) K-1 Form of Seller Subordination Agreement (for seller notes aggregating less than $10,000,000 in original principal amount) L Form of Assignment and Acceptance M Form of Joinder Agreement Schedules - --------- 1.1 Lender's RC Commitments 4.1(a) Jurisdictions 4.1(h) Undisclosed Liabilities 4.1(m) Partnerships 4.1(n) Ownership 4.1(r) Insurance 4.1(t) Intellectual Property 4.1(v) Employee Benefits 4.1(w) Environmental Matters 4.1(y) Names 5.16 Excluded Subsidiaries 5.4 Corporate Restructuring 6.2 Liens 6.3 Indebtedness 6.5 Loans and Investments 6.12 Affiliate Transactions iv CREDIT AGREEMENT THIS FIFTH AMENDED AND RESTATED CREDIT AGREEMENT, dated as of December 31, 1999, by and between NCO GROUP, INC., a Pennsylvania corporation ("NCO Group" or the "Borrower") and the Lenders referred to on the signature page hereto (together with other lenders party hereto from time to time pursuant to Section 11.9 below, and their successors and assigns, the "Lenders"), MELLON BANK, N.A., a national banking association ("Mellon") for itself and as Administrative Agent for the other Lenders (in such capacity, together with its successors and assigns in such capacity, the "Administrative Agent") and MELLON BANK, N.A., a national banking association, as issuer of Letters of Credit hereunder (in such capacity, together with its successors and assigns in such capacity, the "Issuer"). Recitals: A. NCO Financial Systems, Inc. ("NCO Financial") and Mellon entered into that certain Credit Agreement dated as of July 28, 1995 ("Original Credit Agreement"), pursuant to which Mellon made available to NCO Financial certain credit facilities. The Original Credit Agreement was amended and restated on September 5, 1996 (the "1996 Credit Agreement") pursuant to which NCO Financial, NCO Group, Inc. ("NCO Group"), NCO Funding, Inc., and NCO of New York, Inc. each became parties to the 1996 Credit Agreement, and further amended on September 11, 1996, December 13, 1996, and February 11, 1998. The 1996 Credit Agreement was amended and restated as of March 23, 1998 (the "March 1998 Credit Agreement") and further clarified by those certain Closing Memoranda dated May 5, 1998 and May 29, 1998. The March 1998 Credit Agreement was amended and restated as of November 30, 1998 (the "November 1998 Credit Agreement"), pursuant to which all U.S. subsidiaries as of that date (other than the then Excluded Subsidiaries) of NCO Group became parties to the November 1998 Credit Agreement. The November 1998 Credit Agreement was modified by a Closing Memorandum dated November 30, 1998, a Global Amendment dated as of January 11, 1999 and a First Amendment dated February 11, 1999. The November 1998 Credit Agreement was amended and restated as of May 20, 1999 (the "Existing Credit Agreement") under which the credit facilities were increased and restructured. The Existing Credit Agreement was modified by a Closing Memorandum dated as of May 20, 1999. In preparation for syndication of the new reducing revolving credit facility, certain other changes were made in an interim draft of the Existing Credit Agreement dated as of July 23, 1999; these changes were made retroactive to May 20, 1999 and approved by NCO Group by letter dated as of July 27, 1999. B. In response to accounting issues that government regulations have made problematic, the Borrower has requested that the existing credit facility be restructured as a loan to NCO Group that is guaranteed by all U.S. subsidiaries other than the Excluded Subsidiaries of NCO Group. The Lenders have agreed to make this structural change and certain other changes on the terms and conditions set forth below. C. In connection with the foregoing modifications, all Loans outstanding under the Existing Credit Agreement shall be deemed repaid and immediately reborrowed by NCO Group alone on the date hereof. D. In furtherance of their goals, the parties have agreed to amend and restate the Credit Agreement on the terms and conditions set forth below. NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained and intending to be legally bound hereby, the Borrower and the Lenders agree that the Credit Agreement is hereby amended and restated in its entirety as follows: ARTICLE I CREDIT FACILITY 1.1 Commitment To Lend. Upon the terms and subject to the conditions of this Agreement (including all conditions precedent in Section 3.1), each Lender agrees to make, from time to time during the period from and including the Closing Date to but excluding the Maturity Date, one or more revolving credit loans ("RC Loans") to the Borrower in an aggregate unpaid principal amount not exceeding at any time such Lender's RC Commitment at such time; provided, however, that the Borrower shall not request, and the Lenders shall have no obligation to make, any Loans at any time in excess of the Available RC Commitment. The total amount of the RC Commitment of all Lenders on the Closing Date is $350,000,000.00. 1.2 [Intentionally omitted]. 1.3 Manner Of Borrowing. (a) Notice of Borrowing. The Borrower shall give the Administrative Agent notice (which shall be irrevocable), in the case of Prime Rate Loans, no later than 12:00 p.m. (Philadelphia, Pennsylvania time) on the Business Day for the making of such RC Loans and, in the case of LIBO Rate Loans, 12:00 p.m. (Philadelphia, Pennsylvania, time) three (3) Business Days before the requested date for the making of such RC Loans. Each such notice shall be in the form of Exhibit B hereto and shall specify (i) the requested date for the making of such RC Loans which date shall be a Business Day, (ii) the Type or Types of Loans requested and (iii) the amount of each such Type of Loan, which amount shall be $1,000,000.00 or any integral multiple of $500,000.00 in excess thereof (except that the amount of the requested RC Loan may be less if the amount requested is equal to the total Available RC Commitment). Upon receipt of any such notice, the Administrative Agent shall promptly notify each applicable Lender of the contents thereof and of the amount and Type of each Loan to be made by such Lender on the requested date specified therein. (b) Funding by Lenders. Not later than 3:00 p.m. (Philadelphia, Pennsylvania time) on each requested date for the making of Loans, each Lender shall make available to the Administrative Agent, in Dollars and in funds immediately available to the Administrative Agent at the office designated by the Administrative Agent, the Loans to be made by such Lender on such date, provided however that if a Lender does not receive timely notice from the Administrative Agent as set forth in paragraph (a) above, such Lender shall fund the required amount promptly upon receipt of such notice. The obligations of the Lenders hereunder are several; accordingly, any Lender's failure to make any Loan to be made by it on the requested date therefor shall not relieve any -2- other Lender of its obligation to make any Loan to be made by it on such date, but the latter shall not be liable for the former's failure. (c) Permitted Assumption as to Funding. Unless the Administrative Agent shall have received notice from a Lender prior to 1:00 p.m. (Philadelphia, Pennsylvania time) on the requested date for the making of any Loan that such Lender will not make available to the Administrative Agent the Loan requested to be made by it on such date, the Administrative Agent may assume that such Lender has made such Loan available. The Administrative Agent in its sole discretion and in reliance upon such assumption, may make available to the Borrower on the requested date a corresponding amount on behalf of such Lender. If and to the extent such Lender shall not have made available to the Administrative Agent the Loans requested to be made by such Lender on such date and the Administrative Agent shall have so made available to the Borrower a corresponding amount on behalf of such Lender, (i) such Lender shall, on demand, pay to the Administrative Agent such corresponding amount together with interest thereon, for each day from the date such amount shall have been so made available by the Administrative Agent to the Borrower until the date such amount shall have been paid in full to the Administrative Agent, at the Federal Funds Rate until (and including) the third Business Day after demand is made and thereafter at the Prime Rate, and (ii) the Administrative Agent shall be entitled to all interest payable by Borrower on such amount for the period commencing on the date such amount was advanced by the Administrative Agent to but not including the date on which such amount is received by the Administrative Agent from such Lender. Moreover, any Lender that shall have failed to make available the required amount shall not be entitled to vote on such matters as Lenders or Majority Lenders are otherwise entitled to vote on or consent to or approve under this Agreement and the other Loan Documents until such amount with interest is paid in full to the Administrative Agent by such Lender. Without limiting any obligations of any Lender pursuant to this paragraph (c), if such Lender does not pay such corresponding amount promptly upon the Administrative Agent's demand therefor, the Administrative Agent shall notify the Borrower and the Borrower shall promptly repay such corresponding amount to the Administrative Agent together with accrued interest thereon at the applicable rate or rates on such Loans. (d) Disbursements of Funds to Borrower. All amounts made available to the Administrative Agent in accordance with paragraph (b) above shall be disbursed by the Administrative Agent promptly but in any event not later than 4:00 p.m. (Philadelphia, Pennsylvania time) on the requested date therefor in Dollars, in funds immediately available to the Borrower by crediting such amount to an account of Borrower at the Administrative Agent's Domestic Lending Office or in such other manner as may be agreed to by Borrower and the Administrative Agent. 1.4 Repayments. The aggregate outstanding principal amount of the RC Loans shall mature and become due and payable, and shall be repaid by the Borrower, on the Maturity Date. Borrower shall also repay immediately the amount by which the outstanding RC Loans exceed the RC Commitment at any time following a reduction in the RC Commitment. -3- 1.5 Voluntary Prepayments. (a) Optional Prepayments. The Borrower may, at any time and from time to time, prepay the Loans in whole or in part, without premium or penalty (but with any payment required under Section 2.4 (Breakage)), except that any optional partial prepayment (other than a prepayment of all outstanding Loans) shall be in an aggregate principal amount of $500,000.00 or any integral multiple of $250,000.00 in excess thereof. Amounts to be so prepaid shall irrevocably be due and payable on the date specified in the applicable notice of prepayment delivered pursuant to paragraph (b) of this Section 1.5 together with interest thereon as provided in Section 1.8 (Interest), other fees, charges and expenses set forth herein and together with any payment required under Section 2.4 (Breakage). (b) Application and Timing of Prepayments. (i) Notice. The Borrower shall give the Administrative Agent notice of each prepayment of Loans, which notice, in the case of a prepayment of Prime Rate Loans, shall be given no later than 1:00 p.m. (Philadelphia, Pennsylvania time) one (1) Business Day before and, in the case of a prepayment of LIBO Rate Loans, no later than 12:00 P.M. (Philadelphia, Pennsylvania, time) three (3) Business Days before, the date of such prepayment. Each such notice of prepayment shall be in the form of Exhibit C hereto and shall specify (i) the date such prepayment is to be made, and (ii) the amount and Type and, in the case of any LIBO Rate Loan, the last day of the applicable Interest Period for the RC Loan to be prepaid. Upon receipt of any such notice, the Administrative Agent shall promptly notify each applicable Lender of the contents thereof. (ii) Timing and Application of Voluntary Prepayments. Any voluntary prepayments pursuant to paragraph (a) of this Section 1.5 shall be applied in the following order unless otherwise directed by the Borrower: (1) First, prepayments shall be applied against any interest, breakage and other fees, charges and expenses due and payable in respect of the Obligations. (2) Second, prepayments shall be applied against the RC Loans but with no corresponding reduction in the amount of the Commitment unless otherwise specified by Borrower in accordance with Section 1.7 hereof. Any excess shall be applied to any other amounts owing in respect of the Obligations and, if all such Obligations have been then paid in full, then any excess amount shall be returned to Borrower or as otherwise required by applicable Law. 1.6 Payments By The Borrower In General. (a) Time, Place and Manner. All payments due to the Administrative Agent and the Lenders under the Loan Documents shall be made to the Administrative Agent at the office designated by the Administrative Agent on the signature pages hereto or to such other Person or at such other address as the Administrative Agent may designate by written notice to Borrower. Until -4- further notice from the Administrative Agent and except as otherwise provided herein, all such payments shall be made by charging the Borrower's deposit account with the Administrative Agent as provided in Section 1.6(c). Except as otherwise set forth in this Agreement, a payment shall not be deemed to have been made on any day unless such payment has been received by the required Person, at the required place of payment, in Dollars in funds immediately available to such Person, no later than 1:00 p.m. (Philadelphia, Pennsylvania time) on such day; provided, however, that the failure of the Borrower to make any such payment by such time shall not constitute a Default hereunder so long as such payment is received no later than 3:00 p.m. (Philadelphia, Pennsylvania time) on such day, but any such payment received later than 1:00 p.m. (Philadelphia, Pennsylvania time) on such day shall be deemed to have been made on the next Business Day for the purpose of calculating interest on the amount paid, provided further, that any such payment made with the proceeds of Loans shall be deemed to have been made on the date of the making of such Loans, so long as such proceeds are immediately so applied and are not otherwise disbursed to the Borrower. (b) No Reductions. All payments due to the Administrative Agent or any Lender under this Agreement and the other Loan Documents, shall be made by the Borrower without any reduction or deduction whatsoever, including any reduction or deduction for any charge, set-off, holdback, recoupment or counterclaim (whether sounding in tort, contract or otherwise). (c) Authorization to Charge Accounts. The Borrower hereby authorizes the Administrative Agent to charge any amounts due under this Agreement against any or all of the demand deposit or other accounts (other than accounts containing escrow funds) of Borrower with the Administrative Agent (whether maintained at a branch or office located within or without the United States), with the Borrower remaining liable for any deficiency. The Administrative Agent shall give the Borrower one day prior notice of the amount to be charged; provided, however, that advance notice shall not be required to charge any amount due for interest or the Unused Fee, and the Administrative Agent shall only advise of such charge after such charge has been made. (d) Extension of Payment Dates if Not a Business Day. Whenever any payment to the Administrative Agent or any Lender under the Loan Documents would otherwise be due (except by reason of acceleration) on a day that is not a Business Day, such payment shall instead be due on the next succeeding Business Day unless, in the case of a payment of the principal of LIBO Rate Loans, such extension would cause payment to be due in the next succeeding calendar month, in which case such due date shall be advanced to the next preceding Eurodollar Business Day. If the due date for any payment under the Loan Documents is extended (whether by operation of any Loan Document, applicable Law or otherwise), such payment shall bear interest for such extended time at the rate of interest applicable hereunder. (e) Disbursement of Payments to Lenders. The Administrative Agent shall promptly distribute to each applicable Lender its ratable share of each payment received by the Administrative Agent under the Loan Documents for the account of such Lender by crediting an account of such Lender at the Administrative Agent's office or by wire transfer to an account of such Lender at an office of any other commercial bank located in the United States or at any Federal Reserve Bank designated by such Person. Unless the Administrative Agent shall have received notice from Borrower prior to the date on which any payment is due to -5- any Lenders under the Loan Documents that the Borrower will not make such payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent, in its sole discretion may, in reliance upon such assumption, cause to be distributed to each applicable Lender on such due date, a corresponding amount with respect to the amount then due to such Person. If and to the extent that the Borrower shall not have so made such payment in full to the Administrative Agent, and the Administrative Agent shall have so distributed to such Lender or Lenders a corresponding amount, such Lender shall, on demand, repay to the Administrative Agent the amount so distributed together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Person repays such amount to the Administrative Agent, at the Federal Funds Rate until (and including) the third Business Day after demand is made and thereafter at the Prime Rate. Moreover, any Lender that shall have failed to make available the required amount shall not be entitled to vote on such matters as Lenders or Majority Lenders are otherwise entitled to vote on or consent to or approve under this Agreement and the other Loan Documents until such amount with interest is paid in full to the Administrative Agent by such Lender. Nothing in this Section 1.6 shall relieve the Borrower from any payment obligations. (f) Breakage Costs on LIBO Rate Loans. Any repayment or prepayment of a LIBO Rate Loan made on a day other than the last day of the applicable Interest Period therefor shall be subject to payments in respect of breakage costs as required to be paid in respect thereof pursuant to Section 2.4 below. 1.7 Reductions Of RC Commitment. (a) Mandatory Reductions. (i) Quarterly Reductions. Beginning March 31, 2001, the RC Commitment shall be reduced quarterly by $6,250,000 on the last day of each calendar quarter until the Maturity Date. (ii) Debt or Equity Offerings. After March 31, 2000, Borrower shall apply at least fifty percent (50%) of the net proceeds received from any offering of debt or equity by Borrower to reduce the RC Commitment permanently. (b) Optional Reductions and Termination. The Borrower may reduce or terminate the RC Commitment by giving the Administrative Agent notice (which shall be irrevocable) thereof no later than 11:00 a.m. (Philadelphia, Pennsylvania, time) on the third Business Day (fifth Business Day for termination of the RC Commitment) before the requested date of such reduction or termination, provided, that each partial reduction thereof shall be in an amount equal to $5,000,000.00 or any integral multiple of $1,000,000.00 in excess thereof and, provided, further, that no reduction shall reduce the Commitment to an amount less than the aggregate of the principal amount of all Loans outstanding on such date (after giving effect to any repayment or prepayment of RC Loans made on or prior to such date). Upon receipt of any such notice, the Administrative Agent shall promptly notify each Lender of the contents thereof and the amount (based on a pro rata reduction to each Lender's RC Commitment) to which such Lender's RC Commitment is to be reduced. -6- (c) No Reinstatement of RC Commitment. All reductions of the RC Commitment are permanent and the RC Commitment cannot be restored without the written consent of all Lenders. (d) Payment. On each date ("Reduction Date") on which the RC Commitment is reduced (either voluntarily or involuntarily) the Borrower shall pay to the Administrative Agent the amount, if any, by which the outstanding principal balance of the RC Loans exceeds the amount of the RC Commitment as reduced on such Reduction Date. (e) Application of Reductions. Each mandatory reduction made pursuant to Section 1.7(a)(ii) and each optional reduction under Section 1.7(b) shall be applied pro-rata across the remaining quarterly reductions required under Section 1.7(a)(i). 1.8 Interest. (a) Interest Rates in General. Subject to the terms and conditions of this Agreement, each Loan, at the option of the Borrower, shall bear interest on the outstanding principal amount thereof until paid in full at a rate per annum equal to (i) the Prime Rate as in effect from time to time plus the Applicable Margin or (ii) the applicable LIBO Rate for a specified Interest Period plus the Applicable Margin. (b) Election of LIBO Rate. Unless otherwise designated by the Borrower as a LIBO Rate Loan in accordance with this paragraph (b), each Loan shall be deemed to be a Prime Rate Loan as more fully set forth below. (i) Prime Rate Unless Otherwise Designated. Prime Rate Loans shall continue as Prime Rate Loans unless and until such Loans are converted into Loans of another Type. LIBO Rate Loans for any Interest Period shall continue as Loans of such Type until the end of the then current Interest Period therefor, at which time they shall be automatically converted into Prime Rate Loans unless Borrower shall have given the Administrative Agent notice in accordance with clause (ii) below requesting that such Loans continue as LIBO Rate Loans for another Interest Period of a specified duration. (ii) Election of LIBO Rate. To elect a LIBO Rate, Borrower shall give the Administrative Agent notice (which shall be irrevocable) no later than 12:00 p.m. (Philadelphia, Pennsylvania, time) three (3) Eurodollar Business Days before the requested date of the funding, conversion or continuation which date shall be a Eurodollar Business Day. Each such notice shall be in the form of Exhibit D hereto and shall specify (A) the requested date of such funding, conversion or continuation, (B) whether the subject Loan is a new advance or an existing Loan that is to be converted or continued, (C) in the case of any LIBO Rate Loan being continued, the last day of the current Interest Period, and (D) the amount of, and the desired Interest Period for, the Loan subject to such LIBO Rate election, provided that the Borrower shall not be entitled to select an Interest Period for any Loan which shall end on a date later than the Maturity Date. Upon receipt of any such notice, the Administrative Agent shall promptly notify each applicable Lender of the contents thereof. -7- (iii) LIBO Rate Suspended During Event of Default. Notwithstanding anything to the contrary contained in clause (i) or (ii) of this paragraph (b), so long as an Event of Default shall have occurred and be continuing, the Administrative Agent may (and, at the request of the Majority Lenders, shall) notify Borrower that Loans may only be converted into or continued upon the expiration of the applicable current Interest Period therefor as Prime Rate Loans or Loans of such specified Types as shall be acceptable to the Majority Lenders. Thereafter, until no Event of Default shall continue to exist, Loans may not be converted into or continued as Loans of any Type other than Prime Rate Loans or one or more of such specified Types. (iv) Limitation on Types of Loans. Notwithstanding anything to the contrary contained in this Agreement, the Borrower shall borrow, prepay, convert and continue Loans in a manner such that (A) unless otherwise agreed to by the Administrative Agent, the aggregate principal amount of LIBO Rate Loans of the same Type shall, at all times, be not less than $1,000,000.00 and (B) there shall be, at any one time, no more than ten (10) Interest Periods for LIBO Rate Loans in effect. (v) Flexibility as to Source. Each Lender may fund LIBO Rate Loans from any source that such Lender deems (in its sole discretion) appropriate without loss of any rights hereunder. (c) Interest Payment Dates. Interest shall be payable, (i) in the case of Prime Rate Loans, monthly in arrears on each Monthly Payment Date, (ii) in the case of LIBO Rate Loans, on the last day of each applicable Interest Period (and, in the case of any LIBO Rate Loan having an Interest Period longer than three months, on each three month anniversary of the first day of such Interest Period) and (iii) in the case of any Loan, when such Loan shall be due (whether at maturity, upon mandatory prepayment, by reason of notice of prepayment or acceleration or otherwise) or converted, but only to the extent then accrued on the amount then so due or converted. (d) Default Rate. At any time that an Event of Default shall have occurred and shall be continuing, any amount payable hereunder and under each other Loan Document shall bear interest (whether before or after judgment), payable on demand, at a rate per annum equal to the applicable Default Rate. 1.9 Fees. (a) Unused Fee. The Borrower shall pay to the Administrative Agent, for the account of each Lender, an unused fee ("Unused Fee") calculated at a rate per annum equal to the percentage amount set forth below, under the caption "Unused Fee" opposite the relevant Consolidated Funded Debt/Consolidated EBITDA Ratio, on the daily unused amount of such Lender's RC Commitment for each day from and including the Closing Date to but excluding the Maturity Date: -8- GRID A (pre-offering) Consolidated Funded Debt/ Consolidated EBITDA Ratio Unused Fee ------------------------- ---------- below 2.0 1/8% greater than or equal to 2.0 less than or equal to 3.0 1/4% > 3.0 3/8% GRID B (post-offering) Consolidated Funded Debt/ Consolidated EBITDA Ratio Unused Fee ------------------------- ---------- below 2.0 1/8% greater than or equal to 2.0 < 3.0 1/4% greater than or equal to 3.0 less than or equal to 3.5 3/8% > 3.5 1/2% The Unused Fee will be initially calculated based on Grid A. In the event Borrower successfully completes by March 31, 2000 (i ) a convertible subordinated debt issuance in the minimum amount of $150,000,000 and/or (ii) a common stock issuance in the minimum amount of $100,000,000 and/or (iii) a convertible subordinated debt issuance in the minimum amount of $100,000,000 in conjunction with a common stock issuance in the minimum amount of $25,000,000, the Unused Fee shall be calculated on Grid B beginning on the first day of the quarter following such event. Notwithstanding anything above to the contrary, if the RC Loans outstanding are less than $150,000,000 the Unused Fee shall not be less than 1/4%. The Unused Fee shall be payable in arrears (i) on successive Monthly Payment Dates beginning with the first Monthly Payment Date after the Closing Date (ii) on the date of any reduction of the Commitment (to the extent accrued and unpaid on the amount of such reduction) and (iii) on the Maturity Date. The Unused Fee shall be adjusted on the first Business Day of the month after delivery of each Officer's Compliance Certificate under Section 5.1 or in the event of any Permitted Acquisition, on the first Business Day of the month after closing and delivery of the Pro-Forma Covenant Compliance Certificate required for the acquisition. If an Officer's Compliance Certificate is required to be delivered pursuant to Section 5.1 and is not delivered by its deadline, then five (5) Business Days after notice to Borrower the Unused Fee shall be the highest percentage specified above until the Officer's Compliance Certificate is so delivered. (b) Letter of Credit Fees. The Borrower shall pay to the Issuer for the ratable benefit of the Lenders, a "Letter of Credit Fee" on the face amount of each Letter of Credit at a rate per annum equal to 1 1/2%. Such fee shall be payable upon issuance of each Letter of Credit and, if the Letter of Credit is "evergreen", on each anniversary of such issuance for so long as the Letter of Credit remains outstanding. The Borrower shall also pay to the Issuer for the Issuer's sole account the Issuer's then in effect standard document preparation fees and reasonable administrative expenses payable with respect to Letters of Credit. -9- (c) Other Fees. The Borrower shall pay to the Administrative Agent for the sole account of the Administrative Agent, such fees, including an annual Administrative Agent's fee, as have been or may be agreed to in writing by the Borrower and the Administrative Agent in connection with this Agreement and the transactions contemplated by this Agreement. 1.10 Computation Of Interest And Fees. Interest and fees shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed. Interest and fees for any period shall be calculated from and including the first day thereof to but excluding the last day thereof. 1.11 Promissory Notes; Records Of Account. Each Lender's Loans and the Borrower's obligations to repay such Loans with interest in accordance with the terms of this Agreement shall be evidenced by this Agreement, the records of the Administrative Agent and such Lender and a single RC Note payable to the order of such Lender. The records of each Lender shall be prima facie evidence of such Lender's Loans and, in each case, of accrued interest thereon and all payments made in respect thereto. In the event that there is any dispute concerning the amount of any such obligations, the amount of each Lender's RC Commitment and the amount of outstanding Obligations of each and every Type shall at all times be ascertained from the records of the Administrative Agent, which shall be conclusive absent manifest error. 1.12 Pro Rata Treatment. Except to the extent otherwise provided herein, RC Loans shall be made by, and principal, interest and fees in respect thereof shall be paid or repaid to, the Lenders pro rata in accordance with their respective RC Commitments and interest in RC Loans. 1.13 Taxes On Payments. (a) Taxes Payable by the Borrower. If any Tax is required to be withheld or deducted from, or is otherwise payable by the Borrower in connection with, any payment due to the Administrative Agent or any Lender that is not a "United States Person" (as such term is defined in Section 7701(a)(30) of the Code), the Borrower (i) shall, if required, withhold or deduct the amount of such Tax from such payment and, in any case, pay such Tax to the appropriate taxing authority in accordance with applicable Law and (ii) except in the case of any Bank Tax, shall pay to such Lender or the Administrative Agent such additional amounts as may be necessary so that the net amount received by such Person with respect to such payment, after withholding or deducting all Taxes required to be withheld or deducted (including Taxes on additional amounts payable under this paragraph (a)), is equal to the full amount payable hereunder. If any Tax is withheld or deducted from, or is otherwise payable by the Borrower in connection with, any payment due to any Lender or the Administrative Agent hereunder, the Borrower shall furnish to such Person the original or a certified copy of a receipt (if any) for such Tax from the applicable taxing authority or other evidence of payment thereof satisfactory to such Person within 30 days after the date of such payment (or, if such receipt shall not have been made available by such taxing authority within such time, the Borrower shall use reasonable efforts to promptly obtain and furnish such receipt). If the Borrower fails to pay any such Taxes when due to the appropriate taxing authority or fail to remit to any Lender or the Administrative Agent the required receipts or other evidence of payment thereof satisfactory to such Person, the Borrower shall indemnify such Person for any -10- Taxes, interest, penalties or additions to Tax that may become payable by such Person as a result of any such failure. (b) Taxes Payable by any Lender or the Administrative Agent. The Borrower shall, promptly upon request by any Lender or the Administrative Agent that is not a United States Person, pay to such Person an amount equal to (i) all Taxes (other than Bank Taxes and without duplication of amounts paid pursuant to the preceding paragraph (a)) payable by such Person with respect to any payment due to such Person hereunder and (ii) all Taxes (other than Bank Taxes) payable by such Person as a result of payments made by the Borrower (whether made to a taxing authority or to such Person pursuant to the preceding paragraph (a) or this paragraph (b)). (c) Credits and Deductions. If any Lender or the Administrative Agent is, in its sole opinion, able to apply for any refund, offset, credit, deduction or other reduction in Taxes by reason of any payment made by the Borrower under the preceding paragraph (a) or (b), such Lender or the Administrative Agent, as the case may be, shall use reasonable efforts to obtain such refund, offset, credit, deduction or other reduction and, upon receipt thereof, will pay to the Borrower such amount, not exceeding the increased amount paid by the Borrower, as is equal to the net after-tax value to such Lender or the Administrative Agent, in its sole opinion, of such part of such refund, offset, credit, deduction or other reduction as it considers to be allocable to such payment by the Borrower, having regard to all of such Person's dealings giving rise to similar refunds, offsets, credits, deductions or other reductions in relation to the same tax period and to the cost of obtaining the same; provided, however, that if such Person has made a payment to the Borrower pursuant to this paragraph (c) and the applicable refund, offset, credit, deduction or other reduction in Tax is subsequently disallowed, the Borrower shall, promptly upon request by the Administrative Agent or such Lender refund to such Person that portion of such payment determined by such Person, in its sole opinion, relating to such disallowance; and provided, further that (i) the Administrative Agent or such Lender, as the case may be, shall not be obligated to disclose to the Borrower any information regarding its Tax affairs or computations and (ii) nothing in this paragraph (c) shall interfere with the right of such Person to arrange its Tax affairs as it deems appropriate. (d) Exemption from U.S. Withholding Taxes. Each Lender that is not a United States Person shall submit to the Borrower and the Administrative Agent, on or before the fifth day prior to the first Monthly Payment Date occurring after the Closing Date (or, in the case of a Person that is not a United States Person and that became a Lender by assignment, promptly upon such assignment), two duly completed and signed copies of either (A) Form 1001 of the United States Internal Revenue Service (or successor form) entitling such Lender to a complete exemption from withholding on all amounts to be received by such Lender pursuant to this Agreement and the Loans, (B) Form 4224 of the United States Internal Revenue Service (or successor form) relating to all amounts to be received by such Lender pursuant to this Agreement and the Loans or (C) in the case of a Lender that is claiming an exemption from United States withholding tax under Section 871(h) or 881(c) of the Internal Revenue Code with respect to payments of "portfolio interest" two accurate and complete signed original Forms W-8 (or any successor form prescribed by the Internal Revenue Service, certifying that such Lender is exempt from or is entitled to a reduced rate of United States withholding tax on payments under this Agreement or the -11- Notes) and, if such Lender delivers such Forms W-8 (or successor form), two signed certificates that such Lender (1) is not a "bank" for purposes of Section 881(c) of the Internal Revenue Code, (2) is not a 10% shareholder (within the meaning of Section 871(h)(3)(B) of the Internal Revenue Code) of Borrower and (3) is not a controlled foreign corporation related to Borrower (within the meaning of Section 864(d)(4) of the Internal Revenue Code), as appropriate. Each such Lender shall, from time to time after submitting either such form, submit to the Borrower and the Administrative Agent such additional duly completed and signed copies of one or the other such forms (or any successor forms as shall be adopted from time to time by the relevant United States taxing authorities) as may be (A) requested in writing by the Borrower or the Administrative Agent and (B) appropriate under the circumstances and under then current United States law or regulations to avoid or reduce United States withholding taxes on payments in respect of all amounts to be received by such Lender pursuant to this Agreement or the Loans. Upon the request of the Borrower or the Administrative Agent, each Lender that is a United States Person shall submit to the Borrower and the Administrative Agent a certificate to the effect that it is a United States Person. (e) Survival. Obligations under this Section 1.13 shall survive payment of the Loans and the other Obligations. 1.14 Registered Notes And Loans. (a) Request for Registration. Any Lender may request the Borrower (through the Administrative Agent), and the Borrower agrees thereupon, to register such Loans as provided in Section 1.14(c) and to issue such Lender's Note(s), evidencing such Loans, or to exchange such Note(s) for new Note(s), registered as provided in Section 1.14(c) (each, a "Registered Note"). A Registered Note may not be exchanged for a Note that is not in registered form. A Registered Note shall be deemed to be and shall be a Note for all purposes of this Agreement and the other Loan Documents. (b) Delivery of Tax Forms. Each Non-U.S. Lender that requests or holds a Registered Note pursuant to Section 1.14(a) or registers its Loans pursuant to Section 1.14(a) (a "Registered Lender") (or, if such Registered Lender is not the beneficial owner thereof, such beneficial owner) shall deliver to Borrower (with a copy to the Administrative Agent) prior to or at the time such Non-U.S. Lender becomes a Registered Lender, the applicable form described in Section 1.13(d) (or such successor and related forms as may from time to time be adopted by the relevant taxing authorities of the United States) together with an annual certificate stating that such Registered Lender or beneficial owner, as the case may be, is not a "bank" within the meaning of Section 881(c)(3)(A) of the Code and is not otherwise described in Section 881(c)(3) of the Code. Each Registered Lender or beneficial owner, as the case may be, shall promptly notify Borrower (with a copy to the Administrative Agent) if at any time such Registered Lender or beneficial owner, as the case may be, determines that it is no longer in a position to provide such previously delivered certificate to the Borrower (or any other form of certification adopted by the relevant taxing authorities of the United States for such purposes). (c) Registration of Loans. The Administrative Agent, acting, for this purpose, as agent of the Borrower, shall, upon request of any Registered Lender, enter in the Register the name, address and taxpayer identification number (if provided) of the Registered Lender or beneficial -12- owner, as the case may be. In addition to the requirements of Section 11.9 (Successors and Assigns), a Registered Note and the Loans evidenced thereby (or such Loans pending delivery of such Registered Note) or any other Loans registered pursuant to Section 1.14(a) above may be assigned or otherwise transferred in whole or in part only by registration of such assignment or transfer of such Registered Note and/or the Loans so registered on the Register (and each such Registered Note shall expressly so provide). Any assignment or transfer of all or part of such Loans and such Registered Note shall be registered on the Register only upon compliance with the provisions of Section 11.9 and, in the case of Registered Notes, surrender for registration of assignment or transfer of the Registered Note evidencing such Loans, duly endorsed by (or accompanied by a written instrument of assignment or transfer fully executed by) the Registered Lender thereof, and thereupon one or more new Registered Notes in the same aggregate principal amount shall be issued to the designated assignee(s) or transferee(s) and, if less than all of such Registered Notes is thereby being assigned or transferred, the assignor or transferor. 