-----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, PJdJRkuAsIHlw379pb34UOczKw6Cpy8lSkIRTQztbaN7KOJXssLMiFWMcw9uF6h/ fMA+f6mCSezb1hiXl/YX6w== 0000950116-96-000956.txt : 19960912 0000950116-96-000956.hdr.sgml : 19960912 ACCESSION NUMBER: 0000950116-96-000956 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 20 FILED AS OF DATE: 19960911 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NCO GROUP INC CENTRAL INDEX KEY: 0001022608 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: PA FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-11745 FILM NUMBER: 96628565 BUSINESS ADDRESS: STREET 1: 1740 WALTON ROAD CITY: BLUE BELL STATE: PA ZIP: 19422-0987 BUSINESS PHONE: 6108321440 S-1 1 As filed with the Securities and Exchange Commission on September 11, 1996 Registration No. 333-2858652 ============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 NCO GROUP, INC. (Exact name of Registrant as specified in its charter) Pennsylvania 7322 23-2858652 - ------------------------------------ ------------------------------------- ------------------------------------ (State or other jurisdiction of (Primary standard industrial (I.R.S. employer incorporation or organization) classification code number) identification number)
1740 Walton Road Blue Bell, Pennsylvania 19422-0987 Telephone (610) 832-1440 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Michael J. Barrist, President and Chief Executive Officer NCO Group, Inc. 1740 Walton Road Blue Bell, Pennsylvania 19422-0987 Telephone (610) 832-1440 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Francis E. Dehel, Esquire Henry D. Kahn, Esquire Blank Rome Comisky & McCauley Lawrence R. Seidman, Esquire 1200 Four Penn Center Plaza Piper & Marbury L.L.P. Philadelphia, Pennsylvania 19103 36 South Charles Street Baltimore, Maryland 21201 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / /
CALCULATION OF REGISTRATION FEE ================================================================================================================================== Proposed Proposed maximum maximum Amount of Title of securities Amount to be offering price aggregate registration to be registered registered (1) per share (2) offering price (2) fee - ---------------------------------------------------------------------------------------------------------------------------------- Common Stock, no par value...................... 2,875,000 $13.00 $37,375,000 $12,888 ==================================================================================================================================
(1) Includes 375,000 shares which the Underwriters have a right to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the registration fee. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ============================================================================= CROSS-REFERENCE TABLE LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY PART I OF FORM S-1
Item No. Caption Location in Prospectus - ------- ------- ---------------------- Item 1 Forepart of the Registration Statement and Outside Front Cover Page Outside Front Cover Page of Prospectus Item 2 Inside Front and Outside Back Cover Pages Inside Front and Outside Back Cover of Prospectus Pages Item 3 Summary Information, Risk Factors and Prospectus Summary, Risk Factors Ratio of Earnings to Fixed Charges Item 4 Use of Proceeds Use of Proceeds, Dividend Policy and Prior S Corporation Status Item 5 Determination of Offering Price Underwriting Item 6 Dilution Dilution Item 7 Selling Security Holders Principal and Selling Shareholders Item 8 Plan of Distribution Underwriting Item 9 Description of Securities to be Registered Dividend Policy and Prior S Corporation Status, Capitalization, Description of Capital Stock Item 10 Interests of Named Experts and Counsel Not applicable Item 11 Information with Respect to the Registrant (a) Description of Business Prospectus Summary, Acquisition History, Business (b) Description of Property Business (c) Legal Proceedings Business (d) Market Price of and Dividends on the Dividend Policy and Prior S Corporation Registrant's Common Equity and Related Status, Description of Capital Stock, Stockholder Matters Underwriting (e) Financial Statements Index to Financial Statements (f) Selected Financial Data Selected Financial and Operating Data (g) Supplementary Financial Information Not applicable (h) Management's Discussion and Analysis of Management's Discussion and Analysis of Financial Condition and Results of Financial Condition and Results Operations of Operations (i) Changes in and Disagreements with Not applicable Accountants on Accounting and Financial Disclosure (j) Directors and Executive Officers Management (k) Executive Compensation Management (l) Security Ownership of Certain Principal and Selling Shareholders Beneficial Owners and Management (m) Certain Relationships and Related Certain Transactions Transactions Item 12 Disclosure of Commission Position on Not applicable Indemnification for Securities Act Liabilities
Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state. SUBJECT TO COMPLETION DATED SEPTEMBER 11, 1996 2,500,000 Shares NCO GROUP, INC. Common Stock All of the shares of Common Stock offered hereby are being sold by NCO Group, Inc. ("NCO" or the "Company"). Prior to this offering (the "Offering"), there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $11.00 and $13.00 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. Application has been made for quotation of the Common Stock on the Nasdaq National Market under the symbol "NCOG." See "Risk Factors" commencing on page 11 of this Prospectus for a discussion of certain factors that should be considered by prospective purchasers of the Common Stock offered hereby. ---------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
============================================================================================================================= Price to Underwriting Proceeds to Public Discount (1) Company (2) - ----------------------------------------------------------------------------------------------------------------------------- Per Share................................ $ $ $ Total (3)................................ $ $ $ =============================================================================================================================
(1) See "Underwriting" for information concerning indemnification of the Underwriters and other matters. (2) Before deducting offering expenses payable by the Company, estimated at $1,150,000. (3) Certain shareholders of the Company (the "Selling Shareholders") have granted to the Underwriters a 30-day option to purchase up to 375,000 additional shares of Common Stock solely to cover over-allotments, if any. If the Underwriters exercise this option in full, the total Price to Public, Underwriting Discount, Proceeds to Company and Proceeds to Selling Shareholders will be $ , $ , $ , and $ , respectively. See "Principal and Selling Shareholders" and "Underwriting." The shares of Common Stock are offered by the several Underwriters named herein, subject to receipt and acceptance by them and subject to their right to reject any orders in whole or in part. It is expected that delivery of the certificates representing such shares will be made against payment therefor at the office of Montgomery Securities on or about , 1996. ------------------ MONTGOMERY SECURITIES JANNEY MONTGOMERY SCOTT INC. , 1996 [Three pictures depicting the Company's call center in Blue Bell, Pennsylvania, the Company's call center in Buffalo, New York and the Company's computer center in Blue Bell, Pennsylvania appear here.] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. -2- PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, contained elsewhere in this Prospectus. The Company is a recently formed Pennsylvania corporation. On September 3, 1996, the shareholders of NCO Financial Systems, Inc. ("NCO Financial") exchanged each of their shares of NCO Financial for one share of the Company and NCO Financial became a wholly-owned subsidiary of the Company. Unless the context otherwise requires, all references in this Prospectus to the "Company" or "NCO" mean NCO Group, Inc. and its subsidiaries. Unless otherwise indicated, all information in this Prospectus: (i) assumes no exercise of the Underwriters' over-allotment option; (ii) gives effect to a proposed 46.56 stock split to be effected in September 1996; and (iii) gives effect to the Company's acquisition of Management Adjustment Bureau, Inc. ("MAB") on September 5, 1996. The Company NCO is a leading provider of accounts receivable management and related services utilizing an extensive teleservices infrastructure. The Company develops and implements customized accounts receivable management solutions for clients. From eight call centers located in six states, the Company employs advanced workstations and sophisticated call management systems comprised of predictive dialers, automated call distribution systems, digital switching and customized computer software. 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 made four acquisitions which have enabled it to increase its penetration of existing markets, establish a presence in certain new markets and realize significant operating efficiencies. In addition, the Company has leveraged its infrastructure by offering additional services including telemarketing, customer service call centers and other outsourced administrative services. The Company believes that it is among the 15 largest accounts receivable management companies in the United States. The Company provides its services principally to mid- and large-size educational organizations, financial institutions, healthcare organizations, telecommunications companies, utilities and government entities. In 1995, the Company had over 5,000 clients, including Bell Atlantic Corporation, First Union Corporation, George Washington University Hospital, NationsBank and the University of Pennsylvania. For its accounts receivable management services, the Company generates substantially all of its revenue on a contingency fee basis. Such fees typically range from 15% to 35%, with a current average of approximately 24%, which the Company believes is among the lowest in the industry. For many of its other outsourced teleservices, the Company is paid on a fixed fee basis. While NCO's contracts are relatively short-term, the Company seeks to develop long-term relationships with its clients and works closely with them to provide quality, customized solutions. -3- Increasingly, companies are outsourcing many non-core functions to focus on revenue generating activities, reduce costs and improve productivity. In particular, many corporations are recognizing the advantages of outsourcing accounts receivable management and other teleservices as a result of numerous factors including: (i) the increasing complexity of such functions; (ii) changing regulations and increased competition in certain industries; and (iii) the development of sophisticated call management systems requiring substantial capital investment, technical capabilities and human resource commitments. Consequently, receivables referred to third parties for management and recovery in the United States have grown substantially from approximately $43.7 billion in 1990 to approximately $79.0 billion in 1994, according to estimates published by the American Collectors Association, Inc. ("ACA"), an industry trade group. While significant economies of scale exist for large accounts receivable management companies, the industry remains highly fragmented. Based on information obtained from the ACA, there were approximately 7,600 accounts receivable management companies in operation in 1994, the majority of which were small, local businesses. Given the financial and competitive constraints facing these small companies and the limited number of liquidity options for the owners of such businesses, the Company believes that the industry will experience consolidation in the future. The Company strives to be a cost-effective, client service driven provider of accounts receivable management and other related teleservices to companies with substantial outsourcing needs. The Company's business strategy encompasses a number of key elements which management believes are necessary to ensure quality service and to achieve consistently strong financial performance. First, the Company focuses on the efficient utilization of its technology and infrastructure to constantly improve productivity. The Company's teleservices infrastructure enables it to perform large scale accounts receivable management programs cost effectively and to rapidly and efficiently integrate the Company's acquisitions. A second critical component is NCO's commitment to client service. Management believes that the Company's emphasis on designing and implementing customized accounts receivable management programs for its clients provides it with a significant competitive advantage. Third, the Company seeks to be a low cost provider of accounts receivable management services by maintaining a low cost structure. Lastly, the Company is targeting larger clients which offer significant cross-selling opportunities and have greater teleservices outsourcing requirements. The Company seeks to continue its rapid expansion through both internal and external growth. The Company intends to continue to take advantage of the fragmented nature of the accounts receivable management industry by making strategic acquisitions. Through selected acquisitions, the Company will seek to serve new geographic markets, expand its presence in its existing markets or add complementary services. In addition, the Company has experienced and expects to continue to experience strong internal growth by continually striving to increase its market share, expand its industry-specific market expertise and develop and offer new value-added teleservices. The Company's principal executive offices are located at 1740 Walton Road, Blue Bell, Pennsylvania 19422, and its telephone number is (610) 832-1440. -4- - ------------------------------------------------------------------------------- The Offering
Common Stock offered by the Company.................................. 2,500,000 shares Common Stock to be outstanding after the Offering.................... 6,713,447 shares (1) Use of proceeds...................................................... For repayment of bank debt incurred to finance acquisitions, payment of S Corporation distributions, and for working capital and other general corporate purposes, including possible acquisitions. Proposed Nasdaq National Market symbol............................... NCOG
- ---------- (1) Excludes: (i) 464,390 shares of Common Stock reserved for issuance under the Company's 1995 Stock Option Plan, 1996 Stock Option Plan and 1996 Non-Employee Director Stock Option Plan; (ii) 240,591 shares of Common Stock reserved for issuance upon the exercise of warrants granted or expected to be granted by the Company to its lender; and (iii) 83,333 shares of Common Stock reserved for issuance upon the conversion of the Company's $1.0 million Convertible Note (at an assumed conversion price of $12.00 per share) issued as partial consideration for the MAB acquisition. See "Acquisition History," "Management-- Stock Option Plans" and "Description of Capital Stock-- Warrants and Convertible Note." -5- SUMMARY FINANCIAL AND OPERATING DATA (Dollars in thousands, except per share data)
Years Ended December 31, ----------------------------------------------------- 1991 1992 1993 1994 -------------- ------------ ----------- ------------ Statement of Income Data: Revenue...................................... $ 3,792 $ 5,822 $ 7,445 $ 8,578 Operating costs and expenses: Payroll and related expenses.............. 1,892 3,058 4,123 4,558 Selling, general and administrative expenses 1,457 2,013 2,391 2,674 Depreciation and amortization expense..... 40 95 141 215 -------------- ------------ ----------- ------------ Income from operations................. 403 656 790 1,131 Other income (expense)....................... (1) 15 11 (45) -------------- ------------ ----------- ------------ Income before income taxes............. 402 671 801 1,086 Pro forma provision for income taxes (4)..... 160 268 320 434 -------------- ------------ ----------- ------------ Pro forma net income (4).................. $ 242 $ 403 $ 481 $ 652 ============== ============ =========== ============ Pro forma net income per share............... Pro forma weighted average shares outstanding Operating Data: Total value of accounts referred............. $ 178,529 $ 150,707 $ 199,108 $ 281,387 Average fee.................................. 14.4% 16.9% 20.2% 22.5%
Six Months Ended June 30, - ------------------------------ --------------------------------------------- 1995 1995 1996 ----------------------------- ------------- ------------------------------- Pro Pro Actual Forma(1)(2) Actual Forma (2)(3) ------------- --------------- ------------- ----------------- $12,733 $34,509 $ 5,546 $12,543 $19,319 6,797 16,412 2,956 5,954 9,479 4,042 12,531 1,745 4,095 6,326 348 1,529 116 423 833 ------------- --------------- ------------- ------------- ----------------- 1,546 4,037 729 2,071 2,681 (180) (212) (73) (310) (19) ------------- --------------- ------------- ------------- ----------------- 1,366 3,825 656 1,761 2,662 546 1,659 262 704 1,129 ------------- --------------- ------------- ------------- ----------------- $ 820 $ 2,166 $ 394 $ 1,057 $ 1,533 ============= =============== ============= ============= ================= $ 0.17(5) $ 0.35 $ 0.22(5) $ 0.25 ============= =============== ============= ================= 4,745,229(5) 6,211,179 4,750,259(5) 6,216,209 ============= =============== ============= ================= $ 431,927 $1,134,000 $ 180,783 $ 373,499 $ 664,905 22.4% N/A 21.7% 24.0% 24.3%
December 31, ------------------------------------------------------------------ 1991 1992 1993 1994 1995 -------------- ------------ ----------- ------------ ------------- Balance Sheet Data: Cash and cash equivalents.................... $ 355 $ 421 $ 562 $ 526 $ 805 Working capital.............................. 179 362 445 473 812 Total assets................................. 1,546 2,177 2,449 4,106 7,873 Long-term debt, net of current portion....... 108 144 59 732 2,593 Shareholders' equity......................... 403 686 876 1,423 2,051
June 30, 1996 ------------------------------- Pro Forma Actual As Adjusted (6) ------------- ----------------- $ 990 $ 9,515 2,458 11,600 14,655 35,263 7,356 1,710 3,151 26,982
-6- - ------------ (1) Assumes that the acquisitions of MAB, the Trans Union Corporation Collections Division and Eastern Business Services, Inc. occurred on January 1, 1995. (2) Gives effect to: (i) the reduction of certain redundant operating costs and expenses that were immediately identifiable at the time of the acquisitions; (ii) the elimination of interest expense associated with acquisition related debt assumed to be repaid with offering proceeds; and (iii) the issuance of 1,715,950 shares of Common Stock (at an assumed initial public offering price of $12.00 per share) which, net of estimated underwriting commissions and offering expenses payable by the Company, would be sufficient to repay acquisition related debt of $15.0 million and to fund the distribution of undistributed S Corporation earnings (estimated at $3.0 million) through September 3, 1996, the termination date of the Company's S Corporation status, to existing shareholders of the Company. See Pro Forma Consolidated Financial Statements. (3) Assumes that the acquisition of MAB occurred on January 1, 1996. (4) Prior to September 3, 1996 the Company operated as an S Corporation for income tax purposes and accordingly was not subject to federal or state income taxes prior to such date. Accordingly, the historical financial statements do not include a provision for federal and state income taxes for such periods. Pro forma net income has been computed as if the Company had been fully subject to federal and state income taxes for all periods presented. See Note 11 of Notes to Pro Forma Consolidated Financial Statements. (5) Assumes that the Company issued 250,000 shares of Common Stock (at an assumed initial public offering price of $12.00 per share) to fund the distribution of undistributed S Corporation earnings (estimated at $3.0 million) through September 3, 1996, the termination date of the Company's S Corporation status, to existing shareholders of the Company. (6) Gives effect to: (i) the MAB acquisition and (ii) the sale of the 2,500,000 shares of Common Stock offered by the Company hereby (at an assumed initial public offering price of $12.00 per share) and the application of the net proceeds therefrom as set forth in "Use of Proceeds." -7- ACQUISITION HISTORY Since 1994, the Company has completed four strategic acquisitions which have expanded its client base and geographic presence, increased its presence in key industries and substantially increased its revenues and profitability. A key element of the Company's growth strategy is to pursue selected strategic acquisitions to serve new geographic markets or industries, expand its presence in its existing markets or add complementary service applications. The Company regularly reviews various strategic acquisition opportunities and periodically engages in discussions regarding such possible acquisitions. A summary of the completed acquisitions follows: Management Adjustment Bureau, Inc. On September 5, 1996, NCO purchased all of the outstanding stock of MAB for $8.0 million in cash and a $1.0 million convertible note. The note is convertible into the Company's Common Stock at the initial public offering price and bears interest payable monthly at a rate of 8.0% per annum with principal due in September 2001. MAB, based in Buffalo, New York, provides accounts receivable management services, principally to the education, financial services, telecommunications and utility industries. MAB's clients include NationsBank, NYNEX, Marine Midland Bank and Boston Edison. MAB's revenues were $13.0 million for the year ended December 31, 1995 and $6.8 million for the six months ended June 30, 1996. The Company will continue to operate MAB's facilities in Buffalo and Denver, Colorado. The Company has begun to realize operating efficiencies from the MAB acquisition and has reduced compensation and related expenses associated with MAB's principal shareholder, eliminated redundant collection and administrative personnel, and begun to reduce certain expenses, such as telephone, mailing, and data processing, to levels consistent with NCO's current operating results. NCO will also consolidate certain company-wide administrative functions such as human resources and payroll administration into MAB's Buffalo facility, resulting in the reduction of certain NCO administrative costs. Trans Union Corporation Collections Division On January 3, 1996, NCO purchased certain assets of the Trans Union Corporation Collections Division ("TCD") for $4.8 million in cash. TCD provided accounts receivable management services, principally to the telecommunications, utility and healthcare industries from offices in Pennsylvania, Ohio and Kansas. TCD's clients included Bell Atlantic Corporation, Western Resources Corporation and Hutchinson Hospital Corporation. TCD's revenues were $7.5 million for the year ended December 31, 1995. Promptly following the TCD acquisition, the Company reduced costs by eliminating redundant collection and administrative personnel, reducing certain expenses such as rent, telephone, mailing and data processing, and closing one office. Eastern Business Services, Inc. In August 1995, NCO purchased certain assets of Eastern Business Services, Inc. ("Eastern") for $1.6 million in cash and the assumption of a non-interest bearing note payable in the amount of $252,000 and certain other accounts payable in the amount of $209,000. Eastern, based in Beltsville, Maryland, provided accounts receivable management services, principally -8- to the utility and healthcare industries. Eastern's clients included Bell Atlantic Corporation and George Washington University Hospital. Promptly following the Eastern acquisition, the Company reduced costs by eliminating redundant collection and administrative personnel and reducing certain expenses such as telephone, mailing and data processing. B. Richard Miller, Inc. In April 1994, NCO purchased certain assets of B. Richard Miller, Inc. ("BRM") for $1.0 million in cash, the issuance by the Company of a $127,000 promissory note and the issuance of 123,803 shares of Common Stock and an option to acquire 86,881 shares of Common Stock at an exercise price of $2.16 per share (which option was exercised in 1995). In connection with the acquisition, BRM's principal shareholder became an executive officer of the Company. BRM, based in Ardmore, Pennsylvania, provided accounts receivable management services, principally to the education industry. BRM's clients included University of Pennsylvania, Rutgers University and Seton Hall University. Promptly following the BRM acquisition, the Company reduced costs by eliminating redundant collection and administrative personnel, reducing certain expenses such as telephone, mailing and data processing and closing BRM's sole office. Financial Impact of Acquisitions The Company financed the MAB, TCD, Eastern and BRM acquisitions with borrowings from its bank. The bank recently increased the Company's revolving credit facility from $7.0 million to $15.0 million to finance the acquisition of MAB. The revolving credit facility currently bears interest at the rate of prime plus 1.375%. The Bank has issued a commitment letter to further increase this facility to $25.0 million at an interest rate of LIBOR plus 2.5% upon the completion of the Offering, provided that the Offering results in minimum net proceeds to the Company of $24.0 million. The Company granted the bank a warrant to acquire 175,531 shares of Common Stock at a nominal exercise price in consideration for establishing the revolving credit facility for acquisitions, and granted an additional warrant to purchase 46,560 shares of Common Stock at an exercise price equal to the initial public offering price in consideration for increasing the revolving credit facility to $15.0 million. The Company also expects to grant an additional warrant to purchase 18,500 shares of Common Stock at an exercise price equal to the initial public offering price in consideration for increasing the revolving credit facility to $25.0 million. The acquisitions have been accounted for under the purchase method of accounting for financial reporting purposes. These acquisitions have created goodwill estimated at $14.5 million which is being amortized over a 15- to 25-year period resulting in amortization expense of approximately $749,000 annually. Pro forma statements of income for the year ended December 31, 1995 and the six months ended June 30, 1996 appearing elsewhere in this Prospectus assume that the MAB, TCD and Eastern acquisitions had occurred on January 1, 1995 and January 1, 1996, respectively. Pro forma adjustments have been made to reflect the elimination of certain expenses that were immediately identifiable and promptly realized at the time of the acquisitions, including the immediate elimination of certain redundant collection and administrative personnel. These and other expense adjustments are summarized in the table below and related footnotes. -9-
Year Ended Six Months December 31, Ended 1995 June 30, 1996 ------------------ ------------------ Redundant collection and administrative personnel......... $1,437,268 $ 407,400 MAB principal shareholder compensation (1)................ 643,500 321,750 ------------------ ------------------ Total payroll and related expense reductions...................................... 2,080,768 729,150 ------------------ ------------------ TCD occupancy costs (2)................................... 260,300 -- Non-recurring MAB expenses (3)............................ -- 190,000 ------------------ ------------------ Total selling, general and administrative expense reductions.............................. 260,300 190,000 ------------------ ------------------ Depreciation and amortization (4)......................... (379,216) (160,705) ------------------ ------------------ Total operating cost and expense adjustments..................................... $1,961,852 $ 758,445 ================== ==================
- --------- (1) Reflects the reduction of the salary of MAB's principal shareholder (who is no longer active in the day-to-day operations of MAB's business) pursuant to an employment agreement. (2) Reflects the difference between the Company's current rent expense for the TCD facilities and the rental costs allocated to TCD by its parent prior to the acquisition. (3) Reflects reversal of a non-recurring charge recorded by MAB to account for potential losses relating to certain repayment guarantees made on behalf of third parties. (4) Reflects additional amortization expense, assuming MAB, TCD, and Eastern had been acquired at the beginning of the periods presented, partially offset in the year ended December 31, 1995 by depreciation reductions relating to assets not acquired by NCO as part of the TCD and Eastern acquisitions. In each of the acquisitions, the Company acquired businesses with higher cost structures than the Company. In the months following the acquisitions of TCD, Eastern and BRM, the Company leveraged its existing infrastructure to realize additional operating efficiencies in order to bring the cost structure of acquired companies in line with NCO's current operating results. These other cost savings include: (i) further reductions in payroll and related expenses relating primarily to redundant collections and administrative personnel, (ii) further reduction in rent and other facilities costs, and (iii) reduction in certain expenses such as telephone, mailing and data processing. While management believes it will realize similar cost savings from the MAB acquisition, the Company's ability to achieve such cost savings is uncertain and there can be no assurance that MAB's business will be successfully integrated with that of the Company, or that the Company will be able to realize operating efficiencies or eliminate redundant costs. See "Risk Factors -- Risks Associated with TCD and MAB Acquisitions" and " -- Risks Associated with Future Acquisitions." -10- RISK FACTORS Certain statements included in this Prospectus, including, without limitation, statements regarding the anticipated growth in the amount of accounts receivable placed for third-party management, the continuation of trends favoring outsourcing of other administrative functions, the Company's objective to grow through strategic acquisitions and its ability to realize operating efficiencies upon the completion of the MAB acquisition and other acquisitions that may occur in the future, the Company's ability to expand its service offerings, and trends in the Company's future operating performance, are forward-looking statements, and the factors discussed below could cause actual results and developments to be materially different from those expressed in or implied by such statements. Accordingly, in addition to the other information contained in "Acquisition History -- Financial Impact of Acquisitions," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Prospectus, the following factors should be considered carefully in evaluating an investment in the shares of Common Stock offered by this Prospectus. Risks Associated with TCD and MAB Acquisitions The TCD and MAB acquisitions were consummated in January 1996 and September 1996, respectively. These entities had revenues of $7.5 million and $13.0 million, respectively, in 1995 compared to the Company's revenue of $12.7 million in 1995. The Company's efforts in integrating the TCD acquisition are continuing and its efforts in integrating the MAB acquisition are in the initial stages. Such integration will likely place significant demands on the Company's management and infrastructure. There can be no assurance that TCD's or MAB's businesses will be successfully integrated with that of the Company, that the Company will be able to realize operating efficiencies or eliminate duplicative costs or that their businesses will be operated profitably. Further, there can be no assurance that clients of the acquired businesses will continue to do business with the Company or that the Company will be able to retain key employees. Approximately $15.0 million of the proceeds of this Offering will be used to repay indebtedness incurred in the MAB, TCD Eastern and BRM acquisitions. See "Use of Proceeds." Ability to Manage and Sustain Growth The Company has experienced rapid growth over the past several years which has placed significant demands on its administrative, operational and financial resources. The Company seeks to continue such rapid growth which could place additional demands on its resources. Future internal growth will depend on a number of factors, including the effective and timely initiation and development of client relationships, the Company's ability to maintain the quality of services it provides to its clients and the recruitment, motivation and retention of qualified personnel. Sustaining growth will also require the implementation of enhancements to its operational and financial systems and will require additional management, operational and financial resources. There can be no assurance that the Company will be able to manage its expanding operations effectively or that it will be able to maintain or accelerate its growth, and any failure to do so could have a materially adverse effect on the Company's business, results of operations and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." -11- Risks Associated with Future Acquisitions A primary element of the Company's growth strategy is to pursue strategic acquisitions that expand or complement the Company's business. The Company regularly reviews various strategic acquisition opportunities and periodically engages in discussions regarding such possible acquisitions. There can be no assurance that the Company will be able to identify additional acquisition candidates on terms favorable to the Company or in a timely manner, enter into acceptable agreements or close any such transactions. In addition, the Company believes that it will compete for attractive acquisition candidates with other larger companies, consolidators or investors in the accounts receivable management industry. Increased competition for such acquisition candidates could have the effect of increasing the cost to the Company of pursuing this growth strategy or could reduce the number of attractive candidates to be acquired. Future acquisitions could divert management's attention from the daily operations of the Company and otherwise require additional management, operational and financial resources. Moreover, there is no assurance that the Company will successfully integrate future acquisitions into its business or operate such acquisitions profitably. Acquisitions also involve risks associated with unanticipated problems, liabilities or contingencies. See "Business -- Growth Strategy." The Company may require additional debt or equity financing for future acquisitions, which may not be available on terms favorable to the Company, if at all. To the extent the Company uses its capital stock for all or a portion of the consideration to be paid for future acquisitions, dilution may be experienced by existing shareholders, including the purchasers of Common Stock in this Offering. In the event that the Company's capital stock does not maintain sufficient value or potential acquisition candidates are unwilling to accept the Company's capital stock as consideration for the sale of their businesses, the Company may be required to utilize more of its cash resources, if available, in order to continue its acquisition program. If the Company does not have sufficient cash resources or is not able to use its capital stock as consideration for acquisitions, its growth through acquisitions could be limited. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Fluctuations in Quarterly Operating Results The Company has experienced and expects to continue to experience quarterly variations in revenues and net income as a result of many factors, including the timing of clients' accounts receivable management programs, the commencement of new contracts, the termination of existing contracts, costs to support growth by acquisition or otherwise, the costs and timing of completion of additional 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. 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." -12- Dependence on Key Personnel The Company is highly dependent upon the continued services and experience of its senior management team, including Michael J. Barrist, President and Chief Executive Officer. The loss of the services of Mr. Barrist or other members of its senior management could have a materially adverse effect on the Company. The Company has five-year employment contracts with Mr. Barrist and certain other key executives. In addition, the Company has a $4.0 million key person life insurance policy on Mr. Barrist. See "Management." Dependence on Certain Industries; Contract Risks Most of the Company's revenues are derived from clients in the education, financial services, healthcare, telecommunications and utilities industries. A significant downturn in any of these industries or any trends to reduce or eliminate the use of third-party accounts receivable management services could have a materially adverse impact on the Company's business, results of operations and financial condition. 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. Accordingly, there can be no assurance that existing clients will continue to use the Company's services at historical levels, if at all. Under the terms of these contracts, clients are not required to place accounts with the Company but do so on a discretionary basis. In addition, substantially all of the Company's contracts are on a contingent fee basis where the Company recognizes revenues only as accounts are recovered. See "Business." Competition The accounts receivable management industry is highly competitive. The Company competes with over 7,600 providers, including large national corporations such as First Data Corporation, Payco American Corporation, CRW Financial, Inc. and Union Corporation, and many regional and local firms. Some of the Company's competitors have substantially 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 businesses. Moreover, many larger clients retain multiple accounts receivable management providers which exposes the Company to continuous competition in order to remain a preferred vendor. There can be no assurance that outsourcing of the accounts receivable management function will continue or that the Company's clients which currently outsource such services will not bring them in-house. The Company also competes with other firms, such as SITEL Corporation, APAC Teleservices, Inc. and Teletech Holdings, Inc., in providing teleservices. As a result of these factors, there can be no assurance that competition from existing or potential competitors will not have a materially adverse effect on the Company's results of operations. See "Business - Competition." Risk of Business Interruption; Reliance on Computer and Telecommunications Infrastructure The Company's success is dependent in large part on its continued investment in sophisticated telecommunications and computer systems, including predictive dialers, automated call distribution systems and digital switching. The Company has invested significantly in technology in an effort to remain competitive and anticipates that it will be necessary to continue to do so in the -13- future. Moreover, computer and telecommunication technologies are evolving rapidly and are characterized by short product life cycles, which requires the Company to anticipate technological developments. There can be no assurance that the Company will be successful in anticipating, managing or adopting such technological changes on a timely basis or that the Company will have the capital resources available to invest in new technologies. In addition, the Company's business is highly dependent on its computer and telecommunications equipment and software systems, the temporary or permanent loss of which, through casualty or operating malfunction, could have a materially adverse effect on the Company's business. The Company's business is materially dependent on service provided by various local and long distance telephone companies. A significant increase in the cost of telephone services that is not recoverable through an increase in the price of the Company's services, or any significant interruption in telephone services, could have a materially adverse impact on the Company. See "Business - Operations." Dependence on Labor Force The accounts receivable management industry is very labor intensive and experiences high personnel turnover. Many of the Company's employees receive modest hourly wages and a portion of these employees are employed on a part-time basis. A higher turnover rate among the Company's employees would increase the Company's recruiting and training costs and could adversely impact the quality of services the Company provides to its clients. If the Company 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 the Company's business will require it to recruit and train qualified personnel at an accelerated rate from time to time. There can be no assurance that the Company 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 the Company. See "Business - Personnel and Training." Government Regulation The accounts receivable management and telemarketing industries are regulated under various federal and state statutes. In particular, the Company is subject to the federal Fair Debt Collection Practices Act which establishes specific guidelines and procedures which debt collectors must follow in communicating with consumer debtors, including the time, place and manner of such communications. 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, and some states require that the Company be licensed as a debt collection company. With respect to the other teleservices offered by the Company, including telemarketing, the federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 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 -14- regulate telemarketing and some states have enacted restrictions similar to the federal TCPA. The failure to comply with applicable statutes and regulations could have a materially adverse effect on the Company. There can be no assurance that additional federal or state legislation, or changes in regulatory implementation, would not limit the activities of the Company in the future or significantly increase the cost of regulatory compliance. 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. See "Business -- Government Regulation." Control by Principal Shareholders Immediately following this Offering, Michael J. Barrist will beneficially own approximately 39.9% of the Common Stock (approximately 36.4% if the Underwriters' over-allotment option is exercised in full), and together with the other executive officers of the Company will beneficially own approximately 62.9% (approximately 57.3% if the Underwriters' over-allotment option is exercised in full). As a result of such voting concentration, Mr. Barrist, together with other executive officers of the Company, will be able to effectively control most matters requiring approval by the Company's shareholders, including the election of directors. Such voting concentration may have the effect of delaying, deferring or preventing a change in control of the Company. See "Management" and "Principal and Selling Shareholders." Absence of Public Market; Possible Volatility of Stock Price Prior to this Offering, there has been no public market for the Company's Common Stock. Application has been made for quotation of the Common Stock on the Nasdaq National Market. There can be no assurance that a viable public market for the Common Stock will develop or be sustained after the Offering or that purchasers of the Common Stock will be able to resell their Common Stock at prices equal to or greater than the initial public offering price. The initial public offering price has been determined by negotiations among the Company, the Selling Shareholders and the representatives of the Underwriters and may not be indicative of the prices that may prevail in the public market after the Offering is completed. Numerous factors, including announcements of fluctuations in the Company's or its competitors' operating results and market conditions for accounts receivable management, telemarketing industry or business services stocks in general, the timing and announcement of acquisitions by the Company or its competitors or government regulatory action, could have a significant impact on the future price of the Common Stock. 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 adversely affect the market price of the Common Stock. See "Underwriting." Shares Eligible for Future Sale Sales of the Company's Common Stock in the public market after the Offering could adversely affect the market price of the Company's Common Stock and could impair the Company's -15- future ability to raise capital through the sale of equity securities. Upon completion of the Offering, the Company will have 6,713,447 shares of Common Stock outstanding. Of these shares, all of the shares sold in the Offering will be available for resale in the public market without restriction, except for any such shares which may be purchased by affiliates of the Company. The Company's directors, executive officers and existing shareholders have agreed, subject to certain limitations, not to offer, sell or otherwise dispose of any shares of Common Stock for a period of 180 days after the closing of the Offering without the prior written consent of Montgomery Securities. Following the expiration of this 180-day period, such persons will hold an aggregate of 4,213,447 outstanding shares of Common Stock (3,838,447 shares if the over-allotment option is exercised in full) which may be resold under Rule 144. The Company also has or expects to have outstanding warrants to purchase 240,591 shares of Common Stock and a $1.0 million Convertible Note convertible into 83,333 shares of Common Stock (at an assumed conversion price of $12.00 per share) at any time on or before September 5, 2001. The holder of the warrants has agreed, subject to certain limitations, not to offer, sell or otherwise dispose of any shares of Common Stock issuable upon exercise of the warrants for a period of 180 days after the closing of the Offering without the prior written consent of Montgomery Securities. The warrants are entitled to certain demand and piggy-back registration rights following the completion of the Offering. In addition, the Company intends, as soon as practicable after the consummation of the Offering, to register approximately 464,390 shares of Common Stock reserved for issuance to its employees, directors, consultants and advisors under the Company's 1995 Stock Option Plan, 1996 Stock Option Plan and 1996 Non-Employee Director Stock Option Plan. Options to purchase an aggregate of 367,321 shares of Common Stock will be outstanding under all such plans upon the consummation of the Offering. See "Management -- Stock Option Plans," "Description of Capital Stock -- Warrants and Convertible Note" and "Shares Eligible for Future Sale." Anti-Takeover Provisions The Company's Amended and Restated Articles of Incorporation (the "Articles") and Bylaws (the "Bylaws") contain provisions which may be deemed to be "anti-takeover" in nature in that such provisions may deter, discourage or make more difficult the assumption of control of the Company by another corporation or person through a tender offer, merger, proxy contest or similar transaction. The Articles permit the Board of Directors to establish the rights, preferences, privileges and restrictions of, and to issue, up to 5,000,000 shares of Preferred Stock without shareholder approval. The Company's Bylaws also provide for the staggered election of directors to serve for one-, two- and three-year terms, and for successive three-year terms thereafter, subject to removal only for cause upon the vote of not less than 65% of the shares of Common Stock represented at a shareholders' meeting. Certain provisions of the Articles and Bylaws may not be amended except by a similar 65% vote. In addition, the Company is subject to certain anti-takeover provisions of the Pennsylvania Business Corporation Law. See "Description of Capital Stock." Dilution Purchasers of Common Stock in this Offering will experience immediate dilution in net tangible book per share of Common Stock of $10.15 from the initial public offering price per share. See "Dilution." -16- USE OF PROCEEDS The net proceeds from the sale of the 2,500,000 shares of Common Stock offered by the Company hereby are estimated to be approximately $26.8 million after deducting the estimated underwriting discounts and expenses of the Offering and based on an assumed initial public offering price of $12.00 per share. In the event the Underwriters' over-allotment option is exercised, the Company will not receive any proceeds from the sale of Common Stock by the Selling Shareholders. Approximately $15.0 million of the net proceeds will be used to repay outstanding debt under the Company's Credit Agreement with Mellon Bank, N.A. The Company entered into the Credit Agreement in July 1995 to obtain working capital and acquisition financing and to refinance certain existing debt. The Credit Agreement, as amended, provides a revolving line of credit which permits borrowings of up to $15.0 million at an interest rate equal to the prime rate plus 1.375% (9.625% at August 31, 1996). The bank has issued a commitment letter to increase this facility to $25.0 million at an interest rate of LIBOR plus 2.5% upon the completion of the Offering provided that the Offering results in minimum net proceeds to the Company of $24.0 million. Borrowings under the Credit Agreement were used to fund the MAB, TCD and Eastern acquisitions and to refinance indebtedness incurred in connection with the BRM acquisition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The Company also will use a portion of the net proceeds to make distributions to shareholders of record on September 3, 1996, the date on which the Company terminated its S Corporation status (the "S Corporation Distributions"). The amount of the distributions will equal all undistributed S Corporation earnings, estimated at $3.0 million as of September 3, 1996, subject to final adjustment. The Company may use a portion of the net proceeds for future acquisitions. The Company regularly reviews various strategic acquisition opportunities and periodically engages in discussions regarding such possible acquisitions. Currently, the Company is not a party to any agreements or understandings regarding any material acquisitions; however, as the result of the Company's process of reviewing possible acquisition prospects, negotiations may occur from time to time if appropriate opportunities arise. The Company intends to use the remainder of its net proceeds for working capital and other general corporate purposes. Pending the uses described above, the Company intends to invest its net proceeds in short-term, investment-grade securities. DIVIDEND POLICY AND PRIOR S CORPORATION STATUS The Company historically was treated for federal and state income tax purposes as an S Corporation under Subchapter S of the Internal Revenue Code of 1986, as amended (the "Code"), and under Pennsylvania law. As a result of the Company's status as an S Corporation, the Company's shareholders, rather than the Company, were taxed directly on the earnings of the Company for federal and certain state income tax purposes, whether or not such earnings were distributed. The Company made cash distributions to the current shareholders aggregating $658,000, $813,000, $1.1 million and $752,000 in respect of the Company's S Corporation earnings for 1993, -17- 1994 and 1995, and for the six months ended June 30, 1996, respectively. On September 3, 1996 (the "Termination Date"), the Company terminated its status as an S Corporation and thereupon became subject to federal and state income taxes at applicable C Corporation rates. The Company declared a distribution to existing shareholders in an aggregate amount equal to the Company's undistributed S Corporation earnings through the Termination Date, which are estimated at $3.0 million, subject to final adjustment. The Company expects to pay the S Corporation Distributions with a portion of the net proceeds of this Offering. See "Use of Proceeds." The Company has also entered into a distribution and tax indemnification agreement with its current shareholders with respect to taxes resulting from the Company's operations during the period in which it was an S Corporation. See "Certain Transactions--Distribution and Tax Indemnification Agreement." Purchasers of shares of Common Stock in this Offering will not receive any of the S Corporation Distributions or any distribution with respect to any indemnification payment to the current shareholders. The Company does not anticipate paying cash dividends on its Common Stock in the foreseeable future. In addition, the Company's 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. -18- CAPITALIZATION The following table sets forth as of June 30, 1996 the current portion of long-term debt and capitalized lease obligations and the actual capitalization of the Company and the pro forma, as adjusted, capitalization of the Company which gives effect to: (i) the MAB acquisition and (ii) the sale of the 2,500,000 shares of Common Stock in the Offering (at an assumed initial public offering price of $12.00 per share), and the application of the net proceeds therefrom as set forth in "Use of Proceeds." This table should be reviewed in conjunction with the Company's historical and pro forma financial statements and related notes appearing elsewhere in this Prospectus.
June 30, 1996 -------------------------------------- Pro Forma Actual As Adjusted ------------------ ------------------ (In thousands) Current portion of long-term debt and capitalized lease obligations....... $ 101 $ 270 ================== ================== Long-term debt, net of current portion (1): Revolving credit agreement........................................... 7,118 323 Capitalized lease obligations........................................ 238 387 Convertible note payable............................................. -- 1,000 ------------------ ------------------ Total long-term debt and capitalized lease obligations........... 7,356 1,710 Shareholders' equity: Preferred Stock, no par value, 5,000,000 shares authorized; no shares issued or outstanding.................................. -- -- Common Stock, no par value, 25,000,000 shares authorized; 4,213,447 shares issued and outstanding, actual, 6,713,447 shares issued and outstanding, pro forma as adjusted (2)........................................ 537 26,756 Unexercised warrant (3).............................................. 177 177 Unrealized gains on securities....................................... 48 48 Retained earnings (4)................................................ 2,388 0 ------------------ ------------------ Total shareholders' equity....................................... 3,150 26,981 ------------------ ------------------ Total capitalization............................................. $10,506 $28,691 ================== ==================
- --------- (1) See Notes 7, 9 and 13 of Notes to Financial Statements for a description of the terms of the Company's debt. (2) Excludes: (i) an aggregate of 464,390 shares of Common Stock reserved for issuance under the Company's 1995 Stock Option Plan, 1996 Stock Option Plan and 1996 Non-Employee Director Stock Option Plan; (ii) 240,591 shares of Common Stock reserved for issuance upon the exercise of warrants granted or expected to be granted to Mellon Bank, N.A.; and (iii) 83,333 shares of Common Stock reserved for issuance upon the conversion of the Company's $1.0 million Convertible Note (at an assumed conversion price of $12.00 per share). See "Acquisition History," "Management -- Stock Option Plans" and "Description of Capital Stock -- Warrants and Convertible Note." (3) Reflects a warrant to purchase 175,531 shares of Common Stock at a nominal exercise price issued by the Company to Mellon Bank, N.A. in July 1995. (4) Pro forma, as adjusted, retained earnings are reduced for the estimated S Corporation Distributions of $3.0 million but are partially offset by the establishment of a deferred tax asset of $81,000, assuming the Company converted from an S Corporation at June 30, 1996. S Corporation Distributions in excess of retained earnings at June 30, 1996 are deducted from Common Stock. -19- DILUTION At June 30, 1996, the net tangible book value of the Company was approximately $(3.4) million, or $(0.80) per share of Common Stock. Net tangible book value per share represents the amount of the Company's total tangible assets less total liabilities, divided by the number of shares of Common Stock outstanding. The pro forma net tangible book value, after giving effect to the MAB acquisition and the S Corporation Distributions but without giving effect to the Offering would have been $(14.3) million, or $(3.40) per share. After giving further effect to the sale by the Company of 2,500,000 shares of Common Stock in the Offering (assuming an initial public offering price of $12.00 per share) and the application of the estimated net proceeds therefrom after deducting estimated underwriting discounts and offering expenses payable by the Company, the pro forma net tangible book value of the Company at June 30, 1996 would have been approximately $12.4 million, or $1.85 per share of Common Stock. This represents an immediate increase in the pro forma net tangible book value of $5.25 per share of Common Stock to existing shareholders and an immediate dilution in pro forma net tangible book value of $10.15 per share of Common Stock to new investors. The following table illustrates this dilution on a per share basis:
Assumed initial public offering per share.............................. $12.00 Net tangible book value per share at June 30, 1996................................................. $ (0.80) Pro forma adjustments............................................. (2.60) ---------------- Pro forma net tangible book value per share before the Offering................................. (3.40) Increase per share attributable to new investors.................. 5.25 ---------------- Pro forma net tangible book value per share, as adjusted for the Offering.................................................. 1.85 ---------------- Dilution per share to new investors.................................... $10.15 ================
The following table sets forth, as of June 30, 1996, the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by the Company's existing shareholders and by the new investors purchasing shares of Common Stock from the Company in the Offering (before deducting estimated underwriting discounts and offering expenses payable by the Company):
Shares Purchased (1) Total Consideration ----------------------------- ----------------------------- Average Price Number Percent Amount Percent Per Share -------------- ----------- -------------- ------------ ----------------- Existing shareholders................... 4,213,447 62.8 $ 537,326 1.8 $ 0.13 New investors........................... 2,500,000 37.2 30,000,000 98.2 12.00 -------------- ----------- -------------- ------------ Total.............................. 6,713,447 100.0% $30,537,326 100.0% ============== =========== ============== ============
-20- - -------- (1) Excludes: (i) an aggregate of 464,390 shares of Common Stock reserved for issuance under the Company's 1995 Stock Option Plan, 1996 Stock Option Plan and 1996 Non-Employee Director Stock Option Plan; (ii) 175,531 shares of Common Stock reserved for issuance to Mellon Bank, N.A. at a nominal exercise price and 65,060 shares reserved for issuance pursuant to warrants granted or expected to be granted with an exercise price equal to the initial public offering price; and (iii) 83,333 shares of Common Stock reserved for issuance upon the conversion of the Company's $1.0 million Convertible Note (at an assumed conversion price of $12.00 per share). See "Acquisition History," "Management -- Stock Option Plans" and "Description of Capital Stock -- Warrants and Convertible Note." -21- SELECTED FINANCIAL AND OPERATING DATA The selected financial and operating data of the Company for each of the five years in the period ended December 31, 1995 are derived from the financial statements of the Company which have been audited by Coopers & Lybrand L.L.P., independent accountants. The selected financial and operating data as of June 30, 1996 and for the six months ended June 30, 1995 and 1996 are derived from the unaudited financial statements of the Company and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) which are necessary to present fairly the results of operations and financial position for such periods. The results for the six months ended June 30, 1996 are not necessarily indicative of the results to be expected for the full year. The following data should be read in conjunction with the Company's actual and pro forma consolidated financial statements and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. -22- SELECTED FINANCIAL AND OPERATING DATA (Dollars in thousands, except per share data)
Years Ended December 31, --------------------------------------------------------------------------------- 1991 1992 1993 1994 1995 -------------- ------------ ----------- ------------ ---------------------------- Pro Actual Forma(1)(2) ------------- -------------- Statement of Income Data: Revenue...................................... $ 3,792 $ 5,822 $ 7,445 $ 8,578 $12,733 $34,509 Operating costs and expenses: Payroll and related expenses.............. 1,892 3,058 4,123 4,558 6,797 16,412 Selling, general and administrative expenses 1,457 2,013 2,391 2,674 4,042 12,531 Depreciation and amortization expense..... 40 95 141 215 348 1,529 -------------- ------------ ----------- ------------ ------------- -------------- Income from operations................. 403 656 790 1,131 1,546 4,037 Other income (expense)....................... (1) 15 11 (45) (180) (212) -------------- ------------ ----------- ------------ ------------- -------------- Income before income taxes............. 402 671 801 1,086 1,366 3,825 Pro forma provision for income taxes (4)..... 160 268 320 434 546 1,659 -------------- ------------ ----------- ------------ ------------- -------------- Pro forma net income (4).................. $ 242 $ 403 $ 481 $ 652 $ 820 $ 2,166 ============== ============ =========== ============ ============= ============== Pro forma net income per share............... $ 0.17(5) $ 0.35 ============= ============== Pro forma weighted average shares outstanding 4,745,229(5) 6,211,179 ============= ============== Operating Data: Total value of accounts referred............. $ 178,529 $ 150,707 $ 199,108 $ 281,387 $ 431,927 $1,134,000 Average fee.................................. 14.4% 16.9% 20.2% 22.5% 22.4% N/A
Six Months Ended June 30, - --------------------------------------------- 1995 1996 - ------------- ------------------------------- Pro Actual Forma (2)(3) ------------ ----------------- $ 5,546 $12,543 $19,319 2,956 5,954 9,479 1,745 4,095 6,326 116 423 833 - ------------- ------------ ----------------- 729 2,071 2,681 (73) (310) (19) - ------------- ------------ ----------------- 656 1,761 2,662 262 704 1,129 - ------------- ------------ ----------------- $ 394 $ 1,057 $ 1,533 ============= ============ ================= $ 0.22 (5) $ 0.25 ============ ================= 4,750,259 (5) 6,216,209 ============ ================= $ 180,783 $ 373,499 $ 664,905 21.7% 24.0% 24.3%
June 30, 1996 December 31, ------------------- --------------------------------------------------------- Pro Forma 1991 1992 1993 1994 1995 Actual As Adjusted(6) ---------- ------------ ----------- --------------------- ----------- -------------- Balance Sheet Data: Cash and cash equivalents................... $ 355 $ 421 $ 562 $ 526 $ 805 $ 990 $ 9,515 Working capital............................. 179 362 445 473 812 2,458 11,600 Total assets................................ 1,546 2,177 2,449 4,106 7,873 14,655 35,263 Long-term debt, net of current portion...... 108 144 59 732 2,593 7,356 1,710 Shareholders' equity........................ 403 686 876 1,423 2,051 3,151 26,982
-23- - ------- (1) Assumes that the acquisitions of MAB, TCD and Eastern occurred on January 1, 1995. (2) Gives effect to: (i) the reduction of certain redundant operating costs and expenses that were immediately identifiable at the time of the acquisitions; (ii) the elimination of interest expense associated with acquisition related debt assumed to be repaid with offering proceeds; and (iii) the issuance of 1,715,950 shares of Common Stock (at an assumed initial public offering price of $12.00 per share) which, net of estimated underwriting commissions and offering expenses payable by the Company, would be sufficient to repay acquisition related debt of $15.0 million and to fund the distribution of undistributed S Corporation earnings through the Termination Date (estimated at $3.0 million) to existing shareholders of the Company. See Pro Forma Consolidated Financial Statements. (3) Assumes that the acquisition of MAB occurred on January 1, 1996. (4) Prior to the Termination Date, the Company operated as an S Corporation for income tax purposes and accordingly was not subject to federal or state income taxes prior to such date. Accordingly, the historical financial statements do not include a provision for federal and state income taxes for such periods. Pro forma net income has been computed as if the Company had been fully subject to federal and state income taxes for all periods presented. See Note 11 of Notes to Pro Forma Consolidated Financial Statements. (5) Assumes that the Company issued 250,000 shares of Common Stock (at an assumed initial public offering price of $12.00 per share) to fund the distribution of undistributed S Corporation earnings (estimated at $3.0 million) through the Termination Date to existing shareholders of the Company. (6) Gives effect to: (i) the MAB acquisition and (ii) the sale of the 2,500,000 shares of Common Stock offered by the Company hereby (at an assumed initial public offering price of $12.00 per share) and the application of the net proceeds therefrom as set forth in "Use of Proceeds." -24- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview NCO is a leading provider of accounts receivable management and other related services such as customer service call centers, telemarketing, telephone-based auditing and other outsourced administrative services. In 1995, accounts receivable management services comprised more than 95% of the Company's revenue; however, the Company expects other related services to represent a greater portion of its business in the future. As a result of rapid internal growth and selected strategic acquisitions, the Company's revenue has grown from $7.4 million in 1993 to $34.5 million in 1995 on a pro forma basis, giving effect to the Eastern, TCD and MAB acquisitions. Currently, NCO operates eight call centers with 689 workstations in Pennsylvania, New York, Maryland, Ohio, Kansas and Colorado. The Company has historically generated substantially all of its revenue from the recovery of delinquent accounts receivable on a contingency fee basis. Contingency fees typically range from 15% to 35%, but can range from 6% for the management of accounts placed early in the recovery cycle to 50% for accounts which have been serviced extensively by the client or by other third-party providers. In addition, the Company generates revenue from fixed fees for certain accounts receivable management and other related services. Revenue is earned and recognized upon collection of the accounts receivable for contingency fees and as work is performed for fixed fee services. Although its average accounts receivable management fee has increased from 20.2% in 1993 to 24.0% for the six months ended June 30, 1996, the Company expects to remain among the low cost providers of accounts receivable management services; accordingly, the Company does not expect its average contingency fee to increase materially in the future. 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 diminishes over time. The Company's costs consist principally of payroll and related costs, selling, general and administrative costs, and depreciation and amortization. Payroll costs and related expenses consist of wages and salaries, commissions, bonuses and benefits for all employees of the Company, including management and administrative personnel. As the Company has grown, payroll costs as a percentage of revenue have gradually declined. Selling, general and administrative expenses, which include postage, telephone and mailing costs, and other costs of collections as well as expenses which directly support the operations of the business including facilities costs, equipment maintenance, sales and marketing, data processing, professional fees and other management costs, have remained relatively constant as a percentage of revenue since 1993. Since 1994, the Company has made four acquisitions which have had a significant impact on the Company's financial condition and results of operations. With the BRM, Eastern, TCD and MAB acquisitions, the Company has: (i) increased its penetration of the utilities, healthcare, financial services and telecommunications markets; (ii) established a presence in the education and insurance markets; (iii) increased its base of national clients; and (iv) expanded NCO's geographic presence by adding six offices in six states. Pro forma revenues from these four acquired businesses accounted for approximately 69.5% of the Company's pro forma revenue in 1995. With this rapid -25- increase in revenues, the Company has been able to achieve significant economies of scale by eliminating certain redundant expenses, reducing the workforce of the acquired companies, and in the case of BRM and Eastern, closing two offices. The Company regularly reviews various strategic acquisition opportunities and periodically engages in discussions regarding such possible acquisitions. To date, all of the Company's acquisitions have been accounted for under the purchase method of accounting with the results of the acquired companies included in the Company's statements of income beginning on the date of acquisition. In pursuing acquisitions, the Company typically seeks to serve new geographic markets or industries, expand its presence in its existing markets or add complementary services. Upon completion of an acquisition, the Company immediately focuses on achieving operating efficiencies by eliminating redundant expenses and reducing certain other expenses to levels consistent with the Company's current operating results. Included elsewhere in this prospectus are Pro Forma Consolidated Financial Statements which show the effect of the Eastern, TCD and MAB acquisitions as if the results of each acquired company had been included in the Company's statement of income throughout the year ended December 31, 1995 and the six months ended June 30, 1996 and for balance sheet purposes at June 30, 1996. For the periods shown, the Company had been treated for federal and state income tax purposes as an S Corporation. As a result, the Company's shareholders, rather than the Company, were taxed directly on the earnings of the Company for federal and certain state income tax purposes. The Company terminated its status as an S Corporation effective September 3, 1996 and is now subject to federal and state income taxes at applicable C Corporation rates. Accordingly, the pro forma provision for income taxes assumes that the Company was subject to federal and state income taxes for all prior periods. Results of Operations The following tables set forth income statement data on an historical and pro forma basis as a percentage of revenue:
Years Ended December 31, Six Months Ended June 30, ------------------------------------------- ------------------------------- 1993 1994 1995 1995 1996 ---------- --------- -------------------- --------- -------------------- Pro Pro Actual Forma Actual Forma --------- -------- --------- --------- Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Operating costs and expenses: Payroll and related expenses........... 55.4 53.1 53.4 47.6 53.3 47.5 49.1 Selling, general and administrative expenses............................. 32.1 31.2 31.7 36.3 31.5 32.6 32.7 Depreciation and amortization expense.. 1.9 2.5 2.7 4.4 2.1 3.4 4.3 ---------- --------- --------- -------- --------- --------- --------- Total.......................... 89.4 86.8 87.8 88.3 86.9 83.5 86.1 ---------- --------- --------- -------- --------- --------- --------- Income from operations................. 10.6 13.2 12.2 11.7 13.1 16.5 13.9 Other income (expense)..................... 0.1 (0.5) (1.4) (0.6) (1.3) (2.5) (0.1) ---------- --------- --------- -------- --------- --------- --------- Income before income taxes............. 10.7 12.7 10.8 11.1 11.8 14.0 13.8 Pro forma provision for income taxes....... 4.3 5.1 4.3 4.8 4.7 5.6 5.8 ---------- --------- --------- -------- --------- --------- --------- Pro forma net income................... 6.4% 7.6% 6.5% 6.3% 7.1% 8.4% 8.0% ========== ========= ========= ======== ========= ========= =========
-26- Pro Forma Compared to Actual Results of Operations Pro forma operating data for the year ended December 31, 1995 and the six months ended June 30, 1996 assume that the MAB, TCD and Eastern acquisitions were consummated at the beginning of the respective periods. Pro forma adjustments have been made to reflect the elimination of certain expenses that were immediately identifiable at the time of the acquisitions, including the immediate elimination of certain redundant collection and administrative personnel. See "Acquisition History -- Financial Impact of Acquisitions" and "Notes to Pro Forma Consolidated Financial Statements." In each of the acquisitions, the Company acquired businesses with higher cost structures than the Company. In the months following the acquisitions of TCD, Eastern and BRM, the Company leveraged its infrastructure to realize additional operating efficiencies in order to bring the cost structure of acquired companies in line with NCO's current operating results. These other cost savings include: (i) further reductions in payroll and related expenses relating primarily to redundant collections and administrative personnel, (ii) further reduction in rent and other facilities costs, and (iii) reduction in certain expenses such as telephone, mailing and data processing. Management believes it will realize similar cost savings from the MAB acquisition, although no assurances can be given that such cost savings will be realized. Due to the higher cost structures of the acquired businesses and the fact that all expected expense savings are not reflected in pro forma adjustments, certain pro forma operating percentages compare unfavorably to actual operating percentages for the periods under consideration. Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995 Revenue. Revenue increased $7.0 million or 126.1% to $12.5 million for the six-month period ended June 30, 1996 from $5.5 million for the comparable period in 1995. Of this increase, $3.7 million was attributable to the TCD acquisition completed in January 1996, and $1.0 million was attributable to the Eastern acquisition completed in August 1995. Additionally, $973,000 of the increase was due to a full six months of revenue in 1996 from a contract awarded to the Company by a government agency in April 1995. Revenue from other related services, which became an area of focus in 1996, increased $586,000 to $682,000 for the six months ended June 30, 1996 from $96,000 for the comparable period in 1995. The balance of the revenue increase was attributable to the addition of new clients and a growth in business from existing clients. Payroll and related expenses. Payroll and related expenses increased $3.0 million to $6.0 million for the six months ended June 30, 1996 from $3.0 million for the comparable period in 1995, but decreased as a percentage of revenue to 47.5% from 53.3%. The decrease in payroll and related expenses as a percentage of revenue was primarily the result of spreading the relatively fixed costs of management and administrative personnel over a larger revenue base, as well as eliminating redundant administrative staff following the TCD and Eastern acquisitions. Selling, general and administrative expenses. Selling, general and administrative expenses increased $2.4 million to $4.1 million for the six months ended June 30, 1996, from $1.7 million for the comparable period in 1995, and also increased as a percentage of revenue to 32.6% from 31.5%. A large percentage of the increase was due to the increased costs associated with litigation management services performed by the Company on behalf of its clients in states where the laws are more conducive to the utilization of the legal process for the recovery of delinquent accounts. In addition, the Company experienced increased costs as a result of a change in business mix which -27- required the increased use of national databases and credit reporting services. These increases were offset in part by operating efficiencies resulting from the TCD acquisition. Depreciation and amortization. Depreciation and amortization increased to $423,000 for the six months ended June 30, 1996 from $116,000 for the comparable period in 1995. Of this increase, $233,000 was a result of the TCD and Eastern acquisitions. The remaining $74,000 consisted of amortization of deferred financing charges and depreciation resulting from capital expenditures incurred in the ordinary course of business. Other income (expense). Interest expense increased $309,000 for the six months ended June 30, 1996 from the comparable period in 1995, primarily due to increased borrowings associated with the acquisitions of TCD and Eastern. Other income (expense) for the six months ended June 30, 1995, also included a loss from the disposal of assets of $49,000. Pro forma net income. Pro forma net income increased to $1.1 million for the six months ended June 30, 1996 from $394,000 for the comparable period in 1995, a 168% increase. Pro forma net income includes a provision for federal and state income taxes at an assumed rate of 40% for the six months ended June 30, 1996 and 1995. Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 Revenue. Revenue increased $4.2 million or 48.4% to $12.7 million in 1995 from $8.6 million in 1994. In 1995, the Company initiated a marketing program targeted at larger, national accounts. As a result, the Company experienced 38% internal growth from the addition of new clients and growth in business from existing clients. This growth includes approximately $1.3 million from a contract with a governmental agency awarded in April 1995. In addition to strong internal growth, approximately $808,000 of the increase in revenue was attributable to the Eastern acquisition, and $437,000 was attributable to a full year of operations of BRM in 1995 versus eight months in 1994. This was partially offset by a decrease in revenue from outsourcing projects to $259,000 in 1995 from $357,000 in 1994. Approximately $300,000 of revenue from outsourcing projects in 1994 was from a one-time project completed in the first quarter of 1994. Payroll and related expenses. Payroll and related expenses increased $2.2 million to $6.8 million in 1995 from $4.6 million in 1994, and increased slightly as a percentage of revenue to 53.4% from 53.1%. During the fourth quarter of 1995, the Company hired a Vice President of Collection, as well as 20 additional telephone representatives necessary for two outsourcing projects which did not generate revenue until the first quarter of 1996. In addition, the one-time outsourcing project completed during the first quarter of 1994 had lower payroll and related expenses as a percentage of revenue. The increases in personnel were partially offset by spreading the relatively fixed costs of the Company's management and administrative personnel over a larger revenue base, as well as the elimination of redundant administrative staff related to the Eastern acquisition. Selling, general and administrative expenses. Selling, general and administrative expenses increased $1.3 million to $4.0 million in 1995, from $2.7 million in 1994 and increased as a percentage of revenue to 31.7% from 31.2%. These increases were primarily due to higher data processing and facilities costs in anticipation of growth and to allow for the rapid assimilation of the -28- TCD acquisition in the first quarter of 1996 without having to purchase short-term administrative services from the parent company of TCD during the post-acquisition transition. Depreciation and amortization. Depreciation and amortization increased to $348,000 in 1995 from $215,000 in 1994. Of this increase, $90,000 was attributable to the Eastern and BRM acquisitions. The remaining $43,000 consisted of amortization of deferred financing charges and depreciation resulting from capital expenditures incurred in the ordinary course of business. Other income (expense). Interest expense increased to $180,000 in 1995 from $72,000, primarily due to increased borrowings associated with the Eastern and BRM acquisitions. The Company recorded a $49,000 loss from the disposal of assets in 1995. Pro forma net income. Pro forma net income increased to $820,000 for the year ended December 31, 1995 from $652,000 in 1994, representing a 25.7% increase. Pro forma net income includes a provision for federal and state income taxes at an assumed rate of 40% for the years ended December 31, 1995 and 1994. Year Ended December 31, 1994 Compared to Year Ended December 31, 1993 Revenue. Revenue increased $1.2 million or 15.2% to $8.6 million in 1994 from $7.4 million in 1993. Of this increase, $959,000 was attributable to the BRM acquisition completed in April 1994. The remainder of the increase was due to the addition of new clients and from growth in business from existing clients, partially offset by a reduction resulting from the completion of the one-time client project in February 1994. Payroll and related expenses. Payroll and related expenses increased $436,000 to $4.6 million in 1994 from $4.1 million in 1993, but as a percentage of revenue, decreased to 53.1% from 55.4%. Payroll and related expenses as a percentage of revenue were lower in 1994 primarily as a result of spreading the relatively fixed costs of the Company's management and administrative personnel over a larger revenue base, as well as the elimination of duplicative administrative staff related to the BRM acquisition. Selling, general and administrative expenses. Selling, general and administrative expenses increased $283,000 to $2.7 million in 1994, from $2.4 million in 1993. As a percentage of revenue, selling, general and administrative expenses decreased to 31.2% from 32.1%. During 1993, the Company performed services under a one-time contract which had a lower cost structure than the Company's core business; however, in 1994, the Company was able to achieve economies of scale by spreading its fixed costs over a larger revenue base. The Company also closed an office and eliminated duplicative costs in connection with the BRM acquisition. Depreciation and amortization. Depreciation and amortization increased to $215,000 in 1994 from $141,000 in 1993. Of this increase, $61,000 was the result of the BRM acquisition. The remaining $13,000 consisted of depreciation resulting from capital expenditures incurred in the ordinary course of business. Other income (expense). Interest expense increased to $72,000 in 1994 from $14,000 in 1993, primarily due to increased borrowings associated with the BRM acquisition. -29- Pro forma net income. Pro forma net income increased to $652,000 for the year ended December 31, 1994 from $481,000 in 1993, representing a 35.6% increase. Pro forma net income includes a provision for federal and state income taxes at an assumed rate of 40% for the years ended December 31, 1994 and 1993. -30- Quarterly Results The following table sets forth selected actual historical financial data for the calendar quarters of 1994 and 1995, and for the first two calendar quarters of 1996. This quarterly information is unaudited but has been prepared on a basis consistent with the Company's audited financial statements presented elsewhere herein and, in the Company's opinion, includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the quarters presented. The operating results for any quarter are not necessarily indicative of results for any future period.
Quarter Ended ------------------------------------------------------------------------------------------------------ 1994 1995 1996 -------------------------------------- ---------------------------------------- ---------------------- Mar. Jun. Sept. Dec. Mar. Jun. Sept. Dec. Mar. Jun. 31 30 30 31 31 30 30 31 31 30 -------------------------------------- ----------------------------------------- --------------------- (dollars in thousands) Revenue......................$ 2,087 $2,147 $2,188 $2,156 $2,544 $3,002 $3,480 $3,707 $6,044 $6,499 Income from operations....... 431 173 280 247 244 485 496 320 915 1,156 Net income................... 436 160 262 228 227 429 460 250 760 1,001
Quarter Ended ------------------------------------------------------------------------------------------------------ 1994 1995 1996 ---------------------------------------- ------------------------------------------ ------------------ Mar. Jun. Sept. Dec. Mar. Jun. Sept. Dec. Mar. Jun. 31 30 30 31 31 30 30 31 31 30 ----------------------------------------- ----------------------------------------- ------------------ (as a percentage of revenue) Revenue...................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Income from operations....... 20.7 8.0 12.8 11.5 9.6 16.2 14.3 8.6 15.1 17.8 Net income................... 20.9 7.4 12.0 10.6 8.9 14.3 13.2 6.7 12.6 15.4
-31- In the past, the Company has experienced quarterly fluctuations in operating expenses. Due to the low revenue base of the Company at the time these costs were incurred, the impact of these fluctuations was more significant than if they had occurred at the Company's current revenue base. For instance, the fourth quarter of 1995 included additional costs primarily due to increases in data processing and facilities costs in anticipation of growth and to allow for the rapid assimilation of the TCD acquisition. The second quarter of 1994 included $94,000 of moving and acquisition costs related to the BRM acquisition. The first quarter of 1994 included $300,000 of revenue related to the completion of a project which had a lower than normal cost structure. The Company could experience quarterly variations in revenue and operating income as a result of many factors, including the timing of clients' referrals of accounts, the timing of acquisitions that may be effected in the future, the timing of the hiring of personnel, the timing of additional selling, general and administrative expenses incurred to support new business and changes in the Company's revenue mix among its various service offerings. In connection with certain contracts, the Company could incur costs in periods prior to recognizing revenue under those contracts. In addition, the Company must plan its operating expenditures based on revenue forecasts, and a revenue shortfall below such forecast in any quarter would likely adversely affect the Company's operating results for the quarter. While the effects of seasonality of NCO's business have historically been obscured by its rapid growth, the Company's business tends to be slower in the third and fourth quarter of the year due to the summer and the holiday seasons. Liquidity and Capital Resources The Company's primary sources of cash have historically been cash flow from operations and bank borrowings. Cash has been used for acquisitions of accounts receivable management companies and distributions to shareholders, and for purchases of equipment and working capital to support the Company's growth. Cash provided by operating activities was $1.7 million, $2.0 million, $1.1 million, and $980,000 for the six months ended June 30, 1996, and for the years 1995, 1994, and 1993, respectively. The increases in each period were due to increases in net income before non-cash charges which were partially offset by cash used for working capital during the six months ended June 30, 1996 and the calendar year 1994; and partially increased by decreases in working capital for the years 1993 and 1995. Cash used in investing activities was $5.3 million, $2.0 million, $1.1 million, and $135,000 for the six months ended June 30, 1996 and for the years 1995, 1994, and 1993, respectively. In April 1994 the Company purchased certain assets of BRM for consideration consisting in part of $1.0 million in cash and the issuance of a $127,000 promissory note. In August 1995, the Company purchased certain assets of Eastern for $1.6 million in cash and the assumption of a non-interest bearing note payable of $252,000 and certain other accounts payable in the amount of $209,000. In January 1996, the Company purchased all the assets of TCD for $4.8 million in cash. In September 1996, the Company purchased all the outstanding stock of MAB for $8.0 million in cash and the issuance of a $1.0 million, five-year convertible note to the principal shareholder of MAB. The note is convertible into the Common Stock of the Company at the initial public offering price and bears interest payable monthly at a rate of 8.0% per annum. The Company financed the cash portion of these acquisitions with bank borrowings. These acquisitions -32- collectively resulted in goodwill estimated at $14.5 million, which is being amortized at approximately $749,000 per year. See "Acquisition History." Cash provided by financing activities was $3.8 million and $280,000 for the six months ended June 30, 1996 and the year ended December 31, 1995, respectively. Cash used in financing activities was $35,000 and $704,000 in 1994 and 1993, respectively. Bank borrowings have been the Company's primary source of cash from financing activities and have been used for distributions to shareholders and for acquisitions of accounts receivable management companies. The Company borrowed from its bank $4.5 million, $2.4 million and $1.0 million for the six months ended June 30, 1996 and the years 1995 and 1994, respectively. Distributions to shareholders were $752,000, $1.1 million, $813,000 and $658,000 for the six months ended June 30, 1996 and the years 1995, 1994, and 1993, respectively. The Company expects to distribute previously undistributed S Corporation earnings through the Termination Date (which are expected to be approximately $3.0 million) using a portion of the net proceeds of the Offering. See "Use of Proceeds" and "Dividend Policy and Prior S Corporation Status." In July 1995 the Company entered into a revolving credit agreement which provided for borrowings up to $7.0 million at an interest rate equal to prime plus 1.375%, which was recently increased to $15.0 million, to be utilized for working capital and strategic acquisitions. The revolving credit line is collateralized by substantially all the assets of the Company and includes certain financial covenants such as maintaining minimum working capital and net worth requirements and includes restrictions on capital expenditures and distributions to shareholders. The Company has received a commitment letter from its bank to increase the revolving credit facility to $25.0 million and decrease the rate of interest to 2.5% above LIBOR upon completion of the Offering provided that the Company receives minimum net proceeds of $24.0 million from the Offering. In connection with entering into the original revolving credit agreement, the Company recorded deferred charges of approximately $135,000 relating primarily to bank and legal fees. The Company also issued a warrant to the bank exercisable for an aggregate of 175,531 shares of the Company's Common Stock. The warrant expires on July 31, 2005 and is exercisable for nominal consideration. The warrant has been capitalized on the balance sheet as deferred charges and is being amortized over the four-year life of the credit facility. In connection with the expansion of the line of credit in September 1996, the Company recorded deferred charges of $120,000 primarily relating to bank charges and legal fees. In addition, the Company issued an additional warrant to the bank for 46,560 shares of Common Stock. The Company expects to grant an additional warrant to purchase 18,500 shares of Common Stock at an exercise price equal to the initial public offering price in consideration for the increase in the revolving credit facility. The Company believes that funds generated from operations, together with existing cash, the net proceeds from the Offering and available borrowings under its revolving credit line will be sufficient to finance its current operations and planned capital expenditure requirements and internal growth at least through 1997. In addition, the Company believes it will have sufficient funds to make selected acquisitions. However, the Company could require additional debt or equity financing if it were to make any significant acquisitions for cash. The Company has no current commitments or agreements with respect to any acquisitions. -33- The Company will account for corporate income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS No. 109). On the Termination Date and upon application of SFAS No. 109, a net deferred tax asset of $81,000, representing cumulative temporary differences, was recorded in the financial statements. Recently Issued Accounting Standard In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, ("SFAS 123") "Accounting for Stock-Based Compensation," which was adopted by the Company January 1, 1996. SFAS 123 affords two acceptable methods to account for stock-based compensation. Companies are encouraged, but are not required, to adopt the fair value method of accounting for employee stock-based transactions. Companies are also permitted to continue to account for such transactions under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," but would be required to disclose in a note to the financial statements pro forma net income and, if presented, earnings per share as if the company had applied the new method of accounting. The accounting requirements of the new method are effective for all employee awards granted after the beginning of the year of adoption. The Company has elected the disclosure alternative allowed under SFAS 123 and has not recorded expense pursuant to the fair value method. Adoption of the new standard will have no effect on the Company's cash flows. -34- BUSINESS NCO is a leading provider of accounts receivable management and related services utilizing an extensive teleservices infrastructure. The Company develops and implements customized accounts receivable management solutions for clients' delinquent and current accounts. From eight call centers located in six states, the Company employs advanced workstations and sophisticated call management systems comprised of predictive dialers, automated call distribution systems, digital switching and customized computer software. Through efficient utilization of its technology and intensive management of human resources, the Company has achieved rapid growth in recent years. Since April 1994, the Company has made four acquisitions which have enabled it to increase its penetration of existing markets, establish a presence in certain new markets and realize significant operating efficiencies. In addition, the Company has leveraged its infrastructure by offering additional services including telemarketing, customer service call centers and other outsourced administrative services. The Company believes that it is among the 15 largest accounts receivable management companies in the United States. The Company provides its services principally to mid- to large-size educational organizations, financial institutions, healthcare organizations, telecommunications companies, utilities and government entities. In 1995, the Company provided services to such companies as Bell Atlantic Corporation, First Union Corporation, George Washington University Hospital, NationsBank and the University of Pennsylvania. The Company is paid on a contingency or fixed fee basis and seeks to develop long-term relationships with its clients. Industry Background Increasingly, companies are outsourcing many non-core functions to focus on revenue generating activities, reduce costs and improve productivity. In particular, many large corporations are recognizing the advantages of outsourcing accounts receivable management. This trend is being driven by a number of industry-specific factors. First, the complexity of accounts receivable management functions in certain industries has increased dramatically in recent years. For example, with the increasing popularity of HMOs and PPOs, healthcare institutions now face the challenge of billing not only large insurance companies but also individuals who are required to pay small, one-time co-payments. Second, changing regulations and increased competition in certain industries such as utilities and telecommunications have created new outsourcing opportunities. Third, the ability to implement cost-effective specialized accounts receivable management, customer support and telemarketing programs has improved dramatically in recent years with the development of sophisticated call and information systems. These programs require substantial capital investment, technical capabilities, human resource commitments and extensive management supervision. The emphasis on cost-effective outsourcing solutions, the increasing sophistication of call center technology and the efficacy of third-party intervention in the recovery process has resulted in the steady growth of the accounts receivable management industry. Based on studies published by the ACA, an industry trade group, it is estimated that receivables referred to third parties for management and recovery in the United States increased from approximately $43.7 billion in 1990 to approximately $79.0 billion in 1994. The leading market segments within the overall accounts receivable management market are healthcare organizations, financial institutions and utilities which -35- represented approximately 43%, 15% and 12%, respectively, or an aggregate of 70%, of total industry referrals in 1994. The accounts receivable management industry is highly fragmented. Based on information obtained from the ACA, there were approximately 7,600 accounts receivable management companies in operation in 1994, the majority of which were small local businesses. The Company believes that many small accounts receivable management companies have insufficient capital to expand and invest in call center technology and sophisticated workstations and are unable to adequately meet the standards demanded by businesses seeking to outsource their accounts receivable recovery function. In addition, there are a limited number of options for owners of such businesses to obtain liquidity or to sell their businesses. As a result, the Company believes that the industry will experience consolidation in the future and that strategic acquisition opportunities will continue to become available. Business Strategy The Company strives to be a cost-effective, client service driven provider of accounts receivable management and other related teleservices to companies with substantial outsourcing needs. To achieve this goal, the Company's business strategy is based on the following key elements: Efficient Utilization of Technology and Management Infrastructure to Improve Productivity. Efficient use of technology and intensive management of human resources enables the Company to provide cost-effective client solutions and perform large scale accounts receivable management programs. The Company has made a substantial investment in its teleservices infrastructure and is committed to utilizing the best available technologies to achieve operational efficiencies. This investment has enabled the Company to rapidly and efficiently integrate the acquisitions it has made. For example, in the TCD acquisition, the Company was able to reduce the workforce of 148 employees by approximately 40% while maintaining the same revenue base. The Company believes that its infrastructure is capable of supporting additional growth internally or through acquisitions without commensurate increases in costs. Commitment to Client Service. NCO is committed to providing superior service to its clients. The Company works closely with its clients to identify particular needs, design appropriate recovery strategies and implement customized accounts receivable management programs. The Company maintains a client service department to promptly address client issues, assigns dedicated field service representatives to assist larger clients and offers clients the ability to electronically communicate with the Company and monitor operational activity. Offer Low Cost Solutions. The Company seeks to be a low cost provider of accounts receivable management services. To maintain a low cost structure, the Company focuses on centralizing all administrative functions and minimizing overhead at all branch locations. For example, the Company has centralized such functions as payment processing, information systems, accounting, sales and marketing and human resources. Target Larger Clients. The Company continues to focus on expanding its base of larger clients while at the same time continuing to pursue mid-size prospects that have traditionally -36- comprised the Company's client base. While the Company's traditional clients have provided a stable revenue base, the Company believes that larger clients offer significant cross-selling opportunities as they continue to outsource more of their accounts receivable management, customer support and telemarketing functions. The Company believes that its size and increasing geographic diversity will help it to obtain larger national clients. Growth Strategy In light of the increasing volume of accounts receivable referred for third party management, the greater emphasis on the outsourcing of non-core competencies by businesses and the fragmented nature of the industry, the Company believes there are significant opportunities to expand its business. The Company's growth strategy includes the following key elements: Actively Pursue Strategic Acquisitions. The Company intends to take advantage of the fragmented nature of the accounts receivable management industry, along with opportunities in related industries, by making strategic acquisitions. Through selected acquisitions, the Company will seek to serve new geographic markets or industries, expand its presence in its existing vertical markets or add complementary service applications. For example, through the MAB acquisition, management believes that the Company will be able to further its penetration of the education market and expand its presence in the financial services market in the Midwest and Southern regions of the United States. The Company evaluates acquisitions using numerous criteria including size, management strength, service quality, industry focus, diversification of client base, operating characteristics and the ability to integrate the acquired businesses into the Company's operations and eliminate redundant costs. Increase Market Penetration. The Company believes that its long-standing reputation as a quality provider of cost-effective accounts receivable management services is one of its most significant competitive advantages and intends to continue to build upon its reputation. The Company continually strives to increase its share of its clients' accounts receivable management business and to obtain new clients that have outsourced or are seeking to outsource these services. In particular, the Company will continue to focus on the education, financial services, healthcare, telecommunications and utilities industries. These industries include many large corporations which rely heavily on third-party providers for a substantial portion of their accounts receivable management needs. In addition, the Company believes there is significant opportunity for growth in certain new market segments, such as the retail credit card and insurance industries, in which it can leverage its accumulated business expertise and call center infrastructure. Expand Service Offerings. The Company regularly seeks to expand the array of services offered to clients by cross-selling existing services and by developing new value-added services that strengthen its long-term relationship with existing clients. For example, the Company has already begun providing other outsourced administrative services such as customer service call centers, telemarketing, telephone-based auditing and other administrative services outsourcing. Substantially all of these services are presently provided to clients who utilize NCO's accounts receivable management services; however, in the future, the Company plans to market these services to existing and new clients. -37- Accounts Receivable Management Services The Company provides a wide range of accounts receivable management services to its clients utilizing an extensive teleservices 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. The Company generates substantially all of its revenue from the recovery of delinquent accounts receivable on a contingency fee basis. In addition, the Company generates revenue from fixed fees for certain accounts receivable management and other related services. Contingency fees typically range from 15% to 35%, but can range from 6% for the management of accounts placed early in the accounts receivable cycle to 50% for accounts which have been serviced extensively by the client or by third-party providers. Recovery activities 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. Once the client's records have been established in the Company's system, the Company commences the recovery process. The following chart depicts the key steps of the recovery process: [A diagram depicting the accounts receivable recovery process appears here.] -38- Skip Tracing. 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. Litigation Management. When account balances are sufficient, the Company will also coordinate litigation undertaken by a nationwide network of attorneys that the Company utilizes on a routine basis. Typically, account balances must be in excess of $1,000 to warrant litigation and the client is asked to advance legal costs such as filing fees and court costs. The Company's Collection Support staff manages the Company's attorney relationships and facilitates the transfer of all necessary documentation. 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 describes 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 -39- documented complaint tracking and specialized software to track quality metrics to facilitate the comparison of the Company's performance to that of its peers. Other Services The Company selectively provides other related services which complement its traditional accounts receivable management business and which leverage its teleservices infrastructure. The Company believes that the following services will provide additional growth opportunities for the Company. Telemarketing. The Company provides telemarketing services for clients, including lead generation and qualification and the actual booking of appointments for a client's sales representatives. Customer Service Call Center. 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 an electric utility to function as its customer service department to field and respond to calls concerning new services which the utility is beginning to develop and offer. In this manner, the utility can focus on developing these services without investing the resources to build the in-house infrastructure necessary to respond to customer inquiries. Accounts Receivable Outsourcing. 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. Custom Designed Business Applications. The Company has the ability to provide outsourced administrative and other back-office responsibilities currently conducted by its clients. For example, the Company was recently engaged by a national health insurer to assume all administrative operations for its COBRA and individual conversion coverage, including all responsibility for premium billing and payment processing, customer service call center and policy fulfillment. The Company also was engaged by a major Blue Cross plan to audit its base of small business employer accounts to determine if individuals insured through these accounts were, in fact, employees. Operations Technology and Infrastructure. Over the past five years, the Company has made a substantial investment in its call management systems such as predictive dialers, automated call distribution systems, digital switching and customized computer software. As a result, the Company believes it is able to address accounts receivable management 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. -40- NCO provides its accounts receivable management services through the operation of eight state-of-the-art call centers which are electronically linked through the MFS Datanet ATM Network. The Company utilizes two Unix-based NCR 3455 computers which provide necessary redundancy (either computer can operate the system in the event of the failure of the other) and excess capacity for future growth. The computers are linked via network servers to the Company's 689 workstations which consist of personal computers and terminals that are linked to the microcomputers but do not have separate processors. The Company maintains a predictive dialer at each of its Blue Bell, Pennsylvania and Cleveland, Ohio facilities to address its low balance, high volume accounts. These systems scan the Company's database 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 recordkeeping 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 an eight person MIS staff led by a Vice President - Chief Information Officer. The Company maintains disaster recovery contingency plans and has implemented procedures to protect the loss of data against power loss, fire and other casualty. The Company has implemented a security system to protect the integrity and confidentiality of its computer system and data. 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. 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 accounts on a regular basis in order to establish a close client rapport, determine the client's overall level of satisfaction and identify practical methods of improving the client's satisfaction. -41- Client Relationships The Company's client base currently includes over 5,000 companies in such industries as education, financial services, healthcare, telecommunications and utilities. The Company's 10 largest clients in 1995 (including MAB) accounted for approximately 34.9% of the Company's revenue, with the City of Philadelphia Water Revenue Bureau accounting for 5.2% of total revenue. In 1995, the Company (including MAB) derived 31.2% of its referrals from educational organizations, 21.3% from financial institutions, 19.7% from healthcare organizations, 11.7% from telecommunications companies, 6.7% from utilities and 5.3% from government entities. The following table sets forth a list of certain of the Company's key clients:
Financial Services Healthcare Education - ----------------------------- ------------------------------------- ------------------------------------------------ First Union Corporation Reimbursement Technologies, Inc. Pennsylvania Higher Education Assistance Agency Mellon Bank, N.A. Medical Center of Delaware University of Pennsylvania NationsBank, N.A. Franciscan Healthcare Seton Hall University The Progressive George Washington University Penn State University Corporation Hospital Rutgers University United Healthcare Hutchinson Hospital Corporation University of Virginia
Telecommunications Utilities Government - ----------------------------- ------------------------------------ --------------------------------------------- Bell Atlantic Corporation New York State Electric & Gas Water Revenue Bureau, City of Philadelphia NYNEX National Fuel Gas Distribution State of New Jersey Motor Vehicle Services ATX Telecommunications Corporation Frontier Cellular PECO Energy Company Boston Edison Company Western Resources Corporation
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. Sales and Marketing The Company utilizes a focused and highly professional direct selling effort in which salesmen personally cultivate relationships with prospects and existing clients. The Company's sales effort consists of a 23 person direct sales force. Each sales representative is charged with identifying leads, qualifying prospects and closing sales. When appropriate, Company operating personnel will -42- 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. Many of the Company's prospective clients issue requests-for-proposals ("RFPs") as part of the contract award process. The Company retains a technical writer for the purpose of preparing detailed, professional responses to RFPs. In addition, the effect of the Company's direct sales force in maintaining contact with the prospective client often allow them to serve in an informal advisory capacity to the prospective client with respect to the requirements of the RFP which the Company believes gives it a competitive edge in responding to the RFP. 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 June 30, 1996, the Company (including MAB) had a total of 577 full-time employees and 91 part-time employees, of which 547 were telephone representatives. None of the Company's employees is 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 over 7,600 providers, including large national corporations such as First Data Corporation, Payco American Corporation, CRW Financial, Inc. and Union Corporation, and many regional and local firms. Many of the Company's competitors have substantially 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, in many instances, are performed in-house. Moreover, many larger clients retain multiple accounts receivable management and recovery 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. The Company also competes with other firms, such as SITEL Corporation, APAC TeleServices, Inc. and Teletech Holdings, Inc., in providing teleservices. -43- 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. 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. 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. 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. -44- Facilities The Company operates eight leased facilities. The chart below summarizes the Company's facilities:
Location Approximate of Facility Square Footage Function - --------------------------------- ---------------------------- --------------------------------------- Denver, CO 4,800 Processing center Hutchinson, KS 900 Processing center Wichita, KS 10,000 Processing center Beltsville, MD 4,700 Processing center Buffalo, NY 30,000 Processing center Cleveland, OH 7,000 Processing center Blue Bell, PA 36,500 Corporate headquarters and processing center Philadelphia, PA 5,700 Processing center
The leases of these facilities expire between 1997 and 2010, and most contain renewal options. The Company believes that these 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. The Company leases space in four buildings in Blue Bell, Pennsylvania from three limited partnerships of which the existing shareholders of the Company are limited partners and Michael J. Barrist is the sole shareholder of the corporate general partners, pursuant to leases expiring between 1998 and 2000. See "Management -- Certain Transactions -- Leases." 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. -45- MANAGEMENT Directors and Executive Officers The following table sets forth certain information concerning the Company's directors, executive officers and certain key employees:
Name Age Position - -------------------------------------------- ------------ ------------------------------------------------------ Michael J. Barrist........................ 35 Chairman of the Board, President and Chief Executive Officer Charles C. Piola, Jr...................... 49 Executive Vice President and Director Bernard R. Miller......................... 49 Senior Vice President, Development and Director Steven L. Winokur......................... 36 Vice President, Finance and Chief Financial Officer Joseph C. McGowan......................... 43 Vice President, Operations Stephen Elliott........................... 35 Vice President, Technology and Chief Information Officer Steven Leckerman.......................... 44 Vice President, Collection Operations
Michael J. Barrist has served as Chairman of the Board, President and Chief Executive Officer of NCO since purchasing the Company in 1986. Mr. Barrist was employed by U.S. Healthcare Inc. from 1984 to 1986, most recently as Vice President of Operations, and was employed by Gross & Company, a certified public accounting firm, from 1980 through 1984. Mr. Barrist is a certified public accountant. Charles C. Piola, Jr. joined the Company in 1986 as Executive Vice President, Sales and Marketing and has served as a director since that time. Prior to joining NCO, Mr. Piola was the Regional Sales Manager for Trans World Systems from 1983 to 1986 and IC Systems from 1979 to 1981, both accounts receivable management companies. Bernard R. Miller joined the Company as Senior Vice President of Development in 1994 when NCO acquired BRM, a Philadelphia-based accounts receivable management company owned principally by Mr. Miller. Mr. Miller became a director in 1996. Prior to joining the Company, Mr. Miller served as President and Chief Executive Officer of BRM since he founded it in 1980. Steven L. Winokur joined the Company in December 1995 as Vice President, Finance and Chief Financial Officer. 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 & -46- Associates, a certified public accounting firm. From March 1981 to February 1992, Mr. Winokur was a partner with Gross & Company, a certified public accounting firm, where he most recently served as Administrative Partner. Mr. Winokur is a certified public accountant. Joseph C. McGowan joined the Company in 1990 as Vice President, Operations. Prior to that, Mr. McGowan was Assistant Manager of the Collections Department at Philadelphia Gas Works, a public utility, since 1975. Stephen Elliott joined the Company in May 1996 as Vice President, Technology and Chief Information Officer and provided consulting services to the Company since May 1995. Prior to joining NCO, Mr. Elliott was employed by Electronic Data Systems, a computer services company, since 1986, most recently as Senior Account Manager. Steven Leckerman joined the Company in September 1995 as Vice President, Collection Operations. From 1982 to September 1995, Mr. Leckerman was employed by Allied Bond Corporation, a division of Union Corporation, an accounts receivable management company, where he served as manager of dialer and special projects. Board of Directors Within 90 days after completion of this Offering, the Company will expand its Board of Directors from three to five members and will appoint two independent directors to fill the vacancies created by the increase. The Board will be divided into three classes: Class I will consist of Mr. Barrist, whose term will expire at the 1997 annual meeting of shareholders; Class II will consist of Mr. Miller and an independent director, whose terms will expire at the 1998 annual meeting of shareholders; Class III will consist of Mr. Piola and an independent director, whose terms will expire at the 1999 annual meeting of shareholders. Beginning with the 1997 annual meeting of shareholders, directors whose terms are expiring will be elected by the shareholders to serve for three year terms. The Company will also establish an Audit Committee consisting of at least the two independent directors, and a Compensation Committee consisting of Mr. Barrist and the two independent directors. Audit Committee. The Audit Committee will make recommendations concerning the engagement of independent public accountants; review with the independent public accountants the plans for and scope of the audit, the audit procedures to be utilized and the results of the audit; approve the professional services provided by the independent public accountants; review the independence of the independent public accountants; and review the adequacy and effectiveness of the Company's internal accounting controls. Compensation Committee. The Compensation Committee will make recommendations to the Board of Directors concerning compensation for the Company's executive officers; review general compensation levels for other employees as a group; administer the Company's 1995 Stock Option Plan and 1996 Stock Option Plan; and take such other actions as may be required in connection with the Company's compensation and incentive plans. -47- Director Compensation The Company previously has not paid fees to its directors for their services as directors. Upon completion of this Offering, each non-employee director of the Company will receive an annual fee of $5,000 and a fee of $500 for each meeting of the Board or Board committee attended, plus reimbursement of expenses incurred in attending meetings; however, no additional fee will be paid for committee meetings held the same day as Board meetings. Non-employee directors will receive stock options pursuant to the Company's 1996 Non-Employee Director Stock Option Plan and directors who are also employees are eligible to participate in the Company's 1996 Stock Option Plan. See "--Stock Option Plans". Executive Compensation Summary Compensation Table. The following table sets forth the compensation earned by the Chief Executive Officer and the three next most highly compensated executive officers of the Company whose aggregate salaries and bonuses exceeded $100,000 (collectively, the "Named Executive Officers") for services rendered in all capacities to the Company during 1995. SUMMARY COMPENSATION TABLE
Long-Term Compensation Annual Compensation Awards (1) ------------------------------- ------------------ Securities Name and Underlying All Other Principal Position Year Salary Bonus Options (#) Compensation (2) - --------------------------------- --------- ------------- ------------- ------------------ ---------------------- Michael J. Barrist 1995 $200,000 $242,641 -- $5,993 Chairman of the Board, President and Chief Executive Officer Charles C. Piola, Jr. 1995 200,000 135,714 -- 15,835 Executive Vice President and Director Bernard R. Miller 1995 130,000 21,645 -- 5,955 Senior Vice President, Development Joseph C. McGowan 1995 100,000 30,000 44,344 5,088 Vice President, Operations
- -------- (1) The Company did not grant any restricted stock awards or stock appreciation rights or make any long-term incentive plan payouts during 1995. (2) Consists of premiums for disability policies paid by the Company of $3,493, $13,335, $4,197 and $3,695 and the Company matching contribution under the 401(k) Profit Sharing Plan of $2,500, $2,500, $1,758 and $1,393 for the benefit of Messrs. Barrist, Piola, Miller and McGowan, respectively. 1995 Option Grants Table. The following table sets forth certain information concerning stock options granted during 1995 to each of the Named Executive Officers. -48- OPTION GRANTS IN 1995
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation For Individual Grants Option Term (1) --------------------------------------------------------------- --------------------------- Number of Percent of Securities Total Options Underlying Granted to Exercise Options Employees In Price Per Expiration Name Granted Fiscal Year Share Date 5% 10% - ---------------------- ---------------- ---------------- ------------- ------------- ------------- ------------- Michael J. Barrist -- -- -- -- -- -- Charles C. Piola, Jr. -- -- -- -- -- -- Bernard R. Miller -- -- -- -- -- -- Joseph C. McGowan 44,344 (2) 33.3% $ 2.73 6/1/05 76,133 192,937
- ------- (1) Represents the difference between the market value of the Common Stock for which the option may be exercised, assuming that the market value of the Common Stock on the date of grant appreciates in value to the end of the ten-year option term at annualized rates of 5% and 10%, respectively, and the exercise price of the option. The potential realizable value of the options based on the assumed initial public offering price of $12.00 per share will substantially exceed the potential realizable values shown in the table. (2) The options were granted on June 1, 1995 and become exercisable in three equal annual installments beginning one year after the date of grant. Aggregated Option Exercises in 1995 and 1995 Year-End Option Values Table. The following table sets forth certain information concerning the exercise of options in 1995 and the number of unexercised options and the value of unexercised options at December 31, 1995 held by the Named Executive Officers. AGGREGATED OPTION EXERCISES IN 1995 AND 1995 YEAR-END OPTION VALUES
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options at Shares Acquired Value Options at December 31, 1995 December 31, 1995(1) Name on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable - --------------------- ---------------- ------------ ----------------------------- ------------------------- Michael J. Barrist -- -- -- /-- -- /-- Charles C. Piola, Jr. -- -- -- /-- -- /-- Bernard R. Miller 86,881 (2) $854,572 (2) -- /-- -- /-- Joseph C. McGowan -- -- -- /44,344 -- / $411,069
- ------- (1) There was no public trading market for the Common Stock as of December 31, 1995. Accordingly, these values have been calculated on the basis of an assumed initial public offering price of $12.00 per share, less the applicable exercise price. (2) Mr. Miller purchased these shares for an aggregate exercise price of $188,000 pursuant to the exercise of an option issued to him at the time of the BRM acquisition. Because there was no public trading market for the Common Stock as of the date of exercise, the value realized upon exercise of this option was calculated on the basis of an assumed initial public offering price of $12.00 per share, less the exercise price. -49- Employment Agreements In September 1996, the Company entered into five-year employment agreements with Messrs. Barrist, Piola, Miller, McGowan and Winokur pursuant to which they are entitled to receive annual base salaries of $275,000, $200,000, $150,000, $125,000 and $150,000, respectively, adjusted each year in accordance with the Consumer Price Index. Mr. Barrist is entitled to receive an annual bonus of $50,000 if the Company reaches performance goals determined by the Board of Directors. He is also entitled to a bonus of $100,000 if the Company's net income increases by 20% over the prior year and a bonus equal to 5% of any increase in net income in excess of 20%, in each case adjusted for dilution. Mr. Piola is eligible for an annual bonus of $50,000, $75,000 or $100,000 if the Company's annual increase in net income (adjusted for dilution) over the prior year exceeds 20%, 30% or 40%, respectively. Messrs. Miller, McGowan and Winokur receive such annual bonuses as are determined by the Board of Directors. Each of the employment agreements provides that, in the event of the death of the employee or the termination of employment by the Company other than "for cause" (as defined in the agreements), the Company shall continue to pay the employee's full compensation, including bonuses, for the balance of the employment term. In addition to a non-disclosure covenant, each employment agreement also contains a covenant-not-to compete with the Company for a period of two years following the date that the Company ceases to pay the employee any compensation pursuant to the terms of the agreement. Stock Option Plans In June 1995, the Company adopted, and the shareholders approved, the Company's 1995 Stock Option Plan (the "1995 Plan"). In September 1996, the Company adopted, and the shareholders approved, the 1996 Stock Option Plan (the "1996 Plan") and the 1996 Non-Employee Director Stock Option Plan (the "Director Plan" and collectively with the 1995 Plan and the 1996 Plan, the "Plans"). The purpose of the Plans is to attract and retain employees, non-employee directors, and independent consultants and contractors and to provide additional incentive to them by encouraging them to invest in the Common Stock and acquire an increased personal interest in the Company's business. Payment of the exercise price for options granted under the Plans may be made in cash, shares of Common Stock or a combination of both. All options granted pursuant to the Plans are exercisable in accordance with a vesting schedule which is set at the time of the issuance of the option and, except as indicated below, may not be exercised more than ten years from the date of grant. Options granted under the Plans will become immediately exercisable upon a "change in control" as defined in the Plans. 1995 Plan and 1996 Plan. All officers, directors, key employees, independent contractors and independent consultants of the Company or any of its current or future parents or subsidiaries are eligible to receive options under the 1995 Plan and the 1996 Plan. These Plans are administered by the Compensation Committee of the Board of Directors. This committee will select the optionees and will determine the nature of the option granted, the number of shares subject to each option, the option vesting schedule and other terms and conditions of each option. The Board of Directors may modify, amend, suspend or terminate these Plans, provided that such action may not affect outstanding options. The Company has reserved 221,719 shares of Common Stock for issuance upon the exercise of options granted under the 1995 Plan and 218,413 shares of Common Stock for issuance upon the exercise of options granted under the 1996 Plan. Options to purchase an aggregate of 367,321 -50- shares of Common Stock have been issued under the 1995 Plan and the 1996 Plan, respectively. Options granted under these Plans may be incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or options not intended to so qualify. These Plans require the exercise price of incentive stock options to be at least equal to the fair market value of the Common Stock on the date of the grant. In the case of options granted to a shareholder owning, directly or indirectly, in excess of 10% of the Common Stock, the option exercise price must be at least equal to 110% of the fair market value of the Common Stock on the date of grant and such option may not be exercised more than five years from the date of grant. The option price for non-qualified options, at the discretion of the Compensation Committee, may be less than the fair market value of the Common Stock on the date of grant. All unexercised options terminate three months following the date on which an optionee's employment by, or relationship with, the Company or any parent or subsidiary of the Company, terminates other than by reason of disability or death (but not later than the expiration date) whether or not such termination is voluntary. Any option held by an employee who dies or who ceases to be employed because of disability must be exercised by the employee or his representative within one year after the employee dies or ceases to be an employee (but not later than the scheduled termination date). Options are not transferable except to the decedent's estate in the event of death. Additionally, the Compensation Committee may permit gifts of options to family members. No additional options may be granted under the 1995 Plan and no option may be granted under the 1996 Plan after August 2006. In September 1996, the Company granted options to purchase an aggregate of 145,602 shares under the 1996 Plan at an exercise price equal to the initial public offering price. Of these options, 48,534 will become exercisable on the first anniversary of the date of grant and the remaining options will become exercisable in equal amounts on the second and third anniversaries of the date of grant. Director Plan. All non-employee directors automatically receive options under the Director Plan. The Director Plan is administered by the Board of Directors of the Company, including non-employee directors, who may modify, amend, suspend or terminate the plan, other than the number of shares with respect to which options are to be granted, the option exercise price, the class of persons eligible to participate, or options previously granted. The Company has reserved 24,258 shares of Common Stock for issuance upon the exercise of options under the Director Plan. Options granted under the Director Plan are not incentive stock options under Section 422 of the Code. Each person who is first elected or appointed to serve as a non-employee director of the Company is automatically granted options to purchase 1,000 shares of Common stock at the fair market value of the Common Stock on the date of the grant. Immediately after the Company's 1997 annual meeting of shareholders and at each annual meeting of shareholders thereafter, each individual who is re-elected or continues as a non-employee director automatically is granted an option to purchase 1,000 shares of Common stock at the fair market value of the Common Stock on the date of the grant. Compensation Committee Interlocks and Insider Participation in Compensation Decisions Prior to the completion of the Offering, the Company did not have a Compensation Committee and compensation decisions were made by Mr. Barrist. Within 90 days after the -51- completion of this Offering, the Company expects to appoint two outside directors to the Board and to establish a Compensation Committee consisting of Mr. Barrist and the two outside directors. CERTAIN TRANSACTIONS Real Estate Matters The Company currently leases five facilities in Blue Bell, Pennsylvania. These facilities are leased from limited partnerships, in each case the general partner of which is a corporation with Mr. Barrist as the sole shareholder and the limited partners of which are the current shareholders of the Company except that, in certain partnerships, an unaffiliated person is also a limited partner. The leases for the five facilities provide for terms expiring between 1998 and 2005, and provide for total base monthly rent during 1996 of approximately $47,100. Under the facilities leases, the Company paid the limited partnerships controlled by the Company's current shareholders approximately $81,563, $297,500, $385,217, and $282,289 for the years ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1996, respectively. At one of the facilities, the Company has sublet the space to an affiliate of the limited partnership owning the facility for a monthly rent of $1,454, which is equal to the monthly rent paid by the Company. The Company believes that the terms of the leases are no less favorable to the Company than would have been obtained by unaffiliated parties. See "Business -- Facilities" and Note 9 of Notes to the Financial Statements. The Company has made interest-free advances to the limited partnerships for the purpose of making improvements to these facilities. The largest aggregate amount of indebtedness outstanding during 1994 and 1995 and the six months ended June 30, 1996 was $64,000, $100,000 and $249,820, respectively. These advances were repaid in June 1996. S Corporation Termination At the Termination Date, the Company terminated its status as an S Corporation. In connection therewith, the Company declared distributions in an amount equal to the Company's undistributed S Corporation earnings as of the Termination Date, estimated at $3.0 million, subject to adjustment. The Company expects to pay the S Corporation Distributions with a portion of the proceeds from this Offering. See "Use of Proceeds" and "Dividend Policy and Prior S Corporation Status." Distribution and Tax Indemnification Agreement The Company has entered into a distribution and tax indemnification agreement with its current shareholders which provides for: (i) the payment of the S Corporation Distributions, (ii) the adjustment of the S Corporation Distributions based on the final determination of the Company's actual undistributed S Corporation earnings through the Termination Date, (iii) an indemnification by the Company of the current shareholders for any losses or liabilities with respect to any additional taxes (including interest, penalties, legal and accounting fees and any additional taxes resulting from any indemnification) resulting from the Company's operations during the period in which it was an S Corporation (the "S Corporation Period") and (iv) an indemnification by the current shareholders of the Company for the amount of any tax refund received by the current shareholders due to a reduction in their share of the Company's S Corporation taxable income for the S Corporation Period less any taxes, interest or penalties imposed by any tax authority on any -52- distributions to the current shareholders with respect to the S Corporation Period in excess of the current shareholder's share of taxable income of the Company for the S Corporation Period. See "Dividend Policy and Prior S Corporation Status." Loan to Bernard R. Miller In 1995, the Company loaned $135,888 to Bernard R. Miller at an interest rate of 7.0% per year to enable him to exercise an option to purchase 86,881 shares of Common Stock, which option was issued to him in connection with the BRM acquisition. This loan was repaid in May 1996. -53- PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of September 5, 1996, and as adjusted to reflect the sale of the shares of Common Stock offered hereby by: (i) each person known by the Company to own beneficially more than 5% of the Company's outstanding Common Stock; (ii) each of the Company's directors; (iii) each of the Named Executive Officers; and (iv) the Company's directors and executive officers as a group. Except as otherwise indicated, to the knowledge of the Company, the beneficial owners of the Common Stock listed below have sole investment and voting power with respect to such shares.
