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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, 1997
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 23-2858652
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
515 Pennsylvania Ave.
Ft. Washington, Pennsylvania 19034-3313
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(Address of principal (Zip Code)
executive offices)
Registrant's Telephone Number, Including Area Code (215) 793-9300
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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 13,391,584
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(Title of Class) (Number of Shares Outstanding
as of March 30, 1998)
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. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant is $240,384,419(1)
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Certain portions of the Company's Proxy Statement to be filed in connection
with its 1998 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 $25.25, the last reported sale price
for the Company's Common Stock on March 30, 1998. The information provided shall
in no way be construed as an admission that any officer, director or 10%
shareholder in the Company may be deemed an affiliate of the Company or that he
is the beneficial owner of the shares reported as being held by him, and any
such inference is hereby disclaimed. The information provided herein is included
solely for record keeping purposes of the Securities and Exchange Commission.
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TABLE OF CONTENTS
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Page
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PART I
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Item 1. Business 1
Item 2. Properties. 19
Item 3. Legal Proceedings. 20
Item 4. Submission of Matters to a Vote of Security Holders. 20
Item 4.1 Executive Officers of the Registrant who are not also Directors. 20
PART II
Item 5. Market for Registrant's Common Equity and 20
Related Shareholder Matters.
Item 6. Selected Financial Data. 23
Item 7. Management's Discussion and Analysis of Financial 25
Condition and Results of Operations.
Item 7a Quantitative and Qualitative Disclosure about Market Risk 34
Item 8. Financial Statements and Supplementary Data. 34
Item 9. Changes in and Disagreements with Accountants on Accounting and 34
Financial Disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant. 35
Item 11. Executive Compensation. 35
Item 12. Security Ownership of Certain Beneficial Owners and Management. 35
Item 13. Certain Relationships and Related Transactions. 35
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 36
Signatures 41
Index to Consolidated Financial Statements F-1
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All share and per share data have been restated to reflect the three-for-two
stock split of the Company's Common Stock paid in December 1997.
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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 management
solutions for clients. The Company provides these services on a national basis
from 23 call centers located in 15 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 completed twelve acquisitions which
have enabled it to increase its penetration of existing markets, establish a
presence in certain new markets, offer additional services, and realize
significant operating efficiencies. In addition, the Company has leveraged its
infrastructure by offering additional services including telemarketing, customer
service call centers, market research and other outsourced administrative
services. The Company believes that it is currently among the five largest
accounts receivable management companies in the United States.
The Company provides its services principally to clients in the financial
services, healthcare, education, telecommunications, retail and commercial,
utilities and government sectors. In 1997, the Company had over 8,000 clients,
including Bell Atlantic Corporation, Mellon Bank, N.A., NationsBank, Citicorp,
MCI Communication, Federal Express Corporation, and Airborne Express. No client
accounted for more than 4.0% of the Company's actual revenue in 1997. 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
25.5% in 1997. According to the 1996 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 services 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 $116.0 billion in 1996, 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 from the ACA, there are currently
approximately 6,500 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.
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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 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 services. The Company regularly reviews
various strategic acquisition opportunities and periodically engages in
discussions regarding such possible acquisitions.
The Company's principal executive offices are located at 515 Pennsylvania
Avenue, Fort Washington, Pennsylvania, and its telephone number is (215)
793-9300.
Acquisition History
Since 1994, the Company has completed twelve strategic acquisitions which
have expanded its client base and geographic presence, increased its presence in
key industries, added complementary services, 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 and add complementary
service applications. The Company regularly reviews various strategic
acquisition opportunities and periodically engages in discussions regarding such
possible acquisitions.
In March 1998, the Company entered into an agreement with FCA
International Ltd. ("FCA") under which NCO or an affiliate, will make a cash
tender offer (which is expected to be mailed on or before April 7, 1998) for
all of the outstanding common shares of FCA at $9.60 per share, Canadian
(equivalent to $6.77 in U.S. dollars based upon an exchange rate of .7053) as
of March 24, 1998, the "Date of the Agreement". The acquisition is valued at
approximately $68.0 million (U.S. dollars), based upon an exchange rate of
.7053, and is subject to the tender of two-thirds of the outstanding common
shares, on a fully diluted basis, and customary conditions including normal
regulatory approval. FCA's Board of Directors unanimously approved the
agreement and has agreed, subject to certain conditions to recommend that
shareholders tender their common shares into the offer. Pursuant to the
agreement, Fairfax Financial Holdings Limited has agreed, subject to certain
conditions, to tender to the bid, the common shares of FCA owned or controlled
by it. Fairfax currently owns or controls approximately 2,840,485 common
shares, representing approximately 27% of the common shares outstanding on a
fully-diluted basis.
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A summary of completed acquisitions is as follows:
The Response Center
On February 6, 1998, the Company purchased certain assets of The
Response Center ("TRC"), which was an independent division of TeleSpectrum
Worldwide, Inc., for $15.0 million in cash, plus an earn-out based on the value
of the Company's market research business at December 31, 1998. The Response
Center is a full-service custom market research company providing services to
the telecommunications, financial services, utilities, healthcare,
pharmaceutical and consumer products sectors. Its capabilities include problem
conceptualization, program design, data gathering (by telephone, mail, and focus
groups), as well as data tabulation, results analysis and consulting. The
Response Center, located in Upper Darby, Pennsylvania, and Philadelphia,
Pennsylvania, had 1997 revenues of approximately $8.0 million.
Collection Division of American Financial Enterprises, Inc.
On December 31, 1997, effective January 1, 1998, the Company purchased
certain assets of the Collection Division of American Financial Enterprises,
Inc. ("AFECD") for $1.65 million in cash. AFECD, an accounts receivable
management company, will expand NCO's penetration into the governmental and
insurance sectors. The Collection Division of American Financial Enterprises had
1997 revenues of approximately $1.7 million.
ADVANTAGE Financial Services, Inc.
On October 1, 1997, the Company purchased all of the outstanding stock
of ADVANTAGE Financial Services, Inc. ("AFS") for $2.9 million in cash, a $1.0
million note payable which bears interest payable at a rate of 8.0% per annum
with one-half of the principal due in April 1998 and the balance due in January
1999 , and 46,442 shares of the Company's common stock. The acquisition was
valued at approximately $5.0 million. AFS, an accounts receivable management
company located in Dayton, Ohio and Bristol, Tennessee, will allow NCO further
penetration into the medical, telecommunications and commercial sectors. AFS had
1996 revenues of approximately $5.1 million.
Credit Acceptance Corp.
On October 1, 1997, the Company purchased all of the outstanding stock
of Credit Acceptance Corp. ("CAC") for $1.8 million in cash. CAC, an accounts
receivable management company located in Pittsburgh, Pennsylvania, will provide
NCO with further penetration into the healthcare sector. CAC had 1996 revenues
of $2.3 million.
Collections Division of CRW Financial, Inc.
On February 2, 1997, NCO purchased certain assets and assumed certain
liabilities of the Collections Division of CRW Financial, Inc. ("CRWCD") for
$3.75 million in cash, 517,767 shares of Common Stock and warrants to purchase
375,000 shares of Common Stock at an exercise price of $18.417 per share. The
purchase price was valued at approximately $12.8 million. CRWCD provided
accounts receivable management services principally to the telecommunications,
education, financial, government and utility sectors from 14 offices located
throughout the United States. In addition, CRWCD had a commercial collections
division.
CMS A/R Services
On January 31, 1997, NCO purchased certain assets of CMS A/R Services
("CMSA/R"), a division of CMS Energy Corporation, for $5.1 million in cash.
CMSA/R, 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, outsourced administrative services,
early stage accounts receivable management and database management services.
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Tele-Research Center, Inc.
On January 30, 1997, NCO purchased certain assets of Tele-Research Center,
Inc. ("Tele-Research"), for $1.6 million in cash, which increased in January
1998 by an additional $600,000 when certain revenue targets were reached in the
period following the acquisition. Tele-Research, located in Philadelphia,
Pennsylvania, provided market research, data collection, and other teleservices
to market research companies as well as end-users.
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 $14.117 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, provided accounts receivable management services principally to
the telecommunications, education, and utility sectors.
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. In July 1997, the note was converted into 115,385
shares of the Company's Common Stock which were sold by the holder in the
Company's public offering completed in July 1997. MAB, based in Buffalo, New
York, provided accounts receivable management services, principally to the
education, financial services, telecommunications and utility sectors.
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 sectors from offices in Pennsylvania, Ohio and Kansas.
Eastern Business Services, Inc.
On August 1, 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, with a face amount of $252,000 ($207,000, net
of unamortized discount based on an imputed interest rate of 10%), 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 sectors.
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B. Richard Miller, Inc.
On April 29, 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 185,705 shares of Common Stock and an option
to acquire 130,322 shares of Common Stock at an exercise price of $1.44 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,
previously based in Ardmore, Pennsylvania, provided accounts receivable
management services, principally to the education industry.
Collectively, the acquisitions of Goodyear, CMSA/R, Tele-Research, and
CRWCD are known as the "1Q97 Acquisitions." Collectively, the 1Q97 Acquisitions,
CAC and AFS are known as the "1997 Acquisitions." Collectively, the acquisition
of AFECD and TRC are known as the "1Q98 Acquisitions."
Financial Impact of Acquisitions
The Company financed the acquisition of AFS, CAC, AFECD and TRC with
proceeds of the Company's public offering of stock completed in July 1997 (the
"1997 Offering"). The Company financed the acquisitions of Goodyear, CMSA/R,
Tele-Research and CRWCD with borrowings of approximately $8.4 million on its
revolving credit facility with Mellon Bank, N.A., the net proceeds of the
Company's initial public offering (the "IPO") and funds from operations. The
borrowings on the revolving credit facility were repaid with a portion of the
proceeds from the 1997 Offering. The Company financed the MAB, TCD, Eastern and
BRM acquisitions with borrowings from Mellon Bank, N.A. which borrowings were
repaid with proceeds from the IPO. 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 263,297 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 69,840
shares and 27,750 shares of Common Stock at an exercise price of $8.67 per share
in consideration for increasing the revolving credit facility to $15.0 million
and to $25.0 million, respectively. An affiliate of the bank has exercised all
of these warrants. In March 1998, the bank increased the line of credit to $75.0
million in connection with the proposed cash tender offer for FCA International
Ltd., subject to the satisfaction of certain closing conditions.
The acquisitions have been accounted for under the purchase method of
accounting for financial reporting purposes. Through December 31, 1997, these
acquisitions have created goodwill estimated at $41.8 million which is being
amortized over a 15 to 25 year period resulting in amortization expense of
approximately $2.1 million annually.
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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 client's 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 client's customer, the
notification process can begin.
Account Notification. The Company initiates the recovery process by
forwarding an initial letter which is designed to seek payment of the amount due
or open a dialogue with the client's 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 client's
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.
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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 generally are
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.
Market Research. The Company provides full-service custom market research
services to the telecommunications, financial services, utilities, healthcare,
pharmaceutical and consumer products sectors. Its capabilities include problem
conceptualization, program design, data gathering (by telephone, mail, and focus
groups), as well as data tabulation, results analysis and consulting.
Telemarketing. The Company provides telemarketing services for clients,
including lead generation and qualification, and the actual booking of
appointments for a client's sales representatives.
Customer Service Call Center. The Company utilizes its communications and
information system infrastructure to supplement or replace the customer service
function of its clients. For example, the Company is currently engaged by a
large regional utility to provide customer service functions for a segment of
the utility's customer base that is delinquent.
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.
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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 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.
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 23 state-of-the-art call centers which are electronically linked
through a national wide area network. The Company utilizes two computer platform
systems. One system consists of two Unix-based NCR 4300 computers which are
linked via network servers to 873 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 479 workstations. The computers are linked via network servers to the
Company's 1352 workstations, which consist of personal computers and terminals
that are linked to the microcomputers, but do not necessarily have separate
processors.
The Company utilizes 20 predictive dialer locations with 542 stations to
address its low balance, high volume accounts. These systems scan the Company's
database and simultaneously initiate calls on all available telephone lines and
determine if a live connection is made. Upon determining that a live connection
has been made, the computer immediately switches the call to an available
representative and instantaneously displays the associated account record on the
representative's workstation. Calls that reach other signals, such as a busy
signal, telephone company intercept or no answer, are tagged for statistical
analysis and placed in priority recall queues or multiple-pass calling cycles.
The system also automates virtually all record keeping and follow-up activities
including letter and report generation. The Company's automated method of
operations dramatically improves the productivity of the Company's collection
staff.
The Company employs a 20 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.
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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 over 8,000 companies in the
financial services, healthcare, retail and commercial, education,
telecommunications, utilities and government sectors. The Company's 10 largest
clients in 1997 accounted for approximately 21.7% of the Company's revenue on a
pro forma basis assuming that the 1997 Acquisitions had occurred on January 1,
1997. In 1997, no client accounted for more than 4.0% of total revenue (on an
actual or a pro forma basis). In 1997, the Company on a pro forma basis derived
50.1% of its referrals from financial institutions (which includes banking and
insurance sectors), 19.7% from healthcare organizations, 10.6% from retail and
commercial entities, 7.5% from educational organizations, 6.1% from
telecommunications companies, 3.6% from utilities, and 2.3% from government
entities.
The following table sets forth a list of certain of the Company's key clients:
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Financial Services Healthcare Retail and Commercial
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First Union Corporation Catholic Healthcare Airborne Freight Corporation
Initiatives
Mellon Bank Corporation Hutchinson Hospital Emery Worldwide
Corporation
NationsBank Corporation Kaiser Permanente Federal Express Corporation
The Progressive Corporation Medical Center of Delaware The Bon Ton Stores, Inc.
United Healthcare Corporation Reimbursement Technologies,
Inc.
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<TABLE>
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Government
Education Telecommunications and Utilities
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California Student Aid Bell Atlantic Corporation Commonwealth Edison Company
Commission BellSouth Corporation Massachusetts Department of
Pennsylvania State Frontier Cellular Revenue
University
Pennsylvania Higher Education MCI Communication New York State Electric & Gas
Assistance Agency Sprint Corporation Corporation
Rutgers University PECO Energy Company
University of Pennsylvania City of Philadelphia
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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.
-9-
<PAGE>
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 31
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 has on staff a
technical writer for the purpose of preparing detailed, professional responses
to RFPs.
Personnel and Training
The Company's success in recruiting, hiring and training a large number
of employees is critical to its ability to provide high quality accounts
receivable management, customer support and teleservices programs to its
clients. The Company seeks to hire personnel with previous experience in
accounts receivable management or as a telephone representative. NCO generally
offers competitive compensation and benefits and offers promotion opportunities
within the Company.
All Company personnel receive a comprehensive training course that
consists of a combination of classroom and practical experience. Prior to
customer contact, new employees receive one week of training in the Company's
operating systems, procedures and telephone techniques and instruction in
applicable federal and state regulatory requirements. Company personnel also
receive a wide variety of continuing professional education consisting of both
classroom and role playing sessions.
As of December 31, 1997, the Company had a total of 1,325 full-time
employees and 493 part-time employees, of which 1,447 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 6,500 providers, including large national
corporations such as Outsourcing Solutions, Inc., GC Services, Inc., and
Equifax, as well as 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.
-10-
<PAGE>
Regulation
The accounts receivable management industry is regulated both at the
federal and state level. The federal Fair Debt Collection Practices Act (the
"FDCPA") regulates any person who regularly collects or attempts to collect,
directly or indirectly, consumer debts owed or asserted to be owed to another
person. The FDCPA establishes specific guidelines and procedures which debt
collectors must follow in communicating with consumer debtors, including the
time, place and manner of such communications. Further, it prohibits harassment
or abuse by debt collectors, including the threat of violence or criminal
prosecution, obscene language or repeated telephone calls made with the intent
to abuse or harass. The FDCPA also places restrictions on communications with
individuals other than consumer debtors in connection with the collection of any
consumer debt and sets forth specific procedures to be followed when
communicating with such third parties for purposes of obtaining location
information about the consumer. Additionally, the FDCPA contains various notice
and disclosure requirements and prohibits unfair or misleading representations
by debt collectors. The Company is also subject to the Fair Credit Reporting Act
which regulates the consumer credit reporting industry and which may impose
liability on the Company to the extent that the adverse credit information
reported on a consumer to a credit bureau is false or inaccurate. The accounts
receivable management business is also subject to state regulation. Some states
require that the Company be licensed as a debt collection company. Management
believes that the Company currently holds applicable licenses from all states
where required.
With respect to the other teleservices offered by the Company,
including telemarketing, the federal Telemarketing and Consumer Fraud and Abuse
Prevention Act of 1994 (the "TCFAPA") broadly authorizes the Federal Trade
Commission (the "FTC") to issue regulations prohibiting misrepresentations in
telemarketing sales. The FTC's telemarketing sales rules prohibit
misrepresentations of the cost, terms, restrictions, performance or duration of
products or services offered by telephone solicitation and specifically address
other perceived telemarketing abuses in the offering of prizes and the sale of
business opportunities or investments. The federal Telephone Consumer Protection
Act of 1991 (the "TCPA") limits the hours during which telemarketers may call
consumers and prohibits the use of automated telephone dialing equipment to call
certain telephone numbers. A number of states also regulate telemarketing. For
example, some states have enacted restrictions similar to the federal TCPA. From
time to time, Congress and the states consider legislation that would further
regulate the Company's telemarketing operations and the Company cannot predict
whether additional legislation will be enacted and, if enacted, what effect it
would have on the telemarketing industry and the Company's business.
Several of the industries served by the Company are also subject to
varying degrees of government regulation. Although compliance with these
regulations is generally the responsibility of the Company's clients, the
Company could be subject to a variety of enforcement or private actions for its
failure or the failure of its clients to comply with such regulations.
The Company devotes significant and continuous efforts, through
training of personnel and monitoring of compliance, to ensure that it is in
compliance with all federal and state regulatory requirements. The Company
believes that it is in material compliance with all such regulatory
requirements.
-11-
<PAGE>
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, the anticipated changes in revenues from acquired
companies, 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. The factors discussed below, and elsewhere in this
Annual Report on Form 10-K, could cause actual results and developments to be
materially different from those expressed in or implied by such 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 businesses acquired in the first quarter of 1998 had combined
revenues of $9.7 million in 1997 compared to the Company's revenue of $85.3
million in 1997 ($103.5 million on a pro forma basis assuming that the 1997
Acquisitions and the 1Q98 Acquisitions had occurred on January 1, 1997. The
Company is currently in the process of integrating the acquisition of AFS, CAC,
and the 1Q98 Acquisitions as well as completing the integration of the 1Q97
Acquisitions. Such integration will likely place significant demands on the
Company's management and infrastructure. There can be no assurance that
businesses acquired in the 1997 Acquisitions or the 1Q98 Acquisitions 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.
Risks Associated with Rapid 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."
-12-
<PAGE>
Risks Associated with Future Acquisitions
A primary element of the Company's growth strategy is to continue to
pursue strategic acquisitions that expand and complement the Company's business.
The Company regularly reviews various strategic acquisition opportunities and
periodically engages in discussions regarding such possible acquisitions.
Currently the Company is not a party to any agreements, understandings,
arrangements or negotiations regarding any material acquisitions except as noted
regarding the agreement with FCA International Ltd. under which NCO or an
affiliate, will make a cash tender offer for all of the outstanding common
shares of FCA. However, as the result of the Company's process of regularly
reviewing acquisition prospects, negotiations may occur from time to time if
appropriate opportunities arise. 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 also 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 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 acquired businesses profitably. Acquisitions also may involve a
number of additional 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. See "Item 1 - Business - Growth Strategy."
The Company may require 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."
Risks related to FCA Tender offer
In March 1998, the Company entered into an agreement with FCA
International Ltd. ("FCA") under which NCO or an affiliate, will make a cash
tender offer (which is expected to be mailed on or before April 7, 1998) for all
of the outstanding common shares of FCA at $9.60 per share, Canadian (equivalent
to $6.77 in U.S. dollars based upon an exchange rate of .7053). The acquisition
is valued at approximately $68.0 million [USD], based upon an exchange rate of
.7053, and is subject to the tender of two-thirds of the outstanding common
shares, on a fully diluted basis, and customary conditions including normal
regulatory approvals. There can be no assurance that the FCA tender offer will
be successful. The Company will be required to borrow some or all of the
proceeds to pay for the FCA tender offer. In the event that the Company is
successful in the acquisition of FCA, the integration of FCA could divert
management's attention from the daily operation of the Company, require
additional management, operational and financial resources, and place
significant demands on the Company's management and infrastructure. There can be
no assurance that if acquired, FCA's operations can be successfully integrated
with that of the Company, that the Company will be able to realize operating
efficiencies or eliminate redundant costs, or that its business will be operated
profitably. Further, there can be no assurance that clients of FCA will continue
to do business with the Company, or that the Company will be able to retain key
employees.
-13-
<PAGE>
Fluctuations in Quarterly Operating Results
The Company has experienced and expects to continue to experience
quarterly variations in revenue 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 effect of the change of business
mix on margins and the timing of additional selling, general and administrative
expenses to support new business. In connection with certain customer contracts,
the Company could incur costs in periods prior to recognizing revenue under
those contracts which may adversely affect the Company's operating results in a
particular quarter. The Company's planned operating expenditures are based on
revenue forecasts, and if revenues are below expectations in any given quarter,
operating results would likely be materially adversely affected. While the
effects of seasonality on the Company's business historically have been obscured
by its rapid growth, the Company's business tends to be slower in the third and
fourth quarters of the year due to the summer and holiday seasons. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company's quarterly operating results could also be affected by the
costs and timing of completion and integration of acquisitions.
Dependence on Key Personnel
The Company is highly dependent upon the continued services and
experience of its senior management team, including Michael J. Barrist, Chairman
of the Board, President and Chief Executive Officer. 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 $2.0 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 1998 Annual Meeting of Shareholders.
Dependence on Certain Sectors; Contract Risks
Most of the Company's revenues are derived from clients in the
financial services, healthcare, retail and commercial, education,
telecommunications, utilities and government sectors. A significant downturn in
any of these sectors 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 "Item 1 - Business."
-14-
<PAGE>
Competition
The accounts receivable management industry is highly competitive. The
Company competes with approximately 6,500 providers, including large national
corporations such as Outsourcing Solutions, Inc., GC Services, Inc., and
Equifax, as well as 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 "Item 1 - 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 require the
Company to anticipate technological developments. There can be no assurance that
the Company will be successful in anticipating, managing or adopting such
technological changes on a timely basis or that the Company will have the
capital resources available to invest in new technologies. In addition, the
Company's business is highly dependent on its computer and telecommunications
equipment and software systems, the temporary or permanent loss of which,
through casualty or operating malfunction, could have a materially adverse
effect on the Company's business. The Company's business is materially dependent
on service provided by various local and long distance telephone companies. A
significant increase in the cost of telephone services that is not recoverable
through an increase in the price of the Company's services, or any significant
interruption in telephone services, could have a materially adverse impact on
the Company. See "Item 1 - Business - Operations."
Risks Associated with Year 2000
NCO has initiated a program to evaluate and address the impact of the
year 2000 on its information systems in order to insure that its network,
computer systems and software will manage and manipulate data involving the
transition of dates from 1999 to 2000 without functional or data abnormality and
without inaccurate results related to such data. Based on information known at
this time about the Company's systems, management does not expect year 2000
compliance costs to have a material adverse impact on the Company's business or
results of operations. No assurance can be given, however, that unanticipated or
undiscovered year 2000 compliance problems will not have a material adverse
effect on the Company's business or results of operations. In addition, if the
Company's clients or significant suppliers and contractors do not successfully
achieve year 2000 compliance, the Company's business and results of operations
could be adversely affected.