1.15 Issuance Of Letters Of Credit. (a) In General. Upon the terms and subject to the conditions of this Agreement, the Issuer shall, from time to time, from the Closing Date to the date which is 90 days prior to the Maturity Date, issue one or more Letters of Credit for the account of Borrower, provided that the sum of the Contingent Reimbursement Obligations (after giving effect to the requested Letter of Credit) plus the aggregate unpaid amount of all Drawings under Letters of Credit shall not exceed $10,000,000 and provided, further, that the face amount of the Letter of Credit so requested shall not exceed the Lenders' Available RC Commitments at such time. Each Letter of Credit shall be in a form and shall contain such terms as shall be reasonably satisfactory to the Issuer. Letters of Credit shall be issued only on a Business Day and shall be used for the general corporate purposes of the Borrower or for such other purposes as shall be acceptable to the Issuer in its sole discretion. (b) Terms. Each Letter of Credit shall be denominated only in Dollars and shall expire on or before the first anniversary of the issuance thereof and in any event not later than the fifth Business Day preceding the Maturity Date. No Letter of Credit shall have an expiration date which is extendable under an "evergreen" or similar provision unless the Issuer expressly agrees to the same in its sole discretion in any particular case. All other extensions and renewals are also at the sole discretion of the Issuer. For purposes of Section 3.2 only, any extension of the expiry date of a Letter of Credit to a date beyond the first anniversary of the issuance thereof shall constitute an "issuance" of such Letter of Credit for all purposes hereof. (c) Form of Request. The Borrower shall request the issuance of a Letter of Credit by furnishing to the Agent and the Issuer, at least five Business Days before the requested date of such issuance (or at such later time as shall be acceptable to the Issuer), such notice thereof as shall be reasonably satisfactory to the Issuer to which shall be attached a certificate of the chief financial officer representing that the Borrower is not, and after giving effect to the additional Indebtedness will not be, in Default hereunder. (d) Participation by Lenders. Upon the date of issuance of a Letter of Credit, the Issuer shall be deemed to have granted to each Lender -13- (other than the Issuer), and each Lender (other than the Issuer) shall be deemed to have acquired from the Issuer without further action by any party hereto, a participation in such Letter of Credit and any Drawings that may at any time be made thereunder, to the extent of such Lender's pro rata share of the Commitment. (e) Notice of Drawings. The Issuer shall promptly notify Borrower of its receipt of each Drawing request with respect to a Letter of Credit, stating the date and amount of the Drawing requested thereby and the date and amount of each Drawing disbursed pursuant to such request. The failure of the Issuer to give, or delay in giving, any such notice shall not release or diminish the obligations hereunder of the Borrower in respect of such Drawing. (f) Reimbursement of Drawings by Borrower. If at any time Borrower receives notice of a Drawing, the Borrower shall reimburse such Drawing by paying to the Issuer in immediately available funds the amount of the payment made by the Issuer with respect to such Drawing, together with interest thereon at a rate per annum equal to the Prime Rate from the day that the Drawing is made until the day such reimbursement is made if such Drawing is not reimbursed on the day the Drawing is made. Such reimbursement shall be made by the Borrower to the Issuer no later than one (1) Business Day following the Business Day that Borrower receives the relevant notice of Drawing if such notice is received on or prior to 10:00 a.m. (Philadelphia, Pennsylvania time) and no later than two (2) Business Days following the date that Borrower receives the relevant notice of Drawing if such notice is received after 10:00 a.m. (Philadelphia, Pennsylvania time). If the Borrower shall fail to make any payment required by this paragraph (f) at the time specified, and if at such time, there shall be any Commitment, the Administrative Agent may (but is not obligated to) assume that the Borrower intends to use the proceeds of Loans to make such payment. In reliance on such assumption, the Administrative Agent may (but is not obligated to) notify the Lenders (and Borrower) that notwithstanding the Borrower's failure to provide notice pursuant to Section 1.3(a), such notice is deemed given pursuant to this paragraph (f) requesting a Loan bearing interest at the Prime Rate in an amount sufficient to make the payments required by this paragraph. Such notice from the Administrative Agent shall be treated by the Lenders in the same manner as a notice from the Borrower under Section 1.3(a). The Administrative Agent may, at the direction of the Issuer, apply the proceeds of such Loans to satisfy the requirements of this paragraph. (g) Obligations of Lenders to Issuer. In the event that the Borrower shall fail to make any payment when due pursuant to the preceding paragraph (f) and for so long as such failure shall be continuing, the Issuer may give notice of such failure to the Administrative Agent and each Lender, which notice shall include, in the case of a Lender, the amount of such Lender's participating interest in such Drawing, whereupon each such Lender (other than the Issuer) shall promptly remit such amount to the Administrative Agent for the account of the Issuer as provided in this paragraph (g). Each Lender (other than the Issuer) shall, in the event it receives such notice from the Issuer at or before 12:00 noon (Philadelphia, Pennsylvania time) on any Business Day, fund its participation in any unreimbursed Drawing by remitting to the Administrative Agent, no later than 2:00 p.m. (Philadelphia, Pennsylvania time) on such day, in immediately available funds its share of the reimbursement obligations in respect of each Drawing. In the event that the Administrative Agent receives such funds from a Lender at or before 2:00 p.m. (Philadelphia, Pennsylvania time) on any day, the Administrative Agent shall make available the amount thereof to the Issuer, in immediately available funds no later than 4:00 p.m. -14- (Philadelphia, Pennsylvania time) on that same day. Any amount payable by a Lender to the Administrative Agent for the account of the Issuer under this paragraph (g), and any amount payable by the Administrative Agent to the Issuer under this paragraph (g), shall bear interest for each day from the date due (and including such day if paid after 2:00 p.m. (Philadelphia, Pennsylvania time) in the case of any such payment by a Lender to the Administrative Agent, or 4:00 p.m. (Philadelphia, Pennsylvania time), in the case of any such payment by the Administrative Agent to the Issuer, on such day) until the date it is received by the Issuer at a rate equal to the Federal Funds Rate until (and including) the third Business Day after the date due and thereafter at the Prime Rate. Moreover, any Lender that shall have failed to make available the required amount shall not be entitled to vote on such matters, other than those set forth in Section 11.8, as Lenders or Majority Lenders or Super Majority Lenders are otherwise entitled to vote on or consent to or approve under this Agreement and the other Loan Documents until such amount with interest is paid in full to the Administrative Agent by such Lender. Each Lender shall, upon the demand of the Issuer, reimburse the Issuer, through the Administrative Agent to the extent that the Issuer has not been reimbursed by the Borrower after demand therefor, for the reasonable costs and expenses (including reasonable legal fees) incurred by it (other than as a result of its willful misconduct or gross negligence as finally determined by a court of competent jurisdiction) in connection with the collection of amounts due under, the administration of, and the preservation and enforcement of any rights conferred by, the Letters of Credit or the performance of the Issuer's obligations under this Agreement in respect thereof on a pro rata basis relative to such Lender's pro rata share of the Commitment (as of the time such costs and expenses are incurred). The Issuer shall refund through the Administrative Agent any costs and expenses reimbursed by such Lender that are subsequently recovered from the Borrower in an amount equal to such Lender's ratable share thereof. (h) Cash Collateral. It is intended that at all times that the Borrower shall have contingent or other obligations (including obligations in respect of fees) relating to Letters of Credit, there shall be sufficient availability under the Commitment to reimburse the Issuer (and the Lenders) out of proceeds of Loans. Accordingly, in the event that there shall, at any time, be insufficient availability under the Commitment (after giving effect to all outstanding Loans) to do so (whether because the amount of the Commitment is reduced pursuant to a mandatory reduction or is terminated at maturity, upon acceleration or otherwise or because the amount of outstanding Loans and such Letter of Credit obligations exceeds the amount of the Commitment for any other reason), the Borrower shall forthwith pay to the Administrative Agent an amount equal to the aggregate face value of all outstanding Letters of Credit plus the aggregate amount of all unreimbursed Drawings plus the amount of all fees or other obligations in respect of Letters of Credit to the extent of such excess. Such amount shall be maintained by the Administrative Agent in an interest-bearing cash collateral account in the name of and for the benefit of the Issuer and the Lenders to secure such payment obligations of the Borrower. Upon receipt of a notice from the Issuer that there are unreimbursed Drawings or other amounts due in respect of such Letters of Credit (which notice shall set forth the amount of such unreimbursed Drawings or other obligations) the Administrative Agent shall promptly disburse from the cash collateral account the amount specified in the notice and shall pay such amount to the Issuer and Lenders ratably in accordance with the respective amounts owing to each such Person, first, for fees and indemnities until the same are paid in full and, second, for unreimbursed Drawings. The Administrative Agent and the Issuer may rely on their records as to any amounts so owing and shall be fully protected in -15- doing so. Such records shall be conclusive, absent manifest error. At any time that the Commitment again becomes available for reimbursement of Drawings under outstanding Letters of Credit such that (i) the sum of the Commitment at that time and the amount in the cash collateral account exceeds (ii) the sum of all outstanding Loans, the face amount of all outstanding Letters of Credit and the amount of all unreimbursed Drawings, then, upon written request of Borrower (which request shall (A) represent that there exists no Default or Event of Default and (B) specify the amount of such excess), the Administrative Agent shall release such excess amount to the Borrower from the cash collateral account. If all Obligations (other than Obligations constituting contingent obligations under indemnification provisions which survive indefinitely, so long as no unsatisfied claim has been made under any such indemnification provision) have been indefeasibly paid in full in cash, all Commitments have terminated and all Letters of Credit have expired, promptly following demand by Borrower, the Administrative Agent shall release to the Borrower all remaining funds in the Letter of Credit cash collateral account. (i) Obligations Absolute. The obligation of Borrower and each Lender to make available to the Issuer the amounts set forth in this Section 1.15 shall be absolute, unconditional and irrevocable under any and all circumstances without reduction for any set-off or counterclaim of any nature whatsoever, and may not be terminated, suspended or delayed for any reason whatsoever, shall not be subject to any qualification or exception and shall be made in accordance with the terms and conditions of this Agreement under all circumstances, including any of the following circumstances: (1) any lack of validity or enforceability of this Agreement or any of the other Loan Documents; (2) the existence of any claim, setoff, defense or other right which Borrower may have at any time against a beneficiary named in a Letter of Credit, any transferee of any Letter of Credit (or any Person for whom any such transferee may be acting), the Administrative Agent, the Issuer, any Lender or any other Person, whether in connection with this Agreement, any Letter of Credit, the transactions contemplated herein or any unrelated transactions (including any underlying transaction between Borrower and the beneficiary named in any such Letter of Credit); (3) any draft, certificate or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (4) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Loan Documents; or (5) the occurrence of any Default or Event of Default. (j) Limitations on Liability; Protection of Issuer, Administrative Agent and Lenders. -16- (1) Limitation on Liability of Lenders. Without affecting any rights any Lenders may have under applicable Law, Borrower agrees that none of the Lenders, the Issuer, the Administrative Agent or their respective officers or directors shall be liable or responsible for, and the obligations of the Borrower to the Lenders, the Issuer and the Administrative Agent hereunder shall not in any manner be affected by: (A) the use that may be made of any Letter of Credit or the proceeds thereof by the beneficiary thereof or any other Person or any acts or omissions of such beneficiary or any other Person; (B) the validity, sufficiency or genuineness of documents presented in connection with any Drawing, or of any endorsements thereon, even if such documents should, in fact, prove to be in any or all respects, invalid, insufficient, fraudulent or forged; or (C) any other circumstances whatsoever in making or failing to make payment under any Letter of Credit or any other action taken or omitted to be taken by any Person under or in connection with any Letter of Credit, except that the Borrower shall have a claim against the Issuer and the Issuer shall be liable to the Borrower, in each case to the extent and only to the extent of any damages suffered by the Borrower that it proves are caused by the Issuer's willful misconduct or gross negligence. In furtherance and not in limitation of the foregoing, in determining whether to pay under any Letter of Credit, the Issuer shall not have any obligation relative to the other Lenders other than to determine that any documents required to be delivered under such Letter of Credit appear to have been delivered and that they appear to comply on their face with the requirements of such Letter of Credit, regardless of any notice or information to the contrary. Any action taken or omitted to be taken by the Issuer under or in connection with any Letter of Credit (if taken or omitted in the absence of gross negligence or willful misconduct, as finally determined by a court of competent jurisdiction) shall not create for the Issuer any resulting liability to Borrower or any Lender. (2) Indemnification and Expenses. In addition to any other amounts payable under this Agreement, the Borrower agrees to protect, indemnify, pay and hold the Issuer and each Lender harmless from and against any and all claims, costs, charges and expenses (including reasonable attorneys' fees) which the Issuer may incur or be subject to as a consequence, direct or indirect, of (A) the issuance of, or payment of any drawing under, any Letter of Credit, other than as a result of the gross negligence or willful misconduct of the Issuer and/or such Lender as finally determined by a court of competent jurisdiction or (B) the failure of the Issuer to honor a Drawing under any Letter of Credit as a result of any act or omission of any present or future government or Governmental Authority. (3) Issuer Not Responsible. In furtherance of the foregoing limitations on liability, the Issuer shall not be responsible for: (A) the form, validity, -17- sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the issuance of Letters of Credit; (B) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof in whole or in part; (C) errors, omissions, interruptions, or delays in transmissions or delivery of any messages, by mail, cable, telecopy, telex or otherwise, whether or not in cipher; (D) the misapplication by the beneficiary of any Letter of Credit or the proceeds of any drawing under such Letter of Credit; or (E) any consequence arising from causes beyond the control of the Issuer, including any governmental acts except for damages proven to be caused by the Issuer's gross negligence or willful misconduct. ARTICLE II YIELD PROTECTION AND BREAKAGE INDEMNITY 2.1 Mandatory Suspension And Conversion Of LIBO Rate Loans. Each Lender's obligations to make, continue or convert into LIBO Rate Loans of any Type shall be suspended, all such Lender's outstanding Loans of such Type shall be converted into Prime Rate Loans on the last day of their applicable Interest Periods (or, in the case of clause (c) below, on the last day such Lender may lawfully continue to maintain Loans of such Type if earlier, or, in the case of clause (d) below, on the day determined by such Lender to be the last Business Day before the effective date of the applicable restriction), and all pending requests for the making or continuation of or conversion into Loans of such Type by such Lender shall be deemed requests for Prime Rate Loans, if: (a) on or prior to the date required for the determination of a LIBO Rate for any Interest Period, the Administrative Agent determines that for any reason appropriate information is not available to it for purposes of determining the LIBO Rate for such Interest Period; (b) on or prior to the first day of any Interest Period for a LIBO Rate Loan, the Majority Lenders have informed the Administrative Agent of their determination that the LIBO Rate as determined by the Administrative Agent for such Interest Period would not accurately reflect the cost to such Lenders of making, continuing or converting into a LIBO Rate Loan for such Interest Period; (c) at any time such Lender determines that any Regulatory Change makes it unlawful or impracticable for such Lender or its applicable Eurodollar Lending Office to make, continue or convert into a LIBO Rate Loan of such Type, or to comply with its obligations hereunder in respect thereof; or (d) such Lender notifies the Administrative Agent of its determination that (i) by reason of any Regulatory Change, such Lender or its applicable Eurodollar Lending Office is restricted, directly or indirectly, in the amount that it may hold of (A) a category of liabilities that includes deposits by reference to which, or on the basis of which, the interest rate applicable to LIBO Rate Loans of such Type is directly or indirectly determined -18- or (B) the category of assets that includes LIBO Rate Loans of such Type and (ii) in connection therewith, such Lender has elected not to make available hereunder LIBO Rate Loans of such Type. If, as a result of this Section 2.1, any Loan of any Lender that would otherwise be made or maintained as or converted into a LIBO Rate Loan for any Interest Period is instead made or maintained as or converted into a Prime Rate Loan, then, unless the corresponding Loan of each of the other Lenders is also to be made or maintained as or converted into a Prime Rate Loan, such Loan shall be treated as being a LIBO Rate Loan of such Type for such Interest Period for all purposes of this Agreement (including the timing, application and proration among the Lenders of interest payments, conversions and prepayments) except for the calculation of the interest rate borne by such Loan. The Administrative Agent shall promptly notify Borrower and each Lender of the existence or occurrence of any condition or circumstance specified in clause (a) or (b) above, and each Lender shall promptly notify Borrower and the Administrative Agent of the existence, occurrence or termination of any condition or circumstance specified in clause (c) or (d) above applicable to such Lender's Loans, but the failure by the Administrative Agent or such Lender to give any such notice shall not affect such Lender's rights hereunder. 2.2 Regulatory Changes. If in the determination of any Lender (a) any Regulatory Change shall actually directly or indirectly (i) reduce the amount of any sum received or receivable by such Lender with respect to any LIBO Rate Loan or the return to be earned by such Lender on any LIBO Rate Loan, (ii) impose a cost on such Lender or any Affiliate of such Lender that is attributable to the making or maintaining of, or such Lender's commitment to make or acquire, any LIBO Rate Loan, (iii) require such Lender or any Affiliate of such Lender to make any payment on or calculated by reference to any amount received by such Lender in respect of its LIBO Rate Loans or its obligations to make LIBO Rate Loans or (iv) reduce, or have the effect of reducing, the rate of return on any capital such Lender or any Affiliate of such Lender is required to maintain on account of any LIBO Rate Loan or such Lender's commitment to make any LIBO Rate Loan. and (b) such reduction, increased cost or payment shall not be fully compensated for by an adjustment in the applicable rates of interest payable under the Loan Documents, then the Borrower shall pay to such Lender such additional amounts as such Lender determines will fully compensate it for such reduction, increased cost or payment. Such additional amounts shall be payable, in the case of those applicable to prior periods, within 15 Business Days after request for such payment by such Lender, accompanied by the certificate described in Section 2.5 and, in the case of those applicable to future periods, on the dates specified, or determined in accordance with a method specified, by such Lender, provided that the Borrower shall not be liable for any amount payable with respect to any period more than 90 days before the date of such request or certificate, or, if earlier the retroactive effective date of the Regulatory Change if such Regulatory Change occurs during such 90-day period. -19- 2.3 Capital And Reserve Requirements. If, in the determination of any Lender, such Lender or any Affiliate thereof is required, under applicable Law (including Regulation D), or interpretations, directives, requests and governmental or regulatory guidelines (whether or not having the force of law), to maintain capital or deposit any reserve on account of any Loan, or any commitment to make any Loan, or to participate in any Letter of Credit then, upon request by such Lender, the Borrower shall pay to such Lender such additional amounts as such Person determines will fully compensate it for any actual reduction in the rate of return on the capital that such Lender or such Affiliate thereof is so required to maintain. Such additional amounts shall be payable, in the case of those applicable to prior periods, within 15 Business Days after request by such Lender for such payment accompanied by the certificate described in Section 2.5 (provided that the Borrower shall not be liable for any amount payable with respect to any period more than 90 days before the date of such request or certificate, or, if earlier, the retroactive effective date of such determination if made during such 90-day period), and, in the case of those relating to future periods, on the dates specified, or determined in accordance with a method specified, by such Lender. 2.4 Breakage. The Borrower shall pay to each Lender, upon request, such amount as such Lender reasonably determines is necessary to compensate it for any actual loss, cost or expense incurred by it as a result of (a) any payment, prepayment or conversion of a LIBO Rate Loan on a date other than the last day of an Interest Period for such LIBO Rate Loan or (b) a LIBO Rate Loan for any reason not being made or converted, or any payment of principal thereof or interest thereon not being made, on the date determined therefor in accordance with the applicable provisions of this Agreement. At the election of such Lender, and without limiting the generality of the foregoing, but without duplication, such compensation on account of losses may include an amount equal to the excess of (i) the interest that would have been received from the Borrower under this Agreement during the remainder of the applicable Interest Period over (ii) the interest component of the return that such Lender determines it could have obtained had it placed such amount on deposit in the interbank Dollar market for a period equal to such remaining portion of the Interest Period. 2.5 Determinations. In making the determinations contemplated by this Article 2, each Lender shall make such estimates, assumptions, allocations and the like that such Person in good faith determines to be appropriate, and such Person's selection thereof in accordance with this Section 2.5, and the determinations made by such Person on the basis thereof, shall be final, binding and conclusive upon the Borrower, except, in the case of such determinations, for manifest errors. Each Lender shall furnish to the Borrower, at the time of any request for compensation under Section 2.2 or 2.3, a certificate outlining in reasonable detail the computation of any amounts claimed by it under this Article 2 and the assumptions underlying such computations, which shall include a statement of an officer of such Person certifying that such request for compensation is being made pursuant to a policy adopted by such Person to seek such compensation generally from customers similar to the Borrower and having similar provisions in agreements with such Person. 2.6 Replacement Of Lenders. If any Lender requests compensation pursuant to Sections 1.13 (Taxes on Payments), 2.2 (Regulatory Changes) or 2.3 (Capital and Reserve Requirements), or such Lender's obligation to make or continue Loans as LIBO Rate Loans shall be suspended pursuant to Section 2.1 -20- (Mandatory Suspension and Conversion of LIBO Rate Loans) or such Lender has defaulted on its obligations to make or participate in Loans pursuant to Section 1.3 (Manner of Borrowing), Borrower, upon three (3) Business Days' notice, may require that such Lender transfer all of its right, title and interest under this Agreement, such Lender's Notes, if any, and the other Loan Documents to any Eligible Institution identified by Borrower subject to (a) the consent of the Administrative Agent (which consent shall not be unreasonably withheld), (b) satisfaction of the other conditions specified in Section 11.9 below (Successors and Assigns), (c) the agreement of the proposed transferee to assume all of the obligations of such Lender hereunder and under the other Loan Documents for consideration equal to the outstanding principal amount of such Lender's Loans, interest thereon to the date of such transfer, and all other amounts payable hereunder to such Lender to the date of transfer, (d) such transferor Lender shall have been paid on or prior to the date of such transfer all fees and other amounts payable to such transferor hereunder including those amounts payable under said Sections 1.13, 2.2 or 2.3, as applicable (and including any fees accrued hereunder and any amounts that would be payable under Section 2.4 (Breakage) as if all of such Lender's Loans were being prepaid in full on such date) or arrangements satisfactory to the transferor Lender shall have been made for such payments, and (e) satisfaction of the condition that if the Lender being replaced has requested compensation pursuant to Sections 1.13, 2.2 or 2.3, the proposed transferee's aggregate requested compensation, if any, pursuant to Sections 1.13, 2.2 or 2.3 with respect to such replaced Lender's Loans is lower than that of the Lender replaced. Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements of the Borrower contained in Sections 1.13 (Taxes on Payments), 2.2 (Regulatory Changes), 2.3 (Capital and Reserve Requirements), 2.4 (Breakage), 11.12 (Indemnification) and 11.12 (Expenses) (without duplication of any payments made to such Lender by the Borrower or the proposed transferee) shall survive for the benefit of any Lender replaced under this Section 2.6 with respect to the time prior to such replacement. 2.7 Change Of Lending Office. Each Lender agrees that, upon the occurrence of any event giving rise to the operation of Sections 1.13 (Taxes on Payments), 2.1 (Mandatory Suspension and Conversion of LIBO Rate Loans), 2.2 (Regulatory Changes) or 2.3 (Capital and Reserve Requirements) with respect to such Lender, it will, if requested by the Borrower, use reasonable efforts (subject to overall policy considerations of such Lender) to designate another lending office for any Loans affected by such event, provided that such designation is made on such terms that such Lender and its lending office suffer no material economic, legal or regulatory disadvantage, with the object of avoiding the consequence of the event giving rise to the operation of any such Section. Nothing in this Section 2.7 shall affect or postpone any of the obligations of the Borrower or the right of any Lender provided in Section 1.12 -21- (Taxes on Payments), 2.1 (Mandatory Suspension and Conversion of LIBO Rate Loans), 2.2 (Regulatory Changes) or 2.3 (Capital and Reserve Requirements). ARTICLE III CONDITIONS TO EFFECTIVENESS OF AGREEMENT AND FUNDINGS 3.1 Conditions To Initial Loans. The effectiveness of this Agreement (other than this Article 3) and the obligation of the Lenders to make Loans and of the Issuer to issue Letters of Credit on the Closing Date are subject to the satisfaction, immediately prior to or concurrently with the making of such Loan or the issuance of such Letter of Credit, of the following conditions precedent in each case to the satisfaction of the Administrative Agent, in addition to the conditions precedent set forth in Section 3.2 hereof: (a) Agreement; Note. The Administrative Agent shall have received this Agreement and RC Notes, in the form of Exhibit A hereto, each duly executed on behalf of Borrower. (b) Subsidiary Guaranty. The Administrative Agent shall have received Guaranties in the form of Exhibit G attached hereto duly executed on behalf of each of the Guarantors (each such agreement, as it may be further amended, modified or supplemented from time to time, a "Subsidiary Guaranty"). (c) Certain Security Documents Pertaining to Personal Property. The Administrative Agent shall have received the following documents (as amended, modified or supplemented from time to time, each a "Security Document" and collectively the "Security Documents"), each of which shall be in form and substance satisfactory to the Administrative Agent, (except for the certificates representing the stock certificates and other instruments pledged pursuant to such Security Documents and the stock powers delivered in connection therewith): (i) Executed copies of each of the following: (A) An Amended and Restated Security Agreement, duly executed on behalf of each Obligor, in substantially the form of Exhibit E attached hereto (such agreement as it may be further amended, modified or supplemented from time to time, the "Security Agreement"). (B) Amended and Restated Stock Pledge Agreements, duly executed on behalf of each Obligor owning stock in a non-excluded subsidiary of another Obligor, in substantially the form of Exhibit F attached hereto (such agreements as they may be further amended, modified or supplemented from time to time, the "Stock Pledge Agreements"). (ii) Certificates and instruments representing the stock certificates and other instruments pledged pursuant to such Security Documents, accompanied by duly executed instruments of transfer or assignment in blank, and, to the extent required by the Security Documents, duly endorsed to -22- the order of the Administrative Agent, in form and substance satisfactory to the Administrative Agent. (iii) Evidence of the completion of all recordings and filings of or with respect to, and of all other actions with respect to, the above Security Documents as may be necessary or, in the opinion of the Administrative Agent, desirable to create or perfect the Liens created or purported to be created by such Security Documents as valid, continuing and perfected Liens in favor of the Administrative Agent securing the Obligations, prior to all other Liens other than Permitted Liens; and evidence of the payment of any necessary fee, tax or expense relating to such recording or filing. Without limitation of the foregoing, the Administrative Agent shall receive: (A) Proper financing statements duly executed by the Obligors necessary or desirable by Administrative Agent to create or perfect such Liens in favor of Mellon Bank, N.A. as Administrative Agent and representative of the Lenders. (iv) Evidence of the insurance required by the terms of the above Security Documents, containing the endorsements required by such Security Documents and this Agreement. (v) Waivers of landlord's liens, warehouseman's liens and like rights. (vi) Evidence that all other actions necessary or, in the opinion of the Administrative Agent, desirable to create, perfect or protect the Liens created or purported to be created by the above Security Documents have been taken. (vii) A contemporaneous search of UCC, tax, judgment and litigation dockets and records and other appropriate registers shall have revealed no filings or recordings in effect with respect to the Collateral purported to be covered by the above Security Documents, except such as are acceptable to the Administrative Agent (it being understood that such acceptance does not limit the obligations of the Obligors with respect to the priority of the Liens in favor of the Lenders), and the Administrative Agent shall have received a copy of the search reports received as a result of the search and of the acknowledgment copies of the financing statements or other instruments required to be filed or recorded pursuant to this subsection bearing evidence of the recording of such statements or instruments at each of such filing or recording places. (Pending completion of the corporate restructuring described on Schedule 5.4, this condition may be satisfied after the Closing Date via the delivery of post-closing searches of the surviving entities.) (d) Capitalization, Etc. The corporate and capital structure of each Obligor shall be reasonably satisfactory to the Administrative Agent. (e) Corporate Proceedings. The Administrative Agent shall have received certificates by the Secretary or Assistant Secretary of each Obligor dated as of the Closing Date as to (i) true copies of the articles of incorporation and by-laws (or other constituent documents) of each Obligor in effect on such date (which, in the case of articles of incorporation or other constituent documents filed or required to be filed with the Secretary of State or other Governmental Authority in its jurisdiction of incorporation, shall be -23- certified to be true, correct and complete by such Secretary of State or other Governmental Authority not more than 30 days before the Closing Date) or certificates from a Responsible Officer of each Obligor stating that the articles of incorporation and bylaws of each Obligor have not been amended or modified since furnished to the Administrative Agent in connection with the Existing Credit Agreement, (ii) true copies of all corporate action taken by each Obligor relative to this Agreement and the other Loan Documents and (iii) the incumbency and signature of the respective officer of each Obligor executing this Agreement and the other Loan Documents, together with satisfactory evidence of the incumbency of such Secretary or Assistant Secretary. The Administrative Agent shall have received certificates from the appropriate Secretaries of State or other applicable Governmental Authorities dated not more than 30 days before the Closing Date showing the good standing of each Obligor in its state of incorporation and each state in which each Obligor does business. (f) Insurance. The Administrative Agent shall have received a report from each Obligor's insurance broker, addressed to the Administrative Agent, satisfactory in form and substance to the Administrative Agent, as to insurance matters pertaining to each Obligor. The Administrative Agent shall have received evidence satisfactory to it that the insurance policies required by this Agreement and the other Loan Documents have been obtained, containing the endorsements required hereby and thereby. (g) Financial Statements. The Administrative Agent shall have received copies of the financial statements and other information referred to in Section 4.1 hereof. (h) Legal Opinions of Counsel. The Administrative Agent shall have received an opinion addressed to the Lenders, dated the Closing Date, of Blank Rome Comisky & McCauley LLP, counsel to the Obligors, in form and substance satisfactory to the Administrative Agent and its counsel (which will be substantially the same as the opinion issued in connection with the Existing Credit Agreement, with appropriate additional provisions which address the transactions described herein). (i) Responsible Officer Certificates. The Administrative Agent shall have received certificates from a Responsible Officer of each Obligor as to such matters as the Administrative Agent may request. (j) Fees, Expenses, etc. All fees, interest, expenses and other amounts required to be paid to the Administrative Agent on behalf of the Lenders under the Existing Credit Agreement, this Credit Agreement, or any other written agreement on or prior to the Closing Date shall have been paid or received. (k) Interest Rate Hedging Agreement. [Intentionally omitted; condition satisfied under Existing Credit Agreement.] (l) Management Letters. The Administrative Agent shall have received copies of the management letters issued by Borrower's certified public accountants in connection with its audited financial statements dated December 31, 1998 or a letter from such accountants that no such management letters were issued. -24- (m) No Material Adverse Effect. The Responsible Officer of each Obligor shall provide the Administrative Agent with a certificate stating that since September 30, 1999 (the date of the Borrower's most recent financial statements), there has not occurred, or been threatened, any event, act or condition which could have a Material Adverse Effect. (n) Keyman Life Insurance. The Administrative Agent shall have received evidence that the Borrower has in place at least $2,000,000 in keyman life insurance on the life of Michael J. Barrist. (o) Additional Matters. All corporate and other proceedings, and all documents, instruments and other matters in connection with the transactions contemplated by this Agreement and the other Loan Documents shall be reasonably satisfactory in form and substance to the Administrative Agent. 3.2 Conditions To All Loans. The obligation of the Lenders to make any Loan and of the Issuer to issue any Letter of Credit is subject to performance by each Obligor of its obligations to be performed hereunder or under the other Loan Documents on or before the date of such Loan or Letter of Credit, satisfaction of the conditions precedent set forth herein and in the other Loan Documents and to satisfaction of the following further conditions precedent: (a) Notice. Appropriate notice of such Loan or request for a Letter of Credit, as applicable shall have been given by the Borrower as provided in Article 1 hereof. (b) Representations and Warranties. Each of the representations and warranties made by Borrower in Article 4 hereof shall be true and correct in all material respects on and as of such date as if made on and as of such date, both before and after giving effect to the Loans or the issuance of the Letter of Credit requested to be made on such date. (c) No Defaults. No Event of Default or Default shall have occurred and be continuing on such date or after giving effect to the Loans requested to be made on such date. (d) No Violations of Law, etc. Neither the making nor use of the Loans nor issuance of any Letter of Credit shall cause the Lenders to violate or conflict with any Law. (e) No Material Adverse Effect. There shall not have occurred, or be threatened, any other event, act or condition which could have a Material Adverse Effect since the date of the Borrower's most recent financial statements delivered to the Administrative Agent. Each request by Borrower for any Loan or for the issuance of a Letter of Credit shall constitute a representation and warranty by Borrower that the conditions set forth in this Section 3.2 have been satisfied as of the date of such request. Failure of the Administrative Agent to receive notice from the Borrower to the contrary before such Loan is made shall constitute a further representation and warranty by the Borrower that the conditions referred to in this Section 3.2 have been satisfied as of the date such Loan is made. -25- ARTICLE IV REPRESENTATIONS AND WARRANTIES 4.1 Representations And Warranties. The Borrower hereby represents and warrants to the Lenders as follows: (a) Corporate Status. Each Obligor is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation. Each Obligor has corporate power and authority to own its property and transact the business in which it is engaged or presently proposes to engage. Each Obligor is duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions in which the ownership of its properties or the nature of its activities or both makes such qualification necessary or advisable. Schedule 4.1(a) hereof states as of the date hereof the jurisdiction of incorporation of each Obligor and the jurisdictions in which each Obligor is qualified to do business as a foreign corporation. (b) Corporate Power and Authorization. Each Obligor has corporate power and authority to execute, deliver, perform, and take all actions contemplated by each Loan Document to which it is a party, and all such action has been duly and validly authorized by all necessary corporate proceedings on its part. Without limitation of the foregoing, each Obligor has the corporate power and authority to borrow pursuant to the Loan Documents to the fullest extent permitted hereby and thereby from time to time, and has taken all necessary corporate action to authorize such borrowings. (c) Execution and Binding Effect. This Agreement and each other Loan Document to which any Obligor is a party and which is required to be delivered on or before the Closing Date pursuant to Section 3.1 hereof has been duly and validly executed and delivered by such Obligor. This Agreement, and each other Loan Document constitute, the legal, valid and binding obligation of each Obligor, enforceable against Borrower in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency or other similar laws of general application affecting the enforcement of creditors' rights or by general principles of equity limiting the availability of equitable remedies. (d) Governmental Approvals and Filings. No approval, order, consent, authorization, certificate, license, permit or validation of, or exemption or other action by, or filing, recording or registration with, or notice to, any Governmental Authority (collectively, "Governmental Action") is or will be necessary or advisable in connection with the execution and delivery of any Loan Document, consummation of the transactions herein or therein contemplated, performance of or compliance with the terms and conditions hereof or thereof or to ensure the legality, validity, binding effect, enforceability or admissibility in evidence hereof or thereof, provided that Borrower may be required to file the Loan Documents with the Securities and Exchange Commission. (e) Absence of Conflicts. Neither the execution and delivery of any Loan Document, nor consummation of the transactions herein or therein contemplated, nor performance of or compliance with the terms and conditions hereof or thereof does or will (i) violate or conflict with any Law, or -26- (ii) violate, conflict with or result in a breach of any term or condition of, or constitute a default under, or result in (or give rise to any right, contingent or otherwise, of any Person to cause) any termination, cancellation, prepayment or acceleration of performance of, or result in the creation or imposition of (or give rise to any obligation, contingent or otherwise, to create or impose) any Lien upon any property of any Obligor (except for any Lien in favor of the Lender securing the Obligations) pursuant to, or otherwise result in (or give rise to any right, contingent or otherwise, of any Person to cause) any change in any right, power, privilege, duty or obligation of the Borrower under or in connection with, (A) the articles of incorporation or by-laws (or other constituent documents) of any Obligor, (B) any agreement or instrument creating, evidencing or securing any Indebtedness to which any Obligor is a party or by which any of them or any of their respective properties (now owned or hereafter acquired) may be subject or bound, or (C) any other material agreement or instrument to which any Obligor is a party or any of its properties (now owned or hereafter acquired) may be subject or bound. (f) Audited Financial Statements. The Borrower has heretofore furnished to the Administrative Agent financial statements for Borrower and its Subsidiaries as of December 31, 1998 and the related statements of income, cash flows and changes in stockholders' equity for the fiscal year then ended, as examined and reported on by PriceWaterhouseCoopers, who delivered an unqualified opinion in respect thereof. The financial statements present fairly the financial condition of the Borrower and its Subsidiaries, as of the end of such fiscal year, and the results of its operations and its cash flows for the fiscal year then ended, all in conformity with GAAP. (g) Interim Financial Statements. The Borrower has heretofore furnished to the Administrative Agent interim company prepared financial statements for the Borrower and its Subsidiaries, dated September 30, 1999 for the fiscal quarter then ending. Such financial statements present fairly the financial condition of the Borrower and its Subsidiaries, as of the end of such fiscal quarter and the results of its operations and its cash flows for such fiscal quarter, all in conformity with GAAP, subject to normal and recurring year-end audit adjustments. (h) Absence of Undisclosed Liabilities. No Obligor has any liability or obligation of any nature whatever (whether absolute, accrued, contingent or otherwise, whether or not due), forward or long-term commitments or unrealized or anticipated losses from unfavorable commitments, except (w) as disclosed in the financial statements referred to in Sections 4.1(f) and (g) hereof, (x) matters that, individually or in the aggregate, could not have a Material Adverse Effect, (y) as disclosed in Schedule 4.1(h) hereof, and (z) liabilities, obligations, commitments and losses incurred after December 31, 1998 in the ordinary course of business and consistent with past practices. -27- (i) Absence of Material Adverse Changes. Since September 30, 1999, there has been no change in the business, operations, or condition (financial or otherwise) of any Obligor that could reasonably be expected to have a Material Adverse Effect. (j) Accurate and Complete Disclosure. All information (taken as a whole) heretofore, contemporaneously or hereafter provided (orally or in writing) by any Obligor to the Administrative Agent pursuant to or in connection with any Loan Document or any transaction contemplated hereby or thereby is or will be (as the case may be) true and accurate in all material respects on the date as of which such information is dated (or, if not dated, when received by the Administrative Agent as the case may be) and does not or will not (as the case may be) omit to state any material fact necessary to make such information (taken as a whole) not misleading at such time in light of the circumstances in which it was provided. The Obligor has disclosed to the Administrative Agent in writing every fact or circumstance which has, or which could have, a Material Adverse Effect. (k) Solvency. On and as of the Closing Date, and after giving effect to all Loans and other obligations and liabilities being incurred on