-----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, Gzch/bnTFMSz3m0wOGhXs9Tkw5F+aUPqJdZClEszdLFD7ru4yHjHZO8Nslfnxz9M hXXR4ladMgrR4PGeDhHy6w== 0000950116-99-001139.txt : 19990607 0000950116-99-001139.hdr.sgml : 19990607 ACCESSION NUMBER: 0000950116-99-001139 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990521 ITEM INFORMATION: ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990604 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: 8-K SEC ACT: SEC FILE NUMBER: 000-21639 FILM NUMBER: 99640778 BUSINESS ADDRESS: STREET 1: 515 PENNSYLVANIA AVE CITY: FT WASHINGTON STATE: PA ZIP: 19034 BUSINESS PHONE: 2157939300 8-K 1 FORM 8-K - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------------- FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ----------------------------------- Date of Report (Date of earliest event reported): May 21, 1999 NCO GROUP, INC. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) Pennsylvania 0-21639 23-2858652 - ----------------------------- ----------------- ---------------------- (State or other jurisdiction (Commission File (I.R.S. Employer of incorporation or Number) Identification Number) organization) 515 Pennsylvania Avenue Fort Washington, Pennsylvania 19034 ------------------------------------------------------------ (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (215) 793-9300 -------------- Item 2. Acquisition or Disposition of Assets. On May 21, 1999, Co-Source Funding, Inc., a Delaware corporation ("Buyer"), a wholly-owned subsidiary of NCO Group, Inc. ("NCO"), purchased all of the outstanding capital stock of Co-Source Corporation, including its wholly-owned subsidiaries, Milliken & Michaels, Inc., Metropolitan Consumer Collection Services, Inc. and International Account Systems, Inc., for approximately $121 million in cash, subject to adjustments, and warrants to purchase an aggregate of 250,000 shares of NCO's common stock. Co-Source Corporation together with its subsidiaries ("Co-Source") is the leading provider of commercial collection services in the United States. Co-Source's revenue for the year ended December 31, 1998 was $57.6 million. Management believes that the acquisition of Co-Source will significantly enhance NCO's market position as a leading provider in the commercial collection service business. The purchase price was determined by negotiations between the parties. The cash purchase price was paid using borrowings under NCO's credit agreement with Mellon Bank. See Item 5. Item 5. Other Events. Agreement to Acquire Compass International Services Corporation On May 13, 1999, NCO signed a definitive agreement to acquire Compass International Services Corporation ("Compass"), a leading provider of accounts receivable management services and other complementary outsourced services. NCO will issue approximately 3.4 million shares of NCO common stock for all outstanding shares of Compass. Compass' revenue for the year ended December 31, 1998, exclusive of the revenue attributable to the Print and Mail Division, was approximately $105.5 million on a pro forma basis. The transaction is expected to be accounted for using the purchase method and is expected to be treated as a tax free reorganization. The acquisition is contingent upon completion of the sale of Compass' Print and Mail Division and is also subject to regulatory and Compass stockholder approval. The acquisition is scheduled to close during the third quarter of 1999. Amendment to Credit Agreement On May 20, 1999, NCO's credit agreement with Mellon Bank, N.A., for itself and as administrative agent for the other financial institutions named therein, was amended to, among other things, increase NCO's credit facility to provide for borrowings up to $350 million, structured as a revolving credit facility, at an interest rate equal to, at the option of NCO, Mellon Bank's prime rate plus an applicable margin ranging from .25% to .50% or the LIBO Rate plus an applicable margin ranging from .75% to 2.25%. The applicable margin is -2- determined by NCO's consolidated funded debt to consolidated EBITDA ratio and NCO's capital structure. The revolving credit line is collateralized by substantially all of the assets of NCO and includes certain financial covenants such as maintaining net worth and funded debt to EBITDA requirements and includes restrictions on, among other things, capital expenditures and distributions to shareholders. Risks Associated with Pending and Recent Acquisition The businesses acquired by NCO in the fourth quarter of 1998 and in 1999 and to be acquired in the Compass acquisition had combined revenues of $280.8 million in 1998 which was 156.9% of NCO's revenue of $179.0 million in 1998. If NCO is unable to successfully integrate these new businesses into NCO's operations, NCO may not be able to realize expected operating efficiencies, eliminate redundant costs or operate the businesses profitably. The integration of these businesses is subject to a number of risks, including risks that the conversion of the acquired companies computer and operating systems into NCO's systems may take longer or cost more than expected NCO may be unable to retain clients or key employees of the acquired companies and the acquired companies might have additional liabilities that NCO did not anticipate at the time of the acquisitions. Forward Looking Statements Statements included in this Current Report on Form 8-K, other than historical facts, are forward-looking statements, as such term is defined in federal securities laws and regulations, which are intended to be covered by the safe harbors created in those laws and regulations. Forward-looking statements include, among others, statements as to the Company's objective to grow through strategic acquisitions and internal growth, the impact of acquisitions on the Company's earnings, the Company's ability to realize operating efficiencies in the integration of its acquisitions, trends in the Company's future operating performance, Year 2000 compliance, the effects of legal or governmental proceedings, the effects of changes in accounting pronouncements and statements as to the Company's or management's beliefs, expectations and opinions. Forward- looking statements are subject to risks and uncertainties and may be affected by various factors which may cause actual results to differ materially from those in the forward-looking statements. In addition to the factors discussed in this report, 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, risks relating to Year 2000 compliance and the other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K for the year ended December 31, 1998 filed on March 31, 1999, can cause actual results and developments to be materially different from those expressed or implied by such forward-looking statements. -3- Item 7. Financial Statements and Exhibits. The following exhibits are being filed as part of this report: (a) Financial Statements of Businesses Acquired. It is impracticable to provide any financial statements which may be required for Co-Source at this time. Any required financial statements will be filed as an amendment to this Form 8-K as soon as practicable, but not later than August 4, 1999. (b) Pro Forma Financial Information. It is impracticable to provide any pro forma financial information which may be required for Co-Source at this time. Any required pro forma financial information will be filed as an amendment to this Form 8-K as soon as practicable, but not later than August 4, 1999. (c) Exhibits Number Title 2.1 Stock Purchase Agreement among Co-Source Corporation, its Shareholders and Optionholders, H.I.G. - DCI Investments, L.P. and NCO. NCO will furnish to the Securities and Exchange Commission a copy of any omitted schedule upon request. 4.1 Form of Warrant to purchase NCO common stock. 10.1 Fourth Amended and Restated Credit Agreement dated as of May 20, 1999 by and among NCO, its U.S. Subsidiaries, the Financial Institutions listed therein as Lenders and Mellon Bank, N.A. as administrative agent. NCO will furnish to the Securities and Exchange Commission a copy of any omitted schedule upon request. 10.2 Employment Agreement dated as of April 16, 1999, by and between NCO and Thomas V. Cefalu, III (management contract or compensatory plan, contract or arrangement). -4- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. NCO GROUP, INC. By: /s/ Steven L. Winokur ---------------------------------------------- Steven L. Winokur, Executive Vice President, Finance, Chief Financial Officer and Treasurer Date: June 4, 1999 -5- EX-2.1 2 EXHIBIT 2.1 EXHIBIT 2.1 ----------- ================================================================================ STOCK PURCHASE AGREEMENT Among CO-SOURCE CORPORATION, its SHAREHOLDERS and OPTIONHOLDERS, H.I.G.-DCI INVESTMENTS, L.P. and NCO GROUP, INC. April 17, 1999 ================================================================================ Table of Contents
Page ARTICLE I PURCHASE AND SALE OF SHARES AND OPTIONS..................................................................1 1.01 Purchase Price..................................................................................1 1.02 Sale Transactions...............................................................................1 1.03 Purchase Price Adjustment.......................................................................2 1.04 The Closing.....................................................................................4 ARTICLE II CONDITIONS TO CLOSING....................................................................................5 2.01 Conditions to Buyer's Obligations...............................................................5 2.02 Conditions to the Shareholders', HIG Cayman's and the Optionholders' Obligations.....................................................................................7 ARTICLE III REPRESENTATIONS AND WARRANTIES OF EACH SHAREHOLDER, HIG CAYMAN AND EACH OPTIONHOLDER......................................................8 3.01 Authority.......................................................................................8 3.02 Execution and Delivery; Valid and Binding Agreement.............................................8 3.03 Ownership of Capital Stock......................................................................9 3.04 Ownership of DCI Shares.........................................................................9 3.05 DCI.............................................................................................9 3.06 HIG Cayman......................................................................................9 3.07 Brokerage.......................................................................................9 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................................................9 4.01 Organization and Corporate Power...............................................................10 4.02 Subsidiaries...................................................................................10 4.03 Authorization; No Breach; Valid and Binding Agreement..........................................10 4.04 Capital Stock..................................................................................11 4.05 Financial Statements...........................................................................11 4.06 Absence of Certain Developments................................................................12 4.07 Title to Properties............................................................................13 4.08 Tax Matters....................................................................................13 4.09 Contracts and Commitments......................................................................14 4.10 Intellectual Property..........................................................................15
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4.11 Litigation.....................................................................................16 4.12 Governmental Consents, etc.....................................................................16 4.13 Employee Benefit Plans.........................................................................16 4.14 Insurance......................................................................................17 4.15 Compliance with Laws...........................................................................17 4.16 Environmental Compliance and Conditions........................................................18 4.17 Affiliated Transactions........................................................................18 4.18 Absence of Undisclosed Liabilities.............................................................18 4.19 Employee Relations.............................................................................19 4.20 Questionable Payments..........................................................................19 ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER.................................................................19 5.01 Organization and Power.........................................................................19 5.02 Authorization; Valid and Binding Agreement.....................................................20 5.03 No Breach......................................................................................20 5.04 Governmental Consents, etc.....................................................................20 5.05 Litigation.....................................................................................20 5.06 Brokerage......................................................................................20 5.07 Investment Representation......................................................................20 5.08 Financing......................................................................................20 ARTICLE VI PRE-CLOSING COVENANTS...................................................................................21 6.01 Conduct of the Business........................................................................21 6.02 Access to Books and Records....................................................................22 6.03 Regulatory Filings.............................................................................22 6.04 Conditions.....................................................................................23 6.05 Exclusive Dealing..............................................................................23 6.06 Consulting Agreement...........................................................................23 6.07 Code Section 280G Consents.....................................................................23 ARTICLE VII COVENANTS OF BUYER......................................................................................23 7.01 Access to Books and Records....................................................................23 7.02 Notification...................................................................................24 7.03 Director and Officer Liability and Indemnification.............................................24 7.04 Regulatory Filings.............................................................................24 7.05 Conditions.....................................................................................24 7.06 Contact with Customers and Suppliers...........................................................24
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ARTICLE VIII TERMINATION.............................................................................................24 8.01 Termination....................................................................................24 8.02 Effect of Termination..........................................................................25 ARTICLE IX SURVIVAL................................................................................................25 9.01 Survival of Representations and Warranties.....................................................26 ARTICLE X SHAREHOLDER REPRESENTATIVE..............................................................................26 10.01 Designation; Reliance..........................................................................26 10.02 Authority......................................................................................26 10.03 Exculpation....................................................................................27 ARTICLE XI ADDITIONAL COVENANTS AND AGREEMENTS.....................................................................27 11.01 Disclosure Generally...........................................................................27 11.02 Acknowledgment by Parties......................................................................27 11.03 Tax Matters....................................................................................28 11.04 Further Assurances.............................................................................30 11.05 Restrictive Covenants of HIG...................................................................30 11.06 Indemnification................................................................................32 11.07 Cefalu Non-Competition.........................................................................32 ARTICLE XII DEFINITIONS.............................................................................................34 12.01 Definitions....................................................................................34 12.02 Cross-Reference of Other Definitions...........................................................36 ARTICLE XIII MISCELLANEOUS...........................................................................................37 13.01 Press Releases and Communications..............................................................37 13.02 Expenses.......................................................................................37 13.03 Knowledge Defined..............................................................................37 13.04 Waiver of Certain Transfer Restrictions........................................................37 13.05 Notices........................................................................................38 13.06 Assignment.....................................................................................39 13.07 Severability...................................................................................39
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13.08 No Strict Construction.........................................................................39 13.09 Amendment and Waiver...........................................................................39 13.10 Complete Agreement.............................................................................39 13.11 Counterparts...................................................................................39 13.12 Governing Law..................................................................................39 13.13 No Third Party Beneficiaries...................................................................39 13.14 Section Headings...............................................................................40 13.15 Specific Performance...........................................................................40
iv EXHIBITS Exhibit A Form of Warrants Exhibit B Closing Certificate of the Company Exhibit C Closing Certificate of the Shareholder Representative Exhibit D-1 Opinion of the Company's Counsel Exhibit D-2 Opinion of the Shareholders' and Optionholders' Counsel Exhibit E Opinion of Buyer's Counsel Exhibit F Closing Certificate of the Buyer Exhibit G Form of Registration Rights Agreement v SCHEDULES Affiliated Transactions Schedule Authorization Schedule Capital Stock Schedule Contracts Schedule Developments Schedule Employee Benefits Schedule Employee Relations Schedule Environmental Compliance Schedule Financial Statements Schedule Indebtedness Schedule Insurance Schedule Intellectual Property Schedule Liabilities Schedule Lien Schedule Litigation Schedule Optionholders Schedule Permits Notification Schedule Real Property Schedule Regulatory Permits Schedule Shareholders Schedule Subsidiary Schedule Taxes Schedule Third-Party Consents Schedule vi STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made as of April 17, 1999, among NCO Group, Inc., a Pennsylvania corporation ("Buyer"), Co-Source Corporation, a Delaware corporation (the "Company"), the Persons listed on the attached Shareholders Schedule (the "Shareholders"), the Persons listed on the attached Optionholders Schedule (the "Optionholders"), H.I.G.-DCI Investments, L.P., a Cayman Islands limited partnership ("HIG Cayman"), DCI Holding, Inc., a Delaware corporation ("DCI") and, for the purposes of Section 11.05 only, H.I.G. Investment Group, L.P., a Cayman Islands limited partnership. Capitalized terms used and not otherwise defined herein have the meanings set forth in Article XII below. The Shareholders own all of the issued and outstanding shares of capital stock of the Company (the "Shares"). The Optionholders own all of the issued and outstanding options to acquire Shares (the "Options"). As of the date hereof, HIG Cayman owns all the issued and outstanding shares of DCI, a Shareholder. Subject to the terms and conditions set forth herein, the parties hereto desire to consummate the Sale Transactions (as described below in Section 1.02). NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I PURCHASE AND SALE OF SHARES AND OPTIONS --------------------------------------- 1.01 Purchase Price. The aggregate consideration to be delivered by Buyer to the Shareholders (other than DCI) and Optionholders and HIG Cayman (the "Purchase Price") on the Closing Date shall be (a) an amount in cash equal to $121 million plus the total amount of Cash on Hand as of the Closing minus the outstanding amount of the Indebtedness as of the Closing minus the SAR Payments plus the aggregate exercise price of the Options plus the amount, if any, by which the Estimated Net Working Capital (as defined in Section 1.03(a) below) exceeds $-1,200,888 minus the amount, if any, by which Estimated Net Working Capital is less than $-1,200,888, and (b) warrants to purchase 250,000 shares of Buyer's common stock (the "Buyer Common Stock") in substantially the form set forth as Exhibit A hereto (the "Warrants"). 1.02 Sale Transactions. On the basis of the representations, warranties, covenants and agreements and subject to the satisfaction or waiver of the terms and conditions set forth herein, each of the Shareholders (other than DCI), HIG Cayman and each of the Optionholders agrees to and will consummate, at the Closing, the following transactions (the "Sale 1 Transactions"): (A) each Shareholder (other than DCI) shall sell, assign, transfer and convey to Buyer, and Buyer shall purchase and acquire from the Shareholders (other than DCI), good and valid legal title to all of the Shares held by such Shareholders against payment at the Closing in an amount equal to the portion of the aggregate Purchase Price which such Shareholder would be entitled to in the event the Purchase Price was distributed to the Shareholders and Optionholders (as provided in the following clause (C)) in a complete liquidation of the Company pursuant to the Company's Certificate of Incorporation (the "Closing Shareholder Consideration"), (B) HIG Cayman shall sell, transfer and convey to Buyer, and Buyer shall purchase and acquire from HIG Cayman all of the outstanding shares of DCI (the "DCI Shares") against payment at the Closing in an amount equal to the portion of the Closing Shareholder Consideration which DCI would be entitled to receive for its Shares pursuant to clause (A) (the "HIG Consideration") and (C) each Optionholder shall sell, assign, transfer and convey to Buyer, and Buyer shall purchase and acquire from each Optionholder, all of the Options against payment at the Closing in an amount equal to (i) the portion of the aggregate Purchase Price which such Optionholder would be entitled (if such Optionholder had exercised his Options) in the event the Purchase Price was distributed to the Shareholders and Optionholders in a complete liquidation of the Company pursuant to the Company's Certificate of Incorporation minus (ii) the aggregate exercise price of such Optionholder's Options (the "Closing Optionholder Consideration"). Buyer shall be entitled to withhold from the Closing Optionholder Consideration, and shall remit to the proper governmental authority, any amounts required to be withheld by the Company or the Optionholders under applicable law. 1.03 Purchase Price Adjustment. (a) At least three days prior to the Closing Date, the Shareholder Representative shall deliver to Buyer its good faith calculation of its estimate of the Net Working Capital as of the Closing Date (the "Estimated Net Working Capital"). (b) Within 60 days after the Closing Date, Buyer will deliver to the Shareholder Representative its calculation of the Net Working Capital as of the Closing Date (the "Preliminary Net Working Capital Statement"). If the Shareholder Representative has any objections to the Preliminary Net Working Capital Statement, the Shareholder Representative shall deliver to Buyer a statement setting forth its objections thereto (an "Objections Statement"). If an Objections Statement is not delivered to Buyer within 30 days, the Preliminary Net Working Capital Statement shall be final, binding and non-appealable by the parties hereto. The Shareholder Representative and Buyer shall negotiate in good faith to resolve any such objections, but if they do not reach a final resolution within 30 days after the delivery of the Objections Statement, the Shareholder Representative and Buyer shall submit such dispute to Arthur Andersen LLP (the "Independent Auditor"). The Shareholder Representative and Buyer shall use their commercially reasonable efforts to cause the Independent Auditor to resolve all disagreements as soon as practicable, but in any event within 30 days after the submission of the dispute to the Independent Auditor. The resolution of the dispute by the Independent Auditor shall be final, binding and non-appealable on the parties hereto. The costs and expenses of the Independent Auditor shall be paid equally by Buyer and the Shareholder Representative. 2 (c) If the Net Working Capital as finally determined pursuant to clause (b) above is greater than the Estimated Net Working Capital, Buyer shall pay to the Shareholders (other than DCI), the Optionholders and HIG Cayman the difference between the Net Working Capital as finally determined pursuant to clause (b) above and the Estimated Net Working Capital. If the Net Working Capital as finally determined pursuant to clause (b) above is less than the Estimated Net Working Capital, the Shareholder Representative (on behalf of the Shareholders, HIG Cayman and the Optionholders) shall pay to Buyer from the Holdback Amount the amount of the difference between the Net Working Capital as finally determined pursuant to clause (b) above and the Estimated Net Working Capital. Buyer shall promptly deliver to each Shareholder (other than DCI), HIG Cayman and Optionholder its portion (determined in accordance with the last sentence of this clause (c)) of any amounts determined pursuant to this clause (c) to be due by Buyer by wire transfer of immediately available funds to one or more accounts designated by the Shareholder Representative to Buyer. The Shareholder Representative (on behalf of the Shareholders, HIG Cayman and the Optionholders) shall promptly deliver to Buyer from the Holdback Amount any amounts determined pursuant to this clause (c) to be due by the Shareholder Representative (on behalf of the Shareholders, HIG Cayman and the Optionholders) by wire transfer of immediately available funds to one or more accounts designated by Buyer to the Shareholder Representative. Any amounts to be received by any Shareholder, HIG Cayman or any Optionholder pursuant to this clause (c) shall be such additional amount that such Shareholder, HIG Cayman or Optionholder would have received at the Closing if the amount of any payment made pursuant to this clause (c) was added to the Purchase Price in calculating the Closing Shareholder Consideration, the HIG Consideration and the Closing Optionholder Consideration. (d) In the calculation of the Estimated Net Working Capital and Preliminary and/or Final Net Working Capital as provided in this Section 1.03, a liability shall be accrued with respect to the potential state and local sales and use tax liability of Milliken & Michaels, Inc. (1) for the state of Texas pursuant to the audit referenced in that certain letter, dated February 8, 1999, to Milliken & Michaels, Inc. (the "Texas Audit") and (2) for the Commonwealth of Pennsylvania pursuant to an audit, if any, which may arise from the date hereof until the date which is six months after the Closing Date (the "Possible Pennsylvania Audit"), which accrual (the "Accrual") shall be deemed a Working Capital Liability; the Accrual shall be determined in the good faith judgment of the Shareholder Representative, as reasonably agreed to by Buyer. If the Accrual cannot be agreed upon by the Shareholder Representative and Buyer, the Shareholder Representative's determination of the Accrual shall be used in the determination of Estimated Net Working Capital. Upon the resolution of the Texas Audit or any Possible Pennsylvania Audit or on the date which is six months after the Closing Date if no Possible Pennsylvania Audit has been commenced on such date, if it is finally determined that the Accrual exceeded the actual amount of liability which the Company may have in connection with the Audit, such excess, if any, shall be paid (without interest) by the Buyer to the Shareholder Representative who shall allocate such excess as provided in the last sentence of Section 1.03 (c) above. Buyer additionally agrees that neither it nor any of its agents, employees, shareholders, or other affiliates shall communicate with or otherwise take any action with respect to any state or local authority in such a manner as would induce or incite such authority to assess any state or local tax liability. 3 1.04 The Closing. (a) The closing of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of Kirkland & Ellis located at 200 East Randolph Drive, Chicago, Illinois at 10:00 a.m. on the date which is the third business day following satisfaction or waiver of all of the closing conditions set forth in Article II hereof (other than those to be satisfied at the Closing) or on such other date or at such other location as is mutually agreeable to Buyer and the Shareholder Representative. The date and time of the Closing are herein referred to as the "Closing Date." If acceptable to the Shareholder Representative and Buyer, the Closing may be effected by facsimile transmission of the executed closing documents identified in Section 1.04(b) and Article II, by payment of the Purchase Price in the manner set forth in Section 1.04(b), and by sending original copies of the closing documents by reputable overnight delivery service, postage or delivery charges prepaid, for delivery to the parties at the addresses set forth in Section 13.05 on the first business day following the Closing Date. (b) Subject to the terms and conditions set forth in this Agreement, the parties hereto shall consummate the following transactions (the "Closing Transactions") on the Closing Date: (i) Buyer shall deliver to each Optionholder the amount of its Closing Optionholder Consideration, by wire transfer of immediately available funds to one or more accounts designated by the Shareholder Representative to Buyer prior to the Closing; (ii) the Shareholder Representative (on behalf of the Optionholders) shall deliver to the Company the instruments (if any) evidencing all of the Options duly endorsed for transfer or accompanied by appropriate transfer documents and executed releases from each Optionholder releasing the Company and its Subsidiaries from any claims which such Optionholder may have against the Company and its Subsidiaries (other than claims related to such Optionholder's employment with the Company); (iii) Buyer shall deliver to each Shareholder (other than DCI) and HIG Cayman the amount of its Closing Shareholder Consideration and HIG Consideration, respectively, by wire transfer of immediately available funds to one or more accounts designated by the Shareholder Representative to Buyer prior to the Closing; (iv) the Shareholder Representative (on behalf of the Shareholders (other than DCI) and HIG Cayman) shall deliver to Buyer stock certificates representing the Shares and the DCI Shares duly endorsed for transfer or accompanied by duly executed stock powers and executed releases from each Shareholder and HIG Cayman releasing the Company and its Subsidiaries from any claims which such Shareholder may have against the Company and its Subsidiaries (other than claims related to such Shareholder's employment with the Company); 4 (v) Buyer shall repay, or cause to be repaid, on behalf of the Company and its Subsidiaries, all amounts necessary to discharge fully the then outstanding balance of the Indebtedness by wire transfer of immediately available funds as directed by the holders of the Indebtedness set forth on the Indebtedness Schedule at or prior to the Closing, and the Shareholder Representative (on behalf of the Shareholders, HIG Cayman and the Optionholders) shall deliver to Buyer all appropriate payoff letters and releases and shall make arrangements reasonably satisfactory to Buyer for such holders to deliver lien releases and canceled notes at the Closing; (vi) Buyer shall pay, or cause to be paid, on behalf of the Company, all amounts necessary to discharge fully all of the Company's then outstanding obligations under those certain Stock Appreciation Rights Agreements, dated April 15, 1997, by and between the Company and each of Michael Sanderson, Thomas V. Cefalu, III and David Israel (the "SAR Payments") by wire transfer of immediately available funds as directed by Michael Sanderson, Thomas V. Cefalu, III and David Israel at or prior to the Closing, and the Shareholder Representative (on behalf of the Shareholders, HIG Cayman and the Optionholders) shall deliver to Buyer all appropriate termination letters and releases at the Closing; (vii) Buyer shall deliver the Warrants to the Shareholders (other than DCI), HIG Cayman and the Optionholders; and (viii) Buyer, the Company and the Shareholder Representative (on behalf of the Shareholders, HIG Cayman and the Optionholders) shall make such other deliveries in accordance with Article II hereof. ARTICLE II CONDITIONS TO CLOSING --------------------- 2.01 Conditions to Buyer's Obligations. The obligation of Buyer to consummate the transactions contemplated by this Agreement is subject to the satisfaction of the following conditions as of the Closing Date: (a) The representations and warranties set forth in Articles III and IV hereof shall be true and correct in all material respects except that, with respect to the representations and warranties set forth in Section 3.03 and Section 3.04 and those representations and warranties which are modified by the terms "material," "Material Adverse Effect" or similar qualifications, such representations and warranties shall be true and correct in all respects, in either case, on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date; 5 (b) The Company, the Shareholders, HIG Cayman and the Optionholders shall have performed in all material respects all of the covenants and agreements required to be performed by them under this Agreement at or prior to the Closing; (c) All of the consents which are set forth on the Third-Party Consents Schedule attached hereto shall have been obtained; (d) The applicable waiting periods, if any, under the HSR Act shall have expired or been terminated; (e) On or before the Closing Date, no action or proceeding shall have been commenced that prohibits or restrains or attempts to prohibit or restrain, and no order or judgment shall have been issued and no new law shall have been enacted, that prohibits or restrains or retroactively attempts to prohibit or restrain the consummation of the transactions contemplated by this Agreement; (f) There shall not have been any material adverse change or material casualty loss (which is not substantially covered by insurance) affecting the Company and its Subsidiaries taken as a whole or their business, assets or financial condition taken as a whole, between the date of this Agreement and the Closing Date; (g) The Company or the Shareholder Representative (on behalf of the Shareholders, HIG Cayman and the Optionholders), as the case may be, shall have delivered to Buyer each of the following: (i) a certificate of the Company in the form set forth in Exhibit B attached hereto, dated the Closing Date, stating that the preconditions specified in subsections (a) through (e) hereof, inclusive, as they relate to the Company have been satisfied; (ii) a certificate of the Shareholder Representative (on behalf of the Shareholders, HIG Cayman and the Optionholders) in the form of Exhibit C attached hereto, dated the Closing Date, stating that the preconditions specified in subsections (a), (b), (c) and (f) as they relate to the Shareholders, HIG Cayman and the Optionholders have been satisfied; (iii) evidence of the third party and governmental consents described in subsections (c) and (d) above; (iv) the instruments (if any) evidencing the Options the stock certificates representing the Shares and the stock certificates representing the DCI Shares, in each case duly endorsed for transfer or accompanied by duly executed stock powers or transfer documents; 6 (v) all minute books, stock books, ledgers and registers, corporate seals and other corporate records relating to the organization, ownership and maintenance of the Company, its Subsidiaries and DCI; (vi) resignations effective as of the Closing Date from such officers and directors of the Company or its Subsidiaries as Buyer shall have requested in writing and delivered to the Shareholder Representative not less than five days prior to the Closing Date; (vii) a copy of the Certificate of Incorporation or Articles of Incorporation of each of the Company, its Subsidiaries and DCI, certified by the Secretary of State of the state in which each is incorporated and a Certificate of Good Standing or equivalent certificate from the state in which each is incorporated and each state in which each is duly qualified to transact business; (viii) a certificate signed by each of the Shareholders (other than DCI), HIG Cayman and Optionholders acknowledging (A) the respective amounts of the Purchase Price to be paid to them at Closing, as determined pursuant to Sections 1.02(A), (B) and (C) which amounts shall be set forth in an annex to such certificate and shall additionally be provided to Buyer on or before the Closing Date, and (B) their respective percentage interests for determining their interest in any adjustment to the Purchase Price determined pursuant to Section 1.03; (ix) opinions of counsel from Kirkland & Ellis as to the matters concerning the Company set forth as Exhibit D-1 attached hereto and from Kirkland & Ellis or other firm reasonably acceptable to Buyer as to the matters concerning the Shareholders, HIG Cayman and the Optionholders set forth as Exhibit D-2 attached hereto; (x) certified copies of the resolutions duly adopted by the board of directors (or its equivalent governing body) of the Company and HIG Cayman, and of any Shareholder or Optionholder which is not a natural person, authorizing the execution, delivery and performance of this Agreement; (xi) the documents, instruments, stock certificates required to be delivered to Buyer pursuant to Section 1.04(b); and (xii) all other documents, certificates, instruments and writings reasonably requested to be delivered by the Company at or prior to the Closing pursuant to this Agreement or otherwise required in connection herewith. 2.02 Conditions to the Shareholders', HIG Cayman's and the Optionholders' Obligations. The obligations of the Shareholders, HIG Cayman and the Optionholders to consummate the transactions contemplated by this Agreement are subject to the satisfaction of the following conditions as of the Closing Date: 7 (a) The representations and warranties set forth in Article V hereof shall be true and correct in all material respects except that, with respect to the representations and warranties which are modified by the term "material" or similar qualifications, such representations and warranties shall be true and correct in all respects, in either case, on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date; (b) Buyer shall have performed in all material respects all the covenants and agreements required to be performed by it under this Agreement at or prior to the Closing; (c) The applicable waiting periods, if any, under the HSR Act shall have expired or been terminated; (d) On or before the Closing Date, no action or proceeding shall have been commenced that prohibits or restrains or attempts to prohibit or restrain, and no order or judgment shall have been issued and no new law shall have been enacted, that prohibits or restrains or retroactively attempts to prohibit or restrain the consummation of the transactions contemplated by this Agreement; (e) Buyer shall have delivered to the Shareholder Representative, an opinion of counsel from Blank Rome Comisky & McCauley LLP as to the matters concerning the Buyer set forth as Exhibit E attached hereto; (f) Buyer shall have delivered to the Shareholder Representative certified copies of the resolutions duly adopted by Buyer's board of directors (or its equivalent governing body) authorizing the execution, delivery and performance of this Agreement; (g) Buyer shall have executed and delivered to the Shareholder Representative the Registration Rights Agreement attached hereto as Exhibit G; (h) Buyer shall have delivered to the Shareholder Representative (on behalf of the Shareholders and the Optionholders) a certificate in the form set forth as Exhibit F attached hereto, dated the Closing Date, stating that the preconditions specified in subsections (a) through (d) hereof, inclusive, have been satisfied; and (i) The Closing Transactions set forth in Section 1.04(b)(i), (iii), (vi) and (vii) shall have been completed. 8 ARTICLE III REPRESENTATIONS AND WARRANTIES OF EACH SHAREHOLDER, HIG CAYMAN AND EACH OPTIONHOLDER -------------------------------------------------- Each Shareholder, HIG Cayman and each Optionholder, solely for himself or itself (on a several, and not joint basis), represents and warrants to Buyer as follows: 3.01 Authority. Such Shareholder, HIG Cayman or such Optionholder (as the case may be) has all requisite power and authority and full legal capacity to execute and deliver this Agreement and to perform his or its obligations hereunder. 3.02 Execution and Delivery; Valid and Binding Agreement. This Agreement has been duly executed and delivered by such Shareholder, HIG Cayman or such Optionholder (as the case may be), and assuming that this Agreement is the valid and binding agreement of Buyer, this Agreement constitutes the valid and binding obligation of such Shareholder or such Optionholder (as the case may be), enforceable in accordance with its terms. 3.03 Ownership of Capital Stock. Such Shareholder or such Optionholder, as the case may be, is the record and beneficial owner of the number of Shares or Options, as applicable, as set forth opposite his or its name on the attached Shareholders Schedule or Optionholders Schedule, as the case may be. On the Closing Date, such Shareholder shall transfer to Buyer good title to such Shares and such Optionholder shall transfer to the Buyer such Options, in either case free and clear of all claims, pledges, security interests, liens, charges, encumbrances, options, proxies, voting trusts or agreements and other restrictions and limitations of any kind, other than applicable federal and state securities law restrictions. 3.04 Ownership of DCI Shares. HIG Cayman is the record and beneficial owner of the DCI Shares. The DCI Shares represent 100% of the issued and outstanding stock of DCI. On the Closing Date, HIG Cayman shall transfer to Buyer good title to such DCI Shares, free and clear of all claims, pledges, security interests, liens, charges, encumbrances, options, proxies, voting trusts or agreements and other restrictions and limitations of any kind, other than applicable federal and state securities law restrictions. 3.05 DCI. HIG Cayman and DCI hereby represent and warrant to Buyer that (i) DCI is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, with full corporate power and authority to enter into this Agreement and perform its obligations hereunder; (ii) the execution, delivery and performance of this Agreement by DCI and the consummation of the transactions contemplated hereby have been approved by all requisite corporate action; (iii) DCI is not subject to or obligated under its Certificate of Incorporation, its Bylaws, any law, or rule statute, regulation or order, judgment or decree, or any material agreement or instrument, or any license, franchise or permit, which would be breached or violated in any material respect by DCI's execution, delivery or performance of this Agreement; (iv) DCI's sole asset is the Shares; and (v) since its formation, the only activities DCI has conducted are to hold the Shares and to enter into the transactions contemplated by this Agreement. 3.06 HIG Cayman. HIG Cayman hereby represents and warrants that its sole asset is the DCI Shares and that since its formation, the only activities HIG Cayman has conducted are to hold the DCI Shares and to enter into the transactions contemplated by this Agreement. 9 3.07 Brokerage. Except for the fees and expenses of Merrill Lynch & Co. and the fees of H.I.G. Capital Management, Inc. (both of which shall be paid by the Shareholders and the Optionholders), there are no claims for brokerage commissions, finders' fees or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement or agreement made by or on behalf of any Shareholder, any Optionholder or the Company. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY --------------------------------------------- The Company represents and warrants to Buyer that: 4.01 Organization and Corporate Power. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and the Company has all requisite corporate power and authority and all authorizations, licenses and permits necessary to own and operate its properties and to carry on its businesses as now conducted, except where the failure to hold such authorizations, licenses and permits would not have a material adverse effect upon the business, assets, financial condition or operating results of the Company and its Subsidiaries, taken as a whole (a "Material Adverse Effect"). The Company is qualified to do business in every jurisdiction in which its ownership of property or the conduct of business as now conducted requires it to qualify, which jurisdictions are listed on the Regulatory Permits Schedule, except where the failure to be so qualified would not have a Material Adverse Effect. The Company and its Subsidiaries hold all permits, licenses, approvals, certificates and registrations of any governmental or regulatory authority whether within or outside the United States (collectively, "Permits") which are necessary for the conduct of their operations except those Permits the failure to hold which would not have a Material Adverse Effect. All such Permits are in full force and effect, no violations which have not been remedied have been recorded in respect of any Permit and neither the Company nor any Subsidiary is in default, nor has received any notice of any claim of default, with respect to any such Permit or of any notice of any other claim or Proceeding relating to any such Permit. The Regulatory Permits Schedule sets forth each of the Permits held by the Company and the Subsidiaries. 4.02 Subsidiaries. Except as set forth on the attached Subsidiary Schedule, neither the Company nor any of its Subsidiaries owns or holds the right to acquire any stock, partnership interest, joint venture interest or other equity ownership or participation interest in any other Person. Each of the Subsidiaries identified on the Subsidiary Schedule is validly existing and in good standing under the laws of the jurisdiction of its incorporation, has all requisite corporate power and authority and all authorizations, licenses and permits necessary to own its properties and to carry on its businesses as now conducted and is qualified to do business in every jurisdiction in which its ownership of property or the conduct of businesses as now conducted requires it to qualify, except in each such case where the failure to hold such authorizations, licenses and permits or to be so qualified would not have a Material Adverse Effect. All of the capital stock of each of the Subsidiaries is owned by the Company of record and beneficially, and the Company has good and valid legal title to all of the capital stock of the Subsidiaries, free and clear of any liens other than as disclosed on the Lien Schedule. 10 4.03 Authorization; No Breach; Valid and Binding Agreement. Except as set forth on the attached Authorization Schedule, the execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby have been approved by all corporate actions required by Company's board of directors and its shareholders and do not conflict with or result in any breach of, constitute a default under, result in a violation of, result in the creation of any lien, security interest, charge or encumbrance upon any assets of the Company or any of its Subsidiaries, or require any authorization, consent, approval, exemption or other action by or notice to any court or other governmental body, under the provisions of the Company's or any of its Subsidiary's certificate or articles of incorporation or bylaws or any material indenture, mortgage, lease, loan agreement or other agreement or instrument to which the Company or any of its Subsidiaries is bound, or any law, statute, rule or regulation or order, judgment or decree to which the Company or any of its Subsidiaries is subject. Assuming that this Agreement is a valid and binding obligation of Buyer, this Agreement constitutes a valid and binding obligation of the Company, enforceable in accordance with its terms. The Permits Notification Schedule sets forth each of the Permits listed on the Regulatory Permits Schedule which will or may require notification and/or approval by a governmental authority for its continued use in connection with the business of the Company and the Subsidiaries after the consummation of the transactions contemplated hereby. 4.04 Capital Stock. The authorized number of shares of capital stock of the Company ("Common Stock") consists of 150,000 shares of the Company's Class A Common Stock, par value $.01 per share and 14,000 shares of the Company's Class B Common Stock, par value $.01 per share, 10,000 shares of Class C Common Stock, par value $.01 per share, 25,000 shares of Class D Common Stock, par value $.01 per share. As of the date hereof, 100,000 shares of Common Stock are issued and outstanding and are owned of record and beneficially by the Shareholders in the amounts as set forth on the attached Shareholders Schedule. All of the outstanding shares of capital stock of the Company have been duly authorized and are validly issued, fully paid and nonassessable. Except as set forth on the Capital Stock Schedule, the Company does not have any other capital stock, equity securities, securities or rights containing any equity features authorized, issued or outstanding, and there are no agreements, options, warrants, stock appreciation rights, phantom stock plans or other rights or arrangements existing or outstanding which provide for the sale or issuance of any of the foregoing by the Company. Except as set forth on the attached Capital Stock Schedule, there are no rights, subscriptions, warrants, options, conversion rights or agreements of any kind outstanding to purchase or otherwise acquire any shares of capital stock or other equity securities of the Company of any kind. Except as set forth on the Capital Stock Schedule, there are no agreements or other obligations (contingent or otherwise) which require the Company to repurchase or otherwise acquire any shares of the Company's capital stock or other equity securities. 4.05 Financial Statements. The Company has furnished Buyer with copies of its (i) unaudited balance sheet with respect to the Company as of February 28, 1999, and the related statement of income for the two-month period then ended (such balance sheet referred to herein as the "Latest Balance Sheet") and (ii) audited balance sheets and statements of income with respect to the 11 Company as of and for the fiscal year ended December 31, 1998 and the period from April 15, 1997 through December 31, 1997. Except as set forth on the attached Financial Statements Schedule, such financial statements have been based upon the information concerning the Company contained in the Company's books and records, and present fairly in all material respects the financial condition and results of operations of the Company as of the times and for the periods referred to therein in accordance with GAAP (subject, in the case of the unaudited financial statements, to normal year-end audit adjustments). All funds collected on behalf of customers by the Company or the Subsidiaries have been properly remitted to customers or are properly reflected on the financial statements of the Company and its Subsidiaries. The books and records of the Company and its Subsidiaries fairly reflect in all material respects the transactions to which it is a party or by which its properties are subject or bound. Such books and records have been properly kept maintained and are in compliance in all material respects with all applicable legal and accounting requirements. The minute books of the Company, its Subsidiaries and DCI contain records which are accurate in all material respects of all corporate actions of the respective shareholders and board of directors of the Company, its Subsidiaries and DCI. 4.06 Absence of Certain Developments. Since the date of the Latest Balance Sheet, there has not been any material casualty loss (which is not substantially covered by insurance) or any material adverse change in the business, assets, financial condition or results of operations of the Company and its Subsidiaries, taken as a whole. Except as set forth on the attached Developments Schedule and except as expressly contemplated by this Agreement, since the date of the Latest Balance Sheet, neither the Company nor any Subsidiary has individually or in the aggregate: (a) borrowed any amount (other than pursuant to the Company's and its Subsidiaries' existing credit facilities) or incurred or become subject to any material liabilities (other than liabilities incurred in the ordinary course of business and consistent with past practice, liabilities under contracts entered into in the ordinary course of business and consistent with past practice and borrowings from banks (or similar financial institutions) necessary to meet ordinary course working capital requirements and which in any event will not exceed an aggregate of $250,000); (b) mortgaged, pledged or subjected to any lien, charge or other encumbrance, any material portion of its assets, except Permitted Liens; (c) sold, assigned, leased, licensed or transferred any material portion of its tangible assets, except in the ordinary course of business and consistent with past practice; (d) sold, assigned or transferred any patents, trademarks, trade names, copyrights, trade secrets or other intangible assets, except in the ordinary course of business and consistent with past practice; (e) suffered any material extraordinary losses or waived any rights of material value; 12 (f) issued, sold or transferred any of its capital stock or other equity securities, securities convertible into its capital stock or other equity securities or warrants, options or other rights to acquire its capital stock or other equity securities, or any bonds or debt securities; (g) made any material capital expenditures or commitments therefor in excess of the allotted capital expenditure budget of the Company and its Subsidiaries copies of which have been delivered to Buyer; or (h) entered into any other material transaction or contract, except in the ordinary course of business and consistent with past practice; or (i) has taken any of the actions or done any of the things described in clause (b) of Section 6.01. For the purpose of this Section 4.06, "material" means the sum of $250,000 with respect to any transaction or series of related transactions. 4.07 Title to Properties. (a) Except as set forth on the Lien Schedule, the Company owns good and marketable title to all of the personal property shown on the Latest Balance Sheet, free and clear of all liens, security interests and other encumbrances, except for Permitted Liens. (b) Neither the Company nor any Subsidiary owns any real property. The real property demised by the leases (the "Leased Real Property") described on the attached Real Property Schedule constitutes all of the real property leased by the Company and its Subsidiaries. The Leased Real Property leases are in full force and effect, and the Company or a Subsidiary holds a valid and existing leasehold interest under each of the leases. The Company has delivered or made available to Buyer complete and accurate copies of each of the leases described on the Real Property Schedule, and none of the leases have been modified in any material respect, except to the extent that such modifications are disclosed by the copies delivered or made available to Buyer. Neither the Company nor any Subsidiary is in default in any material respect under any of such leases and, to the knowledge of the Company, the other party to such leases is not in default in any material respect. No notice from any lessor, governmental body or other Person has been received by Company or any Subsidiary claiming any material violation of, or breach or default under, any lease or law. (c) To the Company's knowledge, the Company and each of its Subsidiaries possess all of their respective material assets and property that are leased from other persons under valid and enforceable contracts. The Company and its Subsidiaries have all assets necessary to operate, or which are material to the operation of, its respective businesses. The property and assets of the Company and its Subsidiaries, wherever located, are generally in good condition, ordinary wear and tear excepted. 13 4.08 Tax Matters. (a) Except as set forth on the Taxes Schedule, (i) Each of the Company and its Subsidiaries has filed all Tax Returns that it was required to file. All such Tax Returns were correct and complete in all material respects. All Taxes owed by any of the Company and its Subsidiaries (whether or not shown on any Tax Return) have been paid or properly accrued. None of the Company and its Subsidiaries currently is the beneficiary of any extension of time within which to file any Tax Return which has not been timely filed. There are no liens for Taxes on any of the assets of any of the Company and its Subsidiaries other than Taxes not yet due and payable. (ii) To the Company's knowledge, each of the Company and its Subsidiaries has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other third party. (iii) There is no dispute or claim concerning any Tax Liability of any of the Company and its Subsidiaries either claimed or raised by any authority in writing. (iv) None of the Company and its Subsidiaries has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency. (v) None of the Company and its Subsidiaries has made any payments, is obligated to make any payments, or is a party to any agreement that under certain circumstances could obligate it to make any payments that will not be deductible under Code Section 280G, and none of the Company and its Subsidiaries has been a United States real property holding corporation within the meaning of Code Section 897(c)(2) during the applicable period specified in Code Section 897(c)(1)(A)(ii). None of the Company and its Subsidiaries is a party to any Tax allocation or sharing agreement. None of the Company and its Subsidiaries (A) has been a member of an affiliated group filing a consolidated federal income Tax Return (other than a group the common parent of which was the Company) or (B) has any liability for the Taxes of any Person (other than any of the Company and its Subsidiaries) under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local, or foreign law), as a transferee or successor, by contract, or otherwise. (vi) The unpaid Taxes of the Company and its Subsidiaries (A) did not, as of the date of the Latest Balance Sheet, exceed the reserve for Tax liability (rather than any reserve for deferred Taxes established to reflect timing differences between book and Tax income) set forth on the face of the Latest Balance Sheet (rather than in any notes thereto) and (B) do not exceed that reserve as adjusted for the passage of time through the Closing Date in accordance with the past custom and practice of the Company and its Subsidiaries in filing their Tax Returns. 