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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year ended December 31, 1996
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___________ to ___________
Commission File No. 0-21639
NCO GROUP, INC.
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(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 23-1670927
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
1740 Walton Road
Blue Bell Pennsylvania 19422-0987
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(Address of principal (Zip Code)
executive offices)
Registrant's Telephone Number, Including Area Code (610) 832-1440
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Securities Registered Pursuant to Section 12(b) of the Act: None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, no par value 7,058,625
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(Title of Class) (Number of Shares Outstanding
as of March 27, 1997)
Indicate by check mark whether the Registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of
the Registrant is $80,052,177. (1)
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Certain portions of the Company's Proxy Statement to be filed in
connection with its 1997 Annual Meeting of Shareholders are incorporated by
reference in Part I and Part III of this Report. Other documents incorporated by
reference are listed in the Exhibit Index.
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(1) The aggregate dollar amount of the voting stock set forth equals the number
of shares of the Company's Common Stock outstanding, reduced by the amount
of Common Stock held by officers, directors and shareholders owning 10% or
more of the Company's Common Stock, multiplied by $24.875, the last
reported sale price for the Company's Common Stock on March 27, 1997. The
information provided shall in no way be construed as an admission that any
officer, director or 10% shareholder in the Company may be deemed an
affiliate of the Company or that he is the beneficial owner of the shares
reported as being held by him, and any such inference is hereby disclaimed.
The information provided herein is included solely for recordkeeping
purposes of the Securities and Exchange Commission.
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TABLE OF CONTENTS
Page
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PART I
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Item 1. Business 1
Item 2. Properties. 17
Item 3. Legal Proceedings. 18
Item 4. Submission of Matters to a Vote of Security Holders. 18
Item 4.1 Executive Officers of the Registrant who are not also Directors. 18
PART II
Item 5. Market for Registrant's Common Equity and 19
Related Shareholder Matters.
Item 6. Selected Financial Data. 21
Item 7. Management's Discussion and Analysis of Financial 22
Condition and Results of Operations.
Item 8. Financial Statements and Supplementary Data. 28
Item 9. Changes in and Disagreements with Accountants on Accounting and 28
Financial Disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant. 29
Item 11. Executive Compensation. 29
Item 12. Security Ownership of Certain Beneficial Owners and Management. 29
Item 13. Certain Relationships and Related Transactions. 29
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 30
Signatures 35
Index to Consolidated Financial Statements F-1
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PART I
Item 1. Business.
General
NCO Group, Inc. ("NCO" or the "Company") is a leading provider of
accounts receivable management and related services utilizing an extensive
teleservices infrastructure. The Company develops and implements customized
accounts receivable management solutions for clients. From 24 call centers
located in 17 states, the Company employs advanced workstations and
sophisticated call management systems comprised of predictive dialers, automated
call distribution systems, digital switching and customized computer software.
Through efficient utilization of technology and intensive management of human
resources, the Company has achieved rapid growth in recent years. Since April
1994, the Company has made eight acquisitions which have enabled it to increase
its penetration of existing markets, establish a presence in certain new markets
and realize significant operating efficiencies. In addition, the Company has
leveraged its infrastructure by offering additional services including
telemarketing, customer service call centers and other outsourced administrative
services. The Company believes that it is currently among the ten largest
accounts receivable management companies in the United States.
The Company provides its services principally to educational
organizations, financial institutions, healthcare organizations,
telecommunications companies, utilities and government entities. In 1996, the
Company had over 7,000 clients, including Bell Atlantic Corporation, City of
Philadelphia Water Revenue Bureau, First Union Corporation, NationsBank and the
University of Pennsylvania. No client accounted for more than 10% of the
Company's actual revenue in 1996. For its accounts receivable management
services, the Company generates substantially all of its revenue on a
contingency fee basis. The Company seeks to be a low cost provider and as such
its fees typically range from 15% to 35% of the amount recovered on behalf of
the Company's clients, with an average of approximately 25% in 1996. According
to the 1995 Top Collection Markets Survey published by the American Collectors
Association, Inc. ("ACA"), an industry trade group, the average fees realized by
the accounts receivable management companies surveyed were in the range of 30%
to 43% depending upon the industries served. For many of its other outsourced
teleservices, the Company is paid on a fixed fee basis. While NCO's contracts
are relatively short-term, the Company seeks to develop long-term relationships
with its clients and works closely with them to provide quality, customized
solutions.
Increasingly, companies are outsourcing many non-core functions to
focus on revenue generating activities, reduce costs and improve productivity.
In particular, many corporations are recognizing the advantages of outsourcing
accounts receivable management and other teleservices as a result of numerous
factors including: (i) the increasing complexity of such functions; (ii)
changing regulations and increased competition in certain industries; and (iii)
the development of sophisticated call management systems requiring substantial
capital investment, technical capabilities and human resource commitments.
Consequently, receivables referred to third parties for management and recovery
in the United States have grown substantially from approximately $43.7 billion
in 1990 to approximately $79.0 billion in 1994, according to estimates published
by the ACA. While significant economies of scale exist for large accounts
receivable management companies, the industry remains highly fragmented. Based
on information obtained
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from the ACA, there are currently approximately 6,300 accounts receivable
management companies in operation, the majority of which are small, local
businesses. Given the financial and competitive constraints facing these small
companies and the limited number of liquidity options for the owners of such
businesses, the Company believes that the industry will experience consolidation
in the future.
The Company strives to be a cost-effective, client service driven
provider of accounts receivable management and other related teleservices to
companies with substantial outsourcing needs. The Company's business strategy
encompasses a number of key elements which management believes are necessary to
ensure quality service and to achieve consistently strong financial performance.
First, the Company focuses on the efficient utilization of its technology and
infrastructure to constantly improve productivity. The Company's teleservices
infrastructure enables it to perform large scale accounts receivable management
programs cost effectively and to rapidly and efficiently integrate the Company's
acquisitions. A second critical component is NCO's commitment to client service.
Management believes that the Company's emphasis on designing and implementing
customized accounts receivable management programs for its clients provides it
with a significant competitive advantage. Third, the Company seeks to be a low
cost provider of accounts receivable management services by centralizing all
administrative functions and minimizing overhead at all branch locations.
Lastly, the Company is targeting larger clients which offer significant
cross-selling opportunities and have greater teleservices outsourcing
requirements.
The Company seeks to continue its rapid expansion through both internal
and external growth. The Company intends to continue to take advantage of the
fragmented nature of the accounts receivable management industry by making
strategic acquisitions. Through selected acquisitions, the Company will seek to
serve new geographic markets, expand its presence in its existing markets or add
complementary services. In addition, the Company has experienced and expects to
continue to experience strong internal growth by continually striving to
increase its market share, expand its industry-specific market expertise and
develop and offer new value-added teleservices. The Company regularly reviews
various strategic acquisition opportunities and periodically engages in
discussions regarding such possible acquisitions. See "Acquisition History."
The Company's principal executive offices are located at 1740 Walton
Road, Blue Bell, Pennsylvania 19422, and its telephone number is (610) 832-1440.
Acquisition History
Since 1994, the Company has completed eight strategic acquisitions
which have expanded its client base and geographic presence, increased its
presence in key industries and substantially increased its revenues and
profitability. A key element of the Company's growth strategy is to pursue
selected strategic acquisitions to serve new geographic markets or industries,
expand its presence in its existing markets or add complementary service
applications. The Company regularly reviews various strategic acquisition
opportunities and periodically engages in discussions regarding such possible
acquisitions. A summary of the completed acquisitions follows:
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Collections Division of CRW Financial, Inc.
On February 2, 1997, NCO purchased certain assets of the Collections
Division of CRW Financial, Inc. ("CRWCD") for $3.75 million in cash, 345,178
shares of Common Stock and warrants to purchase 250,000 shares of Common Stock
at an exercise price of $27.625 per share. The purchase price was valued at
approximately $12.8 million. CRWCD provides accounts receivable management
services principally to the telecommunications, education, financial, government
and utility industries from 14 offices located throughout the United States. In
addition, CRWCD has a commercial collections division. CRWCD's revenues for the
year ended December 31, 1996 were $25.9 million.
CMS A/R Services
On January 31, 1997, NCO purchased certain assets of CMS A/R Services,
a division of CMS Energy Corporation, owner of Consumers Energy, one of the
nation's largest utility companies, for $5.1 million in cash. CMS A/R Services,
located in Jackson, Michigan, specializes in providing a wide range of accounts
receivable management services to the utility industry, including traditional
recovery of delinquent accounts, project outsourcing, early intervention, and
database management services. CMS A/R Services' revenues for the year ended
December 31, 1996 were $6.8 million.
Tele-Research Center, Inc.
On January 30, 1997, NCO purchased certain assets of Tele-Research
Center, Inc. ("TRC"), for $1.6 million in cash. The purchase price may be
increased by a maximum of up to $600,000 if the TRC business achieves certain
revenue targets during the three year period following the closing date. At the
option of the seller, the purchase price adjustment may be paid in cash or
Common Stock, based on the fair market value of NCO Common Stock as of the date
that the purchase price adjustment accrues. TRC, located in Philadelphia,
Pennsylvania, provides market research, data collection, and other teleservices
to market research companies as well as end-users. TRC's revenues for the year
ended December 31, 1996 were $1.8 million.
Goodyear & Associates, Inc.
On January 22, 1997, NCO purchased all of the outstanding stock of
Goodyear & Associates, Inc. ("Goodyear") for $4.5 million in cash and a $900,000
convertible note. The note is convertible into the Company's Common Stock, at
any time, at $21.175 per share and bears interest payable monthly at a rate of
8.0% per annum with principal due in January 2002. Goodyear, based in Charlotte,
North Carolina, provides accounts receivable management services principally to
the telecommunications, education, and utility industries. Goodyear's revenues
for the year ended December 31, 1996 were $5.5 million.
Management Adjustment Bureau, Inc.
On September 5, 1996, NCO purchased all of the outstanding stock of
Management Adjustment Bureau, Inc. ("MAB") for $8.0 million in cash and a $1.0
million convertible note. The note is convertible at any time into an aggregate
of up to 76,923 shares of the Company's
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Common Stock and bears interest payable monthly at a rate of 8.0% per annum with
principal due in September 2001. MAB, based in Buffalo, New York, provides
accounts receivable management services, principally to the education, financial
services, telecommunications and utility industries. MAB's clients included
NationsBank, NYNEX, Marine Midland Bank and Boston Edison.
Trans Union Corporation Collections Division
On January 3, 1996, NCO purchased certain assets of the Trans Union
Corporation Collections Division ("TCD") for $4.8 million in cash. TCD provided
accounts receivable management services, principally to the telecommunications,
utility and healthcare industries from offices in Pennsylvania, Ohio and Kansas.
TCD's clients included Bell Atlantic Corporation, Western Resources Corporation
and Hutchinson Hospital.
Eastern Business Services, Inc.
In August 1995, NCO purchased certain assets of Eastern Business
Services, Inc. ("Eastern") for $1.6 million in cash and the assumption of a
non-interest bearing note payable in the amount of $252,000 and certain other
accounts payable in the amount of $209,000. Eastern, based in Beltsville,
Maryland, provided accounts receivable management services, principally to the
utility and healthcare industries. Eastern's clients included Bell Atlantic
Corporation and George Washington University Hospital.
B. Richard Miller, Inc.
In April 1994, NCO purchased certain assets of B. Richard Miller, Inc.
("BRM") for $1.0 million in cash, the issuance by the Company of a $127,000
promissory note and the issuance of 123,803 shares of Common Stock and an option
to acquire 86,881 shares of Common Stock at an exercise price of $2.16 per share
(which option was exercised in 1995). In connection with the acquisition, BRM's
principal shareholder became an executive officer of the Company. BRM, based in
Ardmore, Pennsylvania, provided accounts receivable management services,
principally to the education industry. BRM's clients included University of
Pennsylvania, Rutgers University and Seton Hall University.
Financial Impact of Acquisitions
The Company financed the acquisitions of Goodyear, CMS A/R Services,
TRC and CRWCD by borrowing a total of $7.35 million on its revolving credit
facility with Mellon Bank, N.A. and financed the remainder through funds raised
in the Company's initial public offering and through existing working capital.
The Company financed the MAB, TCD, Eastern and BRM acquisitions with borrowings
from Mellon Bank, N.A. In September 1996, the bank increased the Company's
revolving credit facility from $7.0 million to $15.0 million to finance the
acquisition of MAB. The bank further increased this facility to $25.0 million at
an interest rate of LIBOR plus 2.5% in December 1996. The Company granted the
bank a warrant to acquire 175,531 shares of Common Stock at a nominal exercise
price in consideration for establishing the revolving credit facility for
acquisitions, and granted additional warrants to purchase 46,560 shares and
18,500 shares of Common Stock at an exercise price of $13.00 per share in
consideration for increasing the revolving credit facility to $15.0 million and
to $25.0 million, respectively.
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The acquisitions have been accounted for under the purchase method of
accounting for financial reporting purposes. These acquisitions have created
goodwill estimated at $23.4 million which is being amortized over a 15- to
25-year period resulting in amortization expense of approximately $936,000
annually.
Accounts Receivable Management Services
The Company provides a wide range of accounts receivable management
services to its clients utilizing an extensive teleservices infrastructure.
Although most of the Company's accounts receivable management services to date
have focused on recovery of traditional delinquent accounts, the Company does
engage in the recovery of current receivables and early stage delinquencies
(generally, accounts which are 90 days or less past due). The Company generates
substantially all of its revenue from the recovery of delinquent accounts
receivable on a contingency fee basis. In addition, the Company generates
revenue from fixed fees for certain accounts receivable management and other
related services. Contingency fees typically range from 15% to 35% of the amount
recovered on behalf of the Company's clients, but can range from 6% for the
management of accounts placed early in the accounts receivable cycle to 50% for
accounts which have been serviced extensively by the client or by third-party
providers.
Recovery activities typically include the following:
Management Planning. The Company's approach to accounts receivable
management for each client is determined by a number of factors including
account size and demographics, the client's specific requirements and
management's estimate of the collectability of the account. The Company has
developed a library of standard processes for accounts receivable management
which is based upon its accumulated experience. The Company will integrate these
processes with its client's requirements to create a customized recovery
solution. In many instances, the approach will evolve and change as the
relationship with the client develops and both parties evaluate the most
effective means of recovering accounts receivable. The Company's standard
approach, which may be tailored to the specialized requirements of its clients,
defines and controls the steps that will be undertaken by the Company on behalf
of the client and the manner in which data will be reported to the client.
Through its systemized approach to accounts receivable management, the Company
removes most decision making from the recovery staff and ensures uniform,
cost-effective performance.
Once the approach has been defined, the Company electronically or
manually transfers pertinent client data into its information system. Once the
client's records have been established in the Company's system, the Company
commences the recovery process.
Skip Tracing. In cases where the customer's telephone number or address
is unknown, the Company systematically searches the United States Post Office
National Change of Address service, consumer data bases, electronic telephone
directories, credit agency reports, tax assessor and voter registration records,
motor vehicle registrations, military records and other sources. The geographic
expansion of banks, credit card companies, national and regional
telecommunications companies and managed healthcare providers along with the
mobility of consumers has increased the demand for locating the client's
customers. Once the Company has located the customer, the notification process
can begin.
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Account Notification. The Company initiates the recovery process by
forwarding an initial letter which is designed to seek payment of the amount due
or open a dialogue with customers who cannot afford to pay at the current time.
This letter also serves as an official notification to each customer of their
rights as required by the federal Fair Debt Collection Practices Act. The
Company continues the recovery process with a series of mail and telephone
notifications. Telephone representatives remind the customer of their
obligation, inform them that their account has been placed for collection with
the Company and begin a dialogue to develop a payment program.
Credit Reporting. At a client's request, the Company will
electronically report delinquent accounts to one or more of the national credit
bureaus where it will remain for a period of up to seven years. The denial of
future credit often motivates the payment of all past due accounts.
Litigation Management. When account balances are sufficient, the
Company will also coordinate litigation undertaken by a nationwide network of
attorneys that the Company utilizes on a routine basis. Typically, account
balances must be in excess of $1,000 to warrant litigation and the client is
asked to advance legal costs such as filing fees and court costs. Attorneys are
generally compensated on a contingency fee basis. The Company's Collection
Support staff manages the Company's attorney relationships and facilitates the
transfer of all necessary documentation.
Payment Process. After the Company receives payment from the customer,
it either remits the amount received net of its fee to the client or remits the
entire amount received to the client and bills the client for its services.
Activity Reports. Clients are provided with a system-generated set of
standardized or customized reports that fully describes all account activity and
current status. These reports are typically generated monthly, however, the
information included in the report and the frequency that the reports are
generated can be modified to meet the needs of the client.
Quality Tracking. The Company emphasizes quality control throughout all
phases of the accounts receivable management process. Some clients may specify
an enhanced level of supervisory review and others may request customized
quality reports. Large national credit grantors will typically have exacting
performance standards which require sophisticated capabilities such as
documented complaint tracking and specialized software to track quality metrics
to facilitate the comparison of the Company's performance to that of its peers.
Other Services
The Company selectively provides other related services which
complement its traditional accounts receivable management business and which
leverage its teleservices infrastructure. The Company believes that the
following services will provide additional growth opportunities for the Company.
Telemarketing. The Company provides telemarketing services for clients,
including lead generation and qualification, the actual booking of appointments
for a client's sales representatives and information gathering for market
research purposes.
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Customer Service Call Center. The Company utilizes its communications
and information system infrastructure to supplement or replace the customer
service function of its clients. For example, the Company is currently engaged
by PECO Energy Company, a regional utility, to function as its customer service
department to field and respond to calls concerning new services which the
utility is beginning to develop and offer. In this manner, the utility can focus
on developing these services without investing the resources to build the
in-house infrastructure necessary to respond to customer inquiries.
Accounts Receivable Outsourcing. The Company complements existing
service lines by offering adjunct billing services to clients as an outsourcing
option. Additionally, the Company can assist healthcare clients in the billing
and management of third party insurance.
Custom Designed Business Applications. The Company has the ability to
provide outsourced administrative and other back-office responsibilities
currently conducted by its clients. For example, the Company was recently
engaged by United Healthcare, a national health insurer, to assume all
administrative operations for its COBRA and individual conversion coverage,
including all responsibility for premium billing and payment processing,
customer service call center and policy fulfillment. The Company also was
engaged by Independence Blue Cross to audit its base of small business employer
accounts to determine if individuals insured through these accounts were, in
fact, employees.
Operations
Technology and Infrastructure. Over the past five years, the Company
has made a substantial investment in its call management systems such as
predictive dialers, automated call distribution systems, digital switching and
customized computer software. As a result, the Company believes it is able to
address accounts receivable management activities more reliably and more
efficiently than many other accounts receivable management companies. The
Company's systems also permit network access to enable clients to electronically
communicate with NCO and monitor operational activity on a real-time basis.
NCO provides its accounts receivable management services through the
operation of 24 state-of-the-art call centers which are electronically linked
through the MFS Datanet ATM Network. The Company utilizes two computer platform
systems. One system consists of two Unix-based NCR 3455 computers which are
linked via network servers to 583 workstations and which provide necessary
redundancy (either computer can operate the system in the event of the failure
of the other) and excess capacity for future growth. The other system consists
of three Unix-based Hewlett-Packard computers which are linked via network
servers to 754 workstations. The Company's workstations consist of personal
computers and terminals that are linked to the microcomputers but do not
necessarily have separate processors.
The Company maintains ten predictive dialers to address its low
balance, high volume accounts. These systems scan the Company's database and
simultaneously initiate calls on all available telephone lines and determine if
a live connection is made. Upon determining that a live connection has been
made, the computer immediately switches the call to an available representative
and instantaneously displays the associated account record on the
representative's workstation. Calls that reach other signals, such as a busy
signal, telephone company intercept or no answer, are tagged
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for statistical analysis and placed in priority recall queues or multiple-pass
calling cycles. The system also automates virtually all recordkeeping and
follow-up activities including letter and report generation. The Company's
automated method of operations dramatically improves the productivity of the
Company's collection staff.
The Company employs a 15 person MIS staff led by a Vice President Chief
Information Officer. The Company maintains disaster recovery contingency plans
and has implemented procedures to protect the loss of data against power loss,
fire and other casualty. The Company has implemented a security system to
protect the integrity and confidentiality of its computer system and data and
maintains comprehensive business interruption and critical systems insurance on
its telecommunications and computer systems.
Quality Assurance and Client Service. The Company's reputation for
quality service is critical to acquiring and retaining clients. Therefore, the
Company and its clients monitor the Company's representatives for strict
compliance with the clients' specifications and the Company's policies. The
Company regularly measures the quality of its services by capturing and
reviewing such information as the amount of time spent talking with clients'
customers, level of customer complaints and operating performance. In order to
provide ongoing improvement to the Company's telephone representatives'
performance and to assure compliance with the Company's policies and standards,
quality assurance personnel monitor each telephone representative on a frequent
basis and provide ongoing training to the representative based on this review.
The Company's information systems enable it to provide clients with reports on a
real-time basis as to the status of their accounts and clients can choose to
network with the Company's computer system to access such information directly.
The Company maintains a client service department to promptly address
client issues and questions and alert senior executives of potential problems
that require their attention. In addition to addressing specific issues, a team
of client service representatives will contact accounts on a regular basis in
order to establish a close client rapport, determine the client's overall level
of satisfaction and identify practical methods of improving the client's
satisfaction.
Client Relationships
The Company's client base currently includes of over 7,000 companies in
such industries as education, financial services, healthcare, telecommunications
and utilities. The Company's 10 largest clients in 1996 accounted for
approximately 32.1% of the Company's revenue on a pro forma basis assuming that
the MAB acquisition had occurred on January 1, 1996. In 1996, the City of
Philadelphia Water Revenue Bureau, the Company's largest account by revenue,
accounted for 9.5% of total revenue (7.3% on a pro forma basis with MAB). In
1996, the Company on a pro forma basis derived 15.2% of its referrals from
educational organizations, 38.5% from financial institutions, 13.6% from
healthcare organizations, 4.7% from telecommunications companies, 8.1% from
utilities, 15.1% from government entities and 4.8% from retail and commercial
entities.
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The following table sets forth a list of certain of the Company's key clients:
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Financial Services Healthcare Education
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First Union Corporation Reimbursement Technologies, Inc. Pennsylvania Higher Education Assistance
Mellon Bank, N.A. Medical Center of Delaware Agency
NationsBank, N.A. Franciscan Healthcare University of Pennsylvania
The Progressive Corporation Hutchinson Hospital Corporation Seton Hall University
United Healthcare Penn State University
Rutgers University
University of Virginia
Telecommunications Utilities Government
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Bell Atlantic Corporation New York State Electric & Gas Water Revenue Bureau, City of Philadelphia
NYNEX National Fuel Gas Distribution State of New Jersey Motor Vehicle Services
ATX Telecommunications Corporation
Frontier Cellular PECO Energy Company
Boston Edison Company
Western Resources Corporation
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The Company enters into contracts with most of its clients which
define, among other things, fee arrangements, scope of services and termination
provisions. Clients may usually terminate such contracts on 30 or 60 days
notice. In the event of termination, however, clients typically do not withdraw
accounts referred to the Company prior to the date of termination, thus
providing the Company with an ongoing stream of revenue from such accounts which
diminish over time. Under the terms of the Company's contracts, clients are not
required to place accounts with the Company but do so on a discretionary basis.
Sales and Marketing
The Company utilizes a focused and highly professional direct selling
effort in which sales representatives personally cultivate relationships with
prospects and existing clients. The Company's sales effort consists of a 44
person direct sales force. Each sales representative is charged with identifying
leads, qualifying prospects and closing sales. When appropriate, Company
operating personnel will join in the sales effort to provide detailed
information and advice regarding the Company's operational capabilities. Sales
and operating personnel also work together to take advantage of potential
cross-selling opportunities. The Company supplements its direct sales effort
with print media and attendance at trade shows.
Many of the Company's prospective clients issue requests-for-proposals
("RFPs") as part of the contract award process. The Company retains a technical
writer for the purpose of preparing detailed, professional responses to RFPs. In
addition, the effect of the Company's direct sales force in maintaining contact
with the prospective client often allow them to serve in an informal advisory
capacity to the prospective client with respect to the requirements of the RFP
which the Company believes gives it a competitive edge in responding to the RFP.
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Personnel and Training
The Company's success in recruiting, hiring and training a large number
of employees is critical to its ability to provide high quality accounts
receivable management, customer support and teleservices programs to its
clients. The Company seeks to hire personnel with previous experience in
accounts receivable management or as a telephone representative. NCO generally
offers competitive compensation and benefits and offers promotion opportunities
within the Company.
All Company personnel receive a comprehensive training course that
consists of a combination of classroom and practical experience. Prior to
customer contact, new employees receive one week of training in the Company's
operating systems, procedures and telephone techniques and instruction in
applicable federal and state regulatory requirements. Company personnel also
receive a wide variety of continuing professional education consisting of both
classroom and role playing sessions.
As of March 27, 1997, the Company had a total of 1,146 full-time
employees and 249 part-time employees, of which 1,083 were telephone
representatives. None of the Company's employees is represented by a labor
union. The Company believes that its relations with its employees are good.
Competition
The accounts receivable management industry is highly competitive. The
Company competes with approximately 6,300 providers, including large national
corporations such as First Data Corporation, Payco American Corporation and
Union Corporation, and many regional and local firms. Many of the Company's
competitors have substantially greater resources, offer more diversified
services and operate in broader geographic areas than the Company. In addition,
the accounts receivable management services offered by the Company, in many
instances, are performed in-house. Moreover, many larger clients retain multiple
accounts receivable management and recovery providers which exposes the Company
to continuous competition in order to remain a preferred vendor. The Company
believes that the primary competitive factors in obtaining and retaining clients
are the ability to provide customized solutions to a client's requirements,
personalized service, sophisticated call and information systems and price. The
Company also competes with other firms, such as SITEL Corporation, APAC
TeleServices, Inc. and Teletech Holdings, Inc., in providing teleservices.
Regulation
The accounts receivable management industry is regulated both at the
federal and state level. The federal Fair Debt Collection Practices Act (the
"FDCPA") regulates any person who regularly collects or attempts to collect,
directly or indirectly, consumer debts owed or asserted to be owed to another
person. The FDCPA establishes specific guidelines and procedures which debt
collectors must follow in communicating with consumer debtors, including the
time, place and manner of such communications. Further, it prohibits harassment
or abuse by debt collectors, including the threat of violence or criminal
prosecution, obscene language or repeated telephone calls made with the intent
to abuse or harass. The FDCPA also places restrictions on communications with
individuals
-10-
<PAGE>
other than consumer debtors in connection with the collection of any consumer
debt and sets forth specific procedures to be followed when communicating with
such third parties for purposes of obtaining location information about the
consumer. Additionally, the FDCPA contains various notice and disclosure
requirements and prohibits unfair or misleading representations by debt
collectors. The Company is also subject to the Fair Credit Reporting Act which
regulates the consumer credit reporting industry and which may impose liability
on the Company to the extent that the adverse credit information reported on a
consumer to a credit bureau is false or inaccurate. The accounts receivable
management business is also subject to state regulation. Some states require
that the Company be licensed as a debt collection company. Management believes
that the Company currently holds applicable licenses from all states where
required.
With respect to the other teleservices offered by the Company,
including telemarketing, the federal Telemarketing and Consumer Fraud and Abuse
Prevention Act of 1994 (the "TCFAPA") broadly authorizes the Federal Trade
Commission (the "FTC") to issue regulations prohibiting misrepresentations in
telemarketing sales. The FTC's telemarketing sales rules prohibit
misrepresentations of the cost, terms, restrictions, performance or duration of
products or services offered by telephone solicitation and specifically address
other perceived telemarketing abuses in the offering of prizes and the sale of
business opportunities or investments. The federal Telephone Consumer Protection
Act of 1991 (the "TCPA") limits the hours during which telemarketers may call
consumers and prohibits the use of automated telephone dialing equipment to call
certain telephone numbers. A number of states also regulate telemarketing. For
example, some states have enacted restrictions similar to the federal TCPA. From
time to time, Congress and the states consider legislation that would further
regulate the Company's telemarketing operations and the Company cannot predict
whether additional legislation will be enacted and, if enacted, what effect it
would have on the telemarketing industry and the Company's business.
Several of the industries served by the Company are also subject to
varying degrees of government regulation. Although compliance with these
regulations is generally the responsibility of the Company's clients, the
Company could be subject to a variety of enforcement or private actions for its
failure or the failure of its clients to comply with such regulations.
The Company devotes significant and continuous efforts, through
training of personnel and monitoring of compliance, to ensure that it is in
compliance with all federal and state regulatory requirements. The Company
believes that it is in material compliance with all such regulatory
requirements.