-15-
<PAGE>
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 "Item 1
- - 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 actions for
its failure or the failure of its clients to comply with such regulations. See
"Business-Government Regulation."
-16-
<PAGE>
Control by Principal Shareholders
Michael J. Barrist beneficially owns approximately 19.9% of the Common
Stock, and together with the other executive officers of the Company,
beneficially owns approximately 33.3%. As a result of such voting concentration,
Mr. Barrist, together with other executive officers of the Company, would likely
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 1998 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. As of March 30, 1998, the Company had 13,391,584 shares of Common
Stock outstanding. Of these shares, a total of 8,968,254 shares are freely
tradable without restriction or further registration under the Securities Act of
1933 (the "Securities Act"). The remaining 4,423,330 shares are "restricted
securities," as that term is defined in Rule 144 under the Securities Act, and
may be sold only in accordance with an exemption from registration, such as the
exemption provided by Rule 144. The Company also has outstanding a $900,000
Convertible Note convertible into 63,755 shares of Common Stock at any time on
or before January 22, 2002 issued in connection with the Goodyear acquisition
and a warrant to purchase 375,000 shares issued in connection with the CRWCD
acquisition, exercisable at anytime on or before January 31, 2002. The holders
of the convertible notes and the warrants are entitled to certain demand and/or
piggy-back registration rights. The earn-out payable in connection with the TRC
acquisition provides, among other things, that the seller may elect to be paid
the earn-out in the form of a convertible note, convertible into NCO Common
Stock at a price equal to $3.00 above NCO's trailing thirty day average closing
per share price. In addition, the Company has reserved approximately 1,051,841
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. As of March 30, 1998,
options to purchase an aggregate of 923,650 shares of Common Stock are
outstanding under all such plans.
-17-
<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.
-18-
<PAGE>
Item 2. Properties.
The Company currently operates 23 leased facilities. The chart below
summarizes the Company's call center facilities as of December 31, 1997:
Approximate
Location of Facility Square Footage
------------------------------------ --------------
Fort Washington, PA 82,000
Aurora, CO 4,800
Bristol, TN 4,000
Buffalo, NY 30,000
Charlotte, NC 14,993
Cleveland, OH 6,948
Columbia, SC 10,500
Dayton, OH 13,060
Fort Washington, PA 12,300
Honolulu, HI 2,878
Hutchinson, KS 900
Jackson, MI 754
New Orleans, LA 6,920
Odenton, MD 13,336
Philadelphia, PA 4,720
Philadelphia, PA 5,700
Pittsburgh, PA 3,600
Richardson, TX 6,109
San Diego, CA 3,151
Tulsa, OK 13,907
Wichita, KS 10,000
In the 1Q98 Acquisitions, the Company acquired two additional
processing centers in Philadelphia, Pennsylvania, and a processing center and
headquarters for the market research operations in Upper Darby, Pennsylvania.
The leases of these facilities expire between 1998 and 2010, and most
contain renewal options. In addition, the Company leases sales offices in
Austin, Texas; Boston, MA; Jericho, NY; Las Vegas, NV; Little Rock, AK; McAllen,
TX; Stafford, TX; Tucson, AZ.
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.
Prior to July 1997, the Company leased space in four buildings in Blue
Bell, Pennsylvania from three limited partnerships of which Messrs. Barrist,
Piola and Miller and Mr. Barrist's mother, are limited partners and Michael J.
Barrist is the sole shareholder of the corporate general partners, pursuant to
leases expiring between 1998 and 2000. These leases were terminated with the
Company's move to its new Corporate Headquarters. See "Management - Certain
Transactions - Leases" contained in, and incorporated by reference to, the
Company's Proxy Statement relating to the 1998 Annual Meeting of Shareholders.
-19-
<PAGE>
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...................... 38 Executive Vice President, Finance,
Chief Financial Officer and Treasurer
Joseph C. McGowan...................... 45 Executive Vice President and Chief
Operating Officer
</TABLE>
Steven L. Winokur joined the Company in December 1995 as Vice
President, Finance, Chief Financial Officer and Treasurer and became Executive
Vice President in September 1997. 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 Executive Vice President and Chief Operating Officer in
September 1997. Prior to joining the Company, Mr. McGowan was Assistant Manager
of the Collections Department at Philadelphia Gas Works, a public utility, since
1975.
PART II
Item 5. Market for the Registrant's Common Stock and
Related Shareholder Matters.
Following the Company's IPO of Common Stock on November 6, 1996, 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, adjusted to reflect a three-for-two stock split paid in
December 1997.
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<PAGE>
High Low
---- ---
1996
Fourth Quarter (from November 6) $13 $11
1997
First Quarter 18 15/16 11 3/16
Second Quarter 22 1/2 12 3/16
Third Quarter 26 1/2 20 9/16
Fourth Quarter 28 5/16 21
As of March 30, 1998, the Company's Common Stock was held by
approximately 49 holders of record. Based on information obtained from the
Company's transfer agent, the Company believes that the number of beneficial
owners of its Common Stock is in excess of 1000.
Dividend Policy
Prior to September 1996, the Company 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 $1.1 million and $876,838 in respect of the Company's S
Corporation earnings for 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.
Sales of Unregistered Securities during 1997
Set forth below is information concerning certain issuances of Common
Stock during 1997 which were not registered under the Securities Act and which
have not been previously reported.
-21-
<PAGE>
From June to December 1997, the Company granted options to certain
executive officers and key employees under the 1996 Stock Option Plan on the
dates and at the exercise prices set forth below. Generally, options will become
exercisable in equal one-third installments beginning on the first anniversary
of the date of grant. All of the options were issued in connection with such
employee's employment with the Company and no cash or other consideration was
received by the 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.
Date Issued Options Granted Exercise Price
----------- --------------- --------------
September 1997 37,200 $23.334
December 1997 148,825 $24.50
In June 1997, the Company issued options pursuant to the 1996
Non-Employee Director Stock Option Plan to purchase 3,000 shares of Common Stock
to each of Eric S. Siegel and Alan F. Wise. These options were granted at an
exercise price of $19.416 per share. The options were issued in reliance upon
the exemption from the registration requirements provided by Section 4(2) of the
Securities Act.
-22-
<PAGE>
Item 6. Selected Financial Data.
SELECTED FINANCIAL AND OPERATING DATA
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ----------- ----------- ------------ ------------------------------
Pro
Actual Forma (1)(2)
------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenue $ 7,445 $ 8,578 $ 12,733 30,760 $ 85,283 $ 103,460
Operating costs and expenses:
Payroll and related expenses 4,123 4,558 6,797 14,651 42,502 51,996
Selling, general and
administrative expenses 2,391 2,674 4,042 10,033 27,947 33,844
Depreciation and amortization
expenses 141 215 348 1,254 3,368 4,344
----------- ----------- ----------- ------------ ------------ ------------
Income from operations 790 1,131 1,546 4,822 11,466 13,276
other income (expense) 11 (45) (180) (575) 388 748
----------- ----------- ----------- ------------ ------------ ------------
Income before income taxes 801 1,086 1,366 4,247 11,854 14,024
Provision for income taxes (3) 320 434 546 1,706 4,780 5,652
----------- ----------- ----------- ------------ ------------ ------------
Net income (3) 481 $ 652 $ 820 $ 2,541 $ 7,074 $ 8,372
=========== =========== =========== ============ ============ ============
Net income per share - basic (3) $ 0.12 (4) $ 0.34 (4) $ 0.59 $ 0.67
=========== ============ ============ ============
Weighted average shares
outstanding - basic (3) 7,093,359 (4) 7,630,104 (4) 11,941,144 12,514,297
=========== ============ ============ ============
Net income per share - diluted (3) $ 0.12 (4) $ 0.34 (4) $ 0.57 $ 0.64
=========== ============ ============ ============
Weighted average shares
outstanding - diluted (3) 7,093,359 (4) 7,657,691 (4) 12,560,493 13,090,305
=========== ============ ============ ============
Selected Operating Data:
Total value of accounts referred $ 199,108 $ 281,387 $ 431,927 $ 1,173,342 $ 3,989,810 $ 4,152,699
Average fee 20.2% 22.5% 22.4% 25.2% 25.5% 25.6%
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents $ 562 $ 526 $ 805 $ 12,058 $ 29,539
Working capital 445 473 812 13,629 36,440
Total assets 1,990 3,359 6,644 35,826 101,636
Long-term debt, net of current portion 59 732 2,593 1,091 1,437
Shareholders' equity 876 1,423 2,051 30,647 89,334
</TABLE>
- 23 -
<PAGE>
(1) Assumes that the 1997 Acquisitions and the AFECD and TRC acquisitions
occurred on January 1, 1997.
(2) Gives effect to: (i) the reduction of certain redundant operating costs and
expenses that were immediately identifiable at the time of the acquisitions;
(ii) the increase in amortization expense as if the acquisitions had occurred
on January 1, 1997 and the elimination of deprecation and amortization expense
related to assets revalued or not acquired by NCO as part of the acquisitions;
(iii) the elimination of interest expense associated with acquisition related
debt to be repaid with proceeds of the IPO and the 1997 Offering; (iv) the
issuance of 517,767 shares of Common Stock and warrants exercisable for 375,000
shares of Common Stock in connection with the acquisition of CRWCD; (v) the
issuance of 1,425,753 shares of Common Stock at the public offering price in
the 1997 Offering of $19.67 per share which, net of the underwriting discount
and estimated offering expenses payable by the Company, would be sufficient to
repay acquisition related debt of $8.4 million and to fund the acquisitions of
the AFECD and TRC acquisitions; and (vi) the issuance of 46,442 shares of
Common stock issued in connection with the acquisition of AFS.
(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 prior to such date. Accordingly, the historical financial statements do
not include a provision for federal and state income taxes for such periods. A
pro forma provision for income taxes, pro forma net income and pro forma net
income per share have been computed as if the Company had been fully subject to
federal and state income taxes for all periods presented. See Note 9 to
Consolidated Financial Statements.
(4) Assumes that the Company issued 374,637 shares of Common Stock at $8.67 per
share to fund the distribution of undistributed S Corporation earnings of $3.2
million through September 3, 1996, the termination date of the Company S
Corporation status, to existing shareholders of the Company.
-24-
<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,
------------------------------------------------------------------
1993 1994 1995 1996 1997
------- ------- -------- -------- ---------------------
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 55.4 53.1 53.4 47.6 49.8 48.8
Selling, general and
administrative
expenses
32.1 31.2 31.7 32.6 32.8 33.3
Depreciation and amortization
expense 1.9 2.5 2.7 4.1 4.0 4.1
------- ------- -------- -------- --------- --------
Total operating costs and
expenses 89.4 86.8 87.8 84.3 86.6 86.2
------- ------- -------- -------- --------- --------
Income from operations
10.6 13.2 12.2 15.7 13.4 13.8
Other income (expense):
0.1 (0.5) (1.4) (1.9) 0.5 0.3
------- ------- -------- -------- --------- --------
Income before provision for income
taxes 10.7 12.7 10.8 13.8 13.9 14.1
Provision for income taxes(1)
4.3 5.1 4.3 2.0 5.6 5.6
------- ------- -------- -------- --------- --------
Pro forma net income 6.4% 7.6% 6.5% 11.8% 8.3% 8.5%
======= ======= ======== ======== ========= ========
</TABLE>
(1) The Company was taxed as an S Corporation prior to September 3, 1996.
Accordingly, pro forma provisions for income taxes and pro forma net income have
been provided as if the Company had been subject to income taxes in all periods
presented.
Pro Forma Compared to Actual Results of Operations
Pro forma operating data for 1997 assume that the 1997 Acquisitions and the
1Q98 Acquisitions were consummated on January 1, 1997. Pro forma adjustments
have been made to reflect the elimination of certain expenses that were
immediately identifiable at the time of the acquisitions. For instance, pro
forma adjustments to 1997 include the elimination of approximately 155 redundant
administrative and collection personnel, the reduction of the salaries of the
principal shareholders of Goodyear and AFS, the closing or consolidation of five
existing call centers, as well as the downsizing of four call centers into
customer service locations. At the time of the acquisitions, the acquired
companies had higher cost structures than that of the Company's core business.
The Company intends to continue to leverage its infrastructure to realize
additional operating efficiencies in order to bring the cost structure of the
acquired companies 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. Management believes it will
-25-
<PAGE>
realize these cost savings with respect to the acquired companies, although no
assurances can be given that such cost savings will be realized. 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, 1997 Compared to Year ended December 31, 1996
Revenue. Revenue increased $54.5 million or 177.2% to $85.3 million for
1997 from $30.8 million in 1996. Of this income, $13.8 million of revenue was
attributable to the MAB acquisition completed in September 1996 and $37.1
million of revenue was attributable to the 1997 Acquisitions. The addition of
new clients and growth in business from existing clients represented $8.6
million of the increase in revenue. Revenue from other related services, which
became an area of focus in 1996, increased $4.6 million to $6.1 million in 1997
from $1.5 million in 1996.
Payroll and related expenses. Payroll and related expenses increased $27.9
million to $42.5 million for 1997 from $14.7 million in 1996, and increased as a
percentage of revenue to 49.8% from 47.6%. Payroll and related expenses
increased as a percentage of revenue primarily as a result of the businesses
acquired in the MAB acquisition and the 1Q97 Acquisitions having a higher cost
structure than that of the Company. This increase was partially offset by
spreading the cost of management and administrative personnel over a larger
revenue base. In addition, in the fourth quarter of 1997 there was $339,000 of
additional payroll expense attributable to a contract with the United States
Department of Education which did not have any corresponding revenue. Without
these costs, payroll as a percentage of revenue would have been 49.4% for 1997
compared with 47.6% in 1996.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $17.9 million to $27.9 million for 1997 from
$10.0 million in 1996, and increased as a percentage of revenue to 32.8% from
32.6%. Selling, general and administrative costs attributable to the United
States Department of Education contract were $274,000. Without these costs,
selling, general and administrative costs as a percentage of revenue would have
been 32.4% for 1997 compared with 32.6% in 1996. Also, the business acquired in
the 1997 Acquisitions had a higher cost structure than that of the Company and,
as a result of the acquisitions, the Company has continued to experience
increased costs as a result of changes in business mix which require the
increased use of national databases and credit reporting services. These
increases were offset by operating efficiencies obtained by spreading selling,
general and administrative expenses over a larger revenue base.
Depreciation and amortization. Depreciation and amortization increased to
$3.4 million for 1997 from $1.3 million in 1996. Of this increase, $1.8 million
was a result of the MAB acquisition and the 1997 Acquisitions. The remaining
$260,000 consisted of amortization of deferred financing charges and
depreciation resulting from capital expenditures incurred in the normal course
of business.
-26-
<PAGE>
Other income (expense). Interest expense decreased to $591,000 for 1997
from $818,000 in 1996. Although the Company's revolving credit facility had been
repaid with a portion of the net proceeds from the IPO, the Company borrowed
$8.4 million on its revolving credit facility to partially finance the 1Q97
Acquisitions, and issued a $900,000 convertible note payable in connection with
the Goodyear acquisition in January 1997. The revolving credit facility was
repaid with a portion of the proceeds from the Company's public offering
completed in July 1997 (the "1997 Offering"). In addition, the $1.0 million
convertible note payable issued in connection with the MAB acquisition in
September 1996 was converted to Common Stock in connection with the 1997
Offering. Interest and investment income increased $778,000 to $1.0 million for
1997 from the comparable period in 1996. This increase was primarily
attributable to the investment of funds remaining from the 1997 Offering, as
well as an increase in operating funds and funds held in trust for clients. As a
result of the disposal of certain fixed assets in the move of the Company's
corporate headquarters in July 1997, the Company incurred a loss on the disposal
of fixed assets in the amount of $41,000.
Income tax expense. Income tax expense for 1997 was $4.8 million or 40.3%
of income before taxes, and was computed after giving effect to non-deductible
goodwill expenses resulting from certain of the acquired companies. In 1996, the
Company was an S Corporation until September 1, 1996 and, accordingly, there was
no provision for income taxes until that time. The pro forma provision for
income taxes of $1.7 million for 1996 was computed utilizing an assumed rate of
40.0% after giving effect to non-deductible goodwill.
Net income. Net income in 1997 increased to $7.1 million for 1997 from
the pro forma net income of $2.5 million in 1996, a 178.4% increase.
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. Additionally, $4.8 million of increase was due to
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 $7.9
million to $14.7 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.
-27-
<PAGE>
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.
Pro forma provision for income taxes. The pro forma provision for income
taxes of $1.7 million and $546,000 in 1996 and 1995, respectively, was computed
using an assume tax rate of 40.0% after giving effect to non-deductible goodwill
from certain of the acquired companies.
Pro forma net income. Pro forma net income increased to $2.5 million in
1996 from $820,000 in 1995, a 210.0% increase.
Quarterly Results
The following table sets forth selected actual historical financial
data for the calendar quarters of 1996 and 1997. 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
---------------------------------------------------------------------------------------------------
1996 1997
------------------------------------------------- -------------------------------------------------
Mar. June Sept. Dec. Mar. June Sept. Dec.
31 30 30 31 31 30 30 31
----------- ------------ ----------- ----------- ----------- ----------- ------------ -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $6,044 $6,499 $7,715 $10,502 $18,077 $21,162 $21,739 $24,306
Income from
operations 915 1,156 1,183 1,569 2,383 3,039 3,112 2,932
Net income 760 1,001 968 906 1,307 1,717 2,082 1,968
</TABLE>
-28-
<PAGE>
<TABLE>
<CAPTION>
Quarter ended
---------------------------------------------------------------------------------------------------
1996 1997
------------------------------------------------- -------------------------------------------------
Mar. June Sept. Dec. Mar. June Sept. Dec.
31 30 30 31 31 30 30 31
----------- ------------ ----------- ----------- ----------- ----------- ------------ -----------
(dollars in thousands)
<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 15.1% 17.8% 15.3% 14.9% 13.2% 14.4% 14.3% 12.1%
Net income 12.6% 15.4% 12.5% 8.6% 7.2% 8.1% 9.6% 8.1%
</TABLE>
The Company has experienced and expects to continue to experience quarterly
variations in revenue and operating 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 effect of the change of business
mix on margins and the timing of additional selling, general and administrative
expenses to support new business. In connection with certain contracts, the
Company could incur costs in periods prior to recognizing revenue under those
contracts. The Company's planned operating expenditures are based on revenue
forecasts, and if revenues are below expectation in any given quarter, operating
results would likely be materially adversely affected. While the effects of
seasonality on the Company'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.
The Company's quarterly operating results could also be affected by the
costs and timing of completion and integration of acquisitions. In the fourth
quarter of 1996, income from operations and net income as a percentage of
revenue were lower than in prior quarters of 1996 largely as a result of the
higher payroll and related expenses of MAB as compared to the Company's core
business. Similarly, in the first quarter of 1997, the Company's operating and
net margins were adversely affected by the higher cost structures of MAB and the
1Q97 Acquisitions as compared to the Company's core business.
Liquidity and Capital Resources
In July 1997, the Company completed the 1997 Offering selling 4,312,500
shares of common stock at a price to the public of $19.67 per share, including
2,166,000 shares issued by the Company, 650,369 shares and 562,500
over-allotment shares sold by existing shareholders, 75,480 shares acquired by
employees through the exercise of stock options, 225,000 shares acquired by the
Company's bank (Mellon Bank, N.A.) through the exercise of stock warrants,
115,385 shares acquired through the conversion of the Company's convertible
note, and 517,767 shares acquired by CRW Financial, Inc. in connection with the
acquisition by NCO of CRWCD. The proceeds of the Offering, after underwriting
discounts and expenses, were approximately $40.4 million.
In November 1996, the Company completed its IPO selling 4,312,500 shares of
its Common Stock at a price of $8.67 per share, including 3,750,000 shares
issued by the Company, and 562,500 over-allotment shares sold by existing
shareholders. The net proceeds to the Company were $28.8 million.
The Company's primary sources of cash have historically been cash flow from
operations, bank borrowings and, in 1996 and 1997, the net proceeds from the IPO
and the 1997 Offering, respectively. Cash has been used for acquisitions,
distributions to shareholders, purchases of equipment and working capital to
support the Company's growth.
-29-
<PAGE>
Cash provided by operating activities was $6.7 million in 1997 and $2.8
million in 1996. The increase in cash provided by operations was primarily due
to the increase in net income to $7.0 million in 1997 compared to $3.6 million
in 1996, and the increase in non-cash charges, primarily depreciation and
amortization, to $3.4 million in 1997 compared to $1.3 million in 1996. These
increases were offset by a $3.9 million increase in accounts receivable in 1997
compared to a $1.8 million increase in 1996 and a $262,000 increase in accounts
payable and accrued expenses in 1997 compared to a $222,000 increase in the
comparable period in 1996. Approximately $1.0 million of accounts payable and
accrued expenses in acquired companies were reduced in order to bring the
balances in line with NCO's payment policies.
Cash provided by operating activities was $2.8 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 $572,000 increase in 1995 and a $222,000 increase in accounts
payable and accrued expenses in 1996 compared to an $858,000 increase in 1995.
Cash used in investing activities was $29.2 million in 1997 compared to
$13.3 million for 1996. The increase was primarily due to the 1Q97 and 1997
Acquisitions versus the acquisition of TCD and MAB in 1996. In January 1997, the
Company purchased substantially all of the assets of CMS A/R for $5.1 million in
cash, certain assets of TeleResearch for $1.6 million in cash, and all of the
outstanding stock of Goodyear for $4.5 million in cash and a $900,000
convertible Note. The Note is convertible into an aggregate of 63,755 shares of
Common Stock at any time and bears interest payable monthly at a rate of 8.0%
per annum with principal due in January 2002. In February 1997, NCO purchased
substantially all of the assets of CRWCD for $3.75 million in cash, 517,767
shares of Common Stock (which were sold in the 1997 Offering) and warrants for
375,000 shares of Common Stock. The Company financed the cash portion of the
purchase price for the 1Q97 Acquisitions with borrowings of $7.4 million under
its Credit Agreement and financed the balance with proceeds of its IPO and
existing working capital. During March 1997, the Company borrowed an additional
$1.0 million under the Credit Agreement to pay certain accounts payable assumed
as part of the CRWCD acquisition. On October 1, 1997, the Company purchased the
outstanding stock of ADVANTAGE Financial Services, Inc. and related companies
("AFS") for $2.9 million in cash, 46,442 shares of common stock and $1.0 million
in notes payable. The acquisition was valued at approximately $5.0 million. On
October 1, 1997, the Company purchased the outstanding stock of Credit
Acceptance Corp. ("CAC") for $1.8 million in cash. The cash portion of the AFS
and CAC acquisitions were financed with a portion of the proceeds of the 1997
Offering. In addition, the Company has accrued $1.1 million of acquisition
related expenses. The 1997 Acquisitions collectively resulted in goodwill of
$37.0 million.
-30-
<PAGE>
Cash used in investing activities was $13.3 million in 1996 compared to
$2.1 in 1995. The increase was primarily due to the acquisitions of MAB and TCD
in 1996. 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
$8.67 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.
