-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J/BRpqULarg85dBsC4XSVMlSyeBBtLCRRX4I85eLgBLXmTkWxwCV42ntOSd7YsU/ jHszWGLXMwGXXOHLRgUy9A== 0001021408-01-000265.txt : 20010123 0001021408-01-000265.hdr.sgml : 20010123 ACCESSION NUMBER: 0001021408-01-000265 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20010111 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CREDITRUST CORP CENTRAL INDEX KEY: 0001043497 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 521754916 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24619 FILM NUMBER: 1506748 BUSINESS ADDRESS: STREET 1: 7000 SECURITY BLVD 2ND FLOOR CITY: BALTIMORE STATE: MD ZIP: 21244-2543 BUSINESS PHONE: 4105947000 MAIL ADDRESS: STREET 1: 7000 SECURITY BLVD 2ND FLOOR CITY: BALTIMORE STATE: MD ZIP: 21244-2543 10-Q 1 0001.txt CREDITRUST UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____ COMMISSION FILE NUMBER 333-50103 CREDITRUST CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MARYLAND 52-1754916 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 7000 SECURITY BLVD., BALTIMORE, MD 21244-2543 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 410-594-7000 INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS YES [X] NO [_] THE NUMBER OF SHARES OF THE REGISTRANT'S COMMON STOCK OUTSTANDING AS OF JANUARY 10, 2001 WAS 10,453,548. CREDITRUST CORPORATION FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000 INDEX PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page Consolidated Statements of Earnings For the Three and Six Months Ended June 30, 1999 and 2000.......... 1 Consolidated Balance Sheets As of December 31, 1999 and June 30, 2000.......................... 2 Consolidated Statements of Stockholders' Equity and Comprehensive Income as of December 31, 1999 and June 30, 2000................... 3 Consolidated Statements of Cash Flows For the Three and Six Months Ended June 30, 1999 and 2000.......... 4 Notes to Consolidated Financial Statements......................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 16 Item 3. Quantitative and Qualitative Disclosures about Market Risk... 23 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................................. 24 Item 2. Changes in Securities and Use of Proceeds..................... 24 Item 3. Defaults Upon Senior Securities............................... 24 Item 5. Other Information............................................. 24 Item 6. Exhibits and Reports on Form 8-K.............................. 25 SIGNATURE................................................................. 26
PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CREDITRUST CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except share data) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ----------------------------- --------------------------- (Unaudited) (Unaudited) 1999 2000 1999 2000 ----------- ----------- ---------- ----------- Revenue Income on finance receivables................. $ 15,771 $ 5,647 $ 24,904 $ 25,143 Servicing fees................................ 1,306 412 2,869 1,440 Income on investment in securitizations....... 1,341 786 2,670 1,747 ----------- ----------- ---------- ----------- 18,418 6,845 30,443 28,330 ----------- ----------- ---------- ----------- Expenses Personnel..................................... 7,313 5,555 12,973 15,009 Communications................................ 925 880 1,470 1,858 Rent and other occupancy...................... 559 1,602 1,034 2,986 Professional fees............................. 699 2,449 1,414 3,975 Restructuring costs........................... -- 8,664 -- 8,664 Impairment of finance receivables............. -- 52,851 -- 52,851 Impairment of investment in securitizations... -- 18,849 -- 18,849 Other expenses................................ 643 1,937 893 3,058 ----------- ----------- ---------- ----------- 10,139 92,787 17,784 107,250 ----------- ----------- ---------- ----------- Earnings (loss) from operations................... 8,279 (85,942) 12,659 (78,920) Other income (expense) Interest and other income..................... 555 295 703 459 Interest expense.............................. (821) (3,183) (1,364) (6,078) ----------- ----------- ---------- ----------- Earnings (loss) before income taxes............... 8,013 (88,830) 11,998 (84,539) Provision for income taxes (benefit).............. 3,124 (34,644) 4,679 (32,970) ----------- ----------- ---------- ----------- Net earnings (loss)............................... $ 4,889 $ (54,186) $ 7,319 $ (51,569) =========== =========== ========== =========== Basic earnings per common share................... $ .47 $ (5.18) $ .78 $ (4.93) =========== =========== ========== =========== Weighted-average number of basic common shares outstanding................................... 10,387,706 10,453,548 9,373,298 10,453,548 =========== =========== ========== =========== Diluted earnings per common share................. $ .46 $ (5.18) $ .76 $ (4.93) =========== =========== ========== =========== Weighted-average number of diluted common shares outstanding................................... 10,689,739 10,453,548 9,681,405 10,453,548 =========== =========== ========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 1 CREDITRUST CORPORATION CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data) DECEMBER 31, JUNE 30, ------------- ----------- 1999 2000 -------- -------- (Audited) (Unaudited) Assets Cash and cash equivalents, including restricted cash of $3.3 million as of December 31, 1999 and June 30, 2000..................................................... $ 11,927 $ 7,682 Finance receivables held for sale........................................................ 3,126 -- Finance receivables...................................................................... 184,858 120,451 Investment in securitizations............................................................ 31,169 10,081 Property and equipment, net.............................................................. 9,297 3,900 Deferred costs, net...................................................................... 3,111 5,402 Deferred tax asset....................................................................... -- 14,282 Other assets............................................................................. 2,087 735 -------- -------- Total assets...................................................................... $245,575 $162,533 ======== ======== Liabilities and Stockholders' Equity Liabilities Not Subject to Compromise: Notes payable............................................................................ $111,306 $ 94,121 Accounts payable and accrued expenses.................................................... 4,986 3,402 Capitalized lease obligations............................................................ 5,208 1,750 Deferred tax liability................................................................... 20,132 -- Other liabilities........................................................................ 1,606 241 -------- -------- Total Liabilities Not Subject to Compromise............................................ 143,238 99,514 -------- -------- Liabilities subject to compromise: Other undersecured and unsecured liabilities............................................. -- 13,479 -------- -------- Total liabilities subject to compromise................................................ -- 13,479 -------- -------- Total liabilities................................................................. 143,238 112,993 -------- -------- Stockholders' equity Preferred stock, $.01 par value; 5,000,000 shares authorized, none issued and outstanding......................................................................... -- -- Common stock, $.01 par value; 20,000,000 shares authorized, 10,469,068 shares issued and 10,453,548 outstanding at December 31, 1999 and June 30, 2000....................................................................... 105 105 Paid-in capital....................................................................... 71,078 72,109 Stock held for benefit plans.......................................................... (269) (269) Net unrealized gains on available for sale securities................................. 2,259 -- Retained earnings (deficit)........................................................... 29,164 (22,405) -------- -------- Total stockholders' equity........................................................ 102,337 49,540 -------- -------- Total liabilities and stockholders' equity........................................ $245,575 $162,533 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 2 CREDITRUST CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (Dollars in thousands, except share data)
STOCK ACCUMULATED ----- ----------- COMMON STOCK ADDITIONAL PREFERRED STOCK HELD FOR OTHER ------------ ---------- --------------- -------- -------- PAID-IN BENEFIT COMPREHENSIVE RETAINED ------- ------- ------------- -------- SHARES AMOUNT CAPITAL SHARES AMOUNT PLANS INCOME EARNINGS TOTAL ------ ------ ------- ------ ------ ----- ------ -------- ----- Balance at December 31, 1998 (audited).. 7,984,480 $ 80 $27,754 -- $ -- $ (269) $ 6,714 $ 12,146 $ 46,425 Common stock offering................... 2,400,000 24 42,429 -- -- -- -- -- 42,453 Common stock issued on options and warrants exercised................. 69,068 1 895 -- -- -- -- -- 896 Net earnings............................ -- -- -- -- -- -- -- 17,018 17,018 Other comprehensive income, decrease in unrealized gains on available for sale securities, net of taxes of $2,288.............................. -- -- -- -- -- -- (4,455) -- (4,455) -------- Total comprehensive income.............. 12,563 -------- Balance at December 31, 1999 (audited).. 10,453,548 105 71,078 -- -- (269) 2,259 29,164 102,337 Value of common stock purchase warrants issued in connection with debt financing.................... -- -- 1,031 -- -- -- -- -- 1,031 Net earnings (loss)..................... -- -- -- -- -- -- -- (51,569) (51,569) Other comprehensive income, decrease in unrealized gains on available for sale securities, net of taxes of $1,926.............................. -- -- -- -- -- -- (2,259) -- (2,259) -------- Total comprehensive income (loss)....... (53,828) -------- Balance at June 30, 2000(unaudited)..... 10,453,548 $ 105 $72,109 -- $ -- $ (269) $ -- $(22,405) $ 49,540 ========== ====== ======= == ==== ====== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 3 CREDITRUST CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) SIX MONTHS ENDED JUNE 30, ------------------------- 1999 2000 ---- ---- (Unaudited) (Unaudited) Increase (decrease) in cash and cash equivalents Cash flows from operating activities Net earnings (loss)...................................... $ 7,319 $(51,569) Adjustments to reconcile net earnings to net cash (used in) provided by operating activities: Depreciation and amortization........................ 338 2,213 Deferred tax expense................................. 4,679 (32,970) Income on investment in securitization............... (2,670) (1,747) Impairment of investment in securitizations.......... -- 18,849 Impairment of finance receivables.................... -- 52,851 Restructuring costs.................................. -- 8,664 Changes in assets and liabilities: (Increase) decrease in other assets.................. (590) 1,282 Increase in accounts payable and accrued expenses.... 831 5,800 (Decrease) in other liabilities...................... (56) (136) -------- -------- Net cash and cash equivalents provided by (used in) operating activities....................................... 9,851 3,237 -------- -------- Cash flows from investing activities Collections applied to principal (accretion) on finance receivables.................................. (5,388) 11,556 Increase in cash reserves on securitizations............. (2,610) -- Purchases of property and equipment...................... (480) (2,952) Proceeds from sale of finance receivables held for sale.. -- 3,126 Acquisitions of finance receivables...................... (73,898) -- -------- -------- Net cash and cash equivalents (used in) provided by investing activities....................................... (82,376) 11,730 -------- -------- Cash flows from financing activities Proceeds from issuance of common stock................... 42,665 -- (Payments on) proceeds from notes payable, net........... 42,946 (16,154) Proceeds from sale-leaseback transaction................. -- 512 Payments on capital lease obligations.................... (273) (257) Deferred costs........................................... -- (3,313) -------- -------- Net cash and cash equivalents provided by (used in) financing activities....................................... 85,338 (19,212) -------- -------- Net increase (decrease) in cash and cash equivalents........ 12,813 (4,245) -------- Cash and cash equivalents at beginning of period............ 7,906 11,927 -------- -------- Cash and cash equivalents at end of period.................. $ 20,719 $ 7,682 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 4 CREDITRUST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note A--Petition for Relief under Chapter 11 and Plan of Reorganization On June 21, 2000, Creditrust Corporation ("Creditrust") filed a petition for relief under Chapter 11 of the United States Bankruptcy Code ("Chapter 11") in the United States Bankruptcy Court for the District of Maryland (the "Bankruptcy Court"). None of Creditrust's subsidiaries filed. "Debtor", when used herein, refers to Creditrust's assets and liabilities only. Creditrust and its consolidated subsidiaries are referred to herein as the "Company". Under Chapter 11, collection of certain claims against the Debtor in existence prior to the filing of the petition for relief under Chapter 11 are stayed while the Debtor continues business operations as debtor-in-possession. These claims are reflected in the June 30, 2000 balance sheet as "liabilities subject to compromise". Additional claims (liabilities subject to compromise) may arise subsequent to the filing date resulting from rejection of executory contracts, including leases, and from the determination by the Bankruptcy Court (or agreed to by parties of interest) of allowed claims for contingencies and other disputed amounts. Claims secured against the Debtor's assets ("secured claims") also are stayed, although the holders of such claims have the right to move the court for relief from the stay. The Debtor received approval from the Bankruptcy Court to pay or otherwise honor certain of its prepetition obligations, including employee wages and benefits. As of June 30, 2000, liabilities subject to compromise totaled approximately $13.5 million. In accordance with provisions of Chapter 11, Creditrust filed a Plan of Reorganization, dated October 5, 2000, with the Bankruptcy Court. Subsequent amendments were filed, including the Fifth Amended Plan of Reorganization. The Bankruptcy Court approved the Fifth Amended Disclosure Statement with respect to the Fifth Amended Plan of Reorganization (the "Plan") on December 21, 2000 for distribution to all parties of interest and balloting of the vote for the Plan. Ballots are due back by January 12, 2001. The Plan effects a reorganization of Creditrust's business. The Plan is premised on a business plan developed by Creditrust's management involving a merger (the "Merger") of Creditrust with and into NCO Portfolio Funding, Inc., a Delaware corporation ("NCOP" or the "Surviving Corporation"). On the date the Plan is consummated (the "Effective Date"), NCOP's name will be changed to NCO Portfolio Management, Inc., and Creditrust will be merged into NCOP, which will be the Surviving Corporation. Most of the Company's employees will become employees of NCO Financial Systems, Inc. ("NCOF"), a subsidiary of NCO Group, Inc., a Pennsylvania corporation ("NCOG"), which will be the majority owner of NCOP, the Surviving Corporation. The Merger agreement provides that on the Effective Date, NCOP (immediately prior to the Merger) shall have a net book value of $25 million, including at least $10 million of liquidity, and the Surviving Corporation will have a total cash infusion of $15.52 million including the cash contributions for stock by Mr. Michael Barrist and Mr. Joseph Rensin (see below). On the Effective Date, the total number of shares of common stock of NCOP, no par value per share (the "NCOP Common Stock"), issued and outstanding immediately before the Effective Date shall, by virtue of the Merger and without any action on the part of the holder thereof, be automatically converted into and become such number of shares as follows: immediately after the Merger, NCOG shall own approximately 60%, and the Series 1999-2 noteholders (the "SPV99-2 Noteholders") shall own approximately 18.5%, of the issued and outstanding shares of NCOP (after giving effect to the issuance of shares of NCOP to holders of certain options and warrants of Creditrust as described below). There may be further adjustments upward to the percentage of stock issued to NCOG and the holders of the Company's SPV99-2 Notes if there are NCOP Unsecured Obligations after Disputed Claims are resolved (both as defined in the Plan). After all Disputed Claims are resolved and the cash has been distributed from the Reserve created under Section 4.4(c) of the Plan, NCOP Common Stock held in the Reserve shall be distributed in the following priority: (1) For every $418,000 of any outstanding NCOP Unsecured Obligations, 1% of the NCOP Common Stock shall be distributed to the following persons in the stated proportions: NCOG 72.73% SPV99-2 Note Holders 22.42% Michael J. Barrist 3.23% Joseph K. Rensin 1.62% ------ 100% ------ 5 CREDITRUST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Note A--Petition for Relief under Chapter 11 and Plan of Reorganization (Continued) The amounts of NCOP Common Stock so issued shall be proportionally adjusted based upon the exact amount of outstanding NCOP Unsecured Obligations. (2) To holders of all existing equity interests, other than the SPV99- 2 Note Holders, including Common Stock, warrants and options, the Allowed Class 11 Interests under the Plan, pro rata. No fractional shares of NCOP Common Stock shall be issued as a result of the Merger. In lieu of the issuance of fractional shares, the number of shares of NCOP Common Stock to be issued to each shareholder of Creditrust and NCOP shall be rounded off to the nearest whole number of shares of NCOP Common Stock. Although Creditrust believes the NCOP Unsecured Obligations will not exceed the allowable amount of $7.315 million, there can be no assurance of that. In the event that the NCOP Unsecured Obligations equal $7.315 million, the interest of Creditrust's existing equity interest holders' in NCOP as the surviving corporation of the Merger would be reduced to zero. All options and warrants to acquire shares of common stock of Creditrust, $.01 par value per share ("Creditrust Common Stock"), that are issued and outstanding immediately before the Effective Date (collectively, the "Convertible Securities") shall, by virtue of the Merger and without any action on the part of the holder thereof, be automatically voided and cancelled, and converted into shares of the NCOP Common Stock as follows: shortly after the Effective Date, each such holder shall be issued the number of shares having an aggregate value equal to the positive difference, if any, between the aggregate buy-in value of the NCOP Common Stock into which such Convertible Securities would have been exercisable based on the Exchange Ratio (as defined under the Plan), as of the Effective Date, and the aggregate exercise price of such Convertible Securities as of the Effective Date. For purposes of the foregoing, the "buy-in" value shall mean the equivalent per share price at which NCOG is deemed to have made its investment in NCOP as of the Effective Date (i.e., $25 million divided by the number of shares of NCOP Common Stock to be issued to NCOG). The Exchange Ratio is one share of NCOP Common Stock for one share of Creditrust Common Stock. Asset Guarantee Insurance Company ("AGI") filed a claim against Creditrust for $32.7 million in connection with AGI's guarantee of the Company's Series 1998-2 and Series 1998-A bonds (the "Warehouse Facility"). AGI also filed a motion to appoint a Chapter 11 trustee for the Company. Creditrust had previously filed a lawsuit against AGI, its parent company Enhance Financial Services ("EFS") and a former officer of EFS (the "EFS Litigation"). Subject to certain conditions and as part of the Plan, Creditrust has entered into an agreement with AGI and EFS to settle these disputes (the "AGI Settlement Agreement"). AGI shall be entitled to have an allowed claim in the amount of $4.55 million (the "AGI Claim"). The AGI Claim, if any, will be paid in accordance with the provisions of the AGI Settlement Agreement. In accordance with the terms of the AGI Settlement Agreement, the EFS Litigation will be dismissed on the Effective Date. Payment on the AGI Claim can only be demanded if AGI is required to pay under its credit insurance policy for the Series 1998-A bond (and then only in the amount of the payment, not to exceed $4.55 million) and after first exhausting any reserves which are expected to be $4.2 million. NCOF will become the successor servicer under the agreement. Although difficult to predict with any certainty, Creditrust believes that the existing reserves for and collections from the Series 1998-2 and Series 1998-A receivables will be sufficient to pay off the bonds, and therefore there will be no payment on the AGI Claim. Any claim payments would not result in a charge to earnings and would be used to retire the debt. The consummation of the Merger agreement is contingent upon the satisfaction of certain conditions prior to the Effective Date. These conditions include, but are not limited, to the following: a) the Plan shall have been duly approved in accordance with applicable law, b) the NCOP Unsecured Obligations shall not exceed $7.315 million, c) a credit facility with aggregate availability of at least $50 million shall have been established for the benefit of NCOP, d) the shares of NCOP shall have been approved for listing on the NASDAQ National Market System, subject to official notice of issuance, e) a servicing agreement between NCOFS and NCOP shall have been completed assigning all servicing rights to NCOF for a period of ten years, f) an agreement of the holders of the Company's Series 1999-1 bonds to recognize NCOF as the successor servicer to Creditrust and NCOP as the parent company of the special purpose limited liability company which owns the residual interest in the receivables, and g) the cancellation of Creditrust's guarantee of the Company's Series 1999-2 bonds. 6 CREDITRUST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Note A--Petition for Relief under Chapter 11 and Plan of Reorganization (Continued) In connection with the Plan, Creditrust has entered into an agreement with NCOFS, NCOP and the Series 1999-1 bondholders to provide for NCOFS to become successor servicer to Creditrust, which could happen prior to the Effective Date under certain circumstances. Creditrust has also entered into an agreement with the Series 1999-2 bondholders to, among other things, cancel Creditrust's guarantee of the Series 1999-2 bonds, provide for the transition of servicing to NCOFS upon the Effective Date, reduce the servicing fee from 40% of collections to 20% of collections, and cancel the bondholders' warrants for 1.2 million shares of Creditrust's Common Stock in exchange for, among other things, 18.5% of the NCOP Common Stock and a bond paydown of $5 million dollars payable on the Effective Date. Creditrust must satisfy the unsecured creditors' claims, and currently contemplates that with the $13.2 million of cash to be received from NCOP and $2 million in cash to be received from new equity to be issued to Mr. Michael Barrist and $1 million (approximately $320,000 in cash and $680,000 in stock in lieu of an unsecured claim) to be received from new equity to be issued to Mr. Joseph Rensin, Creditrust will be able to satisfy its unsecured creditors in full in cash and pay $5 million to holders of the Company's Series 1999-2 bonds in cash. The Plan, however, provides that any shortfall in cash to pay unsecured creditors' claims, up to the maximum amount of permitted NCOP Unsecured Obligations (or $7.315 million), shall be paid in full on the Effective Date or upon resolution of a Disputed Claim. Assuming there are no NCOP Unsecured Obligations, upon the closing of the Merger on the Effective Date, Creditrust's existing equity interest holders will own approximately 17.5% of NCOP after taking into account the 60% interest of NCOG, the 18.5% interest of the 1999-2 bondholders, a 2.67% interest to Mr. Barrist and 1.33% to Mr. Rensin for their equity contribution. The 17.5% interest is subject to modification depending upon the total amount of Claims, including Administrative Claims (both as defined in the Plan). It is a condition to the obligations under the Merger Agreement of both Creditrust, on the one hand, and of NCOG and NCOP, on the other, that upon the Closing Date the Surviving Corporation enter into an Independent Contractor Agreement (the "Contractor Agreement") with Joseph K. Rensin. Mr. Rensin currently is the Chairman of the Board and Chief Executive Officer of Creditrust, and is the holder of a near majority of the issued and outstanding Creditrust Common Stock. Pursuant to the Contractor Agreement, Mr. Rensin is to provide up to 20 hours per month of consulting services to the Surviving Corporation on an as- needed, as-requested basis for a term of three years from the Effective Date, and is to receive base compensation for his services at the annualized rate of $400,000. In addition to the services which Mr. Rensin has agreed to provide to the Surviving Company, he has also agreed that he will not engage in any business operation (with certain limitations) competing with the business of the Surviving Company and that he will not induce any employee, customer or supplier of Creditrust to terminate employment or any other relationship with the Company. The Nasdaq Stock Market halted trading in the Creditrust Common Stock on June 22, 2000, the day after Creditrust filed its Chapter 11 petition, and de-listed the Creditrust Common Stock on September 26, 2000. The Creditrust Common Stock last traded on the Nasdaq Stock Market on June 21, 2000. On November 8, 2000, the Official Unsecured Creditors Committee ("OUCC") filed a plan of reorganization with the Bankruptcy Court. The basis of the OUCC Plan is an acquisition of Creditrust Common Stock by a co-sponsor solely for the benefit of the creditors and the co-sponsor. While there can be no assurance that the Plan proposed by Creditrust and the Merger with NCOP will prevail, the plan proposed by the OUCC is believed by management to be inferior to Creditrust's Plan. The OUCC has indicated that it now supports the Creditrust Plan and will not be prosecuting its plan. Except for Creditrust's Plan as discussed above, the bankruptcy and the defaults on its line of credit and other facilities raise substantial doubt about the Company's ability to continue as a going concern. There can be no assurance that the Company will be successful in achieving its above objectives. The accompanying financial statements do not include adjustments that might be necessary in the event the Company is unable to continue as a going concern, or as a result of the facilities defaults, or additional loss of servicing. Note B -- Organization and Business Creditrust was incorporated in Maryland on October 17, 1991. The Company purchases, collects and manages defaulted consumer receivables from credit grantors, including banks, finance companies, retail merchants and other service providers. The Company's customers are located throughout the United States. The Company has historically funded its receivables purchases and the expansion of its business through a combination of bank and other Warehouse funding, public and private equity funding and asset-backed securitizations. 7 CREDITRUST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Note B -- Organization and Business (continued) Basis of Accounting In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary for their fair presentation in conformity with generally accepted accounting principles. Interim results are not necessarily indicative of results for a full year. The information included in these statements should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, and the Company's consolidated financial statements and notes thereto, included in Creditrust's Annual Report on Form 10-K, as amended, for the year ended December 31, 1999. Principles of Consolidation The consolidated financial statements include the accounts of Creditrust and its wholly owned subsidiaries, Creditrust Funding I LLC, Creditrust Card Services Corp., Creditrust SPV99-1, LLC, Creditrust SPV99-2 Capital, Inc., and Creditrust SPV99-2, LLC. All material inter-company accounts and transactions have been eliminated. Significant Estimates In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates have been made by management with respect to the amount of future cash flows of portfolios. The estimated future cash flows of the portfolios are used to recognize income on finance receivables and to estimate the fair value of investment in securitizations. Actual results could differ from these estimates, making it reasonably possible that a change in these estimates could occur within one year. Estimates have been revised downward in this quarter and each of the past two quarters. On a quarterly basis, management reviews the estimate of future collections, and it is reasonably possible that its assessment may change based on actual results and other factors. (See notes D and E) Note C -- Earnings per Common Share Creditrust's options and warrants were anti-dilutive for the three and six months ended June 30, 2000 and therefore there was no difference between basic and diluted EPS. However, the following table reconciles basic and diluted EPS for last year for the three and six months ended June 30, 1999: (Dollars in thousands, except per share amounts)
THREE MONTHS ENDED JUNE 30, 1999 SIX MONTHS ENDED JUNE 30, 1999 ---------------------------------- ---------------------------------- PER PER EARNINGS SHARES SHARE EARNINGS SHARES SHARE (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT ---------- ------------ ------ ---------- ------------ ------ Basic EPS Net earnings........................... $4,889 10,387,706 $.47 $7,319 9,373,298 $.78 Effect of dilutive securities Warrants............................... -- 205,381 -- 208,666 Stock options.......................... -- 96,652 -- 99,441 ------ ---------- ------ ----------- Diluted EPS Net earnings plus assumed conversions.. $4,889 10,689,739 $.46 $7,319 9,681,405 $.76 ====== ========== ====== ====== =========== ====
8 CREDITRUST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Note D --Finance Receivables The Company purchases defaulted consumer receivables at a discount from the actual principal balance. The following summarizes the change in finance receivables for the six months ended June 30, 2000: (Dollars in thousands) Balance, at beginning of period............................. $ 184,858 Purchases of finance receivables................... -- Impairment of finance receivables.................. (52,851) Accretion to principal............................. 3,808 Amortization of principal.......................... (15,364) ---------- Balance, at end of period (unaudited)....................... $ 120,451 ========== Unrecorded discount......................................... $2,520,943 ========== The Company aggregates individual static pools (i.e., purchases) into larger homogenous pools for financing purposes. As of June 30, 2000, the carrying value of each of the financing related pools of receivables after recognition of the above impairment was: (Dollars in thousands) Warehouse Facility................... $ 10,388 Revolving Line of Credit............. 16,698 SPV99-2.............................. 34,690 SPV99-1.............................. 53,398 Other................................ 5,277 ------- $120,451 ======== Changes in Estimates The Company monitors its projection models with a view towards enhancing the predictability of both the amount and timing of collections. In the second quarter of 2000, the Company reduced its remaining collections estimates to reflect changes in circumstances that occurred during the quarter. The changes in circumstances that affected the Company's ability to meet collection estimates for the quarter and prompted the revision of all future collections were: a) the loss of servicing of the Warehouse Facility; (b the backup servicer's collections were significantly lower than when the finance receivables were managed by the Company, c) the loss of servicing on securitization Series 1998-2, when combined with the loss of servicing of the Warehouse Facility, significantly changed the financial prospects of the Company, d) the Company's inability to secure additional financing to support its infrastructure and grow its operations, e) a reduction in personnel pursuant to the restructuring of the Company's operations prior to the filing of Chapter 11 reorganization, f) disruption of operations due to the Company's relocation of all of its recovery personnel pursuant to the Company's restructuring, and g) the diminished prospects of the Company while in Chapter 11 to meet growth targets due to restricted availability of funds and a static work force. The change in estimates resulted in a reduction of $12.7 million pretax income on finance receivables for the quarter and an impairment charge of $52.9 million. To the extent that the carrying amount of an individual static pool exceeds its fair value (i.e., its remaining collection estimates), a charge to earnings is recognized in the amount of such excess or impairment. For the quarter ended June 30, 2000, the change in the remaining estimates mentioned above caused the fair value of some of the individual static pools to fall below their respective carrying amounts by $52.9 million before tax, which has been included as an impairment to earnings from operations on the statement of earnings. After the impairment of a static pool, no income is recorded on that static pool and collections are recorded as a return of capital. Approximately $60.4 million in carrying value is in this status. 9 CREDITRUST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Note E -- Investment in Securitizations Investment in securitizations for the six months ended June 30, 2000 is comprised of the following:
(Dollars in thousands) Estimated Cash Amortized Unrealized Fair Reserves Cost Gains Value --------- ---------- ----------- --------- Balance at beginning of period.......... $ 4,550 $ 22,434 $ 4,185 $ 31,169 Deposits to reserves.................... -- -- -- -- Income on investment.................... -- 1,747 -- 1,747 Impairment of investment in securitizations........................ (1,472) (17,377) -- (18,849) Other................................... -- 199 -- 199 Decrease in unrealized gains............ -- -- (4,185) (4,185) ------- -------- ------- -------- Balance at end of period (unaudited).... $ 3,078 $ 7,003 $ -- $ 10,081 ======= ======== ======= ========
These are the residual interests in the two securitizations, Series 1998-1 and 1998-2. Prior to the quarter ended June 30, 2000, absent readily available market quotes for similar investments, the Company computed the fair value of the residual interests in its securitizations using a discounted cash flow valuation. Effective with the NCO purchase offer, the Company believed NCO's value was the best available indication of market value and has reduced the carrying value to reflect NCO's effective offer. Hence, the carrying value was impaired by $18.8 million. In April 2000, the Company received notification from the note insurer, Asset Guaranty Insurance Company ("AGI," as previously defined), of a non-payment related default and that it was terminating the Company's servicing rights effective May 1, 2000 on the Series 1998-2 securitization. The successor servicer is paid a servicing fee of 30% on monthly collections. Once the bond is retired in full, including all interest and other administrative expenses of the trust, the servicing will revert back to the Company. The carrying value of the Series 1998-2 securitization at June 30, 2000 was $1.8 million, which is net of the outstanding bond balance of $11.7 million. The carrying value of Series 1998-1 securitization at June 30, 2000 was $8.3 million, which is net of the outstanding bond balance of $735,000. In August 2000, the Company retired the Series 1998-1 bond in full, including all outstanding interest and administrative fees. Pursuant to the retirement of the Series 1998-1 bond, the cash reserve of $1.3 million was returned to the Company. See Note A. 10 CREDITRUST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Note F -- Accounts Payable and Accrued Expenses Accounts payable and accrued expenses not subject to compromise consist of the following at: (Dollars in thousands) December 31, June 30, 1999 2000 ------ ------ Trade accounts payable....................... $1,453 $ 26 Accrued salaries, taxes and fringe benefits.. 1,550 1,185 Accrued conversion fee SPV99-2 financing..... -- 1,048 Accrued other liabilities.................... 1,983 1,143 ------ ------ $4,986 $3,402 ====== ====== Note G -- Notes Payable Debtor-In-Possession Financing Effective June 22, 2000, the Debtor obtained (subject to Bankruptcy Court approval) a post-petition working capital facility (the "DIP Facility") from Sunrock Capital Corporation ("Sunrock"), the Company's prepetition revolving line of credit lender. The agreement provides for loans to the Debtor for working capital purposes through the earlier of the Effective Date of the Plan of Reorganization, or one year. The DIP Facility extends $5 million in credit, secured by the first priority lien on substantially all of the Debtor's personal property, including accounts receivable, equipment and general intangibles. The DIP Facility provides for cross collateralization of Sunrock's prepetition loan amounts and interest at prime plus 5%. As of June 30, 2000, the Company had not drawn on the DIP Facility. The DIP Facility contains covenants, the most restrictive of which are targeted collections and expense limits. The Company is in compliance with these requirements. Warehouse Facility In September 1998, Creditrust established, through a wholly owned consolidated special purpose finance subsidiary, Creditrust Funding I LLC, an initial $30 million revolving Warehouse Facility for use in acquiring finance receivables. The Warehouse Facility carried a floating interest rate of LIBOR plus .65%, with the revolving period expiring in October 2000. The final due date of all payments due under the facility is October 2005. The Warehouse Facility is secured solely by a trust estate, primarily consisting of specific consumer receivables that the Company has absolutely assigned to the newly formed special purpose finance subsidiary, and is non-recourse to the parent company and its other assets. Generally, the Warehouse Facility provided 95% of the acquisition costs of receivables purchased, with the Company funding the remaining 5%, and imposed a one-time $900,000 cash reserve requirement. The $900,000 cash reserve account is included in cash on the balance sheet and restricted as to use until the Warehouse Facility is retired. It is a requirement of the indenture agreement governing the Warehouse Facility that the cash reserve be increased by $1.3 million and $3.25 million, each increase to be effective one day after the pay-off of Series 1998-1 and 1998-2 securitizations, respectively. The Company's right to service the receivables funded by the Warehouse Facility automatically terminates on a monthly basis subject to reappointment by the note insurer. AGI notified the Company that it was not re-appointing the Company as servicer effective April 1, 2000. The trustee, as back-up servicer, appointed the Company to be servicer for the month of April 2000, and thereafter, selected a third party until the facility is repaid in full. Once the Warehouse Facility is repaid, the servicing will revert back to the Company. The indenture and servicing agreement was amended in February 2000, requiring the Warehouse Facility to be reduced to $19 million by July 10, 2000. Debt service on the Warehouse Facility is interest only during a six-month revolving period, and thereafter is comprised of all collections from receivables less a 20% servicing fee. In February 2000, the servicing fee increased to 35% pursuant to the amended indenture and servicing agreement. These servicing fees are eliminated in consolidation. As described in above Note E, AGI notified the Company that the Warehouse Facility was in default due to a cross default provision with Series 1998-2. The Company was notified that the Warehouse Facility is in default due to the Company's failure to increase the cash reserves by $1.3 million after the retirement of the Series 1998-1 securitization. 11 CREDITRUST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Note G--Notes Payable (Continued) Interest expense, trustee fees and guarantee fees aggregated $479,000 and $500,000 for the three months ending June 30, 1999 and 2000, respectively. As of June 30, 2000, the amount outstanding on the Warehouse Facility was $20.9 million and the carrying value of the assets included in the Warehouse Facility was $10.4 million. See Note A. Revolving Line of Credit In October 1998, the Company entered into a $20 million revolving line of credit with a commercial lender to provide receivables financing. The facility had a term of three years, during which time the Company could borrow and repay funds to purchase receivables at 80% of acquisition cost. Interest was based on prime plus 0.5%, or LIBOR plus 2.5%, at the option of the Company on each advance. Pursuant to an amendment to the loan documents in March 2000, interest was prime plus 2.5%, effective April 1, 2000. The facility is secured by any receivables purchased under the facility and substantially all the Company's other assets. The facility contains financial covenants, the most restrictive of which requires that the Company maintain a net worth of $30.0 million plus 50% of net earnings. Debt service on the revolving facility was interest only for six months following the purchase of receivables. After six months, principal was payable over 24 months. The Company did not make its principal or interest payments on the revolving line of credit facility for April and May 2000. The lender declared default, but did not accelerate the loan. Interest on the line increased to prime plus 5% per annum effective April 1, 2000. Pursuant to a court order and effective for June 2000, the Company modified the terms of the agreement whereby 60% of certain collections are applied to debt service, and the remaining collections go to the Company. Debt service payments are paid weekly. Outstanding debt on the line as of June 30, 2000 was $15.5 million, including $563,000 of interest capitalized as part of the line, and the carrying value of the finance receivables under the facility was $16.7 million. Interest expense totaled $390,000 and $563,000 for the three months ended June 30, 1999 and 2000, respectively. SPV99-2 Financing In August 1999, the Company entered into a $40.0 million interim credit facility to fund purchases of additional portfolios of defaulted receivables. Under this arrangement, Creditrust SPV99-2, LLC (Series 1999-2), a newly formed special purpose subsidiary, issued secured, interim short-term notes in a private placement to institutional investors. The notes are backed by a parent guarantee from Creditrust. The subsidiary used the proceeds of the interim credit facility to purchase portfolios including purchases under forward flow contracts. The Company was initially obligated to retire this facility with proceeds from any capital markets transactions or certain asset sales prior to the May 2000 initial maturity date. Interest was initially payable at 12% per annum. Debt service was initially all collections on the receivables. The notes converted to long-term financing effective March 1, 2000, at which time the interest rate changed to 15% per annum and the maturity extended to September 2002. Pursuant to the conversion of the notes, effective March 1, 2000, the Company may utilize up to $20.0 million from capital markets transactions or certain asset sales for working capital purposes in lieu of retiring the loan balance. Warrants for the purchase of 1,236,138 shares of common stock of the Company were issued to the lenders based on the average stock price under a defined formula at market value. An original issue discount of $1.0 million was recorded pursuant to the issuance of the stock warrants. The lenders will receive a conversion fee of 8.25% of the outstanding debt on March 1, 2000, or $2.8 million, payable from collections on the receivables. As of June 30, 2000, $1.0 million remains unpaid on the conversion fee. Debt service, including payment of the conversion fee, is all collections less a 40% servicing fee paid to the Company. Servicing fees are eliminated in consolidation. The facility includes a technical cross default on the revolving line of credit and securitizations. As a consequence of the Company's filing for relief under Chapter 11 of the federal bankruptcy laws, under the terms of the agreement, the interest rate increased to 21% per annum. As of June 30, 2000, the Company had $33.8 million outstanding under this facility. Interest expense totaled $1.5 million for the three months ended June 30, 2000, and the carrying value of the finance receivables under this facility was $34.7 million. See Note A. 12 CREDITRUST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Note G--Notes Payable (Continued) Non Recourse SPV99-1 Securitization Note In August 1999, the Company issued a $40.0 million asset backed securitization note through its newly formed special purpose subsidiary Creditrust SPV99-1, LLC (Series 1999-1). This note is secured by the receivables pledged to the note holders and is non-recourse to the parent Company and its other assets. Interest is payable at 9.43% per annum and the final maturity date of the note is July 2004. Interest expense totaled $620,000 for the three months ended June 30, 2000. A one-time $2.4 million liquidity reserve is included in cash on the balance sheet and restricted as to use until the note is retired. The securitization did not qualify for gain on sale accounting under generally accepted accounting principles, with the result that the securitization notes are treated as a secured borrowing and appear as debt on the consolidated financial statements of the Company. As of June 30, 2000, the Company had $24.8 million outstanding under the facility, and the carrying value of the finance receivables under the facility was $53.4 million. Debt service is paid from all collections on the receivables less a 20% servicing fee. Servicing fees are eliminated in consolidation. Due to a cross default provision with any other defaulted securitization, the trustee notified the Company that a servicer default had occurred. On May 4, 2000, the Company was notified by the trustee for the bondholders that effective immediately, Creditrust was terminated of all its duties and obligations under the servicing agreement. In subsequent discussions, the bondholders have requested the Company to continue servicing the receivables for an indeterminate period. The servicing will be transferred to NCOF as part of a settlement reached with the Series 1999-1 bondholders. See Note A. As of June 30, 2000, estimated required minimum principal payments payable by the Company were as follows: (dollars in thousands) Year ending December 31, 2000 $ 9,186 2001 25,217 2002 35,223 2003 3,413 2004 and thereafter 21,980 -------- Total minimum principal payments 95,019 Original issue discount on warrants issued from SPV99-2 financing (898) -------- Fair value of debt recorded $ 94,121 ======== The above table does not reflect the impact of potential acceleration of any loans caused by defaults. Note H--Commitments and Contingencies Forward Flow Agreements Beginning in September 1998, the Company entered into multiple forward flow agreements with certain financial institutions, which obligate the Company to purchase, on a monthly basis, portfolios of charged-off receivables meeting certain criteria. As of June 30, 2000, the Company had no commitments under forward flow agreements. 13 CREDITRUST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Note H--Commitments and Contingencies (continued) Litigation Reference is hereby made to Note A above for a description of the Chapter 11 proceeding to which the Company is a party, which description is incorporated herein by reference. The Company filed a complaint on April 4, 2000 against Enhanced Financial Services Group Inc. ("EFS"), AGI and Charles Henneman in the United States District Court for the District of Maryland containing 18 counts alleging securities fraud, common law fraud and other common law tort actions and which seeks compensatory and punitive damages in excess of $200 million. All defendants have filed motions to dismiss, which have been briefed and answered. After Creditrust filed for relief under Chapter 11 of the federal bankruptcy laws, AGI filed a motion for a temporary restraining order in connection with $1.3 million reserves held by Series 98-1 securitization. The court denied AGI's motion. AGI also filed a motion seeking the appointment of a Chapter 11 trustee. AGI filed a claim in the Bankruptcy Court for up to $32.7 million. See Note A for a description of the AGI Settlement Agreement reached with AGI, EFS and Henneman. Creditrust filed a complaint in the United States District Court for the District of Delaware seeking a declaratory judgment with respect to a contract between the Company and MBNA which had terminated as a result of certain actions by MBNA. MBNA answered by denying any liability, and filed a counterclaim seeking damages (not calculated or stated) from the Company for breach of contract. The Company answered by denying all liability. The counterclaim has been stayed by the Chapter 11 proceedings and all parties have agreed to hold off on any discovery with respect to the original claim. MBNA has filed an unliquidated claim and an amended claim in the amount of $4.5 million in the Bankruptcy Court to which the Company has objected. All parties have entered into a Memorandum of Understanding, the terms of which set forth an agreed settlement of all outstanding issues and allows MBNA a cash claim of $65,000. The Company intends to contest this litigation vigorously in the event the settlement was not completed. The Company filed a complaint in the United States District Court for the District of Maryland seeking damages from a former employee et al. for theft and conversion of funds belonging to the Company (currently estimated to be in excess of $200,000). A temporary restraining order was issued and converted to a preliminary injunction preventing the removal or expenditure of assets by the defendants. Subpoenas have been issued to various financial institutions in order to discover any misdirected funds. An insurance claim has been filed. A complaint was filed in the Court of Common Pleas for Lucas County, Ohio seeking damages of approximately $400,000 from the Company and a co-defendant, Key Bank, resulting from a tradeline which the Company allegedly filed on plaintiff's credit report. Plaintiff alleges that the Company knew, or had reason to know, that the account purchased had been previously settled. A stay has been issued pursuant to a notice of suggestion of bankruptcy being filed. Plaintiff has also filed a claim in the United States Bankruptcy Court for the District of Maryland, Northern Division. The Company intends to contest this litigation vigorously. A complaint was filed in the Circuit Court for Baltimore County seeking damages of $1,333,000 from the Company for alleged breach of a contract for the construction of tenant improvements in the Company's former call center in Hunt Valley, Maryland. An answer has been filed and all proceedings stayed by the Chapter 11 filing. A claim was filed in the Bankruptcy Court and the Company has objected to the claim. The Company has provided for any likely loss in connection with this litigation. A class action complaint was filed against the Company in the United States District Court for the Northern District of Illinois seeking class damages for all customers of the Company residing in Illinois who received a collection letter alleged to be in violation of the Fair Debt Collection Practices Act. The Company filed an answer and discovery has commenced. Class certification has been challenged and the original plaintiff has withdrawn and a substitute plaintiff has been added. The Company has again challenged certification of the class based upon the lack of sufficient commonality of facts to support liability. The proceeding was dismissed by the plaintiff for no consideration on July 28, 2000. The plaintiff has filed a claim in the Bankruptcy Court. The Company has objected to this claim. The Company intends to contest this litigation vigorously. 14 CREDITRUST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Note H--Commitments and Contingencies (continued) A complaint was filed against the Company in the United States District Court for the Northern District of Alabama seeking class damages for all customers of the Company who had filed for protection under the U.S. Bankruptcy Code and, in alleged violation of the automatic stay provisions of the Code, continued to receive requests for payment from the Company. Several counts have been dismissed by the court. Class certification is pending. All proceedings have been stayed as a result of the Chapter 11 proceeding. The plaintiff has filed a claim in the Bankruptcy Court. The Company has objected to this claim. Six complaints filed in the United States District Court for the District of Maryland seeking class damages against certain officers of the Company for alleged violation of the Securities and Exchange Act and various rules promulgated thereunder. The Company is not a named defendant because of the Chapter 11 proceeding, but may have indemnification responsibilities to some or all defendants. Motions to dismiss to be filed. The Company's plan of reorganization specifically provides for pre Chapter 11 filing related indemnification claims to be limited to a trust fund and certain insurance policies. The surviving corporation will have no ongoing responsibility for these claims under the plan. Any deductibles the Company may incur have been expensed. Seven individual complaints, filed in the Circuit Court for Baltimore City by the same attorney seek individual yet identical compensatory and punitive damages and state identical causes of action. Said causes of action include the violation of the Maryland Consumer Protection Act, fraud, constructive fraud, the violation of Federal Consumer Credit Protections Act, negligence, breach of contract, interference with contractual relations, and intentional infliction of emotional distress. Motions to dismiss certain counts and defendants and to remove the remaining matters to the United States District Court for the District of Maryland have been filed. The Company believes these claims are without merit. The Bankruptcy stay has caused the case to be administratively closed. The plaintiffs have filed claims in the Bankruptcy Court. The Company has objected to these claims. The Company intends to contest this litigation vigorously. On August 18, 2000 the Official Unsecured Creditors Committee filed a motion seeking the appointment of a Chapter 11 trustee alleging that the Company had failed to provide timely information. The Company opposed the motion, having provided extensive information to the Committee's professionals. The motion was resolved through a consent order setting forth procedures to accommodate the Committee's requests in a reasonable manner. In addition to the Chapter 11 proceeding described under Note A above and the litigations described above in this Note H, the Company is involved in various litigations in the ordinary course of business. Management believes that these other litigations, individually and in the aggregate, will not have a material adverse impact on the Company's financial position, results of operations or liquidity. Note I - Restructuring of Operations In May 2000, the Company effectuated a restructuring plan and closed one of its operations centers. The exit plan included relocating all employees in the closed operations center to its main operations center, disposing of certain equipment leases, and a reduction in staff. The cost of restructuring of $8.7 million before tax is presented as a charge to income as a separate component of earnings from operations. The restructuring costs included writing off unutilized property and equipment leases and leaseholds, and costs of abandonment of the real property lease. Note J - Subsequent Events Subsequent to June 30, 2000, the Company retired the Series 1998-1 securitization bond, including all outstanding interest and administrative fees. The cash reserve of $1,300,000 was returned to the Company upon retirement of the bond. The following day, the Company was notified that a default has been declared on the Warehouse Facility, which carried a requirement to increase its cash reserve by $1.3 million one day after pay-off of the Series 1998-1 securitization. See Note A regarding the Company's plan of reorganization and Merger agreement. Note K - Related Party Transactions In March 2000, the Company's Chairman and Chief Executive Officer loaned the Company $648,000 as a short-term note. The proceeds of the note were used to pay an obligation of the Company under the line of credit facility. See Note A. In 2000, the Company paid $400,000 and has agreed to honor a claim of $416,000 to a company related to a director. The payments are in connection with the return of specific accounts pursuant to account sales warrantees for accounts sold in late 1999. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Quarter Ended June 30, 2000 Compared to Quarter Ended June 30, 1999 Revenues. Total revenues decreased by $11.6 million, or 62.8%, from $18.4 million for the three months ended June 30, 1999 to $6.8 million for the three months ended June 30, 2000. Contributing to the decrease were lower income on finance receivables, servicing income and income on investment in securitizations. Of the $11.6 decrease, $12.7 million was the current period effect of changes in estimates on future collections that occurred during the second quarter of 2000 as a result of the significant changes in circumstances for the Company and from the effect on income this quarter of approximately $60.4 million in finance receivables not earning any income for the quarter. Additionally, decreases in servicing income of $900,000 and income on investment in securitizations of $500,000 were offset by $2.5 million in increased income from an overall increase in finance receivables under management. Servicing fees, while expected to decline since the Company is no longer undertaking securitizations, were primarily lower due to the loss of servicing for the Series 1998-2 securitization. Income on securitizations declined principally due to the lower investment balance of the securities as the result of the revaluation of the securities to market value. Income on finance receivables decreased by $10.2 million, or 64.2%, from $15.8 million for the three months ended June 30, 1999 to $5.6 million for the three months ended June 30, 2000. The changes in circumstances that effected the Company's ability to meet collection estimates for the quarter and prompted the revision of all future collections were: a) the loss of servicing of the Warehouse Facility; and the fact that the backup servicer's collections were significantly lower than when the finance receivables were managed by the Company, b) the loss of servicing on securitization Series 1998-2, when combined with the loss of servicing of the Warehouse Facility, significantly changed the financial prospects of the Company, c) the Company's inability to secure additional financing, d) a decrease in personnel pursuant to the restructuring of its operations prior to the filing of Chapter 11 reorganization, e) the disruption of operations due to the Company's relocating all of its recovery personnel pursuant to the restructuring of its operations, and f) the diminished prospects of the Company while in Chapter 11 to meet growth targets due to restricted availability of funds and a static work force. The change in estimate resulted in a reduction of $12.7 million pretax income on finance receivables and an impairment charge of $52.9 million. After the impairment of a static pool, no income is recorded on that pool and collections are recorded as return of capital. Approximately $60.4 million in carrying value of static pools are in this status. The revision of estimates caused collections to be allocated more to amortization of finance receivables than to income on finance receivables for the quarter ended June 30, 2000. Net collections applied to amortization or (accretion) of finance receivables was $10.4 million and ($2.2) million for the three months ended June 30, 2000 and 1999, respectively. Collections on managed receivables decreased by $2.1 million, or 10.3%, from $20.4 million for the three months ended June 30, 1999 to $18.3 million for the three months ended June 30, 2000. Servicing fees decreased by $900,000 from $1.3 million for the three months ended June 30, 1999 to $400,000 for the three months ended June 30, 2000. Recorded servicing fees represent 20% of collections from the two investments in securitization. Effective May 2000, the Company was removed as servicer on its Series 1998-2 securitization, and servicing was transferred to a new third party servicer. Servicing fees lost due to the change are estimated at $400,000 for the quarter ended June 30, 2000. Additionally, servicing fees were higher in the quarter ended June 30, 1999 compared to June 30, 2000 due to collections on the securitization portfolios reaching their peak in mid 1999. Income on investment in securitization decreased $500,000 from $1.3 million for the three months ended June 30, 1999 to $800,000 for the three months ended June 30, 2000. Prior to the quarter ended June 30, 2000, absent readily available market quotes for similar investments, the Company computed the fair value of the residual interests in its securitizations using a discounted cash flow valuation. Effective with the NCO purchase offer, the Company believed NCO's value was the best available indication of market value and has reduced the carrying value to reflect NCO's effective offer. Hence, the carrying value was impaired by $18.8 million. Expenses from Operations. Total expenses from operations, prior to the one-time charges for restructuring and impairment of receivables and securitizations of $8.7 million and $71.7 million, respectively, increased $2.3 million, or 22.5% from $10.1 million for the three months ended June 30, 1999 to $12.4 million for the three months ended June 30, 2000. Operating expenses increased primarily as a result of increased professional fee expenses incurred in the second quarter of 2000 associated with the Company's strategic planning and reorganization efforts, and occupancy expenses related to the expansion to its third operation facility, which did not exist in the second quarter of 1999. 16 Personnel expenses decreased by $1.8 million, or 24.0%, from $7.3 million for the three months ended June 30, 1999 to $5.5 million for the three months ended June 30, 2000. The decrease in personnel expenses was attributable to a decrease in recruiting, training and compensation costs associated with the decrease in the number of employees needed to service the lower volume of managed receivables due to the loss of servicing the Series 1998-2 securitization and the Warehouse Facility portfolio. Communications costs decreased by $45,000, or 4.8%, from $925,000 for the three months ended June 30, 1999 to $880,000 for the three months ended June 30, 2000. The utilization of long distance telephone services and credit reporting services were flat from the second quarter ended 1999 compared to 2000. Rent and occupancy expenses increased by $1.1 million, or 205.0%, from $500,000 for the three months ended June 30, 1999 to $1.6 million for the three months ended June 30, 2000. This increase was due to the opening of the Company's third operations center in September 1999; therefore no similar expenses were incurred in the second quarter ended 1999 compared to 2000. Professional fees and other expenses increased $3.0 million, or 234.1%, from $1.4 million for the three months ended June 30, 1999 to $4.4 million for the three months ended June 30, 2000, as a result of expenses incurred in connection with the Company's workout and reorganization planning efforts prior to the filing of Chapter 11, amortization of deferred financing costs, as well as increased accounting fees, investor relations expenses, contingency legal and court costs, other consulting fees, and miscellaneous other administrative costs. Earnings from Operations. Earnings from operations, prior to the one-time charges for restructuring and impairment of receivables and securitizations of $8.7 million and $71.7 million, respectively, decreased $13.9 million, from $8.3 million for the three months ended June 30, 1999 to a loss from operations of $5.6 million for the three months ended June 30, 2000. This decrease resulted primarily from the reduced income on finance receivables, and increased professional fees for the quarter ended June 2000 compared to 1999. Other Income (Expense). Other income (expense) increased $2.6 million, from a net expense of $300,000 for the three months ended June 30, 1999 to a net expense of $2.9 million for the three months ended June 30, 2000. This increase resulted from a $200,000 decrease in interest and other income earned on short term cash equivalent investments and an increase in interest expense of $2.4 million as a result of higher borrowing incurred in connection with the credit facilities, SPV99-2 finance facility and the August 1999 securitization. Earnings Before Income Taxes. Earnings before income taxes, prior to the one- time charges for restructuring and impairment of receivables and securitizations of $8.7 million and $71.7 million, respectively, decreased from $8.0 million for the three months ended June 30, 1999 to a loss of $8.5 million for the three months ended June 30, 2000 primarily due to the decrease in earnings from operations and by the increase in interest expense. Provision for Income Taxes. Income tax rates were 39% for the three months ended June 30, 1999. For the three months ended June 30, 2000, a deferred tax asset was recorded at a rate of 39%. The Company's effective tax rate may fluctuate as a result of changes in pre-tax income and nondeductible expenses. Net Earnings. Net earnings, prior to the one-time after tax charges for restructuring and impairment of receivables and securitizations of $5.3 million and $43.7 million, respectively, decreased $10.1 from $4.9 million for the three months ended June 30, 1999 to a net loss of $5.2 million for the three months ended June 30, 2000. This decrease resulted from the same factors which affected earnings from operations and the increase in interest expense. EBITDA. EBITDA, prior to the one-time charges for restructuring and impairment of receivables and securitizations of $8.7 million and $71.7 million, respectively, decreased $14.3 million, from $9.0 million for the three months ended June 30, 1999 to a loss of $5.3 million for the three months ended June 30, 2000. 