Beneficial Ownership ------------------------------------------------------------- Percent Prior Percent After Name of Beneficial Owner Number to the Offering the Offering (1) - ------------------------------------------------- --------------- ---------------- ---------------------- Michael J. Barrist (2)(3)(4).................... 2,681,856 63.6% 39.9% Annette Barrist (2)(4).......................... 320,193 7.6 4.8 Charles C. Piola, Jr. (2)(5).................... 1,180,389 28.0 17.6 Bernard R. Miller (2)........................... 210,684 5.0 3.1 Mellon Bank, N.A................................ 222,091 5.0 3.2 610 West Germantown Pike Suite 200 Plymouth Meeting, PA 19462 Joseph C. McGowan(2)(6)......................... 14,781 * * All directors and executive officers as a group (5 persons) (7)...................... 4,239,314 100.0% 62.9%
- --------- *Less than one percent. (1) Assumes no exercise of the Underwriters' over-allotment option. In the event that the Underwriters' over-allotment option is exercised in full, Messrs. Barrist, Piola and Miller and Mrs. Barrist have agreed to sell 210,188, 117,562, 18,750 and 28,500 shares, respectively, and after the Offering will beneficially own 36.4%, 15.8%, 2.9% and 4.3%, respectively, and all directors and executive officers as a group will beneficially own 57.3% of the outstanding Common Stock. (2) The address of such person is c/o NCO Group, Inc., 1740 Walton Road, Blue Bell, Pennsylvania 19422-0987. (3) Includes: (i) 320,193 shares of Common Stock owned by Mrs. Barrist which Mr. Barrist has the sole right to vote pursuant to an irrevocable proxy and (ii) 140,518 shares held in trust for the benefit of Mr. Piola's children for which Mr. Barrist is a co-trustee. Excludes 140,518 shares held in trust for the benefit of Mr. Barrist's child, as to which Mr. Barrist disclaims beneficial ownership. (4) Mrs. Barrist is the mother of Michael J. Barrist. (5) Excludes 140,518 shares held in trust for the benefit of Mr. Piola's children, as to which Mr. Piola disclaims beneficial ownership. (6) Represents 14,781 shares issuable upon exercise of options which are exercisable within 60 days of September 5, 1996. (7) Includes: (i) 320,193 shares of Common Stock owned by Mrs. Barrist which Mr. Barrist has the sole right to vote pursuant to an irrevocable proxy, (ii) 140,518 shares held in trust for the benefit of Mr. Barrist's child for which an executive officer of the Company is a co-trustee and (iii) an aggregate of 25,867 shares issuable upon exercise of options which are exercisable within 60 days of September 5, 1996. -54- DESCRIPTION OF CAPITAL STOCK The Company is authorized to issue 25,000,000 shares of Common Stock, no par value, and 5,000,000 shares of Preferred Stock, no par value, issuable in series, the relative rights, limitations and preferences of which may be designated by the Board of Directors ("Preferred Stock"). As of the date of this Prospectus, 4,213,447 shares of Common Stock were issued and outstanding and held of record by five shareholders and no shares of Preferred Stock were outstanding. Common Stock The holders of Common Stock are entitled to one vote per share on all matters to be voted upon by shareholders. Subject to preferences that may be applicable to any then outstanding Preferred Stock, the holders of Common Stock are entitled, among other things, (i) to share ratably in dividends if, when and as declared by the Board of Directors out of funds legally available therefor; and (ii) in the event of liquidation, dissolution or winding-up of the Company, to share ratably in the distribution of assets legally available therefor, after payment of debts and expenses. The holders of Common Stock do not have cumulative voting rights in the election of directors and have no preemptive rights to subscribe for additional shares of capital stock of the Company. All currently outstanding shares of the Common Stock are, and the shares offered hereby, when sold in the manner contemplated by this Prospectus will be, fully paid and nonassessable. The rights, preferences and privileges of holders of Common Stock are subject to the terms of any series of Preferred Stock which the Company may issue in the future. Preferred Stock The Preferred Stock may be issued from time to time by the Board of Directors as shares of one or more classes or series. Subject to the provisions of the Company's Articles and limitations prescribed by law, the Board of Directors is expressly authorized to adopt resolutions to issue the shares, to fix the number of shares, to change the number of shares constituting any series, and to provide for or change the voting powers, designations, preferences and relative, participating, optional or other special rights, qualifications, limitations or restrictions thereof, including dividend rights (including whether dividends are cumulative), dividend rates, terms of redemption (including sinking fund provisions), redemption prices, conversion rights and liquidation preferences of the shares constituting any class or series of the Preferred Stock, in each case without any further action or vote by the shareholders. The Company has no current plans to issue any shares of Preferred Stock. One of the effects of undesignated Preferred Stock may be to enable the Board of Directors to render more difficult or to discourage an attempt to obtain control of the Company by means of a tender offer, proxy contest, merger or otherwise, and thereby to protect the continuity of the Company's management. The issuance of shares of the Preferred Stock pursuant to the Board of Directors' authority described above may adversely affect the rights of the holders of Common Stock. For example, Preferred Stock issued by the Company may rank prior to the Common Stock as to dividend rights, liquidation preference or both, may have full or limited voting rights and may be convertible into shares of Common Stock. Accordingly, the issuance of shares of Preferred Stock may discourage bids for the Common Stock or may otherwise adversely affect the market price of the Common Stock. -55- Warrants and Convertible Note In July 1995, the Company issued a warrant (the "1995 Warrant") to purchase 175,531 shares of Common Stock to Mellon Bank, N.A. pursuant to the Company's Credit Agreement. The Company issued a warrant (the "1996 Warrant") to purchase an additional 46,560 shares of Common Stock to Mellon Bank, N.A. upon the amendment of the Credit Agreement in September 1996. The 1995 Warrant is exercisable at any time after the consummation of this Offering and prior to July 31, 2005 at a nominal exercise price. The Company intends to grant an additional warrant to purchase 18,500 shares of Common Stock at an exercise per share price equal to the initial public offering price in consideration of increasing the revolving credit facility to $25.0 million. The 1996 Warrant is exercisable at any time after the consummation of the Offering and prior to July 31, 2005 at an exercise price equal to the initial public offering price of the Common Stock. The number of shares of Common Stock which may be acquired upon exercise of the 1995 Warrant and the 1996 Warrant (collectively, the "Warrants") and the exercise price are each subject to adjustment in certain circumstances, including the sale by the Company of Common Stock at a price per share less than the then current fair market value of the Common Stock. The holder of the Warrants also has the right to surrender the Warrants in exchange for shares of Common Stock having an aggregate fair market value equal to the amount by which the aggregate fair market value of all of the shares issuable upon exercise of the Warrants exceeds the aggregate exercise price of the Warrants. In connection with the Credit Agreement, the Company entered into a Registration Rights Agreement granting Mellon Bank, N.A. and its transferees (collectively, "Holders") the right to register the shares received upon exercise of the Warrants under the Securities Act. Whenever the Company proposes to register any shares of Common Stock at any time prior to July 31, 2005, the Company is required to give notice to the Holders of the proposed registration and to include their shares in such registrations, subject to certain conditions including the right of the underwriters of such offering to limit the number of shares sold by the Holders if, in the underwriters' opinion, the number of securities requested to be included in such registration exceeds the number which can be sold without adversely affecting the marketability of the offering. The Holders may also require the Company to file up to two registration statements under the Securities Act with respect to such shares. The Company is required to pay all registration expenses (other than underwriting discounts), including the reasonable fees of one counsel chosen by the Holders. The Holders have agreed to waive any rights to register shares of Common Stock in this Offering. As part of the purchase price for the MAB acquisition, the Company issued a $1.0 million Convertible Note which is convertible into shares of Common Stock at the initial public offering price at any time prior to maturity in September 2001. Anti-Takeover Provisions The Company's Articles and Bylaws contain several provisions intended to limit the possibility of, or make more difficult, a takeover of the Company. In addition to providing for a classified Board of Directors and the issuance of Preferred Stock having terms established by the Board of Directors without shareholder approval, the Articles provide that: (i) at least 65% of the votes entitled to be cast by shareholders is required to approve amendments to the Articles and Bylaws, unless at least a majority of the incumbent directors on the Board of Directors has voted in favor of the amendment, in which case only a majority of the votes cast by shareholders is required to approve the amendment, (ii) directors can be removed only for cause and only by a vote of at least 65% of the votes entitled to be cast by shareholders, and (iii) the shareholders of the Company are not entitled to call special meetings of the shareholders. In addition, the Articles -56- provide that actions by shareholders without a meeting must receive the unanimous written consent of all shareholders. The Articles also permit the Board of Directors to oppose, in its sole discretion, a tender offer or other offer for the Company's securities and to take into consideration all pertinent issues. Should the Board of Directors determine to reject such an offer, it may take any lawful action to accomplish its purpose, including, among other things, advising shareholders not to accept the offer and commencing litigation against the offeror. The Company's Bylaws establish procedures for the nomination of directors by shareholders and the proposal by shareholders of matters to be considered at meetings of the shareholders, including the submission of certain information within the times prescribed in the Bylaws. In addition, under the Pennsylvania Business Corporation Law of 1988, as amended (the "BCL"), subject to certain exceptions, a business combination between a Pennsylvania corporation and a person owning 20% or more of such corporation's voting stock (an "interested person") may be accomplished only if: (i) the business combination is approved by the corporation's directors prior to the date on which such person acquired 20% or more of such stock or if the board approved such person's acquisition of 20% or more of such stock prior to such acquisition; (ii) the interested person owns shares entitled to cast at least 80% of the votes all shareholders would be entitled to cast in the election of directors, the business combination is approved by the vote of shareholders entitled to cast a majority of votes that all stockholders would be entitled to cast in an election of directors (excluding shares held by the interested person), which vote may occur no earlier than three months after the interested person acquired its 80% ownership, and the consideration received by shareholders in the business combination satisfies certain minimum conditions; (iii) the business combination is approved by the affirmative vote of all outstanding shares of common stock; or (iv) the business combination is approved by the vote of shareholders entitled to cast a majority of the votes that all shareholders would be entitled to cast in the election of directors (excluding shares held by the interested person), which vote may occur no earlier than five years after the interested person became an interested person. A corporation may exempt itself from this provision by an amendment to its articles of incorporation that requires shareholder approval. The Articles do not provide an exemption from this provision. Pennsylvania has also adopted other anti-takeover legislation from which the Company has elected to exempt itself in the Articles. The BCL also provides that the directors of a corporation, in making decisions concerning takeovers or any other matters, may consider, to the extent that they deem appropriate, among other things, (i) the effects of any proposed transaction upon any or all groups affected by such action, including, among others, shareholders, employees, suppliers, customers and creditors, (ii) the short-term and long-term interests of the corporation and (iii) the resources, intent and conduct of the person seeking control. The existence of the foregoing provisions of the Articles, Bylaws and BCL may discourage other persons or companies from making a tender offer for, or seeking to acquire, substantial amounts of the Company's Common Stock. Limitations on Directors' Liabilities and Indemnification As permitted by the BCL, the Company's Bylaws provide that a director shall not be personally liable in such capacity for monetary damages for any action taken, or any failure to take any action, unless the director breaches or fails to perform the duties of his or her office under the BCL, and the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. These provisions of the Bylaws, however, do not apply to the responsibility or liability -57- of a director pursuant to any criminal statute, or to the liability of a director for the payment of taxes pursuant to local, Pennsylvania or federal law. These provisions offer persons who serve on the Board of Directors of the Company protection against awards of monetary damages for negligence in the performance of their duties. The Bylaws also provide that every person who is or was a director or executive officer of the Company, or of any corporation which he served as such at the request of the Company, shall be indemnified by the Company to the fullest extent permitted by law against all expenses and liabilities reasonably incurred by or imposed upon him, in connection with any proceeding to which he may be made, or threatened to be made, a party, or in which he may become involved by reason of his being or having been a director or executive officer of the Company, or of such other corporation, whether or not he is a director or executive officer of the Company or such other corporation at the time the expenses or liabilities are incurred. No indemnification shall be provided, however, with respect to: liabilities arising under Section 16(b) of the Securities Exchange Act of 1934, as amended, if a final unappealable judgment or award establishes that such officer or director engaged in self-dealing, willful misconduct or recklessness, for expenses or liabilities which have been paid directly to, or for the benefit of, such person by an insurance carrier or for amounts paid in settlement of actions without the written consent of the Board of Directors. Transfer Agent and Registrar The transfer agent and registrar for the Common Stock is Mellon Bank, N.A., Philadelphia, Pennsylvania. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering the Company will have an aggregate of 6,713,447 shares of Common Stock outstanding. Of these shares, the 2,500,000 shares of Common Stock sold in this Offering will be freely tradeable without restriction or further registration under the Securities Act of 1933 (the "Securities Act") unless purchased by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act. The remaining 4,213,447 shares of outstanding Common Stock will be "restricted securities", as that term is defined in Rule 144 ("Restricted Shares"), and may be sold only in accordance with an exemption from registration, such as the exemption provided by Rule 144. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least two years, including persons who may be deemed "affiliates" of the Company, would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: (i) one percent of the number of shares of Common Stock then outstanding (approximately 67,134 shares immediately after the Offering) or (ii) the average weekly trading volume of the Common Stock in the over-the-counter market during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the Securities and Exchange Commission. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements, and to the availability of current public information about the Company. In addition, a person who is not deemed to have been an affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least three years, is entitled to sell such shares under Rule -58- 144(k) without regard to the requirements described above. Rule 144 also provides that affiliates of the Company who are selling shares that are not Restricted Shares must nonetheless comply with the same restrictions applicable to Restricted Shares with the exception of the holding period requirement. The Securities and Exchange Commission has published a notice of rule-making that, if adopted as proposed, would shorten the two-year holding period under Rule 144 to one year and would shorten the three-year holding period under Rule 144(k) to two years. The Company cannot predict whether such amendments will be adopted. The Company's directors, executive officers and existing shareholders have agreed, subject to certain limitations, not to offer, sell or otherwise dispose of any shares of Common Stock for a period of 180 days after the closing of the Offering without the prior written consent of Montgomery Securities. Following the expiration of this 180-day period, such directors, executive officers and existing shareholders and will hold an aggregate of 4,213,447 outstanding shares of Common Stock (3,838,447 shares if the over-allotment option is exercised in full) which may be resold under Rule 144. The Company also has outstanding warrants to purchase 222,091 shares of Common Stock and a $1.0 million Convertible Note convertible into 83,333 shares of Common Stock (at an assumed conversion price of $12.00 per share) at any time on or before September 2001. The holder of the warrants has agreed, subject to certain limitations, not to offer, sell or otherwise dispose of any shares of Common Stock issuable upon exercise of the warrants for a period of 180 days after the closing of the Offering without the prior written consent of Montgomery Securities. The holder of the warrants is entitled to certain demand and piggy-back registration rights following completion of the Offering. In addition, the Company intends, as soon as practicable after the consummation of the Offering, to register approximately 464,390 shares of Common Stock reserved for issuance to its employees, directors, consultants and advisors under the Company's 1995 Plan, 1996 Plan and Director Plan. Options to purchase an aggregate of 367,321 shares of Common Stock will be outstanding under all such Plans upon the consummation of the Offering. Prior to this Offering, there has been no public market for the Company's Common Stock. Sales of substantial amounts of Common Stock in the public market could adversely affect market prices for the Common Stock and make it more difficult for the Company to sell equity securities in the future at a time and price which it deems appropriate. -59- UNDERWRITING The Underwriters named below (the "Underwriters"), represented by Montgomery Securities and Janney Montgomery Scott Inc. (the "Representatives"), have severally agreed, subject to the terms and conditions in the underwriting agreement (the "Underwriting Agreement"), by and among the Company, the Selling Shareholders and the Underwriters, to purchase from the Company the number of shares of Common Stock indicated below opposite their respective names, at the initial public offering price less the underwriting discount set forth on the cover page of this Prospectus. The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters are committed to purchase all of the shares of Common Stock, if they purchase any. Number of Underwriters Shares -------------------- Montgomery Securities.............................. Janney Montgomery Scott Inc........................ -------------------- Total..................................... 2,500,000 ==================== The Representatives have advised the Company and the Selling Shareholders that the Underwriters propose initially to offer the Common Stock to the public on the terms set forth on the cover page of this Prospectus. The Underwriters may allow selected dealers a concession of not more than $ per share; and the Underwriters may allow, and such dealers may reallow, a concession of not more than $ per share to certain other dealers. After the initial public offering, the public offering price and other selling terms may be changed by the Representatives. The Common Stock is offered subject to receipt and acceptance by the Underwriters, and to certain other conditions, including the right to reject orders in whole or in part. The Selling Shareholders have granted an option to the Underwriters, exercisable during the 30-day period after the date of this Prospectus, to purchase up to a maximum of 375,000 additional shares of Common Stock to cover over-allotments, if any, at the same price per share as the initial shares to be purchased by the Underwriters. To the extent that the Underwriters exercise such over-allotment option, the Underwriters will be committed, subject to certain conditions, to purchase such additional shares in approximately the same proportion as set forth in the above table. The Underwriters may purchase such shares only to cover over-allotments made in connection with the Offering. -60- The Underwriting Agreement provides that the Company and the Selling Shareholders will indemnify the Underwriters against certain liabilities, including civil liabilities under the Securities Act, or will contribute to payments the Underwriters may be required to make in respect thereof. The Company, the Selling Shareholders and the Company's officers and directors who are also shareholders of the Company and who, immediately following the Offering (assuming no exercise of the Underwriters' over-allotment option) collectively will beneficially own an aggregate of 4,239,314 shares of Common Stock, have agreed that for a period of 180 days after the effective date of the Offering they will not, without the prior written consent of Montgomery Securities, directly or indirectly offer for sale, sell, solicit an offer to sell, contract or grant an option to sell, pledge, transfer, establish an open put equivalent position or otherwise dispose of any shares of Common stock, options or warrants to acquire shares of Common Stock. The Company has also agreed not to issue, offer, sell, grant options to purchase or otherwise dispose of any of the Company's equity securities or any other securities convertible into or exchangeable with its Common Stock for a period of 180 days after the effective date of the Offering without the prior written consent of Montgomery Securities, subject to limited exceptions and grants and exercises of stock options. The holder of the warrants issued by the Company has also agreed not to offer, sell or otherwise dispose of any shares of Common Stock issuable upon exercise of the warrants for a period of 180 days after the closing of the Offering without the prior written consent of Montgomery Securities. In evaluating any request for a waiver of the 180-day lock-up period, the Underwriters will consider, in accordance with their customary practice, all relevant facts and circumstances at the time of the request, including, without limitation, the recent trading market for the Common Stock, the size of the request and, with respect to a request by the Company to issue additional equity securities, the purpose of such an issuance. See "Shares Eligible for Future Sale." The Representatives have informed the Company that the Underwriters do not expect to make sales of Common Stock offered by this Prospectus to accounts over which they exercise discretionary authority in excess of 5% of the number of shares of Common Stock offered hereby. Prior to the Offering, there has been no public trading market for the Common Stock. Consequently, the initial public offering price of the Common Stock has been determined by negotiations between the Company, the Representatives and the Selling Shareholders. Among the factors to be considered in such negotiations were the history of, and the prospects for, the Company and the industry in which the Company competes, an assessment of the Company's management, its financial condition, its past and present earnings and the trend of such earnings, the prospects for future earnings of the Company, the present state of the Company's development, the general condition of the economy and the securities markets at the time of the Offering and the market prices of and demand for publicly traded common stock of comparable companies in recent periods. LEGAL MATTERS An opinion will be rendered by the law firm of Blank Rome Comisky & McCauley, Philadelphia, Pennsylvania, to the effect that the shares of Common Stock offered by the Company and the Selling Shareholders hereby, when issued and paid for as contemplated in this Prospectus, will be legally issued, fully paid and non-assessable. Certain legal matters will be passed upon for the Selling Shareholders by Blank Rome Comisky & McCauley, Philadelphia, Pennsylvania. Certain -61- legal matters will be passed upon for the Underwriters by Piper & Marbury L.L.P., Baltimore, Maryland. EXPERTS The Company's and MAB's balance sheets as of December 31, 1994 and 1995 and the Company's statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995 and MAB's statements of income and shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995 and the six months ended June 30, 1996 included in this Prospectus, have been included herein in reliance on the report of Coopers & Lybrand, L.L.P., independent certified public accountants, given on the authority of that firm as experts in accounting and auditing. The financial statements of Trans Union Corporation Collections Division at December 31, 1994 and 1995 and for each of the three years in the period ended December 31, 1995 included in this Prospectus have been audited by Ernst & Young LLP, independent auditors, as set forth in their report appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission a Registration Statement on Form S-1 under the Securities Act with respect to the Common Stock offered hereby. This Prospectus, filed as part of the Registration Statement, does not contain all of the information included in the Registration Statement and the exhibits and schedules thereto, certain portions of which have been omitted in accordance with the rules and regulations of the Securities and Exchange Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is hereby made to the Registration Statement, including the exhibits and schedules filed therewith. Statements contained in this Prospectus as to the contents of any contract, agreement or other document referred to herein are not necessarily complete and in each such instance, reference is made to the copy of such contract, agreement or other document filed as an exhibit to the Registration Statement for a more complete description of the matters involved, and each such statement shall be deemed qualified in its entirety by such reference. The Registration Statement, including the exhibits and schedules thereto, may be inspected without charge and copied at the offices of the Securities and Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549; 7 World Trade Center, 13th Floor, New York, New York 10048; and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials may be obtained at the prescribed rates from the Commission's Public Reference Section at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The Commission maintains a Web Site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of such Web Site is http://www.sec.gov. As a result of the Offering, the Company will be subject to the information requirements of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). So long as the Company is subject to periodic reporting requirements of the Exchange Act, it will continue to furnish the reports and other information required thereby to the Securities and Exchange Commission. The Company will furnish to its shareholders annual reports containing financial statements audited by its independent auditors and will make available copies of quarterly reports for the first three quarters of each fiscal year containing unaudited financial information. -62- INDEX TO FINANCIAL STATEMENTS NCO Group, Inc. Pro Forma Consolidated Financial Statements: Basis of Presentation F-1 Pro Forma Consolidated Balance Sheet as of June 30, 1996 F-2 Pro Forma Consolidated Statement of Income for the six months ended June 30, 1996 F-3 Pro Forma Consolidated Statement of Income for the year ended December 31, 1995 F-4 Notes to Consolidated Pro Forma Financial Statements F-5 Historical Financial Statements: Report of Independent Accountants F-7 Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996 (Unaudited) F-8 Statements of Income for each of the three years in the period ended December 31, 1995 and the six months ended June 30, 1995 and June 30, 1996 (Unaudited) F-9 Statements of Shareholders' Equity for each of the years in the three year period ended December 31, 1995 and the six months ended June 30, 1996 (Unaudited) F-10 Statements of Cash Flows for each of the years in the three year period ended December 31, 1995 and the six months ended June 30, 1995 and June 30, 1996 (Unaudited) F-11 Notes to Financial Statements F-12 INDEX TO FINANCIAL STATEMENTS, Continued Management Adjustment Bureau, Inc.: Report of Independent Accountants F-26 Balance Sheets as of December 31, 1994 and 1995 and as of June 30, 1996 F-27 Statements of Income and Retained Earnings for the three year period ended December 31, 1995 and the six months ended June 30, 1996 F-28 Statements of Cash Flows for each of the years in the three year period ended December 31, 1995 and the six months ended June 30, 1996 F-29 Notes to Financial Statements F-31 Trans Union Corporation Collections Division: Report of Independent Auditors F-37 Statements of Net Assets as of December 31, 1994 and 1995 F-38 Statements of Operations for each of the three years ended December 31, 1995 F-39 Statements of Cash Flows for each of the three years ended December 31, 1995 F-40 Notes to Financial Statements F-41 Pro Forma Consolidated Financial Statements Basis of Presentation The Pro Forma Consolidated Balance Sheet as of June 30, 1996 and the Pro Forma Consolidated Statements of Income for the year ended December 31, 1995 and the six months ended June 30, 1996 are based on the historical financial statements of NCO Group, Inc. (NCO), Management Adjustment Bureau, Inc. (MAB), Trans Union Corporation Collections Division (TCD) and Eastern Business Services, Inc. (Eastern). The Pro Forma Consolidated Balance Sheet has been prepared assuming the MAB acquisition occurred on June 30, 1996. The Pro Forma Consolidated Statement of Income for the six months ended June 30, 1996 has been prepared assuming the MAB acquisition occurred on January 1, 1996, and the Pro Forma Consolidated Statement of Income for the year ended December 31, 1995 has been prepared assuming the MAB, TCD and Eastern acquisitions occurred on January 1, 1995. Additionally, the Pro Forma Consolidated Financial Statements include adjustments relating to NCO's conversion from an S Corporation effective September 3, 1996 (the "Termination Date"). The Pro Forma Consolidated Statements of Income also reflect the assumed issuance of 1,715,950 shares of Common Stock (at an assumed initial public offering price of $12.00 per share), which, net of estimated underwriting discounts and offering expenses payable by the Company, would result in sufficient net proceeds to repay acquisition-related debt and finance the distribution of all undistributed S Corporation earnings through the Termination Date (estimated at $3.0 million, subject to final adjustment.) These shares are assumed to have been issued, and the debt repaid, at the beginning of the periods presented, and thus interest expense attributable to such debt has been eliminated. The Pro Forma Consolidated Balance Sheet reflects the assumed issuance of 2,500,000 shares of Common Stock at June 30, 1996 (at an assumed initial public offering price of $12.00 per share, net of estimated underwriting discounts and offering expenses payable by the Company) and the application of the net proceeds to repay acquisition-related debt and finance the S Corporation distributions, with the remaining net proceeds of approximately $8,750,000 added to working capital. The Pro Forma Consolidated Financial Statements do not purport to represent what NCO's actual results of operations or financial position would have been had the acquisitions occurred as of such dates, or to project NCO's results of operations or financial position for any period or date, nor does it give effect to any matters other than those described in the notes thereto. The unaudited Pro Forma Consolidated Financial Statements should be read in conjunction with the other financial statements and notes thereto included elsewhere in this Prospectus. F-1 NCO GROUP, INC. Pro Forma Consolidated Balance Sheet June 30, 1996 (Unaudited)
Historical --------------------------------- Pro Forma ASSETS NCO MAB(1) Adjustments Pro Forma ----------- ---------- --------------- ------------ Current assets: Cash and cash equivalents 989,773 $ 475,354 $ 8,750,000 (6) $ 9,515,127 (300,000)(2) (400,000)(3) Available-for-sale securities 329,290 329,290 Accounts receivable, trade 2,830,610 1,234,393 4,065,003 Accounts receivable, purchased Notes receivable 56,088 56,088 Prepaid expenses and other current assets 108,286 135,888 244,174 ----------- ---------- ----------- ----------- Total current assets 4,257,959 1,901,723 8,050,000 14,209,682 Funds held in trust for clients: Cash 2,089,714 1,393,938 3,483,652 Property and equipment, net 1,420,073 1,160,130 2,580,203 Other assets: Goodwill, net of accumulated amortization 6,074,713 8,035,284 (2) 14,109,997 Covenants, net of accumulated amortization 217,708 217,708 Acquired account inventory, net 85,979 85,979 Deferred financing costs 243,879 243,879 Due from related party 33,811 33,811 Other assets 264,505 33,703 298,208 ----------- ---------- ----------- ----------- Total other assets 6,886,784 67,514 8,035,284 14,989,582 ----------- ---------- ----------- ----------- Total assets $14,654,530 $4,523,305 $16,085,284 $35,263,119 =========== ========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Demand loan $ 400,000 $ (400,000)(3) Long-term debt, current portion $ 42,333 60,000 $ 102,333 Capitalized lease obligations, current portion 59,128 108,459 167,587 Accounts payable 182,023 123,756 305,779 Accrued expenses 867,933 318,027 200,000 (2) 1,385,960 Accrued compensation and related expenses 550,423 550,423 Unearned revenue, net of related costs 98,092 98,092 ----------- ---------- ----------- ----------- Total current liabilities 1,799,932 1,010,242 (200,000) 2,610,174 ----------- ---------- ----------- ----------- Funds held in trust for clients 2,089,714 1,393,938 3,483,652 Deferred tax liability 219,000 (5) 219,000 Long-term liabilities: Long-term debt, net of current portion 7,118,039 205,000 (15,000,000)(6) 323,039 8,000,000 (1) Unearned revenue, net of related costs 258,464 258,464 Convertible note 1,000,000 (1) 1,000,000 Capitalized lease obligations, net of current portion 237,620 149,409 387,029 Commitments and contingencies Shareholders' equity: Common stock 537,326 19,000 26,750,000 (6) 26,755,992 (19,000)(4) (531,334)(5)(6) Unexercised warrants 177,294 177,294 Unrealized gain on securities 48,475 48,475 Retained earnings 2,387,666 1,745,716 (1,745,716)(4) 0 (2,387,666)(5)(6) ----------- ---------- ----------- ----------- Total shareholders' equity 3,150,761 1,764,716 22,066,284 26,981,761 ----------- ---------- ----------- ----------- Total liabilities and shareholders' equity $14,654,530 $4,523,305 $16,085,284 $35,263,119 =========== ========== =========== ===========
See accompanying notes to pro forma consolidated financial statements. F-2 NCO GROUP, INC. Pro Forma Consolidated Statement of Income for the six months ended June 30, 1996 (Unaudited)
Historical ---------------------------- Pro Forma NCO MAB Adjustments Pro Forma ----------- ---------- ----------- ----------- Revenue $12,542,664 $6,776,290 $19,318,954 ----------- ---------- ---------- ----------- Operating costs and expenses: Payroll and related expenses 5,953,895 4,254,479 $ (729,150)(7) 9,479,224 Selling, general and administrative expenses 4,094,626 2,421,714 (190,000)(8) 6,326,340 Depreciation and amortization expense 422,814 248,921 160,705 (9) 832,440 ----------- ---------- ---------- ----------- Total operating costs and expenses 10,471,335 6,925,114 (758,445) 16,638,004 ----------- ---------- ---------- ----------- Income (loss) from operations 2,071,329 (148,824) 758,445 2,680,950 Other income (expense): Interest and investment income 47,415 6,712 54,127 Interest expense (357,494) (30,262) 314,785 (10) (72,971) ----------- ---------- ---------- ----------- Income (loss) before taxes $ 1,761,250 $ (172,374) $1,073,230 2,662,106 =========== ========== ========== Pro forma provision for income taxes 1,129,124 (11) ----------- Pro forma net income $ 1,532,982 =========== Pro forma net income per share $ .25 (12) ----------- Pro forma weighted average shares outstanding 6,216,209 ===========
See accompanying notes to pro forma consolidated financial statements. F-3 NCO GROUP, INC. Pro Forma Consolidated Statement of Income for the year ended December 31, 1995 (Unaudited)
Historical --------------------------------------------------- Pro Forma NCO MAB TCD Eastern Adjustments Pro Forma ----------- ----------- ---------- ---------- ----------- ----------- Revenue $12,732,597 $12,975,799 $7,467,000 $1,333,675 $34,509,071 ----------- ----------- ---------- ---------- ----------- Operating costs and expenses: Payroll and related expenses 6,797,338 7,909,785 3,125,000 660,617 $(2,080,768)(7) 16,411,972 Selling, general and administrative expenses 4,042,342 4,138,523 3,840,000 770,742 (260,300)(13) 12,531,307 Depreciation and amortization expense 347,503 457,997 198,000 145,778 379,216 (9) 1,528,494 ----------- ----------- ---------- ---------- ----------- ----------- Total operating costs and expenses 11,187,183 12,506,305 7,163,000 1,577,137 (1,961,852) 30,471,773 ----------- ----------- ---------- ---------- ----------- ----------- Income (loss) from operations 1,545,414 469,494 304,000 (243,462) 1,961,852 4,037,298 ----------- ----------- ---------- ---------- ----------- ----------- Other income (expense): Interest and investment income 49,473 12,115 61,588 Interest expense (180,205) (26,802) (94,904) 252,609 (10) (49,302) Loss on disposal of property and equipment (49,082) (175,392) (224,474) ----------- ----------- ---------- ---------- ----------- ----------- Total other income (expense) (179,814) (190,079) (94,904) 252,609 (212,188) ----------- ----------- ---------- ---------- ----------- ----------- Income (loss) before taxes $ 1,365,600 $ 279,415 $ 304,000 $ (338,366) $ 2,214,461 3,825,110 =========== =========== ========== ========== =========== Pro forma provision for income taxes 1,658,609 (11) ----------- Pro forma net income $ 2,166,501 =========== Pro forma net income per share $ .35 (12) =========== Pro forma weighted average shares outstanding 6,211,179 ===========
See accompanying notes to pro forma consolidated financial statements. F-4 Notes to Consolidated Pro Forma Financial Statements (Unaudited) To date, all of the Company's acquisitions have been accounted for under the purchase method of accounting with the results of the acquired companies included in the Company's statements of income beginning on the date of acquisition. (1) Gives effect to the acquisition of MAB, as if it occurred on June 30, 1996, for $8.0 million in cash and the issuance of a $1.0 million convertible note payable to MAB's principal shareholder. (2) Reflects goodwill estimated at $8,035,284 resulting from the excess of the purchase price over the estimated fair market value of the net assets acquired, including estimated costs related to the acquisition of $500,000. Of such costs, $300,000 are assumed to have been paid upon closing and the remaining $200,000 are assumed to have been accrued. (3) Assumes that the $400,000 demand loan payable by MAB was repaid from the available cash of MAB. (4) Reflects the elimination of MAB's common stock and retained earnings in accordance with purchase method accounting. (5) On September 3, 1996, the Company terminated its S Corporation status for federal income tax purposes and declared a distribution of the Company's estimated undistributed S Corporation earnings through the termination date (estimated at $3.0 million, subject to adjustment.) The declaration also resulted in the elimination of the Company's retained earnings and a charge of $531,334 to the common stock account for the excess of the distribution over the Company's retained earnings. A $219,000 net deferred tax liability was also established based on the estimated book and tax differences of NCO and MAB. (6) Gives effect to the sale by the Company of 2,500,000 shares of Common Stock in the Offering and the application of the estimated net proceeds of $26.8 million to repay the outstanding debt of $15.0 million under the revolving credit facility and to pay the S Corporation distributions (estimated at $3.0 million) to existing shareholders of the Company, with the balance of $8.8 million added to working capital. (7) Reflects the reduction in salary of MAB's principal shareholder (who is no longer active in the day-to-day operations of MAB's business), pursuant to a new employment agreement, in the amount of $321,750 and $643,500 for the six-months ended June 30, 1996 and the year ended December 31, 1995, respectively. In addition, reflects the elimination of payroll and related expenses of $407,400 and $1,437,268 for the six months ended June 30, 1996 and the year ended December 31, 1995, respectively, relating to the elimination of certain redundant collection and administration personnel costs immediately identifiable at the time of the acquisition. F-5 Notes to Consolidated Pro Forma Financial Statements, Continued (Unaudited) (8) Reversal of non-recurring charge of $190,000 recorded by MAB to account for potential losses relating to certain repayment guarantees made on behalf of third parties. (9) Reflects amortization expenses of $160,705 and $680,808 for the six months ended June 30, 1996 and the year ended December 31, 1995, respectively assuming MAB, TCD and Eastern had been acquired at the beginning of the periods presented. In addition, reflects the elimination of depreciation and amortization expense related to assets not acquired by NCO as part of the acquisitions of TCD and Eastern of $301,592 for the year ended December 31, 1995. (10) Reflects the elimination of interest expenses on current and long-term debt assumed to be repaid with the offering proceeds at the beginning of the periods presented. (11) Reflects estimated provision for income taxes, at an assumed rate of 40% after giving consideration to non-deductible goodwill expense, assuming the Company had converted from an S Corporation to a C Corporation at the beginning of the periods presented. (12) Pro forma net income per share was computed by dividing the pro forma net income for the year ended December 31, 1995 and for the six months ended June 30, 1996 by the pro forma weighted average number of shares outstanding. Pro forma weighted average shares outstanding are based on the weighted average number of shares outstanding including common share equivalents giving retroactive effect as of January 1, 1995 and 1996 to the 46.56 for 1 stock split and the issuance of 1,715,950 shares of common stock (at an assumed initial public offering price of $12.00 per share) net of estimated underwriting discounts and offering expenses payable by the Company, to result in net proceeds sufficient to finance the estimated $3,000,000 S Corporation distributions and repay $15,000,000 of acquisition - related debt. (13) Reflects the difference between the Company's current rent expense for the TCD facility and the rental costs allocated to TCD by its parent prior to the acquisition. F-6 Report of Independent Accountants To the Shareholders of NCO Group, Inc. Blue Bell, Pennsylvania We have audited the accompanying balance sheets of NCO Group, Inc. as of December 31, 1994 and 1995 and the related statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NCO Group, Inc. as of December 31, 1994 and 1995 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Coopers & Lybrand LLP 2400 Eleven Penn Center Philadelphia, Pennsylvania February 16, 1996, except as to Notes 1, 2, 3, 7 and 13 for which the date is September 5, 1996 F-7 NCO GROUP, INC. Balance Sheets
December 31, ------------ June 30, ASSETS 1994 1995 1996 ---- ---- ---- (Unaudited) Current assets: Cash and cash equivalents $ 526,018 $ 804,550 $ 989,773 Available-for-sale securities 239,944 299,488 329,290 Accounts receivable, trade, net of allowance for doubtful accounts of $7,400, $23,200 and $64,554, respectively 603,176 1,394,801 2,830,610 Accounts receivable, purchased 44,038 7,745 Notes receivable 64,000 100,000 Prepaid expenses and other current assets 96,552 118,793 108,286 ----------- ---------- ----------- Total current assets 1,573,728 2,725,377 4,257,959 ----------- ---------- ----------- Funds held in trust for clients 746,989 1,228,889 2,089,714 Property and equipment, net 477,327 637,133 1,420,073 Other assets: Goodwill, net of accumulated amortization 940,387 2,636,271 6,074,713 Covenants, net of accumulated amortization 217,708 Acquired account inventory, net 244,499 138,623 85,979 Deferred financing costs 279,014 243,879 Other assets 122,789 227,826 264,505 ----------- ---------- ----------- Total other assets 1,307,675 3,281,734 6,886,784 ----------- ---------- ----------- $ 4,105,719 $7,873,133 $14,654,530 =========== ========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term debt, current portion $ 316,863 $ 46,171 $ 42,333 Capitalized lease obligations, current portion 59,128 Accounts payable 59,961 221,562 182,023 Accrued expenses 169,045 565,734 867,933 Accrued compensation and related expenses 222,587 777,985 550,423 Unearned revenue, net of related costs 332,671 302,384 98,092 ----------- ---------- ----------- Total current liabilities 1,101,127 1,913,836 1,799,932 ----------- ---------- ----------- Funds held in trust for clients 746,989 1,228,889 2,089,714 Long-term liabilities: Long-term debt, net of current portion 732,333 2,592,906 7,118,039 Capitalized lease obligations, net of current portion 237,620 Unearned revenue, net of related costs 102,586 86,155 258,464 Commitments and contingencies Shareholders' equity: Common stock, no par value, 25,000,000 shares authorized, 4,126,566, 4,213,447 and 4,213,447 shares issued and outstanding December 31, 1994 and 1995 and June 30, 1996, respectively 349,326 537,326 537,326 Unexercised warrants 177,294 177,294 Retained earnings 1,086,053 1,378,261 2,387,666 Unrealized gain (loss) on securities (12,695) 41,339 48,475 Notes receivable - shareholder (82,873) ----------- ---------- ----------- Total shareholders' equity 1,422,684 2,051,347 3,150,761 ----------- ---------- ----------- $ 4,105,719 $7,873,133 $14,654,530 =========== ========== ===========
The accompanying notes are an integral part of these financial statements. F-8 NCO GROUP, INC. Statements of Income
Six Months Ended Year Ended December 31, June 30, (unaudited) -------------------------------------------- ------------------------- 1993 1994 1995 1995 1996 ---- ---- ---- ---- ---- Revenue $ 7,444,982 $ 8,577,895 $ 12,732,597 $5,546,258 $ 12,542,664 ------------ ------------ ------------ ---------- ------------ Operating costs and expenses: Payroll and related expenses 4,122,528 4,558,351 6,797,338 2,956,773 5,953,895 Selling, general and administrative expenses 2,390,741 2,673,521 4,042,342 1,744,785 4,094,626 Depreciation and amortization expense 141,497 215,117 347,503 115,869 422,814 ------------ ------------ ------------ ---------- ------------ 6,654,766 7,446,989 11,187,183 4,817,427 10,471,335 ------------ ------------ ------------ ---------- ------------ Income from operations 790,216 1,130,906 1,545,414 728,831 2,071,329 ------------ ------------ ------------ ---------- ------------ Other income (expense): Interest and investment income 24,135 26,735 49,473 24,560 47,415 Interest expense (13,607) (71,588) (180,205) (48,305) (357,494) Loss on disposal of property and equipment (49,082) (49,082) ------------ ------------ ------------ ---------- ------------ 10,528 (44,853) (179,814) (72,827) (310,079) ------------ ------------ ------------ ---------- ------------ Net income $ 800,744 $ 1,086,053 $ 1,365,600 $ 656,004 $ 1,761,250 ============ ============ ============ ========== ============ Pro forma (unaudited): Historical income before income taxes $ 800,744 $ 1,086,053 $ 1,365,600 $ 656,004 $ 1,761,250 Pro forma provision for income taxes 320,000 434,000 546,000 262,000 704,000 ------------ ------------ ------------ ---------- ------------ Pro forma net income $ 480,744 $ 652,053 $ 819,600 $ 394,004 $ 1,057,250 ============ ============ ============ ========== ============ Pro forma net income per share $ .17 $ .22 ============ ============ Pro forma weighted average shares outstanding 4,745,229 4,750,259 ============ ============
The accompanying notes are an integral part of these financial statements. F-9 NCO GROUP, INC. STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock -------------------- Unrealized Number Gains Notes of Unexercised Retained (Losses) on Receivable Shares Amount Warrants Earnings Securities Shareholder Total -------- --------- -------- ---------- ---------- ----------- ----- January 1, 1993 4,002,763 $ 49,326 $ 670,728 $ 720,054 Net income 800,744 800,744 Distributions to shareholders (658,106) (658,106) Change in unrealized gains on securities $ 13,539 13,539 --------- --------- ---------- ---------- --------- ----------- ------------ Balance, December 31, 1993 4,002,763 49,326 813,366 13,539 876,231 Issuance of common stock 123,803 300,000 300,000 Net income 1,086,053 1,086,053 Distributions to shareholders (813,366) (813,366) Change in unrealized losses on securities (26,234) (26,234) --------- --------- ---------- ---------- --------- ----------- ------------ Balance, December 31, 1994 4,126,566 349,326 1,086,053 (12,695) 1,422,684 Issuance of common stock 86,881 188,000 $ (13,588) 52,112 Warrants issued (Note 7) $ 177,294 177,294 Note repayments 53,015 53,015 Net income 1,365,600 1,365,600 Distributions to shareholders (1,073,392) (1,073,392 Change in unrealized gains on securities 54,034 54,034 --------- --------- ---------- ---------- --------- ----------- ------------ Balance, December 31, 1995 4,213,447 537,326 177,294 1,378,261 41,339 (82,873) 2,051,347 Note repayments 82,873 82,873 Net income (unaudited) 1,761,250 1,761,250 Distributions to shareholders (unaudited) (751,845) (751,845) Change in unrealized gains on securities (unaudited) 7,136 7,136 --------- --------- ---------- ---------- --------- ----------- ------------ Balance, June 30, 1996 (unaudited) 4,213,447 $ 537,326 $ 177,294 $2,387,666 $ 48,475 - $ 3,150,761 ========= ========= ========== ========== ========= =========== ============
The accompanying notes are an integral part of these financial statements. F-10 NCO GROUP, INC. Statements of Cash Flows
Six Months Ended Year Ended December 31, June 30, (unaudited) -------------------------------------------- ------------------------- 1993 1994 1995 1995 1996 ---- ---- ---- ---- ---- Cash flows from operating activities: Net income $ 800,744 $1,086,053 $ 1,365,600 $ 656,004 $ 1,761,250 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 141,497 171,378 199,123 83,065 150,008 Loss/(gain) on disposal of equipment 49,082 49,082 (9,043) Loss/(gain) on sale of securities 9,001 4,421 2,877 2,609 (8,925) Amortization of goodwill and covenants 43,739 115,937 32,804 237,670 Amortization of deferred financing fees 32,443 35,135 Provision for doubtful accounts 3,903 3,808 3,808 33,000 Amortization of deferred rent (59,100) Other noncash credits (5,531) Changes in assets and liabilities, net of acquisitions: Accounts receivable, trade (17,776) (41,675) (571,611) (566,168) (646,041) Notes receivable (64,000) (36,000) 64,000 100,000 Acquired accounts inventory 71,375 105,876 53,235 52,644 Accounts receivable, purchased (44,038) 36,293 22,062 7,745 Prepaid expenses (5,728) (40,249) (22,241) (2,153) 10,507 Other assets (27,868) (40,112) (105,037) (4,695) (26,679) Accounts payable 33,036 (123,094) 161,601 (39,539) Accrued expenses 70,511 (214) 187,353 561,334 302,199 Accrued compensation and related expenses 51,755 555,398 (1,200) (227,562) Unearned revenue 40,929 23,950 (46,718) (2,897) 31,982 ---------- ---------- ----------- ----------- ---------- Net cash provided by operating activities 979,715 1,103,192 2,033,784 950,890 1,700,387 ---------- ---------- ----------- ----------- ---------- Cash flows from investing activities: Purchase of property and equipment (131,927) (77,999) (298,076) (88,439) (426,069) Purchase of securities (29,187) (169,785) (107,643) (88,089) (53,307) Proceeds from sales of securities 26,466 143,613 99,256 69,640 39,566 Net cash paid for acquisitions (1,000,000) (1,729,244) (4,875,839) ---------- ---------- ----------- ----------- ---------- Net cash used in investing activities (134,648) (1,104,171) (2,035,707) (106,888) (5,315,649) ---------- ---------- ----------- ----------- ---------- Cash flows from financing activities: Issuance of notes payable 1,000,000 Repayment of notes payable (79,530) (222,084) (1,067,117) (185,040) (80,543) Borrowings under credit agreement 2,450,000 4,550,000 Payment of fees to acquire new debt (134,163) Issuance of common stock 105,127 52,112 Decrease in notes receivable - shareholders 33,604 82,873 Distributions to shareholders (658,106) (813,366) (1,073,392) (914,956) (751,845) ---------- ---------- ----------- ----------- ---------- Net cash provided by (used in) financing activities (704,032) (35,450) 280,455 (1,047,884) 3,800,485 ---------- ---------- ----------- ----------- ---------- Net increase (decrease) in cash 141,035 (36,429) 278,532 (203,882) 185,223 Cash and cash equivalents at beginning of year 421,412 562,447 526,018 526,018 804,550 ---------- ---------- ----------- ----------- ---------- Cash and cash equivalents at end of year $ 562,447 $ 526,018 $ 804,550 $ 322,136 $ 989,773 ========== ========== =========== =========== ========== Supplemental disclosures of cash flow information: Cash paid for interest $ 13,559 $ 71,588 $ 157,379 $ 48,653 $ 323,097 Noncash investing and financing activities: Note receivable - shareholder 82,873 82,873 Fair value of assets acquired 442,874 2,145,578 982,018 Liabilities assumed from acquisitions 127,000 416,334 Warrants issued with debt 177,294 Property acquired under capital leases 348,586 Common stock issued for acquisition 300,000
The accompanying notes are an integral part of these financial statements. F-11 NCO GROUP, INC. Notes to Financial Statements (Amounts and disclosures for the six months ended June 30, 1996 and 1995 are unaudited) 1. Nature of Operations: NCO Group, Inc. (the "Company") is a leading provider of accounts receivable management and related services utilizing an extensive teleservices infrastructure. The Company's client base is comprised of companies in the following industries: education, financial services, healthcare, telecommunications, utilities and government entities. Effective September 3, 1996, the Company reorganized its corporate structure. At September 3, 1996, the shareholders of NCO Financial Systems, Inc. contributed each of their shares of common stock in exchange for one share of common stock of the Company, a recently formed corporation. The Company intends to effect a 46.56 for 1 stock split in September 1996 and will increase the number of authorized shares to 5,000,000 shares of preferred stock and 25,000,000 shares of common stock. All per share and related amounts have been adjusted to reflect the stock exchange and proposed stock split. Simultaneously with the contribution of the common stock of NCO Financial Systems, Inc., two additional subsidiaries of NCO Group were formed. Prior to September 3, 1996, NCO Financial Systems, Inc. was the only company within NCO Group, Inc. to have operations. 2. Summary of Significant Accounting Policies: Revenue Recognition: The Company generates revenues from contingency fees and contractual services. Contingency fee revenue is recognized upon collection of funds on behalf of clients. Contractual services revenue is deferred and recognized as services are performed. Property and Depreciation: 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. F-12 Notes to Financial Statements, Continued (Amounts and disclosures for six months ended June 30, 1996 and 1995 are unaudited) 2. Summary of Significant Accounting Policies, continued: Income Taxes: The Company has elected to be taxed as an S Corporation under the Internal Revenue Code and the Pennsylvania Tax Code. While this election was in effect, no provision was made for income taxes by the Company since all income is taxed directly to, and losses and tax credits utilized directly by, the shareholders of the Company. The Company terminated its S Corporation status on September 3, 1996. Upon termination of its Subchapter S status, the Company adopted SFAS No. 109, "Accounting for Income Taxes". This standard requires an asset and liability approach that takes into account changes in tax rates when valuing the deferred tax amounts to be reported in the balance sheet. Upon termination of the S Corporation status and adoption of SFAS 109, the Company recorded an estimated net deferred tax asset that will not have a material impact on the financial statements. The net deferred tax asset resulted primarily from differences in the treatment of unearned revenue and acquired account inventory. Cash and Cash Equivalents: The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. These financial instruments potentially subject the Company to concentrations of credit risk. At December 31, 1994 and 1995 and June 30, 1996, the Company had bank deposits in excess of federally insured limits of approximately $500,000, $1,276,000 and $2,514,474, respectively. The Company's cash deposits have been placed with a large national bank to minimize risk and the cost approximates fair value. Credit Policy: The Company has two types of arrangements under which it collects its contingency fee revenue. For certain clients the Company remits funds collected on behalf of the client, net of the related contingency fees while, for other clients, the Company remits gross funds, collected on behalf of clients, and bills the client separately for its contingency fees. Management carefully monitors its client relationships in order to minimize its credit risk and generally does not require collateral. In the event of collection delays from clients, management may at its discretion change from the gross remittance method to the net remittance method. F-13 Notes to Financial Statements, Continued (Amounts and disclosures for six months ended June 30, 1996 and 1995 are unaudited) 2. Summary of Significant Accounting Policies, continued: Investment Securities: The Company accounted for marketable securities in accordance with Statement of Financial Accounting Standards SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities," for all periods presented. The statement requires management to make a determination as to which of three categories they will report their investments in: "held to maturity" which are reported at amortized cost; "trading securities" which are reported at fair value with changes in unrealized gains or losses included in current earnings and "available for sale" securities which include all investments not included in the above two categories and are reported at fair value with changes in unrealized gains and losses reflected directly as a separate component of shareholders' equity. Realized gains and losses on the sale of securities are recognized using the specific identification method and included in the statement of income. Accounts Receivable Purchased: Purchased accounts receivable portfolios are recorded at cost and amortized, based upon a percentage of expected collections, over the estimated life of the individual portfolios. The amortization rates are reviewed periodically and adjusted based on the projected overall collection performance of each portfolio. Acquired Account Inventory: Acquired account inventory consists of individual contracts with student loan debtors that do not exceed three years. These accounts are periodically reviewed by management for collectibility. Goodwill and Acquisition Costs: Goodwill represents the excess of purchase price over the fair market value of the net assets of the acquired business. Goodwill is amortized on a straight-line basis over 15 years. The recoverability of goodwill is periodically reviewed by the Company. In making such determination with respect to goodwill, the Company evaluates the operating cash flows of the underlying business which gave rise to such amount. Accumulated amortization at December 31, 1994 and 1995 and June 30, 1996 totaled $43,739, $159,676 and $377,553, respectively. Covenants: Non-compete covenants are based on an allocation of the purchase price of $237,500 in connection with the acquisition of Trans Union Corporation Collections Division (TCD) on January 3, 1996. The non-compete covenant is being amortized on a straight-line basis over the term of the covenant which is 5 years. F-14 Notes to Financial Statements, Continued (Amounts and disclosures for six months ended June 30, 1996 and 1995 are unaudited) 2. Summary of Significant Accounting Policies, continued: Deferred Financing Costs: Deferred financing costs relate to debt issuance costs incurred which are capitalized and amortized over the term of the debt. 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. Earnings Per Share: On September 3, 1996, the shareholders of NCO Financial Systems, Inc. (Note 1) contributed each of their shares of common stock in exchange for one share of the Company's common stock. The Company intends to effect a 46.56 for 1 stock split in September 1996. All per share and related amounts contained in these financial statements and notes have been adjusted to reflect the stock exchange and proposed stock split. Pro forma net income per share was computed by dividing the pro forma net income for the year ended December 31, 1995 and for the six-month period ended June 30, 1996 by the pro forma weighted average number of shares outstanding. Pro forma weighted average shares outstanding are based on the weighted average number of shares outstanding including common equivalent shares giving retroactive effect as of January 1, 1995 to the stock split. All outstanding options and warrants have been treated as common equivalent shares in calculating pro forma net income per share, using the treasury stock method and an assumed initial public offering price of $12.00 per share, only when their effect would be dilutive. The pro forma weighted average number of shares outstanding have also been adjusted to include the number of shares of common stock (250,000) that the Company would have needed to issue at the assumed initial public offering price of $12.00 per share to finance the distribution of undistributed S Corporation earnings through the date on which the Company terminated its S Corporation status (estimated at $3,000,000). Interim Financial Information: The interim financial information as of June 30, 1996 and for the six months ended June 30, 1996 and 1995 has been prepared from the unaudited financial records of the Company and in the opinion of management, reflects all adjustments necessary for a fair presentation of the financial position and results of operations and of cash flows for the respective interim periods. All adjustments were of a normal and recurring nature. F-15 Notes to Financial Statements, Continued (Amounts and disclosures for six months ended June 30, 1996 and 1995 are unaudited) 3. Acquisitions: On January 3, 1996, the Company purchased certain assets of TCD for $4,750,000 in cash. The purchase price was allocated based upon the estimated fair market value of property, accounts receivable and an agreement not to compete which resulted in goodwill in the amount of $3,681,000. On August 1, 1995, the Company purchased certain assets of Eastern Business Services, Inc. (Eastern) for approximately $2,041,000 comprised of $1,625,000 in cash and $416,000 of liabilities assumed. The purchase price was allocated primarily based upon the estimated fair market values of accounts receivable and equipment purchased less notes payable and funds due to clients which resulted in goodwill in the amount of $1,812,000. On April 29, 1994 the Company purchased certain assets of B. Richard Miller, Inc. (BRM) at a cost of $1,427,000, which was comprised of $1,000,000 in cash, common stock valued at $300,000 and a note payable to the seller of $127,000. The purchase price was allocated based upon the estimated fair market value of the acquired property and equipment and account inventory and resulted in goodwill of $984,126. The following summarizes unaudited pro forma results of operations for the years ended December 31, 1994 and 1995 and the six months ended June 30, 1996, assuming the acquisitions (including the acquisition of MAB on September 5, 1966) occurred as of the beginning of the respective periods. June 30, 1994 1995 1996 ----------- ----------- ------------- Net revenue $30,530,000 $34,509,000 $ 19,319,000 Income before taxes 3,001,000 3,825,000 2,662,000 F-16 Notes to Financial Statements, Continued (Amounts and disclosures for six months ended June 30, 1996 and 1995 are unaudited) 4. Marketable Securities: The Company has classified all of its securities as "available for sale" and has recorded them at fair value and unrealized gains and losses as a separate component of shareholders' equity. Proceeds from the sale of investment securities were $26,466, $143,613 and $99,256 for the years ended December 31, 1993, 1994 and 1995, respectively and $69,640 and $39,566 for the six months ended June 30, 1995 and 1996, respectively.
Unrealized Unrealized Holding Holding Fair Cost Gain Loss Value ---------- ---------- ---------- ---------- 1994 ---- Common stock $ 162,342 $ 8,827 $ (18,650) 152,519 Corporate bonds 90,297 (2,872) 87,425 --------- --------- --------- --------- $ 252,639 $ 8,827 $ (21,522) $ 239,944 ========= ========= ========= ========= 1995 ---- Common stock $ 167,852 $ 41,475 $ (6,164) $ 203,163 Corporate bonds 90,297 6,028 96,325 --------- --------- --------- --------- $ 258,149 $ 47,503 $ (6,164) $ 299,488 ========= ========= ========= ========= 1996 ---- Common stock $ 190,518 $ 48,503 $ (1,971) $ 237,050 Corporate bonds 90,297 1,943 92,240 --------- --------- --------- --------- $ 280,815 $ 50,446 $ (1,971) $ 329,290 ========= ========= ========= =========
F-17 Notes to Financial Statements, Continued (Amounts and disclosures for six months ended June 30, 1996 and 1995 are unaudited) 4. Marketable Securities, continued: Investment income, included in interest and investment income on the statement of income, consisted of:
Six Months Ended Year Ended December 31, June 30, ---------------------------------------- ------------------------- 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- Realized gain on the sale of available-for-sale securities $ 11,749 $ 12,217 $ 7,255 $ 11,535 Realized loss on the sale of available-for-sale securities $ (9,001) (16,170) (15,094) (9,864) (2,610) Interest income 7,497 5,142 7,035 3,517 3,517 Dividend income 5,835 5,211 5,892 2,866 3,270 -------- -------- -------- -------- -------- $ 4,331 $ 5,932 $ 10,050 $ 3,774 $ 15,712 ======== ======== ======== ======== ========
The fair values of marketable securities by contractual maturity are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or repayment penalties
December 31, June 30, --------------------- ------- 1994 1995 1996 ------- ------- ------- Within one year $20,425 $20,208 After one year but within 5 years $29,375 10,537 10,172 After 5 years but within 10 years 58,050 65,363 61,860 ------- ------- ------- $87,425 $96,325 $92,240 ======= ======= =======
5. Funds Held in Trust for Clients: In the course of the Company's regular business activities as a 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. F-18 Notes to Financial Statements, Continued (Amounts and disclosures for six months ended June 30, 1996 and 1995 are unaudited) 6. Property and Equipment: Property and equipment, at cost, consists of the following:
December 31, June 30, --------------------------- ---------- 1994 1995 1996 ---------- ---------- ---------- Leased assets $ 324,414 Computer equipment $ 726,099 $ 905,732 1,368,155 Furniture and fixtures 236,413 316,312 462,423 ---------- ---------- ---------- 962,512 1,222,044 2,154,992 Less accumulated depreciation 485,185 584,911 734,919 ---------- ---------- ---------- $ 477,327 $ 637,133 $1,420,073 ========== ========== ==========
Depreciation of property and equipment is calculated on a straight-line basis over their estimated useful lives. Amounts charged to operations amounted to $141,497, $171,378 and $199,123 for the years ended 1993, 1994 and 1995, respectively and $83,065 and $150,008 for the six months ended June 30, 1995 and 1996, respectively. Included in the computer equipment shown above for the six months ended June 30, 1996 are capital leases with a gross amount of $348,586 and accumulated depreciation of $17,429. The Company had not entered into any capital lease transactions for the years ended December 31, 1994 and 1995. F-19 Notes to Financial Statements, Continued (Amounts and disclosures for six months ended June 30, 1996 and 1995 are unaudited) 7. Long-Term Debt:
December 31, June 30, ------------------------------ ----------- 1994 1995 1996 ----------- ----------- ----------- Revolving credit agreement, prime plus 1.375%, due July 1999 $ 2,450,000 $ 7,000,000 Non-interest bearing note acquired; $225,750 face amount, payable in monthly installments of $5,250 through July 1999 (less unamortized discount based on imputed interest rate of 10%) 189,077 160,372 Note payable, bank, prime plus 1.0%, due April 1999 $ 662,500 Note payable, bank, prime plus 0.5%, due March 1996 250,000 Note payable, bank, 7.15%, due August 1995 59,112 Subordinated seller note payable, prime plus 1.5%, due August 1995 77,584 Less current portion (316,863) (46,171) (42,333) ----------- ----------- ----------- $ 732,333 $ 2,592,906 $ 7,118,039 =========== =========== ===========
The following summarizes the Company's required debt payments for the next five years ending June 30: 1997 $ 42,000 1998 54,000 1999 59,000 2000 7,005,000 In July 1995 the Company entered into a revolving credit agreement which provides for borrowings up to $7,000,000 to be utilized for working capital and qualified acquisition indebtedness of the Company. The line of credit is collateralized by substantially all the assets of the Company. Proceeds from the agreement were utilized to primarily refinance notes payable due to the bank in the amount of approximately $850,000, and cash payments of $1,600,000 and $4,500,000 for the acquisition of Eastern and TCD, respectively (see Note 3). F-20 Notes to Financial Statements, Continued (Amounts and disclosures for six months ended June 30, 1996 and 1995 are unaudited) 7. Long-Term Debt, continued: The revolving credit agreement contains, among other provisions, requirements for maintaining defined levels of working capital, net worth, capital expenditures, various financial ratios and restrictions of distributions to shareholders. The Company recorded deferred charges of approximately $311,000 in connection with the acquisition of the revolving credit agreement, which consisted primarily of bank charges, legal fees and warrants issued to the bank exercisable into an aggregate of 175,531 shares of the Company's common stock. The warrants expire on July 31, 2005 and are only exercisable upon certain events at a nominal exercise price. The bank had the right to put, and the Company had the ability to call, the warrants during the twelve-month period ending on July 31, 2001. However, these rights were eliminated as part of the increase in the credit agreement in August 1996. In August 1996 the credit agreement was increased to $15,000,000 to provide financing for the acquisition of Management Adjustment Bureau, Inc. and the bank received a warrant for 46,560 shares, exercisable at the initial public offering price, as consideration. In addition, the bank agreed to increase the credit agreement to $25,000,000 upon completion of the Company's initial public offering (see Note 13) and will receive, as consideration, a warrant for an additional 18,500 shares, exercisable at the initial public offering price. In connection with the acquisition of Eastern Business Services, the Company assumed a noninterest-bearing note payable with an outstanding face amount of $225,750 at December 31, 1995 and June 30, 1996. Long-term debt is primarily variable in nature and is based on the prime rate. Management estimates the carrying value of long-term debt approximates fair value. 8. 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 20% of their income on a pretax basis through contributions to the Plan. The Company will match 25% of employee contributions for an amount up to 6% of each employee's base salary. The charge to operations for the matching contributions was $22,828, $23,536 and $30,027 for 1993, 1994 and 1995, respectively and $14,819 and $20,525 for the six months ended June 30, 1995 and 1996. F-21 Notes to Financial Statements, Continued (Amounts and disclosures for six months ended June 30, 1996 and 1995 are unaudited) 9. Leases: The Company has entered into various office lease agreements with limited partnerships owned by shareholders of the Company. In addition, the Company has made disbursements on behalf of the limited partnerships and has recorded a note receivable of $64,000 and $100,000 at December 31, 1994 and 1995, respectively. This note was repaid during the six-months ended June 30, 1996. The Company leases certain equipment under agreements which are classified as capital leases. The equipment leases have original terms ranging from 36 to 48 months, and have purchase options at the end of the original lease term. Leased capital assets are included in computer equipment. The Company also leases certain equipment under noncancelable operating leases. Future minimum payments, by year and in the aggregate, under noncancelable capital leases and operating leases with initial or remaining terms of one year or more consist of the following at June 30, 1996 (in thousands):
Capital Operating Years Ended June 30, Leases Leases Totals --------------------- ------------- --------------- --------------- 1997 $ 86,216 $ 746,495 $ 832,711 1998 86,216 661,050 747,266 1999 86,216 617,881 704,097 2000 74,113 595,822 669,935 2001 37,431 416,462 453,893 Future years 573,750 573,750 ------------- --------------- --------------- Total minimum lease payments 370,192 $ 3,611,460 $ 3,981,652 =============== =============== Amounts representing interest 73,444 ------------- Present value of net minimum 296,748 payments Current portion 59,128 ------------- $ 237,620 =============
Rent expense was $466,189, $305,308 and $463,916 for the years ended December 31, 1993, 1994 and 1995, respectively and $466,453 and $194,162 for the six months ended June 30, 1996 and 1995. The related party office lease expense was $81,563, $297,500 and $385,217 for 1993, 1994 and 1995, respectively and $201,825 and $282,289 for the six months ended June 30, 1995 and 1996, and provides for an escalation clause which takes effect in 1998. The total amount of base rent payments is being charged to expense on the straight-line method over the term of the lease. F-22 Notes to Financial Statements, Continued (Amounts and disclosures for six months ended June 30, 1996 and 1995 are unaudited) 10. Stock Options: The Company adopted a stock option plan (the Plan) in 1995 for its employees. The Plan authorized 221,719 shares of the Company's common stock to be issued pursuant to either incentive stock options or non-qualified stock options. The option price for incentive stock options shall be equal to at least fair market value, at the date of grant, whereas the option price for non-qualified stock options may be less than fair market value. The vesting period of options issued under either plan is at the discretion of the Board of Directors. The maximum exercise period is ten years after the date of grant. A summary of stock option activity since inception of the plan is as follows:
Number of Number of Option Price Shares Options Per Share Exercisableble --------- ----------- -------------- Outstanding at January 1, 1995 Granted 144,057 $ 2.73 144,057 Exercised Expired ------- ---- ------- Outstanding at December 31, 1995 144,057 2.73 144,057 Granted Exercised Expired ------- ---- ------- Outstanding at June 30, 1996 144,057 $ 2.73 144,057 ======= ====== =======
As part of the purchase price for the acquisition of certain assets of B. Richard Miller, Inc., 123,803 shares of the Company's common stock were issued to BRM's principal shareholder, who also received an option to purchase up to an additional 86,881 shares of the Company which was exercised during 1995 at a cost of $188,000. As a result of the purchase of these shares, a receivable of $82,873 was due from the seller as of December 31, 1995 which was subsequently repaid during the six month period ended June 30, 1996. F-23 Notes to Financial Statements, Continued (Amounts and disclosures for six months ended June 30, 1996 and 1995 are unaudited) 11. Recent Accounting Pronouncements: In October 1995, the FASB issued (SFAS No. 123), "Accounting for Stock-Based Compensation", which is effective for the Company in 1996. SFAS No. 123 requires Companies to either recognize compensation expense, based on fair value of the stock-based compensation determined by an option pricing model utilizing various assumptions regarding the underlying attributes of the options and the Company's stock, or provide pro-forma disclosures and continue to recognize compensation expense in accordance with Accounting Practices Bulletin Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). The Company will adopt the provisions of SFAS No. 123 in its 1996 annual financial statements. The adoption of SFAS No. 123 had no effect on the Company's cash flows. In March 1995, the FASB issued (SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of", which was effective for the Company beginning January 1, 1996. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles be reviewed 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. SFAS No. 121 had no impact on the financial statements upon adoption. 12. Commitments and Contingencies: The Company is party to various legal proceedings incidental to its business. Certain claims, suits, and complaints arising in the ordinary course of business have been filed or are pending against the Company. In the opinion of management, all such matters are adequately covered by insurance or, if not covered, are without merit or are of such kind, or involve such amounts, as would not have a significant effect on the financial position, results of operations, or cash flows of the Company, if disposed of unfavorably. 13. Subsequent Events: The Company intends to file a registration statement in September 1996 with the Securities and Exchange Commission in connection with a proposed initial public offering of 2,500,000 shares of its common stock. The Company intends to use the proceeds for repayment of bank debt incurred to finance acquisitions, payment of S Corporation distributions, and for working capital and other general corporate purposes, including possible acquisitions. F-24 Notes to Financial Statements, Continued (Amounts and disclosures for six months ended June 30, 1996 and 1995 are unaudited) 13. Subsequent Events, continued: The Company purchased the common stock of Management Adjustment Bureau, Inc. for $8,000,000 in cash and a $1,000,000 convertible note on September 5, 1996. The purchase price was allocated based upon the estimated fair market value of the acquired assets and liabilities. MAB provides accounts receivable management to a variety of general businesses. F-25 Report of Independent Accountants To the Shareholder of Management Adjustment Bureau, Inc. We have audited the accompanying balance sheets of Management Adjustment Bureau, Inc. as of December 31, 1994, 1995 and June 30, 1996, and the related statements of income and retained earnings, and cash flows for each of the three years in the period ended December 31, 1995 and the six months ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Management Adjustment Bureau, Inc. as of December 31, 1994, 1995 and June 30, 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 and the six months ended June 30, 1996, in conformity with generally accepted accounting principles. Coopers & Lybrand, L.L.P. Rochester, New York August 20, 1996 F-26 Management Adjustment Bureau, Inc. Balance Sheets
December 31, June 30, Assets 1994 1995 1996 ------ ----------- ----------- ----------- Current assets: Cash $ 413,088 $ 290,197 $ 475,354 Accounts receivable (less allowance for doubtful accounts of $47,000, $80,420 and $92,808, respectively) 924,551 1,308,511 1,234,393 Property held for sale 217,400 Loans receivable 57,623 56,088 Prepaid expenses 145,476 162,091 135,888 ---------- ---------- ---------- Total current assets 1,483,115 2,035,822 1,901,723 ---------- ---------- ---------- Funds held in trust for clients 1,778,502 1,530,270 1,393,938 Property and equipment, net 1,005,664 1,319,614 1,160,130 Other assets: Loan receivable 50,000 33,811 Cash value - officer's life insurance 6,256 6,673 7,189 Deposits 12,000 16,200 26,514 ---------- ---------- ---------- Total other assets 68,256 22,873 67,514 ---------- ---------- ---------- $4,335,537 $4,908,579 $4,523,305 ========== ========== ========== Liabilities and Retained Earnings Current liabilities: Line-of-credit $ 446,000 $ 400,000 Long-term debt, current portion $ 252,176 271,456 168,459 Accounts payable 41,917 92,738 123,756 Accrued expenses 117,178 220,948 318,027 ---------- ---------- ---------- Total current liabilities 411,271 1,031,142 1,010,242 ---------- ---------- ---------- Funds held in trust for clients 1,778,502 1,530,270 1,393,938 Long-term debt 173,089 410,077 354,409 Retained earnings: Common stock, no par value; Class A - authorized 200 shares; issued and outstanding 100 shares 19,000 19,000 19,000 Retained earnings 1,953,675 1,918,090 1,745,716 ---------- ---------- ---------- Total retained earnings 1,972,675 1,937,090 1,764,716 ---------- ---------- ---------- $4,335,537 $4,908,579 $4,523,305 ========== ========== ==========
The accompanying notes are an integral part of the financial statements. F-27 Management Adjustment Bureau, Inc. Statements of Income and Retained Earnings
For the Years Ended December 31, Months ---------------------------------------------- June 30, 1993 1994 1995 1996 --------- ---------- --------- ------------ Revenues $ 9,281,629 $ 11,183,167 $12,975,799 $ 6,776,290 Operating costs and expenses: Payroll and related expenses 5,303,241 6,556,110 7,909,785 4,254,479 Selling, general and administrative expenses 3,425,653 3,624,489 4,138,523 2,421,714 Depreciation and amortization 165,006 300,158 457,997 248,921 ----------- ----------- ----------- ----------- 8,893,900 10,480,757 12,506,305 6,925,114 ----------- ----------- ----------- ----------- Income (loss) from operations 387,729 702,410 469,494 (148,824) ----------- ----------- ----------- ----------- Other income (expense): Interest expense (28,856) (31,065) (26,802) (30,262) Loss on disposal of assets (72,389) (96,792) Miscellaneous income 2,848 1,656 12,115 6,712 Property write-down (78,600) ----------- ----------- ----------- ----------- Total other expense (98,397) (29,409) (190,079) (23,550) ----------- ----------- ----------- ----------- Net income (loss) 289,332 673,001 279,415 (172,374) Retained earnings - beginning of year 1,336,342 1,565,674 1,953,675 1,918,090 Distributions to shareholder (60,000) (285,000) (315,000) ----------- ----------- ----------- ----------- Retained earnings - end of year $ 1,565,674 $ 1,953,675 $ 1,918,090 $ 1,745,716 =========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements. F-28 Management Adjustment Bureau, Inc. Statements of Cash Flows
For the Years Ended For the Six December 31, Months Ended ------------------------------------------ June 30, 1993 1994 1995 1996 --------- --------- --------- --------- Cash flows from operating activities: Net income (loss) $ 289,332 $ 673,001 $ 279,415 $(172,374) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 165,006 300,158 457,997 248,921 Loss on disposal of assets 72,389 96,792 Property write-down 78,600 Provision for doubtful accounts 30,000 17,000 33,420 12,388 Changes in assets and liabilities: Decrease (increase) in accounts receivable (352,768) 130,193 (417,380) 61,730 Decrease (increase) in prepaid expenses 10,558 (109,889) (16,615) 26,203 Decrease (increase) in cash value - officer's life insurance 284 6,000 (417) (516) Increase in deposits (12,000) (4,200) (10,314) Increase (decrease) in accounts payable (15,867) (35,367) 50,821 31,018 Increase (decrease) in accrued expenses 123,436 (41,377) 103,770 97,079 Decrease in accrued profit sharing contributions (175,000) --------- --------- --------- --------- Total adjustments (141,962) 254,718 382,788 466,509 --------- --------- --------- --------- Net cash provided by operating activities 147,370 927,719 662,203 294,135 --------- --------- --------- --------- Cash flows from investing activities: Proceeds from sale of equipment 42,695 5,800 Purchases of equipment (488,186) (371,172) (637,419) (89,437) Repayment (issuance) of loans receivable 117 (50,000) (7,623) (32,276) Proceeds from sale of property 217,400 --------- --------- --------- --------- Net cash provided by (used in) investing activities (445,374) (421,172) (639,242) 95,687 --------- --------- --------- --------- Cash flows from financing activities: Repayment of loans (100,000) (193,324) (204,695) (561,719) Proceeds from loan agreements 200,000 100,000 300,000 400,000 Payment of stock redemption note (70,007) Proceeds from line-of-credit 150,000 Principal payments on capital leases (18,198) (47,428) (76,157) (42,946) Distributions to shareholders (60,000) (285,000) (315,000) --------- --------- --------- --------- Net cash used in financing activities (48,205) (425,752) (145,852) (204,665) --------- --------- --------- --------- Net increase (decrease) in cash (346,209) 80,795 (122,891) 185,157 Cash - beginning of year 678,502 332,293 413,088 290,197 --------- --------- --------- --------- Cash - end of year $ 332,293 $ 413,088 $ 290,197 $ 475,354 ========= ========= ========= =========
The accompanying notes are an integral part of the financial statements. F-29 Management Adjustment Bureau, Inc. Statements of Cash Flows, continued
For the For the Years Ended Six December 31, Months Ended -------------------------------------------- June 30, 1993 1994 1995 1996 -------- -------- -------- -------- Supplemental disclosures of cash flow information: Cash paid for interest $ 36,975 $ 41,704 $ 43,042 $ 27,762 Cash paid for state income taxes $ 607 $ 15,715 $ 15,246 Noncash activities: Capital lease obligations entered into $ 89,139 $ 61,742 $237,121 Debt assumed for property held for sale $296,000
The accompanying notes are an integral part of the financial statements. F-30 Management Adjustment Bureau, Inc. Notes to Financial Statements 1. Nature of Operations Management Adjustment Bureau, Inc. ("MAB"), specializes in accounts receivable management and liquidation, with a concentration of university, guaranteed student loans, bank credit cards, utility, retail, commercial and health care customers. MAB has principal operations in Buffalo, New York and Denver, Colorado. 2. Summary of Significant Accounting Policies Revenue Recognition MAB generates revenues from contingency fees and contractual services and revenue is recognized upon collection of funds on behalf of clients. Credit Policy MAB has two types of arrangements under which it collects its contingency fee revenue. For certain clients, MAB remits funds collected on behalf of the client, net of the related contingency fees while, for other clients, MAB remits gross funds, collected on behalf of clients, and bills the client separately for its contingency fees. Management carefully monitors its client relationships in order to minimize its credit risk and generally does not require collateral. In the event of collection delays from clients, management may at its discretion change from the gross remittance method to the net remittance method. 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. Property, Equipment and Depreciation Property and equipment are stated at cost less accumulated depreciation. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed over the estimated useful lives of the assets which range from three to thirty-nine years, using straight-line and accelerated methods. 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. F-31 Management Adjustment Bureau, Inc. Notes to Financial Statements 2. Summary of Significant Accounting Policies - continued Income Taxes MAB has elected to be treated as an S-Corporation for tax purposes. Accordingly, no provision will be made for income taxes by MAB since all income will be taxed directly to the shareholder of MAB. State taxes which are not significant are included in selling, general and administrative expenses. 3. Concentration of Credit Risk At December 31, 1994, 1995 and June 30, 1996, MAB had bank deposits in excess of federally insured limits of approximately $2,322,000, $1,662,000 and $1,614,070, respectively. MAB's cash deposits have been placed with a large national bank to minimize risk. 4. Loans Receivable In 1994, MAB loaned a former shareholder $50,000. Interest is payable in monthly installments of $333 at a fixed annual rate of eight percent. The loan is due in full on or before September 1, 1996. The note is unsecured. In 1995, MAB also extended various miscellaneous loans to employees. In 1996, MAB loaned $33,811 to a related party. The loan was assumed by the shareholder in August 1996. 5. Funds Held in Trust for Clients In the course of MAB's regular business activities as an accounts receivable management agency, MAB receives clients' funds arising from the collection of accounts placed with MAB. These funds are placed in segregated cash accounts and are generally remitted to clients within 30 days. F-32 Management Adjustment Bureau, Inc. Notes to Financial Statements 6. Demand Loans MAB has a $200,000 unsecured demand line-of-credit with a bank which carries interest at the prime rate less .25%. The demand loan balance at December 31, 1995 was $150,000. The demand loan balance was paid off in January 1996, at which time MAB borrowed $400,000 through an unsecured note from a related party. The related party note is due on demand and accrues interest at nine percent per year. MAB has an outstanding demand line-of-credit of $296,000 with PHH Real Estate Services Corporation at December 31, 1995. The line-of-credit is secured by an investment in real estate and due upon sale of the real estate. In May 1996, the real estate was sold and the line-of-credit was repaid and terminated. 7. Property and Equipment Property and equipment, at cost, are as follows:
December 31, --------------------------- June 30, 1994 1995 1996 ---------- ---------- ---------- Computer equipment $1,059,596 $1,341,432 $1,407,832 Furniture and fixtures 513,633 625,828 648,865 Capitalized leases 150,881 388,002 388,002 ---------- ---------- ---------- 1,724,110 2,355,262 2,444,699 Less: Accumulated depreciation 718,446 1,035,648 1,284,569 ---------- ---------- ---------- $1,005,664 $1,319,614 $1,160,130 ========== ========== ==========
Depreciation charged to operations amounted to approximately $165,006, $300,158 and $457,997 in 1993, 1994 and 1995, respectively and $248,921 for the six months ended June 30, 1996 and included amortization of capital leases of approximately $-0-, $9,984 and $41,567 in 1993, 1994 and 1995, respectively and $29,629 for the six months ended June 30, 1996. F-33 Management Adjustment Bureau, Inc. Notes to Financial Statements 8. Long-Term Debt Long-term debt is as follows:
December 31, -------------------------- June 1994 1995 1996 ---------- --------- ----------- Chemical Bank, collateralized by computer equipment. Monthly principal payments of $8,333 plus interest at 8.4% are due through April 1996. $ 133,333 $ 33,333 Chemical Bank, unsecured term loan. Monthly principal payments of $5,000 plus interest at 8% are due through November 2000. 295,000 $ 265,000 AT&T Credit Corporation, telephone leases. Monthly lease payments of $3,084 and $2,039 which include interest and due through October 1998. 30,684 67,079 49,452 Steelcase Financial Services, office furniture lease. Monthly lease payments of $2,000 for the first 20 months; $3,000 for the next 40 months, which include interest and are due through June 2002. 164,394 153,823 Data General Corporation, lease collateralized by computer equipment Monthly lease payments of $794, which include interest at 9.3%, are due through May 1996. 12,598 3,878 Data General Corporation, lease collateralized by an optical imaging system Monthly payments of $2,758, which include interest at 7.1%, are due through April, 1996. 41,974 10,870 M & T Bank, collateralized by computer equipment Payments of $1,195, which include interest at 6.5%, are due through December 1996. 206,676 106,979 54,593 --------- --------- --------- 425,265 681,533 522,868 Less: Current portion (252,176) (271,456) (168,459) --------- --------- --------- $ 173,089 $ 410,077 $ 354,409 ========= ========= =========
The fair value of debt approximates the carrying value. Long-term debt maturing during the next five years ending December 31, is approximately as follows: 1996 $ 271,500 1997 107,440 1998 91,160 1999 85,340 2000 82,440 F-34 Management Adjustment Bureau, Inc. Notes to Financial Statements 8. Long-Term Debt - continued The term loan agreement contains, among other provisions, requirements for maintaining defined levels of working capital, net worth and various financial ratios. MAB was in violation of covenants for which waivers were obtained. In May 1996, MAB established two unsecured lines-of-credit with a total availability of $1,000,000. Each line-of-credit carries variable interest based on the prime rate. One line-of-credit is collateralized by MAB's accounts receivables and specific equipment. 9. Commitments and Contingencies MAB has operating leases for a building and automobiles which expire at various dates through 2010 with renewal privileges in some instances. Total rental expense under operating leases was approximately $344,500, $330,000 and $469,400 for 1993, 1994, and 1995, respectively and $227,500 for the six months ended June 30, 1996. Future minimum lease payments under operating leases through 2000 for the years ending December 31, are approximately: 1996 $ 416,900 1997 346,600 1998 324,900 1999 305,100 2000 310,700 MAB is involved in various legal issues. In the opinion of MAB's management, the ultimate cost to resolve these matters will not have a material adverse effect on MAB's financial position, results of operations or cash flows beyond the reserves already established. Included in these reserves is an amount for $190,000 for a potential loss related to a specific contract. Management estimates the range of potential losses is between $-0- and $380,000 for this specific contract. 10. Profit Sharing Plan MAB has a profit sharing plan with a 401(k) feature covering all qualified employees. MAB's contribution to this plan is a 50% match on the first 4% contributed by employees. MAB contributed $47,732, $50,531, and $50,805 in 1993, 1994, and 1995, respectively, to the Plan. MAB contributed $40,242 to the Plan for the six month period ended June 30, 1996. F-35 Management Adjustment Bureau, Inc. Notes to Financial Statements 11. Major Customer MAB had revenues from a major customer of approximately 9% and 10% for the years ended December 31, 1994 and 1995, respectively and 13% for the six month period ended June 30, 1996. During August 1996, MAB was notified that it will not continue to provide certain services to this customer. 12. Stock Purchase Agreement In July 1996, the shareholder received a letter of intent from NCO Financial Systems to purchase MAB. MAB is currently pursuing the sale. F-36 [This Page Intentionally Left Blank] [This Page Intentionally Left Blank] Report of Independent Auditors Trans Union Corporation: We have audited the accompanying statements of net assets of the Trans Union Corporation Collections Division (the Collections Division) as of December 31, 1994 and 1995, and the related statements of operations and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the management of the Collections Division and Trans Union Corporation. 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 the 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. As described in Note 1, the accompanying statements of net assets, operations, and cash flows include the assets, liabilities, revenues, expenses, and cash flows which are specifically identifiable with the Collections Division, as well as certain allocated expenses. These financial statements may not necessarily reflect the assets and liabilities and results of operations and cash flows of the Collections Division had it been operated as a stand-alone entity. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets of the Collections Division as of December 31, 1994 and 1995, and the results of its operations and cash flows for the years then ended in conformity with generally accepted accounting principles. Ernst & Young LLP Chicago, Illinois January 16, 1996 1 F-37 Trans Union Corporation Collections Division Statements of Net Assets (In Thousands)
December 31 1994 1995 ------------------------------------------- Assets Current assets: Cash and cash equivalents $2,671 $1,733 Accounts receivable - Trade, net of allowances of $20 in 1994 and 1995 931 614 Prepaid expenses and other current assets 18 11 ------------------- --------------- Total current assets 3,620 2,358 Fixed assets: Equipment 1,449 1,162 Leasehold improvements 13 - Furniture and fixtures 261 302 Capitalized leased assets - - ------------------- --------------- 1,723 1,464 Less: Accumulated depreciation and amortization (1,457) (1,245) ------------------- --------------- 266 219 Deposits - 10 ------------------- --------------- Total assets 3,886 2,587 Liabilities Accounts payable and accrued liabilities 379 393 Current portion of capital lease obligation - - Debtor payments owed clients 357 256 ------------------- --------------- Total liabilities 736 649 Net assets $3,150 $1,938 =================== ===============
See accompanying notes. 2 F-38 Trans Union Corporation Collections Division Statements of Operations (In Thousands)
Year ended December 31 1993 1994 1995 ------------------------------------------------------------ Revenue Service revenues $7,770 $7,537 $7,467 Expenses Salaries and employee benefits 3,746 3,090 2,888 Payroll and other taxes 297 283 237 Depreciation and amortization 324 287 198 Repairs and maintenance 182 170 163 Corporate office charges 62 124 117 Communications 521 438 391 Selling, general, and administrative 3,279 2,926 3,174 Other (income) expenses, net 98 2 (5) ------------------------------------------------------------ Total expenses 8,509 7,320 7,163 ------------------------------------------------------------ Operating income (loss) $ (739) $ 217 $ 304 ============================================================
See accompanying notes. 3 F-39 Trans Union Corporation Collections Division Statements of Cash Flows (In Thousands)
Year ended December 31 1993 1994 1995 -------------------------------------------------------- Operating activities Operating income (loss) $ (739) $ 217 $ 304 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation and amortization 324 287 198 (Gain) loss on fixed asset disposition 87 - (5) Provision for losses on accounts receivable - 1 5 Decrease (increase) in accounts receivable 42 (184) 312 (Increase) decrease in prepaid expenses, other assets, and deposits 12 1 (3) Increase (decrease) in accounts payable and accrued liabilities 46 (40) 14 (Decrease) increase in debtor payments owed clients 61 (6) (101) -------------------------------------------------------- Net cash provided by (used in) operating activities (167) 276 724 Investing activities Purchases of fixed assets (119) (85) (165) Proceeds from sale of fixed assets - - 15 -------------------------------------------------------- Net cash used in investing activities (119) (85) (150) Financing activities Net (distributions) contributions to parent company 1,086 1,709 (1,512) Principal payments under capital lease obligations (19) (50) - -------------------------------------------------------- Net cash (used in) provided by financing activities 1,067 1,659 (1,512) -------------------------------------------------------- Net (decrease) increase in cash and cash equivalents 781 1,850 (938) Cash and cash equivalents at beginning of year 40 821 2,671 -------------------------------------------------------- Cash and cash equivalents at end of year $ 821 $2,671 $1,733 ========================================================
See accompanying notes. 4 F-40 Trans Union Corporation Collections Division Notes to Financial Statements (In Thousands) 1. Business and Basis of Presentation The Trans Union Corporation Collections Division (the Collections Division) is a business unit of Trans Union Corporation (TUC) that provides various collection services. TUC is a wholly owned subsidiary of Marmon Industrial Corporation (MIC), and its ultimate parent company is Marmon Holdings, Inc. Substantially all of the stock of Marmon Holdings, Inc. is owned, directly or indirectly, by trusts for the benefit of the lineal descendants of Nicholas J. Pritzker, deceased, and entities controlled by such trusts. The Collections Division provides third-party debt collection services within the health care, utilities, and insurance markets. The principal markets are located in the states of Ohio, Pennsylvania, and Kansas. These financial statements present the historical assets, liabilities, revenues, expenses, and cash flows directly related to the operations of the Collections Division during the period presented. These financial statements are not necessarily indicative of the financial position and results of operations which would have occurred had the Collections Division been operated as an independent company; specifically, the financial statements do not include a provision for contingencies or income taxes. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. TUC and its Collections Division are part of a group that files a consolidated tax return. There is no tax-sharing agreement for allocating income taxes to the Collections Division. Accordingly, the financial statements do not reflect any income tax expense or benefit. 5 F-41 Trans Union Corporation Collections Division Notes to Financial Statements (continued) (In Thousands) 2. Summary of Significant Accounting Policies Revenue Recognition Service revenues are recognized when debtor payments are received. Fixed Assets Fixed assets are recorded at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the related assets beginning in the month following acquisition. Cash and Cash Equivalents The Collections Division considers cash and cash equivalents to consist of cash on hand and all highly liquid debt instruments purchased with a maturity of three months or less, if any. MIC provides a centralized cash management function; accordingly, the Collections Division does not maintain separate operating cash accounts, and its cash disbursements and the majority of its collections of client revenues are settled to the TUC and MIC cash concentrator accounts. Therefore, certain parent company transactions are deemed to be cash transactions for purposes of the statement of cash flows. 3. Related Party Transactions TUC provides certain common general management services to the Collections Division including accounting, legal, and cash management services. The amount charged to the Collections Division for these services totaled $62, $124, and $117 for the years ended December 31, 1993, 1994, and 1995, respectively. 6 F-42 Trans Union Corporation Collections Division Notes to Financial Statements (continued) (In Thousands) 4. Profit-sharing and Employee Saving Plans The Collections Division employees are part of a MIC mixed savings and profit-sharing plan. All employees with at least one year of continuing service are eligible for participation in the plan. Each participant's contribution is matched in part by MIC up to a maximum of 6% of the participant's annual compensation. Employee savings plans expense was approximately $151, $194, and $139 for the years ended December 31, 1993, 1994, and 1995, respectively. 5. Leases As lessee, the Collections Division shares leased office facilities with TUC and leased equipment under noncancelable operating lease agreements expiring January 31, 2005. Total rent expense under such operating leases based on a square foot allocation for the office facilities and actual usage for office equipment was $146, $171, and $162 for the years ended December 31, 1993, 1994, and 1995, respectively. A summary by year of future minimum lease payments that would be allocable to the Collections Division under noncancelable operating leases as of December 31, 1995, is shown below. Year ending December 31: 1996 $139 1997 72 1998 70 1999 70 2000 70 2001 and beyond 164 =================== $585 =================== 6. Major Customers Bell Atlantic represented more than 10% of the combined revenue of the Collections Division or $1,216, $1,423, and $1,586 for the years ended December 31, 1993, 1994, and 1995, respectively. 7 F-43 =============================================================================== No dealer, sales representative or any other person has been authorized to give any information or to make any representations in connection with the Offering other than those contained in this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or any of the Underwriters. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities other than the shares of Common Stock to which it relates or an offer to, or a solicitation of, any person in any jurisdiction where such offer or solicitation would be unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create an implication that there has been no change in the affairs of the Company, or that information contained herein is correct as of any time, subsequent to the date hereof. _____________________ TABLE OF CONTENTS _____________________ Page Prospectus Summary...................................... 3 Acquisition History..................................... 8 Risk Factors............................................ 11 Use of Proceeds......................................... 17 Dividend Policy and Prior S Corporation Status.......... 17 Capitalization.......................................... 19 Dilution................................................ 20 Selected Financial and Operating Data................... 22 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................ 25 Business................................................ 35 Management.............................................. 46 Certain Transactions.................................... 52 Principal and Selling Shareholders...................... 54 Description of Capital Stock............................ 55 Shares Eligible for Future Sale......................... 58 Underwriting............................................ 60 Legal Matters........................................... 61 Experts................................................. 62 Additional Information.................................. 62 Index to Financial Statements............................F-1 Until , 1996 (25 days after the date of this Prospectus), all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a Prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. =============================================================================== ============================================================================== 2,500,000 Shares [COMPANY LOGO] Common Stock ------------- PROSPECTUS ------------- MONTGOMERY SECURITIES JANNEY MONTGOMERY SCOTT INC. , 1996 ============================================================================= PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The following table sets forth the expenses in connection with the issuance and distribution of the securities being registered, all of which are being borne by the Registrant. Securities and Exchange Commission Registration Fee............ $ 12,888 National Association of Securities Dealers, Inc. Fee........... 4,238 Nasdaq Listing Fee............................................. 34,284 Printing and Engraving Expenses................................ 100,000 Accounting Fees and Expenses................................... 350,000 Legal Fees and Expenses........................................ 300,000 Blue Sky Qualification Fees and Expenses....................... 25,000 Transfer Agent and Registrar Fees and Expenses................. 10,000 Consulting Fee................................................. 240,000 Miscellaneous.................................................. 73,590 ---------- Total........................................ $1,150,000 ========== The foregoing, except for the Securities and Exchange Commission registration fee, the National Association of Securities Dealers, Inc. fee and the Nasdaq listing fee, are estimates. Item 14. Indemnification of Directors and Officers. Sections 1741 through 1750 of Subchapter D, Chapter 17, of the Pennsylvania Business Corporation Law of 1988, as amended (the "BCL"), contain provisions for mandatory and discretionary indemnification of a corporation's directors, officers and other personnel, and related matters. Under Section 1741, subject to certain limitations, a corporation has the power to indemnify directors and officers under certain prescribed circumstances against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with an action or proceeding, whether civil, criminal, administrative or investigative, to which any of them is a party by reason of his being a representative, director or officer of the corporation or serving at the request of the corporation as a representative of another corporation, partnership, joint venture, trust or other enterprise, if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal proceeding, had no reasonable cause to believe his conduct was unlawful. Under Section 1743, indemnification is mandatory to the extent that the officer or director has been successful on the merits or otherwise in defense of any action or proceeding if the appropriate standards of conduct are met. Section 1742 provides for indemnification in derivative actions except in respect of any claim, issue or matter as to which the person has been adjudged to be liable to the corporation unless and II-1 only to the extent that the proper court determines upon application that, despite the adjudication of liability but in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for the expenses that the court deems proper. Section 1744 provides that, unless ordered by a court, any indemnification under Section 1741 or 1742 shall be made by the corporation only as authorized in the specific case upon a determination that the representative met the applicable standard of conduct, and such determination will be made by the board of directors (i) by a majority vote of a quorum of directors not parties to the action or proceeding; (ii) if a quorum is not obtainable, or if obtainable and a majority of disinterested directors so directs, by independent legal counsel; or (iii) by the shareholders. Section 1745 provides that expenses (including attorney's fees) incurred by an officer, director, employee or agent in defending a civil or criminal action or proceeding may be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the corporation. Section 1746 provides generally that, except in any case where the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness, the indemnification and advancement of expenses provided by Subchapter 17D of the BCL shall not be deemed exclusive of any other rights to which a person seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding that office. Section 1747 grants to a corporation the power to purchase and maintain insurance on behalf of any director or officer against any liability incurred by him or her in his or her capacity as officer or director, whether or not the corporation would have the power to indemnify him or her against the liability under Subchapter 17D of the BCL. Section 1748 and 1749 extend the indemnification and advancement of expenses provisions contained in Subchapter 17D of the BCL to successor corporations in fundamental changes and to representatives serving as fiduciaries of employee benefit plans. Section 1750 provides that the indemnification and advancement of expenses provided by, or granted pursuant to, Subchapter 17D of the BCL, shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs and personal representative of such person. For information regarding provisions under which a director or officer of the Company may be insured or indemnified in any manner against any liability which he or she may incur in his or her capacity as such, reference is made to the Company's Articles of Incorporation and Bylaws, copies of which are filed as Exhibits 3.1 and 3.2, respectively, which provide in general that the Company shall indemnify its officers and directors to the fullest extent authorized by law. Reference is also made to Section 11 of the Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement. II-2 Item 15. Recent Sales of Unregistered Securities. In connection with the Company's purchase of certain assets of B. Richard Miller, Inc. in April, 1994, the Company issued 123,803 shares of Common Stock to the seller. In addition, Bernard Miller, the principal shareholder of the seller, received an option to purchase up to an additional 86,881 shares of Common Stock, which option was exercised in 1995. These transactions were made in reliance on the exemption from the registration requirements provided by Section 4(2) of the Securities Act. In July 1995, the Company issued a warrant to purchase an aggregate of 175,531 shares of the Company's Common Stock to Mellon Bank, N.A. in connection with its Credit Agreement. The warrant expires on July 31, 2005 and provides for exercise at a nominal price. The Company issued a warrant to purchase an additional 46,560 shares of Common Stock to Mellon Bank, N.A. upon the amendment of the Credit Agreement in September 1996. This warrant expires on July 31, 2005 and provide for an exercise price per share equal to the initial pubic offering price. All of the warrants were issued in reliance upon the exemption from the registration requirements provided by Section 4(2) of the Securities Act. Pursuant to the Company's 1995 Stock Option Plan, in June, 1995 and September, 1996, respectively, the Company issued options to purchase an aggregate of 367,321 shares of Common Stock to certain executive officers and key employees. 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 Company in exchange for such options. The options were issued in reliance upon the exemption from the registration requirements provided by Rule 701 under the Securities Act. In September 1996, the Company acquired all of the outstanding stock of MAB. As part of the purchase price, the Company issued a Convertible Note in the aggregate principal amount of $1.0 million. This note is convertible into 83,333 shares of Common Stock at the assumed initial public offering price of $12.00 per share. The note was issued in reliance on the exemption from the registration requirements provided by Section 4(2) of the Securities Act. Item 16. Exhibits and Financial Statement Schedules. (a) Exhibits
Exhibit No. Description ----------- -------------------------------------------------------------------------- *1.1 Form of Underwriting Agreement. 2.1 Stock Purchase Agreement, by and among the Company; and Craig Costanzo and Andrew J. Boyuka, as Trustee of the Susan E. Costanzo Grantor Trust and Christopher A. Costanzo Grantor Trust, relating to the acquisition of MAB. 2.2 Asset Purchase Agreement dated December 8, 1995 by and between the Company and Trans Union Corporation. *3.1 The Company's amended and restated Articles of Incorporation. *3.2 The Company's amended and restated Bylaws.
II-3
Exhibit No. Description ----------- -------------------------------------------------------------------------- *4.1 Specimen of Common Stock Certificate. *5.1 Opinion of Blank Rome Comisky & McCauley. *10.1 Employment Agreement, dated September 1, 1996, between the Company and Bernard R. Miller. *10.2 Employment Agreement, dated September 1, 1996, between the Company and Michael J. Barrist. *10.3 Employment Agreement, dated September 1, 1996, between the Company and Charles C. Piola, Jr. *10.4 Employment Agreement, dated September 1, 1996, between the Company and Joseph C. McGowan. *10.5 Employment Agreement, dated September 1, 1996, between the Company and Steven L. Winokur. 10.6 Agreements of Lease dated May 9, 1995, as amended, between the Company and 1710-20 Sentry East Associates, L.P., relating to the offices located at 1710 Walton Road, Blue Bell, Pennsylvania. 10.7 Agreements of Lease dated July 1, 1993 between the Company and 1740 Sentry East Associates, L.P., relating to the offices located at 1740 Walton Road, Blue Bell, Pennsylvania. *10.8 Agreement of Lease for MAB Facility. 10.9 Software License Agreement and Software Purchase Agreement, by and between the Company and CR Software, Inc., relating to computer software (CRS Credit Bureau Reporting Software) and computer hardware. *10.10 Amended and Restated 1995 Stock Option Plan. *10.11 1996 Stock Option Plan. *10.12 1996 Non-Employee Director Stock Option Plan. 10.13 Amended and Restated Credit Agreement by and among the Company, its subsidiaries and Mellon Bank, N.A., dated September 5, 1996. 10.14 Amended and Restated Security Agreement, dated September 5, 1996, by and among the Company, its subsidiaries and Mellon Bank, N.A. 10.15 Warrant Agreement, dated July 28, 1995, by and between the Company and Mellon Bank, N.A. and Amendment dated September 5, 1996. 10.16 Warrant Agreement, dated September 5, 1996, by and between the Company and Mellon Bank, N.A.