Investment Considerations
Certain statements included in this Annual Report on Form 10-K,
including, without limitation, statements regarding the anticipated growth in
the amount of accounts receivable placed for third-party management, the
continuation of trends favoring outsourcing of other administrative functions,
the Company's objective to grow through strategic acquisitions and its ability
to realize operating efficiencies upon the completion of recent acquisitions and
other acquisitions that may occur in the future, the Company's ability to expand
its service offerings, trends in the Company's future operating performance and
statements as to the Company's or management's beliefs, expectations and
opinions, are forward-looking statements, and the
-11-
<PAGE>
factors discussed below could cause actual results and developments to be
materially different from those expressed in or implied by such statements.
Accordingly, in addition to the other information contained, or incorporated by
reference, in this Annual Report on Form 10-K, the following factors should be
considered carefully in evaluating an investment in the Company's Common Stock.
Risks Associated with Recent Acquisitions
The Goodyear, Tele-Research, CMS A/R Services and CRWCD acquisitions
were consummated in January and February 1997. These entities had combined
revenues of $40.0 million in 1996 compared to the Company's revenues of $30.8
million in 1996 ($39.9 million on a pro forma basis assuming that the MAB
acquisition had occurred on January 1, 1996). The Company's efforts in
integrating these acquisitions are in the initial stages. Such integration will
likely place significant demands on the Company's management and infrastructure.
There can be no assurance that Goodyear's, Tele-Research's, CMS A/R Services' or
CRWCD's businesses will be successfully integrated with that of the Company,
that the Company will be able to realize operating efficiencies or eliminate
redundant costs or that their businesses will be operated profitably. Further,
there can be no assurance that clients of the acquired businesses will continue
to do business with the Company or that the Company will be able to retain key
employees.
Ability to Manage and Sustain Growth
The Company has experienced rapid growth over the past several years
which has placed significant demands on its administrative, operational and
financial resources. The Company seeks to continue such rapid growth which could
place additional demands on its resources. Future internal growth will depend on
a number of factors, including the effective and timely initiation and
development of client relationships, the Company's ability to maintain the
quality of services it provides to its clients and the recruitment, motivation
and retention of qualified personnel. Sustaining growth will also require the
implementation of enhancements to its operational and financial systems and will
require additional management, operational and financial resources. There can be
no assurance that the Company will be able to manage its expanding operations
effectively or that it will be able to maintain or accelerate its growth, and
any failure to do so could have a materially adverse effect on the Company's
business, results of operations and financial condition. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Risks Associated with Future Acquisitions
A primary element of the Company's growth strategy is to pursue
strategic acquisitions that expand or complement the Company's business. The
Company regularly reviews various strategic acquisition opportunities and
periodically engages in discussions regarding such possible acquisitions. There
can be no assurance that the Company will be able to identify additional
acquisition candidates on terms favorable to the Company or in a timely manner,
enter into acceptable agreements or close any such transactions. There can be no
assurance that the Company will be able to continue its acquisition strategy,
and any failure to do so could have a materially adverse effect on the Company's
business, financial condition, results of operations and ability to sustain
growth. In addition, the Company believes that it will compete for attractive
acquisition candidates
-12-
<PAGE>
with other larger companies, consolidators or investors in the accounts
receivable management industry. Increased competition for such acquisition
candidates could have the effect of increasing the cost to the Company of
pursuing this growth strategy or could reduce the number of attractive
candidates to be acquired. Future acquisitions could divert management's
attention from the daily operations of the Company and otherwise require
additional management, operational and financial resources. Moreover, there is
no assurance that the Company will successfully integrate future acquisitions
into its business or operate such acquisitions profitably. Acquisitions also may
involve a number of special risks including: adverse short term effects on the
Company's operating results; dependence on retaining key personnel; amortization
of acquired intangible assets; and risks associated with unanticipated problems,
liabilities or contingencies.
The Company may raise additional debt or equity financing to fund any
future acquisitions, which may not be available on terms favorable to the
Company, if at all. To the extent the Company uses its capital stock for all or
a portion of the consideration to be paid for future acquisitions, dilution may
be experienced by existing shareholders. In the event that the Company's capital
stock does not maintain sufficient value or potential acquisition candidates are
unwilling to accept the Company's capital stock as consideration for the sale of
their businesses, the Company may be required to utilize more of its cash
resources, if available, in order to continue its acquisition program. If the
Company does not have sufficient cash resources or is not able to use its
capital stock as consideration for acquisitions, its growth through acquisitions
could be limited. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Fluctuations in Quarterly Operating Results
The Company has experienced and expects to continue to experience
quarterly variations in revenues and net income as a result of many factors,
including the timing of clients' accounts receivable management programs, the
commencement of new contracts, the termination of existing contracts, costs to
support growth by acquisition or otherwise, the costs and timing of completion
of additional acquisitions, the effect of the change of business mix on margins
and the timing of additional selling, general and administrative expenses to
support new business. The Company's planned operating expenditures are based on
revenue forecasts, and if revenues are below expectations in any given quarter,
operating results would likely be materially adversely affected. While the
effects of seasonality on the Company's business historically have been obscured
by its rapid growth, the Company's business tends to be slower in the third and
fourth quarters of the year due to the summer and holiday seasons. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Dependence on Key Personnel
The Company is highly dependent upon the continued services and
experience of its senior management team, including Michael J. Barrist,
President and Chief Executive Officer. The loss of the services of Mr. Barrist
or other members of its senior management could have a materially adverse effect
on the Company. The Company has five-year employment contracts with Mr. Barrist
and certain other key executives. In addition, the Company has a $4.0 million
key person life insurance policy on Mr. Barrist. See "Management" contained in,
and incorporated by reference to, the Company's Proxy Statement relating to the
1997 Annual Meeting of Shareholders.
-13-
<PAGE>
Dependence on Certain Industries; Contract Risks
Most of the Company's revenues are derived from clients in the
education, financial services, healthcare, telecommunications and utilities
industries. A significant downturn in any of these industries or any trends to
reduce or eliminate the use of third-party accounts receivable management
services could have a materially adverse impact on the Company's business,
results of operations and financial condition. The Company enters into contracts
with most of its clients which define, among other things, fee arrangements,
scope of services and termination provisions. Clients may usually terminate such
contracts on 30 or 60 days notice. Accordingly, there can be no assurance that
existing clients will continue to use the Company's services at historical
levels, if at all. Under the terms of these contracts, clients are not required
to place accounts with the Company but do so on a discretionary basis. In
addition, substantially all of the Company's contracts are on a contingent fee
basis where the Company recognizes revenues only as accounts are recovered. See
"Business."
Competition
The accounts receivable management industry is highly competitive. The
Company competes with approximately 6,300 providers, including large national
corporations such as First Data Corporation, Payco American Corporation, Union
Corporation and many regional and local firms. Many of the Company's competitors
have substantially greater resources, offer more diversified services and
operate in broader geographic areas than the Company. In addition, the accounts
receivable management services offered by the Company, in many instances, are
performed in-house. Moreover, many larger clients retain multiple accounts
receivable management providers which exposes the Company to continuous
competition in order to remain a preferred vendor. There can be no assurance
that outsourcing of the accounts receivable management function will continue or
that the Company's clients which currently outsource such services will not
bring them in-house. The Company also competes with other firms, such as SITEL
Corporation, APAC Teleservices, Inc. and Teletech Holdings, Inc., in providing
teleservices. As a result of these factors, there can be no assurance that
competition from existing or potential competitors will not have a materially
adverse effect on the Company's results of operations. See
"Business-Competition."
Risk of Business Interruption; Reliance on Computer and Telecommunications
Infrastructure
The Company's success is dependent in large part on its continued
investment in sophisticated telecommunications and computer systems, including
predictive dialers, automated call distribution systems and digital switching.
The Company has invested significantly in technology in an effort to remain
competitive and anticipates that it will be necessary to continue to do so in
the future. Moreover, computer and telecommunication technologies are evolving
rapidly and are characterized by short product life cycles, which requires the
Company to anticipate technological developments. There can be no assurance that
the Company will be successful in anticipating, managing or adopting such
technological changes on a timely basis or that the Company will have the
capital resources available to invest in new technologies. In addition, the
Company's business is highly dependent on its computer and telecommunications
equipment and software systems, the temporary or permanent loss of which,
through casualty or operating malfunction, could have a materially adverse
effect on the Company's business. The Company's business is materially dependent
on service provided by various local and long distance telephone companies. A
-14-
<PAGE>
significant increase in the cost of telephone services that is not recoverable
through an increase in the price of the Company's services, or any significant
interruption in telephone services, could have a materially adverse impact on
the Company. See "Business - Operations."
Dependence on Labor Force
The accounts receivable management industry is very labor intensive and
experiences high personnel turnover. Many of the Company's employees receive
modest hourly wages and a portion of these employees are employed on a part-time
basis. A higher turnover rate among the Company's employees would increase the
Company's recruiting and training costs and could adversely impact the quality
of services the Company provides to its clients. If the Company were unable to
recruit and retain a sufficient number of employees, it would be forced to limit
its growth or possibly curtail its operations. Growth in the Company's business
will require it to recruit and train qualified personnel at an accelerated rate
from time to time. There can be no assurance that the Company will be able to
continue to hire, train and retain a sufficient number of qualified employees.
Additionally, an increase in hourly wages, costs of employee benefits or
employment taxes also could materially adversely affect the Company. See
"Business - Personnel and Training."
Government Regulation
The accounts receivable management and telemarketing industries are
regulated under various federal and state statutes. In particular, the Company
is subject to the federal Fair Debt Collection Practices Act which establishes
specific guidelines and procedures which debt collectors must follow in
communicating with consumer debtors, including the time, place and manner of
such communications. The Company is also subject to the Fair Credit Reporting
Act which regulates the consumer credit reporting industry and which may impose
liability on the Company to the extent that the adverse credit information
reported on a consumer to a credit bureau is false or inaccurate. The accounts
receivable management business is also subject to state regulation, and some
states require that the Company be licensed as a debt collection company. With
respect to the other teleservices offered by the Company, including
telemarketing, the federal Telemarketing and Consumer Fraud and Abuse Prevention
Act of 1994 broadly authorizes the Federal Trade Commission (the "FTC") to issue
regulations prohibiting misrepresentations in telemarketing sales. The FTC's
telemarketing sales rules prohibit misrepresentations of the cost, terms,
restrictions, performance or duration of products or services offered by
telephone solicitation and specifically address other perceived telemarketing
abuses in the offering of prizes and the sale of business opportunities or
investments. The federal Telephone Consumer Protection Act of 1991 (the "TCPA")
limits the hours during which telemarketers may call consumers and prohibits the
use of automated telephone dialing equipment to call certain telephone numbers.
A number of states also regulate telemarketing and some states have enacted
restrictions similar to the federal TCPA. The failure to comply with applicable
statutes and regulations could have a materially adverse effect on the Company.
There can be no assurance that additional federal or state legislation, or
changes in regulatory implementation, would not limit the activities of the
Company in the future or significantly increase the cost of regulatory
compliance.
Several of the industries served by the Company are also subject to
varying degrees of government regulation. Although compliance with these
regulations is generally the responsibility of the Company's clients, the
Company could be subject to a variety of enforcement or private
-15-
<PAGE>
actions for its failure or the failure of its clients to comply with such
regulations. See "Business- Government Regulation."
Control by Principal Shareholders
Michael J. Barrist beneficially owns approximately 33.0% of the Common
Stock, and together with the other executive officers of the Company,
beneficially owns approximately 52.6%. As a result of such voting concentration,
Mr. Barrist, together with other executive officers of the Company, will be able
to effectively control most matters requiring approval by the Company's
shareholders, including the election of directors. Such voting concentration may
have the effect of delaying, deferring or preventing a change in control of the
Company. See "Management" and "Beneficial Ownership of Common Stock" contained
in, and incorporated by reference to, the Company's Proxy Statement relating to
the 1997 Annual Meeting of Shareholders.
Possible Volatility of Stock Price
The Company's Common Stock is listed on the Nasdaq National Market.
Numerous factors, including announcements of fluctuations in the Company's or
its competitors' operating results and market conditions for accounts receivable
management, telemarketing industry or business services stocks in general, the
timing and announcement of acquisitions by the Company or its competitors or
government regulatory action, could have a significant impact on the future
price of the Common Stock. In addition, the stock market in recent years has
experienced significant price and volume fluctuations that often have been
unrelated or disproportionate to the operating performance of companies. These
broad fluctuations may adversely affect the market price of the Common Stock.
Shares Eligible for Future Sale
Sales of the Company's Common Stock in the public market could
adversely affect the market price of the Company's Common Stock and could impair
the Company's future ability to raise capital through the sale of equity
securities. The Company currently has 7,058,625 shares of Common Stock
outstanding, including 345,178 shares issued in connection with the CRWCD
acquisition (the "CRW Shares"). The Company also has outstanding warrants to
purchase an aggregate of 240,591 shares of Common Stock exercisable at any time
on or before July 31, 2005 issued in connection with the Company's revolving
credit facility, a warrant to purchase 250,000 shares of Common Stock
exercisable at any time on or before January 31, 2002 issued in connection with
the CRWCD acquisition, a $1.0 million Convertible Note convertible into 76,923
shares of Common Stock at any time on or before September 5, 2001 issued in
connection with the MAB acquisition and a $900,000 Convertible Note convertible
into 42,503 shares of Common Stock at any time on or before January 22, 2002
issued in connection with the Goodyear acquisition. The CRW Shares, the warrants
and convertible notes are entitled to certain demand and/or piggy-back
registration rights. In addition, the Company intends to register approximately
724,258 shares of Common Stock reserved for issuance to its employees,
directors, consultants and advisors under the Company's 1995 Stock Option Plan,
1996 Stock Option Plan and Non-Employee Director Stock Option Plan. Options to
purchase an aggregate of 438,971 shares of Common Stock currently are
outstanding under all such plans.
-16-
<PAGE>
Anti-Takeover Provisions
The Company's Amended and Restated Articles of Incorporation (the
"Articles") and Bylaws (the "Bylaws") contain provisions which may be deemed to
be "anti-takeover" in nature in that such provisions may deter, discourage or
make more difficult the assumption of control of the Company by another
corporation or person through a tender offer, merger, proxy contest or similar
transaction. The Articles permit the Board of Directors to establish the rights,
preferences, privileges and restrictions of, and to issue, up to 5,000,000
shares of Preferred Stock without shareholder approval. The Company's Bylaws
also provide for the staggered election of directors to serve for one-, two- and
three-year terms, and for successive three-year terms thereafter, subject to
removal only for cause upon the vote of not less than 65% of the shares of
Common Stock represented at a shareholders' meeting. Certain provisions of the
Articles and Bylaws may not be amended except by a similar 65% vote. In
addition, the Company is subject to certain anti-takeover provisions of the
Pennsylvania Business Corporation Law.
Item 2. Properties.
The Company leases all of its facilities. The chart below summarizes
the Company's facilities as of December 31, 1996:
Location Approximate
of Facility Square Footage Function
- -------------------- ---------------------- ----------------------------
Denver, CO 4,800 Processing center
Hutchinson, KS 900 Processing center
Wichita, KS 10,000 Processing center
Beltsville, MD 4,700 Processing center
Buffalo, NY 30,000 Processing center
Cleveland, OH 7,000 Processing center
Blue Bell, PA 36,500 Corporate headquarters
and processing center
Philadelphia, PA 5,700 Processing center
The leases of these facilities expire between 1997 and 2010, and most
contain renewal options. In addition, the Company leases sales offices in
Birmingham, Alabama and Canton, Massachusetts.
As a result of the four acquisitions consummated in 1997, the Company
acquired 19 additional leased facilities located throughout the country. The
Company believes that its facilities are adequate for its current operations,
but additional facilities may be required to support growth. The Company
believes that suitable additional or alternative space will be available as
needed on commercially reasonable terms. In addition, the Company intends to
close or consolidate certain offices acquired in the 1997 acquisitions.
-17-
<PAGE>
The Company leases space in four buildings in Blue Bell, Pennsylvania
from three limited partnerships of which the existing shareholders of the
Company are limited partners and Michael J. Barrist is the sole shareholder of
the corporate general partners, pursuant to leases expiring between 1998 and
2000. See "Management - Certain Transactions - Leases" contained in, and
incorporated by reference to, the Company's Proxy Statement relating to the 1997
Annual Meeting of Shareholders.
Item 3. Legal Proceedings.
The Company is involved in legal proceedings from time to time in the
ordinary course of its business. Management believes that none of these legal
proceedings will have a materially adverse effect on the financial condition or
results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 4.1 Executive Officers of the Registrant who are not Directors.
<TABLE>
<CAPTION>
Name Age Position
- -------------------------------------------- ------------ ------------------------------------------------------
<S> <C> <C>
Steven L. Winokur......................... 37 Vice President, Finance, Chief Financial
Officer and Treasurer
Joseph C. McGowan......................... 43 Co-Chief Operating Officer
Michael G. Noah........................... 51 Co-Chief Operating Officer
</TABLE>
Steven L. Winokur joined the Company in December 1995 as Vice
President, Finance and Chief Financial Officer. Prior to that, Mr. Winokur acted
as a part-time consultant to the Company since 1986. From February 1992 to
December 1995, Mr. Winokur was the principal of Winokur & Associates, a
certified public accounting firm. From March 1981 to February 1992, Mr. Winokur
was a partner with Gross & Company, a certified public accounting firm, where he
most recently served as Administrative Partner. Mr. Winokur is a certified
public accountant.
Joseph C. McGowan joined the Company in 1990 as Vice President,
Operations and became Co-Chief Operating Officer in February 1997. Prior to
joining the Company, Mr. McGowan was Assistant Manager of the Collections
Department at Philadelphia Gas Works, a public utility, since 1975.
Michael G. Noah has been President of MAB since May 1994. He became
Co-Chief Operating Officer of the Company in February 1997. Prior to joining
MAB, he was an Executive Vice President of Everest National Bank, a subsidiary
of GE Capital, since August 1991.
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<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and
Related Shareholder Matters.
Following the Company's initial public offering of Common Stock on
November 6, 1997, the Company's Common Stock has been listed on the Nasdaq
National Market under the symbol "NCOG." The following table sets forth, for the
fiscal quarters indicated, the high and low closing sale prices for the Common
Stock, as reported by Nasdaq.
High Low
1996
Fourth Quarter (from November 6) $19.00 $16.25
1997
First Quarter (through March 27) 29.75 16.3125
As of March 26, 1997, the Company's Common Stock was held by
approximately 25 holders of record.
Dividend Policy
The Company historically was treated for federal and state income tax
purposes as an S Corporation under Subchapter S of the Internal Revenue Code of
1986, as amended (the "Code"), and under Pennsylvania law. As a result of the
Company's status as an S Corporation, the Company's shareholders, rather than
the Company, were taxed directly on the earnings of the Company for federal and
certain state income tax purposes, whether or not such earnings were
distributed. The Company made cash distributions to the then current
shareholders aggregating $658,000, $813,000, $1.1 million and $876,838 in
respect of the Company's S Corporation earnings for 1993, 1994, 1995 and 1996
(through September 3, 1996), respectively. On September 3, 1996 (the
"Termination Date"), the Company terminated its status as an S Corporation and
thereupon became subject to federal and state income taxes at applicable C
Corporation rates. In November 1996, the Company paid to shareholders of record
as of the Termination Date a distribution of $3,246,851 representing the
Company's undistributed S Corporation earnings through the Termination Date.
The Company does not anticipate paying cash dividends on its Common
Stock in the foreseeable future. In addition, the Company's Revolving Credit
Agreement prohibits the Company from paying cash dividends without the lender's
prior consent. The Company currently intends to retain future earnings to
finance its operations and fund the growth of its business. Any payment of
future dividends will be at the discretion of the Board of Directors of the
Company and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, level of indebtedness, contractual
restrictions with respect to the payment of dividends and other factors that the
Company's Board of Directors deems relevant.
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<PAGE>
Sales of Unregistered Securities during 1996
Set forth below is information concerning certain issuances of Common
Stock during 1996 which were not registered under the Securities Act of 1933.
The Company issued a warrant to purchase 46,560 shares of Common Stock
to Mellon Bank, N.A. upon the amendment of the Company's Credit Agreement in
September 1996. The Company issued an additional warrant to purchase 18,500
shares of Common Stock to Mellon Bank, N.A. in connection with the Bank's
commitment to increase the credit facility to $25.0 million. These warrants have
an exercise price of $13.00 per share and expire on July 31, 2005. All of the
warrants were issued in reliance upon the exemption from the registration
requirements provided by Section 4(2) of the Securities Act.
In September 1996, the Company acquired all of the outstanding stock of
MAB. As part of the purchase price, the Company issued a Convertible Note in the
aggregate principal amount of $1.0 million. This note is convertible at any time
into 76,923 shares of Common Stock at an conversion price of $13.00 per share.
The note was issued in reliance on the exemption from the registration
requirements provided by Section 4(2) of the Securities Act.
In 1996, the Company granted options to certain executive officers and
key employees to purchase an aggregate of 292,854 shares of Common Stock under
the 1995 Stock Option Plan and the 1996 Stock Option Plan on the dates and at
the exercise prices set forth below. Generally, options will become exercisable
in equal one-third installments beginning on the first anniversary of the date
of grant. All of the options were issued in connection with such employee's
employment with the Company and no cash or other consideration was received by
the Company in exchange for such options. The options were issued in reliance
upon the exemption from the registration requirements provided by Section 4(2)
of the Securities Act and, with respect to options issued prior to November 6,
1997, by Rule 701 under the Securities Act.
Date Issued Options Granted Exercise Price
----------- --------------- --------------
July 1996 33,258 $13.00
September 1996 38,801 13.00
October 1996 156,145 13.00
December 1996 64,650 17.00
In December 1996, the Company issued options pursuant to the 1996
Non-Employee Director Stock Option Plan to purchase 1,000 shares of Common Stock
to each of Eric S. Siegel and Alan F. Wise upon their appointment to the Board
of Directors. These options were granted at an exercise price of $18.125 per
share. The options were issued in reliance upon the exemption from the
registration requirements provided by Section 4(2) of the Securities Act.
-20-
<PAGE>
Item 6. Selected Financial Data.
SELECTED FINANCIAL AND OPERATING DATA
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
------------ ------------ ----------- ----------- -------------------------------
Pro
Actual Forma (1)(2)
-------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenue $ 5,822 $ 7,445 $ 8,578 $ 12,733 $ 30,760 $ 39,923
Operating costs and
expenses:
Payroll and related
expenses 3,058 4,123 4,558 6,797 14,651 19,497
Selling, general and
administrative
expenses 2,013 2,391 2,674 4,042 10,033 13,287
Depreciation and
amortization
expenses 95 141 215 348 1,254 1,621
------------ ------------ ----------- ----------- -------------- -------------
Income from operations 656 790 1,131 1,546 4,822 5,518
Other income (expense) 15 11 (45) (180) (575) 102
------------ ------------ ----------- ----------- -------------- -------------
Income before income
taxes (3) 671 801 1,086 1,366 4,247 5,620
Pro forma provision for
income taxes(3) 268 320 434 546 613 2,248
------------ ------------ ----------- ----------- -------------- -------------
Pro forma net income(3) $ 403 $ 481 $ 652 $ 820 $ 3,634 $ 3,372
============ ============ =========== =========== ============== =============
Pro forma net income
per share $ 0.17(4) $ 0.50(4) $ 0.54
=========== ============= =============
Pro forma weighted
average shares out-
standing 4,728,906(4) 5,086,736(4) 6,242,660
========== ============= =============
Operating Data:
Total value of accounts
referred $ 150,707 $ 199,108 $ 281,387 $ 431,927 $ 1,173,342 $ 1,581,748
Average fee 16.9% 20.2% 22.5% 22.4% 25.2% 25.0%
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- -------------- -------------- --------------
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 421 $ 562 $ 52 $ 805 $ 12,058
Working capital 362 445 473 812 13,629
Total assets 1,794 1,990 3,359 6,644 35,826
Long-term debt, net of current portion 144 59 732 2,593 1,091
Shareholders' equity 686 876 1,423 2,051 30,647
</TABLE>
(1) Assumes that the acquisition of MAB occurred on January 1, 1996
(2) Gives effect to: (i) the reduction of certain redundant operating costs and
expenses that were immediately identifiable at the time of the MAB acquisition;
(ii) the elimination of interest expense associated with acquisition-related
debt repaid with offering proceeds; and (iii) the issuance of 1,604,620 shares
of common stock at $13.00 per share, net of commissions and offering expenses,
sufficient to repay acquisition-related debt of $15.0 million and to fund the
distribution of undistributed S Corporation earnings of $3.2 million.
(3) Prior to September 3, 1996, the Company operated as an S Corporation for
income tax purposes and accordingly was not subject to federal or state income
taxes. Accordingly the historical financial statements do not include a
provision for federal and state income taxes for such periods. Pro forma net
income has been computed as if the Company had been fully subject to federal and
state income taxes for all periods presented.
(4) Assumes that the Company issued 249,758 shares of Common Stock at $13.00
per share to fund the distribution of undistributed S Corporation earnings of
$3.2 million through the Termination Date to existing shareholders of the
Company.
-21-
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Results of Operations:
The following table sets forth income statement data on an historical
and pro forma basis as a percentage of revenue:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------
1992 1993 1994 1995 1996
------- -------- ------- ------- ------------------
Pro
Actual Forma
-------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Operating costs and expenses:
Payroll and related expenses 52.5 55.4 53.1 53.4 47.6 48.8
Selling, general and administrative
expenses 34.6 32.1 31.2 31.7 32.6 33.3
Depreciation and amortization expense 1.6 1.9 2.5 2.7 4.1 4.1
------- -------- ------- -------- -------- --------
Total operating costs and expenses 88.7 89.4 86.8 87.8 84.3 86.2
------- -------- ------- -------- -------- --------
Income from operations 11.3 10.6 13.2 12.2 15.7 13.8
Other income (expense): 0.3 0.1 (0.5) (1.4) (1.9) 0.3
------- -------- ------- -------- -------- --------
Income before provision for income taxes 11.6 10.7 12.7 10.8 13.8 14.1
Pro forma provision for income taxes 4.6 4.3 5.1 4.3 2.0 5.6
------- -------- ------- -------- -------- --------
Pro forma net income 7.0 % 6.4 % 7.6 % 6.5 % 11.8 % 8.5 %
======= ======== ======= ======== ======== ========
</TABLE>
Pro Forma Compared to Actual Results of Operations
Pro forma operating data for 1996 assume that the MAB acquisition was
consummated on January 1, 1996. Pro forma adjustments have been made to reflect
the elimination of certain expenses that were immediately identifiable at the
time of the acquisition, including the elimination of certain redundant
collection and administrative personnel. At the time of the acquisition, MAB had
a higher cost structure than the Company. In the months following the
acquisition, the Company has leveraged its infrastructure to realize additional
operating efficiencies in order to bring the cost structure of MAB in line with
NCO's current operating results. These other costs savings include (i) further
reduction in payroll and related expenses relating primarily to redundant
collections and administrative personnel, (ii) further reductions in facilities
costs, and (iii) reduction of certain expenses such as telephone, mailing and
data processing. Due to the higher cost structures of the acquired business and
the fact that all expected expense savings are not reflected in pro forma
adjustments, certain pro forma operating percentages compare unfavorably to
actual operating percentages for the periods under consideration.
Year ended December 31, 1996 Compared to Year ended December 31, 1995
Revenue. Revenue increased $18.0 million or 141.6% to $30.8 million in
1996 from $12.7 million in 1995. Of this increase, $5.0 million was attributable
to the MAB acquisition completed in September 1996, $6.8 million was
attributable to the TCD acquisition completed in January 1996, and $1.3 million
was attributable to a full year of revenue from the Eastern acquisition in 1996
versus three months in 1995. This was partially offset by a decrease in revenue
from the BRM acquisition to $1.3 million in 1996 from $1.4 million in 1995.
Additionally, the
22
<PAGE>
Company experienced 46.7% internal growth from the addition of new clients and a
growth in business from existing clients. Of this internal growth, $2.9 million
of the increase was due to a full twelve months of revenue in 1996 from a
contract awarded to the Company by a government agency in April 1995. Revenue
from other related services, which became an area of focus in 1996, increased
$1.2 million to $1.5 million in 1996 from $259,000 in 1995.
Payroll and related expenses. Payroll and related expenses increased
$7.8 million to $14.6 million in 1996 from $6.8 million in 1995, but decreased
as a percentage of revenue to 47.6% from 53.5%. The decrease in payroll and
related expenses as a percentage of revenue was primarily the result of
spreading the relatively fixed costs of management and administrative personnel
over a larger revenue base and the increased utilization of "on-line" computer
services and other outside services, as well as eliminating redundant
administrative staff following the TCD and Eastern acquisitions. These
efficiencies were offset in part by higher payroll and related expenses of MAB
as a percentage of its revenue. The effect of MAB was minimal due to only four
months of the operations of MAB being included in the income statements.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $6.0 million to $10.0 million in 1996, from
$4.0 million in 1995, and increased as a percentage of revenue to 32.6% from
31.7%. A large percentage of the increase was due to the increased costs
associated with litigation management services performed by the Company on
behalf of its clients in states where the laws are more conducive to the
utilization of the legal process for recovery of delinquent accounts. In
addition, the Company experienced increased costs as a result of a change in
business mix which required the increased use of national data bases and credit
reporting services. These increases were offset in part by operating
efficiencies resulting from the TCD acquisition.
