-----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, CwoucJwmR8DDfuuvDsqB+oLlFCIi8i8t5kwsDdae8nHBoA5CIonCWJLlXGsUJkkZ HMuNks33yImjzm801+uI0Q== 0000950116-98-001722.txt : 19980817 0000950116-98-001722.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950116-98-001722 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NCO GROUP INC CENTRAL INDEX KEY: 0001022608 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-CONSUMER CREDIT REPORTING, COLLECTION AGENCIES [7320] IRS NUMBER: 232858652 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21639 FILM NUMBER: 98689686 BUSINESS ADDRESS: STREET 1: 515 PENNSYLVANIA AVE CITY: FT WASHINGTON STATE: PA ZIP: 19034 BUSINESS PHONE: 2157939300 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q /X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 1998, or / / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to - -------------------------------------------------------------------------------- COMMISSION FILE NUMBER 0-21639 - -------------------------------------------------------------------------------- NCO GROUP, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) PENNSYLVANIA - -------------------------------------------------------------------------------- (State or other jurisdiction of incorporation or organization) 515 Pennsylvania Avenue, Fort Washington, Pennsylvania - -------------------------------------------------------------------------------- (Address of principal executive offices) 23-2858652 - -------------------------------------------------------------------------------- (IRS Employer Identification Number) 19034 - -------------------------------------------------------------------------------- (Zip Code) 215-793-9300 - -------------------------------------------------------------------------------- (Registrant's telephone number including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding of each of the issuer's classes of common stock was 17,864,771 shares common stock, no par value, outstanding as of July 31, 1998. NCO GROUP, INC. INDEX PAGE ---- Part I FINANCIAL INFORMATION Item 1 CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Consolidated Balance Sheets - December 31, 1997 and June 30, 1998 3 Consolidated Statements of Income - Three months and six months ended June 30, 1997 and 1998 4 Consolidated Statements of Cash Flows - Six months ended June 30, 1997 and 1998 5 Notes to Consolidated Financial Statements 6 Pro Forma Consolidated Statement of Income - Six months ended June 30, 1998 11 Notes to Pro Forma Consolidated Statement of Income 12 Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13 PART II 18 Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Shareholders Item 5. Other Information Item 6. Exhibits and Reports on 8-K -2- Part 1 - Financial Information Item 1 - Financial Statements NCO GROUP, INC. Consolidated Balance Sheets (Unaudited) (Amounts in thousands, except per share data)
December 31, June 30, ASSETS 1997 1998 ------------ ---------- Current assets: Cash and cash equivalents $ 29,539 $ 25,554 Accounts receivable, trade, net of allowance for doubtful accounts of $365 and $617, respectively 13,442 23,621 Other current assets 2,357 2,628 ------------ ---------- Total current assets 45,338 51,803 Funds held in trust for clients Property and equipment, net 7,469 10,762 Other assets: Intangibles, net of accumulated amortization 46,403 123,045 Deferred taxes - 10,103 Deposits on acquisitions 1,650 - Other assets 776 4,561 ------------ ---------- Total other assets 48,829 137,709 ------------ ---------- Total assets $ 101,636 $ 200,274 ============ ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term debt, current portion $ 560 $ 1,463 Capitalized lease obligations, current portion 114 268 Corporate taxes payable 286 1,782 Accounts payable 1,913 3,185 Accrued expenses 3,074 4,475 Accrued compensation and related expenses 2,844 4,418 Accrued pension and other benefits, current portion - 995 Unearned revenue, net of related costs 107 153 ------------ ---------- Total current liabilities 8,898 16,739 Funds held in trust for clients Long-term liabilities: Long term debt, net of current portion 1,437 5 Capitalized lease obligations, net of current portion 248 760 Deferred taxes 1,691 - Accrued pension and other benefits, net of current portion - 6,706 Unearned revenue, net of related costs 28 - Commitments and contingencies Shareholders' equity: Preferred stock, no par value, 5,000 shares authorized, no shares issued and outstanding Common stock, no par value, 37,500 shares authorized, 13,216 and 17,395 shares issued and outstanding, respectively. 80,249 161,902 Unexercised warrants 1,122 875 Foreign currency translation adjustment - (266) Retained earnings 7,963 13,553 ------------ ---------- Total shareholders' equity 89,334 176,064 ------------ ---------- Total liabilities and shareholders' equity $ 101,636 $ 200,274 ============ ========== The accompaning notes are an integral part of these consolidated financial statements.
-3- NCO GROUP, INC. Consolidated Statements of Income (Unaudited) (Amounts in thousands, except per share data)
For the Three Months Ended For the Six Months Ended June 30, June 30, --------------------- -------------------- 1997 1998 1997 1998 --------- -------- -------- --------- Revenue $ 21,162 $ 38,990 $ 39,239 $ 66,599 Operating costs and expenses: Payroll and related expenses 10,537 20,125 19,583 34,269 Selling, general and administrative expenses 6,760 11,286 12,691 19,854 Depreciation and amortization expense 827 1,533 1,543 2,688 --------- -------- -------- --------- Total operating costs and expenses 18,124 32,944 33,817 56,811 --------- -------- -------- --------- Income from operations 3,038 6,046 5,422 9,788 Other income (expense): Interest and investment income 69 260 162 492 Interest expense (247) (631) (422) (710) --------- -------- -------- --------- (178) (371) (260) (218) --------- -------- -------- --------- Income before provision for income taxes 2,860 5,675 5,162 9,570 Income tax expense 1,144 2,401 2,138 3,980 --------- -------- -------- --------- Net income $ 1,716 $ 3,274 $ 3,024 $ 5,590 ========= ======== ======== ========= Net income per share: Basic $ 0.16 $ 0.22 $ 0.28 $ 0.40 ========= ======== ======== ========= Diluted $ 0.15 $ 0.22 $ 0.27 $ 0.39 ========= ======== ======== ========= Weighted average shares outstanding: Basic 10,851 14,624 10,753 13,932 Diluted 11,448 15,158 11,339 14,479 The accompaning notes are an integral part of these consolidated financial statements.
-4- NCO GROUP, INC Consolidated Statements of Cash Flows (Unaudited) (Amounts in thousands, except per share data)
For the Six Months Ended June 30, ----------------------- 1997 1998 ---------- --------- Cash flows from operating activities: Net income $ 3,024 $ 5,590 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 599 999 Amortization of intangibles 944 1,692 Provision for doubtful accounts 83 56 Changes in assets and liabilities, net of acquisitions: Accounts receivable, trade (892) (1,345) Other current assets 348 1,247 Deferred taxes 106 1,160 Other assets 85 251 Accounts payable (847) 129 Corporate taxes payable 1,151 1,432 Accrued expenses 1,158 (1,788) Accrued compensation and related costs (37) (410) Unearned revenue (73) (134) ---------- --------- Net cash provided by operating activities 5,649 8,879 Cash flows from investing activities: Purchase of property and equipment (1,625) (2,457) Net cash paid for acquisitions (17,257) (86,964) ---------- --------- Net cash used in investing activities (18,882) (89,421) Cash flows from financing activities: Repayment of notes payable (203) (664) Repayment of acquired notes payable - (4,653) Borrowings under credit agreement 8,350 74,000 Repayment of borrowings under credit agreement - (74,000) Payment of fees to acquire new debt - 493 Issuance of common stock, net - 81,406 ---------- --------- Net cash provided by financing activities 8,147 76,582 Effect of exchange rate on cash - (25) ---------- --------- Net decrease in cash and cash equivalents (5,086) (3,985) Cash and cash equivalents at beginning of period 12,059 29,539 ---------- --------- Cash and cash equivalents at end of period $ 6,973 $ 25,554 ========== ========= The accompaning notes are an integral part of these consolidated financial statements.
-5- NCO GROUP, INC. Notes to Consolidated Financial Statements (Unaudited) 1. Nature of Operations: NCO Group, Inc. (the "Company") is a leading provider of accounts receivable management and other outsoucred services. The Company's client base is comprised of companies located throughout the United States, Canada, United Kingdom and Puerto Rico in the financial services, healthcare, retail and commercial, education, telecommunications, utilities and government sectors. In June 1998, the Company completed a public offering (the "1998 Offering") of 4,329,110 shares of Common Stock at a price to the public of $21.50 per share, including 4,000,000 shares issued by the Company, 180,000 shares sold by management and related shareholders and 149,110 shares sold by certain non-management shareholders. The proceeds of the offering, after underwriting discounts and expenses, were approximately $81.1 million. In July 1998, in connection with the underwriters' exercise of the over-allotment option granted pursuant to the 1998 Offering at a price to the public of $21.50 per share, the Company issued 469,366 shares and 180,000 shares were sold by management and related shareholders. The proceeds from the underwriters' exercise of the over-allotment option, after underwriting discounts and expenses, were approximately $9.6 million. 2. Summary of Significant Accounting Policies: Interim Financial Information: The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month and six month periods ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998 or for any other interim period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K, as amended, filed with the Securities and Exchange Commission on March 31, 1998. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of significant intercompany accounts and transactions. 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. -6- Income Taxes: The Company accounts for income taxes using Statement of Financial Accounting Standards 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 on the balance sheet. If it is more likely than not that some or all of a deferred tax asset will not be realized, a valuation allowance is recognized. 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. Goodwill: Goodwill represents the excess of purchase price over the fair market value of the net assets of the acquired businesses. Goodwill is amortized on a straight-line basis over 15 to 40 years. The Company periodically reviews the recoverability of goodwill. In making such determination with respect to goodwill, the Company evaluates the operating cash flows of the underlying business that gave rise to such amount. 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: All earnings per share computations and presentations are in accordance with SFAS No. 128, "Earnings per Share." 3. Acquisitions: On January 22, 1997, the Company purchased the outstanding stock of Goodyear & Associates, Inc. ("Goodyear") for $5.4 million comprised of $4.5 million in cash and a $900,000 convertible note. The Company recognized goodwill of $4.9 million. On January 30, 1997, the Company purchased substantially all the assets of Tele-Research Center, Inc. ("Tele-Research") for $2.2 million in cash including contingent consideration paid. The Company recognized goodwill of $1.6 million. On January 31, 1997, the Company purchased certain assets of CMS A/R Services ("CMSA/R"), the Collection Division of CMS Energy Corporation, for $5.1 million in cash. The Company recognized goodwill of $3.2 million. On February 2, 1997, the Company purchased certain assets and assumed certain liabilities of the Collections Division of CRW Financial, Inc. ("CRWCD") for $3.8 million in cash, 518,000 shares of common stock and warrants for 375,000 shares of common stock. The acquisition was valued at approximately $12.8 million. The Company recognized goodwill of $10.2 million. -7- On October 1, 1997, the Company purchased the outstanding stock of ADVANTAGE Financial Services, Inc. and related companies ("AFS") for $2.9 million in cash, 46,000 shares of common stock and $1.0 million in notes payable. The acquisition was valued at approximately $5.0 million. The Company recognized goodwill of $5.1 million. On October 1, 1997, the Company purchased the outstanding stock of Credit Acceptance Corp. ("CAC") for $1.8 million in cash. The Company recognized goodwill of $1.8 million. On December 31, 1997, effective January 1, 1998, the Company purchased certain assets of American Financial Enterprises, Inc. Collections Division ("AFECD") for $1.7 million in cash. Cash paid for the acquisition of AFECD is included on the Consolidated Balance Sheet at December 31, 1997 under the caption "Deposits on acquisitions." The Company recognized goodwill of $2.1 million. On February 6, 1998, the Company purchased certain assets of The Response Center ("TRC"), which was an independent division of TeleSpectrum Worldwide, Inc., for $15.0 million in cash plus an earn-out based on the value of the Company's market research business at December 31, 1998. The Company recognized goodwill of $13.9 million. On May 5, 1998, the Company purchased all of the outstanding common shares of FCA International Ltd. ("FCA") at $9.60 per share, Canadian (equivalent to $6.77 in U.S. dollars based upon the exchange rate at the date of the agreement). The acquisition was valued at approximately $69.9 million. The allocation of the fair market value to the acquired assets and liabilities of FCA was based on preliminary estimates and is subject to change. The Company recognized goodwill of $69.8 million. On July 1, 1998, the Company purchased all of the outstanding stock of MedSource, Inc. ("MedSource") for $17.7 million in cash. In connection with the acquisition, the Company repaid debt of $17.3 million. The Company financed the acquisition with $25.5 million of borrowings under the Company's revolving credit facility and with $9.5 million of the proceeds received in July 1998 from the underwriters' exercise of the over-allotment option granted pursuant to the 1998 Offering. The Company expects to recognize goodwill of $36.3 million. 4. Comprehensive Income: Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for the reporting and display of comprehensive income. Comprehensive income consists of net income from operations, plus certain changes in assets and liabilities that are not included in net income but are reported as a separate component of shareholders' equity under generally accepted accounting principles. The Company's comprehensive income is as follows (amounts in thousands):
For the three months For the six months ended June 30, ended June 30, ---------------------- --------------------- 1997 1998 1997 1998 -------- ----------- ------- --------- Net income $ 1,716 $ 3,274 $ 3,024 $ 5,590 Foreign currency translation adjustment - (266) - (266) -------- ----------- ------- --------- Comprehensive income $ 1,716 $ 3,008 $ 3,024 $ 5,324 ======== =========== ======= ========= Acquisitions:
-8- 5. Funds Held in Trust for Clients: In the course of the Company's regular business activities as an accounts receivable management company, the Company receives clients' funds arising from the collection of accounts placed with the Company. These funds are placed in segregated cash accounts and are generally remitted to clients within 30 days. Funds held in trust for clients of $8.1 million and $27.3 million at December 31, 1997 and June 30, 1998, respectively, have been shown net of their offsetting liability for financial statement presentation purposes. 6. Long-term debt: In March 1998, Mellon Bank, N.A. increased the revolving credit facility to $75.0 million from $25.0 million and changed the interest rate from a fixed rate of 2.5% over LIBOR to a variable rate ranging from LIBOR plus 0.75% to LIBOR plus 2.0% (LIBOR was 5.75% at June 30, 1998) based on the Company's interest coverage ratios. There were no outstanding borrowings as of December 31, 1997 or June 30, 1998. 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, among other things, capital expenditures and distributions to shareholders. The bank had received warrants to purchase an aggregate of 361,000 shares of the Company's Common Stock for establishing the credit facility initially and for subsequent amendments to increase the Company's borrowing capacity under such facility. In July 1997, the bank exercised 225,000 warrants for Common Stock which were sold in the 1997 offering. The remainder of the warrants were exercised in January 1998. 7. Earnings per share: Basic earnings per share were computed by dividing the net income for the three months and six months ended June 30, 1997 and 1998 by the weighted average number of shares outstanding. Diluted earnings per share were computed by dividing the net income, adjusted for the effects of interest expense attributable to convertible debt, for the three months and six months ended June 30, 1997 and 1998 by the weighted average number of shares outstanding including all dilutive potential common shares. All outstanding options, warrants and convertible securities have been utilized in calculating diluted net income per share only when their effect would be dilutive. The reconciliation of basic to diluted earnings per share ("EPS") consists of the following (amounts in thousands except EPS amounts):