such date in connection therewith, and on the date of each subsequent Loan or other extension of credit hereunder and after giving effect to application of the proceeds thereof in accordance with the terms of the Loan Documents, the Obligors on a consolidated basis are and will be Solvent. (l) Margin Regulations. No part of the proceeds of any Loan hereunder will be used for the purpose of buying or carrying any "margin stock," as such term is used in Regulation U of the Board of Governors of the Federal Reserve System, as amended from time to time, or to extend credit to others for the purpose of buying or carrying any "margin stock". No Obligor is engaged in the business of extending credit to others for the purpose of buying or carrying "margin stock". No Obligor owns any "margin stock". Neither the making of any Loan nor any use of proceeds of any such Loan will violate or conflict with the provisions of Regulation T, U or X of the Board of Governors of the Federal Reserve System, as amended from time to time. (m) Partnerships, Etc. Except as set forth on Schedule 4.1(m), no Obligor is a partner (general or limited) of any partnership, is a party to any joint venture, or owns (beneficially or of record) any equity or similar interest in any such Person (including but not limited to any interest pursuant to which such Obligor has or may in any circumstance have an obligation to make capital contributions to, or be generally liable for or on account of the liabilities, acts or omissions of such other Person). (n) Ownership and Control. Schedule 4.1(n) hereof states as of the date hereof the authorized capitalization of each Obligor, the number of shares of each class of capital stock issued and outstanding of each Obligor and the number and percentage of outstanding shares of each such class of capital stock and the names of the record owners of such shares and the direct or indirect beneficial owners of such shares (except that for Borrower the listing shall include only the names of any parties beneficially owning, individually or through affiliates, more than 5% of Borrower's stock). The outstanding shares of capital stock of each Obligor have been duly authorized and validly issued and are fully paid and nonassessable. Except as described in Schedule 4.1(n), there are no options, warrants, calls, subscriptions, conversion rights, exchange rights, preemptive rights or other rights, agreements or arrangements (contingent or otherwise) which may in any circumstances now or hereafter -28- obligate Borrower to issue any shares of its capital stock or any other securities. (o) Litigation. To the best of Borrower's knowledge, there is no pending or (to Borrower's knowledge after due inquiry) threatened action, suit, proceeding or investigation by or before any Governmental Authority against any Obligor which would cause a Material Adverse Effect. (p) Absence of Events of Default. No event has occurred and is continuing and no condition exists which constitutes an Event of Default or Default. (q) Absence of Other Conflicts. No Obligor is in violation of or conflict with, or is subject to any contingent liability on account of any violation of or conflict with: (i) any Law to the best of Borrower's knowledge, after due inquiry, (ii) its articles of incorporation or by-laws (or other constituent documents), or (iii) any material agreement or instrument or arrangement to which it is party or by which it or any of its properties (now owned or hereafter acquired) may be subject or bound. (r) Insurance. Each Obligor maintains with financially sound and reputable insurers insurance with respect to its properties and business and against at least such liabilities, casualties and contingencies and in at least such types and amounts as is customary in the case of corporations engaged in the same or a similar business or having similar properties similarly situated. Schedule 4.1(r) hereof sets forth a list of all insurances currently maintained by each Obligor, setting forth the identity of the insurance carrier, the type of coverage, the amount of coverage and the deductible. There are no claims, actions, suits, or proceedings against, arising under or based upon any of such insurance policies except as set forth in such Schedule 4.1(r). (s) Title to Property. Each Obligor has good and marketable title in fee simple to all real property owned or purported to be owned by it and good title to all other property of whatever nature owned or purported to be owned by it, including but not limited to all property reflected in the most recent audited balance sheet referred to in Section 4.1(f) hereof or submitted pursuant to Section 5.1(a) hereof, as the case may be (except as sold or otherwise disposed of in the ordinary course of business after the date of such balance sheet), in each case free and clear of all Liens, other than Permitted Liens. (t) Intellectual Property. Each Obligor owns, or is licensed or otherwise has the right to use, all the patents, trademarks, service marks, names (trade, service, fictitious or otherwise), copyrights, technology (including but not limited to computer programs and software), processes, data bases and other rights, free from burdensome restrictions, necessary to own and operate its properties and to carry on its business as presently conducted and presently planned to be conducted without conflict with the rights of others. Except as described in Schedule 4.1(t), no Obligor owns any patents, trademarks or copyrights. -29- (u) Taxes. All tax and information returns required to be filed by or on behalf of any Obligor have been properly prepared, executed and filed. All taxes, assessments, fees and other governmental charges upon any Obligor or upon any of its properties, incomes, sales or franchises which are due and payable have been paid other than those not yet delinquent and payable without premium or penalty, and except for those being diligently contested in good faith by appropriate proceedings, and in each case adequate reserves and provisions for taxes have been made on the books of each Obligor. The reserves and provisions for taxes on the books of any Obligor are adequate for all open years and for its current fiscal period. No Obligor has knowledge of any proposed additional assessment or basis for any material assessment for additional taxes (whether or not reserved against). (v) Employee Benefits. Except as set forth on Schedule 4.1(v), no Obligor has a Plan or Plans. (w) Environmental Matters. (i) Each Obligor, and each of its respective Environmental Affiliates, is and has been in full compliance with all applicable Environmental Laws, except for (x) matters set forth in Schedule 4.1(w) hereof and (y) matters which, individually or in the aggregate, could not have a Material Adverse Effect. There are to each Obligor's knowledge after due inquiry no circumstances that may prevent or interfere with such full compliance in the future. (ii) Each Obligor and its respective Environmental Affiliates has all Environmental Approvals necessary or desirable for the ownership and operation of their respective properties, facilities and businesses as presently owned and operated and as presently proposed to be owned and operated, except for (x) matters set forth in Schedule 4.1(x) hereof and (y) matters which, individually or in the aggregate, could not have a Material Adverse Effect. (iii) There is no Environmental Claim pending or, to the knowledge of any Obligor after due inquiry, threatened, and there are no past or present acts, omissions, events or circumstances that could form the basis of any Environmental Claim, against any Obligor or any of its respective Environmental Affiliates, except for (x) matters set forth in Schedule 4.1(w) hereof, and (y) matters which, if adversely decided, individually or in the aggregate, could not have a Material Adverse Effect. (iv) No facility or property now or previously owned, operated or leased by any Obligor or any of its respective Environmental Affiliates is an Environmental Cleanup Site. No Obligor or any Environmental Affiliate has directly transported or directly arranged for the transportation of any Environmental Concern Materials to any Environmental Cleanup Site. No Lien exists, and to Borrower's knowledge no condition exists which could result in the filing of a Lien, against any property of any Obligor or any of its respective Environmental Affiliates under any Environmental Law. (x) Business Interruptions. Within two (2) years prior to the Closing Date, none of the business, property or operations of any Obligor has been materially and adversely affected in any way by any casualty, strike, lockout, combination of workers, order of the United States of America, or any state or local government, or any political subdivision or agency thereof, directed against such Obligor. To the best of Borrower's knowledge, -30- there are no pending or threatened labor disputes, strikes, lockouts or similar occurrences or grievances against the business being operated by any Obligor. (y) Names. In the five (5) years prior to the Closing Date, no Obligor has conducted business under or used any names (whether corporate or assumed) except for its present corporate name and those names listed in Schedule 4.1(y) attached hereto and made a part hereof. Each Obligor is the sole owner of its name and any and all business done and all invoices using such name or any names listed in Schedule 4.1(y) represent sales and business of such Obligor and are owned solely by such Obligor. (z) Regulation O. No director, executive officer or principal shareholder of any Obligor is a director, executive officer or principal shareholder of any Lender. For the purposes hereof the terms "director" (when used with reference to any Lender), "executive officer" and "principal shareholder" have the respective meanings assigned thereto in Regulation O issued by the Board of Governors of the Federal Reserve System. (aa) Year 2000 Compliance. As described more fully in Borrower's Form 10-K for 1998, Obligors have (a) reviewed the areas within their business and operations which could be adversely affected by a computer failure to recognize the change in the century at the year 2000 ("Year 2000 Problem") and (b) developed and are implementing plans, which to the best of their knowledge (based on testing to date) will be effective, to avoid any adverse impact as a consequence of a Year 2000 Problem. 4.2 Representations And Warranties Absolute. The representations and warranties of the Borrower set forth in this Article 4 are unaffected by any prior or subsequent investigation by, or knowledge of, the Administrative Agent or any Lender. ARTICLE V AFFIRMATIVE COVENANTS So long as any Loan shall remain unpaid, any Letter of Credit is outstanding or any Lender shall have any Commitment under this Agreement, Borrower shall comply, and shall cause each other Obligor to comply, with the following covenants: 5.1 Basic Reporting Requirements. (a) Annual Audit Reports. As soon as practicable, and in any event within 90 days after the close of each fiscal year of the Borrower, the Borrower shall furnish to the Administrative Agent and each of the Lenders consolidated statements of income, cash flows and changes in stockholders' equity of the Borrower and its Subsidiaries for such fiscal year and a consolidated balance sheet of the Borrower and its Subsidiaries as of the close of such fiscal year, and notes to each, all in reasonable detail, setting forth in comparative form the corresponding figures for the preceding fiscal year, together with all management letters issued, or letters stating that no management letters are being issued, in connection therewith. Such financial statements shall be accompanied by an opinion of independent certified public -31- accountants of recognized national standing selected by the Borrower and reasonably satisfactory to the Administrative Agent. A copy of the opinion of such accountants shall be delivered to the Administrative Agent and each of the Lenders and signed by such accountants. Such opinion shall be free of exceptions or qualifications not acceptable to the Administrative Agent in its reasonable discretion and in any event shall be free of any exception or qualification which is of "going concern" or like nature or which relates to a limited scope of examination. Such opinion in any event shall contain a written statement of such accountants substantially to the effect that (i) such accountants examined such financial statements in accordance with generally accepted auditing standards and accordingly made such tests of accounting records and such other auditing procedures as such accountants considered necessary under the circumstances and (ii) in the opinion of such accountants such financial statements present fairly the financial position of the Borrower and its Subsidiaries as of the end of such fiscal year and the results of their operations and their cash flows and changes in stockholders' equity for such fiscal year, in conformity with GAAP. (b) Quarterly Financial Statements. As soon as practicable but in any event within 45 days after the end of each quarter, the Borrower shall furnish to the Administrative Agent and each of the Lenders financial statements in the form filed with Borrower's Form 10-Q filing with the Securities and Exchange Commission. (c) Quarterly Compliance Certificates. The Borrower shall deliver to the Administrative Agent and each of the Lenders a Quarterly Compliance Certificate in substantially the form set forth as Exhibit I hereto, duly completed and signed by the Chief Financial Officer of Borrower concurrently with the delivery of the financial statements referred to in subsections (a) and (b). The Quarterly Compliance Certificate shall confirm that the unamortized remaining invested balance of all acquired delinquent pools of Accounts does not exceed $25,000,000, in the aggregate among all Obligors, at any point in time. From time to time the Borrower may seek the prior written consent of the Majority Lenders (in their sole discretion) so that the unamortized remaining invested balance of all acquired delinquent pools of accounts may exceed $25,000,000. (d) Annual Budget. As soon as practicable, and in any event within 45 days after the start of each fiscal year, the Borrower shall deliver to the Administrative Agent a consolidated annual budget, which shall include the annual projections of profit and loss statements, balance sheets and cash flow reports (prepared on an annual basis) for the succeeding fiscal year, together with a statement of the assumptions and estimates upon which such projections are based in form and substance consistent with past practice. The projections shall be accompanied by a cover letter stating that such projections, estimates and assumptions, as of the date of preparation thereof, are reasonable, made in good faith, consistent with the Loan Documents, and represent the Borrower's best judgment as to such matters. (e) Commercial Finance Reports. Within 30 days of a request by the Administrative Agent, the Borrower shall furnish to the Administrative Agent a report of a Responsible Officer of the Borrower setting forth information as to (i) receivables, and (ii) payables (which may include, among other things, a breakout of aging and payments). -32- (f) Certain Other Reports and Information. Promptly upon their becoming available to the Borrower, the Borrower shall deliver to the Administrative Agent a copy of (i) all regular or special reports, registration statements and amendments to the foregoing which the Borrower shall file with the Securities and Exchange Commission (or any successor thereto) or any securities exchange, (ii) all reports, proxy statements, financial statements and other information distributed by the Borrower to its stockholders, bondholders or the financial community generally, and (iii) all accountants' management letters pertaining to, all other reports submitted by accountants in connection with any audit of, and all other material reports from outside accountants with respect to, the Borrower. (g) Further Information. The Borrower will promptly furnish to the Administrative Agent or any Lender such other information and in such form as the Administrative Agent or any Lender may reasonably request from time to time. (h) Notice of Certain Events. Promptly upon becoming aware of any of the following, the Borrower shall give the Administrative Agent notice thereof, together with a written statement of a Responsible Officer of the Borrower setting forth the details thereof and any action with respect thereto taken or proposed to be taken by the Borrower: (i) Any Event of Default or Default. (ii) Any material adverse change in the business, operations or condition (financial or otherwise) of any Obligor. (iii) Any pending or threatened action, suit, proceeding or investigation by or before any Governmental Authority against or affecting any Obligor, except for matters that if adversely decided, individually or in the aggregate, could not have a Material Adverse Effect. (iv) Any material violation, breach or default by any Obligor under any agreement or instrument which could have a Material Adverse Effect. (v) Any material amendment or supplement to, or extension, renewal, refinancing, or refunding of, or waiver by any other party thereto of any right under or conditions of, any agreement or instrument creating, evidencing or securing any Indebtedness of any Obligor; any agreement or instrument material to the business, operations or condition (financial or otherwise) of any Obligor, and any negotiations pertaining to any of the foregoing. (vi) Any Pension-Related Event. Such notice shall be accompanied by: (A) a copy of any notice, request, return, petition or other document received by any Obligor or any Controlled Group Member from any Person, or which has been or is to be filed with or provided to any Person (including without limitation the Internal Revenue Service, PBGC or any Plan participant, beneficiary, alternate payee or employer representative), in connection with such Pension-Related Event, and (B) in the case of any Pension-Related Event with respect to a Plan, the most recent Annual Report (5500 Series), with attachments thereto, and the most recent actuarial valuation report, for such Plan, if not previously provided. -33- (vii) Any Environmental Claim pending or threatened against any Obligor, or any past or present acts, omissions, events or circumstances (including but not limited to any dumping, leaching, deposition, removal, abandonment, escape, emission, discharge or release of any Environmental Concern Material at, on or under any facility or property now or previously owned, operated or leased by any Obligor that could form the basis of such Environmental Claim, which Environmental Claim, if adversely resolved, individually or in the aggregate, could have a Material Adverse Effect. (i) Visitation; Verification. Borrower shall permit such Persons as the Administrative Agent or any Lender may designate from time to time to visit and inspect any of the properties of any Obligor, to examine its books and records and take copies and extracts therefrom and to discuss its affairs with its directors, officers, employees and independent accountants at such times and as often as the Administrative Agent may reasonably request. Borrower hereby authorizes such officers, employees and independent accountants to discuss with the Administrative Agent the affairs of such Obligors. The Administrative Agent shall have the right to examine accounts, inventory and other properties and liabilities of each Obligor from time to time, and Borrower shall cooperate with the Administrative Agent in such examination. 5.2 Insurance. Each Obligor shall maintain insurance covering the properties (including tangible Collateral) and business against fire, flood, casualty and such other hazards and risks (including the risk of business interruption from a casualty event) as may be reasonably acceptable to the Administrative Agent in such amounts, with such deductibles and with such insurers as may be reasonably acceptable to the Administrative Agent. In addition: (a) Administrative Agent as Loss Payee and Additional Insured. All casualty insurance policies covering tangible Collateral shall contain standard Loss Payable Clauses issued in favor of the Administrative Agent for the benefit of the Lenders under which all losses thereunder shall be paid to the Administrative Agent for the Lenders as their interests may appear. All other insurance policies shall name the Administrative Agent as an additional insured on behalf of the Lenders as their interests may appear. Such policies shall expressly provide that the requisite insurance cannot be altered or canceled without thirty (30) days prior written notice to the Administrative Agent and shall insure the Lenders notwithstanding the act or neglect of the insured. (b) Administrative Agent's Right to Purchase Insurance. In the event any Obligor fails to procure or cause to be procured any such insurance or to timely pay or cause to be paid the premium(s) on any such insurance, the Administrative Agent may do so for such Obligor but such Obligor shall continue to be liable for the cost of such insurance. (c) Disposition of Insurance Proceeds. Each Obligor, for itself and each Obligor, hereby appoints the Administrative Agent as its attorney-in-fact, exercisable at the Administrative Agent's option, to endorse any check which may be payable to any Obligor in order to collect the proceeds of such insurance. In the absence of a Default or Event of Default, the Administrative Agent shall turn over to the Borrower all insurance proceeds the Administrative Agent receives. The Borrower may use the proceeds for the repair, reconstruction or replacement of Collateral, toward the replacement of lost revenues, for working capital, or for any other proper business purpose; provided that any proceeds that remain unused (i) more than 12 months after the -34- Borrower receives them or (ii) at the time a Default or Event of Default occurs shall be applied immediately as the Majority Lenders may in their discretion direct, including against the Obligations and as a permanent reduction of the RC Commitment. (d) Evidence of Insurance. Each Obligor shall furnish to the Administrative Agent from time to time upon request the policies under which the required insurance is issued, certificates of insurance, loss payable endorsements, and such other information relating to such insurance as the Administrative Agent may request, and provide such other insurance and endorsements as are required by this Agreement and the other Loan Documents. 5.3 Payment Of Taxes And Other Potential Charges And Priority Claims. Each Obligor shall pay or discharge (a) on or prior to the date on which penalties attach thereto, all taxes, assessments and other governmental charges imposed upon it or any of its properties; (b) on or prior to the date when due, all lawful claims of materialmen, mechanics, carriers, warehousemen, landlords and other like Persons which, if unpaid, might result in the creation of a Lien upon any such property; and (c) on or prior to the date when due, all other lawful claims which, if unpaid, might result in the creation of a Lien upon any such property or which, if unpaid, might give rise to a claim entitled to priority over general creditors of such Obligor in a case under Title 11 (Bankruptcy) of the United States Code, as amended; provided, that unless and until foreclosure, distraint, levy, sale or similar proceedings shall have been commenced such Obligor need not pay or discharge any such tax, assessment, charge or claim so long as (x) the validity thereof is contested in good faith and by appropriate proceedings diligently conducted, and (y) such reserves or other appropriate provisions as may be required by GAAP shall have been made therefor. 5.4 Preservation Of Corporate Status. Except as contemplated by the corporate restructuring described in Schedule 5.4, each Obligor shall maintain its status as a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and to be duly qualified to do business as a foreign corporation and in good standing in all jurisdictions in which the ownership of its properties or the nature of its business or both make such qualification necessary. 5.5 Governmental Approvals And Filings. Each Obligor shall keep and maintain in full force and effect all Governmental Actions necessary or advisable in connection with execution and delivery of any Loan Document, consummation of the transactions herein or therein contemplated, performance of or compliance with the terms and conditions hereof or thereof or to ensure the legality, validity, binding effect, enforceability or admissibility in evidence hereof or thereof. 5.6 Maintenance Of Properties. Each Obligor shall maintain or cause to be maintained in good repair, working order and condition the properties now or hereafter owned, leased or otherwise possessed by it and shall make or cause to -35- be made all needful and proper repairs, renewals, replacements and improvements thereto so that the business carried on in connection therewith may be properly and advantageously conducted at all times. 5.7 Avoidance Of Other Conflicts. No Obligor shall violate or conflict with, be in violation of or conflict with, or be or remain subject to any liability (contingent or otherwise) on account of any violation or conflict with (a) any Law in a manner which could cause a Material Adverse Effect, (b) its articles of incorporation or by-laws (or other constituent documents), or (c) any material agreement or instrument to which it is a party or by which any of them or any of their respective properties (now owned or hereafter acquired) may be subject or bound. 5.8 Financial Accounting Practices. Each Obligor shall make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect its transactions and dispositions of its assets and maintain a system of internal accounting controls sufficient to provide reasonable assurances that (a) transactions are executed in accordance with management's general or specific authorization, (b) transactions are recorded as necessary (i) to permit preparation of financial statements in conformity with GAAP and (ii) to maintain accountability for assets, (c) access to assets is permitted only in accordance with management's general or specific authorization and (d) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 5.9 Use Of Proceeds. Subject to the terms and conditions of this Agreement, the Borrower shall apply the proceeds of all Loans hereunder only for working capital and acquisition financing. The Borrower shall not use the proceeds of any Loans hereunder directly or indirectly for any unlawful purpose or inconsistent with any other provision of any Loan Document. 5.10 Continuation Of Or Change In Business. Each Obligor shall continue to engage in its business substantially as conducted and operated during the present and preceding fiscal year, and no Obligor shall engage in any other business not substantially similar to the business as presently conducted. 5.11 Consolidated Tax Return. No Obligor shall file or consent to the filing of any consolidated income tax return with any Person other than another Obligor, except as required by the Code. 5.12 Fiscal Year. No Obligor shall change its fiscal year or fiscal quarter. 5.13 Bank Accounts. As additional consideration for the establishment of the credit facilities hereunder, each Obligor shall maintain its primary depository and disbursement accounts with the Administrative Agent. If the Administrative Agent fails to service the Obligors' depository and disbursement -36- accounts in a commercially-reasonable manner, Obligors may move the accounts to another financial institution of their choice. 5.14 Submission Of Collateral Documents. Each Obligor shall promptly, but in no event later than twenty (20) days following the conversion of an Account to an instrument or chattel paper, notify the Administrative Agent if an Account becomes evidenced or secured by an instrument or chattel paper and, upon request of the Administrative Agent, promptly deliver any such instrument or chattel paper to the Lender. 5.15 Collection Of Accounts. Each Obligor shall continue to collect its Accounts in the ordinary course of its business. 5.16 Subsidiaries As Guarantors. (a) Each Obligor shall cause all of its Subsidiaries, now existing or hereafter formed or acquired, other than (i) foreign Subsidiaries listed on Schedule 5.16 or hereafter formed or acquired if doing so would cause an adverse tax consequence under Section 956 of the Internal Revenue Code as amended ("IRC") or under any similar law, and (ii) other Excluded Subsidiaries, to be or become Guarantors hereunder by Subsidiary Guaranties. All capital stock or other equity interests in each new Guarantor and all of its property meeting the definition of "Collateral" shall be pledged to the Lenders under the Security Documents, which pledge may be accomplished via new Security Documents executed by the new Guarantor or by a Joinder Agreement in the form of Exhibit M attached hereto. (b) Notwithstanding the exclusion of certain foreign Subsidiaries as Obligors, Borrower shall cause each such foreign Subsidiary to comply with the terms and conditions of this Agreement and the appropriate Obligor shall grant to the Administrative Agent (on behalf of the Lenders) a first priority security interest in and lien on 65% of the capital stock or other equity interests in each such foreign Subsidiary so long as such pledge shall not trigger adverse tax consequences under Section 956 of the IRC or similar law. 5.17 Update Of Schedules. Each Obligor shall promptly, but in no event later than thirty (30) days, following a Permitted Acquisition or other event which would result in a material change to any of the information on the disclosure schedules hereto, provide the Administrative Agent with revised schedule(s). The revised schedules must be acceptable in all respects to the Administrative Agent; they will not be acceptable if they disclose actual or potential Events of Default. 5.18 Compliance With Laws. Each Obligor shall comply with all Laws governing such Obligor in the operation of its business, including Environmental Laws and any Laws relating to employment practices and pension benefits and occupational and health standards and controls, but excluding any Laws whose violation would not cause a Material Adverse Effect. 5.19 Keyman Life Insurance. Borrower will at all times maintain at least $2,000,000 in keyman life insurance on the life of Michael J. Barrist. -37- ARTICLE VI NEGATIVE COVENANTS So long as any Obligations shall remain unpaid or any Lender shall have any Commitment under this Agreement, Borrower shall comply, and shall cause each other Obligor to comply, with the following covenants. 6.1 Financial Covenants. (a) Consolidated Fixed Charge Coverage Ratio. The Consolidated Fixed Charge Coverage Ratio shall not at any time be less than 1.15 to 1.00 for any quarter during the period from October 1, 1999 through December 31, 2000; or 1.35 to 1.00 for any quarter thereafter. (b) Consolidated Net Worth. As of the last day of each fiscal quarter Consolidated Net Worth shall not be less than (i) $193,397,400 plus (ii) 50% of Consolidated Net Income for that quarter and, on a cumulative basis without deductions for net losses, all other quarters ending after March 31, 1999 plus (iii) the net proceeds of any offering of equity after March 31, 1999 that are not applied to the reduction of the RC Commitment plus (iv) 90% of the book value of any equity issued after March 31, 1999 in consideration for any acquisition. (c) Consolidated Funded Debt to Consolidated EBITDA. The ratio of Consolidated Funded Debt to annualized Consolidated EBITDA shall not be more than 4.5 to 1.00 for the quarter ending on December 31, 1999; 4.0 to 1.00 for any quarter ending during the period from January 1, 2000 through December 31, 2000; 3.5 to 1.00 for any quarter ending during the period from January 1, 2001 through December 31, 2001; or 3.25 to 1.00 for any quarter ending during the period ending after January 1, 2002. Consolidated EBITDA shall be annualized by multiplying Consolidated EBITDA for the fiscal quarter being tested, adjusted for any acquisition completed during the quarter, by four. For purposes of calculating pro forma compliance with this provision in analyzing a proposed acquisition, Consolidated EBITDA shall include the pre-acquisition EBITDA of the target for the most recently completed quarter annualized after adjustment for unusual expense items. (d) Consolidated Interest Coverage Ratio. The Consolidated Interest Coverage Ratio shall not be less than 2.25 to 1.00 for any quarter. -38- (e) Consolidated Senior Debt to Consolidated EBITDA. The ratio of Consolidated Senior Debt to annualized Consolidated EBITDA shall not be more than 3.75 to 1.00 for the quarter ending on December 31, 1999; 3.0 to 1.00 for any quarter ending during the period from January 1, 2000 through December 31, 2000; 2.5 to 1.00 for any quarter ending during the period from January 1, 2001 through December 31, 2001; or 2.25 to 1.00 for any quarter ending during the period ending after January 1, 2002. Consolidated EBITDA shall be annualized by multiplying Consolidated EBITDA for the fiscal quarter being tested, adjusted for any acquisition completed during the quarter, by four. For purposes of calculating pro forma compliance with this provision in analyzing a proposed acquisition, Consolidated EBITDA shall include the pre-acquisition EBITDA of the target for the most recently completed quarter annualized after adjustment for unusual expense items. 6.2 Liens. No Obligor shall at any time create, incur, assume or suffer to exist any Lien on any of its property (now owned or hereafter acquired), or agree, become or remain liable (contingently or otherwise) to do any of the foregoing, except for the following ("Permitted Liens"): (a) Liens pursuant to the Security Documents in favor of the Administrative Agent (on behalf of the Lenders) to secure the Obligations; (b) Liens existing on the date hereof securing obligations existing on the date hereof, as such Liens and obligations are listed in Schedule 6.2 hereto or Liens relating to Purchase Money Indebtedness for Capital Expenditures permitted by Section 6.14; (c) Liens arising from taxes, assessments, charges or claims described in Section 5.3 hereof that are not yet due or that remain payable without penalty or to the extent permitted to remain unpaid under the proviso to such Section 5.3 , provided that the aggregate amount secured by all Liens described in this Section 6.2(c) shall not at any time exceed $300,000; "Permitted Lien" shall in no event include any Lien imposed by, or required to be granted pursuant to, ERISA or any Environmental Law. Nothing in this Section 6.2 shall be construed to limit any other restriction on Liens imposed by the Security Documents or otherwise in the Loan Documents. 6.3 Indebtedness. No Obligor shall at any time create, incur, assume or suffer to exist any Indebtedness, or agree, become or remain liable (contingently or otherwise) to do any of the foregoing, except: (a) Indebtedness to the Lenders pursuant to this Agreement and the other Loan Documents; -39- (b) Indebtedness of such Obligor existing on the date hereof and listed in Schedule 6.3 hereof (but not any extensions, renewals or refinancings thereof); (c) Purchase Money Indebtedness which is permitted as a Capital Expenditure; (d) Accounts payable to trade creditors arising out of purchases of goods or services in the ordinary course of business; (e) Indebtedness, not to exceed $10,000,000 in the aggregate over the term of this Agreement among all Obligors under Capitalized Leases which are permitted as Capital Expenditures; (f) Permitted Acquisition Indebtedness; (g) Inter-Obligor Indebtedness permitted under Section 6.5(e); and (h) Indebtedness under Interest Rate Hedging Agreements. (i) Indebtedness of NCO Group, not to exceed $150,000,000, under unsecured, convertible, subordinated notes issued on terms acceptable to the Administrative Agent and the Majority Lenders in their sole discretion. Acceptable terms of subordination shall include a prohibition on principal payments while any Obligations to the Lenders are outstanding; provision for the payment of regularly scheduled interest on the notes until an Event of Default; and a 180 day "standstill" period following a default under the notes during which the noteholders shall be prohibited from exercising their remedies. If the notes are issued after March 31, 2000, 50% of the net proceeds from the issuance shall be applied as a permanent reduction of the RC Commitment under Section 1.7(a)(ii). 6.4 Guaranties, Indemnities, Etc. No Obligor shall be or become subject to or bound by any Guaranty or Guaranty Equivalent, or agree, become or remain liable (contingently or otherwise) to do any of the foregoing, except: (a) Guaranties and Guaranty Equivalents of the obligations of third parties (including unconsolidated subsidiaries but excluding consolidated subsidiaries) which, together with loans and advances by all Obligors to such third parties, in the aggregate do not exceed $785,000 at any one time; (b) Contingent liabilities arising from the endorsement of negotiable or other instruments for deposit or collection or similar transactions in the ordinary course of business; (c) Indemnities an Obligor of the liabilities of its directors or officers in their capacities as such pursuant to provisions presently contained in their articles of incorporation or by-laws (or other constituent documents) or as permitted by Law; and (d) Guaranties by an Obligor of Permitted Indebtedness of other Obligors. (e) Guaranties by any Obligor of Borrower's Obligations hereunder. -40- 6.5 Loans, Advances And Investments. No Obligor shall at any time make or suffer to exist or remain outstanding any loan or advance to, or purchase, acquire or own (beneficially or of record) any stock, bonds, notes or securities of, or any partnership interest (whether general or limited) in, or any other interest in, or make any capital contribution to or other investment in, any other Person, or agree, become or remain liable (contingently or otherwise) to do any of the foregoing, except: (a) Loans and investments existing on the date hereof and listed in Schedule 6.5 hereof; but not any amendments, extensions or refinancings thereof; (b) Receivables owing to such Obligor arising from sales of inventory under usual and customary terms in the ordinary course of business; (c) Demand advances to officers and employees of an Obligor to meet expenses incurred by such officers and employees in the ordinary course of business and in amounts at any time outstanding not exceeding $5,000 to any one officer or employee and $10,000 in the aggregate among all Obligors; (d) Cash Equivalent Investments; (e) Loans from one Obligor to another Obligor, provided that the Borrower shall cause any such loans to be evidenced by a promissory note, which shall immediately be delivered as Collateral to the Administrative Agent on behalf of the Lenders; (f) Permitted Acquisitions; (g) investments in one Obligor by another Obligor; (h) other loans and advances to third parties (including unconsolidated subsidiaries but excluding consolidated subsidiaries), the aggregate principal amount of which together with Guaranties and Guaranty Equivalents issued by Obligors for such third parties, do not exceed $785,000 at any time for all Obligors; and (i) investments in entities purchasing delinquent pools of Accounts in accordance with Section 6.13 so long as the Borrower causes such entities to comply with the other applicable provisions of this Agreement. 6.6 Dividends And Related Distributions. No Obligor shall declare or make any Stock Payment, or agree, become or remain liable (contingently or otherwise) to do any of the foregoing, except that one Obligor may make a Stock Payment to another Obligor. 6.7 Sale-Leasebacks. No Obligor shall at any time enter into or suffer to remain in effect any transaction to which such Obligor is a party involving the sale, transfer or other disposition by such Obligor of any property (now owned or hereafter acquired), with a view directly or indirectly to the leasing back of any part of the same property or any other property used for the same or a similar purpose or purposes, or agree, become or remain liable (contingently or otherwise) to do any of the foregoing. -41- 6.8 Leases. No Obligor shall at any time enter into or suffer to remain in effect any lease, as lessee, of any property, or agree, become or remain liable (contingently or otherwise) to do any of the foregoing, except: (a) Operating leases of equipment or office space used by the lessee in the ordinary course of business; (b) Leases cancelable by the lessee without penalty on not more than 90 days' notice; and (c) Capitalized Leases permitted under Section 6.3 hereof. 6.9 Mergers, Acquisitions, Etc. No Obligor shall (a) except for Permitted Acquisitions and mergers among Obligors and Excluded Subsidiaries (provided that the Borrower shall survive any merger between it and another Obligor and an Obligor shall survive any merger between it and an Excluded Subsidiary) merge with or into or consolidate with any other Person, (b) liquidate, wind-up, dissolve or divide, (c) except for Permitted Acquisitions, acquire all or any substantial portion of the properties of any going concern or going line of business, (d) except for Permitted Acquisitions, acquire all or any substantial portion of the properties of any other Person, or (e) agree, become or remain liable (contingently or otherwise) to do any of the foregoing; provided, however, that the Borrower may seek the prior written consent of the Super Majority Lenders for an acquisition which is not a Permitted Acquisition. In connection with considering Borrower's request, the Lenders may conduct their own due diligence or require appropriate third party due diligence regarding the proposed acquisition. Such due diligence shall be coordinated through the Administrative Agent. The results of all such due diligence must be satisfactory to the Super Majority Lenders. Obligors shall bear the cost of all such due diligence. 6.10 Dispositions Of Properties. No Obligor shall sell, convey, assign, lease, transfer, abandon or otherwise dispose of, voluntarily or involuntarily, any of its properties, or agree, become or remain liable (contingently or otherwise) to do any of the foregoing, except: (a) Obligors may sell inventory in the ordinary course of business; (b) Obligors may dispose of equipment which is obsolete or no longer useful in their business; (c) Obligors may make the Cash Equivalent Investments described in Section 6.5(d); and (d) Obligors may dispose of any division or Subsidiary with an enterprise value on an arms length basis per transaction of $500,000 or less. By way of illustration, and without limitation, it is understood that the following are dispositions of property prohibited under this Section 6.10: any disposition of accounts, chattel paper or general intangibles, with or without recourse, and any disposition of any leasehold interest. Nothing in this Section -42- 6.10 shall be construed to limit any other restriction on dispositions of property imposed by the Security Documents or otherwise in the Loan Documents. 6.11 Issuance Of Stock. No Obligor, other than Borrower, shall issue, sell, otherwise dispose or suffer to remain outstanding, voluntarily or involuntarily, any additional shares of capital stock, or any options, warrants, calls, subscriptions, conversion rights, exchange rights, preemptive rights or other rights, agreements or arrangements (contingent or otherwise) which may in any circumstances now or hereafter obligate such Obligor to issue any shares of its capital stock, except to Borrower or another Obligor and except options issued to employees of the Obligors. The Borrower shall use 50% of the net proceeds of any issuance of equity after March 31, 2000 to reduce the RC Commitment as required by Section 1.7(a)(ii). 