14 (b) The Taxes Schedule lists all federal, state, local, and foreign income Tax Returns filed with respect to any of the Company and its Subsidiaries for taxable periods ended on or after April 15, 1997, indicates those Tax Returns that have been audited, and indicates those Tax Returns that currently are the subject of audit. The Company has made available to the Buyer correct and complete copies of all federal income Tax Returns, examination reports, and statements of deficiencies assessed against or agreed to by any of the Company and its Subsidiaries since April 15, 1997. 4.09 Contracts and Commitments. (a) Except as set forth on the attached Contracts Schedule, neither the Company nor any Subsidiary is party to any: (i) collective bargaining agreement or contract with any labor union; (ii) written bonus, pension, profit sharing, retirement or other form of deferred compensation plan, other than as described in Section 4.13 or the schedules relating thereto; (iii) stock purchase, stock option or similar plan; (iv) written contract for the employment or engagement of any officer, individual employee or other person on a full-time or consulting basis; (v) agreement or indenture relating to the borrowing of money or to mortgaging, pledging or otherwise placing a lien on any material portion of the Company's or any Subsidiary's assets; (vi) guaranty of any obligation for borrowed money or other material guaranty; (vii) lease, license, or agreement under which it is lessee or licensee of, or holds or operates any personal property owned by any other party, for which the annual rental exceeds $25,000; (viii) lease or license agreement under which it is lessor or licensor of or permits any third party to hold or operate any property, real or personal, for which the annual rental exceeds $25,000; (ix) contract or group of related contracts with the same party for the purchase of products or services, under which the undelivered balance of such products and services has a selling price in excess of $25,000; (x) contract or group of related contracts with the same party for the sale of products or services under which the undelivered balance of such products or services has a sales price in excess of $25,000; or (xi) contract which prohibits the Company or any Subsidiary from freely engaging in business anywhere in the world; (xii) any software license or contract (excluding licenses for "off the shelf" software which is generally commercially available), (xiii) contracts under which any rights in and/or ownership of any material part of the customer base, business or assets of any of the Company or any of its Subsidiaries, or any shares or other ownership interests in any of the Company or any of its Subsidiaries was acquired; and (xiv) any other agreement, arrangement or contract under which the Company or any of its Subsidiaries has any ongoing obligations that contemplates or involves the payment or delivery of cash or other consideration in an amount or having a value in excess of $25,000 in the aggregate, or contemplates or involves the performance of services having a value in excess of $25,000 in the aggregate under which the Company or any of its Subsidiaries has any ongoing obligations, including without limitation, any escrow agreements or indemnification agreements. (b) Buyer either has been supplied with, or has been given access to, true and correct copies of all written contracts which are referred to on the Contracts Schedule, together with all amendments, waivers or other changes thereto. 15 (c) Other than under Section 10.15 of the Stock Purchase Agreement, dated July 17, 1998, by and among the Company, International Account Systems, Inc., Robert P. Kouwe, Richard L. Kouwe and Milliken & Michaels, Inc. (the "IAS Purchase Agreement"), neither the Company nor any Subsidiary is in default under any contract listed on the Contracts Schedule, except where such default would not have a Material Adverse Effect. To the knowledge of the Company, each such contract is in full force and effect in accordance with its terms and in accordance with any amendments to such contract which have been disclosed or made available to Buyer. Except as set forth in Contracts Schedule, neither the Company nor any Subsidiary has given or received written notice of a material default or notice of termination with respect to any contract listed in the Contracts Schedule. 4.10 Intellectual Property. (a) All of the patents, registered trademarks, registered service marks, registered copyrights, application for any of the foregoing and material unregistered trademarks, service marks, copyrights, trade names and corporate names used in the conduct of the Company's and its Subsidiaries' respective businesses (collectively, "Intellectual Property") are set forth on the attached Intellectual Property Schedule. Except as set forth on the Intellectual Property Schedule (i) the Company or its Subsidiaries owns and possesses all right, title and interest in and to, or possesses the valid right to use, any material Intellectual Property; (ii) neither the Company nor any Subsidiary has received any written notices of infringement or misappropriation from any third party with respect to any material Intellectual Property; and (iii) to the Company's knowledge, neither the Company nor any Subsidiary is currently infringing on intellectual property rights of any other Person. Neither the Company nor any Subsidiaries is in violation of any material provisions of any "off the shelf" software license to which it is a party. (b) The Company or a Subsidiary owns free and clear of any liens or has valid licenses or other rights to use all computer software programs necessary to permit the Company and its Subsidiaries to conduct their operations as currently conducted. With respect to the software owned or used by the Company or any Subsidiary, to the Company's knowledge, each component of such software that creates, accepts, displays, stores, retrieves, accesses, recognizes, distinguishes, compares, sorts, manipulates, processes, calculates or otherwise uses dates or date-related data will do so accurately, without operating defects, using dates in the 20th and 21st centuries, and will not be materially adversely affected by the advent of the year 2000, the advent of the 21st century, or the transition from the 20th century through the year 2000 and into the 21st century. 4.11 Litigation. Except as set forth on the attached Litigation Schedule, there are no actions, suits, proceedings or investigations pending or, to the Company's knowledge, overtly threatened against the Company or any Subsidiary, at law or in equity, or before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which would result in liability to the Company or any Subsidiary in excess of $50,000 individually or $250,000 in the aggregate, and neither the Company nor any Subsidiary is subject to any outstanding judgment, order or decree of any court or governmental body. As to 16 each matter described on the Litigation Schedule, accurate and complete copies of all pertinent pleadings, judgments, orders, correspondence and other legal documents requested by Buyer have been made available to Buyer. If prior to the Closing, the Company or any Subsidiary is served with process or receives notice that an action, suit, proceeding or investigation may be commenced against it, the Company shall promptly notify Buyer. 4.12 Governmental Consents, etc. Except for the applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), no material permit, consent, approval or authorization of, or declaration to or filing with, any governmental or regulatory authority is required in connection with any of the execution, delivery or performance of this Agreement by the Company or the consummation by the Company of any other transaction contemplated hereby. 4.13 Employee Benefit Plans. (a) Except as listed on the attached Employee Benefits Schedule, with respect to employees and former employees of the Company or any of its Subsidiaries, neither the Company nor any Subsidiary maintains or contributes or has an obligation to contribute to (i) any nonqualified deferred compensation or retirement plans, (ii) any qualified defined contribution retirement plans, (iii) any qualified defined benefit pension plans (the plans described in (ii) and (iii) are collectively referred to as the "Pension Plans"), and (iv) any welfare benefit plans and other material fringe benefit plans (the "Welfare Plans"). The Pension Plans and the Welfare Plans are collectively referred to as the "Plans." Each of the Pension Plans has received a favorable determination letter from the Internal Revenue Service that such Plan is a "qualified plan" under Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), the related trusts are exempt from tax under Section 501(a) of the Code, and the Company is not aware of any facts or circumstances that would jeopardize the qualification of such Pension Plan. The Plans comply in form and in operation in all material respects with the requirements of the Code and the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). (b) With respect to the Plans, (i) all required contributions have been made or properly accrued, (ii) other than with respect to any multiemployer Pension Plans, there are no actions, suits or claims pending, other than routine claims for benefits, and (iii) other than with respect to any multiemployer Pension Plans, there have been no "prohibited transactions" (as that term is defined in Section 406 of ERISA or Section 4975 of the Code). (c) The Company has furnished to Buyer true and complete copies of (i) the most recent determination letter received from the Internal Revenue Service regarding the Plans, (ii) the latest financial statements for the Plans and latest prepared actuarial reports and (iii) copies of all of the documents described in paragraph (a) of this Section. (d) None of the Company, its Subsidiaries or, to the Company's knowledge, any of its directors, officers, employees or any other "fiduciary," as such term is defined in Section 3 of ERISA, has committed any material breach of fiduciary responsibility imposed 17 by ERISA or any other applicable law with respect to the Plans which would subject Buyer, its subsidiaries or any of their respective directors, officers or employees to any material liability under ERISA or any applicable law. (e) Neither the Company nor any Subsidiary has incurred any material liability for any tax or civil penalty imposed by Section 4975 of the Code or Section 502 of ERISA. 4.14 Insurance. The attached Insurance Schedule lists each material insurance policy maintained by the Company and its Subsidiaries. All of such insurance policies are in full force and effect, neither the Company nor any Subsidiary is in material default with respect to its obligations under any of such insurance policies and all premiums due thereon have been paid (other than such amounts as are disputed in good faith by the Company or any Subsidiary). Set forth on the Insurance Schedule is a list of all pending claims under such policies. The Company has not within the twelve months prior to the date of this Agreement received any written notice from or on behalf of any insurance carrier issuing policies or binders relating to or covering the Company and its Subsidiaries that there will be a cancellation or non-renewal of existing policies or binders. 4.15 Compliance with Laws. The Company and each Subsidiary is and has been in compliance in all material respects with all applicable laws, regulations, orders and judgments of foreign, federal, state and local governments and all agencies thereof. 4.16 Environmental Compliance and Conditions. (a) To the Company's knowledge, the Company and its Subsidiaries have obtained and possesses all material permits, licenses and other authorizations required under federal, state and local laws and regulations concerning public health and safety, worker health and safety, and pollution or protection of the environment in effect on or prior to the Closing Date, including all such laws and regulations relating to the emission, discharge, release or threatened release of any chemicals, petroleum, pollutants, contaminants or hazardous or toxic materials, substances or wastes into ambient air, surface water, groundwater or lands or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of any chemicals, petroleum, pollutants, contaminants or hazardous or toxic materials, substances or waste ("Environmental and Safety Requirements"), except where the failure to possess such licenses, permits and authorizations would not have a Material Adverse Effect. (b) Except as set forth on the attached Environmental Compliance Schedule, to the Company's knowledge, the Company and its Subsidiaries are in compliance with all terms and conditions of all permits, licenses and authorizations described in 4.16(a) and are also in compliance with all other Environmental and Safety Requirements and all written notices or demand letters issued, entered, promulgated or approved thereunder, except where the failure to comply would not have a Material Adverse Effect. 18 (c) To the Company's knowledge, neither the Company nor any Subsidiary has received any written notice of violations or liabilities arising under Environmental and Safety Requirements, including any investigatory, remedial or corrective obligation, relating to the Company, its Subsidiaries or their facilities and arising under Environmental and Safety Requirements. (d) This Section 4.16 constitutes the sole and exclusive representations and warranties of the Company with respect to Environmental Safety Requirements and all other environmental matters. 4.17 Affiliated Transactions. Except as set forth on the attached Affiliated Transactions Schedule, no officer, director, shareholder or Affiliate (including, without limitation, DCI) of the Company, any Subsidiary or any individual in such officer's, director's or shareholder's immediate family is a party to any material agreement, contract, commitment or transaction with the Company or its Subsidiaries or has any material interest in any material property used by the Company or its Subsidiaries. 4.18 Absence of Undisclosed Liabilities. Except (a) for liabilities and obligations incurred in the ordinary course of business and consistent with past practice since the Latest Balance Sheet, and (b) as otherwise disclosed on the Latest Balance Sheet or in the Liabilities Schedule, since December 31, 1998, neither the Company nor any Subsidiary has incurred any debt, liabilities or obligations of any nature, whether absolute, accrued, unmatured, contingent, known or unknown or otherwise, or any unsatisfied judgments or any leases of personalty or realty or unusual or extraordinary commitments liabilities or obligations (whether direct, indirect, accrued or contingent) required to be presented on the Company's balance sheet in accordance with GAAP. 4.19 Employee Relations. Neither the Company nor any Subsidiary has been a party to or bound by any union or collective bargaining contract, nor is any such contract currently in effect or being negotiated by or on behalf of the Company or any Subsidiary. Except as set forth in the Employee Relations Schedule, neither the Company nor any Subsidiary is a party to any written or oral employment agreement with any of its officers, directors, employees, consultants, agents, or other persons which is not terminable by the Company or its Subsidiaries at will without penalty or cost to the Company or its Subsidiaries. There are no pending, nor, to the knowledge of the Company, threatened walkouts, strikes, union organizing efforts or labor disturbances or any pending arbitration, unfair labor practice, grievance, or other proceeding of any kind with respect to the Company's or any Subsidiary's employees. Upon termination of the employment of any of its employees, neither the Company nor any Subsidiary will by reason of any action taken or agreement, contract, arrangement or plan be liable to any of its employees for severance pay or any other payments, except as and to the extent set forth in the Employee Relations Schedule. Since April 15, 1997, the Company and its Subsidiaries have not had an "employment loss" within the meaning of the Workers' Adjustment and Retraining Notification Act ("WARN Act") and the regulations thereunder. 4.20 Questionable Payments. To the knowledge of the Company, within the last two years no current or former director, executive, officer, representative, agent or employee of the Company or any of its Subsidiaries 19 (when acting in such capacity or otherwise on behalf of the Company or any of its Subsidiaries), (a) has used or is using any corporate funds for any illegal contributions, gifts, entertainment or other unlawful expenses relating to political activity; (b) has used or is using any corporate funds for any direct or indirect unlawful payments to any foreign or domestic government officials or employees; (c) has violated or is violating any provision of the Foreign Corrupt Practices Act of 1977, (d) has established or maintained, or is maintaining, any unlawful or unrecorded fund of corporate monies or other properties; (e) has made at any time since April 15, 1997, any false or fictitious entries on the books and records of any of the Company or any of its Subsidiaries; (f) has made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment of any nature using corporate funds or otherwise on behalf of the Company or any of its Subsidiaries; or (g) made any material favor or gift that is not deductible for federal income tax purposes using corporate funds or otherwise on behalf of the Company or any of its Subsidiaries. ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER --------------------------------------- Buyer represents and warrants to the Shareholders, HIG Cayman, the Optionholders and the Company that: 5.01 Organization and Power. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania, with full corporate power and authority to enter into this Agreement and perform its obligations hereunder. 5.02 Authorization; Valid and Binding Agreement. The execution, delivery and performance of this Agreement by Buyer and the consummation of the transactions contemplated hereby, including the issuance of the Warrants, have been duly and validly authorized by all requisite corporate action, and no other corporate proceedings on its part are necessary to authorize the execution, delivery or performance of this Agreement. Assuming that this Agreement is a valid and binding obligation of the Shareholders, HIG Cayman, the Optionholders and the Company, this Agreement and the Warrants constitute valid and binding obligations of Buyer, enforceable in accordance with their terms. 5.03 No Breach. Buyer is not subject to or obligated under its certificate of incorporation, its bylaws, any applicable law, or rule or regulation of any governmental authority, or any material agreement or instrument, or any license, franchise or permit, or subject to any order, writ, injunction or decree, which would be breached or violated in any material respect by Buyer's execution, delivery or performance of this Agreement, including the issuance of the Warrants. 5.04 Governmental Consents, etc. Except for the applicable requirements of the HSR Act, Buyer is not required to submit any material notice, report or other filing with any governmental authority in connection with the execution, delivery or performance by it of this Agreement or the consummation of the transactions contemplated hereby. No consent, approval or authorization of any governmental or regulatory authority or any other party or Person is required to be obtained by Buyer in connection with its execution, 20 delivery and performance of this Agreement or the consummation of the transactions contemplated hereby. The issuance of the Warrants by Buyer does not require registration under the Securities Act of 1933, as amended (the "Act"), and is otherwise in compliance with all applicable federal, state or local laws. 5.05 Litigation. There are no actions, suits or proceedings pending or, to the Buyer's knowledge, overtly threatened against or affecting Buyer at law or in equity, or before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which would materially adversely affect Buyer's performance under this Agreement or the consummation of the transactions contemplated hereby. 5.06 Brokerage. Except for the fees and expenses of Donaldson, Lufkin & Jenrette (which shall be paid by Buyer), there are no claims for brokerage commissions, finders' fees or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement or agreement made by or on behalf of Buyer. 5.07 Investment Representation. Buyer is purchasing the Shares, the DCI Shares and the Options for its own account with the present intention of holding such securities for investment purposes and not with a view to or for sale in connection with any public distribution of such securities in violation of any federal or state securities laws. Buyer is an "accredited investor" as defined in Regulation D promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended. 5.08 Financing. Buyer has and shall have at the Closing sufficient cash and available credit facilities (and has provided evidence thereof satisfactory to the Shareholder Representative) to pay the full consideration payable to the Shareholders and the Optionholders hereunder, to make all other necessary payments by it in connection with the purchase of the Shares, the DCI Shares and the Options and to pay all of its related fees and expenses. ARTICLE VI PRE-CLOSING COVENANTS --------------------- 6.01 Conduct of the Business. (a) From the date hereof until the Closing Date, the Company shall use its, and the Shareholders, HIG Cayman and the Optionholders shall cause the Company and its Subsidiaries to use their, commercially reasonable efforts to carry on its and their businesses according to their ordinary course of business and substantially in the same manner as heretofore conducted. The Company and its Subsidiaries will use all commercially reasonable efforts to preserve intact their business organization, to keep available the services of their officers and employees and to maintain satisfactory relationships with customers, suppliers and others having business relationships with them and will take no action which would materially adversely affect the ability of the parties to consummate the transactions contemplated by this Agreement, or the timing thereof; provided that, the foregoing 21 notwithstanding, the Company may use all available cash in excess of working capital requirements to repay any Indebtedness and satisfy its obligations under those Stock Appreciation Rights Agreements described in Section 1.04(b)(vi) hereof prior to the Closing. The Company shall consult with Buyer as to the management of business and affairs of the Company and its Subsidiaries at such reasonable times as Buyer may reasonably request. (b) From the date hereof until the Closing Date, except as otherwise provided for by this Agreement or consented to in writing by Buyer, the Company shall not and shall not permit any Subsidiary to, and the Shareholders, HIG Cayman, and the Optionholders shall not permit the Company or any Subsidiary to, (i) issue, sell or transfer any shares of its or any Subsidiary's capital stock or other equity securities, (ii) issue, sell or transfer any securities convertible into, or options with respect to, warrants to purchase or rights to subscribe for any shares of its or any Subsidiary's capital stock or other equity securities; (iii) effect any recapitalization, reclassification, stock dividend, stock split or like change in its capitalization; (iv) amend its or any Subsidiary's certificate or articles of incorporation or bylaws; (v) make any redemption or purchase of any shares of its or any Subsidiary's capital stock; (vi) borrow any amount (other than pursuant to the Company's and its Subsidiaries' existing credit facilities) or incur or become subject to any material liabilities (other than liabilities incurred in the ordinary course of business and consistent with past practice, liabilities under contracts entered into in the ordinary course of business and consistent with past practice and borrowings from banks (or similar financial institutions) necessary to meet ordinary course working capital requirements and which in any event do not exceed an aggregate of $250,000); (vii) mortgage, pledge or subject to any lien, charge or other encumbrance, any material portion of its assets, except Permitted Liens; (viii) sell, assign, lease, license or transfer any material portion of its tangible assets, except in the ordinary course of business and consistent with past practice; (ix) sell, assign, lease, license or transfer any patents, trademarks, trade names, copyrights, trade secrets or other intangible assets, except in the ordinary course of business and consistent with past practice; (x) waive any rights of material value; (xi) issue, sell or transfer any bonds or debt securities;(xii) make any material capital expenditures or commitments in excess of amounts previously budgeted therefor; (xiii) enter into any material transaction or contract, except in the ordinary course of business and consistent with past practice; (xiv) assume, guarantee, endorse or otherwise become liable or responsible for the obligations of any Person except in the ordinary course of business and consistent with past practice; (xv) increase in any manner the compensation of any of its directors, officers or employees except in the ordinary course of business, consistent with past practice as part of their regularly scheduled review; (xvi) pay or agree to pay any pension, retirement allowance or other employee benefit not required, or enter into or amend or agree to enter into or amend any agreement or arrangement with any of its directors, officers or employees, whether past or present, relating to any such pension, retirement allowance or other employee benefit, except as required under currently existing agreements, plans or arrangements; (xvii) grant any severance or termination pay to, or enter into or amend any employment, severance or change in control agreement with, any of its directors, officers or employees; or (xviii) enter into or become obligated under any collective bargaining agreement or any agreement with any labor union or association representing employees, pension plan, welfare plan, 22 multiemployer plan, employee benefit plan, benefit arrangement, or similar plan or arrangement, which was not in existence on the date hereof, including any bonus, incentive, deferred compensation, stock purchase, stock option, stock appreciation right, group insurance, severance pay, retirement or other benefit plan, agreement or arrangement, or employment or consulting agreement with or for the benefit of any Person, or amend any of such plans or any of such agreements in existence on the date hereof; (xix) make any change in the accounting methods or accounting practices followed by the Company and its Subsidiaries, except as required by GAAP; (xx) settle any action, suit, claim, investigation or proceeding (whether legal, administrative or arbitrative) in excess of $100,000 other than any action, suit, claim, investigation or proceeding involving claim against a predecessor of the Company or any Subsidiary; (xxi) merge with or into or consolidate with any other Person (other than between Subsidiaries) or make any acquisition of all or any part of the assets or capital stock or business of any other Person except for tangible property acquired in the ordinary course of business and consistent with past practice; or (xxii) agree or become legally bound to do any of the foregoing. 6.02 Access to Books and Records. From the date hereof until the Closing Date, the Company shall provide Buyer and its authorized representatives ("Buyer's Representatives") with full access at all reasonable times and upon reasonable notice to the offices, properties, personnel, books and records of the Company and its Subsidiaries in order for Buyer to have the opportunity to make such investigation as it shall reasonably desire to make of the affairs of the Company and its Subsidiaries. Buyer acknowledges that it remains bound by the Confidentiality Agreement, dated January 28, 1999, with the Company (the "Confidentiality Agreement"). 6.03 Regulatory Filings. Promptly after the date hereof, the Company and its appropriate Affiliates shall make or cause to be made all filings and submissions (which shall be complete in all respects) under the HSR Act and any other material laws or regulations applicable to the Company and its Subsidiaries for the consummation of the transactions contemplated herein. The Company and its appropriate Affiliates shall use their reasonable best efforts to obtain termination of the waiting period or any review under the HSR Act. The Company shall coordinate and cooperate with Buyer in exchanging such information and assistance as Buyer may reasonably request in connection with all of the foregoing. 6.04 Conditions. The Company, HIG Cayman, each Shareholder and each Optionholder shall use commercially reasonable efforts to cause the conditions set forth in Section 2.01 to be satisfied and to consummate the transactions contemplated herein; provided that none of the Company, any Subsidiary, any Shareholder, HIG Cayman or any Optionholder shall be required to expend any funds to obtain any third-party or governmental consents described in Section 2.01(c) or (d). 6.05 Exclusive Dealing. During the period from the date of this Agreement through the Closing or the earlier termination of this Agreement pursuant to Section 8.01, each Shareholder shall not take or permit any other Person on its behalf to take, and the Company shall not take, any action to encourage, initiate or engage in discussions or negotiations with, or provide any information to, any Person (other than Buyer and Buyer's Representatives) concerning any purchase of the Shares, any merger involving the Company, any 23 sale of substantially all of the assets of the Company or similar transaction involving the Company (other than assets sold in the ordinary course of business) except to the extent not prohibited by Section 6.01(b). 6.06 Consulting Agreement. On or before the Closing Date, the Company (a) shall pay all of its obligations under that certain Consulting and Noncompetition Agreement dated April 15, 1997 (the "Consulting Agreement") by and between the Company and Michael G. Sanderson and shall have received a release signed by Michael G. Sanderson acknowledging the satisfaction in full of all of such obligations or (b) shall deliver to Buyer evidence that HIG Cayman or one of its Affiliates has assumed such obligations in full and a release signed by Michael G. Sanderson releasing the Company (as operated by Buyer after the Closing) and Buyer from liability thereunder. On or before the Closing Date, the Company shall have terminated the Consulting Agreement, dated April 15, 1997, by and between Milliken & Michaels, Inc. and H.I.G. Capital Management, Inc. and shall have received a release signed by H.I.G. Capital Management, Inc. acknowledging such termination. 6.07 Code Section 280G Consents. As of or prior to the Closing, the Company shall have received the consent of the Shareholders and such other documentation necessary to avoid the application of Code Section 280G. ARTICLE VII COVENANTS OF BUYER ------------------ 7.01 Access to Books and Records. From and after the Closing, Buyer shall, and shall cause the Company to, provide the Shareholder Representative, the Shareholders and their authorized representatives with reasonable access (for the purpose of examining and copying), during normal business hours, to the books and records of the Company and its Subsidiaries with respect to periods prior to the Closing Date in connection with any matter whether or not relating to or arising out of this Agreement or the transactions contemplated hereby. Unless otherwise consented to in writing by the Shareholder Representative, the Company shall not, for a period of five years following the Closing Date, destroy, alter or otherwise dispose of any books and records of the Company, or any portions thereof, relating to periods prior to the Closing Date without first offering to surrender to the Shareholder Representative (on behalf of the Shareholders) such books and records or such portions thereof. 7.02 Notification. From the date hereof until the Closing Date, Buyer shall disclose to the Company and the Shareholder Representative in writing any material variances from Buyer's representations and warranties contained in Article V promptly upon discovery thereof. 7.03 Director and Officer Liability and Indemnification. For a period of five years after the Closing, Buyer shall not, and shall not permit the Company or any of its Subsidiaries, or their respective successors, to amend, repeal or modify any provision in the Company's or any of its Subsidiaries' certificate or articles of incorporation or bylaws as in existence on the date hereof relating to the exculpation or indemnification of any 24 officers and directors (unless required by law), it being the intent of the parties that the officers and directors of the Company and its Subsidiaries shall continue to be entitled to such exculpation and indemnification to the full extent of the law. 7.04 Regulatory Filings. Promptly after the date hereof, Buyer shall make or cause to be made all filings and submissions (which shall be complete in all respects) under the HSR Act and any other laws or regulations applicable to Buyer as may be required of Buyer for the consummation of the transactions contemplated herein, and Buyer shall be responsible for all filing fees under the HSR Act. Buyer shall use its reasonable best efforts to obtain termination of the waiting period or any review under the HSR Act. Buyer shall coordinate and cooperate with the Company in exchanging such information and assistance as the Company may reasonably request in connection with all of the foregoing. 7.05 Conditions. Buyer shall use commercially reasonable efforts to cause the conditions set forth in Section 2.02 to be satisfied and to consummate the transactions contemplated herein. 7.06 Contact with Customers and Suppliers. Prior to the Closing, Buyer and Buyer's Representatives shall contact and communicate with the employees, customers and suppliers of the Company and its Subsidiaries in connection with the transactions contemplated hereby only with the prior written consent of the Company or the Shareholder Representative; provided, however, that Buyer and Buyer's Representatives may contact any of the Key Employees at reasonable times and upon reasonable notice. ARTICLE VIII TERMINATION ----------- 8.01 Termination. This Agreement may be terminated at any time prior to the Closing: (a) by the mutual written consent of Buyer and the Shareholder Representative (on behalf of the Shareholders, HIG Cayman and the Optionholders); (b) by Buyer, if there has been a material violation or breach by the Company, the Shareholders, HIG Cayman or the Optionholders of any covenant, representation or warranty contained in this Agreement which has prevented the satisfaction of any condition to the obligations of Buyer at the Closing and such violation or breach has not been waived by Buyer or, in the case of a covenant breach, cured by the Company, the Shareholders, HIG Cayman or the Optionholders within ten days after written notice thereof from Buyer; (c) by the Shareholder Representative, if there has been a material violation or breach by Buyer of any covenant, representation or warranty contained in this Agreement which has prevented the satisfaction of any condition to the obligations of the Shareholders, HIG Cayman or the Optionholders at the Closing and such violation or 25 breach has not been waived by the Shareholder Representative or, with respect to a covenant breach, cured by Buyer within ten days after written notice thereof by the Shareholder Representative, any Shareholder, HIG Cayman or any Optionholder (provided that the failure to deliver the Purchase Price at the Closing as required hereunder shall be subject to cure hereunder unless otherwise agreed to in writing by the Shareholder Representative); or (d) by either Buyer or the Shareholder Representative if the transactions contemplated hereby have not been consummated by May 31, 1999 (or in the event that the Federal Trade Commission or the Department of Justice issues a second request for information based on the Buyer's or the Company's and its Affiliates' filings under the HSR Act, June 30, 1999); provided that (i) neither Buyer nor the Shareholder Representative shall be entitled to terminate this Agreement pursuant to this Section 8.01(d) if such Person's (or the Company's, any Shareholder's, HIG Cayman's or any Optionholder's, in the case of the Shareholder Representative) knowing or willful breach of this Agreement has prevented the consummation of the transactions contemplated hereby. Notwithstanding the foregoing, no party shall be entitled to terminate this Agreement pursuant to Sections 8.01(b), (c) or (d) above if such party is in breach in any material respect of any covenant, representation or warranty made by it in this Agreement. 8.02 Effect of Termination. In the event of termination of this Agreement by either Buyer or the Shareholder Representative as provided above, the provisions of this Agreement shall immediately become void and of no further force and effect (other than this Section 8.02, Article XII and Article XIII hereof which shall survive the termination of this Agreement), and there shall be no liability on the part of any of Buyer, the Company, the Shareholders, HIG Cayman or the Optionholders to one another, except for knowing or willful breaches of this Agreement prior to the time of such termination. ARTICLE IX SURVIVAL -------- 9.01 Survival of Representations and Warranties. The representations and warranties set forth in this Agreement and in any certificates delivered at the Closing in connection with this Agreement shall terminate at the Closing and shall be of no further force or effect. ARTICLE X SHAREHOLDER REPRESENTATIVE -------------------------- 10.01 Designation; Reliance. HIG Cayman (the "Shareholder Representative") is hereby designated by each of the Shareholders and each of the Optionholders to serve as the representative of the Shareholders and the Optionholders with respect to the matters expressly set forth in this Agreement to be performed by the Shareholder Representative. Buyer shall be entitled 26 to rely on its communications with or documents signed by the Shareholder's Representative (on behalf of the Shareholders, HIG Cayman and the Optionholders) as if such communications were made by or such documents were signed by the Shareholders, HIG Cayman and the Optionholders, and the Shareholders, HIG Cayman and the Optionholders shall hold Buyer harmless from any liability it incurs due to such reliance. 10.02 Authority. Each of the Shareholders, HIG Cayman and the Optionholders, by the execution of this Agreement, hereby irrevocably appoints the Shareholder Representative as the agent, proxy and attorney-in-fact for such Shareholders and such Optionholders for all purposes of this Agreement (including the full power and authority on such Shareholder's, HIG Cayman's and such Optionholder's behalf (i) to consummate the transactions contemplated herein; (ii) to withhold $250,000 of the Purchase Price (the "Holdback Amount") on behalf of the Shareholders (other than DCI), the Optionholders and HIG Cayman in order to satisfy any obligations owing under Section 1.03 and to withhold such greater amounts necessary to pay such Shareholder's HIG Cayman and such Optionholder's expenses incurred in connection with the negotiation and performance of this Agreement (whether incurred on or after the date hereof); (iii) to disburse any funds received hereunder to such Shareholder, HIG Cayman or Optionholder and each other Shareholder or Optionholder; (iv) to endorse and deliver any certificates or instruments representing the Shares and the Options and execute such further instruments of assignment as Buyer shall reasonably request; (v) to execute and deliver on behalf of such Shareholder, HIG Cayman and such Optionholder any amendment or waiver hereto; (vi) to take all other actions to be taken by or on behalf of such Shareholder, HIG Cayman or such Optionholder in connection herewith; and (vii) to do each and every act and exercise any and all rights which HIG Cayman, such Shareholder or the Shareholders or such Optionholder or the Optionholders collectively are permitted or required to do or exercise under this Agreement). Each of the Shareholders, HIG Cayman and each of the Optionholders agrees that such agency and proxy are coupled with an interest, are therefore irrevocable without the consent of the Shareholder Representative and shall survive the death, incapacity, bankruptcy, dissolution or liquidation of any Shareholder or Optionholder. After the obligations, if any, of the Shareholders, HIG Cayman and the Optionholders have been satisfied under Section 1.03 and the expenses and amounts referred to in (ii) above have been paid in full, the excess of the Holdback Amount over the amounts, if any, paid by the Shareholder Representative pursuant to clause (ii) above (the "Excess Amount") shall be promptly paid by the Shareholder Representative to the Shareholders (other than DCI), HIG Cayman and the Optionholders in such amounts as such Shareholder, HIG Cayman or Optionholder would have received at the Closing if the Excess Amount was added to the Purchase Price in calculating the Closing Shareholder Consideration, the HIG Consideration and the Closing Optionholder Consideration 10.03 Exculpation. Neither the Shareholder Representative nor any agent employed by it shall incur any liability to any Shareholder or Optionholder by virtue of the failure or refusal of the Shareholder Representative for any reason to consummate the transactions contemplated hereby or relating to the performance of its other duties hereunder, except for actions or omissions constituting fraud or bad faith. 27 ARTICLE XI ADDITIONAL COVENANTS AND AGREEMENTS ----------------------------------- 11.01 Disclosure Generally. If and to the extent any information required to be furnished in any Schedule is contained in this Agreement or in any other Schedule attached hereto, such information shall be deemed to be included in all Schedules in which the information is required to be included provided that such information is relevant and responsive to such other Schedules. The inclusion of any information in any Schedule attached hereto shall not be deemed to be an admission or acknowledgment by the Company, the Shareholders, HIG Cayman or the Optionholders, in and of itself, that such information is material to or outside the ordinary course of the business of the Company. 11.02 Acknowledgment by Parties. (a) Buyer acknowledges that it has conducted to its satisfaction, an independent investigation and verification of the financial condition, results of operations, assets, liabilities, properties and projected operations of the Company and, in making its determination to proceed with the transactions contemplated by this Agreement, Buyer has relied on the results of its own independent investigation and verification and the representations and warranties of the Company and the Shareholders, HIG Cayman and the Optionholders expressly and specifically set forth in this Agreement, including the Schedules attached hereto. SUCH REPRESENTATIONS AND WARRANTIES BY THE COMPANY, THE SHAREHOLDERS, HIG CAYMAN AND THE OPTIONHOLDERS CONSTITUTE THE SOLE AND EXCLUSIVE REPRESENTATIONS AND WARRANTIES OF THE COMPANY, THE SHAREHOLDERS, HIG CAYMAN AND THE OPTIONHOLDERS TO BUYER IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED HEREBY, AND BUYER UNDERSTANDS, ACKNOWLEDGES AND AGREES THAT ALL OTHER REPRESENTATIONS AND WARRANTIES OF ANY KIND OR NATURE EXPRESS OR IMPLIED (INCLUDING, BUT NOT LIMITED TO, ANY RELATING TO THE FUTURE OR HISTORICAL FINANCIAL CONDITION, RESULTS OF OPERATIONS, ASSETS OR LIABILITIES OF THE COMPANY) ARE SPECIFICALLY DISCLAIMED BY THE COMPANY, THE SHAREHOLDERS, HIG CAYMAN AND THE OPTIONHOLDERS. (b) The Company, the Shareholders, HIG Cayman and the Optionholders acknowledge that notwithstanding the right of Buyer to investigate the business, assets and financial condition of the Company and its Subsidiaries, and notwithstanding any knowledge obtained or obtainable by Buyer as a result of such investigation, Buyer has the unqualified right to rely upon, and has relied upon, each of the representations and warranties made by the Company, the Shareholders, HIG Cayman and the Optionholders in this Agreement or pursuant hereto. 28 (c) The parties acknowledge that each representation and warranty made in this Agreement or pursuant hereto is independent of all other representations and warranties made by the same parties, whether or not covering related or similar matters, and must be independently and separately satisfied. Exceptions or qualifications to any such representation or warranty shall not be construed as exceptions or qualifications to any other representation or warranty. 11.03 Tax Matters. The following provisions shall govern the allocation of responsibility as between Buyer and the Shareholders, HIG Cayman and the Optionholders for certain tax matters following the Closing Date: (a) Responsibility for Filing Tax Returns. Buyer shall prepare or cause to be prepared and file or cause to be filed all Tax Returns for the Company and its Subsidiaries for all periods ending prior to or including the Closing Date which have not yet been filed as of the Closing Date. At least 15 days prior to the date on which each such Tax Return relating to the period from January 1, 1999 until the Closing is filed, Buyer shall submit such Tax Return to the Shareholder Representative for the Shareholder Representative's review and approval, which approval may be withheld if the filing of such Tax Return, as prepared by Buyer, is reasonably expected by the Shareholder Representative to adversely affect the Tax liability of any Shareholder, HIG Cayman or any Optionholder. (b) Cooperation on Tax Matters. (i) Buyer, the Company, its Subsidiaries, the Shareholders, HIG Cayman and the Optionholders shall cooperate fully, as and to the extent reasonably requested by the other party, in connection with the filing of Tax Returns pursuant to this Section and any audit, litigation or other proceeding with respect to Taxes. Such cooperation shall include the retention and (upon any other party's request) the provision of records and information which are reasonably relevant to any such audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. The Company, its Subsidiaries, the Shareholders, HIG Cayman and the Optionholders agree (A) to retain all books and records with respect to Tax matters pertinent to the Company and its Subsidiaries relating to any taxable period beginning before the Closing Date until the expiration of the statute of limitations (and, to the extent notified by Buyer or the Company, any extensions of the respective taxable periods), and to abide by all record retention agreements entered into with any taxing authority, and (B) to give the other party reasonable written notice prior to transferring, destroying or discarding any such books and records and, if the other party so requests, the Company and its Subsidiaries or the Company, as the case may be, shall allow the other party to take possession of such books and records. (ii) Buyer, the Shareholders, HIG Cayman and the Optionholders further agree, upon request, to use their best efforts to obtain any certificate or other document from any governmental authority or any other Person as may be necessary to mitigate, reduce 29 or eliminate any Tax that could be imposed (including, but not limited to, with respect to the transactions contemplated hereby). (iii) Buyer, the Shareholders, HIG Cayman and the Optionholders further agree, upon request, to provide the other party with all information that either party may be required to report pursuant to Section 6043 of the Code and all Treasury Department Regulations promulgated thereunder. (c) Tax Sharing Agreements. All tax sharing agreements or similar agreements with respect to or involving the Company, its Subsidiaries and DCI shall be terminated as of the Closing Date and, after the Closing Date, the Company and its Subsidiaries shall not be bound thereby or have any liability thereunder. (d) Certain Taxes. All transfer, documentary, sales, use, stamp, registration and other such Taxes and fees (including any penalties and interest) ("Transfer Taxes") incurred in connection with this Agreement (including any realty transfer or similar tax imposed in any states or subdivisions), shall be paid by Buyer when due, and Buyer will, at its own expense, file all necessary Tax Returns and other documentation with respect to all such transfer, documentary, sales, use, stamp, registration and other Taxes and fees. The Shareholders, HIG Cayman and the Optionholders shall reimburse Buyer for 50% of any such Transfer Taxes. (e) Tax Benefits Associated with Sale Transactions. The parties hereto agree that any Tax refunds attributable to the sale of the Options pursuant to Section 1.02 hereof and attributable to the satisfaction of its obligations under the Consulting Agreement pursuant to Section 6.06 shall be for the benefit of the Shareholders and the Optionholders. Buyer shall prepare, or shall cause the Company to prepare, all Tax Returns in a manner that maximizes the present value of such Tax refunds (including, without limitation, (i) claiming deductions attributable to the Sale Transactions in the Company's Tax Return for the taxable year that includes or, if applicable, ends on the Closing Date, (ii) carrying back any net operating losses resulting from such deductions to prior taxable years to the extent permitted by applicable Tax law, and (iii) filing as soon as is practicable any claims for Tax refunds attributable to such deductions to which the Company is entitled with respect to (A) estimated Taxes paid for the taxable period including or ending on the Closing Date and/or (B) Taxes paid for any period to which any net operating losses referred to in preceding clause (ii) are carried back), and shall permit the Shareholder Representative to review the portion of any such Tax Return which relates to such carrybacks and Tax refund claims prior to the filing of such Tax Return. Buyer shall pay over to each Shareholder and Optionholder, within fifteen (15) days after receipt or entitlement thereto, the additional amount which such Shareholder or Optionholder would have received at the Closing if the aggregate amount of such Tax refunds had been added to the Purchase Price in the calculation of the Closing Shareholder Consideration and the Closing Optionholder Consideration. 11.04 Further Assurances. From time to time, as and when requested by any party hereto and at such party's expense, any other party shall execute and 30 deliver, or cause to be executed and delivered, all such documents and instruments and shall take, or cause to be taken, all such further or other actions as the requesting party may reasonably deem necessary or desirable to evidence and effectuate the transactions contemplated by this Agreement. 11.05 Restrictive Covenants of HIG. (a) HIG-DCI Investments, L.P. and H.I.G. Investment Group, L.P. (collectively, "HIG"), expressly acknowledge that: (i) NCO Business. The accounts receivable collection business conducted by the Company and any of its Subsidiaries (after the Closing, referred to as the "NCO Companies") involve the provision of accounts receivable collection business services using proprietary and confidential systems and information. (ii) Competitive Nature of Business. The business of the Company and any of its Subsidiaries is highly competitive, is marketed throughout the United States, Canada and the United Kingdom and requires long sales "lead times" often exceeding one year. The NCO Companies expend substantial time and money, on an ongoing basis, to train their employees, maintain and expand their customer base, and improve and develop their products and services. (iii) Access to Information. During the period that HIG Cayman was a shareholder of the Company, it had access to proprietary and confidential property, knowledge and information of the Business of the Company and any of its Subsidiaries which, after Closing, shall be proprietary and confidential property, knowledge and information of the NCO Companies. Such property, knowledge and information must be kept in strict confidence to protect NCO's business and maintain the NCO Companies' competitive positions in the marketplace, and such property, knowledge and information would be useful to competitors of the NCO Companies for indefinite periods of time. (iv) Basis for Covenants. The covenants of Section 11.05 (the "Covenants") are a material part of this Agreement and are an integral part of the obligations of HIG hereunder; the Covenants are supported by good and adequate consideration; and the Covenants are reasonable and necessary to protect the legitimate business interests of the NCO Companies. (v) Nondisclosure Covenants. At all times after the Closing Date, except with NCO's prior written consent, HIG shall not, directly or indirectly, in any capacity, communicate, publish or otherwise disclose to any Person, or use for the benefit of any Person, any confidential or proprietary property, knowledge or information of the Company or any of its Subsidiaries, no matter when or how such knowledge or information was obtained, including without limitation (a) any information concerning the conduct and details of the business; (b) the identity of customers and prospects for which proposals have been submitted as of the Closing Date, their specific requirements, and the names, addresses and telephone numbers of individual contacts at customers and prospects; (c) prices, renewal dates and other detailed terms of customer and supplier contracts and proposals; (d) pricing policies, marketing and sales strategies, methods of delivering products and services, and products and service development projects and strategies; (e) 31 employment and payroll records; (f) forecasts, budgets and other nonpublic financial information; and (g) expansion plans, management policies, methods of operation, and other business strategies and policies. (b) Noncompetition and Noninterference Covenants. (i) Competing Business Restrictions. During the period beginning on the Closing Date and ending on the first anniversary of the Closing Date (the "Noncompetition Term") of the Closing Date, HIG shall not directly or indirectly establish, own, manage, operate, finance or control, or participate in the establishment, ownership, management, operation, financing or control of, or be a director, officer, employee, salesman, agent or representative of, or be a consultant to, any Person that engages in the collection of commercial accounts receivable (ii) Noninterference. During the period beginning on the Closing Date and ending on the second anniversary of the Closing Date (the "Noninterference Term"), HIG shall not directly or indirectly solicit for employment as salesman, agent, representative or consultant, any employee of the NCO Companies employed by the Company or any of its Subsidiaries in any management or supervisory capacity as of the Closing Date or direct any of its affiliates to state any disparaging information regarding the NCO Companies to any of the Company's or its Subsidiaries' customers, business prospects or suppliers; provided however, that this clause (ii) shall not apply to any portfolio companies in which HIG has invested and, provided further, that HIG shall not be precluded from hiring any person who (a) initiates discussions regarding employment with HIG without any direct solicitation by HIG, (b) responds to any public advertisement placed by HIG or (c) has been terminated by or resigned from the NCO Companies prior to the commencement of employment discussions between HIG and such person. (c) Nonsolicitation. During the Noninterference Term, HIG shall not directly or indirectly solicit any employee of the Company or any of its Subsidiaries who becomes an employee of the NCO Companies on the Closing Date to become employees or independent contractors of HIG or any of its affiliates; provided however, that this clause (d) shall not apply to any portfolio companies in which HIG has invested and, provided further, that HIG shall not be precluded from hiring any person who (a) initiates discussions regarding employment with HIG without any direct solicitation by HIG, (b) responds to any public advertisement placed by HIG or (c) has been terminated by or resigned from the NCO Companies prior to the commencement of employment discussions between HIG and such person. (d) Certain Exclusions. Confidential and proprietary property, knowledge and information of the NCO Companies shall not include any information that is now known by or readily available to the general public, nor shall it include any information that in the future becomes known by or readily available to the general public other than as a result of any breach of the Covenants of this Agreement. The ownership by HIG of not more than five percent (5%) of the outstanding securities 32 of any public company shall not, by itself, constitute a breach of the Covenants of this Section 11.05, even if such public company competes with the NCO Companies. (e) Enforcement of Covenants. HIG expressly acknowledges that it would be extremely difficult to measure the damages that might result from any breach of the Covenants, and that any breach of the Covenants will result in irreparable injury to the NCO Companies for which money damages could not adequately compensate. If a breach of the Covenants occurs, then the NCO Companies shall be entitled, in addition to all other rights and remedies that they may have at law or in equity, to have an injunction issued by any competent court enjoining and restraining HIG and all other Persons involved therein from continuing such breach. The existence of any claim or cause of action that HIG or any such other Person may have against any of the NCO Companies shall not constitute a defense or bar to the enforcement of any of the Covenants. If the NCO Companies must resort to litigation to enforce any of the Covenants that has a fixed term, then such term shall be extended for a period of time equal to the period during which a breach of such Covenant was occurring, beginning on the date of a final court order (without further right of appeal) holding that such a breach occurred or, if later, the last day of the original fixed term of such Covenant. (f) Scope of Covenants. If any Covenant, or any part thereof, or the application thereof, is construed to be invalid, illegal or unenforceable, then the other Covenants, or the other portions of such Covenant, or the application thereof, shall not be affected thereby and shall be enforceable without regard thereto. If any of the Covenants is determined to be unenforceable because of its scope, duration, geographical area or other factor, then the court making such determination shall have the power to reduce or limit such scope, duration, area or other factor, and such Covenant shall then be enforceable in its reduced or limited form. 11.06 Indemnification. Buyer shall indemnify the Shareholders, HIG Cayman, the Optionholders and the Shareholders' and HIG Cayman's direct and indirect shareholders, partners, officers, directors, employees, agents, representatives, successors and permitted assigns and save and hold each of them harmless against and pay on behalf of or reimburse such Persons as and when incurred for any loss, liability, demand, claim, action, cause of action, cost, damage, fine or expense (including reasonable attorneys' fees), which any such Person may suffer, sustain or become subject to, as a result of, in connection with, relating to the disclosure of the IAS Purchase Agreement and related documentation to the Buyer. 