For the three months ended For the six months ended ---------------------------------- -------------------------------- June 30, 1997 June 30, 1998 June 30, 1997 June 30, 1998 ---------------- ---------------- --------------- --------------- Shares EPS Shares EPS Shares EPS Shares EPS ------ -------- ------ ------- ------ ------- ------ ------- Basic 10,851 $ 0.16 14,624 $ 0.22 10,753 $ 0.28 13,932 $ 0.40 Dilutive effect of warrants 48 - 89 - 47 - 94 - Dilutive effect of options 370 (0.01) 381 - 397 (0.01) 389 (0.01) Dilutive effect of Convertible notes 179 - 64 - 177 - 64 - ------ -------- ------ ------- ------ ------- ------ ------- Diluted 11,448 $ 0.15 15,158 $ 0.22 11,339 $ 0.27 14,479 $ 0.39 ====== ======== ====== ======= ====== ======= ====== =======
-9- 8. Supplemental Cash Flow Information: The following are supplemental disclosures of cash flow information for the six months ended June 30 following (amounts in thousands): 1997 1998 -------- -------- Noncash investing and financing activities: Fair value of assets acquired $ 7,987 $ 34,093 Liabilities assumed from acquisitions 3,400 19,732 Convertible note payable, issued for acquisition 900 - Common stock issued for acquisition 8,215 - Warrants issued for acquisitions 875 - Warrants exercised - 247 -10- NCO GROUP, INC. Pro Forma Consolidated Statement of Income For the Six Months Ended June 30, 1998 (Unaudited) (Amounts in thousands, except per share amounts)
Historical ----------------------------------------------------- NCO Group, The Response Acquisition Inc. Center (1) FCA (1) MedSource (1) Adjustments (2) ---------- ------------ -------- ------------- --------------- Revenue $ 66,599 $ 788 $ 19,340 $ 11,109 $ - Operating costs and expenses: Payroll and related expenses 34,269 429 14,267 6,140 (2,780) Selling, general and administrative expenses 19,854 162 8,995 3,530 (2,732) Depreciation and amortization expense 2,688 7 2,673 635 (1,773) --------- ------- -------- -------- ------- Total operating costs and expenses 56,811 598 25,935 10,305 (7,285) --------- ------- -------- -------- ------- Income (loss) from operations 9,788 190 (6,595) 804 7,285 Other income (expense): Interest and investment income 492 - 107 - (69) --------- Interest expense (710) - (135) (1,048) (2,009) --------- ------- -------- -------- ------- (218) - (28) (1,048) (2,078) --------- ------- -------- -------- ------- Income (loss) before provision for income taxes 9,570 190 (6,623) (244) 5,207 Income tax expense (benefit) 3,980 - 132 146 (866) --------- ------- -------- -------- ------- Net income (loss) $ 5,590 $ 190 $ (6,755)(4) $ (390) $ 6,073 ========= ======= ======== ======== ======= Net income per share: Basic $ 0.40 ========= Diluted $ 0.39 ========= Weighted average shares outstanding: Basic 13,932 ========= Diluted 14,479 =========
[RESTUBBED]
Pro Forma Offering As Pro Forma Adjustments(3) Adjusted --------- -------------- --------- Revenue $ 97,836 $ - $ 97,836 Operating costs and expenses: Payroll and related expenses 52,325 - 52,325 Selling, general and administrative expenses 29,809 - 29,809 Depreciation and amortization expense 4,230 4,230 -------- ------- -------- Total operating costs and expenses 86,364 - 86,364 -------- ------- -------- Income (loss) from operations 11,472 - 11,472 Other income (expense): Interest and investment income 530 - 530 Interest expense (3,902) 2,769 (1,133) -------- ------- -------- (3,372) 2,769 (603) -------- ------- -------- Income (loss) before provision for income taxes 8,100 2,769 10,869 Income tax expense (benefit) 3,392 1,108 4,500 -------- ------- -------- Net income (loss) $ 4,708 $ 1,661 $ 6,369 ======== ======= ======== Net income per share: Basic $ 0.34(5) $ 0.37(5) ======== ======== Diluted $ 0.33(5) $ 0.36(5) ======== ======== Weighted average shares outstanding: Basic 13,932 17,170(6) ======== ======== Diluted 14,479 17,717(6) ======== ======== The accompanying notes are an integral part of these pro forma consolidated financial statements.
-11- NCO GROUP, INC. Notes to Pro Forma Consolidated Statement of Income (Unaudited) (1) Gives effect to the acquisitions of The Response Center ("TRC") and FCA International Ltd. ("FCA") and the pending acquisition of MedSource, Inc. ("MedSource") as if they occurred on January 1, 1998. (2) Gives effect to: (i) the elimination of payroll and related expenses relating to certain redundant collection and administrative personnel costs immediately eliminated at the time of the TRC and FCA acquisitions and expenses identified during the due diligence process which were eliminated upon the closing of the MedSource acquisition; (ii) the elimination of certain rental expenses and related operating costs attributable to facilities which were closed upon the completion of the FCA acquisition and costs attributable to facilities that were identified during the due diligence process and closed upon the completion of the MedSource acquisition; (iii) the increase in amortization expense resulting from the TRC, FCA and MedSource acquisitions; (iv) the elimination of depreciation and amortization expense related to assets revalued or not acquired; (v) interest expense on borrowings related to the FCA and MedSource acquisitions; and (vi) the estimated income tax expense or benefit, after giving consideration to non-deductible goodwill expense. (3) Reflects the elimination of interest expense on debt assumed to be repaid with a portion of the proceeds from the Company's public offering of 4,469,366 shares of Common Stock, including the 469,366 shares of Common Stock sold in July 1998 in connection with the underwriters' exercise of the over-allotment option, at the public offering price of $21.50 per share, net of underwriting discount and estimated offering expenses payable by the Company (the "1998 Offering"). (4) Includes non-recurring charges of $5.7 million. $4.3 million of these expenses were incurred in connection with NCO's acquisition of FCA and were therefore eliminated for the purposes of calculating pro forma net income. $1.4 million of the expenses were not incurred in connection with NCO's acquisition of FCA but are non-recurring in nature and are not necessarily representative of FCA's future operating costs. (5) Includes $1.4 million of expenses which were not incurred in connection with NCO's acquisition of FCA but are non-recurring in nature and are not necessarily representative of FCA's future operating costs. Net income per share - basic and net income per share - diluted would have been $0.40 and $0.38, respectively, on a pro forma basis assuming these expenses had not been incurred. On a pro forma as adjusted basis, net income per share - basic and net income per share - diluted would have been $0.42 and $0.41, respectively, assuming these expenses had not been incurred. (6) Gives effect to the issuance of 4,469,366 shares of Common Stock, including the 469,366 shares of Common Stock sold in July 1998 in connection with the underwriters' exercise of the over-allotment option, in the 1998 Offering. -12- Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Certain statements included in this Report on Form 10-Q, other than historical facts, are forward-looking statements (as such term is defined in the Securities Exchange Act of 1934, and the regulations thereunder) including, without limitation, statements as to the Company's objective to grow through strategic acquisitions and internal growth, the Company's ability to realize operating efficiencies in the integration of its acquisitions, trends in the Company's future operating performance, the classification of the Company's investment portfolio, and statements as to the Company's or management's beliefs, expectations and opinions. Forward-looking statements are subject to risks and uncertainties and may be affected by various factors which may cause actual results to differ materially from those in the forward-looking statements. In addition to the factors discussed in this Report, certain risks, uncertainties and other factors, including, without limitation the risk that the Company will not be able to realize operating efficiencies in the integration of its acquisitions, risks associated with growth and future acquisitions, fluctuations in quarterly operating results, and the other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K, filed on March 31, 1998, as amended, and the Company's Registration Statement on Form S-3, filed on May 4, 1998, as amended, can cause actual results and developments to be materially different from those expressed or implied by such forward-looking statements. In analyzing whether to make, or to continue, an investment in the Company, investors should consider, among other factors, certain risk factors and other information contained in the Company's filings with the Securities and Exchange Commission, including, without limitation, the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 1998, as amended and the Company's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on May 4, 1998, as amended. A copy of the Annual Report on Form 10-K can be obtained, without charge except for exhibits, by written request to Steven L. Winokur, Executive Vice-President, Finance/CFO, NCO Group, Inc., 515 Pennsylvania Avenue, Ft. Washington, PA 19034. Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997 Revenue. Revenue increased $17.8 million or 84.3% to $39.0 million for the three months ended June 30, 1998 from $21.2 million for the comparable period in 1997. Of the increase, $5.5 million was attributable to the addition of new clients and growth in business from existing clients. Revenue attributable to the FCA International Ltd. ("FCA") acquisition completed in May 1998 represented $8.7 million of the increase. In addition, $2.2 million of the increase was attributable to the Collection Division of American Financial Enterprises, Inc. ("AFECD") and The Response Center ("TRC") acquisitions completed in the first quarter of 1998 and $1.4 million of the increase was attributable to the ADVANTAGE Financial Services, Inc. ("AFS") and the Credit Acceptance Corporation ("CAC") acquisitions completed in October 1997. Payroll and related expenses. Payroll and related expenses increased $9.6 million to $20.1 million for the three months ended June 30, 1998 from $10.5 million for the comparable period in 1997, and increased as a percentage of revenue to 51.6% from 49.8%. Payroll and related expenses increased as a percentage of revenue primarily as a result of FCA and the market research division having higher payroll cost structures than that of the remainder of the Company. In addition, the start up of a contract with the United States Department of Education (the "DOE Contract") required the Company to hire and train a certain number of collection personnel the cost of which was only partially offset by revenues generated by the contract during its startup phase. These higher costs were partially offset by lower payroll costs in the AFS and CAC acquisitions and by spreading the cost of management and administrative personnel over a larger revenue base. -13- Selling, general and administrative expenses. Selling, general and administrative expenses increased $4.5 million to $11.3 million for the three months ended June 30, 1998 from $6.8 million for the comparable period in 1997, but decreased as a percentage of revenue to 28.9% from 31.9%. The decrease as a percentage of revenue was, in part, the result of additional operating efficiencies obtained when selling, general and administrative expenses were spread over a larger revenue base. In addition, a portion of the decrease was attributable to the market research division having a lower selling, general and administrative expense structure than that of the Company's core business. These decreases as a percentage of revenue were partially offset by the higher cost structures of acquired companies. Depreciation and amortization. Depreciation and amortization increased to $1.5 million for the three months ended June 30, 1998 from $827,000 for the comparable period in 1997. Of this increase, $262,000 was attributable to the FCA acquisition, $284,000 was attributable to the TRC and AFECD acquisitions and $87,000 was attributable to the AFS and CAC acquisitions. The remaining $40,000 consisted of depreciation resulting from normal capital expenditures incurred in the ordinary course of business. Other income (expense). Interest and investment income increased $190,000 to $259,000 for the three months ended June 30, 1998 from $69,000 for the comparable period in 1997. This increase was primarily attributable to the investment of funds remaining from the Company's public offering completed in July 1997 (the "1997 Offering") and the Company's public offering completed in June 1998 (the "1998 Offering"), as well as an increase in operating funds and funds held in trust for clients. Interest expense increased to $631,000 for the three months ended June 30, 1998 from $247,000 for the comparable period in 1997. The increase was primarily attributable to the Company financing the May 1998 acquisition of FCA with $74.0 million of borrowings under its revolving credit facility. In June 1998, the revolving credit facility was repaid with a portion of the proceeds from the 1998 Offering. Income tax expense. Income tax expense increased to $2.4 million, or 42.3% of income before taxes, for the three months ended June 30, 1998 from $1.1 million, or 40.0% of income before taxes, for the comparable period in 1997. Income taxes were computed after giving effect to non-deductible goodwill expenses resulting from certain of the acquired companies. Net income. Net income increased $1.6 million or 90.7% to $3.3 million for the three months ended June 30, 1998 from $1.7 million for the comparable period in 1997. Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997 Revenue. Revenue increased $27.4 million or 69.7% to $39.0 million for the six months ended June 30, 1998 from $21.2 million for the comparable period in 1997. Of the increase, $11.3 million was attributable to the addition of new clients and growth in business from existing clients. Revenue attributable to the FCA acquisition completed in May 1998 represented $8.7 million of the increase. In addition, $3.9 million of the increase was attributable to the AFECD and TRC acquisitions completed in the first quarter of 1998 and $3.5 million of the increase was attributable to the AFS and the CAC acquisitions completed in October 1997. Payroll and related expenses. Payroll and related expenses increased $14.7 million to $34.3 million for the six months ended June 30, 1998 from $19.6 million for the comparable period in 1997, and increased as a percentage of revenue to 51.5% from 49.9%. Payroll and related expenses increased as a percentage of revenue primarily as a result of FCA and the market research division having higher payroll cost structures than that of the remainder of the Company. In addition, the start up of the DOE Contract required the Company to hire and train a certain number of collection personnel the cost of which was only partially offset by revenues generated by the contract during its startup phase. These higher costs were partially offset by lower payroll costs in the AFS and CAC acquisitions and by spreading the cost of management and administrative personnel over a larger revenue base. Selling, general and administrative expenses. Selling, general and administrative expenses increased $7.2 million to $19.9 million for the six months ended June 30, 1998 from $12.7 million for the comparable period in 1997, and decreased as a percentage of revenue to 29.8% from 32.3%. The decrease as a percentage of revenue was, in part, the result of additional operating efficiencies obtained when selling, general and administrative expenses were spread over a larger revenue base. In addition, a portion of the decrease was attributable to the market research division having a lower selling, general and administrative expense structure than that of the Company's core business. These decreases as a percentage of revenue were partially offset by the higher cost structures of acquired companies. -14- Depreciation and amortization. Depreciation and amortization increased to $2.7 million for the six months ended June 30, 1998 from $1.5 million for the comparable period in 1997. Of this increase, $262,000 was attributable to the FCA acquisition, $515,000 was attributable to the TRC and AFECD acquisitions and $176,000 was attributable to the AFS and CAC acquisitions. The remaining $247,000 consisted of depreciation resulting from normal capital expenditures incurred in the ordinary course of business. Other income (expense). Interest and investment income increased $329,000 to $491,000 for the six months ended June 30, 1998 from $162,000 for the comparable period in 1997. This increase was primarily attributable to the investment of funds remaining from the 1997 Offering and the 1998 Offering, as well as an increase in operating funds and funds held in trust for clients. Interest expense increased to $710,000 for the six months ended June 30, 1998 from $422,000 for the comparable period in 1997. The increase was primarily attributable to the Company financing the May 1998 acquisition of FCA with $74.0 million of borrowings under its revolving credit facility. In June 1998, the revolving credit facility was repaid with a portion of the proceeds from the 1998 Offering. Income tax expense. Income tax expense increased to $4.0 million, or 41.6% of income before taxes, for the six months ended June 30, 1998 from $2.1 million, or 41.4% of income before taxes, for the comparable period in 1997. Income taxes were computed after giving effect to non-deductible goodwill expenses resulting from certain of the acquired companies. Net income. Net income increased $2.6 million or 84.9% to $5.6 million for the six months ended June 30, 1998 from $3.0 million for the comparable period in 1997. Liquidity and Capital Resources In July 1997, the Company completed the 1997 Offering, selling 2,166,000 shares of Common Stock and received net proceeds of approximately $40.4 million. In June 1998, the Company completed the 1998 Offering, selling 4,000,000 shares of Common Stock and received net proceeds of approximately $81.1 million. In July 1998, the Company sold 469,366 shares of Common Stock in connection with the underwriters' exercise of the over-allotment option granted pursuant to the 1998 Offering. The Company received net proceeds of approximately $9.6 million. Since 1996, the Company's primary sources of cash have been public offerings, cash flows from operations and bank borrowings. Cash has been used for acquisitions, purchases of equipment and working capital to support the Company's growth. Cash provided by operating activities was $8.9 million during the six months ended June 30, 1998, and $5.6 million for the comparable period in 1997. The increase in cash provided by operations was primarily due to the increase in net income to $5.6 million for the six months ended June 30, 1998 compared to $3.0 million for the comparable period in 1997, and the decrease in other current assets by $1.2 million for the six months ended June 30, 1998 compared to $348,000 for the comparable period in 1997. In addition, the increase in cash provided by operations was also attributable to the decrease in deferred taxes by $1.2 million for the six months ended June 30, 1998 compared to $106,000 for the comparable period in 1997, and the increase in accounts payable by $129,000 for the six months ended June 30, 1998 compared to a decrease of $847,000 for the comparable period in 1997. These increases were partially offset by the decrease in accrued liabilities by $1.8 million for the six months ended June 30, 1998 compared to an increase of $1.2 million for the comparable period in 1997 -15- Cash used in investing activities was $89.4 million during the six months ended June 30, 1998, and $18.9 million for the comparable period in 1997. The increase was primarily due to the cash portion of the purchase price paid for the acquisitions of AFECD, TRC and FCA during the six months ended June 30, 1998 compared to the cash portion of the purchase price paid for the acquisitions of Goodyear, Tele-Research, CMS A/R, and CRWCD during the first quarter of 1997. In addition, during the six months ended June 30, 1998, capital expenditures were $2.5 million compared to 1.6 million for the comparable period in 1997. Cash provided by financing activities was $76.6 million during the six months ended June 30, 1998 compared to $8.1 million for the comparable period in 1997. The Company borrowed $74.0 million against its revolving credit facility to finance the acquisition of FCA in May 1998. The Company repaid the borrowings under the revolving credit agreement in June 1998 with a portion of the $81.1 million of net proceeds raised in the 1998 Offering. In March 1998, the Company's credit agreement was amended to, among other things, increase the Company's revolving credit facility with Mellon Bank, N.A. to provide for borrowings up to $75.0 million at an interest rate ranging from LIBOR plus 0.75% to LIBOR plus 2.0% (LIBOR was 5.75% at June 30, 1998). The Company has the right to permanently reduce the revolving credit facility by up to $25 million. There were no outstanding borrowings as of December 31, 1997 or June 30, 1998. 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, among other things, capital expenditures and distributions to shareholders. On July 1, 1998, the Company purchased all of the outstanding stock of MedSource, Inc. ("MedSource") for $17.7 million in cash. In connection with the acquisition, the Company repaid debt of $17.3 million. The Company financed the acquisition with $25.5 million of borrowings under the Company's revolving credit facility and with $9.5 million of the proceeds received from the underwriters' exercise of the over-allotment option granted pursuant to the 1998 Offering. The Company believes that funds generated from operations, together with existing cash and available borrowings under its Credit Agreement will be sufficient to finance its current operations and planned capital expenditure requirements and internal growth at least through the next twelve months. However, the Company could require additional debt or equity financing if it were to make any other significant acquisitions for cash. Year 2000 System Modifications NCO has implemented a program to evaluate and address the impact of the year 2000 on its information systems in order to insure that its network and software will manage and manipulate data involving the transition of dates from 1999 to 2000 without functional or data abnormality and without inaccurate results related to such data. This program includes steps to: (a) identify software that require date code remediation; (b) establish timelines for availability of corrective software releases; (c) implement the fix to a test environment and test the remediated product; (d) integrate the updated software to NCO's production environment; (e) communicate and work with clients to implement year 2000 compliant data exchange formats; and (f) provide management with assurance of a seamless transition to the year 2000. The identification phase is substantially complete and deliveries of the final software updates are scheduled for the third quarter of 1998. Management expects to complete the major portion of testing and acceptance procedures in 1998. The Company will continue to coordinate the year 2000 compliance effort throughout the balance of 1998 and into 1999 to synchronize data exchange formats with clients. For the years 1998 and 1999, the Company expects to incur total pre-tax expenses of approximately $200,000 to $250,000, per year. These costs are associated with both internal and external staffing resources for the necessary planning, coordination, remediation, testing and other expenses to prepare its systems for the year 2000. However, a portion of these expenses will not be incremental, but rather represent a redeployment of existing information technology resources. The Company does not expect year 2000 compliance costs to have a material adverse impact on the Company's business or results of operations because the majority of the Company's software has been provided by third-party vendors and the third-party vendors are incorporating the necessary modifications as part of their normal system maintenance. The majority of the costs will be incurred through the modification and testing of electronic data interchange formats with the Company's clients and the testing of modifications performed by its third-party vendors. The cost of planning and initial remediation incurred through 1997 has not been significant. -16- The Company does not expect the impact of the year 2000 to have a material adverse impact on the Company's business or results of operations. No assurance can be given, however, that unanticipated or undiscovered year 2000 compliance problems will not have a material adverse effect on the Company's business or results of operations. In addition, if the Company's clients or significant suppliers and contractors do not successfully achieve year 2000 compliance, the Company's business and results of operations and results of operations could be adversely affected, resulting from, among other things, the Company's inability to properly exchange and/or receive data with its clients. Recent Accounting Pronouncements Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for the reporting and display of comprehensive income, requiring its components to be reported in a financial statement that is displayed with the same prominence as other financial statements. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for reporting financial information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customer. The Company is required to disclose this information for the first time it publishes its 1998 annual report. Management is in the process of evaluating the segment disclosures for purposes of reporting under SFAS No. 131. Management has not determined what impact the adoption of SFAS. No. 131 will have on the consolidated results of operations, financial condition or cash flows of the Company. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for the fiscal years beginning after June 15, 1999. SFAS No. 133 requires that an entity recognize all derivative instruments as either assets or liabilities on its balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction, and, if it is, the type of hedge transaction. The Company will adopt SFAS No. 133 by the first quarter of 2000. Due to the Company's limited use of derivative instruments, SFAS No. 133 is not expected to have a material impact on the consolidated results of operations, financial condition or cash flows of the Company. -17- Part II. Other Information Item 1. Legal Proceedings The Company is involved in legal proceedings from time to time in the ordinary course of its business. Management believes that none of these legal proceedings will have a materially adverse effect on the financial condition or results of operations of the Company. Item 2. Changes in Securities None - not applicable Item 3. Defaults Upon Senior Securities None - not applicable Item 4. Submission of Matters to a Vote of Shareholders The Annual Meeting of Shareholders of the Company was held on June 29, 1998. At the Annual Meeting, the Shareholders elected Bernard R. Miller and Allen F. Wise for a term of three years as described below: Name For Withhold Authority ---- --- ------------------ Bernard R. Miller 10,230,655 38,665 Allen F. Wise 10,230,205 39,115 In addition, the terms of the following directors continued after the Annual Meeting: Michael J. Barrist Charles C. Piola, Jr. Eric S. Siegel At the Annual Meeting, the Shareholders approved an amendment to the 1996 Stock Option Plan as follows: For Against Abstain Broker Non-Vote --- ------- ------- --------------- 7,519,155 1,575,376 10,326 1,164,463 Item 5. Other Information Pursuant to recent amendments to the proxy rules under the Securities Exchange Act of 1934, as amended, the Company's shareholders are notified that the deadline for providing the Company timely notice of any shareholder proposal to be submitted for consideration at the Company's 1999 Annual Meeting of Shareholders (the "Annual Meeting") will be January 29, 1999. As to all such matters which the Company does not have notice on or prior to January 29, 1999, the proxy solicited on behalf of the Board of Directors in connection with the matters to be considered at such Annual Meeting will confer discretionary voting authority on the persons designated in such proxy. Shareholder proposals for the 1999 Annual Meeting of Shareholders must be submitted to the Company by January 29, 1999 to receive consideration for inclusion in the Company's Proxy Statement relating to the 1999 Annual Meeting of Shareholders. -18- Item 6. Exhibits and Reports on 8-K (a) Exhibits 10.1 1996 Stock Option Plan, as amended 10.2 1996 Stock Option Plan for Non-Employee Directors, as amended 27.1 Financial Data Schedule (b) Reports on Form 8-K Date of Report Item Reported 4/22/98 Item 7 - No financial statements for The Response Center 5/4/98 Item 5 - FCA International Ltd. tender offer and Item 7 - FCA International Ltd. financial statements 5/12/98 Item 2 - FCA International Ltd. acquisition, Item 5 - MedSource, Inc. acquisition, and Item 7 - MedSource, Inc. financial statements 7/2/98 Item 5 - MedSource, Inc. acquisition Signatures Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 14, 1998 By: /s/ Michael J. Barrist ---------------------- Michael J. Barrist Chairman of the Board, President and Chief Executive Officer (principal executive officer) Date: August 14, 1998 By: /s/ Steven L. Winokur --------------------- Steven L. Winokur Executive Vice President, Finance, Chief Financial Officer and Treasurer EX-10.1 2 1996 STOCK OPTION PLAN NCO GROUP, INC. 1996 STOCK OPTION PLAN 1. Purpose of Plan The purpose of this 1996 Stock Option Plan (the "Plan") is to provide additional incentive to officers, key employees and directors of, and important consultants to, NCO Group, Inc., a Pennsylvania corporation (the "Company"), and each present or future parent or subsidiary corporation, by encouraging them to invest in shares of the Company's common stock, no par value ("Common Stock"), and thereby acquire a proprietary interest in the Company and an increased personal interest in the Company's continued success and progress. The Plan has been restated on August 4, 1998 to reflect: (i) an increase in the authorized shares approved by the shareholders in June 1997, (ii) the adjustments required by the 3-for-2 stock split paid in December 1997 and (iii) an increase in the authorized shares approved by the shareholders in June 1998. 2. Aggregate Number of Shares 1,717,422 shares of the Company's Common Stock shall be the aggregate number of shares which may be issued under this Plan. Notwithstanding the foregoing, in the event of any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee (defined in Section 4(a)), deems in its sole discretion to be similar circumstances, the aggregate number and kind of shares which may be issued under this Plan shall be appropriately adjusted in a manner determined in the sole discretion of the Committee. Reacquired shares of the Company's Common Stock, as well as unissued shares, may be used for the purpose of this Plan. Common Stock of the Company subject to options which have terminated unexercised, either in whole or in part, shall be available for future options granted under this Plan. No adjustment shall be made with respect to the 46.56-for-1 stock split effected in September 1996. 