II-4
Exhibit No. Description ----------- -------------------------------------------------------------------------- 10.17 Amended and Restated Registration Rights Agreement, dated September 5, 1996, by and between the Company and Mellon Bank, N.A. 10.18 Amended and Restated Limited Guaranty Agreement, dated September 5, 1996, made by Michael J. Barrist, Charles C. Piola, Jr., Annette H. Barrist and Bernard R. Miller in favor of Mellon Bank, N.A. 10.19 Amended and Restated Stock Pledge Agreement, dated September 5, 1996 made by Michael J. Barrist, Charles C. Piola, Jr., Annette H. Barrist, and Bernard R. Miller, in favor of Mellon Bank, N.A. 10.20 Stock Pledge Agreement, dated as of September 5, 1996 made by NCO of New York, Inc. in favor of Mellon Bank, N.A. 10.21 Convertible Note dated September 1, 1996, made by the Company in the principal amount of $1,000,000, as partial payment of the purchase price for the acquisition of MAB. 10.22 Distribution and Tax Indemnification Agreement *10.23 Irrevocable Proxy Agreement by and between Michael J. Barrist and Annette H. Barrist. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Coopers & Lybrand L.L.P. 23.2 Consent of Ernst & Young LLP. 23.3 Consent of Blank Rome Comisky & McCauley (included in the opinion to be filed as Exhibit 5.1 hereto). 24.1 Power of Attorney of directors and officers (included on Page II-5). 27.1 Financial Data Schedules.
- -------- * To be filed by amendment. (b) Financial Statement Schedules Item 17. Undertakings. (a) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 14 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification II-5 against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (b) The undersigned hereby undertakes: (1) to provide to the Underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser; (2) that for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the Registration Statement as of the time it was declared effective; and (3) that for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed the initial bona fide offering thereof. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Blue Bell, Pennsylvania, on September 10, 1996. NCO GROUP, INC. By: /s/ Michael J. Barrist ------------------------------------------- Michael J. Barrist, President and Chief Executive Officer POWER OF ATTORNEY AND SIGNATURES KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael J. Barrist and Steven L. Winokur, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution or resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Registration Statement, and to file the same, with all exhibits thereto, and other documentation in connection therewith, as well as any related registration statement (or amendment thereto) filed pursuant to Rule 462(b) promulgated under the Securities Act of 1933 with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to enable NCO Group, Inc. to comply with the provisions of the Securities Act of 1933 and all requirements of the Securities and Exchange Commission, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE Title(s) Date --------- -------- ---- /s/ Michael J. Barrist - ------------------------- Chairman of the Board, September 10, 1996 Michael J. Barrist President and Chief Executive Officer (principal executive officer) /s/ Charles C. Piola, Jr. - ------------------------- Executive Vice President and September 10, 1996 Charles C. Piola, Jr. Director /s/ Steven L. Winokur - ------------------------- Vice President of Finance, September 10, 1996 Steven L. Winokur Chief Financial Officer and Treasurer (principal financial and accounting officer) /s/ Bernard R. Miller - ------------------------- Senior Vice President, September 10, 1996 Bernard R. Miller Development and Director
II-7 EXHIBIT INDEX
Exhibit No. Description ----------- ----------- *1.1 Form of Underwriting Agreement. 2.1 Stock Purchase Agreement, by and among the Company; and Craig Costanzo and Andrew J. Boyuka, as Trustee of the Susan E. Costanzo Grantor Trust and Christopher A. Costanzo Grantor Trust, relating to the acquisition of MAB. Asset Purchase Agreement dated December 8, 1995 by and between the 2.2 Company and Trans Union Corporation. *3.1 The Company's amended and restated Articles of Incorporation. *3.2 The Company's amended and restated Bylaws. *4.1 Specimen of Common Stock Certificate. *5.1 Opinion of Blank Rome Comisky & McCauley. *10.1 Employment Agreement, dated September 1, 1996, between the Company and Bernard R. Miller. *10.2 Employment Agreement, dated September 1, 1996, between the Company and Michael J. Barrist. *10.3 Employment Agreement, dated September 1, 1996, between the Company and Charles C. Piola, Jr. *10.4 Employment Agreement, dated September 1, 1996, between the Company and Joseph C. McGowan. *10.5 Employment Agreement, dated September 1, 1996, between the Company and Steven L. Winokur. 10.6 Agreements of Lease dated May 9, 1995, as amended, between the Company and 1710-20 Sentry East Associates, L.P., relating to the offices located at 1710 Walton Road, Blue Bell, Pennsylvania. 10.7 Agreements of Lease dated July 1, 1993 between the Company and 1740 Sentry East Associates, L.P., relating to the offices located at 1740 Walton Road, Blue Bell, Pennsylvania. *10.8 Agreement of Lease for MAB Facility. 10.9 Software License Agreement and Software Purchase Agreement, by and between the Company and CR Software, Inc., relating to computer software (CRS Credit Bureau Reporting Software) and computer hardware. *10.10 Amended and Restated 1995 Stock Option Plan. *10.11 1996 Stock Option Plan. *10.12 1996 Non-Employee Director Stock Option Plan. 10.13 Amended and Restated Credit Agreement by and among the Company, its subsidiaries and Mellon Bank, N.A., dated September 5, 1996.
Exhibit No. Description ----------- ----------- 10.14 Amended and Restated Security Agreement, dated September 5, 1996, by and among the Company, its subsidiaries and Mellon Bank, N.A. 10.15 Warrant Agreement, dated July 28, 1995, by and between the Company and Mellon Bank, N.A. and Amendment dated September 5, 1996. 10.16 Warrant Agreement, dated September 5, 1996, by and between the Company and Mellon Bank, N.A. 10.17 Amended and Restated Registration Rights Agreement, dated September 5, 1996, by and between the Company and Mellon Bank, N.A. 10.18 Amended and Restated Limited Guaranty Agreement, dated September 5, 1996, made by Michael J. Barrist, Charles C. Piola, Jr., Annette H. Barrist and Bernard R. Miller in favor of Mellon Bank, N.A. 10.19 Amended and Restated Stock Pledge Agreement, dated September 5, 1996 made by Michael J. Barrist, Charles C. Piola, Jr., Annette H. Barrist, and Bernard R. Miller, in favor of Mellon Bank, N.A. 10.20 Stock Pledge Agreement, dated as of September 5, 1996 made by NCO of New York, Inc. in favor of Mellon Bank, N.A. 10.21 Convertible Note dated September 1, 1996, made by the Company in the principal amount of $1,000,000, as partial payment of the purchase price for the acquisition of MAB. 10.22 Distribution and Tax Indemnification Agreement *10.23 Irrevocable Proxy Agreement by and between Michael J. Barrist and Annette H. Barrist. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Coopers & Lybrand L.L.P. 23.2 Consent of Ernst & Young L.L.P. 23.3 Consent of Blank Rome Comisky & McCauley (included in the opinion to be filed as Exhibit 5.1 hereto). 24.1 Power of Attorney of directors and officers (included on Page II-5). 27.1 Financial Data Schedules.
- -------- * To be filed by amendment. EX-2.1 2 EXHIBIT 2.1 Exhibit 2.1 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT is made and entered into this ___ day of July, 1996, by and among NCO FINANCIAL SYSTEMS, INC., a Pennsylvania corporation or its assignee or nominee ("Buyer"); and CRAIG COSTANZO and ANDREW J. BOYUKA, as Trustee of the SUSAN E. COSTANZO Grantor Trust and the CHRISTOPHER A. COSTANZO Grantor Trust (collectively "Sellers") who collectively own all the capital stock of MANAGEMENT ADJUSTMENT BUREAU, INC., a New York corporation ("MAB") WITNESSETH: A. MAB is engaged in the accounts collection business and related businesses (the "Business"). B. Buyer and Sellers desire to enter into an agreement with each other providing that Sellers will sell, assign, transfer and deliver to Buyer all of the issued and outstanding capital stock of MAB (the "Capital Stock") in exchange for the consideration hereinafter set forth. NOW THEREFORE, Buyer and Sellers, in consideration of the mutual covenants and agreements hereinafter set forth, and intending to be legally bound, hereby agree as follows: 1. Transaction. 1.1 Upon payment of the Purchase Price (as hereinafter defined) and upon satisfaction of the provisions of Section 10 of this Agreement, on the Closing Date (as hereinafter defined), Sellers shall transfer and deliver the Capital Stock to Buyer. The certificates representing the Capital Stock shall be duly endorsed in blank (or accompanied by appropriate instruments of transfer satisfactory in form and substance to counsel to Buyer) and shall have affixed thereto all applicable security transfer tax stamps (if such are required). 1.2 Upon delivery of the Capital Stock in compliance with the terms and conditions of this Agreement, and upon the satisfaction of the provisions of Section 9 hereof, on the Closing Date, Buyer shall deliver the Purchase Price (as hereinafter defined) to Sellers. 1.3 On the Closing Date, MAB shall assign to Mary Anne Costanzo all of the rights under, and Mary Anne Costanzo shall assume all of the obligations under, the automobile lease for the car leased by MAB for Mary Anne Costanzo. 2. Purchase Price and Payment. The purchase price (the "Purchase Price") for the Capital Stock shall be $9,000,000. The Purchase Price shall be paid as follows: (a) $50,000 having heretofore been paid by Buyer as its deposit (the "Deposit"). The Deposit shall continue to be held in escrow by Buyer's counsel, Joshua Gindin ("escrowee"), until the Closing Date. In the event that Buyer does not complete Closing (as hereinafter defined) for any reason, other than a reason permitted in this Agreement, the Deposit shall be released by 2 escrowee to Sellers as Sellers' liquidated damages hereunder. (b) $7,950,000 shall be paid at Closing by wire transfer (Federal Funds) or certified or bank cashier's check, at Sellers option. (c) $1,000,000 in the form of a convertible note (the "Note"). The Note shall bear interest at the rate of 8% per annum, with monthly payments of interest only during a term of five (5) years. The Note shall be convertible by Sellers, in whole or in part, to stock of Buyer only upon an initial public offering ("IPO") of Buyer's stock, to be convertible at the IPO price, during the term of the Note. The Note shall be in form reasonably satisfactory to Sellers and Buyer. In the event that the Net Worth (as hereinafter defined) is less than the amount required in this Agreement, the principal amount of the Note shall be reduced in an amount equal to the shortfall. (d) Schedule 2(d) sets forth the allocation of the Purchase Price. Sellers and Buyer each agree to respect the allocation set forth in said Schedule for tax purposes and to cause all tax returns and other documents filed with the Internal Revenue Service or any other tax collection agency to be consistent with such allocations. (d) Schedule 2(d) sets forth the allocation of the Purchase Price. Sellers and Buyer each agree to respect the allocation set forth in said Schedule for tax purposes and to cause all tax returns and other documents filed with the Internal Revenue Service or any other tax collection agency to be consistent with such allocations. 3. Representations and Warranties of Sellers. Sellers hereby represent and warrant to Buyer that: 3.1 MAB is a corporation duly organized, validly existing and in good standing under the laws of the State of New York. Schedule 3.1 sets forth the jurisdictions in which MAB is 3 duly qualified and in good standing as a foreign corporation to do business. MAB has the corporate power to and is authorized to own and lease its properties and to carry on the Business in the places where such properties are now owned, leased or operated or the Business is now conducted. 3.2 The authorized capital of MAB, and the issued and outstanding shares of MAB are set forth on Schedule 3.2. All of the issued shares are fully paid for and non-assessable, and are referred to herein as Capital Stock. There are no outstanding options, rights, warrants or agreements to purchase or acquire shares of Capital Stock or securities convertible into Capital Stock. 3.3 The Articles of Incorporation of MAB, certified by the Secretary of the State of New York, and the copy of the By-laws of MAB certified as correct by its Secretary, to be delivered to Buyer on or before the Closing Date, are true and complete and they have not been modified, rescinded or repealed. 3.4 Sellers are the sole legal and beneficial owners of all of the issued and outstanding shares of Capital Stock, free and clear of all liens, charges, security interests and encumbrances. This Agreement is valid and binding on Sellers in accordance with its terms, except as such enforcement may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or similar laws now or hereinafter in effect relating to creditor's rights and (ii) the discretion of the appropriate court with respect to specific performance, injunctive relief or other forms 4 of equitable remedies ("Enforceability Limitations"), and Sellers have full power to convey clear and marketable title to Capital Stock free of any liens, charges, pledges, security interests, encumbrances or agreements of any nature whatsoever. Sellers have not entered into, nor are they bound by, any agreement or understanding pursuant to which they have agreed to sell Capital Stock, or any portion thereof, or any interest therein, or pursuant to which any third party has any present or future right to acquire Capital Stock or any part thereof or any interest therein. 3.5 Set forth on Schedule 3.5 hereto is a true and correct list and description of all client lists, contracts, agreements or understandings pursuant to which MAB has agreed to render services, including, but not limited to collection and related services to its clients, businesses or individuals (collectively, the "Contracts") Such list will include all customers of MAB as of the Closing Date. True and correct copies of the Contracts with MAB's ten (10) largest clients will be delivered to Buyer or its counsel during the Due Diligence Period (as hereinafter defined) and originals thereof at Closing. Each of the Contracts is valid, binding and in full force and effect; and MAB and, to the knowledge of Sellers, each other party thereto has performed in all material respects all of the provisions thereof required to be performed by each and neither MAB nor, to the knowledge of Sellers, any other party thereto is or will with the passage of time, by giving notice or otherwise, be in material 5 default in any respect under the terms thereof. Except as set forth on Schedule 3.5 none of the Contracts will be affected by the execution and delivery of this Agreement or the consummation of the transactions contemplated herein. 3.6 Set forth on Schedule 3.6 is a true and complete list as of the date hereof of all computer equipment used in the conduct of the Business including, but not limited to, hardware, software and related items and accessories, of every type (the "Computer Equipment") and the original cost, depreciation and book value of each item of the Computer Equipment. The Computer Equipment listed on Schedule 3.6 consists of items of a quality useable in the ordinary course of business of the Business as presently conducted by MAB, the whole or partial loss of or damage to which is covered by insurance, subject to applicable deductibles and coverage limits. 3.6.1 Except as et forth on Schedule 3.6.1, all of the Computer Equipment is owned by MAB free and clear of all liens, encumbrances, security interests, pledges or agreements of any nature whatsoever. To the extent that any of the Computer Equipment is leased or held by MAB pursuant to other arrangements, true and correct copies of all contracts, agreements or other documents regarding such leases or other arrangements will be delivered to counsel to Buyer or to Buyer during the Due Diligence Period and originals thereof at Closing. Each of such contracts, agreements and understandings, is valid, binding and in full force and effect and, to the knowledge of Sellers, is not subject to any 6 pending right of set off or counterclaim; and MAB and, to the knowledge of Sellers, each other party thereto has performed in all material respects all of the provisions thereof required to be performed by each and neither MAB nor, to the knowledge of Sellers, any other party thereto is or will with the passage of time, by giving notice or otherwise, be in material default in any respect under the terms thereof. Except as set forth on Schedule 3.6.1, none of such contracts, agreements or understandings will be affected by the execution and delivery of this Agreement or the consummation of the transactions contemplated herein. 3.6.2 During the Due Diligence Period, to the extent not a violation of any license agreement to which MAB is a party, MAB shall make available to Buyer source codes for all of the software used or held for use in the Business in order to permit Buyer to commence preparation of its computer equipment for the transition and transfer of information of the Business to Buyer. 3.6.3 Set forth on Schedule 3.6.3 is a true and correct list of all insurance policies, contracts, agreements and understandings regarding the maintenance and repair of and anything else relating to the Computer Equipment. A true and correct copy of each such insurance policies, contract, agreement and understanding will be delivered to counsel to Buyer or to Buyer during the Due Diligence Period and originals thereof at Closing. Each of such contracts, agreements and understandings is in full force and effect and, to the knowledge of Sellers, is not subject to any 7 pending right of set off or counterclaim; and MAB and, to the knowledge of Sellers, each other party thereto has performed in all material respects all of the provisions thereof required to be performed by each. Except as set forth on Schedule 3.6.3, none of such contracts, agreements or understandings will be affected by the execution and delivery of this Agreement or the consummation of the transactions contemplated herein. 3.7 Set forth on Schedule 3.7 is a true and complete list as of the date hereof of all furniture, fixtures, equipment (excluding the Computer Equipment), and all other personal property of every type used or held for use in the Business (the "Personal Property"), together with the original cost, depreciation and book value of each such item of the Personal Property. The Personal Property listed on Schedule 3.7 consists of items of a quality useable in the ordinary course of business of the Business as presently conducted by MAB, the whole or partial loss of or damage to which is covered by insurance subject to applicable deductibles and coverage limits. Except as set forth on Schedule 3.7 all of the Personal Property is owned by MAB free and clear of all liens, encumbrances, security interests, pledges or agreements of any nature whatsoever. To the extent that any of the Personal Property is leased or held by MAB pursuant to other arrangements, true and correct copies of all contracts, agreements or other documents regarding such leases or other arrangements as well as written summaries of such oral leases or agreements will be delivered to counsel to Buyer or to 8 Buyer during the Due Diligence Period and originals thereof at Closing. Each of such contracts, agreements and understandings is valid, binding and in full force and effect and, to the knowledge of Sellers, is not subject to any pending right of set off or counterclaim; and MAB and, to the knowledge of Sellers, each other party thereto has performed in all material respects, all of the provisions thereof required to be performed by each. Except as set forth in Schedule 3.7, none of such contracts, agreements or understandings will be affected by the execution and delivery of this Agreement or the consummation of the transactions contemplated herein. 3.8 Set forth on Schedule 3.8 is a true and correct list of all material contracts, agreements or understandings by and between MAB and any other party thereto and not otherwise set forth on any Schedule to this Agreement. True and correct copies of each such written agreement, as well as written summaries of each such oral agreement will be delivered to counsel to Buyer or to Buyer during the Due Diligence Period and originals thereof at Closing. Each of such contracts, agreements and understandings is valid, binding and in full force and effect and to the knowledge of Sellers, is not subject to any pending right of set off or counterclaim; and MAB and, to the knowledge of Sellers, each other party thereto has performed in all material respects all of the provisions thereof required to be performed by each and neither MAB nor, to the knowledge of Sellers, any other party thereto, is or will with the passage of time, by giving notice or otherwise, be in 9 material default in any respect under the terms thereof. Except as set forth on Schedule 3.8, none of such contracts, agreements or understandings will be affected by the execution and delivery of this Agreement or the consummation of the transactions contemplated herein. 3.9 Attached to Schedule 3.9 is a true and correct copy of all real estate leases between MAB and its respective landlords including, but not limited to its office leases in Buffalo, New York and Englewood, Colorado. Such leases are valid, and enforceable in accordance with their terms, except as may be limited by Enforceability Limitations. To the knowledge of Sellers, the property covered by said leases is in a state of reasonable maintenance and repair. There are no pending actions, claims, proceedings or hearings presently regarding such leases, and MAB has not received notice of any such actions, claims, proceedings or hearings. MAB does not occupy any other office or other space. 3.10 MAB does not have any equity or other interest in any entity, corporate or otherwise, or any warrant or option to acquire any such interest. 3.11 MAB has delivered to Buyer (i) its audited financial statements for the years 1994 and 1995 (the "Audited Statements") and (ii) its unaudited financial statements dated April 30, 1996 (the "April Statement"); the Audited Statements and the April Statement (collectively the "Statements") (i) are in accordance with the books and records of MAB and (ii) present 10 fairly the combined financial results of operations for the periods indicated. The Statements have been prepared in accordance with generally accepted accounting principals consistently applied, except as set forth therein. The net worth of MAB as of April 30, 1996 and as reflected in the April Statement but after the Authorized Withdrawal (as hereinafter defined) is $1,791,731.18 (the "Net Worth"). 3.12 All of MAB's accounts receivable arose in the ordinary course of business, are current and collectible (net of allowance for doubtful accounts), and, to the knowledge of Sellers, are not subject to any pending right of set off or counterclaim, and MAB has rendered all services giving rise to each such account receivable. 3.13 To the knowledge of Sellers, except as set forth on Schedule 3.13, MAB has no liability or obligation of any nature, including, without limitation, contingent liabilities, potential liabilities, except the Guaranty Loans (as hereinafter defined), obligations to employees (with respect to vacation, vacation pay and other fringe benefits) other than (i) liabilities and obligations reflected or reserved for in the Statements, (ii) liabilities and obligations disclosed or exempt from disclosure due to its immateriality in this Agreement or (iii) liabilities and obligations incurred between April 30, 1996 and the Closing Date in the ordinary course of its business. 3.14 Since April 30, 1996 MAB's business has been operated in the ordinary course and there has not been, except as 11 set forth on Schedule 3.14, and except i8n the ordinary course of business: (i) any material adverse change in the financial condition, results of operations, liabilities or assets including, but not limited to, accounts receivable, of the Business of MAB from that shown on the April Statement of MAB; (ii) any damage, destruction or loss, whether covered by insurance or not, materially and adversely affecting the properties or business or assets of MAB; (iii) any capital expenditure by MAB exceeding $25,000 (iv) any change in accounting methods or principles (including, without limitation, any change in depreciation or amortization policies or rates used by Sellers or MAB with respect to the Business or any of MAB's assets; (v) revaluation by Sellers or MAB of any of the assets of MAB; (vi) any declaration, setting aside or payment of any dividend or distribution in respect of Capital Stock or any indirect redemption, purchase or other acquisition of any Capital Stock; (vii) any increase in any loan from any party or in the compensation payable or to become payable by MAB to its officers, key employees or agents or any increase in any bonus, insurance, pension or other beneficial plan, payment or arrangements made to, for or with any of such officers, key employees or agents; (viii) any material commitment made or entered into; (ix) sale or transfer of MAB's assets; (x) any amendment or termination of any major contract to which MAB is a party and which relates to or affects the Business or its assets; (xi) waiver or release of any right or claim of MAB relating to or affecting the Business or any of MAB's assets; (xii) mortgage, pledge, grant of a lien, security interest or other encumbrance of any MAB asset; 12 (xiii) discharge or satisfaction of any lien or encumbrance or payment of any liability or obligation (absolute or contingent) other than current liabilities or the current portion of long term liabilities either shown on the MAB Statements or incurred in the ordinary course of business of the Business since May 1, 1996; and (iv) any other event or condition of any character pertaining to and materially and adversely affecting the assets or the Business of MAB. 3.15 All Federal and New York State Corporation Income Tax Returns, Employer's Quarterly Federal Income Tax Return, Employer's General Federal Unemployment Tax Return, of MAB and, to the knowledge of Sellers, any and all other federal and state unemployment insurance returns, state and city personal income tax withholding returns, city corporation income tax returns, business personal property tax returns state and/or city sales tax returns relating to the Business or any of MAB's assets required by law to be filed under the laws of any jurisdiction, domestic or foreign, have been duly and timely filed and correctly set forth the tax position of MAB relating to the Business and MAB's assets, and all taxes, fees or other governmental charges of any nature required to be paid by MAB due for all periods prior to and including December 31, 1995 have been paid or provided for in the Statements of MAB. Complete and correct copies of such returns and reports and a complete and correct list of all other elections, consents, statements and forms filed with any taxing authority by MAB relating to the Business or its assets for its last three (3) 13 fiscal years will be delivered to Buyer by MAB during the Due Diligence Period, and for all prior years, on Buyer's request. Sellers and MAB have no knowledge of any taxes or any assessment of deficiency or additional tax or other governmental charge with respect to MAB relating to the Business or MAB's assets, or any knowledge of any completed, pending or threatened tax audit or investigation with respect to any thereof, by any taxing or other authority. In addition, MAB shall make available to Buyer payroll and earnings records of all employees of MAB. 3.16 Schedule 3.16 contains a list of the trade-marks, service marks and trade names (whether registered, common law or registration applied for) owned by MAB or any other persons with respect to the Business and of the assignments, licenses or agreements of any kind relating to such trademarks, service marks or trade names to which MAB is a party and which relate to and/or encumber such trademarks, service marks or trade names. To the extent that any of the trademarks, service marks or trade names are owned by any person other than MAB, there does not exist any restriction or any limitation on such other person's right to transfer any of such trademarks, service marks or trade names to Buyer hereunder. MAB and/or any such other person own such trademarks, service marks and trade names free and clear of all liens, charges, security interests and encumbrances and pay no royalty to anyone relating thereto. To the best of the knowledge of Sellers, MAB owns or possesses all trademarks, service marks and trade names which are necessary for the conduct of the Business as 14 it is presently conducted. Neither Sellers nor MAB has any knowledge of, and neither Sellers nor MAB has received any notice of, any conflict with the asserted rights of with respect to any of such trademarks, service marks, trade names or other intangible property owned by MAB or by any other person related or affiliated to MAB. Upon completion of Closing, Buyer shall, subject to rights of other parties holding rights to the same or similar names in states other than New York and Colorado, have sole and exclusive right to use the name "Management Adjustment Bureau". 3.17 Schedule 3.17 describes all material intangible property, other than that set forth on Schedule 3.16 used or held for use in the Business. 3.18 Except as disclosed on Schedule 3.18, to the knowledge of Sellers, with respect to the Business, MAB is not in material violation of any statute, law, ordinance, rule, regulation, order, writ, injunction, decree or judgment of any court or other governmental body, department, instrumentality, agency or subdivision; to the knowledge of Sellers, MAB holds and has at all times held all material licenses, permits, authorizations, consents, approvals, orders, registrations and qualifications necessary for the lawful conduct of the Business pursuant to all applicable statutes, laws, ordinances rules and regulations of all governmental bodies, departments, instrumentalities, agencies and subdivisions having, asserting or claiming jurisdiction over MAB or any part of the Business. Schedule 3.18 constitutes a true and complete list of all material 15 licenses, permits, authorizations, consents, approvals, orders, registrations and qualifications related to conduct of the Business held by MAB. Except as set forth on Schedule 3.18, the execution, delivery and performance of this Agreement by Sellers and MAB will not conflict with, constitute a default under, permit any party to accelerate any right under, require consent, approval or waiver by any party under, or result in the creation of any lien upon any of the properties or assets of MAB pursuant to the certificate of incorporation or by-laws of MAB or any indenture, mortgage, lease, agreement or other instrument to which MAB is a party or by which any of its properties or assets may be bound (except that consent may be required under certain of the agreements, leases or under certain business licenses), or any statute, law, ordinance, rule or regulation, or any order, writ, injunction, decree or judgment now in effect of any court or other governmental body, department, instrumentality, agency or subdivision having asserting or claiming jurisdiction. 3.19 Except as set forth on Schedule 3.19, the assets of MAB, generally or as specifically referred to herein, on the Closing Date (collectively referred to herein as the "Assets") will constitute all the assets, property, property rights and contractual rights which MAB has found necessary to conduct the Business as presently being conducted by MAB. Except as set forth on Schedule 3.19, MAB has good and marketable title to the Assets free and clear of all claims, liens, charges, security interests and encumbrances. 16 3.20 Except as disclosed on Schedule 3.20, provided for or specifically set forth in this Agreement, the other Schedules hereto or the Statements of MAB, MAB is not obligated for, nor are any of the Assets subject to, any material liabilities or adverse obligations, absolute or contingent, asserted or unasserted. 3.21 Except as set forth on Schedule 3.21, MAB is not indebted to Sellers or to any of its officers, directors or employees, other then Mary Anne Costanzo as disclosed in this Agreement, (or to members of their immediate families) or to any of their affiliates in any amount whatsoever. 3.22 Schedule 3.22 sets forth a brief description of all employment and labor union contracts, executive employment contracts, executive compensation agreements, agency agreements, consulting agreements, management agreements, bonus or profit sharing plans, group insurance or other employee benefit plans of MAB. Each of such contracts, agreements, understandings and commitments is valid and binding in accordance with its terms except as may be limited by Enforceability Limitations and is in full force and effect and, to the knowledge of Sellers, is not subject to any pending right of set off or counterclaim; and MAB and, to the knowledge of Sellers, each other party thereto has performed in all material respect, all obligations required to be performed thereunder by each, and neither MAB nor, to the knowledge of Sellers, any other party thereto is or will with the passage of time, by giving notice, or otherwise, be default in any material 17 respect under the terms thereof. True and correct copies of each of such contracts, agreements or understandings will be delivered to counsel to Buyer or to Buyer during the Due Diligence Period and originals thereof at Closing. 3.23 Schedule 3.23 contains a brief description of all claims, litigation, arbitration, legal or other proceedings in which MAB or any of its officers, directors, or employees is now engaged or threatened in connection with the Business and the affairs, properties or the Assets of MAB; 3.24 Schedule 3.24 is a true and correct copy of all insurance policies in force and effect in respect of the Business, properties, or the Assets of MAB. 3.25 Schedule 3.25 is a true and complete list as the date hereof of: (i) all banks, trust companies and savings and loan associations in which MAB maintains an account or safe deposit vault and (ii) the names of all persons authorized to draw thereon. 3.26 With respect to any contract, agreement, plan or arrangement which is an Employee Benefit Plan as described by Section 3(3) of the Employee Retirement Income Security Act of 1974 as amended ("ERISA"), maintained by MAB or to which MAB contributes: 3.26.1 As to each such plan which is a "Pension Plan" within the meaning of ERISA Section 3(2), each such Pension Plan is qualified under Section 401(a) of the Internal Revenue Code of 1986 as amended, and complies in all material respects with ERISA; no such pension plan has an "accumulated funding deficiency" 18 as defined in Section 302(a) (2) of ERISA; no "reportable event", within the meaning of 4043(b) of ERISA, has occurred with respect to any such pension plan; no such plan is presently engaged in any non-exempt "prohibited transactions" within the meaning of 4975 (c) of the Internal Revenue Code of 1986 as amended; and all contributions required to be made by MAB shall have been made or accrued for in the full amount required pursuant to the terms of each such plan or any other contract or agreement requiring contributions thereto. 3.26.2 As to all such Employee Benefit Plans, all disclosures to participants in such plans, and all filings respecting such plans required by ERISA to have been provided or filed have been so provided or filed; and such plans have been administered in accordance with their terms. 3.26.3 MAB is not a party to or bound by any multi-employer pension plan or multi-employer profit sharing plan. 3.27 Schedule 3.27 sets forth the names of the officers, directors and other key personnel of MAB 3.28 References on any Schedule or to any document, instrument, contract or agreement which Sellers or MAB shall not have provided to Buyer a copy of or, if oral a written summary thereof, shall not be deemed for any purposes of this Agreement to be a disclosure of any term, provision or statement of fact of, or relating to, such document, instrument, contract or agreement unless and until a copy of such document, instrument, contract or agreement has been provided to Buyer. 19 3.29 No representations or warranties made by Sellers in this Agreement or in any final financial document, written certificate or Schedule prepared by Sellers or MAB to be furnished to Buyer pursuant hereto, or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of a material fact, or omits or will omit to state a material fact necessary to make the statements or facts contained therein not misleading. 3.30 The representations and warranties of Sellers and MAB herein contained shall be true on and as of the Closing Date with the same force and effect as if made on and as of that date, except to the extent that the facts and conditions upon which such representations and warranties are based are expressly required or permitted to be changed by the terms of this Agreement. The foregoing representations and warranties shall survive the consummation on the Closing Date of the transactions contemplated by this Agreement for a period of eighteen (18) months following the Closing Date. 4. Representations, Warranties and Obligations of Buyer. Buyer represents and warrants to Sellers that: 4.1 Buyer is a corporation duly organized and in good standing under the laws of the Commonwealth of Pennsylvania and has full power to execute and deliver this Agreement and the agreements to be executed and delivered in connection with this Agreement (including, without limitation, the Note) and to consummate the transactions contemplated herein and therein. This 20 Agreement and the agreements to be executed and delivered in connection with this Agreement (including, without limitation, the Note) have been duly authorized, executed and delivered by Buyer and constitute legal, valid and binding obligations of Buyer enforceable, in accordance with its and their terms. Copies of the resolutions of the Board of Directors of Buyer authorizing the execution and delivery of this Agreement and the agreements to be executed and delivered in connection with this Agreement (including, without limitation, the Note) will be delivered to Sellers upon the execution and delivery of this Agreement. 4.2 The execution, delivery and performance of this Agreement and the agreements to be executed and delivered in connection with this Agreement (including, without limitation, the Note) by Buyer will not materially conflict with, constitute a default under, require consent, approval or waiver by any other party under, or result in the creation of any lien upon any of the properties or assets of Buyer pursuant to the certificate of incorporation, other charter document or by-law of Buyer or any indenture, mortgage, lease, agreement or other instrument to which Buyer is a party or by which any of its properties or assets may be bound, or any statute, law, ordinance, rule or regulation, or any order, writ, injunction, decree or judgment now in effect of any court or other governmental body, department, instrumentality, agency or subdivision having, asserting or claiming jurisdiction. Buyer is not aware of any fact which could prevent Buyer from concluding its purchase of Capital Stock or its payment therefor as 21 described in Section 1. 4.3 No representations or warranties made by Buyer in this Agreement or in any written document prepared by Buyer and furnished to Sellers pursuant hereto, or in connection with the transaction contemplated hereby, contains or will contain any untrue statement of a material fact, or omits or will omit to state a material fact necessary to make the statements or facts contained therein not misleading. 4.4 The representations and warranties of Buyer herein contained shall be true on the Closing Date with the same force and effect as if made on and as of that date. The foregoing representations and warranties shall survive the consummation on the Closing Date of the transactions contemplated by this Agreement for a period of eighteen (18) months following the Closing Date. 4.5 On or before July 31, 1996 Buyer shall furnish Sellers with written evidence of Buyer having obtained financing, in an amount not less than $8,000,000, in order to complete the transaction contemplated hereunder. In the event that Buyer is unable to obtain such financing, Buyer or Sellers may terminate this Agreement in writing without any recourse to the other and the Deposit shall be returned to Buyer. 5. Access, Information and Documents. 5.1 For a period of thirty (30) days following the execution and delivery of this Agreement by Sellers and MAB to Buyer (the "Due Diligence Period"), Buyer may, through its representatives, accountants and attorneys make such investigation 22 of the properties and of the financial and legal condition of MAB as it may deem necessary or advisable. Sellers will cause MAB to make available to such persons all books, records and other data as Buyer may reasonably request. During the Due Diligence Period Buyer may terminate this Agreement in writing for any reason whatsoever, in its sole discretion, without any liability to Sellers. Upon such termination escrowee shall return the Deposit to Buyer. 5.2 Craig Costanzo will cooperate with Buyer at its request and expense, subject to Buyer's prior approval, on and after the Closing Date in furnishing information, evidence, testimony and other assistance in connection with any actions, proceedings, arrangements or disputes relating to adjustment of federal income and other taxes of MAB for all periods prior to the Closing Date and in connection with any other actions, proceedings, arrangements or disputes involving MAB or based upon or arising out of any of its contracts, assets commitments, acts or omissions which were in effect or occurred on or prior to the Closing Date. Craig Costanzo shall have the right to participate in any such proceedings and, if he so chooses, to assume and control the defense of such proceedings at his sole expense. 6. Closing Date. "Closing" referred to in this Agreement shall be at 10:00 a.m., on September 5, 1996. Closing shall be at the offices of Buyer's counsel, Joshua Gindin, Esquire. The effective date of Closing shall be September 1, 1996. In the event that Buyer is in the process of an IPO on the Closing Date, Buyer shall, in its sole discretion, have the right to postpone 23 Closing for up to thirty (30) days. 7. Covenants of Sellers. Sellers covenant and agree that, without the prior written consent of Buyer first having been obtained, from the date hereof to the Closing Date: 7.1 MAB will not: 7.1.1 Take any action or step or engage in any transaction or incur any liability or obligation (absolute or contingent) except in the ordinary course of business and consistent with current practices and procedures of MAB. 7.1.2 Increase the annual rate of compensation payable or to become payable to any officer or employee; make any advances, loans, pensions, severance pay, death benefits, distributions (Sub "S" bonus, special or out of its ordinary practice) or other payment or arrangement with respect to any present or former shareholder, officer, director or employee; or voluntarily make any material balance sheet changes to the April Statement or the Net Worth, except in the ordinary course of business and consistent with current practices and procedures of MAB. The foregoing notwithstanding, Sellers shall be permitted to withdraw up to $241,924 for previously taxed income from MAB (the "Authorized Withdrawal") prior to Closing, and at Closing, an existing debt of MAB to Mary Anne Costanzo, in the amount of $400,000, shall be repaid without any reduction of the Purchase Price. 7.1.3 Amend its corporate charter or by-laws or any agreement listed on any Schedule hereto except in the ordinary 24 course of business and consistent with current practices and procedures of MAB. 7.1.4 Do any act, or omit to do any act, or permit any act or omission to act which will cause a breach or default of any right, contract, commitment or obligation of MAB. 7.1.5 Issue, sell, retire or redeem any shares of Capital Stock or grant any option, warrant or right to any person, firm or corporation to purchase or otherwise acquire any Capital Stock or any interest therein. 7.1.6 Make or declare any dividend, distribution or payment in respect of its Capital Stock. 7.1.7 Amend, modify or change the Contracts, leases, client agreements, vendor agreements or any other obligation, contract or agreement by which it is bound and obligated, including, but not limited to any payment terms thereunder except for any non-material amendments or modifications in the ordinary course of business consistent with current practices and procedures of MAB. 7.1.8 Make any changes in or to the Assets, the Personal Property and the Computer Equipment. 7.2 MAB will: 7.2.1 Maintain all contracts, agreements and understandings listed on all Schedules hereto including, but not limited to the Contracts, in good standing and shall not by any act or omission to act, except as MAB reasonably determines is in the best interest of the Business, surrender, modify adversely, forfeit 25 or fail to comply with the conditions of or renew the regular terms of any of them or cause or give reason to any other party thereto to institute any proceedings for the cancellation or modification thereof. 7.2.2 Maintain the Assets, the Personal Property and the Computer Equipment in good working order and repair and maintain and pay all premiums under all insurance policies relating thereto. 7.2.3 Use its best efforts to preserve its business organization intact, to keep available to Buyer the services of its present employees, and to preserve for Buyer the present goodwill and advantageous relationships of MAB with all persons or entities having business dealings with MAB. 7.2.4 Maintain its books, accounts and records in the usual, regular and ordinary manner and on a basis consistent with prior years. 8. Covenants of Craig Costanzo and Mary Anne Costanzo. 8.1 Craig Costanzo, Chief Executive Officer of MAB and his wife, Mary Anne Costanzo, an employee of MAB, acknowledge that the Business of MAB is national in character and that it is presently conducted throughout the United States and that Buyer intends after the Closing Date to continue to conduct the Business throughout the United States. In order that Buyer may have and enjoy the full benefit of ownership of Capital Stock and the assets of MAB, including the good will of the Business, Craig Costanzo and Mary Anne Costanzo, in consideration of an allocated portion of the 26 Purchase Price being paid to them, covenant and agree with and for the benefit of Buyer, its successors and assigns and its affiliates, that they shall not, for a period of five (5) years from the Closing Date (the "Covenant Term"), and so long as Buyer is not in default of the Note, directly or indirectly, and no person, corporation, firm, partnership or other entity related to them and over which they exercise control (whether as a stockholder, affiliate, holder of debt or equity securities, consultant, partner or otherwise) or with which they are affiliated, anywhere in the United States, conduct business involving or connected with the business engaged in by MAB including, without limitation an accounts collection business or any business related thereto or any other business in which MAB is engaged as of the Closing Date; or any business competitive with any of the foregoing. For purposes of this Section 8 each of the following activities, without limitation, shall be deemed to constitute conducting business: to engage in, work with, have an interest in (other than interests of less than 5% in companies with securities traded either on the New York Stock Exchange or the American Stock Exchange or traded over-the-counter and quoted on NASDAQ), advise, manage, operate, lend money to (other than interests of less than 5% in companies with securities traded either on the New York Stock Exchange or the American Stock Exchange or traded over-the-counter and quoted on NASDAQ), guarantee the debts or obligations of, or permit one's name or any part thereof to be used in connection with an enterprise or 27 endeavor, either individually, in partnership or in conjunction with any person or persons firm, association, company or corporation, whether as principal, director, agent, shareholder, partner, employee, consultant or in any other manner whatsoever. The foregoing shall not be construed as a prohibition on Craig Costanzo's ability to teach for or participate in American Collectors' Association activities. 8.2 Craig Costanzo and Mary Anne Costanzo covenant and agree that, during the Covenant Term and for a period of two (2) years thereafter (after which time the restrictions in this Section 8.2 shall not apply), and so long as Buyer is not in default of the Note, they will not directly or indirectly, and no person corporation, firm, partnership or other entity related to them and over which they exercise control (whether as a stockholder, affiliate, holder of debt or equity securities, consultant, partner or otherwise) or with which they are affiliated will (a) enter into any agreement or understanding, written or oral, relating to the services of any person who is known or should be known to be then employed or to have been employed within the preceding one (1) year, by MAB and/or Buyer, or (b) solicit the business of, enter into any written or oral agreement with or otherwise deal with any customers of MAB and/or Buyer who were such at any time during the Covenant Term, except on behalf of businesses in which such party would then be permitted to engage directly without violating subsection 8.1 hereof. 8.3 The scope and effect of the covenants contained 28 in this Section 8 shall be as broad as may be permitted pursuant to the provisions of applicable law. To the extent that the language of said covenants may restrict competition in a larger area or for a longer time, or both, than permitted-by applicable law, that portion thereof shall be ineffective, but the provisions of said covenants shall nevertheless remain effective with respect to the largest area and for the longest period of time as shall be permitted by applicable law. 8.4 Section 8 shall be governed by and construed in accordance with the law of the Commonwealth of Pennsylvania applicable to contracts as though this Agreement was entered into and is entirely to be performed in the Commonwealth of Pennsylvania. 8.5 The parties acknowledge and agree that the extent of damages to Buyer in the event of a breach by Craig Costanzo and Mary Anne Costanzo of the covenants and agreements contained in Section 8 would be impossible to ascertain and that there is and will be available to Buyer no adequate monetary damages or other remedy at law to compensate it in the event of any such breach; consequently, Craig Costanzo and Mary Anne Costanzo agree that in the event of a breach of any such covenant, in addition to any other relief to which Buyer is or may be entitled, Buyer shall be entitled to enforce any or all of such covenants by injunctive or other equitable relief, including the remedy of specific performance, ordered by any court of competent jurisdiction. 29 9. Conditions Precedent to Buyer's Obligation to Close. The obligation of Buyer to consummate the transaction contemplated by this Agreement shall be subject to the satisfaction on or prior to the Closing Date of the following conditions: 9.1 The representations and warranties of Sellers contained in this Agreement or in any Schedule annexed to this Agreement shall be true in all material respects on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of such date, except to the extent that the facts and conditions upon which such representations and warranties are based are expressly required or permitted to be changed by the terms of this Agreement, and Sellers and MAB shall deliver to Buyer a certificate to that effect on the Closing Date. 9.2 Sellers and MAB shall have duly performed all obligations, covenants and agreements undertaken by them herein and complied with all terms and conditions applicable to them, respectively, hereunder to be performed and complied with at or prior to the Closing Date. 9.3 MAB, at its expense, shall furnish to Buyer a favorable opinion of its counsel, addressed to Buyer, dated as of the Closing Date, to the effect that: 9.3.1 This Agreement has been duly executed and delivered by Sellers and is enforceable against Sellers in accordance with its terms. 9.3.2 MAB is a corporation duly organized and 30 in good standing under the laws of the State of New York and is duly qualified to do business in the jurisdictions set forth on Schedule 3.1. 9.3.3 The authorized capital of MAB is as set forth in Section 3.2 hereof and Sellers own all Capital Stock of record and that Capital Stock has been validly issued and is fully paid and non-assessable. 9.3.4 The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby do not violate any provision of MAB's Articles of Incorporation or By-laws. 9.3.5 To the knowledge of such counsel, there is no litigation, arbitration, legal or other proceeding in which MAB or any of its officers or directors is now engaged or threatened which would affect its ability to complete this transaction. 9.4 The Contracts and any other business contacts, agreements, understandings and the Assets of MAB shall not be adversely affected in any material way by the execution of this Agreement and the consummation of the transactions contemplated hereby. 9.5 There shall have been delivered to Buyer at or prior to the Closing Date: (i) certificates of good standing with respect to MAB issued by the Secretary of the State of New York and any other state in which MAB is qualified to do business; and (ii) the documents required to be delivered pursuant to the provisions 31 of Sections 3.3, 3.6.2, 3.8, 3.9, 3.11, 3.15, 3.22 and 3.24. 9.6 There shall be no effective injunction or restraining order of any nature issued by any court of competent jurisdiction which shall direct that this Agreement or the transactions contemplated herein not be consummated. 9.7 MAB shall have delivered to Buyer all of its corporate books and records, including, without limitation, stock certificate and ledger books, minute books, corporate seal, contracts, agreements, leases and insurance policies. 9.8 The resignations, dated the Closing Date, of all of the officers and directors of MAB shall have been delivered to Buyer. 9.9 Michael Noah shall have entered into an employment agreement (the "Employment Agreement") with Buyer. The Employment Agreement shall have a term of five (5) years and shall have terms and conditions similar to his employment agreement with MAB. The Employment Agreement shall be in form reasonably satisfactory to Buyer and Michael Noah. 9.10 MAB shall deliver to Buyer, at Closing, "reviewed" financial statements for the months of January through and including June, 1996. 9.11 MAB shall deliver its written certification to Buyer, certifying and warranting that, except as disclosed on the Statements and the statement required at 9.10 above, (i) all payments due to clients and vendors of the Business as of the Closing Date have been remitted to such clients and vendors except 32 in the ordinary course of business; (ii) all clients of the Business have been paid in full and are not owed any money as of the Closing Date except in the ordinary course of business; and (iii) to its knowledge, all liabilities of MAB, including potential liabilities of MAB regarding Texas and Colorado Guaranty Student Loans (the "Guaranty Loans"), have been disclosed to Buyer. 9.12 A general release of all claims Sellers may have up to the Closing Date against MAB and its directors, officers, agents and employees, in form and substance satisfactory to Buyer's counsel. 9.13 MAB, at MAB's cost, shall obtain and deliver to Buyer, at least ten (10) days prior to the Closing Date, Uniform Commercial Code searches from each state and county that MAB has an office, confirming that except as has been previously disclosed to Buyer, MAB's property, including the Personal Property, the Computer Equipment and the Assets are free and clear of all liens and encumbrances. 9.14 All bank documentation necessary to transfer control over all bank accounts and safety deposit boxes of MAB to a named representative of Buyer. 10. Conditions Precedent to Seller's Obligation to Close. The obligation of Sellers to consummate the transaction contemplated by this Agreement shall be subject to the satisfaction on or prior to the Closing Date of the following conditions: 10.1 The representations and warranties of Buyer 33 contained in this Agreement shall be true in all material respects on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of such date, and Buyer shall deliver to Seller a certificate to that effect on the Closing Date. 10.2 Buyer shall have duly performed all obligations, covenants and agreements undertaken by it herein and complied with all terms and conditions applicable to it, hereunder to be performed and complied with at or prior to the Closing Date. 10.3 Buyer, at its expense, shall furnish to Sellers a favorable opinion of its counsel, addressed to Sellers, dated as of the Closing Date, to the effect that: 10.3.1 This Agreement and the agreements to be executed and delivered by Buyer in connection with this Agreement have been duly authorized by the Directors of Buyer and are duly and properly executed by its officers and are a valid and enforceable against Buyer in accordance with their terms. 10.3.2 Buyer is a corporation duly organized and in good standing under the laws of the Commonwealth of Pennsylvania. 10.3.3 The execution and delivery of this Agreement and the agreements to be executed and delivered in connection with this Agreement (including, without limitation, the Note) and the consummation of the transactions contemplated hereby do not violate any provision of Buyer's Articles of Incorporation or By-laws or any agreement or other restriction to which Buyer is 34 a party or by which it is bound. 10.3.4 To the knowledge of such counsel, there is no litigation, arbitration, legal or other proceeding in which Buyer or any of its officers or directors is now engaged or threatened which would affect its ability to complete this transaction. 10.4 There shall be no effective injunction or restraining order of any nature issued by any court of competent jurisdiction which shall direct that this Agreement or the transactions contemplated herein not be consummated. 11. Indemnifications. 11.1 Sellers' Indemnification of Buyer. At all times after the Closing Date, Sellers shall indemnify Buyer and its successors and assigns, and hold each such person or entity harmless from and against any and all losses, costs, expenses, liabilities, claims, demands, damages, settlements, and judgments of every nature (including the defense or investigation thereof and reasonable attorneys' fees incurred) ("Losses") resulting from or arising out of or in connection with: (a) the inaccuracy of any warranty or representation made by Sellers and MAB pursuant to this Agreement provided, however, that Sellers shall have no liability under this Section 11.1(a) until the aggregate Losses under this Section 11.1(a) exceed, and only to the extent in excess of, $100,000; (b) the non-performance, partial or total, of any covenant of Sellers or MAB hereunder or under any agreement contract or understanding entered into by MAB and referred to 35 herein including, but not limited to those referred to in Sections 3.5, 3.6.2 and 3.22,; and (c) any and all federal and state income and all other tax liabilities, including all disallowed deductions or expenses taken in connection with the Business and for any other taxes which may become due in connection with the change of any law affecting filings prior to the effective date of Closing. Without limiting the foregoing, it is expressly agreed that diminution in the value of Capital Stock by reason of any of the foregoing shall be deemed a Loss for purposes of this indemnification. Sellers may assume the defense of any such matter provided that Buyer may be represented by its own counsel, selected by Buyer, at Buyer's expense. 11.2 Buyer's Indemnification of Sellers. At all times after the date hereof, Buyer shall indemnify Sellers, their heirs successor and assigns, and hold each such person harmless from and against any and all losses, costs, expenses, liabilities, claims, demands, damages, settlements and judgments of every nature (including the defense or investigation thereof and reasonable attorneys' fees incurred) resulting from or arising out of or in connection with: (a) the inaccuracy of any warranty or representation made by Buyer pursuant to this Agreement; (b) the non-performance, partial or total, of any covenant of Buyer in this Agreement, and the agreements to be executed and delivered by Buyer in connection with this Agreement (including, without limitation, the Note); and (c) operation of the Business and/or the use of the Assets after the Closing Date. Buyer may assume the defense of any such matters provided that Sellers may be represented by their own counsel, selected by Sellers, at Sellers' expense. 36 11.3 Buyer's rights under this Agreement with respect to the representations, warranties, indemnification provisions and other covenants by Sellers, shall be limited to enforcement (but not to recoverable damages) of the provisions of this Section 11. 12. Agreements of Sellers and Buyer to be Performed After the Closing Date. Sellers and Buyer agree that after the Closing Date hereunder: 12.1 From time to time, upon request of the other, each will execute and deliver such additional instruments of transfer, assignment and further assurance and do such other things as are necessary or desirable to consummate the transactions contemplated hereby. 12.2 Each will fully cooperate with the other in the defense of any claim for tax or otherwise, arising from facts occurring prior to or after the Closing Date. Sellers shall be responsible for the preparation of tax returns for all periods ending on or prior to the Closing Date and shall be entitled to any refunds attributable to taxes paid for such periods and shall be obligated for payment of any amounts due thereunder. 12.3 Sellers shall deliver to Buyer, within sixty (60) days following Closing, an "audited" final financial statement for the applicable months of 1996 (January through and including the month of Closing) prepared by Brock, Schechter & Polakoff, LLP. Except as herein provided, the final financial statement shall reflect a net worth of the Business of not less than the Net Worth. 37 13. Brokers. Each party represents to the other that such party has not employed or retained any broker or finder in connection with the transactions contemplated herein except M. Kaulkin & Associates, Inc. (the "Broker"). Sellers shall be responsible for payment of the commission due the Broker. Buyer agrees to provide such assistance as Sellers may request from time-to-time in negotiating the commission due the Broker. 14. Miscellaneous. 14.1 This Agreement and the confidentiality agreements signed by the parties or their respective agents or representatives constitute the entire understanding and agreement between the parties hereto with respect to the transaction contemplated herein and supersedes all prior or contemporaneous agreements with respect to such subject matter, including, without limitation, the Letter of Intent dated June 19, 1996. This Agreement may be modified or amended only in writing signed by each of the parties hereto. 14.2 Any notices or other communications required or permitted hereunder shall be sufficiently given if delivered in person or sent by Certified Mail, Return Receipt Requested, postage prepaid, or by facsimile, or delivered by overnight delivery service, to the party to receive such notice addressed as follows: If to Buyer: 1740 Walton Road Blue Bell, PA 19422 With copy to: Joshua Gindin, Esquire 1700 Two Logan Square 18th & Arch Streets Philadelphia, PA 19103 38 If to Sellers: 331 Wellingwood Drive East Amherst, NY 14051 With copy to: Harry G. Meyer, Esquire 1800 One M & T Plaza Buffalo, NY 14203 or to such other address as either party shall by notice give to the other. 14.3 This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania applicable to contracts entered into entirely to be performed in the Commonwealth of Pennsylvania. 14.4 No remedy conferred by any of the specific provisions of this Agreement is intended to be exclusive of any other remedy, and each and every remedy shall be cumulative and shall be in addition to every remedy give hereunder or now or hereafter existing, at law or inequity by statute or otherwise. The election of any one or more remedies by either party shall not constitute a waiver of the right to pursue other available remedies. 14.5 This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors and assigns. 14.6 This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 14.7 The parties hereto agree that this Agreement may be executed and delivered via facsimile with original documents 39 being executed and delivered subsequently. 14.8 Captions and section headings used herein are for convenience only and are not a part of this Agreement and shall not be used in construing it. 14.9 If any provision of this Agreement is held to be unenforceable for any reason it shall be adjusted rather than voided, if possible, in order to achieve the intent of the parties to the extent possible. In any event, all other provisions of this Agreement shall be deemed valid and enforceable to the fullest extent possible. 14.10 In order to expedite the execution of this Agreement, the parties agree to sign this Agreement without all Schedules required herein being completed and attached. The Schedules shall be completed and attached to this Agreement on or before the end of the Due Diligence Period. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. Attest: BUYER: NCO FINANCIAL SYSTEMS, INC. ________________________[SEAL] By: /s/ Bernard Miller --------------------------- Bernie Miller Senior Vice President 40 Witness: SELLERS: /s/ Craig Costanzo - --------------------------- ------------------------------- Craig Costanzo /s/ Andrew J. Boyuka, Trustee - ---------------------------- -------------------------------- Andrew J. Boyuka, Trustee of the Susan E. Costanzo Grantor Trust /s/ Andrew J. Boyuka, Trustee - ---------------------------- -------------------------------- Andrew J. Boyuka, Trustee of the Christopher A. Costanzo Grantor Trust Witness: /s/ Mary Anne Costanzo - ----------------------------- -------------------------------- Mary Anne Costanzo 41 EX-2.2 3 EXHIBIT 2.2 Exhibit 2.2 ASSET PURCHASE AGREEMENT This Agreement, made this 8th day of December, 1995, by and between NCO FINANCIAL SYSTEMS, INC., a Pennsylvania corporation ("Buyer") and TRANS UNION CORPORATION, a Delaware corporation ("Seller"). W I T N E S S E T H: Seller operates a third party consumer accounts collection business (the "Business"). The Seller maintains offices for the Business in Hutchinson and Wichita, Kansas; North Olmstead, Ohio; and Springfield, Pennsylvania and has sales representatives in Jackson, Mississippi and Birmingham, Alabama. Seller desires to sell, assign and transfer to Buyer and Buyer desires to purchase from Seller substantially all of the assets of the Business including, but not limited to, accounts receivable client files, including client contracts, client lists, operating and certain real estate (specifically mentioned in paragraph 4 of this Agreement) leases of the Business, office equipment, furniture, fixtures, fixed assets, supplies, supplier lists, books and records of the Business and such other assets and rights as are more fully described herein. NOW, THEREFORE, the parties hereto, in consideration of the foregoing and of the mutual covenants contained herein and intending to be legally bound hereby, agree as follows: 1. Purchase and Sale, Excluded Assets. Subject to the terms of this Agreement, Seller agrees to sell to Buyer, and Buyer agrees to purchase from Seller, the assets and rights relating to Seller's Business as follows: 1.1 All client lists, client files and any other information regarding clients of the Business in the possession of Seller. 1.2 All of Seller's equipment, machinery, furniture, fixtures, signs and other fixed assets, supplies and other assets owned by Seller and used in connection with the Business (the "Equipment") as more specifically described in Schedule 1.2 hereof. 1.3 All oral or written contracts ("Contracts") including, but not limited to, collection services contracts with clients of the Business, insurance contracts that Buyer wishes to assume and continue and such specific employee arrangements as shall be determined by and identified by Buyer on Schedule 1.3 hereof. (2) 1.4 All operating and real estate (as provided in paragraph 4) leases of the Business. 1.5 All of the Seller's goodwill in the Business. 1.6 All books and records, including but not limited accounting books, of the Business. 1.7 Accounts receivable of the Business of not less than $819,000 (the "Accounts Receivable"). The Accounts Receivable shall be net of a bad debt allowance which is consistent with methodology previously used by Seller for bad debt allowances. Seller warrants that it is not aware of any receivables that are uncollectible in excess of the stated allowances. 1.8 The Accounts Receivable, personal property, the Equipment, Contracts, operating leases, real estate leases (as provided in paragraph 4) and such other assets of Seller as shown to Buyer on Seller's Audited Financial Statements for 1993 and 1994 and Reviewed Financial Statements for 1995 and represented as being included in this transaction herein or to be purchased by Buyer hereunder are hereinafter sometimes collectively referred to as the "Assets". (3) 1.9 All of the Assets shall be sold and assigned to Buyer free and clear of any liens, security interests or other encumbrances of any kind or nature except as is otherwise disclosed hereon or as is more fully described on Schedule 1.9 hereof. 1.10 This sale does not include cash on hand, accounts payable of the Business, notes payable or any other intangible assets not otherwise referred to in this paragraph 1. 2. Purchase Price and Payment. 2.1 The purchase price (the "Purchase Price") for the Assets shall be $4,750,000, and shall be allocated as follows: Client lists and files, Contracts and Goodwill $_________ Equipment, Furniture, and Accounts Receivable $_________ 2.2 The Purchase Price shall be paid as follows: (a) $50,000 as a deposit (the "Deposit") upon execution hereof, to be held by Buyer's counsel in escrow until closing or the termination hereof in accordance with the terms of this Agreement; (b) $4,700,000 shall be paid at Closing (as hereinafter defined) by certified or bank cashier's check or by wire transfer. (4) 2.3 Seller and Buyer agree to respect the allocations set forth in Paragraph 2.1 hereof for tax purposes and to cause all tax returns and other documents filed with the Internal Revenue Service or any other tax collection agency to be consistent with such allocation. 3. Use of Seller's Name. In connection with the transition of the Business from Seller to Buyer, Buyer shall, for a period of one (1) year following Closing, have the right to advise customers of the Business that Buyer is the successor in interest of Seller or that it was "formerly known as Trans Union Corporation." During said one (1) year period, Buyer shall have the right to use the Seller's name where reasonably required in order to assure a smooth transition of the Business. 4. Premises Leases. Subject to Landlord's approval where required by a premises lease, Buyer shall sublease Seller's office space for its Wichita, Kansas and North Olmstead, Ohio offices at a gross rent of $15.50 per square foot and at a gross rent of $12.50 per square foot, respectively. Such subleases shall have a term of five (5) years following the Closing Date (as hereinafter defined) but may be terminated by Buyer upon ninety (90) days prior written notice to Seller before Closing and one hundred eighty (180) days written notice after Closing. Buyer and Seller agree that Buyer shall vacate the Seller's Springfield, Pennsylvania office not later than February 28, 1996. (5) Attached hereto as Schedules 4A and 4B are copies of the leases for the Wichita and North Olmstead offices. 5. Conditions Precedent to Closing. Closing hereunder shall be, and is subject to, and conditioned upon the following: 5.1 The receipt by Buyer of Seller's "audited" financial statements for the years 1993 and 1994, "reviewed" financial statements for the months, January through and including September, 1995, on or before November 28, 1995 and a final audited financial statement for 1995 on or before February 28, 1996. 5.2 The parties hereto shall work together to determine which of Sellers employees will become employee's of Buyer, subject to Buyer's sole determination, and Seller shall assist in obtaining written consent to the transfer from employees, as may be required. The parties further agree that between the date this transaction is made public and march 31, 1996, Seller shall be prohibited from hiring any employees of the Business without the prior written consent of Buyer. 5.3 The oral or written representations and warranties of Seller and of Buyer shall be true, complete and accurate in all material respects on and as of the Closing Date to the same extent and with the same force and effect as if made on that date and Buyer and Seller shall each have performed all covenants and agreements required under this Agreement to be performed prior to Closing. (6) 5.4 Buyer obtaining Uniform Commercial Code searches from each state and county that Seller has an office which indicate that the Assets are free and clear of all liens and encumbrances. 6. Access to Information; Confidentiality. (a) Seller has granted Buyer a sixty (60) day due diligence period effective October 24, 1995 (the "due Diligence Period"). During the Due Diligence Period, Seller shall permit Buyer and its employees, agents, counsel and accountants and other representatives, from the date hereof to the Closing Date, to have access upon reasonable notice in a manner not disruptive of Seller's business during normal business hours, at Seller's main and branch offices, to all books, records, client lists, client files, other information regarding clients, supplier lists, financial and accounting records, and all other books and records relating to the Seller's business, and the properties and the Assets of the Seller being sold hereunder. During the Due Diligence Period, upon request by Buyer, Seller shall use its best efforts to provide Buyer with file layouts and such other computer information to permit Buyer to commence preparation for the transfer of the Business. Seller shall be responsible for any cost of obtaining such layouts, not to exceed $25,000. Until the Closing Date, or in the event of the termination of this Agreement without consummation of the transactions contemplated hereby, Buyer will hold confidential and not make use of any information obtained from the Seller. (7) If this Agreement is terminated, promptly after such termination, all documents, work papers or other written material obtained from Seller, or its representatives, under this Agreement and not theretofore made public (including all copies thereof) shall be returned to Seller. During the Due Diligence Period, Buyer may terminate this Agreement only if Buyer discovers that any financial information previously given to it by Seller that is material to Buyer's decision regarding this transaction is materially untrue or inaccurate. Upon such termination, the Deposit shall be returned to Buyer. (b) The foregoing to the contrary notwithstanding, Buyer has disclosed to Seller and Seller acknowledges that it is aware that Buyer has entered into an agreement with CRW Financial, Inc. ("CRW") whereby CRW and Buyer intend to combine their businesses in the early part of 1996. CRW is a publicly held company and accordingly the audited/reviewed financial statements of Seller, prepared by Ernest Young, may be used in publicly disclosed documents, including but not limited to SEC filings, state securities filings, from 10 Q, form 10K, form 8K, and documents related to the public sale of securities (Prospectus). Seller hereby authorizes Buyer's use of Seller's information as described above. Buyer hereby agrees to pay any cost associated with Ernest & Young permitting their opinion to be used in such public documents, as well as the reasonable cost of any outside counsel hired by Seller to review said documents. (8) 7. Seller's Representations, Warranties and Agreements. Seller hereby represents and warrants to Buyer as follows: 7.1 Seller is a corporation duly organized and existing and subsisting in good standing under the laws of the state of Delaware and has the corporate power and authority to conduct the Business and own the Assets. Seller has not operated the Business under any name other than Seller's corporate name. Seller has good and marketable title to each and all of the Assets, free and clear of all liens, security interests, pledges, restrictions and encumbrances whatsoever except as is otherwise disclosed and acceptable to Buyer. 7.2 Seller has the corporate power to sell, assign, transfer and deliver the Assets; the execution, delivery and performance of this Agreement by Seller has been duly authorized by Board of Directors and in accordance with Seller's Bylaws; and this Agreement constitutes the valid and binding obligation of Seller in accordance with its terms except as such enforceability may be limited by bankruptcy, insolvency or other laws of general application relating to or affecting the enforcement of creditor's rights and except as specific enforceability may be limited by the principles of equity. (9) 7.3 The consummation of the transactions contemplated by this Agreement and compliance with the provisions hereof will not conflict with or result in a breach or default under Seller's Articles of Incorporation or By-laws or any agreement or other instrument to which Seller is a party or by which it is bound, or under any provision of any applicable law, regulation, statute or ordinance or any order, of any court or other governmental agency. 7.4 Seller has not negotiated or entered into any other contract or agreement to sell, encumber by lien, hypothecate, or otherwise dispose of any of the Assets. 7.5 Schedule 7.5 constitutes a true, correct and complete list of all Seller's client lists and client files owned by Seller and/or used by it in connection with the Business. 7.6 Except to the extent reflected in Schedule 7.6 attached hereto, all furniture, fixtures, machinery, and office and systems to be purchased and sold hereunder are and will be on the Closing Date in good working order, reasonable wear and tear excepted, and at Closing, Seller shall have good and marketable title to all of the Assets to be sold herein, subject to no liens, liabilities or obligations of any nature, whether accrued, absolute, contingent or otherwise, including, without limitation, tax (10) liabilities due or to become due except as is otherwise disclosed and acceptable to Buyer. 7.7 Schedule 7.7 is a true, correct and complete list of all material Contracts to which Seller is a party or by which Seller is bound. Seller has delivered to Buyer a true and correct copy of each of such Contracts which is in writing and a written description of the pertinent terms of each material oral Contract. Schedule 7.7 shall also contain a notation regarding the assignability of each such Contract, and where required, shall obtain written approval of assignment to Buyer. Other than Contracts requiring written approval of assignment, the assignment of all Contracts in connection herewith is permissible and shall not cause a default thereunder. 7.8 There is no litigation or proceedings pending, or threatened to the knowledge of Seller, relating to the Business, or any of the Assets; Seller has no knowledge of any basis for any such action which might materially and adversely affect the Business or the Assets being sold hereunder or the consummation of the transactions contemplated herein; and there is no outstanding judgment, decree or order against Seller which affects Seller or the Business or the Assets. Seller shall, immediately, notify Buyer of any fact or matter which may adversely affect the Business, the Assets and Seller's ownership thereof which arises prior to Closing. The foregoing notwithstanding, (11) Seller acknowledges that there are two (2) class action suits against Seller and the Business as well as other actions which may be pending in the normal course of Seller's operation of the Business. These liabilities are not the responsibility of Buyer. 7.9 Except as set forth on Schedule 7.9, Seller is not a party to any written contracts of employment in connection with the Business; and Seller is not a party to any collective bargaining agreements which effect the Business. 7.10 Except as set forth on Schedule 7.10, Seller does not have and none of its employees are covered by any bonus, deferred compensation, pension, profit-sharing, retirement, insurance, stock purchase, stock option or other fringe benefit plan, scheme, arrangement or practice, or any other employment plan, whether formal or informal which may effect Buyer or the Business. 7.11 The Assets (fixed assets and other tangible) owned or leased by the Seller in connection with the Business and all aspects of the Business are and will continue to be adequately insured against fire, casualty and liability to the Closing Date. Buyer and Seller acknowledge that Seller self insures the Assets, and therefore, Seller shall assume all risk of loss related to damage to the Assets until Closing. (12) 7.12 Seller has, to the best of its knowledge, operated the Business in compliance with all applicable Federal, state and local laws, ordinances and regulations, including, but not limited to the Federal Fair Debt Collection Practices Act. Seller has not, except as disclosed in Schedule 7.12 in connection with the use, ownership or operation of the Business or the Assets, received any notice of any suspected or claimed violation of any law, regulation or ordinance. 7.13 All trade creditors of the Business hall be paid in full prior to or with a portion of the Purchase Price at Closing. Further, except as set forth on Schedule 7.13, all clients of the business shall be remitted to and paid in full as of the Closing. Arrangements acceptable to Buyer shall be made at Closing regarding clients listed on Schedule 7.13. 7.14 Seller has all necessary permits, licenses and authorizations required for the ownership of the Assets and the operation of the Business in all jurisdictions in which it is doing business ("Licenses"); and all Licenses are listed on Schedule 7.14 hereto, are in full force and effect as of the date hereof and will continue to be in full force and effect through the Closing Date, and copies of all such Licenses will be delivered to Buyer within seven (7) days before Closing. It is hereby acknowledged by the parties that Schedule 7.14 is for informational purposes only and that the Licenses are not being assigned to Buyer together with the Assets. (13) 7.15 All Federal, state and local taxes relating to the Business or the Assets have been or by the Closing Date will be paid to the extent due except to the extent the same are being contested in good faith by Seller with adequate reserves therefore. 7.16 To the best knowledge of Seller, since September 30, 1995 there has been no material adverse change in, or condition which might materially adversely affect, the Business (financial or otherwise), or the properties, Assets or business prospects of the Business. 7.17 The representations or warranties of Seller in this Agreement do not contain and will not contain any untrue statement or omit or will omit to state a material fact necessary to make the statements therein not misleading. Seller's representations and warranties contained in this Agreement shall be true and correct at the time of Closing as though such representations and warranties were made on and as of such Closing Date. 8. Buyer's Representations and Warranties. Buyer represents and warrants to Seller as follows: 8.1 Buyer is a corporation duly organized, validly existing, and in good standing under the laws of the Commonwealth of Pennsylvania. (14) 8.2 The execution and delivery of this Agreement to the Seller and the purchase of the Assets and Business have been duly authorized by Buyer's Board of Directors and this Agreement constitutes the valid and binding obligation of Buyer enforceable against it in accordance with its terms except as such enforceability may be limited by bankruptcy, insolvency or other laws of general application relating to or affecting the enforcement of creditor's rights and except as specific enforceability may be limited by principles of equity. 8.3 Certified copies of resolutions of the Board of Directors of Buyer authorizing the transactions set forth in this Agreement, together with a copy of each of Buyer's Articles of Incorporation and By-laws certified by Buyer's Secretary, and a good standing certificate issued by the Secretary of State of Pennsylvania dated within twenty (20) days of Closing will be provided on the date of Closing hereinabove specified. 8.4 The consummation of the transactions contemplated by this Agreement and compliance with the provisions hereof will not conflict with or result in a breach or default under Buyer's Articles of Incorporation or by-laws, or any agreement to which Buyer is a party or by which it is bound, or any provision of law, order of any court or other governmental agency. (15) 8.5 There is no litigation or proceedings pending, or threatened to the knowledge of Buyer, nor does Buyer know of any basis for such action which would materially or adversely affect Buyer's ability or right to perform any of its obligations hereunder or consummate the transactions contemplated herein. 8.6 All financial documentation provided by Buyer to Seller in connection with this transaction are true and correct. 8.7 Buyer's business operation is in good standing and economically stable. Buyer is not aware of any fact or matter which could materially and adversely affect the business or the assets of Buyer. 8.8 The representations and warranties of Buyer in this Agreement do not contain and will not contain any untrue statement or omit or will omit to state a material fact necessary to make the statements therein not misleading. Buyer's representations and warranties contained in this Agreement shall be true and correct at the time of Closing as though such representations and warranties were made on and as of such Closing Date. (16) 9. Covenants of Seller Regarding Conduct of Business Pending Closing. Seller covenants and agrees that until Closing, regarding the Business, unless otherwise agreed to in writing by Buyer, Seller and its officers and directors, where required shall: 9.1 Continue the operation of the Business in the ordinary course consistent with current business practices, and will not engage in any sale or enter into any transaction other than in the ordinary course of Seller's business. 9.2 Maintain its current insurance coverages in full force and effect insuring the Assets and the Business to be sold to Buyer pursuant to this Agreement; and Seller shall promptly notify Buyer in writing of any loss, damage and/or claim regarding any Asset or the Business. 9.3 Not enter into any contract, agreement, lease or commitment pertaining to the Business without the prior consent of Buyer. 9.4 Use their best efforts to preserve the business of the Business and to maintain all equipment, machinery, records and files related thereto in good working order and condition; and shall use its and their best efforts to keep available for Buyer all of the present employees of the Business and to preserve for the benefit of the Buyer the goodwill of clients, customers, (17) suppliers and others having business relationships with Seller in connection with the Business. 9.5 Seller shall maintain its furniture, fixtures, equipment and machinery in good working order and repair through the Closing Date, ordinary wear and tear excepted, and Seller shall not dispose of any items of tangible property without the prior written consent of Buyer. 9.6 Maintain or increase its present business hours, but not reduce its business hours from the level currently maintained. 10. Restrictive Covenant. 10.1 Seller covenants and agrees that, for a period of five (5) years from the Closing Date, Seller shall not, directly or indirectly, anywhere in the United States, own, manage, operate, join, control, finance or participate in the ownership, management, operation, control or financing of, or be connected with as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise any business engaged in the debt collection business or interfere in any manner with the business operated by Buyer, including Buyer's operation of the Business. (18) 10.2 The restrictions set forth in subparagraph 10.1 above, notwithstanding, Seller shall be permitted to continue its credit bureau business. If, at any time, Seller acquires a credit bureau business which includes as part of its business a debt collection business, the restriction set forth in subparagraph 10.1 above shall apply and Seller shall not be permitted to operate such debt collection business including during the period that Seller is attempting to sell that business to Buyer or a third party as herein provided. Buyer shall, during the five (5) year restriction period, have a right of first refusal to purchase the collection business portion of any credit bureau business acquired by Seller. If Buyer does not purchase such collection business, Seller shall be required to sell the collection business portion of any acquired credit bureau to a third party or terminate and close the debt collection part of the acquired business. Furthermore, Seller shall be permitted to continue to market its letter series, known as "Collets," in connection with its credit bureau business only. Collets is a collection letter series sold by Seller to its customers. Collets shall not be used as a vehicle for third party collection services but does constitute a letter coming from Seller to consumers asking them to pay a creditor an outstanding balance, or a letter from a creditor to the customer which is facilitated by Seller. Seller's involvement in the collection of accounts through the Collets process shall be no more than that required to comply with the Fair Debt Collection Practices Act. (19) 10.3 Seller agrees that the remedy at law for any breach of the foregoing paragraph will be inadequate and that Buyer will be entitled to temporary or permanent injunctive relief in respect to a breach of the covenant and specific performance in respect to a breach of the right of first refusal, without the necessity of proving actual damage to Buyer. Nothing herein shall be construed as prohibiting Buyer from pursuing any other remedies available to it for such breach or threatened breach including the recovery of damages from Seller. If the period or the scope of any of the foregoing restrictions should be adjudged unreasonable in any court or arbitration proceeding, then the period of time shall be reduced by such number of months or the scope shall be reduced by the elimination of such portion thereof as is deemed unreasonable so that the foregoing provisions may be enforceable during such period of time and such scope as is adjudged to be reasonable. 10.4 The provisions of this paragraph 10 and each subparagraph hereof shall be considered severable and the invalidity or unenforceability of any part thereof shall not affect the validity or enforceability of the remaining portions or provisions of this paragraph or this Agreement. (20) 11. Liabilities. Except as specifically set forth in this Agreement and except with respect to Contracts assigned to and assumed by Buyer, Buyer is not assuming any obligations or liabilities of Seller, whether related to the Business or otherwise, and Seller shall promptly pay, satisfy or discharge all such liabilities. 12. Indemnification. (a) Seller shall indemnify, defend and hold harmless Buyer, its successors and assigns, from, against and in respect of: (i) any loss, damage, expense or deficiency that Buyer may incur and any claim that may be made against Buyer arising out of or resulting from: (A) any misrepresentation, breach or incorrectness of any representation or warranty made by Seller herein, or the omission from any such representation or warranty of any statement of fact necessary to make such representation or warranty not misleading; (B) nonfulfillment of any agreement on the part of the Seller; (C) any misrepresentation in or omission from any certificate or other instrument furnished or to be furnished to the Buyer under this Agreement; (D) any act or omission of Seller before Closing regarding any obligation under any of the Contracts of Seller assumed by Buyer hereunder or otherwise relating to the Business or to any of the Assets transferred to Buyer at Closing under this Agreement; (E) the claims of all or any creditors or clients of Seller and for any of the obligations or liabilities of Seller previously or hereafter asserted against Buyer or the Assets of Seller acquired by Buyer under this Agreement for any and all periods prior to Closing; and (21) (ii) all actions, suits, proceedings, demands assessments, judgments, attorney's fees, costs and expenses incident to any of the foregoing. (b) Buyer shall indemnify, defend and hold harmless the Seller, its successors and assigns, from, against and in respect of any loss, damage, expense or deficiency that any of them may incur and any claim that may be made against any of them arising out of or resulting from any act or omission of Buyer after Closing. This indemnification shall include all actions, suits, proceedings, demands assessments, judgments, attorney's fees, costs and expenses incident to any of the foregoing. 13. Closing Date. Closing hereunder shall be held no earlier than January 3, 1996 (hereinafter after referred to as the "Closing" or the "Closing Date") at the offices of Joshua Gindin, Esquire, 1700 Two Logan Square, Philadelphia, Pennsylvania, or such other date, time and place upon which Seller and Buyer may jointly agree. 14. Delivery of Documents. At Closing, the parties shall deliver documents, instruments and other materials for the transactions provided for herein as follows: (22) 14.1 Seller shall execute and/or deliver to Buyer: a. A Bill of Sale and Assignment transferring the Assets, which Bill of Sale and Assignment shall warrant title to Buyer free and clear of all liens and encumbrances of every kind and nature. b. A list of all employees, their rates of pay, including base pay, and any incentive, commission or bonus plans, and setting forth all employee benefits, if any. c. An Incumbency Certificate for Seller's Officers. d. Certified Resolutions of Seller's Board of Directors authorizing the sale of the Assets and the execution and delivery of this Agreement and all other documents and instruments required to be delivered hereunder. e. A copy of Seller's Articles of Incorporation and By-laws certified by Seller's Secretary or Assistant Secretary. f. A Good Standing Certificate for Seller issued by the Secretary of State of each state in which Seller is authorized to do business and dated within twenty (20) days of Closing. (23) g. A Certificate executed by Seller's President and attested by Seller's Secretary or Assistant Secretary, stating that all of the representations and warranties made by Seller are true and correct as of the Closing Date; and h. Such other documents and instruments as Buyer and its counsel may reasonably require. 14.2 Buyer shall deliver or cause to be delivered to Seller: a. Buyer's certified or bank cashier's check or wire transfer in the amount of the Purchase Price, subject to any adjustments pursuant to paragraph 2.2(a) above. b. An Incumbency Certificate and Certified Resolutions of Buyer's Board of Directors authorizing the purchase of the Assets and the execution and delivery of this Agreement and all other documents and instruments required to be delivered hereunder. c. Such other documents and instruments as Buyer is required to deliver to Seller under this Agreement. (24) 15. Survival Representations, Warranties and Agreements. All representations, warranties and agreements provided for in this Agreement shall survive the Closing Date for a period of three (3) years, except that the condition precedent requiring audited 1995 financial statements, as set forth in paragraph 5.2 and the covenants set forth in paragraph 10 hereof shall survive for the period set forth therein. 16. Brokers. Each of the parties represents and warrants to the other that all negotiations to this Agreement and the transactions contemplated hereby have been carried on between them directly and without the intervention of any other party, and no other third party has or could have any valid claim against either of the parties for a brokerage commission, finder's fee or other like payment. 17. Notices. All notices required or permitted under this Agreement shall be in writing and shall be sufficiently given only if personally delivered or mailed by certified or registered mail, return receipt requested, or by facsimile, or delivered by overnight delivery service, to the party to receive notice at the address set forth below for such party or to such other address as any party shall, by ten (10) days prior notice, direct. (25) If to Seller 555 West Adams Chicago, IL 60661 Attn: David Emery With a copy to: Oscar Marquis, Esquire 555 West Adams Chicago, IL 60661 If to Buyer: NCO Financial Systems, Inc. 1740 Walton Road Blue Bell, PA 19422 Attention: Michael Barrist, President With a copy to: Joshua Gindin, Esquire 1700 Two Logan Square Philadelphia, PA 19103 18. Further Assurances. Each party shall, upon the reasonable request of the other party, take such action and execute and deliver such documents as may be reasonably necessary or appropriate to effectuate the terms of this Agreement and consummate the transactions contemplated hereby. 19. Applicable Law. This Agreement shall be governed by and construed in accordance with the internal laws of the Commonwealth of Pennsylvania. 20. Benefit. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and assigns; provided, however, that this Agreement shall not be assigned by either party without the prior written consent of the other. The foregoing notwithstanding, in the event that Buyer and CRW (26) complete their business combination prior to the Closing Date, Buyer shall have the right to assign its rights and obligations under this Agreement to CRW without the required written consent of Seller. 21. Entire Agreement; Amendment. This Agreement, contains the entire understanding between the parties hereto, no other representations, warranties or covenants having induced any party to execute this Agreement, and this Agreement is intended to, and shall, supersede all prior or contemporaneous agreements, whether oral or in writing, with respect to the subject matter hereof. This Agreement may not be amended or modified in any manner except by a written agreement duly executed on behalf of the party to be charged. 22. Responsibility for Costs. 22.1 Each of the parties hereto shall be responsible for all costs and expenses incurred by each of them in connection with the negotiation of this Agreement and the consummation of the transactions contemplated hereby, including, but not limited to, attorneys' and accountants' fees. 22.2 In the event of a lawsuit by either party to enforce the provisions of this Agreement, the prevailing party shall be entitled to recover reasonable costs, expenses and attorneys' fees from the other party. (27) 23. Headings. The paragraph headings of this Agreement are for convenience of reference only and do not form a part of the terms and conditions of this Agreement or give full notice thereof. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year written above. Buyer: Attest: (Seal) NCO FINANCIAL SERVICES, INC. ______________________________ By:_____________________________ Title_________________________ Michael Barrist, President Seller: Attest: (Seal) TRANS UNION CORPORATION ______________________________ By:_____________________________ Title_________________________ (28) EX-10.6 4 EXHIBIT 10.6 Exhibit 10.6 1710-20 SENTRY EAST ASSOCIATES L.P. AND NCO Financial System, Inc (D.B.A. The Sentry Group) OFFICE PREMISES LEASE TABLE OF CONTENTS 1. INTERPRETATION 1.1 Defined Terms - General 1.2 Defined Terms - Operating Costs and Taxes 1.3 Number, Gender and Joint and Several Liability 1.4 Procedure for Approval 1.5 Divisions 1.6 Entire Agreement 1.7 Reasonableness 1.8 Nature of the Lease 2. DEMISE AND TERM 2.1 Demise-Premises 2.2 Licenses 2.3 Term 2.4 Surrender on Termination 2.5 Holding Over 3. RENT 3.1 Items of Rent 3.2 General 3.3 Final Determination of Certain Items of Rent 3.4 Insufficient Funds 3.5 Deposit 4. USE OF PREMISES 4.1 Use 4.2 Waste and Nuisance 4.3 Extraordinary Equipment 4.4 Fire Prevention and Energy Conservation 4.5 Exterior Appearance of Premises 5. LIMITATION OF LIABILITIES 5.1 Unavoidable Delay 5.2 Limitation of Landlord's Liability 5.3 Indemnity 6. TAXES 6.1 Landlord's Taxes 6.2 Tenant's Taxes 6.3 Assessment Appeals 7. INSURANCE 7.1 Landlord's Insurance 7.2 Tenant's Insurance 8. OPERATION, SERVICES, MAINTENANCE, REPAIR AND ACCESS BY LANDLORD 8.1 Quiet Enjoyment 8.2 Standard of Operation 8.3 Services to Premises 8.4 Services to Building 8.5 Additional Services 8.6 Extra Operating Costs 8.7 Maintenance and Repair 8.8 Access by Landlord 9. MAINTENANCE, REPAIR AND IMPROVEMENTS BY TENANT 9.1 Maintenance of Premises 9.2 Leasehold Improvements 9.3 Liens 9.4 Removal of Leasehold Improvements - Term 9.5 Removal of Leasehold Improvements - Expiration of Term 10. TRANSFERS BY TENANT 10.1 Successors to Tenant 10.2 Licenses, Franchises and Concessions 10.3 Assignment or Subletting 10.4 Change in Control 10.5 Advertising of Premises 11. TRANSFER BY LANDLORD, SUBORDINATION AND ATTORNMENT 11.1 Transfer by Landlord 11.2 Subordination and Attornment 11.3 Estoppel Certificates 12. TERMINATION AND RENT ABATEMENT 12.1 Termination by Tenant 12.2 Termination by Landlord 12.3 Abatement of Rent 13. LANDLORD'S REMEDIES 13.1 Default and Re-Entry 13.2 Re-letting and Sale of Personalty 13.3 Right of Landlord to Remedy 13.4 Bankruptcy of Tenant 13.5 Interest 13.6 Costs 13.7 Confession of Judgment for Rent 13.8 Confession of Judgment for Possession 14. REGULATIONS 14.1 Purpose 14.2 Observance 14.3 Enforcement 15. MISCELLANEOUS 15.1 Exhibiting Premises 15.2 Name of Building 15.3 Relocation 15.4 Notice 15.5 Compliance with Laws, etc 15.6 Governing Law and Severability 15.7 Recordation 15.8 Condemnation 15.9 Rider Schedule "A" Legal Description Schedule "B" Floor Plan Schedule "C" Regulations THIS LEASE MADE in duplicate this _____ day of _______________, 199____ 1710-20 SENTRY EAST ASSOCIATES, L.P. (the "Landlord") of the FIRST PART, - and - NCO Financial System, Inc. (D.B.A. The Sentry Group) (the "Tenant") of the SECOND PART, WHEREBY the parties agree as follows: ARTICLE I INTERPRETATION 1.1 Defined Terms - General. In this lease: "Building" means that certain building known as 1710 Walton Road, Blue Bell, Pa. 19422 located on the Land. "Common Areas" means those parts of the Project designated by the Landlord for common use by the Landlord and the tenants of the Project, including without limitation, the landscaped portions of the Project, the public sidewalks and the landscaped portions of the streets adjacent to the Project, the Delivery Facilities, and Parking Facilities, if any. "Common Service Areas" means those parts of the Project, whether or not within the Building, designated by the Landlord which provide services to the Project; "Cost of Utilities" means the cost of electricity and other utilities supplied to tenants of premises in the Building as determined by the Landlord who in making its determination shall take into account the readings of any electrical check meters installed by the Tenant; "Delivery Facilities" means those portions of the Project designated by the Landlord as facilities for common use by the Landlord and tenants of the Project for deliveries; "Expert" means any architect, engineer, land surveyor, chartered accountant, or other professional consultant, as the case may be, appointed by the Landlord and qualified in the opinion of the Landlord to perform the particular function; "Expiration of the Term" means the termination of this lease by either passage of time or operation of any of its provisions; "Fixed Rent" means the amount payable under section 3.1(a); "Insurance" means coverage with respect to the following risks in amounts equal, in the case of the Landlord, to those maintained by prudent owners of like buildings and, in the case of the Tenant, to those maintained by prudent tenants of like premises: (a) comprehensive general liability; (b) all risks coverage; - 1 - (c) in the case of the Landlord: (i) boiler and machinery; and (ii) loss of rental income by reason of damage; and (d) in the case of the Tenant, comprehensive general liability; and in the case of the Landlord, such other coverage as the Landlord may require to maintain and in the case of the Tenant, such other coverage as the Landlord may require, in each case having regard to the risks which are customarily insured against by prudent landlords and tenants of like premises; "Landlord's Cost" means with respect to any cost incurred by the Landlord the actual amount thereof and a fee on account of management and overhead, said fee to be equal to the amount the Landlord might reasonably pay to a third party for the administration and management of the Building. "Leasehold Improvements" means the fixtures and improvements made by or on behalf of the Tenant in the Premises; "Notice" has the meaning set forth in section 15.4; "Parking Facility", if any, means those portions of the Project designated by the Landlord for parking; "Premises" means the portion of the Building, excluding its exterior, outlined in red on the floor plan attached to, and forming part of, this lease, currently known as suite 200. "Prime" means the rate of interest from time to time announced by Mellon Bank, N.A. as its prime rate; "Project" means the improvements constructed on the Land including the Building, the Common Areas (whether on or adjacent to the Land), the Parking Facility, if any, and any other building; "Land" means the land as described in Schedule "A" attached hereto. "Rent" means the amounts payable by the Tenant to the Landlord under this lease; "Term" means the term of this lease as specified in section 2.3 and any permitted overholding; and "Unavoidable Delay" means any event, beyond the control of the party affected thereby which prevents the fulfillment by such party of any obligation hereunder and not caused by such - 2 - party and not avoidable by the exercise of reasonable effort or foresight by such party. 1.2 Defined Terms - Operating Costs and Taxes. For the purpose of calculating the Proportionate Share of Operating Costs and Taxes: "Fiscal Year" means a calendar year provided that the Landlord may by Notice specify an annual date upon which each subsequent Fiscal Year is to begin, in which event the Fiscal Year which would otherwise be current when such annual date first occurs thereafter shall terminate on the preceding day; "Operating Costs and Taxes" means for a Fiscal Year the aggregate costs paid or payable by the Landlord in accordance with generally accepted accounting principles applied in the real estate management industry on account of Taxes, Insurance and the operation, management, maintenance and repair of the Building and on a proportionate basis as hereinafter provided, the Land, the Common Areas, the Common Service Areas and those costs associated with Condominium Association Fees, together with a charge, the annual cost of which for the purpose of this Lease shall be deemed to be management fees paid by the Landlord for the administration and management of the Building and the Land, and, if the Landlord itself manages the Building and the Land, a fee equal to the amount the Landlord might reasonably pay to a third party for the administration and management of the Building and the Land. Without limiting the generality of the foregoing, Operating Costs and Taxes shall also include the cost amortized at Prime of all capital improvements made after the Building is substantially completed, which (i) have the effect of reducing the costs which would otherwise be included in Operating Costs and Taxes, or (ii) are required by any competent governmental authority. Operating Costs and Taxes shall exclude the following: (i) costs directly recoverable from tenants or insurers; (ii) debt service, depreciation or other costs of a capital nature and interest on any of the foregoing, except as hereinafter provided; (iii) costs of procuring any lease; and (iv) income, corporate and other taxes of a personal nature of the Landlord to the extent not imposed in lieu of Taxes. The proportion of Operating Costs and Taxes attributable to the Land, Common Areas and the Common Service Areas shall be allocated equitably by the Landlord to all buildings forming part of the Project and will be based to the extent possible - 3 - on the respective aggregate areas of Rentable Space in the Building and all other buildings forming part of the Project. If at any time there are unoccupied premises in the Building, the Landlord may make an equitable adjustment of the amount of Operating Costs and Taxes by reason of the fact that unoccupied premises result in lower costs in order that the tenants of the occupied premises will bear the actual amount of the Operating Costs and Taxes attributed to their respective premises; "Taxes" means all taxes and other charges imposed by any lawful authority against the Land and any improvements thereon or upon the Landlord in respect thereof and all costs relating to any appeal thereof, and includes (without limiting the generality of the foregoing) any Rental Taxes; "Proportionate Share" means the ratio, the numerator of which is the Rentable Space of the Premises and the denominator of which is the aggregate Rentable Space of the Building (exclusive of any storage areas); "Rentable Space" whether in the case of a whole floor of the Building or in the case of premises comprising part of a floor of the Building shall be determined by the Landlord's architect or land surveyor according to the American National Standard for measuring floor area in office buildings as established by the Builders Owners and Managers Association International and in effect as of the date of commencement of the Term; "Rental Taxes" means any tax or duty imposed upon the Landlord which is measured or based in whole or in part directly upon the Rent payable under this lease or services provided by the Landlord whether existing at the date hereof imposed by any governmental authority. 1.3 Number, Gender and Joint and Several Liability. The necessary grammatical changes required to make the provisions of this lease apply in the plural sense where the Tenant comprises more than one entity and to corporations, associations, partnerships or individuals, male or female, shall be assumed as though in each case fully expressed. If the Tenant is more than one person or entity its liability shall be joint and several. If the Tenant is a partnership each person who is or becomes a member of the partnership or any successor partnership shall be jointly and severally liable. 1.4 Procedure for Approval. Any request for approval shall be requested by Notice and in the absence of reply given by Notice not later than 15 days after Notice of the request has been received, or such other period of time as is otherwise expressly provided in this lease, the approval shall be deemed to have been given unless the approval may by the terms of - 4 - this lease be withheld in the discretion of the party whose approval is requested. Each approval shall be in writing unless by operation of the preceding sentence it is deemed to have been given. If either party withholds its approval it shall give Notice of its reason unless the approval may by the terms of this lease be withheld in its discretion. 1.5 Divisions. All references in this lease to articles, sections and other subdivisions are to those in this lease. 1.6 Entire Agreement. This lease and the regulations imposed by the Landlord pursuant to section 14.1 constitute the entire agreement between the Landlord and the Tenant concerning the subject matter of this lease. This lease may only be amended by an agreement in writing signed by the parties hereto. 1.7 Reasonableness. The Landlord and the Tenant shall, except as otherwise expressly provided in this lease, each act reasonably, having regard to the fact that they are the owner and a tenant, respectively, of a good quality office building, in the exercise and the enforcement of their respective rights under this lease. Each right shall be exercisable and enforceable from time to time, except as aforesaid. 1.8 Nature of the Lease. This lease is a completely net lease to the Landlord and accordingly, except as otherwise expressly provided in this lease, the Landlord has no obligations to the Tenant with respect to either the Premises, the Building, the Common Areas, the Common Service Areas, the Parking Facility, or if any, the Project. ARTICLE II DEMISE AND TERM 2.1 Demise-Premises. The Landlord hereby leases the Premises to the Tenant and the Tenant hereby leases and accepts the Premises from the Landlord, (being 2,850 square feet of Rentable Space and currently known as suite 200) to have and to hold during the Term, subject to the terms of this lease. 2.2 Licenses. The Landlord hereby grants to the Tenant throughout the Term and subject to control by the Landlord, a non-exclusive license, revocable at any time upon Notice by the Landlord: (a) to use those parts of the Common Areas giving access to the Premises and the Parking Facility, if any; (b) to have its name displayed on the main lobby directory board for the Building, on the floor - 5 - lobby directory board on each floor on which the Premises are located and on the main door to the Premises, all such signs to be under the exclusive control of the Landlord and to conform to the uniform pattern of identification signs for tenants of the Building prescribed by the Landlord; and (c) if the Premises constitute one or more full floors of the Building, to have a sign displaying the name of the Tenant in the elevator lobby of each such floor provided that the design of the sign has been approved by the Landlord. 2.3 Term. The Term shall be ten (10) years beginning January 1, 1996 at 12:00 Midnight and ending the last day of December, 2005 at 5:00 PM. 2.4 Surrender on Termination. Forthwith upon the Expiration of the Term, the Tenant shall vacate and deliver up possession of the Premises in a broom clean condition and in good and substantial repair in accordance with the Tenant's obligation under this lease to repair the Premises, but subject to the Tenant's rights and obligations in respect of removal in accordance with sections 9.4 and 9.5. At the same time the Tenant shall surrender to the Landlord at the place then fixed for the payment of Rent all keys and other devices which provide access to the Premises, the Building or any part thereof and shall inform the Landlord of all combinations to locks, safes and vaults, if any, in the Premises. 2.5 Holding Over. If the Tenant shall continue to occupy the Premises at the expiration of this lease with or without the consent of the Landlord and without any further written agreement the Tenant shall be a monthly tenant at two hundred (200%) of the monthly Fixed Rent herein reserved for the last year of the Term and otherwise on the terms and conditions herein set forth, except as to the length of tenancy. ARTICLE III RENT 3.1 Items of Rent. The tenant shall pay to the Landlord: (a) $45,600.00 per annum in 12 equal Installments of $3,800.00 each based on the rate of $16.00 per square foot per annum of Rentable Space. (b) the Proportionate Share of Operating Costs and Taxes over Base Year 1995; (i) any additional services and equipment agreed to be provided by the Landlord at the request of the Tenant; (c) the amount, if any, by which the Operating - 6 - Costs and Taxes attributed to the Premises by the Landlord exceeds the Proportionate Share of Operating Costs and Taxes if such excess is occasioned by the use or improvement of the Premises. 3.2 General. All amounts payable by the Tenant to the Landlord under this lease shall be deemed to be Rent. The Tenant shall pay Rent without abatement, deduction or set-off, except as expressly provided, in lawful money of the United States to such person and at such address as the Landlord may advise. The Tenant shall pay items of Rent of a recurring nature in advance on the first day of each month of the Term and shall pay other items of Rent within 15 days of the delivery of an invoice therefor. The Landlord shall estimate and may re-estimate, items of Rent of a recurring and variable nature for each Fiscal Year and advise the Tenant thereof. If the Commencement Date is not the first day of a month or if the Expiration of the Term does not occur on the last day of a month, Rent for the partial month shall be pro-rated on a per diem basis. 3.3 Final Determination of Certain Items of Rent. The Landlord shall within 180 days after the end of each Fiscal Year provide to the Tenant a statement (the "Statement") setting out in detail the Proportionate Share of Operating Costs and Taxes and such other items of Rent of a recurring and variable nature for such Fiscal Year. If the aggregate monthly Installments on account thereof paid during such Fiscal Year differ from the actual amount thereof set forth in the Statement, the Tenant shall pay or the Landlord shall refund the difference within 30 days after the Statement is provided. The Tenant may within the 60 day period after the Statement is provided examine the books and records of the Landlord relating to the Project. The Tenant may by Notice given within such 60 day period but not otherwise dispute the Statement whereupon the matter shall be finally resolved by an Expert. If the Expert determines that the amount payable by the Tenant has been overstated by more than three percent(3%) the Landlord shall pay the fee of the Expert. If the Expert determines that the amount payable by the Tenant has not been overstated by three percent (3%) or more the Tenant shall pay such fee. Any adjustment required to any previous payment made by the Tenant or the Landlord by reason of any such determination shall be made forthwith and shall bear interest at a rate equal to Prime plus one percent (1%) per annum from the date the actual overpayment or underpayment is made. 3.4 Insufficient Funds. The Tenant agrees that if any of the Tenant's cheques are returned for lack of sufficient funds, the Tenant shall pay to the Landlord upon receipt of the Landlord's invoice for same, a minimum administrative fee - 7 - of not less than Fifty Dollars ($50.00). 3.5 Deposit. The Landlord acknowledges receipt of the Deposit in the amount of $00.00 prior to the execution of this lease, which sum shall be deposited in an account of Landlords choice. The Deposit shall be applied as a security deposit for the due performance by the Tenant of all the covenants and obligations on its part herein contained, the Landlord hereby reserving unto itself at its sole discretion the right to apply such sum to any damages resulting from any default by the Tenant of any of its covenants and obligations hereunder or towards the payment or reduction of any claim of the Landlord against the Tenant including monthly Rent. If the Deposit hereunder shall be applied in accordance with the provisions hereof, the Tenant covenants to provide sufficient funds to ensure that the Deposit remains at the level herein before indicated within ten (10) days of receipt of the Landlord's Notice therefor. Provided the Tenant is not then in default under the lease and provided that the Tenant has not, in any way, damaged the Premises, the Landlord shall, within thirty (30) days of the Tenant's vacating the Premises, return to the Tenant the balance of the security deposit referred to in section 3.5. Landlord shall be under no obligation to refund any interest that may have accrued on said deposit. ARTICLE IV USE OF PREMISES 4.1 Use. The Premises shall be used for general office purposes only and not for any other purpose without the prior written consent of the Landlord, which consent may be withheld at the discretion of the Landlord, the Tenant shall not permit any part of the Premises to be occupied by any person other than the Tenant and its employees and any subtenant permitted under section 10.3 and the employees of such subtenant. 4.2 Waste and Nuisance. The Tenant shall not commit or permit any waste or damage to the Premises or any manner of use causing annoyance to other tenants of the Project. 4.3 Extraordinary Equipment. The Tenant shall not install any equipment which might affect the capacity of either the structure or the basic systems of the Building. 4.4 Fire Prevention and Energy Conservation. The Tenant shall comply with the requirements of the Landlord with respect to fire prevention and, with respect to the Premises, energy conservation. - 8 - 4.5 Exterior Appearance of Premises. The Tenant shall keep the exterior appearance of the Premises tidy and business-like and shall not erect any sign or other like object within the Premises which is visible from the exterior of the Premises. ARTICLE V LIMITATION OF LIABILITIES 5.1 Unavoidable Delay. Except as herein otherwise expressly provided, if and whenever and to the extent that either the Landlord and the Tenant shall be prevented, delayed or restricted in the fulfillment of any obligations hereunder in respect of the supply or provision of any service or utility, the making of any repair, the doing of any work or any other thing (other than the payment of Rent) by Unavoidable Delay, the time for fulfillment of such obligation shall be extended during the period in which such circumstance operates to prevent, delay or restrict fulfillment thereof, and the other party to this Lease shall not be entitled to compensation for any inconvenience, nuisance or discomfort thereby occasioned nor shall Rent abate. 5.2 Limitation of Landlord's Liability. The Landlord shall only be liable for any personal injury or death suffered by the Tenant or any person in its employ who may be upon the Premises or for the loss or any damage to any property located within the Premises of the Tenant or of any employee of the Tenant if caused by the actual fault or negligence of the Landlord. It is expressly understood and agreed by Tenant that none of Landlord's covenants, undertakings or agreements are made or intended as personal covenants, undertakings or agreements by Landlord or its partners, and any liability for damages or breach or nonperformance by Landlord or for damages caused by or arising from any other action whatsoever, shall be collectable only out of Landlord's interest in the Project and no personal liability is assumed by, nor at any time by be asserted against, Landlord or its partners or any of its or their officers, agents, employees, legal representatives, successors or assigns, if any, all such liability, being expressly waived released by Tenant. 5.3 Indemnity. The Tenant and the Landlord shall each indemnify and save the other harmless in respect of: (a) all claims and liabilities arising from any act or omission of the indemnitor or any person for whose conduct the indemnitor is responsible and the costs incurred by the indemnitee in connection with any action pertaining thereto; and (b) any damage suffered by the indemnitee by reason - 9 - of the breach by the indemnitor of any of its obligations under this lease and the costs incurred by the indemnitee in connection with any action pertaining thereto. ARTICLE VI TAXES 6.1 Landlord's Taxes. The Landlord shall pay before delinquency the Taxes relating to the Building. 6.2 Tenant's Taxes. The Tenant shall pay before delinquency all taxes and other charges imposed by any lawful authority against the Tenant or any sub-tenant, licensee or occupant of the premises which if not paid would constitute either a lien on either the Land or the Building or a liability of the Landlord. 6.3 Assessment Appeals. The Tenant shall not conduct any appeal from any governmental assessment or determination of the value of the Land, the Building or the Premises. ARTICLE VII INSURANCE 7.1 Landlord's Insurance. The Landlord shall maintain Insurance with respect to its interest in the Building, the Common Areas and the Parking Facility, if any. Such insurance shall include, if available, a waiver of any right of subrogation with respect to property insurance only, against the Tenant. 7.2 Tenant's Insurance. The Tenant shall maintain Insurance with respect to its interest in the Premises, the Leasehold Improvements and all operations of the Tenant in and from the Premises in the amounts and forms as specified below. The Tenant shall at the request of the Landlord provide the Landlord with certificates of such insurance. If both the Landlord and the Tenant have claims to be indemnified under any such insurance, the indemnity shall be applied first to the settlement of the claim of the Landlord and the balance to the settlement of the claim of the Tenant. Such insurance shall include the Landlord and any Mortgagee designated by Notice by the Landlord as named insureds as their interests may appear and, if available, shall contain a cross-liability clause protecting the Landlord in respect of claims by the Tenant as if the Landlord were separately insured and a provision prohibiting the insurer from materially altering or canceling the coverage without first giving the Landlord at least 30 days' prior written notice thereof. Such insurance shall include, if available, a waiver of any right of subrogation with respect to property insurance only, against - 10 - the Landlord. (a) Liability Insurance. Tenant shall provide on or before it enters the Demised Premises and shall keep in force during the term, for the benefit of Landlord and Tenant, liability insurance against any liability occasioned by any occurrence in or about the Demised Premises or any appurtenance thereto. Such policy is to be written in a combined single limit of at least $1,000,000 for injury or death to one or more than one person arising from any one occurrence and with respect to property damages. In addition, Tenant shall maintain and provide a $2,000,000 umbrella policy on terms which Landlord shall specify. (b) Fire Insurance. Tenant shall insure and keep its equipment, personal property and all leasehold improvements benefitting the Demised Premises or elsewhere on the Real Estate insured against damage by fire, water damage and other casualties and risks covered by "All Risk" and extended coverage insurance. Landlord shall not carry insurance of any kind on Tenant's property, and, except as provided by law or by reason of its fault or its breach of any of its obligations hereunder, shall not be obligated to repair any damage thereto or replace the same. (c) Worker's Compensation. Tenant shall maintain Worker's Compensation insurance, insuring against and satisfying Tenant's obligations and liabilities under the applicable Worker's Compensation laws. Tenant shall also maintain Employers Liability Insurance in the amount of at least $1,000,000. ARTICLE VIII OPERATION, SERVICES, MAINTENANCE, REPAIR AND ACCESS BY LANDLORD 8.1 Quiet Enjoyment. The Landlord covenants with the Tenant for quiet enjoyment. 