17 Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999 Revenues. Total revenues decreased by $2.1 million, or 6.9%, from $30.4 million for the six months ended June 30, 1999 to $28.3 million for the six months ended June 30, 2000. Contributing to the decrease were lower income on finance receivables, servicing income and income on investment in securitizations. The current period effect of changes in estimates on future collections that occurred during the second quarter of 2000 as a result of the significant changes in circumstances for the Company and the effect on income this quarter of approximately $60.4 million in finance receivables not earning any income for the current quarter reduced income on finance receivables by $12.7 million. Offsetting the decrease were generally higher revenues on higher receivables balances over the same period last year. Additionally, servicing income decreased by $1.4 million and income on investment in securitizations by $1.0. Servicing fees, while expected to decline since the Company is no longer undertaking securitizations, were primarily lower due to the loss of servicing for the Series 1998-2 securitization. Income on securitizations principally declined due to the lower investment balance of the securities as the result of the revaluation of the securities to market value. Income on finance receivables increased by $200,000, or 1.0%, from $24.9 million for the six months ended June 30, 1999 to $25.1 million for the six months ended June 30, 2000. While overall investment in finance receivables were up over last year, income on finance receivables was flat year over year due to the downward revision of future collection estimates in the second quarter of 2000 resulting in decreased revenues of $12.7 million in that quarter. In the second quarter of 2000, the Company reduced the remaining estimates to reflect changes in circumstances that occurred during the quarter. The changes in circumstances that effected the Company's ability to meet collection estimates for the quarter and prompted the revision of all future collections were: a) the loss of servicing of the Warehouse Facility; and the fact that the backup servicer's collections were significantly lower than when the finance receivables were managed by the Company, b) the loss of servicing on securitization Series 1998- 2, when combined with the loss of servicing of the Warehouse Facility significantly changed the financial prospects of the Company, c) the Company's inability to secure additional financing, d) a decrease in personnel pursuant to the restructuring of its operations prior to the filing of Chapter 11 reorganization, e) the disruption of operations due to the Company's relocating all of its recovery personnel pursuant to the restructuring of its operations, and f) the diminished prospects of the Company while in Chapter 11 to meet growth targets due to restricted availability of funds and a static work force. The change in estimate resulted in a reduction of $12.7 million pretax income on finance receivables and an impairment charge of $52.9 million. After the impairment of a static pool, no income is recorded on that pool and collections are recorded as return of capital. Approximately $60.4 million in carrying value of static pools are in this status. The revision of estimates caused collections to be allocated more to amortization of finance receivables than to income on finance receivables for the quarter ended June 30, 2000. Net collections applied to amortization or (accretion) of finance receivables was $11.6 million and ($5.4) million for the six months ended June 30, 2000 and 1999, respectively. Collections on managed receivables increased by $10.0 million, or 29.6%, from $33.8 million for the six months ended June 30, 1999 to $43.8 million for the six months ended June 30, 2000. Servicing fees decreased by $1.5 million from $2.9 million for the six months ended June 30, 1999 to $1.4 million for the six months ended June 30, 2000. Recorded servicing fees represent 20% of collections from the two investments in securitization. Effective May 2000, the Company was removed as servicer on its Series 1998-2 securitization, and servicing was transferred to a new third party servicer. Servicing fees lost due to the change are estimated at $400,000 for the quarter ended June 30, 2000. Additionally, servicing fees were higher in the six months ended June 30, 1999 compared to June 30, 2000 due to collections on the two securitization portfolios reaching their peak in mid 1999. Income on investment in securitization decreased $1.0 million from $2.7 million for the six months ended June 30, 1999 to $1.7 million for the six months ended June 30, 2000. Prior to the quarter ended June 30, 2000, absent readily available market quotes for similar investments, the Company computed the fair value of the residual interests in its securitizations using a discounted cash flow valuation. Effective with the NCO purchase offer, the Company believed NCO's value was the best available indication of market value and has reduced the carrying value to reflect NCO's effective offer. Hence, the carrying value was impaired by $18.8 million. Expenses from Operations. Total expenses from operations, prior to the one-time charges for restructuring and impairment of receivables and securitizations of $8.7 million and $71.7 million, respectively, increased $9.1 million, or 51.2%, from $17.8 million for the six months ended June 30, 1999 to $26.9 million for the six months ended June 30, 2000. Operating expenses increased primarily as a result of increased personnel costs in the first quarter of 2000, professional fees incurred in connection with Company's reorganization planning efforts, and occupancy expenses related to the expansion to its third operations center. 18 Personnel expenses increased by $2.0 million, or 15.7%, from $13.0 million for the six months ended June 30, 1999 to $15.0 million for the six months ended June 30, 2000. Personnel expenses for the six months ended increased due to recruiting, training and compensation costs associated with the increase in the number of employees needed to service the larger volume of managed receivables. This trend was reversed in the second quarter of 2000 with the loss of servicing of two of its receivables portfolios, and restructuring of its operations. Communications costs increased by $400,000, or 26.4%, from $1.5 million for the six months ended June 30, 1999 to $1.9 million for the six months ended June 30, 2000. This increase was due to greater use of long distance telephone services and credit reporting to service the higher volume of managed receivables purchased in the last two quarters of 1999. Rent and occupancy expenses increased by $2.0 million, or 198.5%, from $1.0 million for the six months ended June 30, 1999 to $3.0 million for the six months ended June 30, 2000. This increase was due to the opening of the Company's third operations center in September 1999 and expansion of its operations. This operations center was closed in June 2000 pursuant to the restructuring of operations in the second quarter of 2000. Professional fees and other expenses increased $2.5 million, or 174.6%, from $1.5 million for the six months ended June 30, 1999 to $4.0 million for the six months ended June 30, 2000, as a result of expenses incurred in connection with the Company's workout and reorganization planning efforts prior to the filing of Chapter 11, amortization of deferred financing costs, as well as increased accounting fees, investor relations expenses, contingency legal and court costs, other consulting fees, and miscellaneous other administrative costs. Earnings from Operations. Earnings from operations, prior to the one-time charges for restructuring and impairment of receivables and securitizations of $8.7 million and $71.7 million, respectively, decreased $11.3 million from $12.7 million for the six months ended June 30, 1999 to $1.4 million for the six months ended June 30, 2000. This decrease resulted primarily from the reduced income on finance receivables, and increased professional fees for the quarter ended June 2000 compared to 1999. Other Income (Expense). Other income (expense) decreased $4.9 million, from a net expense of $700,000 for the six months ended June 30, 1999 to a net expense of $5.6 million for the six months ended June 30, 2000. This decrease resulted from a $200,000 decrease in interest and other income earned on short term cash equivalent investments plus by an increase in interest expense of $4.7 million as a result of higher borrowing incurred in connection with the credit facilities, SPV99-2 finance facility and the August 1999 securitization. Earnings Before Income Taxes. Earnings before income taxes, prior to the one- time charges for restructuring and impairment of receivables and securitizations of $8.7 million and $71.7 million, respectively, decreased $16.2 million, from $12.0 million for the six months ended June 30, 1999 to a net loss of $4.2 million for the six months ended June 30, 2000 primarily due to the decrease in earnings from operations plus the increase in interest expense. Provision for Income Taxes. Income tax rates were 39% for the six months ended June 30, 1999. For the six months ended June 30, 2000, a deferred tax asset was recorded at a rate of 39%. The Company's effective tax rate may fluctuate as a result of changes in pre-tax income and nondeductible expenses. Net Earnings. Net earnings, prior to the one-time after tax charges for restructuring and impairment of receivables and securitizations of $5.3 million and $43.7 million, respectively, decreased $9.8 million, from $7.3 million for the six months ended June 30, 1999 to a net loss of $2.5 million for the six months ended June 30, 2000. This decrease resulted from the same factors which affected earnings from operations and the increase in interest expense. EBITDA. EBITDA, prior to the one-time charges for restructuring and impairment of receivables and securitizations of $8.7 million and $71.7 million, respectively, decreased $9.6 million, or 73.8%, from $13.7 million for the six months ended June 30, 1999 to $4.1 million for the six months ended June 30, 2000. 19 Financial Condition Cash and Cash Equivalents. Cash and cash equivalents decreased from $11.9 million as of December 31, 1999 to $7.7 million as of June 30, 2000 due to net cash used in financing activities exceeding net cash provided by operating activities and investing activities due to increased debt service requirements from borrowings. Finance Receivables. Investment in finance receivables decreased $64.5 million to $120.4 million as of June 30, 2000 from $184.9 million as of December 31, 1999. The Company made no purchases of finance receivables during the six months ended June 30, 2000. Net amortization to principal on finance receivables of $11.6 million was recorded for the six months ended June 30, 2000 as collections exceeded recorded income on finance receivables. Additionally, finance receivables were written down to net realizable value through an impairment in the amount of $52.9 due to revisions in the future estimated collections. Investment in Securitizations. Investment in securitizations decreased $21.1 million from $31.2 million as of December 31, 1999 to $10.1 million as of June 30, 2000. The decrease is comprised of an impairment of securitizations of $18.8 million, and a decrease in the unrealized gain of $4.2 million, offset by income on investment in securitizations of $1.7 million, and other adjustments of $200,000. Accounts Payable and Accrued Expenses. Accounts payable and accrued expenses decreased $1.6 million, or 31.8%, from $5.0 million at December 31, 1999 to $3.4 million as of June 30, 2000. As of June 30, 2000, $13.5 million of accrued expenses and accounts payable have been reclassified as liabilities subject to compromise in accordance with the Company's filing for Chapter 11 reorganization in June 2000. The remaining $3.4 million of liabilities represent post-petition trade payables and accrued expenses incurred after the filing of Chapter 11 reorganization, and liabilities related to the Company's consolidated subsidiaries. Notes Payable and Capitalized Lease Obligations. Notes payable decreased from $111.3 million as of December 31, 1999 to $94.1 million as of June 30, 2000. The decrease in notes payable was attributable to the repayments on the Company's credit facilities. Notes payable of $94.1 million are presented net of an original issue discount of $900,000 from the issuance of warrants in connection with the conversion of the SPV99-2 financing to a term note on March 1, 2000. Liquidity and Capital Resources Historically, the Company has derived substantially all of its cash flow from collections on finance receivables and servicing income. The primary sources of funds to purchase receivables are cash flow, asset backed securitizations, the SPV99-2 credit facility, borrowings under two credit facilities and equity capital. As of June 30, 2000, the Company had cash and cash equivalents of $7.7 million. Cash provided by operating activities was $3.2 million for the six months ended June 30, 2000. There were no purchases of finance receivables for the six months ended June 30, 2000. No credit was available under the Company's credit facilities at June 30, 2000. The Company had entered into forward flow contracts with a number of credit grantors. These contracts obligated the Company to make monthly purchases of receivables portfolios provided they met certain agreed-upon criteria. These commitments have expired or terminated. The Company does not currently intend to enter into new forward flow contracts. Presently, the Company does not intend to purchase receivables prior to the Merger. Other Matters The Staff of the Division of Corporation Finance of the SEC has made certain comments to Creditrust regarding its historical financial statements. The Staff has raised certain questions as to the manner in which Creditrust estimates and accounts for the collectibility of its purchased receivables, as well as to its use of the accrual basis of accounting. The Company has discussed these matters with its independent accountants, and believes that these matters have been accounted for properly and that its financial statements are fairly stated. 20 Events Leading to the Commencement of the Chapter 11 Petition: Inability to Secure Additional Financing The debt service requirements associated with the Company's securitizations significantly increased liquidity requirements. The interest only periods under both the line of credit facility and the Warehouse Facility expired, and no further borrowings were permitted under the Warehouse Facility. The Company was unsuccessful in obtaining financing with principal payments and other terms appropriately matched to the anticipated cash flows from receivables that would be purchased with the financing, including replacement financing to payoff the interim credit facility SPV 99-2, which required 100% cash flow to service debt until March 2000. Throughout the third and fourth quarters of 1999, the Company endeavored to float five-year notes to augment the existing financing and pay off SPV 99-2. The credit market for specialty finance companies in general and the Company's sector in particular was unavailable. The Company was unable to secure a refinancing and in December 1999, the Board of Directors voted to engage an advisor to help the Company locate a strategic partner and or pursue a sale of the Company. Several other financing options were pursued in the first quarter of 2000 including a $55 million high yield bond and indications of interest by one or two potential strategic partners. None of these transactions were consummated. AGI Lawsuit; AGI's Termination of Servicing On April 4, 2000, the Company filed in the United States District Court for the District of Maryland an 18-count suit seeking compensatory and punitive damages in excess of $200 million against EFS, AGI, and Charles Henneman, Senior Vice President of EFS. EFS is the parent of AGI, which insures three of the Debtor's four asset backed bonds. The suit alleges that EFS, through its Senior Vice President Charles Henneman, secretly posted maliciously false and disparaging statements about the Debtor on the Yahoo! message board, an Internet web site, at which the Debtor is the dedicated topic of discussion. This suit includes counts alleging violations under the securities laws. After the Company filed suit against AGI and its parent EFS, Creditrust's servicing on two of the three securitizations (Creditrust Receivables Backed Notes, Series 1998-2, and Creditrust Receivables Backed Warehouse Notes, Series 1998-A consolidated) was terminated. Wells Fargo Bank, successor to Norwest Bank Minnesota, National Association, as trustee and back up servicer, immediately became successor servicer and thereafter selected a third party sub-servicer, Coldata Incorporated, effective as of May 1, 2000. Actions to Avoid the Filing In an attempt to avoid a Chapter 11 filing, the Company took certain actions to restructure its obligations and negotiate with its creditors. In early April, Creditrust retained Seneca Financial Group, Inc. to assist as financial advisors during the negotiations with its creditors and establish a financial plan to avoid a filing. The Company had previously retained the law firm of Swidler Berlin Shereff Friedman, LLP as restructuring counsel. During April and May the Company, with the assistance of its advisors, developed a plan to restructure the Company's operations and financing arrangements. As management executed on its plan, it became apparent that due to concerns of the Company's creditors and the lack of progress in negotiations, a Chapter 11 filing was necessary. At that time, management and the Company's advisors turned their attention to planning for the June 21, 2000 petition filing. Downsizing of Debtor and Move from Hunt Valley As of December 31, 1999, the Company had more than 1,000 employees and utilized three servicing facilities. The third facility, "Hunt Valley", included a call center and a new centralized information technology center and had the capacity to house approximately 1,600 additional employees. Following the loss of servicing on the 99-3A (Warehouse) and 98-2 pools of receivables, the Company immediately sought to further reduce its cost base. The Company downsized from more than 1,000 employees in January 2000 to 330 employees in May 2000. However, the Company determined that the expenses related to the new call center lease in Hunt Valley and the equipment required to operate it would make the Company's restructuring more difficult, if not impossible. It concluded that a Chapter 11 proceeding was the best way to permit the infrastructure to be downsized and enable the Company to generate positive cash flow from operations. Therefore, the Company moved from its Hunt Valley facility and consolidated its operations in its remaining two facilities. 21 Commencement of the Case On June 20, 2000, Creditrust's Board of Directors voted unanimously to authorize the Debtor to file for protection under Chapter 11 of the Bankruptcy Code. On June 21, 2000 (the "Petition Date"), Creditrust filed a petition for reorganization under Chapter 11 of the Bankruptcy Code. While Creditrust's residual assets are contained in its special purpose subsidiaries, none of these filed for protection. Subsequent to the filling of its bankruptcy petition, the Debtor has remained in possession of its property and has conducted its business as a Debtor-in-Possession, pursuant to Sections 1107 and 1108 of the Bankruptcy Code. DIP Financing and Use of Cash Collateral To meet the working capital requirements and to support employee and vendor confidence, the Debtor sought a post-petition working capital facility (the "DIP Facility"). On July 7, 2000 the Bankruptcy Court entered an Interim Order, and on July 17, 2000 entered a Final Order, authorizing a post-petition working capital facility (the "DIP Facility," as previously defined) from Sunrock , the Debtor's prepetition working capital lender. Pursuant to the DIP Facility, Sunrock agreed to make loans to Creditrust through the earlier of the Effective Date of a plan of reorganization, or one year from June 22, 2000. The DIP Facility extends $5.0 million in credit, secured by a first priority lien on substantially all of the Debtor's personal property, including accounts receivable, inventory, equipment and general intangibles. The DIP Facility provides for the cross collateralization of Sunrock's prepetition loan amounts as well as (i) an interest rate of prime plus 5%, (ii) a commitment fee of $100,000, (iii) an unused line fee of .5%, (iv) a collateral management fee of $15,000, (v) a fee on the Effective Date of $700,000 and (vi) the reimbursement of certain loan administration costs. Cash borrowings under the DIP Facility have been granted super priority administrative status by the Bankruptcy Court over all obligations except certain limited administrative expenses, as defined in the DIP Facility credit agreement. The Bankruptcy Court also approved a cash collateral agreement, allowing the Debtor to use cash for operations in accordance with the budget attached to the Cash Collateral Order dated July 3, 2000. With the DIP Facility and the Cash Collateral Order, the Debtor believes that it will be able to meet its operating and reorganization expenses for the expected duration of the Chapter 11 proceeding until closing of the Merger. Suspension of Trading The Nasdaq Stock Market halted trading in the Creditrust Common Stock on June 22, 2000, the day after Creditrust filed its Chapter 11 petition, and de-listed the Creditrust Common Stock on September 26, 2000. The Creditrust Common Stock last traded on the Nasdaq Stock Market on June 21, 2000. 22 Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company retains an investment in securitizations with respect to its securitized receivables, which are market risk sensitive financial instruments held for purposes other than trading; it does not invest in derivative financial or commodity instruments. This investment exposes the Company to market risk, which may arise in the credit standing of the investment in securitizations and in interest and discount rates applicable to this investment. The impact of a 1% increase in the discount rate used by the Company in the fair value calculations would decrease the fair value reflected on the Company's balance sheet by $68,000 as of June 30, 2000. A change in the discount rate would have no impact on the Company's future cash flows. Year 2000 The Year 2000 issue arises out of potential problems with computer systems or any equipment with computer chips that use dates where the date has been stored as just two digits (e.g., 99 for 1999). On January 1, 2000, any clock or date recording mechanism, including date sensitive software, which uses only two digits to represent the year, may recognize a date using 00 as the year 1900 rather than the year 2000. As of the date of this filing, the Company had not experienced any significant system failures, miscalculations, or any disruption of operations including, among other things, a temporary inability to process transactions, send letters and statements or engage in similar activities. Inflation The Company believes that inflation has not had a material impact on its results of operations for the six months ended June 30, 1999 and 2000. 23 PART II PART II. OTHER INFORMATION Item 1. Legal Proceedings Reference is hereby made to Note A to the consolidated financial statements of the Company set forth in Part 1, Item 1, above for a description of the Chapter 11 proceeding to which the Company is a party, which description is incorporated herein by reference. Reference is hereby made to Note H to the consolidated financial statements of the Company set forth in Part 1, Item 1, above for a description of certain other legal proceeding to which the Company is a party, which description is incorporated herein by reference. Item 2. Changes in Securities and Use of Proceeds. None. Item 3. Defaults Upon Senior Securities The Company was notified of a payment related default for April, May and June 2000 on its revolving line of credit. The Company has been notified of a non- payment related default with regard to its Series 1998-2 securitization. These defaults caused the Company to be in technical cross default with regard to its Warehouse Facility and Series 1999-2 facility, and its Series 1998-1 and Series 1999-1 securitizations. None of the above loans have been accelerated. A note default has been declared with respect to the Warehouse Facility. A $1.3 million cash reserve increase was not satisfied. Item 4 not applicable. Item 5. Other Information The Nasdaq Stock Market halted trading in the Creditrust Common Stock on June 22, 2000, the day after Creditrust filed its Chapter 11 petition, and de-listed the Creditrust Common Stock on September 26, 2000. The Creditrust Common Stock last traded on the Nasdaq Stock Market on June 21, 2000. 24 Risk Factors and Forward-Looking Statements The Company's business prospects are highly dependant on a variety of factors within and beyond the Company's control which may affect the timing and amount of collections on the Company's portfolios of previously defaulted consumer receivables. Future growth of the Company will depend on numerous factors, including the development and expansion of relationships with credit grantors, the availability of adequate financing to purchase additional receivables, the ability to securitize receivables, the ability to maintain the quality of services the Company provides to its customers and to credit grantors, the recruitment, training and retention of qualified personnel, the enhancement and maintenance of the Company's information technology, operational, and financial systems, any higher than anticipated rate of personnel turnover and the continued availability of receivables that meet the Company's requirements. The Company's future prospects may be significantly affected either positively or negatively depending upon the circumstances of the marketplace and competitive developments. There can be no assurance that the Company will be able to maintain its historical collection rates, or that it will be able to maintain or accelerate its growth, and any failure to do so could have a material adverse effect on the Company's business, results of operations, and financial condition. The Company's quarterly operating results may fluctuate in the future because of a variety of factors. These factors include (1) the timing and amount of collections on the Company's receivables, (2) any charge to earnings resulting from a decline in value of the Company's existing investment in securitizations, (3) increases in operating expenses associated with the growth of the Company's operations, (4) the accuracy of the Company's pricing models, (5) the resolution of defaults on its credit facilities, and (6) the approval of the Plan in accordance with applicable law. No assurance can be given that unanticipated future events, including further refinements to the Company's collection models, will not result in changes in estimates in future periods which could adversely affect quarter-to-quarter comparisons. The Company does not intend to securitize assets in the future that result in gain on sale transactions. Statements made herein and in other written and oral statements of the Company may include the plans and objectives of management for future operations, including plans and objectives relating to future growth in the number of receivables and availability of adequate third-party financing. Any forward- looking statements are based on current expectations which involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive, and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that any of the forward- looking statements will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or by any other person that the objectives and plans of the Company will be achieved. Item 6. Exhibits and Reports on Form 8-K (A) Exhibits: 2.1 Creditrust Corporation Fifth Amended Plan of Reorganization Under Chapter 11 Bankruptcy dated December 21, 2000 2.2 Second Amended and Restated Agreement and Plan of Merger dated as of September 20, 2000 for the Merger of Creditrust Corporation with and into NCO Portfolio Funding, Inc. 2.3 Fifth Amended Disclosure Statement of Creditrust Corporation dated December 21, 2000. 10.1 Third Amendment to the Credit Agreement dated March 17, 2000 by and among Creditrust Corporation and Sunrock Capital as Agent. 10.2 Amended and Restated Limited Liability Company Agreement of Creditrust SPV99&2, LLC dated as of March 1, 2000. 27.1 Financial Data Schedule (B) Reports on Form 8-K Creditrust Corporation filed on Form 8-K item 3, "Bankruptcy or Receivership" on June 21, 2000. Creditrust Corporation filed on Form 8-K item 4, "Changes in Certifying Accountants" on July 21, 2000. 25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Baltimore, State of Maryland, on January 10, 2001. CREDITRUST CORPORATION By: /s/ Richard J. Palmer ---------------------- Vice President and Chief Financial Officer 26 EX-2.1 2 0002.txt EXHIBIT 2.1 Exhibit 2.1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MARYLAND _____________________________________ : In Re: : : CREDITRUST CORPORATION : Case No. 00-5-7812-JS : Chapter 11 Debtor-in-Possession : ____________________________________: CREDITRUST CORPORATION'S FIFTH AMENDED -------------------------------------- PLAN OF REORGANIZATION ---------------------- UNDER CHAPTER 11 OF THE BANKRUPTCY CODE --------------------------------------- Roger Frankel Michael J. Lichtenstein Jonathan P. Guy SWIDLER BERLIN SHEREFF FRIEDMAN, LLP 3000 K Street, N.W., Suite 300 Washington, D.C. 20007 Telephone: (202) 424-7500 Attorneys for the Debtor-in-Possession December 21, 2000 TABLE OF CONTENTS -----------------
Page ---- ARTICLE I - DEFINED TERMS, RULES OF INTERPRETATION, COMPUTATION OF TIME AND GOVERNING LAW............................ 1 1.1 DEFINED TERMS..................................................................................... 1 ------------- 1.2 RULES OF INTERPRETATION, COMPUTATION OF TIME, AND GOVERNING LAW................................... 11 --------------------------------------------------------------- ARTICLE II - TREATMENT OF ADMINISTRATIVE CLAIMS AND PRIORITY TAX CLAIMS.............................................. 12 2.1 ADMINISTRATIVE CLAIMS............................................................................. 12 --------------------- ARTICLE III - SUMMARY OF CLASSIFICATION, TREATMENT, AND VOTING RIGHTS OF CLAIMS AND EQUITY INTERESTS................. 13 ARTICLE IV - CLASSIFICATION AND TREATMENT OF CLAIMS AND EQUITY INTERESTS............................................. 14 4.1 CLASS 1 - PRIORITY CLAIMS......................................................................... 14 ------------------------- 4.2 CLASS 2 - SUNROCK SECURED CLAIM AND SUNROCK DIP CLAIM............................................. 15 ----------------------------------------------------- 4.3 CLASSES 3(i) - 3(x) - FF&E SECURED CLAIMS......................................................... 15 ----------------------------------------- 4.4 CLASS 4 - UNSECURED CLAIMS........................................................................ 17 -------------------------- 4.5 CLASS 5 - RENSIN NOTE CLAIM....................................................................... 18 --------------------------- 4.6 CLASS 6 - SPV99-2 NOTEHOLDERS CLAIMS.............................................................. 18 ------------------------------------ 4.7 CLASS 7 - AGI..................................................................................... 20 ------------- 4.8 CLASS 8 - FDCPA CLAIMS............................................................................ 20 ---------------------- 4.9 CLASS 9 - INDEMNIFICATION CLAIMS.................................................................. 21 -------------------------------- 4.10 CLASS 10 - ADMINISTRATIVE CONVENIENCE CLAIM....................................................... 21 ------------------------------------------- 4.11 CLASS 11- EQUITY INTERESTS........................................................................ 21 -------------------------- 4.12 SPECIAL PROVISION GOVERNING UNIMPAIRED CLAIMS..................................................... 22 --------------------------------------------- 4.13 SPECIAL ADJUSTMENT................................................................................ 23 ------------------ ARTICLE V - IMPLEMENTATION OF THE PLAN............................................................................... 23 5.1 VESTING OF ASSETS IN REORGANIZED CREDITRUST....................................................... 23 ------------------------------------------- 5.2 MODIFICATION OF SECURITY AGREEMENTS............................................................... 24 ----------------------------------- 5.3 ISSUANCE OF NEW SECURITIES; EXECUTION OF RELATED DOCUMENTS........................................ 24 ---------------------------------------------------------- 5.4 CORPORATE GOVERNANCE, DIRECTORS AND OFFICERS, AND CORPORATE ACTION................................ 24 ---------------------------------------------- 5.5 INTENTIONALLY DELETED............................................................................. 25 --------------------- 5.6 SERVICING AGREEMENT............................................................................... 25 ------------------- 5.7 LITIGATION TRUST.................................................................................. 25 ---------------- ARTICLE VI - METHOD OF DISTRIBUTIONS UNDER THE PLAN.................................................................. 25
-i- 6.1 IN GENERAL.......................................................................... 25 ----------- 6.2 DISTRIBUTIONS OF CASH............................................................... 26 ---------------------- 6.3 TIMING OF DISTRIBUTIONS............................................................. 26 ------------------------- 6.4 UNCLAIMED DISTRIBUTIONS............................................................. 26 ------------------------- 6.5 DISTRIBUTIONS MADE ONLY TO RECORD HOLDERS........................................... 27 ----------------------------------------- ARTICLE VII - PROCEDURES FOR THE TREATMENT OF DISPUTED CLAIMS.......................................... 27 7.1 DISALLOWANCE OF LATE CLAIMS......................................................... 27 --------------------------- 7.2 PROSECUTION OF OBJECTIONS TO CLAIMS................................................. 28 ----------------------------------- 7.3 NO DISTRIBUTIONS PENDING ALLOWANCE.................................................. 28 ---------------------------------- 7.4 DISTRIBUTIONS AFTER ALLOWANCE....................................................... 28 ----------------------------- ARTICLE VIII - EXECUTORY CONTRACTS AND UNEXPIRED LEASES................................................ 28 8.1 ASSUMPTION OR REJECTION OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES................. 28 ------------------------------------------------------------------- 8.2 APPROVAL OF ASSUMPTION OR REJECTION OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES..... 29 ------------------------------------------------------------------------------- 8.3 CURE OF DEFAULTS.................................................................... 29 ---------------- 8.4 BAR DATE FOR FILING PROOFS OF CLAIM RELATING TO ANY REJECTED EXECUTORY CONTRACTS AND ------------------------------------------------------------------------------------ UNEXPIRED LEASES.................................................................... 29 ---------------- 8.5 INSURANCE POLICIES.................................................................. 30 ------------------ 8.6 INDEMNIFICATION OBLIGATIONS......................................................... 30 --------------------------- 8.7 COMPENSATION AND BENEFIT PROGRAMS................................................... 30 --------------------------------- ARTICLE IX - RELEASES, WAIVERS AND EXCULPATION......................................................... 31 9.1 RELEASE BY REORGANIZED CREDITRUST................................................... 31 --------------------------------- 9.2 RELEASES BY HOLDERS OF CLAIMS AND EQUITY INTERESTS AND FORMER EQUITY INTERESTS...... 31 ------------------------------------------------------------------------------ 9.3 MUTUAL RELEASES..................................................................... 32 --------------- 9.4 NO LIABILITY FOR SOLICITATION OR PARTICIPATION...................................... 32 ---------------------------------------------- 9.5 BINDING EFFECT OF RELEASES.......................................................... 33 -------------------------- ARTICLE X - CONDITIONS TO CONFIRMATION AND EFFECTIVENESS OF THE PLAN................................... 33 10.1 CONSUMMATION OF THE PLAN............................................................ 33 ------------------------ 10.2 CONDITIONS TO THE EFFECTIVE DATE OF THE PLAN........................................ 33 -------------------------------------------- 10.3 EFFECT OF FAILURE OF CONDITIONS..................................................... 34 ------------------------------- 10.4 WAIVER OF CONDITIONS................................................................ 34 -------------------- ARTICLE XI - EFFECT OF CONFIRMATION OF PLAN............................................................ 35 11.1 TERM OF BANKRUPTCY INJUNCTION OR STAYS.............................................. 35 -------------------------------------- 11.2 REVESTING OF ASSETS................................................................. 35 ------------------- 11.3 DISCHARGE OF DEBTOR................................................................. 35 ------------------- 11.4 PERMANENT INJUNCTION................................................................ 35 --------------------
-ii- 11.5 SETOFFS................................................................................ 36 ------- 11.6 SECTION 346 INJUNCTION................................................................. 36 ---------------------- 11.7 COMPLIANCE WITH TAX REQUIREMENTS....................................................... 36 -------------------------------- ARTICLE XII - RETENTION OF JURISDICTION................................................................... 37 12.1 JURISDICTION........................................................................... 37 ------------ ARTICLE XIII - MISCELLANEOUS PROVISIONS................................................................... 38 13.1 EXEMPTION FROM TRANSFER TAXES.......................................................... 38 ----------------------------- 13.2 EFFECTUATING DOCUMENTS AND FURTHER TRANSACTIONS........................................ 38 ----------------------------------- 13.3 TERMINATION OF OFFICIAL COMMITTEE...................................................... 38 --------------------------------- 13.4 AMENDMENT OR MODIFICATION OF THE PLAN.................................................. 39 ------------------------------------- 13.5 REVOCATION OR WITHDRAWAL OF THE PLAN................................................... 39 ------------------------------------ 13.6 BINDING EFFECT......................................................................... 39 -------------- 13.7 NO ADMISSION........................................................................... 39 ------------ 13.8 NOTICES................................................................................ 39 ------- 13.9 GOVERNING LAW.......................................................................... 40 ------------- 13.10 WITHHOLDING AND REPORTING REQUIREMENTS................................................. 40 -------------------------------------- 13.11 PLAN SUPPLEMENT........................................................................ 41 --------------- 13.12 HEADINGS............................................................................... 41 -------- 13.13 EXHIBITS AND SCHEDULES................................................................. 41 ----------------------
-iii- INDEX OF EXHIBITS AND SCHEDULE SCHEDULE - -------- Schedule A...............Executory Contracts and Unexpired Leases to be Assumed -iv- CREDITRUST CORPORATION'S PLAN OF REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE --------------------------------------- Creditrust Corporation hereby proposes the following plan of reorganization pursuant to Chapter 11 of the Bankruptcy Code. ARTICLE 1 - DEFINED TERMS, RULES OF INTERPRETATION, COMPUTATION OF TIME AND GOVERNING LAW 1.1 DEFINED TERMS. ------------- Unless the context otherwise requires, the following terms shall have the meanings indicated when used in capitalized form in the Plan: Administrative Claim means any right to payment constituting a cost or expense of administration of the Chapter 11 Case under sections 503(b) and 507(a)(1) of the Bankruptcy Code, including, without limitation, (i) any actual and necessary costs and expenses of preserving the estate of the Debtor-in-Possession, or of operating the business of the Debtor-in-Possession, (ii) any indebtedness or obligations incurred or assumed by the Debtor-in-Possession in connection with the conduct of its business, and (iii) all compensation and reimbursement of expenses to the extent Allowed by the Bankruptcy Court under section 330 or 503(b) of the Bankruptcy Code (iv) any fees or charges assessed against the estate of the Debtor under 28 U.S.C. (S) 1930 and (v) all amounts necessary to cure any defaults under any executory contracts which are assumed in accordance with the terms of Article VIII. Administrative Claim shall exclude any claim for indemnification, reimbursement or contribution asserted by any Person arising from or relating to any actions or inactions on the part of the Debtor, its officers or directors which occurred prior to the Petition Date. Administrative Convenience Claims means an Unsecured Claim in an amount of $13,000 or less, or such Claim that is voluntarily reduced to $13,000 by the holder thereof. AGI means Asset Guaranty Insurance Company AGI Settlement Agreement means that certain Settlement Agreement between AGI, EFS, Debtor and other parties designated therein which provides for the compromise of all claims between the parties, a copy of which is attached to the Disclosure Statement, and as it shall be amended by the parties thereto to be consistent with the ruling of the Bankruptcy Court of November 28, 2000. Allowed means, with respect to any Claim, except as otherwise provided herein: (a) a Claim that has been scheduled by the Debtor in its schedule of liabilities as other than disputed, contingent or unliquidated and as to which the Debtor or other party in interest has not filed an objection by the Effective Date; (b) a Claim that either is not a Disputed Claim or has been allowed by a Final Order; (c) a Claim that is allowed: (i) in any stipulation with the Debtor of amount and nature of Claim executed prior to the Confirmation Date and approved by the Bankruptcy Court; (ii) in any stipulation with the Debtor of amount and nature of Claim executed on or after the Effective Date; or (iii) in any contract, instrument, indenture or other agreement entered into in connection with the Plan; (d) a Claim relating to a rejected executory contract or unexpired lease that either (i) is not a Disputed Claim or (ii) has been allowed by a Final Order, in either case only if a proof of Claim has been filed by the Bar Date or has otherwise been deemed timely filed under applicable law, or (e) a Claim that is allowed pursuant to the terms of this Plan. Allowed Claim means an Allowed Claim in the particular class as described. Amended Sunrock Credit Agreement means that certain Credit Agreement dated October 28, 1998, as amended, among Creditrust, together with all related instruments and documents, as each may have been amended and modified from time to time. Available Unsecured Cash shall mean $10,520,786 less Allowed Priority Tax Claims, Allowed Special Administrative Claims (net of fee escrows held by any Bankruptcy Professionals and the amount for Touchstone and Worldwide capped at $300,000 regardless of the amount allowed by the Court), Allowed Class 10 Claims and any reserves created under Section 4.8. Avoidance Action means all rights, remedies, claims or causes of action against all Persons, whether at law or at equity, of or on behalf of the Debtor-in-Possession and/or the Bankruptcy Estate (and/or any Person acting on -2- their behalf) arising under sections 544, 545, 546, 547, 548, 549, 550, 553, or 558 of the Bankruptcy Code, or any other similar state or federal law. Ballot means the Ballot distributed with the approved Disclosure Statement to those Persons entitled to vote for or against the Plan. Bankruptcy Code means the Bankruptcy Reform Act of 1978, as amended from time to time. Bankruptcy Court means the United States Bankruptcy Court for the District of Maryland having jurisdiction over the Chapter 11 Case. Bankruptcy Estate means the estate of the Debtor pursuant to section 541 of the Bankruptcy Code. Bankruptcy Professional means any Person (a) employed pursuant to an order of the Bankruptcy Court in accordance with sections 327 or 1103 of the Bankruptcy Code and to be compensated for services pursuant to sections 327, 328, 329, 330 and 331 of the Bankruptcy Code, or (b) for which compensation and reimbursement is being sought or has been allowed by the Bankruptcy Court pursuant to section 503(b) of the Bankruptcy Code. Bankruptcy Rules means the Federal Rules of Bankruptcy Procedure, promulgated under 28 U.S.C. 2075, and any applicable local rules of the Bankruptcy Court. Bar Date means October 24, 2000, the deadline for the filing of proofs of Claims or Equity Interests established by order of the Bankruptcy Court. Barrist Contribution shall mean that certain commitment by Michael J. Barrist to purchase $2,000,000 of New Common Stock on the Effective Date based on the New Equity Value. This commitment may be satisfied by the purchase of New Common Stock by a nominee of Michael J. Barrist. Business Day means any day other than a Saturday, Sunday or any "legal holiday" (as defined in Bankruptcy Rule 9006(a)). Call Center means all of the assets located at 1705 Whitehead Road, Baltimore, Maryland. -3- Capital Leases means those certain FF&E Agreements which are secured financings under Maryland law. Cash means any legal tender of the United States of America and equivalents thereof. Causes of Action means all rights, remedies, claims or causes of action, whether actions at law or at equity, which may be brought by or on behalf of the Debtor-in-Possession and/or the Bankruptcy Estate arising under any provision of the Bankruptcy Code or other applicable law, including, but not limited to, any Avoidance Action. Chapter 11 Case means the case under Chapter 11 of the Bankruptcy Code commenced by Creditrust, styled In re Creditrust Corporation on the Petition Date and continuing through the Confirmation Date. Claim has the meaning set forth in section 101(5) of the Bankruptcy Code provided and to the extent that such Claim is not subject to disallowance or expungement under section 502 of the Bankruptcy Code. Claim shall also include any claim for indemnification (under the certificate of incorporation or by-laws, applicable state law or any specific agreement, or any combination of the foregoing) arising from any act or omission which has occurred prior to the Petition Date or any Claim arising under Section 510(b). Claimant means a person holding a Claim against Creditrust. Class means a category of holders of Claims or Equity Interests as set forth in the Plan. Collateral means any property or interest in property of the Bankruptcy Estate as of the Confirmation Date that is subject to a Lien to secure the payment or performance of a Claim, which Lien is not subject to avoidance under the Bankruptcy Code or otherwise invalid under the Bankruptcy Code or applicable state law. Confirmation Date means the date on which the Confirmation Order is entered by the Bankruptcy Court in its docket, within the meaning of Bankruptcy Rules 5003 and 9021. Confirmation Hearing means the hearing held by the Bankruptcy Court to consider confirmation of the Plan pursuant to section 1129 of the Bankruptcy Code, as such hearing may be adjourned or continued from time to time. -4- Confirmation Order means a non-appealable Final Order of the Bankruptcy Court confirming the Plan pursuant to section 1129 of the Bankruptcy Code. Creditors' Committee means the Official Committee of Unsecured Creditors. Debtor means Creditrust Corporation, a Maryland corporation as debtor-in-possession. DIP Facility means the $5,000,000 credit facility provided to the Debtor by Sunrock pursuant section 364 of the Bankruptcy Code, together with documents, instruments, agreements, and orders of the Bankruptcy Court authorizing and governing such facility. DIP Facility Lender means Sunrock, its successors, assigns thereunder, or such other lenders as may be approved by the Bankruptcy Court to provide the DIP Facility. Disclosure Statement means the Disclosure Statement, as it may be amended from time to time, filed with the Bankruptcy Court in connection with the Plan pursuant to section 1125 of the Bankruptcy Code. Disputed means with reference to any Claim or Equity Interest, any Claim or Equity Interest proof of which was timely and properly filed and which has been or hereafter is listed on the Schedules as unliquidated, disputed or contingent, and in either case or in the case of an Administrative Claim, any Administrative Claim, Claim or Equity Interest which is disputed under the Plan or as to which the Debtor-in-Possession has interposed a timely objection and/or request for estimation in accordance with section 502(c) of the Bankruptcy Code and/or Bankruptcy Rule 3018, which objection and/or request for estimation has not been withdrawn or determined by a Final Order. Distributable Cash means the maximum amount of Cash that may be distributed on the Effective Date to holders of Allowed Class 4 Claims determined by multiplying the amount of Available Unsecured Cash by a fraction, the numerator of which is the Allowed Class 4 Claims and the denominator of which is the sum of Allowed Class 4 Claims plus disputed Class 4 Claims. Distributable Stock means the maximum amount of New Common Stock that may be distributed on the Effective Date to holders of Allowed Class 11 -5- Interests based on (i) New Common Stock to be retained by NCOG, Class 6, or in connection with the Barrist Contribution and Rensin Contribution, (ii) the maximum NCOP Unsecured Obligations as determined on the Effective Date and the Special Adjustment under Section 4.13 of the Plan, and (iii) New Common Stock to be issued under 4.2(c)(ii)(B), 4.4(c)(ii)(C) and any other administrative claimant. Effective Date means the first Business Day at least 20 days after the Confirmation Date and at least one Business Day after all of the conditions specified in Section 10.2 of the Plan have been satisfied or waived in accordance with the terms of the Plan. EFS means Enhance Financial Services Group, Inc. EFS Litigation means the litigation pending in the United States District Court for the District of Maryland captioned: Creditrust and Joseph K. Rensin vs. EFS et al. Case No. ---------------------------------------------- WMN00966. Equity Interest means any equity interest of Creditrust, including, but not limited to, all issued, unissued, authorized or outstanding shares or stock, together with any warrants, options, or contract rights to purchase or acquire such interests at any time. Estimated Claims means Claims that are the subject of an Order of the Bankruptcy Court under 11 U.S.C. (S) 502(c). Executory Contracts means all contracts to which the Debtor-in-Possession is a party and which are executory within the meaning of section 365 of the Bankruptcy Code, including unexpired leases. Exit Facility means that certain $50,000,000.00 secured credit facility to be provided to Reorganized Creditrust pursuant to the terms of the Exit Facility Commitment such facility may, in its discretion, be provided by NCOG. Exit Facility Commitment means that certain commitment letter by and between the NCOG and the Exit Facility Lender, dated December 15, 2000. Exit Facility Lender means lenders, reasonably satisfactory to the Debtor and NCOG, that are parties to the Exit Facility Commitment. Exit Facility Lender may, in its discretion, be designated as NCOG. -6- FDCPA Claim means Claims against Creditrust pursuant to the Federal Fair Debt Collection Practices Act or any similar state or local laws. FF&E Agreements means the agreements, including Capital Leases, on which the Claims in Classes 3(i)-(x) are based. FF&E Secured Claim means a Claim arising from an FF&E Agreement to the extent of the value of the Collateral securing such claim. Final Order means an order or judgment of the Bankruptcy Court, or other court of competent jurisdiction with respect to the subject matter, which has not been reversed, stayed, modified, amended or the subject of a motion for reconsideration, and as to which the time to appeal or seek certiorari has expired and no appeal or petition for certiorari has been timely taken, or as to which any appeal that has been taken or any petition for certiorari that has been or may be filed has been resolved by the highest court to which the order or judgment was appealed or from which certiorari was sought. Governmental Unit has the meaning set forth in section 101(27) of the Bankruptcy Code. Indemnification Claim means Claims of current and former directors and officers of the Debtor pursuant to the Debtor's by- laws, charter, other corporate governance documents, or under applicable law. Lien has the meaning set forth in section 101(37) of the Bankruptcy Code. Litigation Trust means the sum of $250,000.00 which is to be placed on the Effective Date into a segregated interest bearing trust account which may be used only to satisfy Indemnification Claims (including payment of reasonable attorneys fees). Merger Agreement means that certain Amended and Restated Agreement and Plan of Merger dated as of September 20, 2000 for the Merger of Debtor with and into NCO Portfolio Funding, Inc., attached hereto as Exhibit A and all related documents, as it may be amended from time to time. NCOF means NCO Financial Systems, Inc., a Pennsylvania corporation. NCOG means NCO Group, Inc., a Pennsylvania corporation. NCOP means NCO Portfolio Funding, Inc., a Delaware corporation. -7- NCOP Unsecured Obligations means the unsecured obligations of Reorganized Creditrust to pay the balance, if any, of each Allowed Class 4 Claim (not paid from the Distributable Cash) with interest at six percent per annum from the Effective Date, all in accordance with Section 4.4(c) of the Plan. The NCOP Unsecured Obligation shall be paid on the later of the Effective Date or the date a Class 4 Claim becomes an Allowed Claim. New By-Laws means the By-Laws of NCOP adopted pursuant to this Plan and substantially in the form attached as Exhibit D. New Common Stock means the common stock in Reorganized Creditrust issued pursuant to the Plan. New Charter means the amended Certificate of Incorporation of NCOP adopted in connection with this Plan and substantially in the form attached as Exhibit C. New Equipment Notes means the notes to be issued by Reorganized Creditrust to holders of Allowed FF&E Secured Claims, such notes to be secured by the respective holder's Collateral. New Equity Value shall mean $75,000,000, which is within the lower end of the range of Equity Value of Reorganized Creditrust described in the Disclosure Statement approved by the Bankruptcy Court. New Stock Option Plan means the stock option plan to be adopted by NCOP in connection with this Plan which shall be available to employees of Reorganized Creditrust on and after the Effective Date. Official Committee means any official statutory committee appointed in the Chapter 11 Case pursuant to section 1102 of the Bankruptcy Code. Old Common Stock means stock in the Debtor issued and outstanding as of the Record Date. -8- Ordinary Course Professionals means any attorney, accountant or other professional (other than a Bankruptcy Professional), employed by Creditrust during the Chapter 11 Case pursuant to an order of the Bankruptcy Court that designates such professional as an "Ordinary Course Professional." Person means a person as defined in section 101(41) of the Bankruptcy Code. Petition Date means June 21, 2000, the date the Debtor filed its voluntary petition under Chapter 11 of the Bankruptcy Code. Plan means this plan of reorganization, including, without limitation, all exhibits, schedules, supplements, and appendices hereto, either in its present form or as the same may be altered, amended or modified from time to time. Priority Claim means any Claim, other than an Administrative Claim or a Priority Tax Claim, entitled to priority in right of payment under section 507(a) of the Bankruptcy Code. Priority Tax Claim means any Claim of a Governmental Unit of the kind specified in sections 502(i) and 507(a)(8) of the Bankruptcy Code. Record Date means December 21, 2000. Releasees means (i) all present and former employees, officers, directors, shareholders, affiliates and subsidiaries of the Debtor and any other persons who serve or have served as members of management of the Debtor and all of their successors and assigns, (ii) all attorneys, advisors, accountants, financial advisors, agents and consultants of, or to, the Debtor, and the Official Committee (if any is appointed), including all Bankruptcy Professionals and Ordinary Course Professionals, and (iii) NCOF, in its capacity as successor servicer to the Debtor. Rensin Contribution means that certain commitment by Joseph K. Rensin to purchase $320,786 of New Common Stock on the Effective Date based on the New Equity Value. Rensin Note means that certain promissory note dated March 17, 2000 made by Creditrust to Joseph K. Rensin in the face amount of $647,858.93, representing a claim as of the Petition Date of $679,213.56. Reorganized Creditrust means the surviving entity after the Debtor is merged into NCOP. -9- Reserve means the escrow created under Section 4.4(c)(ii)(B) of the Plan to hold Cash, NCOP Unsecured Obligations and New Common Stock pending resolution of Disputed Claims. Schedules means any schedules of assets and liabilities that were or may be filed by the Debtor pursuant to section 521 of the Bankruptcy Code and Bankruptcy Rule 1007, including any amendments and modifications thereto through the Confirmation Date. Secured Claims means Sunrock Secured Claim and FF&E Secured Claims. Special Administrative Claims means all Administrative Claims but excluding (a) all current post-petition vendor trade payables and accruals incurred in the ordinary course of business (not to exceed $2,000,000.00) and (b) reasonable post- petition fees incurred by the Debtor's auditor/accountants or other special counsel engaged in the ordinary course of business or under 11 U.S.C. (S)327 but only to the extent such fees concern non- bankruptcy related matters and the same would have been incurred without regard to the filing of the Chapter 11 Case. Notwithstanding the foregoing, Special Administrative Claims shall include all reasonable fees and expenses as approved by the Bankruptcy Court of (i) all professionals hired by the Creditors' Committee and (2) Debtor's bankruptcy counsel, Seneca Financial Group, Inc. and Sunrock Capital Corp., plus any reserve created by agreement of Creditrust and NCOG to fund post-Confirmation Date Claims litigation. SPV99-2 Noteholders means all noteholders of Creditrust SPV99-2, LLC, and the Trustee for the SPV99-2 Noteholders, to the extent of its interest. Stock Transfer Agent means the agent appointed by Reorganized Creditrust to record the transfer of and to distribute the New Common Stock pursuant to the Plan and to accept certificates for Old Common Stock. Sunrock means Sunrock Capital Corporation. Sunrock DIP Claim means Sunrock's claim arising out of the DIP Facility. Sunrock Secured Claim means all claims arising from or related to the Amended Sunrock Credit Agreement. -10- Tax Claim means either (a) an Allowed Unsecured Claim of a Governmental Unit as provided by section 507(a)(8) of the Code, or (b) an Allowed Claim of a Governmental Unit secured by a lien on property of the Debtor under applicable state law. Unsecured Claim means any Claim against Creditrust that is not an Administrative Claim, Priority Tax Claim, Priority Claim, Sunrock Secured Claim, or FF&E Secured Claim. 1.2 RULES OF INTERPRETATION, COMPUTATION OF TIME, ------------------------------------------------- AND GOVERNING LAW ----------------- (a) Rules of Interpretation For purposes of the Plan: (a) whenever from the context it is appropriate, each term, whether stated in the singular or the plural, shall include both the singular and the plural, and pronouns stated in the masculine, feminine or neuter gender shall include the masculine, feminine and the neuter gender; (b) any reference in the Plan to a contract, instrument, release, indenture or other agreement or document being in a particular form or on particular terms and conditions means that such document shall be substantially in such form or substantially on such terms and conditions; (c) any reference in the Plan to an existing document or exhibit filed, or to be filed, shall mean such document or exhibit, as it may have been or may be amended, modified or supplemented; (d) unless otherwise specified, all references in the Plan to sections, articles and exhibits are references to Sections, Articles and Exhibits of or to the Plan; (e) the words "herein" and "hereto" refer to the Plan in its entirety rather than to a particular portion of the Plan; (f) captions and headings to Articles and Sections are inserted for convenience of reference only and are not intended to be a part of or to affect the interpretation of the Plan; (g) the rules of construction set forth in section 102 of the Bankruptcy Code shall apply; and (h) any term used in capitalized form in the Plan that is not defined herein but that is used in the Bankruptcy Code or the Bankruptcy Rules shall have the meaning assigned to such term in the Bankruptcy Code or the Bankruptcy Rules, as the case may be. (b) Computation of Time In computing any period of time prescribed or allowed by the Plan, the provisions of Bankruptcy Rule 9006(a) shall apply. (c) Governing Law Except to the extent that the Bankruptcy Code or Bankruptcy Rules are applicable, and subject to the provisions of any contract, instrument, release, indenture or other agreement or document entered into in connection with the Plan, the rights and obligations arising under the Plan -11- shall be governed by, and construed and enforced in accordance with, the laws of the State of Maryland, without giving effect to the principles of conflict of laws thereof. ARTICLE 2 -TREATMENT OF ADMINISTRATIVE CLAIMS AND PRIORITY TAX CLAIMS 2.1 ADMINISTRATIVE CLAIMS --------------------- (1) General. Subject to the Bar Date provisions set forth below, unless otherwise agreed to by Debtor and the holder of such claim, each holder of an Allowed Administrative Claim shall receive Cash equal to the unpaid portion of such Allowed Administrative Claim on the later of (a) the Effective Date or as soon as practicable thereafter, (b) the date on which such Claim becomes an Allowed Administrative Claim, and (c) such other date as is mutually agreed upon by the Debtor (or Reorganized Creditrust) and the holder of such Claim; provided, -------- however, that Administrative Claims that represent liabilities incurred by the - ------- Debtor in the ordinary course of its business during the Chapter 11 Case shall, to the extent not paid on or before the Effective Date, be paid by Reorganized Creditrust in the ordinary course of its business and in accordance with any terms and conditions of any agreements relating thereto. (2) Payment of Statutory Fees. All fees payable pursuant to 28 U.S.C. (S) 1930 shall be paid in Cash in the full amount of such Administrative Claim when due. (3) Bar Date for Bankruptcy Professionals' Administrative Claims. (1) Bankruptcy Professionals. All Bankruptcy Professionals requesting compensation or reimbursement of expenses pursuant to sections 327, 328, 330, 331, 503(b) or 1103 of the Bankruptcy Code for services rendered during the Chapter 11 Case (including, without limitation, any compensation requested by any Bankruptcy Professional or any other entity for making a substantial contribution to the Chapter 11 Case), shall file and serve on Reorganized Creditrust, the Official Committee and the United States Trustee for the District of Maryland an (i) application for final allowance of compensation and reimbursement of expenses no later than thirty (30) days after the Confirmation Date. Objections to timely-filed applications of Bankruptcy Professionals for compensation or reimbursement of expenses must be filed and served on Reorganized Creditrust and the Bankruptcy Professionals to whose application the objections are addressed no later than thirty (30) days after the Confirmation Date, or fifteen (15) days after receipt of such applications, whichever is later. Any fees and expenses incurred by Reorganized Creditrust subsequent to the Confirmation Date for services rendered by Bankruptcy Professionals or any other professionals may be paid by Reorganized Creditrust with notice to parties-in-interest but without -12- application to the Bankruptcy Court. The Debtor and a holder of an allowed Administrative Claim may agree to take New Common Stock at the New Equity Value. (2) Ordinary Course Liabilities. Notwithstanding paragraph (i) hereof, holders of Administrative Claims based on liabilities incurred in the ordinary course of the Debtor's business (including Ordinary Course Professionals) shall not be required to file any request for payment of such Claims or to file any proof of claim. The Administrative Claims of such Persons, to the extent allowed under the terms of the Plan and not paid by the Debtor, shall be paid by Reorganized Creditrust in the ordinary course of its business according to the ordinary and customary business terms and conditions of the particular transaction giving rise to such Administrative Claim without the need for any further action by the holders of such Administrative Claims. ARTICLE 3 - SUMMARY OF CLASSIFICATION, TREATMENT, AND VOTING RIGHTS OF CLAIMS AND EQUITY INTERESTS The categories of Claims and Equity Interests listed below classify Claims and Equity Interests for all purposes, including voting, confirmation and distribution pursuant to the Plan and pursuant to Sections 1122 and 1123(a)(1) of the Bankruptcy Code. A Claim or Equity Interest shall be deemed classified in a particular Class only to the extent that the Claim or Equity Interest qualifies within the description of that Class and shall be deemed classified in a different Class to the extent that any remainder of such Claim or Equity Interest qualifies within the description of such different Class. A Claim or Equity Interest is in a particular Class only to the extent that such Claim or Equity Interest is Allowed in that Class and has not been paid or otherwise settled prior to the Effective Date. The classification of Claims and Equity Interests pursuant to this Plan is as follows: CLASS STATUS VOTING RIGHTS - ----- ------ ------------- Class 1 - Priority Claims Unimpaired Not entitled to vote Class 2 - Sunrock Secured Claim and Sunrock DIP Claim Impaired Entitled to vote Classes 3(i) - 3(x) - FF&E Secured Claims Impaired Entitled to vote Class 4 - Unsecured Claims Impaired Entitled to vote Class 5 - Rensin Note Claim Impaired Entitled to vote Class 6 - SPV99-2 Noteholders Impaired Entitled to vote -13- Class 7 - AGI Impaired Entitled to vote Class 8 - FDCPA Claims Impaired Entitled to vote Class 9 - Indemnification Claims Impaired Entitled to vote of current and former directors and officers of the Debtor Class 10 - Administrative Convenience Impaired Entitled to vote Claims Class 11 - Equity Interests Impaired Entitled to vote ARTICLE 4 - CLASSIFICATION AND TREATMENT OF CLAIMS AND EQUITY INTERESTS The Allowed Claims against, and Allowed Equity Interests in, Creditrust shall be treated, and holders thereof shall receive, as follows: 4.1 CLASS 1 - PRIORITY CLAIMS ------------------------- (1) Classification. Class 1 consists of all Priority Claims. (2) Impairment and voting. Class 1 is unimpaired by the Plan. Each holder of an Allowed Priority Claim in Class 1 (including Priority Tax Claims) is conclusively presumed to have accepted the Plan and is not entitled to vote to accept or reject the Plan. (3) Treatment. Unless the Holder of such Claim and the Debtor agree to a different treatment, each Holder of an Allowed Priority Claim shall receive one of the following alternative treatments, at the election of the Debtor: (i) to the extent then due and owing on the Effective Date, such Claim will be paid in full in Cash by Reorganized Creditrust; (ii) to the extent not due and owing on the Effective Date, such Claim (A) will be paid in full in Cash by Reorganized Creditrust, or (B) will be paid in full in Cash by -14- Reorganized Creditrust when and as such Claim becomes due and owing in the ordinary course of business; or (iii) such Claim will be otherwise treated in any other manner so that such Claims shall otherwise be rendered unimpaired pursuant to section 1124 of the Bankruptcy Code. Any default with respect to any Priority Claim that existed immediately prior to the filing of the Chapter 11 Case shall be deemed cured upon the Effective Date. 4.2 CLASS 2 - SUNROCK SECURED CLAIM AND SUNROCK DIP CLAIM. ----------------------------------------------------- (1) Classification. Class 2 consists of the Sunrock Secured Claim and Sunrock DIP Claim. (2) Impairment and Voting. Class 2 is impaired by the Plan. The holder of Allowed Sunrock Secured and DIP Claims is entitled to vote to accept or reject the Plan. (3) Treatment. (i) The amount of the Sunrock DIP Claim shall be added to and become part of the Sunrock Secured Claim which claim shall continue to be secured by the assets set forth in the existing documents, as modified by any prior order of the Bankruptcy Court. (ii) The Sunrock Secured Claim shall be paid as follows: (a) to the extent due and owing on the Effective Date, the Sunrock Secured Claim shall be paid in full with the proceeds of the Exit Facility; or (b) such other terms and conditions as may be agreed to by Sunrock, including payment of a portion of Sunrock's fees with New Common Stock at the New Equity Value. 