Depreciation and amortization. Depreciation and amortization increased
to $1.3 million in 1996 from $348,000 in 1995. Of this increase, $605,000 was a
result of the MAB, TCD and Eastern acquisitions. The remaining $301,000
consisted of amortization of deferred financing charges and depreciation
resulting from capital expenditures incurred in the ordinary course of business.
Other income (expense). Interest expense increased to $818,000 in 1996
from $180,000 in 1995, primarily due to increased borrowings associated with the
acquisitions of MAB, TCD and Eastern. Also included in other income (expense)
for 1995 was a loss from the disposal of assets of $49,000.
Income tax expense, net of benefit:Income tax expense in 1996 was
$768,000. This was offset by the recognition of a deferred tax benefit of
$155,000 attributable to the termination of the S Corporation election by the
Company.
Net income. Net income was $3.6 million and $1.4 million in 1996 and
1995, respectively. Net income pro forma for taxes increased to $2.5 million in
1996 from $820,000 in 1995, a 210.0% increase. Net income pro forma for taxes
includes a provision for federal and state income taxes at an assumed rate of
40% in 1996 and 1995.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenue. Revenue increased $4.2 million or 48.4% to $12.7 million in
1995 from $8.6 million in 1994. In 1995, the Company initiated a marketing
program targeted at larger national accounts. As a result, the company
experienced 38% internal growth from the addition of new clients and growth in
business from existing clients. This growth includes approximately $1.3 million
from a contract with a governmental agency awarded in April 1995. In addition to
strong internal growth, approximately $808,000 of the increase in revenue was
attributable to the Eastern acquisition, and $437,000 was attributable to a full
year of operations of BRM in 1995 versus eight months in 1994. This was
partially offset by a decrease in revenue from outsourcing projects to $259,000
in 1995 from $357,000 in 1994. Approximately $300,000 in revenue from
outsourcing projects in 1994 was from a one-time project completed in the first
quarter of 1994.
Payroll and related expenses. Payroll and related expenses increased
$2.2 million to $6.8 million in 1995 from $4.6 million in 1994, and increased
slightly as a percentage of revenue to 53.4% from 53.1%. During the fourth
23
<PAGE>
quarter of 1995, the Company hired a Vice President of Collection, as well as 20
additional telephone representatives necessary for two outsourcing projects
which did not generate revenue until the first quarter of 1996. In addition, the
one-time outsourcing project completed during the first quarter of 1994 had
lower payroll and related expenses as a percentage of revenue. The increases in
personnel were partially offset by spreading the relatively fixed costs of the
Company's management and administrative personnel over a larger revenue base, as
well as the elimination of redundant administrative staff related to the Eastern
acquisition.
Selling, general and administrative expenses. Selling general and
administrative expenses increased $1.3 million to $4.0 million in 1995, from
$2.7 million in 1994 and increased as a percentage of revenue to 31.7% from
31.2%. These increases were primarily due to higher data processing and
processing and facilities costs in anticipation of growth and to allow for the
rapid assimilation of the TCD acquisition in the first quarter of 1996 without
having to purchase short-term administrative services from the parent company of
TCD during the post-acquisition transition.
Depreciation and amortization. Depreciation and amortization increased
to $348,000 in 1995 from $215,000 in 1994. Of this increase, $90,000 was
attributable to the Eastern and BRM acquisitions. The remaining $43,000
consisted of amortization of deferred financing charges and depreciation
resulting from capital expenditures incurred in the ordinary course of business.
Other income (expense). Interest expense increased to $180,000 in 1995
from $72,000 in 1994, primarily due to increased borrowings associated with the
Eastern and BRM acquisitions. The Company recorded a $49,000 loss from the
disposal of assets in 1995.
Net income. Net income pro forma for taxes increased to $820,000 in1995
from $652,000 in 1994, representing a 25.7% increase. Net income pro forma for
taxes includes a provision for federal and state income taxes at an assumed rate
of 40% for the years ended December 31, 1995 and 1994.
Quarterly Results
The following table sets forth selected actual historical financial
data for the calendar quarters of 1995 and 1996. This quarterly information is
unaudited but has been prepared on a basis consistent with the Company's audited
financial statements presented elsewhere herein and, in the Company's opinion,
includes all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the information for the quarters presented.
The operating results for any quarter are not necessarily indicative of results
for any future period.
<TABLE>
<CAPTION>
Quarter ended
-------------------------------------------------------------------------------------
1995 1996
-------------------------------------------------------------------------------------
Mar. Jun. Sept. Dec. Mar. Jun. Sept. Dec.
31 30 30 31 31 30 30 31
--------- --------- -------- -------- --------- --------- -------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $2,544 $3,002 $3,480 $3,707 $6,044 $6,499 $7,715 $10,502
Income from
operations 244 485 496 320 915 1156 1183 1569
Net income 227 429 460 250 760 1001 968 906
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Quarter ended
-------------------------------------------------------------------------------------
1995 1996
-------------------------------------------------------------------------------------
Mar. Jun. Sept. Dec. Mar. Jun. Sept. Dec.
31 30 30 31 31 30 30 31
--------- --------- -------- -------- --------- --------- -------- ---------
(as a percentage of revenue)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Income from
operations 9.6% 16.2% 14.3% 8.6% 15.1% 17.8% 15.3% 14.9%
Net income 8.9% 14.3% 13.2% 6.7% 12.6% 15.4% 12.5% 8.6%
</TABLE>
In the past, the company has experienced quarterly fluctuations in
operating expenses. Due to the low revenue base of the company at the time these
costs were incurred, the impact of these fluctuations was more significant than
if they had occurred at the Company's current revenue base. For instance, the
fourth quarter of 1995 included additional costs primarily due to increases in
data processing and facilities costs in anticipation of growth and to allow for
the rapid assimilation of the TCD acquisition.
The Company could experience quarterly variations in revenue and
operating income as a result of many factors, including the timing of clients'
referrals of accounts, the timing of acquisitions that may be effected in the
future, the timing of the hiring of personnel, the timing of additional selling,
general and administrative expenses incurred to support new business and changes
in the Company's revenue mix among its various service offerings. In connection
with certain contracts, the Company could incur costs in periods prior to
recognizing revenue under those contracts. In addition, the Company must plan
its operating expenditures based on revenue forecasts, and a revenue shortfall
below such forecast in any quarter would likely adversely affect the Company's
operating results for the quarter. While the effects of seasonality of NCO's
business have historically been obscured by its rapid growth, the Company's
business tends to be slower in the third and fourth quarter of the year due to
the summer and the holiday seasons.
Liquidity and Capital Resources
The Company's primary sources of cash have historically been cash flow
from operations and bank borrowings. Cash has been used for acquisitions of
accounts receivable management companies and distributions to shareholders, and
for purchases of equipment and working capital to support the Company's growth.
Cash provided by operating activities was $2.9 million in 1996, and
$2.0 million in 1995. The increase in cash provided by operations was primarily
due to the increase in net income to 3.6 million in 1996 compared to $1.4
million in 1995, and the increase in non-cash charges, primarily depreciation
and amortization, to $1.3 million in 1996 compared to $348,000 in 1995. These
increases were offset by a $1.8 million increase in accounts receivable in 1996
compared to a $571,000 increase in 1995 and a $222,000 increase in accounts
payable and accrued expenses in 1996 compared to a $858,000 increase in 1995.
Cash used in investing activities was $13.5 million in 1996 compared to
$2.0 million in 1995. The increase was primarily due to the acquisition of MAB
and TCD. In September 1996, the Company purchased all the outstanding stock of
MAB for $8.0 million in cash and the issuance of a $1.0 million, five-year
convertible note to the principal shareholder of MAB. The note is convertible
into the Common Stock of the Company at the initial public offering price of
$13.00 per share, and bears interest payable monthly at a rate of 8.0% per
annum. In January 1996, the Company purchased all the assets of TCD for $4.8
million in cash. In August 1995, the Company purchased certain assets of Eastern
for $1.6 million in cash and the assumption of a non-interest bearing note
payable of $252,000 and certain other accounts payable in the amount of
$209,000. The Company financed the cash portion of these acquisitions with bank
borrowings. These acquisitions collectively resulted in goodwill of $14.2
million which is being amortized at approximately $722,000 per year.
25
<PAGE>
Cash provided by financing activities was $21.8 million in 1996
compared with $280,000 in 1995. Bank borrowings had been the Company's primary
source of cash from financing activities and were used for the acquisition of
MAB, TCD and Eastern and, along with cash provided by operations, for
distributions to shareholders. Following the completion of the Company's initial
public offering in November 1996 (the "Offering"), the Company repaid the
outstanding bank debt and distributed undistributed S Corporation earnings of
approximately $3.2 million using a portion of the net proceeds from the
Offering. Total distributions to shareholders were $4.1 million in 1996 and $1.1
million in 1995.
In July 1995, the Company entered into a revolving credit agreement
with Mellon Bank, N.A. which provided for borrowings up to $7.0 million at an
interest rate equal to prime plus 1.375%, which was subsequently increased to
$15.0 million in September 1996, to be utilized for working capital and
strategic acquisitions. Subsequent to the Offering, the bank increased the
revolving credit facility to $25.0 million and decreased the rate of interest to
2.5% over LIBOR. There were no outstanding borrowings as of December 31, 1996,
and as of December 31, 1995, the outstanding balance under the revolving credit
line was $2.5 million. The revolving credit line is collateralized by
substantially all the assets of the Company and includes certain financial
covenants such as maintaining minimum working capital and net worth requirements
and includes restrictions on, among other things, capital expenditures and
distributions to shareholders.
In connection with entering into the original revolving credit
agreement, the Company recorded deferred charges of approximately $135,000
relating primarily to bank and legal fees. The Company also issued a warrant to
the bank exercisable for an aggregate of 175,531 shares of the Company's Common
Stock. The warrant expires on July 31, 2005 and is exercisable for nominal
consideration. In connection with the expansion of the line of credit in
September 1996 and December 1996, the Company recorded deferred charges of
$261,000 primarily relating to bank charges and legal fees. In addition, the
Company issued additional warrants to the bank for 65,060 shares of Common Stock
exercisable at $13.00 per share. The increase in the revolving credit facility
was completed in December 1996. The warrants have been capitalized on the
balance sheet as a deferred charge and are being amortized over the four-year
life of the credit facility. All the warrants are currently exercisable.
On November 13, 1996, the Company completed its initial public
offering, selling 2,875,000 shares of Common Stock including 375,000
over-allotment shares sold by existing shareholders. The Offering raised net
proceeds of approximately $30.2 million for the Company. After offering
expenses, repayment of acquisition debt and the distribution of S Corporation
earnings, the Company had available at December 31, 1996, for working capital
and general corporate purposes as well as possible future acquisitions, proceeds
of approximately $10.9 million, in addition to existing cash of $1.2 million, as
well as $25 million available for borrowing from the bank on the revolving
credit facility.
The Company believes that funds generated from operations, together
with existing cash, the net proceeds from the Offering and available credit
under its revolving credit line will be sufficient to finance its current
operations and planned capital expenditure requirements and internal growth at
least through 1997. However, the Company may raise additional debt or equity
financing to fund any future acquisitions.
On January 22, 1997, NCO purchased all of the outstanding stock of
Goodyear & Associates, Inc. ("Goodyear") for $4.5 million in cash and a $900,000
convertible note. The note is convertible into the Company's Common Stock, at
any time, at $21.175 per share and bears interest payable monthly at a rate of
8.0% per annum with principal due in January 2002. Goodyear, based in Charlotte,
North Carolina provides accounts receivable management services principally to
the telecommunications, education, and utility industries. Goodyear's revenues
in 1996 were $5.5 million.
On January 30, 1997, NCO purchased certain assets of Tele-Research
Center, Inc. ("TRC"), for $1.6 million in cash. TRC, located in Philadelphia,
Pennsylvania, provides market research, data collection, and other teleservices
to market research companies as well as end-users. TRC's revenues in 1996 were
$1.8 million.
26
<PAGE>
On January 31, 1997, NCO purchased certain assets of CMS A/R Services,
a division of CMS Energy Corporation, owner of Consumers Energy, one of the
nation's largest utility companies, for $5.1 million in cash. Specializing in
the utility industry, CMS A/R Services, located in Jackson, Michigan, provided a
wide range of accounts receivable management services in addition to traditional
recovery of delinquent accounts including project outsourcing, early
intervention, and database management services. CMS A/R Services' revenues in
1996 were $6.8 million.
On February 2, 1997, NCO purchased certain assets of the Collections
Division of CRW Financial, Inc. (Nasdaq small market symbol CRWF) ("CRWCD") for
$3.75 million in cash, 345,178 shares of its Common Stock and warrants for
250,000 shares of Common Stock. The acquisition was valued at approximately
$12.8 million. CRWCD provided accounts receivable management services
principally to the telecommunications, education, financial, government and
utility industries from 14 offices located throughout the United States. In
addition, CRWCD has a commercial collections division. CRWCD's revenues in 1996
were $25.9 million.
The Company has begun to realize operating efficiencies from the
Goodyear, CMS A/R Services, TRC and CRWCD acquisitions and has begun to
eliminate redundant collection and administrative personnel, consolidate office
locations, and reduce selling, general and administrative expenses to levels
more consistent with NCO's current operating results. In addition, the Company
has reduced the payroll and related expenses associated with the former
principal shareholder of Goodyear.
The Company financed the acquisitions of Goodyear, CMS A/R Services,
TRC and CRWCD, by borrowing $7.35 million on its revolving credit facility and
financed the remainder through funds raised in the Offering and through its
existing working capital.
The Company accounts for corporate income taxes in accordance with the
Statement of Financial Accounting Standards No.109 (SFAS No. 109). Upon the
termination of the S Corporation election by NCO Financial Systems, Inc. on
September 3, 1996 and upon application of SFAS No. 109, the Company recorded a
deferred tax asset of $155,000, representing cumulative temporary differences.
This deferred tax asset was offset by the $84,000 deferred tax liability
recorded by MAB upon termination of its S Corporation election immediately prior
to its acquisition by NCO Group, Inc.
Recent Accounting Pronouncements:
In March 1995, the FASB issued Statement of Financial Accounting
Standards SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed of," which was effective for the Company
beginning January 1, 1996. SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment, based on the
estimated future cash flows, whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. SFAS No.
121 had no impact on the financial statements upon adoption.
27
<PAGE>
Item 8. Financial Statements and Supplementary Data.
The financial statements, financial statement schedules and
related documents that are filed with this Report are listed in Item 14(a) of
this Report on Form 10-K and begin on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
28
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
Incorporated by reference from the Company's Proxy Statement
relating to the 1997 Annual Meeting of Shareholders to be filed pursuant to
General Instruction G(3) to Form 10-K, except information concerning certain
executive officers of the Company which is set forth in Section 4.1 hereof.
Item 11. Executive Compensation.
Incorporated by reference from the Company's Proxy Statement
relating to the 1997 Annual Meeting of Shareholders to be filed pursuant to
General Instruction G(3) to Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
Incorporated by reference from the Company's Proxy Statement
relating to the 1997 Annual Meeting of Shareholders to be filed pursuant to
General Instruction G(3) to Form 10-K.
Item 13. Certain Relationships and Related Transactions.
Incorporated by reference from the Company's Proxy Statement
relating to the 1997 Annual Meeting of Shareholders to be filed pursuant to
General Instruction G(3) to Form 10-K.
29
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K.
(a). Documents filed as part of this report:
1. List of Consolidated Financial Statements. The following
consolidated financial statements and the notes thereto of NCO Group, Inc.,
which are attached hereto beginning on page F-1, have been incorporated by
reference into Item 8 of this Report on Form 10-K:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Income for each of the
three years in the three-year period ended December 31, 1996
Consolidated Statements of Shareholders' Equity for each of the
years
in the three-year period ended December 31, 1996
Notes to Consolidated Financial Statements
2. List of Financial Statement Schedules. Not applicable.
3. List of Exhibits filed pursuant to Item 601 of Regulation
S-K. The following exhibits are incorporated by reference in, or filed with,
this Report on Form 10-K. Management contracts and compensatory plans, contracts
and arrangements are indicated by "*":
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------------ ---------------------------------------------------------------------
<S> <C>
3.1(1) The Company's amended and restated Articles of Incorporation.
3.2(1) The Company's amended and restated Bylaws.
4.1 Specimen of Common Stock Certificate.
*10.1(1) Employment Agreement, dated September 1, 1996, between the Company
and Bernard R. Miller.
*10.2(1) Employment Agreement, dated September 1, 1996, between the Company
and Michael J. Barrist.
*10.3(1) Employment Agreement, dated September 1, 1996, between the Company
and Charles C. Piola, Jr.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------------ ---------------------------------------------------------------------
<S> <C>
*10.4(1) Employment Agreement, dated September 1, 1996, between the Company
and Joseph C. McGowan.
*10.5(1) Employment Agreement, dated September 1, 1996, between the Company
and Steven L. Winokur.
*10.6(1) Agreements of Lease dated May 9, 1995, as amended,
between the Company and 1710-20 Sentry East
Associates, L.P., relating to the offices located at
1710 Walton Road, Blue Bell, Pennsylvania.
10.7(1) Agreements of Lease dated July 1, 1993 between the
Company and 1740 Sentry East Associates, L.P.,
relating to the offices located at 1740 Walton Road,
Blue Bell, Pennsylvania.
10.8(1) Lease Agreement by and between The Uniland
Partnership, L.P. and Management Adjustment Bureau,
Inc., as amended by First Amendment to Lease, dated
December 10, 1994, as further amended by Second
Amendment to Lease, dated December 10, 1994.
10.9(1) Software License Agreement and Software Purchase
Agreement by and between the Company and CRSoftware,
Inc., relating to computer software (CRS Credit Bureau
Reporting Software) and computer hardware.
*10.10(1) Amended and Restated 1995 Stock Option Plan.
*10.11(1) 1996 Stock Option Plan.
*10.12(1) 1996 Non-Employee Director Stock Option Plan.
10.13(1) Amended and Restated Credit Agreement by and among the
Company, its subsidiaries and Mellon Bank, N.A., dated
September 5, 1996.
10.14(1) Amended and Restated Security Agreement, dated
September 5, 1996, by and among the Company, its
subsidiaries and Mellon Bank, N.A.
10.15(1) Warrant Agreement, dated July 28, 1995, by and between the Company and
Mellon Bank, N.A. and Amendment dated September 5, 1996.
10.16(1) Warrant Agreement, dated September 5, 1996, by and between the
Company and Mellon Bank, N.A.
10.17 Second Amended and Restated Registration Rights
Agreement, dated December 13, 1996, by and between the
Company and Mellon Bank, N.A.
10.18 First Amendment dated December 13, 1996 to Amended and
Restated Credit Agreement by and among the Company,
its subsidiaries and Mellon Bank, N.A., dated
September 5, 1996.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------------ ---------------------------------------------------------------------
<S> <C>
10.19 Second 1996 Warrant Agreement, dated December 13,
1996, by and between the Company and Mellon Bank, N.A.
10.20(1) Stock Pledge Agreement, dated as of September 5, 1996 made by NCO
Group, Inc. in favor of Mellon Bank, N.A.
10.21(1) Convertible Note dated September 1, 1996, made by the
Company in the principal amount of $1,000,000, as
partial payment of the purchase price for the
acquisition of MAB.
10.22(1) Distribution and Tax Indemnification Agreement
10.23(1) Irrevocable Proxy Agreement by and between Michael J. Barrist and
Annette H. Barrist.
10.24(1) Common Stock Purchase Warrant for 175,531 shares issued to Mellon
Bank, N.A.
10.25(1) 1996 Common Stock Purchase Warrant for 46,560 shares issued to Mellon
Bank, N.A.
10.26 Second 1996 Common Stock Purchase Warrant for 18,500 shares issued to
Mellon Bank, N.A.
10.27(1) Indemnification Agreement by and between NCO Financial Systems, Inc.,
Management Adjustment Bureau, Inc. and Craig Costanzo.
10.28(1) Stock Purchase Agreement, by and among the Company, and Craig
Costanzo and Andrew J. Boyuka, as Trustee of the Susan E. Costanzo
Grantor Trust and Christopher A. Costanzo Grantor Trust, relating to the
acquisition of MAB.
10.29(1) Asset Purchase Agreement dated December 8, 1995 by and
between the Company and Trans Union Corporation.
10.30(2) Stock Purchase Agreement, dated January 22, 1997, by
and among NCO and the majority shareholders of
Goodyear. NCO will furnish to the Securities and
Exchange Commission a copy of any omitted schedule
upon request.
10.31(2) Stock Purchase Agreement, dated January 22, 1997, by
and among NCO and the minority shareholders of
Goodyear. NCO will furnish to the Securities and
Exchange Commission a copy of any omitted schedule
upon request.
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------------ ---------------------------------------------------------------------
<S> <C>
10.32(2) Non-negotiable Subordinated Convertible Promissory
Note dated January 22, 1997, made by the Company in
the principal amount of $900,000, as partial payment
of the purchase price for the acquisition of Goodyear.
10.33(3) Asset Purchase Agreement, dated January 30, 1997, by
and among NCO, Tele-Research, Strategic Information,
Inc. and the Tele-Research shareholders. NCO will
furnish to the Securities and Exchange Commission a
copy of any omitted schedule upon request.
10.34(4) Asset Purchase Agreement, dated January 21, 1997, by
and among NCO, and CMS A/R Services. NCO will furnish
to the Securities and Exchange Commission a copy of
any omitted schedule upon request.
10.35(4) Asset Acquisition Agreement, dated February 2, 1997, by and among CRW
Financial Systems, Inc. ("CRW"), Kaplan & Kaplan, Inc., NCO, CRWF
Acquisition, Inc., and K&K Acquisition, Inc. dated February 2, 1997. NCO
will furnish to the Securities and Exchange Commission a copy of any
omitted schedule upon request.
10.36(4) Non-Transferable Common Stock Purchase Warrant dated February 2, 1997
issued to CRW.
10.37(4) Registration Rights Agreement dated February 2, 1997 between NCO and
CRW.
10.38(4) Nondisclosure, Nonsolicitation, Noncompetition and Standstill Agreement
dated February 2, 1997 between Jonathan P. Robinson and NCO.
10.39(4) Nondisclosure, Nonsolicitation, Noncompetition and Standstill Agreement
dated February 2, 1997 between J. Brian O'Neill and NCO.
21.1 Subsidiaries of the Registrant.
27.1 Financial Data Schedules.
</TABLE>
- ---------------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-11745), as amended, filed with the Securities Exchange
Commission on September 11, 1996.
(2) Incorporated by reference to the Company's Current Report on Form 8-K (File
No. 0-21639) filed with the Securities Exchange Commission on February 6, 1997.
(3) Incorporated by reference to the Company's Current Report on Form 8-K/A
(File No. 0-21639) filed with the Securities Exchange Commission on February 18,
1997.
(4) Incorporated by reference to the Company's Current Report on Form 8-K (File
No. 0-21639) filed with the Securities Exchange Commission on February 18, 1997.
33
<PAGE>
(b). Reports on Form 8-K. No reports on Form 8-K were filed
during the quarter ended December 31, 1996.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NCO GROUP, INC.
Date: March 31, 1997 By: /s/ Michael J. Barrist
------------------------------------------
Michael J. Barrist, Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE Title(s) Date
--------- -------- ----
<S> <C> <C>
/s/ Michael J. Barrist Chairman of the Board, March 31, 1997
- ---------------------------------- President and Chief
Michael J. Barrist Executive Officer (principal
executive officer)
/s/ Charles C. Piola
- ---------------------------------- Executive Vice President March 31, 1997
Charles C. Piola and Director
/s/ Steven L. Winokur Vice President of Finance, March 31, 1997
- ----------------------------------- Chief Financial Officer and
Steven L. Winokur Treasurer (principal
financial and accounting
officer)
/s/ Bernard R. Miller
- ----------------------------------- Senior Vice President, March 31, 1997
Bernard R. Miller Development and Director
/s/ Eric S. Siegel
- ----------------------------------- Director March 31, 1997
Eric S. Siegel
/s/ Allen F. Wise
- -----------------------------------
Allen F. Wise Director March 31, 1997
</TABLE>
35
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants.........................................F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 .............F-3
Consolidated Statements of Income for each of the three years
in the period ended December 31, 1996.....................................F-4
Consolidated Statements of Shareholders' Equity for each of the years
in the three year period ended December 31, 1996..........................F-5
Consolidated Statements of Cash Flows for each of the years
in the three year period ended December 31, 1996..........................F-6
Notes to Consolidated Financial Statements................................F-7
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of
NCO Group, Inc.
Blue Bell, Pennsylvania
We have audited the accompanying consolidated balance sheets of NCO Group, Inc.
as of December 31, 1996 and 1995 and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of NCO Group, Inc. as
of December 31, 1996 and 1995 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 7, 1997
F-2
<PAGE>
NCO GROUP, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
----------------------------------
ASSETS 1996 1995
---------------- ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 12,058,798 $ 804,550
Available-for-sale securities 299,488
Accounts receivable, trade, net of
allowance for doubtful accounts of $79,000 and $23,200, respectively 4,701,364 1,402,546
Notes receivable 100,000
Other current assets 499,815 118,793
---------------- ---------------
Total current assets 17,259,977 2,725,377
Funds held in trust for clients
Property and equipment, net 2,830,062 637,133
Other assets:
Intangibles, net of accumulated amortization 14,673,155 2,774,894
Deferred taxes 70,760
Deferred financing costs 684,390 279,014
Other assets 308,011 227,826
---------------- ---------------
Total other assets 15,736,316 3,281,734
---------------- ---------------
Total assets $ 35,826,355 $ 6,644,244
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt, current portion $ 46,946 $ 46,171
Capitalized lease obligations, current portion 62,131
Corporate taxes payable 216,709
Accounts payable 657,647 221,562
Accrued expenses 1,044,536 565,734
Accrued compensation and related expenses 1,376,982 777,985
Unearned revenue, net of related costs 225,817 302,384
---------------- ---------------
Total current liabilities 3,630,768 1,913,836
Funds held in trust for clients
Long-term liabilities:
Long term debt, net of current portion 1,091,901 2,592,906
Capitalized lease obligations, net of current portion 385,683
Unearned revenue, net of related costs 70,385 86,155
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized,
no shares issued and outstanding
Common stock, no par value, 25,000,000 shares authorized,
6,713,447 and 4,213,447 shares issued and outstanding
at December 31, 1996 and 1995 respectively. 29,362,326 537,326
Unexercised warrants 396,054 177,294
Retained earnings 889,238 1,378,261
Unrealized gain on securities 41,339
Note receivable, shareholder (82,873)
---------------- ---------------
Total shareholders' equity 30,647,618 2,051,347
---------------- ---------------
Total liabilities and shareholders' equity $ 35,826,355 $ 6,644,244
================ ===============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
F-3
<PAGE>
NCO GROUP, INC.
Consolidated Statements of Income
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------
1996 1995 1994
---------------- ---------------- ---------------
<S> <C> <C> <C>
Revenue $ 30,760,452 $ 12,732,597 $ 8,577,895
Operating costs and expenses:
Payroll and related expenses 14,651,384 6,797,338 4,558,351
Selling, general and administrative
expenses 10,032,216 4,042,342 2,673,521
Depreciation and amortization expense 1,253,867 347,503 215,117
---------------- ---------------- ---------------
Total operating costs and expenses 25,937,467 11,187,183 7,446,989
---------------- ---------------- ---------------
Income from operations 4,822,985 1,545,414 1,130,906
Other income (expense):
Interest and investment income 242,380 49,473 26,735
Interest expense (817,951) (180,205) (71,588)
Loss on disposal of property and equipment (49,082)
---------------- ---------------- ---------------
(575,571) (179,814) (44,853)
---------------- ---------------- ---------------
Income before provision for income taxes 4,247,414 1,365,600 1,086,053
Income tax expense 612,748
---------------- ---------------- ---------------
Net income $ 3,634,666 $ 1,365,600 $ 1,086,053
================ ================ ===============
Pro forma (unaudited):
Historical income before income taxes $ 4,247,414 $ 1,365,600 $ 1,086,053
Pro forma provision for income taxes 1,706,485 546,000 434,000
---------------- ---------------- ---------------
Pro forma net income $ 2,540,929 $ 819,600 $ 652,053
================ ================ ===============
Pro forma net income per share $ 0.50 $ 0.17
================ ================
Pro forma weighted average shares
outstanding 5,086,736 4,728,906
================ ================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
F-4
<PAGE>
NCO GROUP, INC.