The 1996 acquisitions collectively resulted in goodwill of $14.0 million.
In addition to equipment financed under operating leases, capital
expenditures were $298,000, $976,000 and $3.4 million in 1995, 1996 and 1997,
respectively.
Cash provided by financing activities was $39.9 million in 1997 compared to
$21.8 million in 1996. Net proceeds of $40.4 million from the 1997 offering was
the Company's primary source of cash from financing activities which was used
for acquisitions and to repay outstanding indebtedness.
Cash provided by financing activities was $21.8 million in 1996 compared to
$280,000 in 1995. Bank borrowings had been the Company's primary source of cash
from financing activities and were used for acquisitions and, along with cash
provided by operations, for distributions to shareholders. The Company raised
net proceeds of approximately $28.8 million in the IPO of which $15.0 million
was used to repay outstanding indebtedness under the Credit Agreement and
approximately $3.2 million was used to pay undistributed S Corporation earnings.
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 IPO, Mellon Bank, N.A. increased the
revolving credit facility to $25.0 million and decreased the rate of interest to
2.5% over LIBOR. In December 1996, Mellon Bank N.A. reduced the interest rate to
1.5% over LIBOR. Outstanding borrowings under the Credit Agreement at December
31, 1995 were $2.5 million. There were no outstanding borrowings as of December
31, 1996 or 1997. 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 March 1998, the bank increased the line of credit to $75.0
million in connection with the proposed acquisition of FCA International Ltd.
In connection with entering into the original 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 263,297 shares of the Company's Common Stock. The warrant expires
on July 31, 2005 and is exercisable for nominal consideration. In connection
with the increase of the line of credit available under the Credit Agreement 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 an aggregate of 97,590 shares
of Common Stock exercisable at $8.67 per share. 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. In July 1997, the bank exercised
225,000 warrants for Common Stock which was sold in the 1997 offering. The
remainder of the warrants were exercised in January 1998.
-31-
<PAGE>
In March 1998, the Company entered into an agreement with FCA International
Ltd. under which NCO or an affiliate, will make a cash tender offer (which is
expected to be mailed on or before April 7, 1998) for all of the outstanding
common shares of FCA at $9.60 per share, Canadian, or $6.77 in U.S. dollars. The
acquisition is valued at approximately $68.0 million [USD], based upon an
exchange rate of .7053 and is subject to the tender of two-thirds of the
outstanding common shares, on a fully diluted basis, and after customary
conditions, including normal regulatory approval. FCA's Board of Directors
unanimously approved the agreement and has agreed, subject to certain
conditions, to recommend that shareholders tender their common shares into the
offer. Pursuant to the agreement, Fairfax Financial Holdings Limited has agreed,
subject to certain conditions, to tender to the bid, the common shares of FCA
owned or controlled by it. Fairfax currently owns or controls approximately
2,840,485 common shares, representing approximately 27% of the common shares
outstanding on a fully-diluted basis.
The Company believes that funds generated from operations, together with
existing cash, the net proceeds from the Offering and available borrowings under
its Credit Agreement will be sufficient to finance its current operations and
planned capital expenditure requirements and internal growth at least through
December 31, 1998. In addition, the Company believes it will have sufficient
funds to make selected acquisitions. However, the Company could require
additional debt or equity financing if it were to make any significant
acquisitions for cash.
Year 2000 System Modifications
NCO has initiated a program to evaluate and address the impact of the year
2000 on its information systems in order to insure that its network and software
will manage and manipulate data involving the transition of dates from 1999 to
2000 without functional or data abnormality and without inaccurate results
related to such data. This program includes steps to: (a) identify software
vendors areas that require date code remediation; (b) establish timelines for
availability of corrective software releases; (c) implement the fix to a test
environment and test the remediated product, (d) integrate the updated software
to NCO's production environment, (e) communicate and work with clients to
implement year 2000 compliant data exchange formats, and (f) provide management
with assurance of a seamless transition to the year 2000. The identification
phase is substantially complete and delivery of the final software updates are
scheduled for the third quarter of 1998. Management expects to complete the
major portion of testing and acceptance procedures in 1998. The Company will
continue to coordinate the year 2000 compliance effort throughout the balance of
1998 and into 1999 to synchronize data exchange formats with clients.
For the years 1998 and 1999, the Company expects to incur total pre-tax
expenses of approximately $200,000 to $250,000, per year. These costs are
associated with both internal and external staffing resources for the necessary
planning, coordination, remediation, testing, and other expenses to prepare its
systems for the year 2000. However, a portion of these expenses will not be
incremental, but rather represent a redeployment of existing information
technology resources. Management does not expect substantial additional license
fee costs associated directly with year 2000 compliance because the Company's
software vendors are incorporating necessary modifications as part of their
normal system maintenance. The majority of the costs will be incurred through
the modification and testing of electronic data interchange formats with the
Company's clients. The cost of planning and initial remediation incurred through
1997 has not been significant.
-32-
<PAGE>
Recent Accounting Pronouncements:
In June 1997, the Financial Accounting Standard Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for the
reporting and display of comprehensive income, requiring its components to be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The Company will adopt this standard in the first
quarter of 1998. Management believes that the adoption of SFAS No. 130 will have
not have a material impact on its consolidated results of operations, financial
condition or cash flows.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for reporting financial information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customer. The Company is
required to disclose this information for the first time it publishes its 1998
annual report. Management is in the process of evaluating the segment
disclosures for purposes of reporting under SFAS No. 131. Management has not
determined what impact the adoption of SFAS. No. 131 will have on the
consolidated results of operations, financial condition or cash flows.
Forward Looking Statements
Certain statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, as well as elsewhere in this
Annual Report on Form 10-K, 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, the anticipated
changes in revenues from acquired companies, 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
actual results and developments may be materially different from those expressed
in or implied by such statements. See Item 1. - "Business - Investment
Considerations."
-33-
<PAGE>
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable
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.
-34-
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
Incorporated by reference from the Company's Proxy Statement relating
to the 1998 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 1998 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 1998 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 1998 Annual Meeting of Shareholders to be filed pursuant to General
Instruction G(3) to Form 10-K.
-35-
<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 included in this
Report on Form 10-K:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1996 and 1997
Consolidated Statements of Income for each of the three years
in the period ended December 31, 1997
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1997
Consolidated Statements of Shareholders' Equity for each of the years
in the period ended December 31, 1997
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 "*":
<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.
*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.
</TABLE>
-36-
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------------- -----------------------------------------------------------------------------------------
<S> <C>
*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.
10.19 Second 1996 Warrant Agreement, dated December 13, 1996, by
and between the Company and APT Holdings Corporation, an
affiliate of 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.
</TABLE>
-37-
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------------- -----------------------------------------------------------------------------------------
<S> <C>
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 263,297 shares issued to APT Holdings Corporation, an
affiliate of Mellon Bank, N.A.
10.25(1) 1996 Common Stock Purchase Warrant for 69,840 shares issued
to APT Holdings Corporation, an affiliate of Mellon Bank,
N.A.
10.26 Second 1996 Common Stock Purchase Warrant for 27,750 shares
issued to APT Holdings Corporation, an affiliate of 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. NCO will
furnish to the Securities and Exchange Commission a copy of
any omitted schedule upon request.
10.29(1) Asset Purchase Agreement dated December 8, 1995 by and
between the Company and Trans Union Corporation. NCO will
furnish to the Securities and Exchange Commission a copy of
any omitted schedule upon request.
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. 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.
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.
</TABLE>
-38-
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------------- -----------------------------------------------------------------------------------------
<S> <C>
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.
10.34(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.
10.36(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.
10.40(5) Asset Acquisition Agreement by and among The Response
Center Division of TeleSpectrum Worldwide, Inc., , and NCO
dated January 16, 1998. NCO will furnish to the Securities
and Exchange Commission a copy of any omitted schedules
upon request.
10.41 Lease dated March 18, 1997 between Indiana Avenue
Associates, L.P. and the Company related to the lease of
Fort Washington corporate headquarters.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Coopers and Lybrand LLP
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.
-39-
<PAGE>
(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.
(5)Incorporated by reference to the Company's Current Report on Form 8-K (File
No. 0-21639) filed with the Securities Exchange Commission on February 25,
1998.
(b). Reports on Form 8-K. No reports on Form 8-K were filed during the
quarter ended December 31, 1997.
-40-
<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, 1998 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, President March 31, 1998
- ----------------------------- and Chief Executive Officer
Michael J. Barrist (principal executive officer)
/s/ Charles C. Piola Executive Vice President and March 31, 1998
- ----------------------------- Director
Charles C. Piola
/s/ Steven L. Winokur Executive Vice President, March 31, 1998
- ----------------------------- Finance, Chief Financial Officer
Steven L. Winokur and Treasurer (principal
financial and accounting officer)
/s/ Bernard R. Miller Senior Vice President, March 31, 1998
- ----------------------------- Development and Director
Bernard R. Miller
/s/ Eric S. Siegel Director March 31, 1998
- -----------------------------
Eric S. Siegel
/s/Allen F. Wise
- -----------------------------
Allen F. Wise Director March 31, 1998
</TABLE>
-41-
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
Report of Independent Accountants..........................................................................F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 ..............................................F-3
Consolidated Statements of Income for each of the three years
in the period ended December 31, 1997.....................................................................F-4
Consolidated Statements of Shareholders' Equity for each of the years
in the period ended December 31, 1997.....................................................................F-5
Consolidated Statements of Cash Flows for each of the years
in the period ended December 31, 1997.....................................................................F-6
Notes to Consolidated Financial Statements.................................................................F-7
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of
NCO Group, Inc.
Fort Washington, Pennsylvania
We have audited the accompanying consolidated balance sheets of NCO
Group, Inc. as of December 31, 1996 and 1997 and the related consolidated
statements of income, shareholders' equity, and cash flows for each of
the three years in the period ended December 31, 1997. 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 1997 and the results of its
operations and its cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 6, 1998
F-2
<PAGE>
Part 1 - Financial Information
Item 1 - Financial Statements
<TABLE>
<CAPTION>
NCO GROUP, INC.
Consolidated Balance Sheets
December 31, December 31,
ASSETS 1996 1997
------------------ ------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 12,058,798 $ 29,539,103
Accounts receivable, trade, net of
allowance for doubtful accounts of $79,000
and $365,000, respectively 4,701,364 13,441,513
Other current assets 499,815 2,357,184
------------------ ------------------
Total current assets 17,259,977 45,337,800
Funds held in trust for clients
Property and equipment, net 2,830,062 7,469,388
Other assets:
Intangibles, net of accumulated amortization 14,673,155 45,881,276
Deferred taxes 70,760 -
Deferred financing costs 684,390 521,691
Deposits on acquisitions - 1,650,000
Other assets 308,011 775,872
------------------ ------------------
Total other assets 15,736,316 48,828,839
------------------ ------------------
Total assets $ 35,826,355 $ 101,636,027
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt, current portion $ 46,946 $ 560,073
Capitalized lease obligations, current portion 62,131 113,578
Corporate taxes payable 216,709 285,756
Accounts payable 657,647 1,913,270
Accrued expenses 1,044,536 3,074,182
Accrued compensation and related expenses 1,376,982 2,844,025
Unearned revenue, net of related costs 225,817 107,388
------------------ ------------------
Total current liabilities 3,630,768 8,898,272
Funds held in trust for clients
Long-term liabilities:
Long term debt, net of current portion 1,091,901 1,437,293
Capitalized lease obligations, net of current portion 385,683 247,775
Deferred taxes - 1,691,304
Unearned revenue, net of related costs 70,385 27,039
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, 37,500,000 shares authorized,
10,070,171 and 13,216,244 shares issued and outstanding, respectively 29,362,326 80,248,636
Unexercised warrants 396,054 1,122,546
Retained earnings 889,238 7,963,162
------------------ ------------------
Total shareholders' equity 30,647,618 89,334,344
------------------ ------------------
Total liabilities and shareholders' equity $ 35,826,355 $ 101,636,027
================== ==================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-3
<PAGE>
NCO GROUP, INC.
Consolidated Statements of Income
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------
1995 1996 1997
----------------- ------------- --------------
<S> <C> <C> <C>
Revenue $ 12,732,597 $ 30,760,452 $ 85,283,668
Operating costs and expenses:
Payroll and related expenses 6,797,338 14,651,384 42,502,175
Selling, general and administrative expenses 4,042,342 10,032,216 27,947,017
Depreciation and amortization expense 347,503 1,253,867 3,368,528
------------ ------------ ------------
Total operating costs and expenses 11,187,183 25,937,467 73,817,720
------------ ------------ ------------
Income from operations 1,545,414 4,822,985 11,465,948
Other income (expense):
Interest and investment income 49,473 242,380 1,019,901
Interest expense (180,205) (817,951) (591,382)
Loss on disposal of fixed assets (49,082) -- (40,506)
------------ ------------ ------------
(179,814) (575,571) 388,013
------------ ------------ ------------
Income before provision for income taxes 1,365,600 4,247,414 11,853,961
Income tax expense -- 612,748 4,780,037
------------ ------------ ------------
Net income $ 1,365,600 $ 3,634,666 $ 7,073,924
============ ============ ============
Pro Forma
-------------------------------
Historical income before income taxes $ 1,365,600 $ 4,247,414
Pro forma provision for income taxes 546,000 1,706,485
------------ ------------
Pro forma net income $ 819,600 $ 2,540,929
============ ============ ============
Net income per share - basic $ 0.12 $ 0.34 $ 0.59
============ ============ ============
Weighted average shares outstanding - basic 7,093,359 7,630,104 11,941,144
============ ============ ============
Net income per share - diluted $ 0.12 $ 0.34 $ 0.57
============ ============ ============
Weighted average shares outstanding - diluted 7,093,359 7,657,691 12,560,493
============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-4
<PAGE>
NCO GROUP, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------
1995 1996 1997
----------------- ------------------ ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,365,600 $ 3,634,666 $ 7,073,924
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 199,123 465,785 1,311,181
Amortization of intangibles 221,813 707,050 1,882,492
Amortization of deferred financing costs 32,443 81,031 174,855
Loss on disposal of equipment 49,082 - 40,506
Gain on sales of securities 2,877 (70,481) -
Provision for doubtful accounts 3,808 55,845 285,851
Deferred taxes - (154,684) 1,762,064
Changes in assets and liabilities, net of acquisitions: -
Accounts receivable, trade (571,611) (1,825,307) (3,976,740)
Other current assets 14,052 (312,743) (1,530,329)
Other assets (105,037) (8,903) (13,151)
Accounts payable 161,601 422,694 (1,356,286)
Corporate taxes payable - 216,709 68,353
Accrued expenses 187,353 (788,709) 782,967
Accrued compensation and related costs 555,398 598,997 404,958
Unearned revenue (46,718) (227,548) (161,775)
----------------- ------------------ ------------------
Net cash provided by operating activities 2,069,784 2,794,402 6,748,870
Cash flows from investing activities:
Notes receivable (36,000) 155,856 -
Purchase of property and equipment (298,076) (976,080) (3,368,430)
Purchase of securities (107,643) (78,307) -
Proceeds from sale of securities 99,256 406,937 -
Net cash paid for acquisitions (1,729,244) (12,857,223) (25,850,074)
----------------- ------------------ ------------------
Net cash used in investing activities (2,071,707) (13,348,817) (29,218,504)
Cash flows from financing activities:
Repayment of notes payable (1,067,117) (303,138) (465,588)
Borrowings under credit agreement 2,450,000 12,550,000 8,350,000
Repayment under credit agreement - (15,000,000) (8,350,000)
Payment of fees to acquire new debt (134,163) (222,383) (12,157)
Issuance of common stock 105,127 32,500,000 43,274,926
Costs related to issuance of common stock - (3,675,000) (2,847,242)
Decrease in notes receivable, shareholders - 82,873 -
Distributions to shareholders (1,073,392) (4,123,689) -
----------------- ------------------ ------------------
Net cash provided by financing activities 280,455 21,808,663 39,949,939
----------------- ------------------ ------------------
Net increase in cash and cash equivalents 278,532 11,254,248 17,480,305
Cash and cash equivalents at beginning of period 526,018 804,550 12,058,798
----------------- ------------------ ------------------
Cash and cash equivalents at end of period $ 804,550 $ 12,058,798 $ 29,539,103
================= ================== ==================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-5
<PAGE>
NCO GROUP, INC.
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
Number of Unexercised Retained
Shares Amount Warrants Earnings
----------------- -------------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 6,189,849 $ 349,326 $ - $ 1,086,053
Issuance of common stock 130,322 188,000 - -
Warrants issued - - 177,294 -
Note repayments - - - -
Net income - - - 1,365,600
Distributions to shareholders - - - (1,073,392)
Change in unrealized gains
on securities - - - -
----------------- -------------------- ----------------- ---------------
Balance, December 31, 1995 6,320,171 537,326 177,294 1,378,261
Issuance of common stock 3,750,000 28,825,000 - -
Warrants issued - - 218,760 -
Note repayments - - - -
Net income - - - 3,634,666
Distributions to shareholders - - - (4,123,689)
----------------- -------------------- ----------------- ---------------
Balance, December 31, 1996 10,070,171 29,362,326 396,054 889,238
Issuance of common stock 3,146,073 50,886,310 (148,508) -
Warrants issued - - 875,000 -
Net income - - - 7,073,924
----------------- -------------------- ----------------- ---------------
Balance, December 31, 1997 13,216,244 $ 80,248,636 $ 1,122,546 $ 7,963,162
================= ==================== ================= ===============
</TABLE>
RESTUBBED
<TABLE>
<CAPTION>
Unrealized
Gains Notes
(Losses) on Receivable
Securities Shareholder Total
--------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Balance, January 1, 1995 $ (12,695) $ - $ 1,422,684
Issuance of common stock - (135,888) 52,112
Warrants issued - - 177,294
Note repayments - 53,015 53,015
Net income - - 1,365,600
Distributions to shareholders - - (1,073,392)
Change in unrealized gains
on securities 54,034 - 54,034
--------------- ----------------- -----------------
Balance, December 31, 1995 41,339 (82,873) 2,051,347
Issuance of common stock - - 28,825,000
Warrants issued - - 218,760
Note repayments - 82,873 82,873
Net income - - 3,634,666
Distributions to shareholders (41,339) - (4,165,028)
--------------- ----------------- -----------------
Balance, December 31, 1996 - - 30,647,618
Issuance of common stock - - 50,737,802
Warrants issued - - 875,000
Net income - - 7,073,924
--------------- ----------------- -----------------
Balance, December 31, 1997 $ - $ - $ 89,334,344
=============== ================= =================
The accompanying notes are an integral part of these consolidated financial statements.
F-6
</TABLE>
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements
1. Nature of operations:
NCO Group, Inc. (the "Company") is a leading provider of accounts
receivable management and related services utilizing an extensive
teleservices infrastructure. The Company's client base is comprised of
companies located throughout the United States in the following sectors:
financial services, healthcare, retail and commercial, education,
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. In December 1997,
the Company effected a three-for-two stock split and increased the
authorized shares of common stock to 37,500,000. All per share and
related amounts have been adjusted to reflect the stock exchange and
stock splits.
On November 13, 1996, the Company completed its initial public offering
(the "IPO"), selling 4,312,500 shares of common stock including 562,500
over-allotment shares sold by existing shareholders at a price to the
public of $8.67 per share. The IPO 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
IPO.
In July 1997, the Company completed a public offering (the "1997
Offering") selling 4,312,500 shares of common stock at a price to the
public of $19.67 per share, including 2,166,000 shares issued by the
Company, 1,212,869 (562,500 of which were over-allotment shares) sold by
existing shareholders, 75,480 shares acquired by employees through the
exercise of stock options, 225,000 shares acquired by the Company's bank
(Mellon Bank, N.A.) through the exercise of stock warrants, 115,385
shares acquired through the conversion of the Company's convertible note
issued in connection with the acquisition of Management Adjustment Bureau
Inc. ("MAB") in September 1996, and 517,767 shares acquired by CRW
Financial, Inc. in connection with the acquisition by NCO of the
Collection Division of CRW Financial, Inc. ("CRWCD"). The net proceeds of
the 1997 Offering, after underwriting discounts and expenses, were
approximately $40.4 million.
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.
F-7
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
2. Summary of significant accounting policies, continued:
Property and Depreciation (continued):
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,
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.
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.
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, 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 an
initial 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 1997, the Company had cash and cash equivalents
in excess of federally insured limits of approximately $1,045,605 and
$25,717,894, 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.
Deferred Financing Costs:
Deferred financing costs relate to debt issuance costs incurred which are
capitalized and amortized over the term of the debt.
F-8
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
2. Summary of significant accounting policies, continued:
Intangibles:
Intangibles consists primarily of goodwill and also includes 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. Such allocation has been based on estimates which may be revised
at a later date. The recoverability of goodwill is periodically reviewed
by the Company. 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 1997 totaled $762,612 and $2,610,595, respectively.
Estimates Utilized in the Preparation of Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Earnings Per Share:
All earnings per share computations and presentations are in accordance
with SFAS No. 128, "Earnings per Share."
Reclassifications:
Certain amounts for December 31, 1995 and 1996 and the years then ended
have been reclassified for comparative purposes.
3. Acquisitions:
On August 1, 1995, the Company purchased certain assets of Eastern
Business Services, Inc. ("Eastern") for approximately $2.04 million
comprised of $1.63 million in cash and $416,000 of liabilities assumed.
The purchase price was allocated primarily based upon the estimated fair
market values of the acquired assets and liabilities, resulting in
goodwill of $1.8 million.
On January 3, 1996 the Company purchased certain assets of Trans Union
Corporation Collections Division ("TCD") for $4.75 million in cash. The
purchase price was allocated based upon the estimated fair market values
of the acquired assets, resulting in goodwill of $3.7 million.
On September 5, 1996 the Company purchased the outstanding stock of
Management Adjustment Bureau, Inc. ("MAB") for $9.0 million comprised of
$8.0 million in cash and a $1.0 million convertible note. The purchase
price was allocated based upon the estimated fair market values of the
acquired assets and liabilities, resulting in goodwill of $8.5 million.
On January 22, 1997 the Company purchased the outstanding stock of
Goodyear & Associates, Inc. ("Goodyear") for $5.4 million comprised of
$4.5 million in cash and a $900,000 convertible note. The purchase price
was allocated based upon the estimated fair market values of the acquired
assets and liabilities, resulting in goodwill of $4.9 million.
On January 30, 1997 the Company purchased substantially all the assets of
Tele-Research Center, Inc. ("Tele-Research") for $1.6 million in cash,
which was increased in January 1998 by an additional $600,000 when
certain revenue targets were reached in the period following the
acquisition. The purchase price was allocated based upon the estimated
fair market values of the acquired assets, resulting in goodwill of $1.6
million.
F-9
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
3. Acquisitions (continued):
On January 31, 1997 the Company purchased certain assets of the CMS A/R
Services ("CMSA/R"), the Collection Division of CMS Energy Corporation,
for $5.1 million in cash. The purchase price was allocated based upon the
estimated fair market values of the acquired assets, resulting in
goodwill of $3.24 million.
On February 2, 1997 the Company purchased certain assets and assumed
certain liabilities of the Collections Division of CRW Financial, Inc.
for $3.75 million in cash, 517,767 shares of common stock and warrants
for 375,000 shares of common stock. The acquisition was valued at
approximately $12.8 million. The purchase price was allocated based upon
the estimated fair market values of the acquired assets and liabilities,
resulting in goodwill of $10.24 million.