4.3 CLASSES 3(i) - 3(x) - FF&E SECURED CLAIMS. ----------------------------------------- (1) Classification. Classes 3(i) - 3(x) consists of the following FF&E Secured Claims: -15- (i) Class 3(i) consists of the FF&E Secured Claim evidenced by the Lease Agreement dated 12/10/99 executed by the Debtor in favor of Chesapeake Industrial Leasing Co., Inc. (currently held by Farmers & Mechanics National Bank) (ii) Class 3(ii) consists of the FF&E Secured Claim evidenced by the Lease Agreement dated 2/14/00 executed by the Debtor in favor of Chesapeake Industrial Leasing Co., Inc. (iii) Class 3(iii) consists of the FF&E Secured Claim evidenced by the Lease Agreement dated 5/12/00 executed by the Debtor in favor of Commercial Financial Corporation. (currently held by Marlin Leasing Corp.) (iv) Class 3(iv) consists of the FF&E Secured Claim evidenced by the Lease Agreement dated 12/2/99 executed by the Debtor in favor of Commercial Finance Corporation. (currently held by BB&T Leasing Corp.) (v) Class 3(v) consists of the FF&E Secured Claim evidenced by the Lease Agreement dated 10/8/99 executed by the Debtor in favor of Commercial Finance Corporation. (currently held by Cardinal Bank Dulles) (vi) Class 3(vi) consists of the FF&E Secured Claim evidenced by the Lease Agreement dated 12/19/97 executed by the Debtor in favor of Commercial Finance Corporation (currently held by Presidential Savings Bank). (vii) Class 3(vii) consists of the FF&E Secured Claim evidenced by the Lease Agreement dated 11/3/99 executed by the Debtor in favor of Commercial Finance Corporation with an original balance of $331,700 (currently held by Cardinal Bank). + (viii) Class 3(viii) consists of the FF&E Secured Claim evidenced by the Lease Agreement dated 3/15/00 executed by the Debtor in favor of Chesapeake Industrial Leasing Co. (currently held by Farmers & Mechanics National Bank) (ix) Class 3(ix) consists of the FF&E Secured Claim evidenced by the Lease Agreement dated 6/20/00 executed by the Debtor in favor of Davox Corporation. (x) Class 3(x) consists of the FF&E Secured Claim evidenced by a Master Lease dated as of October 8, 1999, executed by the Debtor in favor of Commercial Finance Corporation ("CFC") and Schedule of Leased Equipment No. 3 to the Master Lease dated November 3, 1999, which was assigned by CFC to Cardinal Bank-Manassas/Prince Williams, N.A. (2) Impairment and Voting. -16- Classes 3(i) - 3(x) are impaired by the Plan. The holders of FF&E Secured Claims are entitled to vote to accept or reject the Plan, and each sub-class within Class 3 shall be deemed a separate class for purposes of the Confirmation Hearing. (3) Treatment. On account of its FF&E Secured Claim, each holder shall (a) receive on the Effective Date a New Equipment Note in a principal amount equal to the outstanding amount under the Secured Transaction which shall be repaid in monthly installments of principal and interest (with interest on such notes to continue at the contract rate set forth in the existing contracts) or (b) shall receive such other treatment as may be agreed by Reorganized Creditrust and such holder. The FF&E Secured Claims shall continue to be secured by the Collateral securing each claim. Each FF&E Secured Claim is being treated as a fully secured claim with no deficiency claim which will be entitled to any treatment as a Class 4 claimant. Notwithstanding the foregoing, the Debtor, with the consent of NCOG, reserves the right to reclassify as an executory contract under the Plan one or more FF&E Agreements listed above prior to approval of the Disclosure Statement and to reject such contracts under Article VIII of the Plan. 4.4 CLASS 4 - UNSECURED CLAIMS. -------------------------- (1) Classification. Class 4 consists of all Unsecured Claims, but excludes the Rensin Note Claim, Administrative Convenience Claims and other Unsecured Claims that are separately classified. (2) Impairment and Voting. Class 4 is impaired by the Plan. The holders of Allowed Class 4 Claims are entitled to vote to accept or reject the Plan. (3) Treatment. (i) Each holder of an Allowed Class 4 Claim shall receive Cash payments to pay such Claims in full with interest as hereinafter described and as described in Section 4.4 (c)(ii) below. Each holder of an Allowed Class 4 Claim shall be paid interest at the rate of six (6) percent per annum from the Petition Date to the Effective Date ("Post-Petition Interest"). (ii) (A) The Debtor shall pay on the Effective Date to each holder of an Allowed Class 4 Claim its pro rata share of the Distributable Cash (up to a maximum of the Allowed Amount of each such Claim). The balance, if any, of each such Allowed Claim shall be paid with an NCOP Unsecured Obligation. (B) Reorganized Creditrust shall hold in the Reserve the remainder of the Distributable Cash allocable to Disputed Claims as well as the Cash to pay the -17- NCOP Unsecured Obligation in the Reserve. Disputed Claims shall be paid in Cash with interest at the rate of 6% from the Petition Date to the date when such Disputed Claim becomes an Allowed Claim. For purposes of this Subsection (B), a Claim which the Bankruptcy Court determines is covered by insurance (or for which the claimant agrees to look solely to an insurance policy of the Debtor) shall not be considered to be a Disputed Claim. Upon resolution of all Class 4 Claims pursuant to Section 4.4(c), the remaining Cash in the Reserve, if any shall be returned to Reorganized Creditrust. (C) In lieu of the treatment described in this Section 4.4 above, a holder of a Class 4 Claim may elect, by written notification as provided in the Ballot, to receive payment of its Allowed Claim in full in New Common Stock based on the New Equity Value. 4.5 CLASS 5 - RENSIN NOTE CLAIM --------------------------- (a) Classification. Class 5 consists of the Rensin Note Claim. (b) Impairment and Voting. Class 5 is impaired by the Plan. The holder of the Rensin Note Claim is entitled to vote to accept or reject the Plan. (c) Treatment. The holder of the Rensin Note Claim shall receive, on the Effective Date, in exchange for cancellation of the Rensin Note, shares of New Common Stock having a value of $679,213.56 based on the New Equity Value. Additionally, if holders of Class 4 Claims receive Post-Petition Interest, then the holder of the Class 5 Claim shall receive Post-Petition Interest payable on the Effective Date in New Common Stock at the New Equity Value. 4.6 CLASS 6 - SPV99-2 NOTEHOLDERS CLAIMS ------------------------------------ (1) Classification. Class 6 consists of all SPV99-2 Noteholders. (2) Impairment and Voting. Class 6 is impaired by the Plan. The SPV99-2 Noteholders are entitled to vote to accept or reject the Plan (3) Treatment. -18- (i) The promissory notes (collectively "Notes") which evidence the claims of the SPV99-2 Noteholders shall be modified as of the Effective Date to provide for a maturity date of December 31, 2004, interest to accrue at the contract rate of 15% and amortization schedule to be agreed by the parties. On the Effective Date of the Plan, the SPV99-2 Noteholders shall receive a cash payment of $5 million dollars which shall be applied as a principal reduction to the Notes. In exchange for, and cancellation of, the Creditrust guarantee of the Notes ("Guarantee") and the warrants issued by Creditrust to the SPV99-2 Noteholders, each of the SPV99-2 Noteholders shall receive their pro-rata share of 18.5% of the New Common Stock issued on the Effective Date under the Plan. (ii) The Servicing Agreement between Debtor and Creditrust SPV99-2 LLC dated as of August 2, 1999 (as amended by that certain Amended and Restated Servicing Agreement dated as of March 1, 2000 collectively "99-2 Servicing Agreement") shall be deemed assumed and assigned to NCOF in its new capacity as Successor Servicer (as defined in the Servicing Agreement); provided, however, that such assignment shall be subject to the following as of the Effective Date; (1) the Servicing Fee shall be reduced from 40% to 20%; (2) all pre-petition defaults (monetary and non-monetary) shall be deemed waived and cured, (3) NCOF shall have no liability to indemnify the Issuer, Administrative Agent or Lenders under the provisions of Section 7 of the 99-2 Servicing Agreement for acts or omissions of Debtor which occurred prior to the assignment and NCOF shall be deemed the "Successor Servicer" as defined therein; and (4) the parties shall agree on such other amendments to the 99-2 Servicing Agreement consistent with the terms and conditions of a binding term sheet between the parties, and as such term sheet may be amended by the parties thereto ("Term Sheet"), dated November 22, 2000. (iii) Except for obligations created under the Creditrust Plan, full mutual releases shall be executed on the Effective Date by and among the SPV99-2 Noteholders, NCOG and Creditrust as provided in the Term Sheet. (iv) The SPV99-2 Noteholders, Creditrust and NCOP shall agree upon mutually acceptable securities issues in accordance with the conditions set forth in the Term Sheet including, without limitation, piggyback and demand registration rights, lock-up periods, tag-along and drag-along rights. Documents necessary to memorialize the agreements set forth in the Term Sheet and paragraphs 4.6(c)(i), (ii) and (iii) shall be agreed to by the parties, including the Debtor, no later than 10 days prior to the Confirmation Hearing. 4.7 CLASS 7 - AGI ------------- (a) Classification. Class 7 consists of all Claims of AGI and EFS. (b) Impairment and Voting. -19- Class 7 is impaired by the Plan. The holders of Allowed Class 7 Claims are entitled to vote to accept or reject the Plan. (c) Treatment. AGI shall be entitled to have an Allowed Claim in the amount of $4.55 million, secured by certain existing reserves referenced in certain pre-petition agreements and to be satisfied in accordance with the terms of the AGI Settlement Agreement as it shall be amended by agreement of the parties prior to the Confirmation Date to be consistent with the ruling of the Bankruptcy Court of November 28, 2000. In accordance with the terms of the AGI Settlement Agreement, the EFS Litigation will be dismissed on the Effective Date. Notwithstanding the terms of the AGI Settlement Agreement, the releases of Rensin by Creditrust and of Creditrust by Rensin shall be governed by the terms of the Plan and not by the AGI Settlement Agreement. 4.8 CLASS 8 - FDCPA CLAIMS ---------------------- (a) Classification. Class 8 consists of all FDCPA Claims. (b) Impairment and Voting. Class 8 is impaired by the Plan. The holders of Allowed Class 8 Claims are entitled to vote to accept or reject the Plan. (c) Treatment. Class 8 Claims, and any FDCPA claims, if any, against Wells Fargo Bank, successor to Norwest Bank as trustee under those indentures with various subsidiaries of Creditrust, the subsidiaries, affiliates, officers and directors of the Debtor shall be discharged and such claimants shall receive no distributions from the Debtor on account of such Claims and shall be deemed to have waived all such claims and shall look solely to the Debtor's former and existing professional liability, or other applicable, insurance policies for payment of such Claims. The Debtor shall create a reserve, not to exceed $50,000, in the amount of any unpaid deductibles for these insurance policies. 4.9 CLASS 9 - INDEMNIFICATION CLAIMS -------------------------------- (a) Classification. Class 9 consists of all Indemnification Claims. -20- (b) Impairment and Voting. Class 9 is impaired by the Plan. The holders of Allowed Class 9 Claims are entitled to vote to accept or reject the Plan. (c) Treatment. Class 9 Claims shall be discharged and such claimants shall receive no distributions on account of such Claims and shall be deemed to have waived all such claims and shall look solely to the Litigation Trust Fund for payment of such Claims. In addition, Class 9 claimants shall continue to receive the benefits under the Debtor's former and existing D&O insurance policy. 4.10 CLASS 10 - ADMINISTRATIVE CONVENIENCE CLAIM ------------------------------------------- (a) Classification. Class 10 consists of all existing Administrative Convenience Claims. (b) Impairment and Voting. Class 10 is impaired by the Plan. Each holder of an Administrative Convenience Claim is entitled to vote to accept or reject the Plan. (c) Treatment. Each holder of an Administrative Convenience Claim shall receive payment in full (with interest at 6% per annum from the Petition Date) on the later of the Effective Date or the date on which such claim becomes an Allowed Claim. 4.11 CLASS 11 - EQUITY INTERESTS --------------------------- (1) Classification. Class 11 consists of all existing Equity Interests. (2) Impairment and Voting. Class 11 is impaired by the Plan. Each holder of Equity Interests is entitled to vote to accept or reject the Plan. (3) Treatment. -21- (i) Each share of Allowed Equity Interests on the Record Date shall receive a pro rata share of approximately 17.5% of the New Common Stock in the Reorganized Creditrust (as adjusted in accordance with the terms of the Plan and the Merger Agreement). Each holder of Old Common Stock shall be entitled to the number of shares of the New Common Stock allocated to the holders of Old Common Stock in accordance with the formula set forth in the Merger Agreement and in the Plan. Subject to Section 4.10 (c)(ii) below and except as provided in Section 4.6 of the Plan, the stock options (hereafter "Employee Stock Options") currently being held by employees of Debtor and the Convertible Securities (as defined in the Merger Agreement) (all of which shall be deemed voided and canceled, and automatically converted on the Effective Date into shares of New Common Stock of Reorganized Creditrust in accordance with the formula set forth in the Merger Agreement,), all other Equity Interests of any nature whatsoever shall be canceled and extinguished (and shall receive no distributions under this Plan) including, without limitation, any and all other outstanding rights, options and warrants to purchase Old Common Stock or any options or warrants not listed on Schedule 3.3 of the Merger Agreement. The Employee Stock Options and/or the Convertible Securities when converted into shares of New Common Stock (in accordance with the formula set forth in the Merger Agreement) shall dilute the holders of Class 11 Equity Interests. The existing employee stock option plan shall, as of the Effective Date, be deemed terminated, null and void and the same shall be replaced by the New Stock Option Plan. (ii) (A) The Debtor shall distribute on the Effective Date pro rata to holders of Allowed Class 11 Interests the Distributable Stock. The remainder of the New Common Stock that may be distributed to holders of Allowed --- Class 11 Interests shall be deposited into the Reserve. (B) Subject to the Special Adjustment provided in Section 4.13 of the Plan, any remaining New Common Stock in the Reserve after resolution of Allowed Class 4 Claims shall be distributed pro rata to holders of Class 11 Interests. 4.12 SPECIAL PROVISION GOVERNING UNIMPAIRED CLAIMS --------------------------------------------- Except as otherwise provided in the Plan, nothing under the Plan shall affect the Debtor's or Reorganized Creditrust's rights in respect of any unimpaired Claims, including, but not limited to, all rights in respect of legal and equitable defenses to or setoffs or recoupments against such unimpaired Claims. 4.13 SPECIAL ADJUSTMENT ------------------ After all Disputed Claims are resolved and the Cash has been distributed from the Reserve, New Common Stock held in the Reserve (including New Common Stock placed in the Reserve pursuant to Section 4.4(c)(ii)(C) of the Plan) shall be distributed in the following priority: -22- (a) For every $418,000 of NCOP Unsecured Obligations (if any) existing on the Effective Date, 1% of the New Common Stock shall be distributed to the following persons in the stated proportions: NCOG 72.74% SPV99-2 Noteholders 22.42% Michael J. Barrist 3.23% Joseph K. Rensin 1.61% ------ 100% ------ The amounts of New Common Stock issued hereunder shall be proportionally adjusted based upon the exact amount of NCOP Unsecured Obligations. (b) To holders of Allowed Class 11 Interests, pro rata. ARTICLE 5 - IMPLEMENTATION OF THE PLAN 5.1 VESTING OF ASSETS IN REORGANIZED CREDITRUST ------------------------------------------- On the Effective Date, the Debtor shall be merged into NCOP pursuant to the Merger Agreement. Except as otherwise provided in the Plan, or any agreement, instrument or indenture entered into between the Debtor and another party relating thereto, on or after the Effective Date, all property of the Estate, and any property acquired by the Debtor under the Plan, shall vest in Reorganized Creditrust, free and clear of all Claims, liens, charges, or other encumbrances subject to the terms of the Plan. On and after the Effective Date, Reorganized Creditrust may operate its business and may use, acquire or dispose of property and compromise or settle any Claims, without supervision or approval by the Bankruptcy Court and free of any restrictions of the Bankruptcy Code or Bankruptcy Rules, other than those restrictions expressly imposed by the Plan and the Confirmation Order subject to the terms of the Plan. In accordance with section 1109(b) of the Bankruptcy Code, nothing in this Article V shall preclude any party in interest from appearing and being heard on any issue in the Chapter 11 Case. 5.2 MODIFICATION OF SECURITY AGREEMENTS ----------------------------------- On the Effective Date, except to the extent provided otherwise in the Plan, all security agreements, instruments, certificates, and other documents evidencing the Sunrock Secured Claim and the FF&E Secured Claims shall be deemed amended by the Plan. 5.3 ISSUANCE OF NEW SECURITIES; EXECUTION OF RELATED DOCUMENTS --------------------------------------------------------------- On the Effective Date, or as soon thereafter as is practical, Reorganized Creditrust shall execute and deliver such agreements, documents and instruments as are required to be executed -23- pursuant to the terms of the Plan. Reorganized Creditrust shall issue shares of New Common Stock and any Convertible Securities designated on Schedule 3.3 of the Merger Agreement all in accordance with the provisions of this Plan and the Merger Agreement. 5.4 CORPORATE GOVERNANCE, DIRECTORS AND OFFICERS, AND CORPORATE ACTION ------------------------------------------------------------------ (a) Directors and Officers of Reorganized Creditrust Subject to any requirement of Bankruptcy Court approval pursuant to section 1129(a)(5) of the Bankruptcy Code, as of the Effective Date, the officers and directors of Debtor shall be deemed to have resigned and the new directors of Reorganized Creditrust shall be those persons identified in the Confirmation Order. Joseph K. Rensin and the SPV99-2 Noteholders shall each have the right to appoint one independent director of Reorganized Creditrust while NCOG shall have the right to choose the remaining three directors, in all cases for such terms as are provided for in the Merger Agreement. The independent director appointed by Joseph K. Rensin may be a director or former director of Creditrust subject to the consent of NCOG (such consent not to be unreasonably withheld). (b) Rensin Consulting Agreement. On the Effective Date, Reorganized Creditrust and Joseph K. Rensin shall enter into a consulting agreement substantially similar to Exhibit B hereto ("Rensin Agreement"). (c) Corporate Action On the Effective Date, all actions contemplated by the Plan and the Merger Agreement shall be authorized and approved in all respects (subject to the provisions of the Plan). All matters provided for in the Plan involving the corporate structure of the Debtor or Reorganized Creditrust, and any corporate action required by the Debtor or Reorganized Creditrust in connection with the Plan, shall be deemed to have occurred and shall be in effect, without any requirement of further action by the security holders or directors of the Debtor or Reorganized Creditrust (including, without limitation, adaptation of the New By-Laws and New Charter). On the Effective Date, the appropriate officers of Reorganized Creditrust and members of the board of directors of Reorganized Creditrust are authorized and directed to issue, execute and deliver the agreements, documents, securities and instruments contemplated by the Plan in the name of and on behalf of Reorganized Creditrust. 5.5 INTENTIONALLY DELETED 5.6 SERVICING AGREEMENT ------------------- -24- The Servicing Agreement (as defined in the Merger Agreement) shall have been executed by Reorganized Creditrust and NCOF on or before the Effective Date. The 99-2 Servicing Agreement (under the terms of Section 4.6(c)) shall have been assumed by NCOF. The 99-1 Servicing Agreement (under the terms of Section 10.2(f)) shall have been assumed by NCOF in accordance with the Settlement Agreement between the Noteholders of Creditrust SPV99-1, LLC, NCOF and Debtor dated November 13, 2000 ("99-1 Settlement Agreement"). 5.7 LITIGATION TRUST ---------------- Documents evidencing the formation of the Litigation Trust consistent with the Plan and reasonably satisfactory to the Debtor and NCOG shall have been executed on or before the Effective Date. ARTICLE 6 - METHOD OF DISTRIBUTIONS UNDER THE PLAN 6.1 IN GENERAL. ----------- Subject to Bankruptcy Rule 9010, all distributions under the Plan shall be made by Reorganized Creditrust to the holder of each Allowed Administrative Claim and Allowed Claim in the following manner: (1) Distributions to Holders of Other Claims. All Distributions on account of Allowed Administrative Claims and Allowed Claims shall be made directly by Reorganized Creditrust (or its designee) to the holder of the Administrative Claim and the Claim (as the case may be) as of the Effective Date at the address of such holder as listed on the Schedules unless the Debtor-in-Possession or Reorganized Creditrust has been notified in writing (with a copy to Debtor's counsel) at least 10 days prior to the Effective Date of a change of address by the filing of a proof of Claim by such holder that provides an address for such holder different from the address reflected on the Schedules. (2) Post-Effective Date Distributions. Any subsequent distributions required to be made under the Plan after the Effective Date to holders of any Claims shall be made by Reorganized Creditrust (or its designee) in accordance with the terms of the Plan. (c) Prior to the Effective Date, the Debtor shall provide the Creditors' Committee with a list of all Allowed Administrative Expense Claims, Allowed Priority Claims and Allowed Class 4 and 10 Creditors who will receive a distribution pursuant to the Plan, setting forth the amount of each holder's Allowed Claim and the distribution to be made thereto. The Reorganized -25- Debtor shall thereafter file and serve on the Creditors' Committee a detailed report of all payments made pursuant to the terms of the Plan. 6.2 DISTRIBUTIONS OF CASH. ---------------------- At the option of Reorganized Creditrust, any payment or distribution of Cash made by Reorganized Creditrust pursuant to the Plan shall be made by check or wire transfer. 6.3 TIMING OF DISTRIBUTIONS. ------------------------ Any payment or distribution required to be made under the Plan on a day other than a Business Day shall be made on the next succeeding Business Day. 6.4 UNCLAIMED DISTRIBUTIONS. ------------------------ (1) If any distribution to a holder of an Administrative Claim Equity Interest or Claim is returned as undeliverable, Reorganized Creditrust shall use reasonable efforts to determine the current identity and address of such holder, but no distribution to such holder shall be made unless and until a determination has been made concerning the then-current identity and address of such holder, at which time such distribution shall be made to such holder without further interest. If no proof of Claim or Proof of Interest has been filed and the Schedules fail to specify the address of such holder of an Allowed Administrative Claim or Allowed Claims, the distributions in respect of such Administrative Claims, Equity Interests or Claims shall, within six months after the distribution date, be deemed unclaimed property under section 347(b) of the Bankruptcy Code. All unclaimed payments shall revert to Reorganized Creditrust and such Administrative Claims, Equity Interests or Claims shall be discharged and forever barred. (2) Funds remaining upon termination of the Litigation Trust shall revert to the Reorganized Creditrust free and clear of all liens, claims and encumbrances (unless reverted sooner at the direction of the Board of Directors of Reorganized Creditrust). (3) Any payments (or distributions of New Common Stock) to holders of Claims that remain unclaimed for six months after the Effective Date shall be retained by Reorganized Creditrust. 6.5 DISTRIBUTIONS MADE ONLY TO RECORD HOLDERS ----------------------------------------- (1) Distributions to Holders of Claims as of the Effective Date. As of the close of business on the Effective Date, the Reorganized Creditrust shall be entitled to rely on its Schedules or other records for purposes of determining the identities and addresses of holders of all Claims and Equity Interests and Reorganized Creditrust shall not be required to make any further changes in the record holders of any Claims or Equity Interest. The -26- Debtor and Reorganized Creditrust shall have no obligation to recognize any transfer of any Claims or Equity Interests, or the right to receive the NCOP Unsecured Obligation, occurring after the Effective Date and shall be entitled to recognize and deal for all purposes under the Plan only with those Persons who were record holders of the Claims and Equity Interests as of the close of business on the Effective Date. (b) Distributions to Holders of Equity Interests as of the Effective Date. At the close of business on the Effective Date, the Stock Transfer Agent shall have been designated by the Board of Directors of Reorganized Creditrust under such terms and conditions as the board deems appropriate who shall distribute the New Common Stock in accordance with the terms of this Plan. ARTICLE 7 - PROCEDURES FOR THE TREATMENT OF DISPUTED CLAIMS 7.1 DISALLOWANCE OF LATE CLAIMS. --------------------------- Subject to section 502(j) of the Bankruptcy Code and Bankruptcy Rules 3008 and 9006, any Administrative Claim, Equity Interest or Claim for which the filing of a proof of claim or other filing with the Bankruptcy Court is required under the terms of the Bankruptcy Code, the Bankruptcy Rules, any order of the Bankruptcy Court (including one providing a Bar Date) or the Plan shall be disallowed if and to the extent that such proof of claim (or other filing) is not timely and properly made. 7.2 PROSECUTION OF OBJECTIONS TO CLAIMS. ----------------------------------- Unless otherwise ordered by the Bankruptcy Court after notice and a hearing, the Debtor-in-Possession or Reorganized Creditrust shall have the exclusive right to make and file objections to proofs of Claims, proofs of Interest and to Administrative Claims (or to any amounts listed in the Schedules as disputed, contingent or unliquidated) at any time on or before the Effective Date. Subsequent to the Effective Date, only Reorganized Creditrust shall have the right to make and file objections to proofs of claim, proofs of interest and Administrative Claims; provided, however, that, if in existence, the Creditors' Committee may intervene in any objections and object to any settlement proposed by Reorganized Creditrust, and may object to any Claims not previously objected to. 7.3 NO DISTRIBUTIONS PENDING ALLOWANCE. ---------------------------------- Notwithstanding any other provision hereof, if a Claim or Equity Interest is Disputed (partial or otherwise), no payment or distribution (partial or otherwise) shall be made on account of such Claim and/or Equity Interest, unless and until such Disputed Claim becomes an Allowed Claim and/or such Disputed Interest becomes an Allowed Interest. -27- 7.4 DISTRIBUTIONS AFTER ALLOWANCE. ----------------------------- Payments and distributions to each holder of a Claim that is Disputed, or that is not Allowed, to the extent that such Claim ultimately becomes Allowed, shall be made in accordance with the provisions hereof governing the Class of Claims in which such Claim is classified. As soon as practicable after the date that the order or judgment of the Bankruptcy Court allowing any Disputed Claim becomes a Final Order, Reorganized Creditrust shall distribute to the holder of such Claim any payment or property that would have been distributed to such holder if the Claim had been Allowed as of the Effective Date (or such other date on which such distribution would have been made). ARTICLE 8 - EXECUTORY CONTRACTS AND UNEXPIRED LEASES 8.1 ASSUMPTION OR REJECTION OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES. ------------------------------------------------------------------- Pursuant to sections 365(a) and 1123(b)(2) of the Bankruptcy Code, all executory contracts and unexpired leases (including any equipment leases other than any FF&E Agreements) that exist between the Debtor and any person shall be deemed rejected by Reorganized Creditrust as of the Effective Date, except for any executory contract or unexpired lease (a) that has been assumed pursuant to an order of the Bankruptcy Court entered prior to the Confirmation Date, or (b) that is set forth in Schedule A hereto; provided, however, that the Debtor-in- ---------- Possession or Reorganized Creditrust, with the consent of NCOG, reserves the right, on or prior to the Confirmation Date, to amend Schedule A to delete any ---------- executory contract or unexpired lease therefrom or add any executory contract or unexpired lease thereto, in which event such executory contract(s) or unexpired lease(s) shall be deemed to be, respectively, assumed or rejected. The Debtor- in-Possession or Reorganized Creditrust shall provide notice of any amendments to Schedule A to the parties to the executory contracts and unexpired leases ---------- affected thereby prior to the Confirmation Hearing. The listing of a document on Schedule A shall not constitute an admission by the Debtor-in-Possession or ---------- Reorganized Creditrust that such document constitutes an executory contract or an unexpired lease or that the Debtor-in-Possession or Reorganized Creditrust has any liability thereunder. 8.2 APPROVAL OF ASSUMPTION OR REJECTION OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES. ---------------- Entry of the Confirmation Order shall constitute (a) the approval, pursuant to sections 365(a) and 1123(b)(2) of the Bankruptcy Code, of the assumption (and to the extent indicated, assignment) of all executory contracts and unexpired leases that are assumed pursuant to Schedule A of the Plan, and (b) the ---------- approval, pursuant to sections 365(a) and 1123(b)(2) the Bankruptcy Code, of the rejection of all other executory contracts and unexpired leases. -28- 8.3 CURE OF DEFAULTS. ---------------- Except as may otherwise be agreed to by the parties, on the Effective Date, Reorganized Creditrust shall cure any and all undisputed defaults under any executory contract or unexpired lease assumed pursuant to the Plan in accordance with section 365(b)(1) of the Bankruptcy Code. All disputed defaults that are required to be cured shall be cured either within 30 days of the entry of a Final Order determining the amount, if any, of the Debtor-in-Possession's or Reorganized Creditrust's liability with respect thereto, or as may otherwise be agreed to by the parties. After the Effective Date, all defaults under any executory contract assumed under the Plan (monetary and/or non-monetary) shall be deemed cured. 8.4 BAR DATE FOR FILING PROOFS OF CLAIM RELATING TO ANY REJECTED EXECUTORY CONTRACTS AND UNEXPIRED LEASES. ------------------------------------------------- Claims arising out of the rejection of an executory contract or unexpired lease pursuant to this Article VIII must be filed with the Bankruptcy Court and served upon the attorneys for the Debtor-in-Possession (or Reorganized Creditrust) no later than thirty days after the notice of entry of an order approving the rejection of such executory contract or unexpired lease. Any Claims not filed within such time shall be forever barred from assertion against the Debtor, its estate, Reorganized Creditrust and/or its property or assets. Unless otherwise ordered by the Bankruptcy Court, all Claims arising from the rejection of executory contracts and unexpired leases shall be treated as Unsecured Claims under the Plan and shall be subject to any objections, limitations and reductions available under the Bankruptcy Code or other applicable law. 8.5 INSURANCE POLICIES. ------------------ Each of the Debtor's insurance policies and any agreements, documents or instruments relating thereto shall be treated as executory contracts under the Plan. Notwithstanding the foregoing, distributions under the Plan to any holder of a Claim covered by any of such insurance policies and related agreements, documents or instruments that are assumed hereunder, shall be in accordance with the treatment provided under Article IV of the Plan. Nothing contained in this Section 8.5 shall constitute or be deemed a waiver of any claim right or cause of action that the Debtor or Debtor-in-Possession may hold against the insurer under any policy of insurance, or against the holder of a Claim covered by insurance policies. 8.6 INDEMNIFICATION OBLIGATIONS. --------------------------- For purposes of the Plan, other than as set forth in Section 4.9(c) above, the obligations of the Debtor-in-Possession (or Reorganized Creditrust) to defend, indemnify, reimburse or limit the liability of any current and former directors, officers or employees who were directors, officers or employees, respectively, before, on or after the Commencement Date against any claims or obligations pursuant to the Debtor's certificate of incorporation or by-laws, applicable state law or any specific agreement, or any combination of the foregoing, shall terminate upon the Effective Date -29- and shall be discharged in connection with an event occurring before, on or after the Effective Date. 8.7 COMPENSATION AND BENEFIT PROGRAMS. --------------------------------- Except as provided in Section 8.1 of the Plan and unless otherwise modified, terminated or rejected on or before the Effective Date, all employment, consulting and severance practices and policies, and all compensation, retention and benefit plans, policies, and programs of the Debtor- in-Possession applicable to its directors, officers, employees, consultants or independent contractors, including, without limitation, all savings plan, retirement plans, health care plans, severance benefit plans, incentive plans, workers' compensation programs and life, disability and other insurance plans shall be deemed to be executory contracts under the Plan and are hereby assumed by Reorganized Creditrust pursuant to sections 365(a) and 1123(b)(2) of the Bankruptcy Code (but all stock option plans are deemed terminated as of the Effective Date and replaced by the New Stock Option Plan which shall only apply to employees of Reorganized Creditrust). All the foregoing with respect to Rensin shall be governed by the Rensin Agreement referred to in Section 5.4(b) above which shall replace and supercede any rights to the foregoing which Rensin may have. ARTICLE 9 - RELEASES, WAIVERS AND EXCULPATION 9.1 RELEASE BY REORGANIZED CREDITRUST. --------------------------------- Except as otherwise expressly stated in the Plan, on the Effective Date the Debtor and Reorganized Creditrust (on its own behalf and as the representative of the Bankruptcy Estate), in consideration of services rendered in the Chapter 11 Case and the distributions provided for hereunder and for other good and valuable consideration, will waive and release, and shall be deemed to have forever waived and released, and shall cause its wholly-owned subsidiaries to waive and release unconditionally, each and every one of the Releasees from any and all claims, obligations, suits, judgments, damages, rights, Causes of Action and liabilities whatsoever (including, without limitation, those arising under the Bankruptcy Code), whether known or unknown, foreseen or unforeseen, existing or thereafter arising, in law, equity or otherwise, based in whole or in part on any act, omission, transaction, event or other occurrence taking place before, on or after the Commencement Date up to the Effective Date, in any way relating to the Debtor (before, on or after the Commencement Date), the Debtor-in- Possession, the financial condition of the Debtor and/or Debtor-in-Possession, the Chapter 11 Case, the Plan, and the ownership, management and/or operation of the Debtor. 9.2 RELEASES BY HOLDERS OF CLAIMS AND EQUITY INTERESTS AND FORMER EQUITY -------------------------------------------------------------------- INTERESTS. - --------- Except as otherwise expressly provided in the Plan, as of the Effective Date, each holder of a Claim against, or Equity Interest in or former Equity Interest in, the Debtor, in consideration of the treatment provided under the Plan, hereby forever waives and releases the Debtor, the Debtor-in- -30- Possession, Reorganized Creditrust, NCOF, in its capacity as successor servicer to the Debtor, and NCOP from claims, obligations, rights, Causes of Action and liabilities, in law, equity or otherwise held directly, indirectly or derivatively by the Debtor, the Debtor-in-Possession (or any party acting on their behalf or on behalf of the Bankruptcy Estate) or such holder of a Claim or Equity Interest against such individuals and entities, whether known or unknown, existing or hereafter arising, based in whole or in part upon any act or omission or other event occurring prior to the Commencement Date or during the course of the Chapter 11 Case (including without limitation any Claims under 11 U.S.C. (S)503(b)(3)(D)), including through the Effective Date, in any way relating to the Debtor (before, on or after the Commencement Date), the Debtor- in-Possession, the financial condition of the Debtor and/or Debtor-in- Possession, the Chapter 11 Case, the Plan, and the ownership, management and/or operation of the Debtor. 9.3 MUTUAL RELEASES. --------------- Except as otherwise expressly provided in the Plan on the Effective Date, each of the Debtor, the Debtor-in-Possession (for itself and for the Bankruptcy Estate), Reorganized Creditrust, and the Releasees hereby forever waives and releases any and all Causes of Action and/or Avoidance Actions that it has or may have against each other in connection with, or arising under, the financial condition of the Debtor and/or Debtor-in-Possession, the Chapter 11 Case, the Plan, all documents related to the Plan (including the Disclosure Statement) and all of the representations, negotiations and transactions relating to all of the foregoing. 9.4 NO LIABILITY FOR SOLICITATION OR PARTICIPATION. ---------------------------------------------- (1) Pursuant to section 1125(e) of the Bankruptcy Code, the Confirmation Order shall provide that all of the Persons who have solicited acceptances or rejections of the Plan (including the Debtor, the Debtor-in- Possession, Reorganized Creditrust, and all of their respective officers, directors, shareholders, attorneys, agents, advisers and employees and all of the other Releasees) have acted in good faith and in compliance with the applicable provisions of the Bankruptcy Code, and are not liable on account of such solicitation or participation, for violation of any applicable law, rule, or regulation governing the solicitation of acceptances or rejections of the Plan or the offer, issuance, sale or purchase of securities. (2) None of the Releasees shall have or incur any liability to any Person for any act taken or omission made in good faith in connection with or related to negotiating, formulating, implementing, confirming or consummating the Plan, the Disclosure Statement, or any contract, instrument, release or other agreement or document created in connection with the Plan. The Releasees shall have no liability to any holders of Claims or Equity Interests for actions taken or omissions made under the Plan, in connection therewith or with respect thereto in good faith, including, without limitation, failure to obtain confirmation of the Plan or to satisfy any condition or conditions, or refusal to waive any condition or conditions precedent to Confirmation of the Plan or to the occurrence of the Effective Date. Further, the Releasees shall not have or incur any liability to any holder of a Claim or Equity Interest, or to any party-in-interest herein or any other Person for -31- any act or omission in connection with or arising out of their administration of the Plan or the payments, distributions or property to be distributed under the Plan, except for gross negligence or willful misconduct as finally determined by the Bankruptcy Court, and in all respects such Persons will be entitled to rely upon the advice of counsel with respect to their duties and responsibilities under the Plan. However, nothing contained herein shall release any Releasees from its respective obligations under the Plan. 9.5 BINDING EFFECT OF RELEASES. -------------------------- (1) The Confirmation Order shall constitute a permanent injunction and order to effectuate and enforce all the waivers and releases granted in this Article IX of the Plan. (2) On the Effective Date, each Releasee and each holder of a Claim and/or Equity Interest shall be deemed to have agreed to each of the provisions of this Plan, including Article IX hereof, and shall be fully bound thereby for all purposes. ARTICLE 10 - CONDITIONS TO CONFIRMATION AND EFFECTIVENESS OF THE PLAN 10.1 CONSUMMATION OF THE PLAN. ------------------------ The Effective Date of the Plan shall occur in accordance with the provisions of this Article X of the Plan. 10.2 CONDITIONS TO THE EFFECTIVE DATE OF THE PLAN. -------------------------------------------- The Plan shall not become effective and the Effective Date shall not occur unless and until each of the following conditions shall have been either satisfied or waived pursuant to Section 10.3 of the Plan: (1) The Confirmation Order, in form and substance acceptable to the Debtor and NCOP, shall have been signed and entered by the Bankruptcy Court, and shall be a Final Order; (2) The Exit Facility shall be available to the Debtor in amount not less than $50,000,000.00. (3) All conditions to closing under the Merger Agreement have been satisfied or waived; (4) All actions, documents and agreements necessary to implement the Plan shall have been effected or executed; -32- (5) The sum of all NCOP Unsecured Obligations shall not exceed $7.315 million (subject to reduction based on the NCO purchase price valuation of shares to the extent holders of Class 4 Claims elect to receive New Common Stock under Section 4.4(c)(ii)(C) of the Plan or administrative claimants (including Sunrock) receive New Common Stock in payment of an allowed Administrative Claim); and (6) Reorganized Creditrust will have obtained approval to assume and assign the Indenture and Servicing Agreement ("99-1 Servicing Agreement") between Debtor, Creditrust SPV99-1, LLC and Norwest Bank Minnesota, N.A., k/n/a Wells Fargo Bank ("Trustee") to NCO Financial Systems, Inc. with all existing defaults being deemed waived or through an estoppel certificate or other agreement from the Trustee in form and substance satisfactory to NCOG, or by an order of the Bankruptcy Court transferring servicing or otherwise transfers servicing to on terms acceptable to NCOG. The approval and consummation of the 99-1 Settlement Agreement shall be deemed a satisfaction of the terms of this subparagraph (f). (7) The Effective Date shall occur no later than 20 days after the order confirming the Plan becomes a Final Order. 10.3 EFFECT OF FAILURE OF CONDITIONS. ------------------------------- In the event that one or more of the conditions specified in Section 10.2 of the Plan have not occurred or been duly waived by the Debtor-in-Possession and NCOP before 30 days after the Confirmation Date, upon notification submitted by the Debtor-in-Possession to the Bankruptcy Court, (a) the Confirmation Order shall be vacated, (b) no distributions under the Plan shall be made, (c) the Debtor, Debtor-in-Possession and all holders of Claims and Equity Interests shall be restored to the status quo ante as of the day immediately preceding the Confirmation Date as though the Confirmation Date never occurred and (d) the Debtor's obligations with respect to all of the Claims and Equity Interests shall remain unchanged, and nothing contained herein shall constitute or be deemed a waiver or release of any Claims or Equity Interests by or against the Debtor or any other person or to prejudice in any manner the rights of the Debtor-in-Possession or any person in any further proceedings involving the Debtor-in-Possession. 10.4 WAIVER OF CONDITIONS. -------------------- Notwithstanding anything contained in section 10.2 or 10.3 hereof, the Debtor-in-Possession and NCOP, may waive, by a writing signed by an authorized representative of the Debtor-in-Possession and NCOP, and subsequently filed with the Bankruptcy Court, one or more of the conditions precedent to effectiveness of the Plan set forth in section 10.2, including (without limitation) the condition that the New Common Stock be approved for listing on the NASDAQ National Market System. ARTICLE 11 - EFFECT OF CONFIRMATION OF PLAN -33- 11.1 TERM OF BANKRUPTCY INJUNCTION OR STAYS. -------------------------------------- All injunctions or stays provided for in the Chapter 11 Case under section 105 or 362 of the Bankruptcy Code, or otherwise, and in existence on the Confirmation Date, shall remain in full force and effect until the Effective Date. 11.2 REVESTING OF ASSETS. ------------------- As of the Effective Date, Reorganized Creditrust shall be authorized to operate its business, and may use, acquire and dispose of property and other assets free of any restrictions imposed under the Bankruptcy Code. Except as provided in the Plan, as of the Effective Date, all property of the Debtor and Reorganized Creditrust shall be free and clear of all Liens, claims, encumbrances and interests of holders of Claims. All of the Debtor's assets located at the Call Center shall become the property of NCO Financial Systems, Inc. as of the Effective Date pursuant to the terms of the Merger Agreement. All residuals and reserves under any agreements between the Debtor's subsidiaries and any trustee for a securitization of receivables shall (upon payment of any obligations due and owing under the agreement which were executed by a particular subsidiary and subject to the AGI Settlement Agreement) be dividended to Reorganized Creditrust free and clear of all liens, claims and encumbrances (other than those in favor of Sunrock). 11.3 DISCHARGE OF DEBTOR. ------------------- Except as otherwise provided herein, (1) the rights afforded in the Plan and the treatment of all Claims therein, shall be in exchange for and in complete satisfaction, discharge and release of Claims of any nature whatsoever, including any interest accrued on such Claims from and after the Petition Date, against the Debtor and the Debtor-in-Possession, or any of its assets or properties, (2) on the Effective Date, all such Claims against the Debtor shall be satisfied, discharged and released in full and (3) all Persons and Entities shall be precluded from asserting against Reorganized Creditrust, its successors or its assets or properties any other or further Claims based upon any act or omission, transaction or other activity of any kind or nature that occurred prior to the Effective Date. 11.4 PERMANENT INJUNCTION. -------------------- Except as otherwise expressly provided in the Plan or the Confirmation Order, all entities who have held, hold or may hold Claims that are required to be satisfied under the terms of this Plan, are permanently enjoined, on and after the Effective Date, from (a) commencing or continuing in any manner any action or other proceeding of any kind with respect to any such Claim, (b) the enforcement, attachment, collection or recovery by any manner or means of any judgment, award, decree or order against the Debtor on account of any such Claim, (c) creating, perfecting or enforcing any encumbrance of any kind against the Debtor or against the property or interests in property of the Debtor on account of any such Claim, and (d) asserting any right of setoff, subrogation or recoupment of any kind against any obligation due from the Debtor or against the property or -34- interests in property of the Debtor on account of any such Claim. Such injunction shall also exist and continue for the benefit of all successors of the Debtor (including, without limitation, Reorganized Creditrust) and its respective properties and interests in property. All persons and entities shall be precluded from asserting against NCOG or NCOF, or their assets or properties, any Claims based upon any act or omission, transaction or other activity of any kind or nature of Debtor that occurred prior to the Effective Date. 11.5 SETOFFS. ------- The Debtor may, but shall not be required to, setoff against the distributions to be made pursuant to the Plan the claims, obligations, rights, causes of action and liabilities of any nature that the Debtor may hold against the holder of any Allowed Claim; provided, however that neither the failure to effect such a setoff nor the allowance of any Claim hereunder shall constitute a waiver or release by the Debtor of any of these claims, obligations, rights, causes of action and liabilities that the Debtor has or may have against the holder. 11.6 SECTION 346 INJUNCTION. ---------------------- In accordance with section 346 of the Bankruptcy Code, for purposes of any state or local law imposing a tax, income will not be realized by the Bankruptcy Estate, the Debtor or Reorganized Creditrust by reason of the forgiveness or discharge of indebtedness resulting from the consummation of the Plan. As a result, each state or local taxing authority is permanently enjoined and restrained, after the Confirmation Date, from commencing, continuing, or taking any act to impose, collect or recover in any manner any tax against the Debtor or the Reorganized Creditrust arising by reason of the forgiveness or discharge of indebtedness under this Plan. 11.7 COMPLIANCE WITH TAX REQUIREMENTS. -------------------------------- In connection with this Plan, the Debtor-in-Possession and Reorganized Creditrust shall comply with all applicable withholding and reporting requirements imposed by federal, state, local and foreign taxing authorities, and all distributions hereunder shall be subject to those withholding and reporting requirements. Claimants may be required to provide certain tax information as a condition to receiving distributions pursuant to this Plan. Notwithstanding any other provision of this Plan, each Person receiving a distribution pursuant to this Plan will have sole and exclusive responsibility for the satisfaction and payment of any tax obligations imposed by any Governmental Unit, including income, withholding and other tax obligations, on account of that distribution. ARTICLE 12 - RETENTION OF JURISDICTION 12.1 JURISDICTION. ------------ -35- The Bankruptcy Court shall have exclusive jurisdiction of all matters arising out of, and related to, the Chapter 11 Case and the Plan pursuant to, and for the purposes of, sections 105(a) and 1142 for, among other things, the following purposes: (1) To ensure that distributions to holders of Allowed Claims are accomplished as provided herein; (2) To hear and determine pending applications for the assumption or rejection of executory contracts or unexpired leases, if any are pending, and the allowance of Claims resulting therefrom; (3) To hear and determine any timely objections to Administrative Claims, or to proofs of Claims filed, both before and after the Confirmation Date, including without limitation, any objections to the classification of any Claim, and to allow or disallow any Disputed Claim; (4) To hear and determine all applications for compensation and reimbursement of expenses of professionals under sections 330, 331 and 503(b) of the Bankruptcy Code; (5) To enter and implement such orders as may be appropriate in the event the Confirmation Order is for any reason stayed, revoked, modified or vacated; (6) To issue such orders in aid of execution and consummation of the Plan, to the extent authorized by section 1142 of the Bankruptcy Code; (7) To consider any amendments to or modifications of the Plan, to cure any defect or omission, or reconcile any inconsistency in any order of the Bankruptcy Court, including, without limitation, the Confirmation Order; (8) To determine any and all adversary proceedings, Causes of Action, Avoidance Actions, applications and contested matters; (9) To hear an determine disputes arising in connection with the interpretation, implementation or enforcement of the Plan and agreements entered into in connection therewith; (10) To recover all assets of the Debtor and property of the Debtor's estate, wherever involved to the extent allowed under the Plan; (11) To hear and determine matters concerning state, local and federal taxes in accordance with section 346, 505 and 1146 of the Bankruptcy Code; (12) To hear any other matter not inconsistent with the Bankruptcy Code; and (13) To enter a final decree closing the Chapter 11 Case. -36- ARTICLE 13 - MISCELLANEOUS PROVISIONS 13.1 EXEMPTION FROM TRANSFER TAXES. ----------------------------- Pursuant to section 1146(c) of the Bankruptcy Code, the issuance, transfer or exchange of any notes or equity securities under the Plan, the creation of any mortgage, deed of trust or other security interest, the making or assignment of any lease or sublease, or the making or delivery of any deed or other instrument of transfer under, in furtherance of, or in connection with the Plan, including, without limitation, any merger agreements or agreements of consolidation, deeds, bills of sale or assignments executed in connection with any of the transactions contemplated under the Plan shall not be subject to any stamp, real estate transfer, mortgage recording or other similar tax. 13.2 EFFECTUATING DOCUMENTS AND FURTHER TRANSACTIONS. ----------------------------------------------- The Debtor, Reorganized Creditrust, the Creditors' Committee and any other party whose cooperation is needed in connection with the Plan, are authorized to execute, deliver, file or record such contracts, instruments, releases, indentures and other agreements or documents and take such actions as may be necessary or appropriate to effectuate and further evidence the terms and conditions of the Plan. 13.3 TERMINATION OF OFFICIAL COMMITTEE. --------------------------------- The appointment of the Creditors' Committee shall terminate on the later of (a) the Effective Date or (b) the date when all Disputed Class 4 Claims are resolved. Committee members will receive no compensation from the Debtor or Reorganized Creditrust in connection with their service on the Committee, and, subsequent to the Effective Date, counsel for the Creditors' Committee shall be paid reasonable fees and expenses by Reorganized Creditrust but such fees and expenses shall not exceed in the aggregate $50,000. 13.4 AMENDMENT OR MODIFICATION OF THE PLAN. ------------------------------------- Alterations, amendments or modifications of the Plan (before or after Confirmation) may be made by the Debtor (with the consent of NCOP to the extent the Plan of Merger has not been terminated) in accordance with the provisions of the Bankruptcy Code. 13.5 REVOCATION OR WITHDRAWAL OF THE PLAN. ------------------------------------ The Debtor reserves the right to revoke or withdraw the Plan prior to the Confirmation Date. If the Debtor revokes or withdraws the Plan prior to the Confirmation Date, then the Plan shall be deemed null and void. In such event, nothing contained herein shall constitute or be deemed a waiver or release of any claims by or against the Debtor or any other person or to prejudice in any manner the rights of the Debtor or any person in any further proceedings involving the Debtor. -37- 13.6 BINDING EFFECT. -------------- The Plan shall be binding upon and inure to the benefit of the Debtor, the holders of Claims and Equity Interests, NCOP, NCOG, and their respective successors and assigns, including, without limitation, Reorganized Creditrust. 13.7 NO ADMISSION. ------------ Notwithstanding anything herein to the contrary, nothing contained in the Plan shall be deemed as an admission by the Debtor or Debtor-in-Possession, with respect to any matter set forth herein, including, without limitation, liability on any claim or the propriety of any Claims classification. 13.8 NOTICES. ------- All notices, requests and demands to or upon the Debtor or Reorganized Creditrust to be effective shall be in writing and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when actually delivered or, in the case of notice by facsimile transmission, when received and telephonically confirmed, or by a nationally recognized overnight delivery service addressed as follows: If to the Debtor or Reorganized Creditrust to: Creditrust Corporation 7000 Security Boulevard Baltimore, MD 21244-2543 Attn: Joseph K. Rensin Facsimile: (410) 594-9621 with copies to: Roger Frankel, Esquire Swidler Berlin Shereff Friedman, LLP 3000 K Street, N.W., Suite 300 Washington, D.C. 20037 Facsimile: (202) 424-7645 and NCO Group, Inc. 515 Pennsylvania Avenue Ft. Washington, PA 19034 Attn: Michael J. Barrist -38- with copies to: Joel C. Shapiro, Esquire Blank Rome Comisky & McCauley LLP One Logan Square Philadelphia, PA 19103 Facsimile: (215) 569-5522 13.9 GOVERNING LAW. ------------- Except to the extent the Bankruptcy Code, Bankruptcy Rules or other federal law is applicable, or to the extent an exhibit to the Plan provides otherwise, the rights and obligations arising under the Plan shall be governed by, and construed and enforced in accordance with, the laws of the State of Maryland, without giving effect to the principles of conflicts of law of such jurisdiction. 13.10 WITHHOLDING AND REPORTING REQUIREMENTS. -------------------------------------- In connection with the consummation of the Plan, the Debtor or Reorganized Creditrust, as the case may be, shall comply with all withholding and reporting requirements imposed by any federal, state, local or foreign taxing authority and all distributions hereunder shall be subject to any such withholding and reporting requirements. 13.11 PLAN SUPPLEMENT. --------------- Any and all exhibits or schedules not filed with the Plan shall be contained in a Plan supplement and filed with the Clerk of the Bankruptcy Court at least 10 days prior to the Confirmation Hearing. Upon its filing with the Bankruptcy Court, the Plan supplement may be inspected in the office of the Clerk of the Bankruptcy Court during normal court hours. Holders of Claims or Equity Interests may obtain a copy of the Plan supplement upon written request to the Debtor in accordance with Section 13.08 of the Plan. 13.12 HEADINGS. -------- Headings are used in the Plan for convenience and reference only, and shall not constitute a part of the Plan for any other purpose. 13.13 EXHIBITS AND SCHEDULES. ---------------------- All Exhibits and Schedules to the Plan, including the Plan supplement, are incorporated into and are a part of the Plan as if set forth in full herein. Dated: December 19, 2000 -39- CREDITRUST CORPORATION a Maryland corporation By: /s/ ____________________________________ JOSEPH K. RENSIN Chairman and CEO SWIDLER BERLIN SHEREFF FRIEDMAN, LLP Attorneys for Creditrust Corporation By: /s/ _______________________________________ MICHAEL J. LICHTENSTEIN A Partner of the Firm Roger Frankel, Esquire Michael J. Lichtenstein, Esquire Jonathan P. Guy, Esquire 3000 K Street N.W., Suite 300 Washington, D.C. 20007 Telephone: (202) 424-7500 Facsimile: (202) 424-7645 -40- SCHEDULE A Unexpired Leases and Executory Contracts 1. Servicing agreements a. Indenture and Servicing Agreement dated as of August 1, 1999, as amended, among Creditrust SPV99-1, LLC, as Issuer, Norwest Bank Minnesota, National Association, as Trustee and Backup Servicer of the Receivables and Creditrust Corporation, as Servicer of the Receivables, entered into in connection with the Creditrust Receivables-Backed Notes, Series 1999-1. b. Amended and Restated Servicing Agreement dated as of March 1, 2000, among Creditrust SPV99-2, LLC, as Issuer, Creditrust Corporation, as Servicer of the Consumer Receivables and Norwest Bank Minnesota, National Association, as Administrative Agent. 2. Real estate lease a. 1705 Whitehead Road Baltimore, Maryland 21244 b. 7000 Security Boulevard Baltimore, Maryland 21244 (assigned to First Federated Realty, Inc.) 3. Insurance Policies a. Bonds Issued by Travelers Casualty & Surety Co. 1. No. 103042898; effective date 2/17/00; term date 2/17/01; coverage amount $25,000.00 . 2. No. 103285698; effective date 3/21/00; term date 3/21/01; coverage amount $360.06 . 3. No. 101120498; effective date 8/19/00; term date 8/19/01; coverage amount $5,000.00. 4. No. 101120499; effective date 12/31/99; term date 12/31/01; coverage amount $25,000.00. 5. No. 101120496; effective date 12/31/99, term date 12/31/01; coverage amount $5,000.00. 6. No. 101140971; effective date 9/8/00; term date 9/8/01; coverage amount $5,000.00. 7. No. 103231909; effective date 9/30/00; term date 9/30/01; coverage amount $5,000.00 8. No. 103224718; effective date 9/9/00; term date 9/9/01; coverage amount $20,000.00. 9. No. 101120500; effective date 8/20/00; term date 8/20/01; coverage amount $10,000.00. 10. No. 103258391; effective date 1/1/00; term date 1/1/01; coverage amount $10,000.00. 11. No. 101120497; effective date 8/19/00; term date 8/19/01; coverage amount $5,000.00. b. Others 1. No. 9002544; effective date 8/22/98; term date 8/22/01; issued by Hartford Mutual. 2. No. DOC297358400; effective date 7/24/00; term date 7/24/01; issued by Zurich American. 3. No. TFP0001077; effective date 7/24/00; term date 7/24/03; issued by Philadelphia Insurance Cos. 4. No. HFP0001533; effective date 7/24/00; term date 7/24/01; issued by Philadelphia Insurance Cos. 5. No. 4007694; effective date 8/22/00; term date 8/22/01; issued by Hartford Mutual. 4. Utilities [Global Crossing - entered on 8/12/00] 5. Other Contracts Software and Maintenance Agreement - ---------------------------------- Davox Corporation - entered on 12/30/99. True Leases - ----------- Advanta Leasing Services - entered on 4/1/00. EX-2.2 3 0003.txt EXHIBIT 2.2 Exhibit 2.2 SECOND AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER dated as of September 20, 2000 FOR THE MERGER OF CREDITRUST CORPORATION with and into NCO PORTFOLIO FUNDING, INC. SECOND AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER Table of Contents ----------------- Section 1 Defined Terms.............................................................. 2 1.1 Accounts Receivable............................................................ 2 1.2 Acquired Companies............................................................. 2 1.3 Asset.......................................................................... 2 1.4 Bankruptcy Court............................................................... 2 1.5 Bankruptcy Court Order......................................................... 2 1.6 Bankruptcy Laws................................................................ 2 1.7 Bankruptcy Pleadings........................................................... 2 1.8 Cash Asset..................................................................... 2 1.9 Code........................................................................... 2 1.10 Consent........................................................................ 2 1.11 Contract....................................................................... 3 1.12 Contract Right................................................................. 3 1.13 Intentionally left blank....................................................... 3 1.14 Employee Benefit Plan.......................................................... 3 1.15 Encumbrance.................................................................... 3 1.16 Environmental Laws............................................................. 3 1.17 Exchange Act................................................................... 3 1.18 GAAP........................................................................... 3 1.19 Hazardous Substances........................................................... 3 1.20 including...................................................................... 4 1.21 Insurance Policy............................................................... 4 1.22 Intangible..................................................................... 4 1.23 Judgment....................................................................... 4 1.24 to the knowledge of CTC........................................................ 4 1.25 Law............................................................................ 4 1.26 NASD........................................................................... 4 1.27 Obligation..................................................................... 4 1.28 Permit......................................................................... 4 1.29 Person......................................................................... 5 1.30 Plan........................................................................... 5 1.31 Proceeding..................................................................... 5 1.32 Real Property.................................................................. 5 1.33 Securities Act................................................................. 5 1.34 SEC............................................................................ 5 1.35 Software....................................................................... 5 1.36 SPV99-2 Lenders................................................................ 5 1.37 Tangible Property.............................................................. 5 1.38 Tax............................................................................ 5 Section 2 The Merger................................................................. 5