8.2 Standard of Operation. The Landlord shall operate and manage the Building, the Land, the Common Areas, the Common Service Areas and the Parking Facility, if any, to the standard of a good quality office building, subject to the limitations arising from the design of the Building and its basic systems. 8.3 Services to Premises. The Landlord shall provide the following services to the Premises: (a) heat, ventilation and air conditioning as required for the comfortable use and occupancy of the Premises during the normal business hours as determined by the Landlord from time to time (and being, at the date of this lease, 8:00 a.m. to 6:00 p.m. Monday to Friday except on legal or statutory holidays); - 11 - (b) electrical power for lighting and office equipment; (c) replacement of tubes and ballasts; (d) janitorial services; 8.4 Services to Building. The Landlord shall provide for the Tenant and others the following services: (a) elevators; (b) washroom facilities on each floor of the Building on which the Premises are located; (c) heat, ventilation, air conditioning, lighting, and janitorial service in the appropriate interior portions of the Common Areas; (d) snow removal and landscape maintenance for the appropriate exterior portions of the Common Areas; (e) exterior window washing at such intervals as landlord deems appropriate; (f) garbage removal; and (g) janitorial services for the appropriate interior portions of the Common Areas. 8.5 Additional Services. The Landlord, if it shall from time to time so elect, shall have the exclusive right, by way of Additional Services, to provide or have its designated agents or contractors provide any janitorial or cleaning services to the Premises required by the Tenant which are additional to those required to be provided by the Landlord under section 8.3, including the Additional Services which the Landlord agrees to provide by arrangement and to supervise the moving of furniture or equipment of the Tenant and the making of repairs or alterations conducted within the Premises, and to supervise or make deliveries to the Premises. The cost of Additional Services (including the Landlord's administration fee) provided to the Tenant, whether the Landlord shall be obligated hereunder or shall elect to provide them as Additional Services, shall be paid to the Landlord by the Tenant from time to time promptly upon receipt of invoices therefor from the Landlord. The cost of Additional Services charged directly to the Tenant and other tenants shall be credited in computing Operating Costs and Taxes to the extent that they would otherwise have been included. 8.6 Extra Operating Costs. Upon request by the Tenant, the Landlord may agree from time to time to arrange for extra - 12 - heating, ventilating and air conditioning supply, electrical supply or for the supply of other services to the Premises above those normally provided to tenants of the Building or outside of normal business hours. The Tenant will pay to the Landlord in the manner in which Operating Costs and Taxes are paid from time to time hereunder any and all additional costs and expenses of the Landlord which may arise in respect of the use by the Tenant of the Premises for business hours that do not coincide with normal business hours for the Building generally or that may arise in respect of extra heating, ventilating and air conditioning supply, electrical supply and other services which are arranged to be provided to the Tenant as a result of its activities over and above those normally provided to the tenants of the Building or outside of normal business hours, plus an administration fee equal to fifteen percent (15%) of each component thereof. The Landlord reserves the right to install at the Tenant's expense meters to check the Tenant's consumption of electricity, water or other utilities. 8.7 Maintenance and Repair. The Landlord shall maintain and repair the following: (a) the Building and its basic systems but not the Premises or the premises of other tenants; (b) the structural elements of the Premises; and (c) the Common Areas, the Common Service Areas and the Parking Facility, if any, except where such maintenance and repair is required due to the negligence of the Tenant or those for whom the Tenant is in law responsible, in which circumstances the Tenant shall be liable for the cost of such maintenance and repair. 8.8 Access by Landlord. The Landlord may enter the Premises in order: (a) to perform its obligations hereunder; (b) to install, maintain and repair equipment within or about the Premises for the supply of services to other premises in the Building; (c) to make repairs or alterations to the Building; (d) to take such steps as the Landlord may deem necessary for the safety or preservation of the Project; and (e) to inspect the state of repair of the Premises. Prior to the exercise of this right the Landlord whenever - 13 - possible shall consult with the Tenant in order to minimize inconvenience to the Tenant and in its exercise of this right, shall observe the security requirements of the Tenant. 8.9 Interruption of Services. Landlord shall have no responsibility or liability to Tenant, nor shall there be any abatement for rent for any failure to supply any of said services and facilities that Landlord has agreed to supply hereunder during such period as such services and facilities are out of order, undergoing repair or if prevented by labor disorders, strikes, accidents or other causes beyond Landlord's control. If Landlord, in its sole discretion, deems it advisable or convenient to interrupt any of said services to make repairs, alterations or improvements or because of labor disturbances, strikes, accidents or causes beyond Landlord's control, Landlord may, after prior written notice to Tenant, do so for the period that Landlord deems expedient and advisable without any abatement in rent or other liability to Tenant. ARTICLE IX MAINTENANCE, REPAIR AND IMPROVEMENTS BY TENANT 9.1 Maintenance of Premises. The Tenant shall maintain and repair the Premises and the Leasehold Improvements. 9.2 Leasehold Improvements. The Tenant may make Leasehold Improvements provided that: (a) the Tenant shall furnish the Landlord with professionally prepared plans and specifications therefor; (b) Such plans and specifications shall be approved by the Landlord and, at its election, any Expert; (c) the Tenant shall advise the Landlord of the identity of its contractors and tradesmen and their respective labor affiliations; (d) the Landlord shall either (i) approve any contractors proposed by the Tenant to perform any work which may affect the structure, the walls or the systems of the Building or (ii) require that any such work be performed by either the Landlord or its contractors in which case the Tenant shall pay the Landlord's Cost on account thereof; the Landlord may refuse to allow the contractors and tradesmen of the Tenant access to the Building if their labor affiliations may conflict with those of the Landlord or those employed by it or if they are - 14 - not competent; (e) the Tenant shall produce evidence satisfactory to the Landlord as to the existence of all necessary permits and sufficient insurance coverage; including, but not limited to, Waivers of Liens filed on behalf of the Landlord; (f) the Tenant shall pay the Landlord's Cost on account of the fees of any Expert appointed to review the plans and specifications, whether or not the work proceeds; (g) construction of the Leasehold Improvements shall be performed in accordance with the plans and specifications submitted to the Landlord and, where applicable, approved by the Landlord, subject to any conditions or regulations imposed by the Landlord and in a good and workmanlike and expeditious manner using good quality materials; (h) the Landlord may inspect construction as it proceeds (the onus being on the Tenant to advise the Landlord whenever any phase has been completed so that an inspection can be made); and (i) if the Tenant fails to observe any of the requirements of this section the Landlord may require that construction stop and that the Premises be restored to their prior condition failing which the Landlord may do so and the Tenant shall pay the Landlord's Cost on account thereof. Upon installation of any Leasehold Improvements, such Leasehold Improvements shall become the property of the Landlord and shall not be removed by the Tenant except as hereinafter provided. 9.3 Liens. If any lien under applicable mechanics lien statutes of the Commonwealth of Pennsylvania, as amended from time to time, or any successor statute is registered against the title to the Building and such lien relates to material, labor or any service alleged to have been provided to the Tenant, the Tenant shall upon Notice by the Landlord cause such lien to be discharged within 5 days after such Notice has been given. If the Tenant shall fail to cause any such lien to be discharged, as aforesaid, then in addition to any other rights or remedy of the Landlord, the Landlord may (but shall not be so obligated) discharge same by paying the amount claimed to be due into Court or directly to any such lien - 15 - claimant and the amount so paid by the Landlord and all costs and expenses, including reasonable Attorneys' fees, incurred for the discharge of such lien shall be due and payable by the Tenant to the Landlord as Rent upon receipt of the Landlord's invoice for same. 9.4 Removal of Leasehold Improvements - Term. The Tenant may remove Leasehold Improvements either upon the exercise of its rights under, and upon the terms of, section 9.2 or with the approval of the Landlord which may be withheld in its discretion. 9.5 Removal of Leasehold Improvements - Expiration of Term. The Landlord may upon not less than 30 days' Notice (except in the case of default and re-entry in which case no prior Notice need be given) require the Tenant before the Expiration of the Term to remove some or all Leasehold Improvements and to restore the Premises to their original condition, the cost of which shall be borne exclusively by the Tenant. Upon the Expiration of the Term, all Leasehold Improvements (including carpeting and light fixtures) and all personal property of the Tenant remaining in the Premises shall become the property of the Landlord. ARTICLE X TRANSFERS BY TENANT 10.1 Successors to Tenant. This lease shall inure to the benefit of and be binding upon the executors, administrators, successors and assigns of the Tenant, subject to the limitations of this Article. 10.2 Licenses, Franchises and Concessions. The Tenant shall not suffer or permit any part of the Premises to be used or occupied by any persons other than the Tenant, any subtenants permitted under section 10.3 and the employees of the Tenant and any such permitted subtenant, or suffer or permit any part of the Premises to be used or occupied by any licensee, franchisee or concessionaire, or suffer or permit any persons to be upon the Premises other than the Tenant, such permitted subtenants and their respective employees, customers and others having lawful business with them. 10.3 Assignment or Subletting. The Tenant may assign this lease or sublet the Premises in whole or in part provided that: (a) the Tenant shall by Notice first offer to surrender this lease in respect of the whole or the part of the Premises (the "Subject Area") which the Tenant wishes to assign or sublet. Such offer shall be made not less than 60 days prior to the date on which the Tenant proposes - 16 - that the surrender be effective. The Landlord shall have a period of 15 days after any such offer is made to accept or to decline by Notice; (b) if the Landlord accepts the offer of the Tenant to surrender the whole or any part of the Premises pursuant to subsection (a) of this section, the Tenant shall do so upon the date specified in its Notice. If part of the Premises is to be surrendered, the Rent attributable by the Landlord thereto shall be apportioned by the Landlord and paid to the date of surrender and the Rent for the remainder of the Premises shall thereafter abate and become adjusted in accordance with such attribution. The Landlord shall perform all work required to separate the surrendered part from the remainder and to make such part capable of separate use and the Tenant shall pay the Landlord's Cost on account thereof. The provisions of section 9.5 shall apply to the surrendered part of the Premises; (c) if the Landlord declines such offer or does not respond within the aforesaid period, the Tenant may within the next 180 day period either assign this lease or sublet the Subject Area provided that: (i) the Tenant shall have received a bona fide written offer; (ii) the Tenant shall have provided to the Landlord a true copy of such offer and adequate information to enable the Landlord to assess the credit worthiness, reputation and business of the proposed assignee or subtenant; (iii) the Tenant shall have obtained the approval of the Landlord to such assignment or sublease (which may be withheld in its discretion and for any reason); (iv) the Tenant shall assign or sublet, as the case may be, only upon the terms of the offer provided to the Landlord; and (v) the proposed subtenant or assignee shall have agreed with the Landlord to observe and perform all the obligations of the Tenant under this lease with respect to the Premises or the Subject Area; - 17 - (d) if within the aforesaid 180 day period the Tenant has not assigned this lease or sublet the Subject Area, the provisions of subsection (a) of this section shall again apply; and (e) the Tenant shall pay the Landlord's Cost on account of any request for approval and, if applicable, the preparation of the implementing documentation, in such form as may be acceptable to the Landlord; (f) Notwithstanding any assignment or subletting, the Tenant shall remain jointly and severally liable on this lease and shall not be relieved from performing any of the terms, covenants and conditions of this lease. 10.4 Change in Control. Any change in the effective control of the Tenant (including, without limitation, changes in the shareholders, directors, partners or officers of the Tenant) shall be deemed to be an assignment of the Premises to which the provisions of Section 10.3 shall apply. The Tenant shall provide to the Landlord the information described in Section 10.3(c)(ii) with respect to the person or persons to whom control is passing. 10.5 Advertising of Premises. The Tenant shall not advertise or allow the Premises to be advertised as being available for lease without the approval by the Landlord of the form and content of such advertisement which shall not mention any financial terms. ARTICLE XI TRANSFER BY LANDLORD, SUBORDINATION AND ATTORNMENT 11.1 Transfer by Landlord. This lease shall enure to the benefit of and be binding upon the successors and assigns of the Landlord. If the Landlord transfers or leases the Building, or any part thereof, and to the extent that the transferee or lessee becomes liable to perform the obligations of the Landlord hereunder, the Landlord shall thereupon no longer be liable. 11.2 Subordination and Attornment. The Tenant shall upon Notice: (a) subordinate this lease to any mortgage of the Building or the Land to the intent that this lease and all the interest of the Tenant in the Premises shall be subject thereto as fully as if such mortgage had been executed and registered and the money thereby secured had been advanced before the execution and delivery of this lease; and - 18 - (b) agree to attorn to any mortgagee under such mortgage; 11.3 Estoppel Certificates. The Tenant shall certify in writing to the Landlord or as it may direct that this lease is unmodified and in full force and effect (or if modified, stating the modifications and that this lease is in full force and effect as modified), the dates to which Rent has been paid, whether or not there is any existing default on the part of the Landlord of which the Tenant has notice and any other requested information pertaining to the performance by the Landlord and the Tenant of their respective obligations hereunder. The Tenant shall provide such statement within Ten (10) days after written Notice from the Landlord requesting same. Any such statement may be conclusively relied upon by any purchaser or mortgagee of the Building or Land. ARTICLE XII TERMINATION AND RENT ABATEMENT 12.1 Termination by Tenant. If the Premises or any other part of the Building, the Parking Facility, if any, the Common Areas or the Common Service Areas are damaged and the Landlord is thereby unable to fulfil its obligations to the Tenant and if in the opinion of an Expert, which opinion shall be given not more than 45 days after the date of such damage, the damage cannot be repaired within a 180 day period (employing normal construction methods without overtime or other premium unless the Landlord otherwise instructs the Expert) then the Tenant may by Notice given not more than 15 days after receipt by the Tenant of the opinion of the Expert (whose fee shall be payable by the Tenant) terminate this lease with effect as of the date on which such Notice is given. 12.2 Termination by Landlord. If any part of the Building, the Parking Facility, if any, the Common Areas or the Common Service Areas is damaged and the Landlord is thereby unable to fulfil its obligations to the Tenant or to any other tenant of the Project and if in the opinion of an Expert, which opinion shall be given not more than 45 days after the date of the damage, the damage cannot be repaired within a 180 day period (employing normal construction methods without overtime or other premium), then the Landlord may by Notice given not more than 15 days after receipt by the Landlord of the opinion of the Expert, terminate this lease with effect either (i) as of the date on which such Notice is given, if the Premises have been materially damaged, or (ii) if the Premises have not been so damaged, then as of the date stipulated by the Landlord in its Notice, which shall be not less than 60 days after the date on which it is given. 12.3 Abatement of Rent. If the Premises are damaged to the extent that they are incapable, notwithstanding a reasonable - 19 - amount of inconvenience to the Tenant, of being used by the Tenant for their intended purpose and if the damage has not been caused by any act or omission of either the Tenant or those for whom it is responsible, Rent shall abate with effect as of the date of the damage in proportion to the area of the Premises so damaged until either: (a) the Landlord and the Tenant, each acting diligently, have completed their respective obligations to repair; or (b) the first to occur of (i) the date the proceeds of any loss of rental income insurance attributable to the damage are no longer available for application on account of the abatement of the Rent payable under this lease and the rent payable under any other leases of premises in the Building affected by the same event of damage or (ii) the period of time during which such proceeds would have been available if the Landlord had performed its obligation to maintain the coverage described in part (c)(ii) of the definition of Insurance has expired. ARTICLE XIII LANDLORD'S REMEDIES 13.1 Default and Re-Entry. If (i) the Tenant shall fail to make any payment of Rent as and when same is due to be paid hereunder and such failure to pay shall continue for five (5) days or (ii) the Tenant fails to observe or perform any of its other obligations hereunder after Notice specifying the default and a period to cure has been given, then the Tenant shall be deemed to be in default and the Landlord may at any time thereafter re-enter the Premises and terminate this lease. In the event that rent is not paid by the 5th day of the month, a two hundred ($200.00) dollar late charge shall apply. Notwithstanding anything contained in this lease to the contrary, in the event the Tenant fails to pay any item of Rent when same is due to be paid hereunder or fails to perform any other obligations hereunder, more than twice in any twelve (12) month period, then there shall be no obligation on the part of the Landlord to give the Tenant written Notice and the Landlord shall be entitled to proceed without notice in accordance with the Landlord's rights pursuant to Article XIII hereof. 13.2 Re-letting and Sale of Personalty. Whenever the Landlord becomes entitled to re-enter upon the Premises under any provision of this lease the Landlord in addition to all - 20 - other rights it may have, shall have the right, but shall not be obligated, as agent of the Tenant to enter the Premises and re-let them (for a term or terms shorter or longer than the balance of the Term, granting reasonable concessions in connection therewith) and to receive the Rent therefor and as the agent of the Tenant to take possession of any furniture or other property thereon and to sell the same at public or private sale without Notice and to apply the proceeds thereof and any Rent derived from re-letting the Premises upon account of the Rent due and to become due under this lease and the Tenant shall be liable to the Landlord for the deficiency, if any. 13.3 Right of Landlord to Remedy. If the Tenant defaults hereunder, the Landlord may proceed to remedy the default, including the making of any payments due or alleged to be due by the Tenant to third parties, and the Tenant shall pay on demand the Landlord's cost, plus interest on account thereof, all without prejudice to the Landlord's rights and remedies for such default by the Tenant. 13.4 Bankruptcy of Tenant. If a substantial portion of the property of the Tenant on the Premises is seized or taken in execution or attachment by a creditor of the Tenant or if the Tenant makes an assignment for the benefit of creditors or if a receiver-manager is appointed to control the conduct of the business on or from the Premises or if the Tenant becomes bankrupt or insolvent or takes the benefit of any act now or hereafter in force for bankrupt or insolvent debtors or if an order is made for the winding-up of the Tenant, the next ensuing 3 months' rent immediately will become due and payable as accelerated rent and the Landlord may re-enter and take possession of the Premises as if the Tenant were holding over and this lease shall forthwith be terminated upon Notice by the Landlord to this effect. Accelerated rent will be recoverable by the Landlord in the same manner as the Rent hereby reserved. 13.5 Interest. The Tenant shall pay to the Landlord interest at a rate equal to Prime plus 5% per annum on all arrears of Rent and on any payment made by Landlord for the benefit or on behalf of Tenant. 13.6 Costs. If legal action is brought by Landlord by reason of any default by Tenant hereunder and a default is established, the Tenant shall pay all costs incurred therefor, including reasonable attorney fees. The Tenant shall also be responsible for, and shall pay to the Landlord, including, without limitation reasonable compensation for all time expended by the Landlord's own personnel, reasonable attorney fees and all other costs of any kind whatsoever arising from or incurred as a result of any default of the Tenant or any enforcement by the Landlord of any of the Tenant's obligations under this lease or any other agreement or obligation of the - 21 - Tenant to the Landlord whether or not related to the Premises. The Tenant agrees that if the Tenant remains in default under this lease after receiving Notice as required pursuant to this lease the Landlord shall be entitled to receive from the Tenant and the Tenant shall pay a minimum administration fee of not less than Fifty Dollars ($50.00) per day to the Landlord which the Tenant acknowledges as being reasonable compensation for time expended by the Landlord's personnel in enforcing any of the Landlord's rights pursuant to this lease after the giving of such Notice, it being clearly understood that the payment or demand for such agreed reasonable compensation shall not be in lieu of and shall be in addition to any other fees, costs, compensations due to the Landlord as a result of the Tenant's default pursuant to this lease or pursuant to law or any order of court. 13.7 Confession of Judgment for Rent. Tenant hereby authorizes and empowers any prothonotary or attorney of any court of record (the "Attorney") to appear for Tenant in any actions which may be brought for any Rent due hereunder including accelerated Rent and any other sums which may become due and payable hereunder for the balance of the Term and therein confess Judgement against Tenant for all or any part of the Rent and any other sums due hereunder: and for interest and costs, together with an attorney's commission of ten percent (10%) or $20,000.00 whichever is greater. 13.8 Confession of Judgment for Possession. Tenant hereby authorizes and empowers any prothonotary or attorney to appear for Tenant in any action brought for possession hereunder and therein confess judgment in ejectment in any competent court against Tenant and all persons claiming under Tenant for the recovery by Landlord of possession of the Premises, for which a copy of this lease shall, verified by an affidavit, be a sufficient warrant. Thereafter, if Landlord so desires, a writ of execution or of possession may issue forthwith, without any prior writ or proceedings whatsoever. Such authority shall not be exhausted by one exercise thereof and if such action shall thereafter, for any reason, be terminated and possession of the Premises remain in or be restored to Tenant, Landlord may, upon any subsequent default by Tenant, confess judgment in ejectment to recover possession of the Premises, and the termination for any reason of any such prior actions shall not prevent, hinder or prejudice the right and power of Landlord to bring subsequent actions as set forth in this paragraph. If such action is commenced, Landlord shall be entilteled to a judgement for Attorney's commission of ten percent (10%) of rents due or $20,000.00, whichever is greater. - 22 - ARTICLE XIV REGULATIONS 14.1 Purpose. The Landlord may by Notice impose regulations, from time to time, for the orderly operation of the Building, the Common Areas and the Parking Facility, if any, the present regulations are attached hereto as Schedule "C" to this lease. 14.2 Observance. The Tenant shall observe and shall cause those for whom it is responsible to observe the regulations. 14.3 Enforcement. The Landlord shall enforce the regulations against all occupants of the Building but in doing so will not be obligated to commence any legal proceedings or be held liable for any claims by the Tenant or other tenants arising out of the failure of the Landlord to commence legal proceedings for any breach of regulations. ARTICLE XV MISCELLANEOUS 15.1 Exhibiting Premises. The Landlord may exhibit the Premises to prospective purchasers, prospective mortgagees and, during the last 6 months of the Term, prospective tenants. 15.2 Name of Building. The Landlord may designate the name of the Building and the Project and upon not less than 30 days' Notice may change the name of either the Building or the Project. The Tenant shall only refer to the Building and the Project by their designated names and shall only use such names as its business address. 15.3 Relocation. The Landlord and Tenant agreed that at any time during the Term and any renewal thereof, the Landlord shall have the right, upon providing the Tenant at least thirty (30) days' prior written Notice, to relocate the Tenant to other premises within the Building of approximately the same size, quality and interior design as the Premises provided, however, that the Tenant shall have the right to approve such new space, which approval shall not be unreasonably withheld. The Tenant shall give written Notice to the Landlord of its approval or disapproval of such new space within ten (10) days of the receipt of the Landlord's notice requesting the Tenant to relocate. The Landlord shall pay the Tenant's direct moving costs only provided the Tenant shall provide the Landlord with reasonable evidence of such costs. The relocation shall be effective on the date stated in the Landlord's notice and the Tenant shall complete its move in one (1) weekend. In the event the Landlord relocates the Tenant to such new space, this lease and each and all of its terms, covenants and conditions shall remain in full force and effect and be deemed applicable to such new space save and except: (i) the Right of First Refusal, if any, if the new - 23 - space is located on a different floor than the original Premises; and (ii) the location and size of the Premises which shall be in accordance with the appropriate floor plan. Upon the relocation taking place, the Fixed Rent per square foot for the new space shall be the same Fixed Rent per square foot as for the Premises and the lease will be amended accordingly. If the Tenant reasonably refuses to approve such new space, the Landlord shall have the right to terminate this lease by written Notice given to the Tenant within ten (10) days following the Landlord's receipt of the Tenant's Notice disapproving such new space, which termination shall be effective sixty (60) days after the date of the original Notice. 15.4 Notice. Any Notice to be given pursuant to this lease shall be in writing and shall be deemed to have been given if signed by or on behalf of the party giving Notice and delivered or mailed by registered prepaid post to the other party as follows: (a) to the Landlord at: 1740 Walton Road Att: Michael Barrist Blue Bell, PA 19422 with copy to: Mr.Joshua Gindin, Esq. 1700 Two Logan Square 18th and Arch Streets Philadelphia, Pa 19103 and (b) to the Tenant at NCO Financial System, Inc 1740 Walton Road Blue Bell, Pa 19422 Any Notice so given shall be deemed to have been given, if delivered, on the first business day following the date of such delivery or, if mailed, on the third business day following the date of such mailing. Either party may by Notice change its address. During any interruption, threatened interruption or substantial delay in postal services, all Notices shall be delivered. - 24 - 15.5 Compliance with Laws, etc. The Landlord and the Tenant shall at all times in the performance of their respective obligations under this lease comply with all laws, by-laws, regulations and orders of any competent authority and with the requirements of any insurer of the interest of the Landlord in the Project. 15.6 Governing Law and Severability. This lease shall be governed by and construed in accordance with the laws in force in the State in which the Project is located. The Landlord and the Tenant agree that all of the provisions of this lease are to be construed as covenants and agreements as though the words importing such covenants and agreements were used in each separate section hereof. Should any provision or provisions of this lease be illegal or not enforceable, it or they shall be considered separate and severable from the lease and its remaining provisions shall remain in force and be binding upon the parties hereto as though the said provision or provisions had never been included. 15.7 Recordation. The Tenant may record this Lease with the prior written approval of the Landlord, which approval the Landlord may withhold in its discretion. If the Landlord provides such approval, the Tenant shall not record this Lease but shall prepare and have executed by the parties hereto a short form of lease approved by the Landlord for the purpose only of enabling notice of this Lease to be recorded without affecting the respective rights and obligations of the parties hereunder. The Tenant shall pay the Landlord's Cost incurred in connection with such recordation and, for greater certainty, shall pay the cost of any necessary survey plan of the Premises. 15.8 Condemnation. If at any time during the Term the interest of the Tenant under this lease or the whole or any part of either the Premises or any other part of the Building shall be taken by any lawful power or authority by the right of condemnation or eminent domain, the Landlord may at its option, give Notice to the Tenant terminating this lease on the date when the Tenant or Landlord is required to yield up possession thereof to the condemning authority. Upon such termination, or upon termination by operation of law, as the case may be, the Tenant shall immediately surrender the Premises and all its interest therein, the Rent shall abate and be apportioned to the date of termination, the Tenant shall forthwith pay to the Landlord the apportioned Rent, all other amounts which may be due to the Landlord up to the date of termination, and the provisions of section 2.4 shall apply. The Tenant shall have no claim upon the Landlord for the value of its property or the unexpired Term of this lease, but the parties shall each be entitled to separately advance their claims for compensation for the loss of their respective interests in the Premises and the parties shall each be entitled to receive and retain such compensation as may be - 25 - awarded to each respectively. If an award of compensation made to the Landlord specifically includes an award for the Tenant, the Landlord will account therefor to the Tenant. In this Section the word "condemnation" shall include a sale by the Landlord to an authority with powers of condemnation, in lieu of or under threat of condemnation. 15.9 Hazardous Substances; Wastes. (a) Tenant will not, and will not permit any other occupant of the Premises to store, generate, treat or dispose any Hazardous Substances or Wastes on or about the Premises or the Building, and hereunder shall promptly cure any such condition. Tenant's obligations hereunder shall serve the expiration or sooner termination of this Lease; (b) Tenant hereby represents and warrants that Tenant has not been identified in any litigation, proceeding or investigation as a responsible party or potentially responsible party for any liability for disposal or release of any Hazardous Substances or Wastes; and (c) For the purposes hereof: (i) "Hazardous Substances" shall mean any flammable explosives, radioactive materials, asbestos, unreaformaldehyde, hazardous wastes, toxic substances or any other elements or compounds designated as a "hazardous substance", "pollutant" or "contaminant" in the CComprehensiveEnvironmental Response, Compensation and Liability Act, 42 U.S.C. Section 9600 et. seg or in the Resource Conservation and Recovery Act, 42 U.S.C. Section 6991 et. seg. or any other applicable Federal, state or local law or regulation and (ii) "Wastes" shall mean any hazardous wastes, residual wastes, solid wastes or other wastes as those terms are defined in the applicable Federal, state or local laws or regulations. 15.10 Rider. The Rider attached hereto as Schedule "D" forms a part of this Lease. - 26 - IN WITNESS WHEREOF the Landlord and the Tenant have executed this lease under their respective seals. Dated ________________________________________________, 199__. 1710-20 Sentry East Associates, L.P. by: /s/ Michael J. Barrist ------------------------------------- __________________________ Michael J. Barrist, President Attest 1710-20 Sentry East Inc. The General Partner "LANDLORD" by: /s/ Michael J. Barrist, President ------------------------------------- __________________________ Attest "TENANT" - 27 - Schedule "A" Legal Description Unit 1710-1720 in Sentry Park East Condominium together with an undivided 40.440 percent interest in and to the common elements of the Condominium as described in that certain Declaration of Condominium of Sentry Park East Condominium dated June 30, 1993 as recorded in Deed Book 5046, page 2030, Montgomery County, Pennsylvania. SCHEDULE "C" REGULATIONS Pursuant to Section 14.1 the Landlord hereby imposes the following regulations: 1. Deliveries of building materials, major pieces of equipment and furniture and bulky goods shall only be made by prior arrangement with the Building management and through the Delivery Facilities. 2. The Tenant shall only use the Building key system and shall obtain all keys and cards providing access to the Building, the Parking Facility, if any and the Premises from the Landlord. No additional locks shall be installed on the doors to the Premises. 3. No bicycles or other vehicles shall be brought into the Building. 4. No inflammable oils or other dangerous materials shall be kept in the Building. 5. The Common Areas shall not be obstructed. 6. The Tenant shall provide the Landlord with the names of all persons entitled to enter the Premises outside normal business hours. The Landlord shall only be required to allow access to the Premises by such persons. 7. The Tenant shall not install any power or water consuming machinery and equipment, except normal office equipment, without the approval of the Landlord and, if required by the Landlord, shall connect such machinery and equipment to separate meters. 8. If required by the Landlord, the Tenant shall arrange for pest control. 9. The Tenant shall not remove or alter the Building standard window coverings or except with the approval of the Landlord install any additional window coverings. 10. The Tenant shall keep all window blinds down so as to prevent direct sunlight from penetrating the Premises. 11. The Landlord may restrict canvassing or peddling in the Building. 12. The Tenant shall maintain with the Landlord current lists of the names and license plate numbers of each employee using the Parking Facility, if any and shall cause its employees to affix to their automobiles whatever manner of identification the Landlord may require. 13. The Tenant shall observe the directions of the Landlord as to parking locations in the Parking Facility, if any according to automobile size. 14. The Tenant shall leave the Premises in a condition suitable for the performance by the Landlord of its janitorial services. 1710-20 SENTRY EAST ASSOCIATES L.P. AND NCO Financial System, Inc OFFICE PREMISES LEASE TABLE OF CONTENTS 1. INTERPRETATION 1.1 Defined Terms - General 1.2 Defined Terms - Operating Costs and Taxes 1.3 Number, Gender and Joint and Several Liability 1.4 Procedure for Approval 1.5 Divisions 1.6 Entire Agreement 1.7 Reasonableness 1.8 Nature of the Lease 2. DEMISE AND TERM 2.1 Demise-Premises 2.2 Licenses 2.3 Term 2.4 Surrender on Termination 2.5 Holding Over 3. RENT 3.1 Items of Rent 3.2 General 3.3 Final Determination of Certain Items of Rent 3.4 Insufficient Funds 3.5 Deposit 4. USE OF PREMISES 4.1 Use 4.2 Waste and Nuisance 4.3 Extraordinary Equipment 4.4 Fire Prevention and Energy Conservation 4.5 Exterior Appearance of Premises 5. LIMITATION OF LIABILITIES 5.1 Unavoidable Delay 5.2 Limitation of Landlord's Liability 5.3 Indemnity 6. TAXES 6.1 Landlord's Taxes 6.2 Tenant's Taxes 6.3 Assessment Appeals 7. INSURANCE 7.1 Landlord's Insurance 7.2 Tenant's Insurance 8. OPERATION, SERVICES, MAINTENANCE, REPAIR AND ACCESS BY LANDLORD 8.1 Quiet Enjoyment 8.2 Standard of Operation 8.3 Services to Premises 8.4 Services to Building 8.5 Additional Services 8.6 Extra Operating Costs 8.7 Maintenance and Repair 8.8 Access by Landlord 9. MAINTENANCE, REPAIR AND IMPROVEMENTS BY TENANT 9.1 Maintenance of Premises 9.2 Leasehold Improvements 9.3 Liens 9.4 Removal of Leasehold Improvements - Term 9.5 Removal of Leasehold Improvements - Expiration of Term 10. TRANSFERS BY TENANT 10.1 Successors to Tenant 10.2 Licenses, Franchises and Concessions 10.3 Assignment or Subletting 10.4 Change in Control 10.5 Advertising of Premises 11. TRANSFER BY LANDLORD, SUBORDINATION AND ATTORNMENT 11.1 Transfer by Landlord 11.2 Subordination and Attornment 11.3 Estoppel Certificates 12. TERMINATION AND RENT ABATEMENT 12.1 Termination by Tenant 12.2 Termination by Landlord 12.3 Abatement of Rent 13. LANDLORD'S REMEDIES 13.1 Default and Re-Entry 13.2 Re-letting and Sale of Personalty 13.3 Right of Landlord to Remedy 13.4 Bankruptcy of Tenant 13.5 Interest 13.6 Costs 13.7 Confession of Judgment for Rent 13.8 Confession of Judgment for Possession 14. REGULATIONS 14.1 Purpose 14.2 Observance 14.3 Enforcement 15. MISCELLANEOUS 15.1 Exhibiting Premises 15.2 Name of Building 15.3 Relocation 15.4 Notice 15.5 Compliance with Laws, etc 15.6 Governing Law and Severability 15.7 Recordation 15.8 Condemnation 15.9 Rider Schedule "A" Legal Description Schedule "B" Floor Plan Schedule "C" Regulations THIS LEASE MADE in duplicate this _____ day of_______________, 199____ 1710-20 SENTRY EAST ASSOCIATES, L.P. (the "Landlord") of the FIRST PART, - and - NCO Financial System, Inc. (the "Tenant") of the SECOND PART, WHEREBY the parties agree as follows: ARTICLE I INTERPRETATION 1.1 Defined Terms - General. In this lease: "Building" means that certain building known as 1710 Walton Road, Blue Bell, Pa. 19422 located on the Land. "Common Areas" means those parts of the Project designated by the Landlord for common use by the Landlord and the tenants of the Project, including without limitation, the landscaped portions of the Project, the public sidewalks and the landscaped portions of the streets adjacent to the Project, the Delivery Facilities, and Parking Facilities, if any. "Common Service Areas" means those parts of the Project, whether or not within the Building, designated by the Landlord which provide services to the Project; "Cost of Utilities" means the cost of electricity and other utilities supplied to tenants of premises in the Building as determined by the Landlord who in making its determination shall take into account the readings of any electrical check meters installed by the Tenant; "Delivery Facilities" means those portions of the Project designated by the Landlord as facilities for common use by the Landlord and tenants of the Project for deliveries; "Expert" means any architect, engineer, land surveyor, chartered accountant, or other professional consultant, as the case may be, appointed by the Landlord and qualified in the opinion of the Landlord to perform the particular function; "Expiration of the Term" means the termination of this lease by either passage of time or operation of any of its provisions; "Fixed Rent" means the amount payable under section 3.1(a); "Insurance" means coverage with respect to the following risks in amounts equal, in the case of the Landlord, to those maintained by prudent owners of like buildings and, in the case of the Tenant, to those maintained by prudent tenants of like premises: (a) comprehensive general liability; (b) all risks coverage; - 1 - (c) in the case of the Landlord: (i) boiler and machinery; and (ii) loss of rental income by reason of damage; and (d) in the case of the Tenant, comprehensive general liability; and in the case of the Landlord, such other coverage as the Landlord may require to maintain and in the case of the Tenant, such other coverage as the Landlord may require, in each case having regard to the risks which are customarily insured against by prudent landlords and tenants of like premises; "Landlord's Cost" means with respect to any cost incurred by the Landlord the actual amount thereof and a fee on account of management and overhead, said fee to be equal to the amount the Landlord might reasonably pay to a third party for the administration and management of the Building. "Leasehold Improvements" means the fixtures and improvements made by or on behalf of the Tenant in the Premises; "Notice" has the meaning set forth in section 15.4; "Parking Facility", if any, means those portions of the Project designated by the Landlord for parking; "Premises" means the portion of the Building, excluding its exterior, outlined in red on the floor plan attached to, and forming part of, this lease, currently known as suite 1720. "Prime" means the rate of interest from time to time announced by Mellon Bank, N.A. as its prime rate; "Project" means the improvements constructed on the Land including the Building, the Common Areas (whether on or adjacent to the Land), the Parking Facility, if any, and any other building; "Land" means the land as described in Schedule "A" attached hereto. "Rent" means the amounts payable by the Tenant to the Landlord under this lease; "Term" means the term of this lease as specified in section 2.3 and any permitted overholding; and "Unavoidable Delay" means any event, beyond the control of the party affected thereby which prevents the fulfillment by such party of any obligation hereunder and not caused by such - 2 - party and not avoidable by the exercise of reasonable effort or foresight by such party. 1.2 Defined Terms - Operating Costs and Taxes. For the purpose of calculating the Proportionate Share of Operating Costs and Taxes: "Fiscal Year" means a calendar year provided that the Landlord may by Notice specify an annual date upon which each subsequent Fiscal Year is to begin, in which event the Fiscal Year which would otherwise be current when such annual date first occurs thereafter shall terminate on the preceding day; "Operating Costs and Taxes" means for a Fiscal Year the aggregate costs paid or payable by the Landlord in accordance with generally accepted accounting principles applied in the real estate management industry on account of Taxes, Insurance and the operation, management, maintenance and repair of the Building and on a proportionate basis as hereinafter provided, the Land, the Common Areas, the Common Service Areas and those costs associated with Condominium Association Fees, together with a charge, the annual cost of which for the purpose of this Lease shall be deemed to be management fees paid by the Landlord for the administration and management of the Building and the Land, and, if the Landlord itself manages the Building and the Land, a fee equal to the amount the Landlord might reasonably pay to a third party for the administration and management of the Building and the Land. Without limiting the generality of the foregoing, Operating Costs and Taxes shall also include the cost amortized at Prime of all capital improvements made after the Building is substantially completed, which (i) have the effect of reducing the costs which would otherwise be included in Operating Costs and Taxes, or (ii) are required by any competent governmental authority. Operating Costs and Taxes shall exclude the following: (i) costs directly recoverable from tenants or insurers; (ii) debt service, depreciation or other costs of a capital nature and interest on any of the foregoing, except as hereinafter provided; (iii) costs of procuring any lease; and (iv) income, corporate and other taxes of a personal nature of the Landlord to the extent not imposed in lieu of Taxes. The proportion of Operating Costs and Taxes attributable to the Land, Common Areas and the Common Service Areas shall be allocated equitably by the Landlord to all buildings forming part of the Project and will be based to the extent possible - 3 - on the respective aggregate areas of Rentable Space in the Building and all other buildings forming part of the Project. If at any time there are unoccupied premises in the Building, the Landlord may make an equitable adjustment of the amount of Operating Costs and Taxes by reason of the fact that unoccupied premises result in lower costs in order that the tenants of the occupied premises will bear the actual amount of the Operating Costs and Taxes attributed to their respective premises; "Taxes" means all taxes and other charges imposed by any lawful authority against the Land and any improvements thereon or upon the Landlord in respect thereof and all costs relating to any appeal thereof, and includes (without limiting the generality of the foregoing) any Rental Taxes; "Proportionate Share" means the ratio, the numerator of which is the Rentable Space of the Premises and the denominator of which is the aggregate Rentable Space of the Building (exclusive of any storage areas); "Rentable Space" whether in the case of a whole floor of the Building or in the case of premises comprising part of a floor of the Building shall be determined by the Landlord's architect or land surveyor according to the American National Standard for measuring floor area in office buildings as established by the Builders Owners and Managers Association International and in effect as of the date of commencement of the Term; "Rental Taxes" means any tax or duty imposed upon the Landlord which is measured or based in whole or in part directly upon the Rent payable under this lease or services provided by the Landlord whether existing at the date hereof imposed by any governmental authority. 1.3 Number, Gender and Joint and Several Liability. The necessary grammatical changes required to make the provisions of this lease apply in the plural sense where the Tenant comprises more than one entity and to corporations, associations, partnerships or individuals, male or female, shall be assumed as though in each case fully expressed. If the Tenant is more than one person or entity its liability shall be joint and several. If the Tenant is a partnership each person who is or becomes a member of the partnership or any successor partnership shall be jointly and severally liable. 1.4 Procedure for Approval. Any request for approval shall be requested by Notice and in the absence of reply given by Notice not later than 15 days after Notice of the request has been received, or such other period of time as is otherwise expressly provided in this lease, the approval shall be deemed to have been given unless the approval may by the terms of - 4 - this lease be withheld in the discretion of the party whose approval is requested. Each approval shall be in writing unless by operation of the preceding sentence it is deemed to have been given. If either party withholds its approval it shall give Notice of its reason unless the approval may by the terms of this lease be withheld in its discretion. 1.5 Divisions. All references in this lease to articles, sections and other subdivisions are to those in this lease. 1.6 Entire Agreement. This lease and the regulations imposed by the Landlord pursuant to section 14.1 constitute the entire agreement between the Landlord and the Tenant concerning the subject matter of this lease. This lease may only be amended by an agreement in writing signed by the parties hereto. 1.7 Reasonableness. The Landlord and the Tenant shall, except as otherwise expressly provided in this lease, each act reasonably, having regard to the fact that they are the owner and a tenant, respectively, of a good quality office building, in the exercise and the enforcement of their respective rights under this lease. Each right shall be exercisable and enforceable from time to time, except as aforesaid. 1.8 Nature of the Lease. This lease is a completely net lease to the Landlord and accordingly, except as otherwise expressly provided in this lease, the Landlord has no obligations to the Tenant with respect to either the Premises, the Building, the Common Areas, the Common Service Areas, the Parking Facility, or if any, the Project. ARTICLE II DEMISE AND TERM 2.1 Demise-Premises. The Landlord hereby leases the Premises to the Tenant and the Tenant hereby leases and accepts the Premises from the Landlord, (being 15,000 square feet of Rentable Space and currently known as suite 1720) to have and to hold during the Term, subject to the terms of this lease. 2.2 Licenses. The Landlord hereby grants to the Tenant throughout the Term and subject to control by the Landlord, a non-exclusive license, revocable at any time upon Notice by the Landlord: (a) to use those parts of the Common Areas giving access to the Premises and the Parking Facility, if any; (b) to have its name displayed on the main lobby directory board for the Building, on the floor - 5 - lobby directory board on each floor on which the Premises are located and on the main door to the Premises, all such signs to be under the exclusive control of the Landlord and to conform to the uniform pattern of identification signs for tenants of the Building prescribed by the Landlord; and (c) if the Premises constitute one or more full floors of the Building, to have a sign displaying the name of the Tenant in the elevator lobby of each such floor provided that the design of the sign has been approved by the Landlord. 2.3 Term. The Term shall be ten (10) years beginning January 1, 1996 at 12:00 Midnight and ending the last day of December, 2005 at 5:00 PM. 2.4 Surrender on Termination. Forthwith upon the Expiration of the Term, the Tenant shall vacate and deliver up possession of the Premises in a broom clean condition and in good and substantial repair in accordance with the Tenant's obligation under this lease to repair the Premises, but subject to the Tenant's rights and obligations in respect of removal in accordance with sections 9.4 and 9.5. At the same time the Tenant shall surrender to the Landlord at the place then fixed for the payment of Rent all keys and other devices which provide access to the Premises, the Building or any part thereof and shall inform the Landlord of all combinations to locks, safes and vaults, if any, in the Premises. 2.5 Holding Over. If the Tenant shall continue to occupy the Premises at the expiration of this lease with or without the consent of the Landlord and without any further written agreement the Tenant shall be a monthly tenant at two hundred (200%) of the monthly Fixed Rent herein reserved for the last year of the Term and otherwise on the terms and conditions herein set forth, except as to the length of tenancy. ARTICLE III RENT 3.1 Items of Rent. The tenant shall pay to the Landlord: (a) Years 1 -5: $217,500.00 per annum in 12 equal installments of $18,125.00 each based on the rate of $14.50 per square foot of Rentable Space. Years 6 -10: $232,500.00 per annum in 12 equal installments of $19,375.00 each based on the rate of $15.50 per square foot of Rentable Space. - 6 - (b) the Proportionate Share of Operating Costs and Taxes; (c) the Cost of Utilities supplied to the Premises; (d) the Landlord's Cost on account of the following: (i) the replacement of tubes and ballasts in the Premises; (ii) the installation and any change of the name of the Tenant on the main lobby directory board on which the Tenant has its name and on the main door to the Premises; (iii) any additional services and equipment agreed to be provided by the Landlord at the request of the Tenant; (e) the amount, if any, by which the Operating Costs and Taxes attributed to the Premises by the Landlord exceeds the Proportionate Share of Operating Costs and Taxes if such excess is occasioned by the use or improvement of the Premises. 3.2 General. All amounts payable by the Tenant to the Landlord under this lease shall be deemed to be Rent. The Tenant shall pay Rent without abatement, deduction or set-off, except as expressly provided, in lawful money of the United States to such person and at such address as the Landlord may advise. The Tenant shall pay items of Rent of a recurring nature in advance on the first day of each month of the Term and shall pay other items of Rent within 15 days of the delivery of an invoice therefor. The Landlord shall estimate and may re-estimate, items of Rent of a recurring and variable nature for each Fiscal Year and advise the Tenant thereof. If the Commencement Date is not the first day of a month or if the Expiration of the Term does not occur on the last day of a month, Rent for the partial month shall be pro-rated on a per diem basis. 3.3 Final Determination of Certain Items of Rent. The Landlord shall within 180 days after the end of each Fiscal Year provide to the Tenant a statement (the "Statement") setting out in detail the Proportionate Share of Operating Costs and Taxes and such other items of Rent of a recurring and variable nature for such Fiscal Year. If the aggregate monthly Installments on account thereof paid during such Fiscal Year differ from the actual amount thereof set forth in the Statement, the Tenant shall pay or the Landlord shall refund the difference within 30 days after the Statement is provided. The Tenant may within the 60 day period after the Statement is provided examine the books and records of the Landlord relating to the Project. The Tenant may by Notice given within such 60 day period but not otherwise dispute the Statement whereupon the matter shall be finally resolved by an Expert. If the Expert determines that the amount payable by the Tenant has been overstated by more than three percent(3%) - 7 - the Landlord shall pay the fee of the Expert. If the Expert determines that the amount payable by the Tenant has not been overstated by three percent (3%) or more the Tenant shall pay such fee. Any adjustment required to any previous payment made by the Tenant or the Landlord by reason of any such determination shall be made forthwith and shall bear interest at a rate equal to Prime plus one percent (1%) per annum from the date the actual overpayment or underpayment is made. 3.4 Insufficient Funds. The Tenant agrees that if any of the Tenant's cheques are returned for lack of sufficient funds, the Tenant shall pay to the Landlord upon receipt of the Landlord's invoice for same, a minimum administrative fee of not less than Fifty Dollars ($50.00). 3.5 Deposit. The Landlord acknowledges receipt of the Deposit in the amount of $00.00 prior to the execution of this lease, which sum shall be deposited in an account of Landlords choice. The Deposit shall be applied as a security deposit for the due performance by the Tenant of all the covenants and obligations on its part herein contained, the Landlord hereby reserving unto itself at its sole discretion the right to apply such sum to any damages resulting from any default by the Tenant of any of its covenants and obligations hereunder or towards the payment or reduction of any claim of the Landlord against the Tenant including monthly Rent. If the Deposit hereunder shall be applied in accordance with the provisions hereof, the Tenant covenants to provide sufficient funds to ensure that the Deposit remains at the level herein before indicated within ten (10) days of receipt of the Landlord's Notice therefor. Provided the Tenant is not then in default under the lease and provided that the Tenant has not, in any way, damaged the Premises, the Landlord shall, within thirty (30) days of the Tenant's vacating the Premises, return to the Tenant the balance of the security deposit referred to in section 3.5. Landlord shall be under no obligation to refund any interest that may have accrued on said deposit. ARTICLE IV USE OF PREMISES 4.1 Use. The Premises shall be used for general office purposes only and not for any other purpose without the prior written consent of the Landlord, which consent may be withheld at the discretion of the Landlord, the Tenant shall not permit any part of the Premises to be occupied by any person other than the Tenant and its employees and any subtenant permitted - 8 - under section 10.3 and the employees of such subtenant. 4.2 Waste and Nuisance. The Tenant shall not commit or permit any waste or damage to the Premises or any manner of use causing annoyance to other tenants of the Project. 4.3 Extraordinary Equipment. The Tenant shall not install any equipment which might affect the capacity of either the structure or the basic systems of the Building. 4.4 Fire Prevention and Energy Conservation. The Tenant shall comply with the requirements of the Landlord with respect to fire prevention and, with respect to the Premises, energy conservation. 4.5 Exterior Appearance of Premises. The Tenant shall keep the exterior appearance of the Premises tidy and business-like and shall not erect any sign or other like object within the Premises which is visible from the exterior of the Premises. ARTICLE V LIMITATION OF LIABILITIES 5.1 Unavoidable Delay. Except as herein otherwise expressly provided, if and whenever and to the extent that either the Landlord and the Tenant shall be prevented, delayed or restricted in the fulfillment of any obligations hereunder in respect of the supply or provision of any service or utility, the making of any repair, the doing of any work or any other thing (other than the payment of Rent) by Unavoidable Delay, the time for fulfillment of such obligation shall be extended during the period in which such circumstance operates to prevent, delay or restrict fulfillment thereof, and the other party to this Lease shall not be entitled to compensation for any inconvenience, nuisance or discomfort thereby occasioned nor shall Rent abate. 5.2 Limitation of Landlord's Liability. The Landlord shall only be liable for any personal injury or death suffered by the Tenant or any person in its employ who may be upon the Premises or for the loss or any damage to any property located within the Premises of the Tenant or of any employee of the Tenant if caused by the actual fault or negligence of the Landlord. It is expressly understood and agreed by Tenant that none of Landlord's covenants, undertakings or agreements are made or intended as personal covenants, undertakings or agreements by Landlord or its partners, and any liability for damages or breach or nonperformance by Landlord or for damages caused by or arising from any other action whatsoever, shall be collectable only out of Landlord's interest in the Project and no personal liability is assumed by, nor at any time by be asserted against, Landlord or its partners or any of its or their officers, agents, employees, legal representatives, - 9 - successors or assigns, if any, all such liability, being expressly waived released by Tenant. 5.3 Indemnity. The Tenant and the Landlord shall each indemnify and save the other harmless in respect of: (a) all claims and liabilities arising from any act or omission of the indemnitor or any person for whose conduct the indemnitor is responsible and the costs incurred by the indemnitee in connection with any action pertaining thereto; and (b) any damage suffered by the indemnitee by reason of the breach by the indemnitor of any of its obligations under this lease and the costs incurred by the indemnitee in connection with any action pertaining thereto. ARTICLE VI TAXES 6.1 Landlord's Taxes. The Landlord shall pay before delinquency the Taxes relating to the Building. 6.2 Tenant's Taxes. The Tenant shall pay before delinquency all taxes and other charges imposed by any lawful authority against the Tenant or any sub-tenant, licensee or occupant of the premises which if not paid would constitute either a lien on either the Land or the Building or a liability of the Landlord. 6.3 Assessment Appeals. The Tenant shall not conduct any appeal from any governmental assessment or determination of the value of the Land, the Building or the Premises. ARTICLE VII INSURANCE 7.1 Landlord's Insurance. The Landlord shall maintain Insurance with respect to its interest in the Building, the Common Areas and the Parking Facility, if any. Such insurance shall include, if available, a waiver of any right of subrogation with respect to property insurance only, against the Tenant. 7.2 Tenant's Insurance. The Tenant shall maintain Insurance with respect to its interest in the Premises, the Leasehold Improvements and all operations of the Tenant in and from the Premises in the amounts and forms as specified below. The Tenant shall at the request of the Landlord provide the - 10 - Landlord with certificates of such insurance. If both the Landlord and the Tenant have claims to be indemnified under any such insurance, the indemnity shall be applied first to the settlement of the claim of the Landlord and the balance to the settlement of the claim of the Tenant. Such insurance shall include the Landlord and any Mortgagee designated by Notice by the Landlord as named insureds as their interests may appear and, if available, shall contain a cross-liability clause protecting the Landlord in respect of claims by the Tenant as if the Landlord were separately insured and a provision prohibiting the insurer from materially altering or canceling the coverage without first giving the Landlord at least 30 days' prior written notice thereof. Such insurance shall include, if available, a waiver of any right of subrogation with respect to property insurance only, against the Landlord. (a) Liability Insurance. Tenant shall provide on or before it enters the Demised Premises and shall keep in force during the term, for the benefit of Landlord and Tenant, liability insurance against any liability occasioned by any occurrence in or about the Demised Premises or any appurtenance thereto. Such policy is to be written in a combined single limit of at least $1,000,000 for injury or death to one or more than one person arising from any one occurrence and with respect to property damages. In addition, Tenant shall maintain and provide a $2,000,000 umbrella policy on terms which Landlord shall specify. (b) Fire Insurance. Tenant shall insure and keep its equipment, personal property and all leasehold improvements benefitting the Demised Premises or elsewhere on the Real Estate insured against damage by fire, water damage and other casualties and risks covered by "All Risk" and extended coverage insurance. Landlord shall not carry insurance of any kind on Tenant's property, and, except as provided by law or by reason of its fault or its breach of any of its obligations hereunder, shall not be obligated to repair any damage thereto or replace the same. (c) Worker's Compensation. Tenant shall maintain Worker's Compensation insurance, insuring against and satisfying Tenant's obligations and liabilities under the applicable Worker's Compensation laws. Tenant shall also maintain Employers Liability Insurance in the amount of at least $1,000,000. ARTICLE VIII OPERATION, SERVICES, MAINTENANCE, REPAIR AND ACCESS BY LANDLORD 8.1 Quiet Enjoyment. The Landlord covenants with the Tenant for quiet enjoyment. 8.2 Standard of Operation. The Landlord shall operate and manage the Building, the Land, the Common Areas, the Common Service Areas and the Parking Facility, if any, to the - 11 - standard of a good quality office building, subject to the limitations arising from the design of the Building and its basic systems. 8.3 Services to Premises. The Landlord shall provide the following services to the Premises: (a) heat, ventilation and air conditioning as required for the comfortable use and occupancy of the Premises during the normal business hours as determined by the Landlord from time to time (and being, at the date of this lease, 8:00 a.m. to 6:00 p.m. Monday to Friday except on legal or statutory holidays); (b) electrical power for lighting and office equipment; (c) replacement of tubes and ballasts; (d) janitorial services; 8.4 Services to Building. The Landlord shall provide for the Tenant and others the following services: (a) elevators; (b) washroom facilities on each floor of the Building on which the Premises are located; (c) heat, ventilation, air conditioning, lighting, and janitorial service in the appropriate interior portions of the Common Areas; (d) snow removal and landscape maintenance for the appropriate exterior portions of the Common Areas; (e) exterior window washing at such intervals as landlord deems appropriate; (f) garbage removal; and (g) janitorial services for the appropriate interior portions of the Common Areas. 8.5 Additional Services. The Landlord, if it shall from time to time so elect, shall have the exclusive right, by way of Additional Services, to provide or have its designated agents or contractors provide any janitorial or cleaning services to the Premises required by the Tenant which are additional to those required to be provided by the Landlord under section 8.3, including the Additional Services which the Landlord agrees to provide by arrangement and to supervise the - 12 - moving of furniture or equipment of the Tenant and the making of repairs or alterations conducted within the Premises, and to supervise or make deliveries to the Premises. The cost of Additional Services (including the Landlord's administration fee) provided to the Tenant, whether the Landlord shall be obligated hereunder or shall elect to provide them as Additional Services, shall be paid to the Landlord by the Tenant from time to time promptly upon receipt of invoices therefor from the Landlord. The cost of Additional Services charged directly to the Tenant and other tenants shall be credited in computing Operating Costs and Taxes to the extent that they would otherwise have been included. 8.6 Extra Operating Costs. Upon request by the Tenant, the Landlord may agree from time to time to arrange for extra heating, ventilating and air conditioning supply, electrical supply or for the supply of other services to the Premises above those normally provided to tenants of the Building or outside of normal business hours. The Tenant will pay to the Landlord in the manner in which Operating Costs and Taxes are paid from time to time hereunder any and all additional costs and expenses of the Landlord which may arise in respect of the use by the Tenant of the Premises for business hours that do not coincide with normal business hours for the Building generally or that may arise in respect of extra heating, ventilating and air conditioning supply, electrical supply and other services which are arranged to be provided to the Tenant as a result of its activities over and above those normally provided to the tenants of the Building or outside of normal business hours, plus an administration fee equal to fifteen percent (15%) of each component thereof. The Landlord reserves the right to install at the Tenant's expense meters to check the Tenant's consumption of electricity, water or other utilities. 8.7 Maintenance and Repair. The Landlord shall maintain and repair the following: (a) the Building and its basic systems but not the Premises or the premises of other tenants; (b) the structural elements of the Premises; and (c) the Common Areas, the Common Service Areas and the Parking Facility, if any, except where such maintenance and repair is required due to the negligence of the Tenant or those for whom the Tenant is in law responsible, in which circumstances the Tenant shall be liable for the cost of such maintenance and repair. 8.8 Access by Landlord. The Landlord may enter the Premises in order: - 13 - (a) to perform its obligations hereunder; (b) to install, maintain and repair equipment within or about the Premises for the supply of services to other premises in the Building; (c) to make repairs or alterations to the Building; (d) to take such steps as the Landlord may deem necessary for the safety or preservation of the Project; and (e) to inspect the state of repair of the Premises. Prior to the exercise of this right the Landlord whenever possible shall consult with the Tenant in order to minimize inconvenience to the Tenant and in its exercise of this right, shall observe the security requirements of the Tenant. 8.9 Interruption of Services. Landlord shall have no responsibility or liability to Tenant, nor shall there be any abatement for rent for any failure to supply any of said services and facilities that Landlord has agreed to supply hereunder during such period as such services and facilities are out of order, undergoing repair or if prevented by labor disorders, strikes, accidents or other causes beyond Landlord's control. If Landlord, in its sole discretion, deems it advisable or convenient to interrupt any of said services to make repairs, alterations or improvements or because of labor disturbances, strikes, accidents or causes beyond Landlord's control, Landlord may, after prior written notice to Tenant, do so for the period that Landlord deems expedient and advisable without any abatement in rent or other liability to Tenant. ARTICLE IX MAINTENANCE, REPAIR AND IMPROVEMENTS BY TENANT 9.1 Maintenance of Premises. The Tenant shall maintain and repair the Premises and the Leasehold Improvements. 9.2 Leasehold Improvements. The Tenant may make Leasehold Improvements provided that: (a) the Tenant shall furnish the Landlord with professionally prepared plans and specifications therefor; (b) Such plans and specifications shall be approved by the Landlord and, at its election, any Expert; (c) the Tenant shall advise the Landlord of the - 14 - identity of its contractors and tradesmen and their respective labor affiliations; (d) the Landlord shall either (i) approve any contractors proposed by the Tenant to perform any work which may affect the structure, the walls or the systems of the Building or (ii) require that any such work be performed by either the Landlord or its contractors in which case the Tenant shall pay the Landlord's Cost on account thereof; the Landlord may refuse to allow the contractors and tradesmen of the Tenant access to the Building if their labor affiliations may conflict with those of the Landlord or those employed by it or if they are not competent; (e) the Tenant shall produce evidence satisfactory to the Landlord as to the existence of all necessary permits and sufficient insurance coverage; including, but not limited to, Waivers of Liens filed on behalf of the Landlord; (f) the Tenant shall pay the Landlord's Cost on account of the fees of any Expert appointed to review the plans and specifications, whether or not the work proceeds; (g) construction of the Leasehold Improvements shall be performed in accordance with the plans and specifications submitted to the Landlord and, where applicable, approved by the Landlord, subject to any conditions or regulations imposed by the Landlord and in a good and workmanlike and expeditious manner using good quality materials; (h) the Landlord may inspect construction as it proceeds (the onus being on the Tenant to advise the Landlord whenever any phase has been completed so that an inspection can be made); and (i) if the Tenant fails to observe any of the requirements of this section the Landlord may require that construction stop and that the Premises be restored to their prior condition failing which the Landlord may do so and the Tenant shall pay the Landlord's Cost on account thereof. Upon installation of any Leasehold Improvements, such Leasehold Improvements shall become the property of the - 15 - Landlord and shall not be removed by the Tenant except as hereinafter provided. 9.3 Liens. If any lien under applicable mechanics lien statutes of the Commonwealth of Pennsylvania, as amended from time to time, or any successor statute is registered against the title to the Building and such lien relates to material, labor or any service alleged to have been provided to the Tenant, the Tenant shall upon Notice by the Landlord cause such lien to be discharged within 5 days after such Notice has been given. If the Tenant shall fail to cause any such lien to be discharged, as aforesaid, then in addition to any other rights or remedy of the Landlord, the Landlord may (but shall not be so obligated) discharge same by paying the amount claimed to be due into Court or directly to any such lien claimant and the amount so paid by the Landlord and all costs and expenses, including reasonable Attorneys' fees, incurred for the discharge of such lien shall be due and payable by the Tenant to the Landlord as Rent upon receipt of the Landlord's invoice for same. 9.4 Removal of Leasehold Improvements - Term. The Tenant may remove Leasehold Improvements either upon the exercise of its rights under, and upon the terms of, section 9.2 or with the approval of the Landlord which may be withheld in its discretion. 9.5 Removal of Leasehold Improvements - Expiration of Term. The Landlord may upon not less than 30 days' Notice (except in the case of default and re-entry in which case no prior Notice need be given) require the Tenant before the Expiration of the Term to remove some or all Leasehold Improvements and to restore the Premises to their original condition, the cost of which shall be borne exclusively by the Tenant. Upon the Expiration of the Term, all Leasehold Improvements (including carpeting and light fixtures) and all personal property of the Tenant remaining in the Premises shall become the property of the Landlord. ARTICLE X TRANSFERS BY TENANT 10.1 Successors to Tenant. This lease shall inure to the benefit of and be binding upon the executors, administrators, successors and assigns of the Tenant, subject to the limitations of this Article. 10.2 Licenses, Franchises and Concessions. The Tenant shall not suffer or permit any part of the Premises to be used or occupied by any persons other than the Tenant, any subtenants permitted under section 10.3 and the employees of the Tenant and any such permitted subtenant, or suffer or permit any part of the Premises to be used or occupied by any licensee, - 16 - franchisee or concessionaire, or suffer or permit any persons to be upon the Premises other than the Tenant, such permitted subtenants and their respective employees, customers and others having lawful business with them. 10.3 Assignment or Subletting. The Tenant may assign this lease or sublet the Premises in whole or in part provided that: (a) the Tenant shall by Notice first offer to surrender this lease in respect of the whole or the part of the Premises (the "Subject Area") which the Tenant wishes to assign or sublet. Such offer shall be made not less than 60 days prior to the date on which the Tenant proposes that the surrender be effective. The Landlord shall have a period of 15 days after any such offer is made to accept or to decline by Notice; (b) if the Landlord accepts the offer of the Tenant to surrender the whole or any part of the Premises pursuant to subsection (a) of this section, the Tenant shall do so upon the date specified in its Notice. If part of the Premises is to be surrendered, the Rent attributable by the Landlord thereto shall be apportioned by the Landlord and paid to the date of surrender and the Rent for the remainder of the Premises shall thereafter abate and become adjusted in accordance with such attribution. The Landlord shall perform all work required to separate the surrendered part from the remainder and to make such part capable of separate use and the Tenant shall pay the Landlord's Cost on account thereof. The provisions of section 9.5 shall apply to the surrendered part of the Premises; (c) if the Landlord declines such offer or does not respond within the aforesaid period, the Tenant may within the next 180 day period either assign this lease or sublet the Subject Area provided that: (i) the Tenant shall have received a bona fide written offer; (ii) the Tenant shall have provided to the Landlord a true copy of such offer and adequate information to enable the Landlord to assess the credit worthiness, reputation and business of the proposed assignee or subtenant; - 17 - (iii) the Tenant shall have obtained the approval of the Landlord to such assignment or sublease (which may be withheld in its discretion and for any reason); (iv) the Tenant shall assign or sublet, as the case may be, only upon the terms of the offer provided to the Landlord; and (v) the proposed subtenant or assignee shall have agreed with the Landlord to observe and perform all the obligations of the Tenant under this lease with respect to the Premises or the Subject Area; (d) if within the aforesaid 180 day period the Tenant has not assigned this lease or sublet the Subject Area, the provisions of subsection (a) of this section shall again apply; and (e) the Tenant shall pay the Landlord's Cost on account of any request for approval and, if applicable, the preparation of the implementing documentation, in such form as may be acceptable to the Landlord; (f) Notwithstanding any assignment or subletting, the Tenant shall remain jointly and severally liable on this lease and shall not be relieved from performing any of the terms, covenants and conditions of this lease. 10.4 Change in Control. Any change in the effective control of the Tenant (including, without limitation, changes in the shareholders, directors, partners or officers of the Tenant) shall be deemed to be an assignment of the Premises to which the provisions of Section 10.3 shall apply. The Tenant shall provide to the Landlord the information described in Section 10.3(c)(ii) with respect to the person or persons to whom control is passing. 10.5 Advertising of Premises. The Tenant shall not advertise or allow the Premises to be advertised as being available for lease without the approval by the Landlord of the form and content of such advertisement which shall not mention any financial terms. ARTICLE XI TRANSFER BY LANDLORD, SUBORDINATION AND ATTORNMENT 11.1 Transfer by Landlord. This lease shall enure to the benefit of and be binding upon the successors and assigns of the Landlord. If the Landlord transfers or leases the - 18 - Building, or any part thereof, and to the extent that the transferee or lessee becomes liable to perform the obligations of the Landlord hereunder, the Landlord shall thereupon no longer be liable. 11.2 Subordination and Attornment. The Tenant shall upon Notice: (a) subordinate this lease to any mortgage of the Building or the Land to the intent that this lease and all the interest of the Tenant in the Premises shall be subject thereto as fully as if such mortgage had been executed and registered and the money thereby secured had been advanced before the execution and delivery of this lease; and (b) agree to attorn to any mortgagee under such mortgage; 11.3 Estoppel Certificates. The Tenant shall certify in writing to the Landlord or as it may direct that this lease is unmodified and in full force and effect (or if modified, stating the modifications and that this lease is in full force and effect as modified), the dates to which Rent has been paid, whether or not there is any existing default on the part of the Landlord of which the Tenant has notice and any other requested information pertaining to the performance by the Landlord and the Tenant of their respective obligations hereunder. The Tenant shall provide such statement within Ten (10) days after written Notice from the Landlord requesting same. Any such statement may be conclusively relied upon by any purchaser or mortgagee of the Building or Land. ARTICLE XII TERMINATION AND RENT ABATEMENT 12.1 Termination by Tenant. If the Premises or any other part of the Building, the Parking Facility, if any, the Common Areas or the Common Service Areas are damaged and the Landlord is thereby unable to fulfil its obligations to the Tenant and if in the opinion of an Expert, which opinion shall be given not more than 45 days after the date of such damage, the damage cannot be repaired within a 180 day period (employing normal construction methods without overtime or other premium unless the Landlord otherwise instructs the Expert) then the Tenant may by Notice given not more than 15 days after receipt by the Tenant of the opinion of the Expert (whose fee shall be payable by the Tenant) terminate this lease with effect as of the date on which such Notice is given. 12.2 Termination by Landlord. If any part of the Building, the Parking Facility, if any, the Common Areas or the Common Service Areas is damaged and the Landlord is thereby unable to - 19 - fulfil its obligations to the Tenant or to any other tenant of the Project and if in the opinion of an Expert, which opinion shall be given not more than 45 days after the date of the damage, the damage cannot be repaired within a 180 day period (employing normal construction methods without overtime or other premium), then the Landlord may by Notice given not more than 15 days after receipt by the Landlord of the opinion of the Expert, terminate this lease with effect either (i) as of the date on which such Notice is given, if the Premises have been materially damaged, or (ii) if the Premises have not been so damaged, then as of the date stipulated by the Landlord in its Notice, which shall be not less than 60 days after the date on which it is given. 12.3 Abatement of Rent. If the Premises are damaged to the extent that they are incapable, notwithstanding a reasonable amount of inconvenience to the Tenant, of being used by the Tenant for their intended purpose and if the damage has not been caused by any act or omission of either the Tenant or those for whom it is responsible, Rent shall abate with effect as of the date of the damage in proportion to the area of the Premises so damaged until either: (a) the Landlord and the Tenant, each acting diligently, have completed their respective obligations to repair; or (b) the first to occur of (i) the date the proceeds of any loss of rental income insurance attributable to the damage are no longer available for application on account of the abatement of the Rent payable under this lease and the rent payable under any other leases of premises in the Building affected by the same event of damage or (ii) the period of time during which such proceeds would have been available if the Landlord had performed its obligation to maintain the coverage described in part (c)(ii) of the definition of Insurance has expired. ARTICLE XIII LANDLORD'S REMEDIES 13.1 Default and Re-Entry. If (i) the Tenant shall fail to make any payment of Rent as and when same is due to be paid hereunder and such failure to pay shall continue for five (5) days or (ii) the Tenant fails to observe or perform any of its other obligations hereunder after Notice specifying the default and a period to cure has been given, then the Tenant shall be deemed to be in default and the Landlord may at any time thereafter re-enter the Premises and terminate this lease. In the event that rent is not paid by the 5th day of - 20 - the month, a two hundred ($200.00) dollar late charge shall apply. Notwithstanding anything contained in this lease to the contrary, in the event the Tenant fails to pay any item of Rent when same is due to be paid hereunder or fails to perform any other obligations hereunder, more than twice in any twelve (12) month period, then there shall be no obligation on the part of the Landlord to give the Tenant written Notice and the Landlord shall be entitled to proceed without notice in accordance with the Landlord's rights pursuant to Article XIII hereof. 13.2 Re-letting and Sale of Personalty. Whenever the Landlord becomes entitled to re-enter upon the Premises under any provision of this lease the Landlord in addition to all other rights it may have, shall have the right, but shall not be obligated, as agent of the Tenant to enter the Premises and re-let them (for a term or terms shorter or longer than the balance of the Term, granting reasonable concessions in connection therewith) and to receive the Rent therefor and as the agent of the Tenant to take possession of any furniture or other property thereon and to sell the same at public or private sale without Notice and to apply the proceeds thereof and any Rent derived from re-letting the Premises upon account of the Rent due and to become due under this lease and the Tenant shall be liable to the Landlord for the deficiency, if any. 13.3 Right of Landlord to Remedy. If the Tenant defaults hereunder, the Landlord may proceed to remedy the default, including the making of any payments due or alleged to be due by the Tenant to third parties, and the Tenant shall pay on demand the Landlord's cost, plus interest on account thereof, all without prejudice to the Landlord's rights and remedies for such default by the Tenant. 13.4 Bankruptcy of Tenant. If a substantial portion of the property of the Tenant on the Premises is seized or taken in execution or attachment by a creditor of the Tenant or if the Tenant makes an assignment for the benefit of creditors or if a receiver-manager is appointed to control the conduct of the business on or from the Premises or if the Tenant becomes bankrupt or insolvent or takes the benefit of any act now or hereafter in force for bankrupt or insolvent debtors or if an order is made for the winding-up of the Tenant, the next ensuing 3 months' rent immediately will become due and payable as accelerated rent and the Landlord may re-enter and take possession of the Premises as if the Tenant were holding over and this lease shall forthwith be terminated upon Notice by the Landlord to this effect. Accelerated rent will be recoverable by the Landlord in the same manner as the Rent hereby reserved. - 21 - 13.5 Interest. The Tenant shall pay to the Landlord interest at a rate equal to Prime plus 5% per annum on all arrears of Rent and on any payment made by Landlord for the benefit or on behalf of Tenant. 13.6 Costs. If legal action is brought by Landlord by reason of any default by Tenant hereunder and a default is established, the Tenant shall pay all costs incurred therefor, including reasonable attorney fees. The Tenant shall also be responsible for, and shall pay to the Landlord, including, without limitation reasonable compensation for all time expended by the Landlord's own personnel, reasonable attorney fees and all other costs of any kind whatsoever arising from or incurred as a result of any default of the Tenant or any enforcement by the Landlord of any of the Tenant's obligations under this lease or any other agreement or obligation of the Tenant to the Landlord whether or not related to the Premises. The Tenant agrees that if the Tenant remains in default under this lease after receiving Notice as required pursuant to this lease the Landlord shall be entitled to receive from the Tenant and the Tenant shall pay a minimum administration fee of not less than Fifty Dollars ($50.00) per day to the Landlord which the Tenant acknowledges as being reasonable compensation for time expended by the Landlord's personnel in enforcing any of the Landlord's rights pursuant to this lease after the giving of such Notice, it being clearly understood that the payment or demand for such agreed reasonable compensation shall not be in lieu of and shall be in addition to any other fees, costs, compensations due to the Landlord as a result of the Tenant's default pursuant to this lease or pursuant to law or any order of court. 13.7 Confession of Judgment for Rent. Tenant hereby authorizes and empowers any prothonotary or attorney of any court of record (the "Attorney") to appear for Tenant in any actions which may be brought for any Rent due hereunder including accelerated Rent and any other sums which may become due and payable hereunder for the balance of the Term and therein confess Judgement against Tenant for all or any part of the Rent and any other sums due hereunder: and for interest and costs, together with an attorney's commission of ten percent (10%) or $20,000.00 whichever is greater. 13.8 Confession of Judgment for Possession. Tenant hereby authorizes and empowers any prothonotary or attorney to appear for Tenant in any action brought for possession hereunder and therein confess judgment in ejectment in any competent court against Tenant and all persons claiming under Tenant for the recovery by Landlord of possession of the Premises, for which a copy of this lease shall, verified by an affidavit, be a sufficient warrant. Thereafter, if Landlord so desires, a writ of execution or of possession may issue forthwith, without any prior writ or proceedings whatsoever. Such authority shall not be exhausted by one exercise thereof and - 22 - if such action shall thereafter, for any reason, be terminated and possession of the Premises remain in or be restored to Tenant, Landlord may, upon any subsequent default by Tenant, confess judgment in ejectment to recover possession of the Premises, and the termination for any reason of any such prior actions shall not prevent, hinder or prejudice the right and power of Landlord to bring subsequent actions as set forth in this paragraph. If such action is commenced, Landlord shall be entilteled to a judgement for Attorney's commission of ten percent (10%) of rents due or $20,000.00, whichever is greater. ARTICLE XIV REGULATIONS 14.1 Purpose. The Landlord may by Notice impose regulations, from time to time, for the orderly operation of the Building, the Common Areas and the Parking Facility, if any, the present regulations are attached hereto as Schedule "C" to this lease. 14.2 Observance. The Tenant shall observe and shall cause those for whom it is responsible to observe the regulations. 14.3 Enforcement. The Landlord shall enforce the regulations against all occupants of the Building but in doing so will not be obligated to commence any legal proceedings or be held liable for any claims by the Tenant or other tenants arising out of the failure of the Landlord to commence legal proceedings for any breach of regulations. ARTICLE XV MISCELLANEOUS 15.1 Exhibiting Premises. The Landlord may exhibit the Premises to prospective purchasers, prospective mortgagees and, during the last 6 months of the Term, prospective tenants. 15.2 Name of Building. The Landlord may designate the name of the Building and the Project and upon not less than 30 days' Notice may change the name of either the Building or the Project. The Tenant shall only refer to the Building and the Project by their designated names and shall only use such names as its business address. 15.3 Relocation. The Landlord and Tenant agreed that at any time during the Term and any renewal thereof, the Landlord shall have the right, upon providing the Tenant at least thirty (30) days' prior written Notice, to relocate the Tenant to other premises within the Building of approximately the same size, quality and interior design as the Premises provided, however, that the Tenant shall have the right to - 23 - approve such new space, which approval shall not be unreasonably withheld. The Tenant shall give written Notice to the Landlord of its approval or disapproval of such new space within ten (10) days of the receipt of the Landlord's notice requesting the Tenant to relocate. The Landlord shall pay the Tenant's direct moving costs only provided the Tenant shall provide the Landlord with reasonable evidence of such costs. The relocation shall be effective on the date stated in the Landlord's notice and the Tenant shall complete its move in one (1) weekend. In the event the Landlord relocates the Tenant to such new space, this lease and each and all of its terms, covenants and conditions shall remain in full force and effect and be deemed applicable to such new space save and except: (i) the Right of First Refusal, if any, if the new space is located on a different floor than the original Premises; and (ii) the location and size of the Premises which shall be in accordance with the appropriate floor plan. Upon the relocation taking place, the Fixed Rent per square foot for the new space shall be the same Fixed Rent per square foot as for the Premises and the lease will be amended accordingly. If the Tenant reasonably refuses to approve such new space, the Landlord shall have the right to terminate this lease by written Notice given to the Tenant within ten (10) days following the Landlord's receipt of the Tenant's Notice disapproving such new space, which termination shall be effective sixty (60) days after the date of the original Notice. 15.4 Notice. Any Notice to be given pursuant to this lease shall be in writing and shall be deemed to have been given if signed by or on behalf of the party giving Notice and delivered or mailed by registered prepaid post to the other party as follows: (a) to the Landlord at: 1740 Walton Road Att: Michael Barrist Blue Bell, PA 19422 with copy to: Mr.Joshua Gindin, Esq. 1700 Two Logan Square 18th and Arch Streets Philadelphia, Pa 19103 and - 24 - (b) to the Tenant at NCO Financial System, Inc 1740 Walton Road Blue Bell, Pa 19422 Any Notice so given shall be deemed to have been given, if delivered, on the first business day following the date of such delivery or, if mailed, on the third business day following the date of such mailing. Either party may by Notice change its address. During any interruption, threatened interruption or substantial delay in postal services, all Notices shall be delivered. 15.5 Compliance with Laws, etc. The Landlord and the Tenant shall at all times in the performance of their respective obligations under this lease comply with all laws, by-laws, regulations and orders of any competent authority and with the requirements of any insurer of the interest of the Landlord in the Project. 15.6 Governing Law and Severability. This lease shall be governed by and construed in accordance with the laws in force in the State in which the Project is located. The Landlord and the Tenant agree that all of the provisions of this lease are to be construed as covenants and agreements as though the words importing such covenants and agreements were used in each separate section hereof. Should any provision or provisions of this lease be illegal or not enforceable, it or they shall be considered separate and severable from the lease and its remaining provisions shall remain in force and be binding upon the parties hereto as though the said provision or provisions had never been included. 15.7 Recordation. The Tenant may record this Lease with the prior written approval of the Landlord, which approval the Landlord may withhold in its discretion. If the Landlord provides such approval, the Tenant shall not record this Lease but shall prepare and have executed by the parties hereto a short form of lease approved by the Landlord for the purpose only of enabling notice of this Lease to be recorded without affecting the respective rights and obligations of the parties hereunder. The Tenant shall pay the Landlord's Cost incurred in connection with such recordation and, for greater certainty, shall pay the cost of any necessary survey plan of the Premises. 15.8 Condemnation. If at any time during the Term the interest of the Tenant under this lease or the whole or any part of either the Premises or any other part of the Building shall be taken by any lawful power or authority by the right of condemnation or eminent domain, the Landlord may at its option, give Notice to the Tenant terminating this lease on - 25 - the date when the Tenant or Landlord is required to yield up possession thereof to the condemning authority. Upon such termination, or upon termination by operation of law, as the case may be, the Tenant shall immediately surrender the Premises and all its interest therein, the Rent shall abate and be apportioned to the date of termination, the Tenant shall forthwith pay to the Landlord the apportioned Rent, all other amounts which may be due to the Landlord up to the date of termination, and the provisions of section 2.4 shall apply. The Tenant shall have no claim upon the Landlord for the value of its property or the unexpired Term of this lease, but the parties shall each be entitled to separately advance their claims for compensation for the loss of their respective interests in the Premises and the parties shall each be entitled to receive and retain such compensation as may be awarded to each respectively. If an award of compensation made to the Landlord specifically includes an award for the Tenant, the Landlord will account therefor to the Tenant. In this Section the word "condemnation" shall include a sale by the Landlord to an authority with powers of condemnation, in lieu of or under threat of condemnation. 15.9 Hazardous Substances; Wastes. (a) Tenant will not, and will not permit any other occupant of the Premises to store, generate, treat or dispose any Hazardous Substances or Wastes on or about the Premises or the Building, and hereunder shall promptly cure any such condition. Tenant's obligations hereunder shall serve the expiration or sooner termination of this Lease; (b) Tenant hereby represents and warrants that Tenant has not been identified in any litigation, proceeding or investigation as a responsible party or potentially responsible party for any liability for disposal or release of any Hazardous Substances or Wastes; and (c) For the purposes hereof: (i) "Hazardous Substances" shall mean any flammable explosives, radioactive materials, asbestos, unreaformaldehyde, hazardous wastes, toxic substances or any other elements or compounds designated as a "hazardous substance", "pollutant" or "contaminant" in the CComprehensiveEnvironmental Response, Compensation and Liability Act, 42 U.S.C. Section 9600 et. seg or in the Resource Conservation and Recovery Act, 42 U.S.C. Section 6991 et. seg. or any other applicable Federal, state or local law or regulation and (ii) "Wastes" shall mean any hazardous wastes, residual wastes, solid wastes or other wastes as those terms are defined in the applicable Federal, state or local laws or regulations. 15.10 Rider. The Rider attached hereto as Schedule "D" forms a part of this Lease. - 26 - IN WITNESS WHEREOF the Landlord and the Tenant have executed this lease under their respective seals. Dated ________________________________________________, 199__. 1710-20 Sentry East Associates, L.P. by: /s/ Michael J. Barrist ----------------------------------- _____________________________ Michael J. Barrist, President Attest 1710-20 Sentry East Inc. The General Partner "LANDLORD" by: /s/ Michael J. Barrist, President ----------------------------------- _____________________________ Attest "TENANT" - 27 - Schedule "A" Legal Description Unit 1710-1720 in Sentry Park East Condominium together with an undivided 40.440 percent interest in and to the common elements of the Condominium as described in that certain Declaration of Condominium of Sentry Park East Condominium dated June 30, 1993 as recorded in Deed Book 5046, page 2030, Montgomery County, Pennsylvania. SCHEDULE "C" REGULATIONS Pursuant to Section 14.1 the Landlord hereby imposes the following regulations: 1. Deliveries of building materials, major pieces of equipment and furniture and bulky goods shall only be made by prior arrangement with the Building management and through the Delivery Facilities. 2. The Tenant shall only use the Building key system and shall obtain all keys and cards providing access to the Building, the Parking Facility, if any and the Premises from the Landlord. No additional locks shall be installed on the doors to the Premises. 3. No bicycles or other vehicles shall be brought into the Building. 4. No inflammable oils or other dangerous materials shall be kept in the Building. 5. The Common Areas shall not be obstructed. 6. The Tenant shall provide the Landlord with the names of all persons entitled to enter the Premises outside normal business hours. The Landlord shall only be required to allow access to the Premises by such persons. 7. The Tenant shall not install any power or water consuming machinery and equipment, except normal office equipment, without the approval of the Landlord and, if required by the Landlord, shall connect such machinery and equipment to separate meters. 8. If required by the Landlord, the Tenant shall arrange for pest control. 9. The Tenant shall not remove or alter the Building standard window coverings or except with the approval of the Landlord install any additional window coverings. 10. The Tenant shall keep all window blinds down so as to prevent direct sunlight from penetrating the Premises. 11. The Landlord may restrict canvassing or peddling in the Building. 12. The Tenant shall maintain with the Landlord current lists of the names and license plate numbers of each employee using the Parking Facility, if any and shall cause its employees to affix to their automobiles whatever manner of identification the Landlord may require. 13. The Tenant shall observe the directions of the Landlord as to parking locations in the Parking Facility, if any according to automobile size. 14. The Tenant shall leave the Premises in a condition suitable for the performance by the Landlord of its janitorial services. 1710-20 SENTRY EAST ASSOCIATES L.P. AND NCO Financial System, Inc OFFICE PREMISES LEASE TABLE OF CONTENTS 1.INTERPRETATION 1.1 Defined Terms - General 1.2 Defined Terms - Operating Costs and Taxes 1.3 Number, Gender and Joint and Several Liability 1.4 Procedure for Approval 1.5 Divisions 1.6 Entire Agreement 1.7 Reasonableness 1.8 Nature of the Lease 2. DEMISE AND TERM 2.1 Demise-Premises 2.2 Licenses 2.3 Term 2.4 Surrender on Termination 2.5 Holding Over 3. RENT 3.1 Items of Rent 3.2 General 3.3 Final Determination of Certain Items of Rent 3.4 Insufficient Funds 3.5 Deposit 4. USE OF PREMISES 4.1 Use 4.2 Waste and Nuisance 4.3 Extraordinary Equipment 4.4 Fire Prevention and Energy Conservation 4.5 Exterior Appearance of Premises 5. LIMITATION OF LIABILITIES 5.1 Unavoidable Delay 5.2 Limitation of Landlord's Liability 5.3 Indemnity 6. TAXES 6.1 Landlord's Taxes 6.2 Tenant's Taxes 6.3 Assessment Appeals 7. INSURANCE 7.1 Landlord's Insurance 7.2 Tenant's Insurance 8. OPERATION, SERVICES, MAINTENANCE, REPAIR AND ACCESS BY LANDLORD 8.1 Quiet Enjoyment 8.2 Standard of Operation 8.3 Services to Premises 8.4 Services to Building 8.5 Additional Services 8.6 Extra Operating Costs 8.7 Maintenance and Repair 8.8 Access by Landlord 9. MAINTENANCE, REPAIR AND IMPROVEMENTS BY TENANT 9.1 Maintenance of Premises 9.2 Leasehold Improvements 9.3 Liens 9.4 Removal of Leasehold Improvements - Term 9.5 Removal of Leasehold Improvements - Expiration of Term 10. TRANSFERS BY TENANT 10.1 Successors to Tenant 10.2 Licenses, Franchises and Concessions 10.3 Assignment or Subletting 10.4 Change in Control 10.5 Advertising of Premises 11. TRANSFER BY LANDLORD, SUBORDINATION AND ATTORNMENT 11.1 Transfer by Landlord 11.2 Subordination and Attornment 11.3 Estoppel Certificates 12. TERMINATION AND RENT ABATEMENT 12.1 Termination by Tenant 12.2 Termination by Landlord 12.3 Abatement of Rent 13. LANDLORD'S REMEDIES 13.1 Default and Re-Entry 13.2 Re-letting and Sale of Personalty 13.3 Right of Landlord to Remedy 13.4 Bankruptcy of Tenant 13.5 Interest 13.6 Costs 13.7 Confession of Judgment for Rent 13.8 Confession of Judgment for Possession 14. REGULATIONS 14.1 Purpose 14.2 Observance 14.3 Enforcement 15. MISCELLANEOUS 15.1 Exhibiting Premises 15.2 Name of Building 15.3 Relocation 15.4 Notice 15.5 Compliance with Laws, etc 15.6 Governing Law and Severability 15.7 Recordation 15.8 Condemnation 15.9 Rider Schedule "A" Legal Description Schedule "B" Floor Plan Schedule "C" Regulations THIS LEASE MADE in duplicate this _____ day of_______________, 199____ 1710-20 SENTRY EAST ASSOCIATES, L.P. (the "Landlord") of the FIRST PART, - and - NCO Financial System, Inc. (the "Tenant") of the SECOND PART, WHEREBY the parties agree as follows: ARTICLE I INTERPRETATION 1.1 Defined Terms - General. In this lease: "Building" means that certain building known as 1710 Walton Road, Blue Bell, Pa. 19422 located on the Land. "Common Areas" means those parts of the Project designated by the Landlord for common use by the Landlord and the tenants of the Project, including without limitation, the landscaped portions of the Project, the public sidewalks and the landscaped portions of the streets adjacent to the Project, the Delivery Facilities, and Parking Facilities, if any. "Common Service Areas" means those parts of the Project, whether or not within the Building, designated by the Landlord which provide services to the Project; "Cost of Utilities" means the cost of electricity and other utilities supplied to tenants of premises in the Building as determined by the Landlord who in making its determination shall take into account the readings of any electrical check meters installed by the Tenant; "Delivery Facilities" means those portions of the Project designated by the Landlord as facilities for common use by the Landlord and tenants of the Project for deliveries; "Expert" means any architect, engineer, land surveyor, chartered accountant, or other professional consultant, as the case may be, appointed by the Landlord and qualified in the opinion of the Landlord to perform the particular function; "Expiration of the Term" means the termination of this lease by either passage of time or operation of any of its provisions; "Fixed Rent" means the amount payable under section 3.1(a); "Insurance" means coverage with respect to the following risks in amounts equal, in the case of the Landlord, to those maintained by prudent owners of like buildings and, in the case of the Tenant, to those maintained by prudent tenants of like premises: - 1 - (a) comprehensive general liability; (b) all risks coverage; (c) in the case of the Landlord: (i) boiler and machinery; and (ii) loss of rental income by reason of damage; and (d) in the case of the Tenant, comprehensive general liability; and in the case of the Landlord, such other coverage as the Landlord may require to maintain and in the case of the Tenant, such other coverage as the Landlord may require, in each case having regard to the risks which are customarily insured against by prudent landlords and tenants of like premises; "Landlord's Cost" means with respect to any cost incurred by the Landlord the actual amount thereof and a fee on account of management and overhead, said fee to be equal to the amount the Landlord might reasonably pay to a third party for the administration and management of the Building. "Leasehold Improvements" means the fixtures and improvements made by or on behalf of the Tenant in the Premises; "Notice" has the meaning set forth in section 15.4; "Parking Facility", if any, means those portions of the Project designated by the Landlord for parking; "Premises" means the portion of the Building, excluding its exterior, outlined in red on the floor plan attached to, and forming part of, this lease, currently known as suite 300. "Prime" means the rate of interest from time to time announced by Mellon Bank, N.A. as its prime rate; "Project" means the improvements constructed on the Land including the Building, the Common Areas (whether on or adjacent to the Land), the Parking Facility, if any, and any other building; "Land" means the land as described in Schedule "A" attached hereto. "Rent" means the amounts payable by the Tenant to the Landlord under - 2 - this lease; "Term" means the term of this lease as specified in section 2.3 and any permitted overholding; and "Unavoidable Delay" means any event, beyond the control of the party affected thereby which prevents the fulfillment by such party of any obligation hereunder and not caused by such party and not avoidable by the exercise of reasonable effort or foresight by such party. 1.2 Defined Terms - Operating Costs and Taxes. For the purpose of calculating the Proportionate Share of Operating Costs and Taxes: "Fiscal Year" means a calendar year provided that the Landlord may by Notice specify an annual date upon which each subsequent Fiscal Year is to begin, in which event the Fiscal Year which would otherwise be current when such annual date first occurs thereafter shall terminate on the preceding day; "Operating Costs and Taxes" means for a Fiscal Year the aggregate costs paid or payable by the Landlord in accordance with generally accepted accounting principles applied in the real estate management industry on account of Taxes, Insurance and the operation, management, maintenance and repair of the Building and on a proportionate basis as hereinafter provided, the Land, the Common Areas, the Common Service Areas and those costs associat ed with Condominium Association Fees, together with a charge, the annual cost of which for the purpose of this Lease shall be deemed to be management fees paid by the Landlord for the administration and management of the Building and the Land, and, if the Landlord itself manages the Building and the Land, a fee equal to the amount the Landlord might reasonably pay to a third party for the administration and management of the Building and the Land. Without limiting the generality of the foregoing, Operating Costs and Taxes shall also include the cost amortized at Prime of all capital improvements made after the Building is substantially completed, which (i) have the effect of reducing the costs which would otherwise be included in Operating Costs and Taxes, or (ii) are required by any competent governmental authority. Operating Costs and Taxes shall exclude the following: (i) costs directly recoverable from tenants or insurers; (ii) debt service, depreciation or other costs of a capital nature and interest on any of the foregoing, except as hereinafter provided; - 3 - (iii) costs of procuring any lease; and (iv) income, corporate and other taxes of a personal nature of the Landlord to the extent not imposed in lieu of Taxes. The proportion of Operating Costs and Taxes attributable to the Land, Common Areas and the Common Service Areas shall be allocated equitably by the Landlord to all buildings forming part of the Project and will be based to the extent possible on the respective aggregate areas of Rentable Space in the Building and all other buildings forming part of the Project. If at any time there are unoccupied premises in the Building, the Landlord may make an equitable adjustment of the amount of Operating Costs and Taxes by reason of the fact that unoccupied premises result in lower costs in order that the tenants of the occupied premises will bear the actual amount of the Operating Costs and Taxes attributed to their respective premises; "Taxes" means all taxes and other charges imposed by any lawful authority against the Land and any improvements thereon or upon the Landlord in respect thereof and all costs relating to any appeal thereof, and includes (without limiting the generality of the foregoing) any Rental Taxes; "Proportionate Share" means the ratio, the numerator of which is the Rentable Space of the Premises and the denominator of which is the aggregate Rentable Space of the Building (exclusive of any storage areas); "Rentable Space" whether in the case of a whole floor of the Building or in the case of premises comprising part of a floor of the Building shall be determined by the Landlord's architect or land surveyor according to the American National Standard for measuring floor area in office buildings as established by the Builders Owners and Managers Association International and in effect as of the date of commencement of the Term; "Rental Taxes" means any tax or duty imposed upon the Landlord which is measured or based in whole or in part directly upon the Rent payable under this lease or services provided by the Landlord whether existing at the date hereof imposed by any governmental authority. 1.3 Number, Gender and Joint and Several Liability. The necessary grammatical changes required to make the provisions of this lease apply in the plural sense where the Tenant comprises more than one entity and to corporations, associations, partnerships or individuals, male or female, shall be assumed as though in each case fully expressed. If - 4 - the Tenant is more than one person or entity its liability shall be joint and several. If the Tenant is a partnership each person who is or becomes a member of the partnership or any successor partnership shall be jointly and severally liable. 1.4 Procedure for Approval. Any request for approval shall be requested by Notice and in the absence of reply given by Notice not later than 15 days after Notice of the request has been received, or such other period of time as is otherwise expressly provided in this lease, the approval shall be deemed to have been given unless the approval may by the terms of this lease be withheld in the discretion of the party whose approval is requested. Each approval shall be in writing unless by operation of the preceding sentence it is deemed to have been given. If either party withholds its approval it shall give Notice of its reason unless the approval may by the terms of this lease be withheld in its discretion. 1.5 Divisions. All references in this lease to articles, sections and other subdivisions are to those in this lease. 1.6 Entire Agreement. This lease and the regulations imposed by the Landlord pursuant to section 14.1 constitute the entire agreement between the Landlord and the Tenant concerning the subject matter of this lease. This lease may only be amended by an agreement in writing signed by the parties hereto. 1.7 Reasonableness. The Landlord and the Tenant shall, except as otherwise expressly provided in this lease, each act reasonably, having regard to the fact that they are the owner and a tenant, respectively, of a good quality office building, in the exercise and the enforcement of their respective rights under this lease. Each right shall be exercisable and enforceable from time to time, except as aforesaid. 1.8 Nature of the Lease. This lease is a completely net lease to the Landlord and accordingly, except as otherwise expressly provided in this lease, the Landlord has no obligations to the Tenant with respect to either the Premises, the Building, the Common Areas, the Common Service Areas, the Parking Facility, or if any, the Project. ARTICLE II DEMISE AND TERM 2.1 Demise-Premises. The Landlord hereby leases the Premises to the Tenant and the Tenant hereby leases and accepts the Premises from the Landlord, (being 3,436 square feet of Rentable Space and currently known as suite 300) to have and to hold during the Term, subject to the - 5 - terms of this lease. 2.2 Licenses. The Landlord hereby grants to the Tenant throughout the Term and subject to control by the Landlord, a non-exclusive license, revocable at any time upon Notice by the Landlord: (a) to use those parts of the Common Areas giving access to the Premises and the Parking Facility, if any; (b) to have its name displayed on the main lobby directory board for the Building, on the floor lobby directory board on each floor on which the Premises are located and on the main door to the Premises, all such signs to be under the exclusive control of the Landlord and to conform to the uniform pattern of identification signs for tenants of the Building prescribed by the Landlord; and (c) if the Premises constitute one or more full floors of the Building, to have a sign displaying the name of the Tenant in the elevator lobby of each such floor provided that the design of the sign has been approved by the Landlord. 2.3 Term. The Term shall be ten (10) years beginning January 1, 1996 at 12:00 Midnight and ending the last day of December, 2005 at 5:00 PM. 2.4 Surrender on Termination. Forthwith upon the Expiration of the Term, the Tenant shall vacate and deliver up possession of the Premises in a broom clean condition and in good and substantial repair in accordance with the Tenant's obligation under this lease to repair the Premises, but subject to the Tenant's rights and obligations in respect of removal in accordance with sections 9.4 and 9.5. At the same time the Tenant shall surrender to the Landlord at the place then fixed for the payment of Rent all keys and other devices which provide access to the Premises, the Building or any part thereof and shall inform the Landlord of all combinations to locks, safes and vaults, if any, in the Premises. 2.5 Holding Over. If the Tenant shall continue to occupy the Premises at the expiration of this lease with or without the consent of the Landlord and without any further written agreement the Tenant shall be a monthly tenant at two hundred (200%) of the monthly Fixed Rent herein reserved for the last year of the Term and otherwise on the terms and conditions herein set forth, except as to the length of tenancy. - 6 - ARTICLE III RENT 3.1 Items of Rent. The tenant shall pay to the Landlord: (a) $54,976.00 oer annum in 12 equal Installments of $4,581.33 each based on the rate of $16.00 per square foot per annum of Rentable Space. (b) the Proportionate Share of Operating Costs and Taxes over the Base Year 1996; (i) any additional services and equipment agreed to be provided by the Landlord at the request of the Tenant; (C) the amount, if any, by which the Operating Costs and Taxes attributed to the Premises by the Landlord exceeds the Proportionate Share of Operating Costs and Taxes if such excess is occasioned by the use or improvement of the Premises. 3.2 General. All amounts payable by the Tenant to the Landlord under this lease shall be deemed to be Rent. The Tenant shall pay Rent without abatement, deduction or set-off, except as expressly provided, in lawful money of the United States to such person and at such address as the Landlord may advise. The Tenant shall pay items of Rent of a recurring nature in advance on the first day of each month of the Term and shall pay other items of Rent within 15 days of the delivery of an invoice therefor. The Landlord shall estimate and may re-estimate, items of Rent of a recurring and variable nature for each Fiscal Year and advise the Tenant thereof. If the Commencement Date is not the first day of a month or if the Expiration of the Term does not occur on the last day of a month, Rent for the partial month shall be pro-rated on a per diem basis. 3.3 Final Determination of Certain Items of Rent. The Landlord shall within 180 days after the end of each Fiscal Year provide to the Tenant a statement (the "Statement") setting out in detail the Proportionate Share of Operating Costs and Taxes and such other items of Rent of a recurring and variable nature for such Fiscal Year. If the aggregate monthly Installments on account thereof paid during such Fiscal Year differ from the actual amount thereof set forth in the Statement, the Tenant shall pay or the Landlord shall refund the difference within 30 days after the Statement is provided. The Tenant may within the 60 day period after the Statement is provided examine the books and records of the Landlord relating to the Project. The Tenant may by Notice given within such 60 day period but not otherwise dispute the Statement whereupon the matter shall be finally resolved by an Expert. If the Expert determines that the amount payable by the Tenant has been overstated by more than three percent(3%) the Landlord shall pay the - 7 - fee of the Expert. If the Expert determines that the amount payable by the Tenant has not been overstated by three percent (3%) or more the Tenant shall pay such fee. Any adjustment required to any previous payment made by the Tenant or the Landlord by reason of any such determination shall be made forthwith and shall bear interest at a rate equal to Prime plus one percent (1%) per annum from the date the actual overpayment or underpayment is made. 3.4 Insufficient Funds. The Tenant agrees that if any of the Tenant's cheques are returned for lack of sufficient funds, the Tenant shall pay to the Landlord upon receipt of the Landlord's invoice for same, a minimum administrative fee of not less than Fifty Dollars ($50.00). 3.5 Deposit. The Landlord acknowledges receipt of the Deposit in the amount of $00.00 prior to the execution of this lease, which sum shall be deposited in an account of Landlords choice. The Deposit shall be applied as a security deposit for the due performance by the Tenant of all the covenants and obligations on its part herein contained, the Landlord hereby reserving unto itself at its sole discretion the right to apply such sum to any damages resulting from any default by the Tenant of any of its covenants and obligations hereunder or towards the payment or reduction of any claim of the Landlord against the Tenant including monthly Rent. If the Deposit hereunder shall be applied in accordance with the provisions hereof, the Tenant covenants to provide sufficient funds to ensure that the Deposit remains at the level herein before indicated within ten (10) days of receipt of the Landlord's Notice therefor. Provided the Tenant is not then in default under the lease and provided that the Tenant has not, in any way, damaged the Premises, the Landlord shall, within thirty (30) days of the Tenant's vacating the Premises, return to the Tenant the balance of the security deposit referred to in section 3.5. Landlord shall be under no obligation to refund any interest that may have accrued on said deposit. ARTICLE IV USE OF PREMISES 4.1 Use. The Premises shall be used for general office purposes only and not for any other purpose without the prior written consent of the Landlord, which consent may be withheld at the discretion of the - 8 - Landlord, the Tenant shall not permit any part of the Premises to be occupied by any person other than the Tenant and its employees and any subtenant permitted under section 10.3 and the employees of such subtenant. 4.2 Waste and Nuisance. The Tenant shall not commit or permit any waste or damage to the Premises or any manner of use causing annoyance to other tenants of the Project. 4.3 Extraordinary Equipment. The Tenant shall not install any equipment which might affect the capacity of either the structure or the basic systems of the Building. 4.4 Fire Prevention and Energy Conservation. The Tenant shall comply with the requirements of the Landlord with respect to fire prevention and, with respect to the Premises, energy conservation. 4.5 Exterior Appearance of Premises. The Tenant shall keep the exterior appearance of the Premises tidy and business-like and shall not erect any sign or other like object within the Premises which is visible from the exterior of the Premises. ARTICLE V LIMITATION OF LIABILITIES 5.1 Unavoidable Delay. Except as herein otherwise expressly provided, if and whenever and to the extent that either the Landlord and the Tenant shall be prevented, delayed or restricted in the fulfillment of any obligations hereunder in respect of the supply or provision of any service or utility, the making of any repair, the doing of any work or any other thing (other than the payment of Rent) by Unavoidable Delay, the time for fulfillment of such obligation shall be extended during the period in which such circumstance operates to prevent, delay or restrict fulfillment thereof, and the other party to this Lease shall not be entitled to compensation for any inconvenience, nuisance or discomfort thereby occasioned nor shall Rent abate. 5.2 Limitation of Landlord's Liability. The Landlord shall only be liable for any personal injury or death suffered by the Tenant or any person in its employ who may be upon the Premises or for the loss or any damage to any property located within the Premises of the Tenant or of any employee of the Tenant if caused by the actual fault or negligence of the Landlord. It is expressly understood and agreed by Tenant that none of Landlord's covenants, undertakings or agreements are made or intended as personal covenants, undertakings or agreements by Landlord or its partners, and any liability for damages or breach or - 9 - nonperformance by Landlord or for damages caused by or arising from any other action whatsoever, shall be collectable only out of Landlord's interest in the Project and no personal liability is assumed by, nor at any time by be asserted against, Landlord or its partners or any of its or their officers, agents, employees, legal representatives, successors or assigns, if any, all such liability, being expressly waived released by Tenant. 5.3 Indemnity. The Tenant and the Landlord shall each indemnify and save the other harmless in respect of: (a) all claims and liabilities arising from any act or omission of the indemnitor or any person for whose conduct the indemnitor is responsible and the costs incurred by the indemnitee in connection with any action pertaining thereto; and (b) any damage suffered by the indemnitee by reason of the breach by the indemnitor of any of its obligations under this lease and the costs incurred by the indemnitee in connection with any action pertaining thereto. ARTICLE VI TAXES 6.1 Landlord's Taxes. The Landlord shall pay before delinquency the Taxes relating to the Building. 