On October 1, 1997 the Company purchased the outstanding stock of
ADVANTAGE Financial Services, Inc. and related companies ("AFS") for $2.9
million in cash, 46,442 shares of common stock and $1.0 million in notes
payable. The acquisition was valued at approximately $5.0 million. The
purchase price was allocated based upon the estimated fair market values
of the acquired assets and liabilities, resulting in goodwill of $5.1
million.
On October 1, 1997 the Company purchased the outstanding stock of Credit
Acceptance Corp. ("CAC") for $1.8 million in cash. The purchase price was
allocated based upon the estimated fair market values of the acquired
assets and liabilities, resulting in goodwill of $1.8 million.
The following summarizes unaudited pro forma results of operations for
the years ended December 31, 1996 and 1997, assuming the above
acquisitions occurred as of the beginning of the respective periods. The
pro forma information is provided for informational purposes only. It is
based on historical information, and does not necessarily reflect the
actual results that would have occurred, nor is it indicative of future
results of operations of the consolidated entities:
1996 1997
----------- ------------
Revenue $87,293,957 $93,905,262
Net income $3,159,555 $6,932,900
Earnings per share-basic $0.30 $0.58
Earnings per share-diluted $0.29 $0.55
On December 31, 1997, effective January 1, 1998, the Company purchased
certain assets of American Financial Enterprises, Inc. Collections
Division ("AFECD") for $1.7 million in cash. Cash paid for the
acquisition of AFECD is included on the Consolidated Balance Sheet at
December 31, 1997 under the caption "Deposits on acquisitions."
On February 6, 1998, the Company purchased certain assets of The Response
Center ("TRC"), which was an independent division of TeleSpectrum
Worldwide, Inc., for $15.0 million plus an earn-out based on the value of
the Company's market research business at December 31, 1998.
4. Marketable securities:
In 1995 and 1996, the Company classified all of its securities as
"available-for-sale" and 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 $99,256 in 1995.
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.
F-10
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
4. Marketable securities (continued):
Investment income, included in interest and investment income on the
Consolidated Statements of Income, from available-for-sale securities as
of December 31, 1995 and 1996 consisted of:
1995 1996
-------- ----------
Realized gain on the sales of securities $12,217 $ 86,509
Realized loss on the sales of securities (15,094) (12,186)
Interest income 7,035 33,577
Dividend income 5,892 6,816
-------- ----------
$ 10,050 $114,716
======== ========
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 $14,898,194 at December 31, 1996 and 1997 have been shown net of
their offsetting liability for financial statement presentation.
6. Property and equipment:
At December 31, 1996 and 1997, property and equipment, at cost, consists
of the following:
1996 1997
---------- ----------
Computer equipment $2,461,211 $7,161,209
Furniture and fixtures 1,095,134 2,063,232
Leased assets 324,414 324,414
---------- ----------
3,880,759 9,548,855
Less accumulated depreciation 1,050,697 2,079,467
---------- ----------
$2,830,062 $7,469,388
========== ==========
Depreciation charged to operations amounted to $199,123, $465,785, and
$1,311,181 for the years ended 1995, 1996 and 1997, respectively. The
Company had not entered into any capital lease transactions for the year
ended December 31, 1997.
7. Cash value, life insurance:
The cash value of certain split-dollar life insurance policies is
included under the caption "Other assets" on the consolidated balance
sheets. The insurance policies, which were purchased in 1997, separately
insure: (i) the joint lives of Michael J. Barrist and his spouse; and
(ii) the joint lives of Charles C. Piola Jr. and his spouse. Under the
terms of the split-dollar agreement, the Company will pay the premiums
for certain survivorship life insurance policies on the lives of Mr. and
Mrs. Barrist and Mr. and Mrs. Charles C. Piola with an aggregate face
value of $50.0 million and $30.0 million, respectively, only to the
extent that the premiums are in excess of the cost of the term insurance
coverage. While the proceeds of the policies are payable to the
beneficiaries designated by the respective executives, the Company has an
interest in the insurance benefits equal to the cumulative amount of
premiums it has paid and is not responsible to pay any premiums in excess
of the cash surrender value of the respective policies.
F-11
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
8. Long-term debt:
1996 1997
---------- ---------
Non-interest bearing note; $99,750 remaining
face amount, payable in monthly installments
of $5,250 through July 1999 (less unamortized
discount based on imputed interest rate
of 10%) $ 138,847 $ 91,900
Vehicle loan - from acquired company
payable in monthly installments of $339
through May 1999 - 5,467
Subordinated seller note payable, 8.00% due
September 2001, converted to common stock
in the 1997 Offering 1,000,000 -
Subordinated seller notes payable, 8.00%,
$500,000 due on April 1998 and January 1999 - 1,000,000
Subordinated seller note payable, 8.00% due
February 2002, convertible to common stock
at $14.117 per share - 900,000
Less current portion (46,946) (560,073)
----------- ------------
$1,091,901 $1,437,294
=========== ============
The following summarizes the Company's required debt payments for the
next five years:
1998 $560,073
1999 537,294
2000 -
2001 -
2002 900,000
In July 1995, the Company entered into a $7.0 million revolving credit
agreement. The line of credit is collateralized by substantially all the
assets of the Company. In September 1996, the credit agreement was
increased to $15.0 million and the bank received a warrant for 69,840
shares, exercisable at $8.67 per share. In December 1996, the bank
increased the credit agreement to $25.0 million and received a warrant to
purchase an additional 27,750 shares, exercisable at $8.67 per share. The
credit agreement currently bears interest at LIBOR plus 1.5% on
outstanding borrowings, and a 3/8% charge on the unused portion of the
credit agreement. 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 on dividends. In July 1997, the bank exercised 225,000
warrants for Common Stock which was sold in the 1997 offering. The
remainder of the warrants were exercised in January 1998.
At December 31, 1996 and 1997, there were no borrowings outstanding on
the credit agreement.
F-12
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
9. Income taxes:
A summary of the components of the tax provision at December 31, 1996 and
1997 is as follows:
1996 1997
--------- ----------
Currently payable:
Federal $620,133 $2,535,009
State 147,299 482,964
Deferred:
Federal 500 1,752,184
State 125 9,880
-------- -----------
Provision for income taxes 768,057 4,780,037
(excluding effect of change
in tax status)
Effect of accounting change:
Federal 124,247 -
State 31,062 -
-------- ----------
Total provision $612,748 $4,780,037
======== ==========
Deferred tax assets (liabilities) at December 31, 1996 and 1997 consist
of the following:
1996 1997
-------- ----------
Deferred tax assets:
Amortization $ 90,083 $ -
Contractual revenue recognition 65,333 25,238
Accrued expenses 38,878 103,199
-------- ---------
194,294 128,437
Deferred tax liabilities:
Amortization - 1,709,982
Depreciation 39,610 109,759
Accrual basis conversion 83,924 -
-------- ----------
123,534 1,819,741
-------- ----------
Net deferred tax asset (liability) $ 70,760 $(1,691,304)
======== ============
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% 34%
Income allocable to S Corporation (27%) -
Non-deductible goodwill and other expenses 5% 2%
State taxes, net of federal 2% 4%
---- -----
Effective tax rate 14% 40%
==== =====
F-13
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
10. 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 $30,027, $71,800, and $178,950, for
1995, 1996 and 1997, respectively.
11. Supplemental cash flow information:
The following are supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash paid for interest $ 157,379 $ 817,950 $ 569,122
Cash paid for income taxes - 600,000 4,153,970
Noncash investing and financing
activities:
Fair value of assets acquired 2,145,578 4,081,005 8,706,137
Property acquired under
capital leases - 348,586 -
Value of fixed assets traded for
new fixed assets - - 238,117
Liabilities assumed from
acquisitions 416,334 2,005,749 4,149,741
Note receivable, shareholder 82,873 - -
Convertible note payable,
issued for acquisition - 1,000,000 900,000
Notes payable,
issued for acquisition - - 1,000,000
Convertible note payable,
converted to Common Stock - - 1,000,000
Common stock issued for
acquisitions - - 9,310,118
Warrants issued with debt 177,294 218,760 -
Warrants issued for acquisitions - - 875,000
Warrants exercised - - 148,508
</TABLE>
12. Leases:
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, 1997:
1998 $ 4,299,000
1999 3,668,000
2000 2,686,000
2001 2,082,000
2002 1,547,000
Thereafter 7,749,000
------------
$22,031,000
F-14
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
12. Leases (continued):
Rent expense was $463,916, $1,073,914 and $2,696,819 for the years ended
December 31, 1995, 1996, and 1997, respectively. The related party office
lease expense, which terminated in July 1997, was $385,217, $489,926 and
$231,636, for 1995, 1996, and 1997, respectively. The total amount of
base rent payments is being charged to expense on the straight-line
method over the term of the lease.
13. Earnings per share:
Basic earnings per share were computed by dividing the net income
(including pro forma income taxes where applicable) for the years ended
December 31, 1995, 1996 and 1997 by the pro forma weighted average number
of shares outstanding. Pro forma net income amounts are used for 1995 and
1996 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. Diluted earnings per share were computed by dividing the
net income (including pro forma income taxes where applicable), adjusted
for the effects of interest expense attributable to convertible debt, for
the years ended December 31, 1995, 1996 and 1997 by the weighted average
number of shares outstanding including common equivalent shares. All
outstanding options, warrants and convertible securities have been
utilized in calculating diluted net income per share, using the initial
public offering price of $8.67 per share for periods prior to the IPO,
only when their effect would be dilutive. For 1996, the pro forma
weighted average number of shares outstanding have also been adjusted to
include the number of shares of common stock (375,000 shares) that the
Company would have needed to issue at the initial public offering price
of $8.67 per share to finance the distribution of undistributed S
Corporation earnings through the date on which the Company terminated its
S Corporation status.
The reconciliation of basic to diluted earnings per share ("EPS) consists
of the following (dollars in thousands except EPS amounts (1995 and 1996
are pro forma for taxes):
<TABLE>
<CAPTION>
1995 1996 1997
-------------------- ----------------- -------------------
Shares EPS Shares EPS Shares EPS
--------- --------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Basic 7,093 $ 0.12 7,630 0.34 11,941 $ 0.59
Dilutive effect of warrants - - - - 96 -
Dilutive effect of options - - - - 403 (0.02)
Dilutive effect of
convertible notes - - 28 - 120 -
-------- -------- ------- ------- -------- -------
Diluted 7,093 $ 0.12 7,658 $0.34 12,560 $ 0.57
======== ======== ======= ======= ======== =======
</TABLE>
14. 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"). The 1995 and 1996 plan, as amended, authorized
332,589 and 717,422 shares, respectively, of incentive or non-qualified
stock options. The Director Plan, as amended, authorized 150,000 shares.
The maximum exercise period is ten years after the date of grant. A
summary of stock option activity since inception of the plans is as
follows:
F-15
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
14. Stock options (continued):
Weighted
Average
Number of Option
Price
Options Per Share
-------------- --------------
Outstanding at January 1, 1995 - $ -
Granted 216,086 1.82
-------------- --------------
Outstanding at December 31, 1995 216,086 1.82
Granted 442,371 9.25
-------------- --------------
Outstanding at December 31, 1996 658,457 6.80
Granted 424,075 20.28
Exercised (50,320) 4.20
Forfeited (36,022) 10.72
-------------- --------------
Outstanding at December 31, 1997 996,190 $13.05
============== ==============
Shares exercisable at December 31, 1997 241,201 $ 6.16
============== ==============
The following table summarizes information about fixed stock options
outstanding as of December 31, 1997:
<TABLE>
<CAPTION>
Stock Options Outstanding Stock Options Exercisable
------------------------------------------------- -----------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Prices Shares Remaining Life Exercise Price Shares Exercise Price
-------------------- ------------ ----------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
$ 1.82 151,490 7.41 years $ 1.82 100,993 $ 1.82
$ 8.66 to $12.09 420,625 8.79 years $ 9.29 140,208 $ 9.29
$15.00 to $19.42 238,050 9.24 years $16.75 - $ -
$23.33 to $25.00 186,025 9.92 years $24.53 - $ -
----------- ----------
996,190 8.90 years 241,201
=========== ==========
</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:
<TABLE>
<CAPTION>
1995 1996 1997
-------- ------------ ----------
<S> <C> <C> <C>
Net income - as reported $819,600 $2,540,929 $7,073,924
Net income - pro forma $812,023 $2,483,138 $6,633,961
Basic:
Earnings per share - as reported $0.12 $ 0.34 $0.59
Earnings per share - pro forma $.012 $0.33 $0.55
Diluted:
Earnings per share - as reported $.012 $0.34 $0.59
Earnings per share - pro forma $0.12 $0.32 $0.53
</TABLE>
F-16
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
14. Stock options (continued):
The estimated weighted-average grant-date fair value of the options
granted during the year ended December 31, 1997 was $7.17. 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 the following assumptions on a weighted average basis:
1995 1996 1997
----- ------ ------
Risk-free interest rate 6.6% 6.32% 6.19%
Expected life in years 3.25 3.25 3.25
Volatility factor 0.00 32.16 40.42
Dividend yield None None None
Forfeiture rate 5.0% 5.0% 5.0%
15. Fair value of financial instruments:
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument for which it is practicable
to estimate that value:
Cash and Cash Equivalents: The carrying amount reported in the balance
sheet approximates fair value because of the short maturity of these
instruments.
Debt: The Company's non-seller-financed debt is primarily variable in
nature and based on the prime rate, and accordingly, the carrying amount
of debt instruments approximates fair value. Seller-financed debt arising
from the MAB and the Goodyear acquisitions consists of two notes payable
which contain a conversion option allowing the holder to convert the debt
into shares of common stock at a price of $8.67 and $14.117 per share,
respectively. Valuation of these subordinated notes assumes a required
rate of return of 13.25% and 10.19%, respectively. For valuation of the
option to convert the notes into 115,385 and 63,755 shares of Common
Stock, respectively, the Company utilized the Black-Scholes option
pricing model and assumed a risk-free interest rate of 6.48% at December
31, 1996 and 5.50% at December 31, 1997, an expected life of three years,
a 35.00% volatility factor at December 31, 1996 and a 37.1% volatility
factor at December 31, 1997, and no expected dividends. The note issued
in connection with the MAB acquisition was converted into Common Stock in
July 1997.
The estimated fair value of the Company's financial instruments are as
follows at December 31:
<TABLE>
<CAPTION>
1996 1997
-------------------------- ------------------------
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 $29,539,103 $29,539,103
Financial Liabilities:
Non-interest bearing note payable 138,847 138,847 91,900 91,900
Subordinated seller notes payable - - 1,000,000 1,000,000
Subordinated seller
notes payable, convertible 1,000,000 1,491,016 900,000 1,682,737
</TABLE>
16. 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.
F-17
<PAGE>
NCO GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
16. Quarterly Financial Information (unaudited) (continued):
<TABLE>
<CAPTION>
Quarters Ended
1996 1997
----------------------------------------- -------------------------------------------
Mar. June Sept. Dec. Mar. June Sept. Dec.
31 30 30 31 31 30 30 31
--------- -------- --------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $6,044 $6,499 $7,715 $10,502 $18,077 $21,162 $21,739 $24,306
Income from
operations 915 1,156 1,183 1,569 2,383 3,039 3,112 2,932
Net income
760 1,001 968 906 1,307 1,717 2,082 1,968
</TABLE>
17. Commitments and Contingencies:
The Company is party, from time to time, to various legal proceedings
incidental to its business. In the opinion of management none of these
items individually or in the aggregate would have a significant effect on
the financial position, result of operations, cash flows, or liquidity of
the Company.
18. Other Recent Accounting Pronouncements:
In June 1997, the Financial Accounting Standard Board issued SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
for the reporting and display of comprehensive income, requiring its
components to be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Company will adopt
this standard in the first quarter of 1998. Management believes that the
adoption of SFAS No. 130 will have not have a material impact on
consolidated results of operations, financial condition or cash flows.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards for reporting financial
information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customer. The Company is required to disclose this
information for the first time it publishes its 1998 annual report.
Management is in the process of evaluating the segment disclosures for
purposes of reporting under SFAS No. 131. The Company has not yet
determined the effect that the adoption of SFAS. No. 131 will have on the
consolidated results of operations, financial condition or cash flows.
F-18
<PAGE>
OFFICE SPACE LEASE
for
515 WEST PENNSYLVANIA AVENUE,
FORT WASHINGTON PENNSYLVANIA
by and between
INDIANA AVENUE ASSOCIATES, L.P.
a Pennsylvania limited Partnership
(as Landlord)
and
NCO GROUP, INC.
a Pennsylvania corporation
(as Tenant)
Date: _______, 1997
<PAGE>
THIS LEASE (the "Lease") is made as of March 18, 1997 between INDIANA
AVENUE ASSOCIATES, L.P., a Pennsylvania limited partnership (herein referred
to as "Landlord") whose address is 443 South Gulph Road, King of Prussia,
Pennsylvania 19406 and NCO GROUP, INC., a Pennsylvania corporation (herein
referred to as "Tenant") whose address is 1740 Walton Road, Blue Bell,
Pennsylvania, 19422.
PREAMBLE
BASIC LEASE PROVISIONS AND DEFINITIONS
In addition to other terms elsewhere defined in this Lease, the
following terms whenever used in this Lease shall have only the meanings set
forth in this section, unless such meanings are expressly modified, limited or
expanded elsewhere herein.
1. ADDITIONAL RENT shall mean all sums in addition to Fixed Basic Rent payable
by Tenant to Landlord pursuant to the provisions of the Lease.
2. BROKER(S) shall mean Kelley - Pitcairn, Inc..
3. BUILDING shall mean 515 West Pennsylvania Avenue, Fort Washington,
Montgomery County, Pennsylvania.
4. COMMENCEMENT DATE is July 1, 1997 provided Landlord shall deliver the
Premises with all Landlord Work substantially completed and in broom clean
condition, free of debris, furniture and equipment (unless specified by
Tenant) ready for the construction of Tenant Improvements on or before June
15, 1997. Tenant shall have the right from June 15, 1997 through July 1, 1997
to occupy the Premises for the construction of Tenant Improvements and the
installation of furniture, equipment and fixtures (the "Beneficial Use
Period"). There will be no Fixed Basic Rent or Additional Rent for the
Beneficial Use Period. Upon Tenant's occupancy of the Premises, Tenant shall
execute a Commencement Date Agreement substantially in the form attached
hereto as Exhibit E.
5 DEMISED PREMISES OR PREMISES shall be approximately 82,000 gross rentable
square feet as shown on Exhibit A hereto.
6 EXHIBITS shall be the following, attached to this Lease and incorporated
herein and made a part hereof:
Rider A Renewal Option
Rider B Lease Termination Fee and Commencement
Date Penalty
Exhibit A Location of Premises
Exhibit B Plans and Specifications for Landlord's Work
Exhibit B-1 List of Approved General Contractors
Exhibit C Rules and Regulations
Exhibit D Tenant Estoppel Certificate
Exhibit E Commencement Date Agreement
Exhibit F HVAC Service Contract Specifications
<PAGE>
7. EXPIRATION DATE shall be the day before the twelfth (12th) calendar year
anniversary of the Commencement Date.
8. FIXED BASIC RENT shall mean except for the Fixed Basic Rent during the
Renewal Option periods set forth on Rider A: Twelve Million Six Hundred Sixty
Nine Thousand and 00/100 Dollars ($12,669,000.00), net of electric, calculated
and payable as follows:
Years 1 - 5 Years 6 - 12
----------- ------------
Per Rentable Square Foot $13.50 $14.50
Yearly Rate: $1,107,000.00 $1,189,000.00
Monthly Installment: $92,250.00 $99,083.33
9. ADDITIONAL RENT shall mean any and all sums other than Fixed Basic Rent
which may be due from time to time from Tenant to Landlord or to third parties
pursuant to the terms of the Lease.
10. OFFICE BUILDING AREA is as set forth on Exhibit A
11. PERMITTED USE shall be general office use and for no other purpose.
12. PROPORTIONATE SHARE shall mean one hundred percent (100%).
13. SECURITY DEPOSIT shall mean one (1) month Fixed Basic Rent in the amount
of Ninety Two Thousand Two Hundred Fifty and 00/100 Dollars ($92,250.00).
14. TERM shall mean twelve (12) years from the Commencement Date.
<PAGE>
TABLE OF CONTENTS
Section Page
1. Definitions..........................................................1
2. Premises.............................................................1
3. Landlord's Work......................................................1
4. Term.................................................................1
5. Use of Premises......................................................2
6. Rent.................................................................2
7. Taxes................................................................3
8. Insurance............................................................4
9. Repairs and Maintenance..............................................5
10. Utilities and Services...............................................6
11. Governmental Regulations.............................................6
12. Signs................................................................7
13. Alterations, Additions and Fixtures..................................7
14. Mechanic's Liens.....................................................8
15. Landlord's Right of Entry............................................9
16. Damage by Fire or Other Casualty....................................10
17. Non-Abatement of Rent...............................................11
18. Indemnification.....................................................11
19. Condemnation........................................................12
20. Quiet Enjoyment.....................................................13
21. Rules and Regulations...............................................13
22. Assignment and Sublease.............................................14
23. Tenant's Expansion/Relocation.......................................17
24. Subordination.......................................................17
25. Non-Disturbance.....................................................17
26. Curing Tenant's Defaults............................................18
27. Surrender...........................................................18
28. Defaults-Remedies...................................................18
29. Condition of Premises...............................................21
30. Hazardous Substances................................................22
31. Recording...........................................................22
32. Broker's Commission.................................................23
33. Notices.............................................................23
34. Irrevocable Offer, No Option........................................24
35. Inability to Perform................................................24
36. Survival............................................................24
37. Corporate Tenants...................................................24
38. Waiver of Invalidity of Lease.......................................24
39. Security Deposit....................................................24
40. Tenant Estoppel Certificate.........................................25
41. Rights Reserved by Landlord.........................................25
42. Miscellaneous.......................................................27
43. Additional Definitions..............................................28
<PAGE>
For and in consideration of the covenants herein contained, and upon
the terms and conditions herein set forth, Landlord and Tenant, intending to
be legally bound, agree as follows:
1. Definitions. The definitions set forth in the preceding Preamble
shall apply to the same capitalized terms appearing in this Lease Agreement.
Additional definitions are contained in Section 43 and throughout this Lease.
2. Premises. Landlord hereby demises and leases the Premises to
Tenant for Tenant's sole and exclusive use and Tenant hereby leases and takes
the Premises from Landlord for the Term (as defined in Section 4) and upon the
terms, covenants, conditions, and provisions set forth in this Lease
Agreement, including the Preamble (this "Lease").