11.07 Cefalu Non-Competition. Thomas V. Cefalu, III ("Cefalu") hereby acknowledges that, during and solely as a result of his past employment with the Company and his continued employment by NCO Financial Systems, Inc. ("NCO"), he will have access to confidential information and business and professional contacts. In consideration of such special and unique opportunities afforded by NCO to Cefalu as a result of Cefalu's employment, the other benefits referred to in that certain Employment Agreement, dated April 16, 1999, between NCO Financial Systems, Inc. and Thomas V. Cefalu, III (the "Employment Agreement") and the benefits conferred on Cefalu hereunder, Cefalu hereby agrees, except as agreed to in writing by NCO to the contrary, as follows: 33 (a) For the duration of the Restricted Period (as defined in the Employment Agreement), Cefalu shall not directly or indirectly (A) engage in (as a principal, shareholder, partner, director, officer, agent, employee, consultant or otherwise) or be financially interested in any business operating within the United States (the "Restricted Area")which is involved in or any other business activities which are the same as, similar to or in competition with the business or with any business activities carried on by NCO, or being definitely planned by NCO, at the time of the termination of Cefalu's employment; provided however, that nothing contained in this Section 11.07 shall prevent Cefalu from holding for investment no more than three percent (3%) of any class of equity securities of a company whose securities are publicly traded on a national securities exchange or in a national market system; or (B) induce or attempt to influence any employee, customer, independent contractor or supplier of NCO to terminate employment or any other relationship with NCO. (b) Cefalu shall not use for Cefalu's personal benefit, or disclose, communicate or divulge to, or use for the direct or indirect benefit of any person, firm, association or company other than NCO, any "Confidential Information" which term shall mean any information regarding the business methods, business policies, policies, procedures, techniques, research or development projects or results, historical or projected financial information, budgets, trade secrets, or other knowledge or processes of or developed by NCO or any names and addresses of customers or clients or any data on or relating to past, present or prospective NCO customers or clients or any other confidential information relating to or dealing with the business operations, or activities of NCO as such relate specifically to commercial collection services, made known to Cefalu or learned or acquired by Cefalu while in the employ of NCO, but Confidential Information shall not include information otherwise lawfully known generally by or readily accessible to the trade or the general public. All memoranda, notes, lists, records, files, documents and other papers and other like items (and all copies, extracts and summaries thereof) made or compiled by Cefalu or made available to Cefalu concerning the business of NCO shall be NCO's property and shall be delivered to NCO promptly upon the termination of Cefalu's employment with NCO or at any other time on request. The foregoing provisions of this Section11.07(b) shall apply during and after the period when Cefalu is an employee of NCO and shall be in addition to (and not a limitation of) any legally applicable protections of NCO's interest in confidential information, trade secrets and the like. At the termination of Cefalu's employment with NCO, Cefalu shall return to NCO all copies of Confidential Information in any medium, including computer tapes and other forms of data storage. Notwithstanding the foregoing, Cefalu may retain records relevant to the filing of Cefalu's personal income taxes and NCO shall grant Cefalu reasonable access during normal business hours, to business records of NCO relevant to Cefalu's discharge of Cefalu's duties as an officer of NCO or other legitimate non-competitive business purpose. Notwithstanding the requirements of this Section 11.07(b), should Cefalu leave his employment and work in a position that does not violate any of the restrictions contained in this Section, then Cefalu shall have the right to use Confidential Information, provided, however, that such right shall not permit Cefalu to remove any documents or materials from NCO that are deemed Confidential Information. (c) Cefalu acknowledges that the restrictions contained in the foregoing clauses (a) and (b) above, in view of the nature of the business in which NCO is engaged, are reasonable and necessary in order to protect the legitimate interests of NCO, that their enforcement will not impose a hardship on Cefalu or significantly impair Cefalu's ability to earn a livelihood, and 34 that any violation thereof would result in irreparable injuries to NCO. Cefalu therefore acknowledges that, in the event of Cefalu's violation of any of these restrictions, NCO shall be entitled to obtain from any court of competent jurisdiction preliminary and permanent injunctive relief as well as damages and an equitable accounting of all earnings, profits and other benefits arising from such violation, which rights shall be cumulative and in addition to any other rights or remedies to which NCO may be entitled. (d) If the Restricted Period or the Restricted Area specified in Subsections (a) and (b) above should be adjudged unreasonable in any proceeding, then the period of time shall be reduced by such amount or the area shall be reduced by the elimination of such portion or both such reductions shall be made so that such restrictions may be enforced for such time and in such area as is adjudged to be reasonable. If Cefalu violates any of the restrictions contained in the foregoing clauses (a) or (b), the Restricted Period shall be extended by a period equal to the length of time from the commencement of any such violation until such time as such violation shall be cured by Cefalu to the satisfaction of NCO. NCO shall have the right and remedy to require Cefalu to account for and pay over to NCO all compensation, profits, monies, accruals, increments or other benefits derived or received by Cefalu as the result of any transactions constituting a breach of this Section 11.07, and Cefalu shall account for and pay over such amounts to NCO upon NCO's request therefor. Cefalu hereby expressly consents to the jurisdiction of any court within the Commonwealth of Pennsylvania to enforce the provisions of this Section 11.07, and agrees to accept service of process by mail relating to any such proceeding. NCO may supply a copy of Section 11.07 of this Section to any future or prospective employer of Cefalu or to any person to whom Cefalu has supplied information if NCO determines in good faith that there is a reasonable likelihood that Cefalu has violated or will violate such Section. ARTICLE XII DEFINITIONS ----------- 12.01 Definitions. For purposes hereof, the following terms, when used herein with initial capital letters, shall have the respective meanings set forth herein: "Affiliate" of any particular Person means any other Person controlling, controlled by or under common control with such particular Person. For the purposes of this definition, "control" means the possession, directly or indirectly, of the power to direct the management and policies of a Person whether through the ownership of voting securities, contract or otherwise. "Cash On Hand" means all cash and cash equivalents of the Company and its Subsidiaries minus all cash and cash equivalents owed by the Company and its Subsidiaries to their customers (whether held in trust or otherwise). "GAAP" means United States generally accepted accounting principles consistently applied. 35 "Indebtedness" means, without duplication, all obligations of the Company for borrowed money set forth on the Indebtedness Schedule and any accrued interest, prepayment premiums or penalties related thereto. "Net Working Capital" means (i) Working Capital Assets minus (ii) Working Capital Liabilities. "Permitted Liens" means (i) statutory liens for current Taxes or other governmental charges not yet due and payable or the amount or validity of which is being contested in good faith by appropriate proceedings by the Company and for which appropriate reserves have been established in accordance with GAAP; (ii) mechanics', carriers', workers', repairers' and similar statutory liens arising or incurred in the ordinary course of business for amounts which are not delinquent and which are not, individually or in the aggregate, significant; (iii) zoning, entitlement, building and other land use regulations imposed by governmental agencies having jurisdiction over the Leased Real Property which are not violated by the current use and operation of the Leased Real Property; and (iv) covenants, conditions, restrictions, easements and other similar matters of record affecting title to the Leased Real Property which do not materially impair the occupancy or use of the Leased Real Property for the purposes for which it is currently used or proposed to be used in connection with the Company's business. "Person" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. "Subsidiaries" means Milliken & Michaels, Inc., a Delaware corporation, Metropolitan Consumer Collection Services, Inc., a Delaware corporation, and International Account Systems, Inc., a Florida corporation. "Tax" or "Taxes" means any federal, state, local or foreign income, gross receipts, capital stock, franchise, profits, withholding, social security, unemployment, disability, real property, ad valorem/personal property, stamp, excise, occupation, sales, use, transfer, value added, alternative minimum, estimated or other tax, including any interest, penalty or addition thereto, whether disputed or not. "Tax Returns" means any return, report, information return or other document (including schedules or any related or supporting information) filed or required to be filed with any governmental entity or other authority in connection with the determination, assessment or collection of any Tax or the administration of any laws, regulations or administrative requirements relating to any Tax. "Working Capital Assets" means all current assets, excluding Cash On Hand, deferred taxes and any entitlement to Tax refunds which are required to be paid over to the Shareholders and Optionholders pursuant to Section 11.03(e) hereof, of the Company and the Subsidiaries as of the Closing Date determined in accordance with GAAP. 36 "Working Capital Liabilities" means all current liabilities of the Company and the Subsidiaries as of the Closing Date determined by the Company in accordance with GAAP; provided, however, that Working Capital Liabilities shall not include the Indebtedness or any current maturities of the Indebtedness. 12.02 Cross-Reference of Other Definitions. Each capitalized term listed below is defined in the corresponding Section of this Agreement: Term Section No. ---- ----------- Accrual 1.03(d) Agreement Preamble Buyer Preamble Buyer Stock 1.01 Buyer's Representatives 6.02 Cefalu 11.07 Closing 1.04(a) Closing Date 1.04(a) Closing Optionholder Consideration 1.02 Closing Shareholder Consideration 1.02 Closing Transactions 1.04(b) Code 4.13(a) Common Stock 4.04 Company Preamble Consulting Agreement 6.06 Confidentiality Agreement 6.02 Covenants 11.05(a)(iv) DCI Preamble DCI Shares 1.02 Employment Agreement 11.07 Environmental and Safety Requirements 4.16(a) ERISA 4.13(a) Estimated Net Working Capital 1.03(a) HIG 11.05 HIG Cayman Preamble HIG Consideration 1.02 Holdback Amount 10.02 Independent Auditor 1.03(b) HSR Act 4.12 Intellectual Property 4.10 Key Employees 13.03 Latest Balance Sheet 4.05 Leased Real Property 4.07(b) Material Adverse Effect 4.01 NCO 11.07 37 NCO Companies 11.05 Noncompetition Term 11.05(b)(i) Noninterference Term 11.05(b)(ii) Objections Statement 1.03(b) Optionholders Preamble Options Preamble Pension Plans 4.13(a) Permits 4.01 Plans 4.13(a) Possible Pennsylvania Audit 1.03(d) Preliminary Net Working Capital 1.03(b) Purchase Price 1.01 Restricted Area 11.07(a) Sale Transactions 1.02 SAR Payments 1.04(b)(vi) Shareholder Representative 10.01 Shareholders Preamble Shares Preamble Texas Audit 1.03(d) Transfer Taxes 11.03(d) WARN Act 4.19 Warrants 1.01 Welfare Plans 4.13(a) ARTICLE XIII MISCELLANEOUS ------------- 13.01 Press Releases and Communications. No press release or public announcement related to this Agreement or the transactions contemplated herein, or prior to the Closing, any other announcement or communication to the employees, customers or suppliers of the Company, shall be issued or made by any party except by Buyer with the approval of the Shareholder Representative (which shall not unreasonably be withheld), unless required by law (in the reasonable opinion of counsel) in which case Buyer and the Shareholder Representative shall have the right to review such press release, announcement or communication prior to its issuance, distribution or publication. 13.02 Expenses. Except as otherwise expressly provided herein, each party shall pay all of its own respective expenses (including attorneys' and accountants' fees and expenses) in connection with the negotiation of this Agreement, the performance of its obligations hereunder and the consummation of the transactions contemplated by this Agreement (whether consummated or not). 38 13.03 Knowledge Defined. For purposes of this Agreement, the term "the Company's knowledge" as used herein shall mean the actual knowledge after reasonable investigation of Thomas V. Cefalu, III, Edward Trahan, Louis Molettiere and Phil Weaver (collectively, the "Key Employees"). 13.04 Waiver of Certain Transfer Restrictions. Concurrently with the Closing, the Company expressly waives the restrictions on transfer of the Options contained in those certain Stock Option Agreements, dated as of February 10, 1998, by and between the Company and each of Edward Trahan and Louis Molettiere. 13.05 Notices. All notices, demands and other communications to be given or delivered under or by reason of the provisions of this Agreement shall be in writing and shall be deemed to have been given when personally delivered, one day after deposit with Federal Express or similar overnight courier service or three days after being mailed by first class mail, return receipt requested. Notices, demands and communications to Buyer, the Company, the Shareholders, the Optionholders and the Shareholder Representative shall, unless another address is specified in writing, be sent to the addresses indicated below: Notices to Buyer: ----------------- NCO Group, Inc. 515 Pennsylvania Avenue Fort Washington, PA 19034 Attn: Michael Barrist, President with a copy to: Blank Rome Comisky & McCauley LLP One Logan Square Philadelphia, Pennsylvania 19103 Attn: Lawrence Wiseman Notices to Shareholders, to Optionholders or to the Shareholder Representative: --------------------------------------------------- H.I.G.-DCI Investments, L.P. c/o H.I.G. Capital Management, Inc. 1001 Brickell Bay Drive, Suite 2708 Miami, Florida 33131 Attn: Charles Hanemann 39 with a copy to: Kirkland & Ellis 200 East Randolph Drive Chicago, Illinois 60601 Attn: James L. Learner Notices to Company: ------------------- Co-Source Corporation c/o H.I.G. Capital Management, Inc. 1001 Brickell Bay Drive, Suite 2708 Miami, Florida 33131 Attn: Charles Hanemann 13.06 Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, and neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned or delegated by any party without the prior written consent of the Shareholder Representative in the case of assignment by Buyer or by Buyer in the case of assignment by any other party. Notwithstanding the foregoing, Buyer shall have the right to assign its right to purchase the Shares and the Options to any subsidiary of Buyer provided that such assignment shall not limit Buyer's obligations hereunder. 13.07 Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 13.08 No Strict Construction. The language used in this Agreement shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction shall be applied against any Person. 13.09 Amendment and Waiver. Any provision of this Agreement or the schedules or exhibits hereto may be amended or waived only in a writing signed by Buyer, the Company and the Shareholder Representative. No waiver of any provision hereunder or any breach or default thereof shall extend to or affect in any way any other provision or prior or subsequent breach or default. 13.10 Complete Agreement. This Agreement and the documents referred to herein (including the Confidentiality Agreement) contain the complete agreement between the parties hereto and supersede any prior understandings, agreements or representations by or between the parties, written or oral, which may have related to the subject matter hereof in any way. 40 13.11 Counterparts. This Agreement may be executed in multiple counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together shall constitute one and the same instrument. 13.12 Governing Law. All matters relating to the interpretation, construction, validity and enforcement of this Agreement shall be governed by and construed in accordance with the domestic laws of the State of New York without giving effect to any choice or conflict of law provision or rule (whether of the State of New York or any other jurisdiction) that would cause the application of laws of any jurisdiction other than the State of New York. 13.13 No Third Party Beneficiaries. This Agreement is solely for the benefit of the parties hereto, and their respective successors and permitted assigns, and this Agreement shall not be deemed to confer upon or give to any other Person or third party any remedy, claim liability, reimbursement, cause of action or other right. 13.14 Section Headings. The article and section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or interpretation of this Agreement. 13.15 Specific Performance. The parties agree that any breach of the terms of this Agreement would give rise to irreparable harm for which money damages would not be an adequate remedy and accordingly the parties agree that, in addition to any other remedies, each shall be entitled to enforce the terms of this Agreement by a decree of specific performance without the necessity of proving the inadequacy of money damages as a remedy. * * * * * 41 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. CO-SOURCE CORPORATION By: /s/ Charles Hanemann ------------------------------------------ Its ------------------------------------------- SHAREHOLDERS: DCI HOLDING, INC. By: /s/ John Bolduc ------------------------------------------ Its ------------------------------------------- ANTARES CAPITAL CORPORATION (f/k/a ANTARES LEVERAGED CAPITAL CORP.) By: /s/ David Swanson ------------------------------------------ Its: Director /s/ Thomas V. Cefalu, III ---------------------------------------------- Thomas V. Cefalu, III OPTIONHOLDERS: /s/ Louis A. Molettiere ---------------------------------------------- Louis A. Molettiere /s/ Edward J. Trahan ---------------------------------------------- Edward J. Trahan 42 BUYER: ----- NCO GROUP, INC. By: /s/ Paul Weitzel ------------------------------------------ Its Executive Vice President H.I.G.-DCI INVESTMENTS, L.P. By: /s/ Anthony Tamer ------------------------------------------ Its ------------------------------------------- Solely with respect to the provisions of Section 11.05: H.I.G. INVESTMENT GROUP, L.P. By: /s/ Anthony Tamer ------------------------------------------ Its ------------------------------------------- 43 EX-4.1 3 EXHIBIT 4.1 EXHIBIT 4.1 FORM OF WARRANT NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK WHICH MAY BE PURCHASED HEREUNDER (COLLECTIVELY, THE "SECURITIES") HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND APPLICABLE STATE SECURITIES LAWS AND THE SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNTIL EITHER (1) THE HOLDER THEREOF SHALL HAVE RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT REGISTRATION OF THE SECURITIES UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED OR (2) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS WITH RESPECT TO THE SECURITIES SHALL HAVE BECOME EFFECTIVE. THIS WARRANT MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF WITHOUT THE EXPRESS PRIOR WRITTEN CONSENT OF THE COMPANY WHICH MAY BE WITHHELD IN ITS SOLE AND ABSOLUTE DISCRETION. NON-TRANSFERABLE COMMON STOCK PURCHASE WARRANT To subscribe for and purchase shares of Common Stock, no par value, of NCO GROUP, INC. THIS CERTIFIES that, for value received, [ ] (the "Holder"), subject to the terms and conditions hereof, shall be entitled to purchase from NCO GROUP, INC., a Pennsylvania corporation (the "Company"), at any time during the period from 9:00 A.M. (Philadelphia Time) on May 21, 1999, through 5:00 P.M. (Philadelphia Time) on May 20, 2009, [ ] ( ) shares of Common Stock (as hereinafter defined) of the Company (individually, a "Warrant Share" and collectively, the "Warrant Shares"), at an initial exercise price of $32.97 per share, subject to adjustment from time to time pursuant to the provisions of Section 3, and further subject to the Company's right to pay cash in lieu of issuing Warrant Shares as provided in Section 1.2. For purposes of this Warrant, the term "Common Stock" shall mean the class of capital stock of the Company designated common stock, no par value per share, as constituted on the date hereof, and any other class of capital stock of the Company resulting from successive changes or reclassifications of the Common Stock. 1. Exercise of Warrants. 1.1 Method of Exercise. The Warrant evidenced hereby may be exercised by the Holder, in whole but not in part, by the delivery at the principal office of the Company (or at such other office or agency of the Company as it may designate by notice in writing to the Holder), during normal business hours, of this Warrant and the Form of Exercise attached hereto as Exhibit "A", duly completed and executed, and payment of the Purchase Price (as defined in Section 2) of the Warrant Shares by (i) wire transfer of immediately available United States federal funds or by bank certified, treasurer's or cashier's check payable to the order of the Company or (ii) a written notice to the Company that the Warrantholder is exercising the Warrant (or a portion thereof) by authorizing the Company to withhold from issuance a number of shares of Common Stock issuable upon such exercise of the Warrant which when multiplied by the Market Price of the Common Stock is equal to the aggregate Purchase Price (and such withheld shares shall no longer be issuable under this Warrant). The business day on which the last of such documents and payment of the Purchase Price is received by the Company as provided above shall be the "Exercise Date" for the purposes of this Warrant. 1.2 Cash Payment in Lieu of Issuing Warrant Shares. Anything in this Warrant to the contrary notwithstanding, upon any exercise of this Warrant by the Holder, in lieu of issuing all or any part of the Warrant Shares which are the subject of such exercise, the Company shall have the option (the "Cash Payment Option"), to pay the Holder an amount (the "Cash Payment Amount") equal to such number of Warrant Shares for which the Company has elected to exercise the Cash Payment Option multiplied by the difference between (a) the Market Price (as defined in Section 13) per share of Common Stock as of the Exercise Date less (b) the Exercise Price (as defined in Section 2) as of the Exercise Date. The Company may exercise its Cash Payment Option hereunder at any time prior to the Effective Date (as defined in Section 1.3) by notification to the Holder and by payment of the Cash Payment Amount by wire transfer of immediately available United States federal funds or by bank certified, treasurer's or cashier's check payable to the order of the Holder. 1.3 Effective Date. The Warrant Shares purchased by the Holder pursuant to Section 1.1, less any Warrant Shares as to which the Company has exercised its Cash Payment Option pursuant to Section 1.2, shall be deemed to be issued to the Holder effective as of the opening of business on the third business day following the Exercise Date (the "Effective Date") so that the Holder shall be deemed the record holder for such Warrant Shares for all purposes immediately after the opening of business on the Effective Date. 1.4 Delivery of Certificates. The certificate for the Warrant Shares purchased by the Holder pursuant to Section 1.1, less any Warrant Shares as to which the Company has exercised its Cash Payment Option pursuant to Section 1.2, shall be delivered to the Holder within a reasonable time, not exceeding ten (10) business days, after the Exercise Date. The certificate evidencing the Warrant Shares shall bear a restrictive legend substantially in the form set forth on Exhibit "B". 2 1.5 No Fractional Shares. No fractional Warrant Shares, or scrips for any such fractional Warrant Shares, shall be issued upon the exercise of this Warrant. 1.6 Status of Warrant Shares. The Company represents and warrants to the Holder that all Warrant Shares which may be issued upon the exercise of this Warrant, when issued in accordance with the terms hereof, shall be duly authorized, validly issued, fully paid and nonassessable. 2. Exercise Price. The initial exercise price shall be $32.97 per share, subject to adjustment from time to time as hereinafter provided (such price, as last adjusted, being hereinafter referred to as the "Exercise Price"). The Exercise Price multiplied by the number of Warrant Shares being purchased shall be the "Purchase Price" therefor. 3. Adjustments to Exercise Price and Warrant Shares. The Exercise Price and the number of Warrant Shares issuable upon the exercise of the Warrant are subject to adjustment from time to time upon the occurrence of the events enumerated in this Section 3. 3.1 Adjustment for Change in Capital Stock. (a) If on or after April 19, 1999, the Company: (1) pays a dividend or makes a distribution on its Common Stock in shares of its Common Stock or in shares of its capital stock other than Common Stock; (2) subdivides its outstanding shares of Common Stock into a greater number of shares; (3) combines its outstanding shares of Common Stock into a smaller number of shares; or (4) issues by reclassification of its Common Stock any shares of its capital stock; then, (i) the number of shares of Common Stock for which this Warrant is exercisable immediately after the occurrence of any such event shall be adjusted to equal the number of shares of Common Stock which a record holder of the same number of shares of Common Stock for which this Warrant is exercisable immediately prior to the occurrence of such event would own or be entitled to receive after the happening of such event, and (ii) the Exercise Price shall be adjusted to equal (A) the Exercise Price multiplied by the number of shares of Common Stock for which this Warrant is exercisable immediately prior to the adjustment divided by (B) the number of shares for which this Warrant is exercisable immediately after such adjustment. (b) The adjustment provided for in this Section 3.1 shall be made successively whenever any event listed above shall occur and shall become effective immediately after the record date, in the case of a dividend or distribution, and immediately after the effective date, in the case of a subdivision, combination or reclassification. (c) If, as a result of an adjustment pursuant to this Section 3.1, the Holder shall be entitled to receive shares of two or more classes of capital stock of the Company upon 3 exercise of the Warrant, the Company shall determine the allocation of the adjusted Exercise Price between the classes of capital stock. After such allocation, the exercise privilege and the Exercise Price of each class of capital stock shall thereafter be subject to adjustment on terms comparable to those applicable to Common Stock in this Section 3. (d) This Section 3.1 shall not apply to any transaction to which Section 3.2 is applicable. 3.2 Certain Transactions. If the Company consolidates or merges with or into, or sells, transfers or leases all or substantially all its assets to, any Person, upon consummation of such transaction this Warrant shall automatically become exercisable for the kind and amount of securities, cash or other assets which the Holder of a Warrant would have owned immediately after the consolidation, merger, sale, transfer or lease if the Holder had exercised the Warrant immediately before the effective date of such transaction. Concurrently with the consummation of such transaction, the Person formed by or surviving any such consolidation or merger (if other than the Company), or the Person to which such sale, transfer or lease shall have been made, shall enter into a supplemental Warrant so providing and further providing for adjustments which shall be as nearly equivalent as may be practical to the adjustments provided for in Section 3. The successor Person shall send to the Holder a notice describing the supplemental Warrant. If the issuer of securities deliverable upon exercise of the supplemental Warrant is an Affiliate (as defined in Section 13) of the formed, surviving, transferee or lessee Person, that issuer shall join in the supplemental Warrant Agreement. 3.3 Company Determination Final. Any determination that the Company or the Board of Directors of the Company must make pursuant this Section 3 shall be evidenced in a Board resolution, a copy of which shall be sent to the Holder. All such determinations shall be final and binding. 3.4 Notices to Holder. (a) Upon any adjustment of the Exercise Price pursuant to this Section 3, the Company shall promptly thereafter (i) cause a certificate to be executed by the President, or any Vice President, and by the Chief Financial Officer (or his functional equivalent, however titled) setting forth the Exercise Price after such adjustment and setting forth in reasonable detail the method of calculation and the facts upon which such calculations are based and setting forth the number of Warrant Shares issuable after such adjustment in the Exercise Price, upon exercise of the Warrant in full and payment of the adjusted Exercise Price, which certificate shall be conclusive evidence of the correctness of the matters set forth therein, and (ii) notify the Holder of such adjustments by sending him a copy of the certificate referenced in the preceding clause (i). Where appropriate, such notice may be given in advance. (b) The failure to give the notice required by this Section 3.4 or any defect therein shall not affect the legality or validity of the transaction to which it relates. 4 4. Payment of Taxes. The Company shall pay all documentary stamp taxes, if any, attributable to the initial issuance of Warrant Shares upon exercise of the Warrant. The Company shall not, however, be required to pay any tax or taxes which may be payable in respect of any transfer involved in the issuance and delivery of this Warrant, or any supplemental or replacement Warrant, or any certificate for Warrant Shares or other securities in a name other than set forth on page 1 hereof,, and the Company shall not be required to issue or deliver any such supplemental or replacement Warrants or certificates unless and until the Person(s) requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the reasonable satisfaction of the Company that such tax has been paid. 5. Certain Covenants. (a) The Company shall at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued Common Stock or its authorized and issued Common Stock held in its treasury, for the purpose of enabling it to satisfy any obligation to issue Warrant Shares upon exercise of this Warrant, the maximum number of Warrant Shares which may then be deliverable upon the exercise in full of this Warrant. (b) The Company shall cause all Warrant Shares to be listed on each national securities exchange or securities quotation system, if any, on which the other outstanding shares of Common Stock of the Company are then listed or quoted. (c) The Company shall (i) use its best efforts to comply with the current public information requirements of Rule 144 ("Rule 144") under the 1933 Act and (ii) at all times Rule 144 is available for use by Holder, furnish the Holder upon request with all information within the possession of the Company, required for the preparation and filing of Rule 144. 6. Representations and Warranties. (a) The Company hereby represents and warrants to the Holder as follows: (i) This Warrant has been duly authorized by all necessary corporate action on the part of the Company and has been duly executed by a duly authorized officer of the Company and constitutes a valid and binding obligation of the Company. (ii) Neither the execution and delivery of this Warrant, nor the consummation of the transactions contemplated hereby, will violate or result in any material violation of or be in material conflict with or constitute a material default under any term of the charter or bylaws of the Company or of any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to the Company. (iii) Upon exercise of this Warrant and payment of the Purchase Price by the Holder in the manner set forth in Section 1.1, (i) the Warrant Shares will be duly issued, fully paid and nonassessable shares of Common Stock and free from all transfer or documentary taxes, 5 liens and charges with respect to the issuance thereof and (ii) the Holder shall receive valid title to all of the Warrant Shares. (b) The Holder hereby represents and warrants to the Company as follows (which shall be affirmed by the Holder on the Exercise Date): this Warrant and the Warrant Shares issuable upon exercise of the Warrant (collectively, the "NCO Securities") are being acquired for Holder's own account and not on behalf of any other person, for investment purposes only and not with a view to, or for sale in connection with, any resale or distribution of the NCO Securities. Holder has received and examined the Company's Registration Statement on Form S-4 filed with the Securities and Exchange Commission ("SEC") on March 1, 1999, and all amendments thereto, and NCO's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, and reports and statements filed since such date with the SEC. Holder has had the opportunity to ask questions and receive answers from the Company concerning the Company, and has been furnished with all other information about the Company which it has requested. Holder believes that it has been fully apprised of all facts and circumstances necessary to permit it to make an informed decision about acquiring the NCO Securities, that it has sufficient knowledge and experience in business and financial matters, that it is capable of evaluating the merits and risks of an investment in the NCO Securities, and that it has the capacity to protect its own interests in connection with the transactions contemplated hereby. Holder has been advised by the Company and understands that (a) the NCO Securities have not been registered under any securities Laws, including without limitation, the securities Laws of the United States or the Commonwealth of Pennsylvania, (b) the NCO Securities must be held indefinitely unless and until they are subsequently registered or an exemption from registration becomes available, (c) the NCO Securities shall bear appropriate restrictive legends and (d) the Company shall have the right to place a stop order against the NCO Securities. 7. Holder; No Rights as Shareholder. The Holder shall be deemed the owner of this Warrant for all purposes. The Holder shall not be entitled by virtue of ownership of this Warrant to any rights whatsoever as a shareholder of the Company with respect to the Common Stock issuable upon exercise of this Warrant, either at law or in equity, including, without limitation, the right to vote and to receive dividends and other distributions. 8. Restrictions on Transfer. (a) The Holder may not Transfer this Warrant (as defined in Section 13) without the express prior written consent of the Company which may be withheld in its sole and absolute discretion, and any Transfer in violation of this Section 8(a) shall be void and of no force or effect; provided, however, that the Company shall not unreasonably withhold its consent to the transfer of this Warrant to an Affiliate of the Holder as of the date hereof. In the event that the Company consents to any Transfer requested by the Holder to any Person (a "Proposed Transferee"), such Transfer shall be further conditioned upon the receipt of: (a) an opinion of counsel reasonably satisfactory to the Company that such Transfer to a Proposed Transferee would not result in a violation of the provisions of the Securities Act of 1933, as amended (the "Securities Act") and applicable state securities laws and (b) the Proposed Transferee executes a Standstill Agreement with the Company in form acceptable to the Company. 6 (b) The legend as set forth on Exhibit "B"shall be placed on the Warrant Shares and such Warrant Shares shall be freely transferable subject to applicable securities laws. (c) Each Holder of this Warrant and any Warrant Shares issued upon exercise of this Warrant, by taking or holding the same, consents to and agrees to be bound by the provisions of this Section 8. 9. Lost Warrant. Upon receipt by the Company at its principal office of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, and in the case of any such loss, theft, or destruction, upon delivery of indemnity reasonably satisfactory to the Company or, in case of any such mutilation, upon surrender and cancellation of this Warrant, the Company will issue a new Warrant of like tenor in lieu of this Warrant. 10. Expiration. This Warrant, in all events, shall be wholly void and have no effect after 5:00 P.M. (Philadelphia Time) on May 20, 2009. 11. Notices. All notices, consents or other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given (a) when delivered personally, or (b) one business day after being sent by a reputable overnight delivery service, postage or delivery charges prepaid (provided that confirmation of delivery is obtained from such service), to the parties at their respective addresses set forth below: If to the Company: NCO Group, Inc. 515 Pennsylvania Avenue Fort Washington, PA 19034 Attention: Michael J. Barrist, President If to the Holder: [ ] Attention: [ ] Notices may also be given by prepaid telegram or facsimile and shall be effective on the date transmitted if confirmed within 24 hours thereafter by a signed original sent in the manner provided above. Any party may change its address for notice and the address to which copies must be sent by giving notice of the new addresses to the other parties in accordance with this Section 11, except that any such change of address notice shall not be effective unless and until received. 7 12. Severability. In the event that one or more of the provisions of this Warrant shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Warrant, but this Warrant shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 13. Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania applicable to agreements made and to be entirely performed within such Commonwealth without giving effect to principles of conflicts of laws. 14. Definitions. As used in this Agreement: (a) "Affiliate" means any Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Person specified. The terms "control," "controlled by" and "under common control with" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, as general partner, as a limited partner with a right to receive 50% or more of the income or assets of a limited partnership, by contract or otherwise and with respect to HIG-DCI Investments L.P. shall include its limited partner and any of the limited partners of any partnership or shareholders of any corporation which is its direct or indirect parent. (b) "Market Price" means, (a) the last sale price for the Common Stock on the principal securities exchange on which the Common Stock is listed or admitted to trading, or (b) if not so listed or admitted to trading on any securities exchange, the last sale price, or in the absence of a last sale price, the closing bid price, for the Common Stock on The Nasdaq Stock Market, or (c) if the Common Shares shall not be listed on Nasdaq, the closing bid price in the over-the-counter market, in each such case averaged over a period of 20 consecutive trading days ending on the trading day prior to the Exercise Date. If at any time the Common Stock is not listed on any such exchange or such System or quoted in the over-the-counter market, the Market Price of the Common Stock shall be deemed to be the higher of (1) the book value thereof, as determined in accordance with generally accepted accounting principles consistent with those then being applied by the Company by any firm of independent certified public accountants (which may be the regular auditors of the Company) of recognized national standing selected by the Board of Directors of the Company, as of the last day of the month ending within 31 days preceding the Exercise Date, and (ii) the fair market value thereof, as determined in good faith by an independent brokerage firm, Standard & Poor's Corporation or Moody's Investors Service, as of a date which is within 15 days preceding the Exercise Date. (c) "Person" means any individual, sole proprietorship, joint venture, partnership, corporation, association, cooperative, trust, estate, governmental body, administrative agency, regulatory authority or other entity of any nature. 8 (d) "Transfer" means the disposing of or parting with all or any portion of an interest (legal or equitable) by any means, direct or indirect, absolute or conditional, voluntary or involuntary, including, but not limited to, by sale, assignment, disposition, court order, operation of law, dissolution, merger, consolidation, division, spin-off, dividend, distribution, equitable or other distribution after divorce or separation, settlement, exchange, waiver, abandonment, gift, alienation, bequest, pledge, hypothecation, encumbrance or disposal. 15. Neutral Construction. The parties have negotiated this Warrant and all of the terms and conditions contained in this Warrant in good faith and at arms' length, and each party has been represented by counsel during such negotiations. No term, condition, or provision contained in this Agreement shall be construed against any party or in favor of any party (i) because such party or such party's counsel drafted, revised, commented upon, or did not comment upon, such term, condition, or provision; or (ii) because of any presumption as to any inequality of bargaining power 9 between or among the parties. Furthermore, all terms, conditions, and provisions contained in this Warrant shall be construed and interpreted in a manner which is consistent with all other terms, conditions, and provisions contained in this Warrant. IN WITNESS WHEREOF, NCO GROUP, INC., has caused this Warrant to be signed by its duly authorized officer and dated as of May 21, 1999. NCO GROUP, INC. By: _____________________________ Michael J. Barrist, President 10 EXHIBIT "A" ----------- FORM OF EXERCISE ---------------- (to be executed by the Holder) The Holder hereby exercises its rights to subscribe for and purchase ________ shares of common stock, no par value, ("Common Stock"), of NCO GROUP, INC. evidenced by the attached Warrant, hereby affirms that the representations and warranties set forth in Section 6(b) are true and correct on the date hereof as if made on and as of the date hereof, and herewith makes payment of the Purchase Price of $ _______________ therefor in full. Please issue a certificate in the name of the Holder for the Common Stock in accordance with the instructions given below. Dated: __________________ _____________________________ Signature of Holder Instructions for registration of shares Social Security or Employer Identification Number of Holder: _________________________ Address of Holder: ___________________________________ Street ___________________________________ City, State and Zip Code EXHIBIT "B" ----------- Form of Restrictive Legend To Be Imprinted On Warrant Shares "THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNTIL EITHER (1) THE HOLDER THEREOF SHALL HAVE RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT REGISTRATION OF SUCH SHARES UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED OR (2) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT WITH RESPECT TO SUCH SHARES SHALL HAVE BECOME EFFECTIVE." "THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO CERTAIN RESTRICTIONS ON "TRANSFER" AS DEFINED IN AND SET FORTH IN A REGISTRATION RIGHTS AGREEMENT, A COPY OF WHICH IS AVAILABLE FROM THE COMPANY." EX-10.1 4 EXHIBIT 10.1 EXHIBIT 10.1 ================================================================================ FOURTH AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF MAY 20, 1999 by and among NCO GROUP, INC. AND ITS SUBSIDIARIES IDENTIFIED HEREIN AS BORROWERS and THE FINANCIAL INSTITUTIONS identified herein as Lenders and MELLON BANK, N.A., as Administrative Agent and SUCH CO-AGENTS AS MAY BE APPOINTED FROM TIME TO TIME HEREAFTER ================================================================================ 1 TABLE OF CONTENTS
Page ---- ARTICLE I Credit Facility.................................................................................1 1.1 Commitment To Lend..............................................................................1 1.2 Joint And Several Obligations...................................................................2 1.3 Manner Of Borrowing.............................................................................2 1.4 Scheduled Repayments............................................................................3 1.5 Voluntary Prepayments...........................................................................4 1.6 Payments By The Borrowers In General............................................................5 1.7 Reductions Of Rc Commitment.....................................................................7 1.8 Interest........................................................................................7 1.9 Fees............................................................................................9 1.10 Computation Of Interest And Fees................................................................9 1.11 Promissory Notes; Records Of Account...........................................................10 1.12 Pro Rata Treatment.............................................................................10 1.13 Taxes On Payments..............................................................................10 1.14 Registered Notes And Loans.....................................................................12 1.15 Issuance Of Letters Of Credit.................................................................13 Article II Yield Protection And Breakage Indemnity...............................................................18 2.1 Mandatory Suspension And Conversion Of Libo Rate Loans.........................................18 2.2 Regulatory Changes.............................................................................19 2.3 Capital And Reserve Requirements...............................................................20 2.4 Breakage.......................................................................................20 2.5 Determinations.................................................................................20 2.6 Replacement Of Lenders.........................................................................20 2.7 Change Of Lending Office.......................................................................21 Article III Conditions To Effectiveness Of Agreement And Fundings................................................22 3.1 Conditions To Initial Loans....................................................................22 3.2 Conditions To All Loans........................................................................26 Article IV Representations And Warranties........................................................................27 4.1 Representations And Warranties.................................................................27 4.2 Representations And Warranties Absolute........................................................32 Article V Affirmative Covenants..................................................................................33 5.1 Basic Reporting Requirements...................................................................33 5.2 Insurance......................................................................................35 5.3 Payment Of Taxes And Other Potential Charges And Priority Claims...............................36 5.4 Preservation Of Corporate Status...............................................................36 5.5 Governmental Approvals And Filings.............................................................36 5.6 Maintenance Of Properties......................................................................36 5.7 Avoidance Of Other Conflicts...................................................................37 5.8 Financial Accounting Practices.................................................................37
Page ---- 5.9 Use Of Proceeds................................................................................37 5.10 Continuation Of Or Change In Business..........................................................37 5.11 Consolidated Tax Return........................................................................37 5.12 Fiscal Year....................................................................................37 5.13 Bank Accounts..................................................................................37 5.14 Submission Of Collateral Documents.............................................................38 5.15 Collection Of Accounts.........................................................................38 5.16 Subsidiaries As Borrowers......................................................................38 5.17 Update Of Schedules............................................................................38 Article VI Negative Covenants....................................................................................38 6.1 Financial Covenants............................................................................38 6.2 Liens .........................................................................................39 6.3 Indebtedness...................................................................................39 6.4 Guaranties, Indemnities, Etc...................................................................40 6.5 Loans, Advances And Investments................................................................40 6.6 Dividends And Related Distributions............................................................41 6.7 Sale-Leasebacks................................................................................41 6.8 Leases ......................................................................................41 6.9 Mergers, Acquisitions, Etc.....................................................................42 6.10 Dispositions Of Properties.....................................................................42 6.11 Issuance Of Stock..............................................................................42 6.12 Dealings With Affiliates.......................................................................42 6.13 Acquired Delinquent Pools Of Accounts..........................................................43 6.14 Capital Expenditures...........................................................................43 6.15 Limitations On Modification Of Certain Agreements And Instruments..............................43 6.16 Limitation On Payments Of Purchase Money Indebtedness..........................................44 6.17 Limitation On Other Restrictions On Liens......................................................44 6.18 Limitation On Other Restrictions On Amendment Of The Loan Documents, Etc.................................................................................44 Article VII Defaults 7.1 "Events Of Default.............................................................................44 7.2 Consequences Of An Event Of Default............................................................47 7.3 Application Of Proceeds........................................................................48 Article VIII The Administrative Agent............................................................................48 8.1 Appointment....................................................................................48 8.2 General Nature Of Administrative Agent's Duties................................................49 8.3 Exercise Of Powers.............................................................................49 8.4 General Exculpatory Provisions.................................................................50 8.5 Administration By The Administrative Agent.....................................................50 8.6 Lenders Not Relying On Administrative Agent Or Other Lenders...................................51 8.7 Indemnification................................................................................51 8.8 Register.......................................................................................52
ii
Page ---- 8.9 Successor Administrative Agent.................................................................52 8.10 Additional Agents.............................................................................53 8.11 Calculations...................................................................................53 8.12 Administrative Agent In Its Individual Capacity................................................53 Article IX Special Inter-Borrower Provisions.....................................................................54 9.1 Certain Borrower Acknowledgements..............................................................54 9.2 Certain Inter-Borrower Agreements..............................................................54 9.3 Records........................................................................................55 Article X Definitions; Construction..............................................................................55 10.1 Certain Definitions............................................................................55 10.2 Construction...................................................................................71 10.3 Accounting Principles..........................................................................72 Article XI Miscellaneous.........................................................................................73 11.1 Notices........................................................................................73 11.2 Prior Understandings; Entire Agreement.........................................................73 11.3 Severability...................................................................................73 11.4 Descriptive Headings...........................................................................74 11.5 Governing Law..................................................................................74 11.6 Non-Merger Of Remedies.........................................................................74 11.7 No Implied Waiver; Cumulative Remedies.........................................................74 11.8 Amendments; Waivers............................................................................74 11.9 Successors And Assigns.........................................................................75 11.10 Counterparts; Photocopied Or Telecopied Signature Pages........................................77 11.11 Maximum Lawful Interest Rate...................................................................77 11.12 Indemnification................................................................................77 11.13 Expenses.......................................................................................79 11.14 Maximum Amount Of Joint And Several Liability..................................................79 11.15 Authorization Of Nco Group By Other Borrowers..................................................80 11.16 Certain Waivers By Borrowers...................................................................80 11.17 Set-Off........................................................................................80 11.18 Sharing Of Collections.........................................................................81 11.19 Other Loan Documents...........................................................................81 11.20 Certain Borrower Acknowledgements..............................................................81 11.21 Consent To Jurisdiction, Service And Venue; Waiver Of Jury Trial...............................81 11.22 Most Favored Borrower..........................................................................82