6.12 Dealings With Affiliates. No Obligor shall enter into or carry out any transaction with (including, without limitation, purchase or lease property or services from, sell or lease property or services to, loan or advance to, or enter into, suffer to remain in existence or amend any contract, agreement or arrangement with) any Affiliate of such Obligor, directly or indirectly, or agree, become or remain liable (contingently or otherwise) to do any of the foregoing, except: (a) Obligors may continue to perform under contracts, agreements and arrangements in existence as of the date hereof and set forth in Schedule 6.12 hereof; (b) Directors, officers and employees of an Obligor may be compensated for services rendered in such capacity to such Obligor, provided that such compensation is in good faith and on terms no less favorable to such Obligor than those that could have been obtained in a comparable transaction on an arm's-length basis from an unrelated Person, and the board of directors of such Obligor (including a majority of the directors having no direct or indirect interest in such transaction) approve the same; (c) Transactions in the ordinary course of business and consistent with past practices between one Obligor and another Obligor, in good faith and on terms no less favorable to Borrower than those that could have been obtained in a comparable transaction on an arm's-length basis from an unrelated Person; and (d) Other transactions with Affiliates in good faith and on terms no less favorable to Borrower than those that could have been obtained in a comparable transaction on an arm's-length basis from an unrelated Person. 6.13 Acquired Delinquent Pools Of Accounts. No Obligor shall acquire delinquent pools of Accounts or make investments in entities purchasing delinquent pools of Accounts if such acquisition would cause the unamortized remaining invested balance for all such pools as reflected on the Borrower's consolidated balance sheet to exceed $25,000,000, in the aggregate among all Obligors, at any given point in time. From time to time the Borrower may seek the prior written consent of the Majority Lenders (in their sole discretion) so that the unamortized remaining invested balance of all acquired delinquent pools of accounts or investments in entities purchasing delinquent pools of Accounts may exceed $25,000,000. -43- 6.14 Capital Expenditures. No Obligor shall make any Capital Expenditure that would cause the aggregate amount of Capital Expenditures made by all Obligors to exceed the sum of (a) (i) in 1999, three percent (3%) of Consolidated Pro-Forma Revenue for 1998 or (ii) in any year after 1999, two percent (2%) of Consolidated Pro-Forma Revenue for the previous year plus (b) the amount of money, not to exceed $1,000,000, Borrower could have used pursuant to the foregoing clause (a), but did not use, for Capital Expenditures in 1999 or any year thereafter. For purposes of this provision, (a) all leases, except for real estate leases and automobile leases, shall be deemed to be Capitalized Leases (which under Section 6.3 are limited to $10,000,000 in the aggregate during the term of this Agreement) and therefore shall be accounted for as a Capital Expenditure and (b) Purchase Money Indebtedness shall be accounted for as a Capital Expenditure without duplication. 6.15 Limitations On Modification Of Certain Agreements And Instruments. No Obligor shall materially amend, modify or supplement materially its articles of incorporation or by-laws (or similar constituent documents), if so doing would adversely affect the Lenders' rights or benefits under the Loan Documents. 6.16 Limitation On Payments Of Purchase Money Indebtedness. No Obligor shall directly or indirectly pay, prepay, purchase, redeem, retire, defease or acquire, or make any payment (on account of principal, interest, premium or otherwise) of, or grant or suffer the existence of any Lien on any of its property (now owned or hereafter acquired) to secure any indebtedness, obligation or liability with respect to, or amend, modify or supplement any of the terms and conditions of, any Purchase Money Indebtedness, or agree, become or remain liable (contingently or otherwise) to do any of the foregoing, except that so long as no Event of Default or Default has occurred, the Borrower may pay principal and interest on Purchase Money Indebtedness when due, to the extent consistent with the subordination provisions of such Purchase Money Indebtedness. 6.17 Limitation On Other Restrictions On Liens. No Obligor shall enter into, become or remain subject to any agreement or instrument (other than the Loan Documents) to which such Obligor is a party or by which its properties (now owned or hereafter acquired) may be subject or bound that would prohibit the grant of any Lien upon any of its properties (now owed or hereafter required), except Permitted Liens. 6.18 Limitation On Other Restrictions On Amendment Of The Loan Documents, Etc. No Obligor shall enter into, become or remain subject to any agreement or instrument to which such Obligor is a party or by which such Obligor or any of its respective properties (now owned or hereafter acquired) may be subject or bound that would prohibit or require the consent of any Person to any amendment, modification or supplement to any of the Loan Documents, except for the Loan Documents. -44- ARTICLE VII DEFAULTS 7.1 "Events Of Default." An Event of Default shall mean the occurrence or existence of one or more of the following events or conditions (for any reason, whether voluntary, involuntary or effected or required by Law): (a) Borrower shall fail to pay when due principal of any Loan. (b) Borrower shall fail to pay when due interest on any Loan, any fees, indemnity or expenses, or any other amount due hereunder or under any other Loan Document. (c) Any representation or warranty made or deemed made by any Obligor in or pursuant to or in connection with any Loan Document, or any statement made by any Obligor in any financial statement, certificate, report, exhibit or document furnished by any Obligor to the Lenders pursuant to or in connection with any Loan Document, shall prove to have been false or misleading in any material adverse respect as of the time when made or deemed made (including by omission of material information necessary to make such representation, warranty or statement not misleading). (d) Any Obligor shall default in the performance or observance of any covenant, agreement or duty under this Agreement or any other Loan Document and (i) in the case of a default under Section 5.1 hereof such default shall have continued for a period of ten (10) days and (ii) in the case of any other default such default shall have continued for a period of ten (10) days after the Administrative Agent has sent notice of such default (as long as such ten (10) day period does not extend more than thirty (30) days beyond the date of occurrence of such default) provided that such default is capable of being cured (which shall be determined in the sole and absolute discretion of the Administrative Agent); provided, however that the foregoing notice and grace periods shall not apply to the defaults described in subsections (a), (b) or (c) of Section 7.1. (e) Any Cross-Default Event shall occur with respect to any Cross-Default Obligation; provided, that if a Cross-Default Event would have occurred with respect to a Cross-Default Obligation but for the grant of a waiver or similar indulgence, a Cross-Default Event shall nevertheless be deemed to have occurred if any Obligor directly or indirectly gave or agreed to give any consideration for such waiver or indulgence (including but not limited to a reduction in maturity, an increase in rates or the granting of collateral). As used herein, "Cross-Default Obligation" shall mean any (1) Indebtedness, Guaranty or Guaranty Equivalent of any Obligor in which the principal obligation of such Obligor exceeds $500,000, or (2) any Indebtedness under any Interest Rate Hedging Agreement or any agreement or instrument creating, evidencing or securing such Indebtedness, Guaranty or Guaranty Equivalent. As used herein, "Cross-Default Event" with respect to a Cross-Default Obligation shall mean the occurrence of any default, event or condition which permits or causes any Person or Persons to cause all or any part of such Cross-Default Obligation to become due (by acceleration, mandatory prepayment or repurchase, or otherwise) before its otherwise stated maturity, or failure to pay all or any part of such Cross-Default Obligation at its stated maturity. -45- (f) One or more judgments for the payment of money shall have been entered against any Obligor, which judgment or judgments exceed $250,000 in the aggregate, and such judgment or judgments shall have remained undischarged and unstayed for a period of thirty consecutive days. (g) One or more writs or warrants of attachment, garnishment, execution, distraint or similar process exceeding in value the aggregate amount of $250,000 shall have been issued against any Obligor or any of their properties and shall have remained undischarged and unstayed for a period of thirty consecutive days. (h) Any Governmental Action now or hereafter made by or with any Governmental Authority required in connection with any Loan Document is not obtained or shall have ceased to be in full force and effect or shall have been materially modified or amended or shall have been held to be illegal or invalid, and the Majority Lenders shall have determined in good faith (which determination shall be conclusive) that such event or condition could have a Material Adverse Effect. (i) Any Security Document shall cease to be in full force and effect, or any Lien created or purported to be created in any Collateral pursuant to any Security Document shall fail to be a valid, enforceable and perfected Lien in favor of the Lenders securing the Obligations, prior to all other Liens, except Permitted Liens, or any Obligor or any Governmental Authority shall assert any of the foregoing. (j) Any Loan Document or term or provision thereof shall cease to be in full force and effect, or any Obligor shall, or shall purport to, terminate, repudiate, declare voidable or void or otherwise contest, any Loan Document or term or provision thereof or any obligation or liability of any Obligor thereunder, and the result of which is a material effect on the rights and remedies of the Lenders under the Loan Documents. (k) The Majority Lenders shall have determined in good faith that an event or condition has occurred which will have a Material Adverse Effect. (l) Any one or more Pension-Related Events referred to in subsection (a)(ii), (b) or (e) of the definition of "Pension-Related Event" shall have occurred; or any one or more other Pension-Related Events shall have occurred and the Majority Lenders shall determine in good faith (which determination shall be conclusive) that such other Pension-Related Events, individually or in the aggregate, could have a Material Adverse Effect. (m) Any one or more of the events or conditions set forth in the following clauses (i) or (ii) shall have occurred in respect of any Obligor, and the Majority Lenders shall determine in good faith (which determination shall be conclusive) that such events or conditions, individually or in the aggregate, could have a Material Adverse Effect: (i) any past or present violation of any Environmental Law by such Person, (ii) the existence of any pending or threatened Environmental Claim against any such Person, or the existence of any past or present acts, omissions, events or circumstances that could form the basis of any Environmental Claim against any such Person. -46- (n) A Change of Management shall have occurred. (o) A proceeding shall have been instituted in respect of any Obligor: (i) subject to clause (p)(4) below, seeking to have an order for relief entered in respect of any Obligor, or seeking a declaration or entailing a finding that any Obligor is insolvent or a similar declaration or finding, or seeking dissolution, winding-up, charter revocation or forfeiture, liquidation, reorganization, arrangement, adjustment, composition or other similar relief with respect to any Obligor, its assets or its debts under any Law relating to bankruptcy, insolvency, relief of debtors or protection of creditors, termination of legal entities or any other similar Law now or hereafter in effect, or (ii) subject to clause (p)(5) below, seeking appointment of a receiver, trustee, liquidator, assignee, sequestrator or other custodian for such Person or for all or any substantial part of its property, and such proceeding shall result in the entry, making or grant of any such order for relief, declaration, finding, relief or appointment, or such proceeding shall remain undismissed and unstayed for a period of sixty consecutive days. (p) Obligors on a consolidated basis shall (i) become insolvent; (ii) fail to pay their debts as they become due or (iii) become unable to pay their debts as they become due; or any Obligor shall (1) state that it is or will be unable to pay, its debts as they become due; (2) voluntarily suspend transaction of its business; (3) make a general assignment for the benefit of creditors; (4) institute (or fail to controvert in a timely and appropriate manner) a proceeding described in Section 7.1(o)(i) hereof, or (whether or not any such proceeding has been instituted) shall consent to or acquiesce in any such order for relief, declaration, finding or relief described therein; (5) institute (or fail to controvert for a period of sixty consecutive days in a timely and appropriate manner) a proceeding described in Section 7.1(o)(ii) hereof, or (whether or not any such proceeding has been instituted) shall consent to or acquiesce in any such appointment or to the taking of possession by any such custodian of all or any substantial part of its property; shall dissolve, wind-up, revoke or forfeit its charter (or other constituent documents) or liquidate itself or any substantial part of its property; or (6) take any action in furtherance of any of the foregoing. (q) Any person or any affiliated group of persons, other than present management, obtains control of a majority of the voting stock of NCO Group. (r) An event of default shall occur under an Interest Rate Hedging Agreement. 7.2 Consequences Of An Event Of Default. (a) Events of Default in General. If an Event of Default (other than one specified in paragraphs (o) and (p) of Section 7.1 (Insolvency, Bankruptcy, Etc.) hereof) shall occur and be continuing or shall exist, then, in addition to all other rights and remedies which the Administrative Agent or any other Lender may have hereunder or under any other Loan Document, at law, in equity or otherwise, the Lenders shall be under no further obligation to make Loans, the Issuer shall have no obligation to issue Letters of Credit and the -47- Administrative Agent may, (and, upon the written request of the Majority Lenders shall) by notice to Borrower, from time to time do any or all of the following: (i) Declare the Commitments terminated, whereupon the Commitments will terminate and any fees hereunder shall be immediately due and payable without presentment, demand, protest or further notice of any kind, all of which are hereby waived, and an action therefor shall immediately accrue. (ii) Declare the unpaid principal amount of the Loans, interest accrued thereon and all other Obligations (other than obligations incurred under an Interest Rate Hedging Agreement) to be immediately due and payable without presentment, demand, protest or further notice of any kind, all of which are hereby waived, and an action therefor shall immediately accrue. (iii) Exercise such other remedies as may be available to the Lenders under applicable Law. (b) Automatic Acceleration; Certain Bankruptcy-Related Events. If an Event of Default specified in paragraph (o) or (p) of Section 7.1 (Insolvency, Bankruptcy, Etc.) hereof shall occur or exist, then, in addition to all other rights and remedies which any Lender may have hereunder or under any other Loan Document, at law, in equity or otherwise, the Commitments shall automatically terminate and the Lenders shall be under no further obligation to make Loans, the Issuer shall have no obligation to issue Letters of Credit, and the unpaid principal amount of the Loans, interest accrued thereon and all other Obligations shall become immediately due and payable without presentment, demand, protest or notice of any kind, all of which are hereby waived, and an action therefor shall immediately accrue, and in addition, the Administrative Agent may, and upon the written request of the Majority Lenders, shall exercise such other remedies as may be available to the Lenders under applicable Law. (c) Equitable Remedies. It is agreed that, in addition to all other rights hereunder or under Law, the Administrative Agent shall have the right to institute proceedings in equity or other appropriate proceedings for the specific performance of any covenant or agreement made in any of the Loan Documents or for an injunction against the violation of any of the terms of any of the Loan Documents or in aid of the exercise of any power granted in any of the Loan Documents or by Law or otherwise. 7.3 Application Of Proceeds. After the occurrence of an Event of Default and acceleration of the Loans, any amounts received on account of Obligations shall be applied by the Administrative Agent in the following order: First, to payment of that portion of the Obligations constituting fees, indemnities, expenses and other amounts due to the Administrative Agent in its capacity as such; Second, to payment of that portion of the Obligations constituting fees, indemnities due to the Lenders, ratably among them in proportion to the amounts described in this clause Second due to them; -48- Third, to payment of that portion of the Obligations constituting accrued and unpaid interest on Loans, ratably among the Lenders in proportion to the respective amounts described in this clause Third due to them; Fourth, to payment of that portion of the Obligations constituting unpaid principal of the Loans ratably among the Lenders in proportion to the respective amounts described in this clause Fourth due to them; Fifth, to payment of all other Obligations, ratably among the Lenders in proportion to the respective amounts described in this clause Fifth due to them; and Finally, the balance, if any, after all of the Obligations have been indefeasibly paid in full, to Borrower or as otherwise required by Law. ARTICLE VIII THE ADMINISTRATIVE AGENT 8.1 Appointment. Subject to the provisions of the second sentence of Section 8.9 below, each Lender hereby irrevocably appoints Mellon to act as Administrative Agent for such Lender under this Agreement and the other Loan Documents. Each Lender hereby irrevocably authorizes the Administrative Agent to take such action on behalf of such Lender under the provisions of this Agreement and the other Loan Documents, and to exercise such powers and to perform such duties, as are expressly delegated to or required of the Administrative Agent by the terms hereof or thereof, together with such powers as are reasonably incidental thereto. Mellon hereby agrees to act as Administrative Agent on behalf of the Lenders on the terms and conditions set forth in this Agreement and the other Loan Documents, subject to its right to resign as provided in Section 8.9 hereof. Each Lender hereby irrevocably authorizes the Administrative Agent to execute and deliver each of the Loan Documents and to accept delivery of such of the other Loan Documents as may not require execution by the Administrative Agent. Each Lender agrees that the rights and remedies granted to the Administrative Agent under the Loan Documents shall be exercised exclusively by the Administrative Agent (or a Person designated by the Administrative Agent), and that no Lender shall have any right individually to exercise any such right or remedy, except to the extent, if any, expressly provided herein or therein. 8.2 General Nature Of Administrative Agent's Duties. Notwithstanding anything to the contrary elsewhere in this Agreement or in any other Loan Document: (a) The Administrative Agent shall have no duties or responsibilities except those expressly set forth in this Agreement and the other Loan Documents, and no implied duties or responsibilities on the part of the Administrative Agent shall be read into this Agreement or any other Loan Document or shall otherwise exist. (b) The duties and responsibilities of the Administrative Agent under this Agreement and the other Loan Documents shall be mechanical and administrative in nature, and the Administrative Agent shall not have a fiduciary relationship with respect to any Lender. -49- (c) The Administrative Agent's relationship with and to the Lenders is governed exclusively by the terms of this Agreement and the other Loan Documents. The Administrative Agent does not assume, and shall not at any time be deemed to have, any relationship of agency or trust with or for, any Lender or any other Person or (except only as expressly provided in this Agreement and the other Loan Documents) any other duty or responsibility to such Lender or other Person. (d) The Administrative Agent shall be under no obligation to take any action hereunder or under any other Loan Document if the Administrative Agent believes in good faith that taking such action may conflict with any Law or any provision of this Agreement or any other Loan Document, or may require the Administrative Agent to qualify to do business in any jurisdiction where it is not then so qualified. (e) The authority of the Administrative Agent to request information from the Borrower or take any other voluntary action hereunder shall impose no duty of any kind on the Administrative Agent to make such request or take any such action. 8.3 Exercise Of Powers. The Administrative Agent shall take any action of the type specified in this Agreement or any other Loan Document as being within the Administrative Agent's rights, powers or discretion in accordance with directions from the Majority Lenders (or if expressly required herein the Super Majority Lenders) (or as otherwise expressly provided in the Loan Documents). In the absence of such direction, the Administrative Agent shall have the authority (but under no circumstances shall be obligated), in its sole discretion, to take any such action, except to the extent that this Agreement or such other Loan Document expressly requires the direction or consent of the Majority Lenders (or the Super Majority Lenders, all of the Lenders), in which case the Administrative Agent shall not take such action absent such direction or consent. Any action or inaction pursuant to such direction, discretion or consent shall be binding on each Lender (whether or not it so consented). The Administrative Agent shall not have any liability to any Person as a result of any action or inaction in conformity with this Section 8.3. 8.4 General Exculpatory Provisions. Notwithstanding anything to the contrary elsewhere in this Agreement or any other Loan Document: (a) The Administrative Agent shall not be liable for any action taken or omitted to be taken by it under or in connection with this Agreement or any other Loan Document, except only for direct (as opposed to consequential or other) damages suffered by a Person and only to the extent that such Person proves that such damages were caused by the Administrative Agent's own gross negligence or willful misconduct. (b) The Administrative Agent shall not be responsible for (i) the execution, delivery, effectiveness, enforceability, genuineness, validity or adequacy of any Loan Document, (ii) any recital, representation, warranty, document, certificate, report or statement in, provided for in, or received under or in connection with, any Loan Document, or (iii) any failure of any Obligor or, any Lender to perform any of their respective obligations under any Loan Document. -50- (c) The Administrative Agent shall not be under any obligation to ascertain, inquire or give any notice relating to (i) the performance or observance of any of the terms or conditions of this Agreement or any other Loan Document on the part of any Obligor, (ii) the business, operations, condition (financial or otherwise) or prospects of any Obligor or any other Person (even if the Administrative Agent knows or should know that some event or condition exists or fails to exist), or (iii) except to the extent set forth in Section 8.5(f) below, the existence of any Event of Default or Default. (d) The Administrative Agent shall not be under any obligation, either initially or on a continuing basis, to provide any Lender with any notices, reports or information of any nature, whether in its possession presently or hereafter, whether obtained under or in connection with this Agreement or otherwise, except for such notices, reports and other information expressly required by this Agreement or any other Loan Document to be furnished by the Administrative Agent to such Lender. 8.5 Administration By The Administrative Agent. (a) The Administrative Agent may rely upon any notice or other communication of any nature (written or oral, including but not limited to telephone conversations, whether or not such notice or other communication is made in a manner permitted or required by this Agreement or any other Loan Document) purportedly made by or on behalf of the proper party or parties, and the Administrative Agent shall not have any duty to verify the identity or authority of any Person giving such notice or other communication. (b) The Administrative Agent may consult with legal counsel (including in-house counsel for the Administrative Agent or in-house or other counsel for any Obligor), independent public accountants and any other experts selected by it from time to time, and the Administrative Agent shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts. (c) The Administrative Agent may conclusively rely upon the truth of the statements and the correctness of the opinions expressed in any certificates or opinions furnished to the Administrative Agent in accordance with the requirements of this Agreement or any other Loan Document. Whenever the Administrative Agent shall deem it necessary or desirable that a matter be proved or established with respect to any Obligor or Lender, such matter may be established by a certificate of any Obligor or Lender, as the case may be, and the Administrative Agent may conclusively rely upon such certificate (unless other evidence with respect to such matter is specifically prescribed in this Agreement or another Loan Document). (d) The Administrative Agent may fail or refuse to take any action unless it shall be directed by the Majority Lenders (or the Super Majority Lenders or all of the Lenders, if this Agreement or another Loan Document so expressly requires) to take such action and it shall be indemnified to its satisfaction from time to time against any and all amounts, liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature which may be imposed on, incurred by or asserted against the Administrative Agent by reason of taking or continuing to take any such action. -51- (e) The Administrative Agent may perform any of its duties under this Agreement or any other Loan Document by or through agents or attorneys-in-fact. The Administrative Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. (f) The Administrative Agent shall not be deemed to have any knowledge or notice of the occurrence of any Event of Default or Default unless the Administrative Agent has received notice from a Lender or Borrower referring to this Agreement, describing such Event of Default or Default, and stating that such notice is a "notice of default." If the Administrative Agent receives such a notice, the Administrative Agent shall give prompt notice thereof to each Lender. 8.6 Lenders Not Relying On Administrative Agent Or Other Lenders. Each Lender acknowledges as follows: (a) neither the Administrative Agent nor any other Lender has made any representations or warranties to it, and no act taken hereafter by the Administrative Agent or any other Lender shall be deemed to constitute any representation or warranty by the Administrative Agent or such other Lender to it; (b) it has, independently and without reliance upon the Administrative Agent or any other Lender, and based upon such documents and information as it has deemed appropriate, made its own credit and legal analysis and decision to enter into this Agreement and the other Loan Documents; and (c) it will, independently and without reliance upon the Administrative Agent or any other Lender, and based upon such documents and information as it shall deem appropriate at the time, make its own decisions to take or not take action under or in connection with this Agreement and the other Loan Documents. 8.7 Indemnification. Each Lender agrees to reimburse and indemnify the Administrative Agent and its directors, officers, employees and agents (to the extent not reimbursed by Obligors and without limitation of the obligations of the Obligors to do so), in proportion to the Lenders' respective pro rata share of the Commitment, from and against any and all amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature (including the fees and disbursements of counsel for the Administrative Agent or such other Person in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not the Administrative Agent or such other Person shall be designated a party thereto) that may at any time be imposed on, incurred by or asserted against the Administrative Agent or such other Person as a result of, or arising out of, or in any way related to or by reason of, this Agreement, any other Loan Document, any Acquisition or any other transaction from time to time contemplated hereby or thereby, or any transaction actually or proposed to be financed in whole or in part, directly or indirectly, with the proceeds of any Loan, provided that no Lender shall be liable for any portion of such amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements that such Lender proves were the result of the gross negligence or willful misconduct of the Administrative Agent or such other Person. Payments under this Section 8.7 shall be due and payable on demand. 8.8 Administrative Agent's Records. The Administrative Agent shall maintain at its address referred to in Section 11.1 a copy of each Assignment and Acceptance Agreement delivered to and accepted by it and an electronic record of the names and addresses of the Lenders and the Commitment of, and -52- principal amount of the Loans and stated interest thereon owing to, each Lender from time to time (the "Record"). The entries in the Record shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Record as a Lender hereunder for all purposes of this Agreement. 8.9 Successor Administrative Agent. The Administrative Agent may resign at any time by giving 30 days' prior written notice thereof to the other Lenders and NCO Group. The Administrative Agent may be removed by the Majority Lenders at any time for cause by such Majority Lenders giving 30 days' prior written notice thereof to the Administrative Agent, the other Lenders and NCO Group. Upon any such resignation or removal, the Majority Lenders shall have the right to appoint a successor Administrative Agent with (so long as no Default or Event of Default shall have occurred and then be continuing) the consent of NCO Group whose consent shall not be unreasonably withheld or delayed. If no successor Administrative Agent shall have been so appointed and consented to, and shall have accepted such appointment, within 30 days after such notice of resignation or removal, then another Lender shall have the right to become the successor Administrative Agent by giving written notice thereof to NCO Group and the Lenders and if no Lender volunteers to become successor Administrative Agent or fails to give such notice within thirty five (35) days after the retiring Administrative Agent's notice of resignation or removal, then the retiring Administrative Agent may (but shall not be required to) appoint a successor Administrative Agent. Each successor Administrative Agent shall be a Lender if any Lender shall at the time be willing to become the successor Administrative Agent, and if no Lender shall then be so willing, then such successor Administrative Agent shall be an Eligible Institution. Upon the acceptance by a successor Administrative Agent of its appointment as Administrative Agent hereunder, such successor Administrative Agent shall thereupon succeed to and become vested with all the properties, rights, powers, privileges and duties of the former Administrative Agent in its capacity as such, without further act, deed or conveyance. Upon the effective date of resignation or removal of a retiring Administrative Agent, such Administrative Agent shall be discharged from its duties under this Agreement and the other Loan Documents, but the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted by it while it was Administrative Agent under this Agreement. If and so long as no successor Administrative Agent shall have been appointed, then any notice or other communication required or permitted to be given by the Administrative Agent shall be sufficiently given if given by the Majority Lenders, all notices or other communications required or permitted to be given to the Administrative Agent shall be given to each Lender, and all payments to be made to the Administrative Agent shall be made directly to the Borrower or to the Lender for whose account such payment is made. 8.10 Additional Agents. If the Administrative Agent shall from time to time deem it necessary or advisable, for its own protection in the performance of its duties hereunder or in the interest of the Lenders, the Administrative Agent and the Borrower shall execute and deliver a supplemental agreement and all other instruments and agreements necessary or advisable, in the opinion of the Administrative Agent, to constitute one or more other Persons designated by the Administrative Agent, to act as an "Agent", with such titles as may be designated by the Administrative Agent, including but not limited to, Managing Agent, Co-Agent, Syndication Agent or Documentation Agent. None of the Lenders designated as an Agent herein or in any other document or instrument executed -53- and delivered in connection herewith shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Lenders as such. Without limiting the foregoing, none of such Lenders shall have or be deemed to have any fiduciary relationship with any other Lender hereunder or under the other Loan Documents. Each Lender acknowledges that it has not relied, and will not rely, on any of the Lenders so identified in deciding to enter into this Agreement or in taking or not taking action hereunder. 8.11 Calculations. The Administrative Agent shall not be liable for any calculation, apportionment or distribution of payments made by it in good faith and without gross negligence or willful misconduct. If such calculation, apportionment or distribution is subsequently determined to have been made in error, the sole recourse of any Lender to whom payment was due but not made shall be to recover from the other Lenders any payment in excess of the amount to which they are determined to be entitled or, if the amount due was not paid by Borrower to recover such amount from Borrower. 8.12 Administrative Agent In Its Individual Capacity. With respect to its Commitment hereunder and the Obligations owing to it, the Administrative Agent shall have the same rights and powers under this Agreement and each other Loan Document as any other Lender and may exercise the same as though it were not the Administrative Agent, and the terms "Lender", "Holder of Notes" and like terms shall include the Administrative Agent in its individual capacity as such. The Administrative Agent and its Affiliates may, without liability to account, make loans to, accept deposits from, acquire debt or equity interests in, act as trustee under indentures of, enter into Interest Rate Hedging Agreements with, serve as "Administrative Agent" for other financing vehicles, issue letters of credit on behalf of, and engage in any other business with, (a) any Obligor or any stockholder, Subsidiary or Affiliate of any Obligor, or (b) any other Person, whether such other Person may be engaged in any conflict or dispute with any Obligor or any Lender or otherwise, as though the Administrative Agent were not the Administrative Agent hereunder. ARTICLE IX SPECIAL INTER-OBLIGOR PROVISIONS 9.1 Acknowledgements of Synergies and Inter-dependence. (a) Each Obligor will enjoy significant benefits from the business conducted by the other Obligors because of, inter alia, their combined ability to bargain with other Persons including without limitation their ability to negotiate the credit facilities for the Borrower on the favorable terms granted by this Agreement and other Loan Documents which would not have been available to an individual Obligor acting alone. Each Obligor has determined that it is in its best interest to procure credit facilities which the Borrower may utilize directly and which receive the credit support of the other Obligors as contemplated by this Agreement and the other Loan Documents. (b) The Lenders have advised the Borrower that they are unwilling to enter into this Agreement and the other Loan Documents and make available the credit facilities extended hereby unless each Obligor (other than -54- Borrower) agrees, among other things, to be liable for the due and proper payment of the obligations of Borrower under this Agreement and other Loan Documents. Each Obligor has determined that it is in its best interest and in pursuit of its purposes that it so induce the Lenders to extend credit pursuant to this Agreement and the other documents executed in connection herewith (i) because of the desirability to each Obligor of the credit facilities, the interest rates and the modes of borrowing available to Borrower hereunder, (ii) because each Obligor may engage in transactions jointly with other Obligors and (iii) because each Obligor may require, from time to time, access to funds under this Agreement for the purposes herein set forth. (c) Each Obligor has determined that it has and, after giving effect to the transactions contemplated by this Agreement and the other Loan Documents (including, without limitation, the inter-Obligor arrangement set forth in this Article 9) will have, assets having a fair saleable value in excess of the amount required to pay its probable liability on its existing debts as they fall due for payment and that the sum of its debts is not and will not then be greater than all of its property at a fair valuation, that such Obligor has, and will have, access to adequate capital for the conduct of its business and the ability to pay its debts from time to time incurred in connection therewith as such debts mature and that the value of the benefits to be derived by such Obligor from the access to funds under this Agreement (including, without limitation, the inter-Obligor arrangement set forth in this Article 9) is reasonably equivalent to the obligations undertaken pursuant hereto. 9.2 Certain Inter-Obligor Agreements. (a) Subject to paragraph (b) below, each Obligor as indemnitor shall indemnify the other Obligor as indemnitees for all Obligations incurred by the indemnitee Obligor for proceeds of Loans advanced to the indemnitor Obligor. (b) The rights and obligations of the Obligors pursuant to paragraph (a) above shall be subordinated in all respects to the rights of the Administrative Agent and the Lenders with respect to the Obligations and, accordingly, each Obligor agrees that it shall not make any payment or receive any payment pursuant to the preceding paragraph (a) at any time a Default has occurred and is continuing or would be caused thereby. Each Obligor agrees that in the event it receives any payment described by or in violation of this paragraph (b), it shall accept such payment as agent of the Administrative Agent, for the benefit of the Lenders, and hold the same in trust on behalf of and for the benefit of the Administrative Agent, for the benefit of the Lenders. 9.3 Borrower's Records. Borrower (on behalf of each Obligor) shall maintain records specifying (a) all Obligations incurred by each Obligor, (b) the date of such incurrence, (c) the date and amount of any payments made in respect of such Obligations and (d) all inter-Obligor obligations pursuant to paragraph 9.2 above. Borrower shall make copies of such records available to the Administrative Agent, upon request. -55- ARTICLE X DEFINITIONS; CONSTRUCTION 10.1 Certain Definitions. As used in this Agreement, the following terms have the following meanings, (terms defined in the singular to have a correlative meaning when used in the plural) unless the context hereof otherwise clearly requires: "Accumulated Funding Deficiency" has the meaning given to such term in ss.4001(a)(18) of ERISA. "Administrative Agent" has the meaning ascribed to such term in the preamble of this Agreement. "Affiliate" of a Person (the "Specified Person") shall mean (a) any Person which directly or indirectly controls, or is controlled by, or is under common control with, the Specified Person, (b) any director or officer (or, in the case of a Person which is not a corporation, any individual having analogous powers) of the Specified Person or of a Person who is an Affiliate of the Specified Person within the meaning of the preceding clause (a), and (c) for each individual who is an Affiliate of the Specified Person within the meaning of the foregoing clauses (a) or (b), any other individual related to such Affiliate by consanguinity within the third degree or in a step or adoptive relationship within such third degree or related by affinity with such Affiliate or any such individual. For purposes of the preceding sentence, "control" of a Person means (a) 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 contract or otherwise. "Agent" has the meaning ascribed to such term in Section 8.10. "Agreement" means this Credit Agreement as the same may be amended, modified, restated or supplemented from time to time in accordance with its terms. "Applicable Margin" means a marginal rate of interest which is added to the LIBO Rate or Prime Rate to determine the effective rate of interest on LIBO Rate Loans or the Prime Rate Loans, as the case may be. The Applicable Margin shall be determined in the following manner: For any LIBO Rate Loan or Prime Rate Loan, the Applicable Margin shall be the percentage amount set forth below under the caption "Applicable Margin" for such Loan opposite the relevant Consolidated Funded Debt/Consolidated EBITDA Ratio: -56-
Grid A (pre-offering) Consolidated Funded Debt/ Applicable Margin Applicable Margin Level Consolidated EBITDA Ratio LIBO Rate Loans Prime Rate Loans ------- ------------------------- --------------- ---------------- 1 below 1.50 1.25% .25% 2 greater than or equal to 1.50 less than or equal to 2.00 1.50% .25% 3 > 2.00 less than or equal to 2.50 1.75% .25% 4 > 2.50 less than or equal to 3.00 2.00% .25% 5 > 3.00 2.25% .50%
The Applicable Margin shall be adjusted on the first Business Day of the month after delivery of each Officer's Compliance Certificate under Section 5.1 or in the event of any Permitted Acquisition, on the first Business day of the month after closing and delivery of the Pro-Forma Covenant Compliance Certificate required for the acquisition. If an Officer's Compliance Certificate is required to be delivered pursuant to Section 5.1 and is not delivered by its deadline, then five Business Days after notice to NCO Group the Applicable Margin shall be the highest rate specified above until the Officer's Compliance Certificate is so delivered. In the event NCO Group successfully completes by March 31, 2000 (i) a convertible subordinated debt issuance in the minimum amount of $150,000,000 and/or (ii) a common stock issuance in the minimum amount of $100,000,000 and/or (iii) a convertible subordinated debt issuance in the minimum amount of $100,000,000 in conjunction with a common stock issuance in the minimum amount of $25,000,000, then the Applicable Margin shall be based on Grid B:
Grid B (post-offering) Consolidated Funded Debt/ Applicable Margin Applicable Margin Level Consolidated EBITDA Ratio LIBO Rate Loans Prime Rate Loans ------- ------------------------- --------------- ---------------- 1 below 1.50 1.00% .25% 2 greater than or equal to 1.50 less than or equal to 2.00 1.25% .25% 3 > 2.00 less than or equal to 2.50 1.50% .25% 4 > 2.50 less than or equal to 3.00 1.75% .25% 5 > 3.00 less than or equal to 3.50 2.00% .25% 6 > 3.50 less than or equal to 4.00 2.25% .50% 7 > 4.00 2.50% .75%