3. Landlord's Work.
a) Landlords Work. Landlord, at Landlord's sole cost and expense,
shall cause to be completed upon the Premises and the Property, the work
(collectively, the "Landlord's Work"), all in a good and workmanlike manner
and in accordance with the Plans and Specifications attached hereto as Exhibit
B. The Landlord shall use a general contractor from a list of general
contractors which have been approved by Tenant as set forth on Exhibit B-1 to
perform the Landlord's Work. Landlord, as part of the Landlord's Work, shall
replace the existing roof of the Building and obtain a warranty for not less
than fifteen (15) years from the date of installation of same. In addition,
Landlord shall recoat and restripe the existing parking lot every seven (7)
years in such a manner as to provide no less than the number of parking spaces
existing as of the Commencement Date. Landlord shall obtain a warranty for not
less than one (1) year from its general contractor for the Landlord's Work as
well as a warranty for the HVAC system which is being replaced in accordance
with the Landlord's Work. Landlord shall assign, without recourse, any and all
of its rights under the warranty it obtains from its general contractor as
well as the roof and HVAC warranties to Tenant. Within ten (10) days of the
Commencement Date, Tenant shall deliver a complete and final punchlist to
Landlord which punchlist items shall be completed by Landlord within forty
five (45) days of receipt thereof. Except as expressly provided on Exhibit B
hereto, Landlord shall not be obligated to perform any alteration, improvement
or addition to the Premises or the Property and all such further alterations,
improvements or additions or to the Premises shall be made at Tenant's sole
cost and expense and made only in accordance with Section 13 hereof.
4. Term. The term of this Lease shall commence on the Commencement
Date. Following the Commencement Date, the term of this Lease, unless sooner
terminated as expressly provided in this Lease, shall continue until the date
of expiration of the term specified as the Term of Lease in the Preamble plus
the number of days which remain in the calendar month in which such term
expires (the "Term"). Notwithstanding the foregoing, Tenant shall have the one
time right to terminate this Lease as if such termination date were the date
of termination set forth in the Preamble subject to the following conditions:
(i) Landlord has received one hundred and twenty (120) months of Fixed Basic
Rent and Additional Rent; (ii) Tenant gives Landlord in writing at least six
(6) months prior notice of such termination; and (iii) Tenant reimburses
Landlord for all costs of (x) unamortized tenant improvements completed in
accordance with section 3 of this Lease; and (y) unamortized brokerage
commissions and bonuses paid by Landlord on account of this Lease.
<PAGE>
5. Use of Premises. Tenant shall occupy the Premises throughout the
Term and shall use the same for, and only for, the Permitted Use specified in
the Preamble. The Building is designed to normal building standards for
floor-loading capacity. Tenant shall not use the Premises in such ways which,
in Landlord's judgment, exceed such load limits.
6. Rent. Unless otherwise specifically requested by Landlord at any
time, Fixed Basic Rent, Additional Rent and any other rent or other sums due
under this Lease (hereunder collectively referred to as "Rent") shall be paid
and delivered to Landlord, in the amounts, time and manner more particularly
provided in this Lease.
a. Fixed Basic Rent. Tenant shall pay, throughout the Term, Fixed
Basic Rent in the amount specified on the Preamble (or in the Renewal Option,
if applicable), without notice or demand and without setoff or deduction, in
equal monthly installments equal to one-twelfth of the Fixed Basic Rent
(specified as Monthly Installments in the Preamble or in the Renewal Option),
in advance, on the first day of each calendar month during the Term. If the
Commencement Date falls on a day other than the first day of a calendar month,
the Fixed Basic Rent shall be apportioned on a per diem basis for the period
between the Commencement Date and the first day of the first full calendar
month in the Term and such apportioned sum shall be paid on the Commencement
Date.
b. Additional Rent. Tenant shall pay to Landlord or Landlord's
designated property management affiliate throughout the Term as Additional
Rent a management fee of $10,000.00 per year, payable in equal and consecutive
monthly installments of $833.33, on the first day of each calendar month of
the Term. The scope of the management services to be provided by Landlord or
Landlord's designated property management affiliate shall be set forth in a
writing to be signed by Landlord and Tenant which shall be incorporated in and
become a part of this Lease. All operating expenses, utilities and taxes shall
be paid by Tenant directly to the vendor or service provider selected by
Tenant or the applicable taxing authority as more fully set forth in this
Lease.
2
<PAGE>
c. Independent Covenant; Survival. Tenant's covenant to pay the Rent
is independent of any other covenant, agreement, term or condition of this
Lease. Without limitation of any obligation of Tenant under this Lease which
shall survive the expiration of the Term, the obligation of Tenant to pay the
Rent shall survive the expiration of the Term.
7. Taxes.
a) Real Property Taxes. Tenant shall pay all Real Property Taxes
applicable to the Premises directly to the applicable taxing authority during
the term of this Lease. All such payments shall be made at least ten (10) days
prior to the delinquency date of such payment. Tenant shall promptly furnish
Landlord with satisfactory evidence that all Real Property Taxes have been
paid. If any Real Estate Taxes paid by Tenant shall cover any period of time
prior to or after the expiration of the term hereof, Tenant's share of such
Real Property taxes shall be equitably prorated to cover only the period of
time within the fiscal year applicable to such Real Property Taxes during
which this Lease shall be in effect, and Landlord shall reimburse Tenant to
the extent required within thirty (30) days of the expiration of the Term. If
Tenant shall fail to pay any Real Property Taxes, Landlord shall have the
right to pay the same, in which event Tenant shall repay such amount to
Landlord with Tenant's next rent installment together with interest at the
rate applicable hereunder for sums overdue after any applicable notice or
grace period. For purposes of this Lease, the term "Real Property Taxes" shall
include any form of real estate tax or assessment, general, special, ordinary
or extraordinary, and any license fee, commercial rental tax, improvement bond
or bonds, levy or tax (other than inheritance, personal income or estate
taxes) imposed on the Premises by any authority having the direct or indirect
power to tax, including any city, state or federal government, or any school,
agricultural, sanitary, fire, street, drainage or other improvement district
thereof, as against any legal or equitable interest of Landlord in the
Premises or in the real property of which the Premises are a part, as against
Landlord's right to rent or other income therefrom, and as against Landlord's
business of leasing the Premises. The term "Real Property Taxes" shall also
include any tax, fee, levy, assessment or charge (i) in substitution of,
partially or totally, any tax, fee, levy assessment or charge hereinabove
included within the definition of "Real Property Taxes", or (ii) the nature of
which was hereinbefore included within the definition of "Real Property
Taxes", or (iii) which is added to a tax or charge hereinbefore included
within the definition of "Real Property Taxes" by reason of such transfer,
(iv) which is imposed by reason of this transaction, any modifications or
changes hereto or any transfers hereof, or (v) any fee assessed or charged by
any third party in connection with any assessment appeal or Real Property
Taxes valuation adjustment which actually results in a reduction of the Real
Property Taxes.
3
<PAGE>
b. Personal Property Taxes. Tenant shall pay directly to the
applicable taxing authority prior to delinquency all taxes, if any, assessed
against and levied upon trade fixtures, furnishings, equipment and all other
personal property of Tenant contained in the Premises or elsewhere. When
possible, Tenant shall cause said trade fixtures, furnishings, equipment and
all other personal property to be assessed and billed separately from the real
property of Landlord. In the event any of Tenant's personal property shall be
assessed with Landlord's real property, Tenant shall pay to Landlord the taxes
attributable to Tenant's property within ten (10) days after receipt of a
written statement setting forth the taxes applicable to Tenant's property.
8. Insurance.
a) Liability. Tenant, at Tenant's sole cost and expense, shall
maintain and keep insurance in effect throughout the Term against liability
for bodily injury (including death) and property damage in or about the
Premises or the Property under a policy of comprehensive general public
liability insurance, with such limits as to each as may be reasonably required
by Landlord from time to time, but not less than $2,000,000.00 for each person
and $5,000,000.00 in the aggregate for bodily injury (including death) to more
than one (1) person and $2,000,000.00 for property damage. The policies of
comprehensive general public liability insurance shall name Landlord and
Tenant (and if requested, any mortgagee of Landlord) as the insured parties to
the extent of their respective interests. Each such policy shall provide that
it shall not be cancelable without at least thirty (30) days prior written
notice to Landlord and to any mortgagee named in an endorsement thereto and
shall be issued by an insurer and in a form satisfactory to Landlord. At least
ten (10) days prior to the Commencement Date, and thereafter upon Landlord's
request, a certificate of insurance shall be delivered to Landlord proving
compliance with the foregoing requirements. If Tenant shall fail, refuse or
neglect to obtain or to maintain any insurance that it is required to provide
or to furnish Landlord with satisfactory evidence of coverage on any such
policy upon demand, Landlord, after three (3) days prior written notice to
Tenant, shall have the right to purchase such insurance. All payments made by
Landlord for such insurance shall be recoverable by Landlord from Tenant,
together with interest thereon, as Additional Rent promptly upon demand.
Notwithstanding anything contained herein to the contrary, Tenant may
self-insure all of its personal property situated within the Premises against
property damage and destruction.
b) Waiver of Subrogation. The parties to this Lease each release the
other, to the extent of the releasing party's insurance coverage, from any and
all liability for any loss or damage covered by such insurance which may be
inflicted upon the property of such party even if such loss or damage shall be
brought about by the fault or negligence of the other party, its agents or
employees. If any policy does not permit such a release of liability and a
waiver of subrogation, and if the party to benefit therefrom requests that
such a waiver be obtained, the other party agrees to use its best efforts to
obtain an endorsement to its insurance policies permitting such waiver of
subrogation if it is available. If an additional premium is charged for such
waiver, the party benefiting therefrom agrees to pay the amount of such
additional premium promptly upon demand. In the event a party is unable to
obtain such a waiver, it shall immediately notify the other party of its
inability. In the absence of such notifications, each party shall be deemed to
have obtained such waiver of subrogation.
4
<PAGE>
c) Increase of Premiums. Tenant will not do anything or fail to do
anything or permit anything to be done which will cause the cost of Landlord's
insurance to increase or which will prevent Landlord from procuring insurance
(including but not limited to public liability insurance) from companies, and
in a form, satisfactory to Landlord. If any breach of this subsection (c) by
Tenant shall cause the rate of fire or other insurance to be increased, Tenant
shall pay the amount of such increase as Additional Rent promptly upon demand.
If Tenant does anything or fails to do anything or permits anything to be done
for which insurance cannot be obtained, Landlord may terminate this Lease upon
written notice to Tenant.
9. Repairs and Maintenance.
a) Tenant shall, throughout the Term and at Tenant's sole cost and
expense keep in good order, condition and repair the Premises and every part
thereof, structural and nonstructural (whether or not such portion of the
Premises requiring repair or the means of repairing the same are reasonably or
readily accessible to Tenant, and whether or not the need for such repairs
occurs as a result of Tenant's use, any prior use, the elements or the age of
such portion of the Premises) including, without limitation, all plumbing,
heating, air conditioning, ventilating, electrical, lighting facilities and
equipment within the Premises, fixtures, walls (interior and exterior),
foundations, ceilings, roofs, floors, windows, doors, plate glass and
skylights located within the Premises, and all landscaping, driveways, parking
lots, fences and signs located on the Premises and sidewalks and parkways
adjacent to the Premises. Tenant shall pay directly to a mutually acceptable
HVAC contractor for standard scheduled maintenance of the Building's HVAC
system(s). Tenant and Landlord shall jointly select a mutually acceptable and
qualified HVAC maintenance contractor by July 1, 1997 to perform the HVAC
maintenance services set forth on Exhibit F. Notwithstanding the foregoing,
Landlord shall be responsible, at its sole cost and expense, for all costs
incurred for repairs and replacements to decks, exterior walls, existing
windows (at the time of execution of this Lease) slabs, foundations, roof,
parking lot or other site infrastructure elements which are considered capital
improvements or replacements under Generally Accepted Accounting Principles.
b) Notwithstanding the foregoing, repairs and replacements to the
Premises and the Property arising out of or caused by Tenant's use, manner of
use or occupancy of the Premises, by Tenant's installation of alterations,
additions, improvements, trade fixtures or equipment in or upon the Premises
or by any act or omission of Tenant or any employee, agent, contractor or
invitee of Tenant shall be made at Tenant's sole cost and expense and Tenant
shall pay Landlord the actual cost of any such repair or replacement, as
Additional Rent, upon demand.
5
<PAGE>
c) In the event that Tenant fails to perform or satisfy any
maintenance or repair obligation arising under this Section 9, Landlord, upon
five (5) days prior written notice, by United States mail return receipt
requested or by reputable national overnight delivery service, shall have the
right, but not the obligation to perform said services. Any monies reasonably
expended by Landlord in connection with performance of Tenant's obligations in
this Section 9 shall, upon notice (as provided herein) constitute Additional
Rent payable by Tenant to Landlord.
10. Utilities and Services.
a) Tenant shall pay for all electricity, water, gas, heat, light,
power, telephone and other utilities and services supplied to the Premises,
together with any taxes thereon and shall have all such utilities provided to
the Premises in the Tenant's name.
b) Landlord shall not be liable for any damages to Tenant resulting
from the quality, quantity, failure, unavailability or disruption of any
services beyond the reasonable control of Landlord unless directly caused by
the negligence of Landlord, its representatives or agents and the same shall
not constitute a termination of this Lease or an actual or constructive
eviction or entitle Tenant to an abatement of rent. In the event that (i)
twenty-five percent (25%) or more of the Premises becomes untenantable solely
as a result of the negligence of Landlord, its representatives or agents and
(ii) such condition (a "Basic Services Failure") continues for a period in
excess of three (3) consecutive days, Tenant shall receive a full abatement of
Rent due under this Lease Agreement for the Premises (or such portion of the
Premises rendered untenantable because of a Basic Services Failure) until such
service is restored.
11. Governmental Regulations.
a) Landlord and Tenant shall comply with all laws, ordinances,
notices, orders, rules, regulations and requirements of all federal, state and
municipal government or any department, commission, board of officer thereof,
or of the National Board of Fire Underwriters or any other body exercising
similar functions, relating to the Premises or to the use or manner of use of
the Property. Tenant shall not knowingly do or commit, or suffer to be done or
committed anywhere in the Building, any act or thing contrary to any of the
laws, ordinances, regulations and requirements referred to in this Section.
Tenant shall give Landlord prompt written notice of any accident in the
Premises and of any breakage, defect or failure in any of the systems or
equipment servicing the Premises or any portion of the Premises.
b) Tenant shall pay a pro rata share of capital improvements which
Landlord shall install or construct in compliance with governmental
requirements which take effect after the commencement of the Term hereof or as
energy saving devices. Tenant's pro rata share shall be determined based upon
the estimated life of the capital investment item, determined by Landlord in
accordance with generally accepted accounting principles, and shall include a
cost of capital funds adjustment equal to nine and three-quarters percent
(9.75%) per year on the unamortized portion of all such costs. Tenant shall
only have to pay for the portion of the useful life of the capital improvement
which falls within the Term. Tenant shall thus make payments in equal annual
installments for such capital improvements until the Term expires or until the
cost of the improvement has been fully paid for, whichever first occurs.
6
<PAGE>
12. Signs. Except for signs which are located wholly within the
interior of the Premises and which are not visible from the exterior of the
Premises, Tenant shall not place, erect, maintain or paint any signs upon the
Premises or the Property unless the design of such signs comply with all Fort
Washington Township and other applicable governmental rules, regulations,
ordinances or other statutes. Tenant shall be solely responsible for all costs
and expenses associated with the erection of any signs upon the Premises and
shall be obligated to obtain and provide to Landlord any and all necessary
permits prior to the placement or erection of such signs.
13. Alterations, Additions and Fixtures.
a) Tenant shall have the right to install in the Premises any trade
fixtures; provided, however, that no such installation and no removal thereof
shall be permitted which affects any structural component of the Building or
Premises and that Tenant shall repair and restore any damage or injury to the
Premises or the Property caused by installation or removal.
b) Tenant shall not make or permit to be made any alterations,
improvements or additions to the Premises or Property without on each occasion
first presenting plans and specifications to Landlord and obtaining Landlord's
prior written consent, which shall not be unreasonably withheld or delayed and
shall be communicated to Tenant by Landlord within fifteen (15) business days
after Landlord's receipt of Tenant's proposed plans and specifications.
Notwithstanding the foregoing, Landlord's consent may be conditioned upon
compliance with reasonable requirements of Landlord including, without
limitation, the filing of mechanics' lien waivers by Tenant's contractors and
the submission of written evidence of adequate insurance coverage naming
Landlord as an additional insured thereunder. If Landlord consents to any
proposed alterations, improvements or additions or Tenant's contractor
performs any of the work identified in Section 3 of this Lease Agreement, then
Tenant shall make the proposed alterations, improvements and additions at
Tenant's sole cost and expense provided that: (i) Tenant supplies any
necessary permits; (ii) such alterations and improvements do not, in
Landlord's reasonable judgment, impair the structural strength of the Building
or any other improvements or reduce the value of the Property; (iii) Tenant
takes or causes to be taken all steps that are otherwise required by Section
14 of this Lease and that are required or permitted by law in order to avoid
the imposition of any mechanic's, laborer's or materialman's lien upon the
Premises or the Property; (iv) the alterations, improvements or additions
shall be installed in accordance with the approved plans and specifications
and completed according to a construction schedule submitted by Tenant and
approved by Landlord which approval shall not be unreasonably withheld; and
(v) Tenant provides insurance of the types and coverage amounts required by
Landlord. Any and all alterations, improvements and additions to the Premises
which are constructed, installed or otherwise made by Tenant shall be the
property of Tenant until the expiration or sooner termination of this Lease;
at that time all such alterations and additions shall remain on the Premises
and become the property of Landlord without payment by Landlord unless, upon
the termination of this Lease, Tenant elects, at its sole discretion to remove
the same in which event Tenant will remove such alterations, improvements and
additions, and repair and restore any damage to the Property caused by the
installation or removal. Notwithstanding the foregoing, Tenant shall not be
required to obtain the prior written consent of Landlord to perform
alterations to the interior of the Premises that are non-structural and normal
for office use if the total cost of such work is less than $25,000.00,
provided, however, Tenant shall provide prior written notice thereof to
Landlord. Notwithstanding anything to the contrary contained in this Lease,
Landlord may withhold its approval to any proposed alterations, additions or
improvements to the Premises in its reasonable discretion with respect to any
such alteration, addition or improvement which Landlord determines involves
any modification to the Building's exterior or its structural, electrical,
mechanical or plumbing systems, or any components thereof.
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14. Mechanic's Liens. Tenant shall promptly pay any contractors and
materialmen who supply labor, work or materials to Tenant at the Premises or
the Property so as to minimize the possibility of a lien attaching to the
Premises or the Property. Tenant shall take all steps permitted by law in
order to avoid the imposition of any mechanic's, laborer's or materialman's
lien upon the Premises or the Property. Should any such lien or notice of lien
be filed for work performed for Tenant other than by Landlord, Tenant shall
cause such lien or notice of lien to be discharged of record by payment,
deposit, bond or otherwise within thirty (30) days after the filing thereof or
after Tenant's receipt of notice thereof, whichever is later, regardless of
the validity of such lien or claim. If Tenant shall fail to cause such lien or
claim to be discharged and removed from record within such thirty (30) day
period, then, without obligation to investigate the validity thereof and in
addition to any other right or remedy Landlord may have, Landlord may, but
shall not be obligated to, contest the lien or claim or discharge it by
payment, deposit, bond or otherwise; and Landlord shall be entitled to compel
the prosecution of an action for the foreclosure of such lien by the lienor
and to pay the amount of the judgment in favor of the lienor with interest and
costs. Any amounts so paid by Landlord and all costs and expenses including,
without limitation, attorneys' fees incurred by Landlord in connection
therewith, together with interest at a rate of twelve percent (12%) per annum
from the respective dates of Landlord's making such payment or incurring such
cost or expense, which shall constitute Additional Rent payable hereunder
promptly upon demand therefor. Nothing in this Lease is intended to authorize
Tenant to do or cause any work or labor to be done or any materials to be
supplied for the account of Landlord, all of the same to be solely for
Tenant's account and at Tenant's risk and expense. Further, notwithstanding
anything to the contrary contained in this Lease, nothing contained in or
contemplated by this Lease shall be deemed or construed in any way to
constitute the consent or request by Landlord for the performance of any work
or services or the furnishing of any materials for which any lien could be
filed against the Premises or the Building or the Property or any part of any
thereof, nor as giving Tenant any right, power or authority to contract or
permit the performance of any work or services or the furnishing of any
materials for which any lien could be filed against the Premises, the
Building, the Property or any part of any thereof. Throughout this Lease the
term "mechanic's lien" is used to include any lien, encumbrance or charge
levied or imposed upon the Premises or the Property or any interest therein or
income therefrom on account of any mechanic's, laborer's or materialman's lien
or arising out of any debt or liability to or any claim or demand of any
contractor, mechanic, supplier, materialman or laborer and shall include
without limitation any mechanic's notice of intention given to Landlord or
Tenant, any stop order given to Landlord or Tenant, any notice of refusal to
pay naming Landlord or Tenant and any injunctive or equitable action brought
by any person entitled to any mechanic's lien.
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15. Landlord's Right of Entry.
a) Tenant shall permit Landlord and the authorized representatives of
Landlord and of any mortgagee or any prospective mortgagee to enter the
Premises at all reasonable times, with forty eight(48) hour prior notice
(except in the case of emergency) to Tenant, for the purpose of (i) inspecting
the Premises or (ii) making any necessary repairs to the Premises or to the
Building and performing any work therein. During the progress of any work on
the Premises or the Building, Landlord will attempt not to inconvenience
Tenant, but shall not be liable for inconvenience, annoyance, disturbance,
loss of business or other damage to Tenant by reason of making any repair or
by bringing or storing materials, supplies, tools and equipment in the
Premises during the performance of any work, and the obligations of Tenant
under this Lease shall not be thereby affected in any manner whatsoever.
b) Landlord shall have the right at all reasonable times to, with
prior notice to Tenant, enter and to exhibit the Premises for the purpose of
inspection or showing the Premises in connection with a sale or mortgage and,
during the last twelve (12) months of the Term, to enter upon and to exhibit
the Premises to any prospective tenant.
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16. Damage by Fire or Other Casualty.
a) If the Premises or Building is damaged or destroyed by fire or
other casualty, Tenant shall promptly notify Landlord whereupon Landlord
shall, subject to the consent of Landlord's present or future mortgagee and to
the conditions set forth in this Section 16, repair, rebuild or replace such
damage and restore the Premises to substantially the same condition as the
Premises were in immediately prior to such damage or destruction; provided,
however, that Landlord shall only be obligated to restore such damage or
destruction to the extent of the proceeds of fire and other extended coverage
insurance policies. Notwithstanding the foregoing, if the Premises is
destroyed or damaged to the extent that in Landlord's sole judgment the
Premises cannot be repaired or restored within one hundred eighty (180) days
after such casualty, Landlord may, subject to the rights of Landlord's
mortgagee, terminate this Lease by written notice to the Tenant within sixty
(60) days after the date of such casualty.
b) The repair, rebuilding or replacement work shall be commenced
promptly and completed with due diligence, taking into account the time
required by Landlord to effect a settlement with, and procure insurance
proceeds from, the insurer, and for delays beyond Landlord's reasonable
control.
c) The net amount of any insurance proceeds recovered by reason of
the damage or destruction of the Building (meaning the gross insurance
proceeds excluding proceeds received pursuant to a rental coverage endorsement
and the cost of adjusting the insurance claim and collecting the insurance
proceeds) shall be applied towards the cost of restoration. Notwithstanding
anything to the contrary in this Lease Agreement, if in Landlord's sole
opinion the net insurance proceeds will not be adequate to complete such
restoration, Landlord shall have the right to terminate this Lease and all the
unaccrued obligations of the parties hereto by sending a written notice of
such termination to Tenant specifying a termination date no less then ten (10)
days after its transmission; provided, however, that Tenant may require
Landlord, except during the last two (2) years of the Term, to withdraw the
notice of termination by agreeing to pay the cost of restoration in excess of
the net insurance proceeds and by giving Landlord adequate security for such
payment prior to the termination date specified in Landlord's notice of
termination. If the net insurance proceeds are more than adequate, the amount
by which the net insurance proceeds exceed the cost of restoration will be
retained by Landlord or applied to repayment of any mortgage secured by the
Premises.
d) Landlord's obligation or election to restore the Premises under
this Section shall be subject to the terms of any present or future mortgage
affecting the Premises and to the mortgagee's consent if required in the
mortgage and shall not, in any event, include the repair, restoration or
replacement of the fixtures, improvements, alterations, furniture or any other
property owned, installed, made by, or in the possession of Tenant.