i 2.2 Name........................................................................... 6 2.3 Charter........................................................................ 6 2.4 Bylaws......................................................................... 6 2.5 Directors...................................................................... 6 2.6 Officers....................................................................... 6 2.7 Conversion of Portfolio Common Stock........................................... 7 2.8 Conversion CTC Common Stock.................................................... 7 2.9 No Fractional Shares........................................................... 8 2.10 Stock Options/Warrants......................................................... 8 2.11 CTC Stock held by CTC.......................................................... 9 2.12 Exchange Procedures............................................................ 9 2.13 Additional Distributions of Surviving Corporation Common Stock................. 9 2.14 Effective Date................................................................. 10 Section 3 Representations of CTC..................................................... 10 3.1 Organization................................................................... 10 3.2 Effect of Agreement............................................................ 11 3.3 Capital Stock and Ownership.................................................... 11 3.4 Financial and Corporate Records................................................ 12 3.5 Compliance with Law............................................................ 12 3.6 Financial Statements........................................................... 13 3.7 Assets......................................................................... 13 3.8 Obligations.................................................................... 13 3.9 Operations Since June 30, 2000................................................. 14 3.10 Accounts Receivable............................................................ 15 3.11 Tangible Property.............................................................. 15 3.12 Real Property.................................................................. 15 3.13 Environmental.................................................................. 16 3.14 Software and Other Intangibles................................................. 18 3.15 Contracts...................................................................... 19 3.16 Employees and Independent Contractors.......................................... 19 3.17 Employee Benefit Plans......................................................... 20 3.18 [Intentionally Omitted]........................................................ 22 3.19 Taxes.......................................................................... 22 3.20 Proceedings and Judgments...................................................... 22 3.21 Insurance...................................................................... 22 3.22 Questionable Payments.......................................................... 23 3.23 Related Party Transactions..................................................... 23 3.24 Brokerage Fees................................................................. 23 3.25 Investment Company............................................................. 23 3.26 SEC Filings.................................................................... 24 3.27 Full Disclosure................................................................ 24 Section 4 Representations of NCO and Portfolio....................................... 24 4.1 Organization................................................................... 24 4.2 Agreement...................................................................... 24 4.3 SEC Filings.................................................................... 25 4.4 Absence of Changes............................................................. 25
ii 4.5 Authorization for Portfolio Common Stock....................................... 25 4.6 Compliance with Law............................................................ 25 4.7 Full Disclosure................................................................ 26 4.8 Capital Stock and Ownership.................................................... 26 4.9 Financial and Corporate Records................................................ 26 4.10 Assets......................................................................... 26 4.11 Obligations.................................................................... 26 4.12 Operations Since June 30, 2000................................................. 27 4.13 Contracts...................................................................... 27 4.14 Proceedings and Judgments...................................................... 27 Section 5 Certain Obligations of CTC Pending Closing................................. 28 5.1 Conduct of Business............................................................ 28 5.2 Interim Financial Statements................................................... 29 5.3 NCO's Due Diligence Investigation.............................................. 29 5.4 Consents....................................................................... 30 5.5 Bankruptcy Court Approval...................................................... 30 5.6 Acquisition Proposals.......................................................... 31 5.7 Advice of Changes.............................................................. 31 5.8 Best Efforts................................................................... 32 5.9 Hart-Scott-Rodino.............................................................. 32 5.10 SEC Reports.................................................................... 32 Section 6 Certain Obligations of NCO and Portfolio Pending Closing................... 32 6.1 Corporate Status............................................................... 32 6.2 CTC Due Diligence Investigation................................................ 32 6.3 Consents....................................................................... 33 6.4 SEC Reports.................................................................... 33 6.5 Advice of Changes.............................................................. 33 6.6 Best Efforts................................................................... 33 6.7 Hart-Scott-Rodino.............................................................. 33 6.8 NASDAQ Listing................................................................. 34 6.9 Employee Benefits.............................................................. 34 6.10 Purchase of CTC Call Center.................................................... 34 6.11 Portfolio Net Book Value....................................................... 34 Section 7 Additional Covenants of the Parties........................................ 34 7.1 Disclosure Statement........................................................... 34 7.2 Tax Free Reorganization........................................................ 35 Section 8 Conditions Precedent to CTC's Closing Obligations.......................... 35 8.1 NCO's and Portfolio's Representations.......................................... 35 8.2 NCO's and Portfolio's Performance.............................................. 35 8.3 Absence of Proceedings......................................................... 35 8.4 Hart-Scott-Rodino.............................................................. 35 8.5 Approval of POR................................................................ 35 8.6 Board Seats.................................................................... 36 8.7 Consulting Agreement........................................................... 36 8.8 Adverse Changes................................................................ 36 8.9 Listing of Portfolio Common Stock.............................................. 36
iii 8.10 Tax Opinion.................................................................... 36 8.11 Purchase of CTC Call Center.................................................... 37 8.12 Portfolio Net Book Value....................................................... 37 8.13 Services Agreement............................................................. 37 8.14. NCO Letter..................................................................... 37 8.15 Credit Facility................................................................ 37 8.16. Barrist Stock Purchase Agreement............................................... 37 8.17 Rensin Stock Purchase Agreement................................................ 37 Section 9 Conditions Precedent to NCO's and Portfolio's Closing Obligations.......... 37 9.1 Rensin Letter.................................................................. 37 9.2 Approval of POR................................................................ 38 9.3 CTC's Representations.......................................................... 38 9.4 CTC's Performance.............................................................. 38 9.5 Absence of Proceedings......................................................... 38 9.6 Adverse Changes................................................................ 38 9.7 Hart-Scott-Rodino.............................................................. 38 9.8 Bankruptcy Court Order......................................................... 38 9.9 Confirmation of POR............................................................ 38 9.10 NCOP Unsecured Obligations..................................................... 39 9.11 Services Agreement............................................................. 39 9.12 Bridge Lender Waiver and Release............................................... 39 9.13 CTC Officer and Director Releases.............................................. 39 9.14 Residuals...................................................................... 39 9.15 Asset Pools 99-1, 98-2 and 93-3 Banco Santander................................ 39 9.16 Lender Claims.................................................................. 39 9.17 Reserve Balances............................................................... 39 9.18 Credit Facility................................................................ 40 9.19 Purchase of CTC Call Center.................................................... 40 9.20 Listing of Portfolio Common Stock.............................................. 40 9.21 Consulting Agreement........................................................... 40 9.22 Stock Purchase Agreements...................................................... 40 9.23 Class 3 Creditors.............................................................. 40 Section 10 Closing and Post Closing................................................... 40 10.1 Closing........................................................................ 40 10.2 CTC's Obligations at Closing................................................... 40 10.3 NCO's and Portfolio's Obligations at Closing................................... 42 10.4 Severance Pay.................................................................. 43 Section 11 Other Provisions........................................................... 44 11.1 Termination.................................................................... 44 11.2 Publicity...................................................................... 44 11.3 Fees and Expenses.............................................................. 45 11.4 Notices........................................................................ 45 11.5 Survival of Representations and Covenants...................................... 45 11.6 Interpretation of Representations.............................................. 45 11.7 Reliance....................................................................... 45 11.8 Entire Understanding........................................................... 46
iv 11.9 Parties in Interest............................................................ 46 11.10 Waivers........................................................................ 46 11.11 Severability................................................................... 46 11.12 Counterparts................................................................... 46 11.13 Section Headings............................................................... 46 11.14 References..................................................................... 46 11.15 Controlling Law................................................................ 47 11.16 Jurisdiction and Process....................................................... 47 11.17 No Third-Party Beneficiaries................................................... 47 11.18 Construction................................................................... 47
Exhibits Joseph K. Rensin Consulting Agreement A Bankruptcy Plan of Reorganization B Services Agreement C v SECOND AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER Parties: Creditrust Corporation a Maryland corporation ("CTC") 7000 Security Boulevard, 2/nd/ Floor Baltimore, Maryland 21244 NCO Group, Inc. a Pennsylvania corporation ("NCO") 515 Pennsylvania Avenue Fort Washington, Pennsylvania 19034 NCO Portfolio Funding, Inc. a Delaware corporation ("Portfolio") 515 Pennsylvania Avenue Fort Washington, Pennsylvania 19034 NCO Financial Systems, Inc. (for purposes of Section 6.10 hereof only) a Pennsylvania corporation ("NCOFS") 515 Pennsylvania Avenue Fort Washington, Pennsylvania 19034 Date: As of September 20, 2000 Background: CTC is in the business of purchasing, collecting and managing defaulted consumer receivables and related services ("CTC Business"). On September 20, 2000, the parties hereto entered into an Agreement and Plan of Merger (the "Old Agreement") providing that CTC be merged with and into Portfolio (the "Merger"), on the terms and subject to the conditions set forth in the Old Agreement. The Board of Directors of CTC had determined that the Merger and the other transactions contemplated by the Old Agreement (collectively the "Transactions") were advisable and in the best interests of CTC and its shareholders. The respective Boards of Directors of NCO, Portfolio and NCOFS had determined that the Transactions were advisable and in the best interests of NCO, Portfolio and NCOFS and their respective shareholders. The Old Agreement was previously amended and restated as of September 20, 2000 (the "First Amended and Restated Agreement"). The First Amended and Restated Agreement was amended by a First Amendment dated November 13, 2000 (the "First Amendment"). The Boards of Directors of the parties hereto desire to amend and restate in its entirety the First Amended and Restated Agreement as amended by the First Amendment as set forth in this Second Amended and Restated Agreement and Plan of Merger (the "Agreement"). All other agreements executed in connection with the Old Agreement, the First Amended and Restated Agreement and the First Amendment shall remain in full force and effect. Intending to be legally bound, in consideration of the mutual agreements contained herein and subject to the satisfaction of the terms and conditions set forth herein, the parties hereto agree as follows: SECTION 1 Defined Terms Certain defined terms used in this Agreement and not specifically defined in context are defined in this Section 1, as follows: 1.1. "Accounts Receivable" means (a) any right to payment for goods sold, leased or licensed or for services rendered, whether or not it has been earned by performance, whether billed or unbilled, and whether or not it is evidenced by any Contract (as defined in Section 1.11), (b) any note receivable, or (c) any other receivable or right to payment of any nature. 1.2. "Acquired Companies" means CTC, Creditrust Funding I LLC, Creditrust SPV2, LLC, Creditrust SPV98-2, LLC, Creditrust SPV99-1, LLC, Creditrust SPV99-2, LLC, Creditrust Mortgage Corporation, Creditrust Card Services Corporation, Creditrust SPV99-2 Capital, Inc. and any other subsidiaries of CTC. 1.3. "Asset" means any real, personal, mixed, tangible or intangible property of any nature, including Cash Assets (as defined in Section 1.8), prepayments, deposits, escrows, Accounts Receivable, Tangible Property (as defined in Section 1.37), Real Property (as defined in Section 1.32), Software (as defined in Section 1.35), Contract Rights (as defined in Section 1.12), Intangibles (as defined in Section 1.22) and goodwill, and claims, causes of action and other legal rights and remedies. 1.4. "Bankruptcy Court" means the United States Bankruptcy Court for the District of Maryland. 1.5. "Bankruptcy Court Order" has the meaning set forth in Section 5.5. 1.6. "Bankruptcy Laws" means the United States Bankruptcy Code, as amended, the Federal Rules of Bankruptcy Procedure, as amended, and the local rules of the Bankruptcy Court. 1.7. "Bankruptcy Pleadings"" means all pleadings filed with the Bankruptcy Court by any of the Acquired Companies or any other Person relating to this Agreement or the Acquired Companies. 1.8. "Cash Asset" means any cash on hand, cash in bank or other accounts, readily marketable securities, and other cash-equivalent liquid assets of any nature. 1.9. "Code" means the Internal Revenue Code of 1986, as amended. 1.10. "Consent" means any consent, approval, order or authorization of, or any declaration, filing or registration with, or any application, notice or report to, or any waiver by, 2 or any other action (whether similar or dissimilar to any of the foregoing) of, by or with, any Person (as defined in Section 1.29), which is necessary in order to take a specified action or actions in a specified manner and/or to achieve a specified result. 1.11. "Contract" means any written or oral contract, agreement, instrument, order, arrangement, commitment or understanding of any nature, including sales orders, purchase orders, leases, subleases, data processing agreements, maintenance agreements, license agreements, sublicense agreements, loan agreements, promissory notes, security agreements, pledge agreements, deeds, mortgages, guaranties, indemnities, warranties, employment agreements, consulting agreements, sales representative agreements, joint venture agreements, buy-sell agreements, options or warrants. 1.12. "Contract Right" means any right, power or remedy of any nature under any Contract, including rights to receive property or services or otherwise derive benefits from the payment, satisfaction or performance of another party's Obligations (as defined in Section 1.27), rights to demand that another party accept property or services or take any other actions, and rights to pursue or exercise remedies or options. 1.13. "[Intentionally left blank] " 1.14. "Employee Benefit Plan" means any employee benefit plan as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and any other plan, program, policy or arrangement for or regarding bonuses, commissions, incentive compensation, severance, vacation, deferred compensation, pensions, profit sharing, profit interests, retirement, payroll savings, stock options, stock purchases, stock awards, stock ownership, phantom stock, stock appreciation rights, medical/dental expense payment or reimbursement, disability income or protection, sick pay, group insurance, self insurance, death benefits, employee welfare or fringe benefits of any nature; but not including employment Contracts with individual employees. 1.15. "Encumbrance" means any lien, security interest, pledge, right of first refusal, mortgage, easement, covenant, restriction, reservation, conditional sale, prior assignment, or other encumbrance, claim, burden or charge of any nature. 1.16. "Environmental Laws" means all applicable Laws (including consent decrees and administrative orders) relating to pollution and the protection of the environment, including those governing the use, generation, handling, storage and disposal or cleanup of Hazardous Substances (as defined in Section 1.19), all as amended. 1.17. "Exchange Act" means the Federal Securities Exchange Act of 1934, as amended. 1.18. "GAAP" means generally accepted accounting principles under current United States accounting rules and regulations, as in effect from time to time, consistently applied. 1.19. "Hazardous Substances" means any substance, waste, contaminant, pollutant or 3 material that has been determined by Law or any United States federal government authority, or any state or local government authority having jurisdiction over any Real Property owned, leased or used by the Acquired Companies, to be capable of posing a risk of injury or damage to health, safety, property or the environment, including (a) all substances, wastes, contaminants, pollutants and materials defined, designated or regulated as hazardous, dangerous or toxic pursuant to any Law of any state in which any Real Property owned, leased or used by the Acquired Companies, is located or any United States Law, and (b) asbestos, polychlorinated biphenyls ("PCB's"), petroleum, petroleum products and urea formaldehyde. 1.20. "including" means including but not limited to. 1.21. "Insurance Policy" means any public liability, product liability, general liability, comprehensive, property damage, vehicle, life, hospital, medical, dental, disability, worker's compensation, key man, fidelity bond, theft, forgery, errors and omissions, directors' and officers' liability, or other insurance policy of any nature. 1.22. "Intangible" means any name, corporate name, fictitious name, trademark, trademark application, service mark, service mark application, trade name, brand name, product name, slogan, trade secret, know-how, patent, patent application, copyright, copyright application, design, logo, formula, invention, product right, technology or other intangible asset of any nature, whether in use, under development or design, or inactive. 1.23. "Judgment" means any order, writ, injunction, citation, award, decree or other judgment of any nature of any foreign, federal, state or local court, governmental body, administrative agency, regulatory authority or arbitration tribunal. 1.24. "to the knowledge of CTC" means that none of the directors or executive officers of any of the Acquired Companies have any actual knowledge, after due inquiry, that the statement made is incorrect (except that no inquiry shall be required with respect to the matters set forth in Sections 3.13(a)(ii) and 3.13(b)(ii)) ; and "to the knowledge of NCO and Portfolio" means that none of the directors or executive officers of NCO and Portfolio have any actual knowledge, after due inquiry, that the statement made is incorrect. 1.25. "Law" means any provision of any foreign, federal, state or local law, statute, ordinance, charter, constitution, treaty, code, rule or regulation (including those of self-regulatory organizations such as the NASD (as defined in Section 1.26)). 1.26. "NASD" means the National Association of Securities Dealers, Inc. 1.27. "Obligation" means any debt, liability or obligation of any nature, whether secured, unsecured, recourse, nonrecourse, liquidated, unliquidated, accrued, absolute, fixed, contingent, ascertained, known or otherwise. 1.28. "Permit" means any license, permit, approval, waiver, order, authorization, right or privilege of any nature, granted, issued, approved or allowed by any foreign, federal, state or local governmental body, administrative agency or regulatory authority. 4 1.29. "Person" means any individual, sole proprietorship, joint venture, partnership, corporation, limited liability company, partnership, association, cooperative, trust, estate, governmental body, administrative agency, regulatory authority or other entity of any nature. 1.30. "Plan" - Third Amended Plan of Reorganization filed by CTC with the Bankruptcy Court on December 4, 2000, as amended and restated from time-to-time. 1.31. "Proceeding" means any demand, claim, suit, action, litigation, investigation, arbitration, administrative hearing or other proceeding of any nature. 1.32. "Real Property" means any real estate, land, building, condominium, town house, structure or other real property of any nature, all shares of stock or other ownership interests in cooperative or condominium associations or other forms of ownership interest through which interests in real estate may be held, and all appurtenant and ancillary rights thereto, including easements, covenants, water rights, sewer rights and utility rights. 1.33. "Securities Act" means the Federal Securities Act of 1933, as amended. 1.34. "SEC" means the United States Securities and Exchange Commission and its staff. 1.35. "Software" means any computer program, operating system, applications system, firmware or software of any nature, whether operational, under development or inactive, including all object code, source code, technical manuals, user manuals and other documentation therefor, whether in machine- readable form, programming language or any other language or symbols, and whether stored, encoded, recorded or written on disk, tape, film, memory device, paper or other media of any nature. 1.36. "SPV99-2 Lenders" means the "Lenders" as defined in that certain Bridge Loan Agreement dated as of August 2, 1999 which was executed by CTC. 1.37. "Tangible Property" means any furniture, fixtures, leasehold improvements, vehicles, office equipment, computer equipment, other equipment, machinery, tools, forms, supplies or other tangible personal property of any nature. 1.38. "Tax" means (a) any foreign, federal, state or local income, earnings, profits, gross receipts, franchise, capital stock, net worth, sales, use, value added, occupancy, general property, real property, personal property, intangible property, transfer, fuel, excise, payroll, withholding, unemployment compensation, social security, retirement or other tax of any nature; (b) any foreign, federal, state or local organization fee, qualification fee, annual report fee, filing fee, occupation fee, assessment, sewer rent or other fee or charge of any nature; or (c) any deficiency, interest or penalty imposed with respect to any of the foregoing. SECTION 2 The Merger 2.1. Subject to the terms and conditions of this Agreement, on the Effective Date (as hereinafter defined), CTC shall be merged with and into Portfolio in accordance with the 5 provisions of this Agreement and in compliance with the Maryland General Corporation Law ("MGCL") and the Delaware General Corporation Law ("DGCL" or collectively with the MGCL, the "Corporation Laws"), and the Merger shall have the effect provided for in the Corporation Laws. Portfolio (sometimes referred to as the "Surviving Corporation") shall be the surviving corporation of the Merger and shall continue to exist and to be governed by the laws of the State of Delaware. The corporate existence and identity of Portfolio, with its purposes and powers, shall continue unaffected and unimpaired by the Merger. On the Effective Date, Portfolio shall succeed to and be fully vested with the corporate existence and identity of CTC, and the separate corporate existence and identity of CTC shall cease. The closing of the Merger and the other Transactions shall take place contemporaneously on the Closing Date (as defined in Section 10.1) and shall be effective at the Effective Time (as defined in Section 10.1). 2.2. Name. The name of the Surviving Corporation shall be "NCO Portfolio Management, Inc." or such other name as the Board of Directors of the Surviving Corporation shall determine. 2.3. Charter. Immediately after the Merger, the Certificate of Incorporation of the Surviving Corporation shall be that of Portfolio immediately before the Merger. 2.4. Bylaws. Immediately after the Merger, the Bylaws of the Surviving Corporation shall be those of Portfolio immediately before the Merger. The Bylaws of the Surviving Corporation shall provide that the Board of Directors of the Surviving Corporation shall initially consist of five persons, three of whom shall be selected by NCO, one of whom shall be selected by Joseph K. Rensin and one whom shall be selected by SPV99-2 Lenders, each as provided in Section 2.5 hereof. 2.5. Directors. Immediately after the Merger, the Board of Directors of the Surviving Corporation shall initially consist of five persons, three of whom shall be selected by NCO, one of whom shall be selected by Joseph K. Rensin and one of whom shall be selected by SPV99-2 Lenders. Of the three directors selected by NCO, one shall serve for a term of three years, one shall serve for a term of two years and one shall serve for a term of one year. The director selected by Joseph K. Rensin shall serve for a term of two years, and the director selected by SPV99-2 Lenders shall serve for a term of three years. All such directors shall serve in accordance with the Bylaws of the Surviving Corporation. Each of the directors selected by Joseph K. Rensin and the SPV99-2 Lenders shall be an "independent director" as defined in the NASD rules and regulations. Subject to the consent of NCO, the director to be selected by Joseph K. Rensin may be a current "independent director" of CTC. 2.6. Officers. Immediately after the Merger, the officers of the Surviving Corporation shall include the following persons, who shall serve in accordance with the Bylaws of the Surviving Corporation: 6 Name Title ---- ----- Michael Barrist Chairman, Chief Executive Officer and President Michael Meringolo Senior Vice President Richard Palmer Chief Financial Officer and Treasurer Joshua Gindin Executive Vice President, General Counsel and Secretary 2.7. Conversion of Portfolio Common Stock. On the Effective Date, the total number of shares of common stock of Portfolio, no par value per share (the "Portfolio Common Stock"), issued and outstanding immediately before the Effective Date shall, by virtue of the Merger and without any action on the part of the holder thereof, be automatically converted into and become such number of shares of common stock, no par value per share, of the Surviving Corporation ("Surviving Corporation Common Stock") as follows: It is the intention of the parties that, immediately after the Merger, NCO shall own 60% of the issued and outstanding shares of the Surviving Corporation Common Stock (inclusive of the shares to be issued under Section 2.10 hereof) (unless the context otherwise requires, all references to percentages of Surviving Corporation Common Stock shall include the shares to be issued pursuant to Section 2.10); provided, however, that to the extent the Reserves (as defined in Section 4.4(c) of the Plan) exceed $2.32 million after the NCOP Unsecured Obligation (as defined in Section 4.4(c) of the Plan) is paid in full, the cash in the Reserves in excess of $2.32 million shall be paid to NCO and the foregoing 60% shall be decreased proportionally to an amount not to be less than 55%. This reduction, if any, shall be computed based on the extent that such Reserves exceed $2.32 million divided by $3.2 million and then multiplying such quotient by 5% (i.e., if the ---- Reserves are $1.6 million above $2.32 million then the $1.6 million excess shall be remitted to NCO and the 60% shall be decreased to 57.5% determined by dividing $1.6 million by $3.2 million, then multiplying this quotient by 5%, and then subtracting this result from 60%). 2.8. Conversion CTC Common Stock. On the Effective Date and subject to Section 2.12 hereof, each of the shares of common stock of CTC, $.01 par value per share (the "CTC Common Stock") issued and outstanding immediately before the Effective Date shall, by virtue of the Merger and without any action on the part of the holder thereof, be automatically converted into one share of the Surviving Corporation Common Stock (the "Exchange Ratio"). The parties hereto agree to adjust the Exchange Ratio to the extent necessary to have the Surviving Corporation Common Stock qualify for listing on the NASD National Market System and that any such Exchange Ratio adjustment shall also proportionally affect Section 2.7 hereof. The parties understand that the percentage of stock issued to holders of CTC Common Stock shall be diluted by the following issuances of Surviving Corporation Common Stock: (a) NCO shall own 60% (subject to reduction to 55%) of Surviving Corporation Common Stock as provided in Section 2.7; 7 (b) SPV99-2 Lenders shall own collectively 18.5% of Surviving Corporation Common Stock as provided in the Plan; (c) Michael Barrist shall own 2.667% of Surviving Corporation Common Stock as provided in the Barrist Stock Purchase Agreement (as defined in Section 8.16); (d) Including the shares issued pursuant to Section 4.5 of the Plan (except for shares representing post-petition interest) Joseph Rensin shall own 1.333% of Surviving Corporation Common Stock as provided in the Rensin Stock Purchase Agreement (as defined in Section 8.17) in addition to any shares he may receive in his capacity as a stockholder or optionholder of CTC; (e) The holders of Class 4-Unsecured Claims (as defined in the Plan) or Sunrock and/or Seneca may elect to receive Surviving Corporation Common Stock as provided in Section 4.4(G) of the Plan up to 17.6%; and (f) Holders of CTC Common Stock and Convertible Securities shall own the balance. In addition to the foregoing, the parties understand that the percentage of Surviving Corporation Common Stock to be issued to holders of CTC Common Stock may be further reduced by Section 4.13 of the Plan and Section 2.13 hereof. 2.9. No Fractional Shares. No fractional shares of Surviving Corporation Common Stock shall be issued as a result of the Merger. In lieu of the issuance of fractional shares, the number of shares of Surviving Corporation Common Stock to be issued to each shareholder of CTC and Portfolio in accordance with this Plan shall be rounded off to the nearest whole number of shares of Surviving Corporation Common Stock. 2.10. Stock Options/Warrants. All options and warrants to acquire shares of CTC Common Stock that are identified on Schedule 3.3 hereof and that are issued and outstanding immediately before the Effective Date (collectively, the "Convertible Securities") shall, by virtue of the Merger and without any action on the part of the holder thereof, be automatically voided and cancelled, and automatically converted into shares of the Surviving Corporation Common Stock as follows: As of the Closing Date, each such holder shall be issued the number of shares having an aggregate value equal to the positive difference (if any) between the aggregate buy-in value of the Surviving Corporation Common Stock into which such Convertible Securities would have been exercisable based on the Exchange Ratio, as of the Closing Date, and the aggregate exercise price of such Convertible Securities as of the Closing Date. For purposes of the foregoing sentence, the "buy-in" value shall mean the equivalent per share price at which NCO is deemed to have made its investment in the Surviving Corporation as of the Closing Date (i.e., $25 million divided by the number of shares of Surviving ---- Corporation Common Stock to be issued to NCO pursuant to Section 2.7 hereof). To the extent not otherwise vested, all Convertible Securities listed on Schedule 3.3 shall be deemed vested as of the Closing Date, and all options and/or warrants not listed on Schedule 3.3 shall, as of the Closing Date, be deemed null and void and be entitled to no consideration under this Agreement. The exchange procedure 8 for all Convertible Securities shall be substantially similar to that provided for in Section 2.12 hereof. 2.11. CTC Stock held by CTC. On the Effective Date, any shares of CTC Common Stock that are held by CTC (as treasury shares) immediately before the Effective Date shall, by virtue of the Merger and without any action on the part of the holder thereof, be automatically canceled. 2.12. Exchange Procedures. (a) The Surviving Corporation shall designate its transfer agent to act as the "Exchange Agent" under this Plan. As soon as is practicable after the Effective Date, the Exchange Agent shall mail or deliver, to each record holder of an outstanding certificate that immediately before the Effective Date represented shares of CTC Common Stock, instructions for use in effecting the surrender of such certificate to the Exchange Agent. Upon the surrender of such certificate to the Exchange Agent in accordance with such instructions, the Exchange Agent shall exchange such certificate for a new certificate representing such number of shares of the Surviving Corporation Common Stock into which the shares of CTC Common Stock represented by such certificate have been converted in accordance with this Agreement, which shall be promptly delivered to the holder thereof (or in accordance with instructions provided by the holder thereof). In addition, upon the surrender by NCO of each outstanding certificate that immediately before the Effective Date represented shares of Portfolio Common Stock to the Exchange Agent, the Exchange Agent shall exchange such certificate(s) for a new certificate(s) representing such number of shares of the Surviving Corporation Common Stock into which the shares of Portfolio Common Stock represented by such certificate(s) have been converted in accordance with this Agreement, which shall be promptly delivered to NCO. Until surrendered in accordance with the foregoing, each outstanding certificate that immediately before the Effective Date represented shares of CTC Common Stock or Portfolio Common Stock, as the case may be, shall be deemed to evidence ownership of the number of shares of Surviving Corporation Common Stock into which the shares of CTC Common Stock or Portfolio Common Stock, as the case may be, represented by such certificate(s) have been converted in accordance with this Agreement. (b) Anything in this Section 2.12 to the contrary notwithstanding, the number of shares of Surviving Corporation Common Stock initially distributable under Subsection (a) hereof shall be proportionately reduced by the number of shares of Surviving Corporation Common Stock required to be put in the Reserves under Section 4.11(c) of the Plan. (c) To the extent additional shares of Surviving Corporation Common Stock become available for distribution to former CTC shareholders after the Closing Date either due to the fact that the ownership percentage of NCO as set forth in Section 2.7 hereof has been reduced below 60% and/or shares become available for distribution from those shares of Surviving Corporation Common Stock originally put in the Reserves under Section 4.11(c) of the Plan, the Exchange Agent shall make one or more subsequent distributions to the former CTC Shareholders who surrendered CTC stock certificates pursuant to Subsection (a) above. 2.13. Additional Distributions of Surviving Corporation Common Stock . Anything in this Agreement to the contrary notwithstanding and as provided in Section 4.13 of 9 the Plan, for every $418,000 (or any whole multiple thereof) of outstanding NCOP Unsecured Obligation, if any, the amount of Surviving Corporation Common Stock distributable to CTC shareholders shall be reduced by one full percentage point and such Surviving Corporation Common Stock shall be distributed as follows: to NCO 72.74% to SPV 99-2 Noteholders 22.42 to Michael J. Barrist 3.23 to Joseph K. Rensin 1.61 ----- 100.00% 2.14. Effective Date. As used in this Agreement, the "Effective Date" shall mean the date upon which this Agreement (if necessary) and proper Certificates of Merger for the Merger have been duly signed and filed with the proper officials of the States of Delaware and Maryland as provided for in Section 10 hereof. SECTION 3 Representations of CTC Knowing that NCO and Portfolio rely thereon and except as set forth in the Schedules delivered by CTC to NCO prior to the execution of the Agreement (and subject to Section 5.7 hereof), CTC represents and warrants to NCO and Portfolio as of the date of this Agreement and the Closing Date, and covenants with NCO and Portfolio, as set forth below in each provision of this Section 3. 3.1. Organization. Each of the Acquired Companies is an entity duly organized, validly existing and in good standing under the Laws of the jurisdiction of its organization. CTC possesses the full corporate power and authority to enter into and perform this Agreement. Each of the Acquired Companies possesses the full power and authority to own its Assets and to conduct its business as and where presently conducted. Each of the Acquired Companies is duly qualified or registered to do business in each jurisdiction where such qualification or registration is required by applicable Law except where the failure to be so qualified would not be reasonably likely to have a material adverse effect on the Acquired Companies. Except as set forth on Schedule 3.1, CTC has no subsidiaries. Except as set forth on Schedule 3.1, none of the Acquired Companies owns any securities of any corporation or any other debt or equity interest in any Person. None of the Acquired Companies has any predecessors except as otherwise set forth on Schedule 3.1. Schedule 3.1 states, for each of the Acquired Companies (a) its exact legal name; (b) its corporate business form and jurisdiction of organization and date of formation; (c) its federal employer identification number; (d) its headquarters address, telephone number and facsimile number; (e) its directors and officers, indicating all current title(s) of each such individual; (f) its registered agent and/or office in its jurisdiction of organization (if applicable); (g) all foreign jurisdictions in which it is qualified or registered to do business, the date it so qualified or registered, and its registered agent and/or office in each such jurisdiction (if applicable); (h) all fictitious, assumed or other names of any type that are registered or used by it or under which it has done business at any time since such company's date of incorporation; and (i) any name changes, recapitalizations, mergers, reorganizations or similar events since its 10 date of formation. Accurate and complete copies of articles or certificates of incorporation and bylaws, (or similar organizational documents), each as amended to date, and all Contracts relating to the acquisition of each of the Acquired Companies (or their affiliates or predecessors) have been made available to NCO. 3.2. Effect of Agreement. Subject to the approval by CTC shareholders (as hereinafter set forth) and the approval of the Bankruptcy Court (as hereinafter set forth), CTC's consummation of the Transactions has been duly authorized by all necessary actions including its board of directors and does not constitute a violation of or default under its articles of incorporation, or bylaws (or similar organizational documents). Except as set forth on Schedule 3.2, CTC's execution, delivery and performance of this Agreement, and its consummation of the Transactions, (a) do not constitute a default or breach (immediately or after the giving of notice, passage of time or both) under any Contract to which any of the Acquired Companies is a party or by which any of the Acquired Companies is bound, (b) do not constitute a violation of any Law or Judgment that is applicable to any of the Acquired Companies, or to the business or Assets of any of the Acquired Companies, or to the Transactions, (c) do not accelerate or otherwise modify any Obligation of any of the Acquired Companies, (d) do not result in the creation of any Encumbrance upon, or give to any third party any interest in, any of the business or Assets, or any of the capital stock of or interests in, any of the Acquired Companies, and (e) except as set forth on Schedule 3.2 and except for filings under the HSR Act (as hereinafter defined) and the approval of the Bankruptcy Court (as hereinafter set forth), do not require the Consent of any Person, including any lender of the Acquired Companies required pursuant to any credit or other lending Contract. This Agreement constitutes the valid and legally binding agreement of CTC enforceable against it in accordance with its terms. Except as set forth on Schedule 3.2, there exists no right of first refusal or other preemptive right with respect to any of the Acquired Companies or the stock, business or Assets of any of the Acquired Companies. 3.3. Capital Stock and Ownership. As of the date of this Agreement, the authorized capital stock of CTC consists of: (i) 20,000,000 shares of Common Stock, $.01 par value per share ("CTC Common Stock"), of which 10,453,548 shares are issued and outstanding and no shares are issued but not outstanding; and (ii) 5,000,000 shares of Preferred Stock, par value $.01 per share (the "CTC Preferred Stock") of which no shares are issued and/or outstanding. (The CTC Common Stock and the CTC Preferred Stock shall be referred to collectively, as the "CTC Stock".) With respect to each of the Acquired Companies, other than CTC, Schedule 3.3 is an accurate and complete list of (a) the names of all shareholders or members, (b) the addresses of all shareholders or members, (c) to the extent available, their social security numbers or federal tax identification numbers, and (d) the numbers of, type of shares or interests owned of record by them and the certificate numbers of the stock certificates representing such shares or interests. Except as set forth on Schedule 3.3, CTC is the sole record and beneficial owner of all of the shares of capital stock or interests of each of its subsidiaries and it has good and valid title to such shares or interests, free and clear of any Encumbrance. Except for the shares or interests listed on Schedule 3.3 with respect to each of the Acquired Companies, there currently are no other issued or outstanding shares of capital stock or interests. All of the issued and outstanding shares of capital stock or interests of each of the Acquired Companies have been duly authorized and validly issued, and are fully paid and nonassessable, with no liability or preemptive rights attaching to the ownership thereof. All issuances and grants of all outstanding options and/or 11 warrants, and all offerings, sales and issuances by each of the Acquired Companies of any shares of capital stock or interests were conducted in compliance with all applicable federal and state securities and "blue sky" Laws, all applicable state corporation Laws and all requirements set forth in applicable Contracts. Except as provided on Schedule 3.3, there are no outstanding options, puts, calls, warrants, subscriptions, stock appreciation rights, phantom stock, or other Contracts or Contract Rights relating to the offering, sale, issuance, redemption or disposition of any shares of capital stock or interests, or other securities of, any of the Acquired Companies. 3.4. Financial and Corporate Records. The books and records of each of the Acquired Companies are and have been prepared and maintained in form and substance adequate for preparing audited financial statements in accordance with GAAP, and such books and records fairly and accurately reflect in all material respects all of the Assets and Obligations of each of the Acquired Companies and all Contracts and other transactions to which each of the Acquired Companies is or was a party or by which each of the Acquired Companies or the business or Assets of each of the Acquired Companies is or was affected. Accurate and complete copies of the contents of the minute books and stock books of each of the Acquired Companies have been made available to NCO. Such minute books and stock books include (a) minutes of all meetings of the shareholders, board of directors and any committees of the board of directors at which any material action was taken, which minutes accurately record all material actions taken at such meetings, (b) accurate and complete written statements of all actions taken by the shareholders, board of directors and any committees of the board of directors without a meeting, and (c) accurate and complete records of the subscription, issuance, transfer and cancellation of all shares of capital stock, and all other securities since the date of incorporation or formation. None of the shareholders, board of directors or any committee of the board or members has taken any material action required by Law to be reflected in the records in clauses (a) and (b) of the preceding sentence other than those actions reflected in the records referenced in clauses (a) and (b) of the preceding sentence. Schedule 3.4 is an accurate and complete list of all bank accounts, other accounts, certificates of deposit, marketable securities, other investments, safe deposit boxes, lock boxes and safes of each of the Acquired Companies, and the names of all officers, employees or other individuals who have access thereto or are authorized to make withdrawals therefrom or dispositions thereof. 3.5. Compliance with Law. The operations of each of the Acquired Companies, the conduct of the business of each of the Acquired Companies, as and where such business has been or presently is conducted, and the ownership, possession and use of the Assets of each of the Acquired Companies have complied and currently do comply in all material respects with all applicable Laws other than Environmental Laws which are addressed in Section 3.13 hereof. Except as set forth on Schedule 3.5, each of the Acquired Companies has obtained and holds all Permits required for the lawful operation of its business as and where such business is presently conducted, except where the failure to obtain or hold such Permits would not have a material adverse effect on the business or condition (financial or otherwise) of any of the Acquired Companies or upon the ability of CTC to perform its obligations hereunder or to consummate the transactions contemplated hereby. All Permits held by the Acquired Companies are listed on Schedule 3.5, and copies of such Permits have been made available to NCO and Portfolio. 12 3.6. Financial Statements. Schedule 3.6A lists the fiscal year end for each of the Acquired Companies. Schedule 3.6A includes accurate and complete copies of the following audited consolidated financial statements ("Audited Financial Statements") of the Acquired Companies: (a) a balance sheet as of the end of each of the two most recent fiscal years; and (b) statements of income, statements of shareholders' equity, and statements of cash flows for each of the three most recent fiscal years, and notes thereto. Schedule 3.6B includes accurate and complete copies of all the following unaudited consolidated financial statements ("Unaudited Financial Statements") of the Acquired Companies: an unaudited balance sheet as of June 30, 2000 ("June 2000 Balance Sheet") and related unaudited financial statements, including statements of income, statements of shareholders' equity and statements of cash flows prepared by the management of CTC on an ongoing basis since the beginning of the current fiscal year. All of the Audited Financial Statements were (x) prepared in accordance with GAAP; (y) fairly present in all material respects the financial condition and results of operations of CTC as of the dates and for the periods indicated; and (z) were audited by independent auditors, whose reports thereon are without qualification or explanatory paragraphs. Except as set forth on Schedule 3.6B, all of the Unaudited Financial Statements were prepared in accordance with GAAP except for the absence of full footnote disclosure and on a basis consistent with the Audited Financial Statements. With respect to the Unaudited Financial Statements and except as specifically set forth therein, there are no unusual non-recurring adjustments and all normal recurring adjustments have been made. 3.7. Assets. Schedule 3.7 includes detailed lists of all Assets of each of the Acquired Companies which are reflected on the June 2000 Balance Sheet, including (a) Cash Assets, itemized by bank or other account, showing cost and market value if different from cost; (b) Accounts Receivable, showing customer names, individual invoice dates, individual invoice amounts and allowances for doubtful accounts, or, in the case of earned but not billed receivables, customer names and individual dates on which the receivables are billable (except that such Accounts Receivable are set forth on three CD-ROMS previously delivered to NCO); (c) other current and long-term Assets, itemized by category and with appropriate explanation; (d) Tangible Property, grouped as to type, showing cost, accumulated depreciation and net book value; and (e) Software and Intangibles, showing cost or amount capitalized, accumulated amortization and net book value. Except as set forth on Schedule 3.7, each of the Acquired Companies has good and valid title to all of its respective Assets which are owned by it and has the right to transfer all rights, title and interest in such Assets, free and clear of any Encumbrance. Except for the Assets listed on Schedule 3.7, no other Assets are necessary to operate, or have been material to the operation of, the business of any of the Acquired Companies as they are currently operated. 3.8. Obligations. Schedule 3.8 includes detailed lists of all Obligations of each of the Acquired Companies which are reflected on the June 2000 Balance Sheet, itemized by balance sheet account, and with aggregate net balances equal to the balances on the June 2000 Balance Sheet, including (a) accounts payable, (b) accrued expenses and reserves, itemized by category and with appropriate explanation, (c) deferred revenues, itemized by customer and time periods, and (d) other current and long-term liabilities. As of the date hereof, none of the Acquired Companies has any Obligations other than (i) Obligations reflected on the June 2000 Balance Sheet, (ii) Obligations set forth on Schedule 3.8, (iii) Obligations under Contracts of the type 13 listed or not required to be listed on Schedule 3.15, provided that as of June 30, 2000, no such Obligation consisted of or resulted from a default under or violation of any such Contract, and (iv) Obligations incurred since June 30, 2000, in the ordinary course, consistent with past practices, and not in breach of any of the representations and warranties made in Section 3.9. Except as described on Schedule 3.8, none of the Obligations of any of the Acquired Companies are guaranteed by any Person. 3.9. Operations Since June 30, 2000. Except as set forth on Schedule 3.9, from June 30, 2000 to the date of this Agreement: (a) Except in the ordinary course of their respective businesses consistent with its past practices, none of the Acquired Companies has (i) created or assumed any Encumbrance upon any of its business or Assets, (ii) incurred any Obligation, (iii) made any loan or advance to any Person (excluding normal recurring compensation, benefits and expenses reimbursements due to such Persons in their capacities as employees, officers or directors of any of the Acquired Companies in the ordinary course of business consistent with past practices and excluding indebtedness described on Schedule 3.23); (iv) assumed, guaranteed or otherwise become liable for any Obligation of any Person; (v) committed for any capital expenditure; (vi) purchased, leased, sold, abandoned or otherwise acquired or disposed of any business or Assets; (vii) waived any right or canceled any debt or claim; (viii) assumed or entered into any Contract other than this Agreement; or (ix) increased, or authorized an increase in, the compensation or benefits paid or provided to any of their directors, officers, employees, salesmen, agents or representatives. (b) Even in the ordinary course of their respective businesses consistent with their respective past practices, none of the Acquired Companies made any loan to any Person (excluding normal recurring compensation, benefits and expenses reimbursements due to such Persons in their capacities as employees, officers or directors of any of the Acquired Companies in the ordinary course of business consistent with past practices and excluding indebtedness described on Schedule 3.23), acquired or disposed of any material business or material Assets or entered into any material Contract (other than customer contracts) or other material transaction. (c) There has been no material adverse change or material casualty loss affecting any of the Acquired Companies or their business, Assets or financial condition, and there has been no material adverse change in the financial performance of any of the Acquired Companies. (d) None of the Acquired Companies has (i) incurred any outstanding bank debt or notes payable; (ii) except in connection with the Agreement and the Transactions contemplated hereby, incurred any outstanding indebtedness to any current or former shareholder, director or officer of any of the Acquired Companies (excluding normal recurring compensation, benefits and expense reimbursements due to such Persons in their capacities as employees, officers or directors of any of the Acquired Companies and excluding indebtedness described on Schedule 3.23) or to any affiliate (as such term is defined for purposes of the Exchange Act) of any of the Acquired Companies or any of such company's shareholders, directors or officers; (iii) paid any dividend or made any other distribution of Cash Assets or other Assets to or on behalf of any of the shareholders of any of the Acquired Companies 14 (excluding normal recurring compensation, benefits and expense reimbursements due to such Persons in their capacities as employees, officers or directors of any of the Acquired Companies); or (iv) accrued any deferred bonuses or compensation due to any shareholder, employee, contractor, subcontractor or agent of any of the Acquired Companies, or paid any such deferred bonuses or compensation except to the extent such deferred bonuses or compensation was accrued on the June 2000 Balance Sheet. (e) None of the Acquired Companies has rejected any executory Contract, commitment or lease of non-residential real property under Section 365 of the Bankruptcy Code. 3.10. Accounts Receivable. All Accounts Receivable listed in the three CD- ROMS delivered to NCO pursuant to Schedule 3.7 arose in the ordinary course of business, are proper and valid accounts receivable. Except as disclosed on Schedule 3.7, there are no refunds, discounts, rights of setoff or assignment affecting any such Accounts Receivable. Except as disclosed on Schedule 3.7, proper amounts of deferred revenues appear on the books and records of each of the Acquired Companies, in accordance with GAAP, with respect to all of the Acquired Companies' (a) billed but unearned Accounts Receivable; (b) previously billed and collected Accounts Receivable still unearned; and (c) unearned customer deposits. 3.11. Tangible Property. Each of the Acquired Companies has good and valid title to all of its Tangible Property, free and clear of any Encumbrances except as set forth in the June 2000 Balance Sheet or Schedule 3.7. Except as set forth on Schedule 3.11, all of the Tangible Property of each of the Acquired Companies is located at the offices or facilities of the Acquired Companies, except for automobiles and trucks, mobile telephones and other similar property, and each of the Acquired Companies has the full and unqualified right to require the immediate return of any of its owned Tangible Property which is not located at its offices or facilities. All material items of Tangible Property of each of the Acquired Companies, wherever located, is in working condition, ordinary wear and tear excepted, and is sufficient for the operations and business of each of the Acquired Companies as presently conducted. 3.12. Real Property. None of the Acquired Companies owns any Real Property. Schedule 3.12 is a list of all Real Property leased by any of the Acquired Companies ("CTC Real Property"), showing location and, as applicable, rental cost and landlord. To the knowledge of CTC, all of the CTC Real Property is structurally sound and in good condition, ordinary wear and tear excepted, and is sufficient for the current operations of the Acquired Companies. To the knowledge of CTC, none of the CTC Real Property, nor the ownership, possession, occupancy, maintenance or use thereof, is in violation of, or breach or default under, any Contract or Law to which CTC is subject, and no notice or threat from any lessor, governmental body or other Person has been received by any of the Acquired Companies or served upon CTC with respect to the CTC Real Property claiming any violation of, or breach, default or liability under, any Contract or Law, or requiring or calling attention to the need for any work, repairs, construction, alteration or installations. To the knowledge of CTC, no Proceedings are pending which would adversely affect the zoning or use of any of the CTC Real Property. To the knowledge of CTC, no portion of any CTC Real Property is within an identified flood plain or other designated flood hazard area as established under any Law or otherwise by any governmental authority. To the knowledge of CTC, all of the CTC Real Property has direct legal access to, abuts, and is served 15 by a publicly dedicated and maintained road, which road does and shall provide a valid means of ingress and egress thereto and therefrom, without additional expense. To the knowledge of CTC, all utilities necessary for the Acquired Companies, current use of the CTC Real Property, including water, gas, telephone, electricity, sanitary and storm sewers, are currently available to all of the CTC Real Property, and are adequate to serve such CTC Real Property for each of the Acquired Companies' current use thereof. 3.13. Environmental. Except as set forth in Schedule 3.13: (a) (i) The Acquired Companies have not caused or permitted any Hazardous Substances to be manufactured, refined, treated, discharged, disposed of, deposited or otherwise released in, on, under or from any of the CTC Real Property or any Real Property previously owned, leased, occupied, operated, managed, possessed or otherwise held by any of the Acquired Companies other than in compliance in all material respects with applicable Environmental Laws ("Former CTC Real Property"); and (ii) To the knowledge of CTC, before their lease of any of the CTC Real Property or Former CTC Real Property, no Hazardous Substances have been manufactured, refined, treated, discharged, disposed of, deposited or otherwise released therein, thereon or therefrom other than in compliance in all material respects with applicable Environmental Laws. (b) (i) The Acquired Companies have not caused or permitted any Hazardous Substances to have been stored, used, generated, transported, handled or otherwise present on any of the CTC Real Property or Former CTC Real Property, and no Hazardous Substances currently are stored, used, generated, transported, handled or, to the knowledge of CTC, otherwise present on any CTC Real Property except for (1) any concentrations or quantities that occur naturally thereon or that are present in construction materials, office equipment or other office furnishings used in the existing improvements thereon, and (2) normal quantities of those Hazardous Substances customarily used in the conduct or maintenance of general administrative and executive office activities and use and maintenance of computer systems (e.g., copier fluids and cleaning ---- supplies), in accordance with applicable Law. Notwithstanding the foregoing exceptions, to the knowledge of CTC, no asbestos-containing materials, PCBs or urea formaldehyde are present in or on any of the CTC Real Property; and (ii) To the knowledge of CTC, before their lease of any of the CTC Real Property or Former CTC Real Property, no Hazardous Substances were stored, used, generated, transported, handled or otherwise present thereon except for (1) any concentrations or quantities that occur naturally thereon or that are present in construction materials, office equipment or other office furnishings used in the existing improvements thereon, and (2) normal quantities of those Hazardous Substances customarily used in the conduct or maintenance of general administrative and executive office activities and use and maintenance of computer systems (e.g., copier fluids and cleaning supplies), in accordance ---- with applicable Law. 16 (c) To the knowledge of CTC (i) all of the Former CTC Real Property and the operations of the Acquired Companies thereon were operated in material compliance with applicable Environmental Laws, and (ii) all of the CTC Real Property and the operations of the Acquired Companies thereon have been and currently are being operated in material compliance with applicable Environmental Laws. To the knowledge of CTC, there is not any radon, asbestos or PCB's or any condition with respect to surface soil, subsurface soil, ambient air, surface waters, groundwaters, leachate, run-on or run-off, stream or other sediments, wetlands or similar environmental media on, in, under, above or off any of the CTC Real Property or Former CTC Real Property, which radon, asbestos, PCB's or condition (a) requires investigation and/or remedial or corrective action on or off such CTC Real Property or Former CTC Real Property by the Acquired Companies or other owner thereof, (b) violates any permit requirements, standards or Environmental Laws, and/or (c) is reasonably likely to result in any claim for personal injury, property damage or natural resources damage or any other Proceeding against NCO, Portfolio or any of their affiliates by governmental entities or other Persons (any such radon, asbestos, PCB's or condition is referred to as an "CTC Environmental Condition"). To the knowledge of CTC, none of the Acquired Companies has taken any action or omitted to take any action that has caused or will cause a CTC Environmental Condition to exist. (d) None of the Acquired Companies has received any written notice that any part of the CTC Real Property or the Former CTC Real Property or the operations of the Acquired Companies is the subject of any Proceeding or Judgment relating to environmental matters, and, to the knowledge of CTC, no part of the CTC Real Property or the Former CTC Real Property or the operations of the Acquired Companies is the subject of any Proceeding or Judgment relating to environmental matters. None of the Acquired Companies has received any written notice from any governmental authority or other Person regarding any potential claim or liability relating to environmental matters. (e) To the knowledge of CTC, there is no sinkhole, coastal zone, flood plain, flood hazard area or wetlands in or on the CTC Real Property, which would restrict the continued use of the CTC Real Property as an office, data processing facility and electronic communications network facility. (f) Each of the Acquired Companies has made available to NCO copies of any and all applications, correspondence, affidavits, reports, forms, maps, plans, studies and other documents relating to environmental matters in their possession, custody or control. These shall include any environmental engineering studies, any tests or testing performed on the CTC Real Property or the Former CTC Real Property, and copies of any reports issued by any government authority regarding such CTC Real Property or Former CTC Real Property. (g) No Proceeding has been started, no Judgment has been issued and no Encumbrance has been created against or affecting any of the Acquired Companies or any of the CTC Real Property or Former CTC Real Property regarding any CTC Environmental Condition or arising from any Environmental Law, nor is any such Proceeding, Judgment or Encumbrance pending or anticipated. 