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Common Stock Unrealized
-------------------------- Gains Notes
Number of Unexercised Retained (Losses) on Receivable
Shares Amount Warrants Earnings Securities Shareholder Total
-------------- --------- ----------- ---------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $4,002,763 $ 49,326 $ 813,366 $ 13,539 $ 876,231
Issuance of common stock 123,803 300,000 300,000
Net income 1,086,053 1,086,053
Distributions to shareholders (813,366) (813,366)
Change in unrealized losses
on securities (26,234) (26,234)
-------------- ----------- ---------- ------------ ---------- ----------- ------------
Balance, December 31, 1994 4,126,566 349,326 1,086,053 (12,695) 1,422,684
Issuance of common stock 86,881 188,000 $ (135,888) 52,112
Warrants issued $ 177,294 177,294
Note repayments 53,015 53,015
Net income 1,365,600 1,365,600
Distributions to shareholders (1,073,392) (1,073,392)
Change in unrealized gains
on securities 54,034 54,034
-------------- ----------- ---------- ------------ ------- ------- ---------
Balance, December 31, 1995 4,213,447 537,326 177,294 1,378,261 41,339 (82,873) 2,051,347
Issuance of common stock 2,500,000 28,825,000 28,825,000
Warrants issued 218,760 218,760
Note repayments 82,873 82,873
Net income 3,634,666 3,634,666
Distributions to shareholders (4,123,689) (41,339) (4,165,028)
------------- ----------- ---------- ------------ -------- -------- -----------
Balance, December 31, 1996 $6,713,447 29,362,326 $ 396,054 $ 889,238 $30,647,618
============= =========== ========== ============= ============ ======= ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-5
<PAGE>
NCO GROUP, INC
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------
1996 1995 1994
---------------- ---------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,634,666 $ 1,365,600 $ 1,086,053
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 465,785 199,123 171,378
Loss on disposal of equipment 49,082
(Gain) Loss on sale of securities (70,481) 2,877 4,421
Amortization of intangibles 707,050 221,813 43,739
Amortization of deferred financing costs 81,031 32,443
Provision for doubtful accounts 55,845 3,808 3,903
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, trade (1,825,307) (571,611) (41,675)
Notes receivable 155,856 (36,000) (64,000)
Accounts receivable, purchased (4,755) 36,293 (44,038)
Other current assets (307,988) (22,241) 31,126
Deferred taxes (154,684)
Other assets (8,903) (105,037) (40,112)
Accounts payable 422,694 161,601 (123,094)
Corporate taxes payable 216,709
Accrued expenses (788,709) 187,353 (214)
Accrued compensation and related costs 598,997 555,398 51,755
Unearned revenue (227,548) (46,718) 23,950
------------ ------------ ------------
Net cash provided by operating activities 2,950,258 2,033,784 1,103,192
Cash flows from investing activities:
Purchase of property and equipment (976,080) (298,076) (77,999)
Purchase of securities (78,307) (107,643) (169,785)
Proceeds from sale of securities 406,937 99,256 143,613
Net cash paid for acquisitions (12,857,223) (1,729,244) (1,000,000)
------------ ------------ ------------
Net cash used in investing activities (13,504,673) (2,035,707) (1,104,171)
Cash flows from financing activities:
Repayment of notes payable (303,138) (1,067,117)
Borrowings under credit agreement 12,550,000 2,450,000 1,000,000
Repayment under credit agreement (15,000,000) (222,084)
Payment of fees to acquire new debt (222,383) (134,163)
Issuance of common stock 32,500,000 105,127
Costs related to issuance of common stock (3,675,000)
Decrease in notes receivable, shareholders 82,873
Distributions to shareholders (4,123,689) (1,073,392) (813,366)
------------ ------------ ------------
Net cash provided by (used in) financing activities 21,808,663 280,455 (35,450)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 11,254,248 278,532 (36,429)
Cash and equivalents at beginning of period 804,550 526,018 562,447
------------ ------------ ------------
Cash and equivalents at end of period $ 12,058,798 $ 804,550 $ 526,018
============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
F-6
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements - Continued
1. Nature of operations:
NCO Group, Inc. (the "Company") is a leading provider of accounts receivable
management and related services utilizing an extensive teleservices
infrastructure. The Company's client base is comprised of companies located
throughout the United States in the following industries: education, financial
services, healthcare, telecommunications, utilities and government entities.
Effective September 3, 1996, the shareholders of NCO Financial Systems, Inc.
contributed each of their shares of common stock in exchange for one share of
common stock of the Company, a recently formed corporation. In September 1996,
the Company also effected a 46.56-for-one stock split and increased the number
of authorized shares to 5,000,000 shares of preferred stock and 25,000,000
shares of common stock. All per share and related amounts have been adjusted to
reflect the stock exchange and stock split.
On November 13, 1996, the Company completed its initial public offering (the
"Offering"), selling 2,875,000 shares of common stock including 375,000
over-allotment shares sold by existing shareholders. The Offering raised net
proceeds of approximately $28.8 million for the Company.
A director of the Company received compensation of $240,000 for services
rendered in connection with the Offering.
2. Summary of significant accounting policies:
Principles of Consolidation:
The consolidated financial statements include the accounts of NCO Group, Inc.
and its wholly-owned subsidiaries after elimination of significant intercompany
accounts and transactions.
Revenue Recognition:
The Company generates revenues from contingency fees and contractual services.
Contingency fee revenue is recognized upon collection of funds on behalf of
clients. Contractual services revenue is deferred and recognized as services are
performed.
Property and Depreciation:
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided over the estimated useful life of each class of assets
using the straight-line method. Expenditures for maintenance and repairs are
charged to expense as incurred. Renewals and betterments are capitalized. When
property is sold or retired, the cost and related accumulated depreciation are
removed from the balance sheet and any gain or loss on the transaction is
included in the statement of income.
Income Taxes:
The Company had elected to be taxed as an S Corporation under the Internal
Revenue Code and the Pennsylvania Tax Code. While this election was in effect,
no provision was made for income taxes by the Company since all income was taxed
directly to the shareholders of the Company.
F-7
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements - Continued
2. Summary of significant accounting policies, continued:
Income Taxes, continued:
The Company terminated its S Corporation status on September 3, 1996 and adopted
Statement of Financial Accounting Standards SFAS No. 109, "Accounting for Income
Taxes." This standard requires an asset and liability approach that takes into
account changes in tax rates when valuing the deferred tax amounts to be
reported on the balance sheet. Upon termination of the S Corporation status and
adoption of SFAS No. 109, the Company recorded an estimated net deferred tax
asset. The net deferred tax asset resulted primarily from differences in the
treatment of unearned revenue and acquired account inventory.
Cash and Cash Equivalents:
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents. These financial instruments
potentially subject the Company to concentrations of credit risk.
At December 31, 1996 and 1995, the Company had bank deposits in excess of
federally insured limits of approximately $1,045,605 and $1,276,000,
respectively. The Company's cash deposits have been placed with a large national
bank to minimize risk.
Credit Policy:
The Company has two types of arrangements under which it collects its
contingency fee revenue. For certain clients the Company remits funds collected
on behalf of the client, net of the related contingency fees while, for other
clients, the Company remits gross funds collected on behalf of clients, and
bills the client separately for its contingency fees. Management carefully
monitors its client relationships in order to minimize its credit risk and
generally does not require collateral. In the event of collection delays from
clients, management may at its discretion change from the gross remittance
method to the net remittance method.
Investment Securities:
The Company adopted Statement of Financial Accounting Standards SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities," for all
periods presented. The statement requires management to report their investments
as either "held to maturity", "trading securities", or "available for sale".
Deferred Financing Costs:
Deferred financing costs relate to debt issuance costs incurred which are
capitalized and amortized over the term of the debt.
Intangibles:
Intangibles consists of goodwill and acquisition costs and non-compete
covenants. Goodwill represents the excess of purchase price over the fair market
value of the net assets of the acquired businesses based on their respective
fair values at the date of acquisition. Goodwill is amortized on a straight-line
basis over 15 to 25 years. The recoverability of goodwill is periodically
reviewed by the Company. Such allocation has been based on estimates which may
be revised at a later date. In making such determination with respect to
goodwill, the Company evaluates the operating results of the underlying business
which gave rise to such amount. Accumulated amortization at December 31, 1996
and 1995 totaled $762,612 and $159,676, respectively.
F-8
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements - Continued
2. Summary of significant accounting policies, continued:
Estimates Utilized in the Preparation of Financial Statements:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Earnings Per Share:
Earnings per share were computed by dividing the pro forma net income for the
year ended December 31, 1995 and 1996 by the pro forma weighted average number
of shares outstanding. Pro forma net income amounts are used because the
historical net income does not include the impact of federal and state income
taxes as if the Company had been subject to income taxes. Pro forma weighted
average shares outstanding are based on the weighted average number of shares
outstanding including common equivalent shares. All outstanding options and
warrants have been treated as common equivalent shares in calculating pro forma
net income per share, using the treasury stock method and the initial public
offering price of $13.00 per share for periods prior to the initial public
offering, only when their effect would be dilutive. The pro forma weighted
average number of shares outstanding have also been adjusted to include the
number of shares of common stock (250,000 shares) that the Company would have
needed to issue at the initial public offering price of $13.00 per share to
finance the distribution of undistributed S Corporation earnings through the
date on which the Company terminated its S Corporation status. Fully diluted
earnings per share are not materially different from primary earnings per share.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share." This
Statement establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. This Statement is effective for financial statements issued for
periods ending after December 15, 1997, earlier application is not permitted.
This Statement requires restatement of all prior-period EPS data presented. The
Company is currently evaluating the impact, if any, adoption of SFAS No. 128
will have on its financial statements.
Reclassifications:
Certain amounts for December 31, 1995 and 1994 and the years then ended have
been reclassified for comparative purposes.
3. Acquisitions:
On April 29, 1994, the Company purchased certain assets of B. Richard Miller,
Inc. (BRM) at a cost of $1,427,000, which was comprised of $1,000,000 in cash,
common stock valued at $300,000, and a note payable to the seller of $127,000.
The purchase price was allocated based upon the estimated fair market value of
the acquired property, equipment and account inventory and resulted in goodwill
of $984,126.
On August 1, 1995, the Company purchased certain assets of Eastern Business
Services, Inc. (Eastern) for approximately $2,041,000 comprised of $1,625,000 in
cash and $416,000 of liabilities assumed. The purchase price was allocated
primarily based upon the estimated fair market values of acquired property,
equipment, and accounts receivable less notes payable and funds due to clients
which resulted in goodwill of $1,812,000.
F-9
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements - Continued
3. Acquisitions, continued:
On January 3, 1996 the Company purchased certain assets of Trans Union
Corporation Collections Division (TCD) for $4,750,000 in cash. The purchase
price was allocated based upon the estimated fair market value of acquired
property, equipment, accounts receivable and an agreement not to compete which
resulted in goodwill of $3,681,000.
On September 5, 1996 the Company purchased the outstanding stock of Management
Adjustment Bureau, Inc. ("MAB") for $9,000,000 comprised of $8,000,000 in cash
and a $1,000,000 convertible note. The purchase price was allocated based upon
the estimated fair market value of acquired property, equipment, and accounts
receivable which resulted in goodwill of $8,511,000.
The following summarizes unaudited pro forma results of operations for the years
ended December 31, 1996 and 1995, assuming the above acquisitions occurred as of
the beginning of the respective periods.
1996 1995
---------- ------------
Revenue $39,923,196 $34,509,071
Net income 3,372,491 2,166,501
Earnings per share .54 .36
On January 22, 1997 the Company purchased the outstanding stock of Goodyear &
Associates, Inc. ("Goodyear") for $5,400,000 comprised of $4,500,000 and a
$900,000 convertible note.
On January 30, 1997 the Company purchased substantially all the assets of
Tele-Research Center, Inc. ("TRC") for $1,600,000 in cash, which may be
increased by an additional $600,000 if certain revenue targets are reached in
the three year period following the acquisition.
On January 31, 1997 the Company purchased certain assets of the CMS A/R
Services, the Collection Division of CMS Energy Corporation, for $5,100,000 in
cash.
On February 3, 1997 the Company purchased certain assets and assumed certain
liabilities of the Collections Division of CRW Financial, Inc. for a purchase
price comprised of $3,750,000 in cash, 345,178 shares of its common stock and
warrants for 250,000 shares of common stock. The acquisition is valued at
approximately $12.8 million.
4. Marketable securities:
The Company has classified all of its securities as "available-for-sale" and has
recorded them at fair value and unrealized gains and losses as a separate
component of shareholders' equity.
Proceeds from the sale of investment securities were $406,937 in 1996. As of
December 31, 1996, there were no gross unrealized gains or losses because all
available-for-sale securities were distributed as part of the undistributed S
Corporation earnings and all gains and losses were recognized accordingly.
Proceeds from the sale of investment securities were $99,256 in 1995. Gross
unrealized gains and losses as of December 31, 1995 for available-for-sale
securities are as follows:
F-10
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements - Continued
4. Marketable securities, continued:
<TABLE>
<CAPTION>
Unrealized Unrealized
Holding Holding Fair
Cost Gain Loss Value
---- ---- ---- -----
<S> <C> <C> <C> <C>
Common stock $167,852 $ 41,475 $ (6,164) $203,163
Corporate bonds 90,297 6,028 96,325
---------- ---------- ------------ ----------
$258,149 $ 47,503 $ (6,164) $299,488
======== ========== ========= ========
</TABLE>
Investment income, included in interest and investment income on the statement
of income, from available-for-sale securities as of December 31, 1996, 1995 and
1994 consisted of:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -----
<S> <C> <C> <C>
Realized gain on the sales of securities $86,509 $12,217 $11,749
Realized loss on the sales of securities (12,186) (15,094) (16,170)
Interest income 33,577 7,035 5,142
Dividend income 6,816 5,892 5,211
-------- ------- -------
$114,716 $10,050 $ 5,932
======== ======= =======
</TABLE>
The fair values of marketable securities held as of December 31, 1995 by
contractual maturity are as follows: due within one year, $20,425; due after one
year but within 5 years, $10,537; due after five years but within 10 years,
$65,363. Actual maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or repayment penalties
5. Funds held in trust for clients:
In the course of the Company's regular business activities as an accounts
receivable management company, the Company receives clients' funds arising from
the collection of accounts placed with the Company. These funds are placed in
segregated cash accounts and are generally remitted to clients within 30 days.
Funds held in trust for clients of $3,835,409 and $1,228,889 at December 31,
1996 and 1995 have been shown net of their offsetting liability for financial
statement presentation.
6. Property and equipment:
At December 31, 1996 and 1995, property and equipment, at cost, consists of
the following:
1996 1995
----------- -------
Computer equipment $2,461,211 $905,732
Furniture and fixtures 1,095,134 316,312
Leased assets 324,414
---------- ---------
3,880,759 1,222,044
Less accumulated depreciation 1,050,697 584,911
---------- ---------
$2,830,062 $ 637,133
========== =========
F-11
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements - Continued
6. Property and equipment (continued):
Depreciation charged to operations amounted to $465,785, $199,123, and $171,378
for the years ended 1996, 1995 and 1994, respectively. The Company had not
entered into any capital lease transactions for the year ended December 31,
1995.
7. Long-term debt:
<TABLE>
<CAPTION>
1996 1995
--------- -----
<S> <C> <C> <C>
Non-interest bearing note; $157,500 face amount, $ 138,847 $ 189,077
payable in monthly installments of $5,250 through July
1999 (less unamortized discount based on imputed interest
rate of 10%)
Revolving credit agreement, LIBOR plus 2.5%, due 2,450,000
December 2000
Subordinated seller note payable, 8.00% due
September 2001, convertible to common stock
at $13.00 per share 1,000,000
Less current portion (46,946) (46,171)
---------- ----------
$1,091,901 $2,592,906
========== ==========
</TABLE>
The following summarizes the Company's required debt payments for the next five
years:
1997 46,946
1998 56,346
1999 35,555
2000 -
2001 1,000,000
In July 1995, the Company entered into a $7,000,000 revolving credit agreement.
The line of credit is collateralized by substantially all the assets of the
Company.
The revolving credit agreement contains, among other provisions, requirements
for maintaining defined levels of working capital, net worth, capital
expenditures, various financial ratios and restrictions of distributions to
shareholders.
The Company recorded deferred charges of approximately $311,000 in connection
with the revolving credit agreement which consisted primarily of bank charges,
legal fees and 175,531 warrants issued to the bank. The warrants expire on July
31, 2005 and are only exercisable upon certain events at a nominal exercise
price. The bank had the right to put, and the Company had the ability to call,
the warrants during the twelve-month period ending on July 31, 2001. However ,
these rights were eliminated as part of the increase in the credit agreement in
September 1996.
In September 1996, the credit agreement was increased to $15,000,000 to provide
financing for the acquisition of MAB and the bank received a warrant for 46,560
shares, exercisable at $13.00 per share. In December 1996, the bank increased
the credit agreement to $25,000,000 and received a warrant to purchase an
additional 18,500 shares, exercisable at $13.00 per share.
At December 31, 1996, there were no borrowings outstanding on the credit
agreement.
F-12
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements - Continued
8. Income taxes:
A summary of the components of the tax provision at December 31, 1996 is as
follows:
Currently payable:
Federal $620,133
State 147,299
Deferred:
Federal 500
State 125
--------
Provision for income taxes 768,057
(excluding effect of change in tax status)
Effect of accounting change:
Federal 124,247
State 31,062
--------
Total provision $612,748
Deferred tax assets (liabilities) at December 31, 1996 consist of the following:
Amortization $90,083
Contractual revenue recognition 65,333
Accrued expenses 38,878
-------
Gross deferred tax assets 194,294
Depreciation (39,610)
Accrual basis conversion (83,924)
-------
Gross deferred tax liabilities (123,534)
-------
Net deferred tax asset $70,760
=======
A reconciliation of the U.S. statutory income tax rate to the effective rate
(excluding the effect of the change in tax status) is as follows:
U.S. statutory income tax rate 34%
Income allocable to S Corporation (27%)
Non-deductible goodwill and other expenses 5%
State taxes, net of federal 2%
----
Effective tax rate 14%
====
9. Employee benefit plans:
The Company has a savings plan under Section 401(k) of the Internal Revenue Code
(the "Plan"). The Plan allows all eligible employees to defer up to 20% of their
income on a pretax basis through contributions to the Plan. The Company will
match 25% of employee contributions for an amount up to 6% of each employee's
base salary. The charge to operations for the matching contributions was
$71,800, $30,027, and $23,536, for 1996, 1995 and 1994, respectively.
F-13
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements - Continued
10. Supplemental cash flow information:
The following are supplemental disclosures of cash flow information:
1996 1995 1994
-------- --------- -------
Cash paid for interest $817,950 $157,379 $71,588
Cash paid for income taxes 600,000
Noncash investing and financing
activities:
Note receivable, shareholder 82,873
Fair value of assets acquired 4,081,005 2,145,578 442,874
Liabilities assumed from
acquisitions 2,005,749 416,334 127,000
Warrants issued with debt 218,760 177,294
Property acquired under
capital leases 348,586
Common stock issued for
acquisitions 300,000
Convertible note payable,
issued for acquisition 1,000,000
11. Leases:
The Company has entered into various office lease agreements with limited
partnerships owned by certain shareholders of the Company. In addition, the
Company has made disbursements on behalf of the limited partnerships and
recorded a note receivable of $100,000 at December 31, 1995. The notes
outstanding at December 31, 1995 were repaid during 1996.
The Company leases certain equipment under agreements which are classified as
capital leases. The equipment leases have original terms ranging from 36 to 120
months and have purchase options at the end of the original lease term.
The Company also leases certain equipment under non-cancelable operating leases.
Future minimum payments, by year and in the aggregate, under noncancelable
capital leases and operating leases with initial or remaining terms of one year
or more consist of the following at December 31, 1996:
1997 $1,686,000
1998 1,398,000
1999 1,191,000
2000 1,088,000
2001 727,000
Thereafter 476,000
----------
$6,566,000
==========
Rent expense was $1,073,914, $463,916 and $305,308 for the years ended December
31, 1996, 1995, and 1994, respectively. The related party office lease expense
was $489,926, $385,217 and $297,500 for 1996, 1995, and 1994, respectively, and
provides for an escalation clause which takes effect in 1998. The total amount
of base rent payments is being charged to expense on the straight-line method
over the term of the lease.
F-14
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements - Continued
12. Stock options:
In June 1995, the Company adopted the 1995 Stock Option Plan (the "1995 Plan").
In September 1996, the Company adopted the 1996 Stock Option Plan (the "1996
Plan") and the 1996 Non-Employee Director Stock Option Plan (the "Director Plan"
and collectively with the 1995 Plan and the 1996 Plan, the "Plans"). Payment of
the exercise price for options granted under the Plans may be made in cash,
shares of Common Stock or a combination of both. The 1995 plan authorized
221,719 shares of the Company's common stock to be issued as either incentive or
non-qualified stock options. The 1996 Plan authorized 218,413 shares of the
Company's common stock to be issued as either incentive or non-qualified stock
options and the Director Plan authorized 24,258 shares of the Company's common
stock to be issued as non-qualified stock options. In January 1997, the Board
amended the 1996 Plan, subject to shareholder approval, to increase the number
of shares of Common Stock authorized under that Plan by 259,868 shares to a
total of 478,281 shares. The maximum exercise period is ten years after the date
of grant. A summary of stock option activity since inception of the plan is as
follows:
<TABLE>
<CAPTION>
Weighted Weighted
Average Number of Average
Number of Option Price Shares Exercise Price
Options Per Share Exercisable Per share
------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Outstanding at
January 1, 1995
Granted 144,057 $2.73 48,039 $2.73
------- ------ ------ -----
Outstanding at
December 31, 1995
(all at $2.73) 144,057 2.73 48,039 2.73
Granted 294,914 13.88
------- ------ ------ -----
Outstanding at
December 31, 1996
(at $2.73 to $17.00) 438,971 $10.20 48,039 $2.73
======= ======== ====== =====
</TABLE>
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards SFAS No. 123, "Accounting for Stock-Based Compensation". In accordance
with the provisions of SFAS 123 the Company applies APB Opinion 25 and related
interpretations in accounting for its stock option plans and, accordingly, does
not recognize compensation cost based on the fair value of the options granted
at grant date. If the Company had elected to recognize compensation cost based
on the fair value of the options granted at grant date in accordance with
provisions of SFAS 123, net income and earnings per share for 1996 and 1995
would have been reduced to the unaudited pro forma amounts indicated in the
following table:
1996 1995
---------- -----------
Net income - as reported $2,540,929 $819,600
Net income - pro forma $2,483,138 $812,022
Earnings per share - as reported $.50 $.17
Earnings per share - pro forma $.49 $.17
F-15
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements - Continued
12. Stock options, continued:
The estimated weighted-average grant-date fair value of the options granted
during the year ended December 31, 1996 was $4.35, and the weighted-average
remaining contractual life of options outstanding at December 31, 1996 was 9.3
years. All options granted were at the market price of the stock on the grant
date. For valuation purposes, the Company utilized the Black-Scholes option
pricing model and assumed a weighted average risk-free interest rate of 6.32%, a
weighted average expected life of 3.25 years, a weighted average 32.16%
volatility factor, no expected dividends and a forfeiture rate of 5% over the
vesting period.
As part of the purchase price for the 1994 acquisition of certain assets of B.
Richard Miller, Inc., 123,803 shares of the Company's common stock were issued
to BRM's principal shareholder who also received an option to purchase up to an
additional 86,881 shares of the Company which was exercised during 1995 at a
cost of $188,000. As a result of the purchase of these shares, a receivable of
$82,873 was due from the seller as of December 31, 1995 which was subsequently
repaid during 1996.
13. Fair value of financial instruments:
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate that
value:
Cash and Cash Equivalents: The carrying amount reported in the balance sheet
approximates fair value because of the short maturity of these instruments
Marketable Securities: Available-for-sale securities consisted of debt and
equity securities. Fair values are based on quoted market prices.
Debt: The Company's non-seller-financed debt is primarily variable in nature and
based on the prime rate, and accordingly, the carrying amount of debt
instruments approximates fair value. Seller-financed debt contains a conversion
option which allows the seller to convert the debt into shares of common stock
at a price of $13.00 per share. Valuation of the subordinated note assumes a
required rate of return of 13.25%. For valuation of the option to convert the
note into 76,923 shares of common stock, the Company utilized the Black-Scholes
option pricing model and assumed a risk-free interest rate of 6.48%, an expected
life of three years, a 35.00% volatility factor and no expected dividends.
The estimated fair value of the Company's financial instruments are as follows
at December 31:
<TABLE>
<CAPTION>
1995 1996
------------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $12,058,798 $12,058,798 $ 804,550 $ 804,550
Available-for-sale securities 299,488 299,488
Financial Liabilities:
Non-interest bearing note payable 138,847 138,847 189,077 189,077
Revolving credit agreement 2,450,000 2,450,000
Subordinated seller note payable 1,000,000 1,491,016
</TABLE>
F-16
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements - Continued
14. Quarterly Financial Information (unaudited):
The following table sets forth selected actual unaudited historical financial
data for the calendar quarters of 1995 and 1996. This quarterly information is
unaudited but has been prepared on a basis consistent with the Company's audited
financial statements presented elsewhere herein and, in the Company's opinion,
includes all adjustments (consisting only of normal and recurring adjustments)
necessary for a fair presentation of the information for the quarters presented.
The operating results for any quarter are not necessarily indicative of results
for any future period.
<TABLE>
<CAPTION>
Quarters Ended
----------------------------------------------------------------------------------
1995 1996
--------------------------------------- -----------------------------------------
Mar. Jun. Sept. Dec. Mar. Jun. Sept. Dec.
31 30 30 31 31 30 30 31
------- -------- -------- --------- -------- -------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $2,544 $3,002 $3,480 $3,707 $6,044 $6,499 $7,715 $10,502
Income from
operations 244 485 496 320 915 1,156 1,183 1,569
Net income 227 429 460 250 760 1,001 968 906
</TABLE>
15. Commitments and Contingencies:
The Company is party, from time to time, to various legal proceedings incidental
to its business. In the opinion of management none of these items individually
or in the aggregate would have a significant effect on the financial position,
result of operations or cash flows of the Company.
16. Other Recent Accounting Pronouncements:
In March 1995, the FASB issued Statement of Financial Accounting Standards SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of," which was effective for the Company beginning January
1, 1996. SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment, based on the estimated future cash
flows, whenever events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable. SFAS No. 121 had no impact on the
financial statements upon adoption.
F-17
<PAGE>
Exhibit 10.17
SECOND AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
THIS AGREEMENT dated December 13, 1996 between NCO Group,
Inc., a Pennsylvania corporation (the "Company") and APT Holdings Corporation
("APT"), an affiliate of Mellon Bank, N.A. ("Bank"). Unless otherwise provided
in this Agreement, capitalized terms used herein shall have the meanings set
forth in Section 8 hereof.
WHEREAS, under an Amended and Restated Registration Rights
Agreement (the "Original Agreement") dated September 5, 1996 between the Company
and the Bank, certain registration rights are granted to the Bank with respect
to (a) a warrant (the "1995 Warrant") to purchase 175,531 shares of the Common
Stock of the Company under that certain Warrant Agreement (the "1995 Warrant
Agreement") dated July 28, 1995, as amended, between the Company and the Bank
and (b) a warrant (the "1996 Warrant") to purchase 46,560 shares of the Common
Stock of the Company under that certain Warrant Agreement (the "1996 Warrant
Agreement") dated September 5, 1996, as amended, between the Company and the
Bank; and
WHEREAS, on November 13, 1996, the Company completed
the initial public offering of its Common Stock; and
WHEREAS, the Bank has assigned the 1995 and 1996
Warrants to APT; and
WHEREAS, as an inducement for the Bank to extend additional
credit to the Company, the Company shall today issue to APT, under the "Second
1996 Warrant Agreement" between the Company and APT, a warrant (the "Second 1996
Warrant") for the right to purchase up to 18,500 shares of the Common Stock of
the Company; and
WHEREAS, the Company and APT intend that the holders of the
Warrants shall be entitled to certain registration rights.
NOW THEREFORE, the parties hereto agree to amend the Original
Agreement by restating the Original Agreement in its entirety to read as
follows:
1. Required Registrations.
(a) At any time after November 13, 1997, any holder of the
Registrable Securities may request, in writing, that the Company effect the
registration of Registrable Securities owned by such holder on a form that may
be used for the registration of Registrable Securities. If the holder initiating
the registration intends to distribute the Registrable Securities by means of an
underwriting, it shall so advise the Company in its
<PAGE>
request. In the event such registration is underwritten, the right of other
holders to participate shall be conditioned on such holders' participation in
such underwriting. Upon receipt of any such request, the Company shall promptly
give written notice of such proposed registration to all holders of Registrable
Securities. Such holders shall have the right, by giving written notice to the
Company within 30 days after the Company provides its notice, to elect to have
included in such registration such of their Registrable Securities as such
holders may request in such notice of election; provided that if the underwriter
(if any) managing the offering determines that, because of marketing factors,
all of the Registrable Securities requested to be registered by all holders may
not be included in the offering, then the Company shall include in such
registration (i) first, the securities of the holder of Registrable Securities
initiating the registration, (ii) second, the securities requested to be
included therein by the other holders of the Registrable Securities requested to
be included in such registration, pro rata among the holders of such Registrable
Securities on the basis of the number of shares owned by each such holder.