3. Class of Persons Eligible to Receive Options All officers, key employees and directors of, and important consultants to, the Company and any present or future Company parent or subsidiary corporation are eligible to receive an option or options under this Plan, provided, however, that Incentive Stock Options (defined in Section 5(a)) may be issued only to persons who are employees of the Company or any subsidiary corporation. The individuals who shall, in fact, receive an option or options shall be selected by the Committee, in its sole discretion, except as otherwise specified in Section 4 hereof. No individual may receive options under this Plan for more than 90% of the total number of shares of the Company's Common Stock authorized for issuance under this Plan. 4. Administration of Plan (a) Prior to the registration of the Company's Common Stock under Section 12 of the Securities Exchange Act of 1934, this Plan shall be administered by the Company's Board of Directors and, after such registration, by the Compensation Committee ("Committee") appointed by the Company's Board of Directors provided, however, that at the option of the Board of Directors, the Plan may be administered by the Board of Directors of the Corporation at any time and from time to time. The Committee shall consist of a minimum of two and a maximum of five members of the Board of Directors, each of whom shall be a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3) under the Securities Exchange Act of 1934, as amended, or any future corresponding rule, except that the failure of the Committee or of the Board of Directors for any reason to be composed solely of Non-Employee Directors shall not prevent an option from being considered granted under this Plan. The Committee shall, in addition to its other authority and subject to the provisions of this Plan, determine which individuals shall in fact be granted an option or options, whether the option shall be an Incentive Stock Option or a Non-Qualified Stock Option (as such terms are defined in Section 5(a)), the number of shares to be subject to each of the options, the time or times at which the options shall be granted, the rate of option exercisability, and, subject to Section 5 hereof, the price at which each of the options is exercisable and the duration of the option. The term "Committee", as used in this Plan and the options granted hereunder, refers to the Board of Directors prior to the registration of the Company's Common Stock under Section 12 of the Securities Exchange Act of 1934 and, after such registration, to the Committee or to the Board of Directors, if the Board elects to administer the Plan as provided above. (b) The Committee shall adopt such rules for the conduct of its business and administration of this Plan as it considers desirable. A majority of the members of the Committee shall constitute a quorum for all 2 purposes. The vote or written consent of a majority of the members of the Committee on a particular matter shall constitute the act of the Committee on such matter. The Committee shall have the right to construe the Plan and the options issued pursuant to it, to correct defects and omissions and to reconcile inconsistencies to the extent necessary to effectuate the Plan and the options issued pursuant to it, and such action shall be final, binding and conclusive upon all parties concerned. No member of the Committee or the Board of Directors shall be liable for any act or omission (whether or not negligent) taken or omitted in good faith, or for the exercise of an authority or discretion granted in connection with the Plan to a Committee or the Board of Directors, or for the acts or omissions of any other members of a Committee or the Board of Directors. Subject to the numerical limitations on Committee membership set forth in Section 4(a) hereof, the Board of Directors may at any time appoint additional members of the Committee and may at any time remove any member of the Committee with or without cause. Vacancies in the Committee, however caused, may be filled by the Board of Directors, if it so desires. 5. Incentive Stock Options and Non-Qualified Stock Options (a) Options issued pursuant to this Plan may be either Incentive Stock Options granted pursuant to Section 5(b) hereof or Non-Qualified Stock Options granted pursuant to Section 5(c) hereof, as determined by the Committee. An "Incentive Stock Option" is an option which satisfies all of the requirements of Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code") and the regulations thereunder, and a "Non-Qualified Stock Option" is an option which either does not satisfy all of those requirements or the terms of the option provide that it will not be treated as an Incentive Stock Option. The Committee may grant both an Incentive Stock Option and a Non-Qualified Stock Option to the same person, or more than one of each type of option to the same person. The option price for Incentive Stock Options issued under this Plan shall be equal at least to the fair market value (as defined below) of the Company's Common Stock on the date of the grant of the option, provided, however, that if an Incentive Stock Option is granted to an individual who, at the time the option is granted, is deemed to own more than 10 percent of the total combined voting power of all classes of stock of the Company or any subsidiary corporation of the Company as more fully set forth in Section 422(b)(6) of the Code (after giving effect to the ownership attribution rules of 422(c)(5) of the Code) (a "10% Shareholder"), such option shall comply with the provisions of Section 3 422(c)(5) of the Code, including without limitation, requirements that the option price shall not be less than 110 percent of the fair market value, as determined by the Committee in accordance with its interpretation of the requirements of Section 422 of the Code and the regulations thereunder, of the Company's Common Stock on the date of grant of the option, and such option shall not be exercisable after the expiration of five years from the date the option is granted. The option price for Non-Qualified Stock Options issued under this Plan may, in the sole discretion of the Committee, be less than the fair market value of the Common Stock on the date of the grant of the option. The fair market value of the Company's Common Stock on any particular date shall mean the last reported sale price of a share of the Company's Common Stock on any stock exchange on which such stock is then listed or admitted to trading, or on the Nasdaq National Market or Nasdaq SmallCap Market, on such date, or if no sale took place on such day, the last such date on which a sale took place, or if the Common Stock is not then quoted on the Nasdaq National Market or the Nasdaq SmallCap Market, or listed or admitted to trading on any stock exchange, the average of the bid and asked prices in the over-the-counter market on such date, or if none of the foregoing, a price determined in good faith by the Committee to equal the fair market value per share of the Common Stock. (b) Subject to the authority of the Committee set forth in Section 4(a) hereof, Incentive Stock Options issued to officers and key employees pursuant to this Plan shall be issued substantially in the form set forth in Appendix I hereof, which form is hereby incorporated by reference and made a part hereof, and shall contain substantially the terms and conditions set forth therein. Incentive Stock Options shall not be exercisable after the expiration of ten years (five years in the case of 10% Shareholders) from the date such options are granted, unless terminated earlier under the terms of the option. At the time of the grant of an Incentive Stock Option hereunder, the Committee may, in its discretion, amend or supplement any of the option terms contained in Appendix I for any particular optionee, provided that the option as amended or supplemented satisfies the requirements of Section 422(b) of the Code and the regulations thereunder. Each of the options granted pursuant to this Section 5(b) is intended, if possible, to be an "Incentive Stock Option" as that term is defined in Section 422(b) of the Code and the regulations thereunder. In the event this Plan or any option granted pursuant to this Section 5(b) is in any way inconsistent with the applicable legal requirements of the Code or the regulations thereunder for an Incentive Stock Option, this Plan and such option shall be deemed automatically amended as of the date hereof to conform to such legal requirements, if such conformity may be achieved by amendment. (c) Subject to the authority of the Committee set forth in Section 4(a) hereof, Non-Qualified Stock Options issued to officers and other key employees pursuant to this Plan shall be issued substantially in the form set forth in Appendix II hereof, which form is hereby incorporated by reference and made a part hereof, and shall contain substantially the terms and conditions set forth therein. Subject to the authority of the Committee set forth in Section 4(a) hereof, Non-Qualified Stock Options issued to directors and important consultants pursuant to this Plan shall be issued substantially in the form set forth in Appendix III hereof, which form is hereby incorporated by reference and made a part hereof, and shall contain substantially the terms and conditions set forth therein. Non-Qualified Stock Options shall expire ten years after the date they are granted, unless terminated earlier under the option terms. At the time of granting a Non-Qualified Stock Option hereunder, the Committee may, in its discretion, 4 amend or supplement any of the option terms contained in Appendix II or Appendix III for any particular optionee. (d) Neither the Company nor any of its current or future parent, subsidiaries or affiliates, nor their officers, directors, shareholders, stock option plan committees, employees or agents shall have any liability to any optionee in the event (i) an option granted pursuant to Section 5(b) hereof does not qualify as an "Incentive Stock Option" as that term is used in Section 422(b) of the Code and the regulations thereunder; (ii) any optionee does not obtain the tax treatment pertaining to an Incentive Stock Option; or (iii) any option granted pursuant to Section 5(c) hereof is an "Incentive Stock Option." 6. Amendment, Supplement, Suspension and Termination Options shall not be granted pursuant to this Plan after the expiration of ten years from the date the Plan is adopted by the Board of Directors of the Company. The Board of Directors reserves the right at any time, and from time to time, to amend or supplement this Plan and outstanding options granted under the Plan in any way, or to suspend or terminate the Plan, effective as of such date, which date may be either before or after the taking of such action, as may be specified by the Board of Directors; 5 provided, however, that such action shall not adversely affect holders of options granted under the Plan prior to the actual date on which such action occurred. If an amendment or supplement of this Plan is required by the Code or the regulations thereunder to be approved by the shareholders of the Company in order to permit the granting of "Incentive Stock Options" (as that term is defined in Section 422(b) of the Code and regulations thereunder) pursuant to the amended or supplemented Plan, such amendment or supplement shall also be approved by the shareholders of the Company in such manner as is prescribed by the Code and the regulations thereunder. If the Board of Directors voluntarily submits a proposed amendment, supplement, suspension or termination for shareholder approval, such submission shall not require any future amendments, supplements, suspensions or terminations (whether or not relating to the same provision or subject matter) to be similarly submitted for shareholder approval. 7. Effectiveness of Plan This Plan shall become effective on the date of its adoption by the Company's Board of Directors, subject however to approval by the holders of the Company's Common Stock in the manner as prescribed in the Code and the regulations thereunder. Options may be granted under this Plan prior to obtaining shareholder approval, provided such options shall not be exercisable until shareholder approval is obtained. 8. General Conditions (a) Nothing contained in this Plan or any option granted pursuant to this Plan shall confer upon any employee the right to continue in the employ of the Company or any affiliated or subsidiary corporation or interfere in any way with the rights of the Company or any affiliated or subsidiary corporation to terminate his employment in any way. (b) Nothing contained in this Plan or any option granted pursuant to this Plan shall confer upon any director or consultant the right to continue as a director of, or consultant to, the Company or any affiliated or subsidiary corporation or interfere in any way with the rights of the Company or any affiliated or subsidiary corporation, or their respective shareholders, to terminate the directorship of any such director or the consultancy relationship of any such consultant. 6 (c) Corporate action constituting an offer of stock for sale to any person under the terms of the options to be granted hereunder shall be deemed complete as of the date when the Committee authorizes the grant of the option to the such person, regardless of when the option is actually delivered to such person or acknowledged or agreed to by him. (d) The terms "parent corporation" and "subsidiary corporation" as used throughout this Plan, and the options granted pursuant to this Plan, shall (except as otherwise provided in the option form) have the meaning that is ascribed to that term when contained in Section 422(b) of the Code and the regulations thereunder, and the Company shall be deemed to be the grantor corporation for purposes of applying such meaning. (e) References in this Plan to the Code shall be deemed to also refer to the corresponding provisions of any future United States revenue law. (f) The use of the masculine pronoun shall include the feminine gender whenever appropriate. 7 APPENDIX I INCENTIVE STOCK OPTION To: _____________________________________________________________________ Name _____________________________________________________________________ Address Date of Grant: _______________________________________________________________ You are hereby granted an option, effective as of the date hereof, to purchase __________ shares of common stock, no par value ("Common Stock"), of NCO Group, Inc., a Pennsylvania corporation (the "Company") at a price of $___ per share pursuant to the Company's 1996 Stock Option Plan (the "Plan"). Your option may first be exercised on and after one year from the date of grant, but not before that time. On and after one year and prior to two years from the date of grant, your option may be exercised for up to 33 1/3% of the total number of shares subject to the option minus the number of shares previously purchased by exercise of the option (as adjusted for any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee deems in its sole discretion to be similar circumstances). Each succeeding year thereafter, your option may be exercised for up to an additional 33 1/3% of the total number of shares subject to the option minus the number of shares previously purchased by exercise of the option (as adjusted for any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee deems in its sole discretion to be similar circumstances). Thus, this option is fully exercisable on and after three years after the date of grant, except if terminated earlier as provided herein. No fractional shares shall be issued or delivered. This option shall terminate and is not exercisable after ten years (five years in the case of 10% Shareholders, as defined in the Plan) from the date of its grant (the "Scheduled Termination Date"), except if terminated earlier as hereafter provided. 8 In the event of a "Change of Control" (as defined below) of the Company, your option may, from and after the date your employment is terminated (whether such termination be voluntary or involuntary) after the Change of Control (but in no event later than the Scheduled Termination Date), and notwithstanding the immediately preceding paragraph, be exercised for up to 100% of the total number of shares then subject to the option minus the number of shares previously purchased upon exercise of the option (as adjusted for stock dividends, stock splits, combinations of shares and what the Committee deems in its sole discretion to be similar circumstances) and your vesting date may accelerate accordingly. A "Change of Control" shall be deemed to have occurred upon the happening of any of the following events: 1. A change within a twelve-month period in a majority of the members of the board of directors of the Company; 2. A change within a twelve-month period in the holders of more than 50% of the outstanding voting stock of the Company; or 3. Any other event deemed to constitute a "Change of Control" by the Committee. You may exercise your option by giving written notice to the Secretary of the Company on forms supplied by the Company at its then principal executive office, accompanied by payment of the option price for the total number of shares you specify that you wish to purchase. The payment may be in any of the following forms: (a) cash, which may be evidenced by a check and includes cash received from a stock brokerage firm in a so-called "cashless exercise"; (b) (unless prohibited by the Committee) certificates representing shares of Common Stock of the Company, which will be valued by the Secretary of the Company at the fair market value per share of the Company's Common Stock (as determined in accordance with the Plan) on the date of delivery of such certificates to the Company, accompanied by an assignment of the stock to the Company; or (c) (unless prohibited by the Committee) any combination of cash and Common Stock of the Company valued as provided in clause (b). Any assignment of stock shall be in a form and substance satisfactory to the Secretary of the Company, including guarantees of signature(s) and payment of all transfer taxes if the Secretary deems such guarantees necessary or desirable. 