17 (h) No information request has been received by any of the Acquired Companies pursuant to Section 104 of the Comprehensive Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C. 9601 et seq. or any other -- --- Environmental Laws with regard to the CTC Real Property or Former CTC Real Property or any activities conducted thereon, including off-site waste disposal. 3.14. Software and Other Intangibles. Except for shrinkwrap and other commercially available Software, set forth on Schedule 3.14 is an accurate and complete list and description of all Software and Intangibles owned, marketed, licensed, supported, maintained, used or under development by the Acquired Companies, and, in the case of Software, a product description, the language in which it is written and the type of hardware platform(s) on which it runs. Except for shrinkwrap and other commercially available Software, no other Software or Intangibles is necessary to operate the business of each of the Acquired Companies as currently operated. Except as explained on Schedule 3.14, each of the Acquired Companies has good and valid title to, and has the full right to use, all of the Software and Intangibles listed on Schedule 3.14, free and clear of any Encumbrance (except for use restrictions contained in licensed commercially available Software). All shrinkwrap and other commercially available Software has been properly licensed and registered, and all related fees paid. With respect to the Software listed on Schedule 3.14 and except as set forth on Schedule 3.14, (a) the Acquired Companies maintain machine-readable master-reproducible copies, source code listings, technical documentation and user manuals (if any) for the most current releases or versions thereof and for all earlier releases or versions thereof currently being supported by them; (b) to the knowledge of CTC, in each case, the machine-readable copy substantially conforms to the corresponding source code listing; (c) to the knowledge of CTC, it is written in the language set forth on Schedule 3.14, for use on the hardware set forth on Schedule 3.14 with standard operating systems; (d) to the knowledge of CTC, it can be maintained and modified by reasonably competent programmers familiar with such language, hardware and operating systems or other Persons with whom CTC presently has service and maintenance agreements; (e) in each case, it operates in accordance with the user manual therefor without material operating defects; and (f) to the knowledge of CTC, in each case, each component of such Software that creates, accepts, displays, stores, retrieves, accesses, recognizes, distinguishes, compares, sorts, manipulates, processes, calculates, converts or otherwise uses dates or date-related data, will do so accurately, without any operating defects, loss of functionality or degradation in performance or volume capacity, using dates in the twentieth and twenty-first centuries, and will not be adversely affected by the advent of the twentieth century, or the transition into the twenty-first century. To the knowledge of CTC, all application Software written in-house is year 2000 compliant. To the knowledge of CTC, none of the Software or Intangibles listed on Schedule 3.14, or their respective past or current uses, including the preparation, distribution, marketing or licensing, has violated or infringed upon, or is violating or infringing upon, any Software, technology, patent, copyright, trade secret or other Intangible of any Person. To the knowledge of CTC, no Person is violating or infringing upon, or has violated or infringed upon at any time, any of the Software or Intangibles listed on Schedule 3.14. None of the Software or Intangibles listed on Schedule 3.14 is owned by or registered in the name of any current or former owner, shareholder, partner, director, executive, officer, employee, salesman, agent, customer, representative or contractor of any of the Acquired Companies nor does any such Person have any interest therein or right thereto, including the right to royalty payments. 18 3.15. Contracts. Schedule 3.15 is an accurate and complete list of all of the following types of Contracts which involve either future Obligations of $50,000 or more to which any of the Acquired Companies is a party or by which any of the Acquired Companies is bound, or is otherwise material to any of the Acquired Companies (collectively, the "Specified Contracts"), grouped into the following categories: (a) customer or client Contracts; (b) Contracts for the purchase or lease of Real Property or otherwise concerning Real Property owned or used by any of the Acquired Companies; (c) loan agreements, mortgages, notes, guarantees and other financing Contracts; (d) Contracts for the purchase, lease and/or maintenance of computer equipment and other equipment, Contracts for the purchase, license, lease and/or maintenance of Software under which any of the Acquired Companies is the purchaser, licensee, lessee or user, and other supplier Contracts; (e) employment, consulting and sales representative Contracts (excluding Contracts which constitute Employee Benefit Plans listed on Schedule 3.17, and excluding oral Contracts with employees for "at will" employment); (f) Contracts under which any rights in and/or ownership of any Software product, technology or other Intangible of any of the Acquired Companies, or any prior version thereof, or any part of the customer base, business or Assets of any of the Acquired Companies, or any shares or other ownership interests in any of the Acquired Companies (or any of their predecessors) was acquired; and (g) other material Contracts (excluding Contracts which constitute Insurance Policies listed on Schedule 3.21 and excluding this Agreement and all other Contracts entered into between any of the Acquired Companies and NCO, or among any of the Acquired Companies, NCO and other parties in connection herewith). A description of each oral Specified Contract is included on Schedule 3.15, and copies of each written Specified Contract have been made available to NCO. Except as set forth on Schedule 3.15, with respect to each of the Specified Contracts, none of the Acquired Companies is in default thereunder nor would be in default thereunder with the passage of time, the giving of notice, or both. Except as set forth on Schedule 3.15, to the knowledge of CTC, none of the other parties to any Specified Contract is in default thereunder or would be in default thereunder with the passage of time, the giving of notice or both. Except as set forth on Schedule 3.15, none of the Acquired Companies has given or received any written or oral notice of default or notice of termination with respect to any Specified Contract, and each Specified Contract is in full force and effect in accordance with its terms. The Specified Contracts are all the Contracts necessary and sufficient to operate the business of each of the Acquired Companies as it is presently conducted. Except as set forth on Schedule 3.15, there are no currently outstanding proposals or offers submitted by any of the Acquired Companies to any customer, prospect, supplier or other Person which, if accepted, would result in a legally binding Contract of such company involving an amount or commitment exceeding $25,000 in any single case or an aggregate amount or commitment exceeding $100,000 in the aggregate. 3.16. Employees and Independent Contractors. Schedule 3.16 is a list of all of the employees of the Acquired Companies and (a) their titles or responsibilities; (b) their social security numbers; (c) their dates of hire; (d) their current salaries or wages and all bonuses, commissions and incentives paid at any time during the past twelve months; (e) their last compensation changes and the dates on which such changes were made; (f) any specific bonus, commission or incentive plans or agreements for or with them; and (g) any outstanding loans or advances made to them. Schedule 3.16 is a list of all sales representatives and independent subcontractors or contractors engaged by the Acquired Companies and (a) their payment 19 arrangements (if not set forth in a Contract listed or described on Schedule 3.15); and (b) brief description of their jobs or projects currently in progress. Except as limited by any Contracts listed on Schedule 3.15 and except for any limitations of general application which may be imposed under applicable employment Laws, each of the Acquired Companies has the right to terminate the employment of each of its employees at will and to terminate the engagement of any of its independent contractors without payment to such employee or independent contractor other than for services rendered through termination and without incurring any penalty or liability other than liability for severance pay and benefits in accordance with such company's disclosed severance pay policy and benefits due terminated employees. Neither the Transactions, nor the termination of the employment of any employees of any of the Acquired Companies prior to or following the consummation of the Transactions could result in any of the Acquired Companies making or being required to make any "excess parachute payment" as that term is defined in Section 280G of the Code. To the knowledge of CTC, each of the Acquired Companies is in full compliance in all material respects with all Laws respecting employment practices. None of the Acquired Companies has ever been a party to or bound by any union, collective bargaining or similar Contract, nor is any such Contract currently in effect or being negotiated by or on behalf of any of the Acquired Companies. Since the respective incorporation or formation dates of each of the Acquired Companies, none of the Acquired Companies has experienced any labor problem that was or is material to it. Except as set forth on Schedule 3.16, each of the Acquired Companies' current and past employees has signed an employee or confidentiality agreement which contains certain restrictive covenants substantially in the form attached to Schedule 3.16. Except as set forth on Schedule 3.16, each of the Acquired Companies' current and past contractors or consultants has signed agreements with the Acquired Companies containing restrictions that protect the proprietary and confidential information of the Acquired Companies and vest in the Acquired Companies the full ownership of items developed by such contractor. Except as indicated on Schedule 3.16, since January 1, 2000, to the knowledge of CTC, no employee of any of the Acquired Companies having an annual salary of $50,000 or more has indicated an intention to terminate or has terminated his or her employment with such company. To the knowledge of CTC, the Transactions will not adversely affect relations with any material employee of the Acquired Companies. 3.17. Employee Benefit Plans. Schedule 3.17 sets forth an accurate and complete list of all of CTC's Employee Benefit Plans to which any Acquired Company is bound (collectively referred to as "CTC's Employee Benefit Plans"). Except as set forth on Schedule 3.17, none of the Acquired Companies has (a) established, maintained or contributed to (or has been obligated to contribute to) any Employee Benefit Plans, (b) proposed any Employee Benefit Plans which it plans to establish or maintain or to which it plans to contribute, or (c) proposed any changes to any Employee Benefit Plans now in effect. Accurate and complete copies of all of CTC's Employee Benefit Plans, a list of all employees affected or covered by CTC's Employee Benefit Plans, and all Obligations thereunder have been made available to NCO. If permitted and/or required by applicable Law, the Acquired Companies have properly submitted all of CTC's Employee Benefit Plans in good faith to meet the applicable requirements of ERISA and/or the Code to the Internal Revenue Service (the "IRS") for its approval within the time prescribed therefor under applicable federal regulations. Favorable letters of determination of such tax-qualified status from the IRS are attached to Schedule 3.17. With respect to CTC's Employee Benefit Plans, the Acquired Companies will have made, on or before the Closing Date, all 20 payments required to be made by them on or before the Closing Date and will have accrued (in accordance with GAAP) as of the Closing Date all payments due but not yet payable as of the Closing Date, so there will not have been, nor will there be, any Accumulated Funding Deficiencies (as defined in ERISA or the Code) or waivers of such deficiencies. CTC has made available to NCO an accurate and complete copy of the most current Form 5500 and any other form or filing required to be submitted to any governmental agency with regard to any of CTC's Employee Benefit Plans and the most current actuarial report, if any, with regard to any of CTC's Employee Benefit Plans. All of CTC's Employee Benefit Plans are, and have been, operated in material compliance with their provisions and with all applicable Laws including ERISA and the Code and the regulations and rulings thereunder. The Acquired Companies and all fiduciaries of CTC's Employee Benefit Plans have complied in all material respects with the provisions of CTC's Employee Benefit Plans and with all applicable Laws including ERISA and the Code and the regulations and rulings thereunder. There have been no Reportable Events (as defined in ERISA), no events described in Sections 4062, 4063 or 4064 of ERISA, and no termination or partial termination (including any termination or partial termination attributable to the Transactions contemplated by this Agreement) of any of CTC's Employee Benefit Plans. There would be no Obligation of any of the Acquired Companies under Title IV of ERISA if any of CTC's Employee Benefit Plans were terminated as of the Closing Date. As a result of any action or inaction prior to Closing by any of the Acquired Companies, none of the Acquired Companies has incurred, nor will incur, any withdrawal liability, nor do any of the Acquired Companies have any contingent withdrawal liability, under ERISA to any Multiemployer Plan (as defined in ERISA or the Code). None of the Acquired Companies has incurred, or will incur, any Obligation to the Pension Benefit Guaranty Corporation (or any successor thereto). Neither the execution and delivery of this Agreement nor the consummation of the Transactions will (x) result in any payment (including any severance, unemployment compensation or golden parachute payment) becoming due from any of the Acquired Companies under any of CTC's Employee Benefit Plans, (y) increase any benefits otherwise payable under any of CTC's Employee Benefit Plans, or (z) result in the acceleration of the time of payment or vesting of any such benefits to any extent. There are no pending Proceedings that have been asserted or instituted against any of CTC's Employee Benefit Plans, the Assets of any of the trusts under such plans, the plan sponsor, the plan administrator or any fiduciary of any such plan (other than routine benefit claims), and, to the knowledge of CTC, there are no facts which could form the basis for any such Proceeding. There are no investigations or audits of any of CTC's Employee Benefit Plans, any trusts under such plans, the plan sponsor, the plan administrator or any fiduciary of any such plan that have been instituted or, to the knowledge of CTC, threatened, and, to the knowledge of CTC, there are no facts which could form the basis for any such investigation or audit. Except as disclosed in Schedule 3.17, no event has occurred nor will occur which will result in any of the Acquired Companies having an Obligation in connection with any Employee Benefit Plan established, maintained, contributed to or to which there has been as obligation to contribute (currently or previously) by it or by any other entity which, together with any of the Acquired Companies, constitute elements of either (i) a controlled group of corporations (within the meaning of Section 414(b) of the Code), (ii) a group of trades or businesses under common control (within the meaning of Sections 414(c) of the Code or 4001 of ERISA), (iii) an affiliated service group (within the meaning of Section 414(m) of the Code), or (iv) another arrangement covered by Section 414(o) of the Code. 21 3.18. [Intentionally Omitted] 3.19. Taxes. Schedule 3.19 is an accurate and complete list of all federal, state, local, foreign and other Tax returns and reports (including information returns) (collectively "Returns") filed by each of the Acquired Companies with respect to its last two fiscal years. Accurate and complete copies of all federal, state, local and foreign income, sales, use and other Tax Returns filed by each of the Acquired Companies with respect to its last five fiscal years have been made available to NCO. Except as explained on Schedule 3.19, (a) each of the Acquired Companies has properly and timely filed all Tax Returns required to be filed by it, all of which were accurately prepared and completed in all material respects; (b) each of the Acquired Companies has properly withheld from payments to its employees, agents, representatives, contractors and suppliers all amounts required by Law to be withheld for Taxes; (c) each of the Acquired Companies has paid all Taxes required to be paid by it; (d) no audit of any of the Acquired Companies by any governmental taxing authority has ever been conducted, is currently pending or, to the knowledge of CTC, is threatened; (e) no notice of any proposed Tax audit, or of any Tax deficiency or adjustment, has been received by any of the Acquired Companies, and there is no reasonable basis for any Tax deficiency or adjustment to be assessed against any of the Acquired Companies; and (f) there are no agreements or waivers currently in effect that provide for an extension of time for the assessment of any Tax against any of the Acquired Companies. None of the Acquiring Companies is a party to any tax allocation or sharing agreement. None of the Acquired Companies has been a member of an affiliated group filing a consolidating Federal income tax return (other than a group, the common parent of which is CTC, or has any liability for the Taxes of any person or entity other than the Acquired Companies under Treasury Regulations (S)1.1502-6 or any similar provision of state, local or foreign law as a transferee or successor, by contract or otherwise). Subsequent to January 1, 2000, the Acquired Companies have not been a party to any distribution described in (S)355(e)(2)(A)(i) of the Code. 3.20. Proceedings and Judgments. Except as described on Schedule 3.20 and other than routine ordinary course collection related Proceedings, (a) no Proceeding is currently pending or, to the knowledge of CTC, threatened, nor has any Proceeding occurred at any time since January 1, 1999, to which any of the Acquired Companies is or was a party, or by which any of the Acquired Companies or any Assets or business of any of the Acquired Companies is or was affected; (b) no Judgment is currently outstanding, nor has any Judgment been outstanding at any time since January 1, 1999, against any of the Acquired Companies, or by which any of the Acquired Companies or any Assets or business of any of the Acquired Companies is or was affected; and (c) no breach of contract, breach of warranty, tort, negligence, infringement, product liability, discrimination, wrongful discharge or other claim of any nature has been asserted or, to the knowledge of CTC, threatened by or against any of the Acquired Companies at any time since January 1, 1999, and, to the knowledge of CTC, there is no basis for any such claim. As to each matter described on Schedule 3.20, accurate and complete copies of all pertinent pleadings, Judgments, orders, correspondence and other legal documents have been made available to NCO. 3.21. Insurance. Schedule 3.21 is an accurate and complete list of all Insurance Policies (excluding Insurance Policies that constitute CTC's Employee Benefit Plans described 22 on Schedule 3.17) owned or maintained by any of the Acquired Companies and/or any of their predecessors at any time since January 1, 2000. Except as indicated on Schedule 3.21, all such Insurance Policies are or were on an "occurrence" rather than a "claims made" basis. None of the Acquired Companies has received written or oral notice of cancellation with respect to any such current Insurance Policy, and, to the knowledge of CTC, there is no basis for the insurer thereunder to terminate any such current Insurance Policy. Except as indicated on Schedule 3.21, accurate and complete copies of all Insurance Policies described on Schedule 3.21 have been made available to NCO. Each such Insurance Policy is or was in full force and effect during the period(s) of coverage indicated on Schedule 3.21. Except as described on Schedule 3.21, there are no claims that are pending under any of the Insurance Policies described on Schedule 3.21. 3.22. Questionable Payments. Except as set forth on Schedule 3.22, none of the Acquired Companies or, to the knowledge of CTC, none of the current or former partners, owners, shareholders, members, directors, executives, officers, representatives, agents or employees of any of the Acquired Companies (when acting in such capacity or otherwise on behalf of any of the Acquired Companies or any of their predecessors), (a) has used or is using any corporate funds (i) for any illegal contributions, gifts, entertainment or other unlawful expenses relating to political activity or, (ii) to the knowledge of CTC, in violation of customer policies and/or rules; (b) has used or is using any corporate funds for any direct or indirect unlawful payments to any foreign or domestic government officials or employees; (c) has violated or is violating any provision of the Foreign Corrupt Practices Act of 1977, (d) has established or maintained, or is maintaining, any unlawful or unrecorded fund of corporate monies or other properties; (e) has made at any time since January 1, 1997, any false or fictitious entries on the books and records of any of the Acquired Companies; (f) has made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment of any nature using corporate funds or otherwise on behalf of any of the Acquired Companies; or (g) made any material favor or gift that is not deductible for federal income tax purposes using corporate funds or otherwise on behalf of any of the Acquired Companies. The statements made in that certain Declaration of Joseph K. Rensin dated August 31, 2000 to the Bankruptcy Court are true and correct. 3.23. Related Party Transactions. Except as described on Schedule 3.23 and except for any Contracts listed on Schedule 3.15, there are no real estate leases, personal property leases, loans, portfolio purchases and/or sales, guarantees, Contracts, transactions, understandings or other arrangements of any nature between or among any of the Acquired Companies and any current or former partner, owner, shareholder, member, director, officer or controlling Person of any of the Acquired Companies (or any of their respective predecessors). 3.24. Brokerage Fees. Except as set forth on Schedule 3.24, no Person acting on behalf of any of the Acquired Companies or any of the CTC shareholders is or shall be entitled to any brokerage or finder's fee in connection with the Transactions. 3.25. Investment Company. CTC is not an investment company within the meaning of Section 368(a)(2)(F)(iii)) and (iv) of the Code. 23 3.26. SEC Filings. Except as set forth on Schedule 3.26, CTC has filed all reports, proxy statements, forms and other documents required to be filed with the SEC since January 1, 1999 and prior to the date of this Agreement ("CTC SEC Documents"). As of their respective dates, CTC SEC Documents complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder applicable to such CTC SEC Documents (including Rule 10b-5 under the Exchange Act and the applicable accounting rules and regulations of the SEC). 3.27. Full Disclosure. No representation or warranty made by CTC in this Agreement or pursuant hereto (a) contains any untrue statement of material fact; or (b) omits to state any material fact that is necessary to make the statements made, in light of the circumstances under which they are made, not false or misleading in any respect. The copies of documents attached as Schedules to this Agreement or otherwise delivered to NCO and Portfolio in connection with the Transactions, are accurate and complete, and are not missing any amendments, modifications, correspondence or other related papers which would be material to NCO's or Portfolio's understanding thereof in any respect. There is no fact known to CTC or any of its subsidiaries, that has not been disclosed to NCO in the Schedules to this Agreement or otherwise in writing, that was or is or, so far as either CTC or any of its subsidiaries can reasonably foresee will have, a material adverse effect on any of the Acquired Companies, the business, the Assets or financial condition of any of the Acquired Companies or the ability of CTC to perform its obligations under this Agreement. SECTION 4 Representations of NCO and Portfolio Knowing that CTC relies thereon and except as set forth in the Schedules delivered by NCO and Portfolio to CTC prior to the execution of this Agreement (and subject to Section 6.5 hereof), NCO and Portfolio, jointly and severally, represent and warrant to CTC as of the date of this Agreement and the Closing Date, and covenant with CTC, as set forth below in each provision of this Section 4: 4.1. Organization. Each of NCO, Portfolio and NCOFS is a corporation that is duly organized, validly existing and in good standing under the Laws of the jurisdiction of its respective incorporation. NCO, NCOFS and Portfolio each possess the full corporate power and authority to own its Assets, conduct its business as and where such business is presently conducted, and enter into and perform this Agreement. Each of NCOFS and Portfolio is a wholly-owned subsidiary of NCO and Portfolio has no subsidiaries. 4.2. Agreement. Each of NCO's, Portfolio's and NCOFS's execution, delivery and performance of this Agreement, and its consummation of the Transactions, (a) have been duly authorized by all necessary corporate actions by their respective boards of directors, and shareholders; (b) do not constitute a violation of or default under their respective charters or bylaws; (c) do not constitute a default or breach (immediately or after the giving of notice, passage of time or both) under any Contract to which NCO, Portfolio or NCOFS is a party or by which NCO, Portfolio or NCOFS is bound; (d) do not constitute a violation of any Law or Judgment that is applicable to it or to their respective businesses or Assets, or to the Transactions; (e) do not accelerate or otherwise modify any material Obligation of NCO and 24 Portfolio; and (f) except for the consent of Mellon Bank, N.A., for itself and as administrative agent for the other participating lenders, and except as stated on Schedule 4.2, do not require the Consent of any Person. This Agreement constitutes the valid and legally binding agreement of each of NCO, Portfolio and NCOFS, enforceable against each of them in accordance with its terms. 4.3. SEC Filings. (a) NCO has filed all reports, proxy statements, forms and other documents required to be filed with the SEC since January 1, 1999 and prior to the date of this Agreement ("NCO SEC Documents"). As of their respective dates, NCO SEC Documents complied in all material respects with the requirements of the Securities Act, or the Exchange Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder applicable to such NCO SEC Documents (including Rule 10b-5 under the Exchange Act and the applicable accounting rules and regulations of the SEC). (b) The consolidated financial statements of NCO included in the NCO SEC Documents (i) have been prepared in conformity with GAAP applied on a consistent basis during the periods involved (except as may be indicated in the related notes and schedules thereto) and (ii) fairly present in all material respects the consolidated financial position of NCO and its consolidated subsidiaries as of the dates thereof, and the results of its operations and its cash flows for the periods then ended (subject, in the case of the unaudited statements, to normal year-end audit adjustments, none of which was material and that, in the case of financial statements included therein which reflect an acquisition accounted for as a purchase, the financial statements for the period succeeding the acquisition are presented on a different basis of accounting than the period prior to the acquisition and are not directly comparable). 4.4. Absence of Changes. Except as disclosed in the NCO SEC Documents, since the date of the most recent consolidated balance sheet included in the NCO SEC Documents, there has not been a material adverse change as to NCO and its subsidiaries. 4.5. Authorization for Portfolio Common Stock. NCO and Portfolio will take all necessary corporate action prior to the Closing Date to permit it to issue the number of shares of Portfolio Common Stock required to be issued pursuant to this Agreement. All shares of Portfolio Common Stock issued pursuant to this Agreement will, when issued, be validly issued, fully paid and nonassessable and no Person will have any preemptive right of subscription or purchase in respect thereof. All shares of Portfolio Common Stock issued pursuant to this Agreement will, when issued, be registered or exempt from registration under the Securities Act and the Exchange Act and registered or exempt from registration under any applicable state securities Laws. 4.6. Compliance with Law. The operations of Portfolio, the conduct of the business of Portfolio, as and where such business has been or presently is conducted, and the ownership, possession and use of the assets of Portfolio have complied and currently do comply in all material respects with all applicable Laws. 25 4.7. Full Disclosure. No representation or warranty made by NCO or Portfolio in this Agreement or pursuant hereto (a) contains any untrue statement of material fact; or (b) omits to state any material fact that is necessary to make the statements made, in light of the circumstances under which they are made, not false or misleading in any respect. The copies of documents attached as Schedules to this Agreement or otherwise delivered to CTC by NCO or Portfolio in connection with the Transactions, are accurate and complete, and are not missing any amendments, modifications, correspondence or other related papers which would be pertinent to CTC's understanding thereof in any respect. There is no fact known to NCO or Portfolio that has not been disclosed to CTC in the Schedules to this Agreement or otherwise in writing, that was or is, or so far as either NCO or Portfolio can reasonably foresee will have, a material adverse effect on Portfolio or NCOFS, the business, the Assets or financial condition of either or the ability of NCO, Portfolio or NCOFS to perform their obligations under this Agreement. 4.8. Capital Stock and Ownership. As of the date of this Agreement, the authorized capital stock of Portfolio consists of: 1,000 shares of Portfolio Common Stock, of which 1,000 shares are issued and outstanding, are owned of record and beneficially by NCO and no shares are issued but not outstanding. There are no outstanding options, puts, calls, warrants, subscriptions, stock appreciation rights, phantom stock, or other Contracts or Contract rights relating to the offering, sale, issuance, redemption or disposition of any shares of capital stock, or other securities of, Portfolio. There exists no right of first refusal or other preemptive right with respect to Portfolio, or the stock, business or Assets of Portfolio. 4.9. Financial and Corporate Records. The books and records of Portfolio are and have been prepared and maintained in form and substance adequate for preparing audited financial statements in accordance with GAAP, and such books and records fairly and accurately reflect in all material respects all of the material Assets and Obligations of Portfolio and all material Contracts and other material transactions to which Portfolio is or was a party or by which Portfolio or the business or Assets of Portfolio is or was affected. 4.10. Assets. Schedule 4.10 lists all Assets of Portfolio which are reflected on the "Portfolio June 30, 2000 Balance Sheet" including (a) Cash Assets; (b) Accounts Receivable; (c) other current Assets, itemized by category; (d) Tangible Property, grouped as to type; and (e) Software and Intangibles. Except as set forth on Schedule 4.10, Portfolio has good and valid title to all of its respective Assets which are owned by it and has the right to transfer all rights, title and interest in such Assets, free and clear of any Encumbrance. As of June 30, 2000, except for the Assets listed on Schedule 4.10, no other Assets are necessary to operate the business of Portfolio as it is currently operated. 4.11. Obligations. Schedule 4.11 includes detailed lists of all Obligations of Portfolio which are reflected on the Portfolio June 30, 2000 Balance Sheet, itemized by balance sheet account, including (a) accounts payable, (b) accrued expenses and reserves, (c) deferred revenues, and (d) other current and long-term liabilities. As of the date of this Agreement, Portfolio has no Obligations other than (i) Obligations reflected on the Portfolio June 30, 2000 Balance Sheet, (ii) Obligations set forth on Schedule 4.11, (iii) Obligations under Contracts of the type listed or not required to be listed on Schedule 4.13, provided that as of June 30, 2000, no such Obligation consisted of or resulted from a default under or violation of any such Contract, 26 and (iv) Obligations incurred since June 30, 2000, in the ordinary course, consistent with past practices. Except as described on Schedule 4.11, none of the Obligations of Portfolio are guaranteed by any Person nor, as of the Closing Date, will Portfolio guarantee the Obligations of any Person. 4.12. Operations Since June 30, 2000. From June 30, 2000 to the date of this Agreement, Portfolio has only been operated in the ordinary course of business consistent with past practices. 4.13. Contracts. Schedule 4.13 contains a list that is accurate and complete in all material respects of all of the Contracts which involve either future Obligations of $500,000 or more to which Portfolio is a party or by which Portfolio is bound, or is otherwise material to Portfolio (collectively the "Portfolio Specified Contracts"). A description of each oral Portfolio Specified Contract is included on Schedule 4.13, and a copy of each written Portfolio Specified Contract has been made available to CTC. Except as set forth on Schedule 4.13, with respect to each of the Portfolio Specified Contracts, Portfolio is not in default thereunder nor would it be in default thereunder with the passage of time, the giving of notice, or both. Except as set forth on Schedule 4.13, to the knowledge of NCO, none of the other parties to any Portfolio Specified Contract is in default thereunder or would be in default thereunder with the passage of time, the giving of notice or both. Except as set forth on Schedule 4.13, Portfolio has not given or received any written or oral notice of default or notice of termination with respect to any Portfolio Specified Contract, and each Portfolio Specified Contract is in full force and effect in accordance with its terms. The Portfolio Specified Contracts are all the Contracts necessary and sufficient to operate the business of Portfolio as it is presently conducted. Except as set forth on Schedule 4.13, there are no currently outstanding proposals or offers submitted by Portfolio to any customer, prospect, supplier or other Person which, if accepted, would result in a legally binding Contract of such company involving an amount or commitment exceeding $25,000 in any single case or an aggregate amount or commitment exceeding $150,000 in the aggregate. 4.14. Proceedings and Judgments. Other than routine ordinary course collection related Proceedings, (a) no Proceeding is currently pending or, to the knowledge of NCO or Portfolio, threatened, nor has any Proceeding occurred at any time since January 1, 1999 to which Portfolio is or was a party, or by which Portfolio or any Assets or business of Portfolio is or was affected; (b) no Judgment is currently outstanding, nor has any Judgment been outstanding at any time since January 1, 1999, against Portfolio, or by which Portfolio or any Assets or business of Portfolio is or was affected; and (c) no breach of contract, breach of warranty, tort, negligence, infringement, product liability, discrimination, wrongful discharge or other claim of any nature has been asserted or, to the knowledge of NCO or Portfolio, threatened by or against Portfolio at any time since January 1, 1999, and, to the knowledge of NCO and Portfolio, there is no basis for such claim. 27 SECTION 5 Certain Obligations of CTC Pending Closing 5.1. Conduct of Business. Between the date of this Agreement and the Closing Date or termination of the Agreement, except with the prior written consent of NCO and except as otherwise provided on Schedule 5.1 hereto: (a) Each of the Acquired Companies shall, (i) conduct their respective businesses in the ordinary course consistent with past practice, (ii) not make any material change in their business practices, and (iii) use their reasonable best efforts to preserve their business organization intact, keeping available the services of their current officers, employees, salesmen, agents and representatives, and maintaining the goodwill of their customers, suppliers and other Persons having business relations with the Acquired Companies. (b) Even in the ordinary course of its business consistent with its past practices, none of the Acquired Companies shall, (i) create or assume any Encumbrances upon any of their businesses or Assets, (ii) incur any Obligation, (iii) make any loan or advance (excluding normal recurring compensation, benefits and expense reimbursements due to such Person in their capacities as employees, officers or directors of any of the Acquired Companies in the ordinary course of business consistent with past practices and excluding indebtedness described on Schedule 3.23), (iv) assume, guarantee or otherwise become liable for any Obligation of any other Person, (v) commit for any capital expenditure, (vi) reject any executed Contract, commitment or lease of non- residential real property under Section 365 of the Bankruptcy Code, (vii) purchase, lease, sell, abandon or otherwise acquire or dispose of any business or Assets, (viii) waive any right or cancel any debt or claim, (ix) assume or enter into any Contract other than this Agreement (and any other Contract contemplated herein) or, (x) except for amendments to existing employment agreements which have been approved prior to the date hereof by NCO, increase, or authorize an increase in, the rate of compensation, the compensation or benefits paid or provided to any of their directors, officers, employees, salesmen, agents or representatives, involving, in any single case, an amount exceeding $10,000 or, in the aggregate, an amount exceeding $100,000 or such greater amount as shall have been agreed to by NCO. (c) Except for borrowings under that certain DIP facility with Sunrock Capital Corporation dated June 22, 2000, even in the ordinary course of their business consistent with their past practices except for ordinary operating expenses, none of the Acquired Companies shall, borrow or lend any funds, purchase any goods or services, lease any equipment, incur any debt, Obligation, or enter into any Contract (excluding Customer Contracts and related commitments entered into in the ordinary course of business consistent with past practices) or other transaction involving, in any single case, an amount exceeding $10,000 or, in the aggregate, an amount exceeding $50,000 or such greater amount as shall have been agreed to by NCO. (d) None of the Acquired Companies shall, (i) permit or cause a material breach or material default by them under any of their Contracts, Insurance Policies, licenses or Permits, (ii) adopt or enter into any new Employee Benefit Plan or modify any existing Employee Benefit Plan, (iii) except as permitted by Section 5.6 hereof, participate in any merger, consolidation or reorganization, (iv) begin to engage in any new type of business, (v) acquire the 28 business or any bulk assets of any other Person, (vi) completely or partially liquidate or dissolve, or (vii) terminate any substantial part of their business. (e) Each of the Acquired Companies shall, (i) maintain their Real Property and Tangible Property in working condition and repair, ordinary wear and tear excepted, (ii) maintain their Insurance Policies and Permits in full force and effect or enter into substantially similar replacement policies, (iii) repair, restore or replace any of their material Assets that are damaged, destroyed, lost or stolen, (iv) comply with all applicable Contracts, Permits and Laws, (v) properly file all Tax returns, annual reports and other returns and reports required to be filed by them, and (vi) fully pay when due all Taxes and fees payable by them. (f) Each of the Acquired Companies shall, maintain their corporate existence and good standing in their respective jurisdictions of incorporation and their good standing in each jurisdiction where they are currently qualified as a foreign corporation. None of the Acquired Companies shall amend their certificates of incorporation or bylaws. (g) None of the Acquired Companies shall, redeem, retire or purchase, or create, grant or issue any options, warrants or other Contracts or Contract Rights with respect to, any shares of CTC Stock, or any other capital stock or other securities or interests of the Acquired Companies, or create, grant or issue any stock options, stock appreciation rights, phantom shares or other similar rights. (h) Except with respect to the conversion and/or exercise of currently outstanding warrants and/or stock options, CTC shall not sell, assign, give, pledge or otherwise transfer, dispose of or encumber any shares of the CTC Stock, or any other capital stock or other securities of CTC owned or held by it. (i) The Acquired Companies shall not enter into any Contract that commits it to take any action or omit to take any action that would be inconsistent with any of the provisions of this Section 5.1 or any other provisions of this Agreement or the Plan. 5.2. Interim Financial Statements. For each calendar month that ends between June 30, 2000 and the Closing Date, CTC shall, promptly prepare and deliver to NCO monthly financial statements consistent with past practice. 5.3. NCO's Due Diligence Investigation. Between the date of this Agreement and the Closing Date, the Acquired Companies shall (a) upon reasonable prior notice to CTC, permit NCO and its authorized representatives to have reasonable access to the Acquired Companies' facilities and offices during normal business hours, to observe the Acquired Companies' operations, to meet with the Acquired Companies' officers and employees, and to audit, examine and copy the Acquired Companies' files, books and records and other documents and papers at Portfolio's expense, and (b) provide to NCO and its authorized representatives all information concerning the Acquired Companies' business, Assets and financial condition and the CTC Common Stock that NCO reasonably requests. All such information to which NCO and its representations are given access shall be subject to the Confidentiality Agreement between CTC and NCO dated as of June 28, 2000 (the "Confidentiality Agreement"). 29 5.4. Consents. Between the date of this Agreement and the Closing Date, each of the Acquired Companies shall in good faith use their best efforts to obtain all Consents and approvals of all lenders, lessors, vendors, customers and other Persons necessary to permit the Merger and the other Transactions to be consummated without violating any loan agreement, lease or other material Contract to which any of the Acquired Companies is a party or by which any of the Acquired Companies is bound, and to give the notices and make the filings described on Schedule 3.2. 5.5. Bankruptcy Court Approval. (a) Promptly after the date hereof, CTC shall file the Plan of Reorganization with the Bankruptcy Court in the form of Exhibit B hereto (the "POR") seeking, among other things, the entry of an order of the Bankruptcy Court (the "Bankruptcy Court Order") that authorizes the Merger and the related transactions contemplated by this Agreement and confirmation of the POR. The Bankruptcy Court Order and the POR must be in form and substance satisfactory to NCO; provided, however, that CTC may make non-material changes to the POR without the consent of NCO. Notwithstanding the foregoing and without limiting the foregoing materiality standard contained herein, CTC agrees that each of the following changes to the POR (and the Bankruptcy Court Order to the extent the same effectuates a change in the POR) shall be subject to the prior written approval of NCO: (i) any increases in the payments or distributions to be received by unsecured creditors or equity holders; (ii) any changes to any of the release provisions contained in the POR; (iii) the addition of any class of claims or equity interests, deletion of any class of claims or equity interests or the reclassification of an equity interest or claim; (iv) the assumption or rejection of executory contracts; (v) any changes to the conditions to the Effective Date of the POR or any deadlines relating to the entry of any orders, Confirmation Date or Effective Date under the POR; (vi) any change to the POR which would make the same inconsistent with the terms and provisions of this Agreement; (vii) any material change to the treatment or classification of the beneficiaries under the Litigation Trust; (viii) any changes affecting the Services Agreement or the ability to assume any existing servicing agreements and assignment of the same to NCOFS; or (ix) the treatment of the Secured Claim of Sunrock. Items (i) - (ix) above shall in no way be deemed a limitation on the "materiality" provision contained herein and NCO reserves its rights as to any other changes and as to whether the same are material. (b) Promptly after the filing of the POR, CTC shall use its best efforts to obtain a hearing thereon to approve the Disclosure Statement for the POR and confirmation of the POR at the earliest permissible date after expiration of the applicable notice period. Upon obtaining a hearing date, CTC shall give notice of the POR and the hearing thereon as and when required by applicable provisions of the Bankruptcy Laws and orders of the Bankruptcy Court. CTC shall promptly deliver to NCO copies of all such notices and shall notify NCO of any and all objections to or Bankruptcy Pleadings relating to the POR promptly after CTC's receipt or learning thereof and provide NCO with copies thereof. CTC shall use its best efforts to obtain the prompt entry of the Bankruptcy Court Order. 30 5.6. Acquisition Proposals. Between the date of this Agreement and the Closing Date, neither CTC, nor any officer, employee, representative or agent of any of the Acquired Companies shall, directly or indirectly, solicit, initiate, encourage or respond to any inquiries or proposals from, or participate in any discussions or negotiations with, or provide any non-public information to, any Person or group (other than NCO and its officers, employees, representatives and agents) concerning any bulk sale of any of the Assets of the Acquired Companies (other than with respect to the conversion and/or exercise of currently outstanding warrants and/or stock options), any sale of shares of capital stock or other securities of any of the Acquired Companies (other than with respect to the conversion and/or exercise of currently outstanding warrants and/or stock options), or any merger, consolidation or similar transaction involving any of the Acquired Companies (any of the foregoing is referred to herein as an "Acquisition Proposal"). CTC shall immediately advise NCO of, and communicate to NCO the terms of, any such inquiry or proposal received by any of the Acquired Companies. Notwithstanding the foregoing, nothing contained in this Agreement shall prevent CTC or its Board of Directors from (a) seeking exit financing in connection with a "stand-alone" plan of reorganization so long as CTC or its Board of Directors does not proceed with such plan until this Agreement has been terminated in accordance with Section 11.1 hereof (b) complying with Rule 14e-2 promulgated under the Exchange Act with regard to an Acquisition Proposal, (c) engaging in any discussions or negotiations with or providing any information to any Person in response to an unsolicited bona fide written Acquisition Proposal by any such Person, or (d) recommending such an unsolicited bona fide written Acquisition Proposal under Bankruptcy Law if, and only to the extent that, with respect to the actions referred to in clauses (c) or (d): (i) its Board of Directors concludes in good faith (after consultation with its outside legal counsel and its financial advisor) that taking such Acquisition Proposal is reasonably capable of being completed, taking into account all legal, financial, regulatory and other aspects of the Acquisition Proposal and the Person making the Acquisition Proposal, and would if consummated result in a transaction more favorable to its shareholders from a financial point of view than the Transactions (any such Acquisition Proposal being referred to herein as a "Superior Proposal"); (ii) its Board of Directors determines in good faith after consultation with outside legal counsel that such action is necessary for the Board of Directors to comply with its fiduciary duty to its shareholders under applicable Law; and (iii) prior to providing any information or date to any Person in connection with a Superior Proposal by such Person, its Board of Directors shall have received from such Person an executed confidentiality agreement on terms substantially similar to those contained in the Confidentiality Agreement. 5.7. Advice of Changes. Between the date of this Agreement and the Closing Date, CTC shall promptly advise NCO, in writing, of any fact of which any of them obtains knowledge and that, if existing or known as of the date of this Agreement, would have been required to be set forth or disclosed in or pursuant to this Agreement (it being understood that such advice shall not be deemed to modify the representations, warranties and covenants of CTC contained in this Agreement). For purposes of determining the accuracy of representations and warranties of CTC contained in this Agreement for the purpose of determining the fulfillment of the condition set forth in Section 9, the Schedules delivered by CTC shall be deemed to include only that information contained therein on the date of this Agreement and such additional information related to such actions that the Acquired Companies are permitted or authorized to take pursuant to Section 5.1 hereof, and shall be deemed to exclude any information contained in any 31 subsequent supplement or amendment thereto (except to the extent such information relates to actions permitted or authorized under Section 5.1 hereof). 5.8. Best Efforts. CTC shall use its best efforts to consummate the Merger, the POR and the other Transactions as of the earliest practicable date. Subject to Section 5.6, CTC shall not take, or cause to be taken, or to the best of its ability permit to be taken, any action that would impair the prospect of completing the Merger and the other Transactions. 5.9. Hart-Scott-Rodino. CTC shall promptly make or cause to be made the required filings by it under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), regarding the Merger and shall provide a copy thereof to NCO. CTC will coordinate and cooperate with NCO in exchanging such information, and will provide such reasonable assistance as NCO may request, in connection with the filings by NCO and Portfolio under the HSR Act. CTC will supply NCO with copies of all correspondence, filings or communications (or memoranda setting forth the substance thereof) that it or its representatives receive in connection with its HSR Act filing. 5.10. SEC Reports. Between the date of this Agreement and the Closing Date, CTC shall file all reports and other filings required to be filed by it under the Exchange Act (including all required reports and other filings not filed as of the date hereof), and CTC shall deliver to NCO, promptly after they become available, all registration statements, proxy statements, reports and other filings, and all amendments thereto, that CTC files with the SEC. SECTION 6 Certain Obligations of NCO and Portfolio Pending Closing 6.1. Corporate Status. Between the date of this Agreement and the Closing Date or termination of the Agreement, except with the prior written consent of CTC and except as otherwise provided on Schedule 6.1 attached hereto: (a) NCO, NCOFS and Portfolio each shall maintain their corporate existence and good standing in the Commonwealth of Pennsylvania and the State of Delaware, as the case may be, and shall not amend their charters or bylaws in any manner that would be inconsistent with its obligations under this Agreement or the Plan. (b) Neither NCO, NCOFS or Portfolio shall not enter into any Contract that commits them to take any action or omit to take any action that would be inconsistent with any of the provisions of this Agreement or the Plan. (c) Portfolio shall (i) conduct its business in the ordinary course consistent with past practice, (ii) not make any material change in its practices, and (iii) use its reasonable best efforts to preserve its business organization intact, keeping available the services of its current officers, employees, salesmen, agents and representatives, and maintaining the goodwill of their customers, suppliers and other Persons having business relations with Portfolio. 6.2. CTC Due Diligence Investigation. Between the date of this Agreement and the Closing Date, NCO and Portfolio shall (and shall cause NCOFS to) (a) upon reasonable prior 32 notice to NCO and Portfolio, permit CTC and its authorized representatives to have reasonable access to Portfolio's and NCOFS's facilities and offices during normal business hours, to observe Portfolio's and NCOFS's operations, to meet with Portfolio's and NCOFS's officers and employees, and to audit, examine and copy Portfolio's files, books and records and other documents and papers at CTC's expense, and (b) provide to CTC and its authorized representatives all information concerning Portfolio's and NCOFS's business, Assets and financial condition and the Portfolio Common Stock that CTC reasonably requests. All such information to which CTC and its representatives are given access shall be subject to the Confidentiality Agreement. 6.3. Consents. Between the date of this Agreement and the Closing Date, NCO and Portfolio shall in good faith use their best efforts to obtain all Consents and approvals of all Persons necessary to permit the Merger and the other Transactions to be consummated, and to give the notices and make the filings, described in Section 4.2. 6.4. SEC Reports. Between the date of this Agreement and the Closing Date, NCO shall file all reports and other filings required to be filed by it under the Exchange Act, and NCO shall deliver to CTC promptly after they become available, all registration statements, proxy statements, reports and other filings, and all amendments thereto, that NCO files with the SEC. 6.5. Advice of Changes. Between the date of this Agreement and the Closing Date, NCO and Portfolio shall promptly advise CTC, in writing, of any fact of which it obtains knowledge and that, if existing or known as of the date of this Agreement, would have been required to be set forth or disclosed pursuant to a representation or warranty in this Agreement (it being understood that such advice shall not be deemed to modify the representations, warranties and covenants of NCO and/or Portfolio contained in this Agreement). For purposes of determining the accuracy of representations and warranties of NCO and Portfolio contained in this Agreement and for the purpose of determining the fulfillment of the conditions set forth in Section 8, the Schedules delivered by NCO and Portfolio shall be deemed to include only that information contained therein on the date of this Agreement and such additional information related to such actions that Portfolio is permitted or authorized to take pursuant to Section 6.1 hereof, and shall be deemed to exclude any information contained in any subsequent supplement or amendment thereto (except to the extent such information relates to actions permitted or authorized under Section 6.1 hereof). 6.6. Best Efforts. NCO and Portfolio shall use their best efforts to consummate the Merger, the POR and the other Transactions as of the earliest practicable date (including amending the Articles of Incorporation of Portfolio to allow for the issuance of Surviving Corporation Common Stock as set forth in Section 2 hereof), and neither NCO nor Portfolio shall take, or cause to be taken, or to the best of their ability permit to be taken, any action that would impair the prospect of completing the Merger and the other Transactions. 6.7. Hart-Scott-Rodino. NCO and Portfolio shall promptly make or cause to be made (at its own expense) the required filings by it under the HSR Act regarding the Merger. NCO will coordinate and cooperate with CTC in exchanging such information, and will provide such reasonable assistance as CTC may request, in connection with the filings by CTC under the 33 HSR Act. NCO will supply CTC with copies of all correspondence, filings or communications (or memoranda setting forth the substance thereof) that it or its representatives receive in connection with its HSR Act filing. 6.8. NASDAQ Listing. NCO shall (with the full cooperation and assistance of CTC) use its reasonable best efforts to cause the shares of Portfolio Common Stock to be issued in the Merger to be listed on the NASDAQ National Market System subject to notice of official issuance thereof. 6.9. Employee Benefits. Following the Effective Date, NCO shall cause the Surviving Corporation to provide benefits to such employees which are comparable to those provided to similarly situated employees of NCO from time-to-time. 6.10. Purchase of CTC Call Center. NCO shall cause NCOFS to (and NCOFS shall) (i) purchase all non-leased assets (i.e., excluding, however, the items ---- set forth in 4.3 of the Plan) of the Call Center Operations of CTC (the "Call Center") for a cash purchase price equal to the net book value of the Call Center assets and liabilities but not less than $1 million, (ii) assume or enter into a new agreement with the landlord for the lease of the 1705 Whitehead Road facility of CTC and/or such other real or personal property leases which may include those set forth in 4.3 of the Plan, all as mutually agreed to by CTC and NCO, and (iii) assume the obligations of CTC relating to the Call Center employees as of the Closing Date (but excluding any WARN Act claims or similar claims of any state, city, municipality relating to the termination of employees), in each case prior to or at the Closing. 6.11. Portfolio Net Book Value. As of the Closing Date, NCO shall cause the net book value of Portfolio to be $25 million consisting of portfolio receivables with a net book value of at least $15 million and cash equal to the difference between $25 million and the net book value of such portfolio receivables; provided, however, in no event will Portfolio's assets immediately after the Closing Date consist of less than $10 million cash inclusive of the cash put into Portfolio under Section 6.10 hereof, and (i) to the extent such cash is less than $10 million, NCO shall have agreed to make cash available to the Surviving Corporation to cover such shortfall which may include a loan from NCO and (ii) to the extent the net book value of Portfolio exceeds $25 million, as of the Closing Date, any such excess shall be either paid to NCO in cash at Closing or, if sufficient cash is not then available, paid to NCOG pursuant to a mutually agreed upon interest bearing six month promissory note. SECTION 7 Additional Covenants of the Parties 7.1. Disclosure Statement. (a) As promptly as practicable following the date of this Agreement, NCO and CTC shall prepare the Disclosure Statement (such Disclosure Statement, together with any amendments thereof or supplements thereto, in each case in the form or forms mailed to CTC's shareholders, is herein called the "Disclosure Statement"). CTC will (i) promptly after the Disclosure Statement is cleared by the Bankruptcy Court mail the Disclosure Statement to its shareholders; (ii) use its best efforts to obtain the necessary approvals of the Merger and POR 34 and (iii) otherwise comply with all legal requirements applicable to the approval of the POR. CTC agrees to provide NCO with all comments or correspondence received from the Bankruptcy Court as to the Disclosure Statement and NCO and CTC shall prepare responses to any such comments or correspondence as required to have the Disclosure Statement cleared by the Bankruptcy Court as soon as possible. (b) The Board of Directors of CTC shall recommend approval of the merger of CTC with and in Portfolio in accordance with this Agreement and the POR. 7.2. Tax Free Reorganization. CTC and NCO agree not to take or cause to be taken any actions that would adversely affect the treatment of the Merger as a reorganization within the meaning of Section 368(a) of the Code. SECTION 8 Conditions Precedent to CTC's Closing Obligations Each obligation of CTC to be performed on the Closing Date shall be subject to the satisfaction of each of the conditions stated in this Section 8, except to the extent that such satisfaction is waived by CTC in writing. 8.1. NCO's and Portfolio's Representations. All representations, warranties and certifications made by NCO and/or Portfolio in this Agreement or pursuant hereto shall not have been false or misleading in any material respects, and CTC shall have received a certificate signed by an executive officer of NCO and of Portfolio to that effect. 8.2. NCO's and Portfolio's Performance. All of the terms and conditions of this Agreement to be satisfied or performed by NCO and/or Portfolio on or before the Closing Date (including, but not limited to, the obligations set forth in Section 10.3) shall have been substantially satisfied or performed in all material respects, and CTC shall have received a certificate signed by an executive officer of NCO and of Portfolio to that effect. 8.3. Absence of Proceedings. No Proceeding shall have been instituted (excluding any Proceeding instituted by or on behalf of CTC), no Judgment shall have been issued, and no new Law shall have been enacted, on or before the Closing Date, that seeks to or does prohibit or restrain, or that seeks damages as a result of, the consummation of the Merger or any of the other Transactions. 8.4. Hart-Scott-Rodino. All applicable waiting periods with respect to the Transactions shall have expired under the HSR Act, and neither the Federal Trade Commission nor the Antitrust Division of the Department of Justice shall have (a) required any party to divest itself of any material assets in order to consummate such Transactions, or (b) taken any actions to prohibit the consummation of such Transactions. 8.5. Approval of POR. The POR shall have been duly approved in accordance with applicable Law. 35 8.6. Board Seat. The designee of Joseph K. Rensin (subject to the consent of NCO, such consent not to be unreasonably withheld) for a two-year term shall have been elected to the Board of Directors of the Surviving Corporation, effective as of the Effective Date of the Merger. 8.7. Consulting Agreement. Joseph K. Rensin and Portfolio shall have entered into the Consulting Agreement in the form of Exhibit A. 8.8. Adverse Changes. There shall not have been any material adverse change or material casualty loss affecting Portfolio or its business, Assets or financial condition, between the date of this Agreement and the Closing Date. 8.9. Listing of Portfolio Common Stock. The shares of Portfolio Common Stock issuable in accordance with the Merger shall have been approved for listing on the NASDAQ National Market System, subject to official notice of issuance. 8.10. Tax Opinion. CTC shall have received an opinion of Blank Rome Comisky & McCauley LLP, counsel to NCO, in form and substance reasonably satisfactory to CTC, dated as of the Closing Date, substantially to the effect that on the basis of facts, representations and assumptions set forth in such opinion which are consistent with the state of facts then existing, the Merger will be treated as a reorganization within the meaning of Section 368(a) of the Code, and, accordingly, for United States federal income tax purposes, that: (a) no gain or loss will be recognized by CTC, NCO or Portfolio as a result of the Merger; (b) no gain or loss will be recognized by any shareholder of CTC whose shares (but not options and/or warrants as set forth in Section 2.10 thereof) are exchanged solely for Portfolio Common Stock pursuant to the Merger; (c) the tax basis of Portfolio Common Stock received by a holder of shares in the Merger (but not options and/or warrants as set forth in Section 2.10. thereof) will be the same as the tax basis of the shares surrendered in exchange therefor; and (d) the holding period of the shares of Portfolio Common Stock received by a holder of shares in the Merger (but not options and/or warrants as set forth in Section 2.10 thereof) will include the period during which such shares surrendered in exchange therefor were held, provided that such shares were held as capital assets at the Closing Date. In rendering such opinion, such firm may require and rely upon representations contained in the tax representation letters delivered to it by NCO, Portfolio and CTC, and such other certificates from such other Persons as such firm may reasonably require. Such an opinion may contain such further assumptions and qualifications as are customary in legal opinions concerning federal income taxation. 