6.2 Tenant's Taxes. The Tenant shall pay before delinquency all taxes and other charges imposed by any lawful authority against the Tenant or any sub-tenant, licensee or occupant of the premises which if not paid would constitute either a lien on either the Land or the Building or a liability of the Landlord. 6.3 Assessment Appeals. The Tenant shall not conduct any appeal from any governmental assessment or determination of the value of the Land, the Building or the Premises. ARTICLE VII INSURANCE 7.1 Landlord's Insurance. The Landlord shall maintain Insurance with respect to its interest in the Building, the Common Areas and the Parking Facility, if any. Such insurance shall include, if available, - 10 - a waiver of any right of subrogation with respect to property insurance only, against the Tenant. 7.2 Tenant's Insurance. The Tenant shall maintain Insurance with respect to its interest in the Premises, the Leasehold Improvements and all operations of the Tenant in and from the Premises in the amounts and forms as specified below. The Tenant shall at the request of the Landlord provide the Landlord with certificates of such insurance. If both the Landlord and the Tenant have claims to be indemnified under any such insurance, the indemnity shall be applied first to the settlement of the claim of the Landlord and the balance to the settlement of the claim of the Tenant. Such insurance shall include the Landlord and any Mortgagee designated by Notice by the Landlord as named insureds as their interests may appear and, if available, shall contain a cross-liability clause protecting the Landlord in respect of claims by the Tenant as if the Landlord were separately insured and a provision prohibiting the insurer from materially altering or canceling the coverage without first giving the Landlord at least 30 days' prior written notice thereof. Such insurance shall include, if available, a waiver of any right of subrogation with respect to property insurance only, against the Landlord. (a) Liability Insurance. Tenant shall provide on or before it enters the Demised Premises and shall keep in force during the term, for the benefit of Landlord and Tenant, liability insurance against any liability occasioned by any occurrence in or about the Demised Premises or any appurtenance thereto. Such policy is to be written in a combined single limit of at least $1,000,000 for injury or death to one or more than one person arising from any one occurrence and with respect to property damages. In addition, Tenant shall maintain and provide a $2,000,000 umbrella policy on terms which Landlord shall specify. (b) Fire Insurance. Tenant shall insure and keep its equipment, personal property and all leasehold improvements benefitting the Demised Premises or elsewhere on the Real Estate insured against damage by fire, water damage and other casualties and risks covered by "All Risk" and extended coverage insurance. Landlord shall not carry insurance of any kind on Tenant's property, and, except as provided by law or by reason of its fault or its breach of any of its obligations hereunder, shall not be obligated to repair any damage thereto or replace the same. (c) Worker's Compensation. Tenant shall maintain Worker's Compensation insurance, insuring against and satisfying Tenant's obligations and liabilities under the applicable Worker's Compensation laws. Tenant shall also maintain Employers Liability Insurance in the amount of at least $1,000,000. ARTICLE VIII - 11 - OPERATION, SERVICES, MAINTENANCE, REPAIR AND ACCESS BY LANDLORD 8.1 Quiet Enjoyment. The Landlord covenants with the Tenant for quiet enjoyment. 8.2 Standard of Operation. The Landlord shall operate and manage the Building, the Land, the Common Areas, the Common Service Areas and the Parking Facility, if any, to the standard of a good quality office building, subject to the limitations arising from the design of the Building and its basic systems. 8.3 Services to Premises. The Landlord shall provide the following services to the Premises: (a) heat, ventilation and air conditioning as required for the comfortable use and occupancy of the Premises during the normal business hours as determined by the Landlord from time to time (and being, at the date of this lease, 8:00 a.m. to 6:00 p.m. Monday to Friday except on legal or statutory holidays); (b) electrical power for lighting and office equipment; (c) replacement of tubes and ballasts; (d) janitorial services; 8.4 Services to Building. The Landlord shall provide for the Tenant and others the following services: (a) elevators; (b) washroom facilities on each floor of the Building on which the Premises are located; (c) heat, ventilation, air conditioning, lighting, and janitorial service in the appropriate interior portions of the Common Areas; (d) snow removal and landscape maintenance for the appropriate exterior portions of the Common Areas; (e) exterior window washing at such intervals as landlord deems appropriate; (f) garbage removal; and - 12 - (g) janitorial services for the appropriate interior portions of the Common Areas. 8.5 Additional Services. The Landlord, if it shall from time to time so elect, shall have the exclusive right, by way of Additional Services, to provide or have its designated agents or contractors provide any janitorial or cleaning services to the Premises required by the Tenant which are additional to those required to be provided by the Landlord under section 8.3, including the Additional Services which the Landlord agrees to provide by arrangement and to supervise the moving of furniture or equipment of the Tenant and the making of repairs or alterations conducted within the Premises, and to supervise or make deliveries to the Premises. The cost of Additional Services (including the Landlord's administration fee) provided to the Tenant, whether the Landlord shall be obligated hereunder or shall elect to provide them as Additional Services, shall be paid to the Landlord by the Tenant from time to time promptly upon receipt of invoices therefor from the Landlord. The cost of Additional Services charged directly to the Tenant and other tenants shall be credited in computing Operating Costs and Taxes to the extent that they would otherwise have been included. 8.6 Extra Operating Costs. Upon request by the Tenant, the Landlord may agree from time to time to arrange for extra heating, ventilating and air conditioning supply, electrical supply or for the supply of other services to the Premises above those normally provided to tenants of the Building or outside of normal business hours. The Tenant will pay to the Landlord in the manner in which Operating Costs and Taxes are paid from time to time hereunder any and all additional costs and expenses of the Landlord which may arise in respect of the use by the Tenant of the Premises for business hours that do not coincide with normal business hours for the Building generally or that may arise in respect of extra heating, ventilating and air conditioning supply, electrical supply and other services which are arranged to be provided to the Tenant as a result of its activities over and above those normally provided to the tenants of the Building or outside of normal business hours, plus an administration fee equal to fifteen percent (15%) of each component thereof. The Landlord reserves the right to install at the Tenant's expense meters to check the Tenant's consumption of electricity, water or other utilities. 8.7 Maintenance and Repair. The Landlord shall maintain and repair the following: (a) the Building and its basic systems but not the Premises or the premises of other tenants; - 13 - (b) the structural elements of the Premises; and (c) the Common Areas, the Common Service Areas and the Parking Facility, if any, except where such maintenance and repair is required due to the negligence of the Tenant or those for whom the Tenant is in law responsible, in which circumstances the Tenant shall be liable for the cost of such maintenance and repair. 8.8 Access by Landlord. The Landlord may enter the Premises in order: (a) to perform its obligations hereunder; (b) to install, maintain and repair equipment within or about the Premises for the supply of services to other premises in the Building; (c) to make repairs or alterations to the Building; (d) to take such steps as the Landlord may deem necessary for the safety or preservation of the Project; and (e) to inspect the state of repair of the Premises. Prior to the exercise of this right the Landlord whenever possible shall consult with the Tenant in order to minimize inconvenience to the Tenant and in its exercise of this right, shall observe the security requirements of the Tenant. 8.9 Interruption of Services. Landlord shall have no responsibility or liability to Tenant, nor shall there be any abatement for rent for any failure to supply any of said services and facilities that Landlord has agreed to supply hereunder during such period as such services and facilities are out of order, undergoing repair or if prevented by labor disorders, strikes, accidents or other causes beyond Landlord's control. If Landlord, in its sole discretion, deems it advisable or convenient to interrupt any of said services to make repairs, alterations or improvements or because of labor disturbances, strikes, accidents or causes beyond Landlord's control, Landlord may, after prior written notice to Tenant, do so for the period that Landlord deems expedient and advisable without any abatement in rent or other liability to Tenant. ARTICLE IX MAINTENANCE, REPAIR AND IMPROVEMENTS BY TENANT - 14 - 9.1 Maintenance of Premises. The Tenant shall maintain and repair the Premises and the Leasehold Improvements. 9.2 Leasehold Improvements. The Tenant may make Leasehold Improvements provided that: (a) the Tenant shall furnish the Landlord with professionally prepared plans and specifications therefor; (b) Such plans and specifications shall be approved by the Landlord and, at its election, any Expert; (c) the Tenant shall advise the Landlord of the identity of its contractors and tradesmen and their respective labor affiliations; (d) the Landlord shall either (i) approve any contractors proposed by the Tenant to perform any work which may affect the structure, the walls or the systems of the Building or (ii) require that any such work be performed by either the Landlord or its contractors in which case the Tenant shall pay the Landlord's Cost on account thereof; the Landlord may refuse to allow the contractors and tradesmen of the Tenant access to the Building if their labor affiliations may conflict with those of the Landlord or those employed by it or if they are not competent; (e) the Tenant shall produce evidence satisfactory to the Landlord as to the existence of all necessary permits and sufficient insurance coverage; including, but not limited to, Waivers of Liens filed on behalf of the Landlord; (f) the Tenant shall pay the Landlord's Cost on account of the fees of any Expert appointed to review the plans and specifications, whether or not the work proceeds; (g) construction of the Leasehold Improvements shall be performed in accordance with the plans and specifications submitted to the Landlord and, where applicable, approved by the Landlord, subject to any conditions or regulations imposed by the Landlord and in a good and workmanlike and expeditious manner using good quality materials; - 15 - (h) the Landlord may inspect construction as it proceeds (the onus being on the Tenant to advise the Landlord whenever any phase has been completed so that an inspection can be made); and (i) if the Tenant fails to observe any of the requirements of this section the Landlord may require that construction stop and that the Premises be restored to their prior condition failing which the Landlord may do so and the Tenant shall pay the Landlord's Cost on account thereof. Upon installation of any Leasehold Improvements, such Leasehold Improvements shall become the property of the Landlord and shall not be removed by the Tenant except as hereinafter provided. 9.3 Liens. If any lien under applicable mechanics lien statutes of the Commonwealth of Pennsylvania, as amended from time to time, or any successor statute is registered against the title to the Building and such lien relates to material, labor or any service alleged to have been provided to the Tenant, the Tenant shall upon Notice by the Landlord cause such lien to be discharged within 5 days after such Notice has been given. If the Tenant shall fail to cause any such lien to be discharged, as aforesaid, then in addition to any other rights or remedy of the Landlord, the Landlord may (but shall not be so obligated) discharge same by paying the amount claimed to be due into Court or directly to any such lien claimant and the amount so paid by the Landlord and all costs and expenses, including reasonable Attorneys' fees, incurred for the discharge of such lien shall be due and payable by the Tenant to the Landlord as Rent upon receipt of the Landlord's invoice for same. 9.4 Removal of Leasehold Improvements - Term. The Tenant may remove Leasehold Improvements either upon the exercise of its rights under, and upon the terms of, section 9.2 or with the approval of the Landlord which may be withheld in its discretion. 9.5 Removal of Leasehold Improvements - Expiration of Term. The Landlord may upon not less than 30 days' Notice (except in the case of default and re-entry in which case no prior Notice need be given) require the Tenant before the Expiration of the Term to remove some or all Leasehold Improvements and to restore the Premises to their original condition, the cost of which shall be borne exclusively by the Tenant. Upon the Expiration of the Term, all Leasehold Improvements (including carpeting and light fixtures) and all personal property of the Tenant remaining in the Premises shall become the property of the Landlord. - 16 - ARTICLE X TRANSFERS BY TENANT 10.1 Successors to Tenant. This lease shall inure to the benefit of and be binding upon the executors, administrators, successors and assigns of the Tenant, subject to the limitations of this Article. 10.2 Licenses, Franchises and Concessions. The Tenant shall not suffer or permit any part of the Premises to be used or occupied by any persons other than the Tenant, any subtenants permitted under section 10.3 and the employees of the Tenant and any such permitted subtenant, or suffer or permit any part of the Premises to be used or occupied by any licensee, franchisee or concessionaire, or suffer or permit any persons to be upon the Premises other than the Tenant, such permitted subtenants and their respective employees, customers and others having lawful business with them. 10.3 Assignment or Subletting. The Tenant may assign this lease or sublet the Premises in whole or in part provided that: (a) the Tenant shall by Notice first offer to surrender this lease in respect of the whole or the part of the Premises (the "Subject Area") which the Tenant wishes to assign or sublet. Such offer shall be made not less than 60 days prior to the date on which the Tenant proposes that the surrender be effective. The Landlord shall have a period of 15 days after any such offer is made to accept or to decline by Notice; (b) if the Landlord accepts the offer of the Tenant to surrender the whole or any part of the Premises pursuant to subsection (a) of this section, the Tenant shall do so upon the date specified in its Notice. If part of the Premises is to be surrendered, the Rent attributable by the Landlord thereto shall be apportioned by the Landlord and paid to the date of surrender and the Rent for the remainder of the Premises shall thereafter abate and become adjusted in accordance with such attribution. The Landlord shall perform all work required to separate the surrendered part from the remainder and to make such part capable of separate use and the Tenant shall pay the Landlord's Cost on account thereof. The provisions of section 9.5 shall apply to the surrendered part of the Premises; (c) if the Landlord declines such offer or does not respond - 17 - within the aforesaid period, the Tenant may within the next 180 day period either assign this lease or sublet the Subject Area provided that: (i) the Tenant shall have received a bona fide written offer; (ii) the Tenant shall have provided to the Landlord a true copy of such offer and adequate information to enable the Landlord to assess the credit worthiness, reputation and business of the proposed assignee or subtenant; (iii) the Tenant shall have obtained the approval of the Landlord to such assignment or sublease (which may be withheld in its discretion and for any reason); (iv) the Tenant shall assign or sublet, as the case may be, only upon the terms of the offer provided to the Landlord; and (v) the proposed subtenant or assignee shall have agreed with the Landlord to observe and perform all the obligations of the Tenant under this lease with respect to the Premises or the Subject Area; (d) if within the aforesaid 180 day period the Tenant has not assigned this lease or sublet the Subject Area, the provisions of subsection (a) of this section shall again apply; and (e) the Tenant shall pay the Landlord's Cost on account of any request for approval and, if applicable, the preparation of the implementing documentation, in such form as may be acceptable to the Landlord; (f) Notwithstanding any assignment or subletting, the Tenant shall remain jointly and severally liable on this lease and shall not be relieved from performing any of the terms, covenants and conditions of this lease. 10.4 Change in Control. Any change in the effective control of the Tenant (including, without limitation, changes in the shareholders, directors, partners or officers of the Tenant) shall be deemed to be an assignment of the Premises to which the provisions of Section 10.3 shall apply. The Tenant shall provide to the Landlord the information described in Section 10.3(c)(ii) with respect to the person or persons to whom control is passing. - 18 - 10.5 Advertising of Premises. The Tenant shall not advertise or allow the Premises to be advertised as being available for lease without the approval by the Landlord of the form and content of such advertisement which shall not mention any financial terms. ARTICLE XI TRANSFER BY LANDLORD, SUBORDINATION AND ATTORNMENT 11.1 Transfer by Landlord. This lease shall enure to the benefit of and be binding upon the successors and assigns of the Landlord. If the Landlord transfers or leases the Building, or any part thereof, and to the extent that the transferee or lessee becomes liable to perform the obligations of the Landlord hereunder, the Landlord shall thereupon no longer be liable. 11.2 Subordination and Attornment. The Tenant shall upon Notice: (a) subordinate this lease to any mortgage of the Building or the Land to the intent that this lease and all the interest of the Tenant in the Premises shall be subject thereto as fully as if such mortgage had been executed and registered and the money thereby secured had been advanced before the execution and delivery of this lease; and (b) agree to attorn to any mortgagee under such mortgage; 11.3 Estoppel Certificates. The Tenant shall certify in writing to the Landlord or as it may direct that this lease is unmodified and in full force and effect (or if modified, stating the modifications and that this lease is in full force and effect as modified), the dates to which Rent has been paid, whether or not there is any existing default on the part of the Landlord of which the Tenant has notice and any other requested information pertaining to the performance by the Landlord and the Tenant of their respective obligations hereunder. The Tenant shall provide such statement within Ten (10) days after written Notice from the Landlord requesting same. Any such statement may be conclusively relied upon by any purchaser or mortgagee of the Building or Land. ARTICLE XII TERMINATION AND RENT ABATEMENT 12.1 Termination by Tenant. If the Premises or any other part of the Building, the Parking Facility, if any, the Common Areas or the Common Service Areas are damaged and the Landlord is thereby unable to fulfil - 19 - its obligations to the Tenant and if in the opinion of an Expert, which opinion shall be given not more than 45 days after the date of such damage, the damage cannot be repaired within a 180 day period (employing normal construction methods without overtime or other premium unless the Landlord otherwise instructs the Expert) then the Tenant may by Notice given not more than 15 days after receipt by the Tenant of the opinion of the Expert (whose fee shall be payable by the Tenant) terminate this lease with effect as of the date on which such Notice is given. 12.2 Termination by Landlord. If any part of the Building, the Parking Facility, if any, the Common Areas or the Common Service Areas is damaged and the Landlord is thereby unable to fulfil its obligations to the Tenant or to any other tenant of the Project and if in the opinion of an Expert, which opinion shall be given not more than 45 days after the date of the damage, the damage cannot be repaired within a 180 day period (employing normal construction methods without overtime or other premium), then the Landlord may by Notice given not more than 15 days after receipt by the Landlord of the opinion of the Expert, terminate this lease with effect either (i) as of the date on which such Notice is given, if the Premises have been materially damaged, or (ii) if the Premises have not been so damaged, then as of the date stipulated by the Landlord in its Notice, which shall be not less than 60 days after the date on which it is given. 12.3 Abatement of Rent. If the Premises are damaged to the extent that they are incapable, notwithstanding a reasonable amount of inconvenience to the Tenant, of being used by the Tenant for their intended purpose and if the damage has not been caused by any act or omission of either the Tenant or those for whom it is responsible, Rent shall abate with effect as of the date of the damage in proportion to the area of the Premises so damaged until either: (a) the Landlord and the Tenant, each acting diligently, have completed their respective obligations to repair; or (b) the first to occur of (i) the date the proceeds of any loss of rental income insurance attributable to the damage are no longer available for application on account of the abatement of the Rent payable under this lease and the rent payable under any other leases of premises in the Building affected by the same event of damage or (ii) the period of time during which such proceeds would have been available if the Landlord had performed its obligation to maintain the coverage described in part (c)(ii) of the definition of Insurance has expired. - 20 - ARTICLE XIII LANDLORD'S REMEDIES 13.1 Default and Re-Entry. If (i) the Tenant shall fail to make any payment of Rent as and when same is due to be paid hereunder and such failure to pay shall continue for five (5) days or (ii) the Tenant fails to observe or perform any of its other obligations hereunder after Notice specifying the default and a period to cure has been given, then the Tenant shall be deemed to be in default and the Landlord may at any time thereafter re-enter the Premises and terminate this lease. In the event that rent is not paid by the 5th day of the month, a two hundred ($200.00) dollar late charge shall apply. Notwithstanding anything contained in this lease to the contrary, in the event the Tenant fails to pay any item of Rent when same is due to be paid hereunder or fails to perform any other obligations hereunder, more than twice in any twelve (12) month period, then there shall be no obligation on the part of the Landlord to give the Tenant written Notice and the Landlord shall be entitled to proceed without notice in accordance with the Landlord's rights pursuant to Article XIII hereof. 13.2 Re-letting and Sale of Personalty. Whenever the Landlord becomes entitled to re-enter upon the Premises under any provision of this lease the Landlord in addition to all other rights it may have, shall have the right, but shall not be obligated, as agent of the Tenant to enter the Premises and re-let them (for a term or terms shorter or longer than the balance of the Term, granting reasonable concessions in connection therewith) and to receive the Rent therefor and as the agent of the Tenant to take possession of any furniture or other property thereon and to sell the same at public or private sale without Notice and to apply the proceeds thereof and any Rent derived from re-letting the Premises upon account of the Rent due and to become due under this lease and the Tenant shall be liable to the Landlord for the deficiency, if any. 13.3 Right of Landlord to Remedy. If the Tenant defaults hereunder, the Landlord may proceed to remedy the default, including the making of any payments due or alleged to be due by the Tenant to third parties, and the Tenant shall pay on demand the Landlord's cost, plus interest on account thereof, all without prejudice to the Landlord's rights and remedies for such default by the Tenant. 13.4 Bankruptcy of Tenant. If a substantial portion of the property of the Tenant on the Premises is seized or taken in execution or attachment by a creditor of the Tenant or if the Tenant makes an assignment for the benefit of creditors or if a receiver-manager is - 21 - appointed to control the conduct of the business on or from the Premises or if the Tenant becomes bankrupt or insolvent or takes the benefit of any act now or hereafter in force for bankrupt or insolvent debtors or if an order is made for the winding-up of the Tenant, the next ensuing 3 months' rent immediately will become due and payable as accelerated rent and the Landlord may re-enter and take possession of the Premises as if the Tenant were holding over and this lease shall forthwith be terminated upon Notice by the Landlord to this effect. Accelerated rent will be recoverable by the Landlord in the same manner as the Rent hereby reserved. 13.5 Interest. The Tenant shall pay to the Landlord interest at a rate equal to Prime plus 5% per annum on all arrears of Rent and on any payment made by Landlord for the benefit or on behalf of Tenant. 13.6 Costs. If legal action is brought by Landlord by reason of any default by Tenant hereunder and a default is established, the Tenant shall pay all costs incurred therefor, including reasonable attorney fees. The Tenant shall also be responsible for, and shall pay to the Landlord, including, without limitation reasonable compensation for all time expended by the Landlord's own personnel, reasonable attorney fees and all other costs of any kind whatsoever arising from or incurred as a result of any default of the Tenant or any enforcement by the Landlord of any of the Tenant's obligations under this lease or any other agreement or obligation of the Tenant to the Landlord whether or not related to the Premises. The Tenant agrees that if the Tenant remains in default under this lease after receiving Notice as required pursuant to this lease the Landlord shall be entitled to receive from the Tenant and the Tenant shall pay a minimum administration fee of not less than Fifty Dollars ($50.00) per day to the Landlord which the Tenant acknowledges as being reasonable compensation for time expended by the Landlord's personnel in enforcing any of the Landlord's rights pursuant to this lease after the giving of such Notice, it being clearly understood that the payment or demand for such agreed reasonable compensation shall not be in lieu of and shall be in addition to any other fees, costs, compensations due to the Landlord as a result of the Tenant's default pursuant to this lease or pursuant to law or any order of court. 13.7 Confession of Judgment for Rent. Tenant hereby authorizes and empowers any prothonotary or attorney of any court of record (the "Attorney") to appear for Tenant in any actions which may be brought for any Rent due hereunder including accelerated Rent and any other sums which may become due and payable hereunder for the balance of the Term and therein confess Judgement against Tenant for all or any part of the Rent and any other sums due hereunder: and for interest and costs, together with an attorney's commission of ten percent (10%) or - 22 - $20,000.00 whichever is greater. 13.8 Confession of Judgment for Possession. Tenant hereby authorizes and empowers any prothonotary or attorney to appear for Tenant in any action brought for possession hereunder and therein confess judgment in ejectment in any competent court against Tenant and all persons claiming under Tenant for the recovery by Landlord of possession of the Premises, for which a copy of this lease shall, verified by an affidavit, be a sufficient warrant. Thereafter, if Landlord so desires, a writ of execution or of possession may issue forthwith, without any prior writ or proceedings whatsoever. Such authority shall not be exhausted by one exercise thereof and if such action shall thereafter, for any reason, be terminated and possession of the Premises remain in or be restored to Tenant, Landlord may, upon any subsequent default by Tenant, confess judgment in ejectment to recover possession of the Premises, and the termination for any reason of any such prior actions shall not prevent, hinder or prejudice the right and power of Landlord to bring subsequent actions as set forth in this paragraph. If such action is commenced, Landlord shall be entilteled to a judgement for Attorney's commission of ten percent (10%) of rents due or $20,000.00, whichever is greater. ARTICLE XIV REGULATIONS 14.1 Purpose. The Landlord may by Notice impose regulations, from time to time, for the orderly operation of the Building, the Common Areas and the Parking Facility, if any, the present regulations are attached hereto as Schedule "C" to this lease. 14.2 Observance. The Tenant shall observe and shall cause those for whom it is responsible to observe the regulations. 14.3 Enforcement. The Landlord shall enforce the regulations against all occupants of the Building but in doing so will not be obligated to commence any legal proceedings or be held liable for any claims by the Tenant or other tenants arising out of the failure of the Landlord to commence legal proceedings for any breach of regulations. ARTICLE XV MISCELLANEOUS 15.1 Exhibiting Premises. The Landlord may exhibit the Premises to prospective purchasers, prospective mortgagees and, during the last 6 months of the Term, prospective tenants. - 23 - 15.2 Name of Building. The Landlord may designate the name of the Building and the Project and upon not less than 30 days' Notice may change the name of either the Building or the Project. The Tenant shall only refer to the Building and the Project by their designated names and shall only use such names as its business address. 15.3 Relocation. The Landlord and Tenant agreed that at any time during the Term and any renewal thereof, the Landlord shall have the right, upon providing the Tenant at least thirty (30) days' prior written Notice, to relocate the Tenant to other premises within the Building of approximately the same size, quality and interior design as the Premises provided, however, that the Tenant shall have the right to approve such new space, which approval shall not be unreasonably withheld. The Tenant shall give written Notice to the Landlord of its approval or disapproval of such new space within ten (10) days of the receipt of the Landlord's notice requesting the Tenant to relocate. The Landlord shall pay the Tenant's direct moving costs only provided the Tenant shall provide the Landlord with reasonable evidence of such costs. The relocation shall be effective on the date stated in the Landlord's notice and the Tenant shall complete its move in one (1) weekend. In the event the Landlord relocates the Tenant to such new space, this lease and each and all of its terms, covenants and conditions shall remain in full force and effect and be deemed applicable to such new space save and except: (i) the Right of First Refusal, if any, if the new space is located on a different floor than the original Premises; and (ii) the location and size of the Premises which shall be in accordance with the appropriate floor plan. Upon the relocation taking place, the Fixed Rent per square foot for the new space shall be the same Fixed Rent per square foot as for the Premises and the lease will be amended accordingly. If the Tenant reasonably refuses to approve such new space, the Landlord shall have the right to terminate this lease by written Notice given to the Tenant within ten (10) days following the Landlord's receipt of the Tenant's Notice disapproving such new space, which termination shall be effective sixty (60) days after the date of the original Notice. 15.4 Notice. Any Notice to be given pursuant to this lease shall be in writing and shall be deemed to have been given if signed by or on behalf of the party giving Notice and delivered or mailed by registered prepaid post to the other party as follows: - 24 - (a) to the Landlord at: 1740 Walton Road Att: Michael Barrist Blue Bell, PA 19422 with copy to: Mr.Joshua Gindin, Esq. 1700 Two Logan Square 18th and Arch Streets Philadelphia, Pa 19103 and (b) to the Tenant: NCO Financial System, Inc. 1740 Walton Road Blue Bell, Pa 19422 Any Notice so given shall be deemed to have been given, if delivered, on the first business day following the date of such delivery or, if mailed, on the third business day following the date of such mailing. Either party may by Notice change its address. During any interruption, threatened interruption or substantial delay in postal services, all Notices shall be delivered. 15.5 Compliance with Laws, etc. The Landlord and the Tenant shall at all times in the performance of their respective obligations under this lease comply with all laws, by-laws, regulations and orders of any competent authority and with the requirements of any insurer of the interest of the Landlord in the Project. 15.6 Governing Law and Severability. This lease shall be governed by and construed in accordance with the laws in force in the State in which the Project is located. The Landlord and the Tenant agree that all of the provisions of this lease are to be construed as covenants and agreements as though the words importing such covenants and agreements were used in each separate section hereof. Should any provision or provisions of this lease be illegal or not enforceable, it or they shall be considered separate and severable from the lease and its remaining provisions shall remain in force and be binding upon the parties hereto as though the said provision or provisions had never been included. 15.7 Recordation. The Tenant may record this Lease with the prior written approval of the Landlord, which approval the Landlord may withhold in its discretion. If the Landlord provides such approval, the Tenant shall not record this Lease but shall prepare and have executed by the parties hereto a short form of lease approved by the Landlord for the purpose only of enabling notice of this Lease to be - 25 - recorded without affecting the respective rights and obligations of the parties hereunder. The Tenant shall pay the Landlord's Cost incurred in connection with such recordation and, for greater certainty, shall pay the cost of any necessary survey plan of the Premises. 15.8 Condemnation. If at any time during the Term the interest of the Tenant under this lease or the whole or any part of either the Premises or any other part of the Building shall be taken by any lawful power or authority by the right of condemnation or eminent domain, the Landlord may at its option, give Notice to the Tenant terminating this lease on the date when the Tenant or Landlord is required to yield up possession thereof to the condemning authority. Upon such termination, or upon termination by operation of law, as the case may be, the Tenant shall immediately surrender the Premises and all its interest therein, the Rent shall abate and be apportioned to the date of termination, the Tenant shall forthwith pay to the Landlord the apportioned Rent, all other amounts which may be due to the Landlord up to the date of termination, and the provisions of section 2.4 shall apply. The Tenant shall have no claim upon the Landlord for the value of its property or the unexpired Term of this lease, but the parties shall each be entitled to separately advance their claims for compensation for the loss of their respective interests in the Premises and the parties shall each be entitled to receive and retain such compensation as may be awarded to each respectively. If an award of compensation made to the Landlord specifically includes an award for the Tenant, the Landlord will account therefor to the Tenant. In this Section the word "condemnation" shall include a sale by the Landlord to an authority with powers of condemnation, in lieu of or under threat of condemnation. 15.9 Hazardous Substances; Wastes. (a) Tenant will not, and will not permit any other occupant of the Premises to store, generate, treat or dispose any Hazardous Substances or Wastes on or about the Premises or the Building, and hereunder shall promptly cure any such condition. Tenant's obligations hereunder shall serve the expiration or sooner termination of this Lease; (b) Tenant hereby represents and warrants that Tenant has not been identified in any litigation, proceeding or investigation as a responsible party or potentially responsible party for any liability for disposal or release of any Hazardous Substances or Wastes; and (c) For the purposes hereof: (i) "Hazardous Substances" shall mean any flammable explosives, radioactive materials, asbestos, unreaformaldehyde, hazardous wastes, toxic substances or any other elements or compounds designated as a "hazardous substance", "pollutant" or "contaminant" in the CComprehensiveEnvironmental - 26 - Response, Compensation and Liability Act, 42 U.S.C. Section 9600 et. seg or in the Resource Conservation and Recovery Act, 42 U.S.C. Section 6991 et. seg. or any other applicable Federal, state or local law or regulation and (ii) "Wastes" shall mean any hazardous wastes, residual wastes, solid wastes or other wastes as those terms are defined in the applicable Federal, state or local laws or regulations. 15.10 Rider. The Rider attached hereto as Schedule "D" forms a part of this Lease. - 27 - IN WITNESS WHEREOF the Landlord and the Tenant have executed this lease under their respective seals. Dated ________________________________________________, 199__. 1710-20 Sentry East Associates, L.P. Attest:________________ by: /s/ Michael J. Barrist ------------------------------ Michael J. Barrist, President 1710-20 Sentry East Inc. The General Partner "LANDLORD" Attest:________________ by: /s/ Michael J. Barrist, President ------------------------------ "TENANT" - 28 - Schedule "A" Legal Description Unit 1710- 1720 in Sentry Park East Condominium together with an undivided 40.440 percent interest in and to the common elements of the Condominium as described in that certain Declaration of Condominium of Sentry Park East Condominium dated June 30, 1993 as recorded in Deed Book 5046, page 2030, Montgomery County, Pennsylvania. SCHEDULE "C" REGULATIONS Pursuant to Section 14.1 the Landlord hereby imposes the following regulations: 1. Deliveries of building materials, major pieces of equipment and furniture and bulky goods shall only be made by prior arrangement with the Building management and through the Delivery Facilities. 2. The Tenant shall only use the Building key system and shall obtain all keys and cards providing access to the Building, the Parking Facility, if any and the Premises from the Landlord. No additional locks shall be installed on the doors to the Premises. 3. No bicycles or other vehicles shall be brought into the Building. 4. No inflammable oils or other dangerous materials shall be kept in the Building. 5. The Common Areas shall not be obstructed. 6. The Tenant shall provide the Landlord with the names of all persons entitled to enter the Premises outside normal business hours. The Landlord shall only be required to allow access to the Premises by such persons. 7. The Tenant shall not install any power or water consuming machinery and equipment, except normal office equipment, without the approval of the Landlord and, if required by the Landlord, shall connect such machinery and equipment to separate meters. 8. If required by the Landlord, the Tenant shall arrange for pest control. 9. The Tenant shall not remove or alter the Building standard window coverings or except with the approval of the Landlord install any additional window coverings. 10. The Tenant shall keep all window blinds down so as to prevent direct sunlight from penetrating the Premises. 11. The Landlord may restrict canvassing or peddling in the Building. 12. The Tenant shall maintain with the Landlord current lists of the names and license plate numbers of each employee using the Parking Facility, if any and shall cause its employees to affix to their automobiles whatever manner of identification the Landlord may require. 13. The Tenant shall observe the directions of the Landlord as to parking locations in the Parking Facility, if any according to automobile size. 14. The Tenant shall leave the Premises in a condition suitable for the performance by the Landlord of its janitorial services. AMENDMENT NO. 1 TO LEASE DATED MAY 9, 1995 This agreement, made and entered into this _____ day of ______________ 1995, by and between the 1710-20 Sentry East Associates, L.P. (hereinafter referred to as "Landlord") and NCO Financial Systems (hereinafter referred to as "Tenant") with an office at 1710 Walton Road, Blue Bell, PA 19422. Witnesseth: WHEREAS, Landlord and Tenant entered into a certain Agreement of Lease dated May 9,1995. (hereinafter referred to as "Lease") whereby the Landlord leased to Tenant and Tenant hired from Landlord the Demised Premises of approximately 3,436 square feet, on the Third (3rd) Floor, being outlined on Exhibit "A" attached thereto in the building (hereinafter called "building") known as 1710 Walton Road, Blue Bell, Montgomery County, Pennsylvania for a term of beginning the 1st day of January, 1996 and ending the 31st of December 2005; and WHEREAS, the parties hereto desire to amend the Lease as hereinafter set forth. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto with intent to be legally bound, hereby agree as follows: 1. Modification to Paragraph 2.1 Demise - Premises. Effective June 1, 1996 the square footage shall be modified to reprsent 1,036 rentable square feet in suite 302. 2. Modification to Paragraph 3.1 Items of Rent. Effective June 1, 1996 the following shall be subsituted: (a) $16,575.96 per annum in 12 equal installments of $1,381.33 each based on the rate of $16.00 per square foot per annum of rentable space. 3. Whole Agreement. Except as expressly modified by this Amendment all provisions of the Lease are hereby ratified and confirmed, and shall remain in full force and effect throughout the term of the Lease. IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have executed this First Amendment as of the day and year first above written. LANDLORD: 1710-20 Sentry East Associates, L.P. Attest: ___________________ By: /s/ Michael J. Barrst ---------------------------------------- President, 1710-20 Sentry East Inc. The General Partner TENANT: NCO Financial Systems Attest: ___________________ By: /s/ Michael J. Barrst ---------------------------------------- EX-10.7 5 EXHIBIT 10.7 Exhibit 10.7 1740 SENTRY PARK EAST OFFICE LEASE AGREEMENT . . . 1740 SENTRY EAST ASSOCIATES, L.P. LANDLORD AND NCO FINANCIAL SYSTEMS, INC. TENANT . . . 1740 SENTRY PARK EAST OFFICE LEASE AGREEMENT
Paragraph Page - --------- 1. Demise................................................................................................. 1 2. Term................................................................................................... 1 3. Use of Premises ....................................................................................... 2 4. Rent .................................................................................................. 2 5. Additional Rent ...................................................................................... 4 6. Security Deposit ......................................................................................10 7. Building Services .....................................................................................11 8. Landlord's Right to Enter .............................................................................13 9. Additional Covenants of Tenant ........................................................................13 10. Assignment and Subleasing ............................................................................16 11. Insurance ............................................................................................18 12. Waiver of Claims; Indemnification ....................................................................21 13. Fire or Other Casualty ...............................................................................21 14. Repairs ..............................................................................................24 15. Tenant's Fixtures, Alterations and Improvements ......................................................25 16. Landlord's Alterations and Improvements ..............................................................26 17. Defaults .............................................................................................27 18. Remedies ... .........................................................................................28 19. Confession of Judgment ...............................................................................31 20. Remedies Cumulative ..................................................................................32 21. Notice and Grace .....................................................................................32 22. Condemnation .........................................................................................33 23. Subordination; Attornment ............................................................................34 24. Notices ..............................................................................................35 25. Quiet Enjoyment ......................................................................................35 26. Tenant Holding Over ..................................................................................36 27. Brokers ..............................................................................................36 28. Rules and Regulations ................................................................................37 29. Use of Common Areas; Parking .........................................................................37 30. Landlord's Forebearance not Considered Waiver ........................................................38 31. Landlord's Liability; Rights .........................................................................39 32. Estoppel Certificate .................................................................................40 33. Landlord's Lien' Waiver ..............................................................................41 34. Renewal Option .......................................................................................41 35. Miscellaneous ........................................................................................42
OFFICE LEASE AGREEMENT THIS LEASE AGREEMENT (this "Lease") made this 1st day of July, 1993, by and between 1740 SENTRY EAST ASSOCIATES, L.P., a Pennsylvania limited partnership ("Landlord") having a mailing address at 1740 Sentry Park East, Blue Bell, PA 19422 and NCO FINANCIAL SYSTEMS, INC., a Pennsylvania corporation ("Tenant") having a mailing address at 1740 Sentry Park East, Blue Bell Office Campus, Blue Bell, PA 19422. W I T N E S S E T H T H A T: 1. Demise. Landlord hereby demises and lets unto Tenant and Tenant takes and leases from Landlord all that certain office building comprising 15,000 rentable square feet (the "Premises") and known as 1740 Sentry Park East, Blue Bell, Pennsylvania. 2. Term. The term of this Lease shall commence on the earlier of (a) the date Tenant takes possession of the Premises, or (b) October, 1, 1993. Such date is referred to in this Lease as the "Commencement Date". Unless sooner terminated in accordance with the terms hereof, the term of this Lease shall end without the necessity for notice from either party to the other at 12:01 a.m. local time on the tenth (10th) anniversary of the first day of the first full calendar month during the term. If Landlord is unable to give Tenant possession of the Premises by reason of the holding over of a previous occupant or by any other reasonable cause, except as expressly provided in this Paragraph 2, Landlord shall not be liable in damages to Tenant and the Commencement Date shall be deemed to be the date specified in (b) above; provided, however, that during the period that Landlord is unable to give possession, all rights and remedies of both parties under this Lease shall be suspended. 3. Use of Premises. Tenant shall use and occupy the Premises throughout the term only for office uses in connection with the conduct of Tenant's business and in conformity with all applicable law. Tenant, at its own expense, shall obtain all governmental licenses and permits necessary for such use. 4 Rent. (a) During the intitial five (5) Lease Years (as hereinafter defined), Tenant shall pay minimum annual rent of Two Hundred Seventeen Thousand Five Hundred Dollars ($217,500), computed at the annual rate of $14.50 per rentable square foot, payable in equal monthly installments of Eighteen Thousand One Hundred Twenty Five Dollars ($18,125). During the final five (5) Lease Years, Tenant shall pay minimum annual rent of Two Hundred Fifty Five Thousand Dollars ($255,000), computed at the annual rate of $17.00 per rentable square foot, payable in equal monthly installments of Twenty One Thousand Two Hundred Fifty Dollars ($21,250). Each monthly installment of minimum annual rent is payable in advance on the first day of each month during the term of this Lease, the first installment to be paid upon the 2 Commencement Date. If the Commencement Date shall fall on a date other than the first day of a calendar month, rent shall be apportioned pro rata on a per diem basis for the period between the Commencement Date and the first day of the following calendar month and such apportioned sum shall be paid on the Commencement Date. (b) Tenant shall pay to Landlord, as additional rent, all other charges, fees and sums payable hereunder within ten (10) days after Landlord's written demand. (c) All rent shall be payable without offset, deduction, prior notice or demand at the office of Landlord set forth above, or at such other place as Landlord may from time to time designate by notice to Tenant. Notwithstanding anything contained in this Lease, Tenant shall pay a late charge of ten percent (10%) on each dollar of rent, or any other sum collectable as rent under this Lease, not paid within ten (10) days after the same is due for the purpose of defraying expenses of handling such delinquent payment, together with interest from and after the date which is thirty (30) days after the date such payment was due at the rate of 2% in excess of the prime rate of interest announced from time to time by Mellon Bank, N.A. Any charge or payment herein reserved, included or agreed to be collected as rent may be proceeded for and recovered by Landlord in the same manner as rent due and in arrears. (d) Tenant's obligation to pay rent hereunder shall be the absolute and unconditional obligation of Tenant without the right to offset or deduct for any reason, and payable 3 notwithstanding any early termination of this Lease, or at the occurrence of any event of default. 5. Additional Rent. (a) For each Lease Year, or portion thereof, Tenant shall pay to Landlord, as additional rent, the following: (i) The cost of all electrical consumption attributable to the Premises. Landlord shall bill Tenant for such electric consumption at the same rate billed Landlord by the electric utility provider. Upon request from Tenant, Landlord shall provide Tenant information pertaining to the costs charged Landlord for electricity by the electric utility provider. Tenant shall have the right, exerciseable upon written notice to Landlord, to elect thereafter to be billed for electric consumption at the rate Tenant would be billed by the electric provider if Tenant directly contracted with such provider for electric service. Tenant may exercise such right one time during the term of this Lease, as it may be extended or renewed. Following such election, Tenant may not thereafter rescind such election or otherwise have the right to again be billed for electric consumption at the Premises at the same rate billed Landlord by the electric utility provider. (ii) All Operating Expenses (as defined below) related to the operation of the Premises, provided, that in no event shall the amount payable by Tenant in any Lease Year after the second Lease Year on account of Operating Expenses exceed ten percent (10%) of such amount payable by Tenant for the immediately preceding Lease Year. 4 (iii) Taxes (as defined below) related to the premises. (b) As used in this Lease, the following terms shall have the meanings set forth below. (i) "Operating Expenses" shall include the cost and expense to Landlord of operating, maintaining and repairing all or part of the Premises and its share of condominium fees due and payable to the Unit Owners' Association (the "Association") of Sentry Park East Condominium (the "Condominium") of which Landlord is a member and the Premises are a part, including without limitation the costs and expenses of the following: (A) all wages, salaries and fees of all employees and agents engaged in the management, operation, repair, replacement, maintenance and security of the Premises, including taxes, insurance and all other employee benefits relating thereto; (B) all supplies and materials used in the management, operation, repair, replacement, maintenance and security of the Premises; (C) all utilities, including, without limitation, gas, water, sewer, electricity, power, heating, lighting, air conditioning and ventilation incurred by Landlord in connection with the operation and use of the Premises, the Limited Common Elements and Commons Elements of the Condominium as assessed by the Association and the servicing thereof; (D) all maintenance, monitoring and service contracts for the operation, repair, replacement, maintenance and 5 security of the Premises, the Limited Common Elements and Common Elements of the Condominium as assessed by the Association, including, without limitation, window cleaning, security system, heating, ventilating and air-conditioning system, fire sprinkler system, elevator and landscaping for the Building; (E) all fire (with all risk coverage) and other casualty and public liability insurance for the Premises and Landlord's personal property and fixtures used in connection therewith; (F) all janitorial services for the Premises; (G) the operation, repair, replacement and maintenance of the grounds of the Premises, the Limited Common Elements, and Common Elements of the Condominium as assessed by the Association including, but not limited to, electrical consumption, lighting, snow removal, repairs and maintenance to the parking lot, and landscaping; (H) any capital improvements made to the Premises for the purpose of reducing operating expenses or which may be required by governmental authority under any governmental law or regulation that was not applicable as of the date of this Lease, which cost shall be amortized over such reasonable period as Landlord shall determine, together with interest on the unamortized balance at the rate equal to the Prime Rate or such higher rate as may have been paid by the Landlord on funds borrowed for the purpose of constructing such capital improvements; and (I) all other costs and expenses necessarily 6 and reasonably incurred by Landlord in the proper operation and maintenance of the Premises or as part of its membership in the Association. (ii) Notwithstanding the foregoing, the following shall be excluded from the term "Operating Expenses": (A) expenses for any capital improvements made to the Premises, except as provided in clause (H) above; (B) expenses (other than deductibles) for repairs or other work occasioned by fire, windstorm or other insured casualty unless such casualty is caused by Tenants negligence; (C) legal expenses incurred by Landlord in matters not related to this Lease; and (D) interest or amortization payments on any mortgage or mortgages affecting the Premises. (iii) "Taxes" shall mean all real property taxes and assessments, special or otherwise, without discounts, and personal property taxes, charges and assessments, which are levied, assessed or imposed by any governmental authority during any calendar year or portion thereof of the term hereof with respect to the Premises and any improvements, fixtures and equipment and all other property of the Condominium for which Landlord is obligated to pay, and any tax which shall be levied or assessed in addition to or in lieu of such real or personal property taxes (including, without limitation, any municipal income tax), and any license fees, tax 7 measured by or imposed upon rents, or other tax or charge upon Landlord's business of leasing the Premises, but shall not include any federal or state income taxes. Should the Commonwealth of Pennsylvania, or any political subdivision thereof, or any governmental authority having jurisdiction over the building or the Premises impose a tax assessment or charge a fee which Landlord shall be required to pay wholly or partially in substitution (or in addition to) for any of the above Real Estate Taxes, all such assessments, fees and charges shall be deemed to constitute Real Estate Taxes hereunder. (c) Landlord shall have the right to require Tenant to pay monthly, in advance, during the term of this Lease, an amount equal to one-twelfth of Operating Expenses and Taxes as estimated by Landlord. Landlord shall make an estimate of the Operating Expenses and Taxes and notify Tenant as to such estimate on or before the 15th day of September of each year during the term of this Lease of the monthly payment amount that Tenant shall be required to pay Landlord. (d) On or before August 1 of each year during the term of this Lease, Landlord shall provide Tenant a statement setting forth the actual Operating Expenses and Real Estate Taxes incurred during the prior calendar year or any portion thereof. Operating Expenses shall be accounted for in accordance with generally accpeted accounting principles. Within thirty (30) days after delivery of such statement to Tenant an adjustment shall be made between Landlord and Tenant to reflect any difference between Tenant's 8 payment hereunder, if any, and the actual Operating Expense and Taxes due hereunder by Tenant. Any adjusted amounts payable by Tenant shall be paid with the next installment of minimum annual rent. Any adjusted amounts payable by Landlord shall be paid by crediting the amount owed to Tenant against the next installments of minimum annual rent payable until paid; provided, that if the Lease term has by then expired, any amounts payable by Landlord shall be paid to Tenant at the time such statement is delivered to Tenant. Tenant shall have the right, at its sole cost and expense, to audit Landlord's books and records pertaining to Operating Costs for any Lease Year, provided that Tenant has notified Landlord of Tenant's intention to do so within thirty (30) days after the delivery of the aforesaid statement to Tenant. Such audit shall be performed during regular business hours at the office of Landlord where such books and records are kept. If Tenant's audit reveals a discrepancy in the amount that was or should have been billed to Tenant, Landlord and Tenant, or their respective auditors, shall mutually agree upon a reconciliation of such discrepancy and appropriate adjustments in the amount paid or payable by Tenant therefor shall be promptly made. (e) The additional rent due under the terms and conditions of this paragraph 5 shall be payable by Tenant without any setoff or deduction and shall be prorated as aforesaid during the first and last calendar years of the Lease Term or any renewal thereof. (f) Delay in computation of any of the aforementioned 9 sums shall not be deemed a default hereunder or constitute a waiver of Landlord's right to collect any of such sums. (g) Tenant shall not be entitled to any rebate or credit in the event Operating Expenses or Real for any calendar year are lower than the amount payable on account of the Base Year. (h) The term "Lease Year" shall mean the first twelve (12) full calendar months of the term of this Lease and each succeeding twelve month period, including renewal terms, except that if the Commencement Date is not the first day of a calendar month, then the period from the Commencement Date to the next succeeding calendar month shall be added to and included within the first twelve (12) full calendar months to constitute the first Lease Year. 6. Security Deposit. Tenant shall, upon execution of this Lease, deposit with Landlord as security for Tenant's performance of all the terms, covenants and conditions of this Lease, an amount equal to $18,125. Landlord may from time to time use, apply or retain the whole or any part of the sum deposited to the extent required for the payment of minimum rent, additional rent, and any other sums payable by Tenant under this Lease as to which Tenant is in default or to reimburse Landlord for any sum Landlord may expend or be required to expend by reason of Tenant's default. Upon demand by Landlord, Tenant shall restore such security deposit to the extent of the amount so applied by Landiord. The security deposit is to be retained by Landlord until the expiration of this Lease and shall be returnable to Tenant provided that (a) the Premises 10 have been vacated and returned to Landlord in the condition Tenant is obligated to maintain same under this Lease; (b) Landlord shall have inspected the Premises after such vacation; and (c) Tenant shall have complied with all the terms, covenants and conditions of this Lease. The security deposit is not to be considered as the last monthly installment of rent due under the Lease. If the Premises are sold, Landlord shall have the right to transfer such sum deposited to such purchaser, by which transfer Landlord shall be released from all liability for such sum, and Tenant shall look solely to the new landlord for the return thereof. 7. Building Services. (a) The following services and facilities shall be supplied by Landlord at no additional cost to Tenant in connection with Tenant's use of the Premises, as applicable: (i) Landlord shall supply heat and air conditioning to the Premises from the equipment and facilities for such purposes that are installed in the Premises during ordinary business hours, except on Saturdays, Sundays and legal holidays as the same in Landlord's judgment becomes necessary. Heat shall be supplied between the fifteenth (15th) day of October of each year and the fourteenth (14th) day of May next succeeding, and air conditioning shall be supplied between the fifteenth (15th) day of May of each year and the fourteenth (14th) day of October next succeeding. Heat and air conditioning shall be furnished for the days and periods mentioned between the hours of 8:00 a.m. and 8:00 p.m. Landlord shall furnish heat and air conditioning at other days and periods 11 upon receipt of written request from Tenant, and Landlord shall bill Tenant at cost for such additional heat and air conditioning and Tenant shall pay same upon receipt. (ii) Landlord shall supply janitor service. (iii) Landlord shall provide a listing of Tenant's name on a building directory in the building lobby. (iv) Landlord shall cause the Premises to be posted with "no solicitation' signs. Landlord will enforce, and will assist Tenant in enforcing "no solicitation" rules applicable to the Premises, unless Landlord is advised by its counsel that the right to solicit is protected by applicable law. (b) Landlord's services shall be provided at a level and in a manner consistent with the operation of comparable first-class office buildings in the Blue Bell, Pennsylvania area. Landlord shall have no responsibility or liability to Tenant, nor shall there be any abatement in rent for any failure to supply any of said services and facilities that Landlord has agreed to supply hereunder during such period as such services and facilities are out of order, undergoing repair or if prevented by labor disorders, strikes, accidents or other causes beyond Landlord's control. If Landlord, in its sole discretion, deems it advisable or convenient to interrupt any of said services to make repairs, alterations or improvements or because of labor disturbances, strikes, accidents or causes beyond Landlord's control, Landlord may, after prior written notice to Tenant, do so for the period that Landlord deems expedient and advisable without any abatement in 12 rent or other liability to Tenant. 8. Landlord's Right to Enter. Tenant shall permit Landlord, Landlord's agents, contractors, employees, and any other person or persons authorized by Landlord, upon reasonable prior oral or written notice to Tenant, to inspect the Premises at any time, and to enter the Premises for the purpose of cleaning and if the Landlord shall so elect, for making alterations, improvements, or repairs to the Premises, or for any other reasonable purpose in connection with the operation and maintenance of the Premises. Notwithstanding the foregoing, Landlord shall have no obligation to provide Tenant prior notice for entry relating to marketing, emergency maintenance or repairs, or repairs requested by Tenant. In connection with any such entry, Landlord shall use reasonable efforts to minimize disruption to Tenant's business operations. 9. Additional Covenants of Tenant. (a) Tenant agrees and covenants that it will without demand: (i) comply with all Rules and Regulations issued from time to time by the Association; (ii) comply with all requirements of any of the publicly constituted authorities, and with the terms-of any State or Federal statute or local ordinance or regulation applicable to Tenant or its use of the Premises; (iii) give to Landlord prompt written notice of any accident, fire or damage occurring on or to the Premises; and (iv) peaceably deliver up and surrender possession of the Premises 13 to Landlord at the expiration or sooner termination of this Lease and promptly deliver to Landlord at its office all keys for the Premises. (b) Tenant agrees and covenants that it will do none of the following without the prior written consent of Landlord: (i) place or allow to be placed upon the Premises or on the inside or outside of the Building any sign, projection or device; (ii) use, operate, or maintain any machine equipment or fixture that, in Landlord's reasonable opinion, is harmful to the Building or is disturbing to other tenants occupying the Building or Park; or (iii) place any weights in any portion of the Premises beyond the safe carrying capacity of the Building (c) None of Tenant, its employees or invitees, shall generate, store, dispose of or otherwise handle any toxic substance or hazardous substance on the Premises in any fashion contrary to applicable law. (d) Tenant shall furnish to Landlord the following financial statements: (d) Tenant shall furnish to Landlord the following financial statements: (i) Annual Statements. As soon as available, and in any event within one hundred twenty (120) days after the end of each fiscal year, audited financial statements of tenant, showing the profit and loss and surplus for such fiscal year, and the balance sheet of tenant as of tenant as of the end of such fiscal year, setting forth in comparative form the corresponding figures for the 14 preceding fiscal year, all in reasonable detail, in form acceptable to Landlord, and prepared on a audit basis in accordance with GAAP by an Tenant and acceptable to Landlord; and such financial statements shall be accompanied by a certification, signed by the President or Chief Financial Officer of Tenant, certifying that no event of default has occurred under the terms of the Lease during the preceding fiscal year; (ii) Quarterly Statements. As soon as available, and in any event within forty-five (45) days after the end of each fiscal quarter of each fiscal year, true and correct copies of the financial statements of Tenant, such financial statements to include but not be limited to a balance sheet, a statement of income and expenses and a statement of profit and loss and surplus, showing, at a minimum, the assets and liabilities of Tenant as of the end of such fiscal quarter and the net income, expenses and retained earnings of Tenant for such fiscal quarter (and in particular, detailing all rental revenue, loan payments, expenses and net cash flow), and setting forth in comparative form the corresponding figures as of the end of the corresponding quarter of the previous fiscal year, all in reasonable detail, and prepared in accordance with GAAP by the management of Tenant and acceptable to Landlord; (e) Tenant hereby covenants and agrees with Landlord, that Tenant shall: (i) Cash Flow Coverage; Debt Service. Maintain a ratio of "cash flow" (defined as "net income after dividends plus 15 depreciation, plus interest and rental expenses, determined in accordance with GAAP for the four preceding fiscal quarters then ended") to "debt service" (defined as "current maturities of long term debt plus interest expenses, as determined in accordance with GAAP, as of the four preceding fiscal quarters then ended") equal to, or greater than, 2.00 : 1.00; such covenant to be tested on a quarterly basis; and (ii) Total Liabilities to Tangible Net Worth. Maintain a ratio of total liabilities, minus funds held in trust for clients (with "total liabilities" to be determined in accordance with GAAP) to Tangible Net Worth (defined as "total assets minus total liabilities, each to be determined in accordance with GAAP, excluding, however, from the determination of total assets all assets which would be classified as intangible assets under GAAP, including, without limitation, goodwill, licenses, patents, trademarks, trade names, copy rights and franchises") equal to, or less than, 1.75 : 1.00 such covenants to be tested on a quarterly basis. 10. Assignment and Subleasing. (a) Without Landlord's prior written consent, Tenant shall not assign, mortgage, pledge or encumber this Lease, or any interest in this Lease, or sublease or otherwise permit the use of the Premises or any part thereof by any person or persons other than Tenant. (b) No assignment of this Lease shall be valid unless the assignee shall agree in writing with Landlord to be bound by all of 16 the terms, covenants and conditions contained in this Lease. Upon the valid assignment of this Lease to an entity or person approved by Landlord, Tenant shall be released from liability for the performance of all obligations of the tenant thereafter arising under this Lease. The foregoing release, however, shall not affect any obligations of Tenant which may have accrued prior thereto, whether or not then known to Landlord. (c) Each request by Tenant to sublease all or part of the Premises shall be accompanied by notice of the name and financial background of the proposed sublessee, the area of the Premises proposed to be subleased, and the rent to be paid. In response to Tenant's request for sublease approval, Landlord shall have the options of (i) deny the consent; (ii) granting such consent or (iii) terminating the Lease with respect only to that area of the Premises proposed to be subleased. If Landlord elects option (ii), Tenant may consummate such sublease, provided, Tenant shall pay to Landlord, as additional rent, one-half (1/2) of any profit which may inure to the benefit of Tenant as a result of any subleasing of the Premises. Such profit shall be payable to Landlord upon receipt by Tenant. If Landlord elects option (iii), Tenant shall surrender to Landlord and vacate that area of the Premises for which the Lease has been terminated, all in accordance with the terms of this Lease pertaining to termination thereof or expiration of its term, and Tenant's Proportionate Park Share of Real Estate Taxes and Operating Expenses shall be adjusted accordingly. If Tenant is a corporation, any dissolution, liquidation, merger, consolidation or 17 other reorganization of such corporation, or any transfer of a controlling percentage of the corporate stock of Tenant, shall constitute an assignment of this Lease for purposes of this Paragraph 10. If Tenant is a partnership, any transfer of the entire general partnership interest held by any person or persons who are at the time of the execution of this Lease general partners of the Tenant (except as a result of transfers by bequest or inheritance) shall constitute an assignment of this Lease for purposes of this Paragraph 10. 11. Insurance. (a) Tenant shall during the entire term and during such other time as Tenant occupies the Premises, take out and maintain the following insurance, at the Tenant's sole expenses, in such form and with such companies as Landlord may reasonably approve: (i) comprehensive general liability insurance against claims for bodily injury, including death, and property damage or loss arising out of the use and/or occupation of the Premises, or the Tenant's business on or about the Premises; such insurance shall name Landlord as an additional insured and shall be for the amount of not less than Five Million Dollars ($5,000,000.00) combined single limit or such other amount as may be reasonably required by Landlord from time to time; such comprehensive general liability insurance shall, for Tenant's benefit only, include contractual liability insurance in a form and of a nature broad enough to insure the obligations imposed upon Tenant under the terms of this Lease; 18 (ii) all risk insurance, including sprinkler leakage if applicable, upon Tenant's furniture, fixtures and improvements and upon all other property located in the Premises owned by Tenant or which Tenant is legally liable, all in an amount equal to the full replacement value thereof; provided, however, that Tenant may at its election refrain from carrying such insurance, it being understood that Tenant shall bear all risks of damage to such property and that Landlord is released from any and every manner of liability with respect to damage to or destruction of any such property regardless of how such damage or destruction may occur, unless such damage or destruction results from the gross negligence or other tortious act of Landlord or of any person for whose conduct Landlord is responsible. (b) The policies of insurance referred to above shall contain provisions that such policies of insurance shall not be cancelled without the insurer providing Landlord thirty (30) days written notice stating when such cancellation shall be effective. Landlord shall be provided with a certificate of insurance evidencing such coverage and any renewals thereof. (c) Evidence satisfactory to Landlord of all such policies of insurance shall be provided to Landlord on or before the first day of the first month of each lease year. (d) Landlord shall maintain throughout the term of this Lease insurance against loss or damage to the Building by fire and such other casualties as may be included within either fire and extended coverage insurance or all-risk insurance. 19 (e) Tenant shall not do, cause or suffer to be done, any act, manner or thing whereby any insurance now in force or hereafter pxaced on the Premises or on the Building or Park, or any part thereof, shall become void or suspended, or whereby the same shall be rated as a more hazardous risk than at the date of execution of this Lease, or employ any person or persons objectionable to the insurance companies or have any highly inflammable, volatile or explosive matter of any kind in or about'the Premises. In case of a breach of this covenant (in addition to all other remedies given to Landlord herein) Tenant agrees to pay to Landlord any and all increase or increases of premiums on insurance carried by Landlord on the Premises, the Building or the Park caused thereby. (f) Notwithstanding anything herein to the contrary, Landlord and Tenant each hereby releases the other, its agents and employees, to the extent of the releasing party's actual recovery under its insurance policies, from any and all liability for any loss or damage which may be inflicted upon the property of such party, notwithstanding that such loss or damage shall have arisen out of the negligent or other tortious act or omission of the other party, its agents or employees; provided, however, that this release shall be effective only with respect to loss or damage occurring during such time as the appropriate policy of insurance of the party so releasing shall contain a clause to the effect that such release shall not affect said policy of the right of the insured to recover thereunder, and each party thereto shall use 20 reasonable efforts to have such a clause included in its said policies. 12. Waiver of Claims; Indemnification. Neither Landlord nor any partner within Landlord shall be held responsible for, and each is hereby expressly relieved from, any and all liability by reason of any injury, loss, or damage to any person or property in or about the Premises due to any cause whatever, and whether the loss, injury or damage be to the person or property of Tenant or any other person, unless due to the gross negligence of Landlord, its servants or employees. Tenant further agrees to indemnify, defend and save Landlord and each partner in Landlord harmless from and against all claims by any employee or invitee of Tenant made on account of such injury, loss or damage, including but not limited to reasonable attorney's fees and other legal expenses. Landlord agrees to indemnify, defend and save Tenant harmless from and against all claims by any employee or invitee of Landlord made on account of any injury, loss or damage to any of Tenant's employees or property within the Premises due to Landlord's failure to perform any of its obligations under this Lease or the gross negligence of Landlord or its servants or employees, including but not limited to reasonable attorneys' fees and other legal expenses. The obligations of the parties under this Paragraph shall survive the expiration or earlier termination of this Lease. 13. Fire or Other Casualty. (a) In the event the Premises are damaged by fire, explosion, flood, tornado, or other casualty, or otherwise, after 21 the commencement of the term of this Lease, the Lease shall continue in full force and effect. If the extent of the damage is less than fifty percent (50%) of the cost of replacement of the Premises, the damage shall promptly be repaired by Landlord at Landlord's expense, provided that Landlord shall not be obligated to so repair if such fire, explosion, or other casualty is caused directly by the gross negligence or other tortious act of Tenant, its subtenants, or their agents or employees, and provided further that Landlord shall not be obligated to expend for such repair an amount in excess of the insurance proceeds made available to Landlord for repair of such damage, and that in no event shall Landlord be required to replace Tenant's stock in trade, fixtures, furniture, furnishings, floor coverings and equipment. In the event of any such damage and (i) Landlord is not required to repair as hereinabove provided, or (ii) the Premises shall be damaged to the extent of fifty percent (50%) or more of the cost of replacement, or (iv) all buildings (taken in the aggregate) in the Condominium shall be damaged to the extent of fifty percent (50%) or more of the aggregate cost of replacement, Landlord may elect either to repair or rebuild the Premises or to terminate this Lease upon giving notice of such election ("Landlord's Election Notice") to Tenant within ninety (90) days after the occurrence of the event causing the damage. If Landlord elects to repair or rebuild, Landlord shall also provide Tenant with notice of Landlord's estimate of the time necessary to restore the Premises and Building. If Landlord estimates that the time for such restoration 22 shall exceed 180 days from the giving of Landlord's Election Notice, Landlord shall endeavor to provide Tenant alternate space in the Park or, for such time as an affiliate of Landlord owns and controls leasing at Whitpain Office Campus, at Whitpain Office Campus. If Landlord is unable to provide such alternate space for Tenant's use, Tenant may, by written notice given to Landlord within twenty (20) days after the giving of Landlord's Election Notice, terminate this Lease. Such termination shall be effective upon Landlord's receipt of Tenant's notice as though such date were the date set forth in this Lease for the expiration of its term. (b) If the casualty, repairing, or rebuilding shall render the Premises untenantable, in whole or in part, and the damage shall not have been due to the fault or neglect of Tenant, a proportionate abatement of minimum annual rent and additional rent shall be allowed from the date when the damage occurred until the date Landlord completes the repairing or rebuilding, said proportion to be computed on the basis of the relation which the rentable area of the space rendered untenantable bears to the total rentable area of the Premises. If Landlord is required or elects to repair the Premises as herein provided, Tenant shall repair or replace its stock in trade, fixtures, furniture, furnishings, floor covering and equipment and promptly reoccupy the Premises upon completion of such repairs. (c) No damage or destruction of the Premises shall allow the Tenant to surrender possession of the Premises nor affect Tenant's liability for the payment of rent or any other covenant 23 contained herein, except as specifically provided in this Lease. Notwithstanding any of the provisions contained herein to the contrary, Landlord shall have no obligation to rebuild the Premises and may at its own option cancel this Lease unless the damage or destruction is a result of casualty covered by Landlord's insurance policy. 14. Repairs. (a) Tenant shall keep the Premises in good order and condition, ordinary wear and tear and damage by accidental fire or other casualty not caused by Tenant or those claiming under Tenant or their employees or invitees respectively, alone excepted. Tenant shall make all necessary repairs to the Premises. Tenant shall also remove all dirt, rubbish, waste and refuse from the Premises resulting from Tenant's repairs. (b) Landlord shall make all necessary repairs to the footings, foundations and structural columns forming a part of the Premises; provided, however, Landlord shall have no responsibility to make any repair unless and until Landlord receives written notice of the need for such repair. Landlord shall also make all necessary repairs to the roof, exterior walls of the Premises, driveways, sidewalks, curbs, loading, parking and landscaped areas abutting the Premises, if any, provided, however, Landlord shall have no responsibility to make any such repair unless and until Landlord receives written notice of the need for such repair. Notwithstanding the foregoing provisions of this subparagraph 14(b), repairs made necessary by Tenant's use or occupancy of the 24 Premises (other than any resulting from the normal conduct of Tenant's business over the term of this Lease), Tenant's installations in or upon the Premises, or by any act or omission of Tenant or any employee, agent, contractor or invitee of Tenant shall be made at the sole cost and expense of Tenant. 15. Tenant's Fixtures, Alterations and Improvements. (a) Tenant shall have the right to install upon the Premises trade fixtures used in the conduct of Tenant's business; provided, however, that neither the installation nor removal of such trade fixtures shall affect the structural integrity of the Premises or Building and that Tenant shall repair all damage to the Premises and Building resulting therefrom. (b) Tenant shall not make or permit to be made any alterations, improvements or additions to the Premises or Building without on each occasion first presenting to Landlord plans and specifications therefor and obtaining Landlord's prior written consent thereto. Landlord's consent shall not be unreasonably withheld if such alterations, improvements or additions do not affect the structural integrity of the Premises or Building. All alterations, improvements and additions by Tenant shall be performed in such manner and by such contractors as to assure harmonious labor relations and so as not to damage the Building or interfere with its operation. Tenant shall, at Tenant's sole cost and expense, secure all necessary licenses and permits and obtain and deliver to Landlord a waiver in recordable form executed by all persons or firms furnishing labor or materials on behalf of Tenant 25 and waiving the right to file mechanics' or materialmen's liens. Tenant shall cause the contractors to carry worker's compensation insurance in statutory amounts and promptly pay any contractors and materialmen who supply work or materials to Tenant, and shall deliver to Landlord prior to commencement of any such work a certificate of insurance evidencing such coverage. Should any mechanics' or materialmen's lien or notice of lien be filed for work performed for Tenant other than by Landlord, Tenant shall bond against or discharge the same within ten (10) days after the lien or notice of lien is filed regardless of the validity of such lien or claim. Notwithstanding any provision of this Lease to the contrary, Tenant shall not have the power to subject the interest of Landlord in the Premises to any mechanic's, materialmen's or other liens. (c) All alterations, improvements and additions which may be made by or for Tenant shall be deemed a part of the Building and become the property of Landlord and shall not thereafter be removed by Tenant unless Landlord shall, upon notice to Tenant, require removal of same in which event Tenant shall remove such alterations, improvements, and additions or fixtures, and restore the Premises to the same order and condition in which they were upon initial occupancy. Should Tenant fail to do so, Landlord may do so and Tenant shall pay to Landlord the complete cost and expense thereof as additional rent. 16. Landlord's Alterations and Improvements. Landlord hereby reserves the right at any time and from time to time to make 26 alterations or additions to the Premises as Landlord may determine. 17. Defaults. The occurrence of any of the following shall constitute a default under this Lease: (a) Tenant's failure to pay in full when due any and all installments of rent and/or other charges or payments herein reserved, included, or agreed to be treated or collected as rent and/or any other charges, expenses, or costs herein agreed to be paid by Tenant; (b) Tenant's failure to perform or comply with any covenant or agreement herein contained; (c) Tenant vacates the Premises or removes or attempts to remove or manifests an intention to remove any goods or property therefrom otherwise than in the ordinary and usual course of business without having first paid and satisfied Landlord in full for all rent or other charges, expenses, and costs then due or that may thereafter become due until the expiration of.the term of this Lease; or (d)(i) Tenant makes an assignment for the benefit of creditors, or (ii) Tenant files a voluntary petition under any bankruptcy or insolvency law, or if an involuntary petition alleging an act of bankruptcy or insolvency is filed against Tenant (and not discharged within sixty (60) days), or (iii) a petition is filed by or against Tenant seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future state or federal bankruptcy act or any other present or 27 future federal, state or other statute or law, or (iv) Tenant seeks or consents to or acquiesces in the appointment of a trustee, receiver or liquidator of Tenant or of all or any substantial part of its properties, or (v) a permanent or temporary receiver of Tenant for substantially all of the assets of Tenant shall be appointed, or (vi) Tenant pleads bankruptcy or insolvency as a defense in any action or proceeding, or (vii) an order, judgment or decree shall be entered by any court of competent jurisdiction on the application of a creditor adjudicating Tenant as bankrupt or insolvent, or approving a petition seeking reorganization of Tenant, or its guarantor, or appointment of a receiver, trustee or liquidator of Tenant or its guarantor, if any, or of all or substantially all of either of their respective assets, or (viii) any department of the state or the federal government or any officer thereof, duly authorized, takes possession of the business or property of Tenant by reason of insolvency or alleged insolvency of Tenant or whenever Tenant permits or otherwise suffers this Lease to be taken under any writ of execution, or (ix) if this Lease passes to or devolves upon, by law or otherwise (except as otherwise herein provided) one other than Tenant or in the event of any of the preceding, Tenant fails to restore and maintain the security deposit required under Paragraph 6 and otherwise fails to provide Landlord with adequate assurance of financial responsibility. 18. Remedies. Upon the occurrence of a default under this Lease, thereupon ipso facto and without written notice or other 28 action by Landlord, except as expressly provided in Paragraph 21, at the sole option of Landlord: (a) Landlord shall be entitled to recover damages for such breach; and/or (b) in addition to any rent and other charges already due and payable, the rent for the entire unexpired balance of the term of this Lease, as well as all other charges, costs and expenses herein agreed to be paid by Tenant, at the option of Landlord, or anyone acting on Landlord's behalf at Landlord's option, or any part thereof, shall be taken to be due and payable and in arrears, as if by the terms of this Lease said rent, charges, costs and expenses were on that day due and payable; and/or (c) Landlord, or anyone acting on Landlord's behalf at Landlord's option, may without written notice or demand enter the Premises and (i) take possession of and sell all goods and chattels therein at auction on seven (7) days' notice served in person on Tenant or left or posted on or to the Premises and pay Landlord out of the proceeds of said auction sale; or (ii) remove from the Premises all goods and chattels found therein to any other place or location as Landlord may desire and any costs reasonably incurred for said removal and any charges made for storage of said goods and chattels at the location to which they are removed Tenant agrees to pay; or (iii) take possession and lease the Premises or any part to such person, company, firm or corporation as may in 29 Landlord's sole discretion seem best and Tenant shall be liable for any loss of rent for the then current term; or (iv) proceed by distress and sale of the goods and chattels there found to levy the rent and/or other charges herein payable as rent and all costs and officers' commissions, including watchmen's wages, and further including a sum equal to five percent (5%), of the amount of the levy as commissions to the constable or other persons making the levy, shall be paid by Tenant, and in such case all costs, officers' commissions and other charges shall immediately attach and become part of the claim of Landlord for rent, and any tender of rent without said costs, commissions and charges made after the issue of a warrant of distress shall not be sufficient to satisfy the claim of Landlord; and/or (d) this Lease and the term hereby created shall determine and become absolutely void without any right on the part of Tenant to reinstate this Lease by payment of any sum due or by other performance of any condition, term or covenant broken; whereupon, Landlord shall be entitled to recover all sums actually due and in arrears hereunder as of the date of such breach as above provided in an amount equal to the amount of rent reserved for the balance of the term of this Lease. (e) Following Tenant's vacation of the Premises, Landlord shall show same to prospective new tenants on the same basis as other space is shown to prospective new tenants; provided, that the foregoing shall not obligate Landlord to attempt to release the Premises prior to leasing any other space at the Park or on terms 30 more favorable than those by which other space at the Park may be leased or offered for lease. 19. Confession of Judgment. (a) When this Lease shall be determined by condition broken, either during the original term of this Lease or any renewal or extension thereof, and also when and as soon as the term hereby created or any extension thereof shall have expired, it shall be lawful for any attorney as attorney for Landlord to file an agreement for entering in any competent Court an amicable action and judgment in ejectment against Tenant and all persons claiming under Tenant for the recovery by Landlord of possession of the Premises, for which this Lease or a copy of this Lease shall be his sufficient warrant, whereupon, if Landlord so desires, a writ of execution or of possession may issue forthwith, without any prior writ or proceedings whatsoever, and provided that if for any reason after such action shall have been commenced the same shall be determined and the possession of the Premises remain in or be restored to Tenant, landlord shall have the right upon any subsequent default or defaults or upon the termination of this Lease to bring one or more amicable action or actions to recover possession of the Premises. (c) In any amicable action in ejectment the Landlord shall first cause to be filed in such action an affidavit made by Landlord or someone acting for Landlord setting forth the facts necessary to authorize the entry of judgment, and if a true copy of this Lease be filed in such action, it shall not be necessary to 31 file the original as a warrant of attorney, any rule of court, custom or practice to the contrary notwithstanding. (d) If proceedings shall be commenced by Landlord to recover possession under the Acts of Assembly, either at the end of the term or sooner termination of this Lease, or for nonpayment of rent or for any other reason, Tenant specifically waives the right to the three months' notice and/or the fifteen (15) or thirty (30) days' notice required by the Act of April 6, 1951, P.L. 69, and agrees that five (5) days' notice shall be sufficient in either or any other case. 20. Remedies Cumulative. All of the remedies hereinbefore given to Landlord and all rights and remedies given to Landlord by law and equity shall be cumulative and concurrent. No determination of this Lease or the taking or recovering of the premises shall deprive Landlord of any of its remedies or actions against Tenant for any and all sums due at the time of which, under the terms hereof, would in the future become due, nor shall the bringing of any action for rent or breach of covenant, or the resort to any other remedy herein provided for the recovery of rent be construed as a waiver of the right to obtain possession of the Premises. Tenant releases and discharges Landlord, and its agents, from all claims, actions, suits, damages and penalties, for or by reason or on account of any entry, distraint, levy, appraisement, removal of said goods and chattels or sale. 21. Notice and Grace. Landlord shall have no right to exercise any remedy (other than collection of a late charge and 32 default interest pursuant to subparagraph 4(c)) for default by Tenant and Tenant shall not be, or deemed to be, in default hereunder unless and until Landlord shall send to Tenant written notice of any default specifying the default, and (a) if the default is in payment of money, unless Tenant fails to remedy the default within ten (10) days after said notice is mailed, or (b) if the default is other than in payment of money and is susceptible of being cured, unless Tenant fails to begin to cure the default within twenty (20) days following mailing of said notice and proceeds expeditiously and diligently to cure the default. Notwithstanding the foregoing, Landlord shall not be obligated to provide Tenant with notice of substantially similar defaults and a grace period for curing such defaults more than twice in any twelve-month period, nor shall Landlord be obligated to provide Tenant with any notice or grace period with respect to any default described in subparagraphs 17(c) or 17(d) of this Lease. 22. Condemnation. If the Premises or any part thereof is taken or condemned for a public or quasi-public use, this Lease shall, as to the part so taken, terminate as of the date title shall vest in the condemnor, rent shall abate in proportion to the square feet of leased space taken or condemned or shall cease if the entire Premises is taken; provided, however, if a partial taking shall render the Premises unsuitable, as determined by Landlord, for Tenant's business, then this Lease shall cease and terminate as aforesaid. If all or part of the Building or Park (other than 33 the Premises) is taken or condemned for a public or quasi-public use, Landlord shall have the option to terminate this Lease as of the date title shall vest in the condemnor. Tenant waives all claims against Landlord for any part of the award for the complete or partial taking of the Premises. Landlord shall provide Tenant with written notice of the partial or complete termination of this Lease by reason of the aforesaid promptly after Landlord becomes aware of same. Nothing in this Paragraph shall be interpreted to limit or prevent Tenant from making any claim against the condemning authority for removal expenses, business dislocation damages and moving expenses. 23. Subordination; Attornment. (a) This Lease is subject and subordinate to any and all mortgages now or hereafter placed upon the property of which the Premises is a part, and to all renewals, modifications and extensions thereof, but as long as Tenant is not in default and performs its obligations hereunder Tenant shall not be disturbed in its possession of the Premises and this Lease shall remain in full force and effect. This subordination shall be self-executing, but Tenant agrees upon demand of Landlord to execute, acknowledge and deliver all such instruments as shall be requested by any mortgagee or proposed mortgagee to confirm such subordination, and Tenant agrees to execute an estoppel agreement in favor of any mortgagee, if requested to do so by any mortgagee. Notwithstanding the foregoing, the holder of any such mortgage may at any time subordinate, in whole or in part, its mortgage to the operation and 34 effect of this Lease without Tenant's consent by giving written notice thereof to Tenant, and thereupon this Lease shall be deemed prior to such mortgage and such holder shall have the same rights with respect to this Lease as though this Lease were executed and delivered prior to the execution and delivery of such mortgage. (b) In the event of the sale or assignment of Landlord's interest in the Building of or in the event of sale upon foreclosure of any mortgage made by Landlord encumbering the Building, Tenant shall attorn to the purchaser and recognize such purchaser as Landlord under this Lease. 24. Notices. All notices required to be given by either party hereto to the other shall be in writing. All such notices shall be deemed to have been properly given if served personally, or if sent by United States registered or certified mail, or if sent by a recognized courier guaranteeing overnight delivery, addressed to Landlord at the address set forth in the heading of this Lease, and addressed to Tenant at the Premises, or to such other address which either party may hereafter designate in writing by notice given in a like manner. 25. Quiet Enjoyment. Landlord agrees that Tenant, on paying the rent and other sums payable hereunder and performing the covenants and conditions herein set forth, subject as aforesaid, shall and may, peaceably and quietly have, hold and enjoy the Premises for the term aforesaid, free and clear of anyone claiming through Landlord. 35 26. Tenant Holding Over. If Tenant or any person claiming through Tenant shall not immediately surrender possession of the Premises at the termination of this Lease, Tenant shall be liable to Landlord for any loss or damage Landlord may sustain thereby, and Landlord shall also be entitled to recover compensation for such use and occupancy at the rate of two times the minimum annual rent payable immediately prior to such holdover; provided, however, that Landlord shall in all events be entitled to recover as minimum compensation for such use and occupancy, no matter the duration of same, an amount equal to two times the monthly installment of minimum annual rent payable immediately prior to the commencement of such holdover. Neither Landlord's demand nor Landlord's receipt of such compensation for use and occupancy shall be deemed to provide Tenant with any right to use, occupy or possess the Premises for any period. If Tenant fails to surrender possession of the Premises immediately upon the expiration of the term hereof, all obligations of Tenant and all rights of Landlord applicable during the term of this Lease shall be equally applicable during such period of subsequent occupancy. 27. Brokers. Tenant covenants, represents and warrants that Tenant has had no dealings or negotiations with a broker or agent or finder in connection with the consummation of this Lease except as previously disclosed to Landlord in writing and Tenant covenants and agrees to pay, hold harmless and indemnify Landlord from and against any and all costs, expenses (including reasonable attorney's fees) and liability for any compensation, commissions or 36 charges claimed by any broker or agent with whom Tenant has had any dealings or negotiations with respect to this Lease or negotiations thereof, other than as previously disclosed to Landlord in writing prior to the execution of this Lease. 28. Rules and Regulations. Tenant shall comply with the rules and regulations attached to and made a part of this Lease as Exhibit A. Reasonable additions, alterations and modifications of such rules and regulations dealing with the Premises, the Building, the Park and the tenants thereof may from time to time be made by Landlord and be deemed a part of this Lease and shall be effective at such time as notice thereof is given to Tenant. All rules and regulations will be faithfully observed by Tenant, Tenant's employees, and all persons visiting the Premises, or claiming under Tenant. Nothing contained in this Lease shall be construed to impose upon Landlord any duty or obligation to enforce the rules and regulations or terms, covenants or conditions in any other lease, as against any other tenant, and Landlord shall not be liable to Tenant for violation of the same by any other tenant, its servants, employees, agents, visitors or licensees. 29. Use of Common Areas; Parking. (a) Tenant shall have the non-exclusive right, in common with others, to the use of any common entrances, lobbies, ramps, drives, stairs and similar access and serviceways and common areas in and adjacent to the Building. (b) Tenant shall have the non-exclusive right, in common with others, to park in areas designated for such purpose by 37 Landlord. Tenant shall not overburden the parking facilities and shall cooperate with Landlord and other tenants in the use of parking facilities. Landlord reserves the right in its absolute discretion to determine whether parking facilities a,re becoming crowded and, in such event, to allocate parking spaces among Tenant and other tenants. (c) Landlord shall designate not less than twelve (12) spaces within the parking lot in the area in and around the Building to be designated "Visitor Parking". The choice of which spaces are to be so designated shall be made by Landlord in its discretion. Landiord shall have no obligation to enforce such designation or to otherwise ensure that such spaces are used by visitors to the Building. (d) Tenant shall not be entitled to any compensation or diminution or abatement of rent in the event Landlord shall at any time change or diminish the size, area, location, type or arrangement of the common areas and parking facilities, or if available parking spaces are inadequate for Tenant's needs. No such change or diminution or unavailability of parking spaces shall be deemed a constructive or actual eviction. The foregoing restrictions shall not apply, with respect to a reduction in the number of parking spaces available at the Park, unless such reduction is made to comply with applicable law or administrative or court order. 30. Landlord's Forebearance not Considered Waiver. No delay or forebearance by Landlord in exercising any right or remedy 38 hereunder or in undertaking or performing any act or matter which is not expressly required to be undertaken by Landlord shall be construed, respectively, to be a waiver of Landlord's rights or to represent any agreement by Landlord to undertake or perform Isuch act or matter thereafter. 31. Landlord's Liability; Rights. (a) It is expressly understood and agreed by Tenant that none of Landlord's covenants, undertakings or agreements are made or intended as personal covenants, undertakings or agreements by Landlord or its partners, and any liability for damage or breach or nonperformance by Landlord shall be collectible only out of Landlord's interest in the Premises and no personal liability is assumed by, nor at any time may be asserted against, Landlord or its partners or any of its or their officers, agents, employees, legal representatives, successors or assigns, if any, all such liability, if any, being expressly waived and released by Tenant. (b) The Landlord named in the heading of this Lease and any subsequent owners of such Landlord's interest in the Building, as well as their respective heirs, personal representatives, successors and assigns shall each have the same rights, remedies, powers, authorities and privileges as it would have had it originally signed this Lease as Landlord, including the right to proceed in its own name to enter judgment by confession or otherwise, but any such person, whether or not named herein, shall have no liability under this Lease after it ceases to hold such interest. 39 32. Estoppel Certificate. (a) Tenant shall from time to time, within ten (10) days after request of Landlord, execute, acknowledge and deliver to Landlord a written instrument, in recordable form if requested, certifying (i) that this Lease is in full force and effect and has not been modified, supplemented or amended (or stating such modifications, supplements and amendments as may exist); (ii) the dates to which rent has been paid; (iii) the amount of any prepaid rent or credits owed to Tenant; (iv) if applicable, that Tenant has accepted possession of the Premises, the Commencement Date and term of this Lease; (v) whether Landlord is then in default under this Lease and specifying such default, if any; and (vi) any other fact or condition reasonably requested. Any certification delivered pursuant to this subparagraph may be relied upon by Landlord, any partner within Landlord, and any mortgagee, prospective mortgagee or purchaser of the Park or any interest therein. (b) The failure of Tenant to execute, acknowledge and deliver to Landlord a written instrument in accordance with the provisions specified above shall constitute an acknowledgement by Tenant, which may be relied upon by Landlord, any partner within Landlord, and any mortgagee, prospective mortgagee or purchaser of the Park or any interest therein, that this Lease is in full force and effect and has not been modified, supplemented or amended, except as may be set forth in Landlord's request, that rent has not been paid beyond the due date immediately preceding the date of such request, that tenant has no right of set-off or other defense 40 to this Lease, and of the truth of such other facts and conditions as have been requested to be certified. Notwithstanding the foregoing, Tenant's failure to furnish such written instrument within the time period provided herein shall constitute a default under this Lease. 33. Landlord's Lien Waiver. Following request by Tenant, Landlord shall execute and deliver to Tenant an agreement in favor of a lender providing financing to Tenant waiving Landlord's lien on Tenant's trade fixtures and personal property. The form and content of such agreement shall be satisfactory to Landlord. 34. Renewal Option. (a) Upon not less than six (6) months' prior written notice to Landlord, and provided no default by Tenant then exists under this Lease, Tenant may renew the term of this Lease for an additional term of five (5) years. Tenant may exercise such renewal option up to five (5) times; each exercise shall be for a five year renewal term or such other term as Landlord and Tenant agree. Each renewal term shall be on the same terms and conditions governing the initial term of this Lease, except minimum annual rent for each renewal term shall equal the product obtained by multiplying the minimum annual rent payable as of the end of the immediately preceding Lease Year times a fraction, the numerator of which equals 90% of the Index (as hereinafter defined) announced for the calendar month immediately preceding the calendar month in which the renewal term commences and the denominator of which is the Index announced for the calendar month in which the Commencement 41 Date occurs. In no event shall minimum annual rent payable during any renewal term be less than that payable during the immediately preceding Lease Year. (b) The "Index" is the Consumer Price Index, All Urban Consumers (CPI-U), U.S. City Average - All Items (1982-84=100) published by the Bureau of Labor Statistics of the United States Department of Labor. (c) If the Index ceases to use the 1982-1984 average of 100 as the basis of calculation, or if a substantial change is made in the number of items contained in the Index, then the Index shall be adjusted to the figure that would have been arrived at had the manner of computing the Index in effect at the Commencement Date not been altered. If the Index (or successor index) is not available, a reliable governmental or other non-partisan publication evaluating the information theretofore used in determining the Index shall be used. 35. Miscellaneous. (a) All rights and liabilities herein given to, or imposed upon the respective parties hereto, shall extend to and bind the several and respective heirs, executors, administrators, successors and assigns of said parties. (b) Each term, remedy, provision, condition, obligation and/or waiver contained in this Lease, or any amendment or supplement hereto, is a separate and distinct covenant and, if any such term, remedy, provision, condition, obligation and/or waiver is declared unenforceable or unconstitutional, or invalid by any 42 court of competent jurisdiction or by any act of Congress or by any other governmental authority, such decision, statute, ordinance or regulation will not affect in any manner the enforceability or validity of any other term, remedy, provision, condition, obligation and/or waiver contained herein, and they will remain in full force, virtue and effect. (c) The titles of the Paragraphs hereof are inserted solely for convenience of reference and are not intended to indicate all of the subject matter of the respective sections; they shall not constitute a part of any section nor shall they be interpreted or construed to affect the meaning, construction or effect of any Paragraph. 43 (d) All times, whenever stated in this Lease, are declared to be of the essence of this Lease. IN WITNESS WHEREOF, intending to be legally bound, the parties have executed this Lease as of the day and year first above written. Attest: LANDLORD: 1740 Sentry East Associates, L.P. By: 1740 Sentry East, Inc., its general partner ___________________________ By /s/ Michael J. Barrist -------------------------------- President Attest: TENANT NCO FINANCIAL SYSTEMS, INC. ___________________________ By /s/ Michael J. Barrist -------------------------------- President 44 EX-10.9 6 SOFTWARE LICENSE AGREEMENT Exhibit 10.9 SOFTWARE LICENSE AGREEMENT CR Software, Inc. agrees to grant and NCO Financial Systems Inc., DBA National Collections Office (henceforth referred to as Customer) agrees to accept on the following terms and conditions, nontransferable and non exclusive licenses to use the credit bureau reporting software package (Licensed Programs) herein delivered with this agreement. TERMS: This agreement and any licenses, programs or materials to which it applies may not be assigned, sublicensed or otherwise transferred by the Customer without prior written consent from CR Software. CR Software is the sole owner of the licensed programs. No right to print or copy, in whole or in part, the licensed programs is granted except as hereinafter expressly provided. PERMISSION TO COPY: The Customer may copy the licensed programs ONLY for use as backup copies. These backup copies are for the SOLE use of the customer. The Customer must obtain a separate license for each office in which the licensed programs will be operated. PROTECTION AND SECURITY: The Customer agrees not to provide or otherwise make available any licensed program including but not limited to program listings, object code and source code, in any form to any person or entity other than CR Software, without prior written consent from CR Software. LIMITATION OF LIABILITY: CR Software shall have no liability or responsibility to customer or any other person or entity with respect to any liability, loss or damage caused or alleged to be caused directly or indirectly by computer equipment or programs sold or licensed by CR Software, including but not limited to any interruption of service, loss of business or anticipatory profits or consequential computer equipment and/or computer programs. CR Software warrants that its software performs the functions and features stated in its literature. INITIAL INITIAL -------- --------- Customer CR Software This software is sold as is and is not warranted for fitness for a particular purpose regardless of any statements that may have been made by CR Software or its employees. RESPONSIBILITIES: CR Software will correct any programming errors in its software that may be uncovered in the course of operating the system. These corrections will be made available free of charge to any one licensed to use the system. CR Software reserves the right to charge an optional software maintenance fee. CR Software is not responsible for the correction of errors in NCR or other companies' software. MULTIUSER INFORMATION: Customers using the multi-user or cardless versions of our software agree to purchase the UNIX operating system. As stated in the responsibilities section, CR Software is not responsible for maintaining or correcting errors in the UNIX operating system. GENERAL: Good data processing procedure dictates that the Customer test the programs, run and test sample data, and run the system previously in use for a period of time adequate to insure that the results of operation of the computer equipment and/or programs are satisfactory. Customer Signature: /s/ Michael J. Barrist ------------------------ Name (Please Print): ------------------------ Title (Please Print): ------------------------ Date: ------------------------ CR Software Signature: ------------------------ Name (Please Print): ------------------------ Title (Please Print): ------------------------ Date: ------------------------ CR SOFTWARE PURCHASE AGREEMENT Purchaser: NCO Financial Systems Inc. DBA National Collections Office 1777 Walton Road Blue Bell, PA 19422 The Purchaser agrees to acquire the hardware and software package described below: HARDWARE: 1 Tower 32/600 SCSI Disk Sub-System: Frame and Cabinet Power Supply SCSI Disk Controller One 8" 368 MB Winchester Disk One 32/600 SCSI Disk Sub-System Cable One SCSI Interface Board TOTAL HARDWARE $15,000 SOFTWARE: CRS Credit Bureau Reporting Software $ 1,960 TOTAL SYSTEM PRICE $16,960.00 The NCR Tower 32/600 SCSI Disk Sub-System has the capacity to house up to three internal hard drives, thus providing a maximum of 1104 MB of internal storage. The above system is configured with one 368 MB hard drive providing storage for approximately 300,000 debtors. The CR Software Credit Bureau Reporting package will convert your data from its current format to the format required by the credit bureau you wish to report. As soon as you provide CRS with the credit bureau and appropriate contacts, CRS will make the necessary arrangements for the Purchaser to begin reporting to that credit bureau. Purchaser agrees to provide a $15,000 deposit with this order. The balance of the system, $1,960, is due and payable after the software has been used to generate the first monthly credit bureau report. Purchaser agrees to sign and abide by the terms of our software licensing agreement. CR Software agrees to pay for all installation and delivery charges for the NCR 32/600 SCSI Disk Sub-System. CR Software will support the Credit Bureau Reporting Software at no additional charge provided NCO Financial Systems, Inc. remains on CRS monthly support. Purchaser Signature: /s/ Michael J. Barrist --------------------------- Name (Please Print): --------------------------- Title (Please Print): --------------------------- Date: --------------------------- CR Software Signature: --------------------------- Name (Please Print): --------------------------- Title (Please Print): --------------------------- Date: --------------------------- EX-10.13 7 AMENDED AND RESTATED CREDIT AGREEMENT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AMENDED AND RESTATED CREDIT AGREEMENT by and between NCO GROUP, INC., NCO FINANCIAL SYSTEMS, INC., NCO FUNDING, INC. and NCO OF NEW YORK, INC. and MELLON BANK, N.A. September 5, 1996 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS ARTICLE 1 - DEFINITIONS; CONSTRUCTION ........................................ 1 1.1. Certain Definitions....................................... 1 1.2. Construction............................................. 17 1.3. Accounting Principles.................................... 18 ARTICLE 2 - THE CREDITS ..................................................... 19 2.1. Revolving Credit Loans................................... 19 2.2. Uniland Letter of Credit................................. 19 2.3 Revolving Credit Commitment Fee; Reduction of the Revolving Credit Committed Amounts..................... 20 2.4 Making of Loans.......................................... 21 2.5 Interest Rates........................................... 21 2.6 Prepayments Generally.................................... 22 2.7 Optional Prepayments..................................... 22 2.8 Mandatory Prepayments.................................... 22 2.9 Interest Payment Dates................................... 22 2.10 Additional Compensation in Certain Circumstances......... 23 2.11. Taxes.................................................... 24 ARTICLE 3 - REPRESENTATIONS AND WARRANTIES .................................. 25 3.1. Corporate Status......................................... 26 3.2. Corporate Power and Authorization........................ 26 3.3. Execution and Binding Effect............................. 26 3.4. Governmental Approvals and Filings....................... 26 3.5. Absence of Conflicts..................................... 26 3.6. Audited Financial Statements............................. 27 3.7. Interim Financial Statements............................. 27 3.8. Absence of Undisclosed Liabilities....................... 28 3.9. Absence of Changes....................................... 28 3.10. Accurate and Complete Disclosure......................... 28 3.11. Projections.............................................. 28 3.12. Solvency................................................. 29 3.13. Margin Regulations....................................... 29 3.14. Partnerships, Etc........................................ 29 3.15. Ownership and Control.................................... 29 3.16. Litigation............................................... 30 3.17. Absence of Events of Default............................. 30 3.18. Absence of Other Conflicts............................... 30 3.19. Insurance................................................ 30 3.20. Title to Property........................................ 31 3.21. Intellectual Property.................................... 31 3.22. Taxes.................................................... 31 3.23. Employee Benefits........................................ 31 3.24. Environmental Matters.................................... 31 -i- 3.25. Business Interruptions....................................32 3.26. Names.....................................................32 3.27. Regulation O..............................................33 ARTICLE 4 - CONDITIONS OF LENDING ........................................... 33 4.1. Conditions to Initial Loans.............................. 33 4.2. Conditions to All Loans.................................. 37 ARTICLE 5 - AFFIRMATIVE COVENANTS ........................................... 38 5.1. Basic Reporting Requirements............................. 38 5.2. Insurance................................................ 42 5.3. Payment of Taxes and Other Potential Charges and Priority Claims........................................ 42 5.4. Preservation of Corporate Status......................... 43 5.5. Governmental Approvals and Filings....................... 43 5.6. Maintenance of Properties................................ 43 5.7. Avoidance of Other Conflicts............................. 44 5.8. Financial Accounting Practices............................44 5.9. Use of Proceeds.......................................... 44 5.10. Continuation of or Change in Business.................... 44 5.11. Employment of Management................................. 44 5.12. Consolidated Tax Return.................................. 45 5.13. Fiscal Year.............................................. 45 5.14. Bank Accounts.............................................45 5.15. Submission of Collateral Documents........................45 5.16. Collection of Accounts....................................46 5.17. MAB/NCO New York Merger...................................46 ARTICLE 6 - NEGATIVE COVENANTS .............................................. 46 6.1. Financial Covenants...................................... 46 6.2. Liens.................................................... 47 6.3. Indebtedness............................................. 48 6.4. Guaranties, Indemnities, etc............................. 48 6.5. Loans, Advances and Investments.......................... 49 6.6. Dividends and Related Distributions...................... 49 6.7 Sale-Leasebacks.......................................... 50 6.8. Leases................................................... 51 6.9. Mergers, Acquisitions, etc............................... 51 6.10. Dispositions of Properties............................... 51 6.11. Issuance of Stock........................................ 52 6.12. Dealings with Affiliates................................. 52 6.13. Capital Expenditures..................................... 53 6.14. Limitations on Modification of Certain Agreements and Instruments........................................ 53 6.15. Limitation on Payments and Modification of Restricted Indebtedness................................ 54 6.16. Limitation on Other Restrictions on Dividends by Subsidiaries, etc...................................... 54 6.17. Limitation on Other Restrictions on Liens................ 54 -ii- 6.18. Limitation on Other Restrictions on Amendment of the Loan Documents, etc................................ 54 ARTICLE 7 - DEFAULTS ........................................................ 54 7.1. Events of Default........................................ 55 7.2. Consequences of an Event of Default...................... 58 ARTICLE 8 - MISCELLANEOUS ................................................... 59 8.1. Holidays................................................. 59 8.2. Records.................................................. 59 8.3. Amendments and Waivers................................... 59 8.4. No Implied Waiver; Cumulative Remedies................... 60 8.5 Notices.................................................. 60 8.6. Expenses; Taxes; Indemnity............................... 60 8.7. Severability............................................. 62 8.8. Prior Understandings..................................... 63 8.9. Duration; Survival....................................... 63 8.10. Counterparts............................................. 63 8.11. Limitation on Payments................................... 63 8.12. Set-Off.................................................. 63 8.13. Sharing of Collections................................... 64 8.14. Successors and Assigns; Participations; Assignments............................................ 