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e) Landlord shall maintain sufficient amounts of insurance against
loss or damage to the Building by fire and such other casualties as may be
included within fire and extended coverage insurance or all-risk insurance,
together with a rental coverage endorsement or other comparable form of
coverage. If Tenant is dispossessed of the Premises due to fire or other
casualty, Tenant will receive an abatement of its Fixed Basic Rent and
Additional Rent and any other rent or payment which may be due hereunder
during the period Tenant is dispossessed.
17. Non-Abatement of Rent. Except as otherwise expressly provided in
subsection 16(e) and as to condemnation in subsections 19(a) and (b) there
shall be no abatement or reduction of the Fixed Basic Rent, Additional Rent or
other sums payable hereunder for any cause whatsoever and this Lease shall not
terminate, nor shall Tenant be entitled to surrender the Premises, in the
event of fire, casualty or condemnation or any default by Landlord under this
Lease.
18. Indemnification
a) Unless such loss, costs or damages were caused by negligence of
Landlord, its employees, agents or contractors, Tenant hereby agrees to
indemnify, defend and hold the Landlord and its employees, agents and
contractors harmless from any loss, costs and damages (including reasonable
attorney's fees and costs) suffered by Landlord, its agents, employees or
contractors, as a result of any claim by a third party, its agents, employees
or contractors. Tenant shall have the right to designate counsel acceptable to
Landlord, such approval not be unreasonably withheld, to assume the defense of
any such third party claim on behalf of itself and Landlord. Tenant shall not
have the right to settle any claim without the consent of Landlord which shall
not be unreasonably withheld. This indemnity shall survive the expiration of
termination of this Lease.
b) If Landlord brings any action under this Lease Agreement, Tenant
agrees in each case to pay Landlord's reasonable attorney's fees and other
costs and expenses incurred by Landlord in connection therewith; provided,
however, the Landlord prevails in such action.
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c) Unless such loss, costs or damages were caused by negligence of
Tenant, its employees, agents or contractors, Landlord hereby agrees to
indemnify, defend and hold the Tenant and its employees, agents and
contractors harmless from any loss, costs and damages (including reasonable
attorney's fees and costs) suffered by Tenant, its agents, employees or
contractors, as a result of any claim by a third party, its agents, employees
or contractors arising from the operation of the Building and Property by
Landlord or its agents, servants, employees or business invitees. Landlord
shall have the right to designate counsel acceptable to Tenant, such approval
not to be unreasonably withheld, to assume the defense of any such third party
claim on behalf of itself and Tenant. Landlord shall not have the right to
settle any claim without the consent of Tenant which shall not be unreasonably
withheld. This indemnity shall survive the expiration or termination of this
Lease.
d) If Tenant brings any action under this Lease Agreement, Landlord
agrees in each case to pay Tenant's reasonable attorney's fees and other costs
and expenses incurred by Tenant in connection therewith; provided, however,
the Tenant prevails in such action.
19. Condemnation.
a) Termination. If (i) all of the Premises are covered by a
condemnation; or (ii) any of the Premises is covered by a condemnation and the
remaining part is insufficient for the reasonable operation therein of
Tenant's business; or (iii) subject to the provisions of subsection 19(b)(i)
hereof, any of the Property is covered by a condemnation and the condemnation
proceeds are insufficient to restore the remainder of the Property; then, in
any such event, this Lease shall terminate and all obligations hereunder shall
cease as of the date upon which possession is taken by the condemnor. Upon
such termination the Fixed Basic Rent and all Additional Rent herein reserved
shall be apportioned and paid in full by Tenant to Landlord to that date and
all such rent prepaid for periods beyond that date shall forthwith be repaid
by Landlord to Tenant.
b) Partial Condemnation.
i) If there is a partial condemnation and Landlord decides to
terminate pursuant to subsection 19(a)(iii) hereof then Tenant may require
Landlord, except during the last two (2) years of the Term, to withdraw its
notice of termination by: [A] giving Landlord written notice thereof within
ten (10) days from transmission of Landlord's notice to Tenant of Landlord's
intention to terminate, [B] agreeing to pay the cost of restoration in excess
of the condemnation proceeds reduced by those sums expended by Landlord in
collecting the condemnation proceeds, and [C] giving Landlord adequate
security for such payment within such ten (10) day period.
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ii) If there is a partial condemnation and this Lease has not been
terminated pursuant to subsection (a) hereof, Landlord shall restore the
Building and the improvements which are part of the Premises to a condition
and size as nearly comparable as reasonably possible to the condition and size
thereof immediately prior to the date upon which possession shall have been
taken by the condemnor; provided, however, that Landlord shall only be
obligated to restore such damage from condemnation to the extent possible with
the award damage. If the condemnation proceeds are more than adequate to cover
the cost of restoration and the Landlord's expenses in collecting the
condemnation proceeds, any excess proceeds shall be retained by Landlord or
applied to repayment of any mortgage secured by the Premises.
iii) If there is a partial condemnation and this Lease has not been
terminated by the date upon which the condemnor obtains possession, the
obligations of Landlord and Tenant under this Lease shall be unaffected by
such condemnation except that there shall be an equitable abatement for the
balance of the Term of the Fixed Basic Rent according to the value of the
Premises before and after the date upon which the condemnor takes possession.
In the event that the parties are unable to agree upon the amount of such
abatement, either party may submit the issue to arbitration.
c) Award. In the event of a condemnation affecting Tenant, Tenant
shall have the right to make a claim against the condemnor for removal
expenses and moving expenses, loss of business and any other claims Tenant may
have; provided and to the extent, however, that such claims or payments do not
reduce the sums otherwise payable by the condemnor to Landlord. Except as
aforesaid, Tenant hereby waives all claims against Landlord and against the
condemnor, and Tenant hereby assigns to Landlord all claims against the
condemnor including, without limitation, all claims for leasehold damages and
diminution in value of Tenant's leasehold interest.
d) Temporary Taking. If the condemnor should take only the right to
possession for a fixed period of time or for the duration of an emergency or
other temporary condition then, notwithstanding anything hereinabove provided,
this Lease shall continue in full force and effect without any abatement of
rent, but the amounts payable by the condemnor with respect to any period of
time prior to the expiration or sooner termination of this Lease shall be paid
by the condemnor to Landlord and the condemnor shall be considered a subtenant
of Tenant. Landlord shall apply the amount received from the condemnor
applicable to the rent due hereunder, net of costs, to Landlord for the
collection thereof, or as much thereof as may be necessary for the purpose,
toward the amount due from Tenant as rent for that period.
20. Quiet Enjoyment. Tenant, upon paying the Fixed Basic Rent,
Additional Rent and other charges herein required and observing and keeping
all covenants, agreements and conditions of this Lease, shall quietly have and
enjoy the Premises during the Term without hindrance or molestation by anyone
claiming by or through Landlord, subject, however, to the exceptions,
reservations and conditions of this Lease.
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21. Rules and Regulations. The Landlord hereby reserves the right to
prescribe, from time to time, at its sole discretion, reasonable rules and
regulations (herein called the "Rules and Regulations") attached hereto as
Exhibit C governing the use and enjoyment of the Premises. The Rules and
Regulations shall not materially interfere with the Tenant's use and enjoyment
of the Premises in accordance with the provisions of this Lease for the
Permitted Use and shall not increase or modify Tenant's obligations under this
Lease. In the event of a conflict between the Lease Agreement and such rules
and regulations, the Lease Agreement shall control. The Tenant shall comply at
all times with the Rules and Regulations and shall cause its agents,
employees, invitees, visitors, and guests to do so.
22. Assignment and Sublease. Tenant may assign or sublease the within
Lease to any party subject to the following:
a) In the event Tenant desires to assign this Lease or sublease all
of the Premises to any other party, Tenant shall provide written notice of the
terms and conditions of such assignment or sublease to Landlord prior to the
effective date of any such sublease or assignment, and, prior to such
effective date, the Landlord shall have the option, exercisable by written
notice to Tenant within ten (10) business days of Landlord's receipt of
written notice from Tenant, to: recapture the Premises to be sublet or all of
the Premises (in the case of an assignment)("Recapture Space") for Landlord's
own use, whereupon Tenant shall be fully released from any and all obligations
hereunder with respect to the Recapture Space.
b) In the event that the Landlord elects not to recapture the Lease
as hereinabove provided, the Tenant may nevertheless assign this Lease or
sublet the whole or any portion of the Premises, subject to the Landlord's
prior written consent which shall not be unreasonably withheld on the basis of
the following terms and conditions:
i) The Tenant shall provide to the Landlord the name and
address of the assignee or subtenant.
ii) The assignee or subtenant shall assume, by written
instrument, all of the obligations of this Lease, and a copy of such
assumption agreement shall be furnished to the Landlord within ten (10) days
of its execution. Any sublease shall expressly acknowledge that said
subtenant's rights against Landlord shall be no greater than those of Tenant.
iii) The Tenant and each assignee shall be and remain liable
for the observance of all the covenants and provisions of this Lease,
including, but not limited to, the payment of Fixed Basic Rent and Additional
Rent reserved herein, through the entire Term of this Lease, as the same may
be renewed, extended or otherwise modified provided, however, that Tenant
shall not be obligated for the payment of Rent or any other obligation herein
during any Renewal Option of this Lease without Tenant's prior written
consent. Notwithstanding anything to the contrary herein contained, Landlord,
in its sole and absolute discretion shall be permitted to withhold its consent
to the assignment or sublet of the whole or any portion of the Premises which
includes any Renewal Option of this Lease without Tenant's prior written
agreement to be bound for the full payment of Rent reserved herein for the
Renewal Option.
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iv) The Tenant and any assignee shall promptly pay to
Landlord fifty percent (50%) of the net profit received from such subleasing
or assignment. Net profit will be calculated after deducting the Tenant's
direct costs of implementing the sublease.
v) In any event, the acceptance by the Landlord of any rent
from the assignee or from any of the subtenants or the failure of the Landlord
to insist upon a strict performance of any of the terms, conditions and
covenants herein shall not release the Tenant herein, nor any assignee
assuming this Lease, from any and all of the obligations herein during and for
the entire Term of this Lease.
vi) Landlord shall require a Five Hundred Dollar ($500.00)
payment to cover its handling charges for each request for consent to any
sublet or assignment prior to its consideration of the same. Tenant
acknowledges that its sole remedy with respect to any assertion that
Landlord's failure to consent to any sublet or assignment is unreasonable
shall be the remedy of specific performance and Tenant shall have no other
claim or cause of action against Landlord as a result of Landlord's actions in
refusing to consent thereto.
c) If Tenant is a corporation other than a corporation whose stock is
listed and traded on a nationally recognized stock exchange, the provisions of
subsection (a) hereof shall apply to a transfer (however accomplished, whether
in a single transaction or in a series of related or unrelated transactions)
of stock (or any other mechanism such as, by way of example, the issuance of
additional stock, a stock voting agreement or change in class(es) of stock)
which results in a change of control of Tenant as if such transfer of stock
(or other mechanism) which results in a change of control of Tenant were an
assignment of this Lease, and if Tenant is a partnership or joint venture,
said provisions shall apply with respect to a transfer (by one or more
transfers) of an interest in the distributions of profits and losses of such
partnership or joint venture (or other mechanism, such as, by way of example,
the creation of additional general partnership or limited partnership
interests) which results in a change of control of such a partnership or joint
venture, as if such transfer of an interest in the distributions of profits
and losses of such partnership or joint venture which results in a change of
control of such partnership or joint venture were an assignment of this Lease;
but said provisions shall not apply to transactions with a corporation into or
with which Tenant is merged or consolidated or to which all or substantially
all of Tenant's assets are transferred or to any corporation which controls or
is controlled by Tenant or is under common control with Tenant, provided that
in the event of such merger, consolidation or transfer of all or substantially
all of Tenant's assets (i) the successor to Tenant has a net worth computed in
accordance with generally accepted accounting principles at least equal to the
greater of (1) the net worth of Tenant immediately prior to such merger,
consolidation or transfer, or (2) the net worth of Tenant herein named on the
date of this Lease, and (ii) proof satisfactory to Landlord of such net worth
shall have been delivered to Landlord at least ten (10) days prior to the
effective date of any such transaction.
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d) In the event that any or all of Tenant's interest in the Premises
and/or this Lease is transferred by operation of law to any trustee, receiver,
or other representative or agent of Tenant, or to Tenant as a debtor in
possession, and subsequently any or all of Tenant's interest in the Premises
and/or this Lease is offered or to be offered by Tenant or any trustee,
receiver, or other representative or agent of Tenant as to its estate or
property (such person, firm or entity being hereinafter referred to as the
"Grantor", for assignment, conveyance, lease, or other disposition to a
person, firm or entity other than Landlord (each such transaction being
hereinafter referred to as a "Disposition"), it is agreed that Landlord has
and shall have a right of first refusal to purchase, take, or otherwise
acquire, the same upon the same terms and conditions as the Grantor thereof
shall accept upon such Disposition to such other person, firm, or entity; and
as to each such Disposition the Grantor shall give written notice to Landlord
in reasonable detail of all of the terms and conditions of such Disposition
within twenty (20) days next following its determination to accept the same
but prior to accepting the same, and Grantor shall not make the Disposition
until and unless Landlord has failed or refused to accept such right of first
refusal as to the Disposition, as set forth herein. Landlord shall have sixty
(60) days next following its receipt of the written notice as to such
Disposition in which to exercise the option to acquire Tenant's interest by
such Disposition, and the exercise of the option by Landlord shall be effected
by notice to that effect sent to the Grantor; but nothing herein shall require
Landlord to accept a particular Disposition or any Disposition, nor does the
rejection of any one such offer of first refusal constitute a waiver or
release of the obligation of the Grantor to submit other offers hereunder to
Landlord. In the event Landlord accept such offer of first refusal, the
transaction shall be consummated pursuant to the terms and conditions of the
Disposition described in the notice to Landlord. In the event Landlord rejects
such offer of first refusal, Grantor may consummate the Disposition with such
other person, firm, or entity; but any decrease in price of more than two
percent (2%) of the price sought from Landlord or any change in the terms of
payment for such Disposition shall constitute a new transaction requiring a
further option of first refusal to be given to Landlord hereunder.
e) Without limiting any of the provisions of this Section 22, if
pursuant to the United States Bankruptcy Code (herein referred to as the
"Code"), or any similar law hereafter enacted having the same general purpose,
Tenant is permitted to assign this Lease notwithstanding the restrictions
contained in this Lease, adequate assurance of future performance by an
assignee expressly permitted under such Code shall be deemed to mean the
deposit of cash security in an amount equal to the sum of one year's Fixed
Basic Rent plus an amount equal to the Additional Rent for the calendar year
preceding the year in which such assignment is intended to become effective,
which deposit shall be held by Landlord for the balance of the Term, without
interest, as security for the full performance of all of Tenant's obligations
under this Lease, to be held and applied in the manner specified for any
security deposit required hereunder.
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f) Except as specifically set forth above, no portion of the Premises
or of Tenant's interest in this Lease may be acquired by any other person or
entity, whether by assignment, mortgage, sublease, transfer, operation of law
or act of the Tenant, nor shall Tenant pledge its interest in this Lease or in
any security deposit required hereunder.
23. Tenant's Relocation. [Intentionally deleted]
24. Subordination. This Lease and Tenant's rights hereunder shall be
subject and subordinate at all times in lien and priority to any first
mortgage or other primary encumbrance now or hereafter placed upon or
affecting the Property or the Premises, and to any second mortgage or
encumbrance with the consent of the first mortgagee, and to all renewals,
modifications, consolidations and extensions thereof, without the necessity of
any further instrument or act on the part of Tenant. Tenant shall execute and
deliver upon demand any further instrument or instruments confirming the
subordination of this Lease to the lien of any such first mortgage or to the
lien of any other mortgage, if requested to do so by Landlord with the consent
of the first mortgagee, and any further instrument or instruments of
attornment that may be desired by any such mortgagee or Landlord, provided,
however, that any holder of such lien or mortgage agrees not to disturb the
use and occupancy of the Premises in accordance with the terms of this Lease
Agreement upon any foreclosure. Notwithstanding the foregoing, any mortgagee
may at any time subordinate its mortgage to this Lease, without Tenant's
consent, by giving notice in writing to Tenant and thereupon this Lease shall
be deemed prior to such mortgage without regard to their respective dates of
execution and delivery. In that event such mortgagee shall have the same
rights with respect to this Lease as though this Lease had been executed prior
to the execution and delivery of the mortgage and had been assigned to such
mortgagee. Landlord agrees that it will use best efforts to obtain and deliver
to Tenant then holder(s) of any mortgage or other security interest affecting
the Premises of Building. In the event Landlord fails to deliver such
instrument, Tenant shall have the right to terminate this Lease Agreement by
delivery of written notice thereof to Landlord.
25. Non-Disturbance. Landlord shall deliver to Tenant upon execution
of the Lease a non-disturbance and attornment agreement from all present
mortgagees or prime ground lease lessors. Thus subordination of the Lease to
future mortgagees shall be conditioned upon each future mortgagee delivering a
non-disturbance and attornment agreement to Tenant. Each non-disturbance and
attornment agreement shall assure to Tenant its continued occupancy of the
Premise upon all of the terms and conditions of the Lease, shall specifically
recognize the Tenant's right to cure defaults by Landlord in properly
operating, maintaining and making necessary or required repairs, replacements
or additions, and its right to deduct the cost plus interest from Fixed Rent
and Additional Rent or to terminate the Lease upon such default by Landlord;
and shall specifically provide that any successor Landlord by reason of
foreclosure or deed in lieu of foreclosure or other sale or transfer shall be
responsible for any continuing defaults of Landlord under the Lease, including
the completion of the Premises Improvements.
26. Curing Tenant's Defaults. If Tenant defaults in the performance
of any of its obligations hereunder, Landlord may, without any obligation to
do so and in addition to any other rights it may have in law or equity, elect
to cure such default on behalf of Tenant after written notice (except in the
case of emergency) to Tenant. Tenant shall reimburse Landlord upon demand for
any sums paid or costs incurred by Landlord in curing such default, including
interest thereon from the respective dates of Landlord's making the payments
and incurring such costs, which sums and costs together with interest thereon
shall be deemed Additional Rent payable within ten (10) days of demand.
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27. Surrender.
a) At the expiration or earlier termination of the Term Tenant shall
promptly yield up the Premises and all improvements, alterations and additions
thereto, and all fixtures and equipment servicing the Premises in a condition
which is clean of garbage and debris and broom clean and in the same
condition, order and repair in which they are required to be kept throughout
the Term, ordinary wear and tear excepted.
b) If Tenant, or any person claiming through Tenant, continues to
occupy the Premises after the expiration or earlier termination of the Term or
any renewal thereof without prior written consent of Landlord, the tenancy
under this Lease shall become a month-to-month tenancy , terminable by
Landlord or Tenant on thirty (30) days prior written notice, under the same
terms and conditions set forth in this Lease; except, however, that the Fixed
Basic Rent during such continued occupancy shall be 150% of the amount set
forth in subsection 6(a) and Tenant shall indemnify Landlord for any loss or
damage incurred by reason of Tenant's failure to surrender the Premises.
Anything to the contrary notwithstanding, any holding over by Tenant without
Landlord's prior written consent shall constitute a default hereunder and
shall be subject to all the remedies set forth in subsection 28(b) hereof.
28. Defaults-Remedies.
a) Defaults. It shall be an event of default under this Lease if any
one or more of the following events occurs:
i) Tenant fails to pay in full, within ten (10) days after
written notice by Landlord , any and all installments of Fixed Basic Rent or
Additional Rent or any other charges or payments due and payable under this
Lease whether or not herein included as rent.
ii) Tenant violates or fails to perform or otherwise
breaches any agreement, term, covenant or condition contained in this Lease.
iii) Tenant becomes insolvent or bankrupt in any sense or
makes an assignment for the benefit of creditors or if a petition in
bankruptcy or for reorganization or for an arrangement with creditors under
any federal or state law is filed by or against Tenant, or a bill in equity or
other proceeding for the appointment of a receiver or similar official for any
of Tenant's assets is commenced, or if any of the real or personal property of
Tenant shall be levied upon by any sheriff, marshal or constable; provided,
however, that any proceeding brought by anyone other than the parties to this
Lease under any bankruptcy, reorganization arrangement, insolvency,
readjustment, receivership or similar law shall not constitute an event of
default until such proceeding, decree, judgment or order has continued
unstayed for more than sixty (60) consecutive days.
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iv) Tenant abandons or vacates the Premises without notice
without having first paid to Landlord in full all Fixed Basic Rent, Additional
Rent and other charges that have become due as well as all which will become
due thereafter through the end of the Term.
b) Remedies. Upon the occurrence of an event of default under this
Lease, Landlord shall have all of the following rights:
i) Landlord may charge a late payment charge of five (5%)
percent of any amount owed to Landlord pursuant to this Lease which is not
paid within five (5) days of the due date which is set forth in the Lease or,
if a due date is not specified in this Lease, within thirty (30) days of the
mailing of a bill therefor by Landlord. If Landlord incurs a late charge in
connection with any payment which Tenant has failed to make within the times
required in this Lease, Tenant shall pay Landlord, in addition to such payment
due, the full amount of such late charge incurred by Landlord. Nothing in this
Lease shall be construed as waiving any rights of Landlord arising out of any
default of Tenant, by reason of Landlord's imposing or accepting any such late
charge(s) and/or interest; the right to collect such late charge(s) and/or
interest is separate and apart from any rights relating to remedies of
Landlord after default by Tenant including, without limitation, the rights and
remedies of Landlord provided herein.
ii) Landlord may accelerate the whole or any part of the
Fixed Basic Rent and all Additional Rent for the entire unexpired balance of
the Term of this Lease, as well as all other charges, payments, costs and
expenses herein agreed to be paid by Tenant, and any Fixed Basic Rent or other
charges, payments, costs and expenses so accelerated shall, in addition to any
and all installments of rent already due and payable and in arrears and any
other charge or payment herein reserved, included or agreed to be treated or
collected as rent and any other charge, expense or cost herein agreed to be
paid by Tenant which may be due and payable and in arrears, be deemed due and
payable as if, by the terms and provisions of this Lease, such accelerated
rent and other charges, payments, costs and expenses were on that date payable
in advance.