iii Exhibits - -------- A-1 RC Note B Borrowing Notice C Prepayment Notice D LIBO Rate Selection Notice E Form of Security Agreement F Form of Stock Pledge G Intentionally Omitted H Certificate of Pro Forma Covenant Compliance I Quarterly Compliance Certificate J Form of Seller Subordination Agreement K Form of Seller Subordination Agreement (for seller notes aggregating less than $2,000,000 in original principal amount) K-1 Form of Seller Subordination Agreement (for seller notes aggregating less than $10,000,000 in original principal amount) L Assignment and Acceptance M Joinder Agreement Schedules - --------- 1.1 Lender's RC Commitments 4.1(a) Jurisdictions 4.1(h) Undisclosed Liabilities 4.1(k) Projections 4.1(n) Partnerships 4.1(o) Ownership 4.1(s) Insurance 4.1(u) Intellectual Property 4.1(w) Environmental Matters 4.1(x) Employee Benefits 4.1(z) Names 5.16 Excluded Subsidiaries 6.2 Liens 6.3 Indebtedness 6.5 Loans and Investments 6.12 Affiliate Transactions CREDIT AGREEMENT THIS FOURTH AMENDED AND RESTATED CREDIT AGREEMENT, dated as of May 20, 1999, by and between NCO GROUP, INC., a Pennsylvania corporation ("NCO Group"), AND ITS SUBSIDIARIES LISTED ON THE SIGNATURE PAGE HERETO (NCO Group and such Subsidiaries are each individually a "Borrower" and collectively the "Borrowers") and the Lenders referred to on the signature page hereto (together with other lender parties hereto from time to time pursuant to Section 11.9 below, and their successors and assigns, the "Lenders"), MELLON BANK, N.A., a national banking association ("Mellon") for itself and as Administrative Agent for the other Lenders (in such capacity, together with its successors and assigns in such capacity, the "Administrative Agent") and MELLON BANK, N.A., a national banking association, as issuer of Letters of Credit hereunder (in such capacity, together with its successors and assigns in such capacity, the "Issuer"). Recitals: A. NCO Financial Systems, Inc. ("NCO Financial") and Mellon entered into that certain Credit Agreement dated as of July 28, 1995 ("Original Credit Agreement"), pursuant to which Mellon made available to NCO Financial certain credit facilities. The Original Credit Agreement was amended and restated on September 5, 1996 (the "1996 Credit Agreement") pursuant to which NCO Financial, NCO Group, NCO Funding, Inc., and NCO of New York, Inc. each became parties to the 1996 Credit Agreement, and further amended on September 11, 1996, December 13, 1996, and February 11, 1998. The 1996 Credit Agreement was amended and restated as of March 23, 1998 (the "March 1998 Credit Agreement") and further clarified by those certain Closing Memoranda dated May 5, 1998 and May 29, 1998. The March 1998 Credit Agreement was amended and restated as of November 30, 1998 (the "Existing Credit Agreement") pursuant to which all U.S. subsidiaries (other than the then Excluded Subsidiaries) of NCO Group (as of that date) became parties to the Credit Agreement. The Existing Credit Agreement was modified by a Closing Memorandum dated November 30, 1998, a Global Amendment dated as of January 11, 1999 and a First Amendment dated February 11, 1999. B. The Borrowers have requested that the existing credit facilities be increased and restructured as a $350,000,000 reducing revolving credit facility. Mellon has agreed to do so, with the understanding that the credit will be syndicated and portions of Mellon's commitment will be sold and assigned to other lenders. C. In connection with the foregoing modifications, all Loans outstanding under the Existing Credit Agreement shall be repaid in full on the date hereof from the proceeds of the new Loans and all Commitments, other than Mellon's, shall be terminated. D. In furtherance of their goals, the parties have agreed to amend and restate the Credit Agreement on the terms and conditions set forth below. NOW, THEREFORE, in consideration of the premises and of the mutual -1- covenants herein contained and intending to be legally bound hereby, the Borrowers and the Lenders agree that the Credit Agreement is hereby amended and restated in its entirety as follows: ARTICLE I CREDIT FACILITY 1.1 Commitment To Lend. Upon the terms and subject to the conditions of this Agreement (including all conditions precedent in Section 3.1), each Lender agrees to make, from time to time during the period from and including the Closing Date to but excluding the Maturity Date, one or more RC Loans ("RC Loans") to the Borrowers in an aggregate unpaid principal amount not exceeding at any time such Lender's RC Commitment at such time; provided, however, that the Borrowers shall not request, and the Lenders shall have no obligation to make, any Loans at any time in excess of the Available RC Commitment. The total amount of the RC Commitment of all Lenders on the Closing Date is $350,000,000.00. 1.2 Joint And Several Obligations. WHETHER OR NOT EXPRESSLY STATED HEREIN OR IN ANY OTHER LOAN DOCUMENT, ALL OBLIGATIONS OF THE BORROWERS (OR OF ANY BORROWER) HEREUNDER AND UNDER EACH OTHER LOAN DOCUMENT (WHETHER IN CONNECTION WITH LOANS OR OTHER OBLIGATIONS) ARE JOINT AND SEVERAL OBLIGATIONS OF ALL BORROWERS. 1.3 Manner Of Borrowing. (a) Notice of Borrowing. NCO Group (on behalf of the Borrowers) shall give the Administrative Agent notice (which shall be irrevocable), in the case of Prime Rate Loans, no later than 12:00 p.m. (Philadelphia, Pennsylvania time) on the Business Day for the making of such RC Loans and, in the case of LIBO Rate Loans, 12:00 p.m. (Philadelphia, Pennsylvania, time) three Business Days before the requested date for the making of such Loans. Each such notice shall be in the form of Exhibit B hereto and shall specify (i) the requested date for the making of such Loans which date shall be a Business Day, (ii) the Type or Types of Loans requested and (iii) the amount of each such Type of Loan, which amount shall be $1,000,000.00 or any integral multiple of $500,000.00 in excess thereof (except that the amount of the requested RC Loan may be less if the amount requested is equal to the total Available RC Commitment). Upon receipt of any such notice, the Administrative Agent shall promptly notify each applicable Lender of the contents thereof and of the amount and Type of each Loan to be made by such Lender on the requested date specified therein. (b) Funding by Lenders. Not later than 3:00 p.m. (Philadelphia, Pennsylvania time) on each requested date for the making of Loans, each Lender shall make available to the -2- Administrative Agent, in Dollars and in funds immediately available to the Administrative Agent at the office designated by the Administrative Agent, the Loans to be made by such Lender on such date, provided however that if a Lender does not receive timely notice from the Administrative Agent as set forth in paragraph (a) above, such Lender shall fund the required amount promptly upon receipt of such notice. The obligations of the Lenders hereunder are several; accordingly, any Lender's failure to make any Loan to be made by it on the requested date therefor shall not relieve any other Lender of its obligation to make any Loan to be made by it on such date, but the latter shall not be liable for the former's failure. (c) Permitted Assumption as to Funding. Unless the Administrative Agent shall have received notice from a Lender prior to 1:00 p.m. (Philadelphia, Pennsylvania time) on the requested date for the making of any Loan that such Lender will not make available to the Administrative Agent the Loan requested to be made by it on such date, the Administrative Agent may assume that such Lender has made such Loan available. The Administrative Agent in its sole discretion and in reliance upon such assumption, may make available to the Borrowers on the requested date a corresponding amount on behalf of such Lender. If and to the extent such Lender shall not have made available to the Administrative Agent the Loans requested to be made by such Lender on such date and the Administrative Agent shall have so made available to the Borrowers a corresponding amount on behalf of such Lender, (i) such Lender shall, on demand, pay to the Administrative Agent such corresponding amount together with interest thereon, for each day from the date such amount shall have been so made available by the Administrative Agent to the Borrowers until the date such amount shall have been paid in full to the Administrative Agent, at the Federal Funds Rate until (and including) the third Business Day after demand is made and thereafter at the Prime Rate, and (ii) the Administrative Agent shall be entitled to all interest payable by Borrowers on such amount for the period commencing on the date such amount was advanced by the Administrative Agent to but not including the date on which such amount is received by the Administrative Agent from such Lender. Moreover, any Lender that shall have failed to make available the required amount shall not be entitled to vote on such matters as Lenders or Majority Lenders are otherwise entitled to vote on or consent to or approve under this Agreement and the other Loan Documents until such amount with interest is paid in full to the Administrative Agent by such Lender. Without limiting any obligations of any Lender pursuant to this paragraph (c), if such Lender does not pay such corresponding amount promptly upon the Administrative Agent's demand therefor, the Administrative Agent shall notify NCO Group (on behalf of the Borrowers) and the Borrowers shall promptly repay such corresponding amount to the Administrative Agent together with accrued interest thereon at the applicable rate or rates on such Loans. (d) Disbursements of Funds to Borrowers. All amounts made available to the Administrative Agent in accordance with paragraph (b) above shall be disbursed by the Administrative Agent promptly but in any event not later than 4:00 p.m. (Philadelphia, Pennsylvania time) on the requested date therefor in Dollars, in funds immediately available to the Borrowers by crediting such amount to an account of NCO Group at the Administrative -3- Agent's Domestic Lending Office or in such other manner as may be agreed to by NCO Group and the Administrative Agent. 1.4 Repayments. The aggregate outstanding principal amount of the RC Loans shall mature and become due and payable, and shall be repaid by the Borrowers, on the Maturity Date. Borrowers shall also repay immediately the amount by which the outstanding RC Loans exceed the RC Commitment at any time following a reduction in the RC Commitment. 1.5 Voluntary Prepayments. (a) Optional Prepayments. The Borrowers may, at any time and from time to time, prepay the Loans in whole or in part, without premium or penalty (but with any payment required under Section 2.4 (Breakage)), except that any optional partial prepayment (other than a prepayment of all outstanding Loans) shall be in an aggregate principal amount of $500,000.00 or any integral multiple of $250,000.00 in excess thereof. Amounts to be so prepaid shall irrevocably be due and payable on the date specified in the applicable notice of prepayment delivered pursuant to paragraph (b) of this Section 1.5 together with interest thereon as provided in Section 1.8 (Interest) and together with any payment required under Section 2.4 (Breakage). (b) Application and Timing of Prepayments. (i) Notice. The Borrowers shall give the Administrative Agent notice of each prepayment of Loans, which notice, in the case of a prepayment of Prime Rate Loans, shall be given no later than 1:00 p.m. (Philadelphia, Pennsylvania time) one (1) Business Day before and, in the case of a prepayment of LIBO Rate Loans, no later than 12:00 P.M. (Philadelphia, Pennsylvania, time) three (3) Business Days before, the date of such prepayment. Each such notice of prepayment shall be in the form of Exhibit C hereto and shall specify (i) the date such prepayment is to be made, and (ii) the amount and Type and, in the case of any LIBO Rate Loan, the last day of the applicable Interest Period for the RC Loan to be prepaid. Upon receipt of any such notice, the Administrative Agent shall promptly notify each applicable Lender of the contents thereof. (ii) Timing and Application of Voluntary Prepayments. Any voluntary prepayments pursuant to paragraph (a) of this Section 1.5 shall be applied in the following order unless otherwise directed by the Borrowers: (1) First, prepayments shall be applied against any interest, fees, charges and expenses due and payable in respect of the Obligations. (2) Second, prepayments shall be applied against the RC Loans but with no corresponding reduction in the amount of the Commitment unless otherwise specified by NCO Group (on behalf of the Borrowers) in accordance with Section 1.7 hereof. -4- Any excess shall be applied to any other amounts owing in respect of the Obligations and, if all such Obligations have been then paid in full, then any excess amount shall be returned to NCO Group (on behalf of the Borrowers) or as otherwise required by applicable Law. (c) Certain Provisions Respecting Prepayments Generally. Prepayments shall be subject to the interest payment provisions, as applicable, set forth in Section 1.8 and the breakage indemnity provisions, as applicable, set forth in Section 2.4 below. 1.6 Payments By The Borrowers In General. (a) Time, Place and Manner. All payments due to the Administrative Agent and the Lenders under the Loan Documents shall be made to the Administrative Agent at the office designated by the Administrative Agent on the signature pages hereto or to such other Person or at such other address as the Administrative Agent may designate by written notice to NCO Group on behalf of the Borrowers. Until further notice from the Administrative Agent and except as otherwise provided herein, all such payments shall be made by charging the Borrower's deposit account with the Administrative Agent as provided in Section 1.6(c). Except as otherwise set forth in this Agreement, a payment shall not be deemed to have been made on any day unless such payment has been received by the required Person, at the required place of payment, in Dollars in funds immediately available to such Person, no later than 1:00 p.m. (Philadelphia, Pennsylvania time) on such day; provided, however, that the failure of the Borrowers to make any such payment by such time shall not constitute a Default hereunder so long as such payment is received no later than 3:00 p.m. (Philadelphia, Pennsylvania time) on such day, but any such payment received later than 1:00 p.m. (Philadelphia, Pennsylvania time) on such day shall be deemed to have been made on the next Business Day for the purpose of calculating interest on the amount paid, provided further, that any such payment made with the proceeds of Loans shall be deemed to have been made on the date of the making of such Loans, so long as such proceeds are immediately so applied and are not otherwise disbursed to the Borrowers. (b) No Reductions. All payments due to the Administrative Agent or any Lender under this Agreement and the other Loan Documents, shall be made by the Borrowers without any reduction or deduction whatsoever, including any reduction or deduction for any charge, set-off, holdback, recoupment or counterclaim (whether sounding in tort, contract or otherwise). (c) Authorization to Charge Accounts. The Borrowers hereby authorize the Administrative Agent to charge any amounts due under this Agreement against any or all of the demand deposit or other accounts (other than accounts containing escrow funds) of NCO Group or any Borrower with the Administrative Agent (whether maintained at a branch or office located within or without the United States), with the Borrowers remaining jointly and severally liable for any deficiency. The Administrative Agent shall give the relevant Borrower one day prior notice of the amount to be charged provided, however, that advance notice shall not be required to charge any amount due for interest or the Unused Fee, and the Administrative Agent shall only -5- advise of such charge after such charge has been made. (d) Extension of Payment Dates if Not a Business Day. Whenever any payment to the Administrative Agent or any Lender under the Loan Documents would otherwise be due (except by reason of acceleration) on a day that is not a Business Day, such payment shall instead be due on the next succeeding Business Day unless, in the case of a payment of the principal of LIBO Rate Loans, such extension would cause payment to be due in the next succeeding calendar month, in which case such due date shall be advanced to the next preceding Eurodollar Business Day. If the due date for any payment under the Loan Documents is extended (whether by operation of any Loan Document, applicable Law or otherwise), such payment shall bear interest for such extended time at the rate of interest applicable hereunder. (e) Disbursement of Payments to Lenders. The Administrative Agent shall promptly distribute to each applicable Lender its ratable share of each payment received by the Administrative Agent under the Loan Documents for the account of such Lender by crediting an account of such Lender at the Administrative Agent's office or by wire transfer to an account of such Lender at an office of any other commercial bank located in the United States or at any Federal Reserve Bank designated by such Person. Unless the Administrative Agent shall have received notice from NCO Group (on behalf of the Borrowers) prior to the date on which any payment is due to any Lenders under the Loan Documents that the Borrowers will not make such payment in full, the Administrative Agent may assume that the Borrowers have made such payment in full to the Administrative Agent on such date and the Administrative Agent, in its sole discretion may, in reliance upon such assumption, cause to be distributed to each applicable Lender on such due date, a corresponding amount with respect to the amount then due to such Person. If and to the extent that the Borrowers shall not have so made such payment in full to the Administrative Agent, and the Administrative Agent shall have so distributed to such Lender or Lenders a corresponding amount, such Lender shall, on demand, repay to the Administrative Agent the amount so distributed together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Person repays such amount to the Administrative Agent, at the Federal Funds Rate until (and including) the third Business Day after demand is made and thereafter at the Prime Rate. Moreover, any Lender that shall have failed to make available the required amount shall not be entitled to vote on such matters as Lenders or Majority Lenders are otherwise entitled to vote on or consent to or approve under this Agreement and the other Loan Documents until such amount with interest is paid in full to the Administrative Agent by such Lender. Nothing in this Section 1.6 shall relieve the Borrowers from any payment obligations. (f) Breakage Costs on LIBO Rate Loans. Any repayment or prepayment of a LIBO Rate Loan made on a day other than the last day of the applicable Interest Period therefor shall be subject to payments in respect of breakage costs as required to be paid in respect thereof pursuant to Section 2.4 below. 1.7 Reductions Of RC Commitment. -6- (a) Mandatory Reductions. (i) Quarterly Reductions. Beginning March 31, 2001, the RC Commitment shall be reduced quarterly by $6,250,000 on the last day of each calendar quarter until the Maturity Date. (ii) Debt or Equity Offerings. After March 31, 2000, Borrowers shall apply at least fifty percent (50%) of the net proceeds received from any offering of debt or equity by NCO Group to reduce the RC Commitment permanently. (b) Optional Reductions. The Borrowers may reduce the RC Commitment by giving the Administrative Agent notice (which shall be irrevocable) thereof no later than 11:00 a.m. (Philadelphia, Pennsylvania, time) on the third Business Day (fifth Business day for termination of the RC Commitment) before the requested date of such reduction, provided, that each partial reduction thereof (other than the elimination of the RC Loan) shall be in an amount equal to $5,000,000.00 or any integral multiple of $1,000,000.00 in excess thereof and, provided, further, that no reduction shall reduce the Commitment to an amount less than the aggregate of the principal amount of all Loans outstanding on such date (after giving effect to any repayment or prepayment of RC Loans made on or prior to such date). Upon receipt of any such notice, the Administrative Agent shall promptly notify each Lender of the contents thereof and the amount (based on a pro rata reduction to each Lender's RC Commitment) to which such Lender's RC Commitment is to be reduced. (c) No Reinstatement of RC Commitment. All reductions of the RC Commitment are permanent and the RC Commitment cannot be restored without the written consent of all Lenders. (d) Payment. On each date ("Reduction Date") on which the RC Commitment is reduced (either voluntarily or involuntarily) the Borrowers shall pay to the Administrative Agent the amount, if any, by which the outstanding principal balance of the RC Loans exceeds the amount of the RC Commitment as reduced on such Reduction Date. (e) Application of Reductions. Each mandatory reduction made pursuant to Section 1.7(a)(ii) and each optional reduction under Section 1.7(b) shall be applied pro-rata across the remaining quarterly reductions required under Section 1.7(a)(i). 1.8 Interest. (a) Interest Rates in General. Subject to the terms and conditions of this Agreement, each Loan, at the option of the Borrowers, shall bear interest on the outstanding principal amount thereof until paid in full at a rate per annum equal to (i) the Prime Rate as in effect from time to time plus the Applicable Margin or (ii) the applicable LIBO Rate for a specified Interest Period plus the Applicable Margin. -7- (b) Election of LIBO Rate. Unless otherwise designated by the Borrowers as a LIBO Rate Loan in accordance with this paragraph (b), each Loan shall be deemed to be a Prime Rate Loan as more fully set forth below. (i) Prime Rate Unless Otherwise Designated. Prime Rate Loans shall continue as Prime Rate Loans unless and until such Loans are converted into Loans of another Type. LIBO Rate Loans for any Interest Period shall continue as Loans of such Type until the end of the then current Interest Period therefor, at which time they shall be automatically converted into Prime Rate Loans unless NCO Group (on behalf of the Borrowers) shall have given the Administrative Agent notice in accordance with clause (ii) below requesting that such Loans continue as LIBO Rate Loans for another Interest Period of a specified duration. (ii) Election of LIBO Rate. To elect a LIBO Rate, NCO Group (on behalf of the Borrowers) shall give the Administrative Agent notice (which shall be irrevocable) no later than 12:00 p.m. (Philadelphia, Pennsylvania, time) three (3) Eurodollar Business Days before the requested date of the funding, conversion or continuation which date shall be a Eurodollar Business Day. Each such notice shall be in the form of Exhibit D hereto and shall specify (A) the requested date of such funding, conversion or continuation, (B) whether the subject Loan is a new advance or an existing Loan that is to be converted or continued, (C) in the case of any LIBO Rate Loan being continued, the last day of the current Interest Period, and (D) the amount of, and the desired Interest Period for, the Loan subject to such LIBO Rate election, provided that the Borrowers shall not be entitled to select an Interest Period for any Loan which shall end on a date later than the Maturity Date applicable to such Loan. Upon receipt of any such notice, the Administrative Agent shall promptly notify each applicable Lender of the contents thereof. (iii) LIBO Rate Suspended During Event of Default. Notwithstanding anything to the contrary contained in clauses (i) or (ii) of this paragraph (b), so long as an Event of Default shall have occurred and be continuing, the Administrative Agent may (and, at the request of the Majority Lenders, shall) notify NCO Group (on behalf of the Borrowers) that Loans may only be converted into or continued upon the expiration of the applicable current Interest Period therefor as Prime Rate Loans or Loans of such specified Types as shall be acceptable to the Majority Lenders. Thereafter, until no Event of Default shall continue to exist, Loans may not be converted into or continued as Loans of any Type other than Prime Rate Loans or one or more of such specified Types. (iv) Limitation on Types of Loans. Notwithstanding anything to the contrary contained in this Agreement, the Borrowers shall borrow, prepay, convert and continue Loans in a manner such that (A) unless otherwise agreed to by the Administrative Agent, the aggregate principal amount of LIBO Rate Loans of the same Type shall, at all times, be not less than $1,000,000.00 and (B) there shall be, at any one time, no more than ten (10) Interest Periods for LIBO Rate Loans in effect. -8- (v) Flexibility as to Source. Each Lender may fund LIBO Rate Loans from any source that such Lender deems (in its sole discretion) appropriate without loss of any rights hereunder. (c) Interest Payment Dates. Interest shall be payable, (i) in the case of Prime Rate Loans, monthly in arrears on each Monthly Payment Date, (ii) in the case of LIBO Rate Loans, on the last day of each applicable Interest Period (and, in the case of any LIBO Rate Loan having an Interest Period longer than three months, on each three month anniversary of the first day of such Interest Period) and (iii) in the case of any Loan, when such Loan shall be due (whether at maturity, upon mandatory prepayment, by reason of notice of prepayment or acceleration or otherwise) or converted, but only to the extent then accrued on the amount then so due or converted. (d) Default Rate. At any time that an Event of Default shall have occurred and shall be continuing, any amount payable hereunder and under each other Loan Document shall bear interest (whether before or after judgment), payable on demand, at a rate per annum equal to the applicable Default Rate. 1.9 Fees. (a) Unused Fee. The Borrowers shall pay to the Administrative Agent, for the account of each Lender, an unused fee ("Unused Fee") calculated at a rate per annum equal to the percentage amount set forth below, under the caption "Unused Fee" opposite the relevant Consolidated Funded Debt/Consolidated EBITDA Ratio, on the daily unused amount of such Lender's RC Commitment for each day from and including the Closing Date to but excluding the Maturity Date: GRID A (pre-offering) Consolidated Funded Debt/ Consolidated EBITDA Ratio Unused Fee ------------------------- ---------- below 2.0 1/8% > 2.0 < 3.0 1/4% > 3.0 3/8% -9- GRID B (post-offering) Consolidated Funded Debt/ Consolidated EBITDA Ratio Unused Fee ------------------------- ---------- below 2.0 1/8% > 2.0 < 3.0 1/4% > 3.0 < 3.5 3/8% > 3.5 1/2% The Unused Fee will be initially calculated based on Grid A. In the event NCO Group successfully completes by March 31, 2000 (i ) a convertible subordinated debt issuance in the minimum amount of $150,000,000 and/or (ii) a common stock issuance in the minimum amount of $100,000,000 and/or (iii) a convertible subordinated debt issuance in the minimum amount of $100,000,000 in conjunction with a common stock issuance in the minimum amount of $25,000,000, the Unused Fee shall be calculated on Grid B beginning on the first day of the quarter following such event. Notwithstanding anything above to the contrary, (a) if the RC Loans outstanding are less than $150,000,000 the Unused Fee shall not be less than 1/4%, and (b) Grid B shall not be effective prior to October 1, 1999. The Unused Fee shall be payable in arrears (i) on successive Monthly Payment Dates beginning with the first Monthly Payment Date after the Closing Date (ii) on the date of any reduction of the Commitment (to the extent accrued and unpaid on the amount of such reduction) and (iii) on the Maturity Date. From the Closing Date until the first day of the month following delivery of the first Officer's Compliance Certificate for the third fiscal quarter of 1999, the Unused Fee shall be 3/8%. Thereafter, the Unused Fee shall be adjusted on the first Business Day of the month after delivery of each Officer's Compliance Certificate under Section 5.1 or in the event of any Permitted Acquisition, on the first Business day of the month after closing and delivery of the Proforma Covenant Compliance Certificate required for the acquisition. (b) Letter of Credit Fees. The Borrowers shall pay to the Issuer for the ratable benefit of the Lenders, a "Letter of Credit Fee" on the face amount of each Letter of Credit at a rate per annum equal to 1 1/2%. Such fee shall be payable upon issuance of each Letter of Credit and, if the Letter of Credit is "evergreen" on each anniversary of such issuance for so long as the Letter of Credit remains outstanding. The Borrowers shall also pay to the Issuer for the Issuer's sole account the Issuer's then in effect standard document preparation fees and reasonable administrative expenses payable with respect to Letters of Credit. (c) Other Fees. The Borrowers shall pay to the Administrative Agent for the sole account of the Administrative Agent, such fees, including an annual Administrative Agent's fee, as have been or may be agreed to in writing by the Borrowers or any of them and the Administrative Agent in connection with this Agreement and the transactions contemplated by -10- this Agreement. 1.10 Computation Of Interest And Fees. Interest and commitment fees shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed. Interest and commitment fees for any period shall be calculated from and including the first day thereof to but excluding the last day thereof. 1.11 Promissory Notes; Records Of Account. Each Lender's Loans and the Borrowers' joint and several obligations to repay such Loans with interest in accordance with the terms of this Agreement shall be evidenced by this Agreement, the Register and other records of the Administrative Agent and such Lender and a single RC Note payable to the order of such Lender. The records of each Lender shall be prima facie evidence of such Lender's Loans and, in each case, of accrued interest thereon and all payments made in respect thereto. In the event that there is any dispute concerning the amount of any such obligations, the amount of each Lender's RC Commitment and the amount of outstanding Obligations of each and every Type shall at all times be ascertained from the records of the Administrative Agent, including, without limitation, the Register, all of which shall be conclusive absent manifest error. 1.12 Pro Rata Treatment. Except to the extent otherwise provided herein, RC Loans shall be made by, and principal, interest and fees in respect thereof shall be paid or repaid to, the Lenders pro rata in accordance with their respective RC Commitments and interest in RC Loans. 1.13 Taxes On Payments. (a) Taxes Payable by the Borrowers. If any Tax is required to be withheld or deducted from, or is otherwise payable by the Borrowers in connection with, any payment due to the Administrative Agent or any Lender that is not a "United States Person" (as such term is defined in Section 7701(a)(30) of the Code), the Borrowers (i) shall, if required, withhold or deduct the amount of such Tax from such payment and, in any case, pay such Tax to the appropriate taxing authority in accordance with applicable Law and (ii) except in the case of any Bank Tax, shall pay to such Lender or the Administrative Agent such additional amounts as may be necessary so that the net amount received by such Person with respect to such payment, after withholding or deducting all Taxes required to be withheld or deducted, is equal to the full amount payable hereunder. If any Tax is withheld or deducted from, or is otherwise payable by the Borrowers in connection with, any payment due to any Lender or the Administrative Agent hereunder, the Borrowers shall furnish to such Person the original or a certified copy of a receipt (if any) for such Tax from the applicable taxing authority or other evidence of payment thereof satisfactory to such Person within 30 days after the date of such payment (or, if such receipt shall not have been made available by such taxing authority within such time, the Borrowers shall use reasonable efforts to promptly obtain and furnish such receipt). If the Borrowers fail to pay any such Taxes when due to the appropriate taxing authority or fail to remit to any Lender or the Administrative Agent the required receipts or other evidence of payment thereof satisfactory to such Person, the Borrowers shall indemnify such Person for any Taxes, interest, penalties or -11- additions to Tax that may become payable by such Person as a result of any such failure. (b) Taxes Payable by any Lender or the Administrative Agent. The Borrowers shall, promptly upon request by any Lender or the Administrative Agent that is not a United States Person, pay to such Person an amount equal to (i) all Taxes (other than Bank Taxes and without duplication of amounts paid pursuant to the preceding paragraph (a)) payable by such Person with respect to any payment due to such Person hereunder and (ii) all Taxes (other than Bank Taxes) payable by such Person as a result of payments made by the Borrowers (whether made to a taxing authority or to such Person pursuant to the preceding paragraph (a) or this paragraph (b)). (c) Credits and Deductions. If any Lender or the Administrative Agent is, in its sole opinion, able to apply for any refund, offset, credit, deduction or other reduction in Taxes by reason of any payment made by the Borrowers under the preceding paragraphs (a) or (b), such Lender or the Administrative Agent, as the case may be, shall use reasonable efforts to obtain such refund, offset, credit, deduction or other reduction and, upon receipt thereof, will pay to the Borrowers such amount, not exceeding the increased amount paid by the Borrowers, as is equal to the net after-tax value to such Lender or the Administrative Agent, in its sole opinion, of such part of such refund, offset, credit, deduction or other reduction as it considers to be allocable to such payment by the Borrowers, having regard to all of such Person's dealings giving rise to similar refunds, offsets, credits, deductions or other reductions in relation to the same tax period and to the cost of obtaining the same; provided, however, that if such Person has made a payment to the Borrowers pursuant to this paragraph (c) and the applicable refund, offset, credit, deduction or other reduction in Tax is subsequently disallowed, the Borrowers shall, promptly upon request by the Administrative Agent or such Lender refund to such Person that portion of such payment determined by such Person, in its sole opinion, relating to such disallowance; and provided, further that (i) the Administrative Agent or such Lender, as the case may be, shall not be obligated to disclose to the Borrowers any information regarding its Tax affairs or computations and (ii) nothing in this paragraph (c) shall interfere with the right of such Person to arrange its Tax affairs as it deems appropriate. (d) Exemption from U.S. Withholding Taxes. Each Lender that is not a United States Person shall submit to the Borrowers and the Administrative Agent, on or before the fifth day prior to the first Monthly Payment Date occurring after the Initial Funding Date (or, in the case of a Person that is not a United States Person and that became a Lender by assignment, promptly upon such assignment), two duly completed and signed copies of either (A) Form 1001 of the United States Internal Revenue Service entitling such Lender to a complete exemption from withholding on all amounts to be received by such Lender pursuant to this Agreement and the Loans, (B) Form 4224 of the United States Internal Revenue Service relating to all amounts to be received by such Lender pursuant to this Agreement and the Loans or (C) in the case of a Lender that is claiming an exemption from United States withholding tax under Section 871(h) or 881(c) of the Internal Revenue Code with respect to payments of "portfolio interest" two -12- accurate and complete signed original Forms W-8 (or any successor form prescribed by the Internal Revenue Service, certifying that such Lender is exempt from or is entitled to a reduced rate of United States withholding tax on payments under this Agreement or the Notes) and, if such Lender delivers such Forms W-8 (or successor form), two signed certificates that such Lender is not (1) a "bank" for purposes of Section 881(c) of the Internal Revenue Code, (2) is not a 10% shareholder (within the meaning of Section 871(h)(3)(B) of the Internal Revenue Code) of any Borrower and (3) is not a controlled foreign corporation related to any Borrower (within the meaning of Section 864(d)(4) of the Internal Revenue Code), as appropriate, Each such Lender shall, from time to time after submitting either such form, submit to the Borrowers and the Administrative Agent such additional duly completed and signed copies of one or the other such forms (or any successor forms as shall be adopted from time to time by the relevant United States taxing authorities) as may be (A) requested in writing by the Borrowers or the Administrative Agent and (B) appropriate under the circumstances and under then current United States law or regulations to avoid or reduce United States withholding taxes on payments in respect of all amounts to be received by such Lender pursuant to this Agreement or the Loans. Upon the request of the Borrowers or the Administrative Agent, each Lender that is a United States Person shall submit to the Borrowers and the Administrative Agent a certificate to the effect that it is a United States Person. (e) Survival. Obligations under this Section 1.13 shall survive payment of the Loans. 1.14 Registered Notes And Loans. (a) Request for Registration. Any Lender may request the Borrowers (through the Administrative Agent), and the Borrowers agree thereupon, to register such Loans as provided in Section 1.14(c) and to issue such Lender's Note(s), evidencing such Loans, or to exchange such Note(s) for new Note(s), registered as provided in Section 1.14(c) (each, a "Registered Note"). A Registered Note may not be exchanged for a Note that is not in registered form. A Registered Note shall be deemed to be and shall be a Note for all purposes of this Agreement and the other Loan Documents. (b) Delivery of Tax Forms. Each Non-U.S. Lender that requests or holds a Registered Note pursuant to Section 1.14(a) or registers its Loans pursuant to Section 1.14(a) (a "Registered Lender") (or, if such Registered Lender is not the beneficial owner thereof, such beneficial owner) shall deliver to NCO Group (on behalf of the Borrowers) (with a copy to the Administrative Agent) prior to or at the time such Non-U.S. Lender becomes a Registered Lender, the applicable form described in Section 1.13(d) (or such successor and related forms as may from time to time be adopted by the relevant taxing authorities of the United States) together with an annual certificate stating that such Registered Lender or beneficial owner, as the case may be, is not a "bank" within the meaning of Section 881(c)(3)(A) of the Code and is not otherwise described in Section 881(c)(3) of the Code. Each Registered Lender or beneficial owner, as the case may be, shall promptly notify NCO Group (on behalf of the Borrowers) (with -13- a copy to the Administrative Agent) if at any time such Registered Lender or beneficial owner, as the case may be, determines that it is no longer in a position to provide such previously delivered certificate to the Borrowers (or any other form of certification adopted by the relevant taxing authorities of the United States for such purposes). (c) Registration of Loans. The Administrative Agent, acting, for this purpose, as agent of the Borrowers, shall, upon request of any Registered Lender, enter in the Register the name, address and taxpayer identification number (if provided) of the Registered Lender or beneficial owner, as the case may be. In addition to the requirements of Section 11.9 (Successors and Assigns), a Registered Note and the Loans evidenced thereby (or such Loans pending delivery of such Registered Note) or any other Loans registered pursuant to Section 1.14(a) above may be assigned or otherwise transferred in whole or in part only by registration of such assignment or transfer of such Registered Note and/or the Loans so registered on the Register (and each such Registered Note shall expressly so provide). Any assignment or transfer of all or part of such Loans and such Registered Note shall be registered on the Register only upon compliance with the provisions of Section 11.9 and, in the case of Registered Notes, surrender for registration of assignment or transfer of the Registered Note evidencing such Loans, duly endorsed by (or accompanied by a written instrument of assignment or transfer fully executed by) the Registered Lender thereof, and thereupon one or more new Registered Notes in the same aggregate principal amount shall be issued to the designated assignee(s) or transferee(s) and, if less than all of such Registered Notes is thereby being assigned or transferred, the assignor or transferor. 1.15 Issuance Of Letters Of Credit. (a) In General. Upon the terms and subject to the conditions of this Agreement, the Issuer shall, from time to time, from the Closing Date to the date which is 90 days prior to the Maturity Date, issue one or more Letters of Credit for the account of any Borrower, provided that (i) the sum of the Contingent Reimbursement Obligations (after giving effect to the requested Letter of Credit) plus the aggregate unpaid amount of all Drawings under Letters of Credit shall not exceed $10,000,000 and provided, further, that the face amount of the Letter of Credit so requested shall not exceed the Lenders' Commitments at such time. Each Letter of Credit shall be in a form and shall contain such terms as shall be reasonably satisfactory to the Issuer. Letters of Credit shall be issued only on a Business Day and shall be used for the general corporate purposes of the Borrowers or for such other purposes as shall be acceptable to the Issuer in its sole discretion. (b) Terms. Each Letter of Credit shall be denominated only in Dollars and shall expire on or before the first anniversary of the issuance thereof and in any event not later than the fifth Business Day preceding the Maturity Date. No Letter of Credit shall have an expiration date which is extendable under an "evergreen" or similar provision unless the Issuer expressly agrees to the same in its sole discretion in any particular case. All other extensions and renewals are also at the sole discretion of the Issuer. For purposes of Section 3.2 only, any extension of -14- the expiry date of a Letter of Credit to a date beyond the first anniversary of the issuance thereof shall constitute an "issuance" of such Letter of Credit for all purposes hereof. (c) Form of Request. The Borrowers shall request the issuance of a Letter of Credit by furnishing to the Agent and the Issuer, at least five Business Days before the requested date of such issuance (or at such later time as shall be acceptable to the Issuer), such notice thereof as shall be reasonably satisfactory to the Issuer to which shall be attached a certificate of the chief financial officer representing that the Borrower is not, and after giving effect to the additional Indebtedness will not be, in Default hereunder. (d) Participation by Lenders. Upon the date of issuance of a Letter of Credit, the Issuer shall be deemed to have granted to each Lender (other than the Issuer), and each Lender (other than the Issuer) shall be deemed to have acquired from the Issuer without further action by any party hereto, a participation in such Letter of Credit and any Drawings that may at any time be made thereunder, to the extent of such Lender's pro rata share of the Commitment. (e) Notice of Drawings. The Issuer shall promptly notify NCO Group (on behalf of the Borrowers) of its receipt of each Drawing request with respect to a Letter of Credit, stating the date and amount of the Drawing requested thereby and the date and amount of each Drawing disbursed pursuant to such request. The failure of the Issuer to give, or delay in giving, any such notice shall not release or diminish the obligations hereunder of the Borrowers in respect of such Drawing. (f) Reimbursement of Drawings by Borrowers. If at any time NCO Group (on the behalf of the Borrowers) receives notice of a Drawing, the Borrowers shall reimburse such Drawing by paying to the Issuer in immediately available funds the amount of the payment made by the Issuer with respect to such Drawing, together with interest thereon at a rate per annum equal to the Prime Rate from the day that the Drawing is made until the day such reimbursement is made if such Drawing is not reimbursed on the day the Drawing is made. Such reimbursement shall be made by the Borrowers to the Issuer no later than one (1) Business Day following the Business Day that NCO Group (on behalf of Borrowers) receives the relevant notice of Drawing if such notice is received on or prior to 10:00 a.m. (Philadelphia, Pennsylvania time) and no later than two (2) Business Days following the date that NCO Group receives the relevant notice of Drawing if such notice is received after 10:00 a.m. (Philadelphia, Pennsylvania time). If the Borrowers shall fail to make any payment required by this paragraph (f) at the time specified, and if at such time, there shall be any Commitment, the Administrative Agent may (but is not obligated to) assume that the Borrowers intend to use the proceeds of Loans to make such payment. In reliance on such assumption, the Administrative Agent may (but is not obligated to) notify the Lenders (and NCO Group (on behalf of the Borrowers)) that notwithstanding the Borrowers' failure to provide notice pursuant to paragraph (e) above, such notice is deemed given pursuant to this paragraph (f) requesting a Loan bearing interest at the Prime Rate in an amount sufficient to make the payments required by this paragraph. Such notice from the Administrative Agent shall be treated by the Lenders in the same manner as a notice from the Borrowers under -15- paragraph (e) above. The Administrative Agent may, at the direction of the Issuer, apply the proceeds of such Loans to satisfy the requirements of this paragraph. (g) Obligations of Lenders to Issuer. In the event that the Borrowers shall fail to make any payment when due pursuant to the preceding paragraph (f) and for so long as such failure shall be continuing, the Issuer may give notice of such failure to the Administrative Agent and each Lender, which notice shall include, in the case of a Lender, the amount of such Lender's interest in such Drawing, whereupon each such Lender (other than the Issuer) shall promptly remit such amount to the Administrative Agent for the account of the Issuer as provided in this paragraph (g). Each Lender (other than the Issuer) shall, in the event it receives such notice from the Issuer at or before 12:00 noon (Philadelphia, Pennsylvania time) on any Business Day, fund its participation in any unreimbursed Drawing by remitting to the Administrative Agent, no later than 2:00 p.m. (Philadelphia, Pennsylvania time) on such day, in immediately available funds its share of the reimbursement obligations in respect of each Drawing. In the event that the Administrative Agent receives such funds from a Lender at or before 2:00 p.m. (Philadelphia, Pennsylvania time) on any day, the Administrative Agent shall make available the amount thereof to the Issuer, in immediately available funds no later than 4:00 p.m. (Philadelphia, Pennsylvania time) on that same day. Any amount payable by a Lender to the Administrative Agent for the account of the Issuer under this paragraph (g), and any amount payable by the Administrative Agent to the Issuer under this paragraph (g), shall bear interest for each day from the date due (and including such day if paid after 2:00 p.m. (Philadelphia, Pennsylvania time) in the case of any such payment by a Lender to the Administrative Agent, or 4:00 p.m. (Philadelphia, Pennsylvania time), in the case of any such payment by the Administrative Agent to the Issuer, on such day) until the date it is received by the Issuer at a rate equal to the Federal Funds Rate until (and including) the third Business Day after the date due and thereafter at the Prime Rate. Moreover, any Lender that shall have failed to make available the required amount shall not be entitled to vote on such matters, other than those set forth in Section 11.8, as Lenders or Majority Lenders or Super Majority Lenders are otherwise entitled to vote on or consent to or approve under this Agreement and the other Loan Documents until such amount with interest is paid in full to the Administrative Agent by such Lender. Each Lender shall, upon the demand of the Issuer, reimburse the Issuer, through the Administrative Agent to the extent that the Issuer has not been reimbursed by the Borrowers after demand therefor, for the reasonable costs and expenses (including reasonable legal fees) incurred by it (other than as a result of its willful misconduct or gross negligence as finally determined by a court of competent jurisdiction) in connection with the collection of amounts due under, the administration of, and the preservation and enforcement of any rights conferred by, the Letters of Credit or the performance of the Issuer's obligations under this Agreement in respect thereof on a pro rata basis relative to such Lender's pro rata share of the Commitment (as of the time such costs and expenses are incurred). The Issuer shall refund through the Administrative Agent any costs and expenses reimbursed by such Lender that are subsequently recovered from the Borrowers in an amount equal to such Lender's ratable share thereof. -16- (h) Cash Collateral. It is intended that at all times that the Borrowers shall have contingent or other obligations (including obligations in respect of fees) relating to Letters of Credit, there shall be sufficient availability under the Commitment to reimburse the Issuer (and the Lenders) out of proceeds of Loans. Accordingly, in the event that there shall, at any time, be insufficient availability under the Commitment (after giving effect to all outstanding Loans) to do so (whether because the amount of the Commitment is reduced pursuant to a mandatory reduction or is terminated at maturity, upon acceleration or otherwise or because the amount of outstanding Loans and such Letter of Credit obligations exceeds the amount of the Commitment for any other reason), the Borrowers shall forthwith pay to the Administrative Agent an amount equal to the aggregate face value of all outstanding Letters of Credit plus the aggregate amount of all unreimbursed Drawings plus the amount of all fees or other obligations in respect of Letters of Credit to the extent of such excess. Such amount shall be maintained by the Administrative Agent in an interest-bearing cash collateral account in the name of and for the benefit of the Issuer and the Lenders to secure such payment obligations of the Borrowers. Upon receipt of a notice from the Issuer that there are unreimbursed Drawings or other amounts due in respect of such Letters of Credit (which notice shall set forth the amount of such unreimbursed Drawings or other obligations) the Administrative Agent shall promptly disburse from the cash collateral account the amount specified in the notice and shall pay such amount to the Issuer and Lenders ratably in accordance with the respective amounts owing to each such Person, first, for fees and indemnities until the same are paid in full and, second, for unreimbursed Drawings. The Administrative Agent and the Issuer may rely on their records as to any amounts so owing and shall be fully protected in doing so. Such records shall be conclusive, absent manifest error. At any time that the Commitment again becomes available for reimbursement of Drawings under outstanding Letters of Credit such that (i) the sum of the Commitment at that time and the amount in the cash collateral account exceeds (ii) the sum of all outstanding Loans, the face amount of all outstanding Letters of Credit and the amount of all unreimbursed Drawings, then, upon written request of NCO Group (on behalf of the Borrowers) (which request shall (A) represent that there exists no Default or Event of Default and (B) specify the amount of such excess), the Administrative Agent shall release such excess amount to the Borrowers from the cash collateral account. If all Obligations (other than Obligations constituting contingent obligations under indemnification provisions which survive indefinitely, so long as no unsatisfied claim has been made under any such indemnification provision) have been indefeasibly paid in full in cash, all Commitments have terminated and all Letters of Credit have expired, promptly following demand by NCO Group (on behalf of the Borrowers) the Administrative Agent shall release to the Borrowers all remaining funds in the Letter of Credit cash collateral account. (i) Obligations Absolute. The obligation of each Borrower and each Lender to make available to the Issuer the amounts set forth in this Section 1.15 shall be absolute, unconditional and irrevocable under any and all circumstances without reduction for any set-off or counterclaim of any nature whatsoever, and may not be terminated, suspended or delayed for any reason whatsoever, shall not be subject to any qualification or exception and shall be made in - -17- accordance with the terms and conditions of this Agreement under all circumstances, including any of the following circumstances: (1) any lack of validity or enforceability of this Agreement or any of the other Loan Documents; (2) the existence of any claim, setoff, defense or other right which any Borrower may have at any time against a beneficiary named in a Letter of Credit, any transferee of any Letter of Credit (or any Person for whom any such transferee may be acting), the Administrative Agent, the Issuer, any Lender or any other Person, whether in connection with this Agreement, any Letter of Credit, the transactions contemplated herein or any unrelated transactions (including any underlying transaction between such Borrower and the beneficiary named in any such Letter of Credit); (3) any draft, certificate or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (4) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Loan Documents; or (5) the occurrence of any Default or Event of Default. (j) Limitations on Liability; Protection of Issuer, Administrative Agent and Lenders. (1) Limitation on Liability of Lenders. Without affecting any rights any Lenders may have under applicable Law, each of the Borrowers agrees that none of the Lenders, the Issuer, the Administrative Agent or their respective officers or directors shall be liable or responsible for, and the obligations of the Borrowers to the Lenders, the Issuer and the Administrative Agent hereunder shall not in any manner be affected by: (A) the use that may be made of any Letter of Credit or the proceeds thereof by the beneficiary thereof or any other Person or any acts or omissions of such beneficiary or any other Person; (B) the validity, sufficiency or genuineness of documents presented in connection with any Drawing, or of any endorsements thereon, even if such documents should, in fact, prove to be in any or all respects, invalid, insufficient, fraudulent or forged; or (C) any other circumstances whatsoever in making or failing to make payment under any Letter of Credit or any other action taken or -18- omitted to be taken by any Person under or in connection with any Letter of Credit, except that the Borrowers shall have a claim against the Issuer and the Issuer shall be liable to the Borrowers, in each case to the extent and only to the extent of any damages suffered by the Borrowers that they prove are caused by the Issuer's willful misconduct or gross negligence. In furtherance and not in limitation of the foregoing, in determining whether to pay under any Letter of Credit, the Issuer shall not have any obligation relative to the other Lenders other than to determine that any documents required to be delivered under such Letter of Credit appear to have been delivered and that they appear to comply on their face with the requirements of such Letter of Credit, regardless of any notice or information to the contrary. Any action taken or omitted to be taken by the Issuer under or in connection with any Letter of Credit (if taken or omitted in the absence of gross negligence or willful misconduct, as finally determined by a court of competent jurisdiction) shall not create for the Issuer any resulting liability to any Borrower or any Lender. (2) Indemnification and Expenses. In addition to any other amounts payable under this Agreement, the Borrowers agree jointly and severally to protect, indemnify, pay and hold the Issuer and each Lender harmless from and against any and all claims, costs, charges and expenses (including reasonable attorneys' fees) which the Issuer may incur or be subject to as a consequence, direct or indirect, of (A) the issuance of, or payment of any drawing under, any Letter of Credit, other than as a result of the gross negligence or willful misconduct of the Issuer and/or such Lender as finally determined by a court of competent jurisdiction or (B) the failure of the Issuer to honor a Drawing under any Letter of Credit as a result of any act or omission of any present or future government or Governmental Authority. (3) Issuer Not Responsible. In furtherance of the foregoing limitations on liability, the Issuer shall not be responsible for: (A) the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the issuance of Letters of Credit; (B) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof in whole or in part; (C) errors, omissions, interruptions, or delays in transmissions or delivery of any messages, by mail, cable, telecopy, telex or otherwise, whether or not in cipher; (D) the misapplication by the beneficiary of any Letter of Credit or the proceeds of any drawing under such Letter of Credit; or (E) any consequence arising from causes beyond the control of -19- the Issuer, including any governmental acts except for damages proven to be caused by the Issuer's gross negligence or willful misconduct. ARTICLE II YIELD PROTECTION AND BREAKAGE INDEMNITY 2.1 Mandatory Suspension And Conversion Of Libo Rate Loans. Each Lender's obligations to make, continue or convert into LIBO Rate Loans of any Type shall be suspended, all such Lender's outstanding Loans of such Type shall be converted into Prime Rate Loans on the last day of their applicable Interest Periods (or, in the case of clause (c) below, on the last day such Lender may lawfully continue to maintain Loans of such Type if earlier, or, in the case of clause (d) below, on the day determined by such Lender to be the last Business Day before the effective date of the applicable restriction), and all pending requests for the making or continuation of or conversion into Loans of such Type by such Lender shall be deemed requests for Prime Rate Loans, if: (a) on or prior to the date required for the determination of a LIBO Rate for any Interest Period, the Administrative Agent determines that for any reason appropriate information is not available to it for purposes of determining the LIBO Rate for such Interest Period; (b) on or prior to the first day of any Interest Period for a LIBO Rate Loan, the Majority Lenders have informed the Administrative Agent of their determination that the LIBO Rate as determined by the Administrative Agent for such Interest Period would not accurately reflect the cost to such Lenders of making, continuing or converting into a LIBO Rate Loan for such Interest Period; (c) at any time such Lender determines that any Regulatory Change makes it unlawful or impracticable for such Lender or its applicable Eurodollar Lending Office to make, continue or convert into a LIBO Rate Loan of such Type, or to comply with its obligations hereunder in respect thereof; or (d) such Lender notifies the Administrative Agent of its determination that (i) by reason of any Regulatory Change, such Lender or its applicable Eurodollar Lending Office is restricted, directly or indirectly, in the amount that it may hold of (A) a category of liabilities that includes deposits by reference to which, or on the basis of which, the interest rate applicable to LIBO Rate Loans of such Type is directly or indirectly determined or (B) the category of assets that includes LIBO Rate Loans of such Type and (ii) in connection therewith, such Lender has elected not to make available hereunder LIBO Rate Loans of such Type. If, as a result of this Section 2.1, any Loan of any Lender that would otherwise be made or maintained as or converted into a LIBO Rate Loan for any Interest Period is instead made or maintained as or converted into a Prime Rate Loan, then, unless the corresponding Loan of each -20- of the other Lenders is also to be made or maintained as or converted into a Prime Rate Loan, such Loan shall be treated as being a LIBO Rate Loan of such Type for such Interest Period for all purposes of this Agreement (including the timing, application and proration among the Lenders of interest payments, conversions and prepayments) except for the calculation of the interest rate borne by such Loan. The Administrative Agent shall promptly notify NCO Group (on behalf of the Borrowers) and each Lender of the existence or occurrence of any condition or circumstance specified in clause (a) or (b) above, and each Lender shall promptly notify NCO Group (on behalf of the Borrowers) and the Administrative Agent of the existence, occurrence or termination of any condition or circumstance specified in clause (c) or (d) above applicable to such Lender's Loans, but the failure by the Administrative Agent or such Lender to give any such notice shall not affect such Lender's rights hereunder. 