"Assignment and Acceptance Agreement" shall have the meaning ascribed to such term in Section 11.9. "Available RC Commitment" means, as of any date, the difference obtained by subtracting (a) minus (b) where (a) is the amount of the RC Commitment on such date and (b) is the aggregate outstanding principal amount of all Loans plus amounts available to be drawn under Letters of Credit on such date plus the aggregate outstanding amount of all unreimbursed Drawings. -57- "Bank Tax" means (i) any Tax based on or measured by net income of a Lender, any franchise Tax and any doing business Tax imposed upon any Lender by any jurisdiction (or any political subdivision thereof) in which such Lender or any lending office of a Lender is located and (ii) for the purposes of Section 1.13, any other Tax imposed by a jurisdiction other than the United States or a political subdivision thereof that would not have been imposed but for a present or former connection between such Lender or lending office (as the case may be) and such jurisdiction. "Business Day" means any day other than a Saturday, Sunday, public holiday under the laws of the Commonwealth of Pennsylvania, or other day on which banking institutions are authorized or obligated to close in the city in which the Administrative Agent's Domestic Lending Office is located provided, however, that whether or not expressly stated in this Agreement or other Loan Documents, when "Business Day" is used with respect to any LIBO Rate Loan, such Business Day must also be a Eurodollar Business Day. "Capital Expenditures", of any Person shall mean, for any period, all expenditures (whether paid in cash or accrued as liabilities during such period) of such Person during such period which would be classified as capital expenditures in accordance with GAAP (including, without limitation, expenditures for maintenance and repairs which are capitalized, Capitalized Leases to the extent an asset is recorded in connection therewith in accordance with GAAP, and Purchase Money Indebtedness), but excluding any capital assets acquired as part of a Permitted Acquisition. "Capitalized Lease" shall mean at any time any lease, other than a real estate lease or automobile lease, which is, or is required under GAAP to be, capitalized on the balance sheet of the lessee at such time, and "Capitalized Lease Obligation" of any Person at any time shall mean the aggregate amount which is, or is required under GAAP to be, reported as a liability on the balance sheet of such Person at such time as lessee under a Capitalized Lease. "Cash Equivalent Investments" shall mean any of the following, to the extent acquired for investment and not with a view to achieving trading profits: (a) obligations fully backed by the full faith and credit of the United States of America maturing not in excess of nine months from the date of acquisition, (b) commercial paper maturing not in excess of nine months from the date of acquisition and rated "P-1" by Moody's Investors Service or "A-1" by Standard & Poor's Corporation on the date of acquisition, and (c) the following obligations of any domestic commercial bank having capital and surplus in excess of $500,000,000, which has, or the holding company of which has, a commercial paper rating meeting the requirements specified in clause (b) above: (i) time deposits, certificates of deposit and acceptances maturing not in excess of nine months from the date of acquisition, or (ii) repurchase obligations with a term of not more than seven days for underlying securities of the type referred to in clause (a) above. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation and Liability Act, as amended, and any successor statute of similar import, and regulations thereunder, in each case as in effect from time to time. "CERCLIS" shall mean the Comprehensive Environmental Response, Compensation and Liability Information System List, as the same may be amended from time to time. -58- "Change of Management" shall mean (a) that a majority of the Board of Directors of NCO Group shall be other than those who were directors on the date hereof; or (b) Michael J. Barrist for any reason shall cease to serve as chief executive officer of NCO Group; provided, however, that the cessation of Michael Barrist's status as chief executive officer shall not fall within the definition of a Change of Management so long as a replacement is hired within ninety (90) calendar days of such cessation who is reasonably satisfactory to the Super Majority Lenders. "Closing Date" means the date of execution and delivery of this Agreement. "COBRA Violation" means any violation of the "continuation coverage requirements" of "group health plans" of former ss.162(k) of the Code (as in effect for tax years beginning on or before December 31, 1988) and of ss.4980B of the Code (as in effect for tax years beginning on or after January 1, 1989) and Part 6 of Subtitle B of Title I of ERISA. "Code" means the Internal Revenue Code of 1986, as amended, and any successor statute of similar import, and regulations thereunder, in each case as in effect from time to time, and the Treasury regulations thereunder. "Collateral" shall mean the property from time to time subject to the Liens of the Security Documents. "Commitment" shall mean the RC Commitment. "Consolidated EBIT" for any period, with respect to NCO Group and its consolidated Subsidiaries, shall mean the sum of (a) Consolidated Net Income for such period, (b) Consolidated Interest Expense for such period, (c) charges against income for Taxes for such period, (d) extraordinary losses to the extent included in determining such Consolidated Net Income, minus (e) extraordinary gains to the extent included in determining such Consolidated Net Income, all as determined on a consolidated basis in accordance with GAAP. "Consolidated EBITDA" for any period, with respect to NCO Group and its consolidated Subsidiaries, shall mean the sum of (a) Consolidated EBIT for such period, (b) depreciation expense for such period, and (c) amortization expense for such period, all as determined on a consolidated basis in accordance with GAAP. "Consolidated Fixed Charge Coverage Ratio" for any period, with respect to NCO Group and its consolidated Subsidiaries, shall mean the ratio of (i) Consolidated EBITDA minus Capital Expenditures for such period to (ii) the sum for such period of (a) Consolidated Interest Expense, (b) principal payments on Indebtedness and (c) Taxes, all as determined on a consolidated basis in accordance with GAAP. "Consolidated Funded Debt" shall mean all Indebtedness of NCO Group and its consolidated Subsidiaries for borrowed money, including without limitation the Obligations, Capitalized Leases and Subordinated Debt. -59- "Consolidated Interest Coverage Ratio" for any period shall mean the ratio of Consolidated EBIT for such period to the Consolidated Interest Expense for such period. "Consolidated Interest Expense" for any period shall mean the total Interest Expense of NCO Group and its consolidated Subsidiaries for such period determined on a consolidated basis in accordance with GAAP. "Consolidated Net Income" for any period shall mean the net earnings (or loss) after taxes of NCO Group and its consolidated Subsidiaries for such period determined on a consolidated basis in accordance with GAAP; provided, that there shall be deducted therefrom (a) the income (or deficit) of any Person accrued prior to the date it becomes a consolidated Subsidiary or is merged into or consolidated, acquired by or combined with NCO Group or any consolidated Subsidiary in a business combination accounted for as a pooling of interests, including, in the case of a successor to NCO Group or any consolidated Subsidiary by consolidation or merger or transfer of assets, any earnings of the successor corporation prior to such consolidation, merger or transfer of assets, (b) income or loss accounted for by NCO Group on the equity method because of the income (or deficit) during such period of any Person (other than a consolidated Subsidiary) in which NCO Group or any consolidated Subsidiary has an ownership interest, but the deduction for such equity income shall be reversed to the extent that during such period or at any subsequent time an amount not in excess of such income has been actually received by NCO Group or such consolidated Subsidiary in the form of cash or cash equivalents, (c) income or loss of a foreign Subsidiary, but the deduction for such Subsidiary income shall be reversed to the extent that during such period or at any subsequent time an amount not in excess of such income has been actually received by NCO Group or such consolidated Subsidiary in the form of cash or property dividends or similar distributions, not subject to foreign currency translation, (d) the undistributed earnings of any consolidated Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such consolidated Subsidiary is restricted (whether such restriction arises by operation of Law, by agreement, by its articles of incorporation or by-laws (or other constituent documents), or otherwise), (e) any restoration to income of any contingency reserve, except to the extent that provision for such reserve was made against income during such period, and (f) any gain arising from the acquisition of any securities, or the extinguishment, under GAAP, of any Indebtedness, of NCO Group or any consolidated Subsidiary. "Consolidated Net Worth" at any time shall mean the total amount of stockholders' equity of NCO Group and its consolidated Subsidiaries at such time determined on a consolidated basis in accordance with GAAP. "Consolidated Pro-Forma Revenue" for any period shall mean (a) all revenue reported on the consolidated financial statements of the Borrower provided pursuant to Section 5.1 for the period plus (b) to the extent not included in such reported revenue, revenues during the period generated by properties or businesses Borrower acquires in Permitted Acquisitions during the period minus (c) to the extent not already excluded from the revenue numbers under clauses (a) and (b), any revenues generated by properties or businesses that Borrower or an acquired company has divested during the period. -60- "Consolidated Senior Debt" shall mean all Indebtedness of NCO Group and its consolidated Subsidiaries for borrowed money, including without limitation the Obligations and Capitalized Leases, but excluding Subordinated Debt. "Contingent Reimbursement Obligation" shall mean the contingent obligation of the Borrower to reimburse the Issuer for any Drawings that may be made under an outstanding Letter of Credit, whenever issued. Without limiting the generality of the foregoing, the amount of all Contingent Reimbursement Obligations at any time shall be the aggregate amount available to be drawn under outstanding Letters of Credit at such time. "Controlled Group Member" shall mean each trade or business (whether or not incorporated) which together with Borrower is treated as a single employer under Sections 4001(a)(14) or 4001(b)(1) of ERISA or Sections 414(b), (c), (m) or (o) of the Code. "Default" means any event or condition which with notice, passage of time or both, would constitute an Event of Default. "Default Rate" means, with respect to any amounts payable hereunder or under the other Loan Documents, a rate equal to the sum of (a) two percent (2%) per annum plus (b) the interest rate otherwise in effect with respect to such amounts or, if no such rate is otherwise in effect with respect to such amounts, a rate equal to the sum of (i) the Prime Rate plus (ii) two percent (2%) per annum. "Dollar," "Dollars" and the symbol "$" means lawful money of the United States of America. "Domestic Lending Office" means, with respect to any Lender (i) the office designated as such on the signature page hereof, or (ii) the branch or office of such Lender designated, from time to time, by such Lender in a notice to the Administrative Agent and NCO Group. "Drawing" shall mean (a) any amount disbursed by the Issuer pursuant to the terms of a Letter of Credit or (b) as the context may require, the obligation of the Borrower to reimburse the Issuer for such disbursement. "Eligible Institution" means (i) a Lender; (ii) an Affiliate of a Lender; (iii) a commercial bank organized under the laws of the United States, or any State thereof, and having a combined capital and surplus of at least $1,000,000,000.00; (iv) a savings and loan association or savings bank organized under the laws of the United States, or any State thereof, and having a combined capital and surplus of at least $1,000,000,000.00; (v) a commercial bank organized under the laws of any other country that is a member of the Organization for Economic Cooperation and Development or has concluded special lending arrangements with the International Monetary Fund associated with its General Arrangements to Borrow or under the laws of a political subdivision of any such country, and having a combined capital and surplus of at least $1,000,000,000.00, so long as such bank is acting through a branch or agency located in the United States; and (vi) a finance company, insurance company or other financial institution or fund (whether a corporation, partnership, trust or other entity) that is engaged in making, purchasing or otherwise investing in commercial loans in the ordinary course of its business and having a combined -61- capital and surplus or total assets of at least $500,000,000.00 and (vii) with respect to any Lender that is a fund, any other fund with assets in excess of $100,000,000.00 that invests in bank loans and is managed by the same investment advisor as such Lender; provided, however, that neither Borrower nor any Affiliate of Borrower shall qualify as an Eligible Institution under this definition. "Environmental Affiliate" shall mean, with respect to any Person, any other Person whose liability (contingent or otherwise) for any Environmental Claim such Person has retained, assumed or otherwise is liable for (by Law, agreement or otherwise). "Environmental Approvals" shall mean any Governmental Action pursuant to or required under any Environmental Law. "Environmental Claim" shall mean, with respect to any Person, any action, suit, proceeding, investigation, notice, claim, complaint, demand, request for information or other communication (written or oral) by any other Person (including but not limited to any Governmental Authority, citizens' group or present or former employee of such Person) alleging, asserting or claiming any actual or potential (a) violation of any Environmental Law, (b) liability under any Environmental Law or (c) liability for investigatory costs, cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries, fines or penalties arising out of, based on or resulting from the presence, or release into the environment, of any Environmental Concern Materials at any location, whether or not owned by such Person. "Environmental Cleanup Site" shall mean any location which is listed or proposed for listing on the National Priorities List, on CERCLIS or on any similar state list of sites requiring investigation or cleanup, or which is the subject of any pending or threatened action, suit, proceeding or investigation related to or arising from any alleged violation of any Environmental Law. "Environmental Concern Materials" shall mean (a) any flammable substance, explosive, radioactive material, hazardous material, hazardous waste, toxic substance, solid waste, pollutant, contaminant or any related material, raw material, substance, product or by-product of any substance specified in or regulated or otherwise affected by any Environmental Law (including but not limited to any "hazardous substance" as defined in CERCLA or any similar state Law), (b) any toxic chemical or other substance from or related to industrial, commercial or institutional activities, and (c) asbestos, gasoline, diesel fuel, motor oil, waste and used oil, heating oil and other petroleum products or compounds, polychlorinated biphenyls, radon and urea formaldehyde. "Environmental Law" shall mean any Law, whether now existing or subsequently enacted or amended, relating to (a) pollution or protection of the environment, including natural resources, (b) exposure of Persons, including but not limited to employees, to Environmental Concern Materials, (c) protection of the public health or welfare from the effects of products, by-products, wastes, emissions, discharges or releases of Environmental Concern Materials or (d) regulation of the manufacture, use or introduction into commerce of Environmental Concern Materials including their manufacture, formulation, packaging, labeling, distribution, transportation, handling, storage or -62- disposal. Without limitation, "Environmental Law" shall also include any Environmental Approval and the terms and conditions thereof. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, and any successor statute of similar import, and regulations thereunder, in each case as in effect from time to time. References to sections of ERISA shall be construed also to refer to any successor sections. "Eurodollar Business Day" means any Business Day on which dealings in Dollar deposits are carried on in the London interbank market and on which commercial banks are open for domestic and international business (including dealings in Dollar deposits) in London, England. "Eurodollar Lending Office" means, with respect to any Lender, the branch or office of such Lender designated by such Person on the signature page hereof or in a notice to the Administrative Agent and NCO Group. "Event of Default" shall mean any of the Events of Default described in Article VII hereof. "Excluded Subsidiaries" means those Subsidiaries listed on Schedule 5.16 hereof. "Federal Funds Rate" for any day means the rate per annum determined by the Administrative Agent (which determination shall be conclusive) to be the rate per annum announced by the Federal Reserve Bank of New York on such day as being the weighted average of the rates on overnight Federal funds transactions arranged by federal funds brokers on the previous trading day, or, if such Federal Reserve Bank does not announce such rate on any day, the rate for the last day on which such rate was announced. "GAAP" has the meaning set forth in Section 10.3 hereof. "Governmental Action" has the meaning set forth in Section 4.1(d) hereof. "Governmental Authority" means any government or political subdivision or any agency, authority, bureau, central bank, commission, department or instrumentality of either, or any court, tribunal, grand jury or arbitrator, in each case whether foreign or domestic. "Guarantors" means each U.S. Subsidiary of Borrower other than the Excluded Subsidiaries. Unless the Administrative Agent agrees otherwise, each Person which is now or hereafter becomes a direct or indirect Subsidiary of NCO Group shall at all times after becoming a Subsidiary of NCO Group be a "Guarantor" pursuant to the terms of this Agreement. "Guaranty" means, with respect to any Person, any contractual or other obligation, contingent or otherwise, of such Person to pay any Indebtedness or other obligation of any other Person or to otherwise protect the holder of any such Indebtedness or other obligation against loss (whether such obligation arises by agreement to pay, to keep well, to purchase assets, goods, securities or services or otherwise); provided, however, that the term "Guaranty" shall not -63- include an endorsement for collection or deposit in the ordinary course of business. The term, "Guaranty," when used as a verb has the correlative meaning. "Guaranty Equivalent" shall have the meaning set forth below: A Person (the "Deemed Guarantor") shall be deemed to subject to a Guaranty Equivalent in respect of any indebtedness, obligation or liability (the "Assured Obligation") of another Person (the "Deemed Obligor") if the Deemed Guarantor directly or indirectly guarantees, becomes surety for, endorses, assumes, agrees to indemnify the Deemed Obligor against, or otherwise agrees, becomes or remains liable (contingently or otherwise) for, such Assured Obligation. Without limitation, a Guaranty Equivalent shall be deemed to exist if a Deemed Guarantor agrees, becomes or remains liable (contingently or otherwise), directly or indirectly: (a) to purchase or assume, or to supply funds for the payment, purchase or satisfaction of, an Assured Obligation, (b) to make any loan, advance, capital contribution or other investment in, or to purchase or lease any property or services from, a Deemed Obligor (i) to maintain the solvency of the Deemed Obligor, (ii) to enable the Deemed Obligor to meet any other financial condition, (iii) to enable the Deemed Obligor to satisfy any Assured Obligation or to make any Stock Payment or any other payment, or (iv) to assure the holder of such Assured Obligation against loss, (c) to purchase or lease property or services from the Deemed Obligor regardless of the non-delivery of or failure to furnish of such property or services, (d) in a transaction having the characteristics of a take-or-pay or throughput contract or as described in paragraph 6 of FASB Statement of Financial Accounting Standards No. 47, or (e) in respect of any other transaction the effect of which is to assure the payment or performance (or payment of damages or other remedy in the event of nonpayment or nonperformance) of any Assured Obligation. "Indebtedness" of a Person shall mean: (a) All obligations on account of money borrowed by, or credit extended to or on behalf of, or for or on account of deposits with or advances to, such Person; (b) All obligations of such Person evidenced by bonds, debentures, notes or similar instruments; (c) All obligations of such Person for the deferred purchase price of property or services, including without limitation, with respect to the Obligors, all obligations incurred by the Obligors to a seller in connection with any Permitted Acquisition; (d) All obligations secured by a Lien on property owned by such Person (whether or not assumed); and all obligations of such Person under Capitalized Leases (without regard to any limitation of the rights and remedies of the holder of such Lien or the lessor under such Capitalized Lease to repossession or sale of such property); (e) The face amount of all letters of credit issued for the account of such Person and, without duplication, the unreimbursed amount of all drafts drawn thereunder, and all other obligations of such Person associated with such letters of credit or draws thereon; -64- (f) All obligations of such Person in respect of acceptances or similar obligations issued for the account of such Person; (g) All obligations of such Person under a product financing or similar arrangement described in paragraph 8 of FASB Statement of Accounting Standards No. 49 or any similar requirement of GAAP; and (h) All obligations of such Person under any interest rate or currency protection agreement, interest rate or currency future, interest rate or currency option, interest rate or currency swap or cap or other interest rate or currency hedge agreement. "Indemnified Parties" shall mean the Administrative Agent, the Lenders, their respective affiliates, and the directors, officers, employees, attorneys and agents of each of the foregoing. "Interest Expense" means, for any Person, for any period, the sum (without duplication) of (a) all interest accrued (or accreted) on Indebtedness of such Person during such period whether or not actually paid plus (b) the net amount accrued under any Interest Rate Hedging Agreements (or less the net amount receivable thereunder) during such period. "Interest Period" means with respect to any LIBO Rate Loan, (a) initially, the period commencing on the borrowing or conversion date, as the case may be, and ending one, two, three or six months thereafter as selected by the Borrower pursuant to Section 1.8 above and (b) thereafter, each period commencing on the day after the last day of the preceding Interest Period and ending one, two, three or six months thereafter, as selected by the Borrower pursuant to Section 1.8 above provided, however, if any such Interest Period would otherwise end on a day which is not a Eurodollar Business Day, such Interest Period shall be extended to the next succeeding Eurodollar Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Eurodollar Business Day and provided, further, if any such Interest Period begins on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period (as may be the case with an Interest Period commencing at the end of a calendar month) the Interest Period shall end on the last Eurodollar Business Day of the relevant calendar month. "Interest Rate Hedging Agreement" means any rate swap, cap or collar agreement with a term as may be acceptable to the Lenders to which Borrower is a party and which is on terms and conditions satisfactory to the Majority Lenders. "Issuer" shall have the meaning set forth in the preamble. "Law" means any law (including common law), constitution, statute, treaty, convention, regulation, licensing requirement, rule, ordinance, order, injunction, writ, decree or award of any Governmental Authority. "Lender" has the meaning ascribed to such term in the preamble hereto. -65- "Letter of Credit" shall mean any letter of credit issued by Issuer pursuant to Section 1.15 hereof. "Letter of Credit Participation" shall mean, with respect to any Lender, the participation interest of such Lender in any Letter of Credit acquired pursuant to Section 1.15. The amount of the Letter of Credit Participation of a Lender in any Letter of Credit shall be deemed to be the amount equal to such Lender's pro rata share (determined on the basis of the Commitment at such time) of the sum of (a) the aggregate unpaid amount of all Drawings thereunder at such time and (b) the amount of any Contingent Reimbursement Obligations with respect thereto at such time. "LIBO Rate" means the rate per annum determined by the Administrative Agent by dividing (the resulting quotient to be rounded upward to the nearest 1/100 of 1%) (a) the rate of interest (which shall be the same for each day in such Interest Period) determined in good faith by the Administrative Agent (which determination shall be conclusive) to be the average of the rates per annum for deposits in Dollars offered to major money center banks in the London interbank market at approximately 11:00 a.m., London time, two Eurodollar Business Days prior to the first day of the applicable Interest Period for delivery on the first day of such Interest Period in similar amounts and maturities as the proposed LIBO Rate Loan by (b) a number equal to 1.0 minus the Reserve Percentage. "Reserve Percentage" for any day means the percentage (expressed as a decimal, rounded upward to the nearest 1/100 of 1%), as determined in good faith by the Administrative Agent (which determination shall be conclusive), which is in effect on such day as prescribed by the Board of Governors of the Federal Reserve System representing the maximum reserve requirement (including supplemental, marginal and emergency reserve requirements) with respect to eurocurrency funding (currently referred to as "Eurocurrency liabilities") of a member bank in such System. The LIBO Rate shall be adjusted automatically as of the effective date of each change in the Reserve Percentage. "LIBO Rate Loan" means a Loan bearing interest at the per annum rate of the LIBO Rate plus Applicable Margin. "Licenses" means any and all licenses, permits, franchises, rights to conduct business, approvals by a Governmental Authority or otherwise, consents, qualifications, operating authority, and/or any other authorizations. "Lien" shall mean any mortgage, deed of trust, pledge, lien, security interest, charge or other encumbrance or security arrangement of any nature whatsoever, including but not limited to any conditional sale or title retention arrangement, and any assignment, deposit arrangement or lease intended as, or having the effect of, security. "Limitation" means a revocation, suspension, termination, impairment, probation, limitation, non-renewal, forfeiture, declaration of ineligibility, and/or loss of any other rights. "Loan" shall mean any loan by the Lenders to Borrower under this Agreement, and "Loans" shall mean all Loans made by the Lenders under this Agreement. -66- "Loan Documents" shall mean this Agreement, the Notes, the Subsidiary Guaranties, the Security Documents, and all other agreements and instruments extending, renewing, refinancing or refunding any indebtedness, obligation or liability arising under any of the foregoing, in each case as the same may be amended, modified or supplemented from time to time hereafter. "Majority Lenders" means, as of any date, at least four Lenders holding, in the aggregate, at least 51% of the aggregate outstanding Loans and available Commitments. If any one Lender holds more than 35%, then Majority Lenders shall include at least one Lender designated by the Administrative Agent as an additional Agent under Section 8.10. If the Administrative Agent holds less than 35% and another Lender holds more than 35%, the Administrative Agent may count as the required "additional Agent" for purposes of determining "Majority Lenders." "Material Adverse Effect" shall mean: (a) a material adverse effect on the business, operations or condition (financial or otherwise) of the Obligors taken as a whole, (b) a material adverse effect on the ability of Obligors, taken as a whole, to perform or comply with any of the terms and conditions of any Loan Document, or (c) a material adverse effect on the legality, validity, binding effect, enforceability or admissibility into evidence of any Loan Document, or the ability of the Lender to enforce any rights or remedies under or in connection with any Loan Document. "Maturity Date" shall mean the fifth anniversary of the Closing Date. "Mellon" means Mellon Bank, N.A. "Monthly Payment Date" means the last Business Day of each month. "Multiemployer Plan" has the meaning ascribed to such term in ss.4001(a)(3) of ERISA. "Non-U.S. Lender" means any Lender that is not a United States Person. "Note" means RC Notes. "Obligations" shall mean all indebtedness, obligations and liabilities of any Obligor to the Administrative Agent and the Lenders from time to time arising under or in connection with or related to or evidenced by or secured by or under color of this Agreement, any other Loan Document, or any Interest Rate Hedging Agreement, together with all extensions, renewals or refinancings thereof, whether such indebtedness, obligations or liabilities are direct or indirect, otherwise secured or unsecured, joint or several, absolute or contingent, due or to become due, whether for payment or performance, now existing or hereafter arising. Without limitation of the foregoing, such indebtedness, obligations and liabilities include the principal amount of all Loans, Letters of Credit, interest, fees, indemnities or expenses under or in connection with this Agreement or any other Loan Document, and all extensions, renewals and refinancings thereof, whether or not such Loans were made, or such Letters of Credit were issued, in compliance with the terms and conditions of this Agreement or in excess of the obligation of the Lender to lend. Obligations shall remain Obligations notwithstanding any assignment or transfer or any subsequent assignment or transfer of any of the Obligations or any interest therein. -67- "Obligors" means the Borrower and the Guarantors. "Officer's Compliance Certificate" means a certificate, as of a specified date, of the chief financial officer or controller of NCO Group in substantially the form of Exhibit H hereto as to each of the following: (a) the absence of any Event of Default or Default on such date, (b) the truth of the representations and warranties herein and in the other Loan Documents as of such date, and (c) compliance with the financial covenants set forth in Article 6. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Pension Plan" means a pension plan (as defined in ss.3(2) of ERISA) which is subject to Part 3 of Subtitle B of Title I of ERISA or subject to ss.412 of the Code and maintained by Borrower or any member of its Controlled Group. "Pension-Related Event" shall mean any of the following events or conditions: (a) Any action is taken by any Person (i) to terminate, or which would result in the termination of, a Plan, either pursuant to its terms or by operation of law (including, without limitation, any amendment of a Plan which would result in a termination under Section 4041(e) of ERISA), or (ii) to have a trustee appointed for a Plan pursuant to Section 4042 of ERISA; (b) PBGC notifies any Person of its determination that an event described in Section 4042 of ERISA has occurred with respect to a Plan, that a Plan should be terminated, or that a trustee should be appointed for a Plan; (c) Any Reportable Event occurs with respect to a Plan; (d) Any action occurs or is taken which could result in any Obligor becoming subject to liability for a complete or partial withdrawal by any Person from a Multiemployer Plan (including, without limitation, seller liability incurred under Section 4204(a)(2) of ERISA), or any Obligor or any Controlled Group Member receives from any Person a notice or demand for payment on account of any such alleged or asserted liability; or (e) (i) There occurs any failure to meet the minimum funding standard under Section 302 of ERISA or Section 412 of the Code with respect to a Plan, or any tax return is filed showing any tax payable under Section 4971(a) of the Code with respect to any such failure, or any Obligor or any Controlled Group Member receives a notice of deficiency from the Internal Revenue Service with respect to any alleged or asserted such failure, or (ii) any request is made by any Person for a variance from the minimum funding standard, or an extension of the period for amortizing unfunded liabilities, with respect to a Plan. "Permitted Acquisition" shall mean any acquisition (by way of stock purchase, merger, asset purchase or otherwise) by any Obligor of all of the properties of any going concern or going line of business; provided, however, -68- that (1) each such business being acquired by such Obligor must (a) have a positive EBITDA for the immediately preceding twelve months prior to the acquisition, after adjustments for unusual expense items and (b) be in the same or a similar line of business as such Obligor; (2) after recasting the Borrower's consolidated financial statements for the immediately preceding twelve month period to include the results of operations from the target of the acquisition, and preparing pro-forma financial statements for the immediately succeeding twelve month period, the combined Obligor and target shall have met the financial covenants described in Section 6.1 of this Agreement for the immediately preceding twelve months prior to the acquisition and on a pro-forma basis for the immediately following twelve month period after the acquisition (such compliance to be evidenced by a Pro-Forma Covenant Compliance Certificate in the form of Exhibit H attached hereto ("Pro-Forma Covenant Compliance Certificate"), (3) with respect to any merger, the Obligor shall be the surviving corporation, (4) after giving effect to the acquisition, no Event of Default or Default shall exist, (5) the disclosure schedules shall be updated to account for the acquisition as required by Section 5.17 and (6) the cash consideration to be paid by such Obligor for the acquisition must not exceed $25,000,000 in any rolling twelve month period. An acquisition meeting the criteria set forth in this definition does not require the consent of any Lender provided that the due diligence on such acquisition, including a review of all acquisition documents shall be satisfactory to the Super Majority Lenders. Any acquisition which does not meet the criteria set forth in the provisos to this definition requires the prior written consent of the Super Majority Lenders. "Permitted Acquisition Indebtedness" means Indebtedness incurred by an Obligor to the seller in connection with a Permitted Acquisition that is (1) unsecured, (2) subordinated to the Obligations as provided in the next sentence, and (3) without financial covenants binding on any Obligor. The terms of subordination, which at the request of the Administrative Agent shall be embodied in a separate subordination agreement in the form of Exhibit J attached hereto, shall prohibit the Obligor from making any payments of principal, interest, or other sums on the Indebtedness following an Event of Default under this Agreement; prior to an Event of Default, the Obligor may make regularly scheduled payments of principal and interest on the Indebtedness. Despite the foregoing, (1) the Obligors may incur up to an aggregate of $2,000,000 (based on the original principal amount of notes outstanding at any one time) in Indebtedness to sellers in connection with Permitted Acquisitions on which Obligors may make regularly scheduled payments of principal and interest despite the existence of an Event of Default (other than a bankruptcy or insolvency default, in which case such payments will be prohibited until the Obligations have been repaid in full) so long as such Indebtedness otherwise meets the above requirements (except that the subordination agreement shall take the form of Exhibit K attached hereto) and (2) the Obligors may incur up to an aggregate of $10,000,000 (based on the original principal amount of notes outstanding at any one time) in Indebtedness to sellers in connection with Permitted Acquisitions on which Obligors may make regularly scheduled payments of principal and interest until the occurrence of an Event of Default and may resume such payments six months after the occurrence of such Event of Default (unless the Event of Default is a bankruptcy or insolvency default, or an Event of Default as to which the Lenders are exercising remedies; in any such case such payments will be prohibited until the Obligations have been repaid in full) so long as such Indebtedness otherwise meets the above requirements (except that the subordination agreement shall take the form of Exhibit K-1 attached hereto). -69- "Permitted Liens" shall have the meaning set forth in Section 6.2 hereof. "Person" means an individual, corporation, partnership, trust, unincorporated association, limited liability company, joint venture, joint-stock company, Governmental Authority or any other entity. "Plan" means any employee pension benefit plan within the meaning of Section 3(2) of ERISA (other than a Multiemployer Plan) covered by Title IV of ERISA by reason of Section 4021 of ERISA, of which any Obligor or any Controlled Group Member is or has been within the preceding five years a "contributing sponsor" within the meaning of Section 4001(a)(13) of ERISA, or which is or has been within the preceding five years maintained for employees of any Obligor or any Controlled Group Member. "Prime Rate" means the interest rate per annum announced from time to time by the Administrative Agent as its prime rate. The Prime Rate may be greater or less than other interest rates charged by the Administrative Agent to other customers. "Prime Rate Loan" means any Loan bearing interest at the Prime Rate. "Pro-Forma Covenant Compliance Certificate" has the meaning ascribed to such term in the definition of "Permitted Acquisition." "Prohibited Transaction" has the meaning given to such term in ss.406 of ERISA or ss.4975(c) of the Code. "Purchase Money Indebtedness" shall mean at any time any (a) Indebtedness incurred for the deferred purchase price in connection with a Capital Expenditure and (b) Indebtedness for borrowed money of any Obligor which is incurred in connection with a Permitted Acquisition, and which (i) is unsecured, (ii) is fully and permanently subordinated, as to both principal and interest, to any Obligations, (iii) contains no financial covenants, and (iv) contains permanent "stand still" or forbearance provisions acceptable to the Lender which apply upon the occurrence of an Event of Default or Default under this Agreement. "Quarterly Payment Dates" means the last Business Day of each December, March, June and September. "RC Commitment" means, with respect to any Lender, (a) the obligation of such Lender to make Loans and participate in Letters of Credit in an amount as set forth opposite such Lender's name under the heading "RC Commitment" on Schedule 1.1 (as such Schedule may be amended from time to time) hereto or, in the case of a Lender that becomes a Lender pursuant to an assignment, the amount of the assignor's RC Commitment assigned to such Lender, in either case as the same may be reduced from time to time pursuant to Section 1.7 above or increased or reduced from time to time pursuant to assignments in accordance with Section 11.9 below, or (b) as the context may require, the obligation of such Lender to make Loans in an aggregate unpaid principal amount not exceeding such amount; and "RC Commitment" means with respect to all Lenders, the sum of their individual RC Commitments. -70- "RC Loan" has the meaning ascribed to such term in Section 1.1 of this Agreement. "RC Note" means each promissory note of the Borrower issued to an RC Lender relating to such Lender's RC Loans and RC Commitments substantially in the form of Exhibit A hereto, together with any allonges thereto, from time to time, and any promissory note issued in substitution therefor pursuant to the terms hereof, together with all extensions, renewals, refinancings or refundings thereof in whole or part, in each case as the same may be amended, modified, restated or supplemented from time to time. "Records" of the Administrative Agent or "Administrative Agent's Records" has the meaning given to such term in Section 8.8 hereof. "Registered Lender" has the meaning ascribed to such term in Section 1.14 hereof. "Registered Note" has the meaning ascribed to such term in Section 1.14 hereof. "Regulatory Change" means any applicable law, interpretation, directive, request or guideline (whether or not having the force of law), or any change therein or in the administration or enforcement thereof, that becomes effective or is implemented or first required or expected to be complied with after the Closing Date (including any applicable law that shall have become such as the result of any act or omission of the Borrower or any of its Affiliates, without regard to when such applicable law shall have been enacted or implemented), whether the same is (a) the result of an enactment by a government or any agency or political subdivision thereof, a determination of a court or regulatory authority or otherwise or (b) enacted, adopted, issued or proposed before or after the Closing Date, including any such that imposes, increases or modifies any Tax, reserve requirement, insurance charge, special deposit requirement, assessment or capital adequacy requirement, but excluding any such that imposes, increases or modifies any Bank Tax. "Reorganization" has the meaning ascribed to such term in ERISA. "Reportable Event" means (a) a reportable event described in Section 4043 of ERISA, (b) a withdrawal by a substantial employer from a Plan to which more than one employer contributes, as referred to in Section 4063(b) of ERISA, (c) a cessation of operations at a facility causing more than twenty percent (20%) of Plan participants to be separated from employment, as referred to in Section 4062(e) of ERISA, or (d) a failure to make a required installment or other payment with respect to a Plan when due in accordance with Section 412 of the Code or Section 302 of ERISA which causes the total unpaid balance of missed installments and payments (including unpaid interest) to exceed $750,000. "Responsible Officer" shall mean Michael J. Barrist, Bernard R. Miller or Steven L. Winokur or such other person designated by the Borrower and reasonably acceptable to Administrative Agent. "Security Agreement" shall have the meaning ascribed to such term in Section 3.1(c) hereof. "Security Documents" shall have the meaning set forth in Section 3.1(c) hereof. -71- "Solvent" means, with respect to any Person at any time, that at such time (a) the sum of the debts and liabilities (including, without limitation, contingent liabilities) of such Person is not greater than all of the assets of such Person at a fair valuation, (b) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person has not incurred, will not incur, does not intend to incur, and does not believe that it will incur, debts or liabilities (including, without limitation, contingent liabilities) beyond such person's ability to pay as such debts and liabilities mature, (d) such Person is not engaged in, and is not about to engage in, a business or a transaction for which such person's property constitutes or would constitute unreasonably small capital, and (e) such Person is not otherwise insolvent as defined in, or otherwise in a condition which could in any circumstances then or subsequently render any transfer, conveyance, obligation or act then made, incurred or performed by it avoidable or fraudulent pursuant to, any Law that may be applicable to such Person pertaining to bankruptcy, insolvency or creditors' rights (including but not limited to the Bankruptcy Code of 1978, as amended, and, to the extent applicable to such Person, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act, or any other applicable Law pertaining to fraudulent conveyances or fraudulent transfers or preferences). "Stock Payment" by any Person shall mean any dividend, distribution or payment of any nature (whether in cash, securities, or other property) on account of or in respect of any shares of the capital stock (or warrants, options or rights therefor) of such Person, including but not limited to any payment on account of the purchase, redemption, retirement, defeasance or acquisition of any shares of the capital stock (or warrants, options or rights therefor) of such Person, in each case regardless of whether required by the terms of such capital stock (or warrants, options or rights) or any other agreement or instrument. "Subordinated Debt" means Indebtedness of an Obligor that has been subordinated to the Obligations in writing on terms satisfactory to the Administrative Agent. "Subsidiary" of a Person means (i) a corporation (a) at least 50% of the voting stock of which is at the time owned, directly or indirectly, by such Person and (b) of which such Person, directly or indirectly, has the right to elect a majority of the members of the board of directors either as a result of the ownership of a majority of the voting stock of such corporation or pursuant to a shareholders or other voting agreement or (ii) any partnership, joint venture, limited liability company or similar entity at least 50% of the total equity and voting interests of which (x) is at the time owned, directly or indirectly, by such Person whether in the form of membership, general, special or limited partnership, or otherwise and (y) such Person or any wholly owned Subsidiary of such Person is a controlling general partner or otherwise controls such entity. "Super Majority Lenders" means, as of any date, at least six Lenders holding, in the aggregate, at least 66 2/3% of the aggregate outstanding Loans and available Commitments. If any one Lender holds more than 35%, then Super Majority Lenders shall include at least one Lender designated by the Administrative Agent as an additional Agent under Section 8.10. If the Administrative Agent holds less than 35% and another Lender holds more than 35%, the Administrative Agent may count as the required "additional Agent" for purposes of determining "Super Majority Lenders." -72- "Tax" means any federal, state, local or foreign tax assessment or other governmental charge or levy (including any withholding tax) upon a Person or upon its assets, revenues, income or profits. "Third Party Claims" has the meaning set forth in Section 11.12 hereof. "Transaction Documents" means each of the material documents as may exist from time to time with such changes thereto as are permitted by the terms of this Agreement. "Type" means with respect to Loans, any of the following, each of which shall be deemed to be a different "Type" of Loan: Prime Rate Loans, LIBO Rate Loans having a one-month Interest Period commencing on a specified date, LIBO Rate Loans having a two-month Interest Period commencing on a specified date, LIBO Rate Loans having a three-month Interest Period commencing on a specified date, and LIBO Rate Loans having a six-month Interest Period commencing on a specified date. "UCC" means the Uniform Commercial Code as adopted in the Commonwealth of Pennsylvania. "Unused Fee" has the meaning ascribed to such term in Section 1.9 hereof. "United States Person" has the meaning ascribed to such term in Section 1.13 hereof. "Withdrawal Liability" has the meaning given to such term in ss.4201 of ERISA. 