Thereupon, the Company shall, as expeditiously as possible, use its best efforts
to effect the registration (on a form that may be used for the registration of
Registrable Securities) of all Registrable Securities which the Company has been
requested to so register.
(b) At any time after October 1, 1997 any holder of
Registrable Securities may request, in writing, that the Company (i) begin
preparing a registration statement on Form S-3 (or any successor form relating
to secondary offerings) of Registrable Securities if the Company is expected to
become or becomes eligible to file a registration statement on Form S-3 (or such
successor form) and (ii) use its best efforts to effect such registration
promptly; provided, however, that the Company shall not be required to file on
Form S-3 (or any such successor) before it is eligible to do so, which at the
earliest will be November 13, 1997. Upon receipt of any such request, the
Company shall promptly give written notice of such proposed registration to all
holders of Registrable Securities. Such holders shall have the right, by giving
written notice to the Company within 30 days after the Company provides its
notice, to elect to have included in such registration such of their Registrable
Securities as such holders may request in such notice of election; provided that
if the underwriter (if any) managing the offering determines that, because of
marketing factors, all of the Registrable Securities requested to be registered
by all holders may not be included in the offering, then the Company shall
include in such registration (i) first, the securities of the holder of
Registrable Securities initiating the registration, (ii) second, the securities
requested to be included therein by the other holders of the Registrable
Securities requested to be included in such registration, pro rata among the
holders of such
-2-
<PAGE>
Registrable Securities on the basis of the number of shares owned by each such
holder. Thereupon, the Company shall, as expeditiously as possible, use its best
efforts to effect the registration on Form S-3 (or such successor form) of all
Registrable Securities which the Company has been requested to so register. The
Company shall keep any registration statement on Form S-3 filed pursuant to this
Section 1(b) effective for a period of not less than 90 days.
(c) The Company shall not be required to effect more than one
registration pursuant to the first sentence of paragraph (a) above or pursuant
to the first sentence of paragraph (b) above.
(d) The Registration Expenses shall be paid by the Company in
all Required Registrations.
(e) If at any time of any request to register Registrable
Securities pursuant to this Section 1, the Company is engaged or has fixed plans
to engage within 30 days of the time of the request in a registered public
offering as to which the holders of Registrable Securities may include
Registrable Securities pursuant to Section 2 or is engaged in any other activity
which, in the good faith determination of the Company's Board of Directors,
would be adversely affected by the requested registration to the material
detriment of the Company, then the Company may at its option direct that such
request be delayed for a period not in excess of six months from the effective
date of such offering or the date of commencement of such other material
activity, as the case may be, such right to delay a request to be exercised by
the Company not more than once in any one-year period.
2. Piggyback Registrations.
(a) Right to Piggyback. Subject to the limitations contained
herein, at any time prior to July 31, 2005, whenever the Company proposes to
register any of its securities under the Securities Act and the registration
form to be used may be used for the registration of Registrable Securities (a
"Piggyback Registration"), the Company shall give prompt written notice to all
holders of Registrable Securities of its intention to effect such a registration
and shall include in such registration all Registrable Securities with respect
to which the Company has received written requests for inclusion therein within
30 days after the receipt of the Company's notice.
(b) Piggyback Expenses. The Registration Expenses of the
holders of Registrable Securities shall be paid by the Company in all Piggyback
Registrations.
-3-
<PAGE>
(c) Priority on Primary Registrations. If a Piggyback
Registration is an underwritten primary registration on behalf of the Company,
and the managing underwriters advise the Company in writing that in their
opinion the number of securities requested to be included in such registration
exceeds the number which can be sold in such offering without adversely
affecting the marketability of the offering, the Company shall include in such
registration (i) first, the securities the Company proposes to sell, (ii)
second, the securities requested to be included therein by the holders of the
Registrable Securities requested to be included in such registration, pro rata
among the holders of such Registrable Securities on the basis of the number of
shares owned by each such holder, and (iii) third, other securities requested to
be included in such registration.
(d) Priority on Secondary Registrations. If a Piggyback
Registration is an underwritten secondary registration on behalf of holders of
the Company's securities, and the managing underwriters advise the Company in
writing that in their opinion the number of securities requested to be included
in such registration exceeds the number which can be sold in such offering
without adversely affecting the marketability of the offering, the Company shall
include in such registration the securities requested to be included therein by
the holders requesting such registration, the Registrable Securities requested
to be included in such registration and the other securities requested to be
included in such registration, pro rata among the holders of such securities on
the basis of the number of securities so requested to be included therein.
(e) Other Registrations. If the Company has previously filed a
registration statement with respect to Registrable Securities pursuant to this
paragraph 2, and if such previous registration has not been withdrawn or
abandoned, the Company shall not file or cause to be effected any other
registration of any of its equity securities or securities convertible or
exchangeable into or exercisable for its equity securities under the Securities
Act (except on Form S-8 or on Form S-4 under the Securities Act or any successor
forms), whether on its own behalf or at the request of any holder or holders of
such securities, until a period of at least 90 days has elapsed from the
effective date of such previous registration.
3. Holdback Agreements.
(a) Each holder of Registrable Securities shall not effect any
public sale or distribution (including sales pursuant to Rule 144) of equity
securities of the Company, or any securities convertible into or exchangeable or
exercisable for such securities, during the ten days prior to and the 90-day
period (or longer if requested by the underwriter of the
-4-
<PAGE>
offering) beginning on the effective date of any underwritten Required or
Piggyback Registration in which Registrable Securities are included (except as
part of such underwritten registration), unless the underwriters managing the
registered public offering otherwise agree.
(b) The Company (i) shall not effect any public sale or
distribution of its equity securities, or any securities convertible into or
exchangeable or exercisable for such securities, during the ten days prior to
and during the 90-day period beginning on the effective date of any underwritten
Required or Piggyback Registration (except as part of such underwritten
registration or pursuant to registrations on Form S-8 or on Form S-4 or any
successor form), unless the underwriters managing the registered public offering
otherwise agree, and (ii) shall cause each holder of at least 5% (on a
fully-diluted basis) of its Common Stock, or any securities convertible into or
exchangeable or exercisable for Common Stock, purchased from the Company at any
time after [July 28, 1995] (other than in a registered public offering) to agree
not to effect any public sale or distribution (including sales pursuant to Rule
144) of any such securities during such period (except as part of such
underwritten registration, if otherwise permitted), unless the underwriters
managing the registered public offering otherwise agree.
4. Registration Procedures. Whenever the holders of
Registrable Securities have requested that any Registrable Securities be
registered pursuant to this Agreement, the Company shall use its best efforts to
effect the registration and the sale of such Registrable Securities in
accordance with the intended method of disposition thereof; and pursuant thereto
the Company shall as expeditiously as possible:
(a) prepare and file with the Securities and Exchange
Commission a registration statement on the appropriate form under the Securities
Act, which form shall be available for the sale of such Registrable Securities
in accordance with the intended method or methods of distribution thereof, and
use its commercially reasonable efforts to cause such registration statement to
become effective (provided that before filing a registration statement or
prospectus or any amendments or supplements thereto, the Company shall furnish
to the counsel selected by the holders of a majority of the Registrable
Securities covered by such registration statement copies of all such documents
proposed to be filed, which documents shall be subject to the review and comment
of such counsel);
(b) notify each holder of Registrable Securities of the
effectiveness of each registration statement filed hereunder and prepare and
file with the Securities and Exchange Commission such amendments, post-effective
amendments and supplements to
-5-
<PAGE>
such registration statement and the prospectus used in connection therewith as
may be necessary or appropriate to keep such registration statement effective
for the period required for sale of the Registrable Securities, provided that in
no event shall the Company be obligated to keep such registration statement
effective for more than 90 days, cause such prospectus as so supplemented to be
filed as required under the Securities Act, and comply with the provisions of
the Securities Act with respect to the disposition of all securities covered by
such registration statement during such period in accordance with the intended
methods of disposition by the sellers thereof set forth in such registration
statement or supplement to the prospectus;
(c) if requested by the managing underwriter or underwriters
or a holder of Registrable Securities being sold in connection with an
underwritten offering, immediately incorporate in a Prospectus supplement or
post-effective amendment such information as the managing underwriters and the
holders of a majority in interest of the Registrable Securities being sold
reasonably agree should be included therein relating to the plan of distribution
with respect to such Registrable Securities, including, without limitation,
information with respect to the principal amount of Registrable Securities being
sold to such underwriters, the purchase price being paid therefor by such
underwriters and with respect to any other terms of the underwritten (or best
efforts underwritten) offering of the Registrable Securities to be sold in such
offering; and make all required filings of such Prospectus supplement or
post-effective amendment as soon as notified of the matters to be incorporated
in such Prospectus supplement or post-effective amendment;
(d) furnish to each seller of Registrable Securities such
number of copies of such registration statement, each amendment and supplement
thereto, the prospectus included in such registration statement (including each
preliminary prospectus) and such other documents as such seller may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such seller;
(e) use its best efforts to register or qualify such
Registrable Securities under such other securities or blue sky laws of such
jurisdictions where such registration or qualification is required as any seller
reasonably requests and do any and all other acts and things which may be
reasonably necessary or advisable to enable such seller to consummate the
disposition in such jurisdictions of the Registrable Securities owned by such
seller (provided that the Company shall not be required to (i) qualify generally
to do business in any jurisdiction where it would not otherwise be required to
qualify but for this subparagraph (ii) subject itself to taxation in any such
jurisdiction or (iii) consent to general service of process in any such
jurisdiction);
-6-
<PAGE>
(f) notify each seller of such Registrable Securities, at any
time when a prospectus relating thereto is required to be delivered under the
Securities Act, upon discovery that, or upon the happening of any event as a
result of which the prospectus included in such registration statement as then
in effect, contains an untrue statement of a material fact or omits any fact
necessary to make the statements therein not misleading in the light of the
circumstances under which they were made, and, at the request of any such
seller, the Company shall prepare a supplement or amendment to such prospectus
so that, thereafter delivered to the purchasers of such Registrable Securities,
such prospectus shall not contain an untrue statement of a material fact
required to be stated therein or omit to state any fact necessary to make the
statements therein not misleading;
(g) cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by the Company are then
listed or traded, and, if not so listed or traded, to be listed on the NASD
automated quotation system and, if listed on the NASD automated quotation
system, use commercially reasonable efforts to secure NASDAQ authorization for
such Registrable Securities and, without limiting the generality of the
foregoing, to arrange for at least two market makers to register as such with
respect to such Registrable Securities with the NASD;
(h) cooperate with the selling holders of Registrable
Securities and the managing underwriters, if any, to facilitate the timely
preparation and delivery of certificates representing Registrable Securities to
be sold and not bearing any restrictive legends; and enable such Registrable
Securities to be in such denominations and registered in such names as the
selling holders or the managing underwriters, if any, may request at least ten
Business Days prior to any sale of Registrable Securities; provide a transfer
agent and registrar for all such Registrable Securities not later than the
effective date of such registration statement;
(i) enter into such customary agreements (including, if there
is an underwriter, underwriting agreements in customary form);
(j) make available for inspection by any seller of Registrable
Securities, any underwriter participating in any disposition pursuant to such
registration statement and any attorney, accountant or other agent retained by
any such seller or underwriter, all financial and other records, pertinent
corporate documents and properties of the Company that is customary, and cause
the Company's officers, directors, employees and independent accountants to
supply all information reasonably requested by any such seller, underwriter,
attorney, accountant or agent in connection with such registration statement;
-7-
<PAGE>
(k) cooperate, and cause the Company's officers, directors,
employees and independent accountants to cooperate, with the selling holders of
Registrable Securities and the managing underwriters, if any, in the sale of the
Registrable Securities and take any actions necessary to promote, facilitate or
effectuate such sale;
(l) otherwise use its best efforts to comply with all
applicable rules and regulations of the Securities and Exchange Commission; and
(m) in the event of the issuance of any stop order suspending
the effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any common stock included in such registration statement for sale in any
jurisdiction, the Company shall use its best efforts promptly to obtain the
withdrawal of such order.
5. Registration Expenses.
(a) All expenses incident to the Company's performance of or
compliance with this Agreement, including without limitation all registration
and filing fees (including, if applicable, the fees and expenses of any
"qualified independent underwriter" and its counsel as may be required under the
rules and regulations of the NASD), fees and expenses of compliance with
securities or blue sky laws (including fees and disbursements of counsel for the
underwriters or selling holders in connection with blue sky qualifications and
determination of their eligibility for investment under applicable laws),
printing expenses, messenger, telephone and delivery expenses, fees and
disbursements of custodians, and fees and disbursements of counsel for the
Company and all independent certified public accountants (including the expenses
of any special audit and "cold comfort" letters required by or incident to such
performance), underwriters (excluding underwriters' discounts and commissions)
and other Persons retained by the Company (all such expenses being herein called
"Registration Expenses"), shall be borne as provided in this Agreement, except
that the Company shall, in any event, pay its internal expenses (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expense of any annual audit or
quarterly review, the expense of any liability insurance if such insurance
coverage is obtained by the Company and the expenses and fees for listing the
securities to be registered on each securities exchange on which similar
securities issued by the Company are then listed or on the NASD automated
quotation system.
(b) In connection with each Piggyback Registration, the
Company shall reimburse the holders of Registrable Securities
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included in such registration for the reasonable fees and disbursements of one
counsel chosen by the holders of a majority of the Registrable Securities
included in such registration.
(c) To the extent Registration Expenses are not required to be
paid by the Company, each holder of securities included in any registration
hereunder shall pay those Registration Expenses allocable to the registration of
such holder's securities so included, and any Registration Expenses not so
allocable shall be borne by all sellers of securities included in such
registration in proportion to the aggregate selling price of the securities to
be so registered.
6. Indemnification and Contribution
(a) The Company agrees to indemnify each holder of Registrable
Securities which is included in a registration statement pursuant to Sections 1
and 2 herein, its officers and directors and each Person who controls such
holder (within the meaning of the Securities Act) against all losses, claims,
damages, liabilities and expenses caused by any untrue or alleged untrue
statement of material fact contained in any registration statement, prospectus
or preliminary prospectus or any amendment thereof or supplement thereto or any
omission or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as the
same are caused by or contained in any information furnished in writing to the
Company by such holder expressly for use therein or by such holder's failure to
deliver a copy of the registration statement or prospectus or any amendments or
supplements thereto after the Company has furnished such holder with a
sufficient number of copies of the same.
(b) In connection with any registration statement in which a
holder of Registrable Securities is participating, each such holder shall
furnish to the Company in writing such information and affidavits as the Company
and any underwriter reasonably requests for use in connection with any such
registration statement or prospectus and shall indemnify the Company, its
directors and officers and each Person who controls the Company (within the
meaning of the Securities Act) against any losses, claims, damages, liabilities
and expenses resulting from any untrue or alleged untrue statement of material
fact contained in the registration statement, prospectus or preliminary
prospectus or any amendment thereof or supplement thereto or any omission or
alleged omission of a material fact required to be stated therein or necessary
to make the statements therein not misleading, but only to the extent that such
untrue statement or omission is contained in any information or affidavit so
furnished in writing by such holder.
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(c) Any Person entitled to indemnification hereunder shall (i)
give prompt written notice to the indemnifying party of any claim with respect
to which it seeks indemnification (provided that the failure to give prompt
notice shall not impair any Person's right to indemnification hereunder to the
extent such failure has not materially prejudiced the indemnifying party) and
(ii) unless in such indemnified party's reasonable judgment a conflict of
interest between such indemnified and indemnifying parties may exist with
respect to such claim, permit such indemnifying party to assume the defense of
such claim with counsel reasonably satisfactory to the indemnified party. If
such defense is assumed, the indemnifying party shall not be subject to any
liability for any settlement made by the indemnified party without its consent
(but such consent shall not be unreasonably withheld). An indemnifying party who
is not entitled to, or elects not to, assume the defense of a claim shall not be
obligated to pay the fees and expenses of more than one counsel for all parties
indemnified by such indemnifying party with respect to such claim, unless in the
reasonable judgment of any indemnified party a conflict of interest may exist
between such indemnified party and any other of such indemnified parties with
respect to such claim.
(d) If the indemnification provided for in this Section 6 is
unavailable to an indemnified party under paragraphs (a) or (b) hereof in
respect to any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses in such
proportion as is appropriate to reflect the relative fault of the Company and
the holder of Registrable Securities in connection with the statements or
omissions that resulted in such losses, claim, damages, liabilities or expenses.
The relative fault of the Company and the holder of Registrable Securities in
connection with the statements that resulted in such losses, claims, liabilities
or expenses shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of material facts or the omission or alleged
omission to state a material fact relates to information supplied by the Company
or the holder of the Registrable Securities and the parties relative intent,
knowledge, access to information and opportunity to correct such statement or
omission.
(e) Notwithstanding any other provision of this Section, the
liability of any holder of Registrable Securities for indemnification or
contribution under this Section shall be individual to each holder and shall not
exceed an amount equal to the number of shares sold by such holder of
Registrable Securities multiplied by the net amount per share which he receives
in such underwritten offering.
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(f) The indemnification and contribution provided for under
this Agreement shall remain in full force and effect regardless of any
investigation made by or on behalf of the indemnified party or any officer,
director or controlling Person of such indemnified party and shall survive the
transfer of securities.
7. Participation in Underwritten Registrations. No Person may
participate in any registration hereunder which is underwritten unless such
Person (i) agrees to sell such Person's securities on the basis provided in any
underwriting arrangements approved by the Person or Persons entitled hereunder
to approve such arrangements and (ii) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
reasonably required under the terms of such underwriting arrangements; provided
that no holder of Registrable Securities included in any underwritten
registration shall be required to make any representations or warranties to the
Company or the underwriters other than representations and warranties directly
regarding such holder and such holder's intended method of distribution.
8. Definitions.
"Common Stock" means the Company's Common Stock, without par
value.
"NASD" means the National Association of Securities Dealers.
"Person" means any individual, corporation, partnership,
limited liability company, trust, estate, association, cooperative, government
or governmental entity (or any branch, subdivision or agency thereof) or any
other entity.
"Registrable Securities" means (i) any Common Stock or other
securities issued or issuable upon the exercise of the Warrants ("Warrant
Shares") or (ii) any Common Stock or other securities issued or issuable with
respect to Warrant Shares by way of a stock dividend or stock split or in
connection with a combination of shares, recapitalization, merger, consolidation
or other reorganization. As to any particular Registrable Securities, such
securities shall cease to be Registrable Securities when they have been
distributed to the public pursuant to a offering registered under the Securities
Act or eligible to be sold to the public through a broker, dealer or market
maker in compliance with Rule 144 under the Securities Act (or any such rule
then in force). For purposes of this Agreement, a Person shall be deemed to be a
holder of Registrable Securities whenever such Person has the right to acquire
directly or indirectly such Registrable Securities (upon conversion or exercise
in connection with a transfer of securities or otherwise, but disregarding any
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restrictions or limitations upon the exercise of such right), whether or not
such acquisition has actually been effected.
"Securities Act" means the Securities Act of 1933, as amended.
"Warrants" mean the 1995 Warrant and all other common stock
purchase warrants issued by the Company to Bank and its successors and assigns
pursuant to the 1995 Warrant Agreement; the 1996 Warrant and all other common
stock purchase warrants issued by the Company to Bank and its successors and
assigns pursuant to the 1996 Warrant Agreement; and the Second 1996 Warrant and
all other common stock purchase warrants issued by the Company to APT and its
successors and assigns pursuant to the Second 1996 Warrant Agreement.
9. Miscellaneous.
(a) Adjustments Affecting Registrable Securities. The Company
shall not take any action, or permit any change to occur, with respect to its
securities which would materially and adversely affect the ability of the
holders of Registrable Securities to include such Registrable Securities in a
registration undertaken pursuant to this Agreement or which would materially and
adversely affect the marketability of such Registrable Securities in any such
registration (including, without limitation, effecting a stock split or a
combination of shares).
(b) Amendments and Waivers. Except as otherwise provided
herein, the provisions of this Agreement may be amended or waived only upon the
prior written consent of the Company and holders of a majority of the
Registrable Securities.
(c) Successors and Assigns. All covenants and agreements in
this Agreement by or on behalf of any of the parties hereto shall bind and inure
to the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not and, in addition, whether or not any express
assignment has been made, the provisions of this Agreement which are for the
benefit of purchasers or holders of Registrable Securities are also for the
benefit of, and enforceable by, any subsequent holder of Registrable Securities.
A person is deemed to be a holder of Registrable Securities whenever such person
is the registered holder of Registrable Securities. Upon the transfer of any
Registrable Securities, the transferring holder of Registrable Securities shall
cause the transferee to execute and deliver to the Company a counterpart of this
Agreement.
(d) 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
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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 this Agreement.
(e) Counterparts. This Agreement may be executed
simultaneously in two or more counterparts, any one of which need not contain
the signatures of more than one party, but all such counterparts taken together
shall constitute one and the same Agreement.
(f) Descriptive Heading. The descriptive headings of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.
(g) Governing Law. The corporate law of Pennsylvania shall
govern all issues and questions concerning the relative rights of the Company
and its stockholders. All issues and questions concerning the construction,
validity, interpretation and enforcement of this Agreement shall be governed by,
and construed in accordance with, the laws of Pennsylvania, without giving
effect to any choice of law or conflict of law rules or provisions (whether of
Pennsylvania or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than Pennsylvania.
(h) Notices. All notices, demands or other communications to
be given or delivered under or by reason of the provisions of this Agreement
shall be in writing and shall be deemed to have been given when delivered
personally to the recipient, sent to the recipient by reputable overnight
courier service (charges prepaid) or mailed to the recipient by certified or
registered mail, return receipt requested and postage prepaid. Such notices,
demands and other communications shall be sent to each Person at the address
indicated below:
If to Company:
NCO Group, Inc.
1740 Walton Road
Blue Bell, PA 19422
Attn: Michael J. Barrist
With copies to:
Blank, Rome, Comisky & McCauley
Four Penn Center
Philadelphia, PA 19103
Attn: Joel C. Shapiro, Esquire
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and
Joshua Gindin, Esquire
Kessler & Gindin
230 South Broad Street, 20th floor
Philadelphia, PA 19102
If to APT:
Mellon Bank, N.A.
Plymouth Meeting Executive Campus
610 West Germantown Pike
Plymouth Meeting, PA 19462
Attention: Liz A. Mellace
With a copy to:
Drinker Biddle & Reath
1000 Westlakes Drive, Suite 300
Berwyn, PA 19312
Attention: George V. Strong, Esq.
or to such other address or to the attention of such other person as the
recipient parry has specified by prior written notice to the sending party.
(i) Consent to Jurisdiction: Service of Process. Company and
APT hereby irrevocably consent to the jurisdiction of the Courts of Common Pleas
of Montgomery County, Pennsylvania and of the United States District Court for
the Eastern District of Pennsylvania in any and all actions and proceedings in
connection with this Agreement, and irrevocably consent, in addition to any
methods of service of process permissible under applicable law, to service of
process by certified mail, return receipt requested to the address of Company
and APT as set forth herein. Nothing in this Section shall affect or limit the
right of any Holder to serve legal process in any other manner permitted by law.
Company and APT agree that in any action or proceeding brought by them in
connection with this Agreement or the transactions contemplated hereby,
exclusive jurisdiction shall be in the courts of the Courts of Common Pleas of
Montgomery County, Pennsylvania, and the United States District Court for the
Eastern District of Pennsylvania.
(j) Attorneys' Fees. In any action or proceeding brought to
enforce any provision of this Agreement, the successful party shall be entitled
to recover all of its own costs and expenses (including, but not limited to,
reasonable attorneys' fees and expenses) arising out of or relating to such
action or proceeding in addition to all other remedies available hereunder, or
at law or in equity.
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(k) No Inconsistent Agreements. The Company will not on or
after the date of this Agreement enter into any agreement with respect to its
securities which is inconsistent with the rights granted to the holders of
Registrable Securities in this Agreement or otherwise conflicts with the
provisions hereof. Except as set forth in Schedule 5.4 to the Second 1996
Warrant Agreement, the Company has not previously entered into any agreement
with respect to its securities granting any registration or similar rights to
any Person.
(l) Waiver of Jury Trial. The Company and APT hereby waive any
right that they may have to a trial by jury of any dispute arising under or
relating to this Agreement or any related matters, and agree that any such
dispute shall be tried before a judge sitting without a jury.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
NCO GROUP, INC.
By: /s/ Michael J. Barrist
----------------------------------
Its: President and CEO
---------------------------------
APT HOLDINGS CORPORATION
By: /s/ Liz A. Mellace
----------------------------------
Its: As Agent
---------------------------------
Acknowledged and agreed:
MELLON BANK, N.A.
By: Liz A. Mellace
---------------------------------
Its: Assistant Vice President
--------------------------------
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Exhibit 10.18
FIRST AMENDMENT (this "Amendment"), dated December 13, 1996,
to AMENDED AND RESTATED CREDIT AGREEMENT (the "Credit Agreement") dated
September 5, 1996 by and among NCO GROUP, INC., NCO FINANCIAL SYSTEMS, INC., NCO
FUNDING, INC. and NCO OF NEW YORK, INC. (each individually a "Borrower" and
collectively the "Borrowers") and MELLON BANK, N.A. (the "Lender").
WHEREAS, on November 13, 1996, the Company completed its
initial public offering of common stock by selling 2,875,000 shares (of which
375,000 shares were sold by certain selling shareholders) at a price to the
public of $13.00 per share;
WHEREAS, the parties have agreed to amend the Credit Agreement
on the terms and conditions set forth below.
NOW, THEREFORE, intending to be legally bound, the parties
agree as follows:
1. Defined Terms. Capitalized terms not otherwise defined in
this Amendment will have the meanings that the Credit Agreement gives to those
terms.
2. Amendments to Credit Agreement. The Credit Agreement is
hereby amended as follows:
(A) 1.1 Certain Definitions. The following
definitions in Section 1.1 are amended and restated in their
entirety to read as follows:
"Change of Management" shall mean that a majority of the Board of
Directors of NCO Group shall be other than those who were directors on
the date hereof (including for this purpose Allen F. Wise and Eric S.
Siegel, who are expected to be appointed as directors by February 13,
1997), or 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 acceptable to the Lender in its sole and absolute
discretion.
"Permitted Acquisitions" 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 each such business being acquired by such
Borrower must (1) have a positive EBITDA for the immediately preceding
twelve months prior to the acquisition, after adjustments for unusual
expense items, (2) be in the same or a similar line of business as such
Borrower, (3) after recasting the
<PAGE>
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, and (4) with respect to any merger, the Borrower shall be
the surviving corporation; provided further, however, that the purchase
price paid by such Borrower for the acquisition must not exceed
$5,000,000 in any rolling twelve month period. An acquisition meeting
these criteria does not require the Lender's consent
"Responsible Officer" shall mean Michael J. Barrist, Charles Piola, Jr.
or Steven L. Winokur.
"Revolving Credit Commitment Fee" shall have the meaning set forth in
Section 2.3(a) hereof.
"Revolving Credit Committed Amount" shall mean Twenty-Five Million
Dollars ($25,000,000).
"Revolving Credit Maturity Date" shall mean four (4) years from closing
on this Amendment.
The definition of "Warrant Documents" is amended to include the Second
1996 Warrant Agreement, the 1996 Warrant, and the Second Amended and
Restated Registration Rights Agreement all of even date herewith.
The following definitions are hereby added to Section 1.1:
"IPO" shall mean the initial public offering by NCO Group, Inc. of
2,875,000 shares (of which 375,000 shares were sold by certain selling
shareholders) of common stock at a price to the public of $13.00 per
share on November 13, 1996
"LIBOR Based Rate" shall mean with respect to any LIBOR Based Rate Loan
outstanding, the LIBOR Rate plus two and one-half percent (2 1/2%) per
annum.
"LIBOR Based Rate Loan" shall mean any Revolving Credit Loan on which
interest accrues at the LIBOR Based Rate.
"LIBO Rate Period" shall have the meaning set forth in Section 2.5(a)
hereof.