2.2 Regulatory Changes. If in the determination of any Lender (a) any Regulatory Change shall actually directly or indirectly (i) reduce the amount of any sum received or receivable by such Lender with respect to any LIBO Rate Loan or the return to be earned by such Lender on any LIBO Rate Loan, (ii) impose a cost on such Lender or any Affiliate of such Lender that is attributable to the making or maintaining of, or such Lender's commitment to make or acquire, any LIBO Rate Loan, (iii) require such Lender or any Affiliate of such Lender to make any payment on or calculated by reference to any amount received by such Lender in respect of its LIBO Rate Loans or its obligations to make LIBO Rate Loans or (iv) reduce, or have the effect of reducing, the rate of return on any capital such Lender or any Affiliate of such Lender is required to maintain on account of any LIBO Rate Loan or such Lender's commitment to make any LIBO Rate Loan. and (b) such reduction, increased cost or payment shall not be fully compensated for by an adjustment in the applicable rates of interest payable under the Loan Documents, then the Borrowers shall pay to such Lender such additional amounts as such Lender determines will fully compensate it for such reduction, increased cost or payment. Such additional amounts shall be payable, in the case of those applicable to prior periods, within 15 Business Days after request for such payment by such Lender, accompanied by the certificate described in Section 2.5 and, in the case of those applicable to future periods, on the dates specified, or determined in accordance with a method specified, by such Lender, provided that the Borrowers shall not be liable for any amount payable with respect to any period more than 90 days before the date of such request or certificate, or, if earlier the retroactive effective date of the Regulatory Change if such Regulatory Change occurs during such 90-day period. -21- 2.3 Capital And Reserve Requirements. If, in the determination of any Lender, such Lender or any Affiliate thereof is required, under applicable Law (including Regulation D), or interpretations, directives, requests and governmental or regulatory guidelines (whether or not having the force of law), to maintain capital or deposit any reserve on account of any Loan, or any commitment to make any Loan then, upon request by such Lender, the Borrowers shall pay to such Lender such additional amounts as such Person determines will fully compensate it for any actual reduction in the rate of return on the capital that such Lender or such Affiliate thereof is so required to maintain. Such additional amounts shall be payable, in the case of those applicable to prior periods, within 15 Business Days after request by such Lender for such payment accompanied by the certificate described in Section 2.5 (provided that the Borrowers shall not be liable for any amount payable with respect to any period more than 90 days before the date of such request or certificate, or, if earlier, the retroactive effective date of such determination if made during such 90-day period), and, in the case of those relating to future periods, on the dates specified, or determined in accordance with a method specified, by such Lender. 2.4 Breakage. The Borrowers shall pay to each Lender, upon request, such amount as such Lender reasonably determines is necessary to compensate it for any actual loss, cost or expense incurred by it as a result of (a) any payment, prepayment or conversion of a LIBO Rate Loan on a date other than the last day of an Interest Period for such LIBO Rate Loan or (b) a LIBO Rate Loan for any reason not being made or converted, or any payment of principal thereof or interest thereon not being made, on the date therefor determined in accordance with the applicable provisions of this Agreement. At the election of such Lender, and without limiting the generality of the foregoing, but without duplication, such compensation on account of losses may include an amount equal to the excess of (i) the interest that would have been received from the Borrowers under this Agreement during the remainder of the applicable Interest Period over (ii) the interest component of the return that such Lender determines it could have obtained had it placed such amount on deposit in the interbank Dollar market for a period equal to such remaining portion of the Interest Period. 2.5 Determinations. In making the determinations contemplated by this Article 2, each Lender shall make such estimates, assumptions, allocations and the like that such Person in good faith determines to be appropriate, and such Person's selection thereof in accordance with this Section 2.5, and the determinations made by such Person on the basis thereof, shall be final, binding and conclusive upon the Borrowers, except, in the case of such determinations, for manifest errors. Each Lender shall furnish to the Borrowers, at the time of any request for compensation under Section 2.2 or 2.3, a certificate outlining in reasonable detail the computation of any amounts claimed by it under this Article 2 and the assumptions underlying such computations, which shall include a statement of an officer of such Person certifying that such request for compensation is being made pursuant to a policy adopted by such Person to seek such compensation generally from customers similar to the Borrowers and having similar provisions in agreements with such Person. -22- 2.6 Replacement Of Lenders. If any Lender requests compensation pursuant to Sections 1.13 (Taxes on Payments), 2.2 (Regulatory Changes) or 2.3 (Capital and Reserve Requirements), or such Lender's obligation to make or continue Loans as LIBO Rate Loans shall be suspended pursuant to Section 2.1 (Mandatory Suspension and Conversion of LIBO Rate Loans) or such Lender has defaulted on its obligations to make or participate in Loans pursuant to Section 1.3 (Manner of Borrowing), NCO Group (on behalf of the Borrowers), upon three Business Days' notice, may require that such Lender transfer all of its right, title and interest under this Agreement, such Lender's Notes, if any, and the other Loan Documents to any Eligible Institution identified by NCO Group (on behalf of the Borrowers) subject to (a) the consent of the Administrative Agent (which consent shall not be unreasonably withheld), (b) satisfaction of the other conditions specified in Section 11.9 below (Successors and Assigns), (c) the agreement of the proposed transferee to assume all of the obligations of such Lender hereunder and under the other Loan Documents for consideration equal to the outstanding principal amount of such Lender's Loans, interest thereon to the date of such transfer, and all other amounts payable hereunder to such Lender to the date of transfer, (d) such transferor Lender shall have been paid on or prior to the date of such transfer all fees and other amounts payable to such transferor hereunder including those amounts payable under said Sections 1.13, 2.2 or 2.3, as applicable (and including any fees accrued hereunder and any amounts that would be payable under Section 2.4 (Breakage) as if all of such Lender's Loans were being prepaid in full on such date) or arrangements satisfactory to the transferor Lender shall have been made for such payments, and (e) satisfaction of the condition that if the Lender being replaced has requested compensation pursuant to Sections 1.13, 2.2 or 2.3, the proposed transferee's aggregate requested compensation, if any, pursuant to Sections 1.13, 2.2 or 2.3 with respect to such replaced Lender's Loans is lower than that of the Lender replaced. Without prejudice to the survival of any other agreement of the Borrowers hereunder, the agreements of the Borrowers contained in Sections 1.13 (Taxes on Payments), 2.2 (Regulatory Changes), 2.3 (Capital and Reserve Requirements), 2.4 (Breakage), 11.12 (Indemnification) and 11.12 (Expenses) (without duplication of any payments made to such Lender by the Borrowers or the proposed transferee) shall survive for the benefit of any Lender replaced under this Section 2.6 with respect to the time prior to such replacement. 2.7 Change Of Lending Office. Each Lender agrees that, upon the occurrence of any event giving rise to the operation of Sections 1.13 (Taxes on Payments), 2.1 (Mandatory Suspension and Conversion of LIBO Rate Loans), 2.2 (Regulatory Changes) or 2.3 (Capital and -23- Reserve Requirements) with respect to such Lender, it will, if requested by the Borrowers, use reasonable efforts (subject to overall policy considerations of such Lender) to designate another lending office for any Loans affected by such event, provided that such designation is made on such terms that such Lender and its lending office suffer no material economic, legal or regulatory disadvantage, with the object of avoiding the consequence of the event giving rise to the operation of any such Section. Nothing in this Section 2.7 shall affect or postpone any of the obligations of the Borrowers or the right of any Lender provided in Section 1.12 (Taxes on Payments), 2.1 (Mandatory Suspension and Conversion of LIBO Rate Loans), 2.2 (Regulatory Changes) or 2.3 (Capital and Reserve Requirements). ARTICLE III CONDITIONS TO EFFECTIVENESS OF AGREEMENT AND FUNDINGS 3.1 Conditions To Initial Loans. The effectiveness of this Agreement (other than this Article 3) and the obligation of the Lenders to make Loans and of the Issuer to issue Letters of Credit on the Closing Date are subject to the satisfaction, immediately prior to or concurrently with the making of such Loan or the issuance of such Letter of Credit, of the following conditions precedent in each case to the satisfaction of the Administrative Agent, in addition to the conditions precedent set forth in Section 3.2 hereof: (a) Agreement; Note. The Administrative Agent shall have received this Agreement, duly executed by each Borrower, and executed RC Notes, in the form of Exhibit "A-1" hereto, each duly executed on behalf of each Borrower. (b) Certain Security Documents Pertaining to Personal Property. The Administrative Agent shall have received the following documents (as amended, modified or supplemented from time to time, each a "Security Document" and collectively the "Security Documents"), each of which shall be in form and substance satisfactory to the Administrative Agent, (except for the certificates representing the stock certificates and other instruments pledged pursuant to such Security Documents and the stock powers delivered in connection therewith): (i) Executed copies of each of the following: (A) A Second Amended and Restated Security Agreement, duly executed on behalf of each Borrower, in substantially the form of Exhibit "E" hereto (such agreement as it may be further amended, modified or supplemented from time to time, the "Security Agreement"). (B) An Amended and Restated Stock Pledge Agreement, duly executed on behalf of NCO Group, and Stock Pledge Agreements, duly executed on behalf of FCA Funding, Inc., CRWF Acquisition, Inc., Financial Collection Agencies, Inc. (Puerto Rico), -24- Advantage Financial Services Funding, Inc., MSC Funding, Inc., Medaphis Services Corporation and JDR Holdings, Inc. each in substantially the form of Exhibit "F" hereto (such agreements as it may be further amended, modified or supplemented from time to time, the "Stock Pledge Agreements"). (C) A Global Amendment to Security Documents duly executed on behalf of each of the Borrowers confirming that the Collateral continues to secure the Obligations hereunder. (ii) Certificates and instruments representing the stock certificates and other instruments pledged pursuant to such Security Documents, accompanied by duly executed instruments of transfer or assignment in blank, and, to the extent required by the Security Documents, duly endorsed to the order of the Administrative Agent, in form and substance satisfactory to the Administrative Agent. (iii) Evidence of the completion of all recordings and filings of or with respect to, and of all other actions with respect to, the above Security Documents as may be necessary or, in the opinion of the Administrative Agent, desirable to create or perfect the Liens created or purported to be created by such Security Documents as valid, continuing and perfected Liens in favor of the Administrative Agent securing the Obligations, prior to all other Liens other than Permitted Liens; and evidence of the payment of any necessary fee, tax or expense relating to such recording or filing. Without limitation of the foregoing, the Administrative Agent shall receive: (A) Proper financing statements duly executed by the Borrowers necessary or desirable by Administrative Agent to create or perfect such Liens in favor of the Administrative Agent as Administrative Agent and representative of the Lenders. (iv) Evidence of the insurance required by the terms of the above Security Documents, containing the endorsements required by such Security Documents and this Agreement. (v) Waivers of landlord's liens, warehouseman's liens and like rights. (vi) Evidence that all other actions necessary or, in the opinion of the Administrative Agent, desirable to create, perfect or protect the Liens created or purported to be created by the above Security Documents have been taken. (vii) A contemporaneous search of UCC, tax, judgment and litigation dockets and records and other appropriate registers shall have revealed no filings or recordings in effect with respect to the Collateral purported to be covered by the above Security Documents, except such as are acceptable to the Administrative Agent (it being understood that such acceptance does not limit the obligations of the Borrowers with respect to the priority of the -25- Liens in favor of the Lenders), and the Administrative Agent shall have received a copy of the search reports received as a result of the search and of the acknowledgment copies of the financing statements or other instruments required to be filed or recorded pursuant to this subsection bearing evidence of the recording of such statements or instruments at each of such filing or recording places. (c) Co-Source Acquisition. The Administrative Agent shall have received the following documents evidencing the Co-Source Acquisition, each of which shall be in form and substance satisfactory to the Administrative Agent: (i) Copies of the stock purchase agreement, the closing checklist listing all material documents in connection with the Co-Source Acquisition and any document requested by Administrative Agent in its sole discretion from such closing checklist (all documents listed in such closing checklist, the "Co-Source Acquisition Agreements"). The closing checklist shall be revised by NCO Group and sent to the Administrative Agent as documents are added or deleted. The Administrative Agent shall be satisfied with all Co-Source Acquisition Agreements. The Co-Source Acquisition Agreements accepted by Administrative Agent may not be amended, modified or supplemented, nor may any of their terms or conditions in favor of NCO Group be waived, and the stock purchase, merger and other transactions contemplated thereunder shall take place in strict compliance therewith. (ii) Satisfactory evidence of completion of the conditions precedent to the Co-Source Acquisition but for the payment of the purchase price including evidence that NCO Group has not waived any conditions precedent under the Co-Source Acquisition Agreements without the prior written consent of the Administrative Agent. (iii) Satisfactory evidence that all corporate governmental, judicial and third party consents and approvals necessary in connection with the consummation of the Co-Source Acquisition (including without limitation consents and approvals required under or referred to in the Co-Source Acquisition Agreements) shall have been obtained and, as applicable, become final orders (without imposition of any conditions that are not satisfactory to the Lenders) and shall remain in full force and effect. Without limiting the generality of the foregoing, all appropriate filings shall have been made under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the applicable waiting periods relating thereto shall have expired or been terminated without requests for additional information from the reviewing agencies. (iv) In connection with the Co-Source Acquisition for each acquired US company, an executed Security Agreement from the appropriate Person pursuant to which each grants to the Administrative Agent (on behalf of the Lenders) a blanket lien on all business assets (excluding cash held for clients), including but not limited to accounts receivable, inventory, general intangibles and equipment, now owned or hereafter acquired and/or an executed Stock Pledge Agreement from the appropriate Person pursuant to which each pledges to -26- the Administrative Agent (on behalf of the Lenders) all of its equity interests in any acquired company. (d) Capitalization, Etc. The corporate and capital structure of each Borrower, the articles of incorporation and by-laws (or other constituent documents) of each Borrower, and the terms, conditions, amounts and holders of all equity (except for NCO Group), debt and other indebtedness, obligations and liabilities of each Borrower, shall be reasonably satisfactory to the Administrative Agent. (e) Corporate Proceedings. The Administrative Agent shall have received certificates by the Secretary or Assistant Secretary of each Borrower dated as of the Closing Date as to (i) true copies of the articles of incorporation and by-laws (or other constituent documents) of each Borrower in effect on such date (which, in the case of articles of incorporation or other constituent documents filed or required to be filed with the Secretary of State or other Governmental Authority in its jurisdiction of incorporation, shall be certified to be true, correct and complete by such Secretary of State or other Governmental Authority not more than 30 days before the Closing Date) or certificates from a Responsible Officer of each Borrower stating that the articles of incorporation and bylaws of each Borrower have not been amended or modified since furnished to the Administrative Agent in connection with the Credit Agreement, (ii) true copies of all corporate action taken by each Borrower relative to this Agreement and the other Loan Documents and (iii) the incumbency and signature of the respective officers of each Borrower executing this Agreement and the other Loan Documents, together with satisfactory evidence of the incumbency of such Secretary or Assistant Secretary. The Administrative Agent shall have received certificates from the appropriate Secretaries of State or other applicable Governmental Authorities dated not more than 30 days before the Closing Date showing the good standing of each Borrower in its state of incorporation and each state in which each Borrower does business. (f) Insurance. The Administrative Agent shall have received a report from each Borrower's insurance broker, addressed to the Administrative Agent, satisfactory in form and substance to the Administrative Agent, as to insurance matters pertaining to such Borrower. The Administrative Agent shall have received evidence satisfactory to it that the insurance policies required by this Agreement and the other Loan Documents have been obtained, containing the endorsements required hereby and thereby. (g) Financial Statements, Projections. The Administrative Agent shall have received copies of the financial statements, combining financial statements, pro forma financial statements and projections referred to in Section 4.1 hereof. (h) Legal Opinions of Counsel. The Administrative Agent shall have received an opinion addressed to the Lenders, dated the Closing Date, of Blank Rome Comisky & McCauley LLP, counsel to the Borrowers, in form and substance satisfactory to the Administrative Agent and its counsel (which will be substantially the same as the opinion issued in connection with the -27- Existing Credit Agreement, with appropriate additional provisions which address the transactions described herein). Borrowers shall also have delivered copies of favorable opinions, on which the Administrative Agent and Lenders may rely, from counsel to Co-Source concerning the Co-Source Acquisition. (i) Responsible Officer Certificates. The Administrative Agent shall have received certificates from a Responsible Officer of each Borrower as to such matters as the Administrative Agent may request, including a pro forma certificate of covenant compliance in the form of Exhibit "H" attached hereto, reflecting the Co-Source Acquisition. (j) Fees, Expenses, etc. All fees and other compensation required to be paid to the Administrative Agent on behalf of the Lenders pursuant hereto or pursuant to any other written agreement on or prior to the Closing Date shall have been paid or received, including but not limited to those referred to in the commitment letter from Mellon to Borrowers dated May 10, 1999. (k) Interest Rate Hedging Agreement. The Borrowers shall deliver to the Administrative Agent within 120 days of the Initial Funding Date evidence satisfactory to the Administrative Agent that the Borrowers have purchased an Interest Rate Hedging Agreement with a financial institution acceptable to the Administrative Agent pursuant to which the Borrowers have reduced their risk of exposure to a level reasonably satisfactory to the Administrative Agent in its sole discretion. This interest rate cap agreement shall be in force for at least three (3) years following the Initial Funding Date and shall apply to a minimum of 40% of the Commitment. (l) Management Letters. The Administrative Agent shall have received copies of the management letters issued by NCO Group's certified public accountants in connection with its audited financial statements dated December 31, 1998 or a letter from such accountants that no such management letters were issued. (m) No Material Adverse Effect. The Responsible Officer of NCO Group (on behalf of the Borrowers) shall provide the Administrative Agent with a certificate stating that there has not occurred, or been threatened, any event, act or condition which could have a Material Adverse Effect. (n) Keyman Life Insurance. The Administrative Agent shall have received evidence that the Borrowers have in place at least $2,000,000 in keyman life insurance on the life of Michael J. Barrist. (o) Additional Matters. All corporate and other proceedings, and all documents, instruments and other matters in connection with the transactions contemplated by this Agreement and the other Loan Documents shall be reasonably satisfactory in form and substance to the Administrative Agent. -28- 3.2 Conditions To All Loans. The obligation of the Lenders to make any Loan and of the Issuer to issue any Letter of Credit is subject to performance by each Borrower of its obligations to be performed hereunder or under the other Loan Documents on or before the date of such Loan or Letter of Credit, satisfaction of the conditions precedent set forth herein and in the other Loan Documents and to satisfaction of the following further conditions precedent: (a) Notice. Appropriate notice of such Loan shall have been given by the Borrowers as provided in Article 1 hereof. (b) Representations and Warranties. Each of the representations and warranties made by each Borrower in Article 4 hereof shall be true and correct in all material respects on and as of such date as if made on and as of such date, both before and after giving effect to the Loans requested to be made on such date. (c) No Defaults. No Event of Default or Default shall have occurred and be continuing on such date or after giving effect to the Loans requested to be made on such date. (d) No Violations of Law, etc. Neither the making nor use of the Loans shall cause the Lenders to violate or conflict with any Law. (e) No Material Adverse Effect. There shall not have occurred, or be threatened, any other event, act or condition which could have a Material Adverse Effect since the last Loan. Each request by a Borrower for any Loan shall constitute a representation and warranty by such Borrower that the conditions set forth in this Section 3.2 have been satisfied as of the date of such request. Failure of the Administrative Agent to receive notice from the Borrower to the contrary before such Loan is made shall constitute a further representation and warranty by the Borrower that the conditions referred to in this Section 3.2 have been satisfied as of the date such Loan is made. ARTICLE IV REPRESENTATIONS AND WARRANTIES 4.1 Representations And Warranties. Each Borrower hereby represents and warrants to the Lenders as follows: (a) Corporate Status. Each Borrower is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation. Each Borrower has corporate power and authority to own its property and transact the business in which it is engaged or presently proposes to engage. Each Borrower is duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions in which the ownership of its properties or the nature of its activities or both makes such qualification necessary or advisable. Schedule 4.1(a) hereof states as of the date hereof the jurisdiction of incorporation of each -29- Borrower and the jurisdictions in which each Borrower is qualified to do business as a foreign corporation. (b) Corporate Power and Authorization. Each Borrower has corporate power and authority to execute, deliver, perform, and take all actions contemplated by each Loan Document to which it is a party, and all such action has been duly and validly authorized by all necessary corporate proceedings on its part. Without limitation of the foregoing, each Borrower has the corporate power and authority to borrow pursuant to the Loan Documents to the fullest extent permitted hereby and thereby from time to time, and has taken all necessary corporate action to authorize such borrowings. (c) Execution and Binding Effect. This Agreement and each other Loan Document to which any Borrower is a party and which is required to be delivered on or before the Closing Date pursuant to Section 3.1 hereof has been duly and validly executed and delivered by such Borrower. This Agreement and each other Loan Document constitutes, the legal, valid and binding obligation of each Borrower, enforceable against each Borrower in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency or other similar laws of general application affecting the enforcement of creditors' rights or by general principles of equity limiting the availability of equitable remedies. (d) Governmental Approvals and Filings. No approval, order, consent, authorization, certificate, license, permit or validation of, or exemption or other action by, or filing, recording or registration with, or notice to, any Governmental Authority (collectively, "Governmental Action") is or will be necessary or advisable in connection with the execution and delivery of any Loan Document, consummation of the transactions herein or therein contemplated, performance of or compliance with the terms and conditions hereof or thereof or to ensure the legality, validity, binding effect, enforceability or admissibility in evidence hereof or thereof, provided that Borrower may be required to file the Loan Documents with the Securities and Exchange Commission and Borrowers may be required to obtain certain consents in connection with the Co-Source Acquisition. (e) Absence of Conflicts. Neither the execution and delivery of any Loan Document, nor consummation of the transactions herein or therein contemplated, nor performance of or compliance with the terms and conditions hereof or thereof does or will (i) violate or conflict with any Law, or (ii) violate, conflict with or result in a breach of any term or condition of, or constitute a default under, or result in (or give rise to any right, contingent or otherwise, of any Person to cause) any termination, cancellation, prepayment or acceleration of performance of, or result in the creation or imposition of (or give rise to any obligation, contingent or otherwise, to create or impose) any Lien upon any property of the Borrower (except for any Lien in favor of the Lender securing the Obligations) pursuant to, or otherwise result in (or give rise to -30- any right, contingent or otherwise, of any Person to cause) any change in any right, power, privilege, duty or obligation of the Borrower under or in connection with, (A) the articles of incorporation or by-laws (or other constituent documents) of any Borrower, (B) any agreement or instrument creating, evidencing or securing any Indebtedness to which any Borrower is a party or by which any of them or any of their respective properties (now owned or hereafter acquired) may be subject or bound, or (C) any other material agreement or instrument to which any Borrower is a party or any of its properties (now owned or hereafter acquired) may be subject or bound. (f) Audited Financial Statements. The Borrowers have heretofore furnished to the Administrative Agent balance sheets as of December 31, 1998 and the related statements of income, cash flows and changes in stockholders' equity for the fiscal year then ended, as examined and reported on by PriceWaterhouseCoopers, independent certified public accountants for the Borrowers, who delivered an unqualified opinion in respect thereof. The financial statements present fairly the financial condition of the Borrowers and the Excluded Subsidiaries, as of the end of such fiscal year, and the results of its operations and its cash flows for the fiscal year then ended, all in conformity with GAAP. (g) Interim Financial Statements. The Borrowers have heretofore furnished to the Administrative Agent interim company prepared balance sheets of the Borrowers and the Excluded Subsidiaries, dated March 31, 1999, together with the related consolidated statements of income, cash flows and changes in stockholders' equity for the fiscal quarter ending on such date. The Borrowers' financial statements present fairly the financial condition of the Borrowers and the Excluded Subsidiaries, as of the end of such fiscal quarter and the results of its operations and its cash flows for such fiscal quarter, all in conformity with GAAP, subject to normal and recurring year-end audit adjustments. (h) Absence of Undisclosed Liabilities. No Borrower has any liability or obligation of any nature whatever (whether absolute, accrued, contingent or otherwise, whether or not due), forward or long-term commitments or unrealized or anticipated losses from unfavorable commitments, except (w) as disclosed in the financial statements referred to in Sections 4.1(f) and (g) hereof, (x) matters that, individually or in the aggregate, could not have a Material Adverse Effect, (y) as disclosed in Schedule 4.1(h) hereof, and (z) liabilities, obligations, commitments and losses incurred after December 31, 1998 in the ordinary course of business and consistent with past practices. (i) Absence of Changes. Since March 31, 1999, there has been no change in the business, operations, or condition (financial or otherwise) of the Borrowers. -31- (j) Accurate and Complete Disclosure. All information (taken as a whole) heretofore, contemporaneously or hereafter provided (orally or in writing) by any Borrower to the Administrative Agent pursuant to or in connection with any Loan Document or any transaction contemplated hereby or thereby is or will be (as the case may be) true and accurate in all material respects on the date as of which such information is dated (or, if not dated, when received by the Administrative Agent as the case may be) and does not or will not (as the case may be) omit to state any material fact necessary to make such information (taken as a whole) not misleading at such time in light of the circumstances in which it was provided. Each Borrower has disclosed to the Administrative Agent in writing every fact or circumstance which has, or which could have, a Material Adverse Effect. (k) Projections. Attached hereto as Schedule 4.1(k) are projections prepared by the Borrowers demonstrating the projected financial condition and results of operations of the Borrowers and the Excluded Subsidiaries, for the period commencing on January 1, 1999 and ending on December 31, 2003, which projections are accompanied by a written statement of the assumptions and estimates underlying such projections. Such projections were prepared on the basis of such assumptions and estimates. Such projections, assumptions and estimates, as of the date of preparation thereof and as of the date hereof, are reasonable, are made in good faith, are consistent with the Loan Documents, and represent each Borrower's best judgment as to such matters. Nothing has come to the attention of the Borrowers which would lead the Borrowers to believe that such projections will not be attained or exceeded. Nothing contained in this Section shall constitute a representation or warranty that such future financial performance or results of operations will in fact be achieved. (l) Solvency. On and as of the Closing Date, and after giving effect to all Loans and other obligations and liabilities being incurred on such date in connection therewith, and on the date of each subsequent Loan or other extension of credit hereunder and after giving effect to application of the proceeds thereof in accordance with the terms of the Loan Documents, the Borrowers on a consolidated basis are and will be Solvent. (m) Margin Regulations. No part of the proceeds of any Loan hereunder will be used for the purpose of buying or carrying any "margin stock," as such term is used in Regulation U of the Board of Governors of the Federal Reserve System, as amended from time to time, or to extend credit to others for the purpose of buying or carrying any "margin stock". No Borrower is engaged in the business of extending credit to others for the purpose of buying or carrying "margin stock". No Borrower owns any "margin stock". Neither the making of any Loan nor any use of proceeds of any such Loan will violate or conflict with the provisions of Regulation T, U or X of the Board of Governors of the Federal Reserve System, as amended from time to time. (n) Partnerships, Etc. Except as set forth on Schedule 4.1(n), no Borrower is a partner (general or limited) of any partnership, is a party to any joint venture, or owns (beneficially or of record) any equity or similar interest in any such Person (including but not -32- limited to any interest pursuant to which the Borrower has or may in any circumstance have an obligation to make capital contributions to, or be generally liable for or on account of the liabilities, acts or omissions of such other Person). (o) Ownership and Control. Schedule 4.1(o) hereof states as of the date hereof the authorized capitalization of each Borrower, the number of shares of each class of capital stock issued and outstanding of each Borrower and the number and percentage of outstanding shares of each such class of capital stock and the names of the record owners of such shares and the direct or indirect beneficial owners of such shares (except that for NCO Group the listing shall include only the names of any parties beneficially owning, individually or through affiliates, more than 5% of NCO Group stock). The outstanding shares of capital stock of each Borrower have been duly authorized and validly issued and are fully paid and nonassessable. Except as described in Schedule 4.1(o), there are no options, warrants, calls, subscriptions, conversion rights, exchange rights, preemptive rights or other rights, agreements or arrangements (contingent or otherwise) which may in any circumstances now or hereafter obligate any Borrower to issue any shares of its capital stock or any other securities. (p) Litigation. To the best of each Borrower's knowledge, there is no pending or (to such Borrower's knowledge after due inquiry) threatened action, suit, proceeding or investigation by or before any Governmental Authority against any Borrower which would cause a Material Adverse Effect. (q) Absence of Events of Default. No event has occurred and is continuing and no condition exists which constitutes an Event of Default or Default. (r) Absence of Other Conflicts. No Borrower is in violation of or conflict with, or is subject to any contingent liability on account of any violation of or conflict with: (i) any Law to the best of its knowledge, after due inquiry, (ii) its articles of incorporation or by-laws (or other constituent documents), or (iii) any material agreement or instrument or arrangement to which it is party or by which it or any of its properties (now owned or hereafter acquired) may be subject or bound. (s) Insurance. Each Borrower maintains with financially sound and reputable insurers insurance with respect to its properties and business and against at least such liabilities, casualties and contingencies and in at least such types and amounts as is customary in the case of corporations engaged in the same or a similar business or having similar properties similarly situated. Schedule 4.1(s) hereof sets forth a list of all insurances currently maintained by each Borrower, setting forth the identity of the insurance carrier, the type of coverage, the amount of -33- coverage and the deductible. There are no claims, actions, suits, or proceedings against, arising under or based upon any of such insurance policies except as set forth in such Schedule 4.1(s). (t) Title to Property. Each Borrower has good and marketable title in fee simple to all real property owned or purported to be owned by it and good title to all other property of whatever nature owned or purported to be owned by it, including but not limited to all property reflected in the most recent audited balance sheet referred to in Section 4.1(f) hereof or submitted pursuant to Section 5.1(a) hereof, as the case may be (except as sold or otherwise disposed of in the ordinary course of business after the date of such balance sheet), in each case free and clear of all Liens, other than Permitted Liens. (u) Intellectual Property. Each Borrower owns, or is licensed or otherwise has the right to use, all the patents, trademarks, service marks, names (trade, service, fictitious or otherwise), copyrights, technology (including but not limited to computer programs and software), processes, data bases and other rights, free from burdensome restrictions, necessary to own and operate its properties and to carry on its business as presently conducted and presently planned to be conducted without conflict with the rights of others. Except as described in Schedule 4.1(u), no Borrower owns any patents, trademarks or copyrights. (v) Taxes. All tax and information returns required to be filed by or on behalf of any Borrower have been properly prepared, executed and filed. All taxes, assessments, fees and other governmental charges upon any Borrower or upon any of its properties, incomes, sales or franchises which are due and payable have been paid other than those not yet delinquent and payable without premium or penalty, and except for those being diligently contested in good faith by appropriate proceedings, and in each case adequate reserves and provisions for taxes have been made on the books of such Borrower. The reserves and provisions for taxes on the books of each Borrower are adequate for all open years and for its current fiscal period. No Borrower has knowledge of any proposed additional assessment or basis for any material assessment for additional taxes (whether or not reserved against). (w) Employee Benefits. Except as set forth on Schedule 4.1(w), no Borrower has a Plan or Plans. (x) Environmental Matters. (i) Each Borrower, and each of its respective Environmental Affiliates, is and has been in full compliance with all applicable Environmental Laws, except for (x) matters set forth in Schedule 4.1(x) hereof and (y) matters which, individually or in the aggregate, could not have a Material Adverse Effect. There are to each Borrower's knowledge after due inquiry no circumstances that may prevent or interfere with such full compliance in the future. (ii) Each Borrower and its respective Environmental Affiliates has all -34- Environmental Approvals necessary or desirable for the ownership and operation of their respective properties, facilities and businesses as presently owned and operated and as presently proposed to be owned and operated, except for (x) matters set forth in Schedule 4.1(x) hereof and (y) matters which, individually or in the aggregate, could not have a Material Adverse Effect. (iii) There is no Environmental Claim pending or to the knowledge of any Borrower after due inquiry threatened, and there are no past or present acts, omissions, events or circumstances that could form the basis of any Environmental Claim, against any Borrower or any of its respective Environmental Affiliates, except for (x) matters set forth in Schedule 4.1(x) hereof, and (y) matters which, if adversely decided, individually or in the aggregate, could not have a Material Adverse Effect. (iv) No facility or property now or previously owned, operated or leased by any Borrower or any of its respective Environmental Affiliates is an Environmental Cleanup Site. No Borrower nor any respective Environmental Affiliate has directly transported or directly arranged for the transportation of any Environmental Concern Materials to any Environmental Cleanup Site. No Lien exists, and to Borrower's knowledge no condition exists which could result in the filing of a Lien, against any property of any Borrower or any of its respective Environmental Affiliates under any Environmental Law. (y) Business Interruptions. Within two (2) years prior to the Closing Date, neither the business, property nor operations of any Borrower have been materially and adversely affected in any way by any casualty, strike, lockout, combination of workers, order of the United States of America, or any state or local government, or any political subdivision or agency thereof, directed against any Borrower. To the best of each Borrower's knowledge, there are no pending or threatened labor disputes, strikes, lockouts or similar occurrences or grievances against the business being operated by any Borrower. (z) Names. In the five (5) years prior to the Closing Date, no Borrower has conducted business under or used any names (whether corporate or assumed) except for its present corporate name and those names listed in Schedule 4.1(z) attached hereto and made a part hereof. Each Borrower is the sole owner of its name and any and all business done and all invoices using such name or any names listed in Schedule 4.1(z) represent sales and business of such Borrower and are owned solely by such Borrower. (aa) Regulation O. No director, executive officer or principal shareholder of any Borrower is a director, executive officer or principal shareholder of any Lender. For the purposes hereof the terms "director" (when used with reference to any Lender), "executive officer" and "principal shareholder" have the respective meanings assigned thereto in Regulation O issued by the Board of Governors of the Federal Reserve System. (bb) Year 2000 Compliance. As described more fully in NCO Group's Form 10-K for 1998, NCO Group and NCO Financial Systems, Inc. have (a) reviewed the areas within their -35- business and operations which could be adversely affected by a computer failure to recognize the change in the century at the year 2000 ("Year 2000 Problem") and (b) developed and are implementing plans, which to the best of their knowledge (based on testing to date) will be effective, to avoid any adverse impact as a consequence of a Year 2000 Problem. 4.2 Representations And Warranties Absolute. The representations and warranties of the Borrowers set forth in this Article 4 are unaffected by any prior or subsequent investigation by, or knowledge of, the Administrative Agent or any Lender. ARTICLE V AFFIRMATIVE COVENANTS So long as any Loan shall remain unpaid, any Letter of Credit is outstanding or any Lender shall have any Commitment under this Agreement, each of the Borrowers shall comply with the following covenants. 5.1 Basic Reporting Requirements. (a) Annual Audit Reports. As soon as practicable, and in any event within 90 days after the close of each fiscal year of the Borrowers, the Borrowers shall furnish to the Administrative Agent and each of the Lenders consolidated statements of income, cash flows and changes in stockholders' equity of the Borrowers and the Excluded Subsidiaries for such fiscal year and a consolidated balance sheet of the Borrowers and the Excluded Subsidiaries as of the close of such fiscal year, and notes to each, all in reasonable detail, setting forth in comparative form the corresponding figures for the preceding fiscal year, together with all management letters issued, or letters stating that no management letters are being issued, in connection therewith. Such financial statements shall be accompanied by an opinion of independent certified public accountants of recognized national standing selected by the Borrowers and reasonably satisfactory to the Administrative Agent. A copy of the opinion of such accountants shall be delivered to the Administrative Agent and each of the Lenders and signed by such accountants. Such opinion shall be free of exceptions or qualifications not acceptable to the Administrative Agent in its reasonable discretion and in any event shall be free of any exception or qualification which is of "going concern" or like nature or which relates to a limited scope of examination. Such opinion in any event shall contain a written statement of such accountants substantially to the effect that (i) such accountants examined such financial statements in accordance with generally accepted auditing standards and accordingly made such tests of accounting records and such other auditing procedures as such accountants considered necessary under the circumstances and (ii) in the opinion of such accountants such financial statements present fairly the financial position of the Borrowers as of the end of such fiscal year and the results of their operations and their cash flows and changes in stockholders' equity for such fiscal year, in conformity with GAAP. -36- (b) Quarterly Financial Statements. As soon as practicable but in any event within 45 days after the end of each quarter, the Borrowers shall furnish to the Administrative Agent and each of the Lenders financial statements in the form filed with NCO Group's Form 10-Q filing with the Securities Exchange Commission. (c) Quarterly Compliance Certificates. The Borrowers shall deliver to the Administrative Agent and each of the Lenders a Quarterly Compliance Certificate in substantially the form set forth as Exhibit "I" hereto, duly completed and signed by the Chief Financial Officer of NCO Group concurrently with the delivery of the financial statements referred to in subsection (a) and (b). The Quarterly Compliance Certificate shall confirm that the unamortized remaining invested balance of all acquired delinquent pools of Accounts does not exceed $25,000,000, in the aggregate among all Borrowers, at any point in time. From time to time the Borrowers may seek the prior written consent of the Administrative Agent (in its sole discretion) so that the unamortized remaining invested balance of all acquired delinquent pools of accounts may exceed $25,000,000. (d) Annual Budget. As soon as practicable, and in any event within 45 days after the start of each fiscal year, the Borrowers shall deliver to the Administrative Agent a consolidated annual budget, which shall include the annual projections of profit and loss statements, balance sheets and cash flow reports (prepared on an annual basis) for the succeeding fiscal year, together with a statement of the assumptions and estimates upon which such projections are based in form and substance consistent with past practice. The projections shall be accompanied by a cover letter stating that such projections, estimates and assumptions, as of the date of preparation thereof, are reasonable, made in good faith, consistent with the Loan Documents, and represent the Borrowers' best judgment as to such matters. (e) Commercial Finance Reports. Within 30 days of a request by the Administrative Agent, the Borrowers shall furnish to the Administrative Agent a report of a Responsible Officer of the Borrowers setting forth information as to (i) receivables, and (ii) payables (which may include, among other things, a breakout of aging and payments). (f) Certain Other Reports and Information. Promptly upon their becoming available to the Borrowers, the Borrowers shall deliver to the Administrative Agent a copy of (i) all regular or special reports, registration statements and amendments to the foregoing which the Borrowers shall file with the Securities and Exchange Commission (or any successor thereto) or any securities exchange, (ii) all reports, proxy statements, financial statements and other information distributed by the Borrowers to its stockholders, bondholders or the financial community generally, and (iii) all accountants' management letters pertaining to, all other reports submitted by accountants in connection with any audit of, and all other material reports from outside accountants with respect to, the Borrowers. (g) Further Information. The Borrowers will promptly furnish to the Administrative Agent or any Lender such other information and in such form as the -37- Administrative Agent or any Lender may reasonably request from time to time. (h) Notice of Certain Events. Promptly upon becoming aware of any of the following, the Borrowers shall give the Administrative Agent notice thereof, together with a written statement of a Responsible Officer of the Borrowers setting forth the details thereof and any action with respect thereto taken or proposed to be taken by the Borrowers: (i) Any Event of Default or Default. (ii) Any material adverse change in the business, operations or condition (financial or otherwise) of any Borrower. (iii) Any pending or threatened action, suit, proceeding or investigation by or before any Governmental Authority against or affecting any Borrower, except for matters that if adversely decided, individually or in the aggregate, could not have a Material Adverse Effect. (iv) Any material violation, breach or default by any Borrower under any agreement or instrument which could have a Material Adverse Effect. (v) Any material amendment or supplement to, or extension, renewal, refinancing, or refunding of, or waiver by any other party thereto of any right under or conditions of, any agreement or instrument creating, evidencing or securing any Indebtedness of any Borrower; any agreement or instrument material to the business, operations or condition (financial or otherwise) of any Borrower, and any negotiations pertaining to any of the foregoing. (vi) Any Pension-Related Event. Such notice shall be accompanied by: (A) a copy of any notice, request, return, petition or other document received by any Borrower or any Controlled Group Member from any Person, or which has been or is to be filed with or provided to any Person (including without limitation the Internal Revenue Service, PBGC or any Plan participant, beneficiary, alternate payee or employer representative), in connection with such Pension-Related Event, and (B) in the case of any Pension-Related Event with respect to a Plan, the most recent Annual Report (5500 Series), with attachments thereto, and the most recent actuarial valuation report, for such Plan, if not previously provided. (vii) Any Environmental Claim pending or threatened against any Borrower, or any past or present acts, omissions, events or circumstances (including but not limited to any dumping, leaching, deposition, removal, abandonment, escape, emission, discharge or release of any Environmental Concern Material at, on or under any facility or property now or previously owned, operated or leased by any Borrower that could form the basis of such Environmental Claim, which Environmental Claim, if adversely resolved, individually or in the aggregate, could have a Material Adverse Effect. -38- (i) Visitation; Verification. Each Borrower shall permit such Persons as the Administrative Agent or any Lender may designate from time to time to visit and inspect any of the properties of such Borrower, to examine its books and records and take copies and extracts therefrom and to discuss its affairs with its directors, officers, employees and independent accountants at such times and as often as the Administrative Agent may reasonably request. Each Borrower hereby authorizes such officers, employees and independent accountants to discuss with the Administrative Agent the affairs of such Borrower. The Administrative Agent shall have the right to examine accounts, inventory and other properties and liabilities of each Borrower from time to time, and each Borrower shall cooperate with the Administrative Agent in such examination. 5.2 Insurance. Each Borrower shall maintain insurance covering the properties (including tangible Collateral) and business against fire, flood, casualty and such other hazards and risks (including the risk of business interruption from a casualty event) as may be reasonably acceptable to the Administrative Agent in such amounts, with such deductibles and with such insurers as may be reasonably acceptable to the Administrative Agent. In addition: (a) Administrative Agent as Loss Payee and Additional Insured. All casualty insurance policies covering tangible Collateral shall contain standard Loss Payable Clauses issued in favor of the Administrative Agent for the benefit of the Lenders under which all losses thereunder shall be paid to the Administrative Agent for the Lenders as their interests may appear. All other insurance policies shall name the Administrative Agent as an additional insured on behalf of the Lenders as their interests may appear. Such policies shall expressly provide that the requisite insurance cannot be altered or canceled without thirty (30) days prior written notice to the Administrative Agent and shall insure the Lenders notwithstanding the act or neglect of the insured. (b) Administrative Agent's Right to Purchase Insurance. In the event any Borrower fails to procure or cause to be procured any such insurance or to timely pay or cause to be paid the premium(s) on any such insurance, the Administrative Agent may do so for such Borrower but such Borrower shall continue to be liable for the cost of such insurance. (c) Disposition of Insurance Proceeds. Each Borrower hereby appoints the Administrative Agent as its attorney-in-fact, exercisable at the Administrative Agent's option, to endorse any check which may be payable to such Borrower in order to collect the proceeds of such insurance. In the absence of a Default or Event of Default, the Administrative Agent shall turn over to the Borrowers all insurance proceeds the Administrative Agent receives. The Borrowers may use the proceeds for the repair, reconstruction or replacement of Collateral, toward the replacement of lost revenues, for working capital, or for any other proper business purpose; provided that any proceeds that remain unused (i) more than 12 months after the Borrowers receive them or (ii) at the time a Default or Event of Default occurs shall be applied immediately as the Majority Lenders may in their discretion direct, including against the Obligations and as a permanent reduction of the RC Commitment. -39- (d) Evidence of Insurance. Each Borrower shall furnish to the Administrative Agent from time to time upon request the policies under which the required insurance is issued, certificates of insurance, loss payable endorsements, and such other information relating to such insurance as the Administrative Agent may request, and provide such other insurance and endorsements as are required by this Agreement and the other Loan Documents. 5.3 Payment Of Taxes And Other Potential Charges And Priority Claims. Each Borrower shall pay or discharge (a) on or prior to the date on which penalties attach thereto, all taxes, assessments and other governmental charges imposed upon it or any of its properties; (b) on or prior to the date when due, all lawful claims of materialmen, mechanics, carriers, warehousemen, landlords and other like Persons which, if unpaid, might result in the creation of a Lien upon any such property; and (c) on or prior to the date when due, all other lawful claims which, if unpaid, might result in the creation of a Lien upon any such property or which, if unpaid, might give rise to a claim entitled to priority over general creditors of such Borrower or such Subsidiary in a case under Title 11 (Bankruptcy) of the United States Code, as amended; provided, that unless and until foreclosure, distraint, levy, sale or similar proceedings shall have been commenced such Borrower need not pay or discharge any such tax, assessment, charge or claim so long as (x) the validity thereof is contested in good faith and by appropriate proceedings diligently conducted, and (y) such reserves or other appropriate provisions as may be required by GAAP shall have been made therefor. 5.4 Preservation Of Corporate Status. Each Borrower shall maintain its status as a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and to be duly qualified to do business as a foreign corporation and in good standing in all jurisdictions in which the ownership of its properties or the nature of its business or both make such qualification necessary. 5.5 Governmental Approvals And Filings. Each Borrower shall keep and maintain in full force and effect all Governmental Actions necessary or advisable in connection with execution and delivery of any Loan Document, consummation of the transactions herein or therein contemplated, performance of or compliance with the terms and conditions hereof or thereof or to ensure the legality, validity, binding effect, enforceability or admissibility in evidence hereof or thereof. 5.6 Maintenance Of Properties. Each Borrower shall maintain or cause to be maintained in good repair, working order and condition the properties now or hereafter owned, leased or otherwise possessed by it and shall make or cause to be made all needful and proper -40- repairs, renewals, replacements and improvements thereto so that the business carried on in connection therewith may be properly and advantageously conducted at all times. 5.7 Avoidance Of Other Conflicts. Each Borrower shall not violate or conflict with, be in violation of or conflict with, or be or remain subject to any liability (contingent or otherwise) on account of any violation or conflict with (a) any Law in a manner which could cause a Material Adverse Effect, (b) its articles of incorporation or by-laws (or other constituent documents), or (c) any material agreement or instrument to which it is a party or by which any of them or any of their respective Subsidiaries is a party or by which any of them or any of their respective properties (now owned or hereafter acquired) may be subject or bound. 5.8 Financial Accounting Practices. Each Borrower shall make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect its transactions and dispositions of its assets and maintain a system of internal accounting controls sufficient to provide reasonable assurances that (a) transactions are executed in accordance with management's general or specific authorization, (b) transactions are recorded as necessary (i) to permit preparation of financial statements in conformity with GAAP and (ii) to maintain accountability for assets, (c) access to assets is permitted only in accordance with management's general or specific authorization and (d) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 5.9 Use Of Proceeds. Subject to the terms and conditions of this Agreement, the Borrowers shall apply the proceeds of all Loans hereunder only for working capital and acquisition financing. The Borrowers shall not use the proceeds of any Loans hereunder directly or indirectly for any unlawful purpose or inconsistent with any other provision of any Loan Document. 5.10 Continuation Of Or Change In Business. Each Borrower shall continue to engage in its business substantially as conducted and operated during the present and preceding fiscal year, and no Borrower shall engage in any other business not substantially similar to the business as presently conducted. 5.11 Consolidated Tax Return. No Borrower shall file or consent to the filing of any consolidated income tax return with any Person other than another Borrower, except as required by the Code. 5.12 Fiscal Year. No Borrower shall change its fiscal year or fiscal quarter. 5.13 Bank Accounts. As additional consideration for the establishment of the credit -41- facilities hereunder, each Borrower shall maintain its primary depository and disbursement accounts with the Administrative Agent. If the Administrative Agent fails to service the Borrower's depository and disbursement accounts in a commercially-reasonable manner, Borrower may move the accounts to another financial institution of its choice. 