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iii) Landlord may re-enter the Premises and, at the option
of Landlord, remove all persons and all or any property therefrom, either by
summary dispossess proceedings or by any suitable action or proceeding at law
or by force or otherwise, without being liable for prosecution or damages
therefor, and Landlord may repossess and enjoy the Premises. Upon recovering
possession of the Premises by reason of or based upon or arising out of a
default on the part of Tenant, Landlord may, at Landlord's option, either
terminate this Lease or make such alterations and repairs as may be necessary
in order to relet the Premises and shall use its reasonable efforts to relet
the Premises or any part or parts thereof, either in Landlord's name or
otherwise, for a term or terms which may, at Landlord's option, be less than
or exceed the period which would otherwise have constituted the balance of the
Term of this Lease and at such rent or rents and upon such other terms and
conditions as in Landlord's sole discretion may seem advisable and to such
person or persons as may in Landlord's discretion seem best; upon each such
reletting all rents received by Landlord from such reletting shall be applied
as follows: first, to the payment of any costs and expenses of such reletting,
including all costs of alterations and repairs; second, to the payment of any
indebtedness other than Fixed Basic Rent, Additional Rent or other charges due
hereunder from Tenant to Landlord; third, to the payment of Fixed Basic Rent,
Additional Rent and other charges due and unpaid hereunder; and the residue,
if any, shall be held by Landlord and applied in payment of future rent as it
may become due and payable hereunder. If rentals received from reletting
during any month are less than that to be paid during that month by Tenant,
Tenant shall pay any such deficiency to Landlord. Such deficiency shall be
calculated and paid monthly. No such re-entry or taking possession of the
Premises or the making of alterations or improvements thereto or the reletting
thereof shall be construed as an election on the part of Landlord to terminate
this Lease unless written notice of termination is given to Tenant. Landlord
shall in no event be liable in any way whatsoever for failure to relet the
Premises or, in the event that the Premises or any part or parts thereof are
relet, for failure to collect the rent thereof under such reletting.
Notwithstanding any such reletting without termination, Landlord may at any
time thereafter elect to terminate this Lease for such previous breach.
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iv) Landlord may terminate this Lease and the Term without
any right on the part of Tenant to waive the forfeiture by payment of any sum
due or by other performance of any condition, term or covenant broken. Upon
such termination, Landlord shall be entitled to recover, in addition to any
and all sums and damages for violation of Tenant's obligations hereunder in
existence at the time of such termination, damages for Tenant's default in an
amount equal to the amount of the Fixed Basic Rent and Additional Rent
reserved for the balance of the Term, as well as all other charges, payments,
costs and expenses herein agreed to be paid by Tenant tall of which amount
shall be immediately due and payable from Tenant to Landlord upon demand
therefor.
v) WHEN THIS LEASE AND THE TERM OR ANY EXTENSION OR RENEWAL
THEREOF SHALL HAVE BEEN TERMINATED ON ACCOUNT OF ANY DEFAULT BY TENANT, OR
WHEN THE TERM HAS EXPIRED, AND AFTER TEN (10) DAYS PRIOR WRITTEN NOTICE FROM
LANDLORD TO TENANT OF ITS INTENTION TO DO SO, IT SHALL BE LAWFUL FOR ANY
ATTORNEY OF ANY COURT OF RECORD TO APPEAR AS ATTORNEY FOR TENANT AS WELL AS
FOR ALL PERSONS CLAIMING BY, THROUGH OR UNDER TENANT, AND TO FILE AN AGREEMENT
FOR ENTERING IN ANY COMPETENT COURT AN AMICABLE ACTION FOR JUDGMENT IN
EJECTMENT AGAINST TENANT AND ALL PERSONS CLAIMING BY, THROUGH OR UNDER TENANT
FOR THE RECOVERY BY LANDLORD OF POSSESSION OF THE PREMISES, FOR WHICH THIS
LEASE SHALL BE A SUFFICIENT WARRANT; WHEREUPON, IF LANDLORD SO DESIRES, AN
APPROPRIATE WRIT OF POSSESSION MAY ISSUE FORTHWITH, WITHOUT ANY PRIOR WRIT OR
PROCEEDING WHATSOEVER, AND PROVIDED THAT IS FOR ANY REASON AFTER SUCH ACTION
SHALL HAVE BEEN COMMENCED IT SHALL BE DETERMINED AND POSSESSION OF THE
PREMISES REMAIN IN OR BE RESTORED TO TENANT, LANDLORD SHALL HAVE THE RIGHT FOR
THE SAME DEFAULT AND UPON ANY SUBSEQUENT DEFAULT OR DEFAULTS, OR UPON THE
TERMINATION OF THIS LEASE OR TENANT'S RIGHT OF POSSESSION AS HEREINBEFORE SET
FORTH, TO BRING ONE OR MORE FURTHER ACTIONS IN EJECTMENT AS HEREINBEFORE SET
FORTH TO CONFESS JUDGMENT FOR THE RECOVERY OF POSSESSION OF THE PREMISES.
c) Waiver of Jury Trial. IT IS MUTUALLY AGREED BY AND BETWEEN
LANDLORD AND TENANT THAT (A) THEY HEREBY WAIVE TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTER-CLAIM BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST
THE OTHER ON ANY MATTER WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH
THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, TENANT'S USE OF OCCUPANCY
OF THE PREMISES OR CLAIM OF INJURY OR DAMAGE, AND (B) IN ANY ACTION AGAINST
LANDLORD BY TENANT, THE LEGAL FEES OF THE PREVAILING PARTY WILL BE PAID BY THE
OTHER PARTY TO THE ACTION.
d) Non-Waiver. No waiver by Landlord of any breach by Tenant of any
of Tenant's obligations, agreements or covenants herein shall be a waiver of
any subsequent breach or of any other obligation, agreement or covenant, nor
shall any forbearance by Landlord to seek a remedy for any event of default by
Tenant be a waiver by Landlord of any rights and remedies with respect to such
or any subsequent event of default.
e) Rights and Remedies Cumulative. No right or remedy herein
conferred upon or reserved to Landlord is intended to be exclusive of any
other right or remedy provided herein or by law, but each shall be cumulative
and in addition to every other right or remedy given herein or now or
hereafter existing at law or in equity or by statute.
29. Condition of Premises. Tenant represents that the Property and
the Premises, the zoning thereof, the street or streets, sidewalks, parking
areas, curbs and access ways adjoining them, any surface conditions thereof,
and the present uses and non-uses thereof, have been examined by Tenant and
Tenant accepts them in the condition or state in which they now are, or any of
them now is, without relying on any representation, covenant or warranty,
express or implied, in fact or in law, by Landlord and without recourse to
Landlord, the nature, condition or usability thereof or the use or uses to
which the Premises and the Property or any part thereof may be put under
present zoning ordinances or otherwise, except as to work to be performed by
Landlord pursuant to Section 3 and except as to latent defects in such work.
Tenant's occupancy of the Premises shall, unless otherwise agreed to in
writing by the Landlord and Tenant, constitute acceptance of the work
performed by Landlord pursuant to Section 3.
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30. Hazardous Substances.
a) Landlord and Tenant shall not cause or allow the generation,
treatment, storage or disposal of Hazardous Substances on or near the Premises
or Property. "Hazardous Substances" shall mean any substance the presence of
which requires investigation or remediation under any statute, regulation,
ordinance, order, action, policy or common law; or which is or becomes defined
as a hazardous pollutant, substance or waste under any statute, regulation,
ordinance, order, action or any amendments thereto; or which is toxic,
corrosive, explosive, flammable, or threatening to human health and the
environment and is or becomes regulated by any governmental authority; or the
presence of which on the Premises causes or threatens to cause a nuisance upon
the Premises or to adjacent properties.
b) Landlord and Tenant agree to indemnify, defend and hold harmless
the other, its employees, agents, successors, and assigns, from and against
any and all damage, claim, liability, or loss, including reasonable attorneys'
and other fees, arising out of or in any way connected to the generation,
treatment, storage or disposal of Hazardous Substances by Landlord or Tenant,
its employees, agents, contractors, or invitees, on or near the Premises or
Property. Such duty of indemnification shall include, but not be limited to
damage, liability, or loss pursuant to all Federal, state and local
environmental laws, rules and ordinances, strict liability and common law.
c) Landlord and Tenant agree to notify each other immediately of any
disposal of Hazardous Substances in the Premises or Property, of any discovery
of Hazardous Substances in the Premises, or of any notice by a governmental
authority or private party alleging or suggesting that a disposal of Hazardous
Substances on or near the Premises or Property may have occurred. Furthermore,
Landlord and Tenant agree to provide the other with full and complete access
to any documents or information in its possession or control relevant to the
question of the generation, treatment, storage, or disposal of Hazardous
Substances on or near the Premises.
d) Landlord represents and warrants that, to the best of its
knowledge, there are no Hazardous Substances in, under or about the Building.
31. Recording. Neither this Lease nor a memorandum of this Lease
shall be recorded in any public records without the written consent of both
Landlord and Tenant.
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32. Brokers' Commission. Tenant represents and warrants to Landlord
that the Brokers (as defined in the Preamble) are the sole brokers with whom
Tenant has negotiated in bringing about this Lease and Tenant agrees to
indemnify and hold Landlord and its mortgagee(s) harmless from any and all
claims of other brokers and expenses in connection therewith arising out of or
in connection with the negotiation of or the entering into this Lease by
Landlord and Tenant. In the event that no broker was involved as aforesaid,
then Tenant represents and warrants to the Landlord that no broker brought
about this transaction, and Tenant agrees to indemnify and hold Landlord
harmless from any and all claims of any broker arising out of or in connection
with the negotiations of, or entering into of, this Lease by Tenant and
Landlord.
33. Notices. All notices, demands, requests, consents, certificates,
and waivers required or permitted hereunder from either party to the other
shall be in writing and sent by United States certified mail, return receipt
requested, postage prepaid, or by recognized overnight courier, addressed as
follows:
If to Tenant:
NCO Group, Inc.
1740 Walton Road
Blue Bell, Pennsylvania, 19422
Attn: Michael J. Barrist,
President and Chief Executive Officer
with a copy to:
Joshua Gindin, Esquire
Kessler & Gindin
230 South Broad Street
20th Floor
Philadelphia, PA 19102
If to Landlord:
Mr. Richard Heany
Indiana Avenue Associates, L.P.
c/o O'Neill Properties
443 S. Gulph Road
King of Prussia, PA 19406
with a copy to:
Kevin W. Walsh, Esquire
Adelman Lavine Gold and Levin
1900 Two Penn Center Plaza
Philadelphia, PA 19102
Either party may at any time, in the manner set forth for giving notices to
the other, specify a different address to which notices to it shall thereafter
be sent.
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34. Irrevocable Offer: No Option. Although Tenant's execution of this
Lease shall be deemed an offer irrevocable by Tenant, the submission of this
Lease by Landlord to Tenant for examination shall not constitute a reservation
of or option for the Premises. This Lease shall become effective only upon
execution thereof by both parties and delivery thereof to Tenant.
35. Inability to Perform. If Landlord is delayed or prevented from
performing any of its obligations under this Lease by reason of strike, labor
troubles, or any cause whatsoever beyond Landlord's control, the period of
such delay or such prevention shall be deemed added to the time herein
provided for the performance of any such obligation by Landlord.
36. Survival. Notwithstanding anything to the contrary contained in
this Lease, the expiration of the Term of this Lease, whether by lapse of time
or otherwise, shall not relieve Tenant from its obligations accruing prior to
the expiration of the Term.
37. Corporate Tenants. If Tenant is a corporation, the person(s)
executing this Lease on behalf of Tenant hereby covenant(s) and warrant(s)
that: Tenant is a duly formed corporation qualified to do business in the
state in which the Property is located; Tenant will remain qualified to do
business in said state throughout the Term and any renewals thereof; and such
persons are duly authorized by such corporation to execute and deliver this
Lease on behalf of the corporation.
38. Waiver of Invalidity of Lease. Each party agrees that it will not
raise or assert as a defense to any obligation under the Lease or this or make
any claim that the Lease is invalid or unenforceable due to any failure of
this document to comply with ministerial requirements including, without
limitation, requirements for corporate seals, attestations, witnesses,
notarizations or other similar requirements and each party hereby waives the
right to assert any such defenses or make any claim of invalidity or
unenforceability due to any of the foregoing.
39. Security Deposit. As additional security for the full and prompt
performance by Tenant of the terms and covenants of this Lease, Tenant has
deposited with Landlord the Security Deposit, as set forth in the Preamble.
The Security Deposit shall not constitute rent for any month (unless so
applied by Landlord on account of Tenant's default hereunder). Tenant shall,
upon demand, restore any portion of the Security Deposit which may be applied
by Landlord to cure any default by Tenant hereunder. To the extent that
Landlord has not applied the Security Deposit or any portion thereof on
account of a default, the Security Deposit, or such remaining portion of the
Security Deposit, shall be returned to Tenant, without interest, promptly
following the termination of this Lease. Notwithstanding the foregoing, in the
event that Tenant has timely paid every installment of Rent due to the
Landlord hereunder, then Landlord shall return to Tenant the Security Deposit
without interest to Tenant on the sixth (6th) year anniversary of the
Commencement Date.
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40. Tenant Estoppel Certificate.
a) Tenant shall from time to time, within five (5) days after
Landlord's request or that of any mortgagee of Landlord, execute, acknowledge
and deliver to Landlord a written instrument in recordable form, substantially
in the form attached hereto as Exhibit D (a "Tenant Estoppel Certificate"),
certifying (i) that this Lease is in full force and effect and has not been
modified, supplemented or amended (or, if there have been modifications,
supplements or amendments, that it is in full force and effect as modified,
supplemented or amended, and stating such modifications, supplements and
amendments); (ii) the dates to which Fixed Basic Rent and Additional Rent and
any other charges arising hereunder have been paid; (iii) the amount of any
prepaid rents or credits due Tenant, if any; (iv) if applicable, that Tenant
has accepted possession and has entered into occupancy of the Premises, and
certifying the Commencement Date and the Termination Date; (v) whether or not,
to the best of the Tenant's knowledge, all conditions under the Lease to be
performed by Landlord prior thereto have been satisfied and whether or not
Landlord is then in default in the performance of any covenant, agreement or
condition contained in this Lease and specifying each, if any, unsatisfied
condition and each, if any, default of which Tenant may have knowledge; and
(vi) any other fact or condition reasonably requested. Any certification
delivered pursuant to the provisions of this Article shall be intended to be
relied upon by Landlord and any mortgagee or prospective mortgagee or
purchaser of the Property or of any interest therein.
b) The failure of Tenant to execute, acknowledge and deliver to
Landlord a written Tenant Estoppel Certificate in accordance with the
provisions of this Section 39 within said ten (5) day period shall constitute
an acknowledgment by Tenant, which may be relied upon by any mortgagee or
prospective mortgagee or any purchaser of the Property or of any interest
therein, that this Lease has not been modified, supplemented or amended except
as set forth in landlord's request, and is in full force and effect (or in
full force and effect as so modified, supplemented or amended), that the Base
Rent, Additional Rent and any other charges arising hereunder have not been
paid beyond the respective due dates immediately preceding the date of such
request, that Tenant has no right of set-off or other defense to this Lease
and of the truth of such other facts and conditions as shall have been
requested to be certified, and shall constitute, as to any person entitled to
rely as aforesaid, a waiver of any defaults which may exist prior to the date
of such request. Notwithstanding the foregoing, Tenant's failure to furnish a
Tenant Estoppel Certificate within said five (5) day period shall constitute a
default under this Lease.
41. Rights Reserved by Landlord. Landlord waives no rights, except
those that may be specifically waived herein, and explicitly retains all other
rights including, without limitation, the following rights, each of which
Landlord may exercise without notice to Tenant and without liability to Tenant
for damage or injury to property, person or business on account of the
exercise thereof, and the exercise of any such rights shall not be deemed to
constitute an eviction or disturbance of Tenant's use or possession of the
Premises and shall not give rise to any claim for set-off or abatement of Rent
or any other claim:
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a) To install, affix and maintain any and all signs on the exterior
and on the interior of the Building at any time during the last six (6) months
of the Term.
b) To decorate or to make repairs, alterations, additions, or
improvements, whether structural or otherwise, in and about the Building, or
any part thereof, and for such purposes to enter upon the Premises and during
the continuance of any of such work, to temporarily close doors, entry ways,
public space and corridors in the Building and to interrupt or temporarily
suspend services or use of facilities, all without affecting any of Tenant's
obligations hereunder, so long as the Premises are reasonably accessible and
usable.
c) To furnish door keys for the entry door(s) in the Premises on the
Commencement Date and to retain at all times, and to use in appropriate
instances, keys to all doors within and into the Premises. Tenant agrees to
purchase only from Landlord additional duplicate keys as required, to change
no locks, and not to affix locks on doors without the prior written consent of
the Landlord. Upon the expiration of the Term or Tenant's right to possession,
Tenant shall return all keys to Landlord and shall disclose to Landlord the
combination of any safes, cabinets or vaults left in the Premises.
d) To designate and approve all window coverings used in the
Building.
e) To approve the weight, size and location of safes, vaults and
other heavy equipment and articles in and about the Premises and the Building
so as not to exceed the legal load per square foot designated by the
structural engineers for the Building, and to require all such items and
furniture and similar items to be moved into or out of the Building and
Premises only at such times and in such manner as Landlord shall direct in
writing. Tenant shall not install or operate machinery or any mechanical
devices of a nature not directly related to Tenant's ordinary use, as limited
by the Permitted Use, of the Premises without the prior written consent of
Landlord. The movement of Tenant's property into or out of the Building or the
Premises and within the Building are entirely at the risk and responsibility
of Tenant, and Landlord reserves the right to require written authorization
from Tenant, in form and content satisfactory to Landlord, before allowing any
property to be moved into or out of the Building or Premises.
f) To enter the Premises in accordance with Section 15, and in the
last year of the Term, to show the Premises to prospective tenants at
reasonable times and, if vacated or abandoned, to show the Premises at any
time and to prepare the Premises for re-occupancy.
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g) To erect, use and maintain pipes, ducts, wiring and conduits, and
appurtenances thereto, in and through the Premises.
h) To enter the Premises at any reasonable time to inspect the
Premises and to make repairs or alterations as Landlord deems necessary, with
due diligence and minimum disturbance.
42. Miscellaneous.
a) Captions. The captions in this Lease are for convenience only and
are not a part of this Lease and do not in any way define, limit, describe or
amplify the terms and provisions of this Lease or the scope or intent thereof.
b) Entire Agreement. This Lease represents the entire agreement
between the parties hereto and there are no collateral or oral agreements or
understandings between Landlord and Tenant with respect to the Premises or the
Property. No rights, easements or licenses are acquired in the Property or any
land adjacent to the Property by Tenant by implication or otherwise except as
expressly set forth in the provisions of this Lease.
c) Modification. This Lease shall not be modified in any manner
except by an instrument in writing executed by the parties. Notwithstanding
the foregoing, Landlord shall have the right at anytime, and form time to
time, during the Term, to unilaterally amend the provisions of this Lease if
Landlord is advised by its counsel that all or any portion of the monies paid
by Tenant to Landlord hereunder are, or may be deemed to be, unrelated
business income within the meaning of the United States Internal Revenue Code
or regulations issued thereunder; and Tenant agrees that it will execute all
documents or instruments necessary to effect such amendment or amendments,
provided that no such amendment shall result in Tenant having to pay in the
aggregate a larger sum of money on account of its occupancy of the Premises
under the terms of this Lease as so amended, and provided further that no such
amendment or amendments shall result in Tenant receiving under this Lease less
services than it is entitled to receive, nor services of a less quality. In
addition, Tenant agrees to make such changes to this Lease as are required by
any mortgagee, provided such changes do not substantially affect Tenant's
rights and obligation hereunder.
d) Interpretation. The masculine (or neuter) pronoun, singular
number, shall include the masculine, feminine and neuter genders and the
singular and plural number.
e) Exhibits. Each writing or plan referred to herein as being
attached as an Exhibit or otherwise designated herein as an Exhibit hereto is
hereby made a part hereof.
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f) Captions and Headings. The captions and headings of sections,
subsections and the table of contents herein are for convenience only and are
not intended to indicate all of the subject matter in the text and they shall
not be deemed to limit, construe, affect or alter the meaning of any
provisions of this Lease and are not to be used in interpreting this Lease or
for any other purpose in the event of any controversy.
g) Interest. Wherever interest is required to be paid hereunder, such
interest shall be at the highest rate permitted by law but not in excess of
eight percent (8%).
h) Severability. If any term or provision of this Lease, or the
application thereof to any person or circumstance shall, to any extent, be
invalid or unenforceable, the remainder of this Lease, or the application of
such term or provision to persons or circumstances other than those as to
which it is held invalid or unenforceable, shall not be affected thereby, and
each term and provision of this Lease shall be valid and be enforced to the
fullest extent permitted by law.
i) Joint and Several Liability. [Intentionally deleted]
j) No Representations by Landlord. Landlord and Landlord's agents
have made no representations, agreements, conditions, warranties,
understandings or promises, either oral or written, with respect to this
Lease, the Premises and/or the Building.
k) Relationship of Parties. This Lease shall not create any
relationship between the parties other than that of Landlord and Tenant.
l) Choice of Law. The terms of this Lease shall be construed under
the laws of the Commonwealth of Pennsylvania, and that exclusive jurisdiction
and venue shall be in the Court of Common Pleas of the County in which the
Property is located.
43. Additional Definitions.
a) "Date of this Lease" or "date of this Lease" shall mean the date
of acceptance of this Lease by the Landlord, following execution and delivery
thereof to Landlord by Tenant and that date shall be inserted in the space
provided in the Preamble.
b) "Landlord" as used herein includes the Landlord named above as
well as its successors and assigns, each of whom shall have the same rights,
remedies, powers, authorities and privileges as he would have had he
originally signed this lease as Landlord. Any such person, whether or not
named herein, shall have no liability hereunder after ceasing to hold title to
the Premises. Neither Landlord nor any principal of Landlord nor any owner of
the Building or the Lot, whether disclosed or undisclosed, shall have any
personal liability with respect to any of the provisions of this Lease or the
Premises, and if Landlord is in breach or default with respect to Landlord's
obligations under this Lease or otherwise, Tenant shall look solely to the
equity of Landlord in the Premises for the satisfaction of Tenant's remedies.
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c) "Tenant" as used herein includes the Tenant named above as well as
its heirs, successors and assigns, each of which shall be under the same
obligations, liabilities and disabilities and each of which shall have the
same rights, privileges and powers as it would have possessed had it
originally signed this Lease as Tenant. Each and every person named above as
Tenant shall be bound formally and severally by the terms, covenants and
agreements contained herein. However, no such rights, privileges or powers
shall inure to the benefit of any assignee of Tenant, immediate or remote,
unless the assignment to such assignee is permitted or has been approved in
writing by Landlord. Any notice required or permitted by the terms of this
Lease may be given by or to any one of the persons named above as Tenant, and
shall have the same force and effect as if given by or to all of them.
d) "Mortgage" and "Mortgagee" as used herein includes any lien or
encumbrance on the Premises or the Property or on any part of or interest in
or appurtenance to any of the foregoing, including without limitation any
ground rent or ground lease if Landlord's interest is or becomes a leasehold
estate. The word "mortgagee" is used herein to include the holder of any
mortgage, including any ground Landlord if Landlord's interest is or becomes a
leasehold estate. Wherever any right is given to a mortgagee, that right may
be exercised on behalf of such mortgagee by any representative or servicing
agent of such mortgagee.
e) "Person" as used herein includes a natural person, a partnership,
a corporation, an association, and any other form of business association or
entity.
f) "Property" as used herein shall mean the Building and the lot,
tract or parcel of land on which the Building is situated.
g) "Rent" or "rent" as used herein shall mean all Fixed Basic Rent
and Additional Rent reserved under this Lease.