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"LIBOR Rate" shall mean the annual rate of interest determined by
Lender as being the rate available to Lender at approximately 11:00
a.m. London time in the London Interbank Market, as referenced by
Reuters Screen "LIBO", in accordance with the usual practice in such
market, for the LIBO Rate Period, in effect two Good Business Days
prior to the funding date for a requested LIBOR Based Rate Loan, or for
a LIBOR Based Rate Loan which Borrower has elected to continue as a
LIBOR Based Rate Loan beyond the expiration of the then current LIBO
Rate Period with respect thereto, for deposits of dollars in amounts
equal (as nearly as may be estimated) to the amount of the Revolving
Credit Loan which shall then be loaned or continued by the Lender to
Borrower as of the time of such determination, as such rate may be
adjusted by the reserve percentage applicable during the LIBO Rate
Period in effect (or if more than one such percentage shall be
applicable, the daily average of such percentages for those days in
such LIBO Rate Period during which any such percentage shall be so
applicable) under regulations issued from time to time by the Board of
Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement (including without
limitation, any emergency, supplemental or other marginal reserve
requirement) for the Lender with respect to liabilities or assets
consisting of or including "Eurocurrency Liabilities" as such term is
defined in Regulation D of the Board of Governors of the Federal
Reserve System, as in effect from time to time, having a term equal to
such LIBO Rate Period ("Eurocurrency Reserve Requirement"). Such
adjustment shall be effectuated by calculating, and the LIBOR Rate
shall be equal to, the quotient of (i) the offered rate divided by (ii)
one minus the Eurocurrency Reserve Requirement.
"Libor Based Rate Option" shall have the meaning set forth in Section
2.5(a)(iii) hereof.
"Prime Based Loan" shall mean any Revolving Credit Loan that accrues
interest at the Prime Rate.
"Prime Based Rate Option" shall have the meaning set forth in Section
2.5 hereof.
"S Corporation Termination Date" shall mean September 3, 1996, the date
on which NCO Financial Systems, Inc. terminated its status as an S
corporation
(B) 2.1(c) Revolving Credit Note. Section 2.1(c)
is amended and restated in its entirety to read as follows:
The obligation of the Borrowers to repay the unpaid principal amount of
the Revolving Credit Loans made by the
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Lender and to pay interest thereon shall be evidenced in part by a
promissory note of the Borrowers, dated the date hereof (the "Revolving
Credit Note") in substantially the form attached hereto as Exhibit A,
with the blanks appropriately filled, payable to the order of the
Lender in a face amount equal to $25,000,000 (the "Revolving Credit
Committed Amount").
(C) 2.3(a) Revolving Credit Commitment Fee;
The Borrowers shall pay to the Lender a commitment fee (the "Revolving
Credit Commitment Fee") equal to three-eighths of one percent (3/8%)
per annum (based on a year of 360 days and actual days elapsed), for
each day from and including the date hereof to but not including the
Revolving Credit Maturity Date, on the amount (not less than zero)
equal to (i) the Revolving Credit Committed Amount on such day, minus
(ii) the aggregate principal amount of the Revolving Credit Loan
outstanding on such day. Such Revolving Credit Commitment Fee shall be
due and payable for the preceding period for which such fee has not
been paid: (x) on each Regular Payment Date, (y) on the date of each
reduction of the Revolving Credit Committed Amount (whether optional or
mandatory) on the amount so reduced and (z) on the Revolving Credit
Maturity Date.
(D) 2.5 (a) Interest. Section 2.5(a) is amended
and restated in its entirety to read as follows:
(i) Revolving Credit Interest. Interest on outstanding
Revolving Credit Loans shall be calculated at the Prime Based Rate
Option or the LIBOR Based Rate Option.
(ii) Prime Based Rate Option. All or a portion of the unpaid principal
balance of any Revolving Credit Loan, unless subject to the LIBOR Based
Rate Option, shall bear interest at the Prime Rate, subject to the
terms hereof ("Prime Based Rate Option"). Changes in the Prime Rate
shall become effective on the same day as Lender announces a change in
its Prime Rate.
(iii) LIBOR Based Rate Option. All or a portion of the unpaid principal
balance of any Revolving Credit Loan may, at Borrower's option, bear
interest at the LIBOR Based Rate ("LIBOR Based Rate Option").
(a) LIBOR Based Rate Loans may be selected for periods of one, two, or
three months' duration, during which the LIBOR Based Rate is applicable
(each such period a "LIBO Rate Period"); provided, however, that (1) if
the LIBO Rate Period would otherwise end on a day which shall not be a
Business Day, such LIBO Rate Period shall be extended to the
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next succeeding Business Day, unless such Business Day falls in another
calendar month, in which case such LIBO Rate Period shall end on the
next preceding Business Day subject to clause (3) below; (2) interest
shall accrue from and including the first day of each LIBO Rate Period
to, but excluding the day on which any LIBO Rate Period expires; (3)
with respect to any LIBO Rate Period which begins on the last Business
Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such LIBO Rate
Period), the LIBO Rate Period shall end on the last Business Day of a
calendar month; and (4) not more than ten separate LIBOR Based Rate
Loans may be outstanding at any one time. Subject to all of the terms
and conditions applicable to a request that all or a portion of new
Revolving Credit Loans or that all or a portion of the outstanding
principal balance under a LIBOR Based Rate Loan, Borrower may extend a
LIBOR Based Rate Loan as of the last day of the LIBO Rate Period to a
new LIBOR Based Rate Loan or may convert all or a portion of the
Revolving Credit Loans to the Prime Based Rate Option to a LIBOR Based
Rate Loan. If the Borrower fails to notify the Lender of the LIBO Rate
Period for a subsequent LIBOR Based Rate Loan at least three Business
Days prior to the last day of the then current LIBO Rate Period of an
outstanding LIBOR Based Rate Loan, then such outstanding LIBOR Based
Rate Loan shall become a loan subject to the Prime Based Rate Option at
the end of the current LIBO Rate Period for such outstanding LIBOR
Based Rate Loan and shall accrue interest in accordance with Section
2.5(a)(ii) above.
(b) The LIBOR Rate may be automatically adjusted by Lender on a
prospective basis to take into account the additional or increased cost
of maintaining any necessary reserves for Eurodollar deposits or
increased costs due to changes in applicable law or regulation or the
interpretation thereof occurring subsequent to the commencement of the
then applicable LIBO Rate Period, including but not limited to changes
in tax laws (except changes of general applicability in corporate
income tax laws as they affect financial institutions) and changes in
the reserve requirements imposed by the Board of Governors of the
Federal Reserve System (or any successor) that increase the cost to
Lender of funding the LIBOR Based Rate Loan. Lender shall promptly give
the Borrower notice of such a determination and adjustment, which
determination shall be conclusive as to the correctness of the fact and
the amount of such adjustment.
(c) In the event that the Borrower shall have requested the LIBOR Based
Rate Option in accordance with Section 2.5(a)(iii) and Lender shall
have reasonably determined that Eurodollar deposits equal to the amount
of the principal of
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the requested LIBOR Based Rate Loan and for the LIBO Rate Period are
unavailable, impractical or unlawful, or that the rate based on the
LIBOR Rate will not adequately and fairly reflect the cost of the LIBOR
Based Rate applicable to the specified LIBO Rate Period, of making or
maintaining the principal amount of the requested LIBOR Based Rate Loan
specified by the Borrower during the LIBO Rate Period specified, or
that by reason of circumstances affecting Eurodollar markets, adequate
and reasonable means do not exist for ascertaining the rate based on
the LIBOR Rate applicable to the specified LIBO Rate Period, Lender
shall promptly give notice of such determination to the Borrower that
the rate based on the LIBOR Rate is not available. A determination by
Lender hereunder shall be prima facie evidence of the correctness of
the fact and amount of such additional costs or unavailability. Upon
such a determination, (1) the right of Borrower to select, convert to,
or maintain a LIBOR Based Rate Loan at the rate based on the LIBOR Rate
shall be suspended until Lender shall have notified the Borrower that
such conditions shall have ceased to exist, (2) Lender shall use its
best efforts to offer to Borrower a replacement index at a rate with a
margin that gives Lender a comparable yield to the LIBOR Based Rate
Option, and (3) the Loans subject to the requested LIBOR Based Rate
Option shall accrue interest in accordance with Section 2.5(a)(ii)
above.
(d) In the event that, as a result of any changes in applicable law or
regulation or the interpretation thereof, it becomes unlawful for
Lender to maintain Eurodollar liabilities sufficient to fund any LIBOR
Based Rate Loan subject to the LIBOR Based Rate, then Lender shall
immediately notify Borrowers thereof and Lender's obligations to make,
convert to, or maintain a LIBOR Based Rate Loan at the LIBOR Based Rate
shall be suspended until such time as Lender may again cause the LIBOR
Based Rate to be applicable to any LIBOR Based Rate Loans of the
Revolving Credit Loans subject to the LIBOR Based Rate shall accrue
interest in accordance with Section 2.5(a)(ii) above. Promptly after
becoming aware that it is no longer unlawful for Lender to maintain
such Eurodollar liabilities, Lender shall notify Borrower thereof and
such suspension shall cease to exist.
(iv) Indemnity/Loss of Margin: Borrower shall indemnify, defend and
hold harmless Lender against any and all loss, liability, cost or
expense Lender may sustain or incur as a consequence of (i) any failure
of Borrower to obtain, convert or extend any LIBOR Based Rate Loan
after notice thereof has been given to Lender or (ii) any payment,
prepayment, termination or conversion of a LIBOR Based Rate Loan made
for any reason on a date other than the last day
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of the applicable LIBO Rate Period. Borrower shall pay the full amount
thereof to Lender, on demand by Lender.
(v) Change in Law. In the event that any present or future law, rule,
regulation, treaty or official directive or the interpretation or
application thereof by any central bank, monetary authority or
governmental authority, or the compliance with any guideline or request
of any central bank, monetary authority or governmental authority
(whether or not having the force of law) imposes, modifies or deems
applicable any deposit insurance, reserve, special deposit, or other
similar requirement with respect to deposits in or for the account of,
or loans or advances or commitment to make loans or advances by, Lender
and the result of any of the foregoing is to increase the costs of
Lender, reduce the income receivable by or return on equity of Lender
or impose any expense upon Lender with respect to any advances or
extensions of credit or commitments to make advances or extensions of
credit under this Agreement, Lender shall so notify Borrowers in
writing. Upon notice from Lender, Borrowers agree to pay Lender the
amount of such increase in cost, reduction in income, reduced return on
equity or capital, or additional expense after presentation by Lender
of a statement concerning such increase in cost, reduction in income,
reduced return on equity or capital, or additional expense. Such
statement shall set forth a brief explanation of the amount and
Lender's calculation of the amount (in determining such amount Lender
may use any reasonable averaging and attribution methods), which
statement shall be conclusively deemed correct absent manifest error.
(vi) Limitation on LIBOR Based Rate Loans during Periods of Default:
Upon the occurrence and during the continuance of an Event of Default
and following written notice from Lender to Borrower, Lender may in its
sole discretion eliminate the availability of LIBOR Based Rate Loans.
(vii) Applicable Interest Limitations: In no contingency or event
whatsoever shall the aggregate of all amounts deemed interest hereunder
and charged or collected pursuant to the terms of this Amendment exceed
the highest rate permissible under any law which a court of competent
jurisdiction shall, in a final determination, deem applicable hereto.
In the event that such court determines Lender has charged or received
interest hereunder in excess of the highest applicable rate, Lender
shall in its sole discretion apply and set off such excess interest
received by Lender against other Obligations due or to become due and
such rate shall automatically be reduced to the maximum rate permitted
by such law.
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<PAGE>
(E) 3.4 Governmental Approvals and Filings. Section
3.4 is amended to recognize that Loan Documents may need to be filed with the
Securities and Exchange Commission.
(F) 5.14 Bank Accounts. Section 5.14 is amended to
provide that if Lender 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.
(G) 6.1(a) Consolidated Current Ratio. Section 6.1(a)
is amended and restated in its entirety to read as follows:
The Consolidated Current Ratio shall not at any time be less than .5 to
1.00. For purposes of determining the Consolidated Current Ratio,
Consolidated Current Liabilities shall include all Obligations.
(H) 6.1(b) Consolidated Net Worth. Section 6.1(b) is
amended and restated in its entirety to read as follows:
As of the last day of each fiscal quarter Consolidated Net Worth shall
not at any time be less than $26,000,000 plus 90% of quarterly
Consolidated Net Income on a cumulative basis for each quarter
beginning with the quarter ending December 31, 1996, but without
deductions for net losses plus the net proceeds of any offering of
equity after the IPO. For purposes of this provision only, Consolidated
Net Income shall be calculated after S corporation tax distributions
and compensation dividends payable with respect to periods before the S
Corporation Termination Date.
(I) 6.1(c) Funded Debt to Consolidated EBITDA.
Section 6.1(c) is amended and restated in its entirety to read as follows:
As of the last day of each fiscal quarter, the ratio of Funded Debt to
annualized Consolidated EBITDA shall not be more than 2.5 to 1.00.
Consolidated EBITDA shall be annualized by multiplying Consolidated
EBITDA for the fiscal quarter being tested by four. For purposes of
this provision only, Stock Payments which are paid as annual
compensation dividends pursuant to Section 6.6 hereof with respect to
periods before the S Corporation Termination Date shall be included as
operating expenses in the calculation of Consolidated EBITDA, but tax
bonuses paid to shareholders in lieu of S corporation tax distributions
with respect to periods before the S Corporation Termination Agreement
and the Final S Corp. Distribution shall not be included as
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<PAGE>
operating expenses of Consolidated EBITDA. In addition, for purposes of
this provision only, Consolidated EBITDA shall include the
pre-acquisition EBITDA, for the immediately preceding 12 month period,
of any company acquired by any Borrower.
(J) 6.1(d) Consolidated Interest Coverage Ratio.
Section 6.1(d) is amended and restated in its entirety to read as follows:
The Consolidated Interest Coverage Ratio as of the last day of each
fiscal quarter shall not be less than 4.00 to 1.00. For purposes of
this provision only, Stock Payments which are paid as annual
compensation dividends pursuant to Section 6.6 hereof with respect to
periods before the S Corporation Termination Date shall be included as
operating expenses in the calculation of Consolidated EBIT, but tax
bonuses paid to shareholders in lieu of S corporation tax distributions
with respect to periods before the S Corporation Termination Date and
the Final S Corp. Distribution shall not be included as operating
expenses in the calculation of Consolidated EBIT.
(K) 6.1(e) Net Trade Accounts Receivable Ratio.
Section 6.1(e) is amended and restated in its entirety to read as follows:
On a consolidated basis, the ratio of the Borrowers' net trade accounts
receivable to Obligations shall not at any time be less than .5 to
1.00, and the Borrowers may pledge cash or cash equivalents to the
Lender in order to maintain this ratio; provided, however, that any bad
debts shall be accounted for in a consistent manner with the most
recently delivered financial statements.
(L) 6.5 Loans, Advances and Investments. The
exceptions in Section 6.5 are amended to allow (f) Permitted Acquisitions and
(g) investments in a Borrower by another Borrower.
(M) 6.6(a) Dividends and Related Distributions.
Section 6.6(a) is amended to permit the payment of Stock Payments from one
Borrower to another Borrower.
(N) 6.6 Dividends and Related Distributions. Sections
6.6(b) and (c), which restrict compensation payable to certain officers, are
deleted for fiscal periods following the IPO.
(O) 6.9(v) Mergers, Acquisitions, etc. Section
6.9(v) is amended to permit mergers and consolidations that are part of
Permitted Acquisitions.
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<PAGE>
(P) 6.11 Issuance of Stock. Section 6.11 is amended
and restated in its entirety to read as follows:
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.
(Q) 6.15 Limitations on Modification of Certain
Agreements and Instruments. Section 6.15 is amended and restated in its entirety
to read as follows:
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 Bank's rights or
benefits under the Loan Documents.
(R) 6.14 Capital Expenditures. Section 6.14 is
amended and restated in its entirety to read as follows:
No Borrower shall make any Capital Expenditures on or after the date
hereof, except for Capital Expenditures not in excess of $2,000,000, in
the aggregate among all Borrowers, in any rolling four quarter period;
provided, however, that the Borrowers may carry forward into the
future, on a non-cumulative basis, up to $750,000 in unspent Capital
Expenditures per rolling four quarter period. For purposes of this
provision, (a) all leases, except for real estate leases and automobile
leases, shall be deemed to be Capitalized Leases and therefore shall be
accounted for as a Capital Expenditure, and (b) Purchase Money
Indebtedness shall be accounted for as a Capital Expenditure.
(S) 7.1(g) Events of Default. The threshold for any
judgment or judgments in Section 7.1(g) is increased to $200,000.
(T) 7.1(h) Events of Default. The threshold for
attachment, garnishment, execution, distraint or similar process in Section
7.1(h) is increased to $200,000.
(U) 7.1(r) Events of Default. Section 7.1(r) is added
to read as follows:
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<PAGE>
Any person or any affiliated group of persons, other than present
management, obtains control of a majority of the voting stock of NCO
Group.
(V) 7.2 Consequences of an Event of Default. The
reference to "Section 7.01" in Section 7.2(a) is amended to refer to Section 7.1
and the reference to "subsection q or r of Section 7.1" in Section 7.2(b) is
amended to refer to subsection p or q of Section 7.1.
(W) 8.15 Confidential Information. Section 8.15 is
added to read as follows:
Lender acknowledges that the reports, documents and other information
supplied or to be supplied by Borrowers to Lender pursuant to this
Agreement, including without limitation, the reports, documents and
other information to be supplied pursuant to Section 3.11 and Section
5.1 of this Agreement, are confidential (all such reports, documents
and other information are hereinafter referred to as "Confidential
Information"). Notwithstanding the foregoing, Confidential Information
shall not include any reports, documents and other information which
are, or become, generally available to the public other than as a
result of a breach of this Section 8.15 by Lender or its respective
directors, officers, employees, representatives, agents, affiliates or
professional advisors. Without the prior written consent of Borrowers,
Lender shall not disclose any Confidential Information to any Person
other than (a) its respective directors, officers, employees,
representatives, agents, affiliates and professional advisors and then
only on a "need to know" basis (the "Permitted Persons") or (b) to, or
in any filing with, any state of federal regulatory agency to which
Lender is required to report by its charter or by statute or
regulation. Lender shall cause all Permitted Persons to comply with all
the terms and covenants of this Section 8.15. Lenders shall inform all
Permitted Persons of the confidential nature of the Confidential
Information and shall, if requested by Borrowers, obtain the written
agreement of all Permitted Persons to be bound by and comply with the
provisions of this Section 8.15 on the same terms and conditions as if
specifically named a party. Without limiting the generality of the
foregoing, Lender agrees that it shall not trade in, or make
recommendations concerning trades in, the common stock or other
securities of NCO Group. Lender acknowledges that any breach of this
Section 8.15 may cause irreparable injury to Borrowers for which money
damages could not adequately compensate. If there is such a breach,
Borrowers shall be entitled, in addition to any other rights and
remedies they may have at law or in equity, to have an injunction
issued by any competent court enjoining and restraining the breaching
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<PAGE>
parties from continuing such breach. The existence of any claim or
cause of action which any of the breaching parties may have against any
of the Borrowers shall not constitute a defense or bar to the
enforcement of this Section 8.15. Notwithstanding the foregoing, if the
Lender is required to disclose any Confidential Information in a
judicial, administrative or governmental proceeding, Lender will notify
Borrowers as promptly as practicable so that Borrowers may either seek
an appropriate protective order or relief or waive the provisions of
this Section 8.15. If, in the absence of any such protective order,
relief or waiver, Lender is required, in the written opinion of their
legal counsel, to disclose Confidential Information to any court,
governmental agency or tribunal or else stand liable for contempt or
other penalty, Lender may disclose such Confidential Information
without liability hereunder.
3. Representations and Warranties. Each Borrower hereby
represents and warrants to Lender as follows:
(A) Article 3 of Credit Agreement. Except as amended
hereby or shown on the replacement disclosure schedules attached to this
Amendment, the representations and warranties contained in Article 3 of the
Credit Facility Agreement are accurate on and as of the date hereof.
(B) No Adverse Change. Since June 30, 1996 there has
been no adverse change in such Borrower's business, operations, or condition
(financial or otherwise).
(C) IPO. Borrowers have (1) raised a minimum of
$24,000,000 in net proceeds in the IPO and (2) have cash after repayment of
Lender Outstandings and the Borrowers' Final S Corp. Distributions of at least
$8,000,000.
(D) No Defaults. As of the date hereof, no Event of
Default exists and no event exists that would, with the passage of time or the
giving of notice or both, be such an Event of Default.
(E) Collateral Security. All Security Documents
continue in full force and effect, except that (i) the Guarantor Pledge
Agreement has been terminated and (ii) the three "Existing Intercompany
Subordinated Demand Notes," each in the principal amount of $15,000,000, from
NCO Group, Inc., NCO of New York, Inc., and NCO Financial Systems, Inc.,
respectively, as borrowers to NCO Funding, Inc. as lender, all of which have
been endorsed and pledged to Lender under the Security Agreement, will be
exchanged for "New Intercompany Subordinated Demand Notes" in the amount of
$40,000,000 each. In addition, the Guaranty has been terminated.
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<PAGE>
4. Conditions to Closing. Lender's obligation to enter into
this Amendment are subject to the following conditions having been satisfied in
full to Lender's satisfaction:
(A) Lender shall have received this Amendment and the
Amended and Restated Revolving Credit Note duly executed on behalf of the
parties thereto;
(B) Lender shall have received the Second 1996
Warrant Agreement, Second 1996 Warrant and Second Amended and Restated
Registration Rights Agreement duly executed on behalf of the parties thereto;
(C) Lender shall have received all other documents,
instruments and proceedings which it reasonably may request, in form
satisfactory to Lender
(D) Lender shall have received $50,000 in cash,
representing the balance due on the cash portion of Lender's facility fee;
(E) The Borrowers shall deliver to the Lender
evidence satisfactory to the Lender that the Borrowers have purchased interest
rate protection with a financial institution acceptable to the Lender pursuant
to which the Borrowers have reduced their risk of exposure to a LIBOR Rate in
excess of 9.5%. This interest rate protection agreement shall be in force for a
period of two years and shall apply to a minimum of $3,000,000 of Obligations;
(F) Payment or reimbursement to Lender for all legal
expenses incurred by Lender to analyze, prepare and negotiate and conclude this
Amendment and all related agreements and transactions described herein;
(G) Lender shall have received resolutions executed
by appropriate officers of each Borrower authorizing each Borrower to increase
the Revolving Credit Committed Amount and execute this Amendment;
(H) Lender shall have received opinions from
Borrowers' lawyers on such legal matters as Lender may reasonably request; and
(I) Lender shall have received New Intercompany
Subordinated Demand Notes, endorsed to Lender, whereupon Lender will return the
Existing Intercompany Demand Subordinated Notes for cancellation.
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<PAGE>
5. Continuing Effectiveness of Credit Agreement and Other Loan
Documents. Except as amended hereby, the Credit Agreement and other Loan
Documents remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment as of the date first above written.
NCO GROUP, INC.
By: /s/ Michael J. Barrist
----------------------------------
MICHAEL J. BARRIST
Attest:_____________________ Title: President and CEO
[CORPORATE SEAL]
NCO FINANCIAL SYSTEMS, INC.
By: /s/ Michael J. Barrist
----------------------------------
MICHAEL J. BARRIST
Attest:_____________________ Title: President and CEO
[CORPORATE SEAL]
NCO FUNDING, INC.
By: /s/ Michael J. Barrist
----------------------------------
MICHAEL J. BARRIST
Attest:_____________________ Title: President and CEO
[CORPORATE SEAL]
NCO FUNDING, INC.
By: /s/ Michael J. Barrist
----------------------------------
MICHAEL J. BARRIST
Attest:_____________________ Title: President and CEO
[CORPORATE SEAL]
MELLON BANK, N.A.
By: /s/ Liz A. Mellace
----------------------------------
Name: Liz A. Mellace
--------------------------------
Title: Assistant Vice President
-------------------------------
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<PAGE>
Exhibit 10.19
NCO GROUP, INC.
SECOND 1996 WARRANT AGREEMENT
SECOND 1996 WARRANT AGREEMENT (this "Agreement") dated as of
December 13, 1996 (the "Closing Date") by and between NCO Group, Inc., a
Pennsylvania corporation (the "Company") and APT Holdings Corporation ("APT"), a
Delaware corporation and an affiliate of Mellon Bank, N.A. ("Bank").
RECITALS
1. On November 13, 1996, the Company completed its initial
public offering of common stock by selling 2,875,000 shares (of which 375,000
shares were sold by certain selling shareholders) at a price to the public of
$13.00 per share.
2. Simultaneously with the execution and delivery of this
Agreement (the "Closing"), the Company and Bank are amending that certain
Amended and Restated Credit Agreement dated as of September 5, 1996 (as so
amended, the "Credit Agreement") pursuant to which the Bank has made available
to the Company and its subsidiaries certain credit facilities.
3. As an inducement to the Bank to increase the Revolving
Credit Committed Amount under the Credit Agreement to $25,000,000, the Company
proposes to issue to APT, as assignee of the Bank, warrants exercisable into an
aggregate of 18,500 shares of the Company's common stock (subject to adjustment
as described herein).
NOW, THEREFORE, in consideration of the foregoing, the Company
and APT, intending to be legally bound, agree as follows:
ARTICLE 1
DEFINITIONS
1.1 Definitions. As used herein, the following terms shall
have the following meanings (such meanings to be equally applicable to both the
singular and plural forms of the terms defined):
"Accounts" has the meaning ascribed to that term in the
Uniform Commercial Code.
"Affiliate" means, as to any Person, any Subsidiary of such
Person and any other person which, directly or indirectly, controls, is
controlled by or is under common
<PAGE>
control with such Person and includes each officer or director or
general partner of such Person, and each Person who is the beneficial
owner of 5% or more of any class of voting stock of such Person. For
the purposes of this definition, "control" means the possession of the
power to direct or cause the direction of management and policies of
such Person, whether through the ownership of voting securities, by
contract, or otherwise.
"Agreement" means this Warrant Agreement as from time to time
amended and in effect between the parties.
"Business Day" means any day other than a Saturday, Sunday or
public holiday or the equivalent for banks under the laws of the
Commonwealth of Pennsylvania.
"Common Stock" includes (a) the Company's Common Stock,
without par value, as authorized on the date of this Agreement, (b) any
other capital stock of any class or classes (however designated) of the
Company, authorized on or after the date hereof, the holders of which
shall have the right, without limitation as to amount, either to all or
to a share of the balance of current dividends and liquidating
dividends after the payment of dividends and distributions on any
shares entitled to preference, and the holders of which shall
ordinarily, in the absence of contingencies, be entitled to vote for
the election of a majority of directors of the Company (even though the
right so to vote has been suspended by the happening of such a
contingency), and (c) any other securities in which or for which any of
the securities described in (a) or (b) may be converted or exchanged
pursuant to a plan of recapitalization, reorganization, merger, sale of
assets or otherwise.
"Company" means and shall include NCO Group, Inc., a
Pennsylvania corporation, and its successors and assigns.
"Credit Agreement" means that certain Amended and Restated
Credit Agreement dated September 5, 1996, as further amended, between
the Company and the Lender.
"Event of Force Majeure" shall mean a declaration by Federal
authorities of a banking moratorium, a suspension of trading by a
national securities exchange, a declaration of war or any new outbreak
of hostilities or other national calamity or crisis, the effect of
which on the financial markets of the Untied States shall make it
commercially impracticable to comply with an obligation hereunder.
"Exchange Act" means the Securities Exchange Act of
1934, as amended, or any successor federal statute, and the
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rules and regulations of the Commission thereunder, all as the same
shall be in effect at the time.
"Holder" means APT, its successors and assigns, and all
transferees (in whole or in part) of the Warrants.
"Person" means an individual, a corporation (including,
without limitation, a business trust), a partnership, a joint stock
company, a limited liability company, a joint venture or other entity,
a trust, an unincorporated association, a government and any agency or
political subdivision thereof.
"Registration Rights Agreement" shall have the meaning
assigned to that term in Section 3.2(d).
"Securities" means collectively the Warrants and the Warrant
Shares.
"Securities Act" means the Securities Act of 1933, as amended,
or any successor federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect from time to
time.
"Stock" means shares of capital stock, beneficial or
partnership interest, participations or other equivalents (regardless
of how designated) of or in a corporation or equivalent entity, whether
voting or non-voting, and includes, without limitation, common stock
and preferred stock.
"Stock Equivalents" means all securities convertible into or
exchangeable for Stock and all warrants, options or other rights to
purchase or subscribe for any stock, whether or not presently
convertible, exchangeable or exercisable.
"Subsidiary" or "Subsidiaries" means (i) any corporation more
than fifty percent (50%) of whose stock of any class or classes having
by the terms thereof ordinary voting power to elect a majority of the
directors of such corporation (irrespective of whether or not at the
time stock of any class or classes of such corporation shall have or
might have voting power by reason of the happening of any contingency)
is at the time owned by the Company and/or one or more Subsidiaries of
the Company, (ii) any partnership, association, joint venture or other
entity in which the Company and/or one or more Subsidiaries of the
Company has more than a fifty percent (50%) equity interest at the
time.
"Warrant Documents" shall mean this Agreement, the Warrant,
and the Registration Rights Agreement.
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"Warrant Shares" shall have the meaning assigned to that term
in Section 2.1.
"Warrants" shall have the meaning assigned to that term in
Section 2.1.