5.14 Submission Of Collateral Documents. Each Borrower shall promptly, but in no event later than twenty (20) days following the conversion of an Account to an instrument or chattel paper, notify the Administrative Agent if an Account becomes evidenced or secured by an instrument or chattel paper and, upon request of the Administrative Agent, promptly deliver any such instrument or chattel paper to the Lender. 5.15 Collection Of Accounts. Each Borrower shall continue to collect its Accounts in the ordinary course of its business. 5.16 Subsidiaries As Borrowers. (a) Each Borrower shall cause all of its Subsidiaries, other than (i) foreign Subsidiaries listed on Schedule 5.16 if doing so would cause an adverse tax consequence under Section 956 of the Internal Revenue Code as amended ("IRC") or under any similar law, and (ii) other Excluded Subsidiaries, to be or become Borrowers hereunder by signing this Agreement or, in the case of new Subsidiaries formed or acquired after the Closing Date, a Joinder Agreement in the form of Exhibit M attached hereto. Under the Security Documents, Borrowers shall pledge all the capital stock or other equity interests in each such Subsidiary and cause each such Subsidiary to grant a security interest in all of its property meeting the definition of "Collateral" under the Security Documents. (b) Notwithstanding the exclusion of certain foreign Subsidiaries as Borrowers, Borrowers shall cause each such foreign Subsidiary to comply with the terms and conditions of this Agreement and Borrowers shall grant to the Administrative Agent (on behalf of the Lenders) a first priority security interest in and lien on 65% of the capital stock or other equity interests in each such foreign Subsidiary so long as such pledge shall not trigger adverse tax consequences under Section 956 of the IRC or similar law. 5.17 Update Of Schedules. Each Borrower shall promptly, but in no event later than thirty (30) days, following a Permitted Acquisition or other event which would result in a material change to any of the information on the disclosure schedules hereto, provide the Administrative Agent with revised schedule(s). The revised schedules must be acceptable in all respects to the Administrative Agent; they will not be acceptable if they disclose actual or potential Events of Default. 5.18 Compliance With Laws. Each Borrower shall comply with all Laws governing such Borrower in the operation of its business, including Environmental Laws and any Laws relating to employment practices and pension benefits and occupational and health standards and -42- controls, but excluding any Laws whose violation would not cause a Material Adverse Effect. 5.19 Keyman Life Insurance Borrowers will at all times maintain at least $2,000,000 in keyman life insurance on the life of Michael J. Barrist. ARTICLE VI NEGATIVE COVENANTS So long as any Obligations shall remain unpaid or any Lender shall have any Commitment under this Agreement, each of the Borrowers shall comply with the following covenants. 6.1 Financial Covenants. (a) Consolidated Fixed Charge Coverage Ratio. The Consolidated Fixed Charge Coverage Ratio shall not at any time be less than 1.15 to 1.00 for any quarter during the period from April 1, 1999 through December 31, 2000; or 1.35 to 1.00 for any quarter thereafter. (b) Consolidated Net Worth. As of the last day of each fiscal quarter Consolidated Net Worth shall not be less than (i) $193,397,400.00 plus (ii) 50% of Consolidated Net Income for that quarter and, on a cumulative basis without deductions for net losses, all other quarters ending after the Closing Date plus (iii) the net proceeds of any offering of equity after the Closing Date that are not applied to the reduction of the RC Commitment plus (iv) 90% of the book value of any equity issued after the Closing Date in consideration for any acquisition. (c) Consolidated Funded Debt to Consolidated EBITDA. The ratio of Consolidated Funded Debt to annualized Consolidated EBITDA shall not be more than 4.5 to 1.00 for any quarter ending during the period from Closing through December 31, 1999; 4.0 to 1.00 for any quarter ending during the period from January 1, 2000 through December 31, 2000; 3.5 to 1.00 for any quarter ending during the period from January 1, 2001 through December 31, 2001; or 3.25 to 1.00 for any quarter ending during the period ending after January 1, 2002. -43- Consolidated EBITDA shall be annualized by multiplying Consolidated EBITDA for the fiscal quarter being tested by four. For purposes of calculating pro forma compliance with this provision in analyzing a proposed acquisition, Consolidated EBITDA shall include the pre-acquisition EBITDA of the target for the immediately preceding 12 month period after adjustment for unusual expense items. (d) Consolidated Interest Coverage Ratio. The Consolidated Interest Coverage Ratio shall not be less than 2.25 to 1.00 for any quarter. (e) Consolidated Senior Debt to Consolidated EBITDA. The ratio of Consolidated Senior Debt to annualized Consolidated EBITDA shall not be more than 3.75 to 1.00 for any quarter ending during the period from Closing through December 31, 1999; 3.0 to 1.00 for any quarter ending during the period from January 1, 2000 through December 31, 2000; 2.5 to 1.00 for any quarter ending during the period from January 1, 2001 through December 31, 2001; or 2.25 to 1.00 for any quarter ending during the period ending after January 1, 2002. Consolidated EBITDA shall be annualized by multiplying Consolidated EBITDA for the fiscal quarter being tested by four. For purposes of calculating pro forma compliance with this provision in analyzing a proposed acquisition, Consolidated EBITDA shall include the pre-acquisition EBITDA of the target for the immediately preceding 12 month period after adjustment for unusual expense items. 6.2 Liens. No Borrower shall at any time create, incur, assume or suffer to exist any Lien on any of its property (now owned or hereafter acquired), or agree, become or remain liable (contingently or otherwise) to do any of the foregoing, except for the following ("Permitted Liens"): (a) Liens pursuant to the Security Documents in favor of the Administrative Agent (on behalf of the Lenders) to secure the Obligations; (b) Liens existing on the date hereof securing obligations existing on the date hereof, as such Liens and obligations are listed in Schedule 6.2 hereto or Liens relating to Purchase Money Indebtedness for Capital Expenditures permitted by Section 6.14; (c) Liens arising from taxes, assessments, charges or claims described in Section 5.3 hereof that are not yet due or that remain payable without penalty or to the extent permitted to remain unpaid under the proviso to such Section 5.3 , provided that the aggregate amount secured by all Liens described in this Section 6.2(c) shall not at any time exceed $300,000; -44- "Permitted Lien" shall in no event include any Lien imposed by, or required to be granted pursuant to, ERISA or any Environmental Law. Nothing in this Section 6.2 shall be construed to limit any other restriction on Liens imposed by the Security Documents or otherwise in the Loan Documents. 6.3 Indebtedness. No Borrower shall at any time create, incur, assume or suffer to exist any Indebtedness, or agree, become or remain liable (contingently or otherwise) to do any of the foregoing, except: (a) Indebtedness to the Lenders pursuant to this Agreement and the other Loan Documents; (b) Indebtedness of such Borrower existing on the date hereof and listed in Schedule 6.3 hereof (but not any extensions, renewals or refinancings thereof); (c) Purchase Money Indebtedness which is permitted as a Capital Expenditure; (d) Accounts payable to trade creditors arising out of purchases of goods or services in the ordinary course of business; (e) Indebtedness, not to exceed $10,000,000 in the aggregate over the term of this Agreement among all Borrowers, under Capitalized Leases which are permitted as Capital Expenditures; (f) Permitted Acquisitions Indebtedness; (g) Inter-Borrower Indebtedness permitted under Section 6.5(e); and (h) Indebtedness under Interest Rate Hedging Agreements. (i) Indebtedness of NCO Group under unsecured, convertible, subordinated notes issued on terms acceptable to the Administrative Agent in its sole discretion. Acceptable terms of subordination shall include a prohibition on principal payments while any Obligations to the Lenders are outstanding; provision for the payment of regularly scheduled interest on the notes until an Event of Default; and a 180 "standstill" period following a default under the notes during which the noteholders shall be prohibited from exercising their remedies. If the notes are issued after March 31, 2000, 50% of the net proceeds from the issuance shall be applied as a permanent reduction of the RC Commitment under Section 1.7(a)(ii).. 6.4 Guaranties, Indemnities, Etc. No Borrower shall be or become subject to or bound by any Guaranty or Guaranty Equivalent, or agree, become or remain liable (contingently or otherwise) to do any of the foregoing, except: (a) Guaranties and Guaranty Equivalents of the obligations of third parties -45- (including unconsolidated subsidiaries but excluding consolidated subsidiaries) which, together with loans and advances by Borrowers to such third parties, in the aggregate do not exceed $500,000 at any one time for all Borrowers; (b) Contingent liabilities arising from the endorsement of negotiable or other instruments for deposit or collection or similar transactions in the ordinary course of business; and (c) Indemnities by a Borrower of the liabilities of its directors or officers in their capacities as such pursuant to provisions presently contained in their articles of incorporation or by-laws (or other constituent documents) or as permitted by Law. (d) Guaranties by Borrowers of Permitted Indebtedness of other Borrowers. 6.5 Loans, Advances And Investments. No Borrower shall at any time make or suffer to exist or remain outstanding any loan or advance to, or purchase, acquire or own (beneficially or of record) any stock, bonds, notes or securities of, or any partnership interest (whether general or limited) in, or any other interest in, or make any capital contribution to or other investment in, any other Person, or agree, become or remain liable (contingently or otherwise) to do any of the foregoing, except: (a) Loans and investments existing on the date hereof and listed in Schedule 6.5 hereof; but not any amendments, extensions or refinancings thereof; (b) Receivables owing to such Borrower arising from sales of inventory under usual and customary terms in the ordinary course of business; (c) Demand advances to officers and employees of a Borrower to meet expenses incurred by such officers and employees in the ordinary course of business and in amounts at any time outstanding not exceeding $5,000 to any one officer or employee and $10,000 in the aggregate among all Borrowers; (d) Cash Equivalent Investments; (e) Loans from a Borrower to another Borrower, provided that the Borrowers shall cause any such loans to be evidenced by a promissory note, which shall immediately be delivered to the Lender as Collateral; (f) Permitted Acquisitions; (g) investments in a Borrower by another Borrower; (h) Other loans and advances to third parties (including unconsolidated subsidiaries but excluding consolidated subsidiaries), the aggregate principal amount of which -46- together with Guaranties and Guaranty Equivalents issued by Borrowers for such third parties, do not exceed $785,000 at any time for all Borrowers; and (i) investments in entities purchasing delinquent pools of Accounts in accordance with Section 6.13 so long as the Borrowers cause such entities to comply with the other applicable provisions of this Agreement. 6.6 Dividends And Related Distributions. No Borrower shall declare or make any Stock Payment, or agree, become or remain liable (contingently or otherwise) to do any of the foregoing, except that a Borrower may make a Stock Payment to another Borrower. 6.7 Sale-Leasebacks. No Borrower shall at any time enter into or suffer to remain in effect any transaction to which such Borrower is a party involving the sale, transfer or other disposition by such Borrower of any property (now owned or hereafter acquired), with a view directly or indirectly to the leasing back of any part of the same property or any other property used for the same or a similar purpose or purposes, or agree, become or remain liable (contingently or otherwise) to do any of the foregoing. 6.8 Leases. No Borrower shall at any time enter into or suffer to remain in effect any lease, as lessee, of any property, or agree, become or remain liable (contingently or otherwise) to do any of the foregoing, except: (a) Operating leases of equipment or office space used by the lessee in the ordinary course of business; (b) Leases cancelable by the lessee without penalty on not more than 90 days' notice; and (c) Capitalized Leases permitted under Section 6.3 hereof. 6.9 Mergers, Acquisitions, Etc. No Borrower shall (a) except for Permitted Acquisitions, merge with or into or consolidate with any other Person, (b) liquidate, wind-up, dissolve or divide, (c) except for Permitted Acquisitions, acquire all or any substantial portion of the properties of any going concern or going line of business, (d) except for Permitted Acquisitions, acquire all or any substantial portion of the properties of any other Person, or (e) agree, become or remain liable (contingently or otherwise) to do any of the foregoing; provided, however, that the Borrowers may seek the prior written consent of the Super Majority Lenders for an acquisition which is not a Permitted Acquisition. In connection with considering the Borrowers' request, the Lenders, via the Administrative Agent may conduct their own due diligence or require appropriate third party due diligence regarding the proposed acquisition. The results of all such due diligence must be satisfactory to the Super Majority Lenders. Borrowers shall bear the cost of all such due diligence. -47- 6.10 Dispositions Of Properties. No Borrower shall sell, convey, assign, lease, transfer, abandon or otherwise dispose of, voluntarily or involuntarily, any of its properties, or agree, become or remain liable (contingently or otherwise) to do any of the foregoing, except: (a) The Borrowers may sell inventory in the ordinary course of business; (b) The Borrowers may dispose of equipment which is obsolete or no longer useful in the business of such Borrower; (c) The Cash Equivalent Investments described in Section 6.5(d); and (d) The Borrowers may dispose of any division or Subsidiary with an enterprise value on an arms length basis per transaction of $500,000 or less. By way of illustration, and without limitation, it is understood that the following are dispositions of property prohibited under this Section 6.10: any disposition of accounts, chattel paper or general intangibles, with or without recourse, and any disposition of any leasehold interest. Nothing in this Section 6.10 shall be construed to limit any other restriction on dispositions of property imposed by the Security Documents or otherwise in the Loan Documents. 6.11 Issuance Of Stock. No Borrower, other than NCO Group, shall issue, sell, otherwise dispose or suffer to remain outstanding, voluntarily or involuntarily, any additional shares of capital stock, or any options, warrants, calls, subscriptions, conversion rights, exchange rights, preemptive rights or other rights, agreements or arrangements (contingent or otherwise) which may in any circumstances now or hereafter obligate such Borrower to issue any shares of its capital stock, except to NCO Group or another Borrower and except options issued to employees of the Borrowers. The Borrowers shall use 50% of the net proceeds of any issuance of equity in NCO Group after March 31, 2000 to reduce the RC Commitment as required by Section 1.7(a)(ii). 6.12 Dealings With Affiliates. No Borrower shall enter into or carry out any transaction with (including, without limitation, purchase or lease property or services from, sell or lease property or services to, loan or advance to, or enter into, suffer to remain in existence or amend any contract, agreement or arrangement with) any Affiliate of such Borrower, directly or indirectly, or agree, become or remain liable (contingently or otherwise) to do any of the foregoing, except: (a) Existence and performance of contracts, agreements and arrangements in existence as of the date hereof and set forth in Schedule 6.12 hereof; and (b) Directors, officers and employees of a Borrower may be compensated for services rendered in such capacity to such Borrower, provided that such compensation is in good faith and on terms no less favorable to such Borrower than those that could have been obtained in -48- a comparable transaction on an arm's-length basis from an unrelated Person, and the board of directors of such Borrower (including a majority of the directors having no direct or indirect interest in such transaction) approve the same. (c) Transactions in the ordinary course of business and consistent with past practices between one Borrower and another Borrower, in good faith and on terms no less favorable to either Borrower than those that could have been obtained in a comparable transaction on an arm's-length basis from an unrelated Person; and (d) Other transactions with Affiliates in good faith and on terms no less favorable to a Borrower than those that could have been obtained in a comparable transaction on an arm's length basis from an unrelated Person. 6.13 Acquired Delinquent Pools Of Accounts. The Borrowers shall not acquire delinquent pools of Accounts or make investments in entities purchasing delinquent pools of Accounts if such acquisition would cause the unamortized remaining invested balance for all such pools as reflected on the Borrowers' consolidated balance sheet to exceed $25,000,000, in the aggregate among all Borrowers, at any given point in time. From time to time the Borrowers may seek the prior written consent of the Majority Lenders (in their sole discretion) so that the unamortized remaining invested balance of all acquired delinquent pools of accounts or investments in entities purchasing delinquent pools of Accounts may exceed $25,000,000. 6.14 Capital Expenditures. No Borrower shall make any Capital Expenditure that would cause the aggregate amount of Capital Expenditures made by all Borrowers to exceed the sum of (a) (i) in 1999, three percent (3%) of Consolidated Pro-Forma Revenue for 1998 or (ii) in any year after 1999, two percent (2%) of Consolidated Pro-Forma Revenue for the previous year plus (b) the amount of money, not to exceed $1,000,000, Borrowers could have used, but did not use, for Capital Expenditures in 1999 or any year thereafter. For purposes of this provision, (a) all leases, except for real estate leases and automobile leases, shall be deemed to be Capitalized Leases (which under Section 6.3 are limited to $10,000,000 in the aggregate during the term of this Agreement) and therefore shall be accounted for as a Capital Expenditure and (b) Purchase Money Indebtedness shall be accounted for as a Capital Expenditure. 6.15 Limitations On Modification Of Certain Agreements And Instruments. No Borrower shall materially amend, modify or supplement materially its articles of incorporation or by-laws (or similar constituent documents), if so doing would adversely affect the Lenders' rights or benefits under the Loan Documents. 6.16 Limitation On Payments Of Purchase Money Indebtedness. No Borrower shall directly or indirectly pay, prepay, purchase, redeem, retire, defease or acquire, or make any payment (on account of principal, interest, premium or otherwise) of, or grant or suffer the existence of any Lien on any of its property (now owned or hereafter acquired) to secure any indebtedness, obligation or liability with respect to, or amend, modify or supplement any of the -49- terms and conditions of, any Purchase Money Indebtedness, or agree, become or remain liable (contingently or otherwise) to do any of the foregoing, except that so long as no Event of Default or Default has occurred, the Borrowers may pay principal and interest on Purchase Money Indebtedness when due, to the extent consistent with the subordination provisions of such Purchase Money Indebtedness. 6.17 Limitation On Other Restrictions On Liens. No Borrower shall enter into, become or remain subject to any agreement or instrument to which such Borrower is a party or by which its properties (now owned or hereafter acquired) may be subject or bound that would prohibit the grant of any Lien upon any of its properties (now owed or hereafter required), except Permitted Liens. 6.18 Limitation On Other Restrictions On Amendment Of The Loan Documents, Etc. No Borrower shall enter into, become or remain subject to any agreement or instrument to which such Borrower is a party or by which any Borrower or any of their respective properties (now owned or hereafter acquired) may be subject or bound that would prohibit or require the consent of any Person to any amendment, modification or supplement to any of the Loan Documents, except for the Loan Documents. ARTICLE VII DEFAULTS 7.1 "Events Of Default." An Event of Default shall mean the occurrence or existence of one or more of the following events or conditions (for any reason, whether voluntary, involuntary or effected or required by Law): (a) Any Borrower shall fail to pay when due principal of any Loan. (b) Any Borrower shall fail to pay when due interest on any Loan, any fees, indemnity or expenses, or any other amount due hereunder or under any other Loan Document. (c) Any representation or warranty made or deemed made by any Borrower in or pursuant to or in connection with any Loan Document, or any statement made by any Borrower in any financial statement, certificate, report, exhibit or document furnished by any Borrower to the Lenders pursuant to or in connection with any Loan Document, shall prove to have been false or misleading in any material adverse respect as of the time when made or deemed made (including by omission of material information necessary to make such representation, warranty or statement not misleading). (d) Any Borrower shall default in the performance or observance of any covenant, agreement or duty under this Agreement or any other Loan Document and (i) in the case of a default under Section 5.1 hereof such default shall have continued for a period of ten days and -50- (ii) in the case of any other default such default shall have continued for a period of ten (10) days after the Administrative Agent has sent notice of such default (as long as such ten (10) day period does not extend more than thirty (30) days beyond the date of occurrence of such default) provided that such default is capable of being cured (which shall be determined in the sole and absolute discretion of the Administrative Agent); provided, however that the foregoing notice and grace periods shall not apply to the defaults described in subsections (a), (b) or (c) of Section 7.1. (e) Any Cross-Default Event shall occur with respect to any Cross-Default Obligation; provided, that if a Cross-Default Event would have occurred with respect to a Cross-Default Obligation but for the grant of a waiver or similar indulgence, a Cross-Default Event shall nevertheless be deemed to have occurred if any Borrower directly or indirectly gave or agreed to give any consideration for such waiver or indulgence (including but not limited to a reduction in maturity, an increase in rates or the granting of collateral). As used herein, "Cross-Default Obligation" shall mean any (1) Indebtedness or Guaranty Equivalent of any Borrower in which the principal obligation of such Borrower exceeds $500,000, or (2) any Indebtedness under any Interest Rate Hedging Agreement or any agreement or instrument creating, evidencing or securing such Indebtedness or Guaranty Equivalent. As used herein, "Cross-Default Event" with respect to a Cross-Default Obligation shall mean the occurrence of any default, event or condition which causes any Person or Persons to cause all or any part of such Cross-Default Obligation to become due (by acceleration, mandatory prepayment or repurchase, or otherwise) before its otherwise stated maturity, or failure to pay all or any part of such Cross-Default Obligation at its stated maturity. (f) One or more judgments for the payment of money shall have been entered against any Borrower, which judgment or judgments exceed $250,000 in the aggregate, and such judgment or judgments shall have remained undischarged and unstayed for a period of thirty consecutive days. (g) One or more writs or warrants of attachment, garnishment, execution, distraint or similar process exceeding in value the aggregate amount of $250,000 shall have been issued against any Borrower or any of their properties and shall have remained undischarged and unstayed for a period of thirty consecutive days. (h) Any Governmental Action now or hereafter made by or with any Governmental Authority required in connection with any Loan Document is not obtained or shall have ceased to be in full force and effect or shall have been materially modified or amended or shall have been held to be illegal or invalid, and the Administrative Agent shall have determined in good faith (which determination shall be conclusive) that such event or condition could have a Material Adverse Effect. (i) Any Security Document shall cease to be in full force and effect, or any Lien created or purported to be created in any Collateral pursuant to any Security Document shall fail -51- to be a valid, enforceable and perfected Lien in favor of the Lenders securing the Obligations, prior to all other Liens, except Permitted Liens, or any Borrower or any Governmental Authority shall assert any of the foregoing. (j) Any Loan Document or term or provision thereof shall cease to be in full force and effect, or any Borrower shall, or shall purport to, terminate, repudiate, declare voidable or void or otherwise contest, any Loan Document or term or provision thereof or any obligation or liability of any Borrower thereunder, and the result of which is a material effect on the rights and remedies of the Lenders under the Loan Documents. (k) The Administrative Agent shall have determined in good faith that an event or condition has occurred which will have a Material Adverse Effect. (l) Any one or more Pension-Related Events referred to in subsection (a)(ii), (b) or (e) of the definition of "Pension-Related Event" shall have occurred; or any one or more other Pension-Related Events shall have occurred and the Majority Lenders shall determine in good faith (which determination shall be conclusive) that such other Pension-Related Events, individually or in the aggregate, could have a Material Adverse Effect. (m) Any one or more of the events or conditions set forth in the following clauses (i) or (ii) shall have occurred in respect of any Borrower, and the Administrative Agent shall determine in good faith (which determination shall be conclusive) that such events or conditions, individually or in the aggregate, could have a Material Adverse Effect: (i) any past or present violation of any Environmental Law by such Person, (ii) the existence of any pending or threatened Environmental Claim against any such Person, or the existence of any past or present acts, omissions, events or circumstances that could form the basis of any Environmental Claim against any such Person. (n) A Change of Management shall have occurred. (o) A proceeding shall have been instituted in respect of any Borrower: (i) subject to clause (p)(4) below, seeking to have an order for relief entered in respect of any Borrower, or seeking a declaration or entailing a finding that any Borrower is insolvent or a similar declaration or finding, or seeking dissolution, winding-up, charter revocation or forfeiture, liquidation, reorganization, arrangement, adjustment, composition or other similar relief with respect to any Borrower, its assets or its debts under any Law relating to bankruptcy, insolvency, relief of debtors or protection of creditors, termination of legal entities or any other similar Law now or hereafter in effect, or (ii) seeking appointment of a receiver, trustee, liquidator, assignee, sequestrator or other custodian for such Person or for all or any substantial part of its property, and such proceeding shall result in the entry, making or grant of any such order for relief, -52- declaration, finding, relief or appointment, or such proceeding shall remain undismissed and unstayed for a period of sixty consecutive days. (p) Borrowers on a consolidated basis shall (1) become insolvent; (2) fail to pay or (3) become unable to pay, or any Borrower shall (1) state that it is or will be unable to pay, its debts as they become due; (2) voluntarily suspend transaction of its business; (3) make a general assignment for the benefit of creditors; (4) institute (or fail to controvert in a timely and appropriate manner) a proceeding described in Section 7.1(o)(i) hereof, or (whether or not any such proceeding has been instituted) shall consent to or acquiesce in any such order for relief, declaration, finding or relief described therein; (5) institute (or fail to controvert for a period of sixty consecutive days in a timely and appropriate manner) a proceeding described in Section 7.1(o)(ii) hereof, or (whether or not any such proceeding has been instituted) shall consent to or acquiesce in any such appointment or to the taking of possession by any such custodian of all or any substantial part of its property; shall dissolve, wind-up, revoke or forfeit its charter (or other constituent documents) or liquidate itself or any substantial part of its property; or (6) take any action in furtherance of any of the foregoing. (q) Any person or any affiliated group of persons, other than present management, obtains control of a majority of the voting stock of NCO Group. (r) An event of default shall occur under an Interest Rate Hedging Agreement. 7.2 Consequences Of An Event Of Default. (a) Events of Default in General. If an Event of Default (other than one specified in paragraphs (o) and (p) of Section 7.1 (Insolvency, Bankruptcy, Etc.) hereof) shall occur and be continuing or shall exist, then, in addition to all other rights and remedies which the Administrative Agent or any other Lender may have hereunder or under any other Loan Document, at law, in equity or otherwise, the Lenders shall be under no further obligation to make Loans and the Administrative Agent may, (and upon the written request of the Majority Lenders, shall), by notice to NCO Group (on behalf of the Borrowers), from time to time do any or all of the following: (i) Declare the Commitments terminated, whereupon the Commitments will terminate and any fees hereunder shall be immediately due and payable without presentment, demand, protest or further notice of any kind, all of which are hereby waived, and an action therefor shall immediately accrue. (ii) Declare the unpaid principal amount of the Loans, interest accrued thereon and all other Obligations (other than obligations incurred under an Interest Rate Hedging Agreement) to be immediately due and payable without presentment, demand, protest or further notice of any kind, all of which are hereby waived, and an action therefor shall immediately accrue. -53- (iii) Exercise such other remedies as may be available to the Lenders under applicable Law. (b) Automatic Acceleration; Certain Bankruptcy-Related Events. If an Event of Default specified in paragraphs (o) and (p) of Section 7.1 (Insolvency, Bankruptcy, Etc.) hereof shall occur or exist, then, in addition to all other rights and remedies which any Lender may have hereunder or under any other Loan Document, at law, in equity or otherwise, the Commitments shall automatically terminate and the Lenders shall be under no further obligation to make Loans, and the unpaid principal amount of the Loans, interest accrued thereon and all other Obligations shall become immediately due and payable without presentment, demand, protest or notice of any kind, all of which are hereby waived, and an action therefor shall immediately accrue, and in addition, the Administrative Agent may, and upon the written request of the Majority Lenders, shall exercise such other remedies as may be available to the Lenders under applicable Law. (c) Equitable Remedies. It is agreed that, in addition to all other rights hereunder or under Law, the Administrative Agent shall have the right to institute proceedings in equity or other appropriate proceedings for the specific performance of any covenant or agreement made in any of the Loan Documents or for an injunction against the violation of any of the terms of any of the Loan Documents or in aid of the exercise of any power granted in any of the Loan Documents or by Law or otherwise. 7.3 Application Of Proceeds. After the occurrence of an Event of Default and acceleration of the Loans, any amounts received on account of Obligations shall be applied by the Administrative Agent in the following order: First, to payment of that portion of the Obligations constituting fees, indemnities, expenses and other amounts due to the Administrative Agent in its capacity as such; Second, to payment of that portion of the Obligations constituting fees, indemnities due to the Lenders, ratably among them in proportion to the amounts described in this clause Second due to them; Third, to payment of that portion of the Obligations constituting accrued and unpaid interest on Loans, ratably among the Lenders in proportion to the respective amounts described in this clause Third due to them; Fourth, to payment of that portion of the Obligations constituting unpaid principal of the Loans ratably among the Lenders in proportion to the respective amounts described in this clause Fourth due to them; Fifth, to payment of all other Obligations, ratably among the Lenders in proportion to the respective amounts described in this clause Fifth due to them; and -54- Finally, the balance, if any, after all of the Obligations have been indefeasibly paid in full, to NCO Group (on behalf of the Borrowers) or as otherwise required by Law. ARTICLE VIII THE ADMINISTRATIVE AGENT 8.1 Appointment. Subject to the provisions of the second sentence of Section 8.9 below, each Lender hereby irrevocably appoints Mellon to act as Administrative Agent for such Lender under this Agreement and the other Loan Documents. Each Lender hereby irrevocably authorizes the Administrative Agent to take such action on behalf of such Lender under the provisions of this Agreement and the other Loan Documents, and to exercise such powers and to perform such duties, as are expressly delegated to or required of the Administrative Agent by the terms hereof or thereof, together with such powers as are reasonably incidental thereto. Mellon hereby agrees to act as Administrative Agent on behalf of the Lenders on the terms and conditions set forth in this Agreement and the other Loan Documents, subject to its right to resign as provided in Section 8.9 hereof. Each Lender hereby irrevocably authorizes the Administrative Agent to execute and deliver each of the Loan Documents and to accept delivery of such of the other Loan Documents as may not require execution by the Administrative Agent. Each Lender agrees that the rights and remedies granted to the Administrative Agent under the Loan Documents shall be exercised exclusively by the Administrative Agent (or a Person designated by the Administrative Agent), and that no Lender shall have any right individually to exercise any such right or remedy, except to the extent, if any, expressly provided herein or therein. 8.2 General Nature Of Administrative Agent's Duties. Notwithstanding anything to the contrary elsewhere in this Agreement or in any other Loan Document: (a) The Administrative Agent shall have no duties or responsibilities except those expressly set forth in this Agreement and the other Loan Documents, and no implied duties or responsibilities on the part of the Administrative Agent shall be read into this Agreement or any other Loan Document or shall otherwise exist. (b) The duties and responsibilities of the Administrative Agent under this Agreement and the other Loan Documents shall be mechanical and administrative in nature, and the Administrative Agent shall not have a fiduciary relationship with respect to any Lender. (c) The Administrative Agent's relationship with and to the Lenders is governed exclusively by the terms of this Agreement and the other Loan Documents. The Administrative Agent does not assume, and shall not at any time be deemed to have, any relationship of agency or trust with or for, any Lender or any other Person or (except only as expressly provided in this Agreement and the other Loan Documents) any other duty or responsibility to such Lender or other Person. -55- (d) The Administrative Agent shall be under no obligation to take any action hereunder or under any other Loan Document if the Administrative Agent believes in good faith that taking such action may conflict with any Law or any provision of this Agreement or any other Loan Document, or may require the Administrative Agent to qualify to do business in any jurisdiction where it is not then so qualified. (e) The authority of the Administrative Agent to request information from the Borrowers or take any other voluntary action hereunder shall impose no duty of any kind on the Administrative Agent to make such request or take any such action. 8.3 Exercise Of Powers. The Administrative Agent shall take any action of the type specified in this Agreement or any other Loan Document as being within the Administrative Agent's rights, powers or discretion in accordance with directions from the Majority Lenders (or if expressly required herein the Super Majority Lenders) (or as otherwise provided in the Loan Documents). In the absence of such direction, the Administrative Agent shall have the authority (but under no circumstances shall be obligated), in its sole discretion, to take any such action, except to the extent that this Agreement or such other Loan Document expressly requires the direction or consent of the Majority Lenders (or the Super Majority Lenders, all of the Lenders, or some other Person or group of Persons), in which case the Administrative Agent shall not take such action absent such direction or consent. Any action or inaction pursuant to such direction, discretion or consent shall be binding on each Lender (whether or not it so consented). The Administrative Agent shall not have any liability to any Person as a result of any action or inaction in conformity with this Section 8.3. 8.4 General Exculpatory Provisions. Notwithstanding anything to the contrary elsewhere in this Agreement or any other Loan Document: (a) The Administrative Agent shall not be liable for any action taken or omitted to be taken by it under or in connection with this Agreement or any other Loan Document, except only for direct (as opposed to consequential or other) damages suffered by a Person and only to the extent that such Person proves that such damages were caused by the Administrative Agent's own gross negligence or willful misconduct. (b) The Administrative Agent shall not be responsible for (i) the execution, delivery, effectiveness, enforceability, genuineness, validity or adequacy of any Loan Document, (ii) any recital, representation, warranty, document, certificate, report or statement in, provided for in, or received under or in connection with, any Loan Document, or (iii) any failure of any Borrower or, any Lender to perform any of their respective obligations under any Loan Document. (c) The Administrative Agent shall not be under any obligation to ascertain, inquire or give any notice relating to (i) the performance or observance of any of the terms or conditions of this Agreement or any other Loan Document on the part of any Borrower, (ii) the -56- business, operations, condition (financial or otherwise) or prospects of any Borrower or any other Person (even if the Administrative Agent knows or should know that some event or condition exists or fails to exist), or (iii) except to the extent set forth in Section 8.5(f) below, the existence of any Event of Default or Default. (d) The Administrative Agent shall not be under any obligation, either initially or on a continuing basis, to provide any Lender with any notices, reports or information of any nature, whether in its possession presently or hereafter, whether obtained under or in connection with this Agreement or otherwise, except for such notices, reports and other information expressly required by this Agreement or any other Loan Document to be furnished by the Administrative Agent to such Lender. 8.5 Administration By The Administrative Agent. (a) The Administrative Agent may rely upon any notice or other communication of any nature (written or oral, including but not limited to telephone conversations, whether or not such notice or other communication is made in a manner permitted or required by this Agreement or any other Loan Document) purportedly made by or on behalf of the proper party or parties, and the Administrative Agent shall not have any duty to verify the identity or authority of any Person giving such notice or other communication. (b) The Administrative Agent may consult with legal counsel (including in-house counsel for the Administrative Agent or in-house or other counsel for any Borrower), independent public accountants and any other experts selected by it from time to time, and the Administrative Agent shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts. (c) The Administrative Agent may conclusively rely upon the truth of the statements and the correctness of the opinions expressed in any certificates or opinions furnished to the Administrative Agent in accordance with the requirements of this Agreement or any other Loan Document. Whenever the Administrative Agent shall deem it necessary or desirable that a matter be proved or established with respect to any Borrower or Lender, such matter may be established by a certificate of such Borrower or Lender, as the case may be, and the Administrative Agent may conclusively rely upon such certificate (unless other evidence with respect to such matter is specifically prescribed in this Agreement or another Loan Document). (d) The Administrative Agent may fail or refuse to take any action unless it shall be directed by the Majority Lenders (or the Super Majority Lenders, all of the Lenders, or some other Person or group of Persons, if this Agreement or another Loan Document so expressly requires) to take such action and it shall be indemnified to its satisfaction from time to time against any and all amounts, liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature which may be imposed on, incurred by or asserted against the Administrative Agent by reason of taking or continuing to -57- take any such action. (e) The Administrative Agent may perform any of its duties under this Agreement or any other Loan Document by or through agents or attorneys-in-fact. The Administrative Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. (f) The Administrative Agent shall not be deemed to have any knowledge or notice of the occurrence of any Event of Default or Default unless the Administrative Agent has received notice from a Lender or a Borrower referring to this Agreement, describing such Event of Default or Default, and stating that such notice is a "notice of default." If the Administrative Agent receives such a notice, the Administrative Agent shall give prompt notice thereof to each Lender. 8.6 Lenders Not Relying On Administrative Agent Or Other Lenders. Each Lender acknowledges as follows: (a) neither the Administrative Agent nor any other Lender has made any representations or warranties to it, and no act taken hereafter by the Administrative Agent or any other Lender shall be deemed to constitute any representation or warranty by the Administrative Agent or such other Lender to it; (b) it has, independently and without reliance upon the Administrative Agent or any other Lender, and based upon such documents and information as it has deemed appropriate, made its own credit and legal analysis and decision to enter into this Agreement and the other Loan Documents; and (c) it will, independently and without reliance upon the Administrative Agent or any other Lender, and based upon such documents and information as it shall deem appropriate at the time, make its own decisions to take or not take action under or in connection with this Agreement and the other Loan Documents. 8.7 Indemnification. Each Lender agrees to reimburse and indemnify the Administrative Agent and its directors, officers, employees and agents (to the extent not reimbursed by a Borrower and without limitation of the obligations of the Borrowers to do so), in proportion to the Lenders' respective pro rata share of (without duplication) the Commitment and the Loans, from and against any and all amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature (including the fees and disbursements of counsel for the Administrative Agent or such other Person in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not the Administrative Agent or such other Person shall be designated a party thereto) that may at any time be imposed on, incurred by or asserted against the Administrative Agent or such other Person as a result of, or arising out of, or in any way related to or by reason of, this Agreement, any other Loan Document, any Acquisition or any other transaction from time to time contemplated hereby or thereby, or any transaction actually or proposed to be financed in whole or in part, directly or indirectly, with the proceeds of any Loan, provided that no Lender shall be liable for any portion of such amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements that -58- such Lender proves were the result of the gross negligence or willful misconduct of the Administrative Agent or such other Person. Payments under this Section 8.7 shall be due and payable on demand. 8.8 Register. The Administrative Agent shall maintain at its address referred to in Section 11.1 a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Commitment of, and principal amount of the Loans and stated interest thereon owing to, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrowers, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by NCO Group on behalf of the Borrowers or any Lender at any reasonable time and from time to time upon reasonable prior notice. 8.9 Successor Administrative Agent. The Administrative Agent may resign at any time by giving 30 days' prior written notice thereof to the other Lenders and NCO Group on behalf of the Borrowers. The Administrative Agent may be removed by the Majority Lenders at any time for cause by such Majority Lenders giving 30 days' prior written notice thereof to the Administrative Agent, the other Lenders and NCO Group on behalf of the Borrowers. Upon any such resignation or removal, the Majority Lenders shall have the right to appoint a successor Administrative Agent with (so long as no Default or Event of Default shall have occurred and then be continuing) the consent of NCO Group on behalf of the Borrowers whose consent shall not be unreasonably withheld or delayed. If no successor Administrative Agent shall have been so appointed and consented to, and shall have accepted such appointment, within 30 days after such notice of resignation or removal, then another Lender shall have the right to become the successor Administrative Agent by giving written notice thereof to NCO Group and the Lenders and if no Lender volunteers to become successor Administrative Agent or fails to give such notice within thirty five (35) days after the retiring Administrative Agent's notice of resignation or removal, then the retiring Administrative Agent may (but shall not be required to) appoint a successor Administrative Agent. Each successor Administrative Agent shall be a Lender if any Lender shall at the time be willing to become the successor Administrative Agent, and if no Lender shall then be so willing, then such successor Administrative Agent shall be an Eligible Institution. Upon the acceptance by a successor Administrative Agent of its appointment as Administrative Agent hereunder, such successor Administrative Agent shall thereupon succeed to and become vested with all the properties, rights, powers, privileges and duties of the former Administrative Agent in its capacity as such, without further act, deed or conveyance. Upon the effective date of resignation or removal of a retiring Administrative Agent, such Administrative Agent shall be discharged from its duties under this Agreement and the other Loan Documents, but the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted by it while it was Administrative Agent under this Agreement. If and so long as no successor Administrative Agent shall have been appointed, then any notice or other communication -59- required or permitted to be given by the Administrative Agent shall be sufficiently given if given by the Majority Lenders, all notices or other communications required or permitted to be given to the Administrative Agent shall be given to each Lender, and all payments to be made to the Administrative Agent shall be made directly to the Borrowers or Lender for whose account such payment is made. 8.10 Additional Agents. If the Administrative Agent shall from time to time deem it necessary or advisable, for its own protection in the performance of its duties hereunder or in the interest of the Lenders, the Administrative Agent and the Borrowers shall execute and deliver a supplemental agreement and all other instruments and agreements necessary or advisable, in the opinion of the Administrative Agent, to constitute one or more other Persons designated by the Administrative Agent, to act as co-Agent, with such powers of the Administrative Agent as may be provided in such supplemental agreement, and to vest in such other Person as such co-agent or separate agent, as the case may be, any properties, rights, powers, privileges and duties of the Administrative Agent under this Agreement or any other Loan Document. 8.11 Calculations. The Administrative Agent shall not be liable for any calculation, apportionment or distribution of payments made by it in good faith and without gross negligence or willful misconduct. If such calculation, apportionment or distribution is subsequently determined to have been made in error, the sole recourse of any Lender to whom payment was due but not made shall be to recover from the other Lenders any payment in excess of the amount to which they are determined to be entitled or, if the amount due was not paid by the appropriate Borrower, to recover such amount from the appropriate Borrower. 8.12 Administrative Agent In Its Individual Capacity. With respect to its Commitment hereunder and the Obligations owing to it, the Administrative Agent shall have the same rights and powers under this Agreement and each other Loan Document as any other Lender and may exercise the same as though it were not the Administrative Agent, and the terms "Lender", "Holder of Notes" and like terms shall include the Administrative Agent in its individual capacity as such. The Administrative Agent and its Affiliates may, without liability to account, make loans to, accept deposits from, acquire debt or equity interests in, act as trustee under indentures of, enter into Interest Rate Hedging Agreements with, serve as "Administrative Agent" for other financing vehicles, issue letters of credit on behalf of, and engage in any other business with, (a) any Borrower or any stockholder, Subsidiary or Affiliate of any Borrower, or (b) any other Person, whether such other Person may be engaged in any conflict or dispute with any Borrower or any Lender or otherwise, as though the Administrative Agent were not the Administrative Agent hereunder. -60- ARTICLE IX SPECIAL INTER-BORROWER PROVISIONS 9.1 Certain Borrower Acknowledgements. (a) Each Borrower acknowledges that it will enjoy significant benefits from the business conducted by the other Borrowers because of, inter alia, their combined ability to bargain with other Persons including without limitation their ability to receive the credit facilities on favorable terms granted by this Agreement and other Loan Documents which would not have been available to an individual Borrower acting alone. Each Borrower has determined that it is in its best interest to procure credit facilities which each Borrower may utilize directly and which receive the credit support of the other Borrowers as contemplated by this Agreement and the other Loan Documents. (b) The Lenders have advised the Borrowers that they are unwilling to enter into this Agreement and the other Loan Documents and make available the credit facilities extended hereby to any Borrower unless each Borrower agrees, among other things, to be jointly and severally liable for the due and proper payment of the obligations of each other Borrower under this Agreement and other Loan Documents. Each Borrower has determined that it is in its best interest and in pursuit of its purposes that it so induce the Lenders to extend credit pursuant to this Agreement and the other documents executed in connection herewith (i) because of the desirability to each Borrower of the credit facilities, the interest rates and the modes of borrowing available hereunder, (ii) because each Borrower may engage in transactions jointly with other Borrowers and (iii) because each Borrower may require, from time to time, access to funds under this Agreement for the purposes herein set forth. (c) Each Borrower has determined that it has and, after giving effect to the transactions contemplated by this Agreement and the other Loan Documents (including, without limitation, the inter-Borrower arrangement set forth in this Article 9 will have, assets having a fair saleable value in excess of the amount required to pay its probable liability on its existing debts as they fall due for payment and that the sum of its debts is not and will not then be greater than all of its property at a fair valuation, that such Borrower has, and will have, access to adequate capital for the conduct of its business and the ability to pay its debts from time to time incurred in connection therewith as such debts mature and that the value of the benefits to be derived by such Borrower from the access to funds under this Agreement (including, without limitation, the inter-Borrower arrangement set forth in this Article 9) is reasonably equivalent to the obligations undertaken pursuant hereto. 9.2 Certain Inter-Borrower Agreements. (a) Subject to paragraph (b) below, each Borrower as indemnitor shall indemnify the other Borrowers as indemnitees for all Obligations incurred by the indemnitee Borrowers for -61- Loans advanced to the indemnitor Borrower. (b) The rights and obligations of the Borrowers pursuant to paragraph (a) above shall be subordinated in all respects to the rights of the Administrative Agent and the other Lenders with respect to the Obligations and, accordingly, each Borrower agrees that it shall not make any payment or receive any payment pursuant to the preceding paragraph (a) at any time a Default has occurred and is continuing or would be caused thereby. Each Borrower agrees that in the event it receives any payment described by or in violation of this paragraph (b), it shall accept such payment as agent of the Administrative Agent, for the benefit of the Lenders, and hold the same in trust on behalf of and for the benefit of the Administrative Agent, for the benefit of the Lenders. 9.3 Records. NCO Group (on behalf of each Borrower) shall maintain records specifying (a) all Obligations incurred by each Borrower, (b) the date of such incurrence, (c) the date and amount of any payments made in respect of such Obligations and (d) all inter-Borrower obligations pursuant to paragraph 9.2 above. NCO Group shall make copies of such records available to the Administrative Agent, upon request. ARTICLE X DEFINITIONS; CONSTRUCTION 10.1 Certain Definitions. As used in this Agreement, the following terms have the following meanings, (terms defined in the singular to have a correlative meaning when used in the plural) unless the context hereof otherwise clearly requires: "Accumulated Funding Deficiency" has the meaning given to such term in Section 4001(a)(18) of ERISA. "Administrative Agent" has the meaning ascribed to such term in the preamble of this Agreement. "Affiliate" of a Person (the "Specified Person") shall mean (a) any Person which directly or indirectly controls, or is controlled by, or is under common control with, the Specified Person, (b) any director or officer (or, in the case of a Person which is not a corporation, any individual having analogous powers) of the Specified Person or of a Person who is an Affiliate of the Specified Person within the meaning of the preceding clause (a), and (c) for each individual who is an Affiliate of the Specified Person within the meaning of the foregoing clauses (a) or (b), any other individual related to such Affiliate by consanguinity within the third degree or in a step or adoptive relationship within such third degree or related by affinity with such Affiliate or any such individual. For purposes of the preceding sentence, "control" of a Person means (a) the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by contract or -62- otherwise. "Agreement" means this Credit Agreement as the same may be amended, modified, restated or supplemented from time to time in accordance with its terms. "Applicable Margin" means a marginal rate of interest which is added to the LIBO Rate or Prime Rate to determine the effective rate of interest on LIBO Rate Loans or the Prime Rate Loans, as the case may be. The Applicable Margin shall be determined in the following manner: For any LIBO Rate Loan or Prime Rate Loan, the Applicable Margin shall be the percentage amount set forth below under the caption "Applicable Margin" for such Loan opposite the relevant Consolidated Funded Debt/Consolidated EBITDA Ratio: -63-
Grid A (pre-offering) Consolidated Funded Debt/ Applicable Margin Applicable Margin Level Consolidated EBITDA Ratio LIBO Rate Loans Prime Rate Loans ---------------------------------- ----------------- ------------------ 1 below 1.50 1.00% - 2 > 1.50 < 2.00 1.25% - - - 3 > 2.00 < 2.50 1.50% - - 4 > 2.50 < 3.00 1.75% - - 5 > 3.00 2.00% .25%
From the Closing Date until the first day of the month following delivery of the Officer's Compliance Certificate required under Section 5.1 for the third quarter of 1999, the Applicable Margin shall be at Level 5 of Grid A. Beginning with receipt of the Officer's Compliance Certificate for the third quarter of 1999, the Applicable Margin shall be adjusted on the first Business Day of the month after delivery of each Officer's Compliance Certificate under Section 5.1 or in the event of any Permitted Acquisition, on the first Business day of the month after closing and delivery of the Proforma Covenant Compliance Certificate required for the acquisition. If an Officer's Compliance Certificate is required to be delivered pursuant to Section 5.1 and is not so delivered, then the Applicable Margin shall be the highest rate specified above until the Officer's Compliance Certificate is so delivered. In the event NCO Group successfully completes by March 31, 2000 (i) a convertible subordinated debt issuance in the minimum amount of $150,000,000 and/or (ii) a common stock issuance in the minimum amount of $100,000,000 and/or (iii) a convertible subordinated debt issuance in the minimum amount of $100,000,000 in conjunction with a common stock issuance in the minimum amount of $25,000,000, then the Applicable Margin shall be based on Grid B, but in no event shall Grid B become effective prior to October 1, 1999: -64-
Grid B (post-offering) Consolidated Funded Debt/ Applicable Margin Applicable Margin Level Consolidated EBITDA Ratio LIBO Rate Loans Prime Rate Loans ---------------------------------- ------------------ ------------------ 1 below 1.50 .75% - 2 > 1.50 < 2.00 1.00% - - - 3 > 2.00 < 2.50 1.25% - - 4 > 2.50 < 3.00 1.50% - - 5 > 3.00 < 3.50 1.75% - - 6 > 3.50 < 4.00 2.00% .25% - 7 > 4.00 2.25% .50%