65 Schedule 3.1 Corporate Status Schedule 3.8 Absence of Undisclosed Liabilities Schedule 3.11 Projections Schedule 3.14 Partnerships, etc. Schedule 3.15 Ownership and Control Schedule 3.19 Insurance Schedule 3.21 Intellectual Property Schedule 3.24 Environmental Matters Schedule 3.26 Names Schedule 6.2 Permitted Liens Schedule 6.3 Permitted Indebtedness Schedule 6.5 Existing Loans, Advances and Investments Schedule 6.12 Permitted Dealings with Affiliates Exhibit A Form of Revolving Credit Note Exhibit B Form of Amended and Restated Limited Guaranty Exhibit C Form of Warrant Documents Exhibit D Form of Amended and Restated Security Agreement Exhibit E Form of Amended and Restated Stock Pledge Agreement Exhibit F Form of Stock Pledge Agreement Exhibit G Form of MAB Guaranty Exhibit H Form of MAB Security Agreement Exhibit I Form of Insurance Assignments Exhibit J Form of Opinion of Blank, Rome, Comisky & McCauley -iii- Exhibit K Form of Opinion of Joshua Gindin Exhibit L Form of Quarterly Compliance Certificate -iv- AMENDED AND RESTATED CREDIT AGREEMENT THIS AMENDED AND RESTATED CREDIT AGREEMENT, dated as of September 5, 1996, by and between NCO Group, Inc., a Pennsylvania corporation ("NCO Group"), NCO Financial Systems, Inc., a Pennsylvania corporation ("NCO Financial"), NCO Funding, Inc., a Delaware corporation ("NCO Funding"), and NCO of New York, Inc. a New York corporation ("NCO New York")(NCO Group, NCO Financial, NCO Funding and NCO New York are each individually a "Borrower" and collectively the "Borrowers") and Mellon Bank, N.A., a national banking association (the "Lender"). Recitals: A. NCO Financial and the Lender entered into that certain Credit Agreement dated as of July 28, 1995 ("Credit Agreement"), pursuant to which the Lender made available to NCO Financial certain credit facilities. B. On the Second Closing Date (as defined below), NCO New York (as assignee of NCO Financial) will acquire all of the outstanding common stock of Management Adjustment Bureau, Inc. in an acquistion more particularly described in a Stock Purchase Agreement dated as of July 18, 1996 among the owners of the stock and NCO Financial. C. In order to finance the MAB Acquisition, the Borrowers have requested that the Lender amend and restate the Credit Agreement in order to increase the Revolving Credit Commitment to $15,000,000. D. The Borrowers and the Lender have agreed to amend and restate the Credit Agreement and to thereby increase the amount of the Revolving Credit Commitment and amend certain other terms and provisions of the Credit Agreement. NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained and intending to be legally bound hereby, the Borrowers and the Lender agree that the Credit Agreement is hereby amended and restated in its entirety as follows: ARTICLE 1 - DEFINITIONS; CONSTRUCTION 1.1. Certain Definitions. In addition to other words and terms defined elsewhere in this Agreement, as used herein the following words and terms shall have the following meanings, respectively, unless the context hereof otherwise clearly requires: "Account" shall mean any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper, whether or not it has been earned by performance. "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. "Annual Budget" shall have the meaning set forth in Section 5.1 hereof. "Business Day" shall mean 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 is located the Lender's office. "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 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 -2- 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. "Change of Management" shall mean that a majority of the Board of Directors of NCO Group shall be other than those who were directors on the date hereof, or Michael Barrist or Charles Piola, Jr. shall die, become disabled, shall be terminated from employment with NCO Group (voluntarily or involuntarily), or for any reason shall cease to serve as President and Executive Vice President, respectively, of NCO Group, having duties and responsibilities substantially similar to those held by them on the date hereof; provided, however, that (a) the disability of Michael Barrist shall not fall within the definition of a Change of Management, so long as within thirty (30) calendar days of such disability NCO Group has delivered to the Lender a succession plan which is acceptable to the Lender in its sole and absolute discretion, (b) after a Qualified IPO, the termination from employment of Michael Barrist with NCO Group (voluntarily or involuntarily) shall not fall within the definition of a -3- Change of Management, so long as a replacement is hired within thirty (30) calendar days of such termination who is reasonably acceptable to the Lender in its sole and absolute discretion, (c) the disability of Charles Piola (to the extent such disability prevents Charles Piola from performing his duties with NCO Group for ninety (90) consecutive days) shall not fall within the definition of a Change of Management, so long as NCO Group has delivered to the Lender a succession plan which is acceptable to the Lender, and (d) after a Qualified IPO, the termination from employment of Charles Piola with NCO Group (voluntarily or involuntarily) shall not fall within the definition of a Change of Management. "Closing Date" shall mean the date of the first Loan under the Credit Agreement. "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. References to sections of the Code shall be construed also to refer to any successor sections. "Collateral" shall mean the property from time to time subject to or purported to be subject to the Liens of the Security Documents. "Consolidated Current Assets" at any time shall mean the "current assets" of NCO Group and its consolidated Subsidiaries determined on a consolidated basis in accordance with GAAP. "Consolidated Current Liabilities" at any time shall mean the "current liabilities" of NCO Group and its consolidated Subsidiaries determined on a consolidated basis in accordance with GAAP, except that Consolidated Current Liabilities shall include the aggregate amount of Revolving Credit Loans to the extent not included in "current liabilities" in conformity with GAAP. "Consolidated Current Ratio" at any time shall mean the ratio of the Consolidated Current Assets at such time to the Consolidated Current Liabilities at such time. "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 foreign, federal, state and local income taxes for such period, (d) extraordinary losses to the extent included in determining such Consolidated Net -4- 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 Funded Debt" shall mean all obligations of NCO Group and its consolidated Subsidiaries incurred from time to time for Indebtedness, including without limitation the Obligations and Purchase Money Indebtedness. "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 property dividends or similar distributions, (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 -5- 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. "Controlled Group Member" shall mean each trade or business (whether or not incorporated) which together with any 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. "Credit Agreement" shall mean the Credit Agreement between NCO Financial and the Lender dated as of July 28, 1995. "Debt Service Coverage Ratio" shall mean the ratio of (a) Consolidated Net Income, plus depreciation, plus amortization, for the immediately preceeding 12 month period, to (b) Consolidated Interest Expense for the immediately preceeding 12 month period, plus current maturities of any outstanding Indebtedness. "Dollar," "Dollars" and the symbol "$" shall mean lawful money of the United States of America. "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, -6- 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 disposal. Without limitation, "Environmental -7- 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. "Event of Default" shall mean any of the Events of Default described in Section 7.1 hereof. "Final S Corp. Distribution" shall mean the final distribution by NCO Financial to its shareholders of its accumulated adjustment account, in an amount equal to all previously taxed but undistibuted S corporation earnings of NCO Financial, estimated to be approximately $3,000,000 as of September 1, 1996. "GAAP" shall have the meaning set forth in Section 1.3 hereof. "Governmental Action" shall have the meaning set forth in Section 3.4 hereof. "Governmental Authority" shall mean 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" shall mean Michael Barrist, Charles Piola, Jr., Bernie Miller and Annette Barrist. "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 -8- 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 Borrower, all obligations incurred by the Borrower 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; -9- (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 Lender, its respective affiliates, and the directors, officers, employees, attorneys and agents of each of the foregoing. "Law" shall mean any law (including common law), constitution, statute, treaty, convention, regulation, rule, ordinance, order, injunction, writ, decree or award of any Governmental Authority. "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. "Loan" shall mean any loan by the Lender to any Borrower under this Agreement, and "Loans" shall mean all Loans made by the Lender under this Agreement. "Loan Documents" shall mean this Agreement, the Note, the Security Documents, the Warrant 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. "MAB" shall mean Management Adjustment Bureau, Inc., a New York corporation. "MAB Acquisition" shall mean that certain transaction pursuant to which NCO New York (as assignee of NCO Financial) will acquire all of the outstanding stock of MAB in an acquistion more particularly described in a Stock -10- Purchase Agreement dated as of July 18, 1996 among the owners of the stock and NCO Financial. "MAB/NCO New York Merger" shall mean the merger by which NCO New York shall merge into MAB, with MAB as the surviving entity. "Material Adverse Effect" shall mean: (a) a material adverse effect on the business, operations, condition (financial or otherwise) or prospects of any Borrower, (b) a material adverse effect on the ability of any Borrower to perform or comply with any of the terms and conditions of any Loan Document, or (c) an 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. "Multiemployer Plan" shall mean any employee benefit plan which is a "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA and to which any Borrower or any Controlled Group Member has or had an obligation to contribute. "NCO 1996 Stock Option Plan" shall mean the employee stock option plan to be adopted by NCO Group pursuant to which NCO Group shall issue options to purchase no more than 5,212 shares of its common stock. "NCO Reorganization" shall mean the corporate reorganization of NCO Financial pursuant to which (a) the shareholders of NCO Financial will swap their shares in NCO Financial for an equivalent number of shares in NCO Group, a newly formed Pennsylvania corporation, so that the capitalization of NCO Group shall be identical to the capitalization of NCO Financial prior to the stock-for-stock swap, and NCO Financial shall thereby become a wholly-owned subsidiary of NCO Group, (b) NCO Group shall form NCO Funding, a new wholly-owned subsidiary, as a Delaware corporation, (c) NCO Group shall form NCO New York, a new wholly-owned subsidiary, as a New York corporation. "Net Cash Proceeds" with respect to any property shall mean cash or cash equivalents received by any Borrower from the sale or other disposition of such property, minus the sum of (a) expenses reasonably incurred in respect of such sale or other disposition, (b) any sales or transfer taxes payable as a result of such sale and (c) the amount required to discharge any indebtedness or obligation secured by a -11- Lien on such property and required to be discharged in connection with such sale or other disposition. "Net Realizable IPO Proceeds" shall have the meaning set forth in Section 5.14 hereof. "Note" shall mean the Revolving Credit Note of the Borrowers executed and delivered under this Agreement, together with all extensions, renewals, refinancings or refundings of any thereof in whole or part. "Obligations" shall mean all indebtedness, obligations and liabilities of any Borrower to the Lender 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 or any other Loan Document, and 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, 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 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. "Participant" shall have the meaning set forth in Section 8.13(b) hereof. "PBGC" means the Pension Benefit Guaranty Corporation established under Title IV of ERISA or any other governmental agency, department or instrumentality succeeding to the functions of said corporation. "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 -12- 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 Borrower 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 Borrower 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 Borrower 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 Acquisitions" shall mean the MAB Acquisition and any acquisition by any Borrower of all of the properties of any going concern or going line of business; provided, however, that each such business being acquired by such Borrower must (1) have a positive EBITDA for the immediately preceding twelve months prior to the acquisition, after adjustments for unusual expense items, (2) be in the same or a similar line of business as such Borrower, and (3) after recasting such Borrower's 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 Borrower and target shall have met the financial covenants described in Section 6.1 of this Agreement for the -13- immediately preceding twelve months prior to the acquisition and on a pro-forma basis for the immediately following twelve month period after the acquisition. The aggregate purchase price of Permitted Acquisitions, other than the MAB Acquisition, shall not exceed $3,500,000, among all Borrowers, in any rolling twelve month period. "Permitted Liens" shall have the meaning set forth in Section 6.2 hereof. "Person" shall mean an individual, corporation, partnership, trust, unincorporated association, 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 Borrower 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 Borrower or any Controlled Group Member. "PNC Accounts" shall have the meaning set forth in Section 5.14 hereof. "Postretirement Benefits" shall mean any benefits, other than retirement income, provided by any Borrower to retired employees, or to their spouses, dependents or beneficiaries, including, without limitation, group medical insurance or benefits, or group life insurance or death benefits. "Postretirement Benefit Obligation" shall mean that portion of the actuarial present value of all Postretirement Benefits expected to be provided by any Borrower which is attributable to employees' service rendered to the date of determination (assuming that such liability accrues ratably over an employee's working life to the earlier of his date of retirement or the date on which the employee would first become eligible for full benefits), reduced by the fair market value as of the date of determination of any assets which are segregated from the assets of such Borrower and which have been restricted so that they cannot be used for any purpose other than to provide Postretirement Benefits or to defray related expenses. -14- "Potential Default" shall mean any event or condition which with notice or the passage of time would constitute an Event of Default. "Prime Rate" as used herein, shall mean the interest rate per annum announced from time to time by the Lender, as its prime rate. The Prime Rate may be greater or less than other interest rates charged by the Lender to other borrowers and is not solely based or dependent upon the interest rate which the Lender may charge any particular borrower or class of borrowers. "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 Borrower 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 Potential Default under this Agreement. "Qualified IPO" shall mean an underwritten "best efforts" initial public offering of shares of NCO Group's common stock in which the aggregate net proceeds to NCO Group are at least $9,500,000. "Regular Payment Date" shall mean the first day of each month after the date hereof. "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 Barrist or Charles Piola, Jr. -15- "Revolving Credit Commitment" shall have the meaning set forth in Section 2.1(a) hereof. "Revolving Credit Commitment Fee" shall have the meaning set forth in Section 2.2(a) hereof. "Revolving Credit Committed Amount" shall mean Fifteen Million Dollars ($15,000,000). "Revolving Credit Loans" shall have the meaning set forth in Section 2.1(a) hereof. "Revolving Credit Maturity Date" shall mean July 31, 1999. "Revolving Credit Note" shall mean the promissory note of the Borrowers executed and delivered under Section 2.1(c) hereof, any promissory note issued in substitution therefor, together with all extensions, renewals, refinancings or refundings thereof in whole or part. "Second Closing Date" shall mean September 5, 1996. "Security Agreement" shall mean the Amended and Restated Security Agreement dated as of the date hereof and duly executed on behalf of each Borrower, as it may be amended, modified or supplemented from time to time, and delivered to the Lender pursuant Section 4.1(c) hereof. "Security Documents" shall have the meaning set forth in Section 4.1(e) hereof. "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 -16- 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. "Subsidiary" of a Person at any time shall mean any corporation of which a majority (by number of shares or number of votes) of any class of outstanding capital stock normally entitled to vote for the election of one or more directors (regardless of any contingency which does or may suspend or dilute the voting rights of such class) is at such time owned directly or indirectly, beneficially or of record, by such Person or one or more Subsidiaries of such Person, and any trust of which a majority of the beneficial interest is at such time owned directly or indirectly, beneficially or of record, by such Person or one or more Subsidiaries of such Person. "Taxes" shall have the meaning set forth in Section 2.10 hereof. "Uniland L/C shall have the meaning set forth in Section 2.2 hereof. "Uniland L/C Committed Amount" shall mean Three Hundred Thousand Dollars ($300,000). "Warrant Documents" shall have the meaning set forth in Section 4.1(c) hereof. 1.2. Construction. Unless the context of this Agreement otherwise clearly requires, references to the plural -17- include the singular, the singular the plural and the part the whole; "or" has the inclusive meaning represented by the phrase "and/or"; and "property" includes all properties and assets of any kind or nature, tangible or intangible, real, personal or mixed. References in this Agreement to "determination" (and similar terms) by the Lender include good faith estimates by the Lender (in the case of quantitative determinations) and good faith beliefs by the Lender (in the case of qualitative determinations). The words "hereof," "herein," "hereunder" and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. References herein to "out-of-pocket expenses" of a Person (and similar terms) include, but are not limited to, the fees of in-house counsel and other in-house professionals of such Person to the extent that such fees are routinely identified and specifically charged under such Person's normal cost accounting system. The section and other headings contained in this Agreement and the Table of Contents preceding this Agreement are for reference purposes only and shall not control or affect the construction of this Agreement or the interpretation thereof in any respect. Section, subsection and exhibit references are to this Agreement unless otherwise specified. 1.3. Accounting Principles. (a) As used herein, "GAAP" shall mean generally accepted accounting principles in the United States, applied on a basis consistent with the principles used in preparing NCO Financial's financial statements as of December 31, 1994 and for the fiscal year then ended, as referred to in Section 3.6 hereof. (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 (including principles of consolidation where appropriate), and all accounting or financial terms shall have the meanings ascribed to such terms by GAAP. (c) If and to the extent that the financial statements generally prepared by the Borrowers apply accounting principles other than GAAP, all financial statements referred to in this Agreement or any other Loan Document shall be delivered in duplicate, one set based on the accounting principles then generally applied by the Borrowers and one set based on GAAP, if different. To the extent this Agreement or such other Loan Document requires financial statements to be accompanied by an opinion of independent accountants, each set of financial statements shall be accompanied by such an opinion. -18- ARTICLE 2 - THE CREDITS 2.1. Revolving Credit Loans. (a) Revolving Credit Commitment. Subject to the terms and conditions and relying upon the representations and warranties herein set forth, the Lender agrees (such agreement being herein called "Revolving Credit Commitment") to make loans (the "Revolving Credit Loans") to the Borrowers at any time or from time to time on or after the date hereof and to but not including the Revolving Credit Maturity Date. The Lender shall have no obligation to make a Revolving Credit Loan to the extent that the aggregate principal amount of Revolving Credit Loans at any time outstanding would exceed the Revolving Credit Committed Amount. (b) Nature of Credit. Within the limits of time and amount set forth in this Section 2, and subject to the provisions of this Agreement, the Borrowers may borrow, repay and reborrow Revolving Credit Loans hereunder. (c) Revolving Credit Note. The obligation of the Borrowers to repay the unpaid principal amount of the Revolving Credit Loans made by the Lender and to pay interest thereon shall be evidenced in part by a promissory note of the Borrowers, dated the Second Closing Date (the "Revolving Credit Note") in substantially the form attached hereto as Exhibit A, with the blanks appropriately filled, payable to the order of the Lender in a face amount equal to $15,000,000 ("the Revolving Credit Committed Amount"). (d) Maturity. To the extent not due and payable earlier, the Revolving Credit Loans shall be due and payable on the Revolving Credit Maturity Date. 2.2. Uniland Letter of Credit. (a) Uniland Letter of Credit Commitment. Subject to the terms and conditions of this Agreement, the Lender agrees to issue a standby letter of credit for the account of the Borrowers as support for the obligations of MAB under its office lease with Uniland Partnership, L.P. ("Uniland L/C"), in a face amount not to exceed the Uniland L/C Committed Amount. The Uniland L/C shall be issued on a one-time only basis, and the Borrowers may not borrow and reborrow under this commitment. (b) Conditions Precedent to Issuance. The obligation of the Lender to issue the Uniland L/C is subject to -19- the satisfaction, in addition to the conditions set forth in Article 4 hereof, of the following conditions precedent: (i) The Lender shall have received from the Borrower true and correct copies of the lease and any related documents between MAB and Uniland Partnership, L.P., shall have completed its review of such documents and shall have determined, to its reasonable satisfaction, that such documents are commercially reasonable and customary documents for transactions of this type. (ii) The Borrowers shall have executed and delivered to the Lender such documents as the Lender may reasonably request in connection with the issuance of the Uniland L/C. (iii) The Borrowers shall have completed such other acts and satisfied any other conditions in the Lender's reasonable discretion. (c) Termination of Agreement Prior to Uniland L/C Expiration. Immediately upon the termination of this Agreement, the Borrower agrees to either: (i) provide to the Lender cash collateral, or collateral in the form of Cash Equivalent Investments, in an amount equal to the maximum amount of the Lender's obligations under the Uniland L/C, or (ii) cause to be delivered to the Lender releases of all of the Lender's obligations under the Uniland L/C. At the Lender's discretion, any proceeds of Collateral received by the Lender after the occurrence and during the continuation of an Event of Default or Potential Default may be held as the cash collateral required by this Section 2.2(c). 2.3. Revolving Credit Commitment Fee; Reduction of the Revolving Credit Committed Amounts. (a) Revolving Credit Commitment Fee. The Borrowers shall pay to the Lender a commitment fee (the "Revolving Credit Commitment Fee") equal to one-half of one percent (1/2%) per annum (based on a year of 360 days and actual days elapsed), for each day from and including the date hereof to but not including the Revolving Credit Maturity Date, on the amount (not less than zero) equal to (i) the Revolving Credit Committed Amount on such day, minus (ii) the aggregate principal amount of the Revolving Credit Loan outstanding on such day. Such Revolving Credit Commitment Fee shall be due and payable for the preceding period for which such fee has not been paid: (x) on each Regular Payment Date, (y) on the date of each reduction of the Revolving Credit Committed Amount (whether optional or mandatory) on the amount so reduced and (z) on the Revolving Credit Maturity Date. -20- (b) Reduction of the Revolving Credit Committed Amount. The Borrowers may at any time or from time to time reduce the Revolving Credit Committed Amount to an aggregate amount (which may be zero) not less than the sum of the unpaid principal amount of the Revolving Credit Loans then outstanding plus the principal amount of the Revolving Credit Loans not yet made as to which notice has been given by the Borrowers under Section 2.3 hereof. Any reduction of the Revolving Credit Committed Amount shall be in an aggregate amount which is an integral multiple of $500,000. Reduction of the Revolving Credit Committed Amount shall be made by providing not less than three Business Days' notice (which notice shall be irrevocable) to such effect to the Lender. After the date specified in such notice, the Revolving Credit Commitment Fee shall be calculated upon the Revolving Credit Committed Amount as so reduced. 2.4. Making of Loans. Whenever a Borrower desires that the Lender make a Revolving Credit Loan, such Borrower shall make a telephonic request to Lender (before 11:00 A.M. Philadelphia time), to be confirmed in writing by such Borrower on the same day by facsimile transmission, and the request shall include the following information (a separate notice being required for each such Loan): (a) The date, which shall be a Business Day, on which such proposed Loan is to be made; and (b) The aggregate principal amount of such proposed Loan, which shall be an integral multiple of $25,000 and which shall not be less than $100,000. The Lender may rely upon any and all telephonic and written requests and confirmations purported to be made by a Borrower through any Responsible Officer. Unless any applicable condition specified in Article 4 hereof has not been satisfied, on the date specified in such request the Lender shall make the proceeds of the Loan available to such Borrower in funds immediately available. 2.5. Interest Rate; Payments Generally; Interest on Overdue Accounts. (a) Interest Rate. The unpaid principal amount of the Loans shall bear interest for each day until due at a per annum rate equal to one and three-eighths percent (1-3/8%) in excess of the Prime Rate. (b) Payments Generally. All payments and prepayments to be made by the Borrowers in respect of principal, interest, fees, indemnity, expenses or other amounts due from the Borrowers -21- hereunder or under any Loan Document shall be payable in Dollars at 12:00 o'clock Noon, Philadelphia time, on the day when due without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, and an action therefor shall immediately accrue, without setoff, counterclaim, withholding or other deduction of any kind or nature, except for payments to a Lender subject to a withholding deduction under Section 2.10 hereof. Except for payments under Sections 2.10 and 8.6 hereof, such payments shall be made to the Lender in Dollars in funds immediately available, and payments under Sections 2.10 and 8.6 hereof shall be made to the Lender at such domestic account as it shall specify to the Borrowers from time to time in funds immediately available at such account. Any payment or prepayment received by the Lender after 12:00 o'clock Noon, Philadelphia time, on any day shall be deemed to have been received on the next succeeding Business Day. (c) Interest on Overdue Amounts. After the occurrence and continuance of an Event of Default, to the extent permitted by Law, after there shall have become due (by acceleration or otherwise) principal, interest, fees, indemnity, expenses or any other amounts due from the Borrowers hereunder or under any other Loan Document, such amounts shall bear interest for each day until paid (before and after judgment), payable on demand, at a rate per annum (in each case based on a year of 360 days and actual days elapsed) which for each day shall be equal to two percent (2%) in excess of the contract rate described in Section 2.5(a) above. To the extent permitted by law, interest accrued on any amount which has become due hereunder or under any other Loan Document shall compound on a day-by-day basis, and hence shall be added daily to the overdue amount to which such interest relates. 2.6. Prepayments Generally. Whenever a Borrower desires or is required to prepay any part of the Loans, it shall provide notice to the Lender setting forth the following information: (a) The date, which shall be a Business Day, on which the proposed prepayment is to be made; and (b) The total principal amount of such prepayment. 2.7. Optional Prepayments. The Borrowers shall have the right at their option from time to time to prepay its Loans in whole or part without premium or penalty. Any such prepayment shall be made in accordance with Section 2.6 hereof. 2.8. Mandatory Payments. -22- (a) Asset Sales. The Borrowers shall prepay a principal amount of the Loans from time to time in an amount not less than the Net Cash Proceeds upon the sale of assets in accordance with Section 6.10(b) hereof, payable to the Lender upon receipt of any Net Cash Proceeds, to the extent that such Net Cash Proceeds exceed $25,000 in the aggregate, among all Borrowers, per annum. (b) Applicability of Certain Provisions. Prepayments required by this Section 2.7 are subject to all of the terms and conditions applicable to prepayments generally pursuant to Section 2.5 hereof and Section 2.9 hereof and to all of the terms and conditions applicable to optional prepayments pursuant to Section 2.6 hereof. 2.9. Interest Payment Dates. Interest shall be due and payable on each Regular Payment Date. 2.10. Additional Compensation in Certain Circumstances. (a) Increased Costs or Reduced Return Resulting From Taxes, Reserves, Capital Adequacy Requirements, Expenses, Etc. If any Law or guideline or interpretation or application thereof by any Governmental Authority charged with the interpretation or administration thereof or compliance with any request or directive of any Governmental Authority (whether or not having the force of Law) now existing or hereafter adopted: (i) subjects the Lender to any tax or changes the basis of taxation with respect to all loans made by the Lender which are similar to the Loans in this Agreement, or with respect to payments made under all loans by the Lender which are similar to payments by the Borrowers of principal, interest, commitment fee or other amounts due from the Borrowers hereunder or under the Note (except for taxes on the overall net income or overall gross receipts of the Lender imposed by the jurisdictions (federal, state and local) in which the Lender's principal office is located), (ii) imposes, modifies or deems applicable any reserve, special deposit or similar requirement against credits or commitments to extend credit extended by, assets (funded or contingent) of, deposits with or for the account of, or other acquisitions of funds by, the Lender, (iii) imposes, modifies or deems applicable any capital adequacy or similar requirement (A) against assets (funded or contingent) of, or credits or commitments to extend -23- credit extended by, the Lender, or (B) otherwise applicable to the obligations of the Lender under this Agreement, or (iv) imposes upon the Lender any other condition or expense with respect to this Agreement, the Note or its making, maintenance or funding of any Loan or any security therefor, and the result of any of the foregoing is to increase the cost to, reduce the income receivable by, or impose any expense (including loss of margin) upon the Lender, or, in the case of clause (iii) hereof, any Person controlling the Lender, with respect to this Agreement, the Note or the making, maintenance or funding of any Loan (or, in the case of any capital adequacy or similar requirement, to have the effect of reducing the rate of return on the Lender's or controlling Person's capital, taking into consideration the Lender's or controlling Person's policies with respect to capital adequacy) by an amount which the Lender in its reasonable discretion deems to be material, the Lender may from time to time notify the Borrowers of the amount determined in good faith (using reasonable averaging and attribution methods) by the Lender (which determination shall be conclusive) to be necessary to compensate the Lender for such increase, reduction or imposition in writing together with all relevant calculations and information. Such amount shall be due and payable by the Borrowers to the Lender ten Business Days after such notice is given. A certificate by such Lender as to the amount due and payable under this Section 2.10 from time to time and the method of calculating such amount shall be conclusive, absent manifest error. 2.11. Taxes. (a) Payments Net of Taxes. All payments made by the Borrowers under this Agreement or any other Loan Document shall be made free and clear of, and without reduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, and all liabilities with respect thereto, excluding (i) income or franchise taxes imposed on the Lender by any Governmental Authority of any jurisdiction under the laws of which the Lender is organized or any political subdivision or taxing authority thereof or therein or as a result of a connection between the Lender and any jurisdiction other than a connection resulting solely from this Agreement and the transactions contemplated hereby, and -24- (ii) income or franchise taxes imposed by any jurisdiction in which the Lender's lending offices which make or book Loans are located or any political subdivision or taxing authority thereof or therein (all such non-excluded taxes, levies, imposts, deductions, charges or withholdings being hereinafter called "Taxes"). If any Taxes are required to be withheld or deducted from any amounts payable to the Lender under this Agreement or any other Loan Document, the Borrowers shall pay the relevant amount of such Taxes and the amounts so payable to the Lender shall be increased to the extent necessary to yield to the Lender (after payment of all Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement and the other Loan Documents. Whenever any Taxes are paid by the Borrowers with respect to payments made in connection with this Agreement or any other Loan Document, as promptly as possible thereafter, the Borrowers shall send to the Lender for its own account a certified copy of an original official receipt received by the Borrowers showing payment thereof. (b) Indemnity. Each Borrower hereby indemnifies the Lender for the full amount of all Taxes attributable to payments by or on behalf of such Borrower hereunder or under any of the other Loan Documents, any Taxes paid by the Lender, and any present or future claims, liabilities or losses with respect to or resulting from any omission to pay or delay in paying any Taxes (including any incremental Taxes, interest or penalties that may become payable by the Lender as a result of any failure to pay such Taxes), whether or not such Taxes were correctly or legally asserted. Such indemnification shall be made within 30 days from the date the Lender makes written demand therefor. ARTICLE 3 - REPRESENTATIONS AND WARRANTIES Each Borrower hereby represents and warrants to the Lender as follows: 3.1. Corporate Status. Each Borrower is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation. Each Borrower has corporate power and authority to own its property and transact the business in which it is engaged or presently proposes to engage. Each Borrower 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 3.1 hereof states as of the date hereof the jurisdiction of incorporation of each Borrower and the -25- jurisdictions in which each Borrower is qualified to do business as a foreign corporation. 3.2. Corporate Power and Authorization. Each Borrower 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 Borrower 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. 3.3. Execution and Binding Effect. This Agreement and each other Loan Document to which any Borrower is a party and which is required to be delivered on or before the Second Closing Date pursuant to Section 4.1 hereof has been duly and validly executed and delivered by such Borrower. This Agreement and each other Loan Document constitutes, the legal, valid and binding obligation of each Borrower, enforceable against each 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. 3.4. 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. 3.5. 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 (a) violate or conflict with any Law, or (b) 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 -26- 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 the Borrower (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, (i) the articles of incorporation or by-laws (or other constituent documents) of any Borrower, (ii) any agreement or instrument creating, evidencing or securing any Indebtedness to which any Borrower 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 (iii) any other material agreement or instrument to which any Borrower is a party or any of its properties (now owned or hereafter acquired) may be subject or bound. 3.6. Audited Financial Statements. NCO Financial has heretofore furnished to the Lender balance sheets of NCO Financial and MAB, respectively, as of December 31, 1995, 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 Coopers & Lybrand, independent certified public accountants for NCO Financial, and Brock, Schecter & Pollakoff, independent certified public accountants for MAB, who each delivered an unqualified opinion in respect thereof. NCO Financials' financial statements present fairly the financial condition of NCO Financial, 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. To the best of the Borrowers' knowledge, after due inquiry, MAB's financial statements present fairly the financial condition of MAB, 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. 3.7. Interim Financial Statements. NCO Financial has heretofore furnished to the Lender interim company prepared balance sheets of NCO Financial and MAB, respectively, dated May 31, 1996, together with the related consolidated statements of income, cash flows and changes in stockholders' equity for the applicable fiscal periods ending on such date. NCO Financial's financial statements present fairly the financial condition of NCO Financial, as of the end of each such fiscal quarter and the -27- results of its operations and its cash flows for the fiscal periods then ended, all in conformity with GAAP, subject to normal and recurring year-end audit adjustments. To the best of the Borrowers' knowledge, after due inquiry, MAB's financial statements present fairly the financial condition of MAB, as of the end of each such fiscal quarter and the results of its operations and its cash flows for the fiscal periods then ended, all in conformity with GAAP, subject to normal and recurring year-end audit adjustments. 3.8. Absence of Undisclosed Liabilities. No Borrower 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 3.6 and 3.7 hereof, (x) matters that, individually or in the aggregate, could not have a Material Adverse Effect, (y) as disclosed in Schedule 3.8 hereof, and (z) liabilities, obligations, commitments and losses incurred after December 31, 1995 in the ordinary course of business and consistent with past practices. 3.9. Absence of Changes. Since December 31, 1995, there has been no change in the business, operations, condition (financial or otherwise), or prospects of NCO Financial or, to the best of the Borrowers' knowledge, after due inquiry, MAB, which could in either case have a Material Adverse Effect. 3.10. Accurate and Complete Disclosure. All information (taken as a whole) heretofore, contemporaneously or hereafter provided (orally or in writing) by any Borrower to the Lender 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 Lender 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. Each Borrower has disclosed to the Lender in writing every fact or circumstance which has, or which could have, a Material Adverse Effect. 3.11. Projections. Attached hereto as Schedule 3.11 are projections prepared by the Borrowers demonstrating the projected financial condition and results of operations of the Borrowers, for the period commencing on December 31, 1996 and ending on December 31, 1998, which projections are accompanied by a written statement of the assumptions and estimates underlying such projections. Such projections were prepared on the basis of -28- such assumptions and estimates. Such projections, assumptions and estimates, as of the date of preparation thereof and as of the date hereof, are reasonable, are made in good faith, are consistent with the Loan Documents, and represent each Borrower's best judgment as to such matters. Nothing has come to the attention of the Borrowers which would lead the Borrowers to believe that such projections will not be attained or exceeded. Nothing contained in this Section shall constitute a representation or warranty that such future financial performance or results of operations will in fact be achieved. 3.12. Solvency. On and as of the Second 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, each Borrower is and will be Solvent. 3.13. 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 Regulations G and 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 Borrower is engaged in the business of extending credit to others for the purpose of buying or carrying "margin stock". No Borrower 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 G, T, U or X of the Board of Governors of the Federal Reserve System, as amended from time to time. 3.14. Partnerships, Etc. No Borrower 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 Person (including but not limited to any interest pursuant to which the Borrower 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), except for (x) matters set forth in Schedule 3.14 hereof (which reflects the results of the NCO Reorganization and the MAB Acquisition). 3.15. Ownership and Control. Schedule 3.15 hereof states as of the date hereof the authorized capitalization of each Borrower, the number of shares of each class of capital stock issued and outstanding of each Borrower 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 -29- direct or indirect beneficial owners of such shares. The outstanding shares of capital stock of each Borrower have been duly authorized and validly issued and are fully paid and nonassessable. Except as described in Schedule 3.15, 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 obligate any Borrower to issue any shares of its capital stock or any other securities. 3.16. Litigation. To the best of each Borrower's knowledge, there is no pending or (to such Borrower's knowledge after due inquiry) threatened action, suit, proceeding or investigation by or before any Governmental Authority against any Borrower, other than alleged violations of the Fair Debt Collection Practices Act which would not cause a Material Adverse Effect. 3.17. Absence of Events of Default. No event has occurred and is continuing and no condition exists which constitutes an Event of Default or Potential Default. 3.18. Absence of Other Conflicts. No Borrower is in violation of or conflict with, or is subject to any contingent liability on account of any violation of or conflict with: (a) any Law to the best of its knowledge, after due inquiry, (b) its articles of incorporation or by-laws (or other constituent documents), or (c) 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. 3.19. Insurance. Each Borrower 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 3.19 hereof sets forth a list of all insurance currently maintained by each Borrower, 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, proceedings against, arising under or based upon any of such insurance policies except as set forth in such Schedule 3.19. -30- 3.20. Title to Property. Each Borrower 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 3.6 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. 3.21. Intellectual Property. Each Borrower 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 3.21, no Borrower owns any patents, trademarks or copyrights. 3.22. Taxes. All tax and information returns required to be filed by or on behalf of any Borrower have been properly prepared, executed and filed. All taxes, assessments, fees and other governmental charges upon any Borrower 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 such Borrower. The reserves and provisions for taxes on the books of each Borrower are adequate for all open years and for its current fiscal period. No Borrower has knowledge of any proposed additional assessment or basis for any material assessment for additional taxes (whether or not reserved against). 3.23. Employee Benefits. No Borrower has a Plan or Plans. 3.24. Environmental Matters. (a) Each Borrower, 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 3.24 hereof and (y) matters which, individually or in the aggregate, could not have a Material Adverse Effect. There are to each Borrower's knowledge after due inquiry no -31- circumstances that may prevent or interfere with such full compliance in the future. (b) Each Borrower 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 3.24 hereof and (y) matters which, individually or in the aggregate, could not have a Material Adverse Effect. (c) There is no Environmental Claim pending or to the knowledge of any Borrower 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 Borrower or any of its respective Environmental Affiliates, except for (x) matters set forth in Schedule 3.24 hereof, and (y) matters which, if adversely decided, individually or in the aggregate, could not have a Material Adverse Effect. (d) No facility or property now or previously owned, operated or leased by any Borrower or any of its respective Environmental Affiliates is an Environmental Cleanup Site. No Borrower nor any respective 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 no condition exists which could result in the filing of a Lien, against any property of any Borrower or any of its respective Environmental Affiliates under any Environmental Law. 3.25. Business Interruptions. Within two (2) years prior to the Second Closing Date, neither the business, property nor operations of any Borrower have 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 any Borrower. To the best of each Borrower's knowledge, there are no pending or threatened labor disputes, strikes, lockouts or similar occurrences or grievances against the business being operated by any Borrower. 3.26. Names. Within five (5) years prior to the Second Closing Date, neither NCO Financial nor MAB has conducted business under or used any other names (whether corporate or assumed) except for its present corporate name and those names listed in Schedule 3.26 attached hereto and made part hereof. NCO Financial and MAB are each the sole owner of their respective names and any and all business done and all invoices using such -32- name or any names listed in Schedule 3.26 represent sales and business of such Borrower and are owned solely by such Borrower. 3.27. Regulation O. No director, executive officer or principal shareholder of any Borrower is a director, executive officer or principal shareholder of the Lender. For the purposes hereof the terms "director" (when used with reference to the 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. ARTICLE 4 - CONDITIONS OF LENDING 4.1. Conditions to Initial Loans. The obligation of the Lender to make Loans on the Second Closing Date is subject to the satisfaction, immediately prior to or concurrently with the making of such Loan, of the following conditions precedent, in addition to the conditions precedent set forth in Section 4.2 hereof: (a) Agreement; Note. The Lender shall have received this Agreement, duly executed by each Borrower, and an executed Revolving Credit Note, in the form of Exhibit "A" hereto, duly executed on behalf of each Borrower. (b) Nonrecourse Guaranty. The Lender shall have received, from the Guarantors, an Amended and Restated Limited Guaranty Agreement, substantially in the form of Exhibit "B" hereto (as amended, modified or supplemented from time to time, the "Guaranty"), duly executed on behalf of each Guarantor. (c) Warrant Documents. The Lender shall have received the 1996 Warrant Agreement, the Amendment to Warrant Agreement, the Common Stock Purchase Warrant (3,770 Warrant Shares), the Common Stock Purchase Warrant (1,000 Warrant Shares) and the Amended and Restated Registration Rights Agreement, in substantially the form of Exhibit "C" hereto (as amended, modified or supplemented from time to time, each a "Warrant Document" and collectively the "Warrant Documents"), duly executed on behalf of each Borrower. (d) Facility Fee. The Lender shall have received a facility fee ("Facility Fee") from the Borrower of $40,000, representing the unpaid balance of a total facility fee of $80,000. (e) Certain Security Documents Pertaining to Personal Property. The Lender shall have received the following documents (as amended, modified or supplemented from time to time, each a -33- "Security Document" and collectively the "Security Documents"), each of which shall be in form and substance satisfactory to the Lender, (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 Borrower, in substantially the form of Exhibit "D" hereto (as amended, modified or supplemented from time to time, the "Security Agreement"). (B) An Amended and Restated Stock Pledge Agreement, duly executed on behalf of the Guarantors, in substantially the form of Exhibit "E" hereto (as amended, modified or supplemented from time to time, the "Guarantor Pledge Agreement"). (C) A Stock Pledge Agreement, duly executed on behalf of NCO Group, and a Stock Pledge Agreement, duly executed on behalf of NCO New York, each in substantially the form of Exhibit "F" hereto, as may be amended, modified or supplemented from time to time. (D) A Guaranty and Suretyship Agreement, duly executed on behalf of MAB, in substantially the form of Exhibit "G" hereto, as may be amended, modified or supplemented from time to time. (E) A Security Agreement, duly executed on behalf of MAB, in substantially the form of Exhibit "H" hereto, as may be amended, modified or supplemented from time to time. (F) Insurance Assignments, duly executed by the Borrower, in substantially the form of Exhibit "I" hereto (as amended, modified or supplemented from time to time, the "Insurance Assignments"), in order to assign to the Lender (1) the $1,000,000 keyman life insurance policy issued by Travelers Life Insurance Company (Policy #7293181) on the lives of Michael Barrist and Charles Piola, Jr. (on a "first to die" basis), and (2) the $1,000,000 keyman life insurance policy issued by Travelers Life Insurance Company (Policy #7266517) on the life of Michael Barrist. (ii) Certificates and instruments representing the stock certificates and other instruments pledged pursuant to such Security Documents, accompanied by duly executed instruments -34- of transfer or assignment in blank, and, to the extent required by the Security Documents, duly endorsed to the order of the Lender, in form and substance satisfactory to the Lender. (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 Lender, 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 Lender 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 Lender shall receive: (A) Proper financing statements duly executed by the Borrowers or, in the opinion of the Lender, desirable to create or perfect such Liens in favor of the Lender. (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 Lender, 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, real property, 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 Lender (it being understood that such acceptance does not limit the obligations of the Borrowers with respect to the priority of the Liens in favor of the Lender), and the Lender 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. (f) Capitalization, etc. The corporate and capital structure of each Borrower, the articles of incorporation and by- -35- laws (or other constituent documents) of each Borrower, and the terms, conditions, amounts and holders of all equity, debt and other indebtedness, obligations and liabilities of each Borrower, shall be satisfactory to the Lender. (g) Corporate Proceedings. The Lender shall have received certificates by the Secretary or Assistant Secretary of each Borrower dated as of the Second Closing Date as to (i) true copies of the articles of incorporation and by-laws (or other constituent documents) of each Borrower 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 certified to be true, correct and complete by such Secretary of State or other Governmental Authority not more than 30 days before the Second Closing Date), (ii) true copies of all corporate action taken by each Borrower relative to this Agreement and the other Loan Documents and (iii) the incumbency and signature of the respective officers of each Borrower executing this Agreement and the other Loan Documents, together with satisfactory evidence of the incumbency of such Secretary or Assistant Secretary. The Lender shall have received certificates from the appropriate Secretaries of State or other applicable Governmental Authorities dated not more than 30 days before the Second Closing Date showing the good standing of each Borrower in its state of incorporation and each state in which each Borrower does business. (h) Insurance. The Lender shall have received a report from each Borrower's insurance broker, addressed to the Lender, satisfactory in form and substance to the Lender, as to insurance matters pertaining to such Borrower. The Lender 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. (i) Financial Statements, Projections. The Lender shall have received copies of the financial statements, combining financial statements, pro forma financial statements and projections referred to in Sections 3.6, 3.7, 3.8, 3.11 and 3.12 hereof. (j) Legal Opinions of Counsel to the Loan Parties. The Lender shall have received an opinion addressed to the Lender, dated the Second Closing Date, of Blank, Rome, Comisky & McCauley, and Joshua Gindin, Esquire, counsel to the Borrowers, in substantially the form attached hereto as Exhibit "J" and Exhibit "K", respectively (which are substantially the same as -36- the opinions issued in connection with the Credit Agreement, with appropriate additional provisions which address the transactions described herein). (k) Responsible Officer Certificates. The Lender shall have received certificates from a Responsible Officer of each Borrower as to such matters as the Lender may request. (l) Fees, Expenses, etc. All fees and other compensation required to be paid to the Lender pursuant hereto or pursuant to any other written agreement on or prior to the Second Closing Date shall have been paid or received, including but not limited to those referred to in the commitment letter. (m) Interest Rate Cap. The Borrowers shall deliver to the Lender evidence satisfactory to the Lender that the Borrowers have purchased an interest rate cap agreement with a financial institution acceptable to the Lender pursuant to which the Borrowers have reduced their risk of exposure to a Prime Rate in excess of 12%. This interest rate cap agreement shall be in force until July 31, 1998 and shall apply to a minimum of $6,000,000 of Obligations. (n) Management Letters. The Lender shall have received copies of the management letters issued by NCO Financial's and MAB's certified public accountants in connection with their respective audited financial statements dated December 31, 1995 (provided that MAB's management letters may be delivered within ten days of the Second Closing Date). (o) MAB Acquisition. The MAB Acquisition shall have closed. (p) 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 satisfactory in form and substance to the Lender. 4.2. Conditions to All Loans. The obligation of the Lender to make any Loan is subject to performance by each Borrower of its obligations to be performed hereunder or under the other Loan Documents on or before the date of such Loan, 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 shall have been given by the Borrowers as provided in Article 2 hereof. -37- (b) Representations and Warranties. Each of the representations and warranties made by each Borrower in Article 3 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 requested to be made on such date. (c) No Defaults. No Event of Default or Potential 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 shall cause the Lender 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 last Loan. Each request by a Borrower for any Loan shall constitute a representation and warranty by such Borrower that the conditions set forth in this Section 4.2 have been satisfied as of the date of such request. Failure of the Lender 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 4.2 have been satisfied as of the date such Loan is made. ARTICLE 5 - AFFIRMATIVE COVENANTS Each Borrower hereby covenants to the Lender as follows: 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 Borrowers, the Borrowers shall furnish to the Lender, consolidated statements of income, cash flows and changes in stockholders' equity of the Borrowers for such fiscal year and a consolidated balance sheet of the Borrowers 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 in connection therewith. Such financial statements shall be accompanied by an opinion of independent certified public accountants of recognized national standing selected by the Borrowers and reasonably satisfactory to the Lender. A copy of -38- the opinion of such accountants shall be delivered to the Lender and signed by such accountants. Such opinion shall be free of exceptions or qualifications not acceptable to the Lender 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 Borrowers 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) Monthly Financial Statements. As soon as practicable, and in any event within 30 days after the end of each month, the Borrowers shall furnish to the Lender internally prepared monthly consolidating financial statements of the Borrowers, signed by a Responsible Officer of the Borrowers (which may be in the same format as those previously provided by NCO Financial). (c) Quarterly Compliance Certificates. The Borrowers shall deliver to the Lender a Quarterly Compliance Certificate in substantially the form set forth as Exhibit "L" hereto, duly completed and signed by Michael Barrist, of the Borrowers 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 balance of all acquired delinquent pools of Accounts does not exceed $350,000, in the aggregate among all Borrowers, at any point in time. From time to time the Borrowers may seek the prior written consent of the Lender (in its sole discretion) so that the unamortized remaining cost balance of all acquired delinquent pools of accounts may exceed $350,000. (d) Accountants' Certificate. Each set of financial statements delivered pursuant to Section 5.1(a) hereof shall be accompanied by management letters. (e) Annual Budget. As soon as practicable, and in any event within 45 days after the start of each fiscal year, the Borrowers shall deliver to the Lender a consolidated Annual Budget, which shall include the following: -39- (i) 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. 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 Borrowers' best judgment as to such matters. (ii) A summary report of any changes for the forthcoming fiscal year to the Borrowers' business plan prepared by Siegel Management Company and previously delivered to the Lender. (f) Commercial Finance Reports. As soon as practicable, and in any event within 30 days after the end of each month, the Borrowers shall furnish to the Lender a report of a Responsible Officer of the Borrowers setting forth information as to (i) receivables (which may be in the same format as regularly delivered by NCO Financial prior to the Second Closing Date), and (ii) payables (which may include, among other things, a breakout of aging and payments). (g) Certain Other Reports and Information. Promptly upon their becoming available to the Borrowers, the Borrowers shall deliver to the Lender a copy of (i) all regular or special reports, registration statements and amendments to the foregoing which the Borrowers 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 Borrowers 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 Borrowers. (h) Further Information. The Borrowers will promptly furnish to the Lender such other information and in such form as the Lender may reasonably request from time to time. (i) Notice of Certain Events. Promptly upon becoming aware of any of the following, the Borrowers shall give the Lender notice thereof, together with a written statement of a Responsible Officer of the Borrowers setting forth the details thereof and any action with respect thereto taken or proposed to be taken by the Borrowers: -40- (i) Any Event of Default or Potential Default. (ii) Any material adverse change in the business, operations or condition (financial or otherwise) or prospects of any Borrower. (iii) Any pending or threatened action, suit, proceeding or investigation by or before any Governmental Authority against or affecting any Borrower, 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 Borrower 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 Borrower; any agreement or instrument material to the business, operations, condition (financial or otherwise) or prospects of any Borrower, 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 Borrower 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. (vii) Any Environmental Claim pending or threatened against any Borrower, 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 Borrower 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. -41- (j) Visitation; Verification. Each Borrower shall permit such Persons as the Lender may designate from time to time to visit and inspect any of the properties of such Borrower, 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 Lender may reasonably request. Each Borrower hereby authorizes such officers, employees and independent accountants to discuss with the Lender the affairs of such Borrower. The Lender shall have the right to examine accounts, inventory and other properties and liabilities of each Borrower from time to time, and each Borrower shall cooperate with the Lender in such examination. 5.2. Insurance. Each Borrower shall maintain insurance on all insurable tangible Collateral against fire, flood, casualty and such other hazards as may be reasonably acceptable to the Lender in such amounts, with such deductibles and with such insurers as may be reasonably acceptable to the Lender. The policies of all such casualty insurance shall contain standard Lender's Loss Payable Clauses issued in favor of the Lender under which all losses thereunder shall be paid to the Lender as the Lender's interest 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 Lender and shall insure the Lender notwithstanding the act or neglect of the insured. In the event any Borrower 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 Lender may do so for such Borrower but such Borrower shall continue to be liable for the cost of such insurance. Each Borrower hereby appoints the Lender as its attorney-in-fact, exercisable at the Lender's option, to endorse any check which may be payable to such Borrower in order to collect the proceeds of such insurance. Any and all amount or amounts received or collected by the Lender pursuant to the provisions of this paragraph, in excess of $100,000 per year in the aggregate, may be applied by the Lender to any Obligations or to repair, reconstruct or replace the loss of or damage to Collateral as the Lender in its sole judgment may from time to time determine. Each Borrower shall furnish to the Lender from time to time upon request the policies under which such insurance is issued, certificates of insurance and such other information relating to such insurance as the Lender 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 Borrower shall pay or discharge -42- (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 Borrower or such Subsidiary 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 Borrower 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. Each Borrower 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 or advisable. 5.5. Governmental Approvals and Filings. Each Borrower 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, except in connection with a Qualified IPO. 5.6. Maintenance of Properties. Each Borrower 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 be made all needful and proper repairs, renewals, replacements and improvements thereto so that the business carried on in -43- connection therewith may be properly and advantageously conducted at all times. 5.7. Avoidance of Other Conflicts. Each Borrower shall not 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 of by-laws (or other constituent documents), or (c) any material agreement or instrument to which it is party or by which any of them or any of their respective Subsidiaries 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 Borrower 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 Borrowers shall apply the proceeds of all Loans hereunder only for working capital and acquisition financing. The Borrowers shall not use the proceeds of any Loans hereunder directly or indirectly for any unlawful purpose, in any manner inconsistent with Section 3.13 hereof, or inconsistent with any other provision of any Loan Document. 5.10. Continuation of or Change in Business. Each Borrower shall continue to engage in its business substantially as conducted and operated during the present and preceding fiscal year, and no Borrower shall engage in any other business. 5.11. Employment of Management; Shareholder Status. -44- (a) NCO Group shall continue at all times to employ Michael Barrist as its President and Chief Executive Officer, and Mr. Barrist shall continue to be at all times the majority shareholder of NCO Group; provided that in the event of a Qualified IPO, Mr. Barrist shall remain as President and Chief Executive Officer (unless a replacement is hired who is reasonably satisfactory to the Lender in its sole and absolute discretion), and the requirement that he be the majority shareholder of NCO Group shall not apply. (b) NCO Group shall continue at all times to employ Charles Piola, Jr., as its Executive Vice President, and Mr. Piola shall continue to be at all times a shareholder of NCO Group; provided that in the event of a Qualified IPO, the requirement that he remain as Executive Vice President shall not apply. 5.12. Consolidated Tax Return. No Borrower shall not file or consent to the filing of any consolidated income tax return with any Person other than another Borrower. 5.13. Fiscal Year. No Borrower shall change its fiscal year or fiscal quarter. 5.14. Bank Accounts. As additional consideration for the establishment by the Lender of the Revolving Credit Loans, each Borrower shall maintain all of its depository and disbursement accounts with the Lender, except that the Borrowers may maintain (i) accounts with PNC Bank, N.A. ("PNC Accounts"), and (ii) certain trust accounts required to be maintained by a Borrower at a bank other than the Lender. The Borrowers agree that the aggregate amount of funds contained in the PNC Accounts shall never exceed twenty percent (20%) of the "Net Realizable IPO Proceeds" (as defined below). For these purposes, "Net Realizable IPO Proceeds" shall mean the gross proceeds realized from a Qualified IPO, less (a) amounts for any commissions and expenses associated with the Qualified IPO (including any fees paid to Montgomery Securities and/or Janney Montgomery Scott, Inc.), (b) an amount necessary to pay all Revolving Credit Loans down to a zero balance, and (c) an amount necessary to pay the Final S Corp. Distribution. 5.15. Submission of Collateral Documents. Each Borrower 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 Lender if an Account becomes evidenced or secured by an instrument or chattel paper and, upon request of the Lender, promptly deliver any such instrument or chattel paper to the Lender. -45- 5.16. Collection of Accounts. Each Borrower shall continue to collect its Accounts in the ordinary course of its business. 5.17. MAB/NCO New York Merger. By no later than October 5, 1996, the Borrowers shall have completed the MAB/NCO New York Merger, unless the Borrowers provide the Lender with sufficient information to justify (in the sole discretion of the Lender) delaying or electing not to complete the MAB/NCO New York Merger. ARTICLE 6 - NEGATIVE COVENANTS Each Borrower hereby covenants to the Lender as follows: 6.1. Financial Covenants. (a) Consolidated Current Ratio. The Consolidated Current Ratio shall not at any time be less than .3 to 1.00. For purposes of determining the Consolidated Current Ratio, Consolidated Current Liabilities shall include all Obligations. (b) Consolidated Net Worth. As of the last day of each fiscal quarter, Consolidated Net Worth shall not at any time be less than $1,300,000, plus any increase in Consolidated Net Worth as a result of any Permitted Acquisition, a Qualified IPO (but for these purposes any increase in Consolidated Net Worth as a result of a Qualified IPO shall be reduced by the amount of the Final S Corp. Distribution), or any other issuance of capital stock, plus 90% of Consolidated Net Income. For purposes of this provision only, Consolidated Net Income shall be calculated after S corporation tax distributions and compensation dividends, but without deductions for net losses. (c) Funded Debt to Consolidated EBITDA. As of the last day of each fiscal quarter, the Funded Debt to Consolidated EBITDA Ratio for the immediately preceding twelve month period shall not be more than 3.25 to 1.00. For purposes of this provision only, Stock Payments which are paid as annual compensation dividends pursuant to Section 6.6 hereof shall be included as operating expenses in the calculation of Consolidated EBITDA, but tax bonuses paid to shareholders in lieu of S corporation tax distributions and the Final S Corp. Distribution shall not be included as operating expenses of Consolidated EBITDA. In addition, for purposes of this provision only, Consolidated EBITDA shall include the pre-acquisition EBITDA, for -46- the immediately preceeeding 12 month period, of any company acquired by any Borrower. (d) Consolidated Interest Coverage Ratio. As of the end of the next full month after the Second Closing Date and as of the last day of each fiscal quarter thereafter, the Consolidated Interest Coverage Ratio for such fiscal quarter shall not be less than 3.00 to 1.00. For purposes of this provision only, Stock Payments which are paid as annual compensation dividends pursuant to Section 6.6 hereof shall be included as operating expenses in the calculation of Consolidated EBIT, but tax bonuses paid to shareholders in lieu of S corporation tax distributions and the Final S Corp. Distribution shall not be included as operating expenses in the calculation of Consolidated EBIT. (e) Net Trade Accounts Receivable Ratio. On a consolidated basis, the ratio of the Borrowers' net trade accounts receivable to Obligations shall not at any time be less than .25 to 1.00, and the Borrowers may pledge cash or cash equivalents to the Lender in order to maintain this ratio; provided, however, that any bad debts shall be accounted for in a consistent manner with the most recently delivered financial statements. (f) Consolidated Debt Service Coverage Ratio. As of the last day of each fiscal quarter, the Consolidated Debt Service Coverage Ratio shall not be less than 2.50 to 1.00. 6.2. Liens. No Borrower 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 Lender 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; -47- "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 Borrower 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 Lender pursuant to this Agreement and the other Loan Documents; (b) Indebtedness of such Borrower existing on the date hereof and listed in Schedule 6.3 hereof (but not any extensions, renewals or refinancings thereof); (c) Purchase Money Indebtedness; (d) Accounts payable to trade creditors arising out of purchases of goods or services in the ordinary course of business; and (e) Capitalized Leases which are permitted as Capital Expenditures. 6.4. Guaranties, Indemnities, etc. No Borrower shall be or become subject to or bound by any Guaranty Equivalent, or agree, become or remain liable (contingently or otherwise) to do any of the foregoing, except: (a) Guaranty Equivalents which in the aggregate do not exceed $100,000 at any one time among all Borrowers, except for a guaranty executed in favor of The Uniland Partnership, L.P., in connection with the MAB Acquisition (a copy of which has been delivered to the Lender); (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; and (c) Indemnities by a Borrower 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. -48- 6.5. Loans, Advances and Investments. No Borrower 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, which reflects the results of the NCO Reorganization (but not any amendments, extensions or refinancings thereof); (b) Receivables owing to such Borrower arising from sales of inventory under usual and customary terms in the ordinary course of business; (c) Demand advances to officers and employees of a Borrower 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 Borrowers; and (d) Cash Equivalent Investments and securities held on the Second Closing Date in the PNC Accounts, and, after a Qualified IPO, marketable securities listed on a major stock exchange and Cash Equivalent Investments in an initial amount which does not exceed twenty percent (20%) of the Net Realizable IPO Proceeds; provided, however, that the aggregate total market value of all of the foregoing shall not exceed thirty percent (30%) of the Borrowers' consolidated cash, Cash Equivalent Investments and marketable securities; and (e) Loans from a Borrower to another Borrower, provided that the Borrowers shall cause any such loans to be evidenced by a promissory note, which shall immediately be delivered to the Lender as Collateral. provided, however, that the total amount of loans, advances and investments described in subsections (a) through (d) above shall not exceed $50,000 at any one time, but excluding certain existing promissory notes to 1710/20 Sentry East Associates limited partnership, 1730 Sentry East Associates limited partnership, and 1740 Sentry East Associates limited partnership, in an aggregate amount which does not exceed $250,000 (and which shall each be satisfied in conection with a Qualified IPO). 6.6. Dividends and Related Distributions. -49- (a) No Borrower shall declare or make any Stock Payment, or agree, become or remain liable (contingently or otherwise) to do any of the foregoing, except that NCO Financial may make Stock Payments to shareholders who are officers of NCO Financial in such amounts as may be required to permit such shareholders to pay their federal and state income taxes arising as a result of NCO Financial's S corporation status and for the Final S Corp. Distribution, but such Stock Payments must be made in accordance with applicable federal and state laws governing S corporations. (b) Prior to a Qualified IPO, the Borrowers shall not pay total annual compensation in excess of the following amounts to the following individuals: Michael Barrist $201,634 Charles Piola, Jr. $201,634 Bernie Miller $136,103 Annette Barrist $ 45,872 The amount of the above base salaries may be adjusted annually for increases in the Consumer Price Index. (c) Except for the Final S Corp. Distribution which may be paid pursuant to Section 6.6(e) of this Agreement, the Borrowers shall not pay Stock Payments as total annual compensation dividends in excess of the lesser of $450,000 or 15% of the Borrowers' most recent fiscal year end consolidated pre-tax income. For purposes of this provision, "pre-tax income" shall mean pre-tax income of the Borrowers, plus 100% of any withheld bonuses for tax purposes. For purposes of this provision, shareholders who are officers of NCO Financial may take part of their tax distribution in the form of a 100% withheld bonus. (d) By no later than April 15, 1997, NCO Financial shall deliver to the Lender a certificate or report, dated as of the date of the annual audited financial statements, by an accounting firm acceptable to the Lender providing information satisfactory to the Lender regarding tax distributions by NCO Financial to shareholders for S corporation federal and state taxes for 1996 and regarding the Final S Corp. Distribution. (e) The Final S Corp. Distribution, but only if all outstanding Revolving Credit Loans have been paid down to a zero balance. 6.7. Sale-Leasebacks. No Borrower shall at any time enter into or suffer to remain in effect any transaction to which -50- such Borrower is a party involving the sale, transfer or other disposition by such Borrower 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. 6.8. Leases. No Borrower 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 cancellable by the lessee without penalty on not more than 90 days' notice; and (c) Capitalized Leases permitted under Section 6.3 hereof. (d) Leases for the Buffalo, N.Y. and Denver, CO. offices of MAB, in connection with the MAB Acquisition (copies of which have previously been delivered to the Lender). 6.9. Mergers, Acquisitions, etc. Except for the MAB/NCO New York Merger, no Borrower shall (v) merge with or into or consolidate with any other Person, (w) liquidate, wind-up, dissolve or divide, (x) except for Permitted Acquisitions, acquire all or any substantial portion of the properties of any going concern or going line of business, (y) except for Permitted Acquisitions, acquire all or any substantial portion of the properties of any other Person, or (z) agree, become or remain liable (contingently or otherwise) to do any of the foregoing; provided, however, that the Borrowers may seek the prior written consent of the Lender for an acquisition which is not a Permitted Acquisition, but in connection with considering the Borrowers' request, the Lender may require appropriate third party due diligence regarding the proposed acquisition. 6.10. Dispositions of Properties. No Borrower 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) The Borrowers may sell inventory in the ordinary course of business; -51- (b) The Borrowers may dispose of equipment which is obsolete or no longer useful in the business of such Borrower, provided, that an amount equal to the Net Cash Proceeds of such disposition shall be paid as a mandatory prepayment in accordance with Section 2.7 hereof; and (c) The Cash Equivalent Investments and securities described in Section 6.5(d). By way of illustration, and without limitation, it is understood that the following are dispositions of property subject to this Section 6.10: any disposition of accounts, chattel paper or general intangibles, with or without recourse, any disposition of any leasehold interest. Nothing in this Section 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 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 Borrower to issue any shares of its capital stock, except: (a) Shares of capital stock outstanding on the date hereof and set forth on Schedule 3.15 hereof; (b) Warrants, options, and convertible notes, which are not callable or redeemable prior to the Revolving Credit Maturity Date, and which are issued: (i) in connection with the NCO 1996 Stock Option Plan, with a strike price which shall not be less than fair market value at the time the NCO 1996 Stock Option Plan was adopted, or (ii) as additional consideration in connection with Permitted Acquisitions, with a strike price which shall not be less than fair market value at the time the warrants, options or convertible notes were issued in connection with a Permitted Acquisition; and (c) In connection with a Qualified IPO. 6.12. Dealings with Affiliates. No Borrower shall enter into or carry out any transaction with (including, without limitation, purchase or lease property or services from, sell or -52- 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 Borrower, directly or indirectly, or agree, become or remain liable (contingently or otherwise) to do any of the foregoing, except: (a) Existence and performance of contracts, agreements and arrangements in existence as of the date hereof and set forth in Schedule 6.12 hereof; and (b) Directors, officers and employees of a Borrower may be compensated for services rendered in such capacity to such Borrower, provided that such compensation is in good faith and on terms no less favorable to such Borrower 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 Borrower (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 Borrower and another Borrower, in good faith and on terms no less favorable to either 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 a 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. The Borrowers shall not acquire delinquent pools of Accounts to the extent that the unamortized remaining balance on the Borrowers' consolidated balance sheet for all such acquired pools shall exceed $350,000, in the aggregate among all Borrowers, at any given point in time. From time to time the Borrowers may seek the prior written consent of the Lender (in its sole discretion) so that the unamortized remaining balance of all acquired delinquent pools of accounts may exceed $350,000. 6.14. Capital Expenditures. No Borrower shall make any Capital Expenditures on or after the date hereof, except for Capital Expenditures not in excess of $1,000,000, in the aggregate among all Borrowers, in any rolling four quarter period; provided, however, that the Borrowers may carry forward into the future for purposes of this provision no more than $500,000 in unspent Capital Expenditures per rolling four quarter period, but the total amount of such unspent Capital Expenditures -53- carried forward may not exceed $1,000,000 in the aggregate at any one time. For purposes of this provision, (a) all leases, except for real estate leases and automobile leases, shall be deemed to be Capitalized Leases and therefore shall be accounted for as a Capital Expenditure, and (b) Purchase Money Indebtedness shall be accounted for as a Capital Expenditure. 6.15. Limitations on Modification of Certain Agreements and Instruments. No Borrower shall materially amend, modify or supplement materially its articles of incorporation or by-laws (or similar constituent documents), except in connection with a Qualified IPO. 6.16. Limitation on Payments of Purchase Money Indebtedness. No Borrower 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, 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 Potential Default has occurred, the Borrowers 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 Borrower shall enter into, become or remain subject to any agreement or instrument to which such Borrower 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 the Loan Documents and any Liens relating to Purchase Money Indebtedness for Permitted Capital Expenditures pursuant to Section 6.14. 6.18. Limitation on Other Restrictions on Amendment of the Loan Documents, etc. No Borrower shall enter into, become or remain subject to any agreement or instrument to which such Borrower is a party or by which any Borrower or any of their 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. ARTICLE 7 - DEFAULTS -54- 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) Any Borrower shall fail to pay when due principal of any Loan. (b) Any 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 Borrower in or pursuant to or in connection with any Loan Document, or any statement made by any Borrower in any financial statement, certificate, report, exhibit or document furnished by any Borrower to the Lender pursuant to or in connection with any Loan Document, shall prove to have been false or misleading in any material 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 Borrower shall default in the performance or observance of any covenant contained in this Agreement; provided, however, that with respect to Section 6.6, such default may be cured by the return of the Borrowers, in the form of equity, of any dividends or distributions in excess of the permitted amounts in Section 6.6 (as long as such excess dividends or distributions have not exceeded $25,000 in the immediately preceeding 12 months.) (e) Any Borrower shall default in the performance or observance of any other 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 days and (ii) in the case of any other default such default shall have continued for a period of ten (10) days after the Lender 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 Lender.) (f) 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 Borrower directly or indirectly gave or agreed to give any -55- 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 Indebtedness or Guaranty Equivalent of any Borrower in which the principal obligation of such Borrower exceeds $100,000, or any agreement or instrument creating, evidencing or securing such Indebtedness 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 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. (g) One or more judgments for the payment of money shall have been entered against any Borrower, which judgment or judgments exceed $100,000 in the aggregate, and such judgment or judgments shall have remained undischarged and unstayed for a period of thirty consecutive days. (h) One or more writs or warrants of attachment, garnishment, execution, distraint or similar process exceeding in value the aggregate amount of $100,000 shall have been issued against any Borrower or any of their properties and shall have remained undischarged and unstayed for a period of thirty consecutive days. (i) 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 Lender shall have determined in good faith (which determination shall be conclusive) that such event or condition could have a Material Adverse Effect. (j) 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 valid, enforceable and perfected Lien in favor of the Lender securing the Obligations, prior to all other Liens, or any Borrower or any Governmental Authority shall assert any of the foregoing. (k) Any Loan Document or term or provision thereof shall cease to be in full force and effect, or any Borrower shall, or shall purport to, terminate, repudiate, declare voidable or void or otherwise contest, any Loan Document or term -56- or provision thereof or any obligation or liability of any Borrower thereunder, and the result of which is a material effect on the rights and remedies of the Lender under the Loan Documents. (l) The Lender shall have determined in good faith that an event or condition has occurred which will have a Material Adverse Effect. (m) 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 Required 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. (n) 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 Borrower, and the Lender 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. (o) A Change of Management shall have occurred. (p) A proceeding shall have been instituted in respect of any Borrower: (i) seeking to have an order for relief entered in respect of any Borrower, or seeking a declaration or entailing a finding that any Borrower 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 Borrower, 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) 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, -57- 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. (q) Any Borrower shall become insolvent; shall fail to pay, become unable to pay, or state that it is or will be unable to pay, its debts as they become due; shall voluntarily suspend transaction of its or his business; shall make a general assignment for the benefit of creditors; shall institute (or fail to controvert in a timely and appropriate manner) a proceeding described in Section 7.1(p)(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; shall 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(p)(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 shall take any action in furtherance of any of the foregoing. 7.2. Consequences of an Event of Default. (a) If an Event of Default specified in subsections (a) through (p) of Section 7.01 hereof shall occur and be continuing or shall exist, then, in addition to all other rights and remedies which the Lender may have hereunder or under any other Loan Document, at law, in equity or otherwise, the Lender shall be under no further obligation to make Loans hereunder, and the Lender may, by notice to the Borrowers, from time to time do any or all of the following: (i) Declare the Revolving Credit Commitment 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 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. -58- (b) If an Event of Default specified in subsection (q) or (r) of Section 7.1 hereof shall occur or exist, then, in addition to all other rights and remedies which the Lender may have hereunder or under any other Loan Document, at law, in equity or otherwise, the Revolving Credit Commitment shall automatically terminate and the Lender shall be under no further obligation to make Loans, 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. ARTICLE 8 - MISCELLANEOUS 8.1. Holidays. Whenever any payment or action to be made or taken hereunder or under any other Loan Document shall be stated to be due on a day which is not a Business Day, such payment or action shall be made or taken on the next following Business Day and such extension of time shall be included in computing interest or fees, if any, in connection with such payment or action. 8.2. Records. The unpaid principal amount of the Loans owing to the Lender, the unpaid interest accrued thereon, the interest rate or rates applicable to such unpaid principal amount, the duration of such applicability, the Revolving Credit Committed Amount, and the accrued and unpaid Revolving Credit Commitment Fees shall at all times be ascertained from the records of the Lender, which shall be conclusive absent manifest error. 8.3. Amendments and Waivers. Neither this Agreement nor any Loan Document may be amended, modified or supplemented except in accordance with the provisions of this Section. The Lender and the Borrowers may from time to time amend, modify or supplement the provisions of this Agreement or any other Loan Document for the purpose of amending, adding to, or waiving any provisions, releasing any Collateral, or changing in any manner the rights and duties of the Borrowers or the Lender. Any such amendment, modification or supplement made by Borrowers and the Lender in accordance with the provisions of this Section shall be binding upon the Borrowers and the Lender. Any such amendment, modification or supplement must be in writing and shall be effective only to the extent set forth in such writing. Any Event of Default or Potential Default waived or consented to in any such amendment, modification or supplement shall be deemed to be cured and not continuing to the extent and for the period set forth in such waiver or consent, but no such waiver or consent -59- shall extend to any other or subsequent Event of Default or Potential Default or impair any right consequent thereto. 8.4. No Implied Waiver; Cumulative Remedies. No course of dealing and no delay or failure of the 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 Lender under this Agreement and any other Loan Document are cumulative and not exclusive of any rights or remedies which the Lender would otherwise have hereunder or thereunder, at law, in equity or otherwise. 8.5. Notices. (a) Except to the extent otherwise expressly permitted hereunder or thereunder, all notices, requests, demands, directions and other communications (collectively "notices") under this Agreement or any Loan Document shall be in writing (including telexed and facsimile communication) and shall be sent by first-class mail, or by nationally-recognized overnight courier, or by telex or facsimile transmission (with confirmation in writing mailed first-class or sent by such an overnight courier), or by personal delivery. All notices shall be sent to the applicable party at the address stated on the signature pages hereof or in accordance with the last unrevoked written direction from such party to the other parties hereto, in all cases with postage or other charges prepaid. Any such properly given notice to the Lender or the Borrowers shall be effective on the earliest to occur of receipt, telephone confirmation of receipt of telex or facsimile communication, one Business Day after delivery to a nationally-recognized overnight courier, or three Business Days after deposit in the mail. (b) The Lender may rely on any notice (whether or not such notice is made in a manner permitted or required by this Agreement or any Loan Document) purportedly made by or on behalf of any Borrower, and the Lender shall have no duty to verify the identity or authority of any Person giving such notice. 8.6. Expenses; Taxes; Indemnity. (a) Each Borrower agrees to pay or cause to be paid and to save the Lender harmless 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 -60- local counsel, auditors, consulting engineers, appraisers, and all other professional, accounting, evaluation and consulting costs) incurred by the Lender from time to time arising from or relating to (i) the negotiation, preparation, execution, delivery, administration and performance of this Agreement and the other Loan Documents, (ii) any requested amendments, modifications, supplements, waivers or consents (whether or not ultimately entered into or granted) to this Agreement or any Loan Document, and (iii) the enforcement or preservation of rights under this Agreement or any Loan Document (including but not limited to any such costs or expenses arising from or relating to (A) the creation, perfection or protection of the Lender's Lien on any Collateral, (B) the protection, collection, lease, sale, taking possession of, preservation of, or realization on, any Collateral, including without limitation advances for storage, insurance premiums, transportation charges, taxes, filing fees and the like, (C) collection or enforcement of an outstanding Loan or any other amount owing hereunder or thereunder by the Lender, and (D) any litigation, proceeding, dispute, workout, restructuring or rescheduling related in any way to this Agreement or the Loan Documents). (b) Each Borrower hereby agrees to pay all stamp, document, transfer, recording, filing, registration, search, sales and excise fees and taxes and all similar impositions now or hereafter determined by the Lender to be payable in connection with this Agreement or any other Loan Documents or any other documents, instruments or transactions pursuant to or in connection herewith or therewith, and each Borrower agrees to save the Lender harmless from and against any and all present or future claims, liabilities or losses with respect to or resulting from any omission to pay or delay in paying any such fees, taxes or impositions. (c) Each Borrower hereby agrees to reimburse and indemnify each of the Indemnified Parties from and against any and all losses, liabilities, claims, damages, reasonable out of pocket expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel for such Indemnified Party in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not such Indemnified Party shall be designated a party thereto) that may at any time be imposed on, asserted against or incurred by such Indemnified Party 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 transaction from time to time contemplated hereby or thereby, or any transaction financed in whole or in part or directly or indirectly with the proceeds of any Loan (and without in any way -61- limiting the generality of the foregoing, including any violation or breach of any Environmental Law or any other Law by any Borrower; any Environmental Claim arising out of the management, use, control, ownership or operation of property by any of such Persons, including all on-site and off-site activities involving Environmental Concern Materials; any grant of Collateral; or any exercise by the Lender or any Lender of any of its rights or remedies under this Agreement or any other Loan Document); but excluding any such losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements resulting solely from the gross negligence or willful misconduct of such Indemnified Party, as finally determined by a court of competent jurisdiction. If and to the extent that the foregoing obligations of each Borrower under this subsection (c), or any other indemnification obligation of such Borrower hereunder or under any other Loan Document, are unenforceable for any reason, such Borrower hereby agrees to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under applicable Law. 8.7. Severability; Joint and Several Liability; Presumptions. (a) Severability. The provisions of this Agreement are intended to be severable. If any provision of this Agreement shall be held invalid or unenforceable in whole or in part in any jurisdiction such provision shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without in any manner affecting the validity or enforceability thereof in any other jurisdiction or the remaining provisions hereof in any jurisdiction. (b) Maximum Amount of Joint and Several Liability. Without limiting the preceding subsection (a), to the extent that mandatory and non-waivable provisions of applicable Law (including but not limited to any applicable Laws pertaining to fraudulent conveyance or fraudulent transfer, and any applicable business corporation or partnership Law) otherwise would render the full amount of any Borrower's obligations hereunder and under any other Loan Documents invalid or unenforceable, such Borrower's obligations hereunder and under the other Loan Documents shall be limited to the maximum amount which does not result in such invalidity or unenforceability. (c) Limitation on Amount of Liability Presumed Not to Apply. Notwithstanding anything to the contrary in this Section 8.7 or elsewhere in this Agreement, this Agreement shall be presumptively valid and enforceable to its fullest extent in accordance with its terms, as if this Section 8.7 were not a part of this Agreement. -62- 8.8. Prior Understandings. 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. 8.9. Duration; Survival. All representations and warranties of each Borrower contained herein or in any other in the Loan Document or made in connection herewith or therewith shall survive the making of, and shall not be waived by the execution and delivery of, this Agreement or any other Loan Document, any investigation by or knowledge of the Lender, the making of any Loan, or any other event or condition whatever. All covenants and agreements of each Borrower contained herein or in any other Loan Document shall continue in full force and effect from and after the date hereof so long as such Borrower may borrow hereunder and until payment in full of all Obligations. Without limitation, all obligations of each Borrower hereunder or under any other Loan Document to make payments to or indemnify the Lender shall survive the payment in full of all other Obligations, termination of such Borrower's right to borrow hereunder, and all other events and conditions whatever. 8.10. Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. 8.11. Limitation on Payments. The parties hereto intend to conform to all applicable Laws in effect from time to time limiting the maximum rate of interest that may be charged or collected. Accordingly, notwithstanding any other provision hereof or of any other Loan Document, the Borrowers shall not be required to make any payment to or for the account of any Lender, and the Lender shall promptly refund any payment made by the Borrowers, to the extent that such requirement or such failure to refund would violate or conflict with nonwaivable provisions of applicable Laws limiting the maximum amount of interest which may be charged or collected by such Lender. 8.12. Set-Off. Each Borrower hereby agrees that if an Event of Default or Potential Default shall have occurred and be continuing or shall exist and if any Obligation of any Borrower shall be due and payable (by acceleration or otherwise), the Lender shall have the right (except with respect to trust accounts established by a Borrower on behalf of its customers), without notice to such Borrower, to set-off against and to -63- appropriate and apply to such Obligation any indebtedness, liability or obligation of any nature owing to such Borrower by the Lender, including but not limited to all deposits (whether time or demand, general or special, provisionally credited or finally credited, whether or not evidenced by a certificate of deposit) now or hereafter maintained by such Borrower with the Lender. Such right shall be absolute and unconditional in all circumstances (except with respect to trust accounts established by a Borrower on behalf of its customers) and, without limitation, shall exist whether or not the Lender or any other Person shall have given notice or made any demand to such Borrower, whether such indebtedness, obligation or liability owed to such Borrower is contingent, absolute, matured or unmatured (it being agreed that the Lender may deem such indebtedness, obligation or liability to be then due and payable at the time of such set-off), and regardless of the existence or adequacy of any collateral, guaranty or any other security, right or remedy available to the Lender. The rights provided by this Section are in addition to all other rights of set-off and banker's lien and all other rights and remedies which the Lender may otherwise have under this Agreement, any other Loan Document, at law or in equity, or otherwise, and nothing in this Agreement or any other Loan Document shall be deemed a waiver or prohibition of or restriction on the rights of set-off or bankers' lien of the Lender. 8.13. Successors and Assigns; Participations; Assignments. (a) Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Borrowers, the Lender, all future holders of the Notes, and their respective successors and assigns, except that no Borrower may assign or transfer any of its rights hereunder or interests herein without the prior written consent of the Lender, and any purported assignment without such consent shall be void. (b) Participations. The Lender may, in the ordinary course of its commercial banking business and in accordance with applicable Law, at any time sell participations to one or more commercial banks or other Persons (each a "Participant") in all or a portion of its rights and obligations under this Agreement and the other Loan Documents (including, without limitation, all or a portion of its Commitments and the Loans owing to it and any Note held by it); provided, that (i) the Lender's obligations under this Agreement and the other Loan Documents shall remain unchanged, -64- (ii) the Lender shall remain solely responsible to the Borrower hereto for the performance of such obligations, (iii) the Borrowers shall continue to deal solely and directly with the Lender in connection with the Lender's rights and obligations under this Agreement and each of the other Loan Documents, and (iv) such Participant shall not be a competitor of any Borrower. (c) Financial and Other Information. Each Borrower authorizes the Lender to disclose to any Participant (each, a "transferee") and any prospective transferee any and all financial and other information in such Person's possession concerning such Borrower and its affiliates which has been or may be delivered to such Person by or on behalf of such Borrower in connection with this Agreement or any other Loan Document or such Person's credit evaluation of such Borrower and its affiliates; provided that the Lender shall notify such Borrower of the identity of the transferee and shall obtain a commercially reasonable confidentiality letter (a copy of which shall be provided to the Borrowers) with respect to the disclosure of such information, in accordance with applicable Law. (d) Assignments to Federal Reserve Bank. The Lender may at any time assign all or any portion of its rights under this Agreement, including without limitation any Loans owing to it, and any Note held by it to a Federal Reserve Bank. No such assignment shall relieve the Lender from its obligations hereunder. 8.14. Governing Law; Submission to Jurisdiction: Waiver of Jury Trial; Limitation of Liability. (a) Governing Law. THIS AGREEMENT AND ALL OTHER LOAN DOCUMENTS (EXCEPT TO THE EXTENT, IF ANY, OTHERWISE EXPRESSLY STATED IN SUCH OTHER LOAN DOCUMENTS) SHALL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA, WITHOUT REGARD TO CHOICE OF LAW PRINCIPLES. (b) Certain Waivers. EACH BORROWER HEREBY IRREVOCABLY AND UNCONDITIONALLY: (i) AGREES THAT ANY ACTION, SUIT OR PROCEEDING BY ANY PERSON ARISING FROM OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ANY STATEMENT, COURSE OF CONDUCT, ACT, OMISSION, OR EVENT OCCURRING IN CONNECTION HEREWITH OR THEREWITH (COLLECTIVELY, "RELATED LITIGATION") MAY BE BROUGHT IN ANY STATE -65- OR FEDERAL COURT OF COMPETENT JURISDICTION SITTING IN PHILADELPHIA AND MONTGOMERY COUNTIES, PENNSYLVANIA, SUBMITS TO THE JURISDICTION OF SUCH COURTS, AND TO THE FULLEST EXTENT PERMITTED BY LAW AGREES THAT IT WILL NOT BRING ANY RELATED LITIGATION IN ANY OTHER FORUM (BUT NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE LENDER TO BRING ANY ACTION, SUIT OR PROCEEDING IN ANY OTHER FORUM); (ii) WAIVES ANY OBJECTION WHICH IT MAY HAVE AT ANY TIME TO THE LAYING OF VENUE OF ANY RELATED LITIGATION BROUGHT IN ANY SUCH COURT, WAIVES ANY CLAIM THAT ANY SUCH RELATED LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM, AND WAIVES ANY RIGHT TO OBJECT, WITH RESPECT TO ANY RELATED LITIGATION BROUGHT IN ANY SUCH COURT, THAT SUCH COURT DOES NOT HAVE JURISDICTION OVER THE BORROWER; (iii) CONSENTS AND AGREES TO SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER LEGAL PROCESS IN ANY RELATED LITIGATION BY REGISTERED OR CERTIFIED U.S. MAIL, POSTAGE PREPAID, TO SUCH BORROWER AT THE ADDRESS FOR NOTICES DESCRIBED IN THIS AGREEMENT, AND CONSENTS AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE IN EVERY RESPECT VALID AND EFFECTIVE SERVICE (BUT NOTHING HEREIN SHALL AFFECT THE VALIDITY OR EFFECTIVENESS OF PROCESS SERVED IN ANY OTHER MANNER PERMITTED BY LAW); AND (iv) WAIVES THE RIGHT TO TRIAL BY JURY IN ANY RELATED LITIGATION. (c) Limitation of Liability. TO THE FULLEST EXTENT PERMITTED BY LAW, NO CLAIM MAY BE MADE BY ANY BORROWER AGAINST THE LENDER, OR ANY AFFILIATE, DIRECTOR, OFFICER, EMPLOYEE, ATTORNEY OR ANY OF THEM FOR ANY SPECIAL, INCIDENTAL, INDIRECT, OR CONSEQUENTIAL DAMAGES IN RESPECT OF ANY CLAIM ARISING FROM OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ANY STATEMENT, COURSE OF CONDUCT, ACT, OMISSION, OR EVENT OCCURRING IN CONNECTION HEREWITH OR THEREWITH (WHETHER FOR BREACH OF CONTRACT, TORT OR ANY OTHER THEORY OF LIABILITY). EACH BORROWER HEREBY WAIVES, RELEASES AND AGREES NOT TO SUE UPON ANY CLAIM FOR ANY -66- SUCH DAMAGES, WHETHER SUCH CLAIM PRESENTLY EXISTS OR ARISES HEREAFTER AND WHETHER OR NOT SUCH CLAIM IS KNOWN OR SUSPECTED TO EXIST IN ITS FAVOR. 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. ATTEST: NCO GROUP, INC. By /s/ JOSHUA GINDIN By /s/ MICHAEL J. BARRIST ------------------------ ----------------------- Title: MICHAEL J. BARRIST Title: President and Chief Executive Officer [Corporate Seal] ATTEST: NCO FINANCIAL SYSTEMS, INC. By /s/ JOSHUA GINDIN By /s/ MICHAEL J. BARRIST ------------------------ ----------------------- Title: MICHAEL J. BARRIST Title: President and Chief Executive Officer [Corporate Seal] ATTEST: NCO FUNDING, INC. By /s/ JOSHUA GINDIN By /s/ MICHAEL J. BARRIST ------------------------ ----------------------- Title: MICHAEL J. BARRIST Title: President and Chief Executive Officer [Corporate Seal] ATTEST: NCO OF NEW YORK, INC. By /s/ JOSHUA GINDIN By /s/ MICHAEL J. BARRIST ------------------------ ----------------------- Title: MICHAEL J. BARRIST Title: President and Chief -68- Executive Officer [Corporate Seal] Address for Notices to each Borrower: ------------------------------------- c/o NCO Group, Inc. 1740 Walton Road Blue Bell, PA 19422-0987 Attn: MICHAEL J. BARRIST Telephone: (610) 832-1400 Facsimile: (610) 832-1435 with copies to: BLANK, ROME, COMISKY & McCAULEY Four Penn Center Plaza Philadelphia, PA 19103 Attn: Joel C. Shapiro, Esq. Telephone: (215) 569-5476 Facsimile: (215) 569-5555 and to: JOSHUA GINDIN, ESQ. 1700 Two Logan Square 18th & Arch Streets Philadelphia, PA 19103 Telephone: (215) 567-5830 Facsimile: (215) 636-0366 MELLON BANK, N.A. By /s/LIZ A. MELLACE ----------------------------------- LIZ A. MELLACE Title: Assistant Vice President Address for Notices: Plymouth Meeting Executive Campus 610 West Germantown Pike Suite 200 Plymouth Meeting, PA 19462 Attn: LIZ A. MELLACE Telephone: (610) 941-8423 Facsimile: (610) 941-4136 with a copy to: REED SMITH SHAW & McCLAY -68- 2500 One Liberty Place Philadelphia, PA 19103 Attn: Ben Burke Howell, Esq. Telephone: (215) 851-8172 Facsimile: (215) 851-1420 -69- SCHEDULES TO AMENDED AND RESTATED CREDIT AGREEMENT SCHEDULE 3.1 CORPORATE STATUS ---------------- (a) NCO Financial's state of incorporation is Pennsylvania. (b) NCO Financial is qualified to do business as a foreign corporation in the following states: 1. North Carolina 2. Arkansas 3. West Virginia 4. Massachusetts 5. New Jersey 6. Delaware (c) NCO Group, Inc.'s state of incorporation is Pennsylvania. (d) NCO Funding, Inc.'s state of incorporation is Delaware. (e) NCO of New York, Inc.'s state of incorporation is New York. SCHEDULE 3.8 ABSENCE OF UNDISCLOSED LIABILITIES ---------------------------------- There are no undisclosed liabilities SCHEDULE 3.11 PROJECTIONS ----------- All projections required by Section 3.11 have previously been submitted by the Borrowers to Lender. SCHEDULE 3.14 PARTNERSHIPS ------------ NONE SCHEDULE 3.15 OWNERSHIP AND CONTROL - NCO FINANCIAL SYSTEMS, INC. --------------------------------------------------- Authorized Capitalization: 100,000 shares common stock Stock, issued and outstanding: 90,495 shares (not including Stock Option Plan) Record Owners: 100% - NCO Group, Inc. SCHEDULE 3.15 OWNERSHIP AND CONTROL - NCO OF NEW YORK, INC. --------------------------------------------- Authorized Capitalization: 200 shares common stock Stock, issued and outstanding: 200 shares (not including Stock Option Plan) Record Owners: 100% owned by NCO Group, Inc. SCHEDULE 3.15 OWNERSHIP AND CONTROL - NCO FUNDING, INC. ----------------------------------------- Authorized Capitalization: 1,000 shares common stock Stock, issued and outstanding: 1,000 shares (not including Stock Option Plan) Record Owners: 100% owned by NCO Group, Inc. SCHEDULE 3.15 OWNERSHIP AND CONTROL - NCO GROUP, INC. --------------------------------------- Authorized Capitalization: 200,000 shares common stock Stock, issued and outstanding: 90,495 shares (not including Stock Option Plan) Record Owners: Michael Barrist - 50,723 shares/ 56.05% Annette H. Barrist - 6,877 shares/ 7.6% Charles C. Piola, Jr. - 28,370 shares/ 31.35% Bernie Miller - 4,525 shares/ 5% Stock option Plan: 4762 for 1995 Stock Option Plan SCHEDULE 3.19 PROPERTY AND BUSINESS INSURANCE ------------------------------- Attached hereto is a copy of a Certificate of Insurance for the period 9/l/96 - 9/l/97 setting forth all property and business insurance currently maintained by Borrower. SCHEDULE 3.21 INTELLECTUAL PROPERTY --------------------- NONE SCHEDULE 3.24 ENVIRONMENTAL MATTERS --------------------- NONE SCHEDULE 3.26 NAMES ----- NCO Financial and MAB conduct business solely under the name NCO Financial Systems, Inc. and Management Adjustment Bureau, Inc., respectively, except that NCO Financial conducts business on occasion under the names of "B. Richard Miller", "Sentry Group", "National Collection Office", "Collection Service Division of Transamerica", and "Eastern Collection Services". SCHEDULE 6.2 LIENS ----- The amount of any liens securing obligations or arising from taxes, assessments, charges or claims in existence for which the Borrowers are liable is NONE. Except as set forth on the attached Schedule 3.19, the amount of any liens securing obligations or arising from taxes, assessments, charges or claims in existence for which Management Adjustment Bureau, Inc. is liable is NONE. SCHEDULE 6.3 The amount of any indebtedness in existence for which NCO Financial is liable or may become liable, other than the exceptions as stated in Section 6.3, is NONE, except as may be permitted in the Security Agreement executed by Management Adjustment Bureau, Inc. of even date herewith. NCO FINANCIAL SYSTEMS, INC. CREDIT AGREEMENT SCHEDULE 6.5 Loans and investments owned by NCO Financial as of the date of this agreement are as follows: Investments held by PNC as reflected in the attached statement of account. SCHEDULE 6.12 PERMITTED DEALINGS WITH AFFILIATES ---------------------------------- 1. Lease Agreement between NCO Financial and its Affiliate, 1740 Sentry East Associates, for the premises 1740 Walton Road, Blue Bell, PA, Borrower's corporate office. 2. Lease Agreement between NCO Financial and its Affiliate, 1730 Sentry East Associates, for office space at 1730 Walton Road, Blue Bell, PA. 3. Lease Agreement between NCO Financial and its Affiliate, 1710-20 Sentry East Associates, for office space at 1710-20 Walton Road, Blue Bell, PA. EX-10.14 8 AMENDED AND RESTATED SECURITY AGREEMENT Exhibit 10.14 AMENDED AND RESTATED SECURITY AGREEMENT --------------------------------------- THIS AMENDED AND RESTATED SECURITY AGREEMENT (this "Agreement"), dated September 5, 1996, by NCO Group, Inc., a Pennsylvania corporation ("NCO Group"), NCO Financial Systems, Inc., a Pennsylvania corporation ("NCO Financial"), NCO Funding, Inc., a Delaware corporation ("NCO Funding"), and NCO of New York, Inc., a New York corporation ("NCO New York") (NCO Group, NCO Financial, NCO Funding and NCO New York are each individually a "Grantor" and collectively the "Grantors") in favor of Mellon Bank, N.A., a national banking association (the "Lender"). RECITALS A. NCO Financial and the Lender entered into that certain Credit Agreement dated as of July 28, 1995 (the "Credit Agreement"), pursuant to which the Lender made available to NCO Financial certain credit facilities. B. As a condition precedent to the extension of credit under the Credit Agreement, NCO Financial executed and delivered to the Lender a Security Agreement dated July 28, 1995 in favor of Bank (the "Original Security Agreement"). C. On the date hereof, NCO New York (as an assignee of NCO Financial) will acquire all of the outstanding common stock of Management Adjustment Bureau, Inc. ("MAB") in an acquisition more particularly described in a Stock Purchase Agreement dated as of July 18, 1996 among the owners of the stock and NCO Financial. D. In order to finance the acquisition of Management Adjustment Bureau, Inc. by NCO New York, NCO Financial has requested that the Lender increase the amount of the credit facilities extended by the Lender to NCO Financial pursuant to the Credit Agreement to $15,000,000 and add NCO Group, NCO New York and NCO Funding as co-borrowers under the credit facilities. E. The Grantors and the Lender have agreed to increase the amount of the credit facilities and to enter into an Amended and Restated Credit Agreement dated of even date herewith (the "Amended and Restated Credit Agreement"). F. It is a condition precedent to the extension of additional credit under the Amended and Restated Credit Agreement that the Grantors amend and restate the Original Security Agreement in its entirety by executing and delivering this Agreement. This Agreement is made by the Grantors among other things to induce the Lender to enter into the Loan Documents (as defined below), and to induce the Lender to extend credit under the Amended and Restated Credit Agreement. NOW, THEREFORE, in consideration of the premises, and intending to be legally bound, the Grantors hereby agree as follows: ARTICLE I DEFINITIONS 1.1. Definitions. (a) General. Capitalized terms not otherwise defined herein shall have the meanings given in the Amended and Restated Credit Agreement. In addition to the other terms defined elsewhere in this Agreement, as used herein the following terms shall have the following meanings: "Loan Documents" shall mean the Amended and Restated Credit Agreement, this Agreement, the $15,000,000 Amended and Restated Revolving Credit Note dated September 5, 1996 from the Grantors in favor of the Lender, the Warrant Agreement dated July 28, 1995 by and between NCO Financial and the Lender, as amended by that certain Amendment to Warrant Agreement dated September 5, 1996, the 1996 Warrant Agreement dated September 5, 1996 by and between NCO Group and the Lender, the Amended and Restated Limited Guaranty Agreement dated September 5, 1996 from Michael J. Barrist, Charles A. Piola, Jr., Annette H. Barrist and Bernard R. Miller (collectively the "Guarantors") in favor of the Lender, the Amended and Restated Stock Pledge Agreement dated September 5, 1996 from the Guarantors in favor of the Lender, the Stock Pledge Agreement dated September 5, 1996 from NCO Group in favor of the Lender, the Guaranty and Suretyship Agreement dated September 5, 1996 from MAB to the Lender, the Security Agreement dated September 5, 1996 from MAB to the Lender and all agreements and instruments from time to time delivered under or in connection with any of the foregoing, in each case as the same may be amended from time to time. "Secured Obligations" shall mean all obligations from time to time of the Grantors to the Lender under or in connection with any Loan Document, including all obligations to pay principal, interest, fees, indemnities or other amounts, in each case whether such obligations are direct or indirect, secured or unsecured, joint or several, absolute or contingent, due or to become due, whether for payment or performance, now existing or hereafter arising. "UCC" shall mean the Uniform Commercial Code as in effect in the Commonwealth of Pennsylvania from time to time. -2- (b) Other Definitions. The following terms are defined in this Agreement in the Section or other place indicated: "Amended and Restated Credit Agreement" Recitals "Collateral" 2.1 "Credit Agreement" Recitals "Equipment" 2.1 "Grantors" Preamble "Guarantors" 1.1 "Inventory" 2.1 "Lender" Preamble "NCO Group" Preamble "NCO Financial" Preamble "NCO Funding" Preamble "NCO New York" Preamble "MAB" Recitals "notices" 6.3 "Receivables" 2.1 "Related Contracts" 2.1 1.2. UCC Definitions. Unless otherwise defined herein, terms defined in Article 9 of the UCC shall have the same meanings in this Agreement. ARTICLE II THE SECURITY 2.1. Grant of Security. As security for the full and timely payment and performance of the Secured Obligations, the Grantors hereby assign and pledge to the Lender, and grant to the Lender a security interest in, all right, title and interest of the Grantors in, to and under the following, whether now or hereafter existing or acquired (the "Collateral"): (a) all equipment in all of its forms of the Grantors including, without limitation, all machinery, motor vehicles, furniture, tools, accessories, parts, fixtures and all other personal property of the Grantors, and all parts of and all accessions to any of the foregoing, in each case wherever located (collectively, the "Equipment); (b) all inventory in all of its forms of the Grantors including, without limitation, (i) all raw materials and work in progress therefor, finished goods thereof and materials used or consumed in the manufacture or production thereof, (ii) all goods in which the Grantors have an interest in mass or a joint or other interest or right of -3- any kind (including, without limitation, goods in which the Grantors have an interest or right as consignee), and (iii) all goods which are returned to or repossessed by the Grantors, and all accessions to, products of and documents for any of the foregoing, in each case wherever located (collectively, the "Inventory"); (c) all accounts, accounts receivable, contract rights, chattel paper, instruments, documents and general intangibles (including, but not limited to, all tax refunds, intellectual property and proprietary rights) of the Grantors, whether or not arising out of or in connection with the sale or lease of goods or the rendering of services, and all rights of the Grantors now or hereafter existing in and to all security agreements, guaranties, leases and other contracts securing or otherwise relating to any such accounts, accounts receivable contract rights, chattel paper, instruments, documents or general intangibles (such accounts, accounts receivable contract rights, chattel paper, instruments, documents and general intangibles being collectively the "Receivables," and such security agreements, guaranties, leases and other contracts being collectively the "Related Contracts"); (d) all additions, replacements, attachments, accretions, accessions, components and substitutions to or for any Inventory or Equipment; (e) all property of the Grantors, including without limitation, monies, securities, instruments, chattel paper and documents, which at any time the Lender shall have or have the right to have in its possession, or which is in transit to it (pursuant to the terms of a letter of credit or otherwise) and, independent of and in addition to the Lender's rights of setoff (which the Grantors acknowledge), the balance of any account or any amount which may be owing from time to time by the Lender to the Grantors; (f) all books and records in whatever form (together with all related software) of the Grantors relating to, or used or useful in connection with, any Collateral; and (g) all proceeds of any of the foregoing (including, without limitation, proceeds which constitute property of the types described in the foregoing clauses (a) through (f)) and, to the extent not otherwise included, all payments under insurance (whether or not the Lender is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. -4- As to that portion of the Collateral covered by the Original Security Agreement, it is intended that this Section 2.1 shall, without limitation, operate to confirm the continuation of the liens and security interests originally created and granted under the Original Security Agreement. 2.2. Grantors Remain Liable. Notwithstanding anything to the contrary herein or in any other Loan Document, (a) the Grantors shall remain liable under the contracts and agreements included in the Collateral to the extent set forth therein to perform all of their duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by the Lender of any rights or remedies under or in connection with this Agreement or any other Loan Document shall not release the Grantors from any of their duties or obligations under the contracts and agreements included in the Collateral, and (c) the Lender shall not have any obligation or liability under the contracts and agreements included in the Collateral by reason of this Agreement or any other Loan Document, nor shall the Lender be obligated to perform any of the obligations or duties of the Grantors thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. 2.3. Continuing Agreement. This Agreement creates a continuing security interest in the Collateral and shall continue in full force and effect until all Secured Obligations have been paid and performed in full, and all commitments to extend credit under the Loan Documents have terminated. Upon the payment and performance in full of all Secured Obligations and termination of all commitments to extend credit under the Loan Documents, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to the Grantors. Upon any such termination, the Lender will, at the Grantors' request and expense, immediately return to the Grantors, without any representations, warranties or recourse of any kind whatsoever, such of the Collateral as then may be held by the Lender hereunder, and execute and deliver to the Grantors such documents as the Grantors may reasonably request to evidence such termination. ARTICLE III REPRESENTATIONS AND WARRANTIES The Grantors hereby jointly and severally represent and warrant to the Lender as follows: 3.1. Title. The Grantors are the legal and beneficial owners of the Collateral, free and clear of any lien, security -5- interest, option or other charge or encumbrance, except for the security interest under this Agreement in favor of the Lender securing the Secured Obligations. No effective financing statement or other item similar in effect covering any Collateral is on file in any recording office, except such as may be filed in favor of the Lender relating to this Agreement. 3.2. Validity, Perfection and Priority. This Agreement creates a valid security interest in the Collateral in favor of the Lender securing the Secured Obligations, which security interest has been duly perfected and is prior to all other liens, security interests, options or other charges or encumbrances. All filings and other actions necessary or desirable to perfect and protect such security interest in favor of the Lender have been duly made and taken. 3.3. Governmental Approvals and Filings. To the best of the Grantors' knowledge, after due inquiry, no authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is or will be necessary (a) for the grant by the Grantors of the security interest in the Collateral hereunder or for the execution, delivery or performance of this Agreement by the Grantors, (b) to ensure the validity, perfection or priority of the security interest in the Collateral granted hereunder, or (c) for the exercise by the Lender of any of its rights or remedies hereunder, except for the filing of UCC financing statements and continuation statements in appropriate jurisdictions. 3.4. Offices, etc. Schedule 3.4 identifies as of the date hereof the address of the chief executive office of each Grantor, of each office (whether maintained by the Grantors or otherwise) where books and records relating to the Collateral are kept, and of each place of business of each of the Grantors. Schedule 3.4 also identifies all changes in the foregoing information during the one year period ending on the date hereof. 3.5. Location of Equipment and Inventory. Schedule 3.5 identifies as of the date hereof the address of each place at which Equipment or Inventory of the Grantors are located, except for Equipment and Inventory described in any of clauses (i) through (v) of Section 4.4(a). Schedule 3.5 also identifies all changes in the foregoing information during the one year period ending on the date hereof. 3.6. Names, etc. During the one year period ending on the date hereof, neither the Grantors nor any of their direct or indirect predecessors by merger, consolidation or other corporate reorganization is or has been known by or used any corporate or fictitious name or trade name (other than the corporate names of -6- each of the Grantors as of the date hereof), nor have the Grantors or any such predecessor been the subject of any merger, consolidation or other corporate reorganization, nor have the Grantors or any such predecessor otherwise changed their name, identity or corporate structure, except as set forth in Schedule 3.6. For each such direct and indirect predecessor of the Grantors, Schedule 3.6 also identifies the respective addresses referred to in Sections 3.4 and 3.5 for all times during such period. 3.7. Possession and Control. The Grantors have exclusive possession and control of the Equipment and Inventory. 3.8. Certain Receivables. The Grantors have delivered to the Lender possession of all originals of all promissory notes or other instruments, chattel paper and negotiable documents constituting Collateral. 