9 Your option will, to the extent not previously exercised by you, terminate three months after the date on which your employment by the Company or a Company subsidiary corporation is terminated (whether such termination be voluntary or involuntary) other than by reason of disability as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder, or death, in which case your option will terminate one year from the date of termination of employment due to disability or death (but in no event later than the Scheduled Termination Date). After the date your employment is terminated, as aforesaid, you may exercise this option only for the number of shares which you had a right to purchase and did not purchase on the date your employment terminated. If you are employed by a Company subsidiary corporation, your employment shall be deemed to have terminated on the date your employer ceases to be a Company subsidiary corporation, unless you are on that date transferred to the Company or another Company subsidiary corporation. Your employment shall not be deemed to have terminated if you are transferred from the Company to a Company subsidiary corporation, or vice versa, or from one Company subsidiary corporation to another Company subsidiary corporation. If you die while employed by the Company or a Company subsidiary corporation, your executor or administrator, as the case may be, may, at any time within one year after the date of your death (but in no event later than the Scheduled Termination Date), exercise the option as to any shares which you had a right to purchase and did not purchase during your lifetime. If your employment with the Company or a Company parent or subsidiary corporation is terminated by reason of your becoming disabled (within the meaning of Section 22(e)(3) of the Code and the regulations thereunder), you or your legal guardian or custodian may at any time within one year after the date of such termination (but in no event later than the Scheduled Termination Date), exercise the option as to any shares which you had a right to purchase and did not purchase prior to such termination. Your executor, administrator, guardian or custodian must present proof of his authority satisfactory to the Company prior to being allowed to exercise this option. 10 Notwithstanding any other provision of the Option, the Committee shall have the right to cancel this Option without notice if your employment is terminated for: (i) criminal conduct; or (ii) willful misconduct or gross negligence materially detrimental to the Company. In the event of any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee deems in its sole discretion to be similar circumstances, the number and kind of shares subject to this option and the option price of such shares shall be appropriately adjusted in a manner to be determined in the sole discretion of the Committee. No adjustment shall be made with respect to the 46.56-for-1 stock split effected in September 1996. This option is not transferable otherwise than by will or the laws of descent and distribution, and is exercisable during your lifetime only by you, including, for this purpose, your legal guardian or custodian in the event of disability. Until the option price has been paid in full pursuant to due exercise of this option and the purchased shares are delivered to you, you do not have any rights as a shareholder of the Company. The Company reserves the right not to deliver to you the shares purchased by virtue of the exercise of this option during any period of time in which the Company deems, in its sole discretion, that such delivery would violate a federal, state, local or securities exchange rule, regulation or law. Notwithstanding anything to the contrary contained herein, this option is not exercisable until all the following events occur and during the following periods of time: (a) Until the Plan pursuant to which this option is granted is approved by the shareholders of the Company in the manner prescribed by the Code and the regulations thereunder; (b) Until this option and the optioned shares are approved and/or registered with such federal, state and local regulatory bodies or agencies and securities exchanges as the Company may deem necessary or desirable; or (c) During any period of time in which the Company deems that the exercisability of this option, the offer to sell the shares optioned hereunder, or the sale thereof, may violate a federal, state, local or securities exchange rule, regulation or law, or may cause the Company to be legally obligated to issue or sell more shares than the Company is legally entitled to issue or sell. 11 (d) Until you have paid or made suitable arrangements to pay (which may include payment through the surrender of Common Stock, unless prohibited by the Committee) (i) all federal, state and local income tax withholding required to be withheld by the Company in connection with the option exercise and (ii) the employee's portion of other federal, state and local payroll and other taxes due in connection with the option exercise. (e) Until the Company has completed a public offering of its Common Stock registered under the Securities Act of 1933, as amended, or has registered any of its Common Stock under the Securities Exchange Act of 1934, as amended. The following two paragraphs shall be applicable if, on the date of exercise of this option, the Common Stock to be purchased pursuant to such exercise has not been registered under the Securities Act of 1933, as amended, and under applicable state securities laws, and shall continue to be applicable for so long as such registration has not occurred: (a) The optionee hereby agrees, warrants and represents that he will acquire the Common Stock to be issued hereunder for his own account for investment purposes only, and not with a view to, or in connection with, any resale or other distribution of any of such shares, except as hereafter permitted. The optionee further agrees that he will not at any time make any offer, sale, transfer, pledge or other disposition of such Common Stock to be issued hereunder without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to the Company to the effect that the proposed transaction will be exempt from such registration. The optionee shall execute such instruments, representations, acknowledgements and agreements as the Company may, in its sole discretion, deem advisable to avoid any violation of federal, state, local or securities exchange rule, regulation or law. (b) The certificates for Common Stock to be issued to the optionee hereunder shall bear the following legend: 12 "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under applicable state securities laws. The shares have been acquired for investment and may not be offered, sold, transferred, pledged or otherwise disposed of without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to the Company that the proposed transaction will be exempt from such registration." The foregoing legend shall be removed upon registration of the legended shares under the Securities Act of 1933, as amended, and under any applicable state laws or upon receipt of any opinion of counsel acceptable to the Company that said registration is no longer required. The sole purpose of the agreements, warranties, representations and legend set forth in the two immediately preceding paragraphs is to prevent violations of the Securities Act of 1933, as amended, and any applicable state securities laws. It is the intention of the Company and you that this option shall, if possible, be an "Incentive Stock Option" as that term is used in Section 422(b) of the Code and the regulations thereunder. In the event this option is in any way inconsistent with the legal requirements of the Code or the regulations thereunder for an "Incentive Stock Option," this option shall be deemed automatically amended as of the date hereof to conform to such legal requirements, if such conformity may be achieved by amendment. Nothing herein shall modify your status as an at-will employee of the Company. Further, nothing herein guarantees you employment for any specified period of time. This means that either you or the Company may terminate your employment at any time for any reason, or no reason. You recognize that, for instance, you may terminate your employment or the Company may terminate your employment prior to the date on which your option becomes vested. Any dispute or disagreement between you and the Company with respect to any portion of this option or its validity, construction, meaning, performance or your rights hereunder shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association or its successor, as amended from time to time. However, prior to submission to arbitration you will attempt to resolve any disputes or 13 disagreements with the Company over this option amicably and informally, in good faith, for a period not to exceed two weeks. Thereafter, the dispute or disagreement will be submitted to arbitration. At any time prior to a decision from the arbitrator(s) being rendered, you and the Company may resolve the dispute by settlement. You and the Company shall equally share the costs charged by the American Arbitration Association or its successor, but you and the Company shall otherwise be solely responsible for your own respective counsel fees and expenses. The decision of the arbitrator(s) shall be made in writing, setting forth the award, the reasons for the decision and award and shall be binding and conclusive on you and the Company. Further, neither you nor the Company shall appeal any such award. Judgment of a court of competent jurisdiction may be entered upon the award and may be enforced as such in accordance with the provisions of the award. This option shall be subject to the terms of the Plan in effect on the date this option is granted, which terms are hereby incorporated herein by reference and made a part hereof. In the event of any conflict between the terms of this option and the terms of the Plan in effect on the date of this option, the terms of the Plan shall govern. This option constitutes the entire understanding between the Company and you with respect to the subject matter hereof and no amendment, supplement or waiver of this option, in whole or in part, shall be binding upon the Company unless in writing and signed by the President of the Company. This option and the performances of the parties hereunder shall be construed in accordance with and governed by the laws of the State of Pennsylvania. Please sign the copy of this option and return it to the Company's Secretary, thereby indicating your understanding of and agreement with its terms and conditions. NCO GROUP, INC. By: ________________________________ 14 I hereby acknowledge receipt of a copy of the foregoing stock option and of the Plan as of the date of grant set forth above, hereby acknowledge that this stock option grant discharges any promise (either verbal or written) of the Company made on or prior to the date of grant to give me a stock option, and, having read it, hereby signify my understanding of, and my agreement with, its terms and conditions. In consideration of the grant, I hereby release any claim I may have against the Company with respect to any promise of a stock option grant or other equity interest in the Company. _________________________________________ _____________________________ (Signature) (Date) 15 APPENDIX II NON-QUALIFIED STOCK OPTION FOR OFFICERS AND OTHER KEY EMPLOYEES To: _____________________________________________________________________ Name _____________________________________________________________________ Address Date of Grant: _______________________________________________________________ You are hereby granted an option, effective as of the date hereof, to purchase __________ shares of common stock, no par value ("Common Stock"), of NCO Group, Inc., a Pennsylvania corporation (the "Company") at a price of $__ per share pursuant to the Company's 1996 Stock Option Plan (the "Plan"). Your option may first be exercised on and after one year from the date of grant, but not before that time. On and after one year and prior to two years from the date of grant, your option may be exercised for up to 33 1/3% of the total number of shares subject to the option minus the number of shares previously purchased by exercise of the option (as adjusted for any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee deems in its sole discretion to be similar circumstances). Each succeeding year thereafter, your option may be exercised for up to an additional 33 1/3% of the total number of shares subject to the option minus the number of shares previously purchased by exercise of the option (as adjusted for any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee deems in its sole discretion to be similar circumstances). Thus, this option is fully exercisable on and after three years after the date of grant, except if terminated earlier as provided herein. No fractional shares shall be issued or delivered. This option shall terminate and is not exercisable after ten years from the date of its grant (the "Scheduled Termination Date"), except if terminated earlier as hereafter provided. 16 In the event of a "Change of Control" (as defined below) of the Company, your option may, from and after the date your employment is terminated (whether such termination be voluntary or involuntary) after the Change of Control (but in no event later than the Scheduled Termination Date), and notwithstanding the immediately preceding paragraph, be exercised for up to 100% of the total number of shares then subject to the option minus the number of shares previously purchased upon exercise of the option (as adjusted for stock dividends, stock splits, combinations of shares and what the Committee deems in its sole discretion to be similar circumstances) and your vesting date may accelerate accordingly. A "Change of Control" shall be deemed to have occurred upon the happening of any of the following events: 1. A change within a twelve-month period in a majority of the members of the board of directors of the Company; 2. A change within a twelve-month period in the holders of more than 50% of the outstanding voting stock of the Company; or 3. Any other event deemed to constitute a "Change of Control" by the Committee. You may exercise your option by giving written notice to the Secretary of the Company on forms supplied by the Company at its then principal executive office, accompanied by payment of the option price for the total number of shares you specify that you wish to purchase. The payment may be in any of the following forms: (a) cash, which may be evidenced by a check and includes cash received from a stock brokerage firm in a so-called "cashless exercise"; (b) (unless prohibited by the Committee) certificates representing shares of Common Stock of the Company, which will be valued by the Secretary of the Company at the fair market value per share of the Company's Common Stock (as determined in accordance with the Plan) on the date of delivery of such certificates to the Company, accompanied by an assignment of the stock to the Company; or (c) (unless prohibited by the Committee) any combination of cash and Common Stock of the Company valued as provided in clause (b). Any assignment of stock shall be in a form and substance satisfactory to the Secretary of the Company, including guarantees of signature(s) and payment of all transfer taxes if the Secretary deems such guarantees necessary or desirable. 