1.2 Accounting Terms. All accounting terms not specifically
defined herein shall be construed in accordance with generally accepted
accounting principles consistent with those applied in preparation of the
Company's financial statements, and all financial data submitted pursuant to
this Agreement and all financial tests to be calculated in accordance with this
Agreement shall be prepared and calculated in accordance with such principles.
ARTICLE 2
PURCHASE, SALE AND TERMS OF WARRANTS;
OBLIGATION TO REPURCHASE
2.1 The Warrants. The Company has authorized the issuance and
sale to APT of the Company's Common Stock Purchase Warrants for the purchase
(subject to adjustment as provided therein) of an aggregate of 18,500 shares of
the Company's common stock (the "Warrant Shares"). The Common Stock Purchase
Warrants shall be substantially in the form set forth as Exhibit 2.1 attached
hereto and are herein referred to individually as a "Warrant" and collectively
as the "Warrants", which terms shall also include any warrants delivered in
exchange or replacement thereof. The number of Warrant Shares is subject to
adjustment as set forth in the Warrants. The Warrants shall be exercisable at a
purchase price per Warrant Share equal to $13.00 (such purchase price as further
adjusted from time to time as provided in the Warrant is referred to herein as
the "Purchase Price") and shall expire at 5:00 P.M., Philadelphia time, on July
31, 2005.
2.2 Purchase and Sale of Warrants; Reservation of Shares.
(a) The Company agrees to issue and sell to APT, and, subject
to and in reliance upon the representations, warranties, terms and conditions of
this Agreement, APT agrees to purchase Warrants to acquire 18,500 Warrant
Shares. Such purchase and sale shall take place at the Closing and at the
Closing the Company will initially issue to APT one Warrant to purchase (subject
to adjustment as provided therein) 18,500 Warrant Shares.
(b) The Company has authorized, and has reserved and covenants
to continue to reserve, free of preemptive rights and other preferential rights,
a sufficient number of its previously
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authorized but unissued shares of Common Stock to satisfy the rights of exercise
of the Warrants. The Company covenants and agrees that all shares of Common
Stock which may be issued upon the exercise of the rights represented by the
Warrants shall, upon issuance, be fully paid and non-assessable and free from
all taxes, liens and charges with respect to issuance. If the Purchase Price is
at any time less than the par value of the Common Stock or if the Warrants at
any time are exercisable by delivery alone and without payment of any additional
consideration, the Company also covenants and agrees to cause to be taken such
action (whether by lowering the par value of the Common Stock, the conversion of
the Common Stock from par value to no par value, or otherwise) as will permit
the exercise of the Warrants without any additional payment by the Holder
thereof (other than payment of the Purchase Price, if any, and applicable
transfer taxes, if any), and the issuance of the Common Stock, which Common
Stock, upon issuance, will be fully paid and non-assessable.
ARTICLE 3
CONDITIONS TO PURCHASER'S OBLIGATIONS
The obligations of APT to purchase the Warrants at the Closing
is subject to the following conditions, all or any of which may be waived in
writing by APT:
3.1 Representations and Warranties. Each of the
representations and warranties of the Company set forth in Article 5 hereof
shall be true and correct in all material respects at the time of the sale of
the Warrants.
3.2 Delivery at Closing. APT shall have received prior to or
at the Closing all of the following, each in form and substance satisfactory to
APT and its counsel:
(a) A certified copy of all charter documents of the Company;
a certified copy of the resolutions of the board of directors and, to the extent
required, the stockholders of the Company evidencing approval, as applicable, of
the Warrant Documents and other matters contemplated hereby and thereby; a
certified copy of the By-laws of the Company; and certified copies of all
documents evidencing other necessary corporate or other action and governmental
approvals, if any, with respect to the Warrant Documents and other matters
contemplated hereby or thereby.
(b) Favorable opinions of Blank, Rome, Comisky & McCauley,
counsel for the Company, as to matters set forth in Exhibit 3.2(b), and as to
such other matters as APT or its counsel may reasonably request.
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<PAGE>
(c) A certificate of the Secretary or an Assistant Secretary
of the Company which shall certify the names of the officers of the Company
authorized to sign, as applicable, this Agreement, the Warrant Documents and any
other documents or certificates to be delivered pursuant hereto or thereby by
the Company, as applicable, or any of their respective officers, together with
the true signatures of such officers. APT may conclusively rely on such
certificates until they shall receive a further certificate of the Secretary or
an Assistant Secretary of the Company, as applicable, cancelling or amending the
prior certificate and submitting the signatures of the officers named in such
further certificate.
(d) An amendment, substantially in the form of Exhibit 3.2(d)
attached hereto, to the Amended and Restated Registration Rights Agreement dated
September 5, 1996 (as so amended, the "Registration Rights Agreement") executed
by the Company.
(e) A certificate from a duly authorized officer of the
Company stating that all conditions set forth in this Article 3 have been
satisfied.
(f) Such other documents referenced in any Exhibit hereto or
relating to the transactions contemplated by this Agreement as APT or its
counsel may reasonably request.
3.3 Incurrence of Debt. The Company shall have entered into
the First Amendment of the Credit Agreement with the Bank on terms satisfactory
to the Company and shall have closed or shall close simultaneously the
transactions contemplated thereby and received or shall simultaneously receive
the funds with respect thereto. Copies of all documents delivered to the Bank in
conjunction with the closing of the transactions contemplated by the First
Amendment to the Credit Agreement shall have been delivered to Bank or its
counsel.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF APT
4.1 Representations and Warranties of APT. APT hereby
represents and warrants that:
(a) It has duly authorized, executed and delivered this
Agreement and such other documents as it is required to execute pursuant to this
Agreement and the Credit Agreement.
(b) Its present intention is to acquire the Securities for its
own account.
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<PAGE>
(c) The Securities are being and will be acquired for the
purpose of investment and not with a view to distribution or resale thereof;
subject, nevertheless, to the condition that, except as otherwise provided
herein, the disposition of its property shall at all times be within its
control.
(d) It acknowledges that it has reviewed and discussed the
Company's business, affairs and current prospects with such officers of the
Company and others as it has deemed appropriate or desirable in connection with
the transactions contemplated by this Agreement. It further acknowledges that it
has requested, received and reviewed such information, undertaken such
investigation and made such further inquiries of officers of the Company and
others as it has deemed appropriate or desirable in connection with such
transactions; provided, however, no investigation made heretofore or hereafter
by or on its behalf shall have any effect whatsoever on the representations and
warranties of the Company hereunder, each of which shall survive any such
investigation.
(e) It understands that it must bear the economic risk of its
investment for an indefinite period of time because the Securities are not, and
will not be, registered under the Securities Act or any applicable state
securities laws, except as may be provided in the Registration Rights Agreement,
and may not be resold unless subsequently registered under the Securities Act
and such other laws or unless an exemption from such registration is available.
(f) It has such knowledge and experience in financial and
business matters that it is capable of evaluating the merits and risks of its
investment in the Securities. It further represents that it is an "accredited
investor" as such term is defined in Rule 501 of Regulation D of the Commission
under the Securities Act with respect to the purchase of the Securities.
(g) It hereby acknowledges that the Warrants and each
certificate representing the Warrant Shares and any other securities issued in
respect of such shares upon any stock split, stock dividend, recapitalization,
merger or similar event (unless no longer required in the opinion of counsel,
which opinion and counsel shall be reasonably satisfactory to the Company) shall
bear a legend substantially in the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD
OR TRANSFERRED WITHOUT COMPLIANCE WITH THE REGISTRATION OR
QUALIFICATION PROVISIONS OF APPLICABLE FEDERAL AND STATE SECURITIES
LAWS OR APPLICABLE EXEMPTIONS THEREFROM.
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The acquisition by APT of the Securities shall constitute a
confirmation by it of the foregoing representations made by it.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants as follows:
5.1 Securities Act. Neither the Company nor anyone acting on
its behalf has offered any of the Warrants, or solicited any offers to purchase
or made any attempt by preliminary conversation or negotiations to dispose of
the Warrants, within the meaning of all applicable federal and state securities
laws, to any Person other than APT, and no Person other than APT will purchase
any Warrants except with the prior consent of Bank. Neither the Company nor
anyone acting on its behalf has offered or will offer to sell the Warrants to,
or solicit offers with respect thereto from, or enter into any preliminary
conversations or negotiations relating thereto with, any Person so as to bring
the issuance and sale of the Warrants under the registration provisions of the
Securities Act.
5.2 Other Agreements of Officers. To the best knowledge of the
Company, no officer or key employee of the Company is a party to or bound by any
agreement, contract or commitment, or subject to any restrictions, particularly
but without limitation in connection with any previous employment of any such
person, which has a material adverse effect, or in the future may (so far as the
Company can reasonably foresee) have a material adverse effect. To the best
knowledge of the Company, no officer or key employee of the Company has any
present intention of terminating his employment with the Company, as the case
may be, and the Company has no present intention of terminating such employment.
5.3 Foreign Corrupt Practices Act. The Company has reviewed
its practices and policies and to the best of its knowledge and belief is not
engaged, nor has any of its respective officers, directors, employees or agents
engaged in any act or practice which would constitute a violation of the Foreign
Corrupt Practices Act of 1977, or any rules or regulations promulgated
thereunder.
5.4 Registration Rights. Except as set forth on Schedule 5.4
and pursuant to the terms of the Registration Rights Agreement, no Person has
demand or other rights to cause the Company to file any registration statement
under the Securities Act relating to any securities of the Company or any right
to participate in any such registration statement.
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<PAGE>
5.5 Representations and Warranties Incorporated from Credit
Agreement. Each of the representations and warranties given by the Company to
Bank in the Credit Agreement is true and correct in all material respects as of
the Closing and such representations and warranties are hereby incorporated
herein by this reference as of such date with the same effect as though set
forth herein in their entirety and made by the Company to APT hereunder.
ARTICLE 6
DISCLOSURES TO HOLDERS
So long as any Warrants remain outstanding, the Company shall,
contemporaneously with the sending or making available thereof, send to all
Holders, in accordance with Section 7.3 herein, copies of (i) the Company's
audited financial statements for each fiscal year and (ii) the Company's
unaudited financial statements for each fiscal quarter.
ARTICLE 7
MISCELLANEOUS
7.1 No Waiver; Cumulative Remedies. No failure or delay on the
part of APT in exercising any right, power or remedy hereunder shall operate as
a waiver thereof; nor shall any single or partial exercise of any such right,
power or remedy preclude any other or further exercise thereof or the exercise
of any other right, power or remedy hereunder. The remedies herein provided are
cumulative and not exclusive of any remedies provided by law.
7.2 Amendments, Waivers and Consents. Any provision in this
Agreement or the Warrants to the contrary notwithstanding, changes in or
additions to this Agreement may be made, and compliance with any covenant or
provision herein or therein set forth may be omitted or waived, if the Company
shall obtain consent thereto in writing from APT or Bank.
7.3 Addresses for Notices, etc. All notices, requests, demands
and other communications provided for hereunder shall be in writing and mailed
(by first class registered or certified, postage prepaid), telegraphed, sent by
express overnight courier service or electronic facsimile transmission (with a
copy by mail), or delivered to the applicable party at the addresses indicated
below:
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<PAGE>
If to the Company:
NCO Group, Inc.
1740 Walton Road
Blue Bell, PA 19422
Attention: Michael J. Barrist
With copies to:
Blank, Rome, Comisky & McCauley
Four Penn Center Plaza
Philadelphia, PA 19103
Attention: Joel C. Shapiro, Esquire
and
Joshua Gindin, Esquire
Kessler & Gindin
230 South Broad Street, 20th floor
Philadelphia, PA 19102
If to APT:
Mellon Bank, N.A.
Plymouth Meeting Executive Campus
610 West Germantown Pike
Plymouth Meeting, PA 19462
Attention: Liz A. Mellace
With a copy to:
Drinker Biddle & Reath
1000 Westlakes Drive, Suite 300
Berwyn, PA 19312
Attention: George V. Strong, Esquire
or, as to each of the foregoing, at such other address as shall be designed by
such Person in a written notice to the other party complying as to delivery with
the terms of this Section. All such notices, requests, demands and other
communications shall, when mailed, telegraphed or sent, respectively, be
effective (i) two days after being deposited in the mails or (ii) one day after
being delivered to the telegraph company, deposited with the express overnight
courier service or sent by electronic facsimile transmission, respectively,
addressed as aforesaid.
7.4 Costs, Expenses and Taxes. Except as otherwise provided
herein, the Company agrees to pay on demand all reasonable costs and expenses of
APT and Bank in connection with the preparation, execution and delivery of this
Agreement, the Warrants and other Warrant Documents and other instruments and
documents to be delivered hereunder, and in connection with the
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<PAGE>
consummation of the transaction contemplated hereby and thereby, and in
connection with any amendment, waiver (whether or not such amendment or waiver
becomes effective) or enforcement of this Agreement, the Warrants, the other
Warrant Documents, and other instruments and documents to be delivered hereunder
or thereunder, including the fees and out-of-pocket expenses of counsel for APT
and Bank. In addition, the Company agrees to pay any and all stamp and other
taxes (excluding income taxes) payable or determined to be payable in connection
with the execution and delivery of this Agreement, the Warrants, the other
Warrant Documents, and the other instruments and documents to be delivered
hereunder or thereunder and each agrees jointly and severally to save APT and
Bank harmless from and against any and all liabilities with respect to or
resulting from any delay in paying or omission to pay such taxes and filing
fees.
7.5 Binding Effect; Assignment. This Agreement shall be
binding upon and inure to the benefit of the Company, and its respective
successors and assigns, except that the Company shall not have the right to
assign its rights hereunder or any interest therein without the prior written
consent of Bank.
7.6 Provisions of Credit Agreement. Whenever any provision of
the Credit Agreement is referred to herein or in any instrument furnished
hereunder as expressing or constituting an obligation, condition or limitation
of this Agreement or of such instrument or as expressing or constituting a
representation herein or therein (a) such provision shall be deemed incorporated
herein or therein at length, and (b) except as otherwise provided herein or in
such instrument, the terms used in such provision referred to shall have the
meanings set forth in the Credit Agreement. Except as otherwise specifically
provided herein, and except for amendments or modifications to which Bank
consents in writing, no modification of or amendment to, or waiver of, any
provisions of the Credit Agreement and no payment of the indebtedness
outstanding thereunder or satisfaction or cancellation thereof, shall modify,
amend, waive or otherwise affect any provision thereof as referred to in this
Agreement or in any instrument furnished hereunder, which provision, for the
purpose of this Agreement and such instrument, shall remain unmodified and in
full force and effect.
7.7 Indemnification. The Company agrees to indemnify and hold
harmless APT, Bank, and their respective subsidiaries, directors, officers,
partners, counsel and employees, from and against any and all liability
(including, without limitation, reasonable legal fees incurred in defending
against any such liability) under, arising out of or relating to this Agreement,
the Warrants and the Warrant Shares, the transactions contemplated hereby or
thereby or in connection herewith or therewith, including (to the maximum extent
permitted by law) any liability arising under federal or state securities laws,
except
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<PAGE>
to the extent such liability shall result from any act or omission on the part
of APT or Bank; provided that the Company shall not be liable for the reasonable
fees and expenses of more than one separate firm for all indemnified parties,
unless representation of all parties by the same counsel would be inappropriate
due to actual or potential differing interests among them. The obligations of
the Company under this Section 7.7 shall survive and continue to be in full
force and effect notwithstanding the satisfaction of the Company's obligations
under the Credit Agreement and the termination of this Agreement.
7.8 Survival of Representations and Warranties. All
representations and warranties made in this Agreement, the Warrants, the Warrant
Documents or any other instrument or document delivered in connection herewith
or therewith, shall survive the execution and delivery hereof and thereof,
regardless of any investigation made by APT or Bank.
7.9 Prior Agreements. This Agreement constitutes the entire
agreement between the parties and supersedes any prior understandings or
agreements concerning the subject matter hereof.
7.10 Severability. The invalidity or unenforceability of any
provision hereof shall in no way affect the validity or enforceability of any
other provision.
7.11 Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the Commonwealth of
Pennsylvania.
7.12 Governing Law; Waiver of Jury Trial.
(a) THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE IN
PENNSYLVANIA, AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS
OF PENNSYLVANIA (WITHOUT GIVING EFFECT TO CONFLICT OF LAWS) AND THE UNITED
STATES OF AMERICA. WITHOUT EXCLUDING ANY OTHER JURISDICTION, THE COMPANY AGREES
THAT THE STATE AND FEDERAL COURTS OF PENNSYLVANIA LOCATED IN MONTGOMERY COUNTY,
PENNSYLVANIA, WILL HAVE JURISDICTION OVER PROCEEDINGS IN CONNECTION HEREWITH. TO
THE MAXIMUM EXTENT PERMITTED BY LAW, THE COMPANY HEREBY WAIVES ANY RIGHT THAT IT
MAY HAVE TO A TRIAL BY JURY OF ANY DISPUTE (WHETHER A CLAIM IN TORT, CONTRACT,
EQUITY, OR OTHERWISE) ARISING UNDER OR RELATING TO THIS AGREEMENT OR ANY RELATED
MATTERS, AND AGREES THAT ANY SUCH DISPUTE SHALL BE TRIED BEFORE A JUDGE SITTING
WITHOUT A JURY.
(b) THE COMPANY AGREES THAT SERVICE OF PROCESS MAY BE MADE
UPON IT BY REGISTERED MAIL (RETURN RECEIPT REQUESTED) DIRECTED TO THE COMPANY AT
ITS ADDRESS DESIGNATED FOR NOTICE UNDER THIS AGREEMENT AND SERVICE SO MADE SHALL
BE DEEMED TO BE COMPLETED UPON THE EARLIER IF (i) THE COMPANY'S RECEIPT THEREOF
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<PAGE>
AND (ii) FIVE DAYS AFTER DEPOSIT IN THE UNITED STATES MAIL. NOTHING IN THIS
SECTION SHALL AFFECT THE RIGHT OF ANY HOLDER TO SERVE LEGAL PROCESS IN ANY OTHER
MANNER PERMITTED BY LAW.
7.13 Headings. Article, Section and subsection headings in
this Agreement are included herein for convenience of reference only and shall
not constitute a part of this Agreement for any other purposes.
7.14 Sealed Instrument. This Agreement is executed as an
instrument under seal.
7.15 Counterparts. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument, and each of the parties hereto may execute this Agreement by
signing any such counterpart.
7.16 Further Assurances. From and after the day of this
Agreement, upon the request of APT or Bank, the Company shall execute and
deliver such instruments, documents and other writings as may be reasonably
necessary or desirable to confirm and carry out and to effectuate fully the
intent and purposes of this Agreement and the Warrants.
7.17 Consent to Jurisdiction. The Company irrevocably submits
to the non-exclusive jurisdiction of any state or federal court sitting in the
Commonwealth of Pennsylvania over any suit, action or proceeding arising out of
or relating to this Agreement or any of the Warrants or Warrant Shares. To the
fullest extent it may effectively do so under applicable law, the Company
irrevocably waives and agrees not to assert, by way of motion, as a defense or
otherwise, any claim that is not subject to the jurisdiction of any such court,
any objection that it may now or hereafter have to the laying of venue of any
such suit, action or proceeding brought in any such court and any claim that any
such suit, action or proceeding brought in such court has been brought in an
inconvenient forum.
7.18 Effect of Judgment. The Company agrees, to the fullest
extent it may effectively do so under applicable law, that a judgment in any
suit, action or proceeding of the nature referred to in Section 7.17 brought in
any such court shall, subject to such rights of appeal on issues other than
jurisdiction as may be available to the Company, be conclusive and binding upon
the Company and may be enforced in the courts of the United States of America or
the Commonwealth of Pennsylvania (or any other courts to the jurisdiction of
which the Company is or may be subject) by a suit upon such judgment.
7.19 Service of Process. The Company consents to service of
process in any suit, action or proceeding of the
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<PAGE>
nature referred to in Section 7.17 by mailing a copy thereof by registered or
certified mail, postage prepaid, return receipt requested, to the address of the
Company specified in or designated pursuant to Section 7.3. The Company agrees
that such service (i) shall be deemed in every respect effective service of
process upon the Company in any such suit, action or proceeding and (ii) shall,
to the fullest extent permitted by law, be taken and held to be valid personal
service upon and personal delivery to the Company, as the case may be.
7.20 No Limitation. Nothing in Sections 7.12, 7.17, 7.18 or
7.19 shall affect the right of APT or Bank to serve process in any manner
permitted by law, or limit any right that APT or Bank may have to bring
proceedings against the Company in the courts of any jurisdiction to enforce in
any lawful manner a judgment obtained in one jurisdiction in any other
jurisdiction.
IN WITNESS WHEREOF, the parties hereto have executed this
Warrant Agreement or have caused it to be executed by their respective officers
thereunto duly authorized, as of the date first above written.
NCO GROUP, INC.
By: /s/ Michael J. Barrist
-------------------------------
Name: Michael J. Barrist
Title: President and CEO
APT HOLDINGS CORPORATION
By: /s/ Liz A. Mellace
-------------------------------
Name: Liz A. Mellace
Title: As Agent
Acknowledged and agreed:
MELLON BANK, N.A.
By: /s/ Liz A. Mellace
-----------------------------
Name: Liz A. Mellace
Title: Assistant Vice President
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<PAGE>
Exhibit 10.26
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK UNDERLYING THIS
WARRANT OF NCO GROUP, INC. ("COMPANY") HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), NOR UNDER ANY STATE SECURITIES LAW AND MAY
NOT BE PLEDGED, SOLD, ASSIGNED OR TRANSFERRED UNTIL (A) A REGISTRATION STATEMENT
WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND APPLICABLE STATE SECURITIES
LAW OR (B) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE COMPANY OR COUNSEL
TO THE HOLDER OF SUCH WARRANT (PROVIDED SUCH OTHER COUNSEL IS REASONABLY
SATISFACTORY TO THE COMPANY) THAT SUCH WARRANT MAY BE PLEDGED, SOLD, ASSIGNED OR
TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR
APPLICABLE STATE SECURITIES LAW.
Rightto Purchase up to 18,500 Shares of Common Stock of NCO
Group, Inc.
NCO GROUP, INC.
SECOND 1996 COMMON STOCK PURCHASE WARRANT
dated and issued December 13, 1996
NCO Group, Inc., a Pennsylvania corporation (the "Company"), hereby
certifies that, for value received, APT Holdings Corporation ("APT") is
entitled, subject to the terms set forth below, to purchase from the Company at
any time or from time to time before 5:00 p.m., Philadelphia time, on July 31,
2005 up to 18,500 fully paid and nonassessable shares of Common Stock, without
par value, of the Company at a purchase price per share equal to $13.00 (such
purchase price per share as further adjusted from time to time as herein
provided is referred to herein as the "Purchase Price"). The number and
character of such shares of Common Stock and the Purchase Price are subject to
further adjustment as provided herein.
This Warrant is the Common Stock Purchase Warrant (individually, the
"Warrant" and collectively, the "Warrants") evidencing the right to purchase
shares of Common Stock of the Company, issued pursuant to a certain Warrant
Agreement (the "Agreement") dated today among the Company and APT and subject to
the Registration Rights Agreement, copies of which agreement are on file at the
principal office of the Company, and the Holder of this Warrant shall be
entitled to all of the benefits of the Agreement and the Registration Rights
Agreement, as provided therein. If any term of this Warrant conflicts with any
term of the Warrant Agreement, the terms of this Warrant shall be controlling.
As used herein the following terms, unless the context otherwise
requires, have the following respective meanings:
<PAGE>
(a) The term "Common Stock" includes (i) the Company's Common
Stock, without par value, as authorized on the date of the Agreement,
(ii) any other capital stock of any class or classes (however
designated) of the Company, authorized on or after such date, the
holders of which shall have the right, without limitation as to amount,
either to all or to a share of the balance of current dividend and
liquidating dividends after the payment of dividends and distributions
on any shares entitled to preference and the holders of which shall
ordinarily, in the absence of contingencies, be entitled to vote for
the election of a majority of directors of the Company (even though the
right so to vote has been suspended by the happening of such a
contingency), and (iii) any other securities into which or for which
any of the securities described in (i) or (ii) may be converted or
exchanged pursuant to a plan of recapitalization, reorganization,
merger, sale of assets or otherwise.
(b) The term "Company" shall include any corporation which
shall succeed or assume the obligations of the Company hereunder.
(c) The term "Convertible Securities" shall mean evidences of
indebtedness, shares of stock or other securities which are convertible
into or exchangeable, with or without payment of additional
consideration in cash or property, for additional shares of Common
Stock, either immediately or upon the occurrence of a specified date or
a specified event.
(d) The term "Current Market Price" shall mean, in respect of
any share of Common Stock on any date herein specified, the higher of
(a) the appraised value per share of Common Stock as at such date, or
if there shall then be a public market for the Common Stock, (b) the
average of the daily market prices for 15 consecutive trading days
commencing 20 days before such date. The daily market price for each
such trading days shall be (i) the closing sale price on such date or,
if there is no such sale price, the average of the last reported
closing bid and asked prices on such day in the over-the-counter
market, as furnished by the National Association of Securities Dealers
Automatic Quotation System or the National Quotation Bureau, Inc., (ii)
if neither such corporation at the time is engaged in the business of
reporting such prices, as furnished by a similar firm then engaged in
such business, or (iii) if there is no such firm, as furnished by any
member of the NASD selected mutually by APT and the Company or, if they
cannot agree upon such selection, as selected by two such members of
the NASD, one of which shall be selected by APT and one of which shall
be selected by the Company.
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<PAGE>
(e) The term "Other Securities" refers to any stock (other
than Common Stock) and other securities of the Company or any other
person (corporate or otherwise) which the Holders of the Warrants at
any time shall be entitled to receive, or shall have received, on the
exercise of the Warrants, in lieu of or in addition to Common Stock, or
which at any time shall be issuable or shall have been issued in
exchange for or in replacement of Common Stock or other Securities
pursuant to Section 1 or otherwise.
(f) The term "Outstanding" shall mean, when used with
reference to Common Stock, at any date as of which the number of shares
thereof is to be determined, all issued shares of Common Stock, except
shares then owned or held by or for the account of the Company thereof,
and shall include all shares issuable in respect of outstanding scrip
or any certificates representing fractional interests in shares of
Common Stock.
(g) The Term "Registration Rights Agreement" shall mean that
certain Amended and Restated Registration Rights Agreement dated today
among the Company and APT.
All capitalized terms used herein without specific definition shall
have the meanings assigned to such terms in the Agreement.
1. Exercise of Warrant.
1.1 Full Exercise. This Warrant may be exercised in full by
the Holder hereof by surrender of this Warrant, with the form of subscription at
the end hereof duly executed by such Holder, to the Company at its principal
office, accompanied by payment, in cash or by certified or official bank check
payable to the order of the Company, in the amount obtained by multiplying the
number of shares of Common Stock for which this Warrant is then exercisable by
the Purchase Price then in effect.
1.2 Partial Exercise. This Warrant may be exercised in part
(in lots of 1,000 or, if this Warrant is then exercisable for a lesser amount,
in such lesser amount) by surrender of this Warrant in the manner and at the
place provided in Section 1.1 except that the amount payable by the Holder on
such partial exercise shall be the amount obtained by multiplying (a) the number
of shares of Common Stock designated by the Holder in the subscription at the
end hereof by (b) the Purchase Price then in effect. On any such partial
exercise the Company at its expense will forthwith issue and deliver to or upon
the order of the Holder hereof a new Warrant or Warrants of like tenor, in the
name of the Holder hereof or as such Holder (upon payment by such Holder of any
applicable transfer taxes) may request, calling in the aggregate on the face or
faces thereof for the number of
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<PAGE>
shares of Common Stock for which such Warrant or Warrants may still be
exercised.
1.3 Right to Convert Warrant.
(a) In addition to and without limiting the right of
the Holder of this Warrant, such Holder shall have the right (the
"Conversion Right") to convert this Warrant or any portion thereof into
shares of Common Stock as provided in this subsection at any time or
from time to time prior to its expiration. Upon exercise of the
Conversion Right with respect to a particular number of shares subject
to this Warrant (which number and kind of shares for the purposes of
this subsection shall mean the shares of Common Stock of the Company
and which shares of Common Stock are sometimes referred to in this
subsection as the "Converted Warrant Shares"), the Company shall
deliver to the registered Holder of this Warrant, without payment by
such Holder of any exercise price or any cash or other consideration,
that number of shares of Common Stock equal to the number obtained by
multiplying the number of shares of Common Stock for which the
Conversion Right is being exercised at any time by a fraction, (i) the
numerator of which shall be a number equal to the difference, if
positive, between (x) the Fair Market Value (as defined below) of a
single share of Common Stock and (y) the Purchase Price in effect at
such time and (ii) the denominator of which shall be the Fair Market
Value of a single share of Common Stock, determined in each case as of
the close of business on the Conversion Date (as defined below). No
fractional shares shall be issued upon exercise of the Conversion
Right, and if the number of shares to be issued in accordance with the
foregoing formula is other than a whole number, the Company shall pay
to the registered Holder of this Warrant an amount in cash equal to the
Fair Market Value of the resulting fractional share.