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IN WITNESS WHEREOF, and in consideration of the mutual entry into
this Lease and for other good and valuable consideration, and intending to be
legally bound, each party hereto has caused this agreement to be duly executed
under seal.
Landlord:
Date Signed: 4/3/97 INDIANA AVENUE ASSOCIATES, L.P.
-----------------------
a Pennsylvania limited partnership
By: INDIANA AVENUE ASSOCIATES
ACQUISITION CORPORATION, a
Pennsylvania corporation,
its General Partner
By:
-------------------------
Richard Heany President
Tenant:
Date Signed:
-----------------------
NCO GROUP, INC.,
a Pennsylvania corporation
By:
-------------------------
MICHAEL J. BARRIST,
President and Chief Executive
Officer
<PAGE>
RIDER A
RENEWAL OPTION: Tenant is hereby granted an option to renew this Lease upon
the following terms and conditions:
At the time of the exercise of the option to renew and at the time of the said
renewal, the Tenant shall not be in default in accordance with the terms and
provisions of this Lease, and shall be in possession of the Premises pursuant
to this Lease.
Notice of the exercise of the option shall be sent to the Landlord in writing
at least twelve (12) months but not more than fifteen (15) months before the
expiration of the term of this Lease.
The renewal term shall be for a period of three (3) years, to commence at the
expiration of the Term of this Lease, and all of the terms and conditions of
this Lease, other than the Fixed Basic Rent, shall apply during any such
renewal term.
The Fixed Basic Rent to be paid during the renewal term shall be: Three
Million Eight Hundred Thirteen Thousand and 00/100 Dollars ($3,813,000.00),
net of electric, calculated and payable as follows:
Years 1 - 5
-----------
er Rentable Square Foot $15.50
Yearly Rate: $1,271,000.00
Monthly Installment: $ 105,916.67
<PAGE>
RIDER B
LEASE TERMINATION FEE AND COMMENCEMENT DATE PENALTY
(a) In the event that Landlord or its nominee fails to make closing
under agreements of sale by and between Landlord or its nominee and 1710-20
Sentry East Associates, L.P., 1730 Sentry East Associates, L.P. and 1740
Sentry East Associates, L.P. (collectively referred to as "Sentry") for
certain buildings identified as Units 1710 1720, 1730 and 1740 at Sentry Park
East ("Sentry Park Premises") on or before July 1, 1997 (or such later date as
Landlord or its nominee and Sentry shall agree) and Sentry has not otherwise
executed agreements of sale with other purchasers for the Sentry Park Premises
providing for the sale of the Sentry Park Premises on or before July 1, 1997,
then Landlord, its successors and assigns agree to pay to Sentry a lease
termination fee of One Hundred and Sixty Thousand Dollars ($160,000) on or
before July 31, 1997.
(b) In the event that Landlord fails to deliver the Premises with all
Landlord's Work substantially completed and in broom clean condition, free of
debris, furniture and equipment on or before July 1, 1997, then Tenant shall
have the right to occupy the Sentry Park Premises and Landlord shall be
obligated to pay to Sentry fixed basic rent in an amount not to exceed a total
of Forty Thousand Dollars ($40,000) per month on a pro rated basis through the
earlier of (i) the date of occupancy by Tenant of the Premises or (ii)
September 1, 1997.
<PAGE>
EXHIBIT A
LOCATION OF PREMISES
All of that building and real property known as 515 West Pennsylvania Avenue,
Fort Washington, Pennsylvania
<PAGE>
EXHIBIT B
PLANS AND SPECIFICATIONS FOR LANDLORD'S WORK
<PAGE>
EXHIBIT B-1
APPROVED CONTRACTORS
<PAGE>
EXHIBIT C
RULES AND REGULATIONS
1. OBSTRUCTION OF PASSAGEWAYS: The sidewalks, entrance, passages, courts,
elevators, vestibules, stairways, corridors and public parts of the Building
shall not be obstructed or encumbered by Tenant or used by Tenant for any
purpose other than ingress and egress. If the Premises are situated on the
ground floor with direct access to the street, then Landlord shall, at
Landlord's expense, keep the sidewalks and curbs directly in front of the
Premises clean and free from ice, snow and refuse.
2. WINDOWS: Windows in the Premises shall not be covered or obstructed by
Tenant. No bottles, parcels or other articles shall be placed on the window
sills, in the halls, or in any other part of the Building other than the
Premises. No article shall be thrown out of the doors or windows of the
Premises.
3. PROJECTIONS FROM BUILDING: No awnings, air-conditioning units, or other
fixtures shall be attached to the outside walls or the window sills of the
Building or otherwise affixed so as to project from the Building, without
prior written consent of Landlord.
4. SIGNS: No sign or lettering shall be affixed by Tenant to any part of the
outside of the Premises, or any part of the inside of the Premises so as to be
clearly visible from the outside of the Premises, without the prior written
consent of Landlord. However, Tenant shall have the right to place its name on
any door leading into the Premises the size, color and style thereof to be
subject to the Landlord's approval. Tenant shall not have the right to have
additional names placed on the Building directory without Landlord's prior
written consent.
5. FLOOR COVERING: Tenant shall not lay linoleum or other similar floor
covering so that the same shall come in direct contact with the floor of the
Premises. If linoleum or other similar floor covering is desired to be used,
an interlining of builder's deadening felt shall first be fixed to the floor
by a paste or other material that may easily be removed with water, the use of
cement or other similar adhesive material being expressly prohibited.
6. INTERFERENCE WITH OCCUPANTS OF BUILDING: Tenant shall not make, or permit
to be made, any unseemly or disturbing noises or odors and shall not interfere
with other tenants or those having business with them. Tenant will keep all
mechanical apparatus in the Premises free of vibration and noise which may be
transmitted beyond the limits of the Premises.
<PAGE>
7. LOCK KEYS: If Tenant shall add any additional locks or bolts of any kind on
any of the doors or windows, then Tenant shall immediately deliver any
necessary keys and/or combinations required to unlock same to Landlord. Tenant
shall, on the termination of Tenant's tenancy, deliver to Landlord all keys to
any space within the Building either furnished to or otherwise procured by
Tenant, and in the event of the loss of any keys furnished, Tenant shall pay
to Landlord the cost thereof. Tenant, before closing and leaving the Premises,
shall ensure that all windows are closed and entrance doors locked. Nothing in
this Paragraph 7 shall be deemed to prohibit Tenant from installing a burglar
alarm within the Premises, provided: (1) Tenant obtains Landlord's consent
which will not be unreasonably withheld or delayed; (2) Tenant supplies
Landlord with copies of the plans and specifications of the system; (3) such
installation shall not damage the Building; and (4) all costs of installation
shall be borne solely by Tenant.
8. CONTRACTORS: No contract of any kind with any supplier of towels, water,
toilet articles, waxing, rug shampooing, venetian blind washing, furniture
polishing, lamp servicing, cleaning of electrical fixtures, removal of waste
paper, rubbish, garbage, or other like service shall be entered into by
Tenant, nor shall any machine of any kind be installed in the Building or the
Office Building Area without the prior written consent of the Landlord which
shall not be unreasonably withheld. Tenant shall not employ any persons other
than Landlord's janitors for the purpose of cleaning the Premises without
prior written consent of Landlord which shall not be unreasonably withheld.
Landlord shall not be responsible to Tenant for any loss of property from the
Premises however occurring, or for any damage to the effects of Tenant by such
janitors or any of its employees, or by any other person or any other cause.
9. PROHIBITED ON PREMISES: Tenant shall not conduct, or permit any other
person to conduct, any auction upon the Premises, manufacture or store goods,
wares or merchandise upon the Premises without the prior written approval of
Landlord, except the storage of usual supplies and inventory to be used by
Tenant in the conduct of his business, permit the Premises to be used for
gambling, make any unusual noises in the Building, permit to be played musical
instrument on the Premises, permit any radio to be played, or television,
recorded or wired music in such loud manner as to disturb or annoy other
tenants, or permit any unusual odors to be produced on the Premises. Tenant
shall not permit any portion of the Premises to be occupied as an office for a
public stenographer or typewriter, or for the storage, manufacture, or sale of
intoxicating beverages, narcotics, tobacco in any form or as a barber or
manicure shop. Canvassing, soliciting and peddling in the Building and the
Office Building Area are prohibited and Tenant shall cooperate to prevent the
same. No bicycles, vehicles or animals of any kind shall be brought into or
kept in or about the Premises.
10. PLUMBING, ELECTRIC AND TELEPHONE WORK: Plumbing facilities shall not be
used for any purpose other than those for which they were constructed; and no
sweepings, rubbish, ashes, newspaper or other substances of any kind shall be
thrown into them. Waste and excessive or unusual amounts of electricity or
water is prohibited. When electric wiring of any kind is introduced, it must
be connected as directed by Landlord, and no stringing or cutting of wires
will be allowed, except by prior written consent of Landlord, and shall be
done by contractors approved by Landlord. The number and locations of
telephones, telegraph instruments, electrical appliances, call boxes, etc.
shall be subject to Landlord's approval.
<PAGE>
11. MOVEMENT OF FURNITURE, FREIGHT OR BULKY MATTER: The carrying in or out of
freight, furniture or bulky matter of any description must take place during
such hours as Landlord may from time to time reasonably determine and only
after advance notice to the superintendent of the Building. The persons
employed by Tenant for such work must be reasonably acceptable to the
Landlord. Tenant may, subject to these provisions, move freight, furniture,
bulky matter, and other material into or out of the Premises on Saturdays
between the hours of 9:00 a.m. and 1:00 p.m., provided Tenant pays additional
costs, if any, incurred by Landlord for elevator operators or security guards,
and for any other expenses occasioned by such activity of Tenant. If, at least
three (3) days prior to such activity, Landlord requests that Tenant deposit
with Landlord, as security of Tenant's obligations to pay such additional
costs, a sum of which Landlord reasonably estimates to be the amount of such
additional cost, the Tenant shall deposit such sum with Landlord as security
of such cost. There shall not be used in the Building or Premises, either by
Tenant or by others in the delivery or receipt of merchandise, any hand trucks
except those equipped with rubber tires and side guards, and no hand trucks
will be allowed in the elevators without the consent of the superintendent of
the Building.
12. SAFES AND OTHER HEAVY EQUIPMENT: Landlord reserves the right to prescribe
the weight and position of all safes and other heavy equipment so as to
distribute properly the weight thereof and to prevent any unsafe condition
from arising.
13. ADVERTISING: Landlord shall have the right to prohibit any advertising by
Tenant which in Landlord's reasonable opinion tends to impair the reputation
of the Building or its desirability as a building for offices, and upon
written notice from Landlord, Tenant shall refrain from or discontinue such
advertising.
14. NON-OBSERVANCE OR VIOLATION OF RULES BY OTHER TENANTS: Landlord shall not
be responsible to Tenant for non-observance or violation of any of these rules
and regulations by any other tenant.
15. PARKING: Tenant and its employees shall park their cars only in those
portions of the parking area designated by Landlord.
16. RESERVATION OF RIGHTS: Landlord hereby reserves to itself any and all
rights not granted to Tenant hereunder, including, but not limited to, the
following rights which are reserved to Landlord for its purposes in operating
the Building:
a. the exclusive right to the use of the name of the Building for all
purposes, except that Tenant may use the name as its business address and for
no other purposes; and
b. the right to change the name or address of the Building, without
incurring any liability to Tenant for doing so; and
<PAGE>
c. the right to install and maintain a sign on the exterior of the
Building; and
d. the exclusive right to use or dispose of the use of the roof of
the Building; and
e. the right to limit the space on the directory of the Building to
be allotted to Tenant; and
f. the right to grant to anyone the right to conduct any particular
business or undertaking in the Building.
17. HEALTH AND SAFETY: The Tenant shall be responsible for initiating,
maintaining and supervising all health and safety precautions and/or programs
required by Law in connection with the Tenant's use and occupancy of the
Premises.
18. HAZARDOUS MATERIALS: The Tenant shall not store, introduce or otherwise
permit any material known to be hazardous within the Premises. Any material
within the Premises which is determined to be hazardous shall be removed and
properly disposed of by the Tenant at the Tenant's sole expense.
-- END --
<PAGE>
EXHIBIT D
TENANT ESTOPPEL CERTIFICATE
TO: ______________________ ("_______") pursuant to that certain _________
Agreement (the "Agreement") dated _________, 199_, by and between _________
and ____________________________________________ ("Lessor").
1. The undersigned ("Lessee") is the lessee under that certain Lease
dated __________, 19__, by and between _____________________________________,
as lessor, and ____________________________________, as lessee (the "Lease"),
covering a portion of those certain premises commonly known and designated as
_____________________________________________, Pennsylvania, consisting of
approximately ________ square feet (the "Premises"). A true, complete and
correct copy of the Lease is attached hereto as Exhibit "A".
2. The Lease has not been modified, changed, altered or amended in any respect
(except as indicated following this sentence) and is the only lease or
agreement between the undersigned and the Lessor affecting the Premises. If
none, state "none".
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
3. The undersigned has made no agreements with Lessor or its agents
or employees, which are not described in the Lease concerning free rent,
partial rent, rebate of rental payments or any other type of rental concession
with respect to the Lease (except as indicated following this sentence). If
none, state "none".
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
4. The undersigned accepted possession of the Premises on _________,
19__, currently occupies the Premises and has been open for business since
__________, 19__. The current term of the Lease began on __________, 19__. The
current term of the Lease will expire on __________, 19__, and Lessee has no
present right to cancel or terminate the Lease under the terms thereof, or
otherwise. No rent payable pursuant to the Lease has been prepaid for more
than two (2) months, and no monies otherwise payable to Lessor under the Lease
have been paid in advance of the due date therefor as set forth in the Lease.
The fixed minimum rent currently being paid under the Lease is $__________ per
month. Future changes to the fixed minimum rental are as set forth in the
Lease. The undersigned also pays amounts for percentage rent, insurance and
property tax escalations based upon the square footage of the Premises subject
to the Lease, as set forth in the Lease, which amounts have been paid to and
including _________, 199_.
<PAGE>
5. The Lease is fully valid and enforceable and is currently in full
force and effect. Neither Lessor or Lessee is in default thereunder, and all
conditions and obligations on the part of Lessor to be fulfilled under the
terms of the Lease have been satisfied or fully performed including, without
limitation, all required tenant improvements, allowances, alterations,
installations and construction, and payment therefor has been made in full.
Lessee has no offset, claim, defense or counterclaim against any rent or other
sum payable by Lessee under the Lease or against any other obligation of
Lessee under the Lease. No condition exists which with the giving of notice or
the passage of time, or both, would constitute a default under the Lease.
6. Lessee has not suffered any assignment of the Lease or sublet the
Premises or any portion thereof, and no person or entity, other than Lessee,
has any possessory interest in the Premises or right to occupy the Premises or
any portion thereof, except as permitted under the Lease.
7. Lessee claims no right, title or interest in or to the Premises or
right to possession of the Premises, except as lessee under the terms of the
Lease. The Lease does not contain and the undersigned does not have any
outstanding options or rights of first refusal to purchase the Premises or any
portion thereof or the real property of which the Premises are a part, except
as otherwise set forth below. If none, state "none".
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
8. No actions, whether voluntary or otherwise, are pending against
the undersigned under the bankruptcy laws of the United States or any state
thereof, and Lessee knows of no fact or pending or threatened claim or
litigation that might result in the insolvency or bankruptcy of Lessee.
9. Lessee is a [corporation][limited partnership][general
partnership] duly organized and validly existing and in good standing under
the laws of the State of _________ [and qualified to do business in the State
where the Premises is located]. [__________, a __________, owns and holds all
of the issued and outstanding stock in and of Lessee, and is a separate and
distinct entity from Lessee].
10. Lessee's occupancy of the Premises complies fully with all local,
state and federal laws, ordinances, codes, rules, regulations and orders
including, without limitation, those concerning hazardous wastes, hazardous
materials, asbestos, oil and underground storage tanks. In addition, no such
hazardous wastes, hazardous materials, asbestos, oil or underground storage
tanks have been or are incorporated in, stored on or under, released from,
treated on, transported to or from or disposed of, on or from the Premises or
any portion thereof.
<PAGE>
11. All inspections, licenses, permits, consents, permissions,
approvals and certificates required, whether by law, regulation or insurance
standards, to be made or issued with respect to the conduct of Lessee's
business, the Premises and the use and occupancy of the Premises by Lessee
have been made by or issued by all necessary private parties, the appropriate
governmental or quasi-governmental authorities or other authorities having
jurisdiction over the Premises and/or Lessee's business, are in full force and
effect, and Lessee has not received notification from any such authority that
Lessee or the Premises is in material noncompliance with such laws,
regulations or standards, that the Premises is being used, operated or
occupied unlawfully or that Lessee has failed to obtain such inspections,
permits, consents, permissions, approvals, licenses or certificates, as the
case may be. Lessee has not received notice of any violation or failure to
conform with any such law, ordinance, regulation, standard, license, permit,
consent, permission, approval or certificate.
12. All insurance policies required to be maintained by Lessee under
the Lease have been maintained, are in full force and effect and all premiums
with respect thereto have been paid in full.
13. Upon receipt of notice of the closing of the purchase and sale of
the Premises as set forth in the Agreement, Lessee shall recognize _____ as
lessor under the Lease, and all payments of rent and other sums due to Lessor
under the Lease and all communications permitted or required under the Lease
shall be directed to _____ c/o
_______________________________________________________________________, and
all communications permitted or required under the Lease shall be directed to
Lessee at the address for Lessee set forth in the Lease (except as otherwise
indicated following this sentence), unless and until otherwise specified in
written notice by the party to whom notice is to be given at such address.
If none, state "none".
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
11. This certification is made to induce _____ to enter into the
Agreement, knowing that _____ is relying upon the truth of this Tenant
Estoppel Certificate in entering into the Agreement, and that the acquisition
of the Premises by _____ pursuant to the Agreement shall be deemed good and
valuable consideration to Lessee for the foregoing representations made by
Lessee.
Dated this ____ day of _________, 199_.
LESSEE:
------------------------------,
a
------------------------------
BY:
----------------------------
Name:
----------------------------
Title:
----------------------------
<PAGE>
EXHIBIT E
COMMENCEMENT DATE AGREEMENT
THIS AGREEMENT made the _________ day of ________, 199__ is by and
between ________________ (hereinafter "Landlord") whose address is
_________________________________ and _________________________ (hereinafter
"Tenant") whose address is ________________________________________________.
STATEMENT OF FACTS
A. Landlord and Tenant entered into a Lease dated ____________, 199__
(hereinafter "Lease") setting forth the terms of occupancy by Tenant of
approximately ________ rentable square feet on the _____ (___) floor
(hereinafter "Premises") at _____________________________ (hereinafter
"Building"); and
B. The Term of the Lease is for ____________ (__) months with the
Commencement Date of the initial Term being defined in the Preamble to the
Lease as being subject to change under Section 4 thereof; and
C. It has been determined in accordance with the provisions of
Section 4 of the Lease that ___________, 199__ is the Commencement Date of the
Term of the Lease.
STATEMENT OF TERMS
NOW, THEREFORE, in consideration of the Premises and the covenants
hereinafter set forth, it is agreed:
1. The Commencement Date of the Term of the Lease is ___________ ,
199__ and the Expiration Date thereof is _____________ , 199__ and the Lease
Preamble Articles 6 and 9 shall be deemed modified accordingly.
2. Article 10 of the Preamble shall be deemed modified as follows:
This Agreement is executed by the parties hereto for the purpose of
providing a record of the Commencement and Expiration Dates of the Lease,
adjust the Term of the Lease and Fixed Basic Rent amount accordingly.
3. Except as modified herein, the Lease covering the Premises shall
remain in full force and effect as if the same were set forth in full herein
and Landlord and Tenant hereby ratify and confirm all the terms and conditions
thereof.
<PAGE>
4. This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective legal representatives, successors and
permitted assigns.
5. Each party agrees that it will not raise or assert as a defense to
any obligation under the Lease or this Agreement or make any claim that the
Lease or this Agreement is invalid or unenforceable due to any failure of this
document to comply with ministerial requirements including, but not limited
to, requirements for corporate seals, attestations, witnesses, notarizations,
or other similar requirements, and each party hereby waives the right to
assert any such defense or make any claim of invalidity or unenforceability
due to any of the foregoing.
IN WITNESS THEREOF, Landlord and Tenant have hereunto set their hands
and seals the date and year first above written and acknowledge one to the
other they possess the requisite authority to enter into this transaction and
to sign this Agreement.
LANDLORD:
----------------------------------
BY:
------------------------------
Name:
------------------------------
Title:
------------------------------
Attest:
------------------------------
TENANT:
----------------------------------
BY:
------------------------------
Name:
------------------------------
Title:
------------------------------
Attest:
------------------------------
<PAGE>
Exhibit 21.1
Corporate Organization of NCO Group, Inc.
NCO Group, Inc.
Pennsylvania corporation
Wholly-Owned Subsidiaries
NCO Financial Systems, Inc.
Pennsylvania corporation
also doing business as "The Sentry Group" and "American Financial
Enterprises - Collection Division"
NCO Funding, Inc.
Delaware corporation
Management Adjustment Bureau, Inc.
New York corporation
NCO Teleservices, Inc.
Pennsylvania corporation also doing business as "The Response
Center"
NCO Financial Systems of MI, Inc.
Michigan corporation
CRWF Acquisition, Inc.
Pennsylvania corporation doing business as "CRW Financial"
K&K Acquisition, Inc.
Pennsylvania corporation doing business as "Kaplan & Kaplan"
NCO Financial Systems of NC, Inc.
North Carolina corporation
Goodyear & Associates, Inc.
North Carolina corporation
Advantage Financial Services, Inc.
an Ohio corporation
Advantage Southeast, Inc.
a Tennessee corporation
American Transportation Services Bureau, Inc.
an Ohio corporation
<PAGE>
Credit Acceptance Corporation
a Pennsylvania corporation
CRW California, Inc.
a Delaware corporation
CRW Texas, Inc.
a Delaware corporation
CC Services, Inc.
a Delaware corporation
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
NCO Group, Inc. on Form S-8 (File No. 333-42743) of our report dated March 6,
1998, on our audits of the consolidated financial statements of NCO Group, Inc.
as of December 31, 1997 and 1996, and for the years ended December 31 1997,
1996 and 1995, which report is included in this Annual Report on Form 1O-K.
Coopers & Lybrand L.L.P.
Philadelphia, Pennsylvania
March 26, 1998
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 29,539,103
<SECURITIES> 0
<RECEIVABLES> 13,806,513
<ALLOWANCES> 365,000
<INVENTORY> 0
<CURRENT-ASSETS> 45,337,800
<PP&E> 9,548,855
<DEPRECIATION> 2,079,467
<TOTAL-ASSETS> 101,636,027
<CURRENT-LIABILITIES> 8,898,272
<BONDS> 0
0
0
<COMMON> 80,248,636
<OTHER-SE> 9,085,708
<TOTAL-LIABILITY-AND-EQUITY> 101,636,027
<SALES> 85,283,668
<TOTAL-REVENUES> 85,283,668
<CGS> 0
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<OTHER-EXPENSES> 72,552,325
<LOSS-PROVISION> 286,000
<INTEREST-EXPENSE> 591,382
<INCOME-PRETAX> 11,853,961
<INCOME-TAX> 4,780,037
<INCOME-CONTINUING> 7,073,924
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