3.9. Compliance with Laws, etc. To the best of Grantors' knowledge, after due inquiry, all Inventory has been produced in compliance with all requirements of the Fair Labor Standard Act. 3.10. Representations and Warranties Remade at Each Extension of Credit. Each request (including any deemed request) by the Grantors for any extension of credit under any Loan Document shall be deemed to constitute a representation and warranty by the Grantors to the Lender that the representations and warranties made by the Grantors in this Article III are true and correct on and as of the date of such request with the same effect as though made on and as of such date. Failure by the Lender to receive notice from the Grantors to the contrary before the Lender makes any extension of credit under any Loan Document shall constitute a further representation and warranty by the Grantors to the Lender that the representations and warranties made by the Grantors in this Article III are true and correct on and as of the date of such extension of credit with the same effect as though made on and as of such date. ARTICLE IV COVENANTS 4.1. Books and Records; Inspection. The Grantors shall (a) keep complete and accurate books and records concerning the Collateral and, at the request of the Lender from time to time, permit the Lender or its representatives to inspect and copy such books and records during normal business hours, (b) at the request of the Lender from time to time, permit the Lender or its representatives to inspect any Collateral not in the -7- possession of the Lender, and (c) furnish to the Lender such information and reports in connection with the Collateral at such times and in such form as the Lender may reasonably request. The Lender shall have the right to examine, but not verify the Collateral from time to time. 4.2. Transfers and Other Liens, etc. (a) Transfers. The Grantors shall not sell, assign, lease, transfer or otherwise dispose of any Collateral (voluntarily or involuntarily, by operation of law or otherwise) except (i) Inventory in the ordinary course of business, and (ii) Equipment that is worn-out or obsolete, all in the ordinary course of business. (b) Other Liens. The Grantors shall not create or permit to exist any lien, security interest, option or other charge or encumbrance on any Collateral (voluntarily or involuntarily, by operation of law or otherwise) except for (i) the security interest under this Agreement in favor of the Lender securing the Secured Obligations, (ii) Permitted Liens and (iii) as otherwise permitted in Section 6.2 of the Amended and Restated Credit Agreement. 4.3. Change in Name, etc. The Grantors shall not have, use or be know by any corporate or fictitious name or trade name other than their corporate names as of the date hereof, nor be the subject of any merger, consolidation or other corporate reorganization, nor otherwise change their names, identities or corporate structures, except as permitted by Section 6.9 of the Amended and Restated Credit Agreement, and after all actions referred to in Section 4.7(a) hereof have been completed. 4.4. Certain Covenants Relating Primarily to Equipment and Inventory. (a) Location. The Grantors shall keep all Equipment and Inventory at the addresses identified in Schedule 3.5, or upon 30 days' notice to the Lender (specifically referring to this Section 4.4(a)), at such other locations in jurisdictions where all actions referred to in Section 4.7(a) have been completed provided, that the foregoing restriction shall not apply to the following: (i) Inventory in transit to purchasers from the Grantors in the ordinary course of business, (ii) Equipment and Inventory purchased by the Grantors in the ordinary course of business but not yet received, (iii) Equipment temporarily removed in the ordinary course of business for repair, refurbishment or routine service, (iv) Equipment constituting motor vehicles, aircraft, shipping vessels, rolling stock or other mobile goods and relocated in the ordinary course -8- of business, and (v) Equipment and Inventory temporarily removed in the course of contract work by the Grantors in the ordinary course of business. The Grantors shall keep all Equipment and Inventory in the 48 contiguous United States (except for Equipment and Inventory described in the proviso to the foregoing sentence). (b) Maintenance and Repair. The Grantors shall cause the Equipment to be maintained and preserved in the same condition, repair and working order as when new, ordinary wear and tear excepted, and in accordance with any applicable manufacturer's manual; and the Grantors shall forthwith, or in the case of any loss or damage to any of the Equipment as promptly as practicable after the occurrence thereof, make or cause to be made all repairs, replacements and other improvements in connection therewith which are necessary or desirable to such ends. The Grantors shall promptly notify the Lender of any material loss or damage to any of the Equipment. (c) Possession and Control. The Grantors shall at all times retain exclusive possession and control of all Equipment and Inventory. (d) Negotiable Documents. The Grantors will not permit any Collateral to constitute or be covered by a negotiable document except for (i) the Promissory Note in the original principal amount of $135,900 from Richard B. Miller in favor of the NCO Financial, and (ii) such other loans as permitted by Section 6.5 of the Amended and Restated Credit Agreement. The Grantors shall immediately deliver to the Lender any negotiable documents, whether allowed hereunder or in existence in violation of this provision, in accordance with Section 4.7. (e) Taxes, Claims; FLSA. The Grantors shall pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Equipment and Inventory. In producing Inventory, the Grantors shall comply with all requirements of the Fair Labor Standards Act. (f) Certificate of Title. The Grantors shall cause the security interests in favor of the Lender hereunder to be duly noted on any certificate of title with respect to any Collateral, and shall promptly (and in any event within ten days after the acquisition of any property subject to any certificate of title), deliver or cause to be delivered to the Lender each such certificate of title. 4.5. Certain Covenants Relating Primarily to -9- Receivables. (a) Offices. The Grantors shall keep their chief executive offices, the offices (whether maintained by the Grantors or otherwise) where books and records relating to the Collateral are kept and their places of business at the respective addresses identified in Section 3.5 or, upon 60 days' notice (specifically referring to this Section 4.5(a)) to the Lender, at such other locations in jurisdictions where all actions referred to in Section 4.7(a) have been completed. The Grantors shall maintain their chief executive offices in the 48 contiguous United States. (b) Collection; Servicing. Except as otherwise provided in this Section 4.5(b), the Grantors shall continue to collect, at their own expense, all amounts due or to become due the Grantors under the Receivables. In connection with such collections, the Grantors may take (and, at the Lender's direction, shall take) such action as the Grantors or the Lender may deem necessary or advisable to enforce collection of the Receivables; provided, however, that the Lender shall have the right at any time, after the occurrence of an Event of Default or Potential Default, upon notice to the Grantors of its intention to do so, to notify (or require the Grantors to notify) the account debtors or obligors under any Receivables of the security interest in favor of the Lender in the Receivables and to direct such account debtors or obligors to make payments of all amounts due or to become due to the Grantors thereunder directly to the Lender and, upon such notification and at the expense of the Grantors, to enforce collection of any such Receivables, and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as the Grantors may have done. After receipt by any of the Grantors of the notice from the Lender referred to in the proviso to the preceding sentence, (i) all amounts and proceeds (including instruments) received by the Grantors in respect of the Receivables shall be received in trust for the benefit of the Lender hereunder, shall be segregated from other funds of the Grantors and shall be forthwith paid over or delivered to the Lender in the same form as so received (with any necessary endorsement) to be held as collateral hereunder and either (A) released to the Grantors so long as no Event of Default or Potential Default shall have occurred and be continuing, or (B) if any Event of Default or Potential Default shall have occurred and be continuing, and if the Lender does not otherwise in its discretion elect to release such amounts to Grantors, applied as provided in Section 5.6, and (ii) the Grantors shall not adjust, settle or compromise the amount or payment of any Receivable, release wholly or partly any account debtor or obligor thereof, or allow any credit or discount thereon. -10- 4.6. Insurance. The Grantors shall, at their own expense, maintain or cause to be maintained insurance in accordance with Section 5.2 of the Amended and Restated Credit Agreement. All insurance on Inventory and Equipment shall identify the Lender as either loss payee or lender loss payee at the option of the Lender. 4.7. Further Assurances. (a) General. The Grantors shall from time to time, at their expense, promptly execute and deliver all further instruments and agreements, and take all further actions that may be necessary or appropriate, or that the Lender may reasonably request, in order to perfect or protect any assignment, pledge or security interest granted or purported to be granted hereby or to enable the Lender to exercise or enforce its rights and remedies hereunder. Without limiting the generality of the foregoing, the Grantors will: (i) if any Collateral shall be evidenced by a promissory note or other instrument, immediately deliver to the Lender such promissory note or instrument, duly endorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to the Lender, (ii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as the Lender may reasonably request, in order to perfect and preserve the security interest granted or purported to be granted hereby, and (iii) mark conspicuously each copy of all chattel paper and negotiable documents included in the Collateral and, at the request of the Lender, each of its records pertaining to the Collateral with a legend, in form and substance satisfactory to the Lender, indicating that such chattel paper, negotiable document, or Collateral is subject to the security interest granted pursuant hereto. (b) Financing Statements, etc. The Grantors hereby authorize the Lender to file one or more financing or continuation statements, and amendments thereto, relating to any Collateral without the signature of the Grantors where permitted by law. A photocopy or other reproduction of this Agreement or any financing statement covering any Collateral shall be sufficient as a financing statement where permitted by law. -11- ARTICLE V CERTAIN RIGHTS AND REMEDIES OF THE LENDER 5.1. Lender May Perform. If the Grantors fail to perform any obligation under or in connection with this Agreement, the Lender may (but shall have no duty to) itself perform or cause performance of such obligation, and the expenses of the Lender incurred in connection therewith shall be payable by the Grantors pursuant to Section 6.4. The Lender may from time to time take any other action which the Lender deems necessary or appropriate for the maintenance, preservation or protection of any of the Collateral or of its security interest therein. 5.2. No Duty to Exercise Powers. The powers of the Lender under and in connection with this Agreement are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. 5.3. Duties of Lender. Except for exercise of reasonable care in the custody and preservation of any Collateral in its possession and accounting for moneys received by it pursuant to this Agreement, the Lender shall have no duty as to any Collateral. In any event the Lender (a) shall have no duty to take any steps to preserve rights against prior parties or any other rights pertaining to any Collateral, (b) shall have no duty as to ascertaining or taking action with respect to calls, conversions, exchanges, tenders, maturities or other matters pertaining to any Collateral, whether or not the Lender has any knowledge of such matters, and (c) shall not be liable for any action, omission, insolvency or default on the part of any agent or custodian (other than the Lender) appointed by the Lender in good faith. The Lender shall be deemed to have exercised reasonable care in the custody and preservation of Collateral in its possession if it takes such action for such purpose as the Grantors request in writing from time to time (but failure to take any such action shall not in itself be deemed a failure to exercise reasonable care or evidence of such failure). Subject only to the performance by the Lender of its duties set forth in this Section 5.3, risk of loss, damage and diminution in value of the Collateral, of whatever nature and however caused, shall be on the Grantors. 5.4. Power of Attorney. The Grantors hereby irrevocably appoint the Lender, with full power of substitution, to be the attorney-in-fact of the Grantors, with full authority in the place and stead of the Grantors and in the name of the Grantors or otherwise, from time to time in the Lender's discretion, to take any action and to execute any instruments and agreements which the Lender may deem necessary or advisable to -12- accomplish the purposes of this Agreement, including the following: (a) to demand, collect, enforce, file claims for, sue for, recover, compromise, release, and take any action or institute any proceedings to collect or enforce, all rights to payments due or to become due and all other rights of the Grantors under or in connection with any Collateral, (b) to receive, endorse and collect any checks, notes or other instruments, documents, chattel paper or any other payment media in connection with the foregoing clause (a), and (c) to perform all obligations of the Grantors hereunder provided that, except for taking actions referred to in Section 4.7(a), such power of attorney may be exercised only so long as an Event of Default has occurred and is continuing. Such power of attorney is irrevocable and coupled with an interest. All third parties are entitled to rely conclusively on a representation by the Lender that it is entitled to exercise such power of attorney. 5.5. Certain Remedies. If any Event of Default shall have occurred and be continuing, the Lender may exercise all rights and remedies which it may have under this Agreement, any other agreement, at law or otherwise, and in addition, the following provisions shall apply: (a) The Lender may exercise all rights and remedies with respect to the Collateral and each part thereof as are provided by the UCC to a secured party on default (whether or not the UCC applies to the affected Collateral). To the extent, if any, the Lender does not otherwise have the right to do so, the Lender may (i) take absolute possession and control of the Collateral or any part thereof, (ii) transfer any Collateral into the name of the Lender or its nominees, (iii) notify the parties obligated on the Collateral to make to the Lender any payments due or to become due, (iv) receive any payments made under or in connection with the Collateral, (v) exercise all rights and remedies of the Grantor under or in connection with the Collateral, (vi) demand, collect, enforce, file claims for, sue for, recover, compromise, release, and take any action or institute any proceedings to collect or enforce, all rights to payments due or to become due and all other rights of the Grantors under or in connection with any Collateral, and (vii) otherwise deal in and act with respect to the Collateral in -13- all respects as though it were the outright owner thereof. (b) Upon the request of the Lender, the Grantors will, at their expense, forthwith assemble all or part of the Collateral as directed by the Lender and make it available to the Lender at a place to be designated by the Lender that is reasonably convenient to both parties. The Lender may enter into, occupy and take possession of any premises where any Collateral is located, without obligation to the Grantors. (c) All payments received by the Grantors in respect of any Collateral shall be received in trust for the benefit of the Lender, shall be segregated from other funds of the Grantors and shall be forthwith paid over to the Lender in the same form as so received (with any necessary endorsement). (d) The Lender may, without notice except to the extent required by law, sell the Collateral or any part thereof, in one or more parcels, at public or private sale, at any of the Lender's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Lender may deem commercially reasonable. The Grantors agree that, to the extent notice of sale is required by law, at least ten days' prior notice to the Grantors of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Lender shall not be obligated to make any sale, regardless of notice of sale having been given. The Lender may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (e) The Grantors agree that the Lender may comply with any limitation or restriction in connection with any sale of any Collateral as the Lender may deem to be necessary or advisable in order to comply with any law, or in order to obtain or make, or avoid the need to obtain or make, any approval or registration of the offering, sale or purchaser by or with any governmental agency or regulatory body. The Grantors agree that (i) the Lender may make sales in compliance with such limitations and restrictions, even though such sales may be at prices and on other terms less favorable to the seller than if such approvals or registrations were obtained or made, (ii) the Lender shall have no obligation to delay sale of any Collateral in order to obtain or make any such approval or registration, and (iii) it shall not be commercially unreasonable to make -14- sales in compliance with such limitations and restrictions. 5.6. Application of Payments. All cash held by the Lender as Collateral and all cash proceeds received by the Lender in respect of any sale of, collection from, or other realization upon any of the Collateral, may in the discretion of the Lender be held by the Lender as collateral for the Secured Obligations, or then or at any time thereafter applied (after payment of any amounts payable to the Lender pursuant to Section 6.4) in whole or part by the Lender to the Secured Obligations in such order as the Lender may elect. If and when all Secured Obligations shall have been paid in full and all commitments to extend credit under the Loan Documents shall have terminated, any surplus of such cash or cash proceeds held by the Lender shall be immediately paid over to the Grantors or as otherwise required by law. The Grantors shall remain liable for any deficiency. ARTICLE VI MISCELLANEOUS 6.1. Amendments, etc. No amendment to or waiver of any provision of this Agreement, and no consent to any departure by the Grantors herefrom, shall in any event be effective unless in a writing manually signed by or on behalf of the Lender. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 6.2. No Implied Waiver; Remedies Cumulative. No delay or failure of the Lender in exercising any right or remedy under this Agreement shall operate as a waiver thereof; nor shall any single or partial exercise of any such right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. The rights and remedies of the Lender under this Agreement are cumulative and not exclusive of any other rights or remedies available hereunder, under any other agreement, at law, or otherwise. 6.3. Notices. Except to the extent, if any, otherwise expressly provided herein, all notices and other communications (collectively, "notices") under this Agreement shall be given, shall be effective, and may be relied upon, in the same way as notices under the Amended and Restated Credit Agreement. -15- 6.4 Indemnity and Expenses. (a) Indemnity. The Grantors agree to indemnify the Lender from and against any and all claims, losses, liabilities and expenses (including reasonable attorneys' fees) arising out of or resulting from this Agreement (including, without limitation, enforcement of this Agreement), except claims, losses, liabilities and expenses resulting solely from the gross negligence or willful misconduct of the Lender. (b) Expenses. The Grantors will upon demand pay to the Lender the amount of all reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, which the Lender may incur in connection with (i) the custody, preservation, use or operation of, or the sale of, collection of or other realization upon, any Collateral, (ii) the exercise or enforcement of any of the rights of the Lender hereunder, or (iii) the failure by any of the Grantors to perform or observe any of the provisions hereof. 6.5. Entire Agreement. This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior and contemporaneous understandings and agreements. 6.6. Survival. All representations and warranties of the Grantors contained in or made in connection with this Agreement shall survive, and shall not be waived by, the execution and delivery of this Agreement, any investigation by or knowledge of the Lender, any extension of credit, termination of this Agreement, or any other event or circumstance whatever. The obligations of the Grantors under Section 6.4 shall survive termination of this Agreement. 6.7. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, and all such counterparts shall constitute but one and the same agreement. 6.8. Construction. In this Agreement, unless the context otherwise clearly requires, references to the plural include the singular, the singular the plural, and the part the whole; and "or" is not exclusive. In this Agreement, "include," includes," "including" and similar terms are not limiting; "hereof," "herein," "hereunder" and similar terms refer to this Agreement as a whole and not to any particular provision; and "expenses," "costs," "out-of-pocket expenses" and similar terms include the charges of in-house counsel, auditors and other professionals of the relevant Person to the extent that such amounts are routinely identified and charged under such Person's -16- cost accounting system. Section and other headings in this Agreement, and any table of contents herein, are for reference only and shall not affect the interpretation of this Agreement in any respect. Section and other references in this Agreement are to this Agreement unless otherwise specified. This Agreement has been fully negotiated between the applicable parties, each party having the benefit of legal counsel, and accordingly neither any doctrine of construction of security agreements in favor of the grantor, nor any doctrine of construction of ambiguities against the party controlling the drafting, shall apply to this Agreement. 6.9 Successors and Assigns. This Agreement shall be binding upon the Grantors and their successors and assigns, and shall inure to the benefit of and be enforceable by the Lender and its successors and assigns. Without limitation of the foregoing, the Lender (and any successive assignee or transferee) from time to time may assign or otherwise transfer all or any portion of its rights or obligations under the Loan Documents (including all or any portion of any commitment to extend credit), or any Secured Obligations, to any other Person, and such Secured Obligations (including any Secured Obligations resulting from extension of credit by such other Person under or in connection with the Loan Documents) shall be and remain Secured Obligations entitled to the benefit of this Agreement, and to the extent of its interest in such Secured Obligations such other Person shall be vested with all the benefits in respect thereof granted to the Lender in this Agreement or otherwise. 6.10. Choice of Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, exclusive of choice of law principles, except to the extent that perfection and the effect of perfection or nonperfection of the security interests in the Collateral is governed by the laws of a jurisdiction other than the Commonwealth of Pennsylvania pursuant to the UCC. -17- IN WITNESS WHEREOF, the Grantors have caused this Agreement to be duly executed and delivered as of the date first above written. ATTEST: NCO GROUP, INC. By By /s/ MICHAEL J. BARRIST ------------------------ ------------------------ Title: MICHAEL J. BARRIST Title: [Corporate Seal] ATTEST: NCO FINANCIAL SYSTEMS, INC. By By /s/ MICHAEL J. BARRIST ------------------------ ------------------------ Title: MICHAEL J. BARRIST Title: [Corporate Seal] ATTEST: NCO FUNDING, INC. By By /s/ MICHAEL J. BARRIST ------------------------ ------------------------ Title: MICHAEL J. BARRIST Title: [Corporate Seal] ATTEST: NCO OF NEW YORK, INC. By By /s/ MICHAEL J. BARRIST ------------------------ ------------------------ Title: MICHAEL J. BARRIST Title: [Corporate Seal] ACCEPTED AND AGREED: MELLON BANK, N.A. By: ----------------------- LIZ A. MELLACE Assistant Vice President -18- SCHEDULE 3.4 ------------ LOCATION OF OFFICES, ETC. ------------------------- A. Address (including street address and county) of the chief executive office of each of the Grantors: B. Address (including street address and county) of each additional place of business of each of the Grantors and any additional office (whether maintained by a Grantor or otherwise) where books and records relating to Collateral are kept: C. Changes in the foregoing information during the one year period ending on the date of the Security Agreement: SCHEDULE 3.5 ------------ LOCATION OF EQUIPMENT AND INVENTORY ----------------------------------- Address (including street address and county) of each location where Equipment or Inventory is located: SCHEDULE 3.6 ------------ NAMES, ETC. ----------- EX-10.15 9 EXHIBIT 10.15 Exhibit 10.15 NCO FINANCIAL SYSTEMS, INC. WARRANT AGREEMENT WARRANT AGREEMENT (this "Agreement) dated as of July 28, 1995 (the "Closing Date") by and between NCO Financial Systems, Inc., a Pennsylvania corporation (the "Company") and Mellon Bank, N.A. ("Bank") RECITALS 1. Simultaneously with the execution and delivery of this Agreement (the "Closing"), the Company and Bank are entering into that certain Credit Agreement dated as of July 28, 1995 (the "Credit Agreement") pursuant to which the Bank is making available to the Company certain credit facilities. 2. As an inducement to the Bank to enter into the Credit Agreement, the Company proposes to issue warrants exercisable into an aggregate of 3,770 shares of the Company's common stock (subject to adjustment as described herein). NOW, THEREFORE, in consideration of the foregoing, the Company and Bank, intending to be legally bound, agree as follows: ARTICLE 1 DEFINITIONS 1.1. Definitions. As used herein, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Accounts" has the meaning ascribed to that term in the Uniform Commercial Code. "Affiliate" means, as to any Person, any Subsidiary of such Person and any other person which, directly or indirectly, controls, is controlled by or is under common control with such Person and includes each officer or director or general partner of such Person, and each Person who is the beneficial owner of 5% or more of any class of voting stock of such Person. For the purposes of this definition, "control" means the possession of the power to direct or cause the direction of management and policies of such Person, whether through the ownership of voting securities, by contract, or otherwise. "Agreement" means this Warrant Agreement as from time to time amended and in effect between the parties. "Business Day" means any day other than a Saturday, Sunday or public holiday or the equivalent for banks under the laws of the Commonwealth of Pennsylvania. "Change in Control" means any transaction or any event as a result of which any one or more persons (other than Bank or any of its Affiliates) acquires or for the first time controls or is able to vote (directly or through nominees or beneficial ownership) after the Closing Date (other than as the direct result of a transfer by descent of distribution of a decedent's estate) fifty percent (50%) or more of any class of stock of the Company outstanding at the time having power ordinarily to vote for the directors of the Company. "Common Stock" includes (a) the Company's Common Stock, $.01 par value per share, as authorized on the date of this Agreement, (b) any other capital stock of any class or classes (however designated) of the Company, authorized on or after the date hereof, the holders of which shall have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference, and the holders of which shall ordinarily, in the absence of contingencies, be entitled to vote for the election of a majority of directors of the Company (even though the right so to vote has been suspended by the happening of such a contingency), and (c) any other securities in which or for which any of the securities described in (a) or (b) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets of otherwise. "Company" means and shall include NCO Financial Systems, Inc., a Pennsylvania corporation, and its successors and assigns. "Credit Agreement" means that certain Credit Agreement dated of even date herewith between the Company and the Lender. "Equity Securities" shall have the meaning assigned to that term in Section 2.08. "Event of Force Majeure" shall mean a declaration by Federal authorities of a banking moratorium, a suspension of trading by a national securities exchange, a declaration of war or any new outbreak of hostilities or other national calamity or crisis, the effect of which on the financial markets of the Untied States shall make it commercially impracticable to comply with an obligation hereunder. "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Exercise Event" means any of a (i) a Change in Control, (ii) a Qualified Disposition or (iii) a Qualified IPO. "Holder" means Bank, its successors and assigns, and all transferees (in whole or in part) of the Warrants. "Outstanding Common Stock" shall have the meaning assigned to that term in Section 2.06. "Person" means, an individual, a corporation (including, without limitation, a business trust), a partnership, a joint stock company, a joint venture or other entity, a trust, an unincorporated association, a government and any agency or political subdivision thereof. "Put Closing Date" shall have the meaning assigned to that term in Section 2.03. "Put Notice" shall have the meaning assigned to that term in Section 2.03. "Qualified Disposition" means (i) any merger or consolidation of the Company with any Person, (ii) any sale, assignment, lease or other disposition of or voluntary parting with the control of (whether in one transaction or in a series of related transactions) all or substantially all of the consolidated assets (whether now owned or hereafter acquired) of the Company and (iii) any issuance of equity securities of the Company which, when aggregated with all issuances of equity securities of the Company subsequent to the Closing, exceeds fifty percent (50%) of the aggregate of all outstanding equity securities of the Company immediately after the closing on a fully diluted basis (assuming the exercise of the Warrants and up to an aggregate of 4,961 shares issued pursuant to the Company's Stock Option Plan (or amendments, restatements or successors thereto)). "Qualified IPO" means a firm commitment underwritten public offering of shares of the Company's Common Stock in which the aggregate net proceeds to the Company are at least $9,500,000. "Registration Rights Agreement" shall have the meaning assigned to that term in Section 3.02. "Repurchase Price" shall have the meaning assigned to that term in Section 2.06. "Securities" means collectively the Warrants and the Warrant Shares. "Securities Act" means the Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect from time to time. "Stock" means shares of capital stock, beneficial or partnership interest, participations or other equivalents (regardless of how designated) of or in a corporation or equivalent entity, whether voting or non-voting and, includes, without limitation, common stock and preferred stock. "Stock Equivalents" means all securities convertible into or exchangeable for Stock and all warrants, options or other rights to purchase or subscribe for any stock, whether or not presently convertible, exchangeable or exercisable. "Subsidiary" or "Subsidiaries" means (i) any corporation more than fifty percent (50%) of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by the Company and/or one or more Subsidiaries of the Company, (ii) any partnership, association, joint venture or other entity in which the Company and/or one or more Subsidiaries of the Company has more than a fifty percent (50%) equity interest at the time. "Warrant Documents" shall mean this Agreement, the Warrant, and the Registration Rights Agreement. "Warrant Shares" shall have the meaning assigned to that term in Section 2.01. "Warrants" shall have the meaning assigned to that term in Section 2.01. 1.2. Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles consistent with those applied in preparation of the Financial Statements, and all financial data submitted pursuant to this Agreement and all financial tests to be calculated in accordance with this Agreement shall be prepared and calculated in accordance with such principles. ARTICLE 2 PURCHASE, SALE AND TERMS OF WARRANTS; OBLIGATION TO REPURCHASE 2.1. The Warrants. The Company has authorized the issuance and sale to Bank of the Company's Common Stock Purchase Warrants for the purchase (subject to adjustment as provided therein) of an aggregate of 3,770 shares of the Company's common stock (the "Warrant Shares"). The Common Stock Purchase Warrants shall be substantially in the form set forth as Exhibit 2.01 attached hereto and are herein referred to individually as a "Warrant" and collectively as the "Warrants", which terms shall also include any warrants delivered in exchange or replacement thereof. The number of Warrant Shares is subject to adjustment as set forth in the Warrants. The Warrants shall be exercisable at a purchase price of $0.01 per Warrant Share, and shall expire at 5:00 P.M., Philadelphia time, on July 31, 2005. 2.2. Purchase and Sale of Warrants; Reservation of Shares. (a) The Company agrees to issue and sell to Bank, and, subject to and in reliance upon the representations, warranties, terms and conditions of this Agreement, Bank agrees to purchase Warrants to acquire 3,770 Warrant Shares. Such purchase and sale shall take place at the Closing and at the Closing the Company will initially issue to Bank one Warrant to purchase (subject to adjustment as provided therein) 3,770 Warrant Shares. (b) The Company has authorized, and has reserved and covenants to continue to reserve, free of preemptive rights and other preferential rights, a sufficient number of its previously authorized but unissued shares of Common Stock to satisfy the rights of exercise of the Warrants. The Company covenants and agrees that all shares of Common Stock which may be issued upon the exercise of the rights represented by the Warrants shall, upon issuance, be fully paid and non-assessable and free from all taxes, liens and charges with respect to issuance. If the Exercise Price is at any time less than the par value of the Common Stock or if the Warrants at any time are exercisable by delivery alone and without payment of any additional consideration, the Company also covenants and agrees to cause to be taken such action (whether by lowering the par value of the Common Stock, the conversion of the Common Stock from par value to no par value, or otherwise) as will permit the exercise of the Warrants without any additional payment by the Holder thereof (other than payment of the Exercise Price, if any, and applicable transfer taxes, if any), and the issuance of the Common Stock, which Common Stock, upon issuance, will be fully paid and non-assessable. 2.3. Right to Put Warrants. (a) During the twelve-month period ending on July 31, 2001 (the "Put Period"), each of the Holders of the Warrants shall have the right to sell to the Company, and the Company hereby agrees to purchase, at the Repurchase Price determined under Section 2.06, any or all of the Warrants held by such Holder. No Holders of Warrant Shares shall have the right to sell Warrant Shares to the Company pursuant to this Section 2.03. (b) A Holder of Warrants shall give the Company at least thirty (30) days prior written notice (which notice shall be irrevocable, except for an Event of Force Majeure) of its intention to exercise any right of sale set forth in this Section 2.03 (the "Put Notice") and shall specify in such notice the number of Warrants to be sold and may specify in such notice a proposed date of sale. The closing of any repurchase of the Warrants pursuant to this Section 2.03 shall take place at the offices of the Company at 10:00 A.M. local time on a Business Date (the "Put Closing Date") which shall not be later than the latest to occur of (i) the date specified in the Put Notice and (ii) the date five Business Days after a final determination of the Repurchase Price pursuant to Section 2.06. On or prior to the Put Closing Date, the Company shall deliver a certified or bank cashier's check to each Holder of the Warrants being repurchased, in an amount equal to the Repurchase Price of the Warrants being repurchased from such Holder, determined in accordance with Section 2.06, or shall transfer such amount by wire transfer of immediately available funds to any account specified in writing by such Holder. 2.4. Right to Call Warrants. (a) During the twelve-month period ending on July 31, 2001 (the "Call Period"), the Company shall have the right to repurchase from each of the Holders of the Warrants, on a pro-rata basis, and each of the Holders of the Warrants hereby agrees to sell to the Company, on a pro-rata basis, at the Repurchase Price determined under Section 2.06, any or all of the Warrants. The Company shall have no right to repurchase Warrant Shares pursuant to this Section 2.04. (b) The Company shall give each of the Holders of the Warrants at least thirty (30) days prior written notice (which notice shall be irrevocable, except for an Event of Force Majeure) of its intention to exercise any right of purchase set forth in this Section 2.04 (the "Call Notice") and shall specify in such notice the number of Warrants to be repurchased and may specify in such notice a proposed date of sale. The closing of any repurchase of the Warrants pursuant to this Section 2.04 shall take place at the offices of the Company at 10:00 A.M. local time on a Business Date (the "Call Closing Date") which shall not be later than the latest to occur of (i) the date specified in the Call Notice and (ii) the date five Business Days after a final determination of the Repurchase Price pursuant to Section 2.06. On or prior to the Call Closing Date, the Company shall deliver a certified or bank cashier's check to each Holder of the Warrants being repurchased, in an amount equal to the Repurchase Price for such Holder's pro-rata share of the Warrants being repurchased, determined in accordance with Section 2.06, or shall transfer such amount by wire transfer of immediately available funds to any account specified in writing by such Holder. 2.5. Insufficiency of Funds. With respect to a repurchase by the Company under either Section 2.03 or Section 2.04, in the event that any or all of the Repurchase Price is not paid as a result of the insufficiency of legally available funds under the Pennsylvania Business Corporation Law or otherwise, the obligation to effect the repurchase shall remain an obligation of the Company and shall be performed as soon as there are funds legally available therefor. 2.6. Repurchase Price for Warrants. (a) The repurchase price (the "Repurchase Price") for each Warrant ( determined on the basis of the number of Warrant Shares into which it is then exercisable) which is to be repurchased by the Company pursuant to either Section 2.03 or Section 2.04 shall be equal to (I) the quotient obtained by dividing (x) the fair market value determined in accordance with Section 2.06(b) of the aggregate of all of the outstanding Common Stock as of the end of the Company's last full fiscal quarter immediately preceding the Put Notice or the Call Notice, as the case may be, including in such outstanding Common Stock the Warrant Shares and all shares of Common Stock which could be acquired upon exercise or conversion of any outstanding options or other securities then exercisable or convertible into Common Stock (collectively, as of any time of determination the "Outstanding Common Stock"), by (y) the number of shares of Outstanding Common Stock, minus (II) the exercisable price per Warrant Share. (b) For purposes of this Section 2.06, the "fair market value" of the Outstanding Common Stock shall be determined in good faith by the Holders of the Warrants being repurchased and the Company. If such Holders and the Company are unable to agree on such fair market value, such Holders shall select a pool of three independent investment banking firms or valuation firms (or a combination thereof) from which the Company shall select one such firm to appraise the fair market value of the Outstanding Common Stock and to perform the computations involved. The determination of such firm shall be binding upon the Company. All expenses of such firm shall be borne by the Company. 2.7. Delivery of Certificates Reissued. Upon the timely receipt of the Repurchase Price for the Warrants sold to the Company pursuant to either Section 2.03 or Section 2.04, the Holders thereof shall forward the Warrants, as the case may be, so sold to the Company. To the extent that less than all of such Holder's Warrants are sold, the Company shall forthwith issue and deliver to such Holder, as appropriate, (a) Warrants in every respect identical to the Warrants so forwarded, except that the same shall provide for the purchase by such Holder of such lesser number of Warrant Shares as shall be represented by the Warrants which the Company has not repurchased. Upon timely payment of the Repurchase Price therefor Warrants so repurchased shall no longer be exercisable or have any validity whatsoever. 2.8. Right to New Equity Securities. Prior to issuing any equity securities or any options or convertible securities exercisable for or convertible into such equity securities (collectively, "Equity Securities") of the Company, other than in connection with a Qualified IPO, the Company will simultaneously issue without charge to each of the Holders of the Warrants and Warrant Shares the same proportion of the securities proposed to be sold by the Company as the number of Warrants and Warrant Shares owned by such Holder bears to the total number of shares of Outstanding Common Stock at that time, provided, that, prior to an Exercise Event, the securities to be issued by the Company to the Holders pursuant to this Section 2.08 shall be limited to warrants similar in all material respects to the Warrants. Holders electing to purchase Equity Securities pursuant to this Section shall also be entitled to purchase (pro rata according to their holdings of Warrant and Warrant Shares) offered Equity Securities that other Holders decline to purchase. Any such right of purchase shall be exercisable for a period of thirty (30) days after the Holders receive written notice of a proposed issuance of Equity Securities (and any such notice by the Company shall be given not less than thirty (30) nor more than ninety (90) days prior to any such issuance). This Section 2.08 shall not apply to Equity Securities issued upon exercise of the Warrant. 2.9. Termination Upon Qualified IPO. Bank's rights under Sections 2.03 and 2.08 shall terminate upon the closing of a Qualified IPO. 2.10. No Termination Upon Satisfaction of Credit Agreement Obligations. Bank's rights under Sections 2.03 and 2.08 shall not terminate solely by virtue of the satisfaction by the Company of all of its obligations to the Bank under the Credit Agreement; provided, however, that Bank's rights under Sections 2.03 and 2.08 shall terminate if, within one year from the date of this Agreement, the Company receives a notice from the Bank pursuant to Section 2.09 of the Credit Agreement that the Bank is requiring additional compensation from the Company pursuant to that Section, and the Company thereafter satisfies all of its obligations to the Bank through a refinancing. ARTICLE 3 CONDITIONS TO PURCHASERS' OBLIGATIONS The obligations of Bank to purchase the Warrants at the Closing is subject to the following conditions, all or any of which may be waived in writing by Bank: 3.1. Representations and Warranties. Each of the representations and warranties of the Company set forth in Article 4 hereof shall be true and correct in all material respects at the time of the sale of the Warrants. 3.2. Delivery at Closing. Bank shall have received prior to or at the Closing all of the following, each in form and substance satisfactory to Bank and its counsel: (a) A certified copy of all charter documents of the Company; a certified copy of the resolutions of the board of directors and, to the extent required, the stockholders of the Company evidencing approval, as applicable, of this Agreement, the Warrant Documents and other matters contemplated hereby and thereby; a certified copy of the By-laws of the Company ; and certified copies of all documents evidencing other necessary corporate or other action and governmental approvals, if any, with respect to this Agreement, the Warrant Documents and other matters contemplated hereby or thereby. (b) Favorable opinions of Blank, Rome, Comisky & McCauley, counsel for the Company, as to matters set forth in Exhibit 3.02(b), and as to such other matters as Bank or its counsel may reasonably request. (c) A certificate of the Secretary or an Assistant Secretary of the Company which shall certify the names of the officers of the Company authorized to sign, as applicable, this Agreement, the Warrant Documents and any other documents or certificates to be delivered pursuant hereto or thereby by the Company, as applicable, or any of their respective officers, together with the true signatures of such officers. Bank may conclusively rely on such certificates until they shall receive a further certificate of the Secretary or an Assistant Secretary of the Company, as applicable, cancelling or amending the prior certificate and submitting the signatures of the officers named in such further certificate. (d) A Registration Rights Agreement (the "Registration Rights Agreement") executed by the Company substantially in the form of Exhibit 3.02(d) attached hereto. (e) A certificate from a duly authorized officer of the Company stating that all conditions set forth in this Article have been satisfied. (f) Such other documents referenced in any Exhibit hereto or relating to the transactions contemplated by this Agreement as Bank or its counsel may reasonably request. 3.3. Incurrence of Debt. The Company shall have entered into the Credit Agreement with the Bank on terms satisfactory to the Company and shall have closed or shall close simultaneously the transactions contemplated thereby and received or shall simultaneously receive the funds with respect thereto. Copies of all documents delivered to the Bank in conjunction with the closing of the transactions contemplated by the Credit Agreement shall have been delivered to Bank or its counsel. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BANK 4.1. Representations and Warranties of Bank. Bank hereby represents and warrants that: (a) It has duly authorized, executed and delivered this Agreement and such of the Operative Documents as require execution by it. (b) Its present intention is to acquire the Securities for its own account. (c) The Securities are being and will be acquired for the purpose of investment and not with a view to distribution or resale thereof; subject, nevertheless, to the condition that, except as otherwise provided herein, the disposition of its property shall at all times be within its control. (d) It acknowledges that it has reviewed and discussed the Company's business, affairs and current prospects with such officers of the Company and others as it has deemed appropriate or desirable in connection with the transactions contemplated by this Agreement. It further acknowledges that it has requested, received and reviewed such information, undertaking such investigation and made such further inquiries of officers of the Company and others as it has deemed appropriate or desirable in connection with such transactions; provided, however, no investigation made heretofore or hereafter by or on its behalf shall have any effect whatsoever on the representations and warranties of the Company hereunder, each of which shall survive any such investigation. (e) It understands that it must bear the economic risk of its investment for an indefinite period of time because the Securities are not, and will not be, registered under the Securities Act or any applicable state securities laws, except as may be provided in the Registration Rights Agreement, and may not be resold unless subsequently registered under the Securities Act and such other laws or unless an exemption from such registration is available. It also understands that it is not contemplated that any registration will be made under the Securities Act or that the Company will take steps which will make the provisions of Rule 144 under the Securities Act available to permit resale of the Securities. (f) It has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of its investment in the Securities. It further represents that it is an "accredited investor" as such term is defined in Rule 501 of Regulation D of the Commission under the Securities Act with respect to the purchase of the Securities. (g) It hereby acknowledges that the Warrants and each certificate representing the Warrant Shares and any other securities issued in respect of such shares upon any stock split, stock dividend, recapitalization, merger or similar event (unless no longer required in the opinion of counsel, which opinion and counsel shall be reasonably satisfactory to the Company) shall bear a legend substantially in the following form: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD OR TRANSFERRED WITHOUT COMPLIANCE WITH THE REGISTRATION OR QUALIFICATION PROVISIONS OF APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR APPLICABLE EXEMPTIONS THEREFROM. The acquisition by Bank of the Securities shall constitute a confirmation by it of the foregoing representations made by it. ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants as follows: 5.1. Securities Act. Neither the Company nor anyone acting on its behalf has offered any of the Warrants, or solicited any offers to purchase or made any attempt by preliminary conversation or negotiations to dispose of the Warrants, within the meaning of all applicable federal and state securities laws, to any Person other than Bank, and no Person other than Bank will purchase any Warrants except with the prior consent of Bank. Neither the Company nor anyone acting on its behalf has offered or will offer to sell the Warrants to, or solicit offers with respect thereto from, or enter into any preliminary conversations or negotiations relating thereto with, any Person so as to bring the issuance and sale of the Warrants under the registration provisions of the Securities Act. 5.2. Other Agreements of Officers. To the best knowledge of the Company, no officer or key employee of the Company is a party to or bound by any agreement, contract or commitment, or subject to any restrictions, particularly but without limitation in connection with any previous employment of any such person, which has a material adverse effect, or in the future may (so far as the Company can reasonably foresee) have a material adverse effect. To the best knowledge of the Company, no officer or key employee of the Company has any present intention of terminating his employment with the Company, as the case may be, and the Company has no present intention of terminating such employment. 5.3. Foreign Corrupt Practices Act. The Company has reviewed its practices and policies and to the best of its knowledge and belief is not engaged, nor has any of its respective officers, directors, employees or agents engaged in any act or practice which would constitute a violation of the Foreign Corrupt Practices Act of 1977, or any rules or regulations promulgated thereunder. 5.4. Registration Rights. Other than pursuant to the terms of the Registration Rights Agreement, no Person has demand or other rights to cause the Company to file any registration statement under the Securities Act relating to any securities of the Company or any right to participate in any such registration statement. 5.5. Representations and Warranties Incorporated from Credit Agreement. Each of the representations and warranties given by the Company to Bank in the Credit Agreement is true and correct in all material respects as of the Closing Date and such representations and warranties are hereby incorporated herein by this reference as of such date with the same effect as though set forth herein in their entirety and made by the Company to Bank hereunder. ARTICLE 6 DISCLOSURES TO HOLDERS So long as any Warrants remain outstanding, the Company shall, contemporaneously with the sending or making available thereof, send to all Holders, in accordance with Section 7.03 herein copies of (i) the Company's audited financial statement for each fiscal year and (ii) the Company's unaudited financial statement for each fiscal quarter. ARTICLE 7 MISCELLANEOUS 7.1. No Waiver; Cumulative Remedies. No failure or delay on the part of Bank in exercising any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy hereunder. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. 7.2. Amendments, Waivers and Consents. Any provision in this Agreement or the Warrants to the contrary notwithstanding, changes in or additions to this Agreement may be made, and compliance with any covenant or provision herein or therein set forth may be omitted or waived, if the Company shall obtain consent thereto in writing from Bank. 7.3. Addresses for Notices, etc. All notices, requests, demands and other communications provided for hereunder shall be in writing and mailed (by first class registered or certified, postage prepaid), telegraphed, sent by express overnight courier service or electronic facsimile transmission (with a copy by mail), or delivered to the applicable party at the addresses indicated below: If to the Company: NCO Financial Systems, Inc. 1740 Walton Road Blue Bell, PA 19422 Attention: Michael J. Barrist With copies to: Blank, Rome, Comisky & McCauley Four Penn Center Plaza Philadelphia, PA 19103 Attention: Alan L. Zeiger, Esquire and Joshua Gindin, Esquire 1700 Two Logan Square Philadelphia, PA 19103 If to Bank: Mellon Bank, N.A. Plymouth Meeting Executive Campus 610 West Germantown Pike Plymouth Meeting, PA 19462 Attention: Liz A. Mellace With a copy to: Reed Smith Shaw & McClay 2500 One Liberty Place Philadelphia, PA 19103 Attention: Ben Burke Howell, Esquire Telecopy: 215-851-1420 or, as to each of the foregoing, at such other address as shall be designed by such Person in a written notice to the other party complying as to delivery with the terms of this Section. All such notices, requests, demands and other communications shall, when mailed, telegraphed or sent, respectively, be effective (i) two days after being deposited in the mails or (ii) one day after being delivered to the telegraph company, deposited with the express overnight courier service or sent by electronic facsimile transmission, respectively, addressed as aforesaid. 7.4. Costs, Expenses and Taxes. Except as otherwise provided herein, the Company agrees to pay on demand all reasonable costs and expenses of Bank in connection with the preparation, execution and delivery of this Agreement, the Warrants and other Warrant Documents and other instruments and documents to be delivered hereunder, and in connection with the consummation of the transaction contemplated hereby and thereby, and in connection with any amendment, waiver (whether or not such amendment or waiver becomes effective) or enforcement of this Agreement, the Warrants, the other Warrant Documents, and other instruments and documents to be delivered hereunder or thereunder, including the fees and out-of-pocket expenses of Reed Smith Shaw & McClay, counsel for Bank. In addition, the Company agrees to pay any and all stamp and other taxes (excluding income taxes) payable or determined to be payable in connection with the execution and delivery of this Agreement, the Warrants, the other Warrant Documents, and the other instruments and documents to be delivered hereunder or thereunder and each agrees jointly and severally to save Bank harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes and filing fees. 7.5. Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of the Company, and its respective successors and assigns, except that the Company shall not have the right to assign its rights hereunder or any interest therein without the prior written consent of Bank. 7.6. Provisions of Credit Agreement. Whenever any provision of the Credit Agreement is referred to herein or in any instrument furnished hereunder as expressing or constituting an obligation, condition or limitation of this Agreement or of such instrument or as expressing or constituting a representation herein or therein (a) such provision shall be deemed incorporated herein or therein at length, and (b) except as otherwise provided herein or in such instrument, the terms used in such provision referred to shall have the meanings set forth in the Credit Agreement. Except as otherwise specifically provided herein, and except for amendments or modifications to which Bank consents in writing, no modification of or amendment to, or waiver of, any provisions of the Credit Agreement and no payment of the indebtedness outstanding thereunder or satisfaction or cancellation thereof, shall modify, amend, waive or otherwise affect any provision thereof as referred to in this Agreement or in any instrument furnished hereunder, which provision, for the purpose of this Agreement and such instrument, shall remain unmodified and in full force and effect. 7.7. Indemnification. The Company agrees to indemnify and hold harmless Bank, its subsidiaries, directors, officers, partners, counsel and employees, from and against any and all liability (including, without limitation, reasonable legal fees incurred in defending against any such liability) under, arising out of or relating to this Agreement, the Warrants and the Warrant Shares, the transactions contemplated hereby or thereby or in connection herewith or therewith, including (to the maximum extent permitted by law) any liability arising under federal or state securities laws, except to the extent such liability shall result from any act or omission on the part of Bank; provided that the Company shall not be liable for the reasonable fees and expenses of more than one separate firm for all indemnified parties, unless representation of all parties by the same counsel would be inappropriate due to actual or potential differing interests among them. The obligations of the Company under this Section 7.07 shall survive and continue to be in full force and effect notwithstanding the satisfaction of the Company's obligations under the Credit Agreement and the termination of this Agreement. 7.8. Survival of Representations and Warranties. All representations and warranties made in this Agreement, the Warrants, the Warrant Documents or any other instrument or document delivered in connection herewith or therewith, shall survive the execution and delivery hereof and thereof, regardless of any investigation made by Bank. 7.9. Prior Agreements. This Agreement constitutes the entire agreement between the parties and supersedes any prior understandings or agreements concerning the subject matter hereof. 7.10. Severability. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. 7.11. Governing Law. This Agreement shall be governed by and construed in accordance with, the internal laws of the Commonwealth of Pennsylvania. 7.12. Governing Law; Waiver of Jury Trial. (a) THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE IN PENNSYLVANIA, AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF PENNSYLVANIA (WITHOUT GIVING EFFECT TO CONFLICT OF LAWS) AND THE UNITED STATES OF AMERICA. WITHOUT EXCLUDING ANY OTHER JURISDICTION, THE COMPANY AGREES THAT THE STATE AND FEDERAL COURTS OF PENNSYLVANIA LOCATED IN MONTGOMERY COUNTY, PENNSYLVANIA, WILL HAVE JURISDICTION OVER PROCEEDINGS IN CONNECTION HEREWITH. TO THE MAXIMUM EXTENT PERMITTED BY LAW, THE COMPANY HEREBY WAIVES ANY RIGHT THAT IT MAY HAVE TO A TRIAL BY JURY OF ANY DISPUTE (WHETHER A CLAIM IN TORT, CONTRACT, EQUITY, OR OTHERWISE) ARISING UNDER OR RELATING TO THIS AGREEMENT OR ANY RELATED MATTERS, AND AGREES THAT ANY SUCH DISPUTE SHALL BE TRIED BEFORE A JUDGE SITTING WITHOUT A JURY. (b) THE COMPANY AGREES THAT SERVICE OF PROCESS MAY BE MADE UPON IT BY REGISTERED MAIL (RETURN RECEIPT REQUESTED) DIRECTED TO THE COMPANY AT ITS ADDRESS DESIGNATED FOR NOTICE UNDER THIS AGREEMENT AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON THE EARLIER IF (i) THE COMPANY'S RECEIPT THEREOF AND (ii) FIVE DAYS AFTER DEPOSIT IN THE UNITED STATES MAIL. NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT OF ANY HOLDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNY PERMITTED BY LAW. 7.13. Headings. Article, Section and subsection headings in this Agreement are included herein for convenience or reference only and shall not constitute a part of this Agreement for any other purposes. 7.14. Sealed Instrument. This Agreement is executed as an instrument under seal. 7.15. Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and each of the parties hereto may execute this Agreement by signing any such counterpart. 7.16. Further Assurances. From and after the day of this Agreement, upon the request of Bank, the Company shall execute and deliver such instruments, documents and other writings as may be reasonably necessary or desirable to confirm and carry out and to effectuate fully the intent and purposes of this Agreement and the Warrants. 7.17. Consent to Jurisdiction. The Company irrevocably submits to the non-exclusive jurisdiction of any state or federal court sitting in the Commonwealth of Pennsylvania over any suit, action or proceeding arising out of or relating to this Agreement or any of the Warrants or Warrant Shares. To the fullest extent it may effectively do so under applicable law, the Company irrevocably waives and agrees not to assert, by way of motion, as a defense or otherwise, any claim that is not subject to the jurisdiction of any such court, any objection that it may now or hereafter have to the laying of venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in such court has been brought in an inconvenient forum. 7.18. Effect of Judgment. The Company agrees, to the fullest extent it may effectively do so under applicable law, that a judgment in any suit, action or proceeding of the nature referred to in Section 7.17 brought in any such court shall, subject to such rights of appeal on issues other than jurisdiction as may be available to the Company, be conclusive and binding upon the Company and may be enforced in the courts of the United States of America or the Commonwealth of Pennsylvania (or any other courts to the jurisdiction of which the Company is or may be subject) by a suit upon such judgment. 7.19. Service of Process. The Company consents to service of process in any suit, action or proceeding of the nature referred to in Section 7.17 by mailing a copy thereof by registered or certified mail, postage prepared, return receipt requested, to the address of the Company specified in or designated pursuant to Section 7.03. The Company agrees that such service (i) shall be deemed in every respect effective service of process upon the Company in any such suit, action or proceeding and (ii) shall, to the fullest extent permitted by law, be taken and held to be valid personal service upon and personal delivery to the Company, as the case may be. 7.20. No Limitation. Nothing in Sections 7.12, 7.17, 7.18 or 7.19 shall affect the right of Bank to serve process in any manner permitted by law, or limit any right that Bank may have to bring proceedings against the Company in the courts of any jurisdiction to enforce in any lawful manner a judgment obtained in one jurisdiction in any other jurisdiction. IN WITNESS WHEREOF, the parties hereto have executed this Warrant Agreement or have caused it to be executed by their respective officers thereunto duly authorized, as of the date first above written. NCO FINANCIAL SYSTEMS, INC. By:________________________________ Name: Title: MELLON BANK, N.A. By:________________________________ Name: Title: AMENDMENT TO WARRANT AGREEMENT This AMENDMENT TO WARRANT AGREEMENT (this "Amendment") dated as of September 5, 1996 (the "Second Closing Date") by and between NCO Group, Inc., a Pennsylvania corporation (the "Company") and Mellon Bank, N.A. (the "Lender"). RECITALS 1. NCO Financial Systems, Inc. (the "Predecessor") and the Lender entered into that certain Credit Agreement dated as of July 28, 1995 (the "Original Credit Agreement") pursuant to which the Lender made available to the Company certain credit facilities. 2. As an inducement to the Lender to enter into the Original Credit Agreement, the Predecessor issued a Common Stock Purchase Warrant (the "Warrant") exercisable into an aggregate of 3,770 shares of the Predecessor's common stock and entered in to that certain Warrant Agreement dated July 28, 1995 by and between the Predecessor and the Lender (the "Warrant Agreement"). 3. Pursuant to a reorganization of the Predecessor, the Company became the sole securityholder of the Predecessor and the former securityholders of the Predecessor became the securityholders of the Company. 4. Simultaneously with the execution and delivery of this Agreement (the "Closing"), the Predecessor, the Company, NCO Funding, Inc., NCO of New York, Inc. (collectively, the "Borrowers") and the Lender are entering into that certain Amended and Restated Credit Agreement dated as of September 5, 1996 (the "Credit Agreement") pursuant to which the Lender is extending additional credit to the Borrower. 5. As an inducement to the Lender to enter into the Credit Agreement and to reflect the reorganization of the Predecessor, the Company is entering into this Agreement. NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained and intending to be legally bound hereby, the parties hereto agree as follows: AMENDMENTS 1. Section 2.9 of the Warrant Agreement shall be amended and restated to read in its entirety as follows: "2.9. Termination Upon Qualified IPO. Bank's rights under Sections 2.3 and 2.8 and the Company's rights under Section 2.4 shall terminate upon the closing of a Qualified IPO." 2. The definition of "Qualified Disposition" shall be amended and restated to read in its entirety as follows: "Qualified Disposition" means (i) any merger or consolidation of the Company with any Person, (ii) any sale, assignment, lease or other disposition of or voluntary parting with the control of (whether in one transaction or in a series of related transactions) all or substantially all of the consolidated assets (whether now owned or hereafter acquired) of the Company and (iii) any issuance of equity securities of the Company which, when aggregated with all issuances of equity securities of the Company subsequent to the Closing, exceeds fifty percent (50%) of the aggregate of all outstanding equity securities of the Company immediately after the Closing on a fully diluted basis (assuming the exercise of the Warrants and up to an aggregate of 15,000 shares issued pursuant to the Company's stock option plans (or amendments, restatements or successors thereto)). 3. All reference to the "Company" in the Warrant Agreement shall be references to NCO Group, Inc., successor by reorganization to NCO Financial Systems, Inc. MISCELLANEOUS 4. Exchange of Warrant. The Company shall issue to the Lender a Common Stock Purchase Warrant for the right to purchase up to 3,770 shares of the Company's Common Stock as a replacement for the Common Stock Purchase Warrant issued by the Predecessor to the Lender for the right to purchase up to 3,770 shares of the Predecessor's Common Stock. 5. Reaffirmation; No Waiver. Except as expressly modified herein, the terms of the Warrant Agreement remain in full force and, are in no manner impaired hereby and, are hereby reaffirmed by all of the parties. 6. Severability. The provisions of this Amendment are intended to be severable. If any provision of this Amendment shall be held invalid or unenforceable in whole or in part in any jurisdiction such provision shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without in any manner affecting the validity or enforceability thereof in any other jurisdiction or the remaining provisions hereof in any jurisdiction. 7. Prior Understandings. This Amendment supersedes all prior and contemporaneous understandings and agreements, whether written or oral, among the parties hereto relating to the transactions provided for herein and therein. 8. Counterparts. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. 9. Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the Company, the Lender, all future holders of the Warrant, and their respective successors and assigns, except that the Company may not assign or transfer any of its rights hereunder or interests herein without the prior written consent of the Lender, and any purported assignment without such consent shall be void. 10. Governing Law. THIS AMENDMENT AND ALL OTHER AMENDMENT DOCUMENTS (EXCEPT TO THE EXTENT, IF ANY, OTHERWISE EXPRESSLY STATED IN SUCH OTHER AMENDMENT DOCUMENTS) SHALL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF PENNSYLVANIA, WITHOUT REGARD TO CHOICE OF LAW PRINCIPLES. IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly authorized, have executed and delivered this Amendment as of the date first above written. Attest: NCO GROUP, INC., as successor by reorganization to NCO Financial Systems, Inc. By: /s/ xxxxxx Sec. By: /s/ Michael J. Barrist ----------------------- -------------------------------- Name: Name: Michael J. Barrist Title: Title: President MELLON BANK, N.A. By: /s/ Liz A. Mellace -------------------------------- Name: Liz A. Mellace Title: Assiatant Vice President EX-10.16 10 1996 WARRANT AGREEMENT NCO GROUP, INC. --------------- 1996 WARRANT AGREEMENT ---------------------- 1996 WARRANT AGREEMENT (this "Agreement) dated as of September 5, 1996 (the "Closing Date") by and between NCO Group, Inc., a Pennsylvania corporation (the "Company") and Mellon Bank, N.A. ("Bank") RECITALS 1. Simultaneously with the execution and delivery of this Agreement (the "Closing"), the Company and Bank are entering into that certain Amended and Restated Credit Agreement dated as of September 5, 1996 (the "Credit Agreement") pursuant to which the Bank is making available to the Company and its subsidiaries certain credit facilities. 2. As an inducement to the Bank to enter into the Credit Agreement, the Company proposes to issue warrants exercisable into an aggregate of 1,000 shares of the Company's common stock (subject to adjustment as described herein). NOW, THEREFORE, in consideration of the foregoing, the Company and Bank, intending to be legally bound, agree as follows: ARTICLE 1 DEFINITIONS 1.1. Definitions. As used herein, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Accounts" has the meaning ascribed to that term in the Uniform Commercial Code. "Affiliate" means, as to any Person, any Subsidiary of such Person and any other person which, directly or indirectly, controls, is controlled by or is under common control with such Person and includes each officer or director or general partner of such Person, and each Person who is the beneficial owner of 5% or more of any class of voting stock of such Person. For the purposes of this definition, "control" means the possession of the power to direct or cause the direction of management and policies of such Person, whether through the ownership of voting securities, by contract, or otherwise. "Agreement" means this Warrant Agreement as from time to time amended and in effect between the parties. "Business Day" means any day other than a Saturday, Sunday or public holiday or the equivalent for banks under the laws of the Commonwealth of Pennsylvania. "Change in Control" means any transaction or any event as a result of which any one or more persons (other than Bank or any of its Affiliates) acquires or for the first time controls or is able to vote (directly or through nominees or beneficial ownership) after the Closing Date (other than as the direct result of a transfer by descent of distribution of a decedent's estate) fifty percent (50%) or more of any class of stock of the Company outstanding at the time having power ordinarily to vote for the directors of the Company. "Common Stock" includes (a) the Company's Common Stock, without par value, as authorized on the date of this Agreement, (b) any other capital stock of any class or classes (however designated) of the Company, authorized on or after the date hereof, the holders of which shall have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference, and the holders of which shall ordinarily, in the absence of contingencies, be entitled to vote for the election of a majority of directors of the Company (even though the right so to vote has been suspended by the happening of such a contingency), and (c) any other securities in which or for which any of the securities described in (a) or (b) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets of otherwise. "Company" means and shall include NCO Group, Inc., a Pennsylvania corporation, and its successors and assigns. "Credit Agreement" means that certain Amended and Restated Credit Agreement dated of even date herewith between the Company and the Lender. -2- "Equity Securities" shall have the meaning assigned to that term in Section 2.8. "Event of Force Majeure" shall mean a declaration by Federal authorities of a banking moratorium, a suspension of trading by a national securities exchange, a declaration of war or any new outbreak of hostilities or other national calamity or crisis, the effect of which on the financial markets of the Untied States shall make it commercially impracticable to comply with an obligation hereunder. "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Exercise Event" means any of a (i) a Change in Control, (ii) a Qualified Disposition or (iii) a Qualified IPO. "Holder" means Bank, its successors and assigns, and all transferees (in whole or in part) of the Warrants. "Outstanding Common Stock" shall have the meaning assigned to that term in Section 2.6. "Person" means, an individual, a corporation (including, without limitation, a business trust), a partnership, a joint stock company, a joint venture or other entity, a trust, an unincorporated association, a government and any agency or political subdivision thereof. "Put Closing Date" shall have the meaning assigned to that term in Section 2.3. "Put Notice" shall have the meaning assigned to that term in Section 2.3. "Qualified Disposition" means (i) any merger or consolidation of the Company with any Person, (ii) any sale, assignment, lease or other disposition of or voluntary parting with the control of (whether in one transaction or in a series of related transactions) all or substantially all of the consolidated assets (whether now owned or hereafter acquired) of the Company and (iii) any issuance of equity securities of the Company which, when aggregated with all issuances of equity securities of the Company subsequent to the Closing, exceeds fifty percent (50%) of the aggregate of all outstanding equity securities of the Company -3- immediately after the Closing on a fully diluted basis (assuming the exercise of the Warrants and up to an aggregate of 15,000 shares issued pursuant to the Company's stock option plans (or amendments, restatements or successors thereto)). "Qualified IPO" means a firm commitment underwritten public offering of shares of the Company's Common Stock in which the aggregate net proceeds to the Company are at least $9,500,000. "Registration Rights Agreement" shall have the meaning assigned to that term in Section 3.2. "Repurchase Price" shall have the meaning assigned to that term in Section 2.6. "Securities" means collectively the Warrants and the Warrant Shares. "Securities Act" means the Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect from time to time. "Stock" means shares of capital stock, beneficial or partnership interest, participations or other equivalents (regardless of how designated) of or in a corporation or equivalent entity, whether voting or non-voting and, includes, without limitation, common stock and preferred stock. "Stock Equivalents" means all securities convertible into or exchangeable for Stock and all warrants, options or other rights to purchase or subscribe for any stock, whether or not presently convertible, exchangeable or exercisable. "Subsidiary" or "Subsidiaries" means (i) any corporation more than fifty percent (50%) of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by the Company and/or one or more Subsidiaries of the Company, (ii) any partnership, association, joint venture or other entity in which the Company and/or one or more Subsidiaries of the Company has more than a fifty percent (50%) equity interest at the time. -4- "Warrant Documents" shall mean this Agreement, the Warrant, and the Registration Rights Agreement. "Warrant Shares" shall have the meaning assigned to that term in Section 2.1. "Warrants" shall have the meaning assigned to that term in Section 2.1. 1.2. Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles consistent with those applied in preparation of the Financial Statements, and all financial data submitted pursuant to this Agreement and all financial tests to be calculated in accordance with this Agreement shall be prepared and calculated in accordance with such principles. ARTICLE 2 PURCHASE, SALE AND TERMS OF WARRANTS; OBLIGATION TO REPURCHASE 2.1. The Warrants. The Company has authorized the issuance and sale to Bank of the Company's Common Stock Purchase Warrants for the purchase (subject to adjustment as provided therein) of an aggregate of 1,000 shares of the Company's common stock (the "Warrant Shares"). The Common Stock Purchase Warrants shall be substantially in the form set forth as Exhibit 2.1 attached hereto and are herein referred to individually as a "Warrant" and collectively as the "Warrants", which terms shall also include any warrants delivered in exchange or replacement thereof. The number of Warrant Shares is subject to adjustment as set forth in the Warrants. The Warrants shall be exercisable at a purchase price per Warrant Share equal to: i) the offering price of the shares of the Company's common stock to be offered in a Qualified IPO to occur on or before December 31, 1996 (after giving effect to any stock split declared in connection with any Qualified IPO) or ii) if the Company does not conduct a Qualified IPO on or before December 31, 1996, then $181.80, and shall expire at 5:00 P.M., Philadelphia time, on July 31, 2005. 2.2. Purchase and Sale of Warrants; Reservation of Shares. (a) The Company agrees to issue and sell to Bank, and, subject to and in reliance upon the representations, warranties, -5- terms and conditions of this Agreement, Bank agrees to purchase Warrants to acquire 1,000 Warrant Shares. Such purchase and sale shall take place at the Closing and at the Closing the Company will initially issue to Bank one Warrant to purchase (subject to adjustment as provided therein) 1,000 Warrant Shares. (b) The Company has authorized, and has reserved and covenants to continue to reserve, free of preemptive rights and other preferential rights, a sufficient number of its previously authorized but unissued shares of Common Stock to satisfy the rights of exercise of the Warrants. The Company covenants and agrees that all shares of Common Stock which may be issued upon the exercise of the rights represented by the Warrants shall, upon issuance, be fully paid and non-assessable and free from all taxes, liens and charges with respect to issuance. If the Exercise Price is at any time less than the par value of the Common Stock or if the Warrants at any time are exercisable by delivery alone and without payment of any additional consideration, the Company also covenants and agrees to cause to be taken such action (whether by lowering the par value of the Common Stock, the conversion of the Common Stock from par value to no par value, or otherwise) as will permit the exercise of the Warrants without any additional payment by the Holder thereof (other than payment of the Exercise Price, if any, and applicable transfer taxes, if any), and the issuance of the Common Stock, which Common Stock, upon issuance, will be fully paid and non-assessable. 2.3. Right to Put Warrants. (a) During the twelve-month period ending on July 31, 2001 (the "Put Period"), each of the Holders of the Warrants shall have the right to sell to the Company, and the Company hereby agrees to purchase, at the Repurchase Price determined under Section 2.6, any or all of the Warrants held by such Holder. No Holders of Warrant Shares shall have the right to sell Warrant Shares to the Company pursuant to this Section 2.3. (b) A Holder of Warrants shall give the Company at least thirty (30) days prior written notice (which notice shall be irrevocable, except for an Event of Force Majeure) of its intention to exercise any right of sale set forth in this Section 2.3 (the "Put Notice") and shall specify in such notice the number of Warrants to be sold and may specify in such notice a proposed date of sale. The closing of any repurchase of the Warrants pursuant to this Section 2.3 shall take place at the offices of the Company at 10:00 A.M. local time on a Business Date (the "Put Closing Date") which shall not be later than the latest to occur of (i) the date specified in the Put Notice and -6- (ii) the date five Business Days after a final determination of the Repurchase Price pursuant to Section 2.6. On or prior to the Put Closing Date, the Company shall deliver a certified or bank cashier's check to each Holder of the Warrants being repurchased, in an amount equal to the Repurchase Price of the Warrants being repurchased from such Holder, determined in accordance with Section 2.6, or shall transfer such amount by wire transfer of immediately available funds to any account specified in writing by such Holder. 2.4. Right to Call Warrants. (a) During the twelve-month period ending on July 31, 2001 (the "Call Period"), the Company shall have the right to repurchase from each of the Holders of the Warrants, on a pro-rata basis, and each of the Holders of the Warrants hereby agrees to sell to the Company, on a pro-rata basis, at the Repurchase Price determined under Section 2.6, any or all of the Warrants. The Company shall have no right to repurchase Warrant Shares pursuant to this Section 2.4. (b) The Company shall give each of the Holders of the Warrants at least thirty (30) days prior written notice (which notice shall be irrevocable, except for an Event of Force Majeure) of its intention to exercise any right of purchase set forth in this Section 2.4 (the "Call Notice") and shall specify in such notice the number of Warrants to be repurchased and may specify in such notice a proposed date of sale. The closing of any repurchase of the Warrants pursuant to this Section 2.4 shall take place at the offices of the Company at 10:00 A.M. local time on a Business Date (the "Call Closing Date") which shall not be later than the latest to occur of (i) the date specified in the Call Notice and (ii) the date five Business Days after a final determination of the Repurchase Price pursuant to Section 2.6. On or prior to the Call Closing Date, the Company shall deliver a certified or bank cashier's check to each Holder of the Warrants being repurchased, in an amount equal to the Repurchase Price for such Holder's pro-rata share of the Warrants being repurchased, determined in accordance with Section 2.6, or shall transfer such amount by wire transfer of immediately available funds to any account specified in writing by such Holder. 2.5. Insufficiency of Funds. With respect to a repurchase by the Company under either Section 2.3 or Section 2.4, in the event that any or all of the Repurchase Price is not paid as a result of the insufficiency of legally available funds under the Pennsylvania Business Corporation Law or otherwise, the obligation to effect the repurchase shall remain an obligation -7- of the Company and shall be performed as soon as there are funds legally available therefor. 2.6. Repurchase Price for Warrants. (a) The repurchase price (the "Repurchase Price") for each Warrant (determined on the basis of the number of Warrant Shares into which it is then exercisable) which is to be repurchased by the Company pursuant to either Section 2.3 or Section 2.4 shall be equal to (I) the quotient obtained by dividing (x) the fair market value determined in accordance with Section 2.6(b) of the aggregate of all of the outstanding Common Stock as of the end of the Company's last full fiscal quarter immediately preceding the Put Notice or the Call Notice, as the case may be, including in such outstanding Common Stock the Warrant Shares and all shares of Common Stock which could be acquired upon exercise or conversion of any outstanding options or other securities then exercisable or convertible into Common Stock (collectively, as of any time of determination the "Outstanding Common Stock"), by (y) the number of shares of Outstanding Common Stock, minus (II) the exercisable price per Warrant Share. (b) For purposes of this Section 2.6, the "fair market value" of the Outstanding Common Stock shall be determined in good faith by the Holders of the Warrants being repurchased and the Company. If such Holders and the Company are unable to agree on such fair market value, such Holders shall select a pool of three independent investment banking firms or valuation firms (or a combination thereof) from which the Company shall select one such firm to appraise the fair market value of the Outstanding Common Stock and to perform the computations involved. The determination of such firm shall be binding upon the Company. All expenses of such firm shall be borne by the Company. 2.7. Delivery of Certificates Reissued. Upon the timely receipt of the Repurchase Price for the Warrants sold to the Company pursuant to either Section 2.3 or Section 2.4, the Holders thereof shall forward the Warrants, as the case may be, so sold to the Company. To the extent that less than all of such Holder's Warrants are sold, the Company shall forthwith issue and deliver to such Holder, as appropriate, (a) Warrants in every respect identical to the Warrants so forwarded, except that the same shall provide for the purchase by such Holder of such lesser number of Warrant Shares as shall be represented by the Warrants which the Company has not repurchased. Upon timely payment of the Repurchase Price therefor Warrants so repurchased shall no longer be exercisable or have any validity whatsoever. -8- 2.8. Right to New Equity Securities. Prior to issuing any equity securities or any options or convertible securities exercisable for or convertible into such equity securities (collectively, "Equity Securities") of the Company, other than in connection with a Qualified IPO, the Company will simultaneously issue without charge to each of the Holders of the Warrants and Warrant Shares the same proportion of the securities proposed to be sold by the Company as the number of Warrants and Warrant Shares owned by such Holder bears to the total number of shares of Outstanding Common Stock at that time, provided, that, prior to an Exercise Event, the securities to be issued by the Company to the Holders pursuant to this Section 2.8 shall be limited to warrants similar in all material respects to the Warrants. Holders electing to purchase Equity Securities pursuant to this Section shall also be entitled to purchase (pro rata according to their holdings of Warrant and Warrant Shares) offered Equity Securities that other Holders decline to purchase. Any such right of purchase shall be exercisable for a period of thirty (30) days after the Holders receive written notice of a proposed issuance of Equity Securities (and any such notice by the Company shall be given not less than thirty (30) nor more than ninety (90) days prior to any such issuance). This Section 2.8 shall not apply to Equity Securities issued upon exercise of the Warrant. 2.9. Termination Upon Qualified IPO. Bank's rights under Sections 2.3 and 2.8 and the Company's rights under Section 2.4 shall terminate upon the closing of a Qualified IPO. 2.10. No Termination Upon Satisfaction of Credit Agreement Obligations. Bank's rights under Sections 2.3 and 2.8 shall not terminate solely by virtue of the satisfaction by the Company of all of its obligations to the Bank under the Credit Agreement; provided, however, that Bank's rights under Sections 2.3 and 2.8 shall terminate if, within one year from the date of this Agreement, the Company receives a notice from the Bank pursuant to Section 2.9 of the Credit Agreement that the Bank is requiring additional compensation from the Company pursuant to that Section, and the Company thereafter satisfies all of its obligations to the Bank through a refinancing. ARTICLE 3 CONDITIONS TO PURCHASERS' OBLIGATIONS The obligations of Bank to purchase the Warrants at the Closing is subject to the following conditions, all or any of which may be waived in writing by Bank: -9- 3.1. Representations and Warranties. Each of the representations and warranties of the Company set forth in Article 4 hereof shall be true and correct in all material respects at the time of the sale of the Warrants. 3.2. Delivery at Closing. Bank shall have received prior to or at the Closing all of the following, each in form and substance satisfactory to Bank and its counsel: (a) A certified copy of all charter documents of the Company; a certified copy of the resolutions of the board of directors and, to the extent required, the stockholders of the Company evidencing approval, as applicable, of this Agreement, the Warrant Documents and other matters contemplated hereby and thereby; a certified copy of the By-laws of the Company; and certified copies of all documents evidencing other necessary corporate or other action and governmental approvals, if any, with respect to this Agreement, the Warrant Documents and other matters contemplated hereby or thereby. (b) Favorable opinions of Blank, Rome, Comisky & McCauley, counsel for the Company, as to matters set forth in Exhibit 3.2(b), and as to such other matters as Bank or its counsel may reasonably request. (c) A certificate of the Secretary or an Assistant Secretary of the Company which shall certify the names of the officers of the Company authorized to sign, as applicable, this Agreement, the Warrant Documents and any other documents or certificates to be delivered pursuant hereto or thereby by the Company, as applicable, or any of their respective officers, together with the true signatures of such officers. Bank may conclusively rely on such certificates until they shall receive a further certificate of the Secretary or an Assistant Secretary of the Company, as applicable, cancelling or amending the prior certificate and submitting the signatures of the officers named in such further certificate. (d) An Amended and Restated Registration Rights Agreement (the "Registration Rights Agreement") executed by the Company substantially in the form of Exhibit 3.2(d) attached hereto. (e) A certificate from a duly authorized officer of the Company stating that all conditions set forth in this Article 3 have been satisfied. -10- (f) Such other documents referenced in any Exhibit hereto or relating to the transactions contemplated by this Agreement as Bank or its counsel may reasonably request. 3.3. Incurrence of Debt. The Company shall have entered into the Credit Agreement with the Bank on terms satisfactory to the Company and shall have closed or shall close simultaneously the transactions contemplated thereby and received or shall simultaneously receive the funds with respect thereto. Copies of all documents delivered to the Bank in conjunction with the closing of the transactions contemplated by the Credit Agreement shall have been delivered to Bank or its counsel. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BANK 4.1. Representations and Warranties of Bank. Bank hereby represents and warrants that: (a) It has duly authorized, executed and delivered this Agreement and such other documents as it is required to execute pursuant to this Agreement and the Credit Agreement. (b) Its present intention is to acquire the Securities for its own account. (c) The Securities are being and will be acquired for the purpose of investment and not with a view to distribution or resale thereof; subject, nevertheless, to the condition that, except as otherwise provided herein, the disposition of its property shall at all times be within its control. (d) It acknowledges that it has reviewed and discussed the Company's business, affairs and current prospects with such officers of the Company and others as it has deemed appropriate or desirable in connection with the transactions contemplated by this Agreement. It further acknowledges that it has requested, received and reviewed such information, undertaking such investigation and made such further inquiries of officers of the Company and others as it has deemed appropriate or desirable in connection with such transactions; provided, however, no investigation made heretofore or hereafter by or on its behalf shall have any effect whatsoever on the representations and warranties of the Company hereunder, each of which shall survive any such investigation. (e) It understands that it must bear the economic risk of its investment for an indefinite period of time because the -11- Securities are not, and will not be, registered under the Securities Act or any applicable state securities laws, except as may be provided in the Registration Rights Agreement, and may not be resold unless subsequently registered under the Securities Act and such other laws or unless an exemption from such registration is available. It also understands that it is not contemplated that any registration will be made under the Securities Act or that the Company will take steps which will make the provisions of Rule 144 under the Securities Act available to permit resale of the Securities. (f) It has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of its investment in the Securities. It further represents that it is an "accredited investor" as such term is defined in Rule 501 of Regulation D of the Commission under the Securities Act with respect to the purchase of the Securities. (g) It hereby acknowledges that the Warrants and each certificate representing the Warrant Shares and any other securities issued in respect of such shares upon any stock split, stock dividend, recapitalization, merger or similar event (unless no longer required in the opinion of counsel, which opinion and counsel shall be reasonably satisfactory to the Company) shall bear a legend substantially in the following form: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD OR TRANSFERRED WITHOUT COMPLIANCE WITH THE REGISTRATION OR QUALIFICATION PROVISIONS OF APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR APPLICABLE EXEMPTIONS THEREFROM. The acquisition by Bank of the Securities shall constitute a confirmation by it of the foregoing representations made by it. ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants as follows: 5.1. Securities Act. Neither the Company nor anyone acting on its behalf has offered any of the Warrants, or solicited any offers to purchase or made any attempt by preliminary conversation or negotiations to dispose of the Warrants, within the meaning of all applicable federal and state securities laws, to any Person other than Bank, and no Person other than Bank will purchase any Warrants except with the prior - -12- consent of Bank. Neither the Company nor anyone acting on its behalf has offered or will offer to sell the Warrants to, or solicit offers with respect thereto from, or enter into any preliminary conversations or negotiations relating thereto with, any Person so as to bring the issuance and sale of the Warrants under the registration provisions of the Securities Act. 5.2. Other Agreements of Officers. To the best knowledge of the Company, no officer or key employee of the Company is a party to or bound by any agreement, contract or commitment, or subject to any restrictions, particularly but without limitation in connection with any previous employment of any such person, which has a material adverse effect, or in the future may (so far as the Company can reasonably foresee) have a material adverse effect. To the best knowledge of the Company, no officer or key employee of the Company has any present intention of terminating his employment with the Company, as the case may be, and the Company has no present intention of terminating such employment. 5.3. Foreign Corrupt Practices Act. The Company has reviewed its practices and policies and to the best of its knowledge and belief is not engaged, nor has any of its respective officers, directors, employees or agents engaged in any act or practice which would constitute a violation of the Foreign Corrupt Practices Act of 1977, or any rules or regulations promulgated thereunder. 5.4. Registration Rights. Other than pursuant to the terms of the Registration Rights Agreement, no Person has demand or other rights to cause the Company to file any registration statement under the Securities Act relating to any securities of the Company or any right to participate in any such registration statement. 5.5. Representations and Warranties Incorporated from Credit Agreement. Each of the representations and warranties given by the Company to Bank in the Credit Agreement is true and correct in all material respects as of the Closing Date and such representations and warranties are hereby incorporated herein by this reference as of such date with the same effect as though set forth herein in their entirety and made by the Company to Bank hereunder. -13- ARTICLE 6 DISCLOSURES TO HOLDERS So long as any Warrants remain outstanding, the Company shall, contemporaneously with the sending or making available thereof, send to all Holders, in accordance with Section 7.3 herein copies of (i) the Company's audited financial statement for each fiscal year and (ii) the Company's unaudited financial statement for each fiscal quarter. ARTICLE 7 MISCELLANEOUS 7.1. No Waiver; Cumulative Remedies. No failure or delay on the part of Bank in exercising any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy hereunder. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. 7.2. Amendments, Waivers and Consents. Any provision in this Agreement or the Warrants to the contrary notwithstanding, changes in or additions to this Agreement may be made, and compliance with any covenant or provision herein or therein set forth may be omitted or waived, if the Company shall obtain consent thereto in writing from Bank. 7.3. Addresses for Notices, etc. All notices, requests, demands and other communications provided for hereunder shall be in writing and mailed (by first class registered or certified, postage prepaid), telegraphed, sent by express overnight courier service or electronic facsimile transmission (with a copy by mail), or delivered to the applicable party at the addresses indicated below: If to the Company: NCO Group, Inc. 1740 Walton Road Blue Bell, PA 19422 Attention: Michael J. Barrist -14- With copies to: Blank, Rome, Comisky & McCauley Four Penn Center Plaza Philadelphia, PA 19103 Attention: Alan L. Zeiger, Esquire and Joshua Gindin, Esquire 1700 Two Logan Square Philadelphia, PA 19103 If to Bank: Mellon Bank, N.A. Plymouth Meeting Executive Campus 610 West Germantown Pike Plymouth Meeting, PA 19462 Attention: Liz A. Mellace With a copy to: Reed Smith Shaw & McClay 2500 One Liberty Place Philadelphia, PA 19103 Attention: Ben Burke Howell, Esquire Telecopy: 215-851-1420 or, as to each of the foregoing, at such other address as shall be designed by such Person in a written notice to the other party complying as to delivery with the terms of this Section. All such notices, requests, demands and other communications shall, when mailed, telegraphed or sent, respectively, be effective (i) two days after being deposited in the mails or (ii) one day after being delivered to the telegraph company, deposited with the express overnight courier service or sent by electronic facsimile transmission, respectively, addressed as aforesaid. 7.4. Costs, Expenses and Taxes. Except as otherwise provided herein, the Company agrees to pay on demand all reasonable costs and expenses of Bank in connection with the preparation, execution and delivery of this Agreement, the Warrants and other Warrant Documents and other instruments and documents to be delivered hereunder, and in connection with the consummation of the transaction contemplated hereby and thereby, and in connection with any amendment, waiver (whether or not such amendment or waiver becomes effective) or enforcement of this Agreement, the Warrants, the other Warrant Documents, and other instruments and documents to be delivered hereunder or -15- thereunder, including the fees and out-of-pocket expenses of Reed Smith Shaw & McClay, counsel for Bank. In addition, the Company agrees to pay any and all stamp and other taxes (excluding income taxes) payable or determined to be payable in connection with the execution and delivery of this Agreement, the Warrants, the other Warrant Documents, and the other instruments and documents to be delivered hereunder or thereunder and each agrees jointly and severally to save Bank harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes and filing fees. 7.5. Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of the Company, and its respective successors and assigns, except that the Company shall not have the right to assign its rights hereunder or any interest therein without the prior written consent of Bank. 7.6. Provisions of Credit Agreement. Whenever any provision of the Credit Agreement is referred to herein or in any instrument furnished hereunder as expressing or constituting an obligation, condition or limitation of this Agreement or of such instrument or as expressing or constituting a representation herein or therein (a) such provision shall be deemed incorporated herein or therein at length, and (b) except as otherwise provided herein or in such instrument, the terms used in such provision referred to shall have the meanings set forth in the Credit Agreement. Except as otherwise specifically provided herein, and except for amendments or modifications to which Bank consents in writing, no modification of or amendment to, or waiver of, any provisions of the Credit Agreement and no payment of the indebtedness outstanding thereunder or satisfaction or cancellation thereof, shall modify, amend, waive or otherwise affect any provision thereof as referred to in this Agreement or in any instrument furnished hereunder, which provision, for the purpose of this Agreement and such instrument, shall remain unmodified and in full force and effect. 7.7. Indemnification. The Company agrees to indemnify and hold harmless Bank, its subsidiaries, directors, officers, partners, counsel and employees, from and against any and all liability (including, without limitation, reasonable legal fees incurred in defending against any such liability) under, arising out of or relating to this Agreement, the Warrants and the Warrant Shares, the transactions contemplated hereby or thereby or in connection herewith or therewith, including (to the maximum extent permitted by law) any liability arising under federal or state securities laws, except to the extent such liability shall result from any act or omission on the part of Bank; provided that the Company shall not be liable for the reasonable fees and expenses of more than one separate firm for all indemnified -16- parties, unless representation of all parties by the same counsel would be inappropriate due to actual or potential differing interests among them. The obligations of the Company under this Section 7.7 shall survive and continue to be in full force and effect notwithstanding the satisfaction of the Company's obligations under the Credit Agreement and the termination of this Agreement. 7.8. Survival of Representations and Warranties. All representations and warranties made in this Agreement, the Warrants, the Warrant Documents or any other instrument or document delivered in connection herewith or therewith, shall survive the execution and delivery hereof and thereof, regardless of any investigation made by Bank. 7.9. Prior Agreements. This Agreement constitutes the entire agreement between the parties and supersedes any prior understandings or agreements concerning the subject matter hereof. 7.10. Severability. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. 7.11. Governing Law. This Agreement shall be governed by and construed in accordance with, the internal laws of the Commonwealth of Pennsylvania. 7.12. Governing Law; Waiver of Jury Trial. (a) THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE IN PENNSYLVANIA, AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF PENNSYLVANIA (WITHOUT GIVING EFFECT TO CONFLICT OF LAWS) AND THE UNITED STATES OF AMERICA. WITHOUT EXCLUDING ANY OTHER JURISDICTION, THE COMPANY AGREES THAT THE STATE AND FEDERAL COURTS OF PENNSYLVANIA LOCATED IN MONTGOMERY COUNTY, PENNSYLVANIA, WILL HAVE JURISDICTION OVER PROCEEDINGS IN CONNECTION HEREWITH. TO THE MAXIMUM EXTENT PERMITTED BY LAW, THE COMPANY HEREBY WAIVES ANY RIGHT THAT IT MAY HAVE TO A TRIAL BY JURY OF ANY DISPUTE (WHETHER A CLAIM IN TORT, CONTRACT, EQUITY, OR OTHERWISE) ARISING UNDER OR RELATING TO THIS AGREEMENT OR ANY RELATED MATTERS, AND AGREES THAT ANY SUCH DISPUTE SHALL BE TRIED BEFORE A JUDGE SITTING WITHOUT A JURY. (b) THE COMPANY AGREES THAT SERVICE OF PROCESS MAY BE MADE UPON IT BY REGISTERED MAIL (RETURN RECEIPT REQUESTED) DIRECTED TO THE COMPANY AT ITS ADDRESS DESIGNATED FOR NOTICE UNDER THIS AGREEMENT AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON THE EARLIER IF (i) THE COMPANY'S RECEIPT THEREOF AND (ii) FIVE DAYS AFTER DEPOSIT IN THE UNITED STATES MAIL. -17- NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT OF ANY HOLDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. 7.13. Headings. Article, Section and subsection headings in this Agreement are included herein for convenience or reference only and shall not constitute a part of this Agreement for any other purposes. 7.14. Sealed Instrument. This Agreement is executed as an instrument under seal. 7.15. Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and each of the parties hereto may execute this Agreement by signing any such counterpart. 7.16. Further Assurances. From and after the day of this Agreement, upon the request of Bank, the Company shall execute and deliver such instruments, documents and other writings as may be reasonably necessary or desirable to confirm and carry out and to effectuate fully the intent and purposes of this Agreement and the Warrants. 7.17. Consent to Jurisdiction. The Company irrevocably submits to the non-exclusive jurisdiction of any state or federal court sitting in the Commonwealth of Pennsylvania over any suit, action or proceeding arising out of or relating to this Agreement or any of the Warrants or Warrant Shares. To the fullest extent it may effectively do so under applicable law, the Company irrevocably waives and agrees not to assert, by way of motion, as a defense or otherwise, any claim that is not subject to the jurisdiction of any such court, any objection that it may now or hereafter have to the laying of venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in such court has been brought in an inconvenient forum. 7.18. Effect of Judgment. The Company agrees, to the fullest extent it may effectively do so under applicable law, that a judgment in any suit, action or proceeding of the nature referred to in Section 7.17 brought in any such court shall, subject to such rights of appeal on issues other than jurisdiction as may be available to the Company, be conclusive and binding upon the Company and may be enforced in the courts of the United States of America or the Commonwealth of Pennsylvania (or any other courts to the jurisdiction of which the Company is or may be subject) by a suit upon such judgment. -18- 7.19. Service of Process. The Company consents to service of process in any suit, action or proceeding of the nature referred to in Section 7.17 by mailing a copy thereof by registered or certified mail, postage prepared, return receipt requested, to the address of the Company specified in or designated pursuant to Section 7.3. The Company agrees that such service (i) shall be deemed in every respect effective service of process upon the Company in any such suit, action or proceeding and (ii) shall, to the fullest extent permitted by law, be taken and held to be valid personal service upon and personal delivery to the Company, as the case may be. 7.20. No Limitation. Nothing in Sections 7.12, 7.17, 7.18 or 7.19 shall affect the right of Bank to serve process in any manner permitted by law, or limit any right that Bank may have to bring proceedings against the Company in the courts of any jurisdiction to enforce in any lawful manner a judgment obtained in one jurisdiction in any other jurisdiction. IN WITNESS WHEREOF, the parties hereto have executed this Warrant Agreement or have caused it to be executed by their respective officers thereunto duly authorized, as of the date first above written. NCO GROUP, INC. By: /s/ MICHAEL J. BARRIST -------------------------------- Name: MICHAEL J. BARRIST Title: President MELLON BANK, N.A. By: /s/ LIZ A. MELLACE -------------------------------- Name: LIZ A. MELLACE Title: Assistant Vice President EX-10.17 11 AMENDED, RESTATED REGISTRATION RIGHTS AGREEMENT Exhibit 10.17 AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT THIS AGREEMENT dated September 5, 1996 between NCO Group, Inc., a Pennsylvania corporation (the "Company") and Mellon Bank, N.A. ("Bank"). Unless otherwise provided in this Agreement, capitalized terms used herein shall have the meanings set forth in paragraph 8 hereof. WHEREAS, pursuant to a reorganization of NCO Financial Systems, Inc. ("Predecessor"), the Company became the sole securityholder of Predecessor and the former securityholders of Predecessor became the securityholders of the Company; WHEREAS, prior to the reorganization described above, Predecessor issued to Bank a Common Stock Purchase Warrant for the right to purchase up to 3,770 shares of the Common Stock of Predecessor (the "1995 Warrant") pursuant to that certain Warrant Agreement dated July 28, 1995 between Predecessor and Bank (the "1995 Warrant Agreement") and subject to that certain Registration Rights Agreement dated July 28, 1995 between Predecessor and Bank (the "Original Agreement"); WHEREAS, due to the reorganization described above, the Company shall issue to Bank on the date hereof a Common Stock Purchase Warrant for the right to purchase up to 3,770 shares of the Common Stock of the Company as a replacement for the 1995 Warrant; WHEREAS, as an inducement for the Bank to extend additional credit to the Company, the Company shall issue to Bank on the date hereof, pursuant to that certain 1996 Warrant Agreement dated September 5, 1996 between the Company and Bank (the "1996 Warrant Agreement"), a Common Stock Purchase Warrant for the right to purchase up to 1,000 shares of the Common Stock of the Company (the "1996 Warrant"); and WHEREAS, the Company and Bank intend that the holders of the Warrants shall be entitled to certain registration rights. NOW THEREFORE, the parties hereto agree to amend the Original Agreement by restating the Original Agreement in its entirety to read as follows: 1. Required Registrations. (a) At any time after a period of twelve (12) months immediately following the closing of the Company's first underwritten public offering of its securities pursuant to a registration statement, any holder of the Registrable Securities may request, in writing, that the Company effect the registration of Registrable Securities owned by such holder on a form that may be used for the registration of Registrable Securities. If the holder initiating the registration intends to distribute the Registrable Securities by means of an underwriting, it shall so advise the Company in its request. In the event such registration is underwritten, the right of other holders to participate shall be conditioned on such holders' participation in such underwriting. Upon receipt of any such request, the Company shall promptly give written notice of such proposed registration to all holders of Registrable Securities. Such holders shall have the right, by giving written notice to the Company within 30 days after the Company provides its notice, to elect to have included in such registration such of their Registrable Securities as such holders may request in such notice of election; provided that if the underwriter (if any) managing the offering determines that, because of marketing factors, all of the Registrable Securities requested to be registered by all holders may not be included in the offering, then the Company shall include in such registration (i) first, the securities of the holder of Registrable Securities initiating the registration, (ii) second, the securities requested to be included therein by the other holders of the Registrable Securities requested to be included in such registration, pro rata among the holders of such Registrable Securities on the basis of the number of shares owned by each such holder. Thereupon, the Company shall, as expeditiously as possible, use its best efforts to effect the registration (on a form that may be used for the registration of Registrable Securities) of all Registrable Securities which the Company has been requested to so register. (b) At any time after a period of twelve (12) months immediately following the closing of the Company's first underwritten public offering of its securities pursuant to a registration statement, if the Company becomes eligible to file a registration statement on Form S-3 (or any successor form relating to secondary offerings), then any holder of Registrable Securities may request the Company, in writing to effect the registration on Form S-3 (or such successor form) of Registrable Securities. Upon receipt of any such request, the Company shall promptly give written notice of such proposed registration to all holders of Registrable Securities. Such holders shall have the right, by giving written notice to the Company within 30 days after the Company provides its notice, to elect to have included in such registration such of their Registrable Securities as such holders may request in such notice of election; provided that if the underwriter (if any) managing the offering determines that, because of marketing factors, all of the Registrable Securities requested to be registered by all holders may not be included in the offering, then the Company shall include in such registration -2- (i) first, the securities of the holder of Registrable Securities initiating the registration, (ii) second, the securities requested to be included therein by the other holders of the Registrable Securities requested to be included in such registration, pro rata among the holders of such Registrable Securities on the basis of the number of shares owned by each such holder. Thereupon, the Company shall, as expeditiously as possible, use its best efforts to effect the registration on Form S-3 (or such successor form) of all Registrable Securities which the Company has been requested to so register. The Company shall keep any registration statement on Form S-3 filed pursuant to this Section 1(b) effective for a period of not less than 90 days. (c) The Company shall not be required to effect more than one registration pursuant to the first sentence of paragraph (a) above or pursuant to the first sentence of paragraph (b) above. (d) The Registration Expenses shall be paid by the Company in all Required Registrations. (e) If at any time of any request to register Registrable Securities pursuant to this Section 1, the Company is engaged or has fixed plans to engage within 30 days of the time of the request in a registered public offering as to which the holders of Registrable Securities may include Registrable Securities pursuant to Section 2 or is engaged in any other activity which, in the good faith determination of the Company's Board of Directors, would be adversely affected by the requested registration to the material detriment of the Company, then the Company may at its option direct that such request be delayed for a period not in excess of six months from the effective date of such offering or the date of commencement of such other material activity, as the case may be, such right to delay a request to be exercised by the Company not more than once in any one-year period. 2. Piggyback Registrations. (a) Right to Piggyback. Subject to the limitations contained herein, at any time prior to July 31, 2005, whenever the Company proposes to register any of its securities under the Securities Act and the registration form to be used may be used for the registration of Registrable Securities (a "Piggyback Registration"), the Company shall give prompt written notice to all holders of Registrable Securities of its intention to effect such a registration and shall include in such registration all Registrable Securities with respect to which the Company has -3- received written requests for inclusion therein within 30 days after the receipt of the Company's notice. (b) Excluded Registration. The right of any holder of Registrable Securities to a Piggyback Registration pursuant to subparagraph (a) of this Paragraph shall not apply to the Company's registration of its securities in connection with a Qualified IPO (as defined in the 1996 Warrant Agreement) to be conducted by the Company on or before December 31, 1996. (c) Piggyback Expenses. The Registration Expenses of the holders of Registrable Securities shall be paid by the Company in all Piggyback Registrations. (d) Priority on Primary Registrations. If a Piggyback Registration is an underwritten primary registration on behalf of the Company, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in such offering without adversely affecting the marketability of the offering, the Company shall include in such registration (i) first, the securities the Company proposes to sell, (ii) second, the securities requested to be included therein by the holders of the Registrable Securities requested to be included in such registration, pro rata among the holders of such Registrable Securities on the basis of the number of shares owned by each such holder, and (iii) third, other securities requested to be included in such registration (e) Priority on Secondary Registrations. If a Piggyback Registration is an underwritten secondary registration on behalf of holders of the Company's securities, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in such offering without adversely affecting the marketability of the offering, the Company shall include in such registration the securities requested to be included therein by the holders requesting such registration, the Registrable Securities requested to be included in such registration and the other securities requested to be included in such registration, pro rata among the holders of such securities on the basis of the number of securities so requested to be included therein. (f) Other Registrations. If the Company has previously filed a registration statement with respect to Registrable Securities pursuant to this paragraph 2, and if such previous registration has not been withdrawn or abandoned, the Company shall not file or cause to be effected any other registration of -4- any of its equity securities or securities convertible or exchangeable into or exercisable for its equity securities under the Securities Act (except on Form S-8 under the Securities Act or any successor forms), whether on its own behalf or at the request of any holder or holders of such securities, until a period of at least 90 days has elapsed from the effective date of such previous registration 3. Holdback Agreements. (a) Each holder of Registrable Securities shall not effect any public sale or distribution (including sales pursuant to Rule 144) of equity securities of the Company, or any securities convertible into or exchangeable or exercisable for such securities, during the ten days prior to and the 90-day period (or longer if requested by the underwriter of the offering) beginning on the effective date of any underwritten Required or Piggyback Registration in which Registrable Securities are included (except as part of such underwritten registration), unless the underwriters managing the registered public offering otherwise agree. (b) The Company (i) shall not effect any public sale or distribution of its equity securities, or any securities convertible into or exchangeable or exercisable for such securities, during the ten days prior to and during the 90-day period beginning on the effective date of any underwritten Required or Piggyback Registration (except as part of such underwritten registration or pursuant to registrations on Form S-8 or any successor form), unless the underwriters managing the registered public offering otherwise agree, and (ii) shall cause each holder of at least 5% (on a fully-diluted basis) of its Common Stock, or any securities convertible into or exchangeable or exercisable for Common Stock, purchased from the Company at any time after the date of this Agreement (other than in a registered public offering) to agree not to effect any public sale or distribution (including sales pursuant to Rule 144) of any such securities during such period (except as part of such underwritten registration, if otherwise permitted), unless the underwriters managing the registered public offering otherwise agree. 4. Registration Procedures. Whenever the holders of Registrable Securities have requested that any Registrable Securities be registered pursuant to this Agreement, the Company shall use its best efforts to effect the registration and the sale of such Registrable Securities in accordance with the intended method of disposition thereof; and pursuant thereto the Company shall as expeditiously as possible: -5- (a) prepare and file with the Securities and Exchange Commission a registration statement on the appropriate form under the Securities Act, which form shall be available for the sale of such Registrable Securities in accordance with the intended method or methods of distribution thereof, and use its commercially reasonable efforts to cause such registration statement to become effective (provided that before filing a registration statement or prospectus or any amendments or supplements thereto, the Company shall furnish to the counsel selected by the holders of a majority of the Registrable Securities covered by such registration statement copies of all such documents proposed to be filed, which documents shall be subject to the review and comment of such counsel); (b) notify each holder of Registrable Securities of the effectiveness of each registration statement filed hereunder and prepare and file with the Securities and Exchange Commission such amendments, post-effective amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary or appropriate to keep such registration statement effective for the period required for sale of the Registrable Securities, provided that in no event shall the Company be obligated to keep such registration statement effective for more than 90 days, cause such prospectus as so supplemented to be filed as required under the Securities Act, and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended methods of disposition by the sellers thereof set forth in such registration statement or supplement to the prospectus; (c) if requested by the managing underwriter or underwriters or a holder of Registrable Securities being sold in connection with an underwritten offering, immediately incorporate in a Prospectus supplement or post-effective amendment such information as the managing underwriters and the holders of a majority in interest of the Registrable Securities being sold reasonably agree should be included therein relating to the plan of distribution with respect to such Registrable Securities, including, without limitation, information with respect to the principal amount of Registrable Securities being sold to such underwriters, the purchase price being paid therefor by such underwriters and with respect to any other terms of the underwritten (or best efforts underwritten) offering of the Registrable Securities to be sold in such offering; and make all required filings of such Prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment; -6- (d) furnish to each seller of Registrable Securities such number of copies of such registration statement, each amendment and supplement thereto, the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as such seller may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such seller; (e) use its best efforts to register or qualify such Registrable Securities under such other securities or blue sky laws of such jurisdictions where such registration or qualification is required as any seller reasonably requests and do any and all other' acts and things which may be reasonably necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the Registrable Securities owned by such seller (provided that the Company shall not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subparagraph (ii) subject itself to taxation in any such jurisdiction or (iii) consent to general service of process in any such jurisdiction); (f) notify each seller of such Registrable Securities, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon discovery that, or upon the happening of any event as a result of which the prospectus included in such registration statement as then in effect, contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading in the light of the circumstances under which they were made, and, at the request of any such seller, the Company shall prepare a supplement or amendment to such prospectus so that, thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not contain an untrue statement of a material fact required to be stated therein or omit to state any fact necessary to make the statements therein not misleading; (g) cause all such Registrable Securities to be listed on each securities exchange on which similar securities issued by the Company are then listed or traded, and, if not so listed or traded, to be listed on the NASD automated quotation system and, if listed on the NASD automated quotation system, use commercially reasonable efforts to secure NASDAQ authorization for such Registrable Securities and, without limiting the generality of the foregoing, to arrange for at least two market makers to register as such with respect to such Registrable Securities with the NASD; (h) cooperate with the selling holders of Registrable Securities and the managing underwriters, if any, to facilitate -7- the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends; and enable such Registrable Securities to be in such denominations and registered in such names as the selling holders or the managing underwriters, if any, may request at least ten Business Days prior to any sale of Registrable Securities; provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of such registration statement; (i) enter into such customary agreements (including, if there is an underwriter, underwriting agreements in customary form); (j) make available for inspection by any seller of Registrable Securities, any underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other agent retained by any such seller or underwriter, all financial and other records, pertinent corporate documents and properties of the Company that is customary, and cause the Company's officers, directors, employees and independent accountants to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement; (k) cooperate, and cause the Company's officers, directors, employees and independent accountants to cooperate, with the selling holders of Registrable Securities and the managing underwriters, if any, in the sale of the Registrable Securities and take any actions necessary to promote, facilitate or effectuate such sale; (l) otherwise use its best efforts to comply with all applicable rules and regulations of the Securities and Exchange Commission; (m) in the event of the issuance of any stop order suspending the effectiveness of a registration statement, or of any order suspending or preventing the use of any related prospectus or suspending the qualification of any common stock included in such registration statement for sale in any jurisdiction, the Company shall use its best efforts promptly to obtain the withdrawal of such order. 