"Assignment and Acceptance Agreement" shall have the meaning ascribed to such term in Section 11.9. "Available RC Commitment" means, as of any date, the difference obtained by subtracting (a) minus (b) where (a) is the amount of the RC Commitment on such date and (b) is the aggregate outstanding principal amount of all Loans plus amounts available to be drawn under Letters of Credit on such date. "Bank Tax" means (i) any Tax based on or measured by net income of a Lender, any franchise Tax and any doing business Tax imposed upon any Lender by any jurisdiction (or any political subdivision thereof) in which such Lender or any lending office of a Lender is located and (ii) for the purposes of Section 1.13, any other Tax imposed by a jurisdiction other than the United States or a political subdivision thereof that would not have been imposed but for a present or former connection between such Lender or lending office (as the case may be) and such jurisdiction. "Borrowers" has the meaning ascribed to such term in the preamble hereto. Unless the Administrative Agent agrees otherwise, each Person which is now or hereafter becomes a direct or indirect Subsidiary of NCO Group shall at all times after becoming a Subsidiary of NCO Group be a "Borrower" pursuant to the terms of this Agreement. "Business Day" means any day other than a Saturday, Sunday, public holiday under the laws of the Commonwealth of Pennsylvania, or other day on which banking institutions are authorized or obligated to close in the city in which the Administrative Agent's Domestic Lending Office is located provided, however, that whether or not expressly stated in this Agreement or other Loan Documents, when "Business Day" is used with respect to any LIBO Rate Loan, such Business Day must also be a Eurodollar Business Day. "Capital Expenditures", of any Person shall mean, for any period, all expenditures -65- (whether paid in cash or accrued as liabilities during such period) of such Person during such period which would be classified as capital expenditures in accordance with GAAP (including, without limitation, expenditures for maintenance and repairs which are capitalized, Capitalized Leases to the extent an asset is recorded in connection therewith in accordance with GAAP, and Purchase Money Indebtedness), but excluding any capital assets acquired as part of a Permitted Acquisition. "Capitalized Lease" shall mean at any time any lease, other than a real estate lease or automobile lease, which is, or is required under GAAP to be, capitalized on the balance sheet of the lessee at such time, and "Capitalized Lease Obligation" of any Person at any time shall mean the aggregate amount which is, or is required under GAAP to be, reported as a liability on the balance sheet of such Person at such time as lessee under a Capitalized Lease. "Cash Equivalent Investments" shall mean any of the following, to the extent acquired for investment and not with a view to achieving trading profits: (a) obligations fully backed by the full faith and credit of the United States of America maturing not in excess of nine months from the date of acquisition, (b) commercial paper maturing not in excess of nine months from the date of acquisition and rated "P-1" by Moody's Investors Service or "A-1" by Standard & Poor's Corporation on the date of acquisition, and (c) the following obligations of any domestic commercial bank having capital and surplus in excess of $500,000,000, which has, or the holding company of which has, a commercial paper rating meeting the requirements specified in clause (b) above: (i) time deposits, certificates of deposit and acceptances maturing not in excess of nine months from the date of acquisition, or (ii) repurchase obligations with a term of not more than seven days for underlying securities of the type referred to in clause (a) above. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation and Liability Act, as amended, and any successor statute of similar import, and regulations thereunder, in each case as in effect from time to time. "CERCLIS" shall mean the Comprehensive Environmental Response, Compensation and Liability Information System List, as the same may be amended from time to time. "Change of Management" shall mean (a) that a majority of the Board of Directors of NCO Group shall be other than those who were directors on the date hereof plus Stuart Wolf; or (b) Michael J. Barrist for any reason shall cease to serve as chief executive officer of NCO Group; provided, however, that the cessation of Michael Barrist's status as chief executive officer shall not fall within the definition of a Change of Management so long as a replacement is hired within ninety (90) calendar days of such cessation who is reasonably satisfactory to the Super Majority Lenders. "Closing Date" means the date of execution and delivery of this Agreement. "COBRA Violation" means any violation of the "continuation coverage requirements" of -66- "group health plans" of former Section 162(k) of the Code (as in effect for tax years beginning on or before December 31, 1988) and of Section 4980B of the Code (as in effect for tax years beginning on or after January 1, 1989) and Part 6 of Subtitle B of Title I of ERISA. "Code" means the Internal Revenue Code of 1986, as amended, and any successor statute of similar import, and regulations thereunder, in each case as in effect from time to time, and the Treasury regulations thereunder. "Collateral" shall mean the property from time to time subject to the Liens of the Security Documents. "Commitment" shall mean the RC Commitment. "Consolidated EBIT" for any period, with respect to NCO Group and its consolidated Subsidiaries, shall mean the sum of (a) Consolidated Net Income for such period, (b) Consolidated Interest Expense for such period, (c) charges against income for Taxes for such period, (d) extraordinary losses to the extent included in determining such Consolidated Net Income, minus (e) extraordinary gains to the extent included in determining such Consolidated Net Income, all as determined on a consolidated basis in accordance with GAAP. "Consolidated EBITDA" for any period, with respect to NCO Group and its consolidated Subsidiaries, shall mean the sum of (a) Consolidated EBIT for such period, (b) depreciation expense for such period, and (c) amortization expense for such period, all as determined on a consolidated basis in accordance with GAAP. "Consolidated Fixed Charge Coverage Ratio" for any period, with respect to NCO Group and its consolidated Subsidiaries, shall mean the ratio of (i) Consolidated EBITDA minus Capital Expenditures for such period to (ii) the sum for such period of (a) Consolidated Interest Expense, (b) principal payments on Indebtedness and (c) Taxes, all as determined on a consolidated basis in accordance with GAAP. "Consolidated Funded Debt" shall mean all Indebtedness of NCO Group and its consolidated Subsidiaries for borrowed money, including without limitation the Obligations, Capitalized Leases and Subordinated Debt. "Consolidated Interest Coverage Ratio" for any period shall mean the ratio of Consolidated EBIT for such period to the Consolidated Interest Expense for such period. "Consolidated Interest Expense" for any period shall mean the total Interest Expense of NCO Group and its consolidated Subsidiaries for such period determined on a consolidated basis in accordance with GAAP. "Consolidated Net Income" for any period shall mean the net earnings (or loss) after taxes of NCO Group and its consolidated Subsidiaries for such period determined on a -67- consolidated basis in accordance with GAAP; provided, that there shall be deducted therefrom (a) the income (or deficit) of any Person accrued prior to the date it becomes a consolidated Subsidiary or is merged into or consolidated, acquired by or combined with NCO Group or any consolidated Subsidiary in a business combination accounted for as a pooling of interests, including, in the case of a successor to NCO Group or any consolidated Subsidiary by consolidation or merger or transfer of assets, any earnings of the successor corporation prior to such consolidation, merger or transfer of assets, (b) income or loss accounted for by NCO Group on the equity method because of the income (or deficit) during such period of any Person (other than a consolidated Subsidiary) in which NCO Group or any consolidated Subsidiary has an ownership interest, but the deduction for such equity income shall be reversed to the extent that during such period or at any subsequent time an amount not in excess of such income has been actually received by NCO Group or such consolidated Subsidiary in the form of cash or property dividends or similar distributions, (c) income or loss of a foreign Subsidiary, but the deduction for such Subsidiary income shall be reversed to the extent that during such period or at any subsequent time an amount not in excess of such income has been actually received by NCO Group or such consolidated Subsidiary in the form of cash or property dividends or similar distributions, not subject to foreign currency translation, (d) the undistributed earnings of any consolidated Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such consolidated Subsidiary is restricted (whether such restriction arises by operation of Law, by agreement, by its articles of incorporation or by-laws (or other constituent documents), or otherwise), (e) any restoration to income of any contingency reserve, except to the extent that provision for such reserve was made against income during such period, and (f) any gain arising from the acquisition of any securities, or the extinguishment, under GAAP, of any Indebtedness, of NCO Group or any consolidated Subsidiary. "Consolidated Net Worth" at any time shall mean the total amount of stockholders' equity of NCO Group and its consolidated Subsidiaries at such time determined on a consolidated basis in accordance with GAAP. "Consolidated Pro-Forma Revenue" for any period shall mean (a) all revenue reported on the financial statements provided pursuant to Section 3.2 of the Borrowers for the period plus (b) to the extent not included in such reported revenue, revenues during the period generated by properties or businesses Borrowers acquire in Permitted Acquisitions during the period minus (c) to the extent not already excluded from the revenue numbers under clauses (a) and (b), any revenues generated by properties or businesses that a Borrower or an acquired company has divested during the period. "Consolidated Senior Debt" shall mean all Indebtedness of NCO Group and its consolidated Subsidiaries for borrowed money, including without limitation the Obligations and Capitalized Leases, but excluding Subordinated Debt. "Contingent Reimbursement Obligation" shall mean the contingent obligation of the Borrowers to reimburse the Issuer for any Drawings that may be made under an outstanding -68- Letter of Credit, whenever issued. Without limiting the generality of the foregoing, the amount of all Contingent Reimbursement Obligations at any time shall be the aggregate amount available to be drawn under outstanding Letters of Credit at such time. "Controlled Group Member" shall mean each trade or business (whether or not incorporated) which together with any Borrower is treated as a single employer under Sections 4001(a)(14) or 4001(b)(1) of ERISA or Sections 414(b), (c), (m) or (o) of the Code. "Co-Source Acquisition" means the proposed acquisition by NCO Group of all of the stock of Co-Source Corporation under a stock purchase agreement. "Co-Source Acquisition Agreements" has the meaning set forth in Section 3.1(c)(i) hereof. "Credit Agreement" shall mean the Amended and Restated Credit Agreement between the Borrowers and the Administrative Agent dated as of September 5, 1996, as amended. "Default" means any event or condition which with notice, passage of time or both, would constitute an Event of Default. "Default Rate" means, with respect to any amounts payable hereunder or under the other Loan Documents, a rate equal to the sum of (a) two percent (2%) per annum plus (b) the interest rate otherwise in effect with respect to such amounts or, if no such rate is otherwise in effect with respect to such amounts, a rate equal to the sum of (i) the Prime Rate plus (ii) two percent (2%). "Dollar," "Dollars" and the symbol "$" means lawful money of the United States of America. "Domestic Lending Office" means, with respect to any Lender (i) the office designated as such on the signature page hereof, or (ii) the branch or office of such Lender designated, from time to time, by such Lender in a notice to the Administrative Agent and NCO Group. "Drawing" shall mean (a) any amount disbursed by the Issuer pursuant to the terms of a Letter of Credit or (b) as the context may require, the obligation of the Borrowers to reimburse the Issuer for such disbursement. "Eligible Institution" means (i) a Lender; (ii) an Affiliate of a Lender; (iii) a commercial bank organized under the laws of the United States, or any State thereof, and having a combined capital and surplus of at least $1,000,000,000.00; (iv) a savings and loan association or savings bank organized under the laws of the United States, or any State thereof, and having a combined capital and surplus of at least $1,000,000,000.00; (v) a commercial bank organized under the laws of any other country that is a member of the Organization for Economic Cooperation and Development or has concluded special lending arrangements with the International Monetary Fund associated with its General Arrangements to Borrow or under the laws of a political -69- subdivision of any such country, and having a combined capital and surplus of at least $1,000,000,000.00, so long as such bank is acting through a branch or agency located in the United States; and (vi) a finance company, insurance company or other financial institution or fund (whether a corporation, partnership, trust or other entity) that is engaged in making, purchasing or otherwise investing in commercial loans in the ordinary course of its business and having a combined capital and surplus or total assets of at least $500,000,000.00 and (vii) with respect to any Lender that is a fund, any other fund with assets in excess of $100,000,000.00 that invests in bank loans and is managed by the same investment advisor as such Lender; provided, however, that neither any Borrower nor any Affiliate of a Borrower shall qualify as an Eligible Institution under this definition. "Environmental Affiliate" shall mean, with respect to any Person, any other Person whose liability (contingent or otherwise) for any Environmental Claim such Person has retained, assumed or otherwise is liable for (by Law, agreement or otherwise). "Environmental Approvals" shall mean any Governmental Action pursuant to or required under any Environmental Law. "Environmental Claim" shall mean, with respect to any Person, any action, suit, proceeding, investigation, notice, claim, complaint, demand, request for information or other communication (written or oral) by any other Person (including but not limited to any Governmental Authority, citizens' group or present or former employee of such Person) alleging, asserting or claiming any actual or potential (a) violation of any Environmental Law, (b) liability under any Environmental Law or (c) liability for investigatory costs, cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries, fines or penalties arising out of, based on or resulting from the presence, or release into the environment, of any Environmental Concern Materials at any location, whether or not owned by such Person. "Environmental Cleanup Site" shall mean any location which is listed or proposed for listing on the National Priorities List, on CERCLIS or on any similar state list of sites requiring investigation or cleanup, or which is the subject of any pending or threatened action, suit, proceeding or investigation related to or arising from any alleged violation of any Environmental Law. "Environmental Concern Materials" shall mean (a) any flammable substance, explosive, radioactive material, hazardous material, hazardous waste, toxic substance, solid waste, pollutant, contaminant or any related material, raw material, substance, product or by-product of any substance specified in or regulated or otherwise affected by any Environmental Law (including but not limited to any "hazardous substance" as defined in CERCLA or any similar state Law), (b) any toxic chemical or other substance from or related to industrial, commercial or institutional activities, and (c) asbestos, gasoline, diesel fuel, motor oil, waste and used oil, heating oil and other petroleum products or compounds, polychlorinated biphenyls, radon and urea formaldehyde. -70- "Environmental Law" shall mean any Law, whether now existing or subsequently enacted or amended, relating to (a) pollution or protection of the environment, including natural resources, (b) exposure of Persons, including but not limited to employees, to Environmental Concern Materials, (c) protection of the public health or welfare from the effects of products, by-products, wastes, emissions, discharges or releases of Environmental Concern Materials or (d) regulation of the manufacture, use or introduction into commerce of Environmental Concern Materials including their manufacture, formulation, packaging, labeling, distribution, transportation, handling, storage or disposal. Without limitation, "Environmental Law" shall also include any Environmental Approval and the terms and conditions thereof. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, and any successor statute of similar import, and regulations thereunder, in each case as in effect from time to time. References to sections of ERISA shall be construed also to refer to any successor sections. "Eurodollar Business Day" means any Business Day on which dealings in Dollar deposits are carried on in the London interbank market and on which commercial banks are open for domestic and international business (including dealings in Dollar deposits) in London, England. "Eurodollar Lending Office" means, with respect to any Lender, the branch or office of such Lender designated by such Person on the signature page hereof or in a notice to the Administrative Agent and NCO Group. "Event of Default" shall mean any of the Events of Default described in Article 7 hereof. "Excluded Subsidiaries" means those Subsidiaries listed on Schedule 5.16 hereof. "Federal Funds Rate" for any day means the rate per annum determined by the Administrative Agent (which determination shall be conclusive) to be the rate per annum announced by the Federal Reserve Bank of New York on such day as being the weighted average of the rates on overnight Federal funds transactions arranged by federal funds brokers on the previous trading day, or, if such Federal Reserve Bank does not announce such rate on any day, the rate for the last day on which such rate was announced. "GAAP" has the meaning set forth in Section 10.3 hereof. "Governmental Action" has the meaning set forth in Section 4.1(d) hereof. "Governmental Authority" means any government or political subdivision or any agency, authority, bureau, central bank, commission, department or instrumentality of either, or any court, tribunal, grand jury or arbitrator, in each case whether foreign or domestic. "Guaranty" means, with respect to any Person (a "Guarantor"), any contractual or other -71- obligation, contingent or otherwise, of such Person to pay any Indebtedness or other obligation of any other Person or to otherwise protect the holder of any such Indebtedness or other obligation against loss (whether such obligation arises by agreement to pay, to keep well, to purchase assets, goods, securities or services or otherwise) provided, however, that the term "Guaranty" shall not include an endorsement for collection or deposit in the ordinary course of business. The term, "Guaranty," when used as a verb has the correlative meaning. "Guaranty Equivalent" shall have the meaning set forth below: A Person (the "Deemed Guarantor") shall be deemed to subject to a Guaranty Equivalent in respect of any indebtedness, obligation or liability (the "Assured Obligation") of another Person (the "Deemed Obligor") if the Deemed Guarantor directly or indirectly guarantees, becomes surety for, endorses, assumes, agrees to indemnify the Deemed Obligor against, or otherwise agrees, becomes or remains liable (contingently or otherwise) for, such Assured Obligation. Without limitation, a Guaranty Equivalent shall be deemed to exist if a Deemed Guarantor agrees, becomes or remains liable (contingently or otherwise), directly or indirectly: (a) to purchase or assume, or to supply funds for the payment, purchase or satisfaction of, an Assured Obligation, (b) to make any loan, advance, capital contribution or other investment in, or to purchase or lease any property or services from, a Deemed Obligor (i) to maintain the solvency of the Deemed Obligor, (ii) to enable the Deemed Obligor to meet any other financial condition, (iii) to enable the Deemed Obligor to satisfy any Assured Obligation or to make any Stock Payment or any other payment, or (iv) to assure the holder of such Assured Obligation against loss, (c) to purchase or lease property or services from the Deemed Obligor regardless of the non-delivery of or failure to furnish of such property or services, (d) in a transaction having the characteristics of a take-or-pay or throughput contract or as described in paragraph 6 of FASB Statement of Financial Accounting Standards No. 47, or (e) in respect of any other transaction the effect of which is to assure the payment or performance (or payment of damages or other remedy in the event of nonpayment or nonperformance) of any Assured Obligation. "Indebtedness" of a Person shall mean: (a) All obligations on account of money borrowed by, or credit extended to or on behalf of, or for or on account of deposits with or advances to, such Person; (b) All obligations of such Person evidenced by bonds, debentures, notes or similar instruments; (c) All obligations of such Person for the deferred purchase price of property or services, including without limitation, with respect to the Borrower, all obligations incurred by the Borrower to a seller in connection with any Permitted Acquisition; (d) All obligations secured by a Lien on property owned by such Person (whether or not assumed); and all obligations of such Person under Capitalized Leases (without regard to any limitation of the rights and remedies of the holder of such Lien or -72- the lessor under such Capitalized Lease to repossession or sale of such property); (e) The face amount of all letters of credit issued for the account of such Person and, without duplication, the unreimbursed amount of all drafts drawn thereunder, and all other obligations of such Person associated with such letters of credit or draws thereon; (f) All obligations of such Person in respect of acceptances or similar obligations issued for the account of such Person; (g) All obligations of such Person under a product financing or similar arrangement described in paragraph 8 of FASB Statement of Accounting Standards No. 49 or any similar requirement of GAAP; and (h) All obligations of such Person under any interest rate or currency protection agreement, interest rate or currency future, interest rate or currency option, interest rate or currency swap or cap or other interest rate or currency hedge agreement. "Indemnified Parties" shall mean the Lender, its respective affiliates, and the directors, officers, employees, attorneys and agents of each of the foregoing. "Interest Expense" means, for any Person, for any period, the sum (without duplication) of (a) all interest accrued (or accreted) on Indebtedness of such Person during such period whether or not actually paid plus (b) the net amount accrued under any Interest Rate Hedging Agreements (or less the net amount receivable thereunder) during such period. "Interest Period" means with respect to any LIBO Rate Loan, (a) initially, the period commencing on the borrowing or conversion date, as the case may be, and ending one, two, three or six months thereafter as selected by the Borrowers pursuant to Section 1.8 above and (b) thereafter, each period commencing on the day after the last day of the preceding Interest Period and ending one, two, three or six months thereafter, as selected by the Borrower pursuant to Section 1.8 above provided, however, if any such Interest Period would otherwise end on a day which is not a Eurodollar Business Day, such Interest Period shall be extended to the next succeeding Eurodollar Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Eurodollar Business Day and provided, further, if any such Interest Period begins on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period (as may be the case with an Interest Period commencing at the end of a calendar month) the Interest Period shall end on the last Eurodollar Business Day of the relevant calendar month. "Interest Rate Hedging Agreement" means any rate swap, cap or collar agreement with a term as may be acceptable to the Lenders to which any or all of the Borrowers are party and -73- which is on terms and conditions satisfactory to the Majority Lenders. "Issuer" shall have the meaning set forth in the preamble. "Law" means any law (including common law), constitution, statute, treaty, convention, regulation, licensing requirement, rule, ordinance, order, injunction, writ, decree or award of any Governmental Authority. "Lender" has the meaning ascribed to such term in the preamble hereto. "Letter of Credit" shall mean any letter of credit issued by Issuer pursuant to Section 1.15 hereof. "Letter of Credit Participation" shall mean, with respect to any Lender, the participation interest of such Lender in any Letter of Credit acquired pursuant to Section 1.15. The amount of the Letter of Credit Participation of a Lender in any Letter of Credit shall be deemed to be the amount equal to such Lender's pro rata share (determined on the basis of the Commitment at such time) of the sum of (a) the aggregate unpaid amount of all Drawings thereunder at such time and (b) the amount of any Contingent Reimbursement Obligations with respect thereto at such time. "LIBO Rate" means the rate per annum determined by the Administrative Agent by dividing (the resulting quotient to be rounded upward to the nearest 1/100 of 1%) (a) the rate of interest (which shall be the same for each day in such Interest Period) determined in good faith by the Administrative Agent (which determination shall be conclusive) to be the average of the rates per annum for deposits in Dollars offered to major money center banks in the London interbank market at approximately 11:00 a.m., London time, two Eurodollar Business Days prior to the first day of the applicable Interest Period for delivery on the first day of such Interest Period in similar amounts and maturities as the proposed LIBO Rate Loan by (b) a number equal to 1.0 minus the Reserve Percentage. "Reserve Percentage" for any day means the percentage (expressed as a decimal, rounded upward to the nearest 1/100 of 1%), as determined in good faith by the Administrative Agent (which determination shall be conclusive), which is in effect on such day as prescribed by the Board of Governors of the Federal Reserve System representing the maximum reserve requirement (including supplemental, marginal and emergency reserve requirements) with respect to eurocurrency funding (currently referred to as "Eurocurrency liabilities") of a member bank in such System. The LIBO Rate shall be adjusted automatically as of the effective date of each change in the Reserve Percentage. "LIBO Rate Loan" means a Loan bearing interest at the per annum rate of the LIBO Rate plus Applicable Margin. "Licenses" means any and all licenses, permits, franchises, rights to conduct business, approvals by a Governmental Authority or otherwise, consents, qualifications, operating -74- authority, and/or any other authorizations. "Lien" shall mean any mortgage, deed of trust, pledge, lien, security interest, charge or other encumbrance or security arrangement of any nature whatsoever, including but not limited to any conditional sale or title retention arrangement, and any assignment, deposit arrangement or lease intended as, or having the effect of, security. "Limitation" means a revocation, suspension, termination, impairment, probation, limitation, non-renewal, forfeiture, declaration of ineligibility, and/or loss of any other rights. "Loan" shall mean any loan by the Lenders to any Borrower under this Agreement, and "Loans" shall mean all Loans made by the Lenders under this Agreement. "Loan Documents" shall mean this Agreement, the Notes, the Security Documents, and all other agreements and instruments extending, renewing, refinancing or refunding any indebtedness, obligation or liability arising under any of the foregoing, in each case as the same may be amended, modified or supplemented from time to time hereafter. "Majority Lenders" means, as of any date, Lenders otherwise eligible to vote pursuant to the terms of this Agreement holding, in the aggregate, at least 51% of the aggregate outstanding Loans and available Commitments so eligible to vote. "Material Adverse Effect" shall mean: (a) a material adverse effect on the business, operations or condition (financial or otherwise) of the Borrowers taken as a whole, (b) a material adverse effect on the ability of any Borrowers, taken as a whole, to perform or comply with any of the terms and conditions of any Loan Document, or (c) a material adverse effect on the legality, validity, binding effect, enforceability or admissibility into evidence of any Loan Document, or the ability of the Lender to enforce any rights or remedies under or in connection with any Loan Document. "Maturity Date" shall mean the fifth anniversary of the Closing Date. "Mellon" has the meaning ascribed to such term in the preamble hereof. "Monthly Payment Date" means the last Business Day of each month. "Multiemployer Plan" has the meaning ascribed to such term in Section 4001(a)(3) of ERISA. "Non-U.S. Lender" means any Lender that is not a United States Person. "Note" means RC Notes. "Obligations" shall mean all indebtedness, obligations and liabilities of any Borrower to the Lenders from time to time arising under or in connection with or related to or evidenced by or -75- secured by or under color of this Agreement, any other Loan Document, or any Interest Rate Hedging Agreement, together with all extensions, renewals or refinancings thereof, whether such indebtedness, obligations or liabilities are direct or indirect, otherwise secured or unsecured, joint or several, absolute or contingent, due or to become due, whether for payment or performance, now existing or hereafter arising. Without limitation of the foregoing, such indebtedness, obligations and liabilities include the principal amount of all Loans, Letters of Credit, interest, fees, indemnities or expenses under or in connection with this Agreement or any other Loan Document, and all extensions, renewals and refinancings thereof, whether or not such Loans were made, or such Letters of Credit were issued, in compliance with the terms and conditions of this Agreement or in excess of the obligation of the Lender to lend. Obligations shall remain Obligations notwithstanding any assignment or transfer or any subsequent assignment or transfer of any of the Obligations or any interest therein. "Officer's Compliance Certificate" means a certificate, as of a specified date, of the chief financial officer or controller of NCO Group in substantially the form of Exhibit H hereto as to each of the following: (a) the absence of any Event of Default or Default on such date, (b) the truth of the representations and warranties herein and in the other Loan Documents as of such date, and (c) compliance with the financial covenants set forth in Article 6. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Pension Plan" means a pension plan (as defined in Section 3(2) of ERISA) which is subject to Part 3 of Subtitle B of Title I of ERISA or subject to Section 412 of the Code and maintained by any Borrower or any member of its Controlled Group. "Pension-Related Event" shall mean any of the following events or conditions: (a) Any action is taken by any Person (i) to terminate, or which would result in the termination of, a Plan, either pursuant to its terms or by operation of law (including, without limitation, any amendment of a Plan which would result in a termination under Section 4041(e) of ERISA), or (ii) to have a trustee appointed for a Plan pursuant to Section 4042 of ERISA; (b) PBGC notifies any Person of its determination that an event described in Section 4042 of ERISA has occurred with respect to a Plan, that a Plan should be terminated, or that a trustee should be appointed for a Plan; (c) Any Reportable Event occurs with respect to a Plan; (d) Any action occurs or is taken which could result in any Borrower becoming subject to liability for a complete or partial withdrawal by any Person from a Multiemployer Plan (including, without limitation, seller liability incurred under Section -76- 4204(a)(2) of ERISA), or any Borrower or any Controlled Group Member receives from any Person a notice or demand for payment on account of any such alleged or asserted liability; or (e) (i) There occurs any failure to meet the minimum funding standard under Section 302 of ERISA or Section 412 of the Code with respect to a Plan, or any tax return is filed showing any tax payable under Section 4971(a) of the Code with respect to any such failure, or any Borrower or any Controlled Group Member receives a notice of deficiency from the Internal Revenue Service with respect to any alleged or asserted such failure, or (ii) any request is made by any Person for a variance from the minimum funding standard, or an extension of the period for amortizing unfunded liabilities, with respect to a Plan. "Permitted Acquisition" shall mean any acquisition (by way of stock purchase, merger, asset purchase or otherwise) by any Borrower of all of the properties of any going concern or going line of business; provided, however, that (1) each such business being acquired by such Borrower must (a) have a positive EBITDA for the immediately preceding twelve months prior to the acquisition, after adjustments for unusual expense items and (b) be in the same or a similar line of business as such Borrower, (2) after recasting the Borrowers' consolidated financial statements for the immediately preceding twelve month period to include the results of operations from the target of the acquisition, and preparing pro-forma financial statements for the immediately succeeding twelve month period, the combined Borrower and target shall have met the financial covenants described in Section 6.1 of this Agreement for the immediately preceding twelve months prior to the acquisition and on a pro-forma basis for the immediately following twelve month period after the acquisition (such compliance to be evidenced by a Pro-Forma Covenant Compliance Certificate in the form of Exhibit "H" attached hereto ("Pro-Forma Covenant Compliance Certificate"), (3) with respect to any merger, the Borrower shall be the surviving corporation, (4) after giving effect to the acquisition, no Event of Default or Default shall exist, (5) the disclosure schedules shall be updated to account for the acquisition as required by Section 5.17 and (6) the cash consideration to be paid by such Borrower for the acquisition must not exceed $25,000,000 in any rolling twelve month period. An acquisition meeting the criteria set forth in this definition does not require the consent of any Lender provided that the due diligence on such acquisition, including a review of all acquisition documents shall be satisfactory to the Super Majority Lenders. Any acquisition which does not meet the criteria set forth in the provisos to this definition requires the prior written consent of the Super Majority Lenders. "Permitted Acquisition Indebtedness" means Indebtedness incurred by a Borrower to the seller in connection with a Permitted Acquisition that is (1) unsecured, (2) subordinated to the Obligations as provided in the next sentence, and (3) without financial covenants binding on any Borrower. The terms of subordination, which at the request of the Administrative Agent shall be embodied in a separate subordination agreement in the form of Exhibit "J" attached -77- hereto, shall prohibit the Borrower from making any payments of principal, interest, or other sums on the Indebtedness following an Event of Default under this Agreement; prior to an Event of Default, the Borrower may make regularly scheduled payments of principal and interest on the Indebtedness. Despite the foregoing, (1) the Borrowers may incur up to an aggregate of $2,000,000 (based on the original principal amount of notes outstanding at any one time) in Indebtedness to sellers in connection with Permitted Acquisitions on which Borrowers may make regularly scheduled payments of principal and interest despite the existence of an Event of Default (other than a bankruptcy or insolvency default, in which case such payments will be prohibited until the Obligations have been repaid in full) so long as such Indebtedness otherwise meets the above requirements (the subordination agreement shall take the form of Exhibit "K" attached hereto) and (2) the Borrowers may incur up to an aggregate of $10,000,000 (based on the original principal amount of notes outstanding at any one time) in Indebtedness to sellers in connection with Permitted Acquisitions on which Borrowers may make regularly scheduled payments of principal and interest until the occurrence of an Event of Default and may resume such payments six months after the occurrence of such default (unless the default is a bankruptcy or insolvency default, or a default as to which the Lenders are exercising remedies; in any such case such payments will be prohibited until the Obligations have been repaid in full) so long as such Indebtedness otherwise meets the above requirements (the subordination agreement shall take the form of Exhibit "K-1" attached hereto). "Permitted Liens" shall have the meaning set forth in Section 6.2 hereof. "Person" means an individual, corporation, partnership, trust, unincorporated association, limited liability company, joint venture, joint-stock company, Governmental Authority or any other entity. "Plan" means any employee pension benefit plan within the meaning of Section 3(2) of ERISA (other than a Multiemployer Plan) covered by Title IV of ERISA by reason of Section 4021 of ERISA, of which any Borrower or any Controlled Group Member is or has been within the preceding five years a "contributing sponsor" within the meaning of Section 4001(a)(13) of ERISA, or which is or has been within the preceding five years maintained for employees of any Borrower or any Controlled Group Member. "Prime Rate" means the interest rate per annum announced from time to time by the Administrative Agent as its prime rate. The Prime Rate may be greater or less than other interest rates charged by the Administrative Agent to other borrowers. "Prime Rate Loan" means any Loan bearing interest at the Prime Rate. "Pro-Forma Covenant Compliance Certificate" has the meaning ascribed to such term in the definition of "Permitted Acquisition." "Prohibited Transaction" has the meaning given to such term in Section 406 of ERISA or -78- Section 4975(c) of the Code. "Purchase Money Indebtedness" shall mean at any time any (a) Indebtedness incurred for the deferred purchase price in connection with a Capital Expenditure and (b) Indebtedness for borrowed money of any Borrower which is incurred in connection with a Permitted Acquisition, and which (i) is unsecured, (ii) is fully and permanently subordinated, as to both principal and interest, to any Obligations, (iii) contains no financial covenants, and (iv) contains permanent "stand still" or forbearance provisions acceptable to the Lender which apply upon the occurrence of an Event of Default or Default under this Agreement. "Quarterly Payment Dates" means the last Business Day of each December, March, June and September. "RC Commitment" means, with respect to any Lender, (a) the obligation of such Lender to make Loans and participate in Letters of Credit in an amount as set forth opposite such Lender's name under the heading "RC Commitment" on Schedule 1.1 (as such Schedule may be amended from time to time) hereto or, in the case of a Lender that becomes a Lender pursuant to an assignment, the amount of the assignor's RC Commitment assigned to such Lender, in either case as the same may be reduced from time to time pursuant to Section 1.7 above or increased or reduced from time to time pursuant to assignments in accordance with Section 11.9 below, or (b) as the context may require, the obligation of such Lender to make Loans in an aggregate unpaid principal amount not exceeding such amount; and "RC Commitment" means with respect to all Lenders, the sum of each Lender's RC Commitment. "RC Loan" has the meaning ascribed to such term in Section 1.1 of this Agreement. "RC Note" means each promissory note of the Borrowers issued to an RC Lender relating to such Lender's RC Loans and RC Commitments substantially in the form of Exhibit A-1 hereto, together with any allonges thereto, from time to time, and any promissory note issued in substitution therefor pursuant to the terms hereof, together with all extensions, renewals, refinancings or refundings thereof in whole or part, in each case as the same may be amended, modified, restated or supplemented from time to time. "Register" has the meaning ascribed to such term in Section 8.8 hereof. "Registered Lender" has the meaning ascribed to such term in Section 1.14 hereof. "Registered Note" has the meaning ascribed to such term in Section 1.14 hereof. "Regulatory Change" means any applicable law, interpretation, directive, request or guideline (whether or not having the force of law), or any change therein or in the administration or enforcement thereof, that becomes effective or is implemented or first required or expected to be complied with after the Closing Date (including any applicable law that shall have become such as the result of any act or omission of the Borrowers or any of their Affiliates, without -79- regard to when such applicable law shall have been enacted or implemented), whether the same is (a) the result of an enactment by a government or any agency or political subdivision thereof, a determination of a court or regulatory authority or otherwise or (b) enacted, adopted, issued or proposed before or after the Closing Date, including any such that imposes, increases or modifies any Tax, reserve requirement, insurance charge, special deposit requirement, assessment or capital adequacy requirement, but excluding any such that imposes, increases or modifies any Bank Tax. "Reorganization" has the meaning ascribed to such term in ERISA. "Reportable Event" means (a) a reportable event described in Section 4043 of ERISA, (b) a withdrawal by a substantial employer from a Plan to which more than one employer contributes, as referred to in Section 4063(b) of ERISA, (c) a cessation of operations at a facility causing more than twenty percent (20%) of Plan participants to be separated from employment, as referred to in Section 4062(e) of ERISA, or (d) a failure to make a required installment or other payment with respect to a Plan when due in accordance with Section 412 of the Code or Section 302 of ERISA which causes the total unpaid balance of missed installments and payments (including unpaid interest) to exceed $750,000. "Responsible Officer" shall mean Michael J. Barrist, Bernard R. Miller or Steven L. Winokur or such other person designated by the Borrowers and reasonably acceptable to Administrative Agent. "Security Agreement" shall have the meaning ascribed to such term in Section 3.1(b) hereof. "Security Documents" shall have the meaning set forth in Section 3.1(e) hereof. "Solvent" means, with respect to any Person at any time, that at such time (a) the sum of the debts and liabilities (including, without limitation, contingent liabilities) of such Person is not greater than all of the assets of such Person at a fair valuation, (b) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person has not incurred, will not incur, does not intend to incur, and does not believe that it will incur, debts or liabilities (including, without limitation, contingent liabilities) beyond such person's ability to pay as such debts and liabilities mature, (d) such Person is not engaged in, and is not about to engage in, a business or a transaction for which such person's property constitutes or would constitute unreasonably small capital, and (e) such Person is not otherwise insolvent as defined in, or otherwise in a condition which could in any circumstances then or subsequently render any transfer, conveyance, obligation or act then made, incurred or performed by it avoidable or fraudulent pursuant to, any Law that may be applicable to such Person pertaining to bankruptcy, insolvency or creditors' rights (including but not limited to the Bankruptcy Code of 1978, as amended, and, to the extent applicable to such Person, the Uniform Fraudulent Conveyance Act, -80- the Uniform Fraudulent Transfer Act, or any other applicable Law pertaining to fraudulent conveyances or fraudulent transfers or preferences). "Stock Payment" by any Person shall mean any dividend, distribution or payment of any nature (whether in cash, securities, or other property) on account of or in respect of any shares of the capital stock (or warrants, options or rights therefor) of such Person, including but not limited to any payment on account of the purchase, redemption, retirement, defeasance or acquisition of any shares of the capital stock (or warrants, options or rights therefor) of such Person, in each case regardless of whether required by the terms of such capital stock (or warrants, options or rights) or any other agreement or instrument. "Subordinated Debt" means Indebtedness of Borrowers that has been subordinated to the Obligations in writing on terms satisfactory to the Administrative Agent. "Subsidiary" of a Person means (i) a corporation (a) at least 50% of the voting stock of which is at the time owned, directly or indirectly, by such Person and (b) of which such Person, directly or indirectly, has the right to elect a majority of the members of the board of directors either as a result of the ownership of a majority of the voting stock of such corporation or pursuant to a shareholders or other voting agreement or (ii) any partnership, joint venture, limited liability company or similar entity at least 50% of the total equity and voting interests of which (x) is at the time owned, directly or indirectly, by such Person whether in the form of membership, general, special or limited partnership, or otherwise and (y) such Person or any wholly owned Subsidiary of such Person is a controlling general partner or otherwise controls such entity. "Super Majority Lenders" means, as of any date, Lenders otherwise eligible to vote pursuant to the terms of this Agreement holding, in the aggregate, at least 66 2/3% of the aggregate outstanding Loans and available Commitments so eligible to vote. "Tax" means any federal, state, local or foreign tax assessment or other governmental charge or levy (including any withholding tax) upon a Person or upon its assets, revenues, income or profits. "Third Party Claims" has the meaning set forth in Section 11.12 hereof. "Transaction Documents" means each of the material documents as may exist from time to time with such changes thereto as are permitted by the terms of this Agreement. "Type" means with respect to Loans, any of the following, each of which shall be deemed to be a different "Type" of Loan: Prime Rate Loans, LIBO Rate Loans having a one-month Interest Period commencing on a specified date, LIBO Rate Loans having a two-month Interest Period commencing on a specified date, LIBO Rate Loans having a three-month Interest Period commencing on a specified date, and LIBO Rate Loans having a six-month Interest -81- Period commencing on a specified date. "UCC" means the Uniform Commercial Code as adopted in the Commonwealth of Pennsylvania. "Unused Fee" has the meaning ascribed to such term in Section 1.9 hereof. "United States Person" has the meaning ascribed to such term in Section 1.13 hereof. "Withdrawal Liability" has the meaning given to such term in Section 4201 of ERISA. 10.2 Construction. In this Agreement and each other Loan Document, unless the context otherwise clearly requires, (a) references to the plural include the singular, the singular the plural and the part the whole; (b) "or" has the inclusive meaning represented by the phrase "and/or;" (c) the terms "property" and "assets" each include all properties and assets of any kind or nature, tangible or intangible, real, personal or mixed, now existing or hereafter acquired; (d) the words "hereof," "herein" and "hereunder" (and similar terms) in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document, as the case may be, as a whole and not to any particular provision of this Agreement or such other Loan Document; (e) the words "includes" and "including" (and similar terms) in this Agreement or any other Loan Document mean "includes, without limitation" and "including, without limitation," respectively whether or not stated; and (f) references to "determination" (and similar terms) by any Lender include good faith estimates by such Lender (in the case of quantitative determinations) and good faith beliefs by such Lender (in the case of qualitative determinations). No doctrine of construction of ambiguities in agreements or instruments against the interests of the party controlling the drafting thereof shall apply to this Agreement or any other Loan Document. The section and other headings contained in this Agreement and in each other Loan Document, and any tables of contents contained herein or therein, are for reference purposes only and shall not affect the construction or interpretation of this Agreement or such other Loan Document in any respect. Whenever this Agreement requires the delivery of financial projections, it is understood that the projections shall be made in good faith, consistent with the Loan Documents and based on NCO Group's reasonable judgment as to the anticipated financial performance and results of operations. However, any such financial projections shall not -82- constitute a representation or warranty that such future financial performance or results of operations will in fact be achieved. 10.3 Accounting Principles. (a) As used herein, "GAAP" shall mean generally accepted accounting principles (other than as set forth herein as to consolidation) in the United States, applied on a basis consistent with the principles used in preparing the financial statements of NCO Group and its consolidated Subsidiaries as of December 31, 1998 and for the fiscal year then ended. When the word "consolidated" is used in this Agreement, it shall be used in a manner consistent with generally accepted accounting principles in the United States except that such principles relating to what entities shall be consolidated shall be superseded by any terms of this Agreement which designate what entities shall be consolidated for purposes relating hereto. (b) Except as otherwise provided in this Agreement, all computations and determinations as to accounting or financial matters shall be made, and all financial statements to be delivered pursuant to this Agreement shall be prepared, in accordance with GAAP and all accounting or financial terms shall have the meanings ascribed to such terms by GAAP; provided that if because of a change in GAAP after the date hereof Borrowers would be required to alter a previously utilized accounting principle, method or policy in order to remain in compliance with GAAP, such determination shall continue to be made in accordance with Borrowers' previous accounting principles, methods and policies unless otherwise agreed by the Administrative Agent (on behalf of the Lenders). -83- ARTICLE XI MISCELLANEOUS 11.1 Notices. Unless otherwise expressly provided under this Agreement all notices, requests, demands, directions and other communications (collectively "notices") given to or made upon any party under the provisions of this Agreement (and unless otherwise specified, in each other Loan Document) shall be by telephone (immediately confirmed in writing) or in writing (including facsimile communication) and if in writing shall be delivered by hand, nationally recognized overnight courier or U.S. mail or sent by facsimile to the respective parties at the addresses and numbers set forth under their respective names on the signature pages of this Agreement or in accordance with any subsequent unrevoked written direction from any party to the others. All notices shall, except as otherwise expressly provided in this Agreement, be effective (a) in the case of facsimile, when received, (b) in the case of hand-delivered notice, when hand delivered, (c) in the case of telephone, when telephoned, provided, however, that in order to be effective unless otherwise expressly provided, telephonic notices must be confirmed in writing no later than the next day by letter or facsimile, (d) if given by U.S. mail, the day after such communication is deposited in the mails with overnight first class postage prepaid, return receipt requested, and (e) if given by any other means (including by air courier), when delivered; provided, further, that notices to the Administrative Agent shall not be effective until received. Any Lender giving any notice to the Borrowers shall simultaneously send a copy of such notice to the Administrative Agent, and the Administrative Agent shall promptly notify the other Lenders of the receipt by it of any such notice. Except as otherwise provided in this Agreement, in the event of a discrepancy between any telephonic or written notice, the written notice shall control. 11.2 Prior Understandings; Entire Agreement. This Agreement and the other Loan Documents supersede all prior and contemporaneous understandings and agreements, whether written or oral, among the parties hereto relating to the transactions provided for herein and therein except as expressly provided otherwise (e.g., certain fee agreements and fee arrangements with the Administrative Agent). This Agreement and the other Loan Documents represent the entire agreement between the parties to this Agreement with respect to the transactions contemplated hereby or thereby and, except as expressly provided herein or in the other Loan Documents, shall not be affected by reference to any other documents. 11.3 Severability. Every provision of this Agreement and each of the other Loan Documents is intended to be severable, and if any term or provision of this Agreement or any of the other Loan Documents shall be invalid, illegal or unenforceable for any reason, the validity, legality and enforceability of the remaining provisions shall not be affected or impaired thereby, and any invalidity, illegality or unenforceability in any jurisdiction shall not affect the validity, legality or enforceability of any such term or provision in any other jurisdiction. If any provision of this Agreement shall be held invalid or unenforceable in whole or in part in any jurisdiction, this Agreement shall, as to such jurisdiction, be deemed amended to modify or delete, as -84- necessary, the offending provision or provisions and to alter the bounds thereof in order to render it or them valid and enforceable to the maximum extent permitted by applicable Law, without in any manner affecting the validity or enforceability of such provision or provisions in any other jurisdiction or the remaining provisions hereof in any jurisdiction. 11.4 Descriptive Headings. The descriptive headings of the several sections of this Agreement are inserted for convenience only and shall not affect the meaning or construction of any of the provisions of this Agreement. 11.5 Governing Law. This Agreement and the rights and obligations of the parties under this Agreement and under the other Loan Documents shall be construed in accordance with and shall be governed by the laws of the Commonwealth of Pennsylvania. 11.6 Non-Merger Of Remedies. The covenants and obligations of the Borrowers and the rights and remedies of the Administrative Agent and other Lenders hereunder and under the other Loan Documents shall not merge with or be extinguished by the entry of a judgment hereunder or thereunder, and such covenants, obligations, rights and remedies shall survive any entry of a judgment until payment in full of the Obligations and termination of the Commitment. All obligations under the Loan Documents shall continue to apply with respect to and during the collection of amounts due under the Loan Documents or the proof and allowability of any claim arising under this Agreement or any other Loan Document, whether in bankruptcy or receivership proceedings or otherwise, and in any workout, restructuring or in connection with the protection, preservation, exercise or enforcement of any of the terms of this Agreement or of any rights under this Agreement or under any other Loan Document or in connection with any foreclosure, collection or bankruptcy proceedings. Without limiting the generality of the foregoing, post-judgment interest rate shall be the interest rate provided in paragraph (d) of Section 1.8 (Default Rate) above. 11.7 No Implied Waiver; Cumulative Remedies. No course of dealing and no delay or failure of the Administrative Agent or any other Lender in exercising any right, power or privilege under this Agreement or any other Loan Document shall affect any other or future exercise thereof or exercise of any other right, power or privilege; nor shall any single or partial exercise of any such right, power or privilege or any abandonment or discontinuance of steps to enforce such a right, power or privilege preclude any further exercise thereof or of any other right, power or privilege. The rights and remedies of the Administrative Agent and the other Lenders under this Agreement and any other Loan Document are cumulative and not exclusive of any rights or remedies which the Administrative Agent or any other Lender would otherwise have hereunder or thereunder, at law, in equity or otherwise. Any waiver of a specific default made in accordance with Section 11.8 below shall be effective only as to such specific default and shall not apply to any subsequent default. 11.8 Amendments; Waivers. -85- (a) Any term, covenant, agreement or condition of any Loan Document to which the Lenders (or the Administrative Agent) are party may be amended, and any right under the Loan Documents may be waived, if, but only if, such amendment or waiver is in writing and is signed by the Majority Lenders or, as to any term requiring the consent or approval of the Super Majority Lenders, by the Super Majority Lenders (or by the Administrative Agent at the direction of the Majority Lenders or Super Majority Lenders, as appropriate); provided, however, if the rights and duties of the Administrative Agent are affected thereby, such amendment or waiver must be executed by the Administrative Agent; and provided, always that no such amendment or waiver shall be effective unless in writing and signed by all Lenders, if it would (i) amend the definition of "Majority Lenders" or "Super-Majority Lenders"; (ii) release any Borrower from its Obligations; (iii) change the principal amount of the Loans; (iv) change the maturity of any Loan or the time of any scheduled principal payment of any Loan or any Reduction Date; (v) decrease the rates of interest or amount of fees payable hereunder or extend the time for payment of interest or fees hereunder; or (vi) release any Collateral, except in connection with a disposition of stock or assets permitted under this Agreement. In addition, the Administrative Agent may, without the consent of any Person, release any Borrower as a court of competent jurisdiction may direct. For purposes of determining whether "all Lenders", "Super Majority Lenders", "the Majority Lenders" or "any Lender" has consented to any amendment or waiver, no effect shall be given to the determination of any Lender who has lost its right to vote pursuant to Sections 1.3(c) or 1.6(e). Further, the Administrative Agent and the Lenders may amend or modify the provisions of Article 8 hereof (except for Section 8.9 (Successor Administrative Agent) and Article 11 hereof) without the need for any consent or approval from the Borrowers, it being acknowledged that the Borrowers are not third party beneficiaries of the provisions of said Article 9 (except for Section 9.9 (Successor Administrative Agent) and (y) without the consent of any Lenders, the Administrative Agent may enter into amendments and modifications to this Agreement and the other Loan Documents as necessary or desirable to cure any ambiguities herein or therein or to add additional Borrowers or add collateral. 