36 8.11. Purchase of CTC Call Center As of the Closing Date, NCOFS shall have complied with Section 6.10 hereof. 8.12. Portfolio Net Book Value As of the Closing Date, the net book value of Portfolio shall comply with the provisions of Section 6.11. 8.13. Services Agreement. Portfolio and NCOFS shall have entered into the ten-year Services Agreement in the form of Exhibit C to this Agreement (the "Services Agreement"). 8.14. NCO Letter. Except as otherwise required by NCO's financing agreements, CTC shall have received from NCO a letter stating that it will not sell, assign, give, pledge or otherwise transfer or dispose of any of its shares of capital stock or other securities of the Surviving Corporation until 90 days after the Closing Date (the "Affiliate Restriction Period"). 8.15. Credit Facility. A credit facility with aggregate availability of at least $50 million shall have been established for the benefit of the Surviving Corporation, which shall have been arranged by Portfolio on terms reasonably acceptable to CTC; provided that a term sheet with respect to such credit facility shall have been obtained by Portfolio (on terms reasonably acceptable to CTC) by the latter of either (i) December 5, 2000, or (ii) the date the Bankruptcy Court holds the rescheduled hearing on the Third Amended Disclosure Statement dated December 4, 2000, as amended, but in no event later than December 21, 2000. 8.16. Barrist Stock Purchase Agreement. Michael Barrist shall have executed, delivered and performed an agreement with the Surviving Corporation (which agreement shall contain a demand registration right among other rights) whereby he (or his nominee) shall have agreed to purchase 2.667% of Surviving Corporation Common Stock on the Effective Date at a price per share based upon the New Equity Value (as defined in the Plan) for an aggregate purchase price of $2.0 million cash (the "Barrist Stock Purchase Agreement"). 8.17 Rensin Stock Purchase Agreement Joseph Rensin shall have executed, delivered and performed an agreement with the Surviving Corporation (which agreement shall contain a piggyback registration right among other rights) whereby he shall have agreed to purchase 1.333% of Surviving Corporation Common Stock on the Effective Date at a price per share based upon the New Equity Value for an aggregate purchase price of $320,786.44 in cash and relinquishment of his $679,213.56 in claims against CTC (the "Rensin Stock Purchase Agreement"). The Rensin Stock Purchase Agreement shall be subject to adjustment, if any, to the extent contemplated by Section 4.5 of the Plan. SECTION 9 Conditions Precedent to NCO's and Portfolio's Closing Obligations Each obligation of NCO and Portfolio to be performed on the Closing Date shall be subject to the satisfaction of each of the conditions stated in this Section 9, except to the extent that such satisfaction is waived by NCO in writing. 9.1. Rensin Letter. NCO shall have received from Joseph K. Rensin (and to the extent necessary, his Affiliates) a duly signed letter, in form and substance satisfactory to NCO, 37 stating that, other than for estate planning purposes only, he will not sell, assign, give, pledge or otherwise transfer or dispose of any of his capital stock or other securities of the Surviving Corporation until after the Affiliate Restriction Period. 9.2. Approval of POR. The POR shall have been duly approved in accordance with applicable Law and all conditions contained therein shall have been satisfied and/or waived. 9.3. CTC's Representations. All representations, warranties and certifications made by CTC in this Agreement or pursuant hereto shall not have been false or misleading in any material respect, and NCO shall have received a certificate signed by an executive officer of CTC to that effect. 9.4. CTC's Performance. All of the terms and conditions of this Agreement to be satisfied or performed by CTC on or before the Closing Date (including the Obligations set forth in Section 10.2) shall have been substantially satisfied or performed in all material respects, and NCO shall have received a certificate signed by an executive officer of CTC to that effect. 9.5. Absence of Proceedings. No Proceeding shall have been instituted (excluding any such Proceeding initiated by or on behalf of NCO or any of its subsidiaries), no Judgment shall have been issued, and no new Law shall have been enacted, on or before the Closing Date, that seeks to or does prohibit or restrain, or that seeks damages as a result of, the consummation of the Merger or any of the other Transactions. 9.6. Adverse Changes. There shall not have been any material adverse change or material casualty loss affecting any of the Acquired Companies, or their respective businesses, Assets or financial condition, between the date of this Agreement and the Closing Date, and there shall not have been any material adverse change in the financial performance of any of the Acquired Companies between the date of this Agreement and the Closing Date. 9.7. Hart-Scott-Rodino. All applicable waiting periods with respect to the Transactions shall have expired under the HSR Act, and neither the Federal Trade Commission nor the Antitrust Division of the Department of Justice shall have (a) required any party to divest itself of any assets in order to consummate such Transactions, or (b) taken any actions to prohibit the consummation of such Transactions. 9.8. Bankruptcy Court Order The Bankruptcy Court Order shall have been entered by January 31, 2001 and the same is a final non-appealable order as of the Closing Date. 9.9. Confirmation of POR The POR shall have been confirmed by the Bankruptcy Court and not less than 20 days after the date of such confirmation shall have passed. 38 9.10. NCOP Unsecured Obligations As of the Closing Date, NCOP Unsecured Obligations (as defined in Section 4.4(c) of the Plan) shall not exceed $7.315 million dollars (subject to appropriate reduction based on the NCO purchase price valuation of shares to the extent Class 4 Creditors under Section 4.4(E) of the Plan or Seneca or Sunrock elect to receive Surviving Corporation Common Stock). 9.11. Services Agreement. Portfolio and NCOFS shall have entered into the Services Agreement. 9.12. Bridge Lender Waiver and Release The CTC Bridge Lender for CTC Portfolio 99-2 shall have entered into a waiver and release of the Acquired Companies and Portfolio on such terms and conditions as is reasonably satisfactory to NCO and the servicing with respect to Asset Pool 99-2 shall have been assigned to and assumed by NCOFS, and the consummation of the conditions set forth in a certain Term Sheet executed by CTC, NCO and the CTC Bridge Lenders dated November 22, 2000, as amended, shall have occurred. 9.13. CTC Officer and Director Releases All CTC defendants in all class action litigation currently pending shall have entered into general releases (on terms and conditions satisfactory to NCO, in its sole and absolute discretion) to release any and all claims for indemnification against the Surviving Corporation from liabilities not covered by CTC's existing and former D&O insurance policies and the Litigation Trust (as defined in the POR), or alternatively the Bankruptcy Court shall have entered an order to the same effect. 9.14. Residuals. As of the Closing Date and subject to Section 9.15 hereof, NCO shall be satisfied that the assets of the Acquired Companies will include the residuals on all asset pools currently owned by the Acquired Companies (collectively, "the Asset Pools") and the right to service all Asset Pools. 9.15. Asset Pools 99-1, 98-2 and 93-3 Banco Santander. As of the Closing Date, the servicing with respect to Asset Pools 99-1, 98-2 and 99-3 Banco Santander shall have been assigned to and assumed by NCOFS on terms and conditions satisfactory to NCOFS or NCOFS shall be deemed the successive servicer thereto as defined in the relevant indenture and services agreement for each such portfolio. 9.16. Lender Claims. As of the Closing Date, (i) each of CTC's lenders and the trustees of the various Asset Pools currently being serviced by CTC, other than Sunrock, shall have agreed in writing to have their claims against the Acquired Companies limited to the collateral with respect to the debt associated with such Asset Pools and (ii) each such lender shall have agreed in writing that they have no other claims against any of the Acquired Companies other than ordinary post-petition non-bankruptcy expenses, or alternatively the Bankruptcy Court shall have entered an order to the same effect. 9.17. Reserve Balances. As of the Closing Date, with respect to the Asset Pools that are not to be serviced by NCOFS pursuant to the Services Agreement, NCO shall be satisfied that the Surviving Corporation will receive timely reports with respect thereto and, after 39 repayment of all debt associated with such Asset Pool, all reserve balances and any residual payments with respect to such Asset Pools will go to the Surviving Corporation. 9.18. Credit Facility. A credit facility with aggregate availability of at least $50 million shall have been established for the benefit of the Surviving Corporation, which shall have been arranged by Portfolio on terms reasonably acceptable to NCO; provided that a term sheet with respect to such credit facility shall have been obtained by Portfolio (on terms reasonably acceptable to CTC) by the latter of either (i) December 5, 2000, or (ii) the date the Bankruptcy Court holds the rescheduled hearing on the Third Amended Disclosure Statement dated December 4, 2000, as amended, and in no event later than December 21, 2000. 9.19. Purchase of CTC Call Center. As of the Closing Date, CTC shall have complied with Section 6.10 hereof. 9.20. Listing of Portfolio Common Stock. The shares of Portfolio Common Stock issuable in accordance with the Merger shall have been approved for listing on the NASDAQ National Market System, subject to official notice of issuance. 9.21. Consulting Agreement. Joseph K. Rensin and Portfolio shall have entered into the Consulting Agreement in the form of Exhibit "A" hereto. 9.22. Stock Purchase Agreements. Each of the Barrist Stock Purchase Agreements and Rensin Stock Purchase Agreement shall have been executed, delivered and performed in accordance with their terms. 9.23. Class 3 Creditors. NCO, with the consent of CTC, reserves the right to reclassify as an executory contract one or more FF&E Agreements listed in Section 4.3 of the Plan prior to approval of the Disclosure Statement and CTC shall have caused the rejection of such contracts under Article VIII of the Plan." SECTION 10 Closing and Post Closing 10.1. Closing. The closing of the Merger and the other Transactions (the "Closing") shall take place at a mutually agreeable time and place on a date designated by NCO (the "Closing Date"), which shall be no later than the second business day after the satisfaction or waiver of the conditions set forth in Sections 8 and 9. Contemporaneously with the Closing, the parties hereto shall cause this Agreement (if necessary) and properly executed Certificates and/or Articles of Merger conforming to the requirements of the Delaware and Maryland General Corporation Laws (the "Certificates of Merger") to be filed with the proper officers of the States of Delaware and Maryland, and the parties shall take such further actions as may be required by the States of Delaware and Maryland, and any other applicable Law, in connection with consummation of the Merger. The Merger shall take effect at the time such filing is made with the States of Delaware and Maryland or at such later time as may be specified in the Certificates of Merger (the "Effective Time"). 10.2. CTC's Obligations at Closing. At or prior to the Closing, NCO and Portfolio shall have received the following: 40 (a) All instruments or documents necessary to change the names of the individuals who have access to or are authorized to make withdrawals from or dispositions of all bank accounts, other accounts, certificates of deposits, marketable securities, other investments, safe deposit boxes, lock boxes and safes of CTC described on Schedule 3.4 and all keys and combinations to all safe deposit boxes, lock boxes and safes of CTC and other depositories described on Schedule 3.4. (b) A certificate, dated the Closing Date, in form and substance satisfactory to NCO, signed by the Chief Executive Officer, Chief Financial Officer, Chief Informational Officer and General Counsel of CTC, certifying, that (i) all representations and warranties made by CTC in this Agreement are correct in all material respects as of the Closing Date, as if made on and as of the Closing Date, except for changes contemplated or permitted by this Agreement, (ii) all of the terms and conditions of this Agreement to be satisfied or performed by CTC on or before the Closing Date have been substantially satisfied or performed, and (iii) there has not been any material adverse change or material casualty loss affecting any of the Acquired Companies, or their business, Assets or financial condition, between the date of this Agreement and the Closing Date, and there has not been any material adverse change in CTC's financial performance between the date of this Agreement and the Closing Date. (c) Certificates of Merger for the States of Delaware and Maryland, in form and substance, reasonably acceptable to the parties, dated the Closing Date and duly executed by CTC. (d) The signed copies of all Consents listed on Schedule 3.2. (e) All of the original minute books and stock books of the Acquired Companies (including original stock certificates evidencing CTC's 100% ownership of each of the subsidiaries) and duly executed resignations, dated the Closing Date, of all directors and officers of the Acquired Companies other than as specified by NCO. (f) Good standing certificates for CTC, dated no earlier than ten days before the Closing Date, from the State of Maryland and from each other jurisdiction in which it is qualified or registered to do business as a foreign corporation and good standing certificate or equivalent from each of the other Acquired Companies from their respective jurisdiction of incorporation. (g) A certificate of Secretary of CTC as to the incumbency and signatures of the officers of CTC executing this Agreement. (h) Copies of the resolutions duly adopted by the shareholders and board of directors of CTC, authorizing CTC to execute, deliver and perform this Agreement and to consummate the Transactions, certified by an officer of CTC as in full force and effect, without modification or rescission, on and as of the Closing Date. 41 (i) A duly signed letter, from each affiliate of CTC, in form and substance satisfactory to NCO, stating that such affiliate will not sell, assign, give, pledge or otherwise transfer, dispose of such affiliate's shares of CTC or other securities of Portfolio until expiration of the Affiliate Restriction Period (as defined in Section 9.1). (j) A legal opinion of Blank Rome Comisky & McCauley LLP, counsel to NCO, dated as of the Closing Date and addressed to NCO and CTC, to the effect that the Merger will constitute a reorganization within the meaning of Section 368 of the Code (it being understood that, in rendering such opinion, such outside counsel may rely upon tax representation letters being delivered in connection with the Transactions). (k) A legal opinion of Swidler Berlin Shereff, Freedman, LLP, counsel to CTC, as to various corporate and related matters in connection with the Transactions and reasonably acceptable to NCO. (l) All other agreements, certificates, instruments, financial statement certifications, opinions of counsel and documents reasonably requested by NCO in order to fully consummate the Transactions and carry out the purposes and intent of this Agreement and the Plan. 10.3. NCO's and Portfolio's Obligations at Closing. At the Closing, CTC shall have received the following: (a) The Certificates of Merger duly executed by Portfolio. (b) A certificate, dated the Closing Date, in form and substance satisfactory to CTC, signed by the Chief Executive Officer and Chief Financial Officer of NCO, certifying, that (i) all representations and warranties made by NCO and/or Portfolio in this Agreement are correct in all material respects as of the Closing Date, as if made on and as of the Closing Date except for changes contemplated or permitted by this Agreement, (ii) all of the terms and conditions of this Agreement to be satisfied or performed by NCO and/or Portfolio on or before the Closing Date have been substantially satisfied or performed, and (iii) there has not been any material adverse change or material casualty loss affecting Portfolio, or is business, Assets or financial condition, between the date of this Agreement and the Closing Date, and there has not been any material adverse change in Portfolio's financial performance between the date of this Agreement and the Closing Date. (c) Good standing certificates for each of NCO and Portfolio, dated no earlier than ten days before the Closing Date, from the Commonwealth of Pennsylvania and the State of Delaware, as the case may be. (d) Copies of the resolutions duly adopted by the board of directors of NCO and by the board of directors and the sole shareholder of Portfolio, authorizing NCO and Portfolio, respectively, to execute, deliver and perform this Agreement and the Plan and to consummate the Transactions, certified by an officer of NCO or Portfolio, respectively, as in full force and effect, without modification or rescission, on and as of the Closing Date. 42 (e) A certificate of Secretary of each of NCO and Portfolio as to the incumbency and signatures of the officers of NCO and Portfolio executing this Agreement. (f) A legal opinion of Blank Rome Comisky & McCauley LLP, counsel to NCO, dated as of the Closing Date addressed to NCO and CTC, to the effect that the Merger will constitute a reorganization within the meaning of Section 368 of the Code (it being understood that, in rendering such opinion, such outside counsel may rely upon the tax representation letters being delivered in connection with the Transactions). (g) Notice that all applicable waiting periods with respect to the Transactions shall have expired under the HSR Act, and neither the Federal Trade Commission nor the Antitrust Division of the Department of Justice shall have (i) required any party to divest itself of any assets in order to consummate such Transactions, or (ii) taken any actions to prohibit the consummation of such Transactions. (h) The signed copies of the Consents listed on Schedule 4.2. (i) A legal opinion of Blank Rome Comisky & McCauley LLP, counsel to NCO and Portfolio, as to various corporate and related matters in connection with the Transactions and reasonably acceptable to CTC. (j) All other agreements, certificates, instruments, opinions of counsel and documents reasonably requested by CTC in order to fully consummate the Transactions and carry out the purposes and intent of this Agreement. 10.4. Severance Pay. To the extent that any of the following individuals are employed by CTC on the Closing Date but not employed by either the Surviving Corporation and/or NCO (including their respective Affiliates) for a period of at least six months following the Closing Date, and provided such person has not been terminated for cause or voluntarily terminated his employment during such six month period, each shall be entitled to the following severance benefits from either Portfolio or NCOFS, as the case may be, payable in equal monthly payments during the specified period thereof beginning on the date of termination: Name Severance Payment ---- ---------------- Thomas Henning six months Tom Juranich six months Tom Crotty six months William Young three months Stephen McGill three months 43 SECTION 11 Other Provisions 11.1. Termination. At any time before the Closing, whether or not the Merger has been approved by CTC's shareholders, this Agreement may be terminated and the Merger abandoned in accordance with any of the following methods: (a) By the mutual written consents of NCO and CTC, authorized by their respective boards of directors. (b) By written notice from NCO to CTC, or from CTC to NCO, if it becomes certain (for all practical purposes) that any of the conditions to the closing obligations of the party giving such notice cannot be satisfied on or before January 31, 2001, for a reason other than such party's default, and such party is not willing to waive the satisfaction of such condition. (c) By written notice from NCO to CTC, or from CTC to NCO, if the Closing does not occur on or before January 31, 2001 for any reason other than a breach of this Agreement by the party giving such notice. (d) by NCO in the event CTC has breached any representation, warranty or covenant contained in this Agreement in any material respect, NCO has notified CTC of the breach, and the breach has continued without cure for a period of 10 days after the written notice of breach. (e) by CTC in the event NCO or Portfolio has breached any representation, warranty or covenant contained in this Agreement in any material respect, CTC has notified NCO of the breach, and the breach has continued without cure for a period of 10 days after the written notice of breach. (f) by CTC if CTC has received a Superior Proposal, has otherwise complied with the requirements of Section 5.6, and provides NCO with all of the material terms of the Superior Proposal at least two business days in advance of such termination. If this Agreement is terminated by CTC other than pursuant to Sections 11.1(a) or 11.1(e) hereof or by NCO pursuant to Sections 11.1(b) (other than because of the conditions set forth in Section 8.15 and 9.18 hereof having not been satisfied or Joseph K. Rensin having not entered into the Rensin Stock Purchase Agreement or the Consulting Agreement), 11.1(c) or 11.1(d) hereof, within five days of such termination, CTC shall pay NCO the sum of $500,000 (the "Break-Up Fee") in connection with the Transactions in immediately available funds. CTC shall obtain an order from the Bankruptcy Court approving the payment of the Break-Up Fee, which order shall be entered by December 21, 2000. CTC shall keep NCO fully informed of such efforts throughout the pursuit of the same, including providing drafts of motions to NCO prior to the filing of the same and keeping NCO advised in advance of dates and times of the various Bankruptcy Court hearings. If CTC fails to obtain approval of the payment of the Break-Up Fee by December 21, 2000, then NCO may terminate this Agreement. 11.2. Publicity. Unless required by Law or stock exchange regulation, in the opinion of such parties' counsel, none of CTC, NCO or Portfolio shall make any public announcement 44 regarding the Transactions without first consulting with the other. With respect to any announcement that a party is required by Law or stock exchange regulation to issue, such party shall, to the extent possible under the circumstances, review the necessity for the contents of the announcement with the other parties before issuing the announcement. 11.3. Fees and Expenses. Subject to Section 11.1, NCO shall pay all of the fees and expenses incurred by it and/or Portfolio and CTC shall pay all of the fees and expenses incurred by it in negotiating and preparing this Agreement, the Plan and the POR (and all other contracts and documents executed in connection herewith or therewith) and in consummating the Transactions. 11.4. Notices. All notices, consents or other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given when delivered personally or one business day after being sent by a nationally recognized overnight delivery service, postage or delivery charges prepaid. Notices may also be given by prepaid facsimile and shall be effective on the date transmitted if confirmed telephonically immediately thereafter and within 48 hours thereafter by a signed original sent in the manner provided in the preceding sentence. Notices to CTC shall be sent to CTC's address stated on page one of this Agreement to the attention of its Chief Executive Officer and General Counsel, with a copy sent simultaneously to the same address to the attention of its Chief Financial Officer and to Swidler Berlin Shereff Friedman, LLP, 3000 K Street, Washington, DC 20007, Attention: Roger Frankel. Notices to NCO and/or Portfolio shall be sent to NCO's address stated on page one of this Agreement to the attention of its Chief Executive Officer and General Counsel, with a copy sent simultaneously to the same address to the attention of its Chief Financial Officer and to Blank Rome Comisky & McCauley LLP, One Logan Square, Philadelphia, PA 19103-6998, Attention: Lawrence Wiseman. Any party may change its address for notice and the address to which copies must be sent by giving notice of the new addresses to the other parties in accordance with this Section 15.4, provided that any such change of address notice shall not be effective unless and until received. 11.5. Survival of Representations and Covenants. All representations and warranties and covenants made in this Agreement or pursuant hereto shall not survive the Closing Date, the Effective Date and the consummation of the Transactions. 11.6. Interpretation of Representations. Each representation and warranty made in this Agreement or pursuant hereto is independent of all other representations and warranties made by the same parties, whether or not covering related or similar matters, and must be independently and separately satisfied. Exceptions or qualifications to any such representation or warranty shall not be construed as exceptions or qualifications to any other representation or warranty. 11.7. Reliance. Notwithstanding the right of NCO and Portfolio to investigate the businesses, Assets and financial condition of the Acquired Companies, and notwithstanding any knowledge determined or determinable by NCO and Portfolio as a result of such investigation, NCO and Portfolio have the unqualified right to rely upon, and have relied upon, each of the representations and warranties made by CTC in this Agreement or pursuant hereto. 45 Notwithstanding the right of CTC to investigate the businesses, assets and financial condition of NCO and Portfolio, and notwithstanding any knowledge determined or determinable by CTC as a result of such investigation, CTC has the unqualified right to rely upon, and have relied upon, each of the representations and warranties made by NCO and Portfolio in this Agreement or pursuant hereto. 11.8. Entire Understanding. This Agreement, together with the Exhibits and Schedules hereto and the Confidentiality Agreement state the entire understanding among the parties with respect to the subject matter hereof, and supersede all prior oral and written communications and agreements, and all contemporaneous oral communications and agreements, with respect to the subject matter hereof, including without limitation the Old Agreement, the First Amended and Restated Agreement, and the First Amendment, all confidentiality letter agreements and letters of intent previously entered into among some or all of the parties hereto. No amendment or modification of this Agreement shall be effective unless in writing and signed by the party against whom enforcement is sought. 11.9. Parties in Interest. This Agreement shall bind, benefit, and be enforceable by and against CTC, NCO and Portfolio and their respective successors and assigns. No party shall in any manner assign any of its rights or obligations under this Agreement without the express prior written consent of the other parties. Nothing in this Agreement or the Plan is intended to confer, or shall be deemed to confer, any rights or remedies upon any Persons other than the parties hereto and the respective directors of CTC, NCO and Portfolio. 11.10. Waivers. Except as otherwise expressly provided herein, no waiver with respect to this Agreement shall be enforceable unless in writing and signed by the party against whom enforcement is sought. Except as otherwise expressly provided herein, no failure to exercise, delay in exercising, or single or partial exercise of any right, power or remedy by any party, and no course of dealing between or among any of the parties, shall constitute a waiver of, or shall preclude any other or further exercise of, any right, power or remedy. 11.11. Severability. If any provision of this Agreement is construed to be invalid, illegal or unenforceable, then the remaining provisions hereof shall not be affected thereby and shall be enforceable without regard thereto. 11.12. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be an original hereof, and it shall not be necessary in making proof of this Agreement to produce or account for more than one counterpart hereof. 11.13. Section Headings. Section and subsection headings in this Agreement are for convenience of reference only, do not constitute a part of this Agreement, and shall not affect its interpretation. 11.14. References. All words used in this Agreement shall be construed to be of such number and gender as the context requires or permits. 46 11.15. Controlling Law. Except and only to the extent that the corporate law aspects of the Merger are governed by the corporate laws of the State of Delaware. THIS AGREEMENT IS MADE UNDER, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED SOLELY THEREIN, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. 11.16. Jurisdiction and Process. In any action between or among any of the parties, whether arising out of this Agreement or otherwise, (a) each of the parties irrevocably consents to the exclusive jurisdiction and venue of the federal and state courts located in the Commonwealth of Pennsylvania, (b) if any such action is commenced in a state court, then, subject to applicable law, no party shall object to the removal of such action to any federal court located in the Commonwealth of Pennsylvania, (c) each of the parties irrevocably waives the right to trial by jury, and (d) each of the parties irrevocably consents to service of process by first class certified mail, return receipt requested, postage prepaid, to the address at which such party is to receive notice in accordance with Section 11.4, and the prevailing parties shall be entitled to recover their reasonable attorneys' fees and court costs from the other parties. 11.17. No Third-Party Beneficiaries. No provision of this Agreement or the Plan is intended to or shall be construed to grant or confer any right to enforce this Agreement or the Plan, or any remedy for breach of this Agreement or the Plan, to or upon any Person other than the parties hereto, including, but not limited to, any customer, prospect, supplier, employee, contractor, salesman, agent or representative of any of the Acquired Companies. 11.18. Construction. The parties hereto agree that any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not be applied in the construction or interpretation of this Agreement or any agreements delivered in connection with the Transactions. Witness the due execution and delivery hereof as of the date first stated above. CREDITRUST CORPORATION NCO GROUP, INC. By: _____________________________ By ________________________________ Name: _____________________________ Name: ________________________________ Title: _____________________________ Title: ________________________________ NCO PORTFOLIO FUNDING, INC. NCO FINANCIAL SYSTEMS, INC. (for purposes of Section 6.10 hereof only) By: _____________________________ By: ________________________________ Name: _____________________________ Name: ________________________________ Title: _____________________________ Title: ________________________________ 47 EX-2.3 4 0004.txt EXHIBIT 2.3 Exhibit 2.3 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MARYLAND ============================================ : In Re: : : Case No. 00-5-7812-JS CREDITRUST CORPORATION : Chapter 11 : Debtor-in-Possession : ____________________________________________: FIFTH AMENDED DISCLOSURE STATEMENT of CREDITRUST CORPORATION December 21, 2000 APPROVAL OF THIS DISCLOSURE STATEMENT BY THE BANKRUPTCY COURT DOES NOT CONSTITUTE A DETERMINATION BY THE BANKRUPTCY COURT OF THE FAIRNESS OR MERITS OF THE PLAN OF REORGANIZATION DESCRIBED HEREIN OR OF THE ACCURACY OR COMPLETENESS OF THE INFORMATION CONTAINED HEREIN. FIFTH AMENDED DISCLOSURE STATEMENT DATED DECEMBER 21, 2000 Solicitation of Votes on the Plan of Reorganization of CREDITRUST CORPORATION ii - -------------------------------------------------------------------------------- THE VOTING DEADLINE TO ACCEPT OR REJECT THE PLAN OF REORGANIZATION IS 5:00 P.M., EASTERN TIME, ON JANUARY 12, 2001, UNLESS EXTENDED. - -------------------------------------------------------------------------------- HOLDERS OF CLAIMS AGAINST AND EQUITY INTERESTS IN CREDITRUST CORPORATION ARE ENCOURAGED TO READ AND CAREFULLY CONSIDER THE MATTERS DESCRIBED IN THIS DISCLOSURE STATEMENT UNDER "RISK FACTORS" PRIOR TO VOTING ON THE PLAN OF REORGANIZATION DESCRIBED HEREIN (THE "PLAN"). IN MAKING ITS VOTING DECISION, EACH HOLDER MUST RELY ON ITS OWN EXAMINATION OF CREDITRUST CORPORATION AND THE TERMS OF THE PLAN, INCLUDING THE MERITS AND RISKS INVOLVED. HOLDERS SHOULD NOT CONSTRUE THE CONTENTS OF THIS DISCLOSURE STATEMENT AS PROVIDING ANY LEGAL, BUSINESS, FINANCIAL OR TAX ADVICE AND SHOULD CONSULT WITH THEIR OWN ADVISORS. CREDITRUST CORPORATION IS RELYING ON THE EXEMPTION PROVIDED BY SECTION 1145(a)(1) OF THE BANKRUPTCY CODE TO EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND UNDER APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS THE OFFER OF SURVIVING CORPORATION COMMON STOCK WHICH MAY BE DEEMED TO BE MADE PURSUANT TO THE SOLICITATION. THE SURVIVING CORPORATION COMMON STOCK TO BE ISSUED UNDER THIS PLAN WILL NOT HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") UNDER THE SECURITIES ACT OR UNDER ANY STATE SECURITIES OR "BLUE SKY" LAW AND WILL BE ISSUED IN RELIANCE UPON THE EXEMPTION FROM THE SECURITIES ACT AND EQUIVALENT STATE LAW REGISTRATION PROVIDED BY SECTION 1145(a)(1) OF THE BANKRUPTCY CODE. THE SURVIVING CORPORATION COMMON STOCK TO BE ISSUED UNDER THIS PLAN HAS NOT BEEN APPROVED OR DISAPPROVED BY THE COMMISSION OR BY ANY STATE SECURITIES COMMISSION OR SIMILAR PUBLIC, GOVERNMENTAL OR REGULATORY AUTHORITY, AND NEITHER THE COMMISSION NOR ANY SUCH AUTHORITY HAS PASSED UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT OR UPON THE MERITS OF THE PLAN. CERTAIN STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT, INCLUDING PROJECTED FINANCIAL INFORMATION AND OTHER FORWARD-LOOKING STATEMENTS, ARE BASED ON ESTIMATES AND ASSUMPTIONS. THERE CAN BE NO ASSURANCE THAT SUCH STATEMENTS WILL BE REFLECTIVE OF ACTUAL OUTCOMES. FORWARD-LOOKING STATEMENTS ARE PROVIDED IN THIS DISCLOSURE STATEMENT PURSUANT TO THE SAFE HARBOR ESTABLISHED UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND IN RELIANCE UPON THE EXEMPTION PROVIDED iii BY SECTION 1145(a)(1) OF THE BANKRUPTCY CODE, AND SHOULD BE EVALUATED IN THE CONTEXT OF THE ESTIMATES, ASSUMPTIONS, UNCERTAINTIES AND RISKS DESCRIBED HEREIN. iv THE STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT ARE MADE AS OF THE DATE HEREOF UNLESS OTHERWISE SPECIFIED. THE TERMS OF THE PLAN GOVERN IN THE EVENT OF ANY INCONSISTENCY WITH THE SUMMARIES IN THIS DISCLOSURE STATEMENT. THE INFORMATION IN THIS DISCLOSURE STATEMENT IS BEING PROVIDED SOLELY FOR PURPOSES OF VOTING TO ACCEPT OR REJECT THE PLAN OR OBJECTING TO CONFIRMATION. NOTHING IN THIS DISCLOSURE STATEMENT MAY BE USED BY ANY ENTITY FOR ANY OTHER PURPOSE. HOLDERS OF CLAIMS AND EQUITY INTERESTS SHOULD NOT CONSTRUE THE CONTENTS OF THIS DISCLOSURE STATEMENT AS PROVIDING ANY LEGAL, BUSINESS, FINANCIAL OR TAX ADVICE. EACH SUCH HOLDER SHOULD, THEREFORE, CONSULT WITH ITS OWN LEGAL, BUSINESS, FINANCIAL AND TAX ADVISORS AS TO ANY SUCH MATTERS CONCERNING THE SOLICITATION, THE PLAN AND THE TRANSACTIONS CONTEMPLATED THEREBY. v TABLE OF CONTENTS ----------------- I. SUMMARY............................................................................. 1 A. Introductory Explanation................................................... 1 B. Purpose of the Disclosure Statement........................................ 1 C. Overview of the Reorganization............................................. 2 D. Voting Procedures.......................................................... 8 1. Record Date....................................................... 8 2. Classes Entitled to Vote.......................................... 8 E. Brief Explanation of Chapter 11............................................ 9 II. BACKGROUND AND HISTORY OF THE DEBTOR................................................ 11 A. Description of the Debtor and its Operations............................... 11 1. General........................................................... 11 2. Receivables Analysis and Acquisition.............................. 11 3. Receivables Collection............................................ 11 B. Financing the Purchase of Receivables...................................... 12 1. General Description of the Financing.............................. 12 2. Public Equity Offerings........................................... 12 3. Securitizations and Warehouse Facility............................ 12 a. Securitization 1998-1........................................ 12 b. Securitization 1998-2........................................ 12 c. Securitization 99-1.......................................... 13 d. SPV99-2 Financing............................................ 13 e. Warehouse Facility........................................... 13 4. Revolving Line of Credit.......................................... 14 C. Competition................................................................ 14 D. Trademarks and Proprietary Information..................................... 14 E. Government Regulation...................................................... 15 F. Employees.................................................................. 16 G. Events Leading to the Commencement of the Case............................. 16 1. Inability to Secure Additional Financing.......................... 16 2. AGI Lawsuit; AGI's Termination of Servicing....................... 17 3. Actions to Avoid the Filing....................................... 18 H. Downsizing of Debtor and Move from Hunt Valley............................. 18 III. THE DEBTOR'S CHAPTER 11 CASE........................................................ 19 A. Commencement of the Case................................................... 19 B. Nasdaq Suspension of Trading............................................... 19 C. DIP Financing and Use of Cash Collateral................................... 19 D. Official Committee......................................................... 20 E. Employment of Professionals................................................ 20 F. Operational Matters........................................................ 20 1. Rejection of Hunt Valley Lease.................................... 20
vi 2. Additional Time to Assume or Reject Leases............................... 21 3. The Debtor's Current Financial Condition................................. 21 G. Significant Litigation............................................................ 21 1. Creditrust as Plaintiff.................................................. 21 a. Creditrust, et al. v. Enhance Financial Services Group, Inc. et al.. 21 ----- b. Creditrust v. MBNA America Bank, N.A................................ 21 c. Creditrust v. Witt, et al........................................... 22 ----- 2. Creditrust as Defendant.................................................. 22 a. Thomas D. Kelsey v. Creditrust, et al............................... 22 b. Constantine Commercial Construction, Inc. v. Creditrust....................................... 22 c. Bigalke v. Creditrust............................................... 22 d. Hutcherson v. Creditrust............................................ 23 e. Conlon v. Rensin, et al.; Brewington v. Rensin, et al.; Romine v. Rensin, et al.; Tepper v. Rensin, et al.; Graham v. Rensin, et al.; Goldstein v. Rensin, et al....................... 23 f. Martin v. Creditrust, et al.; Harold Harris v. Creditrust, et al.; Jones v. Creditrust, et al.; Charles L. Banks v. Creditrust, et al.; Adolph Harris v. Creditrust; Charles Banks v. Creditrust, et al.; Long v. Creditrust, et al.............. 23 3. Motions to Appoint Chapter 11 Trustee.................................... 24 H. Bar Dates......................................................................... 24 I. Employment Issues................................................................. 24 1. Management............................................................... 24 2. Board of Directors....................................................... 24 IV. THE MERGER................................................................................. 26 A. The Merger Generally.............................................................. 26 B. Conversion of NCOP and Creditrust Common Stock.................................... 27 C. Treatment of Convertible Securities............................................... 28 D. Exchange Procedures............................................................... 29 E. Representations and Warranties.................................................... 29 F. Certain Obligations of the Parties Pending Closing................................ 30 G. Conditions Precedent to the Closing............................................... 31 H. Termination of the Merger Agreement and Breakup Fee............................... 34 I. Servicing Agreement............................................................... 35 J. Independent Contractor Agreement.................................................. 36 K. Tax Considerations Relating to the Merger......................................... 37 1. General.................................................................. 37 2. Treatment of Holders of Creditrust Common Stock.......................... 37 3. Treatment of Convertible Securities...................................... 39 V. GOVERNANCE, MANAGEMENT AND OWNERSHIP OF THE SURVIVING CORPORTION........................... 41 A. Governance and Management......................................................... 41
vii 1. Certificate of Incorporation and Bylaws...................................... 41 2. Board of Directors and Committees............................................ 41 3. Directors and Executive Officers............................................. 42 4. 2000 Stock Option Plan....................................................... 43 5. Employment Agreements........................................................ 44 B. Ownership of Surviving Corporation Common Stock....................................... 45 C. Description of Surviving Corporation Capital Stock.................................... 45 1. Surviving Corporation Common Stock........................................... 46 a. Voting Rights Stock.................................................... 46 b. Dividend Rights Stock.................................................. 46 c. No Preemptive or Other Rights Stock.................................... 46 d. Right to Receive Liquidated Distribution Stock......................... 46 2. Surviving Corporation Preferred Stock........................................ 46 3. Anti-Takeover Provisions..................................................... 47 4. Limitations on Directors' Liabilities and Indemnification.................... 48 5. Transfer Agent and Registrar................................................. 49 D. Comparison of Stockholders' Rights.................................................... 49 1. Stock Preferences............................................................ 49 a. Surviving Corporation Preferred Stock................................... 49 b. Creditrust Preferred Stock.............................................. 49 2. Size and Classification of the Board of Directors............................ 50 a. Surviving Corporation................................................... 50 b. Creditrust.............................................................. 50 3. Removal of Directors......................................................... 50 a. Surviving Corporation................................................... 50 b. Creditrust.............................................................. 50 4. Meeting of Stockholders; Action by Written Consent........................... 51 a. Surviving Corporation................................................... 51 b. Creditrust.............................................................. 51 5. Stockholders Inspection Rights; Stockholder Lists............................ 51 a. Surviving Corporation................................................... 51 b. Creditrust.............................................................. 51 6. Amendment of Governing Documents............................................. 52 a. Surviving Corporation................................................... 52 b. Creditrust.............................................................. 52 7. Power of Board to Oppose Tender Offer and Take-Over Transactions; State Law Protections.................................................................. 53 a. Surviving Corporation................................................... 53 b. Creditrust.............................................................. 53 8. Required Vote for Authorization of Mergers, Consolidate or Sale of Assets.... 55 a. Surviving Corporation................................................... 55 b. Creditrust Corporation.................................................. 56 E. Business of the Surviving Corporation after the Effective Date........................ 56 VI. SUMMARY OF THE PLAN............................................................................ 57
viii A. Classification and Treatment of Claims and Interests.......................... 57 1. Unclassified Claims.................................................. 57 2. Class 1 (Priority Claims)............................................ 57 3. Class 2 (Sunrock Claims)............................................. 58 4. Class 3 (Other Secured Claims)....................................... 58 a. Classification.................................................. 58 b. Impairment and Voting........................................... 59 c. Treatment....................................................... 59 5. Class 4 (Unsecured Claims)........................................... 61 a. Classification.................................................. 61 b. Impairment and Voting........................................... 61 c. Treatment....................................................... 61 6. Class 5 (Rensin Note Claims)......................................... 62 a. Classification................................................... 63 b. Impairment and Voting........................................... 63 c. Treatment....................................................... 63 7. Class 6 (SPV99-2 Noteholders Claims)................................. 63 a. Classification.................................................. 63 b. Impairment and Voting........................................... 63 c. Treatment....................................................... 63 8. Class 7 (AGI)........................................................ 64 a. Classification.................................................. 64 b. Impairment and Voting........................................... 64 c. Treatment....................................................... 64 9. Class 8 (FDCPA Claims)............................................... 64 a. Classification.................................................. 64 b. Impairment and Voting........................................... 65 c. Treatment....................................................... 65 10. Class 9 (Indemnification Claims)..................................... 65 a. Classification.................................................. 65 b. Impairment and Voting........................................... 65 c. Treatment....................................................... 65 11. Class 10 Administrative Convenience Claims........................... 65 a. Classification.................................................. 66 b. Impairment and Voting........................................... 66 c. Treatment....................................................... 66 12. Class 11 Old Equity Interests (Creditrust Common Stock).............. 66 a. Classification.................................................. 66 b. Impairment and Voting........................................... 66 c. Treatment....................................................... 66 13. Special Adjustment................................................... 67 14. Releases............................................................. 68 VII. IMPLEMENTATION OF THE PLAN............................................................. 69 A. Merger........................................................................ 69 B. Purchase of Call Center....................................................... 69
ix C. Corporate Action............................................................... 69 D. Miscellaneous Tax Matters...................................................... 70 E. Regulatory Approval............................................................ 70 VIII. GOING CONCERN VALUATION AND FEASIBILITY................................................. 71 A. Feasibility and Projections.................................................... 71 1. Feasibility........................................................... 71 2. Projected Financial Information....................................... 72 3. Going Concern Valuation............................................... 73 B. Funding (exit financing)....................................................... 75 IX. RISK FACTORS............................................................................ 77 A. Risk Factors and Forward-Looking Statements.................................... 77 B. Certain Bankruptcy Law Considerations.......................................... 77 1. Failure to Satisfy Vote Requirement................................... 77 2. Risk of Non-Occurrence of the Effective Date.......................... 77 C. Risk Factors Affecting the Value of the Surviving Corporation Common Stock to be Issued Under the Plan....................................... 78 1. Ability to Maintain Creditrust's Historic Growth Rate................. 78 2. Substantial Debt...................................................... 78 3. Possible Losses on Consumer Receivables............................... 79 4. Use of Reporting Estimates............................................ 79 5. Possible Shortage of Available Receivables for Purchase............... 80 6. Risks of Securitization Transactions.................................. 80 7. Stock Price Volatility................................................ 80 8. Control by NCOG....................................................... 81 9. Financial Projections................................................. 81 10. Dependence upon NCOG; Potential Conflicts with NCOG................... 82 11. Dependence on Senior Management....................................... 82 12. Restrictions on Cash Dividends........................................ 83 X. SECURITIES LAW MATTERS.................................................................. 84 A. Issuance of Surviving Corporation Common Stock Under the Plan.................. 84 B. Registration Rights............................................................ 84 C. Status of the Surviving Corporation............................................ 85 XI LIQUIDATION ANALYSIS.................................................................... 86 A. Liquidation Under Chapter 7.................................................... 86 B. Liquidation Valuation.......................................................... 86 XII. REQUIREMENTS FOR CONFIRMATION........................................................... 90 A. Bankruptcy Code Requirements................................................... 90 B. Acceptances.................................................................... 90 C. Cramdown....................................................................... 91 XIII. FINANCIAL INFORMATION................................................................... 92
x A. General.......................................................................... 92 B. Selected Financial Data.......................................................... 92 C. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................................................... 92 D. Recent Performance............................................................... 92 XIV. RECOMMENDATION............................................................................ 93 XV. CONCLUSION................................................................................ 93
xi EXHIBITS FOURTH AMENDED PLAN OF REORGANIZATION...................................................... A AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER.......................................... B Selected Exhibits: Joseph K. Rensin Contractor Agreement...(Exhibit A to Merger Agreement) Servicing Agreement.....................(Exhibit C to Merger Agreement) CREDITRUST CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999..... C CREDITRUST CORPORTION QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2000... D PRO FORMA AND PROJECTED FINANCIAL INFORMATION.............................................. E CERTIFICATE OF INCORPORATION OF NCO PORTFOLIO MANAGEMENT, INC.............................. F BYLAWS OF NCO PORTFOLIO MANAGEMENT, INC.................................................... G RECENT FINANCIAL STATISTICS................................................................ H SETTLEMENT AGREEMENT WITH AGI.............................................................. I LETTER AGREEMENT BETWEEN DEBTOR AND FARMERS & MECHANICS BANK, N.A. AGI..................... J ESTIMATE OF CASH AVAILABLE FOR CLASS 4..................................................... K
xii IN THE UNITED STATES BANKRUPTCY FOR THE DISTRICT OF MARYLAND =========================================== : In Re: : : Case No. 00-5-7812-JS CREDITRUST CORPORATION : Chapter 11 : Debtor-in-Possession : - ------------------------------------------- FIFTH AMENDED DISCLOSURE STATEMENT ---------------------------------- I. SUMMARY A. Introductory Explanation Founded in 1991, Creditrust Corporation ("Creditrust" or the "Debtor") is a leading information-based purchaser, collector and manager of defaulted consumer receivables. On June 21, 2000, Creditrust field a voluntary petition under Chapter 11 of the Bankruptcy Code and continues to operate as a Debtor-in- Possession. Creditrust has filed a Fifth Amended Plan of Reorganization, dated December 21, 2000 (the "Plan"), with the United States Bankruptcy Court for the District of Maryland (the "Bankruptcy Court"). Terms capitalized herein and in the Plan that are not otherwise defined herein are defined in the Plan. B. Purpose of the Disclosure Statement The purpose of this Disclosure Statement is to provide creditors, shareholders and other holders of Claims and Equity Interests with sufficient information to make an informed decision as to whether to accept or reject the Plan. All Equity Interest holders and all creditors whose Claims are impaired and who will receive a distribution under the Plan are entitled to vote. THIS DISCLOSURE STATEMENT CONTAINS IMPORTANT INFORMATION ABOUT THE DEBTOR AND THE PLAN THAT MAY BEAR UPON YOUR DECISION TO ACCEPT OR REJECT THE PLAN. PLEASE READ THIS DOCUMENT WITH CARE. The information contained in this Disclosure Statement has been prepared by the Debtor's management unless specifically stated to be derived from other sources. The Debtor's management believes the information contained herein is accurate in all material respects, based upon the Debtor's books and records. On December 21, 2000, after notice and hearing, the Bankruptcy Court entered an order pursuant to section 1125 of the Bankruptcy Code approving this Disclosure Statement (the "Disclosure Statement Order") as containing information of a kind, and in sufficient detail, adequate to enable a hypothetical, reasonable investor, typical of the solicited holders of Claims against and Equity Interests in the Debtor, to make an informed judgment with respect to the acceptance or rejection of the Plan. The Disclosure Statement Order is filed with the Bankruptcy Court, and a copy is being sent to holders of Claims and Equity Interests. Each holder of a Claim or Equity Interest entitled to vote to accept or reject the Plan should read this Disclosure Statement and the Plan in their entirety before voting. The summaries of the Plan and related documents contained in this Disclosure Statement are qualified in their entirety by reference to the Plan itself, the appendices thereto and all documents described therein as being filed with the Bankruptcy Court prior to approval of this Disclosure Statement. The information contained in this Disclosure Statement, including the information regarding the Debtor and its history, businesses and operations; the historical and projected financial information of the Debtor (including the projected results of operations of the Reorganized Creditrust); and the liquidation analysis relating to the Debtor, is included for purposes of soliciting acceptances of the Plan. As to contested matters or any pending litigation, however, such information is not to be construed as admissions or stipulations, but rather as statements made in settlement negotiations. No solicitation of votes to accept or reject the Plan may be made except pursuant to this Disclosure Statement and Section 1125 of the Bankruptcy Code. You should not rely on any information relating to the Debtor, its businesses or the Plan other than that contained in this Disclosure Statement and the exhibits hereto. The delivery of this Disclosure Statement will not under any circumstances imply that the information herein is correct as of any time subsequent to the date hereof. After carefully reviewing this Disclosure Statement, including the attached exhibits, please indicate your acceptance or rejection of the Plan on the particular ballot or ballots enclosed in your package. See Section I.D, --- "Voting Procedures." C. Overview of the Reorganization The Plan effects a reorganization of the Debtor's business. The Plan is premised on a business plan developed by the Debtor's management involving a merger with NCO Portfolio Funding, Inc., a Delaware corporation ("NCOP") pursuant to an Amended and Restated Agreement and Plan of Merger, dated as of September 20, 2000 (as it may be amended by the parties thereto from time to time ("Merger Agreement"), among Creditrust, NCOP and NCO Group, Inc., a Pennsylvania corporation ("NCOG"). A copy of the Merger Agreement is attached as Exhibit B. On the Effective Date, NCOP's name will be changed to NCO Portfolio Management, Inc., and Creditrust will be merged into NCOP (the "Merger"), which will be the surviving corporation (in such capacity, the "Surviving Corporation" or "Reorganized Creditrust"). Most of the Debtor's employees, including the collectors, shall become employees of NCO Financial Systems, Inc. ("NCOF"), a subsidiary of NCOG, which will be the majority owner of the Surviving Corporation. The Merger Agreement provides that, as a condition to completion of the Merger, on the Effective Date, immediately prior to the Merger, NCOP shall have a net book value of $25 million, including at least $10 million of liquidity, with a total cash 2 infusion of $15.55 million (including the Barrist Contribution). For a description of the Merger, see Section IV, "The Merger." IV, "The Merger." --- The following is a brief summary of the treatment of certain Claims and Equity Interests under the Plan. The description of the Plan set forth below constitutes a summary only. All parties in interest are urged to review the more detailed description of the Plan contained in this Disclosure Statement, and the Plan itself, which is attached as Exhibit A to this Disclosure Statement. --------- The Plan provides for the payment in full in Cash of all Administrative Claims on the Effective Date unless otherwise agreed by the Debtor and a holder of such Claim. In addition, pursuant to Section 1129(a)(9)(C) of the Bankruptcy Code, Priority Tax Claims will be paid in cash. See Section VI.A.1, --- "Unclassified Claims." The remaining Claims and Equity Interests in the Debtor are classified in Classes Two through Eleven under the Plan. Unsecured Creditors (i.e., holders of "Allowed Class 4 Claims") will receive Cash Payments to pay such Claims in full on the later of the Effective Date upon such date that a disputed Class 4 Claim becomes an Allowed Claim. Secured Creditors, other than Sunrock Capital Corporation, will be paid in full over time with interest in accordance with the New Equipment Notes to be executed by Reorganized Creditrust. Holders of shares of the common stock of Creditrust, par value $.01 per share (including holders of certain Creditrust stock options and warrants) ("Creditrust Common Stock"), will receive approximately 17.5% (subject to adjustment as provided in the Plan and the Merger Agreement) of the total common stock of the Surviving Corporation, no par value per share ("Surviving Corporation Common Stock"). See --- Section IV.B, "Conversion of NCOP and Creditrust Common Stock," and Section VI.A, "Classification and Treatment of Claims," for a discussion of Equity Interest Holders' distributions under the Plan. The following table provides a summary of the classification and treatment under the Plan of all Claims and Equity Interests. Specifically, the table provides estimates of: (i) the approximate amount of Claims or Equity Interests in each Class that have been asserted; (ii) the amount of Claims or Equity Interests in each Class that the Debtor presently estimates will be Allowed; and (iii) the nature and extent of the distributions to be made under the Plan on account of such Allowed Claims and Equity Interests. Reference should be made to the entire Disclosure Statement and to the Plan for a complete description of the classification and treatment of Claims and Equity Interests. 3 CLASSIFIED CLAIMS AND INTERESTS -------------------------------
Classes of Claims and Equity Interests Treatment of Classes of Claims and Equity Interests _____________________________________________ _______________________________________________ Class 1 Claims (Priority Claims) Unimpaired. Paid in full in Cash on the Asserted Claims: $112,598.00 Effective Date, or paid on other agreed Estimated terms. Allowed Claims: $322,960.41 Estimated Recovery: 100% ____________________________________________ _______________________________________________ Class 2 Claims (Sunrock Claims) Impaired. Sunrock's DIP Loan shall be paid Estimated in full on the Effective Date. Sunrock's Asserted Claims: $15,503,336 Secured Claim shall be paid in full on the Estimated Effective Date or paid in accordance with Allowed Claims: $14,574,610 (as of 1-31-01) Estimated Recovery: 100% ______________________________________________ _______________________________________________ Class 3(i)-(x) Claims (Other Secured Claims) Impaired. Creditors in Class 3 shall be Estimated paid in accordance with the terms of the Asserted Claims: $5,413,135 respective secured financing transactions Estimated to be memorialized in new notes. Each note Allowed Claims: $4,238,551 shall be secured by the collateral assigned to that creditor. Estimated Recovery: 100%
4 _____________________________________________ _________________________________________________ Class 4 Claims (Unsecured Claims - other than Claims of $13,000 or less) Impaired. Each holder of an Allowed Unsecured Claim shall be paid in full in Asserted Claims: $10,263,292.00 cash on the Effective Date, or on such Estimated later date that such Claim becomes allowed. Allowed Claims: $6-8 million Estimated Recovery: 100% _______________________________________________ ________________________________________________ Class 5 (Rensin Note Claim) Impaired. The holder of the Rensin Note Asserted Claims: $679,213.56 Claim shall receive, on the Effective Date, Estimated shares of New Common Stock having a value Allowed Claims: $679,213.56 of $679,213.56 based on the New Equity Value
5 ________________________________________________ ___________________________________________________ Class 6 SPV 99-2 Noteholders Impaired. The Class 6 SPV 99-2 Noteholders Asserted Claims: $38,014,550.13 shall be treated as follows: Estimated Allowed Deficiency Claims: A. The promissory notes evidencing the $18,500,000.00 claims shall be modified as of the Effective Date to provide for a maturity date of December 31, 2004 at a 15% interest rate. On the Effective Date, the SPV 99-2 Noteholders shall receive $5,000,000.00, which shall be applied to reduce the principal balance of the Notes. In addition, in exchange for cancellation of the Guaranty and the warrants issued by Creditrust, and in satisfaction of the Allowed Class 6 Claims, the SPV 99-2 Noteholders shall receive 18.5% of the New Common Stock, which, subject to the conditions in the Term Sheet (defined in Section 4.6(c) of the Plan), shall be held for at least 90 days after the Effective Date. B. The Servicing Agreement between the Debtor and SPV 99-2 shall be modified, assumed and assigned to NCOF at a 20% servicing fee in accordance with the Term Sheet. C. The parties shall exchange mutual releases as set forth in the Term Sheet. Estimated Recovery: 80%-100%
6 ________________________________________________ ___________________________________________________ Class 7 AGI Impaired. AGI shall have an Allowed Claim Asserted Claim: up to $32,700,000.00 in the amount of $4.55 million secured by Estimated certain existing reserves (which shall not Allowed Claim: $4,550,000 be paid on the Effective Date) as described in the AGI Settlement Agreement, payment of which is contingent upon the satisfaction of the terms and conditions set forth in the Settlement Agreement. The Settlement Agreement shall be amended by the parties thereto to be consistent with the Court's ruling of November 28, 2000. All litigation among AGI, the Debtor and related parties will be terminated on the Effective Date. Notwithstanding the terms of the AGI Settlement Agreement, the release of Rensin by Creditrust and of Creditrust by Rensin shall be governed by the terms of the Plan. ________________________________________________ Class 8 FDCPA Claims Estimated Recovery: 100%. __________________________________ Asserted Claims: $9,894,000.00 Estimated Impaired. The Class 8 Claimants shall Allowed Claims: $0 receive no distributions from the Debtor and to the extent allowed shall look solely to the Debtor's former and existing professional insurance policies for payment of such Claims. Estimated Recovery: unknown. ________________________________________________ Class 9 Indemnification Claims Impaired. Holders of Class 9 Claims shall Asserted Claims: Unknown receive no distributions under Plan, but Estimated shall benefit from the Litigation Trust and Allowed Claims: $0 existing and former Creditrust D&O insurance policies. Estimated Recovery: unknown.