5. Registration Expenses. (a) All expenses incident to the Company's performance of or compliance with this Agreement, including without limitation all registration and filing fees (including, if applicable, the fees and expenses of any "qualified independent underwriter" and -8- its counsel as may be required under the rules and regulations of the NASD), fees and expenses of compliance with securities or blue sky laws (including fees and disbursements of counsel for the underwriters or selling holders in connection with blue sky qualifications and determination of their eligibility for investment under applicable laws), printing expenses, messenger, telephone and delivery expenses, fees and disbursements of custodians, and fees and disbursements of counsel for the Company and all independent certified public accountants (including the expenses of any special audit and "cold comfort" letters required by or incident to such performance), underwriters (excluding underwriters' discounts and commissions) and other Persons retained by the Company (all such expenses being herein called "Registration Expenses"), shall be borne as provided in this Agreement, except that the Company shall, in any event, pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit or quarterly review, the expense of any liability insurance if such insurance coverage is obtained by the Company and the expenses and fees for listing the securities to be registered on each securities exchange on which similar securities issued by the Company are then listed or on the NASD automated quotation system, (b) In connection with each Piggyback Registration, the Company shall reimburse the holders of Registrable Securities included in such registration for the reasonable fees and disbursements of one counsel chosen by the holders of a majority of the Registrable Securities included in such registration. (c) To the extent Registration Expenses are not required to be paid by the Company, each holder of securities included in any registration hereunder shall pay those Registration Expenses allocable to the registration of such holder's securities so included, and any Registration Expenses not so allocable shall be borne by all sellers of securities included in such registration in proportion to the aggregate selling price of the securities to be so registered. 6. Indemnification and Contribution (a) The Company agrees to indemnify each holder of Registrable Securities which is included in a registration statement pursuant to Section 1 herein, its officers and directors and each Person who controls such holder (within the meaning of the Securities Act) against all losses, claims, damages, liabilities and expenses caused by any untrue or alleged untrue statement of material fact contained in any registration statement, prospectus or preliminary prospectus or any amendment -9- thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information furnished in writing to the Company by such holder expressly for use therein or by such holder's failure to deliver a copy of the registration statement or prospectus or any amendments or supplements thereto after the Company has furnished such holder with a sufficient number of copies of the same. In connection with an underwritten offering, the Company shall index such underwriters, their officers and directors and each Person who controls such underwriters (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification of the holders of Registrable Securities. (b) In connection with any registration statement in which a holder of Registrable Securities is participating, each such holder shall furnish to the Company in writing such information and affidavits as the Company and any underwriter reasonably requests for use in connection with any such registration statement or prospectus and shall indemnify the Company, its directors and officers and each Person who controls the Company (within the meaning of the Securities Act) against any losses, claims, damages, liabilities and expenses resulting from any untrue or alleged untrue statement of material fact contained in the registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or omission is contained in any information or affidavit so furnished in writing by such holder. (c) Any Person entitled to indemnification hereunder shall (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification (provided that the failure to give prompt notice shall not impair any Person's right to indemnification hereunder to the extent such failure has not materially prejudiced the indemnifying party) and (ii) unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party shall not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent shall not be unreasonably withheld). An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim shall not be -10- obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. (d) If the indemnification provided for in this Section 5 is unavailable to an indemnified party under paragraphs (a) or (b) hereof in respect to any losses, claims, damages, liabilities or expenses referred to therein, then an indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the Company and the holder of Registrable Securities in connection with the statements or omissions that resulted in such losses, claim, damages, liabilities or expenses. The relative fault of the Company and the holder of Registrable Securities in connection with the statements that resulted in such losses, claims, liabilities or expenses shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of material facts or the omission or alleged omission to state a material fact relates to information supplied by the Company or the holder of the Registrable Securities and the parties relative intent, knowledge, access to information and opportunity to correct such statement or omission. (e) Notwithstanding any other provision of this Section, the liability of any holder of Registrable Securities for indemnification or contribution under this Section shall be individual to each holder and shall not exceed an amount equal to the number of shares sold by such holder of Registrable Securities multiplied by the net amount per share which he receives in such underwritten offering. (f) The indemnification and contribution provided for under this Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling Person of such indemnified party and shall survive the transfer of securities. 7. Participation in Underwritten Registrations. No Person may participate in any registration hereunder which is underwritten unless such Person (i) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved by the Person or Persons entitled hereunder to approve such arrangements and (ii) completes and executes all -11- questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements; provided that no holder of Registrable Securities included in any underwritten registration shall be required to make any representations or warranties to the Company or the underwriters other than representations and warranties directly regarding such holder and such holder's intended method of distribution 8. Definitions. "Common Stock" means the Company's Common Stock, without par value. "NASD" means the National Association of Securities Dealers. "Person" means any individual, corporation, partnership, limited liability company, trust, estate, association, cooperative, government or governmental entity (or any branch, subdivision or agency thereof) or any other entity. "Registrable Securities" means (i) any Common Stock or other securities issued or issuable upon the exercise of the Warrants ("Warrant Shares") or (ii) any Common Stock or other securities issued or issuable with respect to Warrant Shares by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. As to any particular Registrable Securities, such securities shall cease to be Registrable Securities when they have been distributed to the public pursuant to a offering registered under the Securities Act or eligible to be sold to the public through a broker, dealer or market maker in compliance with Rule 144 under the Securities Act (or any such rule then in force). For purposes of this Agreement, a Person shall be deemed to be a holder of Registrable Securities whenever such Person has the right to acquire directly or indirectly such Registrable Securities (upon conversion or exercise in connection with a transfer of securities or otherwise, but disregarding any restrictions or limitations upon the exercise of such right), whether or not such acquisition has actually been effected. "Securities Act" means the Securities Act of 1933, as amended. "Warrants" mean the Common Stock Purchase Warrant dated the date hereof issued by the Company to Bank in replacement of the 1995 Warrant and all other common stock purchase warrants issued by the Company to Bank and its successors and assigns -12- pursuant to the 1995 Warrant Agreement and the 1996 Warrant and all other common stock purchase warrants issued by the Company to Bank and its successors and assigns pursuant to the 1996 Warrant Agreement. 9. Miscellaneous. (a) No Inconsistent Agreements. The Company shall not hereafter enter into any agreement with respect to its securities which is inconsistent with or violates the rights granted to the holders of Registrable Securities in this Agreement. (b) Adjustments Affecting Registrable Securities. The Company shall not take any action, or permit any change to occur, with respect to its securities which would materially and adversely affect the ability of the holders of Registrable Securities to include such Registrable Securities in a registration undertaken pursuant to this Agreement or which would materially and adversely affect the marketability of such Registrable Securities in any such registration (including, without limitation, effecting a stock split or a combination of shares). (c) Amendments and Waivers. Except as otherwise provided herein, the provisions of this Agreement may be amended or waived only upon the prior written consent of the Company and holders of a majority of the Registrable Securities. (d) Successors and Assigns. All covenants and agreements in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or not In addition, whether or not any express assignment has been made, the provisions of this Agreement which are for the benefit of purchasers or holders of Registrable Securities are also for the benefit of, and enforceable by, any subsequent holder of Registrable Securities. A person is deemed to be a holder of Registrable Securities whenever such person is the registered holder of Registrable Securities. Upon the transfer of any Registrable Securities, the transferring holder of Registrable Securities shall cause the transferee to execute and deliver to the Company a counterpart of this Agreement. (e) Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to -13- the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. (f) Counterparts. This Agreement may be executed simultaneously in two or more counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together shall constitute one and the same Agreement. (g) Descriptive Heading. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. (h) Governing Law. The corporate law of Pennsylvania shall govern all issues and questions concerning the relative rights of the Company and its stockholders. All issues and questions concerning the construction, validity, interpretation and enforcement of this Agreement shall be governed by, and construed in accordance with, the laws of Pennsylvania, without giving effect to any choice of law or conflict of law rules or provisions (whether of Pennsylvania or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than Pennsylvania. (i) Notices. All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement shall be in writing and shall be deemed to have been given when delivered personally to the recipient, sent to the recipient by reputable overnight courier service (charges prepaid) or mailed to the recipient by certified or registered mail, return receipt requested and postage prepaid. Such notices, demands and other communications shall be sent to each Person at the address indicated below: If to Company: NCO Group, Inc. 1740 Walton Road Blue Bell, PA 19422 Attn: Michael J. Barrist With copies to: Blank, Rome, Comisky & McCauley Four Penn Center Philadelphia, PA 19103 Attn: Alan L. Zeiger, Esquire and -14- Joshua Gindin, Esquire 1700 Two Logan Square Philadelphia, PA 19103 If to Bank: Mellon Bank, N.A. Plymouth Meeting Executive Campus 610 West Germantown Pike Plymouth Meeting, PA 19462 Attention: Liz A. Mellace With a copy to: Reed Smith Shaw & McClay 2500 One Liberty Place Philadelphia, PA 19103 Attention: Ben Burke Howell, Esquire or to such other address or to the attention of such other person as the recipient parry has specified by prior written notice to the sending party. (j) Consent to Jurisdiction: Service of Process. Company and Bank hereby irrevocably consent to the jurisdiction of the Courts of Common Pleas of Montgomery County, Pennsylvania and of the United States District Court for the Eastern District of Pennsylvania in any and all actions and proceedings in connection with this Agreement, and irrevocably consent, in addition to any methods of service of process permissible under applicable law, to service of process by certified mail, return receipt requested to the address of Company and Bank as set forth herein. Nothing in this Section shall affect or limit the right of any Holder to serve legal process in any other manner permitted by law. Company and Bank agree that in any action or proceeding brought by them in connection with this Agreement or the transactions contemplated hereby, exclusive jurisdiction shall be in the courts of the Courts of Common Pleas of Montgomery County, Pennsylvania, and the United States District Court for the Eastern District of Pennsylvania. (k) Attorneys' Fees. In any action or proceeding brought to enforce any provision of this Agreement, the successful party shall be entitled to recover all of its own costs and expenses (including, but not limited to, reasonable attorneys' fees and expenses) arising out of or relating to such action or -15- proceeding in addition to all other remedies available hereunder, or at law or in equity. (l) No Inconsistent Agreements. The Company will not on or after the date of this Agreement enter into any agreement with respect to its securities which is inconsistent with the rights granted to the holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. Except as set forth in Schedule 3.02 to the 1996 Warrant Agreement, the Company has not previously entered into any agreement with respect to its securities granting any registration or similar rights to any Person. (m) Waiver of Jury Trial. The Company and Bank hereby waive any right that they may have to a trial by jury of any dispute arising under or relating to this Agreement or any related matters, and agree that any such dispute shall be tried before a judge sitting without a jury. -16- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. NCO GROUP, INC. By: /s/ MICHAEL J. BARRIST -------------------------- Its: President ------------------------- MELLON BANK, N.A. By: /s/ LIZ A. MELLACE -------------------------- Its: Assistant Vice President ------------------------- -17- EX-10.18 12 EXHIBIT 10.18 Exhibit 10.18 AMENDED AND RESTATED LIMITED GUARANTY AGREEMENT THIS AMENDED AND RESTATED LIMITED GUARANTY AGREEMENT (this "Agreement"), dated as of September 5, 1996, made by MICHAEL J. BARRIST, CHARLES C. PIOLA, JR., ANNETTE H. BARRIST and BERNARD R. MILLER, each an adult individual residing in the Commonwealth of Pennsylvania (collectively the "Guarantors"), in favor of MELLON BANK, N.A., a national banking association (the "Lender"). RECITALS A. NCO FINANCIAL SYSTEMS, INC., a Pennsylvania corporation ("NCO Financial") entered into a Credit Agreement dated as of July 28, 1995 (the "Credit Agreement") with the Lender. The Guarantors, as owners of all of the outstanding shares of stock of NCO Financial, derived substantial direct and indirect benefit from the transactions contemplated by the Credit Agreement. B. As a condition precedent to the extension of credit under the Credit Agreement, the Guarantors executed and delivered to the Lender a Limited Guaranty Agreement dated July 28, 1995 (the "Original Limited Guaranty"). C. On the date hereof, NCO of New York, Inc. ("NCO New York"), as a assignee of NCO Financial, will acquire all of the outstanding common stock of Management Adjustment Bureau, Inc. ("MAB") in an acquisition more particularly described in a Stock Purchase Agreement dated as of July 18, 1996 among the owners of the stock and NCO Financial. D. In order to finance the acquisition of MAB by NCO New York, NCO Financial has requested that the Lender increase the amount of the credit facilities extended by the Lender to NCO Financial pursuant to the Credit Agreement to $15,000,000 and add NCO Group, Inc. ("NCO Group"), NCO New York and NCO Funding, Inc. ("NCO Funding") as co-borrowers under the credit facilities. (Hereinafter, NCO Group, NCO Financial, NCO Funding and NCO New York shall collectively be referred to as the "Borrowers".) E. The Borrowers and the Lender have agreed to increase the amount of the credit facilities and to enter into an Amended and Restated Credit Agreement dated of even date herewith (the "Amended and Restated Credit Agreement"). F. In order to secure the Guaranteed Obligations (as defined below), the Guarantors have executed and delivered an Amended and Restated Stock Pledge Agreement dated of even date herewith (as amended from time to time, the "Stock Pledge Agreement") pursuant to which the Guarantors have pledged all of the outstanding shares of stock of NCO Group. G. It is a condition precedent to the extension of credit under the Amended and Restated Credit Agreement that the Guarantors amend and restate the Original Limited Guaranty by executing and delivering this Agreement. This Agreement is made by the Guarantors among other things to induce the Lender to enter into the Loan Documents (as defined below), and to induce the Lender to extend credit under the Amended and Restated Credit Agreement. H. The Guarantors acknowledge that the Lender has relied and will rely on this Agreement in entering into the Loan Documents and extending credit under the Amended and Restated Credit Agreement. The Guarantors further acknowledge that they have, independently and without reliance upon the Lender or any representation by or other information from the Lender, made their own credit analysis and decision to enter into this Agreement. NOW, THEREFORE, in consideration of the premises, and intending to be legally bound, the Guarantors hereby agree as follows: ARTICLE I DEFINITIONS 1.1. Definitions. (a) General. Capitalized terms not otherwise defined herein shall have the meanings given in the Amended and Restated Credit Agreement. In addition to the other terms defined elsewhere in this Agreement, as used herein the following terms shall have the following meanings: "Guaranteed Obligations" shall mean all obligations from time to time of the Borrowers to the Lender under or in connection with any Loan Document, including all obligations to pay principal, interest, fees, indemnities or other amounts, in each case whether such obligations are direct or indirect, secured or unsecured, joint or several, absolute or contingent, due or to become due, whether for payment or performance, now existing or hereafter arising (including interest and other obligations arising or accruing after the commencement of any bankruptcy, insolvency, reorganization, dissolution or similar proceeding with respect to the Borrowers or any other Person, or which would have arisen or accrued but for the commencement of such proceeding, even if such obligation or the claim thereof is not enforceable or allowable in such proceeding). -2- "Loan Documents" shall mean the Amended and Restated Credit Agreement, this Agreement, the Amended and Restated Stock Pledge Agreement dated September 5, 1996 from the Guarantors in favor of the Lender, the $15,000,000 Amended and Restated Revolving Credit Note dated September 5, 1996 from the Borrowers in favor of the Lender, the Amended and Restated Security Agreement dated September 5, 1996 from the Borrowers in favor of the Lender, the Warrant Agreement dated July 28, 1995 by and between NCO Financial and the Lender, as amended by that certain Amendment to Warrant Agreement dated September 5, 1996, the 1996 Warrant Agreement dated September 5, 1996 by and between NCO Group and the Lender, the Stock Pledge Agreement dated September 5, 1996 from NCO Group in favor of the Lender, the Guaranty and Suretyship Agreement dated September 5, 1996 from MAB in favor of the Lender, the Security Agreement dated September 5, 1996 from MAB in favor of the Lender and all agreements and instruments from time to time delivered under or in connection with any of the foregoing, in each case as the same may be amended from time to time. (b) Other Definitions. The following terms are defined in this Agreement in the Section or other place indicated: "Amended and Restated Credit Agreement" Recitals "Borrowers" Recitals "Credit Agreement" Recitals "direct and indirect security" 2.3(d) "Guarantors" Preamble "Lender" Preamble "MAB" Recitals "NCO Financial" Recitals "NCO Funding" Recitals "NCO Group" Recitals "NCO New York" Recitals "notices" 4.3 "Original Limited Guaranty" Recitals "Related Litigation" 4.7(b) "Stock Pledge Agreement" Recitals ARTICLE II GUARANTY AND SURETYSHIP 2.1. Guaranty and Suretyship. The Guarantors hereby absolutely, unconditionally and irrevocably guarantee and become surety for the full and punctual payment and performance of the Guaranteed Obligations as and when such payment or performance -3- shall become due (at scheduled maturity, by acceleration or otherwise) in accordance with the terms of the Loan Documents. This Agreement is an agreement of suretyship as well as of guaranty, is a guarantee of payment and performance and not merely of collectibility, and is in no way conditioned upon any attempt to collect from or proceed against the Borrowers or any other Person or any other event or circumstance. The obligations of the Guarantors under this Agreement are direct and primary obligations of the Guarantors and are independent of the Guaranteed Obligations, and a separate action or actions may be brought against the Guarantors regardless of whether action is brought against the Borrowers or any other Person or whether the Borrowers or any other Person are joined in any such action or actions. As to that portion of the Guaranteed Obligations covered by the Original Limited Guaranty, it is intended that this Section 2.1 shall, without limitation, operate to confirm the continuation of the guaranty and suretyship originally created under the Original Limited Guaranty. 2.2. Limited Recourse. Notwithstanding anything to the contrary contained herein or in any other Loan Document, no recourse shall be had for the payment or performance of the Guaranteed Obligations against the Guarantors or any assets of the Guarantors, nor shall the Guarantors be personally liable for the Guaranteed Obligations, except that recourse may be had against the Collateral (as defined in the Stock Pledge Agreement) which has been pledged to the Lender by the Guarantors in the Stock Pledge Agreement, provided, however, that nothing contained herein shall constitute a waiver of any of the Guaranteed Obligations. 2.3. Obligations Absolute. The Guarantors agree that the Guaranteed Obligations will be paid and performed strictly in accordance with the terms of the Loan Documents, regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting the Guaranteed Obligations, any of the terms of the Loan Documents or the rights of the Lender or any other Person with respect thereto. The obligations of the Guarantors under this Agreement shall be absolute, unconditional and irrevocable, irrespective of any of the following: (a) any lack of legality, validity, enforceability or allowability (in a bankruptcy, insolvency, reorganization, dissolution or similar proceeding, or otherwise), or any avoidance or subordination, in whole or in part, of any Loan Document or any of the Guaranteed Obligations; -4- (b) any increase, decrease or change in the amount, nature, type or purpose of any of the Guaranteed Obligations (whether or not contemplated by the Loan Documents as presently constituted); any change in the time, manner, method or place of payment or performance of, or in any other term of, any of the Guaranteed Obligations; any execution or delivery of any additional Loan Documents; or any amendment to, or refinancing or refunding of, any Loan Document or any of the Guaranteed Obligations; (c) any impairment by the Lender or any other Person of any recourse of the Guarantors against the Borrowers or any other Person; any failure to assert any breach of or default under any Loan Document or any of the Guaranteed Obligations; any extensions of credit in excess of the amount committed under or contemplated by the Loan Documents, or in circumstances in which any condition to such extensions of credit has not been satisfied; any impairment by the exercise or non-exercise, or any other failure, omission, breach, default, delay or wrongful action in connection with any exercise or non-exercise, of any right or remedy against the Borrowers or any other Person under or in connection with any Loan Document or any of the Guaranteed Obligations; any refusal of payment or performance of any of the Guaranteed Obligations, whether or not with any reservation of rights against the Guarantors; or any application of collections (including collections resulting from realization upon any direct or indirect security for the Guaranteed Obligations) to other obligations, if any, not entitled to the benefits of this Agreement, in preference to Guaranteed Obligations entitled to the benefits of this Agreement, or if any collections are applied to Guaranteed Obligations, any application to particular Guaranteed Obligations; (d) any taking, exchange, amendment, termination, subordination, release, loss or impairment of, or any failure to protect, perfect, or preserve the value of, or any enforcement of, realization upon, or exercise of rights or remedies under or in connection with, or any failure, omission, breach, default, delay or wrongful action by the Lender or any other Person in connection with the enforcement of, realization upon, or exercise of rights or remedies under or in connection with, or any other action or inaction by the Lender or any other Person in respect of, any direct or indirect security for any of the Guaranteed Obligations. As used in this Agreement, "direct or indirect security" for the Guaranteed Obligations, and similar phrases, includes any collateral security, guaranty, suretyship, letter of credit, capital maintenance agreement, -5- put option, subordination agreement or other right or arrangement of any nature providing direct or indirect assurance of payment or performance of any of the Guaranteed Obligations, made or on behalf of any Person; (e) any merger, consolidation, liquidation, dissolution, winding-up, charter revocation or forfeiture, or other change in, restructuring or termination of the corporate structure or existence of, the Borrowers or any other Person; any bankruptcy, insolvency, reorganization, dissolution or similar proceeding with respect to the Borrowers or any other Person; or any action taken or election made by the Lender (including any election under Section 1111(b)(2) of the United States Bankruptcy Code), the Borrowers or any other Person in connection with any such proceeding; (f) any defense, setoff or counterclaim (including any defense of failure of consideration, breach of warranty, statute of frauds, bankruptcy, lack of legal capacity, statute of limitations, lender liability, accord and satisfaction or usury, and excluding only the defense of full, strict and indefeasible payment and performance), which may at any time be available to the Borrowers or any other Person with respect to any Loan Document or any of the Guaranteed Obligations; or any discharge by operation of law or release of the Borrowers or any other Person from the performance or observance of any Loan Document or any of the Guaranteed Obligations; or (g) any other event or circumstance, whether similar or dissimilar to the foregoing, and whether known or unknown, which might otherwise constitute a defense available to, or limit the liability of, the Borrowers, the Guarantors, a guarantor or a surety, excepting only full, strict and indefeasible payment and performance of the Guaranteed Obligations. 2.4. Waivers, etc. The Guarantors hereby waive any defense to or limitation on their obligations under this Agreement arising out of or based on any event or circumstance referred to in Section 2.3. Without limitation, the Guarantors waive each of the following: (a) all notices, disclosures and demands of any nature which otherwise might be required from time to time to preserve intact any rights against the Guarantors, including (i) any notice of any event or circumstance described in Section 2.3, (ii) any notice required by any law, regulation or order now or hereafter in effect in any jurisdiction, -6- (iii) any notice of nonpayment, nonperformance, dishonor, or protest under any Loan Document or any of the Guaranteed Obligations, (iv) any notice of the incurrence of any Guaranteed Obligation, (v) any notice of any default or any failure on the part of the Borrowers or any other Person to comply with any Loan Document or any of the Guaranteed Obligations or any direct or indirect security for any of the Guaranteed Obligations, and (vi) any notice of any information pertaining to the business, operations, condition (financial or otherwise) or prospects of the Borrowers or any other Person; (b) any right to any marshalling of assets, or to the exercise against the Borrowers or any other Person of any other right or remedy under or in connection with any Loan Document or any of the Guaranteed Obligations or any direct or indirect security for any of the Guaranteed Obligations; any requirement of promptness or diligence on the part of the Lender or any other Person; any requirement to exhaust any remedies under or in connection with, or to mitigate the damages resulting from default under, any Loan Document or any of the Guaranteed Obligations or any direct or indirect security for any of the Guaranteed Obligations; and any requirement of acceptance of this Agreement, and any requirement that the Guarantors receive notice of such acceptance; and (c) any defense or other right arising by reason of any law now or hereafter in effect in any jurisdiction pertaining to election of remedies (including anti-deficiency laws, "one action" laws or similar laws), or by reason of any election of remedies or other action or inaction by the Lender (including commencement or completion of any judicial proceeding or nonjudicial sale or other action in respect of collateral security for any of the Guaranteed Obligations), which results in denial or impairment of the right of the Lender to seek a deficiency against the Borrowers or any other Person, or which otherwise discharges or impairs any of the Guaranteed Obligations or any recourse of the Guarantors against the Borrowers or any other Person. 2.5. Reinstatement. This Agreement shall continue to be effective, or be automatically reinstated, as the case may be, if at any time payment of any of the Guaranteed Obligations is avoided, rescinded or must otherwise be returned by the Lender for any reason, all as though such payment had not been made. 2.6. No Stay. Without limitation of any other provision of this Agreement, if any acceleration of the time for payment or performance of -7- any Guaranteed Obligation, or any condition to any such acceleration, shall at any time be stayed, enjoined or prevented for any reason (including stay or injunction resulting from the pendency against the Borrowers or any other Person of a bankruptcy, insolvency, reorganization, dissolution or similar proceeding), the Guarantors agree that, for purposes of this Agreement and their obligations hereunder, such Guaranteed Obligation shall be deemed to have been accelerated, and such condition to acceleration shall be deemed to have been met. 2.7. Subrogation, etc. The Guarantors hereby irrevocably waive and release any and all rights they now have or hereafter may have (known and unknown, whether arising by operation of law, by agreement or otherwise) against the Borrowers or any other Person arising from the existence, payment, performance or enforcement of any of the obligations of the Guarantors under or in connection with this Agreement or any other Loan Document, including any and all rights of subrogation, reimbursement, exoneration, contribution or indemnity. 2.8. Continuing Agreement. This Agreement is a continuing guaranty and shall continue in full force and effect until all Guaranteed Obligations and all other amounts payable under this Agreement have been paid and performed in full, and all commitments to extend credit under the Loan Documents have terminated, subject in any event to reinstatement in accordance with Section 2.5. This Agreement shall terminate upon the occurrence of a Qualified IPO (as defined in the Amended and Restated Credit Agreement). ARTICLE III REPRESENTATIONS AND WARRANTIES Each Guarantor hereby represents and warrants to the Lender as follows: 3.1. All the Guarantors are sui juris and of full capacity to make and perform this Agreement. 3.2 This Agreement has been duly executed and delivered by the Guarantors and such execution and delivery and the performance by the Guarantors of the Guarantors' obligations hereunder will not to the best of each Guarantor's knowledge, violate any applicable provision of law or judgment, order or regulation of any court or of any public or governmental agency or authority nor conflict with or constitute a breach of or a default under any instrument to which the Guarantors are a party or by which the Guarantors or any -8- of the Guarantors' property is bound, and this Agreement is a legal, valid and binding obligation of the Guarantors enforceable in accordance with its terms. 3.3 Representations and Warranties Remade at Each Extension of Credit. Each request (including any deemed request) by the Borrowers for any extension of credit under any Loan Document shall be deemed to include a representation and warranty by the Guarantors to the Lender that the representations and warranties made by the Guarantors in this Article III are true and correct on and as of the date of such request with the same effect as though made on and as of such date. Failure by the Lender to receive notice from the Guarantors to the contrary before the Lender makes any extension of credit under any Loan Document shall constitute a further representation and warranty by the Guarantors to the Lender that the representations and warranties made by the Guarantors in this Article III are true and correct on and as of the date of such extension of credit with the same effect a though made on and as of such date. ARTICLE IV MISCELLANEOUS 4.1. Amendments, etc. No amendment to or waiver of any provision of this Agreement, and no consent to any departure by the Guarantors herefrom, shall in any event be effective unless in a writing manually signed by or on behalf of the Lender. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 4.2. No Implied Waiver; Remedies Cumulative. No delay or failure of the Lender in exercising any right or remedy under this Agreement shall operate as a waiver thereof; nor shall any single or partial exercise of any such right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. The rights and remedies of the Lender under this Agreement are cumulative and not exclusive of any other rights or remedies available hereunder, under any other agreement, at law, or otherwise. 4.3. Notices. Except to the extent, if any, otherwise expressly provided herein, all notices and other communications (collectively "notices") under this Agreement shall be in writing (including facsimile transmission) and shall be sent by first-class mail, by nationally-recognized overnight courier, by personal delivery, or by facsimile transmission in all cases with charges prepaid. -9- If to Lender: MELLON BANK, N.A. Plymouth Meeting Executive Campus 610 West Germantown Pike Suite 200 Plymouth Meeting, PA 19462 Attn: Liz A. Mellace Phone: (610) 941-8425 Fax: (610) 941-4136 With a copy to: REED SMITH SHAW & McCLAY 2500 One Liberty Place Philadelphia, PA 19103 Attn: Ben Burke Howell, Esq. Phone: (215) 851-8172 Fax: (215) 851-1420 If to Guarantors: MICHAEL J. BARRIST President & Chief Executive Officer NCO Financial Systems, Inc. 1740 Walton Road Blue Bell, PA 19422-0987 Phone: Fax: CHARLES C. PIOLA, JR. Executive Vice President NCO Financial Systems, Inc. 1740 Walton Road Blue Bell, PA 19422-0987 Phone: Fax: ANNETTE H. BARRIST Secretary NCO Financial Systems, Inc. 1740 Walton Road Blue Bell, PA 19422-0987 Phone: Fax: BERNARD R. MILLER Senior Vice President of Planning NCO Financial Systems, Inc. 1740 Walton Road Blue Bell, PA 19422-0987 Phone: Fax: -10- With a copy to: BLANK, ROME, COMISKY & McCAULEY Four Penn Center Plaza Philadelphia, PA 19103 Attn: Joel C. Shapiro, Esq. Phone: (215) 569-5476 Fax: (215) 569-5555 and to: JOSHUA GINDIN, ESQ. 1700 Two Logan Square 18th & Arch Streets Philadelphia, PA 19103 Phone: (215) 567-5830 Fax: (215) 636-0366 Any properly given notice shall be effective when received, except that properly given notices to the Guarantors shall be effective at the following time, if earlier: if given by telephone, when telephoned; if by first-class mail, three Business Days after deposit in the mail; if by overnight courier, one Business Day after pickup by such courier; and if by facsimile transmission, upon transmission. The Lender may rely on any notice (whether or not made in a manner contemplated by this Agreement) purportedly made by or on behalf of the Guarantors, and the Lender shall have no duty to verify the identity or authority of the Person giving such notice. 4.4. Expenses. Each Guarantor agrees to pay upon demand all reasonable expenses (including reasonable fees and expenses of counsel) which the Lender may incur from time to time arising from or relating to the or exercise, enforcement or preservation of rights or remedies under, this Agreement, arising from or related to such Guarantor's breach of this Agreement. 4.5. Construction. In this Agreement, unless the context otherwise clearly requires, references to the plural include the singular, the singular, the plural and the part the whole; "or" is not exclusive; and "include" means include without limitation (and similarly for similar terms). This Agreement has been fully negotiated between the applicable parties, each party having the benefit of legal counsel, and accordingly neither any doctrine of construction of guaranties or suretyships in favor of the guarantor or surety, nor any doctrine of construction of ambiguities against the party controlling the drafting, shall apply to this Agreement. Section and other references in this Agreement are to this Agreement unless otherwise specified. 4.6. Successors and Assigns. This Agreement shall be binding upon the Guarantors, their successors and assigns, and -11- shall inure to the benefit of and be enforceable by the Lender and its successors and assigns. 4.7. Certain Legal Matters. (a) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, exclusive of choice of law principles. (b) Submission to Jurisdiction and Venue; Consent to Service of Process; Waiver of Jury Trial; Etc. The Guarantors hereby irrevocably and unconditionally: (i) agree that any action, suit or proceeding by any Person arising from or relating to this Agreement or statement, course of conduct, act, omission or event in connection with any of the foregoing (collectively, "Related Litigation") may be brought in any state or federal court of competent jurisdiction sitting in Philadelphia County, Pennsylvania, submit to the jurisdiction of such courts, and agree not to bring any Related Litigation in any other forum (but nothing herein shall affect the right of the Lender to bring any Related Litigation in any other forum); (ii) acknowledge that such courts will be the most convenient forum for any Related Litigation, waive any objection to the laying of venue of any Related Litigation brought in any such court, waive any claim that any Related Litigation brought in any such court has been brought in an inconvenient forum, and waive any right to object, with respect to any Related Litigation, that such court does not have jurisdiction over them; (iii) consent and agree to service of any summons, complaint or other legal process in any Related Litigation by registered or certified U.S. mail, postage prepaid, to them at the addresses for notices described in this Agreement, and consent and agree that such service shall constitute in every respect valid and effective service (but nothing herein shall affect the validity or effectiveness of process served in any other manner permitted by law); and (iv) waive the right to trial by jury in any Related Litigation. (c) Limitation of Liability. No claim may be made by the Guarantors against the Lender or any affiliate, director, officer, employee, attorney or agent of the Lender for any special, indirect, or consequential damages in respect of any claim arising from or relating to this Agreement or any other Loan Document or any statement, course of conduct, act, omission -12- or event in connection with any of the foregoing (whether for breach of contract, tort or any other theory of liability); and the Guarantors hereby waive, release and agree not to sue upon any claim for any such damages, whether or not accrued and whether or not known or suspected to exist. IN WITNESS WHEREOF, the Guarantors have caused this Agreement to be duly executed and delivered as of the date first above written. WITNESS: /s/JOEL SHAPIRO /s/ MICHAEL J. BARRIST - -------------------------------- -------------------------- JOEL SHAPIRO MICHAEL J. BARRIST WITNESS: /s/ JOSHUA GINDEN /s/ CHARLES C. PIOLA, JR. - -------------------------------- -------------------------- CHARLES C. PIOLA, JR. WITNESS: /s/ JOSHUA GINDEN /s/ ANNETTE H. BARRIST - -------------------------------- -------------------------- ANNETTE H. BARRIST WITNESS: /s/ JOSHUA GINDEN /s/ BERNARD R. MILLER - -------------------------------- -------------------------- BERNARD R. MILLER ACCEPTED AND AGREED: MELLON BANK, N.A. By: /s/ LIZ A. MELLACE ----------------------------------- LIZ A. MELLACE Assistant Vice President EX-10.19 13 AMENDED AND RESTATED STOCK PLEDGE AGREEMENT AMENDED AND RESTATED STOCK PLEDGE AGREEMENT THIS AMENDED AND RESTATED STOCK PLEDGE AGREEMENT (this "Agreement"), dated as of September 5, 1996, made by MICHAEL J. BARRIST, CHARLES C. PIOLA, JR., ANNETTE H. BARRIST and BERNARD R. MILLER, each an adult individual residing in the Commonwealth of Pennsylvania (collectively the "Grantors"), in favor of MELLON BANK, N.A., a national banking association (the "Lender"). RECITALS A. NCO Financial Systems, Inc. ("NCO Financial") entered into a Credit Agreement dated as of July 28, 1995 (the "Credit Agreement") with the Lender. The Grantors, as owners of all the outstanding shares of stock of NCO Financial, derived substantial direct and indirect benefit from the transactions contemplated by the Credit Agreement. B. As a condition precedent to the extension of credit under the Credit Agreement, the Grantors executed and delivered to the Lender a Stock Pledge Agreement dated July 28, 1995 (the "Stock Pledge"). C. On the date hereof, NCO of New York, Inc. ("NCO New York"), as a assignee of NCO Financial, will acquire all of the outstanding common stock of Management Adjustment Bureau, Inc. ("MAB") in an acquisition more particularly described in a Stock Purchase Agreement dated as of July 18, 1996 among the owners of the stock and NCO Financial. D. Pursuant to a reorganization of NCO Financial, NCO Group, Inc., a Pennsylvania corporation ("NCO Group"), became the sole shareholder of NCO Financial and the Grantors became the shareholders of NCO Group. E. In order to finance the acquisition of MAB by NCO New York, NCO Financial has requested the Lender to increase the amount of the credit facilities extended by the Lender to NCO Financial pursuant to the Credit Agreement to $15,000,000 and to add NCO Group, NCO New York and NCO Funding, Inc. ("NCO Funding") as co-borrowers under the credit facilities. (Hereinafter, NCO Group, NCO Financial, NCO Funding and NCO New York shall collectively be referred to as the "Borrowers".) F. The Borrowers and the Lender have agreed to increase the amount of the credit facilities and to enter into an Amended and Restated Credit Agreement dated of even date herewith (the "Amended and Restated Credit Agreement"). G. It is a condition precedent to the extension of additional credit under the Amended and Restated Credit Agreement that the Grantors amend and restate the Stock Pledge in its entirety by executing and delivering this Agreement. This Agreement is made by the Grantors among other things to induce the Lender to enter into the Loan Documents (as defined below), and to induce the Lender to extend credit under the Amended and Restated Credit Agreement. NOW, THEREFORE, in consideration of the premises, and intending to be legally bound, the Grantors hereby agree as follows: ARTICLE I DEFINITIONS 1.1. Definitions. (a) General. Capitalized terms not otherwise defined herein shall have the meanings given in the Amended and Restated Credit Agreement. In addition to the other terms defined elsewhere in this Agreement, as used herein the following terms shall have the following meanings: "Designated Pledged Shares" shall mean the shares of capital stock identified in Schedule 3.4(a). "Distributions" shall mean all property, rights and interests of any kind or nature (whether cash, securities or other) from time to time received, receivable or otherwise distributed with respect to or in exchange for any Collateral, including all cash, securities or other property received or receivable as dividends, or as a result of any stock splits, reclassifications, mergers or consolidations, or as any other distributions (whether similar or dissimilar to the foregoing), or as a result of exercise of any options, warrants or rights included in or associated with any Collateral, or as principal, interest or premium. "Loan Documents" shall mean the Amended and Restated Credit Agreement, this Agreement, the Amended and Restated Limited Guaranty Agreement dated September 5, 1996 from the Grantors in favor of the Lender (the "Guaranty"), the $15,000,000 Amended and Restated Revolving Credit Note dated September 5, 1996 from the Borrowers in favor of the Lender, the Amended and Restated Security Agreement dated September 5, 1996 from the Borrowers to the Lender, the Warrant Agreement dated July 28, 1995 by and between NCO Financial and the Lender, as amended by that certain Amendment to Warrant Agreement dated September 5, 1996, the 1996 Warrant Agreement dated September 5, 1996 by and between NCO Group and the Lender, the Stock Pledge Agreement dated September 5, 1996 from NCO Group in favor of the Lender, the Guaranty -2- and Suretyship Agreement dated September 5, 1996 from MAB to the Lender, the Security Agreement dated September 5, 1996 from MAB to the Lender and all agreements and instruments from time to time delivered under or in connection with any of the foregoing, in each case as the same may be amended from time to time.. "Secured Obligations" shall mean the Guaranteed Obligations (as that term is defined in the Guaranty). "UCC" shall mean the Uniform Commercial Code as in effect in the Commonwealth of Pennsylvania from time to time. (b) Other Definitions. The following terms are defined in this Agreement in the Section or other place indicated: "Amended and Restated Credit Agreement" Recitals "Borrowers" Recitals "Collateral" 2.1 "Credit Agreement" Recitals "Grantors" Preamble "Guaranty" 1.1 "Lender" Preamble "NCO Financial" Recitals "NCO Funding" Recitals "NCO Group" Recitals "NCO New York" Recitals "MAB" Recitals "Notices" 6.3 1.2. UCC Definitions. Unless otherwise defined herein, terms defined in Articles 8 or 9 of the UCC shall have the same meanings in this Agreement. ARTICLE II THE SECURITY 2.1. Grant of Security. As security for the full and timely payment and performance of the Secured Obligations, the Grantors hereby assign and pledge to the Lender, and grant to the Lender a security interest in, all right, title and interest of the Grantors in, to and under the following, whether now or hereafter existing or acquired (the "Collateral"): -3- (a) the Designated Pledged Shares, and all additional shares of stock of the Borrower from time to time acquired by the Grantors in any manner; (b) all Distributions; and (c) all proceeds of any of the foregoing. 2.2. Continuing Agreement. This Agreement creates a continuing security interest in the Collateral and shall continue in full force and effect until all Secured Obligations have been paid and performed in full, and all commitments to extend credit under the Loan Documents have terminated. 2.3 Termination. Upon the occurrence of either (a) the closing of a Qualified IPO (as defined in the Amended and Restated Credit Agreement), or (b) the payment and performance in full of all Secured Obligations and termination of all commitments to extend credit under the Loan Documents, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to the Grantors. Upon any such termination, the Lender will, at the Grantors' request and expense, return to the Grantors, without any representations, warranties or recourse of any kind whatsoever, such of the Collateral as then may be held by the Lender hereunder, and execute and deliver to the Grantors such documents as the Grantors may reasonably request to evidence such termination. ARTICLE III REPRESENTATIONS AND WARRANTIES The Grantors hereby represent and warrant to the Lender as follows: 3.1. Title. Each Grantor is the legal and beneficial owner of his/her respective Collateral, free and clear of any lien, security interest, option or other charge or encumbrance, except for the security interest under this Agreement in favor of the Lender securing the Secured Obligations. 3.2. Validity, Perfection and Priority. This Agreement creates a valid security interest in the Collateral in favor of the Lender securing the Secured Obligations, which security interest has been duly perfected and is prior to all other liens, security interests, options or other charges or encumbrances. No filing or other action is or will be necessary to perfect or protect such security interest, except for delivery to the Lender of the certificates evidencing the Designated Pledged Shares, which delivery has been duly made. -4- 3.3. Governmental Approvals and Filings. To the best of each Grantor's knowledge, after due inquiry, no authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is or will be necessary (a) for the grant by the Grantors of the security interest in the Collateral hereunder or for the execution, delivery or performance of this Agreement by the Grantors, (b) to ensure the validity, perfection or priority of the security interest in the Collateral granted hereunder, or (c) for the exercise by the Lender of any of its rights or remedies hereunder, except as may be required in connection with a disposition of Collateral constituting securities by laws affecting the offering and sale of securities generally. 3.4. Designated Pledged Shares. The Designated Pledged Shares include all of the capital stock owned by each of the Grantors as of the date hereof. Schedule 3.4(a) sets forth, for each class of capital stock to which Designated Pledged Shares belong, the respective owners of the Designated Pledged Shares, the total number of issued and outstanding shares of such class and the percentage of such total number of issued and outstanding shares represented by the Designated Pledged Shares. To the best of each Grantors' knowledge, after due inquiry, the Designated Pledged Shares have been duly authorized and validly issued and are fully paid and nonassessable. All of the Designated Pledged Shares are certificated securities. ARTICLE IV COVENANTS 4.1. Books and Records; Inspection. The Grantors shall (a) keep complete and accurate books and records concerning the Collateral and, at the request of the Lender from time to time, permit the Lender or its representatives to inspect and copy such books and records, and (b) furnish to the Lender such information and reports in connection with the Collateral at such times and in such form as the Lender may reasonably request. The Lender shall have the right to verify the Collateral from time to time. 4.2. Transfers and Other Liens, etc. (a) Transfers. The Grantors shall not sell, assign, lease, transfer or otherwise dispose of any Collateral (voluntarily or involuntarily, by operation of law or otherwise). (b) Other Liens. The Grantors shall not create or permit to exist any lien, security interest, option or other -5- charge or encumbrance on any Collateral (voluntarily or involuntarily, by operation of law or otherwise) except for the security interest under this Agreement in favor of the Lender securing the Secured Obligations. (c) Other Shares. The Grantors shall cause the Borrower not to issue any capital stock or other securities in addition to or in substitution for the Designated Pledged Shares issued by the Borrower, except (i) to the Grantors, and (ii) as otherwise permitted in the Loan Documents. All shares of capital stock and other securities of the Borrower from time to time outstanding shall constitute Collateral, and the Grantors shall deliver to the Lender, immediately upon issuance thereof, all certificates and instruments constituting or evidencing any such shares of capital stock or other securities. 4.3. Certain Covenants. (a) Delivery of Certificates and Instruments. All certificates or instruments at any time representing or evidencing any Collateral shall be immediately delivered to and held by or on behalf of the Lender pursuant hereto, and shall be in suitable form for transfer by delivery, or shall be accompanied by instruments of transfer or assignment, duly executed in blank, all in form and substance satisfactory to the Lender. The Lender shall have the right, at any time, after the occurrence of an Event of Default or Potential Default, to transfer to or to register in the name of the Lender or its nominee any Collateral. In addition, the Lender shall have the right at any time to exchange certificates or instruments representing or evidencing Collateral for certificates or instruments of smaller or larger denominations. (b) Voting Rights. (i) Subject to Section 4.3(b)(ii), the Grantors shall be entitled to exercise all voting and other consensual rights pertaining to the Collateral; provided, that the Grantors shall not exercise or refrain from exercising any such right if such action would (A) conflict with any provision of this Agreement or any other Loan Document, or (B) impair the value of any Collateral or impair the interest or rights of the Grantors or the Lender. (ii) If an Event of Default or Potential Default has occurred and is continuing, the Lender may from time to time give notice to the Grantors revoking in whole or in part the rights of the Grantors under Section 4.3(b)(i). If and to the extent such notice has been given, all voting and other consensual rights pertaining to the Collateral shall thereupon be vested in the -6- Lender, who shall thereafter have the sole right to exercise or refrain from exercising such rights. (iii) The Lender shall execute and deliver to the Grantors such proxies and other instruments as the Grantors may reasonably request for the purpose of enabling the Grantors to exercise the voting and other consensual rights which it is entitled to exercise pursuant to Section 4.3(b)(i). The Grantors hereby grant the Lender an irrevocable proxy, with full power of substitution, coupled with an interest, to exercise all voting and other consensual rights pertaining to the Collateral, exercisable if and to the extent that the Lender is entitled to exercise such rights pursuant to Section 4.3(b)(ii). All third parties are entitled to rely conclusively on a representation by the Lender that it is entitled to exercise such power of attorney. (c) Distributions. (i) Subject to Section 4.4(c)(ii), the Grantors shall be entitled to receive and retain all Distributions permitted under Section(s) 6.6 of the Amended and Restated Credit Agreement, except for the following: (A) Distributions paid or payable other than in cash, (B) Distributions paid or payable in cash in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in surplus, (C) Distributions paid or payable in cash in respect of principal of, or in redemption of, or in exchange for, any Collateral, and (D) Distributions made in contravention of any provision of the Loan Documents. Distributions referred to in the foregoing clauses (A), (B), (C) and (D) shall be Collateral, and shall be forthwith delivered to the Lender to hold as such. (ii) If an Event of Default or Potential Default has occurred and is continuing, all rights of the Grantors to receive and retain the Distributions that it would otherwise be authorized to receive and retain pursuant to Section 4.3(c)(i) shall automatically cease, and all such rights shall thereupon -7- vest in the Lender. Such Distributions shall be Collateral, and shall be forthwith delivered to the Lender to hold as such. (iii) If the Grantors receive any payment or property which they are not entitled to retain pursuant to Section 4.3(c)(i) or 4.3(c)(ii), such payment or property shall be received in trust for the benefit of the Lender, shall be segregated from other funds and property of the Grantors, and shall be forthwith delivered to the Lender as Collateral in the same form as so received (with any necessary endorsement). 4.4. Further Assurances. The Grantors shall from time to time, at their expense, promptly execute and deliver all further instruments and agreements, and take all further actions, that may be necessary or appropriate, or that the Lender may reasonably request, in order to perfect or protect any assignment, pledge or security interest granted or purported to be granted hereby or to enable the Lender to exercise or enforce its rights and remedies hereunder. ARTICLE V CERTAIN RIGHTS AND REMEDIES OF THE LENDER 5.1. Lender May Perform. If the Grantors fail to perform any obligation under or in connection with this Agreement, the Lender may (but shall have no duty to) itself perform or cause performance of such obligation, and the expenses of the Lender incurred in connection therewith shall be payable by the Grantors pursuant to Section 6.4. The Lender may from time to time take any other action which the Lender deems necessary or appropriate for the maintenance, preservation or protection of any of the Collateral or of its security interest therein. 5.2. No Duty to Exercise Powers. The powers of the Lender under and in connection with this Agreement are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. 5.3. Duties of Lender. Except for exercise of reasonable care in the custody and preservation of any Collateral in its possession and accounting for moneys received by it pursuant to this Agreement, the Lender shall have no duty as to any Collateral. In any event the Lender (a) shall have no duty to take any steps to preserve rights against prior parties or any other rights pertaining to any Collateral, and (b) shall have no duty as to ascertaining or taking action with respect to calls, conversions, exchanges, tenders, maturities or other matters pertaining to any Collateral, whether or not the Lender has any -8- knowledge of such matters, and (c) shall not be liable for any action, omission, insolvency or default on the part of any agent or custodian (other than the Lender) appointed by the Lender in good faith. The Lender shall be deemed to have exercised reasonable care in the custody and preservation of Collateral in its possession if it takes such action for such purpose as any Grantor requests in writing from time to time (but failure to take any such action shall not in itself be deemed a failure to exercise reasonable care or evidence of such failure). Subject only to the performance by the Lender of its duties set forth in this Section 5.3, risk of loss, damage and diminution in value of the Collateral, of whatever nature and however caused, shall be on the Grantors, absent Lender's gross negligence or willful misconduct. 5.4. Power of Attorney. The Grantors hereby irrevocably appoint the Lender, with full power of substitution, to be the attorney-in-fact of the Grantors, with full authority in the place and stead of the Grantors and in the name of the Grantors or otherwise, from time to time in the Lender's discretion, to take any action and to execute any instruments and agreements which the Lender may deem necessary or advisable to accomplish the purposes of this Agreement (subject to the rights of the Grantors under Section 4.3), including the following: (a) to demand, collect, enforce, file claims for, sue for, recover, compromise, release, and take any action or institute any proceedings to collect or enforce, all rights to payments due or to become due and all other rights of the Grantors under or in connection with any Collateral, (b) to receive, endorse and collect any checks, notes or other instruments, documents or chattel paper in connection with the foregoing clause (a), and (c) to perform all obligations of the Grantors hereunder, provided that (except for taking actions referred to in Section 4.4) such power of attorney may be exercised only so long as an Event of Default has occurred and is continuing. Such power of attorney is irrevocable and coupled with an interest. All third parties are entitled to rely conclusively on a representation by the Lender that it is entitled to exercise such power of attorney. 5.5. Certain Remedies. If any Event of Default shall have occurred and be continuing, the Lender may exercise all rights and remedies which it may have under -9- this Agreement, any other agreement, at law or otherwise, and in addition, the following provisions shall apply: (a) The Lender may exercise all rights and remedies with respect to the Collateral and each part thereof as are provided by the UCC to a secured party on default (whether or not the UCC applies to the affected Collateral). To the extent, if any, the Lender does not otherwise have the right to do so, the Lender may (i) take absolute possession and control of the Collateral or any part thereof, (ii) transfer any Collateral into the name of the Lender or its nominees, (iii) notify the parties obligated on the Collateral to make to the Lender any payments due or to become due, (iv) receive any payments made under or in connection with the Collateral, (v) exercise all rights and remedies of the Grantors under or in connection with the Collateral, (vi) demand, collect, enforce, file claims for, sue for, recover, compromise, release, and take any action or institute any proceedings to collect or enforce, all rights to payments due or to become due and all other rights of the Grantors under or in connection with any Collateral, and (vii) otherwise deal in and act with respect to the Collateral in all respects as though it were the outright owner thereof. (b) The Lender may, without notice except to the extent required by law, sell the Collateral or any part thereof, in one or more parcels, at public or private sale, at any of the Lender's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Lender may deem commercially reasonable. The Grantors agree that, to the extent notice of sale is required by law, at least ten days' prior notice to the Grantors of the time and place of any public sale or the time after which any private sale is to be made, shall constitute reasonable notification. The Lender shall not be obligated to make any sale, regardless of notice of sale having been given. The Lender may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (c) The Grantors recognize that the Lender may be unable, or may deem it inadvisable, to effect a public sale of some or all of the Collateral by reason of requirements of applicable securities laws, but may deem it advisable, for the purpose of complying with such laws, to resort to one or more private sales to members of a restricted group of offerees who will be obliged, among other things, to acquire such Collateral for their own accounts for -10- investment and not with a view to distribution or resale. The Grantors agree that (i) the Lender may make private sales in such manner, even though such sales may be at prices and on other terms less favorable to the seller than if such Collateral were sold by public sale, (ii) the Lender shall have no obligation to delay sale of any Collateral in order to permit the issuers of such Collateral, even if such issuers would agree, to register or qualify such Collateral for public sale under applicable securities laws, and (iii) it shall not be commercially unreasonable to make private sales in such manner. 5.6. Application of Payments. All cash held by the Lender as Collateral and all cash proceeds received by the Lender in respect of any sale of, collection from, or other realization upon any of the Collateral, may in the discretion of the Lender be held by the Lender as collateral for the Secured Obligations, or then or at any time thereafter applied (after payment of any amounts payable to the Lender pursuant to Section 6.4) in whole or part by the Lender to the Secured Obligations in such order as the Lender may elect. If and when all Secured Obligations shall have been paid in full and all commitments to extend credit under the Loan Documents shall have terminated, any surplus of such cash or cash proceeds of the Collateral held by the Lender shall be paid over to the Grantors or as otherwise required by law. ARTICLE VI MISCELLANEOUS 6.1. Amendments, etc. No amendment to or waiver of any provision of this Agreement, and no consent to any departure by the Grantors herefrom, shall in any event be effective unless in a writing manually signed by or on behalf of the Lender. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 6.2. No Implied Waiver; Remedies Cumulative. No delay or failure of the Lender in exercising any right or remedy under this Agreement shall operate as a waiver thereof; nor shall any single or partial exercise of any such right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. The rights and remedies of the Lender under this Agreement are cumulative and not exclusive of any other rights or remedies available hereunder, under any other agreement, at law, or otherwise. 6.3. Notices. Except to the extent, if any, otherwise expressly provided herein, all notices and other communications (collectively, "notices") under this Agreement shall be given, -11- shall be effective, and may be relied upon, in the same way as notices under the Guaranty. 6.4. Indemnity and Expenses. (a) Indemnity. Any Grantor who breaches his or her obligations under this Agreement hereby agrees to indemnify the Lender from and against any and all claims, losses, liabilities and expenses (including reasonable attorneys' fees) arising out of or resulting from this Agreement (including, without limitation, enforcement of this Agreement), arising from such Grantor's breach, except claims, losses, liabilities and expenses resulting solely from the gross negligence or willful misconduct of the Lender. (b) Expenses. The Grantors will upon demand pay to the Lender the amount of all reasonable expenses, including the reasonable fees and expenses of the Lender's counsel and of any experts and agents, which the Lender may incur in connection with (i) the custody, preservation, use or operation of, or the sale of, collection of or other realization upon, any Collateral, (ii) the exercise or enforcement of any of the rights of the Lender hereunder, or (iii) the failure by the Grantors to perform or observe any of the provisions hereof. 6.5. Entire Agreement. This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior and contemporaneous understandings and agreements. 6.6. Survival. All representations and warranties of the Grantors contained in or made in connection with this Agreement shall survive, and shall not be waived by, the execution and delivery of this Agreement, any investigation by or knowledge of the Lender, any extension of credit, termination of this Agreement, or any other event or circumstance whatever. The obligations of the Grantors under Section 6.4 shall survive termination of this Agreement. 6.7. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, and all such counterparts shall constitute but one and the same agreement. 6.8. Construction. In this Agreement, unless the context otherwise clearly requires, references to the plural include the singular, the singular the plural, and the part the whole; and "or" is not exclusive. In this Agreement, "include," "includes," "including" and similar terms are not limiting; and "hereof," "herein," "hereunder" and similar terms refer to this -12- Agreement as a whole and not to any particular provision; and "expenses," "costs," "out-of-pocket expenses" and similar terms include the charges of in-house counsel, auditors and other professionals of the relevant Person to the extent that such amounts are routinely identified and charged under such Person's cost accounting system. Section and other headings in this Agreement, and any table of contents herein, are for reference only and shall not affect the interpretation of this Agreement in any respect. Section and other references in this Agreement are to this Agreement unless otherwise specified. This Agreement has been fully negotiated between the applicable parties, each party having the benefit of legal counsel, and accordingly neither any doctrine of construction of security agreements in favor of the grantor, nor any doctrine of construction of ambiguities against the party controlling the drafting, shall apply to this Agreement. 6.9. Successors and Assigns. This Agreement shall be binding upon the Grantors and their successors and assigns, and shall inure to the benefit of and be enforceable by the Lender and its successors and assigns. 6.10. Choice of Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, exclusive of choice of law principles, except to the extent that perfection and the effect of perfection or nonperfection of the security interests in the Collateral is governed by the laws of a jurisdiction other than the Commonwealth of Pennsylvania pursuant to the UCC. -13- IN WITNESS WHEREOF, the Grantors have caused this Agreement to be duly executed and delivered as of the date first above written. WITNESS: /s/ JOEL SHAPIRO /s/ MICHAEL J. BARRIST - ------------------------- -------------------------- WITNESS: /s/ JOSHUA GINDEN /s/ CHARLES C. PIOLA, JR. - ------------------------- -------------------------- CHARLES C. PIOLA, JR. WITNESS: /s/ JOSHUA GINDEN /s/ ANNETTE H. BARRIST - ------------------------- -------------------------- ANNETTE H. BARRIST WITNESS: /s/ JOSHUA GINDEN /s/ BERNARD R. MILLER - ------------------------- -------------------------- BERNARD R. MILLER ACCEPTED AND AGREED: MELLON BANK, N.A. By: /s/ LIZ A. MELLACE ---------------------- LIZ A. MELLACE Assistant Vice President -14- SCHEDULE 3.4(a) DESIGNATED PLEDGED SHARES OWNER: MICHAEL J. CHARLES C. ANNETTE H. BERNARD R. BARRIST PIOLA, JR. BARRIST MILLER ISSUER: NCO NCO NCO NCO Group, Group, Group, Group, Inc. Inc. Inc. Inc. CLASS: Common Common Common Common PAR VALUE: $.01 $.01 $.01 $.01 STOCK CERTIFICATE NO.: 1 2 3 4 NO. OF SHARES: 50,723 28,370 6,877 4,525 PERCENTAGE SHARE: 56.05% 31.35% 7.6% 5.00% EX-10.20 14 STOCK PLEDGE AGREEMENT Exhibit 10.20 STOCK PLEDGE AGREEMENT THIS STOCK PLEDGE AGREEMENT (this "Agreement"), dated as of September 5, 1996, made by NCO OF NEW YORK, INC., a New York corporation (the "Grantor"), in favor of MELLON BANK, N.A., a national banking association (the "Lender"). RECITALS A. NCO Financial Systems, Inc. ("NCO Financial") entered into a Credit Agreement dated as of July 28, 1995 (the "Credit Agreement") with the Lender. B. On the date hereof, Grantor, as a assignee of NCO Financial, will acquire all of the outstanding common stock of Management Adjustment Bureau, Inc. ("MAB") in an acquisition more particularly described in a Stock Purchase Agreement dated as of July 18, 1996 among the owners of the stock and NCO Financial. C. Pursuant to a reorganization of NCO Financial, NCO Group, Inc., a Pennsylvania corporation ("NCO Group"), became the sole shareholder of NCO Financial and the former shareholders of NCO Financial became the shareholders NCO Group. NCO Group is also the sole shareholder of Grantor and NCO Funding, Inc., a Delaware corporation ("NCO Funding"). D. In order to finance the acquisition of MAB by Grantor, NCO Financial has requested that the Lender increase the amount of the credit facilities extended by the Lender to NCO Financial pursuant to the Credit Agreement to $15,000,000 and add Grantor, NCO Group and NCO Funding as co-borrowers under the credit facilities. (Hereinafter, Grantor, NCO Financial, NCO Funding and NCO Group shall collectively be referred to as the "Borrowers".) E. The Borrowers and the Lender have agreed to increase the amount of the credit facilities and to enter into an Amended and Restated Credit Agreement dated of even date herewith (the "Amended and Restated Credit Agreement"). F. It is a condition precedent to the extension of additional credit under the Amended and Restated Credit Agreement that the Grantor executes and delivers this Agreement. This Agreement is made by the Grantor among other things to induce the Lender to enter into the Loan Documents (as defined below), and to induce the Lender to extend credit under the Amended and Restated Credit Agreement. NOW, THEREFORE, in consideration of the premises, and intending to be legally bound, the Grantor hereby agrees as follows: ARTICLE I DEFINITIONS 1.1. Definitions. (a) General. Capitalized terms not otherwise defined herein shall have the meanings given in the Amended and Restated Credit Agreement. In addition to the other terms defined elsewhere in this Agreement, as used herein the following terms shall have the following meanings: "Designated Pledged Shares" shall mean the shares of capital stock identified in Schedule 3.4(a). "Distributions" shall mean all property, rights and interests of any kind or nature (whether cash, securities or other) from time to time received, receivable or otherwise distributed with respect to or in exchange for any Collateral, including all cash, securities or other property received or receivable as dividends, or as a result of any stock splits, reclassifications, mergers or consolidations, or as any other distributions (whether similar or dissimilar to the foregoing), or as a result of exercise of any options, warrants or rights included in or associated with any Collateral, or as principal, interest or premium. "Loan Documents" shall mean the Amended and Restated Credit Agreement, this Agreement, the $15,000,000 Amended and Restated Revolving Credit Note dated September 5, 1996 from the Borrowers in favor of the Lender, the Amended and Restated Security Agreement dated September 5, 1996 from the Borrowers to the Lender, the Warrant Agreement dated July 28, 1995 by and between NCO Financial and the Lender, as amended by that certain Amendment to Warrant Agreement dated September 5, 1996, the 1996 Warrant Agreement dated September 5, 1996 by and between NCO Group and the Lender, the Amended and Restated Limited Guaranty Agreement dated September 5, 1996 from Michael J. Barrist, Charles A. Piola, Jr., Annette H. Barrist and Bernard R. Miller (collectively the "Guarantors") in favor of the Lender, the Amended and Restated Stock Pledge Agreement dated September 5, 1996 from the Guarantors in favor of the Lender, the Stock Pledge Agreement dated September 5, 1996 from NCO Group in favor of the Lender, the Guaranty and Suretyship Agreement dated September 5, 1996 from MAB to the Lender, the Security Agreement dated September 5, 1996 from MAB to the Lender and all agreements and instruments from time to time delivered under or in connection with any of the foregoing, in each case as the same may be amended from time to time.. "Secured Obligations" shall mean all obligations from time to time of the Borrowers to the Lender under or in connection with any Loan Document, including all obligations -2- to pay principal, interest, fees, indemnities or other amounts, in each case whether such obligations are direct or indirect, secured or unsecured, joint or several, absolute or contingent, due or to become due, whether for payment or performance, now existing or hereafter arising. "UCC" shall mean the Uniform Commercial Code as in effect in the Commonwealth of Pennsylvania from time to time. (b) Other Definitions. The following terms are defined in this Agreement in the Section or other place indicated: "Amended and Restated Credit Agreement" Recitals "Borrowers" Recitals "Collateral" 2.1 "Credit Agreement" Recitals "Grantor" Preamble "Guarantors" 1.1 "Lender" Preamble "NCO Financial" Recitals "NCO Funding" Recitals "NCO Group" Recitals "MAB" Recitals "Notices" 6.3 1.2. UCC Definitions. Unless otherwise defined herein, terms defined in Articles 8 or 9 of the UCC shall have the same meanings in this Agreement. ARTICLE II THE SECURITY 2.1. Grant of Security. As security for the full and timely payment and performance of the Secured Obligations, the Grantor hereby assigns and pledges to the Lender, and grants to the Lender a security interest in, all right, title and interest of the Grantor in, to and under the following, whether now or hereafter existing or acquired (the "Collateral"): (a) the Designated Pledged Shares, and all additional shares of stock of MAB from time to time acquired by the Grantor in any manner; (b) all Distributions; and -3- (c) all proceeds of any of the foregoing. 2.2. Continuing Agreement. This Agreement creates a continuing security interest in the Collateral and shall continue in full force and effect until all Secured Obligations have been paid and performed in full, and all commitments to extend credit under the Loan Documents have terminated. 2.3 Termination. Upon the payment and performance in full of all Secured Obligations and termination of all commitments to extend credit under the Loan Documents, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to the Grantor. Upon any such termination, the Lender will, at the Grantor's request and expense, return to the Grantor, without any representations, warranties or recourse of any kind whatsoever, such of the Collateral as then may be held by the Lender hereunder, and execute and deliver to the Grantor such documents as the Grantor may reasonably request to evidence such termination. ARTICLE III REPRESENTATIONS AND WARRANTIES The Grantor hereby represents and warrants to the Lender as follows: 3.1. Title. Grantor is the legal and beneficial owner of its respective Collateral, free and clear of any lien, security interest, option or other charge or encumbrance, except for the security interest under this Agreement in favor of the Lender securing the Secured Obligations. 3.2. Validity, Perfection and Priority. This Agreement creates a valid security interest in the Collateral in favor of the Lender securing the Secured Obligations, which security interest has been duly perfected and is prior to all other liens, security interests, options or other charges or encumbrances. No filing or other action is or will be necessary to perfect or protect such security interest, except for delivery to the Lender of the certificates evidencing the Designated Pledged Shares, which delivery has been duly made. 3.3. Governmental Approvals and Filings. To the best of Grantor's knowledge, after due inquiry, no authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is or will be necessary (a) for the grant by the Grantor of the security interest in the Collateral hereunder or for the execution, delivery or performance of this Agreement by the Grantor, (b) to ensure the -4- validity, perfection or priority of the security interest in the Collateral granted hereunder, or (c) for the exercise by the Lender of any of its rights or remedies hereunder, except as may be required in connection with a disposition of Collateral constituting securities by laws affecting the offering and sale of securities generally. 3.4. Designated Pledged Shares. The Designated Pledged Shares include all of the capital stock of MAB owned by the Grantor as of the date hereof. Schedule 3.4(a) sets forth, for each class of capital stock to which Designated Pledged Shares belong, the total number of issued and outstanding shares of such class and the percentage of such total number of issued and outstanding shares represented by the Designated Pledged Shares. To the best of Grantor's knowledge, after due inquiry, the Designated Pledged Shares have been duly authorized and validly issued and are fully paid and nonassessable. All of the Designated Pledged Shares are certificated securities. ARTICLE IV COVENANTS 4.1. Books and Records; Inspection. The Grantor shall (a) keep complete and accurate books and records concerning the Collateral and, at the request of the Lender from time to time, permit the Lender or its representatives to inspect and copy such books and records, and (b) furnish to the Lender such information and reports in connection with the Collateral at such times and in such form as the Lender may reasonably request. The Lender shall have the right to verify the Collateral from time to time. 4.2. Transfers and Other Liens, etc. (a) Transfers. The Grantor shall not sell, assign, lease, transfer or otherwise dispose of any Collateral (voluntarily or involuntarily, by operation of law or otherwise). (b) Other Liens. The Grantor shall not create or permit to exist any lien, security interest, option or other charge or encumbrance on any Collateral (voluntarily or involuntarily, by operation of law or otherwise) except for the security interest under this Agreement in favor of the Lender securing the Secured Obligations. (c) Other Shares. The Grantor shall cause the Borrower not to issue any capital stock or other securities in addition to or in substitution for the Designated Pledged Shares issued by the Borrower, except (i) to the Grantor, and (ii) as -5- otherwise permitted in the Loan Documents. All shares of capital stock and other securities of the Borrower from time to time outstanding shall constitute Collateral, and the Grantor shall deliver to the Lender, immediately upon issuance thereof, all certificates and instruments constituting or evidencing any such shares of capital stock or other securities. 4.3. Certain Covenants. (a) Delivery of Certificates and Instruments. All certificates or instruments at any time representing or evidencing any Collateral shall be immediately delivered to and held by or on behalf of the Lender pursuant hereto, and shall be in suitable form for transfer by delivery, or shall be accompanied by instruments of transfer or assignment, duly executed in blank, all in form and substance satisfactory to the Lender. The Lender shall have the right, at any time, after the occurrence of an Event of Default or Potential Default, to transfer to or to register in the name of the Lender or its nominee any Collateral. In addition, the Lender shall have the right at any time to exchange certificates or instruments representing or evidencing Collateral for certificates or instruments of smaller or larger denominations. (b) Voting Rights. (i) Subject to Section 4.3(b)(ii), the Grantor shall be entitled to exercise all voting and other consensual rights pertaining to the Collateral; provided, that the Grantor shall not exercise or refrain from exercising any such right if such action would (A) conflict with any provision of this Agreement or any other Loan Document, or (B) impair the value of any Collateral or impair the interest or rights of the Grantor or the Lender. (ii) If an Event of Default or Potential Default has occurred and is continuing, the Lender may from time to time give notice to the Grantor revoking in whole or in part the rights of the Grantor under Section 4.3(b)(i). If and to the extent such notice has been given, all voting and other consensual rights pertaining to the Collateral shall thereupon be vested in the Lender, who shall thereafter have the sole right to exercise or refrain from exercising such rights. (iii) The Lender shall execute and deliver to the Grantor such proxies and other instruments as the Grantor may reasonably request for the purpose of enabling the Grantor to exercise the voting and other consensual rights which it is entitled to exercise pursuant to Section 4.3(b)(i). The Grantor hereby grants the Lender an irrevocable proxy, with full power of -6- substitution, coupled with an interest, to exercise all voting and other consensual rights pertaining to the Collateral, exercisable if and to the extent that the Lender is entitled to exercise such rights pursuant to Section 4.3(b)(ii). All third parties are entitled to rely conclusively on a representation by the Lender that it is entitled to exercise such power of attorney. (c) Distributions. (i) Subject to Section 4.4(c)(ii), the Grantor shall be entitled to receive and retain all Distributions permitted under Section(s) 6.6 of the Amended and Restated Credit Agreement, except for the following: (A) Distributions paid or payable other than in cash, (B) Distributions paid or payable in cash in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in surplus, (C) Distributions paid or payable in cash in respect of principal of, or in redemption of, or in exchange for, any Collateral, and (D) Distributions made in contravention of any provision of the Loan Documents. Distributions referred to in the foregoing clauses (A), (B), (C) and (D) shall be Collateral, and shall be forthwith delivered to the Lender to hold as such. (ii) If an Event of Default or Potential Default has occurred and is continuing, all rights of the Grantor to receive and retain the Distributions that it would otherwise be authorized to receive and retain pursuant to Section 4.3(c)(i) shall automatically cease, and all such rights shall thereupon vest in the Lender. Such Distributions shall be Collateral, and shall be forthwith delivered to the Lender to hold as such. (iii) If the Grantor receives any payment or property which they are not entitled to retain pursuant to Section 4.3(c)(i) or 4.3(c)(ii), such payment or property shall be received in trust for the benefit of the Lender, shall be segregated from other funds and property of the Grantor, and shall be forthwith delivered to the Lender as Collateral in the same form as so received (with any necessary endorsement). -7- 4.4. Further Assurances. The Grantor shall from time to time, at its expense, promptly execute and deliver all further instruments and agreements, and take all further actions, that may be necessary or appropriate, or that the Lender may reasonably request, in order to perfect or protect any assignment, pledge or security interest granted or purported to be granted hereby or to enable the Lender to exercise or enforce its rights and remedies hereunder. ARTICLE V CERTAIN RIGHTS AND REMEDIES OF THE LENDER 5.1. Lender May Perform. If the Grantor fails to perform any obligation under or in connection with this Agreement, the Lender may (but shall have no duty to) itself perform or cause performance of such obligation, and the expenses of the Lender incurred in connection therewith shall be payable by the Grantor pursuant to Section 6.4. The Lender may from time to time take any other action which the Lender deems necessary or appropriate for the maintenance, preservation or protection of any of the Collateral or of its security interest therein. 5.2. No Duty to Exercise Powers. The powers of the Lender under and in connection with this Agreement are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. 5.3. Duties of Lender. Except for exercise of reasonable care in the custody and preservation of any Collateral in its possession and accounting for moneys received by it pursuant to this Agreement, the Lender shall have no duty as to any Collateral. In any event the Lender (a) shall have no duty to take any steps to preserve rights against prior parties or any other rights pertaining to any Collateral, and (b) shall have no duty as to ascertaining or taking action with respect to calls, conversions, exchanges, tenders, maturities or other matters pertaining to any Collateral, whether or not the Lender has any knowledge of such matters, and (c) shall not be liable for any action, omission, insolvency or default on the part of any agent or custodian (other than the Lender) appointed by the Lender in good faith. The Lender shall be deemed to have exercised reasonable care in the custody and preservation of Collateral in its possession if it takes such action for such purpose as any Grantor requests in writing from time to time (but failure to take any such action shall not in itself be deemed a failure to exercise reasonable care or evidence of such failure). Subject only to the performance by the Lender of its duties set forth in this Section 5.3, risk of loss, damage and diminution in value of -8- the Collateral, of whatever nature and however caused, shall be on the Grantor, absent Lender's gross negligence or willful misconduct. 5.4. Power of Attorney. The Grantor hereby irrevocably appoints the Lender, with full power of substitution, to be the attorney-in-fact of the Grantor, with full authority in the place and stead of the Grantor and in the name of the Grantor or otherwise, from time to time in the Lender's discretion, to take any action and to execute any instruments and agreements which the Lender may deem necessary or advisable to accomplish the purposes of this Agreement (subject to the rights of the Grantor under Section 4.3), including the following: (a) to demand, collect, enforce, file claims for, sue for, recover, compromise, release, and take any action or institute any proceedings to collect or enforce, all rights to payments due or to become due and all other rights of the Grantor under or in connection with any Collateral, (b) to receive, endorse and collect any checks, notes or other instruments, documents or chattel paper in connection with the foregoing clause (a), and (c) to perform all obligations of the Grantor hereunder, provided that (except for taking actions referred to in Section 4.4) such power of attorney may be exercised only so long as an Event of Default has occurred and is continuing. Such power of attorney is irrevocable and coupled with an interest. All third parties are entitled to rely conclusively on a representation by the Lender that it is entitled to exercise such power of attorney. 5.5. Certain Remedies. If any Event of Default shall have occurred and be continuing, the Lender may exercise all rights and remedies which it may have under this Agreement, any other agreement, at law or otherwise, and in addition, the following provisions shall apply: (a) The Lender may exercise all rights and remedies with respect to the Collateral and each part thereof as are provided by the UCC to a secured party on default (whether or not the UCC applies to the affected Collateral). To the extent, if any, the Lender does not otherwise have the right to do so, the Lender may (i) take absolute possession and control of the Collateral or any part thereof, (ii) transfer any Collateral into the name of the Lender or its nominees, -9- (iii) notify the parties obligated on the Collateral to make to the Lender any payments due or to become due, (iv) receive any payments made under or in connection with the Collateral, (v) exercise all rights and remedies of the Grantor under or in connection with the Collateral, (vi) demand, collect, enforce, file claims for, sue for, recover, compromise, release, and take any action or institute any proceedings to collect or enforce, all rights to payments due or to become due and all other rights of the Grantor under or in connection with any Collateral, and (vii) otherwise deal in and act with respect to the Collateral in all respects as though it were the outright owner thereof. (b) The Lender may, without notice except to the extent required by law, sell the Collateral or any part thereof, in one or more parcels, at public or private sale, at any of the Lender's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Lender may deem commercially reasonable. The Grantor agrees that, to the extent notice of sale is required by law, at least ten days' prior notice to the Grantor of the time and place of any public sale or the time after which any private sale is to be made, shall constitute reasonable notification. The Lender shall not be obligated to make any sale, regardless of notice of sale having been given. The Lender may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (c) The Grantor recognizes that the Lender may be unable, or may deem it inadvisable, to effect a public sale of some or all of the Collateral by reason of requirements of applicable securities laws, but may deem it advisable, for the purpose of complying with such laws, to resort to one or more private sales to members of a restricted group of offerees who will be obliged, among other things, to acquire such Collateral for their own accounts for investment and not with a view to distribution or resale. The Grantor agrees that (i) the Lender may make private sales in such manner, even though such sales may be at prices and on other terms less favorable to the seller than if such Collateral were sold by public sale, (ii) the Lender shall have no obligation to delay sale of any Collateral in order to permit the issuers of such Collateral, even if such issuers would agree, to register or qualify such Collateral for public sale under applicable securities laws, and (iii) it shall not be commercially unreasonable to make private sales in such manner. -10- 5.6. Application of Payments. All cash held by the Lender as Collateral and all cash proceeds received by the Lender in respect of any sale of, collection from, or other realization upon any of the Collateral, may in the discretion of the Lender be held by the Lender as collateral for the Secured Obligations, or then or at any time thereafter applied (after payment of any amounts payable to the Lender pursuant to Section 6.4) in whole or part by the Lender to the Secured Obligations in such order as the Lender may elect. If and when all Secured Obligations shall have been paid in full and all commitments to extend credit under the Loan Documents shall have terminated, any surplus of such cash or cash proceeds of the Collateral held by the Lender shall be paid over to the Grantor or as otherwise required by law. ARTICLE VI MISCELLANEOUS 6.1. Amendments, etc. No amendment to or waiver of any provision of this Agreement, and no consent to any departure by the Grantor herefrom, shall in any event be effective unless in a writing manually signed by or on behalf of the Lender. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 6.2. No Implied Waiver; Remedies Cumulative. No delay or failure of the Lender in exercising any right or remedy under this Agreement shall operate as a waiver thereof; nor shall any single or partial exercise of any such right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. The rights and remedies of the Lender under this Agreement are cumulative and not exclusive of any other rights or remedies available hereunder, under any other agreement, at law, or otherwise. 6.3. Notices. Except to the extent, if any, otherwise expressly provided herein, all notices and other communications (collectively, "notices") under this Agreement shall be given, shall be effective, and may be relied upon, in the same way as notices under the Amended and Restated Credit Agreement. 6.4. Indemnity and Expenses. (a) Indemnity. If Grantor breaches its obligations under this Agreement, Grantor hereby agrees to indemnify the Lender from and against any and all claims, losses, liabilities and expenses (including reasonable attorneys' fees) arising out of or resulting from this Agreement (including, without limitation, enforcement of this Agreement), arising from such -11- Grantor's breach, except claims, losses, liabilities and expenses resulting solely from the gross negligence or willful misconduct of the Lender. (b) Expenses. The Grantor will upon demand pay to the Lender the amount of all reasonable expenses, including the reasonable fees and expenses of the Lender's counsel and of any experts and agents, which the Lender may incur in connection with (i) the custody, preservation, use or operation of, or the sale of, collection of or other realization upon, any Collateral, (ii) the exercise or enforcement of any of the rights of the Lender hereunder, or (iii) the failure by the Grantor to perform or observe any of the provisions hereof. 6.5. Entire Agreement. This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior and contemporaneous understandings and agreements. 6.6. Survival. All representations and warranties of the Grantor contained in or made in connection with this Agreement shall survive, and shall not be waived by, the execution and delivery of this Agreement, any investigation by or knowledge of the Lender, any extension of credit, termination of this Agreement, or any other event or circumstance whatever. The obligations of the Grantor under Section 6.4 shall survive termination of this Agreement. 6.7. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, and all such counterparts shall constitute but one and the same agreement. 6.8. Construction. In this Agreement, unless the context otherwise clearly requires, references to the plural include the singular, the singular the plural, and the part the whole; and "or" is not exclusive. In this Agreement, "include," "includes," "including" and similar terms are not limiting; and "hereof," "herein," "hereunder" and similar terms refer to this Agreement as a whole and not to any particular provision; and "expenses," "costs," "out-of-pocket expenses" and similar terms include the charges of in-house counsel, auditors and other professionals of the relevant Person to the extent that such amounts are routinely identified and charged under such Person's cost accounting system. Section and other headings in this Agreement, and any table of contents herein, are for reference only and shall not affect the interpretation of this Agreement in any respect. Section and other references in this Agreement are to this Agreement unless otherwise specified. This Agreement has been fully negotiated between the applicable parties, each party -12- having the benefit of legal counsel, and accordingly neither any doctrine of construction of security agreements in favor of the grantor, nor any doctrine of construction of ambiguities against the party controlling the drafting, shall apply to this Agreement. 6.9. Successors and Assigns. This Agreement shall be binding upon the Grantor and its successors and assigns, and shall inure to the benefit of and be enforceable by the Lender and its successors and assigns. 6.10. Choice of Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, exclusive of choice of law principles, except to the extent that perfection and the effect of perfection or nonperfection of the security interests in the Collateral is governed by the laws of a jurisdiction other than the Commonwealth of Pennsylvania pursuant to the UCC. IN WITNESS WHEREOF, the Grantor has caused this Agreement to be duly executed and delivered as of the date first above written. ATTEST: NCO OF NEW YORK, INC. By:/s/ JOSHUA GINDEN, SEC. By /s/ MICHAEL J. BARRIST ---------------------------- ----------------------- Title: MICHAEL J. BARRIST Title: President [Corporate Seal] ACCEPTED AND AGREED: MELLON BANK, N.A. By: /s/ LIZ A. MELLACE ---------------------------- LIZ A. MELLACE Assistant Vice President -13- SCHEDULE 3.4(a) --------------- DESIGNATED PLEDGED SHARES ------------------------- OWNER: NCO NCO NCO Group, Group, Group, Inc. Inc. Inc. ISSUER: NCO NCO NCO of Financial, Funding, New York, Inc. Inc. Inc. CLASS: Common Common Common PAR VALUE: $.01 $.01 $.01 STOCK CERTIFICATE NO.: 1 1 1 NO. OF SHARES: 90,495 1,000 200 PERCENTAGE SHARE: 100% 100% 100% EX-10.21 15 NON-NEGOTIABLE SUBORD. CONVERT. PROMISSORY NOTE Exhibit 10.21 THIS NOTE AND THE SHARES INTO WHICH THIS NOTE IS CONVERTIBLE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND ANY APPLICABLE STATE SECURITIES LAWS COVERING SUCH SECURITIES OR THE COMPANY RECEIVES AN OPINION OF COUNSEL (SATISFACTORY TO THE COMPANY AND ITS COUNSEL) FOR THE HOLDER OF THESE SECURITIES, OR AN OPINION OF THE COMPANY'S COUNSEL, STATING THAT SUCH SALE, TRANSFER OR ASSIGNMENT IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT AND ANY APPLICABLE STATE SECURITIES LAWS. NON-NEGOTIABLE SUBORDINATED CONVERTIBLE PROMISSORY NOTE $1,000,000 September 1, 1996 FOR VALUE RECEIVED, NCO GROUP, INC., a Pennsylvania corporation (the "Company"), hereby promises to pay to CRAIG COSTANZO (the "Holder"), the principal sum of One Million Dollars ($1,000,000) together with interest on the unpaid principal balance hereof from the date of this Note and for a term of five (5) years therefrom (the "Term"). 1. The unpaid balance of principal shall bear interest at the rate of eight percent (8%) per annum computed on a daily basis upon the unpaid balance with each day representing 1/365th of a year. 2. During the Term, payments of interest only shall be payable on the first (1st) day of each month, commencing October 1, 1996. Notwithstanding the foregoing, if the date of execution of this Note is other than the first day of a month, the first monthly installment hereunder shall include interest from the date this Note has been executed. 3. This Note is subject to the terms of a Subordination Agreement dated September 5, 1996, in favor of Mellon Bank ("Bank") which Subordination Agreement is incorporated herein by reference. Notwithstanding any contrary statement contained in this Note, no payment on account of the principal or interest thereof shall become due or be paid except in accordance with the terms of said Subordination Agreement. 4. This Note has been issued pursuant to and in accordance with the terms and conditions of a certain Stock Purchase Agreement dated July 18, 1996 (the "Agreement"), the Company and the Holder being parties thereto. The Company's obligation to render payment hereunder shall be subject to the terms and conditions of the Agreement, including, but not limited to, the Holder's obligation to complete Closing, and may be subject to diminution by set-off, counterclaim, abatement or otherwise pursuant to the Company's rights to indemnification under the Agreement. 5. All payments hereon are to be made to the Holder, at the address of the Holder as set forth in Section 14 of this Note (or such other address as may be specified by written notice to the Company in accordance with the notice provisions as set forth in this Note) in lawful money of the United States of America. 6. Subject to the provisions of the Subordination Agreement, in the event that (a) any payment of interest due hereunder shall not be paid when due, and such nonpayment shall continue for a period of more than 15 days after receipt by the Company of written notice from the Holder, or (b) the Company shall cease doing or conducting business, or (c) any proceeding in bankruptcy shall be commenced by or against the Company, which proceeding shall not be stayed or dismissed within 90 days from the date such proceeding is commenced, or (d) a receiver shall be appointed for the Company's assets, or (e) the Company shall make an assignment for the benefit of creditors, or (f) if the Holder is required to give the Company notice pursuant to section (a) above more than three (3) times in any twelve (12) month period then, the entire principal amount outstanding and accrued interest thereon shall, at the option of the Holder, become immediately due and payable regardless of any prior forbearance. Furthermore, in the event that the Company is in default of its obligations under Bank debt (referenced above), and Bank has given the Holder written notice of such default, then that declared event of default shall be a default hereunder. Upon the occurrence of a default hereunder due to the foregoing, the following shall apply: (a) The interest rate hereunder shall immediately increase to Prime Rate (as announced in the Wall Street Journal from time to time) plus four percent (4%) until such time as the default is cured or this Note is repaid; or (b) The Company shall have ninety (90) days to cure such default by: (i) curing the default with Bank and paying to the Holder all amounts of interest and principal due and payable up to the date the Company cures the default; or (ii) repaying the entire outstanding principal hereunder and all accrued interest. Upon such repayment, the right of Conversion as herein set forth shall become a right to purchase 2 the Common Stock pursuant to the same terms and conditions as a Conversion, and for such purpose, this Note shall serve as a Warrant to purchase the Common Stock. (c) In the event that the Company does not cure the foregoing default within the required ninety (90) day period, the Holder's covenant not to compete or interfere with the business of the Company, as set forth in paragraph 8 of the Agreement, shall become null and void. 7. At the election of the Holder, in his sole discretion, at any time and from time to after the registration of the Company's common stock (the "Common Stock") pursuant to a registration statement on Form S-1 (or any equivalent successor form) (the "Registration Statement") under the Securities Act of 1933, as amended, but before all amounts due hereunder by the Company are repaid to the Holder or the end of the Term, whichever is first to occur, all or any part of the outstanding principal amount of this Note and any accrued but unpaid interest thereon up to and including the date determined by the Holder on which a conversion ("Conversion") is to be effective (the "Conversion Date") and all other amounts due and owing hereunder (if any) (collectively, the "Conversion Amount"), as designated by the Holder, shall be converted into an amount of the Common Stock equal to the Conversion Amount divided by the IPO price (as hereinafter defined) per share of the Common Stock on the Conversion Date, provided, however, that an appropriate adjustment shall be made in the event of any change to the Common Stock by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization or other similar circumstances. The "IPO price" shall be equal to the price per share at which the Common Stock was sold to the public as set forth in the Registration Statement on the date it is declared effective by the Securities and Exchange Commission (the "IPO"). The foregoing notwithstanding, in the event that the Holder has defaulted in performing any material obligation under the Agreement or if the Holder or Mary Anne Costanzo, the Holder's wife, breach any covenant under paragraph 8 of the Agreement, unless such breach is pursuant to their right under paragraph 6(c) of this Note, and such default is not cured within 30 days after notice by the Company, the right of Conversion shall be forfeited immediately, without the requirement of Notice from the Company. 8. If the Holder desires to exercise his elective right of Conversion hereunder, the Holder shall give written notice (the "Conversion Notice") to the Company, at least 30 days prior to the Conversion Date stating his intention to convert this Note, at the Company's offices, on the Conversion Date and stating the Conversion Amount. On or prior to the Conversion Date, the Holder shall surrender this Note for cancellation to the Company in exchange for (a) a certificate evidencing the number of shares of Common Stock into which this Note is being converted, and (b) if 3 the principal amount of this Note is being converted in part only, a replacement Note of like tenor and date executed by the Company evidencing the balance due. The Conversion shall be deemed to have occurred immediately prior to the close of business on the Conversion Date (the "Effective Time"). With respect to the Conversion Amount to be converted, until the Effective Time, nothing herein shall be construed as conferring on the Holder the right to receive notice as a stockholder in respect of the meetings of stockholders or the election of directors of the Company or any other matter, to vote or to consent to actions, to receive dividends, distributions or other amounts payable to holders of record of Common Stock or to any other rights whatsoever as a stockholder of the Company. 9. With respect to any Conversion of this Note by the Holder: (a) Anything in this Note to the contrary notwithstanding, if the Holder exercises his right of Conversion by sending the Conversion Notice as required pursuant to Section 8, then, regardless of whether the Holder surrenders this Note as required on or prior to the Conversion Date, the Conversion Amount designated by the Holder shall be deemed "satisfied in full" as of the Effective Time and, thereafter, the Holder shall be treated for all purposes as the record holders of the Common Stock into which the Conversion Amount has been converted. (b) the Company shall not be obligated to issue any certificates representing the Common Stock into which the Conversion Amount has been converted, or any replacement Note for any amount not converted, until this Note is delivered to the Company or the Holder notifies the Company that this Note has been lost, stolen or destroyed and executes an agreement satisfactory to the Company to indemnify the Company from any loss incurred by it in connection therewith. Until the Note or such agreement is received, the Company may withhold all dividends, distributions and other amounts otherwise payable to the Holder on account of the Common Stock into which the Conversion Amount has been converted and any principal and interest payment otherwise payable to the Holder on account of any replacement Note. (c) All certificates representing shares of the Common Stock to be issued to the Holder hereunder on any Conversion of this Note shall bear the following legend: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND ANY APPLICABLE STATE SECURITIES LAWS COVERING SUCH 4 SECURITIES OR THE COMPANY RECEIVES AN OPINION OF COUNSEL (SATISFACTORY TO THE COMPANY AND ITS COUNSEL) FOR THE HOLDER OF THESE SECURITIES, OR AN OPINION OF THE COMPANY'S COUNSEL, STATING THAT SUCH SALE, TRANSFER OR ASSIGNMENT IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT AND ANY APPLICABLE STATE SECURITIES LAWS." The foregoing notwithstanding, the sale of the Common Stock acquired by the Holder through a Conversion shall be restricted for a period of one hundred eighty (180) days following the IPO. (d) Subject to rules and regulations of the Securities and Exchange Commission, whenever the Company proposes to register any of its securities under the Securities Act of 1933 and the registration form to be used may be used for the registration of securities of the type held by the Holder upon Conversion (a "Piggyback Registration"), the Company shall give prompt written notice to the Holder of its intention to effect such a registration and the Holder shall, at his sole expense, have the right to a Piggyback Registration of his Common Stock. (e) The shares of the Common Stock issued pursuant to the Holder's right of Conversion hereunder shall be deemed fully paid and not liable to any further call or assessment. The Holder shall have and possess all rights appertaining to owners of the Common Stock of the Company and shall have the same rights and preferences upon liquidation as all other holders of the Common Stock. (f) The Holder shall pay any and all franchise, transfer, and filing fees and taxes which may be imposed by any governmental agency with respect to the issuance and delivery of the Common Stock upon any Conversion of this Note. 10. The Company does hereby waive presentment, demand for payment, notice of dishonor, notice of protest and all other notices or demands in connection with the delivery, acceptance, performance of or default on this Note, except as otherwise provided herein. 11. All of the terms and provisions of this Note shall be binding upon, inure to the benefit of and be enforceable by each of the parties hereto, and their respective heirs, executors, administrators, successors and permitted assigns. This Note or any part hereof may not be transferred or assigned by the Holder except with the written consent of the Company which consent shall not be unreasonably withheld. 12. No failure to exercise, delay in exercising, or single or partial exercise by the Holder of any right, power or remedy with 5 respect to this Note shall constitute a waiver thereof, preclude any other or further exercise thereof, or preclude the exercise of any other right, power or remedy. 13. If any part of this Note is adjudged illegal, invalid or unenforceable, then the remainder hereof shall not be affected thereby. 14. Notices. Any notices or other communications required or permitted hereunder shall be sufficiently given if delivered in person or sent by Certified Mail, Return Receipt Requested, postage prepaid, or by facsimile, or delivered by overnight delivery service, to the party to receive such notice addressed as follows: If to Company: 1740 Walton Road Blue Bell, PA 19422 With copy to: Joshua Gindin, Esquire 1700 Two Logan Square 18th & Arch Streets Philadelphia, PA 19103 If to Holder: 331 Wellingwood Drive East Amherst, NY 14051 With copy to: Harry G. Meyer, Esquire 1800 One M & T Plaza Buffalo, NY 14203 or to such other address as either party shall designate by notice given to the other. 15. This Note shall be governed by, and construed in accordance with, the laws of the Commonwealth of Pennsylvania. This Note may not be varied, amended or modified except in writing signed by the Company and the Holder. IN WITNESS WHEREOF, this Note has been executed by the Company as of the date and year first above written. Attest: NCO GROUP, INC. ________________________ By: /s/ Michael Barrist ---------------------------- Michael Barrist, President 6 EX-10.22 16 EXHIBIT 10.22 Exhibit 10.22 DISTRIBUTION AND TAX INDEMNIFICATION AGREEMENT THIS DISTRIBUTION AND TAX INDEMNIFICATION AGREEMENT ("Agreement") is made and dated as of _______________, 1996, by and among NCO FINANCIAL SYSTEMS, INC., a Pennsylvania corporation (the "Company"), and MICHAEL J. BARRIST, ANNETTE BARRIST, CHARLES C. PIOLA, JR., and BERNARD R. MILLER (the "Shareholders"). W I T N E S S E T H: WHEREAS, the Company elected to be taxed as an "S" corporation under Section 1362 of the Internal Revenue Code of 1986, as amended (the "Code") and under similar provisions of various state tax laws, for the period commencing on January 1, 1987 and ending on the date the Company ceased to be eligible to be an S corporation (the "S Corporation Period"); WHEREAS, for Federal and certain state income tax purposes, the Company did not incur any income tax liability during the S Corporation Period, and the Company's items of income, loss, deductions and credit were passed through and included in the determination of the taxable income the Shareholders; WHEREAS, it was the Company's practice to distribute to the Shareholders with respect to each calendar year an amount at least equal to each Shareholder's pro rata share of the Company's taxable income for such year multiplied by the Effective Tax Rate (the highest of the combined effective Federal and state personal income tax rates applicable to the Shareholder, taking into account any deductions or credits allowed by any Federal or state taxing jurisdictions for income taxes paid to any other jurisdiction); and WHEREAS, the parties to this Agreement desire to set forth their agreement with respect to distributions to be made to the Shareholders with respect to undistributed earnings of the Company for the S Corporation Period, and certain taxes, interest and penalties which may be imposed upon the Shareholders as a result of the conduct of the Company's business during the S Corporation Period; NOW, THEREFORE, in consideration of the foregoing and of the mutual promises, covenants and conditions hereinafter contained, intending to be legally bound, the parties hereto agree as follows: 1. On or before December 31, 1996, the Company will distribute $3,000,000 to the Shareholders. The distribution shall be allocated among the Shareholders pro rata in accordance with their ownership of stock of the Company immediately prior to the end of the S Corporation Period. The amount of the distribution is the estimate of the Company's Accumulated Adjustments Account ("AAA") as determined under Section 1368(e)(1) of the Code for the S Corporation Period. 2. On or before March 15, 1997, the actual AAA account shall be determined for the S Corporation Period, without reduction for the $3,000,000 distribution provided for Section 1 (the "Final AAA"). The Final AAA shall be determined by the Company's accountants, subject to review and approval by the Shareholders' accountants. - 2 - (a) If the Final AAA exceeds $3,000,000, then within thirty days after such determination the Company shall make a cash distribution to the Shareholders equal to the amount of such excess, such distribution to be made pro rata among the Shareholders in accordance with their ownership of stock of the Company immediately prior to the end of the S Corporation Period. (b) If the Final AAA is less than $3,000,000, then within thirty days after such determination the Shareholders shall contribute to the Company cash equal to the amount of such deficiency, net of any taxes, interest or penalties imposed by any tax authority on the Shareholders with respect to the portion of the distribution under Section 1 in excess of the Final AAA, such contribution to be made pro rata among the Shareholders in accordance with there ownership of stock of the Company immediately prior to the end of the S Corporation Period. 3. If, after the S Corporation Period, there is an increase in the taxable income of the Company for any taxable year during the S Corporation Period, whether as a result of a final determination with respect to an amended return filed by the Company or a Shareholder or an audit of the Company or a Shareholder conducted by the Internal Revenue Service, then within thirty days after the date of the final determination, the Company will distribute to each Shareholder an amount of cash equal to the sum of (A) the product of (i) the Shareholder's pro rata share of the Company's increased taxable income for such period, as determined under Section 1366 of the Code, multiplied by (ii) the - 3 - Effective Tax Rate, plus (B) any interest and penalties imposed on the Shareholder by the Code with respect to such increase in taxable income and any legal and accounting fees incurred by the Shareholder in connection with such determination, plus (C) an amount equal to the federal and state income taxes imposed with respect to all distributions to the Shareholder pursuant to this Section 3 such that the amount received by the Shareholder pursuant to this Section 3, net of all such taxes, is equal to the sum of the amounts specified in (A) and (B) of this Section 3. 4. The Company may, at its own expense, upon written notice from the Company to the Shareholder, request that the Shareholder contest any adjustment proposed by a tax authority with respect to taxes for the S Corporation Period. If the Company shall request that any proposed adjustment be contested, then the Shareholder shall, at the Company's expense, contest the proposed adjustment or permit the Company and its representatives, at the Company's request, to contest the proposed adjustment (including pursuing all remaining administrative and judicial appeals). The Company shall pay to the Shareholder on demand all costs and expenses (including, without limitation, legal and accounting costs and expenses) that the Shareholder may incur in contesting such proposed adjustments. The Shareholder shall not make, accept or enter into a settlement or other compromise with respect to any taxes indemnified hereunder, or forego or terminate any proceeding otherwise required hereunder without the consent of the Company, which shall not be unreasonably withheld. - 4 - 5. If a Shareholder receives a refund of federal and/or state income taxes, including interest (a "Refund"), due to any reduction in the Shareholder's share of the Company's income for any taxable year during the S Corporation Period, whether due to a decrease in the Company's taxable income as reported for any taxable year in the S Corporation Period or due to a determination that the Company's taxable income was not includible in Shareholder's taxable income at any time during the S Corporation Period, then within thirty days after the receipt of such Refund, the Shareholder shall pay to the Company an amount of cash equal to the amount of such Refund, net of any taxes, interest or penalties imposed by any tax authority on any distributions to the Shareholder with respect to the S Corporation Period in excess of the Shareholder's share of taxable income of the Company for the S Corporation Period. 6. The obligation to make the payments provided for in Section 2(a) and Section 3 of this Agreement shall be a joint and several liability of the Company and any corporation that is or becomes a member of the affiliated group that includes the Company, as determined under Section 1504(a) of the Code. 7. The covenants and agreements of the parties set forth in this Agreement shall survive indefinitely. 8. All notices, requests, demands and other communications which are required or which may be given under this Agreement shall be in writing. - 5 - 9. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral and written, between the parties hereto with respect to the subject matter hereof. 10. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. 11. No provision of this Agreement may be amended, waived or otherwise modified without the prior written consent of each of the parties hereto. 12. This Agreement shall be governed by, and construed in accordance with, the laws of the Commonwealth of Pennsylvania, without reference to the principles of conflicts of law. IN WITNESS WHEREOF, this Agreement has been duly executed as of the day and year first above written. NCO FINANCIAL SYSTEMS, INC. By:____________________________ Name: Michael J. Barrist Title: President SHAREHOLDERS /s/ MICHAEL J. BARRIST --------------------------------- MICHAEL J. BARRIST - 6 - /s/ ANNETTE BARRIST --------------------------------- ANNETTE BARRIST /s/ CHARLES C. PIOLA, JR. --------------------------------- CHARLES C. PIOLA, JR. /s/ BERNARD R. MILLER --------------------------------- BERNARD R. MILLER - 7 - EX-21 17 EXHIBIT 21.1 Exhibit 21.1 NCO Group, Inc. owns all of the outstanding stock of: (i) NCO Financial Systems, Inc., a Pennsylvania Corporation; (ii) NCO of New York, Inc., a New York Corporation; (iii) NCO Funding, Inc., a Delaware Corporation; and (iv) CC Services, Inc., a Pennsylvania Corporation. NCO of New York, Inc. owns all of the outstanding stock of Management Adjustment Bureau, Inc., a New York Corporation. EX-23.1 18 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 (File No. 333- ) of our report dated February 16, 1996, except for notes 1,2,3,7 and 13 for which the date is September 5, 1996 on our audits of the financial statements of NCO Group, Inc. as of December 31, 1994 and 1995 and for the three years in the period ended December 31, 1995. We also consent to the inclusion of our report dated August 20, 1996 on our audits of the financial statements of Management Adjustment Bureau, Inc. as of December 31, 1994, 1995 and June 30, 1996 and for the three years in the period ended December 31, 1995 and the six months ended June 30, 1996. We also consent to the reference to our firm under the caption "Experts." /s/ Coopers & Lybrand, L.L.P. - ----------------------------- Coopers & Lybrand, L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania September 9, 1996 EX-23.2 19 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated January 16, 1996, with respect to the financial statements of the Trans Union Corporation Collections Division included in the Registration Statement (Form S-1) and related Prospectus of NCO Group, Inc. for the registration of 2,875,000 shares of its common stock. /s/ Ernst & Young LLP ----------------------- Ernst & Young LLP Chicago, Illinois September 6, 1996 EX-27.1 20 FINANCIAL DATA SCHEDULE
5 0001022608 NCO GROUP INC. 1 DOLLAR YEAR YEAR 6-MOS DEC-31-1994 DEC-31-1995 JUN-30-1996 JAN-1-1994 JAN-1-1995 JAN-1-1996 DEC-31-1994 DEC-31-1995 JUN-30-1996 1 1 1 526,018 804,550 989,773 0 0 0 610,576 1,418,001 2,895,164 7,400 23,200 64,554 0 0 0 1,573,728 2,725,377 4,257,959 962,512 1,222,044 2,154,992 485,185 584,911 734,919 4,105,719 7,873,133 14,654,530 1,101,127 1,913,836 1,799,932 0 0 0 0 0 0 0 0 0 349,326 537,326 537,326 1,073,358 1,514,021 2,613,435 4,105,719 7,873,133 14,654,530 8,577,895 12,732,597 12,542,664 8,604,630 12,782,070 12,590,079 0 0 0 7,231,872 10,839,680 10,048,521 215,117 396,585 422,814 0 0 0 71,588 180,205 357,494 0 0 0 0 0 0 1,086,053 1,365,600 1,761,250 0 0 0 0 0 0 0 0 0 1,086,053 1,365,600 1,761,250 0.00 0.00 0.00 0.00 0.00 0.00
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