17 Your option will, to the extent not previously exercised by you, terminate three months after the date on which your employment by the Company or a Company subsidiary corporation is terminated (whether such termination be voluntary or involuntary) other than by reason of disability as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder, or death, in which case your option will terminate one year from the date of termination of employment due to disability or death (but in no event later than the Scheduled Termination Date). After the date your employment is terminated, as aforesaid, you may exercise this option only for the number of shares which you had a right to purchase and did not purchase on the date your employment terminated. If you are employed by a Company subsidiary corporation, your employment shall be deemed to have terminated on the date your employer ceases to be a Company subsidiary corporation, unless you are on that date transferred to the Company or another Company subsidiary corporation. Your employment shall not be deemed to have terminated if you are transferred from the Company to a Company subsidiary corporation, or vice versa, or from one Company subsidiary corporation to another Company subsidiary corporation. If you die while employed by the Company or a Company subsidiary corporation, your executor or administrator, as the case may be, may, at any time within one year after the date of your death (but in no event later than the Scheduled Termination Date), exercise the option as to any shares which you had a right to purchase and did not purchase during your lifetime. If your employment with the Company or a Company parent or subsidiary corporation is terminated by reason of your becoming disabled (within the meaning of Section 22(e)(3) of the Code and the regulations thereunder), you or your legal guardian or custodian may at any time within one year after the date of such termination (but in no event later than the Scheduled Termination Date), exercise the option as to any shares which you had a right to purchase and did not purchase prior to such termination. Your executor, administrator, guardian or custodian must present proof of his authority satisfactory to the Company prior to being allowed to exercise this option. Notwithstanding any other provision of the Option, the Committee shall have the right to cancel this Option without notice if your employment is terminated for: (i) criminal conduct; or (ii) willful misconduct or gross negligence materially detrimental to the Company. 18 In the event of any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee deems in its sole discretion to be similar circumstances, the number and kind of shares subject to this option and the option price of such shares shall be appropriately adjusted in a manner to be determined in the sole discretion of the Committee. No adjustment shall be made with respect to the 46.56-for-1 stock split effected in September 1996. This option is not transferable otherwise than by will or the laws of descent and distribution, and is exercisable during your lifetime only by you, including, for this purpose, your legal guardian or custodian in the event of disability. Until the option price has been paid in full pursuant to due exercise of this option and the purchased shares are delivered to you, you do not have any rights as a shareholder of the Company. The Company reserves the right not to deliver to you the shares purchased by virtue of the exercise of this option during any period of time in which the Company deems, in its sole discretion, that such delivery would violate a federal, state, local or securities exchange rule, regulation or law. Notwithstanding anything to the contrary contained herein, this option is not exercisable until all the following events occur and during the following periods of time: (a) Until the Plan pursuant to which this option is granted is approved by the shareholders of the Company in the manner prescribed by the Code and the regulations thereunder; (b) Until this option and the optioned shares are approved and/or registered with such federal, state and local regulatory bodies or agencies and securities exchanges as the Company may deem necessary or desirable; or (c) During any period of time in which the Company deems that the exercisability of this option, the offer to sell the shares optioned hereunder, or the sale thereof, may violate a federal, state, local or securities exchange rule, regulation or law, or may cause the Company to be legally obligated to issue or sell more shares than the Company is legally entitled to issue or sell. 19 (d) Until you have paid or made suitable arrangements to pay (which may include payment through the surrender of Common Stock, unless prohibited by the Committee) (i) all federal, state and local income tax withholding required to be withheld by the Company in connection with the option exercise and (ii) the employee's portion of other federal, state and local payroll and other taxes due in connection with the option exercise. (e) Until the Company has completed a public offering of its Common Stock registered under the Securities Act of 1933, as amended, or has registered any of its Common Stock under the Securities Exchange Act of 1934, as amended. The following two paragraphs shall be applicable if, on the date of exercise of this option, the Common Stock to be purchased pursuant to such exercise has not been registered under the Securities Act of 1933, as amended, and under applicable state securities laws, and shall continue to be applicable for so long as such registration has not occurred: (a) The optionee hereby agrees, warrants and represents that he will acquire the Common Stock to be issued hereunder for his own account for investment purposes only, and not with a view to, or in connection with, any resale or other distribution of any of such shares, except as hereafter permitted. The optionee further agrees that he will not at any time make any offer, sale, transfer, pledge or other disposition of such Common Stock to be issued hereunder without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to the Company to the effect that the proposed transaction will be exempt from such registration. The optionee shall execute such instruments, representations, acknowledgements and agreements as the Company may, in its sole discretion, deem advisable to avoid any violation of federal, state, local or securities exchange rule, regulation or law. (b) The certificates for Common Stock to be issued to the optionee hereunder shall bear the following legend: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under applicable state securities laws. The shares have been acquired for investment and may not be offered, sold, transferred, pledged or otherwise disposed of without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to the Company that the proposed transaction will be exempt from such registration." 20 The foregoing legend shall be removed upon registration of the legended shares under the Securities Act of 1933, as amended, and under any applicable state laws or upon receipt of any opinion of counsel acceptable to the Company that said registration is no longer required. The sole purpose of the agreements, warranties, representations and legend set forth in the two immediately preceding paragraphs is to prevent violations of the Securities Act of 1933, as amended, and any applicable state securities laws. It is the intention of the Company and you that this option shall not be an "Incentive Stock Option" as that term is used in Section 422 of the Code and the regulations thereunder. Nothing herein shall modify your status as an at-will employee of the Company. Further, nothing herein guarantees you employment for any specified period of time. This means that either you or the Company may terminate your employment at any time for any reason, or no reason. You recognize that, for instance, you may terminate your employment or the Company may terminate your employment prior to the date on which your option becomes vested. Any dispute or disagreement between you and the Company with respect to any portion of this option or its validity, construction, meaning, performance or your rights hereunder shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association or its successor, as amended from time to time. However, prior to submission to arbitration you will attempt to resolve any disputes or disagreements with the Company over this option amicably and informally, in good faith, for a period not to exceed two weeks. Thereafter, the dispute or disagreement will be submitted to arbitration. At any time prior to a decision from the arbitrator(s) being rendered, you and the Company may resolve the dispute by settlement. You and the Company shall equally share the costs charged by the American Arbitration Association or its successor, but you and the Company shall otherwise be solely responsible for your own respective counsel fees and expenses. The decision of the arbitrator(s) shall be made in writing, setting forth the award, the reasons for the decision and award and shall be binding and conclusive on you and the Company. Further, neither you nor the Company shall appeal any such award. Judgment of a court of competent jurisdiction may be entered upon the award and may be enforced as such in accordance with the provisions of the award. 21 This option shall be subject to the terms of the Plan in effect on the date this option is granted, which terms are hereby incorporated herein by reference and made a part hereof. In the event of any conflict between the terms of this option and the terms of the Plan in effect on the date of this option, the terms of the Plan shall govern. This option constitutes the entire understanding between the Company and you with respect to the subject matter hereof and no amendment, supplement or waiver of this option, in whole or in part, shall be binding upon the Company unless in writing and signed by the President of the Company. This option and the performances of the parties hereunder shall be construed in accordance with and governed by the laws of the State of Pennsylvania. Please sign the copy of this option and return it to the Company's Secretary, thereby indicating your understanding of and agreement with its terms and conditions. NCO GROUP, INC. By: _____________________________________ 22 I hereby acknowledge receipt of a copy of the foregoing stock option and of the Plan as of the date of grant set forth above, hereby acknowledge that this stock option grant discharges any promise (either verbal or written) of the Company made on or prior to the date of grant to give me a stock option, and, having read it, hereby signify my understanding of, and my agreement with, its terms and conditions. In consideration of the grant, I hereby release any claim I may have against the Company with respect to any promise of a stock option grant or other equity interest in the Company. __________________________________________ ___________________________ (Signature) (Date) 23 APPENDIX III NON-QUALIFIED STOCK OPTION FOR DIRECTORS AND IMPORTANT CONSULTANTS To: _____________________________________________________________________ Name _____________________________________________________________________ Address Date of Grant: _______________________________________________________________ You are hereby granted an option, effective as of the date hereof, to purchase __________ shares of common stock, no par value ("Common Stock"), of NCO Group, Inc., a Pennsylvania corporation (the "Company") at a price of $___ per share pursuant to the Company's 1996 Stock Option Plan (the "Plan"). Your option may first be exercised on and after one year from the date of grant, but not before that time. On and after one year and prior to two years from the date of grant, your option may be exercised for up to 33 1/3% of the total number of shares subject to the option minus the number of shares previously purchased by exercise of the option (as adjusted for any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee deems in its sole discretion to be similar circumstances). Each succeeding year thereafter, your option may be exercised for up to an additional 33 1/3% of the total number of shares subject to the option minus the number of shares previously purchased by exercise of the option (as adjusted for any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee deems in its sole discretion to be similar circumstances). Thus, this option is fully exercisable on and after three years after the date of grant, except if terminated earlier as provided herein. No fractional shares shall be issued or delivered. This option shall terminate and is not exercisable after ten years from the date of its grant (the "Scheduled Termination Date"), except if terminated earlier as hereafter provided. 24 In the event of a "Change of Control" (as defined below) of the Company, your option may, from and after the date your employment is terminated (whether such termination be voluntary or involuntary) after the Change of Control (but in no event later than the Scheduled Termination Date), and notwithstanding the immediately preceding paragraph, be exercised for up to 100% of the total number of shares then subject to the option minus the number of shares previously purchased upon exercise of the option (as adjusted for stock dividends, stock splits, combinations of shares and what the Committee deems in its sole discretion to be similar circumstances) and your vesting date may accelerate accordingly. A "Change of Control" shall be deemed to have occurred upon the happening of any of the following events: 1. A change within a twelve-month period in a majority of the members of the board of directors of the Company; 2. A change within a twelve-month period in the holders of more than 50% of the outstanding voting stock of the Company; or 3. Any other event deemed to constitute a "Change of Control" by the Committee. You may exercise your option by giving written notice to the Secretary of the Company on forms supplied by the Company at its then principal executive office, accompanied by payment of the option price for the total number of shares you specify that you wish to purchase. The payment may be in any of the following forms: (a) cash, which may be evidenced by a check and includes cash received from a stock brokerage firm in a so-called "cashless exercise"; (b) (unless prohibited by the Committee) certificates representing shares of Common Stock of the Company, which will be valued by the Secretary of the Company at the fair market value per share of the Company's Common Stock (as determined in accordance with the Plan) on the date of delivery of such certificates to the Company, accompanied by an assignment of the stock to the Company; or (c) (unless prohibited by the Committee) any combination of cash and Common Stock of the Company valued as provided in clause (b). Any assignment of stock shall be in a form and substance satisfactory to the Secretary of the Company, including guarantees of signature(s) and payment of all transfer taxes if the Secretary deems such guarantees necessary or desirable. 25 Your option will, to the extent not previously exercised by you, terminate three months after the date on which you cease for any reason to be a director of, or consultant to, the Company or a subsidiary corporation (whether by death, disability, resignation, removal, failure to be reappointed, reelected or otherwise, or the expiration of any consulting arrangement, and regardless of whether the failure to continue as a director or consultant was for cause or without cause or otherwise), but in no event later than ten years from the date this option is granted. After the date you cease to be a director or consultant, you may exercise this option only for the number of shares which you had a right to purchase and did not purchase on the date you ceased to be a director or consultant. If you are a director of a subsidiary corporation, your directorship shall be deemed to have terminated on the date such company ceases to be a subsidiary corporation, unless you are also a director of the Company or another subsidiary corporation, or on that date became a director of the Company or another subsidiary corporation. Your directorship or consultancy shall not be deemed to have terminated if you cease being a director of, or consultant to, the Company or a subsidiary corporation but are or concurrently therewith become an employee or director of, or consultant to, the Company or another subsidiary corporation. Notwithstanding any other provision of the Option, the Committee shall have the right to cancel this Option without notice if your directorship or consultancy is terminated for: (i) criminal conduct; or (ii) willful misconduct or gross negligence materially detrimental to the Company. In the event of any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee deems in its sole discretion to be similar circumstances, the number and kind of shares subject to this option and the option price of such shares shall be appropriately adjusted in a manner to be determined in the sole discretion of the Committee. No adjustment shall be made with respect to the 46.56-for-1 stock split effected in September 1996. 