11.9 Successors And Assigns -86- (a) Assignments by the Borrowers. Without the prior written consent of all of the Lenders, no Borrower may assign any of its rights or delegate any of its duties or obligations under this Agreement or any other Loan Document. (b) Participations. Any Lender may sell participations to one or more Eligible Institutions of all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment); provided, however, that, with respect to any Lender, (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties to this Agreement for the performance of such obligations, (iii) all amounts payable by the Borrowers under this Agreement shall be determined as if such transferor Lender had not sold such participation and no participant shall be entitled to receive any greater amount pursuant to this Agreement than the transferor Lender would have been entitled to receive in respect of the amount of the participation transferred by such transferor Lender to such participant had no such transfer occurred, (iv) such participant shall agree to be bound by the provisions of this Agreement and the other Loan Documents, and (v) the Borrowers, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such transferor Lender in connection with such Lender's rights and obligations under this Agreement, and such Lender shall retain the sole rights and responsibility vis-a-vis the Borrowers to enforce the obligations of the Borrowers relating to the Loans including the right to approve any amendment, modification or waiver of any provision of this Agreement (except that such Lender may give its participants the right to direct such Lender to approve or disapprove any amendment, modification or waiver which would require such Lender's consent under clause (a) (b), (c), of the preceding Section 11.8). (c) Assignments by Lenders. Each Lender may assign to one or more Eligible Institutions all or a portion of its interest, rights and obligations under this Agreement (including all or a portion of its Commitment) and the other Loan Documents; provided, however, that with respect to any assignment, (i) the aggregate principal amount of the interest, rights and obligations so assigned to any assignee may not be less than $5,000,000; (ii) unless the assignee is (prior to the effective time of the assignment) an existing Lender or an Affiliate of an existing Lender, the Administrative Agent and, if no Event of Default has occurred and is continuing, NCO Group (on behalf of the Borrowers) must give their prior written consent to such assignment (which consent shall not be unreasonably withheld), and (iii) the parties to each such assignment shall execute and deliver to the Administrative Agent and, unless an Event of Default has occurred and is continuing, NCO Group (on behalf of the Borrowers), for their acceptance, an Assignment and Acceptance Agreement in substantially the form attached hereto as Exhibit "L" (an "Assignment and Acceptance Agreement"), together with (A) any Note subject to such assignment, and (B) a processing and recordation fee of $3,500.00. If the assignee is not incorporated under the laws of the United States of America or a state thereof, it shall, prior to the first date on which interest or fees are payable hereunder for its account, deliver to NCO Group (on behalf of the Borrowers) and the Administrative Agent certification as to exemption from deduction or withholding of any United States federal income taxes. -87- (d) Procedures Respecting Assignment. Upon their receipt of an Assignment and Acceptance executed by the assignor and the assignee, subject to the conditions set forth in the preceding paragraph (c), the Administrative Agent and (unless an Event of Default shall have occurred and be continuing) NCO Group (on behalf of the Borrowers) shall accept such Assignment and Acceptance. Within thirty (30) days after such Assignment and Acceptance is signed and accepted by all parties and made effective, the Borrowers, at their own expense, shall execute and deliver to the Administrative Agent new Notes in exchange for the surrendered Notes, each to the order of such assignee in an amount equal to its portion of the Commitment and Loans, assigned to it pursuant to such Assignment and Acceptance and new Notes to the order of the assigning Lender in an amount equal to the Commitment and Loans retained by it. Such Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Notes, shall be dated the date of such surrendered Notes (each assignee shall confirm in the Assignment and Acceptance that, notwithstanding the date of the new Notes made in favor of such assignee, such assignee shall have no right to, or interest in, any fees or interest which shall have accrued on the Loans prior to the effective date of the Assignment and Acceptance). Cancelled or replaced Notes shall be returned to the Borrowers upon the execution of such new Notes. (e) Assignments to Federal Reserve Bank. Notwithstanding any of the terms of this Section 11.9, without the consent of the Administrative Agent and the Borrowers, any Lender may assign all or any portion of its rights to payments in connection with this Agreement to a Federal Reserve Bank as collateral in accordance with Regulation A of the Board of Governors of the Federal Reserve System. Such assignment shall not affect any other rights or any obligations of the assigning Lender 11.10 Counterparts; Photocopied Or Telecopied Signature Pages. Any Loan Document may be executed in one or more counterparts, each of which shall constitute an original, but all of which together shall constitute one and the same instrument. Delivery of a photocopy or telecopy of an executed counterpart of a signature page to any Loan Document shall be as effective as delivery of a manually executed counterpart of such Loan Document. 11.11 Maximum Lawful Interest Rate. Notwithstanding any provision contained in this Agreement or the Notes or any other Loan Document, the total liability of the Borrowers for payment of interest pursuant to this Agreement and the Notes shall not exceed the maximum amount of such interest permitted by Law to be charged, collected, or received from the Borrowers, and if any payment by the Borrowers includes interest in excess of such a maximum amount, each Lender shall apply such excess to the reduction of the unpaid principal amount due pursuant to this Agreement and the Notes, or if none is due, to the other Obligations, if any, and then such excess shall be refunded to NCO Group (on behalf of the Borrowers). 11.12 Indemnification. (a) Whether or not any fundings are made under this Agreement, the Borrowers -88- jointly and severally shall unconditionally upon demand, pay or reimburse the Administrative Agent and other Lenders for, and indemnify and save the Administrative Agent, the other Lenders and their respective Affiliates, officers, directors, employees, agents, attorneys, shareholders and consultants (collectively, "Indemnitees") harmless from and against, any and all losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature whatsoever (including the reasonable fees and disbursements of counsel for such Indemnitee in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not such Indemnitee shall be designated a party thereto) that may at any time be imposed on, asserted against or incurred by such Indemnitee as a result of, or arising out of, or in any way related to or by reason of, this Agreement or any other Loan Document, any acquisition or transaction from time to time contemplated hereby or by any other Loan Document, or any transaction actually or proposed to be financed in whole or in part or directly or indirectly with the proceeds of any Loan, any transaction contemplated by the Transaction Documents but excluding any such losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements that the Borrowers prove were the result solely of the gross negligence or willful misconduct of such Indemnitee(s), as finally determined by a court of competent jurisdiction. If and to the extent that the foregoing obligations of the Borrowers under this paragraph (a), or any other indemnification obligation of the Borrowers hereunder or under any other Loan Document are unenforceable for any reason, the Borrowers hereby agree, jointly and severally, to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under applicable Law. (b) Without limiting the generality of the foregoing, the Borrowers jointly and severally hereby indemnify and agree to defend and hold harmless each Indemnitee, from and against any and all claims, actions, causes of action, liabilities, penalties, fines, damages, judgments, losses, suits, expenses, legal or administrative proceedings, interest, costs and expenses (including court costs and reasonable attorneys', consultants' and experts' fees) arising out of or in any way relating to: (i) the use, handling, management, production, treatment, processing, storage, transfer, transportation, disposal, release or threat of release of any Environmental Concern Material by or on behalf of, any Borrower or any of its Environmental Affiliates; (ii) the presence of Environmental Concern Materials on, about, beneath or arising from any premises owned or occupied by any Borrower or any of its Environmental Affiliates (herein collectively, the "Premises"); (iii) the failure of any Borrower or Environmental Affiliate of a Borrower or any occupant of any Premises to comply with the Environmental Laws; (iv) any Borrower's breach of any of the representations, warranties and covenants contained herein or in any Loan Documents; (v) Regulatory Actions (as hereinafter defined) and Third Party Claims (as hereinafter defined); or (vi) the imposition or recording of a Lien against any Premises in connection with any release at, on or from any Premises or any activities undertaken on or occurring at any Premises, or arising from such Premises or pursuant to any Environmental Law. The Borrowers' indemnity and defense obligations under this section shall include, whether foreseeable or unforeseeable, any and all costs related to any remedial action. "Regulatory -89- Action" means any notice of violation, citation, complaint, request for information, order, directive, compliance schedule, notice of claim, consent decree, action, litigation or proceeding brought or instituted by any governmental authority under or in connection with any Environmental Law involving any Borrower or any occupant of any of the Premises or involving any of the Premises or any activities undertaken on or occurring at any Premises. "Third Party Claims" means claims by a party (other than a party to this Agreement and other than Regulatory Actions) based on negligence, trespass, strict liability, nuisance, toxic tort or detriment to human health or welfare due to Environmental Concern Materials on, about, beneath or arising from any Premises or in any way related to any alleged violation of any Environmental Laws or any activities undertaken on or occurring at any Premises. (c) The indemnities contained herein shall survive repayment of the Obligations, termination of the Commitment and satisfaction, release, and discharge of the Loan Documents, whether through full payment of the Loans, foreclosure, deed in lieu of foreclosure or otherwise. (d) The foregoing amounts are in addition to any other amounts which may be due and payable to the Administrative Agent and/or the Lenders under this Agreement. A certification by the Administrative Agent or a Lender hereunder of the amount of liabilities, losses, costs, expenses, claims and/or charges shall be conclusive, absent manifest error. 11.13 Expenses. Whether or not there shall be any funding hereunder, the Borrowers agree, jointly and severally, to pay promptly or cause to be paid promptly and to hold harmless (i) the Administrative Agent (and after an Event of Default, and for the period in which the same shall continue, each Lender) against liability for the payment of all reasonable out-of-pocket costs and expenses (including but not limited to reasonable fees and expenses of counsel, including local counsel, auditors, consulting engineers, appraisers, and all other professional, accounting, evaluation and consulting costs) incurred by it from time to time arising from or relating to (1) the negotiation, preparation, execution and delivery of this Agreement and the other Loan Documents, (2) the syndication of the credit facilities this Agreement establishes, (3)the administration and performance of this Agreement and the other Loan Documents, and (4) any requested amendments, modifications, supplements, waivers or consents (whether or not ultimately entered into or granted) to this Agreement or any other Loan Document; (ii) the Administrative Agent (and, with respect to clause (2) of this paragraph (ii) after an Event of Default, and for the period in which the same shall continue, each Lender) against liability for the payment of all reasonable out-of-pocket costs and expenses (including but not limited to reasonable fees and expenses of counsel, including local counsel, auditors, consulting engineers, appraisers, and all other professional, accounting, evaluation and consulting costs) incurred by it from time to time arising from or relating to the enforcement or -90- preservation of rights under, or administration of, or syndication of, this Agreement or any other Loan Document (including but not limited to any such costs or expenses arising from or relating to (1) collection or enforcement of an outstanding Loan, Obligation, and (2) any litigation, proceeding, dispute, work-out, restructuring or rescheduling related in any way to this Agreement or the other Loan Documents); and (iii) each Lender against liability for all stamp, document, transfer, recording, filing, registration, search, sales and excise fees and taxes and all similar impositions now or hereafter determined by any Lender to be payable in connection with this Agreement or any other Loan Documents. 11.14 Maximum Amount Of Joint And Several Liability. To the extent that applicable Law otherwise would render the full amount of the joint and several obligations of any Subsidiary of NCO Group hereunder and under the other Loan Documents invalid or unenforceable, such Borrower's obligations hereunder and under the other Loan Documents shall be limited to the maximum amount which does not result in such invalidity or unenforceability, provided, however, that each Borrower's obligations hereunder and under the other Loan Documents shall be presumptively valid and enforceable to their fullest extent in accordance with the terms hereof or thereof, as if this Section 11.14 were not a part of this Agreement. 11.15 Authorization Of NCO Group By Other Borrowers. (a) Each of the Borrowers hereby irrevocably authorizes NCO Group to give notices, make requests, make payments, receive payments and notices, give receipts and execute agreements, make agreements or take any other action whatever on behalf of such Borrower under and with respect to any Loan Document and each Borrower shall be bound thereby. This authorization is coupled with an interest and shall be irrevocable, and the Administrative Agent and each Lender may rely on any notice, request, information supplied by NCO Group and every document executed by NCO Group, agreement made by NCO Group or other action taken by NCO Group in respect of the Borrowers or any thereof as if the same were supplied, made or taken by any or all Borrowers. Without limiting the generality of the foregoing, the failure of one or more Borrowers to join in the execution of any writing in connection herewith shall not, unless the context clearly requires, relieve any such Borrower from obligations in respect of such writing. (b) The Borrowers acknowledge that the credit provided hereunder is on terms more favorable than any Borrower acting alone would receive and that each Borrower benefits indirectly from all Loans and Letters of Credit hereunder. NCO Group and, subject only to the terms of the preceding paragraph (a), each of the other Borrowers, shall be jointly and severally liable for all Obligations, regardless of, inter alia, which Borrower requested (or received the proceeds of) a particular Loan. 11.16 Certain Waivers By Borrowers. Each Borrower hereby waives promptness, -91- diligence, notice of acceptance and any other notice with respect to any of the Obligations and any requirement that any Lender exhaust any right or take any action against any other Borrower or any other Person or any collateral or other direct or indirect security for any of the Obligations. Without limiting the generality of the foregoing, each Borrower acknowledges and agrees that the Administrative Agent or other Lender may commence an action against such Borrower whether or not any action is brought against any other Borrower or against any collateral and it shall be no defense to any action brought against any Borrower that the Lenders have failed to bring an action against any other Borrower or any Collateral. 11.17 Set-Off. The Borrowers hereby agree that, to the fullest extent permitted by Law, if any Loan shall be due and payable (by acceleration or otherwise), each Lender shall have the right, without notice to any Borrower, to set-off against and to appropriate and apply to such Loan any indebtedness, liability or obligation of any nature owing to any Borrower by such Lender, including but not limited to all deposits now or hereafter maintained by any Borrower with such Lender but not including any escrow account maintained by any Borrower. Such right shall exist whether or not such Lender or any other Person shall have given notice or made any demand to any Borrower or any other Person. The Borrowers hereby agree that, to the fullest extent permitted by Law, any participant and any Affiliate of any Lender or any participant shall have the same rights of set-off as a Lender as provided in this Section 11.17. The rights provided by this Section 11.17 are in addition to all other rights of set-off and banker's lien and all other rights and remedies which any Lender (or any such participant, or Affiliate) may otherwise have under this Agreement, any other Loan Document, at law or in equity, or otherwise. 11.18 Sharing Of Collections. The Lenders hereby agree among themselves that if any Lender shall receive (by voluntary payment, realization upon security, charging of accounts, set-off or from any other source) any amount on account of the Obligations in greater proportion than any such amount received by any other Lender (based on the relative amount of each such Lender's interest in the Obligations), then the Lender receiving such proportionately greater payment shall notify each other Lender and the Administrative Agent of such receipt, and equitable adjustment will be made in the manner stated in this Section 11.18 so that, in effect, all such excess amounts will be shared ratably among all of the Lenders. The Lender receiving such excess amount shall purchase (which it shall be deemed to have done simultaneously upon the receipt of such excess amount) for cash from the other Lenders a participation in the applicable Obligations owed to such other Lenders in such amount as shall result in a ratable sharing by all Lenders of such excess amount (and to such extent the receiving Lender shall be a participant). If all or any portion of such excess amount is thereafter recovered from the Lender making such purchase, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, together with interest or other amounts, if any, required by Law to be paid by the Lender making such purchase. The Borrowers hereby consent to and confirm the foregoing arrangements. Each participant shall be bound by this Section 11.18 as fully as if it were a Lender hereunder. -92- 11.19 Other Loan Documents. Each Lender acknowledges that on signing this Agreement it is bound by the terms of the Loan Documents. 11.20 Certain Borrower Acknowledgements. Each Borrower hereby acknowledges that neither the Administrative Agent nor any other Lender has any fiduciary relationship with, or any fiduciary duty to any Borrower arising out of or in connection with this Agreement or any of the other Loan Documents and the relationship between the Administrative Agent and the other Lenders, on the one hand, and the Borrower, on the other hand, in connection herewith or therewith is solely that of debtor and creditor. 11.21 Consent To Jurisdiction, Service And Venue; Waiver Of Jury Trial. (a) Consent to Jurisdiction. For the purpose of enforcing payment and performance of the Loan Documents, including, any payment under the Notes and performance of other obligations under the Loan Documents, or in any other matter relating to, or arising out of, the Loan Documents, each of the Borrowers hereby consents to the jurisdiction and venue of the courts of the Commonwealth of Pennsylvania or of any federal court located in such state, waive personal service of any and all process upon it and consents that all such service of process be made by certified or registered mail directed to NCO Group (on behalf of the applicable Borrowers) at the address provided for in Section 11.1 and service so made shall be deemed to be completed upon actual receipt or execution of a receipt by any Person at such address. Each of the Borrowers hereby waives the right to contest the jurisdiction and venue of the courts located in the Commonwealth of Pennsylvania on the ground of inconvenience or otherwise and, further, waives any right to bring any action or proceeding against (a) the Administrative Agent in any court outside the Commonwealth of Pennsylvania, or (b) any other Lender other than in a state within the United States designated by such Lender. The provisions of this Section 11.21 shall not limit or otherwise affect the right of the Administrative Agent or any other Lender to institute and conduct an action in any other appropriate manner, jurisdiction or court. (b) WAIVER OF JURY TRIAL; DAMAGES. NEITHER ANY LENDER NOR ANY BORROWER, NOR ANY ASSIGNEE, SUCCESSOR, HEIR OR PERSONAL REPRESENTATIVE OF THE FOREGOING SHALL SEEK A JURY TRIAL IN ANY PROCEEDING BASED UPON OR ARISING OUT OF THIS AGREEMENT, OR ANY OTHER LOAN DOCUMENT, OR INVOLVING ANY COLLATERAL OR ANY GUARANTY RELATING TO THE INDEBTEDNESS HEREUNDER OR THE RELATIONSHIP BETWEEN OR AMONG SUCH PERSONS OR ANY OF THEM. NO SUCH PERSON WILL SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. EXCEPT AS PROHIBITED BY LAW, EACH PARTY TO THIS AGREEMENT WAIVES ANY RIGHTS IT MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION REFERRED TO IN THIS SECTION 11.21 ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. EACH PARTY TO THIS AGREEMENT (I) CERTIFIES THAT -93- NEITHER THE ADMINISTRATIVE AGENT NOR ANY LENDER NOR ANY REPRESENTATIVE, OR ATTORNEY OF THE ADMINISTRATIVE AGENT OR ANY LENDER HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE ADMINISTRATIVE AGENT OR SUCH LENDER WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (II) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND EACH OTHER LOAN DOCUMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS PARAGRAPH (B) OF SECTION 11.21. THE PROVISIONS OF THIS SECTION 11.21 HAVE BEEN FULLY DISCLOSED TO THE PARTIES AND THE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. NO PARTY HAS IN ANY WAY AGREED WITH OR REPRESENTED TO ANY OTHER PARTY THAT THE PROVISIONS OF THIS SECTION 11.21 WILL NOT BE FULLY ENFORCED IN ALL INSTANCES. 11.22 Most Favored Borrower. Notwithstanding anything in this Agreement to the contrary, Borrowers are required to pay taxes, charges and other amounts to Lender(s) and/or Administrative Agent under Sections 1.13, 2.2, 2.3 and 2.4 only if, and to the extent, such Lender(s) and/or Administrative Agent charge similarly situated borrowers similar amounts under similar circumstances. -94- IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly authorized, have executed and delivered this Agreement as of the date first above written. NCO GROUP, INC. NCO FINANCIAL SYSTEMS INC. NCO TELESERVICES, INC. CRWF ACQUISITION, INC. K & K ACQUISITION, INC. NCO FINANCIAL SYSTEMS OF MI, INC. NCO FINANCIAL SYSTEMS OF NC, INC. MANAGEMENT ADJUSTMENT BUREAU FUNDING, INC. CREDIT ACCEPTANCE FUNDING CORPORATION ADVANTAGE FINANCIAL SERVICES FUNDING, INC. AMERICAN TRANSPORT SERVICE BUREAU, INC. ADVANTAGE SOUTHEAST, INC. GOODYEAR & ASSOCIATES FUNDING, INC. NCO FUNDING, INC. CRW TEXAS, INC. CRW CALIFORNIA, INC. MEDSOURCE FUNDING, INC. FCA FUNDING, INC. MSC FUNDING, INC. ASSETCARE, INC. MEDAPHIS SERVICES CORPORATION JDR HOLDINGS, INC. JDR MARKETING, INC. JDR RECOVERY CORPORATION NATIONWIDE COMMUNICATIONS, INC. By: /s/ Michael J. Barrist ---------------------- MICHAEL J. BARRIST, as President and Chief Executive Officer of each [Corporate Seals] -95- FINANCIAL COLLECTION AGENCIES, INC. FCA LEASING, INC. By: /s/ Steven L. Winokur ---------------------- STEVEN L. WINOKUR as Treasurer of each [Corporate Seals] Address for Notices to each Borrower: c/o NCO Group, Inc. 515 Pennsylvania Avenue Fort Washington, PA 19034 Attn: MICHAEL J. BARRIST Telephone: (215) 793-2101 Facsimile: (215) 793-2908 with copies to: BLANK ROME COMISKY & McCAULEY LLP One Logan Square, 10th Floor Philadelphia, PA 19103 Attn: Joel C. Shapiro, Esq. Telephone: (215) 569-5476 Facsimile: (215) 569-5555 MELLON BANK, N.A. By: /s/ Liam M. Brickley -------------------- Liam M. Brickley Vice President -96- Address for Notices: Plymouth Meeting Executive Campus 610 West Germantown Pike, Suite 200 Plymouth Meeting, PA 19462 Attn: Liam M. Brickley Telephone: (610) 941-8401 Facsimile: (610) 941-4136 with a copy to: DRINKER BIDDLE & REATH LLP 1000 Westlakes Drive, Suite 300 Berwyn, PA 19312 Attn: George V. Strong, III, Esq. Telephone: (610) 993-2218 Facsimile: (610) 993-8585 -97- EX-10.2 5 EXHIBIT 10.2 EXHIBIT 10.2 EMPLOYMENT AGREEMENT THIS AGREEMENT, made this 16th day of April 1999, by and between NCO Financial Systems, Inc., a Pennsylvania corporation, (hereinafter called "Company"), and Thomas V. Cefalu, III, an individual (hereinafter called "Employee"). W I T N E S S E T H: WHEREAS, Employee's present employer, Co-Source Corporation, as successor to M&M Acquisition, Inc. ("CSC"), is being acquired by NCO Group, Inc. ("NCO"), the parent company of Company (the "Acquisition"); WHEREAS, Company wishes to continue to employ Employee and Employee wishes to continue in the employ of Company on the terms and conditions contained in this Agreement. NOW, THEREFORE, subject to the closing of the Acquisition, and in consideration of the facts, mutual promises and covenants contained herein, intending to be legally bound hereby, Company and Employee agree as follows: 1. Definitions. As used herein, the following terms shall have the meanings set forth below unless the context otherwise requires. "Affiliate" shall mean a person who with respect to any entity, directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such entity; "Annual Bonus" shall mean the bonus payments set forth in Section 5(b), as such amount may be adjusted from time to time. "Base Compensation" shall mean the annual rate of compensation set forth in Section 5(a), as such amount may be adjusted from time to time. "Board" shall mean the Board of Directors of NCO and/or Company. "Business" shall mean the business conducted by Company or CSC in the past and on the date of execution of this Agreement, including without limitation any business in the collection of commercial accounts receivable and including business activities in developmental stages, business activities which may be developed by Company, or any Subsidiary or corporate parent thereof or entity sharing a common corporate parent with Company, during the period of Employee's employment by Company, and all other business activities which flow from a reasonable expansion of any of the foregoing, including any business engaged in by Company subsequent to the execution of this Agreement in which Employee participates. "Cause" shall mean any one or more of the following: (a) if Employee is convicted of a felony involving fraud, theft or embezzlement or has entered a plea of nolo contendere (or similar plea) to a charge of such an offense; or (b) if Employee commits any act of fraud or deliberate misappropriation relating to or involving Company; or (c) habitual intoxication or drug addiction; or (d) if Employee commits a material breach of this Agreement which breach, after 20 days' prior written notice, is not cured. "Commencement Date" shall have the meaning specified in Section 4 hereof. "Confidential Information" shall have the meaning specified in Section 14(c) hereof. "Disability" shall mean Employee's inability, for a period of 120 consecutive days, or more than 210 days in the aggregate over a consecutive period of eighteen months, to perform the essential duties of Employee's position, with or without any reasonable accommodation required by law, due to a mental or physical impairment which substantially limits one or more major life activities. "Restricted Area" shall have the meaning specified in Section 14(a) hereof. "Restricted Period" shall mean: (a) For purposes of Section 14(a)(A), from the date hereof until three (3) years after Employee's employment with Company is either terminated by Employee or by Company for Cause, or for the remaining term of this -2- Agreement, but in no event less than two (2) years, if Employee's employment with Company is terminated by Company without Cause; (b) For purposes of Section 14(a)(B) and 14(c), from the date hereof until five (5) years after Employee's employment is either terminated by Employee or by Company for Cause, or for the remaining term of this Agreement, but in no event less than two (2) years, if Employee's employment with Company is terminated by Company without Cause; "Subsidiary" shall mean any corporation in which Company owns directly or indirectly 50% or more of the Voting Stock or 50% or more of the equity; or any other venture in which it owns either 50% or more of the voting rights or 50% or more of the equity. "Term of Employment" shall mean the period specified in Section 4 hereof as the same may be modified in accordance with this Agreement. 2. Employment. Company hereby employs Employee and Employee hereby accepts employment by Company for the period and upon the terms and conditions specified in this Agreement. 3. Office and Duties. (a) Employee initially shall serve as Executive Vice President of NCO and Divisional Chief Executive Officer of Company's Commercial Services Division (the "Division"). In such capacity, Employee shall render such services as are necessary and desirable to protect and advance the best interests of NCO and Company, acting, in all instances, under the supervision of and in accordance with the policies set by the Board. Employee will be responsible for and provide senior management services relating to the commercial accounts collection and professional financial services and related marketing of the services of Company and ongoing senior management services relating to all aspects of Company's general administration. In addition, Employee will render such other executive services and perform such other executive duties for Company and NCO and its direct and indirect wholly owned Subsidiaries thereof as the Boards of Directors of NCO and/or Company may from time to time reasonably request of Employee. Employee may, in addition, hold such offices with NCO or Company which may from time to time be offered to Employee. Employee's authority shall be subject at all times to the direction and control of the Chief Executive Officer and the Boards of Directors of Company and NCO and to the Boards' discretion to determine the policies of Company and NCO. -3- (b) For as long as Employee shall remain an employee of Company, Employee's entire working time, energy, skill and best efforts shall be devoted to the performance of Employee's duties hereunder in a manner which will faithfully and diligently further the business and interests of Company. Employee may engage in charitable, civic, fraternal, trade and professional association activities that do not interfere with Employee's obligations to Company, but Employee shall not be employed by any other for-profit business without prior written consent of Board, which shall not be unreasonably withheld. (c) Employee's services will be conducted at Company's headquarters in New Orleans, Louisiana area and at such other places as Employee's duties may require; provided however, that Employee shall not be required by Company to relocate his principal residence without his consent, and shall not be required to perform services in any location that is greater than fifty (50) miles from his principal residence, except in the course of normal daily business travel. 4. Term. Employee shall be employed by Company for an initial Term of Employment (the "Initial Term"), commencing on the effective date of the Acquisition (the "Commencement Date"), and ending on May 31, 2002, unless sooner terminated as hereinafter provided. Unless either party elects to terminate this Agreement at the end of the Initial Term by giving the other party written notice of such election at least one hundred twenty (120) days before the expiration of the Initial Term, the Term of Employment shall be deemed to have been extended for an additional term of one (1) year (the "Additional Term") commencing on the day after the expiration of the Initial Term. At any time during the Additional Term, either party may terminate this Agreement by giving the other party written notice of such election at least sixty (60) days prior to such termination. 5. Compensation and Benefits. (a) For all of the service rendered by Employee to Company, Employee shall receive Base Compensation at the gross annual rate of Two Hundred Fifty Thousand Dollars ($250,000.00) payable in installments in accordance with Company's regular payroll practices in effect from time to time. The amount of Base Compensation payable hereunder may, but shall not be required, to be further increased by such other amounts as may be determined in the discretion of the Board. (b) In addition to the foregoing compensation, the Employee shall be entitled to an annual bonus in an amount up to One Hundred Thirty Thousand Dollars ($130,000.00) based upon certain EBITDA goals for the Division (but not including EBITDA earned non-CSC business of the Division) established by mutual agreement of Company and Employee. This bonus may be increased based on the -4- actual financial performance of the Division based upon mutual agreement of Company and Employee. (c) As additional compensation, the Employee shall receive an option to purchase up to 40,000 shares of the common stock of NCO in accordance with the terms of NCO's Stock Option Plan at the closing price of such stock on the effective day of the closing of the Acquisition. NCO may, at its election, issue additional shares to the Employee from time to time. 6. Fringe Benefits. As an inducement to Employee to commence employment hereunder, and in consideration of Employee's covenants under this Agreement, Employee shall be entitled to the benefits set forth below (the "Fringe Benefits") during the Term of Employment: (a) Employee shall be eligible to participate in any health, life, accident or disability insurance, sick leave or other benefit plans or programs made available to other similarly situated employees of Company as long as they are kept in force by Company and provided that Employee meets the eligibility requirements and other terms, conditions and restrictions of the respective plans and programs. (b) Employee shall be entitled to four (4) weeks paid vacation and personal days during each year, subject to Company's generally applicable policies. All vacation and personal days must be used within the year in which available and may not be carried over into subsequent years. Employee shall give oral or written notice prior to the commencement of any vacation in excess of five (5) business days. (c) Company will reimburse Employee for all reasonable expenses incurred by Employee in connection with the performance of Employee's duties hereunder upon receipt of documentation therefor in accordance with Company's regular reimbursement procedures and practices in effect from time to time. Payment to Employee will be made upon presentation of expense vouchers in such detail as Company may from time to time require. 7. Disability. If Employee suffers a Disability, Company may terminate Employee's employment relationship with Company at any time thereafter by giving Employee ten (10) days written notice of termination. Thereafter, Company shall have no obligation to Employee for Base Compensation, Annual Bonus, Fringe Benefits or any other form of compensation or benefit to Employee, except as otherwise required by law or by benefit plans provided at Company expense, other than (a) amounts of Base Compensation accrued through the date of termination, (b) a pro rata portion of the Annual Bonus to the date of termination of employment, to the extent payable hereunder, and (c) reimbursement of appropriately documented expenses -5- incurred by Employee before the termination of employment, to the extent that Employee would have been entitled to such reimbursement but for the termination of employment. 8. Death. If Employee dies during the Term of Employment, the Term of Employment and Employee's employment with Company shall terminate as of the date of Employee's death. Company shall have no obligation to Employee or Employee's estate for Base Compensation, Annual Bonus, Fringe Benefits or any other form of compensation or benefit, except as otherwise required by law or by benefit plans provided at Company expense, other than (a) amounts of Base Compensation that have accrued through the date of Employee's death, (b) a pro rata portion of the Annual Bonus to the date of Employee's death, to the extent payable hereunder, and (c) reimbursement of appropriately documented expenses incurred by Employee before Employee's death, to the extent that Employee would have been entitled to such reimbursement but for his death. 9. Termination for Cause. Company may terminate Employee's employment relationship with Company at any time for Cause. Upon termination of Employee under this Section 9, Company shall have no obligation to Employee for Base Compensation, Annual Bonus, Fringe Benefits or other form of compensation or benefits other than (a) amounts of Base Compensation accrued through the date of termination, and (b) reimbursement of appropriately documented expenses incurred by Employee before the termination of employment, to the extent that Employee would have been entitled to such reimbursement but for the termination of employment. 10. Termination without Cause. Company may terminate Employee's employment relationship with Company at any time without Cause. Notwithstanding termination of Employee' employment under this Section 10, Employee shall continue to be eligible to receive and Company shall continue to pay Employee's Base Compensation in accordance with standard payroll practices, a prorated portion of the Annual Bonus and all other compensation and benefits as such amounts would have accrued through the end of the Initial Term or, if such termination occurs during the Additional Term, through the end of the Additional Term. 11. Termination by Employee. Employee may terminate his employment at any time upon at least 120 days' prior written notice to Company. If Employee terminates his employment, Company shall have no obligation to Employee for Base Compensation, Annual Bonus, Fringe Benefits or other form of compensation or benefits other than (a) amounts of Base Compensation accrued through the date of termination, and (b) reimbursement of appropriately documented expenses incurred by Employee before the termination of employment, to the extent that Employee would have been entitled to such reimbursement but for the termination of employment. -6- 12. Consideration. Employee agrees and acknowledges that Employee is agreeing to be bound by the terms of this Agreement, including without limitation the provisions of Sections 13 and 14, in consideration of Company's agreement to pay in full all amounts due as Base Compensation and other amounts due after Employee's termination without Cause in accordance with Section 10 of this Agreement; and Employee further agrees and acknowledges that the Fringe Benefits described above constitute full, complete and adequate consideration for Employee's obligations hereunder. 13. Company Property. All advertising, sales, manufacturers' and other materials or articles or information, including without limitation data processing reports, computer programs, software, customer information and records, business records, price lists or information, samples, or any other materials or data of any kind furnished to Employee by Company or developed by Employee on behalf of Company or at Company's direction or for Company's use or otherwise in connection with Employee's employment hereunder, are and shall remain the sole property of Company, including in each case all copies thereof in any medium, including computer tapes and other forms of information storage. If Company requests the return of such materials at any time during or at or after the termination of Employee's employment, Employee shall deliver all copies of the same to Company immediately. Notwithstanding the foregoing, Employee may retain records relevant to the filing of Employee's personal income taxes and Company shall grant Employee reasonable access during normal business hours, to business records of Company relevant to the discharge of Employee's duties as an officer of Company or any other legitimate noncompetitive business purpose. 14. Noncompetition, Trade Secrets, Etc. Employee hereby acknowledges that, during and solely as a result of his employment by Company, Employee will have access to confidential information and business and professional contacts. In consideration of such special and unique opportunities afforded by Company to Employee as a result of Employee's employment and the other benefits referred to in Section 12 of this Agreement, Employee hereby agrees as follows: (a) For the duration of the Restricted Period, Employee shall not directly or indirectly (A) engage in (as a principal, shareholder, partner, director, officer, agent, employee, consultant or otherwise) or be financially interested in any business operating within the United States (the "Restricted Area"), which is involved in or any other business activities which are the same as, similar to or in competition with the Business, or with any business activities carried on by Company, or being definitely planned by Company, at the time of the termination of Employee's employment; provided however, that nothing contained in this Section 14 shall prevent Employee -7- from holding for investment no more than three percent (3%) of any class of equity securities of a company whose securities are publicly traded on a national securities exchange or in a national market system; or (B) induce or attempt to influence any employee, customer, independent contractor or supplier of Company to terminate employment or any other relationship with Company. (b) During the Term of Employment, Employee shall not, directly or indirectly, disclose or otherwise communicate to any of the clients, customers or accounts of Company, its Affiliates or any Subsidiary thereof that he is considering terminating, or has decided to terminate, employment with Company. Following the termination of Employee's employment, Company shall have sole discretion to determine who may notify the clients, customers or accounts of Company of the termination of Employee's employment, and the form, substance and timing of such notification; provided, however, that Company shall not disseminate any notice of Employee's termination for any reason other than Cause which is unfavorable to Employee's professional or personal reputation or career. Company shall inform Employee of the identity of all persons or entities to be so notified and provide to Employee a copy of any written notice to such persons or entities at least ten business days prior to its dissemination to allow Employee to object to or otherwise challenge the content of the written notice and/or its dissemination. (c) Employee shall not use for Employee's personal benefit, or disclose, communicate or divulge to, or use for the direct or indirect benefit of any person, firm, association or company other than Company, any "Confidential Information" which term shall mean any information regarding the business methods, business policies, policies, procedures, techniques, research or development projects or results, historical or projected financial information, budgets, trade secrets, or other knowledge or processes of or developed by Company or any names and addresses of customers or clients or any data on or relating to past, present or prospective Company customers or clients or any other confidential information relating to or dealing with the business operations, or activities of Company as such relate specifically to commercial collection services, made known to Employee or learned or acquired by Employee while in the employ of Company, but Confidential Information shall not include information otherwise lawfully known generally by or readily accessible to the trade or the general public. All memoranda, notes, lists, records, files, documents and other papers and other like items (and all copies, extracts and summaries thereof) made or compiled by Employee or made available to Employee concerning the business of Company shall be Company's property and shall be delivered to Company promptly upon the termination of Employee's employment with Company or at any other time on request. The foregoing provisions of this Subsection 14(c) shall apply during and after the period when Employee is an employee of Company and shall be in addition to (and not a limitation of) any legally applicable protections of Company's interest in confidential -8- information, trade secrets and the like. At the termination of Employee's employment with Company, Employee shall return to Company all copies of Confidential Information in any medium, including computer tapes and other forms of data storage. Notwithstanding the foregoing, Employee may retain records relevant to the filing of Employee's personal income taxes and Company shall grant Employee reasonable access during normal business hours, to business records of Company relevant to Employee's discharge of Employee's duties as an officer of Company or other legitimate non-competitive business purpose. Notwithstanding the requirements of this paragraph 14(c), should Employee leave his employment and work in a position that does not violate any of the restrictions contained in this Agreement, then Employee shall have the right to use Confidential Information, provided, however, that such right shall not permit Employee to remove any documents or materials from Company that are deemed Confidential Information. (d) Any and all writings, inventions, improvements, processes, procedures and/or techniques which Employee may make, conceive, discover or develop, either solely or jointly with any other person or persons, at any time when Employee is an employee of Company, whether or not during working hours and whether or not at the request or upon the suggestion of Company, which relate to or are useful in connection with the Business or with any business now or hereafter during the time of Employee's employment hereunder carried on or known by Employee to be contemplated by Company, including developments or expansions of its present fields of operations, shall be the sole and exclusive property of Company. Employee shall make full disclosure to Company of all such writings, inventions, improvements, processes, procedures and techniques, and shall do everything necessary or desirable to vest the absolute title thereto in Company. Employee shall write and prepare all specifications and procedures regarding such inventions, improvements, processes, procedures and techniques and otherwise aid and assist Company so that Company can prepare and present applications for copyright or Letters Patent therefor and can secure such copyright or Letters Patent wherever possible, as well as reissues, renewals, and extensions thereof, and can obtain the record title to such copyright or patents so that Company shall be the sole and absolute owner thereof in all countries in which it may desire to have copyright or patent protection. Employee shall not be entitled to any additional or special compensation or reimbursement regarding any and all such writings, inventions, improvements, processes, procedures and techniques. (e) Employee acknowledges that the restrictions contained in the foregoing Subsections (a), (b), (c) and (d), in view of the nature of the business in which Company is engaged, are reasonable and necessary in order to protect the legitimate interests of Company, that their enforcement will not impose a hardship on Employee or significantly impair Employee's ability to earn a livelihood, and that any violation thereof would result in irreparable injuries to Company. Employee therefore -9- acknowledges that, in the event of Employee's violation of any of these restrictions, Company shall be entitled to obtain from any court of competent jurisdiction preliminary and permanent injunctive relief as well as damages and an equitable accounting of all earnings, profits and other benefits arising from such violation, which rights shall be cumulative and in addition to any other rights or remedies to which Company may be entitled. (f) If the Restricted Period or the Restricted Area specified in Subsections (a) and (b) above should be adjudged unreasonable in any proceeding, then the period of time shall be reduced by such amount or the area shall be reduced by the elimination of such portion or both such reductions shall be made so that such restrictions may be enforced for such time and in such area as is adjudged to be reasonable. If Employee violates any of the restrictions contained in the foregoing Subsections (a) or (b), the Restricted Period shall be extended by a period equal to the length of time from the commencement of any such violation until such time as such violation shall be cured by Employee to the satisfaction of Company. Company shall have the right and remedy to require Employee to account for and pay over to Company all compensation, profits, monies, accruals, increments or other benefits derived or received by Employee as the result of any transactions constituting a breach of this Section 14, and Employee shall account for and pay over such amounts to Company upon Company's request therefor. Employee hereby expressly consents to the jurisdiction of any court within the Commonwealth of Pennsylvania to enforce the provisions of this Section 14, and agrees to accept service of process by mail relating to any such proceeding. Company may supply a copy of Section 14 of this Agreement to any future or prospective employer of Employee or to any person to whom Employee has supplied information if Company determines in good faith that there is a reasonable likelihood that Employee has violated or will violate such Section. 15. Prior Agreements. Employee represents to Company that there are no restrictions, agreements or understandings, oral or written, to which Employee is a party or by which Employee is bound that prevent or make unlawful Employee's execution or performance of this Agreement. Upon this Agreement becoming effective as a result of the Acquisition being completed, any employment agreement between Employee and CSC or any of its affiliates and any rights of Employee therein contained shall automatically terminate. 16. Consent to Jurisdiction/Arbitration. (a) Any legal suit, action, claim, proceeding or investigation arising out of or relating to this Agreement may be instituted in the Montgomery County Court of Common Pleas of the Commonwealth of Pennsylvania, and each of the parties hereto waives any objection which party may now or hereafter have to such venue of -10- any such suit, action, claim, proceeding or investigation, and irrevocably submits to the jurisdiction of any such court. Any and all service of process and any other notice in any such suit, action, claim, proceeding or investigation shall be effective against any party if given by registered or certified mail, return receipt requested, or by any other means of mail which requires a signed receipt, postage prepaid, mailed to such party as herein provided. Nothing herein contained shall be deemed to affect the right of any party to serve process in any manner permitted by law or to commence legal proceedings or otherwise proceed against any other party in any jurisdiction other than Pennsylvania. (b) With the exception of Company's right to injunctive or equitable relief described in paragraph 14(e) above, any dispute, controversy or claim arising out of or relating to this Agreement or the breach or alleged breach of this Agreement shall be settled by arbitration in Montgomery County, Pennsylvania in accordance with the commercial arbitration rules, then obtaining, of the American Arbitration Association, and judgment upon any such arbitration award rendered by the arbitrators may be entered in any state or federal court sitting in Pennsylvania. If the parties to any such dispute, controversy or claim are unable to agree upon an arbitrator or arbitrators, then three arbitrators shall be appointed by the American Arbitration Association, as it may determine, in accordance with the commercial arbitration rules and practices, then obtaining, of such Association. If the parties to any such dispute, controversy or claim shall agree upon two arbitrators, but such parties or such arbitrators shall be unable to agree upon a third arbitrator, then only such third arbitrator shall be appointed as aforesaid by the American Arbitration Association. Each of the parties and the arbitrators shall use its best efforts to keep confidential the existence of any dispute and arbitration proceedings and all information relating thereto or submitted in connection therewith and, in the event of judicial proceedings for the enforcement of this paragraph or any award pursuant thereto, shall cooperate to seal the record of any such arbitration or judicial proceedings. (c) In the event judicial proceedings or arbitration proceedings are commenced, the prevailing party shall be entitled to an award for its reasonable legal fees and costs incurred in relation to such proceedings. 17. Miscellaneous. (a) Indulgences, Etc. Neither the failure nor any delay on the part of either party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of -11- such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver. (b) Controlling Law. This Agreement and all questions relating to its validity, interpretation, performance and enforcement (including, without limitation, provisions concerning limitations of actions), shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, notwithstanding any conflict-of-laws doctrines of such jurisdiction to the contrary, and without the aid of any canon, custom or rule of law requiring construction against the draftsman. (c) Notices. All notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given, made and received only when personally delivered, on the day specified for delivery when deposited with a recognized national or regional courier service for delivery to the intended addressee or five (5) days following the day when deposited in the United States mails, first class postage prepaid, addressed as set forth below: If to Employee: Mr. Thomas V. Cefalu, III 3844 Lakeshore Drive Metairie, Louisiana 70002 with a copy, given in the manner prescribed above, to: ______________________________________________ ______________________________________________ If to Company: Michael Barrist Chief Executive Officer NCO Financial Systems, Inc. 515 Pennsylvania Avenue Fort Washington, PA 19034 with a copy, given in the manner prescribed above, to: Joshua Gindin Executive Vice-President and General Counsel NCO Group, Inc. 515 Pennsylvania Avenue Fort Washington, PA 19034 -12- In addition, notice by mail shall be by air mail if posted outside of the continental United States. Any party may alter the address to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of this Section for the giving of notice. (d) Binding Nature of Agreement. This Agreement shall be binding upon Company and shall inure to the benefit of Company, its present and future Subsidiaries, Affiliates, successors and assigns including any transferee of the business operation, as a going concern, in which Employee is employed and shall be binding upon Employee, Employee's heirs and personal representatives. None of the rights or obligations of Employee hereunder may be assigned or delegated, except that in the event of Employee's death or Disability, any rights of Employee hereunder shall be transferred to Employee's estate or personal representative, as the case may be. Company may assign its rights and obligations under this Agreement in whole or in part to any one or more Affiliates or successors, but no such assignment shall relieve Company of its obligations to Employee if any such assignee fails to perform such obligations. (e) Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when such number of counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. (f) Provisions Separable. The provisions of this Agreement are independent of and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part. (g) Entire Agreement. This Agreement contains the entire understanding among the parties hereto with respect to the employment of Employee by Company, and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, except as herein contained. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing. Notwithstanding the foregoing, nothing herein shall limit the application of any generally applicable Company policy, practice, plan or the terms of any manual or handbook -13- applicable to Company's employees generally, except to the extent the foregoing directly conflict with this Agreement, in which case the terms of this Agreement shall prevail. (h) Section Headings. The Section headings in this Agreement are for convenience only; they form no part of this Agreement and shall not affect its interpretation. (i) Number of Days. Except as otherwise provided herein, in computing the number of days for purposes of this Agreement, all days shall be counted, including Saturdays, Sundays and holidays; provided, however, that if the final day of any time period falls on a Saturday, Sunday or holiday on which federal banks are or may elect to be closed, then the final day shall be deemed to be the next day which is not a Saturday, Sunday or such holiday. (j) Gender, Etc. Words used herein, regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context indicates is appropriate. (k) Survival. All provisions of this Agreement which by their terms survive the termination of Employee's employment with Company, including without limitation the covenants of Employee set forth in Sections 13 and 14 and the obligations of Company to make any post-termination payments under this Agreement, shall survive termination of Employee's employment by Company and shall remain in full force and effect thereafter in accordance with their terms. [signature lines are on the following page] -14- IN WITNESS WHEREOF, the parties have duly executed and delivered this Agreement as of the date first above written. NCO FINANCIAL SYSTEMS, INC. By: /s/ Joshua Gindin ------------------------------------ Name: Joshua Gindin Title: Executive Vice President /s/ Thomas V. Cefaulu, III ------------------------------------- THOMAS V. CEFALU, III COMPANY AND EMPLOYEE AGREE AND ACKNOWLEDGE THAT THIS EMPLOYMENT AGREEMENT AND THE COMPANY'S OBLIGATION TO HIRE THE EMPLOYEE, ARE CONDITIONED UPON COMPANY COMPLETING THE ACQUISITION. -15- -----END PRIVACY-ENHANCED MESSAGE-----