7 ________________________________________________ ___________________________________________________ Class 10 Administrative Convenience Claims (Unsecured Claims of $13,000 or less) Impaired. Each holder of an Administrative Convenience Claim shall Asserted Claims: $382,360.00 receive payment in full on the later of the Estimated Effective Date or the date on which such Allowed Claims: $292,016.07 claim becomes an Allowed Claim. Estimated Recovery: 100% ________________________________________________ ___________________________________________________ Class 11 Old Equity Interests Impaired. Each holder shall receive a pro rata share of approximately 17.5% of the New Common Stock, subject to adjustment in accordance with the terms of the Plan and the Merger Agreement
D. Voting Procedures 1. Record Date The date of entry of the Disclosure Statement Order will be considered the record date for all Claims against the Debtor for voting purposes. June 21, 2000 shall be the record date for holders of Equity Interests. Entities holding Claims or Equity Interests transferred after such dates will not be permitted to vote to accept or reject the Plan. 2. Classes Entitled to Vote Pursuant to the Bankruptcy Code, only Classes of Claims or Equity Interests that are "impaired" (as defined in Section 1124 of the Bankruptcy Code) under the Plan are entitled to vote to accept or reject the Plan. Classes of Claims or Equity Interests that are not impaired are not entitled to vote on the Plan and are treated as having accepted the Plan. The classification of Claims and Equity Interests under the Plan is set forth, together with notations as to whether each Class of Claims or Equity Interests is impaired or unimpaired, in the table above and in Section V.A, "Classification and Treatment of Claims and Interests." The Bankruptcy Court may estimate and allow a disputed, unliquidated or contingent Claim for the purpose of voting on the Plan. Any party in interest may seek an order of the Bankruptcy Court temporarily allowing, for voting purposes, a Disputed Claim. If you are entitled to vote on the Plan, you should have received a ballot with this Disclosure Statement. Please use only the ballot that accompanies this Disclosure Statement. If you did not receive a ballot or if you have any questions about voting, please contact: 8 Debra O. Fullem, Senior Legal Assistant Swidler Berlin Shereff Friedman, LLP Attorneys for Debtor 3000 K Street, N.W., Suite 300 Washington, D.C. 20007 (202) 424-7500 (202) 424-7645 (fax) IT IS IMPORTANT THAT CREDITORS AND EQUITY INTEREST HOLDERS EXERCISE THEIR RIGHT TO VOTE TO ACCEPT OR REJECT THE PLAN. PRIOR TO VOTING, CREDITORS AND EQUITY INTEREST HOLDERS ARE ENCOURAGED TO READ AND CONSIDER CAREFULLY THIS ENTIRE DISCLOSURE STATEMENT, INCLUDING THE PLAN OF REORGANIZATION ATTACHED HERETO AS EXHIBIT A AND THE MATTERS DESCRIBED IN THIS DISCLOSURE STATEMENT UNDER "RISK FACTORS." Creditors and Equity Interest holders should read the ballot carefully and follow the instructions contained therein. Incomplete, improperly completed or unsigned ballots might not be counted, so please follow the instructions carefully. After filling out the ballot completely, please sign ---------------------------------------------------- the ballot and return it to the address above. - --------------------------------------------- IF YOU HOLD CLAIMS OR INTERESTS IN MORE THAN ONE CLASS, YOU MAY RECEIVE MORE THAN ONE BALLOT. YOU SHOULD COMPLETE, SIGN AND RETURN EACH OF THE BALLOTS THAT YOU RECEIVE. TO BE COUNTED, YOUR BALLOT MUST BE ACTUALLY RECEIVED BY 5:00 P.M., EASTERN STANDARD TIME, ON JANUARY 12, 2001 AT THE ABOVE ADDRESS. IT IS OF THE UTMOST IMPORTANCE TO THE DEBTOR THAT YOU VOTE PROMPTLY TO ACCEPT OR REJECT THE PLAN. Votes cannot be transmitted orally or by facsimile. Accordingly, you are urged to return your completed and signed ballot promptly. E. Brief Explanation of Chapter 11 Chapter 11 is the principal business reorganization chapter of the Bankruptcy Code. Pursuant to Chapter 11, a debtor-in-possession is authorized to reorganize its business for the benefit of its creditors and its shareholders. Pursuant to Chapter 7 of the Bankruptcy Code, a debtor may also choose to liquidate its assets. Chapter 11 authorizes a debtor to continue operating its business and remain in possession of its property as a "debtor-in-possession" during the pendency of its bankruptcy case unless the Bankruptcy Court orders the appointment of a trustee. The Debtor in this case has remained in possession of its property, often referred to as its Bankruptcy Estate, and continues to operate its business as a Debtor-in-Possession. 9 The filing of a Chapter 11 petition also triggers the automatic injunction ("Automatic Stay") provisions of the Bankruptcy Code. The Automatic Stay prevents attempts to collect on pre-petition claims from the debtor or otherwise interfere with its property or business. In Chapter 11 cases, the Automatic Stay remains in full force and effect until the effective date of a confirmed plan of reorganization, unless the Bankruptcy Court specifically orders otherwise. Formulation of a plan of reorganization is the primary purpose of the Chapter 11 reorganization case. The plan is a vehicle for financially restructuring a debtor to create a viable entity while treating the holders of claims against and interests in that debtor in accordance with the requirements of the Bankruptcy Code. Unless a trustee is appointed or the Bankruptcy Court otherwise orders, a debtor has the exclusive right to file a plan during the first 120 days of the Chapter 11 case. The Bankruptcy Court may shorten or extend the 120-day period. In this case, as part of the Order authorizing Debtor-in-Possession financing, the Debtor stipulated that the exclusivity period was waived only as to the Creditors' Committee. If the Debtor files its plan during the first 120 days of a Chapter 11 case, it may solicit acceptances of a plan for the first 180 days, unless the Bankruptcy Court extends the solicitation period. In this case, as a result of the Plan being filed on October 5, 2000 the Debtor's exclusive solicitation period has been extended to December 18, 2000, except as to the Creditors' Committee, and the Debtor currently has pending before the Court a request for a further extension in order to solicit votes for its Plan. 10 II. BACKGROUND AND HISTORY OF THE DEBTOR A. Description of the Debtor and its Operations 1. General The Debtor was incorporated in Maryland on October 17, 1991. The Debtor is a leading information-based purchaser, collector and manager of defaulted consumer receivables. Defaulted consumer receivables are the unpaid debts of individuals to credit grantors, including banks, finance companies, retail merchants and other service providers. Creditrust uses its software systems and its information databases to generate collections of purchased, defaulted receivables. Most of the Debtor's receivables are VISA(R) and MasterCard(R) credit card accounts that the issuing banks have charged off their books for non-payment. Since its founding in 1991 through June 30, 2000, Creditrust has invested $215.0 million to purchase receivables at a significant discount. As of March 31, 2000, the Debtor managed over two million accounts with a charged-off amount of over $4.9 billion. 2. Receivables Analysis and Acquisition Creditrust purchases defaulted consumer receivables that have been incurred through VISA(R), MasterCard(R), private label credit cards and unsecured consumer loans issued by credit grantors, including banks, finance companies, retail merchants and other service providers. The receivables typically are charged-off by the credit grantors after a default-period of 180 days. From the time of purchase, Creditrust has found that the average portfolio of receivables has an estimated economic life of at least 60 months. Creditrust purchases portfolios of receivables at a discount from their charged-off amount, typically the aggregate unpaid balance at the time of charge-off by the credit grantors. Generally, there is an inverse correlation between purchase price and the perceived effort necessary to recover the receivables. Some credit grantors pursue an auction type sales approach by constructing a portfolio of receivables and seeking bids from competing parties invited to submit bids. Other means of purchasing receivables include privately negotiated, direct sales between credit grantors and reputable purchasers. Credit grantors have also entered into "forward flow" contracts that provide for a credit grantor to sell some or all of its receivables over a period of time to a single third party on the terms specified in a contract. 3. Receivables Collection Creditrust's Recovery Department is responsible for recovering account balances and providing customer service to its customers. The Recovery Department, unlike a traditional "collections shop," uses a friendly, customer- focused approach to collect on receivables. Instead of simply calling about an old bill, Creditrust's employees work to maximize yield while minimizing customer negativity and maintaining a positive working environment. The Debtor also utilizes technology to improve efficiency within its Recovery Department, specifically a proprietary program called Mozart that manages the workflow and reporting associated within its Recovery Department. 11 B. Financing the Purchase of Receivables 1. General Description of the Financing The Debtor has historically funded its receivables purchases and the expansion of its business through a combination of credit facilities, public and private equity funding and asset-backed securitizations. 2. Public Equity Offerings The Debtor consummated two public offerings of shares of its common stock. The first of these commenced on July 29, 1998, and netted proceeds of approximately $27.3 million, after deducting underwriting discounts and commissions and estimated offering expenses, from the sale of 2,000,000 shares of Creditrust Common Stock. The Debtor used a portion of the net proceeds from the sale of the common stock to repay debt. The remaining net proceeds of the offering were used primarily to acquire receivables and for working capital. The Debtor's second common stock offering commenced on March 19, 1999, and netted proceeds of approximately $42.5 million, after deducting underwriting discounts and commissions and offering expenses, from the sale of 2,400,000 shares of Creditrust Common Stock. The net proceeds of the offering were used for expansion of the business and for working capital and general corporate purposes, including purchasing additional receivables. In addition, the Debtor used a portion of the net proceeds to repay outstanding indebtedness under its credit facilities. 3. Securitizations and Warehouse Facility This section describes various securitizations and other facilities that were created by Creditrust during the period from June of 1998 through 1999. Generally, the securitizations were created through wholly-owned finance subsidiaries that issued notes to institutional investors. Unless otherwise indicated below, these securitizations and the notes issued by the special purpose subsidiaries are without recourse to or guarantee by the Debtor. a. Securitization 1998-1 In June 1998, the Debtor completed its first securitization of finance receivables (the "Initial Securitization"). The Initial Securitization included receivables owned by the Debtor with a charged-off amount of $412 million and a carrying value of $4.8 million as well as $6.5 million of receivables Creditrust was servicing for a third party with a charged-off amount of $692 million. These receivables were transferred to Creditrust SPV2, LLC ("SPV2"), a special purpose finance subsidiary. SPV2 issued an aggregate principal amount of $14.5 million of 6.43% Creditrust Receivables-Backed Notes, Series 1998-1, which notes were secured by the receivables transferred to SPV2 and insured by a financial guaranty insurance policy issued by AGI. These notes were paid in full on August 10, 2000. b. Securitization 1998-2 12 The Debtor completed its second securitization in December 1998 (the "Second Securitization"). The Second Securitization included receivables with a charged-off amount of $956 million and a carrying value of $28.6 million. The Debtor transferred the receivables to Creditrust SPV98-2, LLC ("SPV98-2"), a special purpose finance subsidiary. SPV98-2 issued an aggregate principal amount of $27.5 million of 8.61% Creditrust Receivables-Backed Notes, Series 1998-2, which notes are secured by the receivables transferred to SPV98-2 and insured by a financial guaranty insurance policy from AGI. In accordance with the December, 1999 amendments, a transfer of servicing from the Debtor to a successor servicer was effected in on April 1, 2000, however, until May 2000 the Debtor continued to service these accounts. c. Securitization 99-1 In August 1999, the Debtor completed its third securitization of finance receivables (the "Third Securitization"). The Third Securitization included receivables with a charged-off amount of $1.1 billion and a carrying value of $89 million. The Debtor transferred the receivables to Creditrust SPV99-1, LLC ("SPV99-1"), a special purpose finance subsidiary. SPV99-1 issued an aggregate principal amount of $40 million of 9.43% Creditrust Receivable - Backed Notes, Series 1999-1, which are secured by the receivables transferred to SPV99-1. A notice of termination of servicing was delivered to the Debtor subsequent to the delivery of a Notice of Servicer Cross Default dated April 12, 1999. d. SPV99-2 Financing In August 1999, the Debtor entered into a $40.0 million interim credit facility to fund purchases of additional portfolios of defaulted receivables (the "SPV99-2 Financing"). Under this arrangement, Creditrust SPV99-2, LLC (Series 1999-2) ("SPV 99-2"), a newly formed, special purpose subsidiary issued secured, interim short-term notes in a private placement to institutional investors, backed by an unconditional guarantee of payment from the Debtor. SPV 99-2 used the proceeds of the interim credit facility to purchase portfolios of accounts. SPV 99-2 was initially obligated to retire this facility with proceeds from any capital markets transactions or certain asset sales prior to the May 2000 initial maturity date. Interest was initially payable at 12% per annum. Prior to the initial maturity date all collections of the SPV99-2 receivables were paid to the SPV99-2 Noteholders. On April 11, 2000 the Debtor and the SPV99-2 Noteholders amended their agreements as follows: (a) the notes converted to long-term financing effective March 1, 2000, at which time the interest rate changed to 15% per annum and the note maturity date was changed from May 2, 2004 to September 30, 2002; (b) warrants in the amount of 1,236,138 shares of common stock of Creditrust were issued to the SPV99-2 Noteholders based on the average stock price under a defined formula at market value; and (c) the governance documents of SPV99-2 were changed to name an independent member of SPV99-2. Soon after the Debtor's petition under chapter 11 was filed, and based on the chapter 11 filing, SPV99-2 received a notice of cross default and that the interest rate on the SPV99-2 notes increased from 15% to 21%. e. Warehouse Facility 13 In September 1998, the Debtor established through a wholly owned consolidated special purpose finance subsidiary, Creditrust Funding I LLC, an initial $30 million revolving warehouse facility for use in acquiring finance receivables (the "Warehouse Facility"). The Warehouse Facility carried a floating interest rate of LIBOR plus .65%, with the revolving period originally expiring in October 2000. By amendment, the revolving period in fact expired on February 29, 2000. The final due date of all payments due under the Warehouse Facility is October 2005. The Warehouse Facility is secured solely by a trust estate, primarily consisting of specific consumer receivables that the Debtor has absolutely assigned to the newly formed special purpose finance subsidiary, and is non-recourse to the parent Debtor and its other assets. The Warehouse Facility is also insured by AGI. In accordance with the December, 1999 amendments, a transfer of servicing from the Debtor to a successor servicer was effected on April 1, 2000, however, until May 2000, the Debtor continued to service these accounts. 4. Revolving Line of Credit In October 1998, the Debtor entered into a $20 million revolving line of credit with Sunrock Capital Corporation to provide receivables financing (the "Revolving Credit Facility"). The Revolving Credit Facility had an original term of three years. During this time the Debtor could borrow and repay funds to purchase receivables at 80% of acquisition cost. Interest was based on prime plus 0.5%, or LIBOR plus 2.5% at the option of the Debtor on each advance. Pursuant to an amendment to the governing loan documents in March 2000, interest is prime plus 2.5% effective April 1, 2000. The Revolving Credit Facility is secured by any receivables purchased under the Revolving Credit Facility and by substantially all the Debtor's other assets. C. Competition The Debtor's business is highly competitive, and it expects that competition from new and existing companies will intensify. The Debtor competes with other purchasers of defaulted consumer receivables and with third-party collection agencies. The Debtor's ability to obtain new customers is also materially affected by the financial services companies that choose to manage their own defaulted consumer receivables. Some of these companies may have substantially greater personnel and financial resources. The Debtor seeks to compete with these companies on the basis of its superior information technology capabilities, which the Debtor believes enable it to purchase, collect and manage receivables more effectively than its competitors. For information concerning the business of the Surviving Corporation as it is proposed to be conducted after the Effective Date, please see Section V.E, "Business of the Surviving Corporation after the Effective Date." D. Trademarks and Proprietary Information The Debtor has obtained federal trademark registrations with the United States Patent and Trademark Office with respect to the name "Creditrust" and the Creditrust logo. The rights to the Creditrust logo, subject to certain restrictions, will be transferred to Joseph K. Rensin as described under Section IV.J, "Independent Contractor Agreement." 14 The Debtor relies on trade secrets to protect its proprietary rights in its systems and information databases. The Debtor attempts to protect its trade secrets and other proprietary information through agreements with employees and other security measures. Although the Debtor intends to protect its rights to the extent necessary under the Merger Agreement, there can be no assurance that these measures will be successful. E. Government Regulation The Fair Debt Collection Practices Act ("FDCPA") and comparable state statutes establish specific guidelines and procedures which debt collectors must follow to communicate with consumer debtors, including the time, place and manner of such communications. It is the Debtor's policy to comply with the provisions of the FDCPA and comparable state statutes in all of its collection activities, although it may not be specifically subject thereto. If these laws apply to some or all of the Debtor's collection activities, the Debtor's failure to comply with such laws could have a materially adverse effect on the Debtor. Federal and state consumer protection and related laws and regulations extensively regulate the relationship of a customer and a credit card issuer. Because many of its receivables were originated through credit card transactions, such laws and regulations affect certain of the Debtor's operations. Significant laws include the FDCPA, the Fair Credit Reporting Act, the Federal Truth-In-Lending Act, the Fair Credit Billing Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act and the Electronic Funds Transfer Act (and the Federal Reserve Board's regulations which relate to these Acts), as well as comparable statutes in those states in which customers reside or in which the grantors are located. State laws may also limit the interest rate and the fees that a credit card issuer may impose on its customers. Among other things, the laws and regulations applicable to credit card issuers impose disclosure requirements when a credit card account is advertised, when it is applied for and when it is opened, at the end of monthly billing cycles and at year-end. Federal law requires credit card issuers to disclose to consumers the interest rates, fees, grace periods and balance calculation methods associated with their credit card accounts, among other things. In addition, customers are entitled under current laws to have payments and credit applied to their credit card accounts promptly, to receive prescribed notices and to require billing errors to be resolved promptly. In addition, some laws prohibit certain discriminatory practices in connection with the extension of credit. Failure by the credit grantors to have complied with applicable statutes, rules and regulations could create claims and rights for the customers that would reduce or eliminate their obligations under their receivables, and this could have a materially adverse effect on the Debtor. Pursuant to agreements under which the Debtor purchases receivables, the Debtor is normally indemnified against losses caused by the failure of the credit grantor to have complied with applicable statutes, rules and regulations relating to the receivables before they are sold to Creditrust. Certain laws, including the laws described above, may limit the Debtor's ability to collect amounts owing with respect to the receivables regardless of any act or omission on the part of the Debtor. For example, under the federal Fair Credit Billing Act, a credit card issuer is subject to all claims (other than tort claims) and defenses arising out of certain transactions in which a credit card is used if the obligor has made a good faith attempt to obtain satisfactory resolution of a disagreement or problem relative to the transaction and, except in cases where there is a specified relationship between the person honoring the card and the credit card issuer, the 15 amount of the initial transaction exceeds $50.00 and the place where the initial transaction occurred was in the same state as the customer's billing address or within 100 miles of that address. As a purchaser of defaulted consumer receivables, the Debtor may purchase receivables subject to legitimate defenses on the part of the customer. The statutes further provide that, in certain cases, customers cannot be held liable for, or their liability is limited with respect to, charges to the credit card account that were a result of an unauthorized use of the credit card. No assurances can be given that certain of the receivables were not established as a result of unauthorized use of a credit card, and, accordingly, the amount of such receivables could not be collected by the Debtor. Pursuant to some agreements under which the Debtor purchased receivables, the Debtor is indemnified against certain losses with respect to such receivables regardless of any act or omission on the part of the Debtor or the credit grantor. Additional consumer protection laws may be enacted that would impose requirements on the enforcement of and collection on consumer credit card or installment accounts. Any new laws, rules or regulations that may be adopted as well as existing consumer protection laws, may adversely affect the ability of the Debtor to collect the receivables. In addition, the failure of Creditrust to comply with such requirements could adversely affect the Debtor's ability to enforce the receivables. The Debtor's policy is to respond promptly and fully to inquiries from the Federal, state and local regulators in connection with alleged complaints from customers. Various Claims have been filed in the Chapter 11 Case and are treated in Class 8 of the Plan. The Debtor believes that these Claims are without merit but, if allowed, will be covered by applicable insurance. F. Employees The Debtor currently has more than 330 full-time employees. None of the Debtor's employees is represented by a labor union. The Debtor believes that its relations with its employees are good. Under the Plan, all but a few of the Debtor's employees, including the collectors, will become employees of NCOF. Most of the remaining employees will be employed by Reorganized Creditrust. G. Events Leading to the Commencement of the Case 1. Inability to Secure Additional Financing The debt service requirements associated with the securitization significantly increased liquidity requirements. The interest only periods under both the Line of Credit Facility and the Warehouse Facility expired, and no further borrowings were permitted under the Warehouse Facility. The Debtor was unsuccessful in obtaining financing with principal payments and other terms appropriately matched to the anticipated cash flows from receivables that would be purchased with the financing, including replacement financing to payoff the interim credit facility SPV 99-2, which required 100% cash flow to service debt. Throughout the third and fourth quarters of 1999, the Debtor endeavored to float five year notes to augment the existing financing and pay off SPV 99-2. The credit market for specialty finance companies in general and the Debtor's sector in particular was unavailable. The Debtor was unable to secure a refinancing and in December, the Board of Directors voted to engage an advisor to help the 16 company locate a strategic partner and or pursue a sale of the company. Several other financing options were pursued in the first quarter of 2000 including a $55 million high yield bond and indications of interest by one or two potential strategic partners. None of these transactions were consummated. 2. AGI Lawsuit; AGI's Termination of Servicing On April 4, 2000, the Debtor filed in the United States District Court for the District of Maryland an 18-count suit seeking compensatory and punitive damages in excess of $200 million against Enhance Financial Services Group, Inc. (NYSE:EFS), AGI, and Charles Henneman, Senior Vice President of EFS. EFS is the parent of AGI, which insures three of the Debtor's four asset backed bonds. The suit alleges that EFS, through its Senior Vice President Charles Henneman, secretly posted maliciously false and disparaging statements about the Debtor on the Yahoo! message board, an internet web site, at which the Debtor is the dedicated topic of discussion. This suit includes counts alleging violations under the securities laws. After the Debtor filed suit against AGI and its parent EFS, Creditrust's term as servicer on two of the three securitizations (Creditrust Receivables Backed Notes, Series 1998-2, and Creditrust Receivables Backed Warehouse Notes, Series 1998-A consolidated) expired. Wells Fargo Bank, successor to Norwest Bank Minnesota, National Association, as trustee and back up servicer, immediately became successor servicer and thereafter selected a third party sub-servicer, Coldata Incorporated, effective as of May 1, 2000. In August, AGI filed a motion seeking appointment of a Chapter 11 Trustee and filed a complaint to recover at least $1.3 million related to the Debtor's AGI-insured asset backed securitization. In light of the costs and risks of litigation and the delay, and the mutual desire to consummate a consensual plan, the parties have entered into a settlement agreement, a copy of which is attached hereto as Exhibit I. Pursuant to the terms of the Plan and the AGI Settlement Agreement, other than the contingent claim of $4.55 million, all other claims between the Debtor, AGI and related parties have been settled. See Section VI.A.7 --- describing the Creditrust-AGI settlement. On November 28, 2000, the Court denied the motion to approve the AGI Settlement without prejudice to consideration of the AGI Settlement at the confirmation hearing on the Debtor's Plan. 17 3. Actions to Avoid the Filing In an attempt to avoid a Chapter 11 Filing, the company took certain actions to restructure its obligations and negotiate with its creditors. In early April, Creditrust retained Seneca Financial Group, Inc. to assist as financial advisors during the negotiations with its creditors and establish a financial plan to avoid a filing. It had previously retained the law firm of Swidler Berlin Shereff Friedman, LLP as restructuring counsel. During April and May the Company, with the assistance of its advisors, developed a plan to restructure the Company's operations and financing arrangements. As management executed on its plan, it became apparent that due to concerns of the Company's creditors and the lack of progress in negotiations, a Chapter 11 filing was necessary. At that time, management and the Company's advisors turned their attention to planning for the June 21, 2000 petition filing. H. Downsizing of Debtor and Move from Hunt Valley As of December 31, 1999, Creditrust had more than 1,000 employees and utilized three servicing facilities. The third facility, "Hunt Valley", included a call center and a new centralized information technology center and had the capacity to house approximately 1,600 additional employees. Following the loss of servicing on the 99-3 and 99-1 pools of receivables, the Debtor immediately sought to further reduce its cost base. The Debtor downsized from more than 1,000 employees in January 2000, to 330 employees in May 2000. However, the Debtor determined that the expenses related to the new call center lease in Hunt Valley and the equipment required to operate it would make the Debtor's restructuring more difficult, if not impossible. It concluded that a Chapter 11 proceeding was the best way to permit the infrastructure to be downsized and enable the Debtor to generate positive cash flow from operations. Therefore, the Debtor moved from its Hunt Valley facility and consolidated its operations in its remaining two facilities. 18 III. THE DEBTOR'S CHAPTER 11 CASE A. Commencement of the Case On June 20, 2000, Creditrust's Board of Directors voted unanimously to authorize the Debtor to file for protection under Chapter 11 of the Bankruptcy Code. On June 21, 2000 (the "Petition Date"), Creditrust filed a petition for reorganization under Chapter 11 of the Bankruptcy Code. While the Debtor's residual assets are contained in its special purpose subsidiaries, none of these filed for protection. Creditrust, exclusive of the non-filed subsidiaries, filed schedules in the Bankruptcy Court indicating assets with a book value of $116,288,000 and liabilities of $27,587,000 as of April 30, 2000. Subsequent to the filling of its bankruptcy petition, the Debtor has remained in possession of its property and has conducted its business as a Debtor-in-Possession, pursuant to Sections 1107 and 1108 of the Bankruptcy Code. B. Nasdaq Suspension of Trading When Creditrust filed its Chapter 11 petition, the Nasdaq Stock Market halted trading in the Creditrust Common Stock on June 22, 2000, and delisted the Creditrust Common Stock on September 26, 2000. The Creditrust Common Stock last traded on the Nasdaq Stock Market on June 21, 2000. C. DIP Financing and Use of Cash Collateral To meet the working capital requirements and to support employee and vendor confidence, the Debtor sought a post-petition working capital facility (the "DIP Facility"). On July 7, 2000 the Bankruptcy Court entered an Interim Order and on July 17, 2000 a Final Order authorizing a post-petition working capital facility (the "DIP" Facility") from Sunrock Capital Corporation ("Sunrock"), the Debtor's prepetition working capital lender. Pursuant to the DIP Facility, Sunrock agreed to make loans to Creditrust through the earlier of the Effective Date of a plan of reorganization, or one year from June 22, 2000. The DIP Facility extends $5,000,000 in credit, secured by a first priority lien on substantially all of the Debtor's personal property, including accounts, receivables, inventory, equipment and general intangibles. The DIP Facility provides for the cross collateralization of Sunrock's prepetition loan amounts as well as (i) an interest rate of prime plus 5%, (ii) a commitment fee of $100,000, (iii) an unused line fee of .5%, (iv) a collateral management fee of $15,000, (v) a fee on the Effective Date of $700,000 and (vi) the reimbursement of certain loan administration costs. Cash borrowings under the DIP Facility have been granted super priority administrative status by the Bankruptcy Court over all obligations except certain limited administrative expenses, as defined in the DIP Facility credit agreement. The Bankruptcy Court also approved a cash collateral agreement, allowing the Debtor to use cash for operations in accordance with the budget attached to the Cash Collateral Order dated July 3, 2000. 19 D. Official Committee Section 1102 of the Bankruptcy Code provides for the appointment of official committees to represent unsecured creditors and equity security holders. Official committees appointed under Section 1102 have a number of rights, including but not limited to, the rights to: (i) consult with the debtor concerning administration of the case; (ii) investigate the acts, conduct, assets, liabilities and financial condition of the debtor, the operation of the debtor's business and any other matters relevant to the case or to the formulation of a plan; and (iii) participate in the formulation and acceptance or rejection of a plan. Pursuant to Section 1102 of the Bankruptcy Code, the United States Trustee appointed an interim Official Committee of Unsecured Creditors ("Creditors' Committee") on June 26, 2000. The permanent Creditors' Committee was appointed on July 7, 2000. The Creditors' Committee has retained counsel and financial advisors to assist it in performing its statutory functions. See --- Section III. E, "Employment of Professionals." E. Employment of Professionals Section 327 of the Bankruptcy Code authorizes debtors, with court approval, to employ certain professionals to represent and assist them in their cases. In this case, the Debtor has retained Swidler Berlin Shereff Friedman, LLP of Washington, D.C. to serve as the Debtor's counsel. The Debtor's financial advisor is Seneca Financial Group, Inc. and the Debtor's auditor is Reznick Fedder & Silverman. In addition, the Debtor has hired various other professionals for certain specific purposes, all of whom have been approved by the Bankruptcy Court. Section 1103 of the Bankruptcy Code authorizes, with court approval, the hiring of professionals by the Creditors' Committee. Counsel for the Creditors' Committee is Shapiro & Olander (now known as Shapiro, Sher & Guinot) of Baltimore, Maryland. Navigant Consulting, Inc. has been retained to provide accounting services to the Creditors' Committee. The Creditors' Committee has also retained Touchstone Fund Management, L.L.C. as investment bankers. As of October, 2000, approximately $931,000 in professional fees and expenses have been paid over the course of the Debtor's case pursuant to a certain administrative order of the Bankruptcy Court. F. Operational Matters 1. Rejection of Hunt Valley Lease Subsequent to the Petition Date, the Debtor took immediate action to reject the Hunt Valley lease and to reject certain equipment leases. The Bankruptcy Court entered an order rejecting the Hunt Valley lease as of the Petition Date. 20 2. Additional Time to Assume or Reject Leases Section 365(d)(4) of the Bankruptcy Code provides that a debtor has an initial period of 60 days to assume or reject leases of non-residential real property. This time may be extended by the Bankruptcy Court for cause. In this case, the Debtor's time to assume or reject non-residential real property leases has been extended until confirmation of a plan of reorganization through a Bankruptcy Court order resulting from the Debtor's motion. The Plan provides that all unexpired leases and executory contracts will be rejected unless assumed under the Plan. 3. The Debtor's Current Financial Condition - See Exhibit H, --- --------- "Recent Financial Statistics" G. Significant Litigation 1. Creditrust as Plaintiff: a. Creditrust, et al. v. Enhance Financial Services Group, Inc., et al. A complaint filed against EFS, AGI and Charles Henneman in the US District Court for the District of Maryland (WMN CV 966) containing eighteen (18) counts alleging securities fraud, common law fraud and other common law tort actions and which seeks compensatory and punitive damages in excess of $200 million. All defendants have filed motions to dismiss, which have been briefed and answered. See Section VI.A.7 for a description of the --- Settlement Agreement reached with AGI, EFS and Henneman. b. Creditrust v. MBNA America Bank, NA A complaint filed in the US District Court for the District of Delaware (Civil Action No. 00-103-JJF) seeking a declaratory judgment with respect to a contract between Creditrust and MBNA which had terminated as a result of certain actions by MBNA. MBNA has answered denying any liability and has filed a counter claim seeking damages (not calculated or stated) from Creditrust for breach of contract. Creditrust has answered denying all liability. The counter claim has been "stayed" by the Chapter 11 proceedings and all parties have agreed to hold off on any discovery with respect to the original claim. MBNA has filed an unliquidated claim and an amended claim in the amount of $4.5 million in the Bankruptcy Court. The Debtor has objected to MBNA's claim. 21 c. Creditrust v. Witt et al. ------ A complaint filed in the US District Court for the District of Maryland (CV 00-1285-L) seeking damages from the defendants for theft and conversion of funds belonging to Creditrust (currently estimated to be in excess of $200,000). A TRO was issued and converted to a preliminary injunction preventing the removal or expenditure of assets by the defendants. Subpoenas have been issued to various financial institutions in order to discover any misdirected funds. 2. Creditrust as Defendant a. Thomas D. Kelsey v. Creditrust et al. A complaint filed in Court of Common Pleas for Lucas County, Ohio (CIO 199703890) seeking damages of approximately $400,000 from Creditrust and a co- defendant Key Bank resulting from a tradeline which Creditrust allegedly filed on Plaintiff's Credit Report. Kelsey alleges that Creditrust knew, or had reason to know, that the account purchased had been previously settled. Creditrust vigorously denies plaintiff's allegations. A stay has been issued pursuant to a notice of suggestion of bankruptcy being filed. Kelsey has also filed a claim in the United States Bankruptcy Court for the District of Maryland, Northern Division. b. Constantine Commercial Construction, Inc. v. Creditrust A complaint filed in the Circuit Court for Baltimore County (Case No. 03-C-00-004876) seeking damages of $1,333,000 from Creditrust for alleged breach of a contract for the construction of tenant improvements in Hunt Valley. An answer has been filed and all proceedings stayed by the Chapter 11 filing. c. Bigalke v. Creditrust A complaint filed as a class action in the US District Court for the Northern District of Illinois (99-C-2303) seeking class damages for all customers of Creditrust residing in Illinois who received a collection letter alleged to be in violation of the FDCPA. An answer has been filed and discovery has commenced (interrogatories). Class certification has been challenged and the original plaintiff has withdrawn and a substitute plaintiff has been added. Creditrust has again challenged certification of the class based upon the lack of sufficient commonality of facts to support 22 liability. The proceeding was dismissed by the plaintiff for no consideration on July 28, 2000. Bigalke has filed a claim in the Bankruptcy Court. The Debtor has objected to this Claim. d. Hutcherson v. Creditrust A complaint was filed in the U.S. District Court for the Northern District of Alabama (CV-99-P-2743-5) seeking class damages for all customers of Creditrust who had filed for protection under the U.S. Bankruptcy Code and, in alleged violation of the Automatic Stay provisions of the Code, continued to receive requests for payment from Creditrust. Several counts have been dismissed by the Court. Class certification is pending. All proceedings have been stayed as a result of the Debtor's Chapter 11 proceeding. Hutcherson has filed a claim in the Bankruptcy Court. The Debtor has objected to this claim. e. Conlon v. Rensin, et al; Brewington v. Rensin, et al.; Romine v. Rensin, et al.; Tepper v. Rensin, et al.; Graham v. Rensin, et al.; Goldstein v. Rensin, et al. Six complaints filed in the US District Court for the District of Maryland (MJG-00-2174; 2297; 2343; 2346; 2347; 2569, respectively) seeking class damages against certain officers of Creditrust for alleged violation of the Securities Exchange Act and various rules promulgated thereunder. Creditrust is not a named defendant because of the Chapter 11 proceeding, but may have indemnification responsibilities to some or all defendants. Motion to Dismiss to be filed. f. Martin v. Creditrust, et al.; Harold Harris v. Creditrust, et al.; Jones v. Creditrust, et al.; Charles L. Banks v. Creditrust, et al.; Adolph Harris v. Creditrust; Charles Banks v. Creditrust, et al.; Long v. Creditrust, et al. Seven individual complaints, filed in the Circuit Court for Baltimore City (24-C-00-002990 through 2996, respectively), by the same attorney seek individual, yet identical compensatory and punitive damages and state identical causes of action. Said causes of action include the violation of the Maryland Consumer Protection Act, Fraud, Constructive Fraud, the violation of Federal Consumer Credit Protections, Negligence, Breach of Contract, Interference with Contractual Relations, and Intentional Infliction of Emotional Distress. Motions to dismiss certain counts and defendants and to remove the remaining matters to the US District Court for the District of Maryland have been filed. The Company 23 believes these claims are without merit. The Bankruptcy stay has caused the case to be administratively closed. The plaintiffs have filed claims in the Bankruptcy Court. The Debtor has objected to these claims. 3. Motions to Appoint Chapter 11 Trustee After the Petition Date, AGI filed a motion for a temporary restraining order in connection with $1.3 million reserves held by 98-1. The Court denied AGI's motion. AGI also filed a motion seeking the appointment of a Chapter 11 Trustee. A settlement with AGI was reached, as described in Section VI.A.7. On August 18, 2000 the Committee filed a motion seeking the appointment of a Chapter 11 trustee alleging that the Debtor had failed to provide timely information. The Debtor opposed the motion, having provided extensive information to the Committee's professionals. The motion was resolved through a consent order setting forth procedures to accommodate the Committee's requests in a reasonable manner. H. Bar Date The Bar Date is the last permissible date for filing proofs of claim against the Debtor. The Bar Date was October 24, 2000 in this case. Pursuant to authority from the Bankruptcy Court, notice of the Bar Date was published in the Wall Street Journal and the Washington Post. I. Employment Issues 1. Management The current members of the Debtor's senior management, and their respective positions and annual base salaries, are as follows:
Name Position(s) Salary ---- ----------- -------- Joseph K. Rensin Chairman and CEO $250,000 Richard J. Palmer Vice President and CFO 150,000 Thomas J. Crotty Vice President and Chief Information Officer 150,000 Thomas Henning Vice President and General Counsel 92,000 Thomas J. Juranich Vice President, Operations 150,000 Steve K. McGill Vice President, Strategic Initiatives 143,000 William F. Young Vice President, Recovery 135,000
For information concerning the management of the Surviving Corporation, see Section V.A, "Governance and Management." --- 2. Board of Directors 24 As of the Petition Date, there were four members of the Debtor's Board of Directors: Joseph K. Rensin, Chairman and Chief Executive Officer, Michael S. Witlin, Stuart Wolpoff and Jeffrey A. Schraeder. All Directors, except for Joseph K. Rensin, receive $1,500 per meeting (in person) and $500 per meeting (telephonic). For information concerning the Board of Directors of the Surviving Corporation, see Section V.A, "Governance and Management." --- 25 IV. THE MERGER THE FOLLOWING IS A SUMMARY OF THE SIGNIFICANT ELEMENTS OF THE MERGER AGREEMENT, A COPY OF WHICH IS ATTACHED HERETO AS EXHIBIT B, AND THE OTHER PRINCIPAL AGREEMENTS TO BE ENTERED INTO IN CONNECTION THEREWITH. THIS DISCLOSURE STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION SET FORTH IN THE MERGER AGREEMENT AND SUCH RELATED AGREEMENTS. A. The Merger Generally Subject to the terms and conditions of the Merger Agreement, on the Effective Date, Creditrust will be merged with and into NCOP in accordance with the provisions of the Merger Agreement and in compliance with the Maryland General Corporation Law (the "MGCL") and the Delaware General Corporation Law (the "DGCL" and, collectively with the MGCL, the "Corporation Laws"), and the Merger shall have the effect provided for in the Corporation Laws. NCOP (sometimes referred to as the "Surviving Corporation") will be the surviving corporation of the Merger and will continue to exist and to be governed by the laws of the State of Delaware. The corporate existence and identity of NCOP, with its purposes and powers, will continue unaffected and unimpaired by the Merger. On the Effective Date, NCOP shall succeed to and be fully vested with the corporate existence and identity of Creditrust, and the separate corporate existence and identity of Creditrust shall cease, provided, however, that each and every subsidiary of Creditrust (including all special purpose subsidiaries referred to in Section II.B) shall remain separate corporate entities and will thus become subsidiaries of the Surviving Corporation. The closing of the Merger and the other transactions contemplated by the Merger Agreement shall take place contemporaneously on the Effective Date. The name of the Surviving Corporation will be changed from "NCO Portfolio Funding, Inc." to "NCO Portfolio Management, Inc." or such other name as the Board of Directors of the Surviving Corporation shall determine. NCO Group, Inc. ("NCOG") is a publicly traded holding company which, through its subsidiaries, provides a broad spectrum of accounts receivable management and outsourcing services to a wide range of businesses in national and international markets. NCOG provides these services from call centers located throughout North America and in the United Kingdom and Puerto Rico. NCOG's clients are primarily in the financial services, healthcare, education, retail, commercial, utilities, government and telecommunications sectors. NCOG is a Pennsylvania corporation which was formed in 1996. As of June 30, 2000, NCOG had total assets of approximately $766.7 million, total liabilities of approximately $400 million and total shareholders equity of approximately $367 million. NCOG's principal executive offices are located at 515 Pennsylvania Avenue, Fort Washington, Pennsylvania 19034. 26 NCO Financial Systems, Inc. ("NCOF") is a wholly-owned subsidiary of NCOG. NCOF is an operating company which generally provides accounts receivable management services. NCOF is a Pennsylvania corporation which was formed in 1966. NCO Portfolio Funding, Inc. ("NCOP") is a wholly-owned subsidiary of NCOG. NCOP is a holding company which owns and manages portfolios of receivables. NCOP is a Delaware corporation which was formed in 1999. Immediately after the Merger, the Certificate of Incorporation and Bylaws of the Surviving Corporation will be those of NCOP immediately before the Merger. The Merger Agreement provides that the Board of Directors of the Surviving Corporation shall initially consist of five persons, three of whom shall be selected by NCO, one of whom shall be selected by Joseph K. Rensin, who currently is Creditrust's Chairman of the Board and Chief Executive Officer and its majority stockholder, and one of whom shall be selected by the SPV 99-2 Noteholders. Of the three directors selected by NCO, one will serve for a term of three years, one shall serve for a term of two years, and one shall serve for a term of one year. The director selected by Joseph K. Rensin will serve for a term of two years. The director selected by the SPV99-2 Noteholders will serve for a term of three years. All such directors will serve in accordance with the Bylaws of the Surviving Corporation. The Merger Agreement provides that immediately after the Merger, the officers of the Surviving Corporation shall include the following persons, who shall serve in accordance with the Bylaws of the Surviving Corporation:
Name Title ---- ----- Michael J. Barrist Chairman, Chief Executive Officer and President Michael Meringolo Senior Vice President Richard J. Palmer Chief Financial Officer and Treasurer Joshua Gindin Executive Vice President, General Counsel and Secretary
For additional information concerning the Board of Directors and management of the Surviving Corporation, see Section V.A, "Governance and Management." --- B. Conversion of NCOP and Creditrust Common Stock On the Effective Date, the total number of shares of common stock of NCOP, no par value per share (the "NCOP Common Stock"), issued and outstanding immediately before the Effective Date shall, by virtue of the Merger and without any action on the part of the holder thereof, be automatically converted into and become such number of shares as follows: Immediately after the Merger, NCOG shall own 60% and the SPV99-2 Noteholders shall own 18.5% of the issued and outstanding shares of Surviving Corporation Common Stock (after giving effect to the issuance of shares of Surviving Corporation Common Stock to holders of certain options and warrants of Creditrust as described below); provided, however, that to the extent the Allowed Claims exceed $10 million and are less than $13.2 million (the Claim of the 27 SPV99-2 Noteholders is $5 million for purposes of this calculation and pursuant to the treatment of Class 6 under the Plan), the foregoing 60% shall be decreased proportionally down to a minimum of 55% based on the amount of cash in the Reserve in excess of $2,320 million which is returned to NCOG. For example, if the cash return to NCOG is $1.6 million, then 60% shall be decreased (determined by dividing $1.6 million by $3.2 million, and then multiplying this quotient by 5%, and then subtracting this result from 60%. The Stock being issued to NCOG is in consideration for numerous items including, without limitation, (1) the assets of NCOP; (2) the agreement to service the portfolios at a below market rate of 20%; and (3) the agreement to guarantee the Exit Facility being made available to the Reorganized Creditrust. There may be further adjustments pursuant to Section 4.13 of the Plan to the percentage of stock issued to NCOG and the SPV99-2 Noteholders if there are NCOP Unsecured Obligations after Disputed Claims are resolved. After all Disputed Claims are resolved and the Cash has been distributed from the Reserve created under Section 4.4(c) of the Plan, New Common Stock held in the Reserve (including New Common Stock placed in the Reserve because holders of Class 4 Disputed Claims have elected to receive New Common Stock shall be distributed in the following priority: (1) For every $418,000 of NCOP Unsecured Obligations (if any) that would have been outstanding if there had been no Asset Sales, then 1% of the New Common Stock shall be distributed to the following persons in the stated proportions: NCOG 72.73% SPV99-2 Noteholders 22.42% Michael J. Barrist 3.23% Joseph K. Rensin 1.62% ----- 100% ----- The amounts of New Common Stock issued hereunder shall be proportionally adjusted based upon the exact amount of NCOP Unsecured Obligations. (2) To holders of Allowed Class 11 Interests, pro rata. No fractional shares of Surviving Corporation Common Stock shall be issued as a result of the Merger. In lieu of the issuance of fractional shares, the number of shares of Surviving Corporation Common Stock to be issued to each shareholder of Creditrust and NCOP shall be rounded off to the nearest whole number of shares of Surviving Corporation Common Stock. C. Treatment of Convertible Securities Except to the extent provided for in the treatment of Class 5, all options and warrants to acquire shares of Creditrust Common Stock that are issued and outstanding immediately before the Effective Date (collectively, the "Convertible Securities") shall, by virtue of the Merger and without any action on the part of the holder thereof, be automatically voided and cancelled, and automatically converted into shares of the Surviving Corporation Common Stock as follows: As 28 of the Closing Date, each such holder shall be issued the number of shares having an aggregate value equal to the positive difference (if any) between the aggregate buy-in value of the Surviving Corporation Common Stock into which such Convertible Securities would have been exercisable based on the Exchange Ratio, as of the Effective Date, and the aggregate exercise price of such Convertible Securities as of the Effective Date. For purposes of the foregoing, the "buy-in" value shall mean the equivalent per share price at which NCOG is deemed to have made its investment in the Surviving Corporation as of the Effective Date (i.e., $25 million divided by the number of shares of Surviving Corporation Common Stock to be issued to NCOG). The exchange procedure for all Convertible Securities shall be substantially similar to that provided for in Section IV.D, "Exchange Procedures," below. D. Exchange Procedures The Surviving Corporation shall designate its transfer agent to act as the "Exchange Agent" for purposes of the Merger. After the Effective Date, and in two stages as contemplated by the Plan, the Exchange Agent will mail or deliver, to each record holder of an outstanding certificate that immediately before the Effective Date represented shares of Creditrust Common Stock, instructions for use in effecting the surrender of such certificate to the Exchange Agent. Upon the surrender of such certificate to the Exchange Agent in accordance with such instructions, the Exchange Agent will exchange such certificate for a new certificate representing such number of shares of the Surviving Corporation Common Stock into which the shares of Creditrust Common Stock represented by such certificate have been converted in accordance with the Merger Agreement and the Plan, which will be promptly delivered to the holder thereof (or in accordance with instructions provided by the holder thereof). In addition, upon the surrender by NCOG to the Exchange Agent of each outstanding certificate that immediately before the Effective Date represented shares of NCOP Common Stock, the Exchange Agent will exchange such certificate(s) for a new certificate(s) representing such number of shares of Surviving Corporation Common Stock into which the shares of NCOP Common Stock represented by such certificate(s) have been converted in accordance with the Merger Agreement, which shall be promptly delivered to NCOG. Until surrendered in accordance with the foregoing, each outstanding certificate that immediately before the Effective Date represented shares of Creditrust Common Stock or NCOP Common Stock, as the case may be, will be deemed to evidence ownership of the number of shares of Surviving Corporation Common Stock into which the shares of Creditrust Common Stock or NCOP Common Stock, as the case may be, represented by such certificate(s) have been converted in accordance with the Merger Agreement and the Plan. E. Representations and Warranties The Merger Agreement contains customary representations and warranties on the part of Creditrust, NCOG and NCOP. Although these representations and warranties will not survive the closing of the Merger, it is a condition to the obligations of each party to consummate the Merger that the representations and warranties of the other party be true and correct in all material respects as of the Effective Date. 29 Pursuant to the Merger Agreement, Creditrust has made representations and warranties as to the following: (a) the organization and good standing of Creditrust and its subsidiaries; (b) the binding effect of the Merger Agreement on Creditrust; (c) the authorized and outstanding capital stock of Creditrust; (d) the accuracy of Creditrust's financial and corporate records and historical financial statements; (e) Creditrust's legal status and its compliance with law in the conduct of its operations to date; (f) the identity and nature of Creditrust's assets and liabilities; (g) the conduct of Creditrust's operations since June 30, 2000; (h) the relations between Creditrust and its employees; (i) Creditrust's employee benefit plans; (j) Creditrust's tax compliance; (k) the status of litigation matters pertaining to Creditrust; (l) Creditrust's insurance coverage; (m) the nature of the transactions between Creditrust and its affiliates; (n) the brokerage fees payable by Creditrust in connection with the Merger; (o) the accuracy and completeness of Creditrust's SEC filings since January 1, 1999; and (p) the completeness and accuracy of the disclosures made by Creditrust to NCOG relating to the Merger. Pursuant to the Merger Agreement, NCOG and NCOP have made representations and warranties as to the following: (a) the organization and good standing of NCOP, NCOG and NCOF; (b) the binding effect of the Merger Agreement on NCOP, NCOG and NCOF; (c) the accuracy and completeness of NCOG's SEC filings since January 1, 1999; (d) the absence of material adverse changes affecting NCOG and its subsidiaries; (e) the valid status of the Surviving Corporation Common Stock to be issued in connection with the Merger; (f) NCOP's compliance with law in the conduct of its operations to date; (g) the completeness and accuracy of the disclosures made by NCOG and NCOP to Creditrust relating to the Merger; (h) the authorized and outstanding capital stock of NCOP; (i) the accuracy of NCOP's financial and corporate records; (j) the identity and nature of NCOP's assets and liabilities; (k) the conduct of NCOP's operations since June 30, 2000; and (l) the status of litigation matters pertaining to NCOP and NCOG. All representations and warranties made in the Merger Agreement or pursuant thereto shall not survive the Closing Date, the Effective Date and the consummation of the Merger. F. Certain Obligations of the Parties Pending Closing Pursuant to the Merger Agreement, each of the parties are subject to certain obligations prior to the closing date of the Merger. Regarding Creditrust, it must conduct its business only in the ordinary course and consistent with past practices. The ability of Creditrust to enter into enumerated material transactions, even in the ordinary course, is limited. Creditrust must undertake to obtain all the consents necessary for the transactions contemplated by the Merger, and otherwise must undertake its best efforts to complete the Merger. Creditrust's ability to entertain alternative acquisition proposals from parties other than NCOG is limited. If, however, Creditrust receives an unsolicited acquisition proposal that its Board determines to be financially superior to the NCOG acquisition proposal (as described in this Disclosure Statement), then Creditrust may pursue the transaction. If Creditrust terminates the Merger as a result of entering into an alternative transaction, it must pay NCOG a break-up fee of $500,000. The Merger Agreement obligates NCOG and NCOP each to undertake its best efforts to complete the Merger. Further, NCOG must use its reasonable best efforts to cause the shares of 30 NCOP Common Stock to be issued in the Merger to be listed on the NASDAQ National Market System, subject to notice of official issuance thereof. NCOG must cause the net book value of NCOP as of the Closing Date to be at least $25 million, consisting of portfolio receivables with a net book value of at least $15 million and cash equal to the difference between $25 million and the net book value of the receivables. In no event may NCOP's assets as of the Effective Date consist of less than $10 million in cash (including the amount of cash paid by NCOF to the Debtor as described below and amounts loaned by NCOG to NCOP). If the net book value of NCOP as of the Closing Date is in excess of $25 million, NCOG will be paid cash by Reorganized Creditrust for such excess net book value, or if cash is not then available, Reorganized Creditrust will issue an interest-bearing six month note to NCOG in such amount. NCOG shall cause NCOF to purchase all non-leased assets of Creditrust's Call Center Operations at 1705 Whitehead Road, Baltimore, Maryland (the "Call Center") for (i) a cash purchase price equal to the net book value of the Call Center assets and liabilities but not less than $1 million, (ii) assume (prior to or upon approval of the Plan by the Bankruptcy Court) or enter into a new agreement with the landlord for the lease of the Call Center and/or such other real or personal property leases mutually agreed to by Creditrust and NCOG, and (iii) assume the obligations of Creditrust relating to most of the Call Center employees as of the Effective Date. Following the Effective Date, NCOG shall cause the Surviving Corporation to provide benefits to such employees which are comparable to those provided to similarly situated employees of NCOF from time-to-time. Creditrust and NCOG both have agreed not to take or cause to be taken any actions that would adversely affect the treatment of the Merger as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986. G. Conditions Precedent to the Closing The obligations of the parties to consummate the Merger are subject to the satisfaction of certain conditions on the Effective Date, except to the extent that such satisfaction is waived by the party entitled to the benefit thereof. The obligations of Creditrust, on the one hand, and of NCOG and NCOP, on the other, are each subject to the satisfaction of the following conditions by the other party: (a) such party's representations and warranties shall not have been false or misleading in any material respects; (b) all of the terms and conditions of the Merger Agreement to be satisfied or performed by such party on or before the Effective Date shall have been substantially satisfied or performed in all material respects; (c) no proceeding shall have been instituted, no judgment shall have been issued, and no new law shall have been enacted, on or before the Effective Date, that seeks to or does prohibit or restrain, or that seeks damages as a result of, the consummation of the Merger or any of the other related transactions; (d) all applicable waiting periods with respect to the Merger shall have expired under the Hart Scott Rodino Act, and neither the Federal Trade Commission nor the Antitrust Division of the Department of Justice shall have (i) required any party to divest itself of any material assets in order to consummate the Merger, or (ii) taken any actions to prohibit the consummation of the 31 Merger: (e) the Plan of Reorganization shall have been duly confirmed in accordance with applicable law; (f) [Joseph K. Rensin and NCOP shall have entered into the Independent Contractor Agreement in the form attached to the Merger Agreement as Exhibit A, as described under Section IV.J, "Independent --------- Contractor Agreements"]; (g) the shares of NCOP Common Stock issuable in accordance with the Merger shall have been approved for listing on the NASDAQ National Market System, subject to official notice of issuance; [(h) NCOF shall have complied with its obligations relating to the purchase of the Call Center and related matters, as described above under Section IV.F, "Certain Obligations of the Parties Pending Closing"]; (i) [NCOP and NCOF shall have entered into the ten-year Servicing Agreement in the form of Exhibit C attached to the Merger Agreement, as described under Section IV.F, "Certain Obligations of the Parties Pending Closing"]; and (j) a credit facility with aggregate availability of at least $50 million shall have been established for the benefit of the Surviving Corporation, which shall have been arranged by NCOP on terms reasonably acceptable to Creditrust. The obligation of Creditrust to consummate the Merger is subject to the satisfaction of the following additional conditions: (a) one designee of Joseph K. Rensin for a two-year term, shall have been elected to the Board of Directors of the Surviving Corporation in accordance with the Plan; (b) there shall not have been any material adverse change or material casualty loss affecting NCOP or its business, assets or financial condition, since the date of the Merger Agreement; (c) Creditrust shall have received an opinion of Blank Rome Comisky & McCauley LLP, counsel to NCOG, in form and substance reasonably satisfactory to Creditrust, dated as of the Closing Date, substantially to the effect that the Merger will be treated as a reorganization within the meaning of Section 368(a) of the Code, and as to certain other related United States federal income tax matters as described under Section IV.K, "Tax Considerations Relating to the Merger;" (d) as of the Effective Date, the net book value of NCOP shall comply with the provisions of Section 6.11 of the Plan; (e) except as otherwise required by NCOG's financing agreements, Creditrust shall have received from NCOG a letter stating that it will not sell, assign, give, pledge or otherwise transfer or dispose of any of its shares of capital stock or other securities of the Surviving Corporation until 90 days after the Effective Date (the "Affiliate Restriction Period"); and (f) Michael Barrist shall have executed and delivered an agreement with the Surviving Corporation (which agreements shall contain a demand registration right among other rights) whereby he shall have agreed to purchase $2 million of Surviving Corporation Common Stock for a price based on Equity Value as described in Section VIII.A.3, below (subject to adjustment for reverse stock splits or similar events) from the Surviving Corporation on the Effective Date. The obligations of NCOG and NCOP to consummate the Merger are subject to the satisfaction of the following additional conditions: (a) NCOG shall have received from Joseph K. Rensin (and to the extent necessary, his affiliates) a duly signed letter, in form and substance satisfactory to NCOG, stating that, other than for estate planning purposes only, he will not sell, assign, give, pledge or otherwise transfer or dispose of any of his capital stock or other securities of the Surviving Corporation until after the Affiliate Restriction Period; (b) there shall not have been any material adverse change or material casualty loss affecting any of Creditrust and its subsidiaries, their respective businesses, assets or financial condition, since the date of the Merger Agreement, and there shall not have been any material adverse change in the financial performance of Creditrust or any of its subsidiaries since the date of the Merger Agreement; (c) 32 the Bankruptcy Court shall have entered an order by January 31, 2001 that, among other things, authorizes the Merger and the related transactions contemplated by the Merger Agreement, and such order shall be a final and nonappealable order as of the Closing Date and the Plan shall have been confirmed by the Bankruptcy Court and the Closing Date shall occur within twenty days after such Confirmation; (d) NCOP Unsecured Obligations shall not exceed $7.315 million, as described in Section 10.2 of the Plan, and the non-Special Administrative Claims shall not exceed $2 million; (e) the bridge lender for Portfolio 99-2 shall have entered into a waiver and release of Creditrust and its subsidiaries and NCOP on such terms and conditions as is satisfactory to NCOG, in its sole and absolute discretion, and the servicing with respect to Asset Pool 99-2 shall have been assigned to and assumed by NCOF; (f) all Creditrust defendants in all class action litigation currently pending shall have entered into general releases (on terms and conditions satisfactory to NCOG, in its sole and absolute discretion) to release any and all claims for indemnification against the Surviving Corporation from liabilities not covered by Creditrust's existing and former D&O insurance policies and the Litigation Trust (as defined in the Plan), or alternatively the Bankruptcy Court shall have entered an order to the same effect; (g) as of the Closing Date and subject to the next clause, NCOG shall be satisfied that the assets of Creditrust and its subsidiaries will include the residuals on all asset pools currently owned by Creditrust and its subsidiaries (collectively, "the Asset Pools") and the right to service all Asset Pools; (h) as of the Closing Date, the servicing with respect to Asset Pools 99-1, 98-2 and 99-3 Banco Santander shall have been assigned to and assumed by NCOF on terms and conditions satisfactory to NCOF or NCOF shall be deemed the successor servicer thereto as defined in the relevant indenture and services agreement for each such portfolio; (i) each of Creditrust's lenders and the trustees of the various Asset Pools currently being serviced by Creditrust, other than Sunrock, shall have agreed in writing to have their claims against Creditrust and its subsidiaries limited to the collateral with respect to the debt associated with such Asset Pools and (j) each such lender shall have agreed in writing that they have no other claims against Creditrust and its subsidiaries other than ordinary post-petition non-bankruptcy expenses, or alternatively the Bankruptcy Court shall have entered an order to the same effect; and (k) as of the Closing Date, with respect to the Asset Pools that are not to be serviced by NCOF pursuant to the Servicing Agreement, NCOG shall be satisfied that the Surviving Corporation will receive timely reports with respect thereto and, after repayment of all debt associated with such Asset Pool, all reserve balances and any residual payments with respect to such Asset Pools will go to the Surviving Corporation. Although the quantity of conditions precedent to Closing may be high, this is not unusual for a merger of two publicly traded companies. In fact, most of the contingencies simply require that documents already fully negotiated by the parties be signed at Closing. The significant contingencies, in the view of the Debtor, are the following: (a) Financing. NCOG has now obtained a financing commitment from Mellon Bank for the $50 million of financing necessary to consummate the merger. (b) Entry of the Confirmation Order by January 31, 2001. 