10.2 Construction. In this Agreement and each other Loan Document, unless the context otherwise clearly requires, (a) references to the plural include the singular, the singular the plural and the part the whole; (b) "or" has the inclusive meaning represented by the phrase "and/or;" (c) the terms "property" and "assets" each include all properties and assets of any kind or nature, tangible or intangible, real, personal or mixed, now existing or hereafter acquired; (d) the words "hereof," "herein" and "hereunder" (and similar terms) in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document, as the case may be, as a whole and not to any particular provision of this Agreement or such other Loan Document; (e) the words "includes" and "including" (and similar terms) in this Agreement or any other Loan Document mean "includes, without limitation" and "including, without limitation," respectively whether or not stated; and (f) references to "determination" (and similar terms) by the Administrative Agent or any Lender include good faith estimates by the Administrative Agent or Lender (in the case of quantitative determinations) and -73- good faith beliefs by the Administrative Agent or Lender (in the case of qualitative determinations). No doctrine of construction of ambiguities in agreements or instruments against the interests of the party controlling the drafting thereof shall apply to this Agreement or any other Loan Document. The section and other headings contained in this Agreement and in each other Loan Document, and any tables of contents contained herein or therein, are for reference purposes only and shall not affect the construction or interpretation of this Agreement or such other Loan Document in any respect. Whenever this Agreement requires the delivery of financial projections, it is understood that the projections shall be made in good faith, consistent with the Loan Documents and based on NCO Group's reasonable judgment as to the anticipated financial performance and results of operations. However, any such financial projections shall not constitute a representation or warranty that such future financial performance or results of operations will in fact be achieved. 10.3 Accounting Principles. (a) As used herein, "GAAP" shall mean generally accepted accounting principles (other than as set forth herein as to consolidation) in the United States, applied on a basis consistent with the principles used in preparing the financial statements of NCO Group and its consolidated Subsidiaries as of December 31, 1998 and for the fiscal year then ended. When the word "consolidated" is used in this Agreement, it shall be used in a manner consistent with generally accepted accounting principles in the United States except that such principles relating to what entities shall be consolidated shall be superseded by any terms of this Agreement which designate what entities shall be consolidated for purposes relating hereto. (b) Except as otherwise provided in this Agreement, all computations and determinations as to accounting or financial matters shall be made, and all financial statements to be delivered pursuant to this Agreement shall be prepared, in accordance with GAAP and all accounting or financial terms shall have the meanings ascribed to such terms by GAAP; provided that if because of a change in GAAP after the date hereof Borrower would be required to alter a previously utilized accounting principle, method or policy in order to remain in compliance with GAAP, such determination shall continue to be made in accordance with Borrower's previous accounting principles, methods and policies unless otherwise agreed by the Administrative Agent (on behalf of the Lenders). ARTICLE XI MISCELLANEOUS 11.1 Notices. Unless otherwise expressly provided under this Agreement all notices, requests, demands, directions and other communications (collectively "notices") given to or made upon any party under the provisions of this Agreement (and unless otherwise specified, in each other Loan Document) shall be by telephone (immediately confirmed in writing) or in writing (including facsimile communication) and if in writing shall be delivered by hand, nationally recognized overnight courier or U.S. mail or sent by facsimile to the respective parties at the addresses and numbers set forth under their respective names on the signature pages of this Agreement or in accordance with -74- any subsequent unrevoked written direction from any party to the others. All notices shall, except as otherwise expressly provided in this Agreement, be effective (a) in the case of facsimile, when received, (b) in the case of hand-delivered notice, when hand delivered, (c) in the case of telephone, when telephoned, provided, however, that in order to be effective unless otherwise expressly provided, telephonic notices must be confirmed in writing no later than the next day by letter or facsimile, (d) if given by U.S. mail, the day after such communication is deposited in the mails with overnight first class postage prepaid, return receipt requested, and (e) if given by any other means (including by air courier), when delivered; provided, further, that notices to the Administrative Agent shall not be effective until received. Any Lender giving any notice to the Borrower shall simultaneously send a copy of such notice to the Administrative Agent, and the Administrative Agent shall promptly notify the other Lenders of the receipt by it of any such notice. Except as otherwise provided in this Agreement, in the event of a discrepancy between any telephonic or written notice, the written notice shall control. 11.2 Prior Understandings; Entire Agreement. This Agreement and the other Loan Documents supersede all prior and contemporaneous understandings and agreements, whether written or oral, among the parties hereto relating to the transactions provided for herein and therein except as expressly provided otherwise (e.g., certain fee agreements and fee arrangements with the Administrative Agent). This Agreement and the other Loan Documents represent the entire agreement between the parties to this Agreement with respect to the transactions contemplated hereby or thereby and, except as expressly provided herein or in the other Loan Documents, shall not be affected by reference to any other documents. 11.3 Severability. Every provision of this Agreement and each of the other Loan Documents is intended to be severable, and if any term or provision of this Agreement or any of the other Loan Documents shall be invalid, illegal or unenforceable for any reason, the validity, legality and enforceability of the remaining provisions shall not be affected or impaired thereby, and any invalidity, illegality or unenforceability in any jurisdiction shall not affect the validity, legality or enforceability of any such term or provision in any other jurisdiction. If any provision of this Agreement shall be held invalid or unenforceable in whole or in part in any jurisdiction, this Agreement shall, as to such jurisdiction, be deemed amended to modify or delete, as necessary, the offending provision or provisions and to alter the bounds thereof in order to render it or them valid and enforceable to the maximum extent permitted by applicable Law, without in any manner affecting the validity or enforceability of such provision or provisions in any other jurisdiction or the remaining provisions hereof in any jurisdiction. 11.4 Descriptive Headings. The descriptive headings of the several sections of this Agreement are inserted for convenience only and shall not affect the meaning or construction of any of the provisions of this Agreement. 11.5 Governing Law. This Agreement and the rights and obligations of the parties under this Agreement and under the other Loan Documents shall be construed in accordance with and shall be governed by the laws of the Commonwealth of Pennsylvania. 11.6 Non-Merger Of Remedies. The covenants and obligations of the Borrower and the rights and remedies of the Administrative Agent and other Lenders hereunder and under the other Loan Documents shall not merge with or be extinguished by the entry of a judgment hereunder or thereunder, and such -75- covenants, obligations, rights and remedies shall survive any entry of a judgment until payment in full of the Obligations and termination of the Commitment. All obligations under the Loan Documents shall continue to apply with respect to and during the collection of amounts due under the Loan Documents or the proof and allowability of any claim arising under this Agreement or any other Loan Document, whether in bankruptcy or receivership proceedings or otherwise, and in any workout, restructuring or in connection with the protection, preservation, exercise or enforcement of any of the terms of this Agreement or of any rights under this Agreement or under any other Loan Document or in connection with any foreclosure, collection or bankruptcy proceedings. Without limiting the generality of the foregoing, post-judgment interest rate shall be the interest rate provided in paragraph (d) of Section 1.8 (Default Rate) above. 11.7 No Implied Waiver; Cumulative Remedies. No course of dealing and no delay or failure of the Administrative Agent or any other Lender in exercising any right, power or privilege under this Agreement or any other Loan Document shall affect any other or future exercise thereof or exercise of any other right, power or privilege; nor shall any single or partial exercise of any such right, power or privilege or any abandonment or discontinuance of steps to enforce such a right, power or privilege preclude any further exercise thereof or of any other right, power or privilege. The rights and remedies of the Administrative Agent and the other Lenders under this Agreement and any other Loan Document are cumulative and not exclusive of any rights or remedies which the Administrative Agent or any other Lender would otherwise have hereunder or thereunder, at law, in equity or otherwise. Any waiver of a specific default made in accordance with Section 11.8 below shall be effective only as to such specific default and shall not apply to any subsequent default. 11.8 Amendments; Waivers. (a) Any term, covenant, agreement or condition of any Loan Document to which the Lenders (or the Administrative Agent) are party may be amended, and any right under the Loan Documents may be waived, if, but only if, such amendment or waiver is in writing and is signed by the Majority Lenders or, as to any term requiring the consent or approval of the Super Majority Lenders, by the Super Majority Lenders (or by the Administrative Agent at the direction of the Majority Lenders or Super Majority Lenders, as appropriate); provided, however, if the rights and duties of the Administrative Agent are affected thereby, such amendment or waiver must be executed by the Administrative Agent; and provided, always that no such amendment or waiver shall be effective unless in writing and signed by all Lenders, if it would (i) amend the definition of "Majority Lenders" or "Super Majority Lenders" or reduce the number of Lenders required for the approval of any matter hereunder; (ii) release any Obligor from its Obligations or modify the joint and several nature of the Obligors' Obligations; (iii) change the principal amount of the Loans; (iv) change the maturity of any Loan or the time of any scheduled principal payment of any Loan or any Reduction Date; -76- (v) decrease the rates of interest or amount of fees payable hereunder or extend the time for payment of interest or fees hereunder; (vi) release any Collateral, except in connection with a disposition of stock or assets permitted under this Agreement; or (vii) amend this Section 11.8. In addition, the Administrative Agent may, without the consent of any Person, release Borrower as a court of competent jurisdiction may direct. For purposes of determining whether "all Lenders", "Super Majority Lenders", "the Majority Lenders" or "any Lender" has consented to any amendment or waiver, no effect shall be given to the determination of any Lender who has lost its right to vote pursuant to Sections 1.3(c) or 1.6(e). Further, the Administrative Agent and the Lenders may amend or modify the provisions of Article 8 hereof (except for Section 8.9 (Successor Administrative Agent) and Article 11 hereof) without the need for any consent or approval from the Borrower, it being acknowledged that the Borrower is not a third party beneficiary of the provisions of said Article 9 (except for Section 9.9 (Successor Administrative Agent)) and (y) without the consent of any Lenders, the Administrative Agent may enter into amendments and modifications to this Agreement and the other Loan Documents as necessary or desirable to cure any ambiguities herein or therein or to add additional Obligors or add collateral. 11.9 Successors And Assigns (a) Assignments by the Borrower. Without the prior written consent of all of the Lenders, no Obligor may assign any of its rights or delegate any of its duties or obligations under this Agreement or any other Loan Document. (b) Participations. Any Lender may sell participations to one or more Eligible Institutions of all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment); provided, however, that, with respect to any Lender, (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties to this Agreement for the performance of such obligations, (iii) all amounts payable by the Borrower under this Agreement shall be determined as if such transferor Lender had not sold such participation and no participant shall be entitled to receive any greater amount pursuant to this Agreement than the transferor Lender would have been entitled to receive in respect of the amount of the participation transferred by such transferor Lender to such participant had no such transfer occurred, (iv) such participant shall agree to be bound by the provisions of this Agreement and the other Loan Documents, and (v) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such transferor Lender in connection with such Lender's rights and obligations under this Agreement, and such Lender shall retain the sole rights and responsibility vis-a-vis the Borrower to enforce the obligations of the Borrower relating to the Loans including the right to approve any amendment, modification or waiver of any provision of this Agreement (except that such -77- Lender may give its participants the right to direct such Lender to approve or disapprove any amendment, modification or waiver which would require such Lender's consent under clause (a) (b), (c), of the preceding Section 11.8). (c) Assignments by Lenders. Each Lender may assign to one or more Eligible Institutions all or a portion of its interest, rights and obligations under this Agreement (including all or a portion of its Commitment) and the other Loan Documents; provided, however, that with respect to any assignment, (i) the aggregate principal amount of the interest, rights and obligations so assigned to any assignee may not be less than $5,000,000; (ii) unless the assignee is (prior to the effective time of the assignment) an existing Lender or an Affiliate of an existing Lender, the Administrative Agent and, if no Event of Default has occurred and is continuing, NCO Group must give its prior written consent to such assignment (which consent shall not be unreasonably withheld), and (iii) the parties to each such assignment shall execute and deliver to the Administrative Agent and, unless an Event of Default has occurred and is continuing, NCO Group, for their acceptance, an Assignment and Acceptance Agreement in substantially the form attached hereto as Exhibit L (an "Assignment and Acceptance Agreement"), together with (A) any Note subject to such assignment, and (B) a processing and recordation fee of $3,500.00. If the assignee is not incorporated under the laws of the United States of America or a state thereof, it shall, prior to the first date on which interest or fees are payable hereunder for its account, deliver to NCO Group and the Administrative Agent certification as to exemption from deduction or withholding of any United States federal income taxes. (d) Procedures Respecting Assignment. Upon their receipt of an Assignment and Acceptance executed by the assignor and the assignee, subject to the conditions set forth in the preceding paragraph (c), the Administrative Agent and (unless an Event of Default shall have occurred and be continuing) NCO Group shall accept such Assignment and Acceptance. Within thirty (30) days after such Assignment and Acceptance is signed and accepted by all parties and made effective, the Borrower, at its own expense, shall execute and deliver to the Administrative Agent new Notes in exchange for the surrendered Notes, each to the order of such assignee in an amount equal to its portion of the Commitment and Loans, assigned to it pursuant to such Assignment and Acceptance and new Notes to the order of the assigning Lender in an amount equal to the Commitment and Loans retained by it. Such Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Notes, shall be dated the date of such surrendered Notes (each assignee shall confirm in the Assignment and Acceptance that, notwithstanding the date of the new Notes made in favor of such assignee, such assignee shall have no right to, or interest in, any fees or interest which shall have accrued on the Loans prior to the effective date of the Assignment and Acceptance). Cancelled or replaced Notes shall be returned to the Borrower upon the execution of such new Notes. (e) Assignments to Federal Reserve Bank. Notwithstanding any of the terms of this Section 11.9, without the consent of the Administrative Agent and the Borrower, any Lender may assign all or any portion of its rights to payments in connection with this Agreement to a Federal Reserve Bank as collateral in accordance with Regulation A of the Board of Governors of the Federal Reserve System. Such assignment shall not affect any other rights or any obligations of the assigning Lender -78- 11.10 Counterparts; Photocopied Or Telecopied Signature Pages. Any Loan Document may be executed in one or more counterparts, each of which shall constitute an original, but all of which together shall constitute one and the same instrument. Delivery of a photocopy or telecopy of an executed counterpart of a signature page to any Loan Document shall be as effective as delivery of a manually executed counterpart of such Loan Document. 11.11 Maximum Lawful Interest Rate. Notwithstanding any provision contained in this Agreement or the Notes or any other Loan Document, the total liability of the Borrower for payment of interest pursuant to this Agreement and the Notes shall not exceed the maximum amount of such interest permitted by Law to be charged, collected, or received from the Borrower, and if any payment by the Borrower includes interest in excess of such a maximum amount, each Lender shall apply such excess to the reduction of the unpaid principal amount due pursuant to this Agreement and the Notes, or if none is due, to the other Obligations, if any, and then such excess shall be refunded to NCO Group. 11.12 Indemnification. (a) Whether or not any fundings are made under this Agreement, the Borrower shall unconditionally upon demand, pay or reimburse the Administrative Agent and Lenders for, and indemnify and save the Administrative Agent, the Lenders and their respective Affiliates, officers, directors, employees, agents, attorneys, shareholders and consultants (collectively, "Indemnitees") harmless from and against, any and all losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature whatsoever (including the reasonable fees and disbursements of counsel for such Indemnitee in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not such Indemnitee shall be designated a party thereto) that may at any time be imposed on, asserted against or incurred by such Indemnitee as a result of, or arising out of, or in any way related to or by reason of, this Agreement or any other Loan Document, any acquisition or transaction from time to time contemplated hereby or by any other Loan Document, or any transaction actually or proposed to be financed in whole or in part or directly or indirectly with the proceeds of any Loan, any transaction contemplated by the Transaction Documents but excluding any such losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements that the Borrower proves were the result solely of the gross negligence or willful misconduct of such Indemnitee(s), as finally determined by a court of competent jurisdiction. If and to the extent that the foregoing obligations of the Borrower under this paragraph (a), or any other indemnification obligation of the Borrower hereunder or under any other Loan Document are unenforceable for any reason, the Borrower hereby agrees to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under applicable Law. (b) Without limiting the generality of the foregoing, the Borrower hereby indemnifies and agrees to defend and hold harmless each Indemnitee, from and against any and all claims, actions, causes of action, liabilities, penalties, fines, damages, judgments, losses, suits, expenses, legal or administrative proceedings, interest, costs and expenses (including court costs and reasonable attorneys', consultants' and experts' fees) arising out of or in any way relating to: (i) the use, handling, management, production, treatment, processing, storage, transfer, transportation, disposal, release or threat of release of any Environmental Concern Material by or on behalf of, any -79- Obligor or any of its Environmental Affiliates; (ii) the presence of Environmental Concern Materials on, about, beneath or arising from any premises owned or occupied by Borrower or any of its Environmental Affiliates (herein collectively, the "Premises"); (iii) the failure of Borrower or Environmental Affiliate of Borrower or any occupant of any Premises to comply with the Environmental Laws; (iv) any Obligor's breach of any of the representations, warranties and covenants contained herein or in any Loan Documents; (v) Regulatory Actions (as hereinafter defined) and Third Party Claims (as hereinafter defined); or (vi) the imposition or recording of a Lien against any Premises in connection with any release at, on or from any Premises or any activities undertaken on or occurring at any Premises, or arising from such Premises or pursuant to any Environmental Law. The Borrower's indemnity and defense obligations under this section shall include, whether foreseeable or unforeseeable, any and all costs related to any remedial action. "Regulatory Action" means any notice of violation, citation, complaint, request for information, order, directive, compliance schedule, notice of claim, consent decree, action, litigation or proceeding brought or instituted by any governmental authority under or in connection with any Environmental Law involving any Obligor or any occupant of any of the Premises or involving any of the Premises or any activities undertaken on or occurring at any Premises. "Third Party Claims" means claims by a party (other than a party to this Agreement and other than Regulatory Actions) based on negligence, trespass, strict liability, nuisance, toxic tort or detriment to human health or welfare due to Environmental Concern Materials on, about, beneath or arising from any Premises or in any way related to any alleged violation of any Environmental Laws or any activities undertaken on or occurring at any Premises. (c) The indemnities contained herein shall survive repayment of the Obligations, termination of the Commitment and satisfaction, release, and discharge of the Loan Documents, whether through full payment of the Loans, foreclosure, deed in lieu of foreclosure or otherwise. (d) The foregoing amounts are in addition to any other amounts which may be due and payable to the Administrative Agent and/or the Lenders under this Agreement. A certification by the Administrative Agent or a Lender hereunder of the amount of liabilities, losses, costs, expenses, claims and/or charges shall be conclusive, absent manifest error. 11.13 Expenses. Whether or not there shall be any funding hereunder, the Borrower agrees to pay promptly or cause to be paid promptly and to hold harmless (i) the Administrative Agent (and after an Event of Default, and for the period in which the same shall continue, each Lender) against liability for the payment of all reasonable out-of-pocket costs and expenses (including but not limited to reasonable fees and expenses of counsel, including local counsel, auditors, consulting engineers, appraisers, and all other professional, accounting, evaluation and consulting costs) incurred by it from time to time arising from or relating to (1) the negotiation, preparation, execution and delivery of this Agreement and the other Loan Documents, (2) the syndication of the credit facilities this Agreement establishes, (3)the administration and performance of this Agreement and the other Loan Documents, and (4) any requested amendments, modifications, supplements, waivers or -80- consents (whether or not ultimately entered into or granted) to this Agreement or any other Loan Document; (ii) the Administrative Agent (and, with respect to clause (2) of this paragraph (ii) after an Event of Default, and for the period in which the same shall continue, each Lender) against liability for the payment of all reasonable out-of-pocket costs and expenses (including but not limited to reasonable fees and expenses of counsel, including local counsel, auditors, consulting engineers, appraisers, and all other professional, accounting, evaluation and consulting costs) incurred by it from time to time arising from or relating to the enforcement or preservation of rights under, or administration of, or syndication of, this Agreement or any other Loan Document (including but not limited to any such costs or expenses arising from or relating to (1) collection or enforcement of an outstanding Loan, Obligation, and (2) any litigation, proceeding, dispute, work-out, restructuring or rescheduling related in any way to this Agreement or the other Loan Documents); and (iii) each Lender against liability for all stamp, document, transfer, recording, filing, registration, search, sales and excise fees and taxes and all similar impositions now or hereafter determined by any Lender to be payable in connection with this Agreement or any other Loan Documents. 11.14 Maximum Amount Of Joint And Several Liability. To the extent that applicable Law otherwise would render the full amount of the joint and several obligations of any Subsidiary of NCO Group under the Loan Documents invalid or unenforceable, such Obligors' obligations hereunder and under the other Loan Documents shall be limited to the maximum amount which does not result in such invalidity or unenforceability, provided, however, that each Obligor's obligations under the Loan Documents shall be presumptively valid and enforceable to their fullest extent in accordance with the terms hereof or thereof, as if this Section 11.14 were not a part of this Agreement. 11.15 Authorization Of NCO Group By Other Obligors. (a) Each of the Obligors has irrevocably authorized NCO Group to give notices, make requests, make payments, receive payments and notices, give receipts and execute agreements, make agreements or take any other action whatever on behalf of all Obligors under and with respect to any Loan Document and each Obligor has agreed to be bound thereby. This authorization has been coupled with an interest and shall be irrevocable, and the Administrative Agent and each Lender may rely on any notice, request, information supplied by NCO Group and every document executed by NCO Group, agreement made by NCO Group or other action taken by NCO Group in respect of the Obligors or any thereof as if the same were supplied, made or taken by any or all Obligors. Without limiting the generality of the foregoing, the failure of one or more Obligor to join in the execution of any writing in connection herewith shall not, unless the context clearly requires, relieve any such Obligor from obligations in respect of such writing. (b) The Borrower acknowledges that the credit provided hereunder is on terms more favorable than any Obligor acting alone would receive and that each Obligor benefits indirectly from all Loans and Letters of Credit hereunder. Borrower and, subject only to the terms of the preceding paragraph (a), each Guarantor, in accordance with the terms of its respective Subsidiary -81- Guaranty, shall be liable for all Obligations, regardless of, inter alia, which Obligor benefitted from the proceeds of a particular Loan. 11.16 Certain Waivers By Borrower. Borrower hereby waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Obligations and any requirement that any Lender exhaust any right or take any action against any Obligor or any other Person or any collateral or other direct or indirect security for any of the Obligations. Without limiting the generality of the foregoing, Borrower acknowledges and agrees that the Administrative Agent or other Lender may commence an action against any Obligor whether or not any action is brought against any other Obligor or against any collateral and it shall be no defense to any action brought against any Obligor that the Lenders have failed to bring an action against any other Obligor or any Collateral. 11.17 Set-Off. The Borrower hereby agrees that, to the fullest extent permitted by Law, if any Loan shall be due and payable (by acceleration or otherwise), each Lender shall have the right, without notice to any Obligor, to set-off against and to appropriate and apply to such Loan any indebtedness, liability or obligation of any nature owing to any Obligor by such Lender, including but not limited to all deposits now or hereafter maintained by any Obligor with such Lender but not including any escrow account maintained by any Obligor. Such right shall exist whether or not such Lender or any other Person shall have given notice or made any demand to any Obligor or any other Person. The Borrower hereby agrees that, to the fullest extent permitted by Law, any participant and any Affiliate of any Lender or any participant shall have the same rights of set-off as a Lender as provided in this Section 11.17. The rights provided by this Section 11.17 are in addition to all other rights of set-off and banker's lien and all other rights and remedies which any Lender (or any such participant, or Affiliate) may otherwise have under this Agreement, any other Loan Document, at law or in equity, or otherwise. 11.18 Sharing Of Collections. The Lenders hereby agree among themselves that if any Lender shall receive (by voluntary payment, realization upon security, charging of accounts, set-off or from any other source) any amount on account of the Obligations in greater proportion than any such amount received by any other Lender (based on the relative amount of each such Lender's interest in the Obligations), then the Lender receiving such proportionately greater payment shall notify each other Lender and the Administrative Agent of such receipt, and equitable adjustment will be made in the manner stated in this Section 11.18 so that, in effect, all such excess amounts will be shared ratably among all of the Lenders. The Lender receiving such excess amount shall purchase (which it shall be deemed to have done simultaneously upon the receipt of such excess amount) for cash from the other Lenders a participation in the applicable Obligations owed to such other Lenders in such amount as shall result in a ratable sharing by all Lenders of such excess amount (and to such extent the receiving Lender shall be a participant). If all or any portion of such excess amount is thereafter recovered from the Lender making such purchase, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, together with interest or other amounts, if any, required by Law to be paid by the Lender making such purchase. The Borrower hereby consents to and confirms the foregoing arrangements. Each participant shall be bound by this Section 11.18 as fully as if it were a Lender hereunder. -82- 11.19 Other Loan Documents. Each Lender acknowledges that on signing this Agreement it is bound by the terms of the Loan Documents. 11.20 Certain Borrower Acknowledgements. Each Borrower hereby acknowledges that neither the Administrative Agent nor any other Lender has any fiduciary relationship with, or any fiduciary duty to any Borrower arising out of or in connection with this Agreement or any of the other Loan Documents and the relationship between the Administrative Agent and the other Lenders, on the one hand, and the Borrower, on the other hand, in connection herewith or therewith is solely that of debtor and creditor. 11.21 Consent To Jurisdiction, Service And Venue; Waiver Of Jury Trial; Damages. (a) Consent to Jurisdiction, Service and Venue. For the purpose of enforcing payment and performance of the Loan Documents, including, any payment under the Notes and performance of other obligations under the Loan Documents, or in any other matter relating to, or arising out of, the Loan Documents, Borrower hereby consents to the jurisdiction and venue of the courts of the Commonwealth of Pennsylvania or of any federal court located in such state, waives personal service of any and all process upon it and consents that all such service of process be made by certified or registered mail directed to NCO Group at the address provided for in Section 11.1 and service so made shall be deemed to be completed upon actual receipt or execution of a receipt by any Person at such address. Borrower hereby waives the right to contest the jurisdiction and venue of the courts located in the Commonwealth of Pennsylvania on the ground of inconvenience or otherwise and, further, waives any right to bring any action or proceeding against (a) the Administrative Agent in any court outside the Commonwealth of Pennsylvania, or (b) any other Lender other than in a state within the United States designated by such Lender. The provisions of this Section 11.21 shall not limit or otherwise affect the right of the Administrative Agent or any other Lender to institute and conduct an action in any other appropriate manner, jurisdiction or court. (b) WAIVER OF JURY TRIAL; DAMAGES. NEITHER ANY LENDER NOR BORROWER, NOR ANY ASSIGNEE, SUCCESSOR, HEIR OR PERSONAL REPRESENTATIVE OF THE FOREGOING SHALL SEEK A JURY TRIAL IN ANY PROCEEDING BASED UPON OR ARISING OUT OF THIS AGREEMENT, OR ANY OTHER LOAN DOCUMENT, OR INVOLVING ANY COLLATERAL OR ANY GUARANTY RELATING TO THE INDEBTEDNESS HEREUNDER OR THE RELATIONSHIP BETWEEN OR AMONG SUCH PERSONS OR ANY OF THEM. NO SUCH PERSON WILL SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. EXCEPT AS PROHIBITED BY LAW, EACH PARTY TO THIS AGREEMENT WAIVES ANY RIGHTS IT MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION REFERRED TO IN THIS SECTION 11.21 ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. EACH PARTY TO THIS AGREEMENT (I) CERTIFIES THAT NEITHER THE ADMINISTRATIVE AGENT NOR ANY LENDER NOR ANY REPRESENTATIVE, OR ATTORNEY OF THE ADMINISTRATIVE AGENT OR ANY LENDER HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE ADMINISTRATIVE AGENT OR SUCH LENDER WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (II) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS -83- AGREEMENT AND EACH OTHER LOAN DOCUMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS PARAGRAPH (B) OF SECTION 11.21. THE PROVISIONS OF THIS SECTION 11.21 HAVE BEEN FULLY DISCLOSED TO THE PARTIES AND THE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. NO PARTY HAS IN ANY WAY AGREED WITH OR REPRESENTED TO ANY OTHER PARTY THAT THE PROVISIONS OF THIS SECTION 11.21 WILL NOT BE FULLY ENFORCED IN ALL INSTANCES. 11.22 Most Favored Borrower. Notwithstanding anything in this Agreement to the contrary, Borrower is required to pay taxes, charges and other amounts to Lender(s) and/or Administrative Agent under Sections 1.13, 2.2, 2.3 and 2.4 only if, and to the extent, such Lender(s) and/or Administrative Agent charge similarly situated customers similar amounts under similar circumstances. [Remainder of Page Intentionally Left Blank] -84- IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly authorized, have executed and delivered this Agreement as of the date first above written. NCO GROUP, INC. By_________________________________ MICHAEL J. BARRIST, as President and Chief Executive Officer [Corporate Seal] Address for Notices to Borrower: -------------------------------- c/o NCO Group, Inc. 515 Pennsylvania Avenue Fort Washington, PA 19034 Attn: MICHAEL J. BARRIST Telephone: (215) 793-2101 Facsimile: (215) 793-2908 with copies to: BLANK ROME COMISKY & McCAULEY LLP One Logan Square, 10th Floor Philadelphia, PA 19103 Attn: Joel C. Shapiro, Esq. Telephone: (215) 569-5476 Facsimile: (215) 569-5555 [Signature Page to Fifth Amended & Restated Credit Agreement] -85- EX-10.25 3 EXHIBIT 10.25 EMPLOYMENT AGREEMENT THIS AGREEMENT, made this 31st day of March 1999, by and between NCO Group, Inc., a Pennsylvania corporation, (hereinafter called "Company"), and David E. D'Anna, an individual (hereinafter called "Employee"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Employee's present employer, JDR Holdings, Inc. ("JDR"), is being acquired by and merged with a wholly owned subsidiary of Company (the "Merger"); WHEREAS, Company wishes to continue to employ Employee and Employee wishes to continue in the employ of Company on the terms and conditions contained in this Agreement. NOW, THEREFORE, subject to the closing of the aforementioned acquisition and merger, and in consideration of the facts, mutual promises and covenants contained herein, intending to be legally bound hereby, Company and Employee agree as follows: 1. Definitions. As used herein, the following terms shall have the meanings set forth below unless the context otherwise requires. "Affiliate" shall mean a person who with respect to any entity, directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such entity; "Annual Bonus" shall mean the bonus payments set forth in Section 5(b), as such amount may be adjusted from time to time. "Base Compensation" shall mean the annual rate of compensation set forth in Section 5(a), as such amount may be adjusted from time to time. "Board" shall mean the Board of Directors of Company. "Business" shall mean the business conducted by Company or JDR in the past and on the date of execution of this Agreement, including without limitation any business in the debt collection, telemarketing, outsourcing and teleservices industries, and including business activities in developmental stages, business activities which may be developed by Company, or any Subsidiary or corporate parent thereof or entity sharing a common corporate parent with Company, during the period of Employee's employment by Company, and all other business activities which flow from a reasonable expansion of any of the foregoing, including any -1- business engaged in by Company subsequent to the execution of this Agreement in which Employee participates. "Cause" shall mean any one or more of the following: (a) if Employee is convicted of a felony involving fraud, theft or embezzlement or has entered a plea of nolo contendere (or similar plea) to a charge of such an offense; or (b) if Employee commits any act of fraud or deliberate misappropriation relating to or involving Company; or (c) if Employee commits a material breach of this Agreement. "Commencement Date" shall have the meaning specified in Section 4 hereof. "Confidential Information" shall have the meaning specified in Section 14(c) hereof. "Disability" shall mean Employee's inability, for a period of 150 consecutive days, or more than 240 days in the aggregate over a consecutive period of eighteen months, to perform the essential duties of Employee's position, with or without any reasonable accommodation required by law, due to a mental or physical impairment which substantially limits one or more major life activities. "Restricted Area" shall have the meaning specified in Section 14(a) hereof. "Restricted Period" shall mean: (a) For purposes of Section 14(a)(A), from the date hereof until one (1) year after Employee's employment with Company is either terminated by Employee or by Company for Cause, or for the remaining term of this Agreement if Employee's employment with Company is terminated by Company without Cause; (b) For purposes of Section 14(a)(B), from the date hereof until five (5) years after Employee's employment is either terminated by Employee or by Company for Cause, or for five (5) years after the remaining term of this Agreement if Employee's employment with Company is terminated by Company without Cause; -2- "Subsidiary" shall mean any corporation in which Company owns directly or indirectly 50% or more of the Voting Stock or 50% or more of the equity; or any other venture in which it owns either 50% or more of the voting rights or 50% or more of the equity. "Term of Employment" shall mean the period specified in Section 4 hereof as the same may be modified in accordance with this Agreement. 