26 This option is not transferable otherwise than by will or the laws of descent and distribution, and is exercisable during your lifetime only by you, including, for this purpose, your legal guardian or custodian in the event of disability. Until the option price has been paid in full pursuant to due exercise of this option and the purchased shares are delivered to you, you do not have any rights as a shareholder of the Company. The Company reserves the right not to deliver to you the shares purchased by virtue of the exercise of this option during any period of time in which the Company deems, in its sole discretion, that such delivery would violate a federal, state, local or securities exchange rule, regulation or law. Notwithstanding anything to the contrary contained herein, this option is not exercisable until all the following events occur and during the following periods of time: (a) Until the Plan pursuant to which this option is granted is approved by the shareholders of the Company in the manner prescribed by the Code and the regulations thereunder; (b) Until this option and the optioned shares are approved and/or registered with such federal, state and local regulatory bodies or agencies and securities exchanges as the Company may deem necessary or desirable; or (c) During any period of time in which the Company deems that the exercisability of this option, the offer to sell the shares optioned hereunder, or the sale thereof, may violate a federal, state, local or securities exchange rule, regulation or law, or may cause the Company to be legally obligated to issue or sell more shares than the Company is legally entitled to issue or sell. (d) Until you have paid or made suitable arrangements to pay (which may include payment through the surrender of Common Stock, unless prohibited by the Committee) (i) all federal, state and local income tax withholding required to be withheld by the Company in connection with the option exercise and (ii) the employee's portion of other federal, state and local payroll and other taxes due in connection with the option exercise. (e) Until the Company has completed a public offering of its Common Stock registered under the Securities Act of 1933, as amended, or has registered any of its Common Stock under the Securities Exchange Act of 1934, as amended. 27 The following two paragraphs shall be applicable if, on the date of exercise of this option, the Common Stock to be purchased pursuant to such exercise has not been registered under the Securities Act of 1933, as amended, and under applicable state securities laws, and shall continue to be applicable for so long as such registration has not occurred: (a) The optionee hereby agrees, warrants and represents that he will acquire the Common Stock to be issued hereunder for his own account for investment purposes only, and not with a view to, or in connection with, any resale or other distribution of any of such shares, except as hereafter permitted. The optionee further agrees that he will not at any time make any offer, sale, transfer, pledge or other disposition of such Common Stock to be issued hereunder without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to the Company to the effect that the proposed transaction will be exempt from such registration. The optionee shall execute such instruments, representations, acknowledgements and agreements as the Company may, in its sole discretion, deem advisable to avoid any violation of federal, state, local or securities exchange rule, regulation or law. (b) The certificates for Common Stock to be issued to the optionee hereunder shall bear the following legend: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under applicable state securities laws. The shares have been acquired for investment and may not be offered, sold, transferred, pledged or otherwise disposed of without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to the Company that the proposed transaction will be exempt from such registration." The foregoing legend shall be removed upon registration of the legended shares under the Securities Act of 1933, as amended, and under any applicable state laws or upon receipt of any opinion of counsel acceptable to the Company that said registration is no longer required. 28 The sole purpose of the agreements, warranties, representations and legend set forth in the two immediately preceding paragraphs is to prevent violations of the Securities Act of 1933, as amended, and any applicable state securities laws. It is the intention of the Company and you that this option shall not be an "Incentive Stock Option" as that term is used in Section 422(b) of the Code and the regulations thereunder. Any dispute or disagreement between you and the Company with respect to any portion of this option or its validity, construction, meaning, performance or your rights hereunder shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association or its successor, as amended from time to time. However, prior to submission to arbitration you will attempt to resolve any disputes or disagreements with the Company over this option amicably and informally, in good faith, for a period not to exceed two weeks. Thereafter, the dispute or disagreement will be submitted to arbitration. At any time prior to a decision from the arbitrator(s) being rendered, you and the Company may resolve the dispute by settlement. You and the Company shall equally share the costs charged by the American Arbitration Association or its successor, but you and the Company shall otherwise be solely responsible for your own respective counsel fees and expenses. The decision of the arbitrator(s) shall be made in writing, setting forth the award, the reasons for the decision and award and shall be binding and conclusive on you and the Company. Further, neither you nor the Company shall appeal any such award. Judgment of a court of competent jurisdiction may be entered upon the award and may be enforced as such in accordance with the provisions of the award. 29 This option shall be subject to the terms of the Plan in effect on the date this option is granted, which terms are hereby incorporated herein by reference and made a part hereof. In the event of any conflict between the terms of this option and the terms of the Plan in effect on the date of this option, the terms of the Plan shall govern. This option constitutes the entire understanding between the Company and you with respect to the subject matter hereof and no amendment, supplement or waiver of this option, in whole or in part, shall be binding upon the Company unless in writing and signed by the President of the Company. This option and the performances of the parties hereunder shall be construed in accordance with and governed by the laws of the State of Pennsylvania. Please sign the copy of this option and return it to the Company's Secretary, thereby indicating your understanding of and agreement with its terms and conditions. NCO GROUP, INC. By: _________________________________ I hereby acknowledge receipt of a copy of the foregoing stock option and of the Plan as of the date of grant set forth above, hereby acknowledge that this stock option grant discharges any promise (either verbal or written) of the Company made on or prior to the date of grant to give me a stock option, and, having read it, hereby signify my understanding of, and my agreement with, its terms and conditions. In consideration of the grant, I hereby release any claim I may have against the Company with respect to any promise of a stock option grant or other equity interest in the Company. ______________________________________________ ________________________ (Signature) (Date) 30 EX-10.2 3 1996 STOCK OPTION PLAN NCO GROUP, INC. 1996 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS 1. Purpose of Plan The purpose of the 1996 Stock Option Plan for Non-Employee Directors (the "Plan") contained herein is to enhance the ability of NCO Group, Inc. a Pennsylvania corporation (the "Company") to attract, retain and motivate members of its Board of Directors and to provide additional incentive to members of its Board of Directors by encouraging them to invest in shares of the Company 's common stock and thereby acquire a proprietary interest in the Company and an increased personal interest in the Company's continued success and progress, to the mutual benefit of directors, employees and shareholders. The Plan has been restated on August 4, 1998 to reflect: (i) amendments approved by the Board on April 10, 1997 and by the shareholders on June 23, 1997 (the "Amendments") and (ii) the adjustments required by the 3-for-2 stock split paid in December 1997. 2. Aggregate Number of Shares 150,000 shares of the Company's common stock, no par value ("Common Stock"), shall be the aggregate number of shares which may be issued under this Plan. Notwithstanding the foregoing, in the event of any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Board of Directors deems in its sole discretion to be similar circumstances, the aggregate number and kind of shares which may be issued under this Plan shall be appropriately adjusted in a manner determined in the sole discretion of the Board of Directors. Reacquired shares of the Company's Common Stock, as well as unissued shares, may be used for the purpose of this Plan. Common Stock of the Company subject to options which have terminated unexercised, either in whole or in part, shall be available for future options granted under this Plan. No adjustment shall be made with respect to the 46.56-for-1 stock split effected in September 1996. 3. Participation Each director of the Company at the close of business on the date that the Amendments to the Plan were adopted by the Board of Directors (the "Effective Date") who is not an employee of the Company or any Company subsidiary corporation automatically shall be granted an option to purchase 15,000 shares of the Company's Common Stock (such figure to be subject to adjustment for the same events described in Section 2 hereof). Thereafter, each person who is not an employee of the Company or any Company subsidiary corporation on the date of grant of an option hereunder and who is first (i) appointed as a director by the Board of Directors to fill any vacancy on the Board (an "Appointment"); or (ii) elected as a director of the Company at any annual or special meeting of shareholders of the Company automatically shall be granted, as of the date of such Appointment ("Appointment Date") or such election, as the case may be, an initial option to purchase 3,000 shares of the Company's Common Stock (such figure to be subject to adjustment for the same events described in Section 2 hereof). Thereafter, each person who is not an employee of the Company or any Company subsidiary corporation on the date of grant of an option hereunder and who (i) is reelected as a director of the Company at any annual or special meeting of shareholders of the Company; or (ii) continues as a director of the Company at any annual or special meeting of shareholders of the Company at which directors of the Company are elected or reelected automatically shall be granted, as of the date of each such annual or special meeting of shareholders, an option to purchase 3,000 shares of the Company's Common Stock (such figure to be subject to adjustment for the same events described in Section 2 hereof); provided, however, that if at any time there are insufficient shares then available for grant under this Plan to all persons who are to receive a option on such date, then each such person automatically shall be granted an option to purchase such lower number of shares as shall be equal to the number of shares then available (if any) for grant under this Plan multiplied by a fraction, of which the numerator shall be the full number of shares for which such person was supposed to receive an option and the denominator shall be the total full number of shares for which all such persons were supposed to receive an option under this Plan on such date, subject, however, to the provisions of Section 6 hereof, but in no event shall any such person receive an amount of options in excess of that which such person was to receive under this Plan if sufficient shares had been available. The Effective Date, the Appointment Date, or the election or reelection of directors at an annual or special meeting of shareholders after the Effective Date of the Plan, as the case may be, shall constitute the grant of the option and the date of the grant of such option to each such director. 4. Administration of Plan This Plan shall be administered by the Board of Directors of the Company. The Board of Directors of the Company shall adopt such rules for the conduct of its business and administration of this Plan as it considers desirable. A majority of the members of the Board of Directors of the Company shall constitute a quorum for all purposes. The vote or written consent of a majority of the members of the Board of Directors of the Company on a particular matter shall constitute the act of the Board of Directors of the Company on such matter. The Board of Directors of the Company shall have the exclusive right to construe the Plan and the options issued pursuant to it, to correct defects and omissions and to reconcile inconsistencies to the extent necessary to effectuate the purpose of this Plan and the options issued pursuant to it, and such action shall be final, binding and conclusive upon all parties concerned. No member of the Board of Directors of the Company shall be liable for any act or omission (whether or not negligent) taken or omitted in good faith, or for the exercise of any authority or discretion granted in connection with the Plan to the Board of Directors, or for the acts or omissions of any other members of the Board of Directors. 5. Non-Qualified Stock Options, Option Price and Term (a) Options issued pursuant to this Plan shall be non-qualified stock options. A non-qualified stock option is an option which does not satisfy the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). The option price for the non-qualified stock options issued under this Plan shall be equal to the fair market value, as determined by the Board of Directors of the Company, of the Company's Common Stock on the date of the grant of the option. The fair market value of the Company's Common Stock on any particular date shall mean the last reported sale price of a share of the Company's Common Stock on any stock exchange on which such stock is then listed or admitted to trading, or on the Nasdaq National Market or Nasdaq SmallCap Market, on such date, or if no sale took place on such day, the last such date on which a sale took place, or if the Common Stock is not then quoted on the Nasdaq National Market or Nasdaq SmallCap Market, or listed or admitted to trading on any stock exchange, the average of the bid and asked prices in the over-the-counter market on such date, or if none of the foregoing, a price determined in good faith by the Board of Directors to equal the fair market value per share of the Common Stock. -3- (b) Options issued pursuant to this Plan shall be issued substantially in the form set forth in Appendix I hereof, which form is hereby incorporated by reference and made a part hereof, and shall contain substantially the terms and conditions set forth therein. Options shall expire ten years after the date they are granted, unless terminated earlier as provided herein. 6. Amendment, Supplement, Suspension and Termination Options shall not be granted pursuant to this Plan after the expiration of ten years from and after the date this Plan is approved by the shareholders of the Company. The Board of Directors of the Company reserves the right at any time, and from time to time, to amend or supplement this Plan in any way, or to suspend or terminate it, effective as of such date, which date may be either before or after the taking of such action, as may be specified by the Board of Directors of the Company. If the Board of Directors voluntarily submits a proposed amendment, supplement, suspension or termination for shareholder approval, such submission shall not require any future amendments, supplements (whether or not relating to the same provision or subject matter), suspensions or terminations to be similarly submitted for shareholder approval. 7. Effectiveness of Plan This Plan shall become effective on the date of its adoption by the Company's Board of Directors, subject however to approval by the holders of the Company's Common Stock. 