(b) The Conversion Right may be exercised by the
Holder of the Warrant by the surrender of this Warrant at the principal
office of the Company together with a written statement specifying that
such Holder thereby intends to exercise the Conversion Right and
indicating the number of shares of Common Stock subject to this Warrant
which are being surrendered in exercise of the Conversion Right. Such
conversion shall be effective upon receipt by the Company of this
Warrant together with the aforesaid written statement, or on such later
date as is specified therein (the "Conversion Date"), but not later
than the expiration date of this Warrant. Certificates for the shares
of Common Stock issuable upon exercise of the Conversion Right,
together with a check in payment of any fractional share and, in the
case of a partial exercise, a new warrant
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<PAGE>
evidencing the shares remaining subject to this Warrant, shall be
issued as of the Conversion Date and shall be delivered to the
registered Holder of this Warrant within twenty (20) days following the
Conversion Date.
(c) For purposes of this Warrant, the "Fair Market
Value" of a share of Common Stock as of a particular date (the
"Valuation Date") shall mean:
(i) Current Market Price; or
(ii) if the Company's Common Stock is not quoted as
set forth in (i), then as determined in good faith by the
Company's Board of Directors upon a review of all relevant
factors. If the Company and the Holder of the Warrant disagree
as to the determination of Fair Market Value, the Company and
the Holder of the Warrant shall engage an independent,
third-party investment banking firm or other appraiser to
determine the valuation of the Company. The cost of such
valuation shall be borne by the Company.
1.4 Company Acknowledgment. The Company will, at the time of
the exercise of the Warrant, upon the request of the Holder hereof acknowledge
in writing its continuing obligation to afford to such Holder any rights to
which such Holder shall continue to be entitled after such exercise in
accordance with the provisions of this Warrant. If the Holder shall fail to make
any such request, such failure shall not affect the continuing obligation of the
Company to afford to such Holder any such rights.
1.5 No Rights as Stockholder. This Warrant does not entitle
the Holder hereof to any voting rights or other rights as a stockholder of the
Company prior to its exercise.
2. Delivery of Stock Certificate, etc. on Exercise. As soon as
practicable after the exercise of this Warrant in full or in part and in any
event within 10 days thereafter, the Company at its expense (including the
payment by it of any applicable issue taxes, but not income taxes of the Holder)
will cause to be issued in the name of and delivered to the Holder hereof, or as
such Holder (upon payment by such Holder of any applicable transfer taxes) may
direct, a certificate or certificates for the number of fully paid and
nonassessable shares of Common Stock (or Other Securities) to which such Holder
shall be entitled on such exercise, plus, in lieu of any fractional share to
which such Holder would otherwise be entitled, cash value to such fraction
multiplied by the then Current Market Value of one full share, together with any
other stock or other securities and property
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<PAGE>
(including cash, where applicable) to which such Holder is entitled upon such
exercise pursuant to Section 1 or otherwise.
3. Adjustments.
The number of shares of Common Stock for which this Warrant is
exercisable, or the price at which such shares may be purchased upon exercise of
this Warrant, shall be subject to adjustment from time to time as set forth in
this Section 3. The Company shall give each Holder notice of any event described
below which requires an adjustment pursuant to this Section 3 at the time of
such event.
3.1 Stock Dividends, Subdivisions and Combinations. If at
any time the Company shall:
(a) take a record of the holders of its Common Stock
for the purpose of entitling them to receive a dividend payable in, or
other distribution of, additional shares of Common Stock,
(b) subdivide its outstanding shares of Common Stock
into a larger number of shares of Common Stock, or
(c) combine its outstanding shares of Common Stock
into a smaller number of shares of Common 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 Purchase Price shall be
adjusted to equal (A) the Purchase 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.
3.2 Certain Other Distributions. If at any time the Company
shall take a record of the holders of its Common Stock for the purpose of
entitling them to receive any dividend or other distribution of:
(a) any shares of its stock or any other securities
or property of any nature whatsoever (other than cash, Convertible
Securities or additional shares of Common Stock), or
(b) any warrants or other rights to subscribe for or
purchase any shares of its stock or any other securities
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<PAGE>
or property of any nature whatsoever (other than cash, Convertible
Securities or additional shares of Common Stock),
the Holder shall be entitled to receive such dividends or distributions as if
the Holder has exercised the Warrant. A reclassification of the Common Stock
(other than a change in par value, or from par value to no par value or from no
par value to par value) into shares of Common Stock and shares of any other
class of stock shall be deemed a distribution by the Company to the holders of
its Common Stock of such shares of such other class of stock within the meaning
of this Section 3.2 and, if the outstanding shares of Common Stock shall be
changed into a larger or smaller number of shares of Common Stock as a part of
such reclassification, such change shall be deemed a subdivision or combination,
as the case may be, of the outstanding shares of Common Stock within the meaning
of Section 3.1.
3.3 Issuance of Additional Shares of Common Stock.
(a) If at any time the Company shall (except as
hereinafter provided) issue or sell any additional shares of Common
Stock in exchange for consideration in an amount per additional share
of Common Stock less than the Fair Market Value at the time the
additional shares of Common Stock are issued, then (i) the Purchase
Price as to the number of shares for which this Warrant is exercisable
prior to such adjustment shall be reduced to a price determined by
dividing (A) an amount equal to the sum of (x) the number of shares of
Common Stock Outstanding immediately prior to such issue or sale
multiplied by the then existing Purchase Price, plus (y) the
consideration, if any, received by the Company upon such issue or sale,
by (B) the total number of shares of Common Stock Outstanding
immediately after such issue or sale; and (ii) the number of shares of
Common Stock for which this Warrant is exercisable shall be adjusted to
equal the product obtained by multiplying the Purchase Price in effect
immediately prior to such issue or sale by the number of shares of
Common Stock for which this Warrant is exercisable immediately prior to
such issue or sale and dividing the product thereof by the Purchase
Price resulting from the adjustment made pursuant to clause (i) above.
(b) If at any time the Company (except as hereinafter
provided) shall issue or sell any additional shares of Common Stock in
exchange for consideration in an amount per additional share of Common
Stock which is less than the Fair Market Value at the time the
additional shares of Common Stock are issued, the adjustment required
under this Section 3.3 shall be made in accordance with the formula in
paragraph (a) above which results in the lower Purchase Price following
such adjustment. The provisions of
-7-
<PAGE>
paragraph (a) of Section 3.3 shall not apply to any issuance of
additional shares of Common Stock for which an adjustment is provided
under Section 3.1 or 3.2. No adjustment of the number of shares of
Common Stock for which this Warrant shall be exercisable shall be made
under paragraph (a) of Section 3.3 upon the issuance of any additional
shares of Common Stock which are issued pursuant to the exercise of any
warrants or other subscription or purchase rights or pursuant to the
exercise of any conversion or exchange rights in any Convertible
Securities, if (i) such warrants or other subscription or purchase
rights, including options issued under the Company's stock option plan,
or Convertible Securities are outstanding on the date hereof and are
disclosed in the Company's prospectus dated October 18, 1996 or (ii)
any such adjustment shall previously have been made upon the issuance
of such warrants or other rights or upon the issuance of such
Convertible Securities (or upon the issuance of any warrant or other
rights therefor) pursuant to Section 3.4 or Section 3.5 or if no such
adjustment shall have been required pursuant to Section 3.4 or Section
3.5.
3.4 Issuance of Warrants or Other Rights. If at any time the
Company shall take a record of the holders of its Common Stock for the purpose
of entitling them to receive a distribution of, or shall in any manner (whether
directly or by assumption in a merger in which Company is the surviving
corporation) issue or sell, any warrants or other rights to subscribe for or
purchase any additional shares of Common Stock or any Convertible Securities,
whether or not the rights to exchange or convert thereunder are immediately
exercisable, and the price per share for which Common Stock is issuable upon the
exercise of such Warrants or other right or upon conversion or exchange of such
Convertible Securities shall be less than the Fair Market Value immediately
prior to the time of such issue or sale, then the number of shares for which
this Warrant is exercisable and the Purchase Price shall be adjusted as provided
in Section 3.3 on the basis that the maximum number of additional shares of
Common Stock issuable pursuant to all such warrants or other rights or necessary
to effect the conversion or exchange of all such Convertible Securities shall be
deemed to have been issued and outstanding and the Company shall have received
all of the consideration payable therefor, if any, as of the date of the actual
issuance of such warrants or other rights. No further adjustments of the
Purchase Price shall be made upon the actual issue of such Common Stock or of
such Convertible Securities upon exercise of such warrants or other rights or
upon the actual issue of such Common Stock upon such conversion or exchange of
such Convertible Securities.
3.5 Issuance of Convertible Securities. If at any time the
Company shall take a record of the holders of its Common Stock for the purpose
of entitling them to receive a distribution
-8-
<PAGE>
of, or shall in any manner (whether directly or by assumption in a merger in
which the Company is the surviving corporation) issue or sell, any Convertible
Securities, whether or not the rights to exchange or convert thereunder are
immediately exercisable, and the price per share for which Common Stock is
issuable upon such conversion or exchange shall be less than the Fair Market
Value immediately prior to the time of such issue or sale, then the number of
shares for which this Warrant is exercisable and the Purchase Price shall be
adjusted as provided in Section 3.3 on the basis that the maximum number of
additional shares of Common Stock necessary to effect the conversion or exchange
of all such Convertible Securities shall be deemed to have been issued and
outstanding and the Company shall have received all of the consideration payable
therefor, if any, as of the date of actual issuance of such Convertible
Securities. No adjustment of the number of shares for which this Warrant is
exercisable and the Purchase Price shall be made under this Section 3.5 upon the
issuance of any Convertible Securities which are issued pursuant to the exercise
of any warrants or other subscription or purchase rights therefor, if any such
adjustment shall previously have been made upon the issuance of such warrants or
other rights pursuant to Section 3.4. No further adjustments of the number of
shares for which this Warrant is exercisable and the Purchase Price shall be
made upon the actual issue of Common Stock upon conversion or exchange of such
Convertible Securities and, if any issue or sale of such Convertible Securities
is made upon exercise of any warrant or other right to subscribe for or to
purchase any such Convertible Securities for which adjustments of the number of
shares for which this Warrant is exercisable and the Purchase Price have been or
are to be made pursuant to other provisions of this Section 3, no further
adjustments of the number of shares for which this Warrant is exercisable and
the Purchase Price shall be made by reason of such issue or sale.
3.6 Superseding Adjustment. If, at any time after any
adjustment of the number of shares of Common Stock for which this Warrant is
exercisable and the Purchase Price shall have been made pursuant to Section 3.4
or Section 3.5 as the result of any issuance of warrants, rights or Convertible
Securities, and
(a) such warrants or rights, or the right of
conversion or exchange in such other Convertible Securities, shall
expire, and all or a portion of such warrants or rights, or the right
of conversion or exchange with respect to all or a portion of such
other Convertible Securities, as the case may be, shall not have been
exercised, or
(b) the consideration per share for which shares of
Common Stock are issuable pursuant to such warrants or rights, or the
terms of such other Convertible Securities, shall be increased solely
by virtue of provisions therein
-9-
<PAGE>
contained for an automatic increase in such consideration per share
upon the occurrence of a specified date or event,
then for each outstanding Warrant such previous adjustment shall be rescinded
and annulled and the additional shares of Common Stock which were deemed to have
been issued by virtue of the computation made in connection with the adjustment
so rescinded and annulled shall no longer be deemed to have been issued by
virtue of such computation. Thereupon, a recomputation shall be made of the
effect of such rights or options or other Convertible Securities on the basis of
(c) treating the number of additional shares of
Common Stock or other property, if any, theretofore actually issued or
issuable pursuant to the previous exercise of any such warrants or
rights or any such right of conversion or exchange, as having been
issued on the date or dates of any such exercise and for the
consideration actually received and receivable therefor, and
(d) treating any such warrants or rights or any such
other Convertible Securities which then remain outstanding as having
been granted or issued immediately after the time of such increase of
the consideration per share for which shares of Common Stock or other
property are issuable under such warrants or rights or other
Convertible Securities; whereupon a new adjustment of the number of
shares of Common Stock for which this Warrant is exercisable and the
Purchase Price shall be made, which new adjustment shall supersede the
previous adjustment so rescinded and annulled.
3.7 Other Provisions Applicable to Adjustments Under this
Section. The following provisions shall be applicable to the making of
adjustments of the number of shares of Common Stock for which this Warrant is
exercisable and the Purchase Price provided for in this Section 3:
(a) Computation of Consideration. To the extent that
any additional shares of Common Stock or any Convertible Securities or
any warrants or other rights to subscribe for or purchase any
additional shares of Common Stock or any Convertible Securities shall
be issued for cash consideration, the consideration received by Company
therefor shall be the amount of the cash received by Company therefor,
or, if such additional shares of Common Stock or Convertible Securities
are offered by Company for subscription, the subscription price, or, if
such additional shares of Common Stock or Convertible Securities are
sold to underwriters or dealers for public offering without a
subscription offering, the initial public offering price (in any such
case subtracting any amounts paid or receivable for
-10-
<PAGE>
accrued interest or accrued dividends and without taking into account
any compensation, discounts or expenses paid or incurred by Company for
and in the underwriting of, or otherwise in connection with, the
issuance thereof). To the extent that such issuance shall be for a
consideration other than cash, then, except as herein otherwise
expressly provided, the amount of such consideration shall be deemed to
be the fair value of such consideration at the time of such issuance as
determined in good faith by the Board of Directors of the Company. In
case any additional shares of Common Stock or any Convertible
Securities or any warrants or other rights to subscribe for or purchase
such additional shares of Common Stock or Convertible Securities shall
be issued in connection with any merger in which the Company issues any
securities, the amount of consideration therefor shall be deemed to be
the fair value, as determined in good faith by the Board of Directors
of the Company, of such portion of the assets and business of the
nonsurviving corporation as such Board in good faith shall determine to
be attributable to such additional shares of Common Stock, Convertible
Securities, warrants or other rights, as the case may be. The
consideration for any additional shares of Common Stock issuable
pursuant to any warrants or other rights to subscribe for or purchase
the same shall be the consideration received by Company for issuing
such warrants or other rights plus the additional consideration payable
to the Company upon exercise of such warrants or other rights. The
consideration for any additional shares of Common Stock issuable
pursuant to the terms of any Convertible Securities shall be the
consideration received by the Company for issuing warrants or other
rights to subscribe for or purchase such Convertible Securities, plus
the consideration paid or payable to the Company in respect of the
subscription for or purchase of such Convertible Securities, plus the
additional consideration, if any, payable to the Company upon the
exercise of the right of conversion or exchange in such Convertible
Securities. In case of the issuance at any time of any additional
shares of Common Stock or Convertible Securities in payment or
satisfaction of any dividends upon any class of stock other than Common
Stock, the Company shall be deemed to have received for such additional
shares of Common Stock or Convertible Securities a consideration equal
to the amount of such dividend so paid or satisfied.
(b) When Adjustments to be Made. The adjustments
required by this Section 3 shall be made whenever and as often as any
specified event requiring an adjustment shall occur, except that any
adjustment of the number of shares of Common Stock for which this
Warrant is exercisable that would otherwise be required may be
postponed (except in the case of a subdivision or combination of shares
of the Common
-11-
<PAGE>
Stock, as provided for in Section 3.1) up to, but not beyond the date
of exercise if such adjustment either by itself or with other
adjustments not previously made adds to or subtracts less than $.0001
from the Purchase Price of the shares of Common Stock for which this
Warrant is exercisable immediately prior to the making of such
adjustment. Any adjustment representing a change of less than such
minimum amount (except as aforesaid) which is postponed shall be
carried forward and made as soon as such adjustment, together with
other adjustments required by this Section 3 and not previously made,
would result in a minimum adjustment or on the date of exercise. For
the purpose of any adjustment, any specified event shall be deemed to
have occurred at the close of business on the date of its occurrence.
(c) Fractional Interests. In computing adjustments
under this Section 3, fractional interests in Common Stock shall be
taken into account to the nearest 1000th of a share.
(d) When Adjustment Not Required. If the Company
shall take a record of the holders of its Common Stock for the purpose
of entitling them to receive a dividend or distribution or subscription
or purchase rights and shall thereafter and before the distribution to
stockholders thereof, legally abandon its plan to pay or deliver such
dividend, distribution, subscription or purchase rights, then
thereafter no adjustment shall be required by reason of the taking of
such record and any such adjustment previously made in respect thereof
shall be rescinded and annulled.
3.8 Reorganization, Reclassification, Merger, Consolidation or
Disposition of Assets.
(a) In case the Company shall reorganize its capital,
reclassify its capital stock, consolidate or merge with or into another
corporation (where the Company is not the surviving corporation or
where there is a change in or distribution with respect to the Common
Stock of the Company), or sell, transfer or otherwise dispose of all or
substantially all of its property, assets or business to another
corporation and, pursuant to the terms of such reorganization,
reclassification, merger, consolidation or disposition of assets,
shares of common stock of the successor or acquiring corporation, or
any cash, shares of stock or other securities or property of any nature
whatsoever (including warrants or other subscription or purchase
rights) in addition to or in lieu of common stock of the successor or
acquiring corporation ("Other Property"), are to be received by or
distributed to the holders of the Common Stock of the Company, then
each Holder
-12-
<PAGE>
shall have the right thereafter, to receive, upon exercise of this
Warrant, the number of shares of common stock of the successor or
acquiring corporation or of the Company, if it is the surviving
corporation, and Other Property receivable upon or as a result of such
reorganization, reclassification, merger, consolidation or disposition
of assets by any holder of the number of shares of Common Stock for
which this Warrant is exercisable immediately prior to such event. In
case of any such reorganization, reclassification, merger,
consolidation or disposition of assets, the successor or acquiring
corporation (if other than the Company) shall expressly assume the due
and punctual observance and performance of each and every covenant and
condition of this Warrant to be performed and observed by the Company
and all the obligations and liabilities hereunder, subject to such
modifications as may be deemed appropriate (as determined by resolution
of the Board of Directors of the Company) in order to provide for
adjustments of shares of the Common Stock for which this Warrant is
exercisable which shall be as nearly equivalent as practicable to the
adjustments provided for in this Section 3. For purposes of this
Section 3.8, "common stock of the successor or acquiring corporation"
shall include stock of such corporation of any class which is not
preferred as to dividends or assets over any other class of stock of
such corporation and which is not subject to redemption and shall also
include any evidences of indebtedness, shares of stock or other
securities which are convertible into or exchangeable for any such
stock, either immediately or upon the arrival of a specified date or
the happening of a specified event and any warrants or other rights to
subscribe for or purchase any such stock. The foregoing provisions of
this Section 3.8 shall similarly apply to successive reorganizations,
reclassifications, mergers, consolidations or disposition of assets.
(b) In the event of any dissolution of the Company
following the transfer of all or substantially all of its properties or
assets, the Company, prior to such dissolution, shall at its expense
deliver or cause to be delivered the stock and other securities and
property (including cash, where applicable) receivable by the Holders
of the Warrants after the effective date of such dissolution pursuant
to this Section 3 to a bank or trust company, as trustee for the Holder
or Holders of the Warrants.
3.9 Certain Limitations. Notwithstanding anything herein to
the contrary, after any and all adjustments required by the provisions of this
Section 3 are made, the Purchase Price shall not be less than the par value per
share of Common Stock.
-13-
<PAGE>
4. Record Date as Date of Issue or Sale; Treasury Stock.
(a) In the event that at any time the Company shall
take a record of the holders of its Common Stock for the purpose of
entitling them (i) to receive a dividend or other distribution payable
in Common Stock or Convertible Securities, or (ii) to subscribe for or
purchase Common Stock or Convertible Securities then such record date
shall be deemed to be the date of the issue or sale of the shares of
Common Stock deemed to have been issued or sold upon the declaration of
such dividend or the making of such other distribution or the date of
the granting of such right of subscription or purchase, as the case may
be.
(b) The number of shares of Common Stock outstanding
at any given time shall not include shares owned or held by or for the
account of the Company, and the disposition of any such shares shall be
considered an issue or sale of Common Stock for the purposes of Section
3.
5. No Dilution or Impairment. The Company will not by an action,
including, without limitation, by amending its Certificate of Incorporation or
through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms of the Warrants.
Without limiting the generality of the foregoing, the Company (a) will not
increase the par value of any stock receivable on the exercise of this Warrant
above the amount payable therefor on such exercise, (b) will take all such
action as may be necessary or appropriate in order that the Company may validly
and legally issue fully paid and nonassessable shares of stock on the exercise
of this Warrant and (c) will use its best efforts to obtain all such
authorizations, exemptions or consents from any public regulatory body having
jurisdiction thereof as may be necessary to enable Company to perform its
obligations under this Warrant.
Upon the request of the Holder, the Company will at any time during the
period this Warrant is outstanding acknowledge in writing, in form satisfactory
to the Holder, the continuing validity of this Warrant and the obligations of
the Company hereunder.
6. Certificate as to Adjustments. In each case of any adjustment or
readjustment in the shares of Common Stock issuable on the exercise of the
Warrants, the Company at its expense will compute such adjustment or
readjustment in accordance with the terms of the Warrants and prepare a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. If requested by
the holder hereof, the Company will provide an
-14-
<PAGE>
accountant's certificate verifying the accuracy of the adjustments. The Company
will forthwith mail a copy of each such certificate to each Holder of a Warrant,
and will, on the written request at any time of any Holder of a Warrant, furnish
to such Holder a like certificate setting forth the Purchase Price at the time
in effect and showing how it was calculated.
7. Notices of Record Date, etc. In the event of:
(a) any taking by the Company of a record of the
holders of any class of securities for the purpose of determining the
holders thereof who are entitled to receive any dividend or other
distribution, or any right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other securities or
property, or to receive any other right, or
(b) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the
Company or any transfer of all or substantially all of the assets of
the Company to or consolidation or merger of the Company with or into
any other person, or
(c) any voluntary or involuntary dissolution,
liquidation or winding-up of the Company,
then and in each such event the Company will mail or cause to be mailed to each
Holder of a Warrant a notice specifying (i) the date on which any such record is
to be taken for the purpose of such dividend, distribution or right, and stating
the amount and character of such dividend, distribution or right, (ii) the date
on which any such reorganization, reclassification, recapitalization, transfer,
consolidation, merger, dissolution, liquidation or winding-up is to take place,
and the time, if any is to be fixed, as of which the holders of record of Common
Stock shall be entitled to exchange their shares of Common Stock for securities
or other property deliverable on such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding-up, and (iii) the amount and character of any stock or other securities,
or rights or options with respect thereto, proposed to be issued or granted, the
date of such proposed issue or grant and the persons or class of persons to whom
such proposed issue or grant is to be offered or made. Such notice shall be
mailed at least 10 days prior to the date specified in such notice on which any
such action is to be taken. Notwithstanding the foregoing, failure to give such
notice or any defect in such notice shall not effect the validity or legality of
any such transaction.
8. Reservation of Stock, etc. Issuable on Exercise of Warrants. The
Company will at all times reserve and keep available, solely for issuance and
delivery on the exercise of
-15-
<PAGE>
the Warrants, all shares of Common Stock from time to time issuable on the
exercise of the Warrants.
9. Exchange of Warrants. On surrender for exchange of any Warrant,
properly endorsed, to the Company, the Company at its expense will issue and
deliver to or on the order of the Holder thereof a new Warrant or Warrants of
like tenor, calling in the aggregate on the face or faces thereof for the number
of shares of Common Stock called for on the face or faces of the Warrant or
Warrants so surrendered.
10. Replacement of Warrants. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of any
Warrant and, in the case of any such loss, theft or destruction of any Warrant,
on delivery of an indemnity agreement or security reasonably satisfactory in
form and amount to the Company or, in the case of any such mutilation, on
surrender and cancellation of such Warrant, the Company at its expense will
execute and deliver, in lieu thereof, a new Warrant of like tenor.
11. Negotiability, etc. This Warrant is issued upon the following
terms, to all of which each Holder or owner hereof by the taking hereof consents
and agrees:
(a) Title to this Warrant may be transferred by
endorsement (by the Holder hereof executing the form of assignment at
the end hereof) and delivery in the same manner as in the case of a
negotiable instrument transferrable by endorsement and delivery; and
(b) subject to (a) above, any person in possession of
this Warrant properly endorsed is authorized to represent himself as
absolute owner hereof and is empowered to transfer absolute title
thereto by endorsement and delivery hereof to a bona fide purchaser
hereof for value; each prior taker or owner waives and renounces all of
his equities or rights in this Warrant in favor of each such bona fide
purchaser, and each such bona fide purchaser shall acquire absolute
title hereto and to all rights represented hereby.
12. Notices, etc. All notices and other communications from the Company
to the Holder of this Warrant shall be mailed by first class registered or
certified mail, postage prepaid, at such address as may have been furnished to
the Company in writing by such Holder or, until any such Holder furnishes to the
Company an address, then to, and at the address of, the last Holder of this
Warrant who has so furnished an address to the Company.
13. Miscellaneous. This Warrant and any term hereof may be changed,
discharged or terminated only by an instrument in
-16-
<PAGE>
writing signed by the party against which enforcement of such change, waiver,
discharge or termination is sought. Any covenant or provision hereof may be
omitted or waived with the written consent of the holder or holders of at least
fifty percent (50%) of the Common Stock issued and issuable upon exercise of the
Warrant. This Warrant shall be construed and enforced in accordance with and
governed by the laws of the Commonwealth of Pennsylvania. The headings in this
Warrant are for purposes of reference only, and shall not limit or otherwise
affect any of the terms hereof. This Warrant is being executed as an instrument
under sale. The invalidity or unenforceability of any provision hereof shall in
no way affect the validity or enforceability of any other provision.
14. Expiration. The right to exercise this Warrant shall expire at
5:00 p.m., Philadelphia time, July 31, 2005.
IN WITNESS WHEREOF, the Company has executed this Warrant under seal as
of the date first written above.
NCO GROUP, INC.
BY: /s/ Michael J. Barrist
-----------------------------------
Name: Michael J. Barrist
Title: President and CEO
[Corporate Seal]
Attest:
By: /s/ Joshua Gindin
----------------------------
Name: Joshua Gindin
--------------------------
Title: Secretary
-------------------------
-17-
<PAGE>
FORM OF SUBSCRIPTION
[To be signed only on exercise of Warrant]
TO NCO GROUP, INC.
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise this Warrant for, and to purchase thereunder, __________
shares of Common Stock of NCO GROUP, INC. and herewith makes payment of
$_________________ therefor, and requests that the certificates for such shares
be issued in the name of, and delivered to ____________________, whose address
is__________________________________.
Dated:
-----------------------------------
(Signature must conform to name of
holder as specified on the face of
the Warrant)
-----------------------------------
(Address)
FORM OF ASSIGNMENT
(To be signed only on transfer of Warrant)
For value received, the undersigned hereby sells, assigns, and
transfers unto _________________ the right represented by the within Warrant to
purchase ____________________ shares of Common Stock of NCO GROUP, INC. to which
the within Warrant relates, and appoints ________________ Attorney to transfer
such right on the books of NCO GROUP, INC. with full power of substitution in
the premises.
Dated: -------------------------------------
(Signature must conform to name of
holder as specified on the face of
the Warrant)
-------------------------------------
(Address)
-18-
<PAGE>
Exhibit 21.1
Corporate Organization of NCO Group, Inc.
NCO Group, Inc.
Pennsylvania corporation
Wholly-Owned Subsidiaries
NCO Financial Systems, Inc.
Pennsylvania corporation
NCO Funding, Inc.
Delaware corporation
Management Adjustment Bureau, Inc.
New York corporation
NCO Teleservices, Inc.
Pennsylvania corporation
NCO Financial Systems of MI, Inc.
Michigan corporation
CRWF Acquisition, Inc.
Pennsylvania corporation
K&K Acquisition, Inc.
Pennsylvania corporation
CC Services, Inc.
Pennsylvania corporation
NCO Financial Systems of NC, Inc.
North Carolina corporation
Wholly-Owned Subsidiary of NCO Financial Systems of NC, Inc.
Goodyear & Associates, Inc.
North Carolina corporation
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,058,798
<SECURITIES> 0
<RECEIVABLES> 4,780,364
<ALLOWANCES> 79,000
<INVENTORY> 0
<CURRENT-ASSETS> 17,259,977
<PP&E> 3,880,759
<DEPRECIATION> 1,050,697
<TOTAL-ASSETS> 35,826,355
<CURRENT-LIABILITIES> 3,630,768
<BONDS> 0
0
0
<COMMON> 29,362,326
<OTHER-SE> 1,285,292
<TOTAL-LIABILITY-AND-EQUITY> 35,826,355
<SALES> 30,760,452
<TOTAL-REVENUES> 30,760,452
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 25,881,622
<LOSS-PROVISION> 55,845
<INTEREST-EXPENSE> 575,571
<INCOME-PRETAX> 4,247,414
<INCOME-TAX> 612,748
<INCOME-CONTINUING> 3,634,666
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,634,666
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
</TABLE>