2. Employment. Company hereby employs Employee and Employee hereby accepts employment by Company for the period and upon the terms and conditions specified in this Agreement. 3. Office and Duties. (a) Employee initially shall serve as Executive Vice President of Company and Divisional Chief Executive Officer of Company's Technology Based Outsourcing Division (the "Division"). In such capacity, Employee shall render such services as are necessary and desirable to protect and advance the best interests of Company, acting, in all instances, under the supervision of and in accordance with the policies set by the Board. Employee will be responsible for and provide senior management services relating to the debt collection and professional financial services and related marketing of the services of Company and ongoing senior management services relating to all aspects of Company's general administration. In addition, Employee will render such other executive services and perform such other executive duties for Company and its direct and indirect wholly owned Subsidiaries thereof (collectively, with Company, the "NCO Group") as the Boards of Directors of the members of the NCO Group may from time to time reasonably request of Employee. Employee may, in addition, hold such offices with the NCO Group which may from time to time be offered to Employee. Employee's authority shall be subject at all times to the direction and control of the Chief Executive Officer of Company and the Boards of Directors of Company and the other members of the NCO Group and to the Boards' discretion to determine the policies of the NCO Group. (b) For as long as Employee shall remain an employee of Company, Employee's entire working time, energy, skill and best efforts shall be devoted to the performance of Employee's duties hereunder in a manner which will faithfully and diligently further the business and interests of Company. Employee may engage in charitable, civic, fraternal, trade and professional association activities that do not interfere with Employee's obligations to Company, but Employee shall not be employed by any other for-profit business without prior written consent of Board, which shall not be unreasonably withheld. (c) Employee's services will be conducted at Company's headquarters in Ramsey, New Jersey and at such other places as Employee's duties may require; provided however, that Employee shall not be required by Company to relocate his principal residence without his consent, and shall not be required to perform services in any location that is greater -3- than fifty (50) miles from his principal residence, except in the course of normal daily business travel. 4. Term. Employee shall be employed by Company for an initial Term of Employment (the "Initial Term"), commencing on the effective date of the Merger (the "Commencement Date"), and ending on March 31, 2002, unless sooner terminated as hereinafter provided. Unless either party elects to terminate this Agreement at the end of the Initial Term by giving the other party written notice of such election at least one hundred eighty (180) days before the expiration of the Initial Term, the Term of Employment shall be deemed to have been extended for an additional term of one (1) year (the "Additional Term") commencing on the day after the expiration of the Initial Term. At any time during the Additional Term, either party may terminate this Agreement by giving the other party written notice of such election at least sixty (60) days prior to such termination. 5. Compensation and Benefits. (a) For all of the service rendered by Employee to Company, Employee shall receive Base Compensation at the gross annual rate of Three Hundred Sixty- Seven Thousand Five Hundred Dollars ($367,500.00) payable in installments in accordance with Company's regular payroll practices in effect from time to time. The amount of Base Compensation payable hereunder shall be adjusted no later than June 30 of each year during the Term of Employment, effective as of June 1 of each year, by an increase of at least five (5) percent, and may be further increased by such other amounts as may be determined in the discretion of the Board. (b) In addition to the foregoing compensation, if the outsourcing business of the Division records an increase in gross revenues in any year over the immediately prior year's gross revenues, then Employee shall be entitled to receive an annual bonus (the "Annual Bonus") in the amount of One Hundred Fifty Thousand Dollars ($150,000.00). If such increase in gross revenues exceeds the immediately prior year's gross revenues by more than 20%, then the Annual Bonus shall be increased by an amount equal to the product obtained by multiplying Fifteen Thousand Dollars ($15,000.00) by the lesser of (x) 10 or (y) the amount by which such percentage increase in gross revenues exceeds 20%. For example, if the Division's outsourcing business annual gross revenues for 1998 were $1,000,000, and the applicable annual gross revenues for 1999 are $1,250,000 (i.e., an increase in annual gross revenue of 25%), then the Annual Bonus of $150,000 would be increased by $75,000 to a total of $225,000. It should be noted that in no event would the total Annual Bonus as calculated above exceed Three Hundred Thousand Dollars ($300,000.00). If the increase in applicable gross revenues exceeds 30%, any further additional bonus shall be at the discretion of Company. For purposes of determining gross revenues, such revenues must be of a quality consistent with the Division's past practice and the applicable business plan. In addition, the Annual Bonus formula set forth above shall be subject to adjustment for any extraordinary events, including, without limitation, shifts in business between divisions, as well as acquisitions and divestitures within the Division. -4- For the year ending December 31, 1999, a 20% increase in the immediately prior year's gross revenues would be attained if the applicable gross revenues for the year ended December 31, 1999 equal $44,877,600. 6. Fringe Benefits. As an inducement to Employee to commence employment hereunder, and in consideration of Employee's covenants under this Agreement, Employee shall be entitled to the benefits set forth below (the "Fringe Benefits") during the Term of Employment: (a) Employee shall be eligible to participate in any health, life, accident or disability insurance, sick leave or other benefit plans or programs made available to other similarly situated employees of Company as long as they are kept in force by Company and provided that Employee meets the eligibility requirements and other terms, conditions and restrictions of the respective plans and programs. (b) Employee shall be entitled to paid vacation and personal days during each year, subject to Company's generally applicable policies. All vacation and personal days must be used within the year in which available and may not be carried over into subsequent years. Employee shall give oral or written prior to the commencement of any vacation in excess of five (5) business days. (c) Company will reimburse Employee for all reasonable expenses incurred by Employee in connection with the performance of Employee's duties hereunder upon receipt of documentation therefor in accordance with Company's regular reimbursement procedures and practices in effect from time to time. Payment to Employee will be made upon presentation of expense vouchers in such detail as Company may from time to time require. (d) Company shall provide Employee one Company leased automobile which shall of comparable value to that presently provided to Employee, shall provide automobile insurance on that Company leased automobile, shall provide a cellular telephone and shall maintain Employee's reserved parking space at the Ramsey, New Jersey office. 7. Disability. If Employee suffers a Disability, Company may terminate Employee's employment relationship with Company at any time thereafter by giving Employee ten (10) days written notice of termination. Thereafter, Company shall have no obligation to Employee for Base Compensation, Annual Bonus, Fringe Benefits or any other form of compensation or benefit to Employee, except as otherwise required by law or by benefit plans provided at Company expense, other than (a) amounts of Base Compensation accrued through the date of termination, (b) a pro rata portion of the Annual Bonus to the date of termination of employment, to the extent payable hereunder, and (c) reimbursement of appropriately documented expenses incurred by Employee before the termination of employment, to the extent that Employee would have been entitled to such reimbursement but for the termination of employment. -5- 8. Death. If Employee dies during the Term of Employment, the Term of Employment and Employee's employment with Company shall terminate as of the date of Employee's death. Company shall have no obligation to Employee or Employee's estate for Base Compensation, Annual Bonus, Fringe Benefits or any other form of compensation or benefit, except as otherwise required by law or by benefit plans provided at Company expense, other than (a) amounts of Base Compensation that have accrued through the date of Employee's death, (b) a pro rata portion of the Annual Bonus to the date of Employee's death, to the extent payable hereunder, and (c) reimbursement of appropriately documented expenses incurred by Employee before Employee's death, to the extent that Employee would have been entitled to such reimbursement but for his death. 9. Termination for Cause. Company may terminate Employee's employment relationship with Company at any time for Cause. Upon termination of Employee under this Section 9, Company shall have no obligation to Employee for Base Compensation, Annual Bonus, Fringe Benefits or other form of compensation or benefits other than (a) amounts of Base Compensation accrued through the date of termination, and (b) reimbursement of appropriately documented expenses incurred by Employee before the termination of employment, to the extent that Employee would have been entitled to such reimbursement but for the termination of employment. 10. Termination without Cause. Company may terminate Employee's employment relationship with Company at any time without Cause. Notwithstanding termination of Employee' employment under this Section 10, Employee shall continue to be eligible to receive and Company shall continue to pay Employee's Base Compensation in accordance with standard payroll practices, a prorated portion of the Annual Bonus and all other compensation and benefits as such amounts would have accrued through the end of the Initial Term or, if such termination occurs during the Additional Term, through the end of the Additional Term. 11. Termination by Employee. Employee may terminate his employment at any time upon at least 30 days' prior written notice to Company. If Employee terminates his employment, Company shall have no obligation to Employee for Base Compensation, Annual Bonus, Fringe Benefits or other form of compensation or benefits other than (a) amounts of Base Compensation accrued through the date of termination, and (b) reimbursement of appropriately documented expenses incurred by Employee before the termination of employment, to the extent that Employee would have been entitled to such reimbursement but for the termination of employment. 12. Consideration. Employee agrees and acknowledges that Employee is agreeing to be bound by the terms of this Agreement, including without limitation the provisions of Sections 13 and 14, in consideration of Company's agreement to pay in full all amounts due as Base Compensation and other amounts due after Employee's termination without Cause in accordance with Section 10 of this Agreement; and Employee further agrees and acknowledges -6- that the benefits described above constitute full, complete and adequate consideration for Employee's obligations hereunder. 13. Company Property. All advertising, sales, manufacturers' and other materials or articles or information, including without limitation data processing reports, computer programs, software, customer information and records, business records, price lists or information, samples, or any other materials or data of any kind furnished to Employee by Company or developed by Employee on behalf of Company or at Company's direction or for Company's use or otherwise in connection with Employee's employment hereunder, are and shall remain the sole property of Company, including in each case all copies thereof in any medium, including computer tapes and other forms of information storage. If Company requests the return of such materials at any time during or at or after the termination of Employee's employment, Employee shall deliver all copies of the same to Company immediately. Notwithstanding the foregoing, Employee may retain records relevant to the filing of Employee's personal income taxes and Company shall grant Employee reasonable access during normal business hours, to business records of Company relevant to the discharge of Employee's duties as an officer of Company or any other legitimate non-competitive business purpose. 14. Noncompetition, Trade Secrets, Etc. Employee hereby acknowledges that, during and solely as a result of his employment by Company, Employee will have access to confidential information and business and professional contacts. In consideration of such special and unique opportunities afforded by Company to Employee as a result of Employee's employment and the other benefits referred to in Section 12 of this Agreement, Employee hereby agrees as follows: (a) For the duration of the Restricted Period, Employee shall not directly or indirectly (A) engage in (as a principal, shareholder, partner, director, officer, agent, employee, consultant or otherwise) or be financially interested in any business operating within the United States (the "Restricted Area"), which is involved in or any other business activities which are the same as, similar to or in competition with the Business, or with any business activities carried on by Company, or being definitely planned by Company, at the time of the termination of Employee's employment; provided however, that nothing contained in this Section 14 shall prevent Employee from holding for investment no more than five percent (5%) of any class of equity securities of a company whose securities are publicly traded on a national securities exchange or in a national market system; or (B) induce or attempt to influence any employee, customer, independent contractor or supplier of Company to terminate employment or any other relationship with Company. (b) During the Term of Employment, Employee shall not, directly or indirectly, disclose or otherwise communicate to any of the clients, customers or accounts of Company, its Affiliates or any Subsidiary thereof that he is considering terminating, or has decided to terminate, employment with Company. Following the termination of Employee's employment, Company shall have sole discretion to determine who may notify the clients, -7- customers or accounts of Company of the termination of Employee's employment, and the form, substance and timing of such notification; provided, however, that Company shall not disseminate any notice of Employee's termination for any reason other than Cause which is unfavorable to Employee's professional or personal reputation or career. Company shall inform Employee of the identity of all persons or entities to be so notified and provide to Employee a copy of any written notice to such persons or entities at least ten business days prior to its dissemination to allow Employee to object to or otherwise challenge the content of the written notice and/or its dissemination. (c) Employee shall not use for Employee's personal benefit, or disclose, communicate or divulge to, or use for the direct or indirect benefit of any person, firm, association or company other than Company, any "Confidential Information" which term shall mean any information regarding the business methods, business policies, policies, procedures, techniques, research or development projects or results, historical or projected financial information, budgets, trade secrets, or other knowledge or processes of or developed by Company or any names and addresses of customers or clients or any data on or relating to past, present or prospective Company customers or clients or any other confidential information relating to or dealing with the business operations or activities of Company, made known to Employee or learned or acquired by Employee while in the employ of Company, but Confidential Information shall not include information otherwise lawfully known generally by or readily accessible to the trade or the general public. All memoranda, notes, lists, records, files, documents and other papers and other like items (and all copies, extracts and summaries thereof) made or compiled by Employee or made available to Employee concerning the business of Company shall be Company's property and shall be delivered to Company promptly upon the termination of Employee's employment with Company or at any other time on request. The foregoing provisions of this Subsection 14(c) shall apply during and after the period when Employee is an employee of Company and shall be in addition to (and not a limitation of) any legally applicable protections of Company's interest in confidential information, trade secrets and the like. At the termination of Employee's employment with Company, Employee shall return to Company all copies of Confidential Information in any medium, including computer tapes and other forms of data storage. Notwithstanding the foregoing, Employee may retain records relevant to the filing of Employee's personal income taxes and Company shall grant Employee reasonable access during normal business hours, to business records of Company relevant to Employee's discharge of Employee's duties as an officer of Company or other legitimate non-competitive business purpose. (d) Any and all writings, inventions, improvements, processes, procedures and/or techniques which Employee may make, conceive, discover or develop, either solely or jointly with any other person or persons, at any time when Employee is an employee of Company, whether or not during working hours and whether or not at the request or upon the suggestion of Company, which relate to or are useful in connection with the Business or with any business now or hereafter during the time of Employee's employment hereunder carried on or known by Employee to be contemplated by Company, including developments or expansions of -8- its present fields of operations, shall be the sole and exclusive property of Company. Employee shall make full disclosure to Company of all such writings, inventions, improvements, processes, procedures and techniques, and shall do everything necessary or desirable to vest the absolute title thereto in Company. Employee shall write and prepare all specifications and procedures regarding such inventions, improvements, processes, procedures and techniques and otherwise aid and assist Company so that Company can prepare and present applications for copyright or Letters Patent therefor and can secure such copyright or Letters Patent wherever possible, as well as reissues, renewals, and extensions thereof, and can obtain the record title to such copyright or patents so that Company shall be the sole and absolute owner thereof in all countries in which it may desire to have copyright or patent protection. Employee shall not be entitled to any additional or special compensation or reimbursement regarding any and all such writings, inventions, improvements, processes, procedures and techniques. (e) Employee acknowledges that the restrictions contained in the foregoing Subsections (a), (b), (c) and (d), in view of the nature of the business in which Company is engaged, are reasonable and necessary in order to protect the legitimate interests of Company, that their enforcement will not impose a hardship on Employee or significantly impair Employee's ability to earn a livelihood, and that any violation thereof would result in irreparable injuries to Company. Employee therefore acknowledges that, in the event of Employee's violation of any of these restrictions, Company shall be entitled to obtain from any court of competent jurisdiction preliminary and permanent injunctive relief as well as damages and an equitable accounting of all earnings, profits and other benefits arising from such violation, which rights shall be cumulative and in addition to any other rights or remedies to which Company may be entitled. (f) If the Restricted Period or the Restricted Area specified in Subsections (a) and (b) above should be adjudged unreasonable in any proceeding, then the period of time shall be reduced by such amount or the area shall be reduced by the elimination of such portion or both such reductions shall be made so that such restrictions may be enforced for such time and in such area as is adjudged to be reasonable. If Employee violates any of the restrictions contained in the foregoing Subsections (a) or (b), the Restricted Period shall be extended by a period equal to the length of time from the commencement of any such violation until such time as such violation shall be cured by Employee to the satisfaction of Company. Company shall have the right and remedy to require Employee to account for and pay over to Company all compensation, profits, monies, accruals, increments or other benefits derived or received by Employee as the result of any transactions constituting a breach of this Section 14, and Employee shall account for and pay over such amounts to Company upon Company's request therefor. Employee hereby expressly consents to the jurisdiction of any court within the Commonwealth of Pennsylvania to enforce the provisions of this Section 14, and agrees to accept service of process by mail relating to any such proceeding. Company may supply a copy of Section 14 of this Agreement to any future or prospective employer of Employee or to any person to whom Employee has supplied information if Company determines in good faith that there is a reasonable likelihood that Employee has violated or will violate such Section. -9- 15. Prior Agreements. Employee represents to Company that there are no restrictions, agreements or understandings, oral or written, to which Employee is a party or by which Employee is bound that prevent or make unlawful Employee's execution or performance of this Agreement. 16. Consent to Jurisdiction/Arbitration. (a) Any legal suit, action, claim, proceeding or investigation arising out of or relating to this Agreement may be instituted in the Montgomery County Court of Common Pleas of the Commonwealth of Pennsylvania, and each of the parties hereto waives any objection which party may now or hereafter have to such venue of any such suit, action, claim, proceeding or investigation, and irrevocably submits to the jurisdiction of any such court. Any and all service of process and any other notice in any such suit, action, claim, proceeding or investigation shall be effective against any party if given by registered or certified mail, return receipt requested, or by any other means of mail which requires a signed receipt, postage prepaid, mailed to such party as herein provided. Nothing herein contained shall be deemed to affect the right of any party to serve process in any manner permitted by law or to commence legal proceedings or otherwise proceed against any other party in any jurisdiction other than Pennsylvania. (b) With the exception of Company's right to injunctive or equitable relief described in paragraph 14(e) above, any dispute, controversy or claim arising out of or relating to this Agreement or the breach or alleged breach of this Agreement shall be settled by arbitration in Montgomery County, Pennsylvania in accordance with the commercial arbitration rules, then obtaining, of the American Arbitration Association, and judgment upon any such arbitration award rendered by the arbitrators may be entered in any state or federal court sitting in Pennsylvania. If the parties to any such dispute, controversy or claim are unable to agree upon an arbitrator or arbitrators, then three arbitrators shall be appointed by the American Arbitration Association, as it may determine, in accordance with the commercial arbitration rules and practices, then obtaining, of such Association. If the parties to any such dispute, controversy or claim shall agree upon two arbitrators, but such parties or such arbitrators shall be unable to agree upon a third arbitrator, then only such third arbitrator shall be appointed as aforesaid by the American Arbitration Association. Each of the parties and the arbitrators shall use its best efforts to keep confidential the existence of any dispute and arbitration proceedings and all information relating thereto or submitted in connection therewith and, in the event of judicial proceedings for the enforcement of this paragraph or any award pursuant thereto, shall cooperate to seal the record of any such arbitration or judicial proceedings. (c) In the event judicial proceedings or arbitration proceedings are commenced, the prevailing party shall be entitled to an award for its reasonable legal fees and costs incurred in relation to such proceedings. -10- 17. Miscellaneous. (a) Indulgences, Etc. Neither the failure nor any delay on the part of either party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver. (b) Controlling Law. This Agreement and all questions relating to its validity, interpretation, performance and enforcement (including, without limitation, provisions concerning limitations of actions), shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, notwithstanding any conflict-of-laws doctrines of such jurisdiction to the contrary, and without the aid of any canon, custom or rule of law requiring construction against the draftsman. (c) Notices. All notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given, made and received only when personally delivered, on the day specified for delivery when deposited with a recognized national or regional courier service for delivery to the intended addressee or five (5) days following the day when deposited in the United States mails, first class postage prepaid, addressed as set forth below: If to Employee: Mr. David E. D'Anna 30 Trotters Lane Mahwah, NJ 07430 with a copy, given in the manner prescribed above, to: Herbert Henryson II Wolf, Block, Schorr and Solis-Cohen LLP 250 Park Avenue New York, NY 10177 -11- If to Company: Michael Barrist Chief Executive Officer NCO Group, Inc. 515 Pennsylvania Avenue Fort Washington, PA 19034 with a copy, given in the manner prescribed above, to: Joshua Gindin Executive Vice-President and General Counsel NCO Group, Inc. 515 Pennsylvania Avenue Fort Washington, PA 19034 In addition, notice by mail shall be by air mail if posted outside of the continental United States. Any party may alter the address to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of this Section for the giving of notice. (d) Binding Nature of Agreement. This Agreement shall be binding upon Company and shall inure to the benefit of Company, its present and future Subsidiaries, Affiliates, successors and assigns including any transferee of the business operation, as a going concern, in which Employee is employed and shall be binding upon Employee, Employee's heirs and personal representatives. None of the rights or obligations of Employee hereunder may be assigned or delegated, except that in the event of Employee's death or Disability, any rights of Employee hereunder shall be transferred to Employee's estate or personal representative, as the case may be. Company may assign its rights and obligations under this Agreement in whole or in part to any one or more Affiliates or successors, but no such assignment shall relieve Company of its obligations to Employee if any such assignee fails to perform such obligations. (e) Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when such number of counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. (f) Provisions Separable. The provisions of this Agreement are independent of and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part. -12- (g) Entire Agreement. This Agreement contains the entire understanding among the parties hereto with respect to the employment of Employee by Company, and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, except as herein contained. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing. Notwithstanding the foregoing, nothing herein shall limit the application of any generally applicable Company policy, practice, plan or the terms of any manual or handbook applicable to Company's employees generally, except to the extent the foregoing directly conflict with this Agreement, in which case the terms of this Agreement shall prevail. (h) Section Headings. The Section headings in this Agreement are for convenience only; they form no part of this Agreement and shall not affect its interpretation. (i) Number of Days. Except as otherwise provided herein, in computing the number of days for purposes of this Agreement, all days shall be counted, including Saturdays, Sundays and holidays; provided, however, that if the final day of any time period falls on a Saturday, Sunday or holiday on which federal banks are or may elect to be closed, then the final day shall be deemed to be the next day which is not a Saturday, Sunday or such holiday. (j) Gender, Etc. Words used herein, regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context indicates is appropriate. (k) Survival. All provisions of this Agreement which by their terms survive the termination of Employee's employment with Company, including without limitation the covenants of Employee set forth in Sections 13 and 14 and the obligations of Company to make any post-termination payments under this Agreement, shall survive termination of Employee's employment by Company and shall remain in full force and effect thereafter in accordance with their terms. -13- IN WITNESS WHEREOF, the parties have duly executed and delivered this Agreement as of the date first above written. NCO GROUP, INC. By: ------------------------------- Name: Title: (SEAL) ----------------------------- David E. D'Anna -14- EX-10.26 4 EXHIBIT 10.26 Exhibit 10.26 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement"), dated this 2nd day of May, 1998 to be effective as of the first (1st) day of the Term (as hereinafter defined) is made and entered into by and between NCO FINANCIAL SYSTEMS, INC., a Pennsylvania corporation, with its principal offices at 515 Pennsylvania Avenue, Fort Washington, PA 19034 (the "Company") and PAUL E. WEITZEL, JR., an individual, residing at 800 Fernwood Road, Moorestown, New Jersey (the "Employee"). 1. Employment. The Company hereby employs the Employee as a Senior Vice President in the Company's mergers and acquisitions division and/or such other divisions of the Company as the Company shall reasonably determine from time to time. Employee hereby accepts such employment in accordance with the terms and conditions of this Agreement. 2. Duties of the Employee. In connection with his employment, as Senior Vice President of the Company's mergers and acquisitions divisions, the Employee's duties shall include, but shall not be limited to, exploring and negotiating potential acquisitions which are acceptable to the Company, and such other services of a similar nature as may be reasonably required of him or assigned to him by the Company, as well as the promotion of the business and interests of the Company and of its corporate subsidiaries or divisions. The Employee shall, at all times, be subject to the supervision of and report to the Chief Executive Officer and Board of Directors of the Company. 3. Term of Employment. The term of employment shall begin upon completion of the acquisition of the capital stock and collection business of MedSource, Inc. ("MedSource") by the Company and continue for a term of three (3) years (the "Term"). 1 The Company shall have the option, subject to the Employee's acceptance, to extend the Term for two (2) additional one (1) year periods as it may determine. 4. Other Employment. The Employee shall not, during his employment by the Company, act in or otherwise perform any other work for or accept employment with any other person or entity without the prior written consent of the Company. 5. Compensation of the Employee. As full compensation for the services rendered by the Employee pursuant to this Agreement, the Company agrees to pay and the Employee shall be entitled to the compensation set forth on the attached Exhibit "A". 6. Employee Benefits and Business Expenses. A. Benefits. The Employee shall participate in the Company's medical and dental insurance plan and shall be otherwise entitled to participate in all benefits available to other similarly situated employees of the Company. The Employee shall be entitled to four (4) weeks paid vacation on a per annum basis during the Term and any extension thereof in accordance with policies of the Company for similarly situated employees. The Employee shall schedule such vacations in accordance with the reasonable needs of the Company. Unused vacation or personal/sick days hereunder in any year shall not be cumulative and may not be carried forward into each ensuing year. In addition, the Employee shall receive a monthly car allowance of $1000 in connection with his Employment. B. Business Expenses. The Company will pay, or reimburse the Employee for, all ordinary and reasonable out-of-pocket business expenses, including lodging, tolls, beeper, reasonable cell phone expenses related to business of the Company, meals, transportation for business purposes and client entertainment, incurred 2 by the Employee in connection with his performance of services hereunder during the Term in accordance with the Company's expense authorization and approval procedures then in effect upon presentation to the Company of an itemized account and written proof of such expenses. The Company shall also reimburse the Employee for reasonable expenses incurred in connection with professional education classes and seminars and professional CPA license fees. 7. Death or Total Disability of the Employee. A. Death. In the event of the death of the Employee during the Term or any extension thereof, this Agreement shall terminate effective as of the date of Employee's death, and the Company shall not have any further obligation or liability hereunder except that the Company shall pay to the Employee's designated beneficiary or, if none, his estate, the portion, if any, of his compensation due for the period up to the Employee's date of death which remains unpaid. B. Total Disability. In the event of the Total Disability (as that term is hereinafter defined) of the Employee, the Company shall have the right to terminate the Employee's employment hereunder by giving the Employee ten (10) days' written notice thereof and, upon expiration of such ten (10) day period, the Company shall not have any further obligation or liability under this Agreement except that the Company shall pay to the Employee the portion, if any, of his compensation due to the Employee for the period up to the date of termination which remains unpaid, provided that if the Employee, during any period of disability, receives any periodic payments representing lost compensation under any health and accident policy or under any salary continuation insurance policy, the premiums for which have been paid by the Company, the amount of the compensation, if 3 any, that the Employee would be entitled to receive from the Company during such period of disability shall be decreased by the amounts of such payments. Subject to the provisions of the Company's Stock Option Plan, all stock options shall vest and remain exercisable for a period of one (1) year after such termination. The term "Total Disability," when used herein, shall mean a mental, emotional or physical condition which rendered the Employee for a period of ninety (90) consecutive days, during the Term of this Agreement, unable or incompetent to carry out, on the basis set forth herein, the job responsibilities he held or tasks that he was assigned at the time the disability was incurred. The Employee agrees, in the event of any dispute as to the determination made pursuant to this paragraph, to submit to a physical or other examination by a licensed physician selected jointly by the Company and the Employee, the cost of which examination shall be paid by the Company. 8. Termination of Employment. (a) In addition to termination pursuant to paragraph 7, the Company, following prior written notice to the Employee, may discharge the Employee and thereby terminate his employment hereunder for cause as follows: (i) habitual intoxication; (ii) drug addiction; (iii) conviction of a felony; (iv) adjudication as an incompetent; (v) violation of any reasonable rule or regulation that may be established by the Company from time to time for the conduct of the Company's business, as set forth in the Company's employee handbook after thirty (30) days notice and opportunity to cure; (vi) misappropriation of Company funds or fraudulent acts; or (vii) the Employee's breach of this Agreement in any material or respect after thirty (30) days notice and opportunity to cure. 4 In the event that the Company shall discharge the Employee pursuant to this paragraph 8, the Company shall not have any further obligations or liability under this Agreement, except that the Company shall pay to Employee the portion, if any, of the Employee's compensation due to the Employee for the period up to the date of termination which remains unpaid. (b) If termination by the Company is without cause, the Company shall pay the Employee the Base Salary for the remaining term of this Agreement in a lump sum payment, options shall be extended for one (1) year, insurance coverage shall be made available to the Employee under COBRA, at the Employee's expense, and the Employee shall be released from the restrictions set forth in paragraph 10A, it being understood that the restrictions of paragraph 10B and any other restriction or covenant in this Agreement shall remain in full force and effect. (c) The Employee shall have the right, upon ninety (90) days prior written notice to the Company, to terminate this Agreement. Upon such termination the Company shall have no further obligations to the Employee, any unvested options shall terminate upon delivery of the foregoing notice and this Agreement shall, except for the covenants and restrictions set forth in Sections 9 and 10 and elsewhere in this Agreement which shall survive such termination, terminate. 9. Non-Disclosure. The Employee recognizes and acknowledges that he will have access to certain confidential information of the Company and that such information constitutes valuable, special and unique property of the Company. The Employee agrees that he will not, for any reason or purpose whatsoever, during or after the Term of his employment and any extension thereof, disclose any of such confidential information to 5 any party without express authorization of the Company, except as necessary in the ordinary course of performing his duties hereunder. 10. Restrictions. A. Non-Competition. The Employee shall not, unless acting with the prior written consent of the Board of Directors, the Chief Executive Officer or President of the Company, directly or indirectly: (a) During the Term and any extension thereof, and for a period of three (3) years thereafter (the "Covenant Term"), (i) own, manage, operate, finance, join, control or participate in the ownership, management, operation, financing or control of, or be connected as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise with any business or enterprise engaged in the business of the MedSource division or any other business engaged in by the Company or any of its subsidiaries if the Employee provided any services for the same in all those geographic areas in which the Company has an office; or (ii) use or permit his name to be used in connection with any business or enterprise engaged in the business of the MedSource division or any other business engaged in by the Company or any of its subsidiaries if the Employee provided any services for the same in all those geographic areas in which the Company has an office; and B. Non-Interference. The Employee agrees that during the Term and any extension thereof, during the Covenant Term and for a period of three (3) years after the Covenant Term, the Employee shall not, unless acting with the prior written consent of 6 the Board of Directors, the Chief Executive Officer or the President of the Company, directly or indirectly: (a) solicit business from or perform services for, any person, company or other entity which at any time during the Employee's employment by the Company was a client or customer of the Company if such business or services are of the same general character as those engaged in or performed by the MedSource division or any other business engaged in by the Company or any of its subsidiaries if the Employee provided any services for the same; (b) solicit for or employment or hire any of the employees of the Company; or (c) use the name of the Company or any name similar thereto, but nothing in this clause shall be deemed, by implication, to authorize or permit use of such name after expiration of the period covered by this paragraph. In the event that any provisions of this paragraph should ever be adjudicated to exceed the time, geographic, service or product limitations permitted by applicable law in any jurisdiction, then such provisions shall be deemed reformed in such jurisdiction to the maximum time, geographic, service or product limitations permitted to applicable law. 11. Equitable Relief; Survival. (a) The Employee acknowledges that the restrictions contained in paragraphs 9 and 10 hereof are, in view of the nature of the business of the Company, reasonable and necessary to protect the legitimate interests of the Company, and that any violation of any provisions of such paragraphs will result in irreparable injury to the Company. The Employee also acknowledges that the Company shall be entitled to 7 temporary and permanent injunctive relief, without the necessity of proving actual damages, and to an equitable accounting of all earnings, profits and other benefits arising from any such violation, which rights shall be cumulative and in addition to any other rights or remedies to which the Company may be entitled. In the event of any such violation, the Company shall be entitled to commence and action for temporary and permanent injunctive relief and other equitable relief in any court of competent jurisdiction. Effective service of process may be made upon the Employee by mail under the notice provisions contained in paragraph 15 hereof. (b) Survival of Covenants. The provisions of paragraphs 9, 10 and 12 shall survive the termination of this Agreement other than as a result of a material breach by the Company which breach shall not be cured by the Company within thirty (30) days after written notice of such breach from the Employee or the termination of the Employee by the Company without cause. 12. Representation by the Employee. The Employee hereby warrants and represents to the Company that he is not bound by or subject to any sort of restriction which would prohibit him from accepting employment with the Company, such as a restrictive covenant, non-interference or non-competition agreement related to his previous employment position or positions. 13. Remedies Cumulative; No Waiver. No remedy conferred upon the Company by this Agreement is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to any other remedy given hereunder or now or hereafter existing at law or in equity. No delay or omission by the Company in exercising any right, remedy or power hereunder or existing at law or in equity 8 shall be construed as a waiver thereof, and any such right, remedy or power may be exercised by the Company from time to time and as often as it deems expedient or necessary. 