8. General Conditions (a) Nothing contained in this Plan or any option granted pursuant to this Plan shall confer upon any director the right to continue as a director of the Company or interfere in any way with the rights of the Company to terminate him as a director. -4- (b) Corporate action constituting an offer of stock for sale to any director under the terms of the options to be granted hereunder shall be deemed complete as of the Effective Date, the Appointment Date, or the date of the annual or special meeting of shareholders at which directors of the Company are elected or reelected, as the case may be, regardless of when the option is actually delivered to the director or acknowledged or agreed to by him. (c) The term "subsidiary corporation" as used throughout this Plan shall mean a corporation in which the Company owns, directly or indirectly, shares of stock representing fifty percent or more of the outstanding voting power of all classes of stock of such corporation at the time of the granting of an option under this Plan. (d) The use of the masculine pronoun shall include the feminine gender whenever appropriate. -5- APPENDIX I NON-QUALIFIED STOCK OPTION To: _____________________________________________________________________ Name _____________________________________________________________________ Address Date: _____________________________________________________________________ You are hereby granted an option, effective as of the date hereof, to purchase shares of common stock, no par value per share ("Common Stock"), of NCO Group, Inc., a Pennsylvania corporation (the "Company"), at a price of $ per share pursuant to the Company's 1996 Stock Option Plan for Non-Employee Directors (the "Plan"). Your option may first be exercised on and after the earlier to occur of (i) one year from the date of its grant or (ii) a "change in control" of the Company, as hereinafter defined, but not before that time. On and after the earlier to occur of (i) one year from the date your option is granted or (ii) a "change in control" of the Company, and prior to ten years from the date of its grant, your option may be exercised in whole, or from time to time in part, for up to the total whole number of shares then subject to the option minus the number of shares previously purchased by exercise of the option (as appropriately adjusted for stock dividends, stock splits and what the Board of Directors of the Company deems in its sole discretion to be similar circumstances). No fractional shares shall be issued or delivered. This option shall terminate and is not exercisable after the expiration of ten years from the date of its grant, except if terminated earlier as hereafter provided. For purposes of your option, a "change in control" of the Company shall have been deemed to conclusively occur when any of the following events shall have occurred without your prior written consent: (1) a change in the constituency of the Company's Board of Directors with the result that individuals (the "Incumbent Directors") who are members of the Board on the date the Plan is approved by the Company's shareholders cease for any reason to constitute at least a majority of the Board of Directors, provided that any individual who is elected or appointed to the Board of Directors after shareholder approval of the Plan and whose nomination for election or appointment was unanimously approved by the Incumbent Directors shall be considered an Incumbent Director beginning on the date of his or her election to the Board of Directors. -6- (2) a person or group acting in concert as described in Section 13(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") proposes to hold or acquire beneficial ownership within the meaning of Rule 13(d)(3) promulgated under the Exchange Act of a number of voting shares of the Company which constitutes either (i) more than fifty percent of the shares which voted in the election of directors of the Company at the shareholders' meeting immediately preceding such determination or (ii) more than thirty percent of the Company's outstanding voting shares. The term "proposes to hold or acquire" shall mean when a person or group acting in concert has (A) the right to acquire or merge (whether such right is exercisable immediately or only after the passage of time or upon the receipt of such regulatory approvals as is required by applicable law) pursuant to an agreement, arrangement or understanding (whether or not in writing) or upon the exercise or conversion of rights, exchange rights, warrants or options or otherwise; (B) commenced a tender or exchange offer with respect to the voting shares of the Company or securities convertible or exchangeable into voting shares of the Company; or (C) the right to vote pursuant to any agreement, arrangement or understanding (whether or not in writing); provided, however, that such person or group acting in concert shall not be deemed to have acquired such shares if the agreement, arrangement or understanding to vote such securities arises solely from a revocable proxy given in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations of the Exchange Act and is not also then reportable on Schedule 13D under the Exchange Act or any comparable or successor report. For purposes of this provision any person or group existing on the date the Plan is approved by shareholders shall be excluded from the definition of "a person or group acting in concert." You may exercise your option by giving written notice to the Secretary of the Company on forms supplied by the Company at its then principal executive office, accompanied by payment of the option price for the total number of shares you specify that you wish to purchase. The payment may be in any of the following forms: (a) cash, which may be evidenced by a check and includes cash received from a stock brokerage firm in a so-called "cashless exercise"; (b) (unless prohibited by the Board of Directors) certificates representing shares of Common Stock of the Company, which will be valued by the Secretary of the Company at the fair market value per share of the Company's Common Stock (as determined in accordance with the Plan) on the date of delivery of such certificates to the Company, accompanied by an assignment of the stock to the Company; or (c) (unless prohibited by the Board -7- of Directors) any combination of cash and Common Stock of the Company valued as provided in clause (b). Any assignment of stock shall be in a form and substance satisfactory to the Secretary of the Company, including guarantees of signature(s) and payment of all transfer taxes if the Secretary deems such guarantees necessary or desirable. Your option will, to the extent not previously exercised by you, terminate three months after the date on which you cease to be a director of the Company or a subsidiary corporation (whether by death, disability, resignation, removal, failure to be reelected or otherwise and regardless of whether the failure to continue as a director was for cause or otherwise), but in no event later than ten years from the date this option is granted. After the date you cease to be a director, you may exercise this option only for the number of shares which you had a right to purchase and did not purchase on the date you ceased to be a director. If you are a director of a subsidiary corporation, your directorship shall be deemed to have terminated on the date such company ceases to be a subsidiary corporation, unless you are also a director of the Company or another subsidiary corporation, or on that date became a director of the Company or another subsidiary corporation. Your directorship shall not be deemed to have terminated if you cease being a director of the Company or a subsidiary corporation but are or concurrently therewith become a director of the Company or another subsidiary corporation. If you die while a director of the Company or a subsidiary corporation, executor or administrator, as the case may be, may, at any time within three months after the date of your death (but in no event later than ten years from the date this option is granted), exercise the option as to any shares which you had a right to purchase and did not purchase during your lifetime. If your directorship with the Company or a subsidiary corporation is terminated by reason of your becoming disabled, you or your legal guardian or custodian may at any time within three months after the date of such termination (but in no event later than ten years from the date this option is granted), exercise the option as to any shares which you had a right to purchase and did not purchase prior to such termination. Your executor, administrator, guardian or custodian must present proof of his authority satisfactory to the Company prior to being allowed to exercise this option. -8- In the event of any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Board of Directors deems in its sole discretion to be similar circumstances, the number and kind of shares subject to this option and the option price of such shares shall be appropriately adjusted in a manner to be determined in the sole discretion of the Board of Directors. No adjustment shall be made with respect to the 46.56-for-1 stock split effected in September 1996. This option is not transferable otherwise than by will or the laws of descent and distribution, and is exercisable during your lifetime only by you, including, for this purpose, your legal guardian or custodian in the event of disability. Until the option price has been paid in full pursuant to due exercise of this option and the purchased shares are delivered to you, you do not have any rights as a shareholder of the Company. The Company reserves the right not to deliver to you the shares purchased by virtue of exercise of this option during any period of time in which the Company deems, in its sole discretion, that such delivery may not be consummated without violating a federal, state, local or securities exchange rule, regulation or law. Notwithstanding anything to the contrary contained herein, this option is not exercisable until all the following events occur and during the following periods of time: (a) Until the Plan is approved by the shareholders; (b) Until this option and the optioned shares are approved and/or registered with such federal, state and local regulatory bodies or agencies and securities exchanges as the Company may deem necessary or desirable; -9- (c) During any period of time in which the Company deems that the exercisability of this option, the offer to sell the shares optioned hereunder, or the sale thereof, may violate a federal, state, local or securities exchange rule, regulation or law, or may cause the Company to be legally obligated to issue or sell more shares than the Company is legally entitled to issue; (d) Until you have paid or made suitable arrangements to pay (which may include payment through the surrender of Common Stock, unless prohibited by the Board of Directors) (i) all federal, state and local income tax withholding required to be withheld by the Company in connection with the option exercise and (ii) your portion of other federal, state and local payroll and other taxes due in connection with the option exercise; or (e) Until the Company has completed a public offering of its Common Stock registered under the Securities Act of 1933, as amended, or has registered any of its Common Stock under the Securities Exchange Act of 1934, as amended. The following two paragraphs shall be applicable if, on the date of exercise of this option, the Common Stock to be purchased pursuant to such exercise has not been registered under the Securities Act of 1933, as amended, and under applicable state securities laws, and shall continue to be applicable for so long as such registration has not occurred: (a) The optionee hereby agrees, warrants and represents that he will acquire the Common Stock to be issued hereunder for his own account for investment purposes only, and not with a view to, or in connection with, any resale or other distribution of any of such shares, except as hereafter permitted. The optionee further agrees that he will not at any time make any offer, sale, transfer, pledge or other disposition of such Common Stock to be issued hereunder without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to the Company to the effect that the proposed transaction will be exempt from such registration. The optionee shall execute such instruments, representations, acknowledgements and agreements as the Company may, in its sole discretion, deem advisable to avoid any violation of federal, state, local or securities exchange rule, regulation or law. -10- (b) The certificates for Common Stock to be issued to the optionee hereunder shall bear the following legend: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under applicable state securities laws. The shares have been acquired for investment and may not be offered, sold, transferred, pledged or otherwise disposed of without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to the Company that the proposed transaction will be exempt from such registration." The foregoing legend shall be removed upon registration of the legended shares under the Securities Act of 1933, as amended, and under any applicable state laws or upon receipt of any opinion of counsel acceptable to the Company that said registration is no longer required. The sole purpose of the agreements, warranties, representations and legend set forth in the two immediately preceding paragraphs is to prevent violations of the Securities Act of 1933, as amended, and any applicable state securities laws. It is the intention of the Company and you that this option shall not be an "Incentive Stock Option" as that term is used in Section 422(b) of the Code and the regulations thereunder. Any dispute or disagreement between you and the Company with respect to any portion of this option or its validity, construction, meaning, performance or your rights hereunder shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association or its successor, as amended from time to time. However, prior to submission to arbitration you will attempt to resolve any disputes or disagreements with the Company over this option amicably and informally, in good faith, for a period not to exceed two weeks. Thereafter, the dispute or disagreement will be submitted to arbitration. At any time prior to a decision from the arbitrator(s) being rendered, you and the Company may resolve the dispute by settlement. You and the Company shall equally share the costs charged by the American Arbitration Association or its successor, but you and the Company shall otherwise be solely responsible for your own respective -11- counsel fees and expenses. The decision of the arbitrator(s) shall be made in writing, setting forth the award, the reasons for the decision and award and shall be binding and conclusive on you and the Company. Further, neither you nor the Company shall appeal any such award. Judgment of a court of competent jurisdiction may be entered upon the award and may be enforced as such in accordance with the provisions of the award. This option shall be subject to the terms of the Plan in effect on the date this option is granted, which terms are hereby incorporated herein by reference and made a part hereof. In the event of any conflict between the terms of this option and the terms of the Plan in effect on the date of this option, the terms of the Plan shall govern. This option constitutes the entire understanding between the Company and you with respect to the subject matter hereof and no amendment, supplement or waiver of this option, in whole or in part, shall be binding upon the Company unless in writing and signed by the President of the Company. This option and the performances of the parties hereunder shall be construed in accordance with and governed by the laws of the Commonwealth of Pennsylvania. Please sign the copy of this option and return it to the Company's Secretary, thereby indicating your understanding of and agreement with its terms and conditions. NCO GROUP, INC. (SEAL) By: _____________________________ I hereby acknowledge receipt of a copy of the foregoing stock option and, having read it hereby signify my understanding of, and my agreement with, its terms and conditions. ________________ _______________________________ date signature -12- EX-27 4 FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 25,553,571 0 24,237,505 617,000 0 51,802,063 21,416,332 10,653,857 200,273,562 15,743,659 0 0 0 161,902,504 14,161,903 200,273,562 66,599,372 66,599,372 0 56,632,388 0 178,740 218,727 9,569,517 3,979,559 5,589,958 0 0 0 5,589,958 .40 .39
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