14. Enforceability. If any provision of this Agreement shall be invalid or unenforceable, in whole or in part, then such provision shall be deemed to be modified or restricted to the extent and in the manner necessary to render the same valid and enforceable, or shall be deemed excised from this Agreement, as the case may require, and this Agreement shall be construed and enforced to the maximum extent permitted by law, as if such provision had been originally incorporated herein as so modified or restricted, or as if such provision had not been originally incorporated herein, as the case may be. 15. Notices. All notices, request, demands, claims and other communications hereunder will be in writing. Any notices, requests, demands, claims or communications hereunder shall be deemed fully given if such are sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: If to the Company: 515 Pennsylvania Avenue Fort Washington, PA 19034 with copy to: Joshua Gindin, Esquire Kessler & Gindin 230 South Broad Street, 20th Floor Philadelphia, PA 19102 If to the Employee: 800 Fernwood Road Moorestown, NJ 08057 with copy to: James D. Rosener, Esquire Pepper, Hamilton & Scheetz 1235 Westlakes Drive, Suite 400 Berwyn, PA 19312-2401 9 Any party hereto may give any notice, request, demand, claim or other communication hereunder using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the individual for whom it is intended. Any party hereto may change its address for the foregoing purposes by giving the other parties hereto notice in the manner herein set forth. 16. Governing Law. This Agreement shall be deemed to have been executed in the Commonwealth of Pennsylvania and shall, therefore, be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. 17. Contents of Contract; Amendment and Assignment. This Agreement sets forth the entire understanding between the parties hereto with respect to the subject matter hereof and supersedes and is instead of all other employment arrangement between the Employee and the Company. This Agreement cannot be changed, modified or terminated except upon written amendment duly executed by the parties hereto. All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, representatives, successors and assigns of the parties hereto, except that the duties and responsibilities of the Employee hereunder are of a personal nature and shall not be assignable in whole or in part by the Employee. The Company may assign its rights hereunder to any of its wholly owned subsidiaries without 10 the Employee's consent, provided, however, that the Company shall not relocate the primary work place of the Employee, Philadelphia metropolitan area. 18. Prior Employment Agreements. The Employee and the Company hereby acknowledge that this Agreement shall supersede any existing employment agreement that the Employee has with MedSource and the provisions of the Non-Compete and Non-Solicitation Agreement between MedSource and the Employee. IN WITNESS WHEREOF, this Agreement has been executed by the parties on the date first above written. Attest: NCO Financial Systems, Inc. ___________________________[SEAL] BY:_______________________________ Witness: ___________________________ _______________________________ Paul E. Weitzel, Jr. 11 EXHIBIT "A" EMPLOYEE COMPENSATION PAUL WEITZEL A. Base Salary: The Employee shall, during the Term, be paid an annual base salary (the "Base Salary") of One Hundred Fifity Thousand Dollars ($150,000). The Base Salary shall be payable in installments, in arrears, in accordance with the Company's regular payroll practices, but not less often than monthly. B. Bonus: The Employee shall also be entitled to an annual bonus (the "Bonus") of up to Seventy Five Thousand Dollars ($75,000) based upon certain performance goals and a mergers and acquisitions formula determined by the Company. C. Stock Option Plan: As additional compensation, the Employee shall receive an option to purchase up to 10,000 shares of the common stock of the Company in accordance with the terms of the Company's Stock Option Plan at a price of Twenty Two Dollars ($21.50) per share. The Company may, at its election, issue additional shares to the Employee from time to time. THE COMPANY AND THE EMPLOYEE AGREE AND ACKNOWLEDGE THAT THIS EMPLOYMENT AGREEMENT AND THE COMPANY'S OBLIGATION TO HIRE THE EMPLOYEE, ARE CONDITIONED UPON THE COMPANY COMPLETING THE CLOSING ON THE COMPANY'S ACQUISITION OF THE CAPITAL STOCK OF MEDSOURCE. 12 EX-10.27 5 EXHIBIT 10.27 ADDENDUM This Addendum amends that certain Employment Agreement dated May 2, 1998 by and between PAUL E. WEITZEL, JR. and NCO FINANCIAL SYSTEMS, INC., a Pennsylvania corporation (the "Agreement"), and this Addendum shall be effective as of January 1, 1999 (the "Effective Date"). For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Paragraph 3 of the Agreement is amended by deleting the text of such paragraph in its entirety and replacing it with the following: "The term of this Agreement shall be for a period of five (5) years, commencing on the Effective Date and terminating on December 31, 2003, subject to any early termination provisions set forth in the Agreement." 2. Paragraph A of Exhibit "A" of the Agreement is amended by providing for a Base Salary of $200,000 per annum, commencing on the Effective Date. The Base Salary shall, at a minimum, be adjusted annually, on the anniversary date of the Effective Date pursuant to the CPI then in effect for the Philadelphia metropolitan area. The Base Salary shall be payable in installments, in arrears, in accordance with the Company's regular payroll practices, but not less often than monthly. 3. In the event any term or condition of this Addendum is inconsistent with any term or condition of the Agreement, the terms of this Addendum will control. Except as stated above, all the terms and conditions of the Agreement, including all restrictions and covenants, shall remain in full force and effect and are incorporated herein by reference as though set forth at length. IN WITNESS WHEREOF, the parties have executed this Addendum to become effective on the Effective Date. NCO FINANCIAL SYSTEMS, INC. By:________________________ ______________________________ Paul E. Weitzel, Jr. EX-10.28 6 EXHIBIT 10.28 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement"), dated this 1st day of June, 1999, to be effective as of the first (1st) day of August, 1999 (the "Effective Date") is made and entered into by and between NCO FINANCIAL SYSTEMS, INC., a Pennsylvania corporation, with its principal offices at 515 Pennsylvania Avenue, Fort Washington, PA 19034 (the "Company") and ROBERT DISANTE, an individual, residing at _________________________ (the "Employee"). 1. Employment. The Employee has heretofore been employed and the Company hereby acknowledges its desire to continue to employ the Employee as Divisional Chief Executive Officer, International Operations (formally known as FCA International Ltd. ("FCA") collection business ("International Division")). The Employee hereby agrees to continue his employment with the Company in accordance with the terms and conditions of this Agreement. 2. Duties of the Employee. During the Term (as hereinafter defined) the Employee shall devote his full business time to the operations of the Company and shall perform duties customarily incident to the positions held by him, including, but not limited to, supervising and overseeing the entire business operations of the Company and all other duties the Executive Officers of the Company or its parent company may from time to time assign to him. The Employee shall use his best efforts to the performance of his duties hereunder and to the promotion of the business and interests of the Company and any of its corporate subsidiaries or affiliated companies. The Employee's office of employment shall be in the Montreal area, subject to customary travel responsibilities. 3. Term of Employment. The term of employment hereunder shall begin on the Effective Date and continue for a term of three (3) years, unless sooner terminated (the "Term"). The Company shall have the option, subject to the Employee's acceptance, to extend the Term for two (2) additional one (1) year periods as it may determine. 4. Other Employment. The Employee shall not, during his employment by the Company, act in or otherwise perform any other work or accept employment with any other person or entity in violation of his duties and obligations under this Agreement. 5. Compensation of the Employee. As full compensation for the services rendered by the Employee pursuant to this Agreement, the Company agrees to pay and the Employee shall be entitled to the compensation set forth on the attached Exhibit "A". 6. Employee Benefits and Business Expenses. A. Benefits. The Employee shall participate in the Company's medical and dental insurance plan, executive life insurance plan and shall be otherwise entitled to participate in all benefits available to other similarly situated employees of the Company. The Employee shall be entitled to four (4) weeks paid vacation on a per annum basis during the Term and any extension thereof in accordance with policies of the Company for similarly situated employees. The Employee shall schedule such vacations in accordance with the reasonable needs of the Company. Unused vacation or personal/sick days hereunder in any year shall not be cumulative and may not be carried forward into each ensuing year. In addition, the Employee shall have the use of a car leased by the Company at a cost not to exceed $650.00 per month (exclusive of any value added taxes). The Company shall also reimburse the Employee for reasonable and necessary out of pocket automobile expenses incurred in performing his duties hereunder. B. Business Expenses. The Company will pay, or reimburse the Employee for, all ordinary and reasonable out-of-pocket business expenses, 2 including lodging, tolls, beeper, reasonable cell phone expenses related to business of the Company, meals, transportation for business purposes and client entertainment, membership in trade associations incurred by the Employee in connection with his performance of services hereunder during the Term in accordance with the Company's expense authorization and approval procedures then in effect upon presentation to the Company of an itemized account and written proof of such expenses. In addition, so long as the Employee is employed by the Company, the Company shall pay for the Employee's golf club membership (annual dues and expenses of approximately $5,000) and health club membership ($1,000 annually). 7. Death or Total Disability of the Employee. A. Death. In the event of the death of the Employee during the Term or any extension thereof, this Agreement shall terminate effective as of the date of Employee's death, and the Company shall not have any further obligation or liability hereunder except that the Company shall pay to the Employee's designated beneficiary or, if none, his estate, the portion, if any, of his compensation (which shall be his regular Base Salary) due for the period up to the Employee's date of death which remains unpaid. B. Total Disability. In the event of the Total Disability (as that term is hereinafter defined) of the Employee, the Company shall have the right to terminate the Employee's employment hereunder by giving the Employee ten (10) days' written notice thereof and, upon expiration of such ten (10) day period, the Company shall not have any further obligation or liability under this Agreement except that the Company shall pay to the Employee the portion, if any, of his compensation due to the Employee (which shall be his regular Base Salary) for the period up to the date of termination which remains unpaid, provided that 3 if the Employee, during any period of disability, receives any periodic payments representing lost compensation under any health and accident policy or under any salary continuation insurance policy, the premiums for which have been paid by the Company, the amount of the compensation, if any, that the Employee would be entitled to receive from the Company during such period of disability shall be decreased by the amounts of such payments. The term "Total Disability," when used herein, shall mean a mental, emotional or physical condition which rendered the Employee for a period of one hundred twenty (120) consecutive days, during the Term of this Agreement, unable or incompetent to carry out, on the basis set forth herein, the job responsibilities he held or tasks that he was assigned at the time the disability was incurred. The Employee agrees, in the event of any dispute as to the determination made pursuant to this paragraph, to submit to a physical or other examination by a licensed physician selected jointly by the Company and the Employee, the cost of which examination shall be paid by the Company. 8. Termination of Employment. (a) In addition to termination pursuant to paragraph 7, the Company, following prior written notice to the Employee, may discharge the Employee and thereby terminate his employment hereunder for cause as follows: (i) habitual intoxication; (ii) drug addiction; (iii) conviction of a felony; (iv) adjudication as an incompetent; (v) violation of any reasonable rule or regulation that may be established by the Company from time to time for the conduct of the Company's business, as set forth in the Company's employee handbook after thirty (30) days notice and opportunity to cure; (vi) misappropriation of 4 Company funds or fraudulent acts; or (vii) the Employee's breach of this Agreement in any material respect, after thirty (30) days written notice and opportunity to cure. In the event that the Company shall discharge the Employee pursuant to this paragraph 8, the Company shall not have any further obligations or liability under this Agreement, except that the Company shall pay to Employee the portion, if any, of the Employee's compensation (which shall be his regular Base Salary) due to the Employee for the period up to the date of termination which remains unpaid. (b) If termination by the Company during the Term or any extension thereof is without cause, if the Company does not renew this Agreement at the end of the Term or any renewal thereof or if the Employee resigns from his employment during the Term (but not to avoid a "for cause" termination), the Company shall, as severance, pay the Employee the net present value of Base Salary for a period of two (2) years plus any Bonus amount which may become payable to the Employee. 9. Non-Disclosure. The Employee recognizes and acknowledges that he will have access to certain confidential information of the Company and that such information constitutes valuable, special and unique property of the Company. The Employee agrees that he will not, for any reason or purpose whatsoever, during or after the Term of his employment and any extension thereof, disclose any of such confidential information to any party without express authorization of the Company, except as necessary in the ordinary course of performing his duties hereunder. 10. Restrictions. In consideration of the Company's continued employment of the Employee in accordance herewith and for other good and valuable consideration, the Employee agrees to the following restrictions: 5 A. Non-Competition. The Employee shall not, unless acting with the prior written consent of the Board of Directors, the Chief Executive Officer or President of the Company, directly or indirectly: (a) During the Term and any extension thereof, and for a period of three (3) years thereafter (the "Covenant Term"), (i) own, manage, operate, finance, join, control or participate in the ownership, management, operation, financing or control of, or be connected as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise with any business or enterprise engaged in the same or similar collection business as the Company or any other business engaged in by the Company or any of its subsidiaries if the Employee provided any material services for the same in all those geographic areas in which the Employee performed services for the Company; or (ii) use or permit his name to be used in connection with any business or enterprise engaged in the same collection business as the Company or any other business engaged in by the Company or any of its subsidiaries if the Employee provided any material services for the same in all those geographic areas in which the Employee performed services for the Company; and B. Non-Interference. The Employee agrees that during the Term and any extension thereof, during the Covenant Term and for a period of two (2) years after the Covenant Term, the Employee shall not, unless acting with the prior written consent of the Board of Directors, the Chief Executive Officer or the President of the Company, directly or indirectly: 6 (1) solicit business from or for, any person, company or other entity which at any time during the Employee's employment by the Company was a client or customer of the Company if such business or services are of the same general character as those engaged in or performed by the Company or any other business engaged in by any of the Company's subsidiaries if the Employee provided any services for the same; (2) solicit for employment or hire any of the employees of the Company; or (3) use the name of the Company or any name similar thereto, but nothing in this clause shall be deemed, by implication, to authorize or permit use of such name after expiration of the period covered by this paragraph. For good and valuable consideration previously delivered to the Employee as well as the increase in the Employee's Base Salary (as shown on Exhibit "A") the Employee has agreed and does agree to the restrictions set forth in paragraph 8 and this paragraph 9 and any other covenant or restriction contained in this Agreement. In the event that any provision of the foregoing restrictions should ever be adjudicated to exceed the time, geographic, service or product limitations permitted by applicable law in any jurisdiction, then such provisions shall be deemed reformed in such jurisdiction to the maximum time, geographic, service or product limitations permitted to applicable law. 11. Equitable Relief; Survival. (a) The Employee acknowledges that the restrictions contained in paragraphs 9 and 10 hereof are, in view of the nature of the business of the Company, reasonable and necessary to protect the legitimate interests of the Company, and that any violation of any provisions of such paragraphs will result 7 in irreparable injury to the Company. The Employee also acknowledges that the Company shall be entitled to temporary and permanent injunctive relief, without the necessity of proving actual damages, and to an equitable accounting of all earnings, profits and other benefits arising from any such violation, which rights shall be cumulative and in addition to any other rights or remedies to which the Company may be entitled. In the event of any such violation, the Company shall be entitled to commence and action for temporary and permanent injunctive relief and other equitable relief in any court of competent jurisdiction. Effective service of process may be made upon the Employee by mail under the notice provisions contained in paragraph 15 hereof. (b) Survival of Covenants. The provisions of paragraphs 9, 10 and 12 shall survive the termination of this Agreement other than as a result of a material breach by the Company which breach shall not be cured by the Company within thirty (30) days after written notice of such breach from the Employee or the termination of the Employee by the Company without cause. 12. Representation by the Employee. The Employee hereby warrants and represents to the Company that he is not bound by or subject to any sort of restriction which would prohibit him from accepting employment with the Company, such as a restrictive covenant, non-interference or non-competition agreement related to his previous employment position or positions. 8 13. Remedies Cumulative; No Waiver. No remedy conferred upon the Company by this Agreement is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to any other remedy given hereunder or now or hereafter existing at law or in equity. No delay or omission by the Company in exercising any right, remedy or power hereunder or existing at law or in equity shall be construed as a waiver thereof, and any such right, remedy or power may be exercised by the Company from time to time and as often as it deems expedient or necessary. 14. Enforceability. If any provision of this Agreement shall be invalid or unenforceable, in whole or in part, then such provision shall be deemed to be modified or restricted to the extent and in the manner necessary to render the same valid and enforceable, or shall be deemed excised from this Agreement, as the case may require, and this Agreement shall be construed and enforced to the maximum extent permitted by law, as if such provision had been originally incorporated herein as so modified or restricted, or as if such provision had not been originally incorporated herein, as the case may be. 15. Notices. All notices, request, demands, claims and other communications hereunder will be in writing. Any notices, requests, demands, claims or communications hereunder shall be deemed fully given if such are sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: If to the Company: 515 Pennsylvania Avenue Fort Washington, PA 19034 Attn: Chief Executive Officer 9 with copy to: Joshua Gindin, Esquire General Counsel [same address as above] If to the Employee: __________________________ __________________________ Any party hereto may give any notice, request, demand, claim or other communication hereunder using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the individual for whom it is intended. Any party hereto may change its address for the foregoing purposes by giving the other parties hereto notice in the manner herein set forth. 16. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of Canada. 17. Contents of Contract; Amendment and Assignment. This Agreement sets forth the entire understanding between the parties hereto with respect to the subject matter hereof and supersedes and is instead of all other employment arrangement between the Employee and the Company. This Agreement cannot be changed, modified or terminated except upon written amendment duly executed by the parties hereto. All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, representatives, successors and assigns of the parties hereto, except that the duties and responsibilities of the Employee hereunder are of a personal nature and shall not be assignable in whole or in part by the Employee. The Company may assign its rights hereunder to any of its wholly owned subsidiaries without the Employee's consent, provided, however, that the Company shall not relocate the primary work place of the Employee or change the duties of the Employee hereunder, such work place being the Company's Montreal office. 10 18. Prior Employment Agreements. The Employee and the Company hereby acknowledge that this Agreement shall supersede any existing employment agreement that the Employee has with FCA or the Company. IN WITNESS WHEREOF, this Agreement has been executed by the parties on the date first above written. Attest: NCO Financial systems, Inc. __________________________________[SEAL] BY:_______________________________ Witness: ________________________________ _______________________________ Robert DiSante 11 EXHIBIT "A" EMPLOYEE COMPENSATION ROBERT DISANTE A. Base Salary: The Employee shall, during the Term, be paid an annual base salary (the "Base Salary") Two Hundred Thousand Canadian Dollars (C$200,000). The Base Salary shall be payable in installments, in arrears, in accordance with the Company's regular payroll practices, but not less often than monthly. B. Bonus: In addition to the Base Salary, so long as the Employee satisfies the duties and obligations of his employment and the International division attains certain financial goals as established by the Company, the Employee shall be entitled to receive an annual bonus in an amount up to Fifty Thousand Canadian Dollars (C$50,000). C. Stock Option Plan: The Employee, as part of his employment by the Company, has received at the time his employment commenced, an option to purchase up to 25,000 shares of the common stock of the Company, at a price of $21.00 per share, in accordance with the Company's Employee Stock Option Plan. 12 EX-10.29 7 EXHIBIT 10.29 Exhibit 10.29 EMPLOYMENT AGREEMENT THIS AGREEMENT, dated this 12th day of February, 1998, to be effective as of the date of the Closing (as hereinafter defined) (the "Effective Date") is made and entered into by and between NCO TELESERVICES, INC., whose address is 515 Pennsylvania Avenue, Fort Washington, PA 19034 (referred to as the "Company") and RICHARD RAQUET whose address is____________________________ (referred to as the "Employee"). 1. Employment. The Company hereby employs the Employee to act as Executive Vice-President and Chief Operating Officer of the Company and the Employee hereby accepts such employment in accordance with the terms and conditions of this Agreement. 2. Duties of the Employee. During the Term the Employee shall devote his full business time to the operations of the Company and shall perform duties customarily incident to the positions held by him, including, but not limited to, supervising and overseeing the operations of the Company and all other duties the Board of Directors of the Company may from time to time assign to him. In performing his duties hereunder, the Employee shall report to the President of the Company or his successor or any other person designated by the Board of Directors of the Company. The Employee shall use his best efforts to the performance of his duties hereunder and to the promotion of the business and interests of the Company and any of its corporate subsidiaries or affiliated companies. Except for periods of travel incident to the Employee's duties hereunder, Employee shall not be required to perform his duties hereunder outside a 35 mile radius of the Company's corporate offices. 3. Term of Employment. The term of employment shall begin on the effective date hereof and continue for a term of three (3) years (the "Term"). The Company shall have the option, subject to the Employee's acceptance, to extend the Term for two (2) additional one (1) year periods as it may determine. 4. Other Employment. The Employee shall not, during his employment by the Company, act in any other work capacity or employment without having first obtained the written consent of the Company. 5. Compensation of the Employee. As full compensation, including, but not limited to, "Base Salary" and "Bonus," for the services rendered by the Employee pursuant to this Agreement, the Employer agrees to pay and the Employee shall be entitled to the compensation set forth on the attached Exhibit "A". 6. Employee Benefits. A. Vacation and Sick/Personal Days. The Employee shall be entitled to five (5) weeks paid vacation and five (5) personal/sick days on a per annum basis during the Term and any extension thereof in accordance with policies of the Company for similarly situated employees. The Employee shall schedule these vacations in accordance with the reasonable needs of the Company. Unused vacation or personal/sick days hereunder in any year shall not be cumulative and may not be carried forward into each ensuing year. B. Other Benefits. The Employee shall be included on the Company's employee medical insurance plan, which includes dental coverage, shall, provided he is insurable at regular rates, receive an officer's life insurance policy in the amount of five (5) times Base Salary and shall be otherwise entitled to participate in all benefits available to other similarly situated employees of the Company. In addition, the Employee shall have 2 the use of a car leased by the Company or receive a car allowance not to exceed $500.00 per month. C. Business Expenses. The Company will pay, or reimburse the Employee for, all ordinary and reasonable out-of-pocket business expenses, including lodging, tolls, beeper, portable telephone, meals, transportation for business purposes and client entertainment, incurred by the Employee in connection with his performance of services hereunder during the Term, in accordance with the Company's expense authorization and approval procedures then in effect, upon presentation to the Company of an itemized account and written proof of such expenses. 7. Death or Total Disability of the Employee. A. Death. In the event of the death of the Employee during the Term any extension thereof of this Agreement shall terminate effective as of the date of Employee's death, and the Company shall not have any further obligation or liability hereunder except that the Company shall pay to the Employee's designated beneficiary or, if none, his estate, the portion, if any, of the Employee's Base Salary and any other compensation, including, but not limited to, a pro rata portion of the Bonus, due to him for the period up to the Employee's date of death which remains unpaid. B. Total Disability. In the event of the Total Disability (as that term is hereinafter defined) of the Employee, the Company shall have the right to terminate the Employee's employment hereunder by giving the Employee ten (10) days' written notice thereof and, upon expiration of such ten (10) day period, the Company shall not have any further obligation or liability under this Agreement except that the Company shall pay to the Employee the portion, if any, of the Employee's Base Salary and any other compensation 3 due to him for the period up to the date of termination which remains unpaid, provided that if the Employee, during any period of disability, receives any periodic payments representing lost compensation under any health and accident policy or under any salary continuation insurance policy, the premiums for which have been paid by the Company, the amount of the Base Salary and the Bonus, if any, that the Employee would be entitled to receive from the Company during such period of disability shall be decreased by the amounts of such payments. The term "Total Disability," when used herein, shall mean a mental, emotional or physical condition which rendered the Employee for a period of ninety (90) consecutive days, during the Term of this Agreement, unable or incompetent to carry out, on a substantially full-time basis, the job responsibilities he held or tasks that he was assigned at the time the disability was incurred. The Employee agrees, in the event of any dispute as to the determination made pursuant to this paragraph, to submit to a physical or other examination by a licensed physician selected jointly by the Company and the Employee, the cost of which examination shall be paid by the Company. 8. Termination of Employment. In addition to termination pursuant to paragraph 7, the Company may discharge the Employee and thereby terminate his employment hereunder for the following reasons: (a) for cause (for "cause") which shall be defined to be (i) habitual intoxication; (ii) drug addiction; (iii) conviction of a felony; (iv) adjudication as an incompetent; (v) violation of any rule or regulation that may be established by the Company from time to time for the conduct of the Company's business, as set forth in the Company's employee handbook; (vi) misappropriation of Company funds or fraudulent 4 acts; or (vii) the Employee's breach of this Agreement in any manner or respect, or (b) immediately upon the Company discontinuing all of its business operations. In the event that the Company shall discharge the Employee pursuant to this paragraph 8, the Company shall not have any further obligations or liability under this Agreement, except that the Company shall pay to Employee the portion, if any, of the Employee's Base Salary and any other compensation, including, but not limited to, a pro rated portion of the Bonus, due to him for the period up to the date of termination which remains unpaid. 9. Non-Disclosure. The Employee recognizes and acknowledges that he will have access to certain confidential information of the Company and that such information constitutes valuable, special and unique property of the Company. The Employee agrees that he will not, for any reason or purpose whatsoever, during or after the Term of his employment and any extension thereof, disclose any of such confidential information to any party without express authorization of the Company, except as necessary in the ordinary course of performing his duties hereunder. 10. Non-Interference. The Employee agrees that during the Term of this Agreement and any extension thereof, and for a period of two (2) years after his employment ceases, the Employee shall not, unless acting pursuant hereto or with the prior written consent of the Board of Directors of the Company, directly or indirectly: (i) solicit business from or perform services for, any person, company or other entity which at any time during the Employee's employment by the Company was a client or customer of the Company if such business or services are of the same general character as those engaged in or performed by the Company; 5 (ii) solicit for employment or in any other fashion hire any of the employees of the Company; or (iii) use the name of the Company or any name similar thereto, but nothing in this clause shall be deemed, by implication, to authorize or permit use of such name after expiration of the period covered by this paragraph. 11. Equitable Relief; Survival. (a) The Employee acknowledges that the restrictions contained in paragraphs 9 and 10 hereof are, in view of the nature of the business of the Company, reasonable and necessary to protect the legitimate interests of the Company, and that any violation of any provisions of those paragraphs will result in irreparable injury to the Company. The Employee also acknowledges that the Company shall be entitled to temporary and permanent injunctive relief, without the necessity of proving actual damages, and to an equitable accounting of all earnings, profits and other benefits arising from any such violation, which rights shall be cumulative and in addition to any other rights or remedies to which the Company may be entitled. In the event of any such violation, the Company shall be entitled to commence and action for temporary and permanent injunctive relief and other equitable relief in any court of competent jurisdiction. Effective service of process may be made upon the Employee by mail under the notice provisions contained in paragraph 15 hereof. (b) Survival of Covenants. The provisions of paragraphs 9, 10 and 12 shall survive the termination of this Agreement. 6 12. Representation by the Employee. The Employee hereby warrants and represents to the Company that he is not bound by or subject to any sort of restriction which would prohibit him from accepting employment with the Company, such as a restrictive covenant, non-interference or non-competition agreement related to any of his previous employment position or positions. 13. Remedies Cumulative; No Waiver. No remedy conferred upon the Company by this Agreement is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to any other remedy given hereunder or now or hereafter existing at law or in equity. No delay or omission by the Company in exercising any right, remedy or power hereunder or existing at law or in equity shall be construed as a waiver thereof, and any such right, remedy or power may be exercised by the Company from time to time and as often as may be deemed expedient or necessary by the Company in its sole discretion. 14. Enforceability. If any provision of this Agreement shall be invalid or unenforceable, in whole or in part, then such provision shall be deemed to be modified or restricted to the extent and in the manner necessary to render the same valid and enforceable, or shall be deemed excised from this Agreement, as the case may require, and this Agreement shall be construed and enforced to the maximum extent permitted by law, as if such provision had been originally incorporated herein as so modified or restricted, or as if such provision had not been originally incorporated herein, as the case may be. 15. Notices. All notices, request, demands, claims and other communications hereunder will be in writing. Any notices, requests, demands, claims or communications hereunder shall be deemed fully given if such are sent by registered or certified mail, return 7 receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: If to the Company: 515 Pennsylvania Avenue Fort Washington, PA 19034 with copy to: Joshua Gindin, Esquire Twentieth Floor 230 South Broad Street Philadelphia, PA 19102 If to the Employee: _______________________________ _______________________________ Any party hereto may give any notice, request, demand, claim or other communication hereunder using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the individual for whom it is intended. Any party hereto may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other parties hereto notice in the manner herein set forth. 16. Governing Law. This Agreement shall be be governed by and construed in accordance with the internal laws (and not the law of conflicts) of the Commonwealth of Pennsylvania. 17. Contents of Contract; Amendment and Assignment. This Agreement sets forth the entire understanding between the parties hereto with respect to the subject matter hereof and supersedes and is instead of all other employment arrangement between the Employee and the Company. This Agreement cannot be changed, modified or terminated 8 except upon written amendment duly executed by the parties hereto. All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, representatives, successors and assigns of the parties hereto, except that the duties and responsibilities of the Employee hereunder are of a personal nature and shall not be assignable in whole or in part by the Employee. The Company may assign its rights hereunder to any of its subsidiaries or related companies, without the Employee's consent. 18. Prior Employment Agreements. The Employee hereby acknowledges that this Agreement shall supersede any existing employment agreement that the Employee has with TRC (as hereinafter defined). IN WITNESS WHEREOF, this Agreement has been executed by the parties on the date first above written. Attest: NCO Teleservices, Inc. ________________________[SEAL] BY:____________________________ Witness: ________________________ ____________________________ Richard Raquet, Employee 9 EXHIBIT "A" EMPLOYEE COMPENSATION RICHARD RAQUET A. Base Salary: The Employee shall, during the Term, be paid an annual base salary (the "Base Salary") of $200,000. The Base Salary shall be payable in installments, in arrears, in accordance with the Company's regular payroll practices, but not less often than monthly. B. Bonus: The Employee shall be entitled to an annual bonus of up to $50,000 based upon the Company successfully reaching certain quarterly financial goals as established by mutual agreement of the Company and the Employee. C. Stock Option Plan: As additional compensation, the Employee shall participate in the Company's stock option plan, in accordance with the terms and conditions of such plan. The Employee shall receive an option to purchase 20,000 shares of common stock of the Company at a per share price equal to the closing price of such stock on the day before the Closing. 4. Signing Bonus: In connection with his execution of this Agreement, but subject to the Closing being completed, the Employee shall receive a signing bonus of $200,000 payable within thirty (30) days after the Closing. THE COMPANY AND THE EMPLOYEE ACKNOWLEDGE AND AGREE THAT NOTWITHSTANDING THEIR EXECUTION OF THIS EMPLOYMENT AGREEMENT, THE COMPANY'S OBLIGATION TO HIRE THE EMPLOYEE IN ACCORDANCE WITH THE TERMS HEREOF, IS SUBJECT TO AND CONDITIONED UPON THE COMPANY COMPLETING CLOSING (the "Closing") ON THE PURCHASE BY THE COMPANY OF THE ASSETS OF THE BUSINESS KNOWN AS "THE RESPONSE CENTER" ("TRC") THE EMPLOYEE'S PRIOR EMPLOYER. 10 EX-10.30 8 EXHIBIT 10.30 Exhibit 10.30 AMENDMENT OF EMPLOYMENT AGREEMENT This Amendment of Employment Agreement (this "Amendment") amends that certain Employment Agreement dated February 12, 1998 (attached hereto as Exhibit "A" and made a part hereof by this reference) (the "Agreement") by and between RICHARD RAQUET (the "Employee") and NCO TELESERVICES, INC., a Pennsylvania corporation (the "Company"), and this Amendment shall be effective as of June 25, 1999 (the "Effective Date"). For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Paragraph 2 of the Agreement is amended by providing that the Employee's title shall be Chief Executive Officer of the Company. 2. Paragraph 2 of the Agreement is amended to provide that the Employee's duties shall be those which are customarily incident to the position of a Chief Executive Officer. 3. Paragraph 3 of the Agreement is amended by providing that the Term (as such term is defined in the Agreement) shall be extended for an additional period of three (3) years. 4. Paragraph A of Exhibit "A" of the Agreement is amended by providing for a Base Salary of $250,000.00 per annum, commencing on the Effective Date. The Base Salary shall be payable in installments, in arrears, in accordance with the Company's regular payroll practices, but not less often than monthly. 5. Paragraph B of Exhibit "A" of the Agreement is amended by providing that the Bonus shall be up to $100,000.00 based upon the Company successfully achieving certain financial goals as established by mutual agreement of the Company and the Employee. 6. In addition to the options granted to the Employee in the Agreement, the Employee shall receive an option to purchase 10,000 Shares of common stock of NCO Group, Inc. (the Company's parent company) at the per share price equal to the closing price of such stock on the Effective Date. 7. The Employee, in lieu of an automobile allowance, shall receive a company car as agreed to by the Employee and the Company. 8. In the event any term or condition of this Addendum is inconsistent with any term or condition of the Agreement, the terms of this Addendum will control. Except as stated above, all the terms and conditions of the Agreement, including all restrictions and covenants, which restrictions and covenants the Employee hereby acknowledges as being for sufficient consideration and enforceable, shall remain in full force and effect and are incorporated herein by reference as though set forth at length. IN WITNESS WHEREOF, the parties have executed this Addendum to become effective on the Effective Date. NCO FINANCIAL SYSTEMS, INC. By:____________________________ _______________________________ Richard Raquet EX-23.1 9 EXHIBIT 23.1 Consent of Independent Accountants ---------------------------------- We hereby consent to the incorporation by reference in the registration statements of NCO Group, Inc. on Form S-8 (File No's. 333-42743, 333-62131, 333-73087, 333-83229 and 333-87493) and Form S-3 (File No. 333-86473) of our report dated February 16, 2000, on our audits of the consolidated financial statements and the financial statement schedule of NCO Group, Inc. as of December 31, 1998 and 1999, and for each of the three years in the period ended December 31, 1999, which report is included in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP - ------------------------------ PricewaterhouseCoopers LLP Philadelphia, Pennsylvania March 23, 2000 EX-23.2 10 EXHIBIT 23.2 Exhibit 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated January 29, 1999 on the financial statements of JDR Holdings, Inc. and Subsidiaries for the period from May 29, 1997 to December 31, 1997 and for the year ended December 31, 1998 included in this Form 10-K, into NCO Group, Inc.'s previously filed Registration Statements on Form S-8 (File No. 333-42743), (File 333-62131), (File No. 333-73087), (File No. 333-83229) and (File No. 333-87493) and on Form S-3 (File No. 333-86473). /s/ Arthur Andersen LLP ----------------------- Philadelphia, Pa., March 23, 2000 EX-27.1 11 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 52,380,000 0 88,632,000 6,425,000 0 150,161,000 72,434,000 15,611,000 797,940,000 72,536,000 0 0 0 313,558,000 51,330,000 797,940,000 492,354,000 492,354,000 0 418,668,000 0 2,629,000 17,997,000 53,060,000 23,694,000 29,366,000 0 0 0 28,989,000 1.27 1.22
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