33 This is a contingency which is very much dependent upon the Court's schedule and the posture taken by the Official Committee of Unsecured Creditors. It is also a date which can be extended by agreement of the parties. (c) Maximum NCOP Unsecured Obligations. This is the maximum amount of Unsecured Obligations which the Reorganized Company will assume as part of the reorganization process. In fact, this would allow Class 4 Allowed Unsecured Claims to be as high as approximately $15 million. See Exhibit K to Disclosure Statement. As indicated elsewhere in this Disclosure, it is anticipated that Allowed Class 4 Claims will be substantially lower than $15 million. (d) Servicing Assigned to NCOFS by the Various Pools. The Debtor and NCOG has successfully negotiated settlement agreements with all of the pool lenders so that this condition can now be satisfied. Although it is possible that other conditions may not be met, that likelihood is considered highly remote. H. Termination of the Merger Agreement and Break-Up Fee At any time before the Effective Date, whether or not the Merger has been approved by Creditrust's shareholders, the Merger Agreement may be terminated and the Merger abandoned in accordance with any of the following methods: (a) by the mutual written consents of NCOG and Creditrust, authorized by their respective boards of directors; (b) by written notice from NCOG to Creditrust, or from Creditrust to NCOG, if it becomes certain (for all practical purposes) that any of the conditions to the closing obligations of the party giving such notice cannot be satisfied on or before January 31, 2001, for a reason other than such party's default, and such party is not willing to waive the satisfaction of such condition; (c) by written notice from NCOG to Creditrust, or from Creditrust to NCOG, if the Effective Date does not occur on or before January 31, 2001 for any reason other than a breach of the Merger Agreement by the party giving such notice; (d) by NCOG in the event Creditrust has breached any representation, warranty or covenant contained in the Merger Agreement in any material respect, NCOG has notified Creditrust of the breach, and the breach has continued without cure for a period of ten days after the written notice of breach; (e) by Creditrust in the event NCOG or NCOP has breached any representation, warranty or covenant contained in the Merger Agreement in any material respect, 34 Creditrust has notified NCOG of the breach, and the breach has continued without cure for a period of ten days after the written notice of breach; and (f) by Creditrust if Creditrust has received or receives an unsolicited acquisition proposal that its Board determines to be financially superior to the NCOG acquisition proposal (as described in this Disclosure Statement). If the Merger Agreement is terminated by Creditrust other than pursuant to paragraphs (a) or (e) above or by NCOG pursuant to paragraphs (b), (c) or (d) above, within five days of such termination, Creditrust shall pay NCOG the sum of $500,000 (the "Break-Up Fee"). Notwithstanding the foregoing, NCOG has agreed not to seek a Break-Up Fee if it has not obtained a commitment for a $50 million credit facility, and the Break-Up Fee shall be paid only if approved by the Bankruptcy Court. I. Servicing Agreement It is a condition to the obligations under the Merger Agreement of both Creditrust, on the one hand, and of NCOG and NCOP on the other, that upon the Closing Date the Surviving Corporation enter into a servicing agreement with NCOF (the "Servicing Agreement") whereby NCOF will be engaged to service all current and future receivables owned by the Debtor and subsidiaries of the Debtor currently being serviced by Creditrust. A copy of the Servicing Agreement is attached to the Merger Agreement as Exhibit C. The receivables are generally charged-off consumer credit-card accounts that Debtor or its subsidiaries purchase from the originators or other holders thereof. The NCOF servicing agreement is made subject to the specific arrangements in the 98-2 and 98-A indentures with respect to servicing. Pursuant to the Servicing Agreement, NCOF will act as custodian of all files and records relating to the receivables and is obligated to "service" the receivables (i.e. collect the receivables from the obligors thereof). In consideration of the various obligations of NCOF under the Servicing Agreement as servicer of the receivables and custodian of the files and records related thereto, it will be entitled to a servicing fee of 20% of amounts it collects upon the receivables. The Servicing Agreement will require NCOF to remit to Debtor on a weekly basis amounts collected upon the receivables less a servicing fee. The original term of the Servicing Agreement is ten years and extends thereafter for successive yearly terms unless cancelled by either party no later than 90 days prior to the expiration of the original or any extended term. The Surviving Corporation will be entitled to place certain receivables with an alternate servicer, and if the alternate servicer's percentage rate of collection upon such receivables exceeds that of NCOF by five percent or more determined every six months, the Surviving Corporation will be entitled to place additional receivables with the alternate servicer. NCOF can "earn back" servicing of the receivables placed with the alternative servicer (except with respect to the initial receivables placed with the alternate servicer) for each six-month period in which the alternate servicer's percentage rate of collection does not exceed that of NCOF by five percent or more. 35 Upon a default by NCOF in its obligations under the Servicing Agreement which, for certain events of default, continues beyond certain cure periods, the Surviving Corporation will be entitled to terminate the Servicing Agreement. J. Independent Contractor Agreement It is a condition to the obligations under the Merger Agreement of both Creditrust, on the one hand, and of NCOG and NCOP, on the other, that upon the Closing Date the Surviving Corporation enter into an Independent Contractor Agreement (the "Contractor Agreement") with Joseph K. Rensin in a form attached to the Merger Agreement. A copy of the Contractor Agreement is attached to the Merger Agreement as Exhibit A. Mr. Rensin currently is the Chairman of the Board and Chief Executive Officer of Creditrust, and is the holder of a majority of the issued and outstanding Creditrust Common Stock. Pursuant to the Contractor Agreement, Mr. Rensin is to provide up to 20 hours per month of consulting services to the Surviving Corporation on an as- needed, as-requested basis for a term of three years from the Effective Date, and is to receive base compensation for his services at the annualized rate of $400,000. Additionally, the Surviving Corporation is to pay Mr. Rensin $1,500 for each day or any part of a day during which he performs services in excess of 20 hours per month. If Mr. Rensin provides less than 20 hours of services in any given month, such unutilized hours will not be carried over to subsequent months. Mr. Rensin is also entitled to be reimbursed for his reasonable expenditures and is eligible to participate in any medical and dental benefits plan at least as favorable as those made available to the Chief Executive Officer of the Surviving Corporation. For the first 18 months of his service pursuant to the Contractor Agreement, the Surviving Corporation also will provide Mr. Rensin with a monthly car allowance of $1,000. Upon the date of completion of the Merger Agreement, and assuming that each share of Creditrust Common Stock is exchanged for one share of Surviving Corporation Common Stock pursuant to the Merger, Mr. Rensin will beneficially own approximately 5,200,000 shares of Surviving Corporation Common Stock. Pursuant to the Contractor Agreement, the Surviving Corporation will grant Mr. Rensin two demand registration rights and unlimited incidental (or "piggyback") registration rights with respect to the Surviving Corporation Common Stock to be held by him. The number of shares of the Surviving Corporation Common Stock subject to any demand registration must be at least 500,000 and may not exceed 2,600,000. The demand registration rights may not be exercised more than one time for each 12-month period after the Closing Date. In addition, the second demand registration may not be exercised until at least 60 days after the termination of the first demand registration. The registration rights granted to Mr. Rensin will be subject to customary suspension, "hold back," indemnification/contribution and priority provisions. Mr. Rensin will also acquire from the Surviving Corporation, pursuant to the Contractor Agreement, all of the Surviving Corporation's right, title and interest in the Creditrust logo and trademark for $1,000, although he will be prohibited from using that trademark in connection with a business involving the purchase, management or collection of defaulted debt (other than 36 mortgages). Mr. Rensin and the Surviving Corporation also will agree not to disparage one another, and Mr. Rensin will agree not to compete with the Surviving Corporation directly or indirectly or to induce any employee, customer, independent contractor or supplier of the Surviving Corporation to terminate its relationship with NCOP. Mr. Rensin has agreed to purchase $320,000 of New Common Stock on the Effective Date at the Equity Value, as described in VIII.A.3. below. In addition to the services which Mr. Rensin has agreed to provide to the Surviving Company, he has also agreed that he will not engage in any business operation (with certain limitations) competing with the business of the Surviving Company and that he will not induce any employee, customer or supplier of Creditrust to terminate employment or any other relationship with the Company. Essentially, Mr. Rensin has agreed that the only services that he will provide in this industry will be for the benefit of Reorganized Creditrust. Further, Mr. Rensin has agreed to a 90-day "lock-up" period during which time he will not sell his shares of the New Common Stock. The Independent Contractor Agreement, as well as the related Non-Compete, Non-Solicitation and Lock-Up Provisions were heavily negotiated at arms length between NCOG and their counsel, on the one hand, and Mr. Rensin and his personal counsel, on the other hand. K. Tax Considerations Relating to the Merger 1. General The following summary of the material federal income tax consequences of the Merger is provided for general information purposes only and does not constitute, and is not intended to constitute, and should not be considered as, legal or tax advice to stockholders. This summary is not a comprehensive description of all of the tax consequences that may be relevant to stockholders. For example, this summary does not describe tax consequences that arise from rules that apply generally to all taxpayers or to some classes of taxpayers. This summary does not discuss tax consequences under the laws of states or local governments or of any other jurisdiction. This summary is based upon the Internal Revenue Code, the regulations of the U.S. Treasury Department, published positions of the Internal Revenue Service, and court and administrative rulings and decisions in effect on the date of this Disclosure Statement. These laws may change, possibly retroactively, and any change could affect the continuing validity of this summary. Each holder of NCOP and Creditrust Common Stock is urged to obtain, and should rely only upon, his or her own tax advice. 2. Treatment of Holders of Creditrust Common Stock The closing of the Merger is conditioned on Creditrust receiving a tax opinion from Blank Rome Comisky & McCauley LLP, tax counsel to NCOP, to the effect that, for federal income tax purposes, the Merger will constitute a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder, and that the federal income tax consequences of the Merger will be as follows: . no gain or loss will be recognized by Creditrust, NCOG or NCOP as a result of the Merger; 37 . no gain or loss will be recognized by Creditrust stockholders upon their receipt of Surviving Corporation Common Stock in exchange for their Creditrust Common Stock; . the tax basis of the shares of Surviving Corporation Common Stock received by the holders of Creditrust Common Stock will be the same as the tax basis of their shares of Creditrust Common Stock exchanged for Surviving Corporation Common Stock; and . the holding period of the shares of Surviving Corporation Common Stock in the hands of Creditrust stockholders will include the holding period of their Creditrust Common Stock exchanged for Surviving Corporation Common Stock, provided that the Creditrust Common Stock to be exchanged is held as a capital asset as of the effective time of the Merger. The parties are not requesting a ruling from the Internal Revenue Service in connection with the Merger. An opinion of counsel only represents counsel's best judgment and neither binds the Internal Revenue Service nor the courts nor precludes the Internal Revenue Service from adopting a contrary position. In addition, the tax opinion is subject to certain assumptions and qualifications and is based upon representations made by NCOP and Creditrust and assumes that the representations made by NCOP and Creditrust are true, correct and complete and will remain true, correct and complete through and after the Effective Date and the Closing Date. For example, of particular importance are those assumptions and representations relating to the "continuity of interest" and "continuity of business enterprise" requirements. To satisfy the "continuity of interest" requirement, Creditrust's stockholders must not, pursuant to a plan or intent existing at or prior to the Merger, sell or otherwise transfer to NCOP or a party related to NCOP so much of either their Creditrust Common Stock prior to the Merger or their shares of Surviving Corporation Common Stock to be received in the Merger, such that the Creditrust stockholders, as a group, would no longer have a substantial proprietary interest in the Creditrust business being conducted by the Surviving Corporation after the Merger. This includes, among other things, shares of Creditrust Common Stock sold to NCOP before the Merger. Creditrust's stockholders will generally be regarded as having retained a substantial proprietary interest as long as the shares of Surviving Corporation Common Stock received in the Merger, after reduction for any dispositions described above, in the aggregate, represent at least 50% of the entire consideration received by the Creditrust stockholders in the Merger and in sales to NCOP in advance of the Merger. To satisfy the "continuity of business enterprise" requirement, NCOP must continue the historic business conducted by Creditrust or use a significant portion of the historic business assets of Creditrust in a business. A successful Internal Revenue Service challenge to the "reorganization" status of the Merger would result in a Creditrust stockholder recognizing gain or loss with respect to each share of Creditrust Common Stock surrendered equal to the difference between the stockholder's basis in the share and the fair market value, as of the effective time of the Merger, of the shares of Surviving Corporation Common Stock received in exchange therefor. In that event, a stockholder's aggregate basis in the shares of Surviving Corporation Common Stock received would equal their fair market value and the holding period of those shares would begin the day after the Merger. 38 This summary also assumes that stockholders hold their shares of Creditrust Common Stock as a capital asset and does not address the tax consequences that may be relevant to a particular stockholder receiving special treatment under some federal income tax laws. Stockholders receiving this special treatment include: banks and other financial institutions; tax-exempt organizations; insurance companies; investment companies and real estate and financial asset securitization investment trusts; dealers in securities or foreign currencies; Creditrust stockholders who received their Creditrust Common Stock through the exercise of employee stock options or otherwise as compensation; Creditrust stockholders who are not U.S. persons; and Creditrust stockholders who hold new Creditrust Common Stock as part of a hedge, straddle or conversion transaction. 3. Treatment of Convertible Securities The Merger Agreement provides that certain Creditrust Convertible Securities (other than holders of Class 5 Claims) that are issued and outstanding immediately before the Effective Date shall, by virtue of the Merger, be converted into shares of Surviving Corporation Common Stock as described under Section IV.C, "Treatment of Stock Options and Warrants." The federal income tax consequences of such conversion to the holders of the Convertible Securities depends upon how they were acquired. If a holder acquired Convertible Securities as compensation (e.g., "incentive stock options" as defined in Section of the Code or options governed by Section 83 of the Code) for services performed (the "Compensatory Convertible Securities"), then the Surviving Corporation Common Stock received as a result of the conversion will be taxable as ordinary income to such holder in amount equal to their fair market value on the date of their issuance. A Compensatory Convertible Securities holder's aggregate basis in the shares of Surviving Corporation Common Stock received would equal their fair market value on the date of their issuance, and the holding period of those shares would begin the day after the Effective Date. All other holders of Convertible Securities will not recognize any gain or loss upon their receipt of Surviving Corporation Common Stock in exchange for their Convertible Securities. The tax basis of the shares of Surviving Corporation Common Stock received by the holders of Convertible Securities will be the same as the tax basis of their Convertible Securities exchanged for Surviving Corporation Common Stock. The holding period of the shares of Surviving Corporation Common Stock in the hands of the Convertible Securities holders will include the holding period of their Convertible Securities exchanged for Surviving Corporation Common Stock, provided that the Convertible Securities to be exchanged are held as a capital asset as of the effective time of the Merger. TAX MATTERS ARE VERY COMPLICATED AND THE TAX CONSEQUENCES OF THE MERGER TO CREDITRUST STOCKHOLDERS WILL DEPEND ON EACH STOCKHOLDER'S PARTICULAR SITUATION. CREDITRUST STOCKHOLDERS ARE ENCOURAGED TO CONSULT THEIR OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING TAX RETURN REPORTING REQUIREMENTS, THE APPLICABILITY OF FEDERAL, STATE, 39 LOCAL AND FOREIGN TAX LAWS AND THE EFFECT OF ANY PROPOSED CHANGE IN THE TAX LAWS. 40 V. GOVERNANCE, MANAGEMENT, OWNERSHIP AND BUSINESS OF THE SURVIVING CORPORATION A. Governance and Management 1. Certificate of Incorporation and Bylaws Immediately after the Merger, the Certificate of Incorporation and Bylaws of the Surviving Corporation will be those of NCOP immediately before the Merger. Copies of such Certificate of Incorporation and Bylaws are attached hereto as Exhibit F and Exhibit G, respectively. --------- --------- 2. Board of Directors and Committees a. Board of Directors The Merger Agreement provides that immediately after the Merger, the Board of Directors of the Surviving Corporation will initially consist of five persons, three of whom will be selected by NCOG, one of whom will be selected by Mr. Rensin, and one of whom shall be selected by the SPV99-2 Noteholders, each of whom shall be an independent director. The independent director appointed byJoseph K. Rensin may be a director or former director of Creditrust, subject to the consent of NCOG (which consent shall not be unreasonably withheld). NCOG has selected Mr. Barrist as a director but has not yet decided on the other two directors; Mr. Rensin and the SPV 99-2 Noteholders will each select one director prior to the confirmation hearing. The Surviving Corporation's Certificate of Incorporation will provide for a classified Board of Directors consisting of three classes: Class I will consist of a director selected by NCOG, whose term will expire at the 2001 annual meeting of stockholders of the Surviving Corporation; Class II will consist of a director selected by Mr. Rensin and a director selected by NCOG, whose terms will expire at the 2002 annual meeting of stockholders of the Surviving Corporation; and Class III will consist of Messrs. Barrist and a director selected by the SPV99-2 Noteholders, whose terms will expire at the 2003 annual meeting of stockholders of the Surviving Corporation. Beginning with the 2001 annual meeting of stockholders, directors whose terms are expiring will be elected by the stockholders to serve for three year terms. Following the Merger, the Surviving Corporation will also establish an Audit Committee and a Compensation Committee. b. Audit Committee The Audit Committee will make recommendations concerning the engagement of independent public accountants; review with the independent public accountants the plans for and scope of the audit, the audit procedures to be utilized and the results of the audit; approve the professional services provided by the independent public accountants; review the independence of the independent public accountants; and review the adequacy and effectiveness of the Surviving Corporation's internal accounting controls. c. Compensation Committee 41 The Compensation Committee will make recommendations to the Board of Directors concerning compensation for the Surviving Corporation's executive officers; review general compensation levels for other employees as a group; administer the Surviving Corporation's 2000 Stock Option Plan; and take such other actions as may be required in connection with the Surviving Corporation's compensation and incentive plans. d. Director Compensation Each non-employee director of the Surviving Corporation will receive an annual fee of $10,000 and an additional fee of $500 for each meeting of the Board or Board committee attended, plus reimbursement of expenses incurred in attending meetings; however, no additional fee will be paid for committee meetings held the same day as Board meetings. Directors will also be eligible to participate in the Surviving Corporation's 2000 Stock Option Plan. 3. Directors and Executive Officers On the Effective Date, the persons listed below will become the directors and executive officers of the Surviving Corporation: Director Name Age Position Term Expires -------------------- --- -------------------------------- --------- Michael J. Barrist 39 Chairman of the Board, President 2003 and Chief Executive Officer * Director 2002, 2003 Michael B. Meringolo 53 Senior Vice President n/a Richard J. Palmer 49 Chief Financial Officer and n/a Treasurer Joshua Gindin 44 Executive Vice President, n/a General Counsel and Secretary _______________________ * Directors to be selected by Mr. Rensin (1), SPV99-2 Noteholders (1) and NCOG (2). The following information about the Surviving Corporation's proposed directors and executive officers is based, in part, upon information supplied by such persons. 42 Michael J. Barrist has served as Chairman of the Board, President and Chief Executive Officer of NCO Group since purchasing that company in 1986. Mr. Barrist was employed by U.S. Healthcare Inc. from 1984 to 1986, most recently as Vice President of Operations, and was employed by Gross & Company, a certified public accounting firm, from 1980 through 1984. Mr. Barrist is a certified public accountant. Michael B. Meringolo has been employed by NCOF since September, 1997, most recently as Senior Vice President, Portfolio Acquisitions and Management. Prior to that, from 1991 to 1997 he was employed by First Union National Bank, most recently as Vice President of Consumer Products, with responsibility for managing the collection of consumer lending products. Richard J. Palmer has been Chief Financial Officer of Creditrust since 1996. From 1983 to1996, Mr. Palmer served as Chief Financial Officer of, and in various other financial functions for, CRI, Inc., a national real estate investment company with headquarters in Rockville, Maryland. Prior to his employment with CRI, Inc., Mr. Palmer was with Grant Thornton LLP from 1976 until 1983 and KPMG Peat Marwick from 1973 to 1976. Mr. Palmer has a BS degree in accounting from Florida Atlantic University in Boca Raton, Florida. He received his Florida certified public accounting certificate in 1974, and received reciprocity in the District of Columbia in 1976. Joshua Gindin has served as Executive Vice President and General Counsel of NCOG since May, 1998. Prior to joining NCOG, Mr. Gindin was a partner in the law firm of Kessler & Gindin since 1995. Mr. Gindin has practiced law since 1983 and has represented NCOF since 1986 and NCOG since its formation in 1996. 4. 2000 Stock Option Plan On October 17, 2000 the Board of Directors and sole stockholder of NCOP approved the 2000 Stock Option Plan, sometimes referred to as the 2000 Plan. The purpose of the 2000 Plan is to attract and retain officers, directors, key employees, independent contractors and independent consultants and to provide additional incentive to them by encouraging them to invest in NCOP Common Stock and acquire an increased personal interest in NCOP=s business. All officers, directors, key employees, independent contractors and independent consultants of NCOP or of any of its current or future parents or subsidiaries are eligible to receive options under the 2000 Plan. The 2000 Plan is administered by the Compensation Committee of the Board of Directors or, at the option of the Board of Directors, the Board may administer the 2000 Plan, except that certain authority has been give to the President of NCOP as described in the next paragraph. The Committee will select the optionees and will determine the nature of the option granted, the number of shares subject to each option, the option vesting schedule and other terms and conditions of each option. The Board of Directors may modify or supplement the 2000 Plan and outstanding options and may suspend or terminate the 2000 Plan, provided that such action may not adversely affect outstanding options. 43 The 2000 Plan provides that the President of NCOP has authority to select optionees and determine the nature of the option granted, the number of shares subject to each option (subject to an annual limit of 5,000 shares per participant or 10,000 shares with respect to grants to participants in connection with an acquisition), the option vesting schedule and other terms and conditions of each option. However, the President has no authority to grant options to any participant who is subject to Section 16 of the Securities and Exchange Act of 1934. Payment of the exercise price for options granted under the 2000 Plan may be made in cash, shares of NCOP Common Stock or a combination of both. All options granted pursuant to the 2000 Plan are exercisable in accordance with a vesting schedule which is set at the time of the issuance of the option and, except as indicated below, may not be exercised more than ten years from the date of grant. Options granted under the 2000 Plan will become immediately exercisable upon a "change in control" as defined in the 2000 Plan. NCOP will be authorized to issue 3,000,000 shares of NCOP Common Stock upon the exercise of options granted under the 2000 Plan. Options granted under the 2000 Plan may be incentive stock options intended to qualify under Section 422 of the Code, or options not intended to so qualify, except that incentive stock options may only be granted to employees of NCOP. The 2000 Plan requires the exercise price of incentive stock options to be at least equal to the fair market value of NCOP Common Stock on the date of the grant. In the case of incentive stock options granted to a shareholder owning, directly or indirectly, in excess of 10% of NCOP Common Stock, the option exercise price must be at least equal to 110% of the fair market value of NCOP Common Stock on the date of grant and such option may not be exercised more than five years from the date of grant. The option price for non-qualified options, at the discretion of the Compensation Committee, may be less than the fair market value of Common Stock on the date of grant. All unexercised options terminate three months following the date on which an optionee=s employment by, or relationship with, NCOP or any parent or subsidiary of NCOP, terminates other than by reason of disability or death (but not later than the expiration date) whether or not such termination is voluntary. Any option held by an employee who dies or who ceases to be employed because of disability must be exercised by the employee or his representative within one year after the employee dies or ceases to be an employee (but not later than the scheduled termination date). Options are not transferable otherwise than by will or the laws of descent and distribution. No options may be granted under the 2000 Plan after October 16, 2010. No individual may receive options under the 2000 Plan for more than 90% of the total number of shares of NCOP=s Common Stock authorized for issuance under such the Plan. To date, no options have been granted under the 2000 Plan. Upon completion of the Merger, the 2000 Plan will become the Surviving Corporation's plan and the options will become options to purchase Surviving Corporation Common Stock. 5. Employment Agreements 44 It is a condition to the obligations of the parties under the Merger Agreement that upon the Closing of the Merger the Surviving Corporation enter into the Contractor Agreement with Joseph K. Rensin. For a description of the Contractor Agreement, see Section IV.J, "Independent Contractor Agreement." --- B. Ownership of Surviving Corporation Common Stock The following table identifies those persons which, to Creditrust's knowledge, will own beneficially or have investment discretion with respect to more than 5% of the Surviving Corporation Common Stock as of the Effective Date: Estimated Amount of Estimated Percentage Name Beneficial Ownership(1) of Beneficial Ownership(2) - ---- ----------------------- -------------------------- NCO Group, Inc. 60% Joseph K. Rensin 5,191,289 (3) SPV99-2 Noteholders 18.5% ________________________ (1) Assumes an Exchange Ratio of one share of Surviving Corporation Common Stock for each share of Creditrust Common Stock. See Section IV.B, --- "Conversion of NCOP and Creditrust Common Stock." (2) Assumes that 60% of the Surviving Corporation Common Stock will be held by NCOG. Under the Merger Agreement, the amount of Surviving Corporation Common Stock held by NCOG is between 55% and 60%, depending upon stock issued to holders of Class 4 Claims. To the extent NCOG holds a greater percentage (i.e., higher than 55%) of the Surviving Corporation Common Stock, and to the extent that stock is issued to holders of Convertible Securities or holders of Class 4 claims, the percentage ownership of all Creditrust stockholders, including Joseph K. Rensin will be reduced pro rata. See Section IV.B, "Conversion of NCOP and Creditrust Common Stock." --- (3) Does not include New Common Stock being issued to Mr. Rensin on account of his Class 5 Claim or the Rensin Contribution. C. Description of Surviving Corporation Capital Stock Prior to the Effective Date, the Certificate of Incorporation and Bylaws of NCOP, as the Surviving Corporation, will be amended and restated as provided in Exhibit F and Exhibit G. The following summary is based upon those documents. - --------- --------- You are urged to read both documents carefully. The Surviving Corporation will be authorized to issue 35,000,000 shares of common stock, no par value (the "Surviving Corporation Common Stock," as previously defined), and 45 5,000,000 shares of preferred stock, no par value, issuable in classes or series, the relative rights, limitations and preferences of which may be designated by the Board of Directors. It is currently expected that upon completion of the Merger on the Effective Date, approximately 26 to 30 million shares of Surviving Corporation Common Stock will be issued and outstanding and held of record by approximately 474 stockholders and no shares of Surviving Corporation preferred stock will be outstanding. 1. Surviving Corporation Common Stock All shares of Surviving Corporation Common Stock issued in exchange for shares of Creditrust Common Stock and NCOP Common Stock pursuant to the Merger Agreement and the Plan will be fully paid and nonassessable. The rights, preferences and privileges of holders of Surviving Corporation Common Stock are subject to, and may be adversely affected by, the terms of any series of preferred stock which the Surviving Corporation may issue in the future. a. Voting Rights Each holder of Surviving Corporation Common Stock is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders and does not have cumulative voting rights. Accordingly, NCOG, as the holder of a majority of the shares of Surviving Corporation Common Stock outstanding on the Effective Date, will be able to elect all of the directors standing for election and generally approve all proposals requiring approval of the holders of a majority of the outstanding Surviving Corporation Common Stock. b. Dividend Rights Subject to preferences that may apply to shares of Surviving Corporation preferred stock outstanding at the time, holders of Surviving Corporation Common Stock are entitled to receive dividends out of assets legally available at the times and in the amounts as the Board of Directors may from time to time determine. No dividends are expected for the foreseeable future. c. No Preemptive or Other Rights Holders of Surviving Corporation Common Stock are not entitled to preemptive, subscription, conversion or redemption rights. d. Right to Receive Liquidation Distributions Upon the liquidation, dissolution or winding-up of the Surviving Corporation, holders of Surviving Corporation Common Stock and any participating preferred stock outstanding at that time are entitled to receive ratably the Surviving Corporation's net assets available after the payment of all debts and other claims and payment of any liquidation preferences on any outstanding Surviving Corporation preferred stock. 2. Surviving Corporation Preferred Stock 46 The Surviving Corporation's Board of Directors is authorized to issue up to an aggregate of 5,000,000 shares of preferred stock in one or more series without stockholder approval. The Board of Directors has the discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences of each series of Surviving Corporation preferred stock. Issuance of Surviving Corporation preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could among other things: $ have the effect of making it more difficult for a third-party to acquire, or of discouraging a third-party from attempting to acquire, a majority of the Surviving Corporation's outstanding voting stock; $ protect the Surviving Corporation's existing management; $ cause the market price of Surviving Corporation Common Stock to decline; or $ impair the voting and other rights of the holders of Surviving Corporation Common Stock. The Surviving Corporation has no current plans to issue any shares of preferred stock. 3. Anti-Takeover Provisions The Surviving Corporation's Certificate of Incorporation and Bylaws contain several provisions intended to limit the possibility of, or make more difficult, a takeover of the Surviving Corporation. In addition to providing for the possible issuance of Surviving Corporation preferred stock having terms established by the Board of Directors without stockholder approval, the Certificate of Incorporation provides that: $ the Board of the Surviving Corporation is divided into three classes as nearly equal in number as possible and the directors of each class serve for three year terms; $ at least 65% of the votes entitled to be cast by stockholders is required to approve amendments to the Certificate of Incorporation and Bylaws, unless at least a majority of the incumbent directors on the Board of Directors has voted in favor of the amendment, in which case only a majority of the votes cast by stockholders is required to approve the amendment; $ directors can be removed only for cause and only by a vote of at least 65% of the votes entitled to be cast by stockholders; $ the stockholders of the Surviving Corporation are not entitled to call special meetings of the stockholders;. $ actions by stockholders without a meeting which has not been approved by at least a majority of the incumbent directors must receive the written consent of stockholders 47 holding at least 65% of the votes entitled to be cast by stockholders. In addition, the Surviving Corporation's Bylaws establish procedures for the nomination of directors by stockholders and the proposal by stockholders of matters to be considered at meetings of the stockholders, including the submission of certain information within the times prescribed in the Bylaws. The existence of the foregoing provisions of the Certificate of Incorporation and Bylaws, as well as the possible issuance of the Surviving Corporation preferred stock, may have the effect of delaying, deferring or preventing a change in control of the Surviving Corporation, including without limitation, discouraging a proxy contest or making more difficult the acquisition of a substantial block of the Surviving Corporation Common Stock. The provisions could also limit the price that investors might be willing to pay in the future for shares of Surviving Corporation Common Stock. 4. Limitations on Directors' Liabilities and Indemnification As permitted under Delaware law, the Surviving Corporation's Certificate of Incorporation will eliminate a director's liability to stockholders for monetary damages for a breach of fiduciary duty, except in circumstances involving wrongful acts, such as the breach of a director's duty of loyalty or acts or omissions which involve intentional misconduct or a knowing violation of law. The Certificate of Incorporation also provides that every person who is or was a director or executive officer of the Surviving Corporation, or of any corporation which he served as such at the request of NCOP, shall be indemnified by the Surviving Corporation to the fullest extent permitted by law against all expenses and liabilities reasonably incurred by or imposed upon him, in connection with any proceeding to which he may be made, or threatened to be made, a party, or in which he may become involved by reason of his being or having been a director or executive officer of the Surviving Corporation, or of such other corporation, whether or not he is a director or executive officer of the Surviving Corporation or such other corporation at the time the expenses or liabilities are incurred. No indemnification shall be provided, however, with respect to: liabilities arising under Section 16(b) of the Securities Exchange Act of 1934, as amended, if a final nonappealable judgment or award establishes that such officer or director engaged in self-dealing, willful misconduct or recklessness, for expenses or liabilities which have been paid directly to, or for the benefit of, such person by an insurance carrier or for amounts paid in settlement of actions without the written consent of the Board of Directors. These provisions offer persons who serve on the Board of Directors of the Surviving Corporation protection against awards of monetary damages for negligence in the performance of their duties. 48 5. Transfer Agent and Registrar The transfer agent and registrar for the Surviving Corporation Common Stock will be American Stock Transfer & Trust Company. D. Comparison of Stockholders' Rights' The rights of NCOP stockholders are governed by NCOP's Certificate of Incorporation and Bylaws and by the Delaware General Corporation Law (the "DGCL," as previously defined). The rights of Creditrust stockholders are governed by Creditrust's Articles of Incorporation and Bylaws and by the Maryland General Corporation Law (the "MGCL," as previously defined). After the date the Merger is completed, the rights of the stockholders of the Surviving Corporation will be governed by Surviving Corporation's Certificate of Incorporation and Bylaws and by the DGCL. The following is a summary of the material differences between the rights of Surviving Corporation stockholders and the rights of Creditrust stockholders. This summary is not intended to be complete and is qualified in its entirety by reference to applicable provisions of the DGCL, the MGCL, Surviving Corporation's Certificate of Incorporation and Bylaws and Creditrust's Articles of Incorporation and Bylaws. 1. Stock Preferences a. Surviving Corporation Preferred Stock Surviving Corporation's Board of Directors can issue up to 5,000,000 shares of Surviving Corporation preferred stock without further action by stockholders. Surviving Corporation's Board of Directors may, without stockholder approval, issue Surviving Corporation preferred stock with dividend rates, redemption prices, preferences on liquidation or dissolution, conversion rights, voting rights and any other preferences. These rights and preferences could be senior to the rights of the holders of Surviving Corporation Common Stock. One of the effects of undesignated preferred stock may be to enable the Board of Directors to render more difficult or to discourage an attempt by a third party to attempt to acquire Surviving Corporation or obtain control of Surviving Corporation by means of a tender offer, proxy contest, merger or other transaction. This would also protect Surviving Corporation's current management. Accordingly, the issuance of shares of Surviving Corporation preferred stock may discourage bids for Surviving Corporation Common Stock or may otherwise adversely affect the market price of Surviving Corporation Common Stock. No shares of Surviving Corporation preferred stock are issued or outstanding and Surviving Corporation has no current plans to issue any shares of Surviving Corporation preferred stock. b. Creditrust Preferred Stock 49 Creditrust's Board of Directors can issue up to 5,000,000 shares of Creditrust preferred stock without further action by stockholders. Creditrust's Board of Directors may, without stockholder approval, issue Creditrust preferred stock with dividend rates, redemption prices, preferences on liquidation or dissolution, conversion rights, voting rights and any other preferences. These rights and preferences could be senior to the rights of the holders of Creditrust Common Stock. No shares of Creditrust preferred stock are outstanding, and Creditrust has no current plans to issue any shares of Creditrust preferred stock. 2. Size and Classification of the Board of Directors a. Surviving Corporation The Surviving Corporation's Certificate of Incorporation provides that the Board of Directors will consist of not less than three and not more than ten directors as determined by the Surviving Corporation Board of Directors from time to time. On the Effective Date, the Surviving Corporation will have five directors and it is expected that two additional directors will be elected at the 2001 annual meeting of stockholders. The Surviving Corporation Board will be divided into three classes as nearly equal in number as possible. The initial terms of each class of director will expire over a period of three years. Upon their reelection, each director will serve for a term of three years and until his or her successor has been elected and qualified, except in the event of his or her earlier resignation, removal or disqualification. b. Creditrust The Board of Directors of Creditrust currently consists of four directors, each of whom is elected annually for a term of one year and until his or her successor is elected and qualified, except in the event of his or her earlier death, resignation, retirement or removal from office. The Articles of Incorporation and Bylaws of Creditrust permit the Board to change the number of directors constituting the Board to not less than three directors and not more than 25 directors. 3. Removal of Directors a. Surviving Corporation The Surviving Corporation's Certificate of Incorporation provides that the entire Surviving Corporation Board of Directors, or a class of the Board, or any individual director, may be removed from office only for cause, as defined in the Surviving Corporation's Certificate of Incorporation, and only by the affirmative vote of stockholders entitled to cast at least 65% of the votes entitled to be cast by all stockholders at any annual or regular election of directors or of any class of directors. In addition, the Surviving Corporation Board of Directors will have the right, without stockholder approval, to declare vacant the office of any director for any proper cause. Vacancies created by these removals may be filled by the Board of Directors. b. Creditrust 50 Creditrust's Articles of Incorporation provides that subject to the rights of the holders of any class separately entitled to elect one or more directors, and director, or the entire Board of Directors, may be removed from office at any time, with or without cause, by the affirmative vote of the holders of at least a majority of the combined voting power of all classes of shares of capital stock entitled to vote in the election for directors voting together as a single class at any duly called meeting of stockholders at which a quorum is present. Vacancies created by these removals may be filled by the Board of Directors. 4. Meeting of Stockholders; Action by Written Consent a. Surviving Corporation Under the Surviving Corporation's Certificate of Incorporation and Bylaws, a special meeting of the stockholders may be called at any time by the Board of Directors or the Chairman of the Board of the Surviving Corporation. Stockholders may not call special meetings. The Surviving Corporation's Certificate of Incorporation provides that any action which has received the prior approval of a majority of the incumbent directors, as defined in the charter, may be approved by the written consent of stockholders having not less than the minimum number of votes necessary to authorize such action at a meeting of stockholders. Actions which have not received approval of the incumbent directors may be authorized upon the written consent of stockholders entitled to cast at least 65% of the votes entitled to be cast by all stockholders. b. Creditrust Under Creditrust's Bylaws, a special meeting of the stockholders may be called at any time by a majority of the Board of Directors, the Chairman of the Board or the President of Creditrust. In addition, a special meeting may be called upon the written request of stockholders entitled to cast at least a majority of all the votes entitled to be cast at the meeting. Under the MGCL, Creditrust's stockholders may take action without a meeting only upon the unanimous written consent of all stockholders. 5. Stockholder Inspection Rights; Stockholder Lists a. Surviving Corporation Under the DGCL, any stockholder has the right to inspect the stock ledger, stockholder list and the corporation's books and records for a purpose reasonably related to the person's interest as a stockholder. b. Creditrust. 51 Under the MGCL, any stockholder has the right to inspect the corporation's bylaws, minutes of stockholder meetings, an annual statement of affairs and any voting trust agreements on file and to request a list of all securities issued by the corporation during the preceding 12 months. In addition, one or more stockholders who together have held of record five percent or more of the corporation's stock for a period of six months may inspect the corporation's books of account, stock ledger and statement of the corporation's assets and liabilities as of a reasonably current date. 6. Amendment of Governing Documents a. Surviving Corporation. Under the Surviving Corporation's Certificate of Incorporation, the stockholders of the Surviving Corporation are not entitled to propose an amendment to Surviving the Corporation's Certificate of Incorporation. The DGCL provides that in order to effect any amendment to a corporation's certificate of incorporation, the board of directors must first adopt a resolution setting forth the proposed amendment, declaring its advisability, and directing that the proposed amendment be considered at a meeting of stockholders. Any amendment to, or repeal of, any provision of the Surviving Corporation's Certificate of Incorporation which has not previously received the approval of at least a majority of the incumbent directors on its Board of Directors will require for adoption the affirmative vote of the stockholders entitled to cast at least 65% of the votes entitled to be cast by all stockholders at any duly convened annual or special meeting of the stockholders, in addition to any other approval which is required by law, the Surviving Corporation's Certificate of Incorporation, the Surviving Corporation's Bylaws or otherwise. Amendments which have received approval of the incumbent directors generally will require for adoption the affirmative vote of the stockholders entitled to cast at least a majority of the votes entitled to be cast by all stockholders at any duly convened annual or special meeting of the stockholders. In addition, the Surviving Corporation's Certificate of Incorporation provides that the Surviving Corporation's Bylaws may be amended or repealed without stockholder approval by a majority of the incumbent directors, subject to any other approval which is required by law, the Surviving Corporation's Certificate of Incorporation, the Surviving Corporation's Bylaws, or otherwise. Any amendment to, or repeal of, any provision of Surviving Corporation's Bylaws which has not previously received the approval of at least a majority of the incumbent directors on the Board of Directors will require for adoption the affirmative vote of the stockholders entitled to cast at least 65% of the votes entitled to be cast by all stockholders at any duly convened annual or special meeting of the stockholders, in addition to any other approval which is required by law, the Surviving Corporation's Certificate of Incorporation, the Surviving Corporation's Bylaws, or otherwise. Amendments which have received approval of the incumbent directors which are submitted to stockholders for approval generally will require for adoption the affirmative vote of the stockholders entitled to cast at least a majority of the votes present in person or by proxy at a duly convened annual or special meeting of the stockholders. b. Creditrust 52 The MGCL provides that in order to effect any amendment to Creditrust's Articles of Incorporation, Creditrust's Board of Directors must first adopt a resolution setting forth the proposed amendment, declaring its advisability, and directing that the proposed amendment be considered at a meeting of the Creditrust stockholders. The affirmative vote of two-thirds of all of the votes entitled to be cast by Creditrust stockholders is required for the proposed amendment to be approved by the Creditrust stockholders, except that amendments to Article Sixth or Article Seventh of Creditrust's charter, which govern the number and election of directors, indemnification, corporate governance and other matters, require the approval of 80% of all of the votes entitled to be cast by Creditrust stockholders. Creditrust's Articles of Incorporation provides that Creditrust's Bylaws may be altered, amended or repealed by either a vote of not less than two-thirds of the Creditrust Board of Directors or at a meeting of the Creditrust stockholders by the vote of the holders of a majority of the outstanding Creditrust Common Stock. In order for the Creditrust Bylaws to be altered, amended or repealed by the stockholders at a special meeting, the notice to the stockholders of the special meeting must contain notice of the alteration, amendment, or repeal of the bylaws. 7. Power of Board to Oppose Tender Offer and Other Take-Over Transactions; State Law Protections a. Surviving Corporation The Surviving Corporation's Board of Directors has full discretion, subject to its fiduciary duties, to accept or oppose any tender offer or other offer for Surviving Corporation's securities. Section 203 of the DGCL prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A business combination includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to a number of exceptions, an interested stockholder is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation's voting stock. As permitted by the DGCL, the Surviving Corporation has elected to opt out of coverage of Section 203. b. Creditrust The Creditrust Articles of Incorporation provides that its Board of Directors may, in connection with the exercise of its business judgment involving a merger, consolidation, share exchange, sale or lease of substantially all assets, stock issuance, liquidation or dissolution, reclassification or recapitalization of securities or transaction with an interested stockholder, or any actual or proposed transaction which would or may involve a change in control of the corporation, in determining what is in the best interests of the corporation and its stockholders and in making any recommendation to its stockholders, give due consideration to all relevant factors, including, but not limited to: 53 . the economic effect, both immediate and long-term, upon the corporation's stockholders, including stockholders, if any, who decide not to participate in the transaction; . the social and economic effect on the employees of, and others dealing with, the corporation and its subsidiaries and on the communities in which the corporation and its subsidiaries operate or are located; . whether the proposal is acceptable based on the historical and current operating results or financial condition of the corporation; . whether a more favorable price could be obtained for the corporation's stock or other securities in the future; . the reputation and business practices of the offeror and its management and affiliates as they would affect the employees of the corporation and its subsidiaries; . the future value of the stock or any other securities of the corporation; . any antitrust or other legal and regulatory issues that are raised by the proposal; and . the business and financial condition and earnings prospects of the acquiring person or entity, including, but not limited to, debts service and other existing financial obligations, financial obligations to be incurred in connection with the acquisition, and other likely financial obligations of the acquiring person or entity. If the Creditrust Board of Directors determines that any proposed business combination or actual or proposed transaction which would or may involve a change in control of the corporation should be rejected, it may take any lawful action to defeat such transaction, including, but not limited to, any or all of the following: advising stockholders not to accept the proposal; instituting litigation against the party making the proposal; filing complaints with governmental and regulatory authorities; acquiring the stock or any of the securities of the corporation; selling or otherwise issuing authorized but unissued stock, other securities or treasury stock or granting options with respect thereto; acquiring a company to create an antitrust or other regulatory problem for the party making the proposal; and obtaining a more favorable offer from another individual or entity. Under the MGCL, certain "business combinations" (including a merger, consolidation, share exchange, or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities) between a Maryland corporation and (i) any person who beneficially owns 10% or more of the voting power of the corporation's shares, (ii) an affiliate or associate of such corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then-outstanding voting stock of the corporation (in either case, an "interested stockholder"), or (iii) any affiliate of an interested stockholder, are prohibited for five years after the most recent date on which the interested stockholder became an interested stockholder, and thereafter must be recommended by the board 54 of directors of the Maryland corporation and approved by the affirmative vote of at least (a) 80% of the votes entitled to be cast by holders of its outstanding voting shares, and (b) two-thirds of the votes entitled to be cast by holders of such outstanding voting shares, other than shares held by the interested stockholder with whom the business combination is to be effected; unless, among other things, the corporation's stockholders receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form as previously paid by the interested stockholder for its shares. These provisions of the MGCL do not apply to business combinations that are approved or exempted by the board of directors of the corporation prior to the time that the interested stockholder becomes an interested stockholder. Creditrust is generally governed by the MGCL's business combinations statute. However, Creditrust's Articles of Incorporation exempts any business combination with Mr. Rensin or his present or future affiliates from the application of such statute. The MGCL provides that "control shares" of a Maryland corporation acquired in a "control share acquisition" have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast by stockholders, excluding shares of stock as to which the acquiring person, officers of the corporation and directors of the corporation who are employees of the corporation are entitled to exercise or direct the exercise of the voting power of the shares in the election of directors. "Control shares" are voting shares of stock which, if aggregated with all other shares of stock previously acquired by such person, would entitle the acquirer to exercise voting power in electing directors within one of the following ranges of voting power: (i) one-fifth or more but less than one-third, (ii) one- third or more but less than a majority or (iii) a majority of all voting power. Control shares do not include shares that the acquiring person is entitled to vote as a result of having previously obtained stockholder approval. A "control share acquisition" means the acquisition, directly or indirectly, of control shares, subject to certain exceptions. A person who has made or proposes to make a control share acquisition, upon satisfaction of certain conditions (including an undertaking to pay expenses), may compel the board of directors to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. If voting rights are not approved at the meeting or if the acquirer does not deliver an acquiring person statement as required by the statute, then subject to certain conditions and limitations, the corporation may redeem any or all of the control shares, except those for which voting rights have previously been approved, for fair value determined, without regard to voting rights, as of the date of the last control share acquisition or of any meeting of stockholders at which the voting rights of such shares are considered and not approved. If voting rights for control shares are approved at a stockholders' meeting and the acquirer becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of such appraisal rights may not be less than the highest price per share paid in the control share acquisition, and certain limitations and restrictions generally applicable to the exercise of appraisal rights do not apply in the context of a control share acquisition. The control share acquisition statute does not apply to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or to acquisitions approved or excepted by the charter or the bylaws of the corporation. The business combination statute and the control share 55 acquisition statute could have the effect of discouraging unsolicited offers to acquire Creditrust and of increasing the difficulty of consummating any such offer. 8. Required Vote for Authorization of Mergers, Consolidations or Sales of Assets a. Surviving Corporation Under the DGCL, a merger, consolidation or sale of assets generally must be approved by the holders of a majority of all of the votes entitled to be cast on the proposal. b. Creditrust Under the MGCL, a merger, consolidation or sale of assets generally must be approved by the holders of two-thirds of all of the votes entitled to be cast on the proposal. E. Business of the Surviving Corporation after the Effective Date After the Effective Date, the Surviving Corporation will purchase, own and manage consumer receivables generated by consumer credit card and other consumer credit transactions. Generally, all collection of the receivables owned by the Surviving Corporation will be handled by NCOF under the Servicing Agreement although the Surviving Corporation will be permitted to place receivables with an unaffiliated servicer amounting to 10%, and under certain cases 20%, of the total receivables owned by the Surviving Corporation. After the Effective Date, it is anticipated that the Surviving Corporation will have approximately ten (10) employees. The principal office of the Surviving Corporation is expected to be located at: 1705 Whitehead Road, Baltimore, Maryland. 56 VI. SUMMARY OF THE PLAN THE FOLLOWING IS A SUMMARY OF SOME OF THE SIGNIFICANT ELEMENTS OF THE PLAN. THIS DISCLOSURE STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION SET FORTH IN THE PLAN AND THE ATTACHMENTS THERETO. A. Classification and Treatment of Claims and Interests 1. Unclassified Claims The Bankruptcy Code does not require certain administrative and priority claims to be classified under a plan of reorganization. Accordingly, Administrative Claims and Priority Tax Claims are not classified in the Plan. Under the Bankruptcy Code, Allowed Administrative Claims must be paid in full in Cash. The Plan provides for such payment to occur as soon as practicable after the later of the Effective Date or 30 days after the court order which allows such Claim to become a Final Order, unless the holder of any such Claim agrees to other treatment. In general, Administrative Expenses are the actual and necessary costs and expenses of preserving the Bankruptcy Estate and operating the businesses of the Debtor after the Petition Date. Such expenses may include, without limitation, any fees or charges assessed against the Bankruptcy Estate under Section 1930, Chapter 123 of Title 28 of the Bankruptcy Code, Claims for reclamation Allowed in accordance with Section 546(c)(2) of the Bankruptcy Code, and any indebtedness or obligations incurred by the Debtor as Debtor-in-Possession in connection with the conduct of the business of the Debtor-in-Possession, including the Sunrock DIP Claim. Ordinary course post-petition liabilities will be paid pursuant to their terms in the ordinary course of the Debtor's business. Compensation or reimbursement of expenses to professionals retained by the Debtor and the Creditors' Committee (and approved by the Bankruptcy Court) will be paid to the extent Allowed and awarded by the Bankruptcy Court. The Debtor estimates that the total amount of Allowed Administrative Claims (not including the Sunrock DIP Claim) will be $1,390,000. The foregoing estimate does not include the fees and expenses already paid to professionals retained by the Debtor and the Creditors' Committee during the course of the Chapter 11 Case pursuant to a certain administrative order of the Bankruptcy Court, which fees and expenses totaled $931,000, as of October, 2000. Also, certain administrative claimants (Seneca Financial and Sunrock Capital) may agree to take a portion of their fees in New Common Stock at the Equity Value. 2. Class 1 (Priority Claims) All Claims entitled to priority under Section 507(a) of the Bankruptcy Code, except for Administrative Claims and Priority Tax Claims, are classified as a single Class. (See Plan Section 3.1, "Class 1 Claim"). Each holder of an --- Allowed Class 1 Claim will be paid (a) the full amount of such Allowed Class 1 Claim in Cash, without interest, on the Effective Date or (b) in 57 such amount, on such other date and upon such other terms as may be agreed upon by and between the Debtor and each respective holder of such Allowed Class 1 Claim. (See Plan Section 4.1, "Class 1 Claim"). --- The Plan also provides for the payment of Allowed Priority Tax Claims beginning on the first Business Day following the first anniversary of the Effective Date. In general, Priority Tax Claims include certain income tax claims, property tax claims, withholding tax claims, and employment tax claims. Section 507(a)(8) of the Bankruptcy Code specifies such taxes in detail. Priority Tax Claims may be repaid over a six year period. The Plan provides that such payments will be made in cash in six equal annual installments, commencing on the first anniversary after the Effective Date. Payments will include simple interest accruing from the Effective Date on the unpaid portion of each Allowed Priority Tax Claim, unless Reorganized Creditrust chooses to prepay any such Priority Tax Claim or the unpaid portion thereof. Prepayment will not result in any premium or penalty. The Debtor estimates that the total amount of Allowed Priority Tax Claims will be $322,960. 3. Class 2 (Sunrock Claims) The holder of the Class 2 Claims, which consists of the Sunrock DIP Claim and the Sunrock Secured Claim, will be paid as follows: on the Effective Date, all amounts owed under the Sunrock DIP Loan and the Sunrock Secured Claim shall be paid in full or on such other terms and conditions as may be agreed to by Sunrock. The Debtor estimates that the total amount of the Class 2 Claim will be approximately $14,574,610. The Class 2 Claims are impaired under the Plan. 4. Class 3 (Other Secured Claims) Class 3 consists of the FF&E Secured Claims and is divided into subclasses subject to the following treatment: CLASSES 3(i) - 3(x) - FF&E SECURED CLAIMS. - ----------------------------------------- a. Classification Classes 3(i) - 3(x) consists of the following FF&E Secured Claims: (i) Class 3(i) consists of the FF&E Secured Claim evidenced by the Lease Agreement dated 12/10/99 executed by the Debtor in favor of Chesapeake Industrial Leasing Co., Inc. (currently held by Farmers & Mechanics National Bank)./1/ _____________________ /1/ The terms of the Agreement with Farmers & Mechanics National Bank are reflected in the November 17/th/ letter attached hereto as an exhibit. Additionally, Farmers & Mechanics National Bank shall be allowed $5,000 in pre- petition costs and fees for each of the two agreements, which amount shall be added into the lease payments. 58 (ii) Class 3(ii) consists of the FF&E Secured Claim evidenced by the Lease Agreement dated 2/14/00 executed by the Debtor in favor of Chesapeake Industrial Leasing Co., Inc. (iii) Class 3(iii) consists of the FF&E Secured Claim evidenced by the Lease Agreement dated 5/12/00 executed by the Debtor in favor of Commercial Financial Corporation. (currently held by Marlin Leasing Corp.). (iv) Class 3(iv) consists of the FF&E Secured Claim evidenced by the Lease Agreement dated 12/2/99 executed by the Debtor in favor of Commercial Finance Corporation. (currently held by BB&T Leasing Corp.). (v) Class 3(v) consists of the FF&E Secured Claim evidenced by the Lease Agreement dated 10/8/99 executed by the Debtor in favor of Commercial Finance Corporation. (currently held by Cardinal Bank Dulles). (vi) Class 3(vi) consists of the FF&E Secured Claim evidenced by the Lease Agreement dated 12/19/97 executed by the Debtor in favor of Commercial Finance Corporation (currently held by Presidential Savings Bank). (vii) Class 3(vii) consists of the FF&E Secured Claim evidenced by the Lease Agreement dated 11/3/99 executed by the Debtor in favor of Commercial Finance Corporation with an original balance of $331,700 (currently held by Cardinal Bank). (viii) Class 3(viii) consists of the FF&E Secured Claim evidenced by the Lease Agreement dated 3/15/00 executed by the Debtor in favor of Chesapeake Industrial Leasing Co. (currently held by Farmers & Mechanics National Bank). (ix) Class 3(ix) consists of the FF&E Secured Claim evidenced by the Lease Agreement dated 6/20/00 executed by the Debtor in favor of Davox Corporation. (x) Class 3(x) consists of the FF&E Secured Claim evidenced by a Lease Agreement dated 10/8/99 executed by the Debtor in favor of Commercial Finance Corporation (currently held by Cardinal Bank - Manassas/Prince William, N.A.). b. Impairment and Voting Classes 3(i) - 3(x) are impaired by the Plan. The holders of FF&E Secured Claims are entitled to vote to accept or reject the Plan, and each sub-class within Class 3 shall be deemed a separate class for purposes of the Confirmation Hearing. c. Treatment On account of its FF&E Secured Claim, each holder shall (a) receive on the Effective Date a New Equipment Note in a principal amount equal to the outstanding amount under the Secured Transaction which shall be repaid in monthly installments of principal and interest (with 59 interest on such notes to continue at the contract rate set forth in the existing contracts) or (b) shall receive such other treatment as may be agreed by Reorganized Creditrust and such holder. The FF&E Secured Claims shall continue to be secured by the Collateral securing each claim. Each FF&E Secured Claim is being treated as a fully secured claim with no deficiency claim which will be entitled to any treatment as a Class 4 claimant. Notwithstanding the foregoing, the Debtor, with the consent of NCOG, reserves the right to reclassify as an executory contract under the Plan one or more FF&E Agreements listed above prior to approval of the Disclosure Statement and to reject such contracts under Article VIII of the Plan. The Debtor has no present intention to reclassify such contracts. Specifically, the Class 3 Claimants shall be treated as follows: (i) The Class 3(i) Claim shall be treated as set forth in the November 17, 2000 letter to Michael Nord, attached to the Disclosure Statement as an exhibit. (ii) The Class 3(ii) Claim shall have an outstanding balance of $408,871.00 as of January 31, 2001 and shall be paid monthly payments in the amount of $17,273.00 until paid in full. (iii) The Class 3(iii) Claim shall be treated as set forth in the November 13, 2000 letter to Jim Kowalski. (iv) The Class 3(iv) Claim shall be treated as set forth in the December 4, 2000 letter to James Shepherd. (v) The Class 3(v) Claim shall be allowed in the amount of $485,704.70 (according to the Debtor) or $530,893.44 (according to Cardinal) as of December 20, 2000, plus pre-petition fees and expenses in the amount of $3,004.03. The Class 3(v) agreement shall be amended to reflect a balance of the foregoing amount less payments made subsequent to December, 2000 through the Confirmation Date, which amount shall be paid in monthly payments of $22,120.56 until paid in full. The remaining provision of the Agreement shall remain in full force and effect. The Class 3(v) Claimant shall retain its security interests as set forth in the existing agreement. The Debtor shall continue to make monthly post-petition payments of $22,120.56 until the Confirmation Date. (vi) The Class 3(vi) Claim shall be treated as set forth in the November 13, 2000 letter to Ira Wolpert. (vii) The Class 3(vii) Claim shall be allowed in the amount of $240,230.81 (according to the Debtor) or $263,950.50 (according to Cardinal) as of December 20, 2000, plus pre-petition fees and expenses in the amount of $2,483.71. The Class 3(vii) agreement shall be amended to reflect a balance of the foregoing amount less payments made subsequent to December, 2000 through the Confirmation Date, which amount shall be paid in monthly payments of $10,558.02 until paid in full. The remaining provision of the Agreement shall remain in full force and effect. The Class 3(vii) Claimant shall retain its security interests 60 as set forth in the existing agreement. The Debtor shall continue to make monthly post-petition payments of $10,558.02 until the Confirmation Date. (viii) The Class 3(viii) Claim shall be treated as set forth in the November 17, 2000 letter to Michael Nord, attached to the Disclosure Statement as an exhibit. (ix) The Class 3(ix) Claim shall be treated as set forth in the November 14, 2000 letter to Dan Logan. (x) The Class 3(x) Claim shall be allowed in the amount of $625,072.72 (according to the Debtor) or $694,002.27 (according to Cardinal) plus pre-petition fees and expenses in the amount of $3,016.03 less any amounts paid subsequent to December 20, 2000, including a payment in the amount of $40,296.91 made on December 21, 2000, and monthly payments in the amount of $7,388.00 until the Confirmation Date and thereafter monthly payments in the amount of $22,387.17 until paid in full. The remaining provision of the Agreement shall remain in full force and effect. The Class 3(x) Claimant shall retain its security interest as provided in the existing agreement. The Debtor shall continue to make monthly post-petition payments until the Confirmation Date. 5. Class 4 (Unsecured Claims) (a) Classification. Class 4 consists of all Unsecured Claims, but excludes the Rensin Note Claim, Administrative Convenience Claims and other Unsecured Claims that are separately classified. (b) Impairment and Voting. Class 4 is impaired by the Plan. The holders of Allowed Class 4 Claims are entitled to vote to accept or reject the Plan. (c) Treatment. (i) Each holder of an Allowed Class 4 Claim shall receive Cash payments to pay such Claims in full with interest as hereinafter described and as described in Section 4.4 (c)(ii) below. Each holder of an Allowed Class 4 Claim shall be paid interest at the rate of six (6) percent per annum from the Petition Date to the Effective Date ("Post-Petition Interest"). (ii) (A) The Debtor shall pay on the Effective Date to each holder of an Allowed Class 4 Claim its pro rata share of the Distributable Cash (up to a maximum of the Allowed Amount of each such Claim). The balance, if any, of each such Allowed Claim shall be paid with an NCOP Unsecured Obligation. 61 (B) Reorganized Creditrust shall hold in the Reserve the remainder of the Distributable Cash allocable to Disputed Claims as well as the cash to pay the NCOP Unsecured Obligation in the Reserve. Disputed Claims shall be paid in cash with interest at the rate of 6% from the Petition Date on the date when such disputed claim becomes an Allowed Claim. For purposes of this Subsection (B), a Claim which the Bankruptcy Court determines is covered by insurance (or for which the claimant agrees to look solely to an insurance policy of the Debtor) shall not be considered to be a Disputed Claim. Upon resolution of all Class 4 claims pursuant to 4.4(c), the remaining cash in the reserve, if any shall be returned to Reorganized Creditrust. (C) In lieu of the treatment described in this Section 4.4 above, a holder of a Class 4 Claim may elect, by written notification as provided in the Ballot, to receive payment of its Allowed Claim in full in New Common Stock based on the New Equity Value. 6. Class 5 (Rensin Note Claim) (a) Classification Class 5 consists of the Rensin Note Claim. (b) Impairment and Voting Class 5 is impaired by the Plan. The holder of the Rensin Note Claim is entitled to vote to accept or reject the Plan. (c) Treatment The holder of the Rensin Note Claim shall receive on the Effective Date, in exchange for cancellation of the Rensin Note, shares of New Common Stock having a value of $679,213.56 based on the New Equity Value. Additionally, if holders of Class 4 Claims receive Post-Petition Interest, then the holder of the Class 5 Claim shall receive Post-Petition Interest payable on the Effective Date in New Common Stock at the New Equity Value. 7. Class 6 (SPV99-2 Noteholders Claims) (a) Classification Class 6 consists of all SPV99-2 Noteholders. (b) Impairment and Voting Class 6 is impaired by the Plan. The SPV 99-2 Noteholders are entitled to vote to accept or reject the Plan. (c) Treatment 62 (i) The promissory notes (collectively "Notes") which evidence the Claims of the SPV99-2 Noteholders shall be modified as of the Effective Date to provide for a maturity date of December 31, 2004, interest to accrue at the contract rate of 15% and amortization schedule to be agreed by the parties. On the Effective Date of the Plan, the SPV99-2 Noteholders shall receive a cash payment of $5 million dollars which shall be applied as a principal reduction to the Notes. In exchange for, and cancellation of, the Creditrust guarantee of the Notes ("Guarantee") and the warrants issued by Creditrust to the SPV99-2 Noteholders, the SPV99-2 Noteholders shall receive pro-rata 18.5% of the New Common Stock issued on the Effective Date under the Plan. (ii) The Servicing Agreement between Debtor and SPV99-2 LLC dated as of August 2, 1999 (as amended by that certain Amended and Restated Servicing Agreement dated as of March 1, 2000 collectively "99-2 Servicing Agreement") shall be deemed assumed and assigned to NCOF in its new capacity as Successor Servicer (as defined in the Servicing Agreement); provided, however, that such assignment shall be subject to the following as of the Effective Date; (1) the Servicing Fee shall be reduced from 40% to 20%; (2) all pre-petition defaults (monetary and non-monetary) shall be deemed waived and cured, (3) NCOF shall have no liability to indemnify the Issuer, Administrative Agent or Lenders under the provisions of Section 7 of the 99-2 Servicing Agreement for acts or omissions of Debtor which occurred prior to the assignment and NCOF shall be deemed the "Successor Servicer" as defined therein; and (4) the parties shall agree on such other amendments to the 99-2 Servicing Agreement consistent with the terms and conditions of a binding term sheet dated November 22, 2000 between the parties, as such term sheet may be amended by the parties thereto ("Term Sheet"). (iii) Except for the obligations created under the Creditrust Plan, full mutual releases shall be executed on the Effective Date by and among the SPV99-2 Noteholders, NCOG, Creditrust and other parties, as provided in the Term Sheet. (iv) The SPV99-2 Noteholders, Creditrust and NCOP shall agree upon mutually acceptable securities issues on or before the hearing on the Debtor's disclosure statement, including registration rights, lock-up periods, tag-along and drag-along rights. Documents necessary to memorialize the agreements set forth on the Term Sheet and paragraph 4.6(c)(i), (ii) and (iii) shall be agreed to by the parties, including the Debtor, no later than 10 days prior to the Confirmation Hearing. 8. Class 7 (AGI) (a) Classification. Class 7 consists of all Claims of AGI and EFS. (b) Impairment and Voting. 63 Class 7 is impaired by the Plan. The holders of Allowed Class 7 Claims are entitled to vote to accept or reject the Plan. (c) Treatment. AGI shall be entitled to have an allowed claim in the amount of $4.55 million, secured by certain existing reserves referenced in certain pre-petition agreements and to be satisfied in accordance with the terms of the AGI Settlement Agreement which is hereby incorporated into this Plan. In accordance with the terms of the AGI Settlement Agreement, the EFS Litigation will be dismissed on the Effective Date. Notwithstanding the terms of the AGI Settlement Agreement, the releases of Rensin by Creditrust and of Creditrust by Rensin shall be governed by the terms of the Plan and not by the AGI Settlement Agreement. 9. Class 8 (FDCPA Claims) (a) Classification Class 8 consists of all Fair Debt Collection Practices Act ("FDCPA") Claims (b) Impairment and Voting Class 8 is impaired by the Plan. The holders of Allowed Class 8 Claims are entitled to vote to accept or reject the Plan. (c) Treatment Class 8 Claims and FDCPA Claims, if any, against Wells Fargo Bank, successor to Norwest Bank as trustee, under those indentures with various subsidiaries of Creditrust, the subsidiaries, affiliates, officers and directors of the Debtor, shall be discharged and such claimants shall receive no distributions from the Debtor on account of such Claims and shall be deemed to have waived all such claims and shall look solely to the Debtor's former and existing insurance policies for payment of such Claims to the extent allowed. For claims filed before August 21, 1997, the Debtor is insured by Harford Mutual with an aggregate policy limit of $2,000,000 and a claim limit of $1,000,000. For claims filed between August 22, 1997 and August 21, 1998, the Debtor is insured by Acceptance with an aggregate policy limit of $2,000,000 and a claim limit of $2,000,000. For claims filed between August 22, 1998 and August 21, 2000, the Debtor is insured by Tudor with an aggregate policy limit of $2,000,000 and a claim limit of $2,000,000. For claims filed on August 22, 2000 or after the Debtor is insured by Acceptance/Lloyds with an aggregate policy limit of $2,000,000 a claim limit of $2,000,000. The Debtor shall create a reserve, not to exceed $50,000, in the amount of any unpaid deductibles for these insurance policies. 10. Class 9 (Indemnification Claims) (a) Classification. 64 Class 9 consists of all Indemnification Claims. (b) Impairment and Voting. Class 9 is impaired by the Plan. The holders of Allowed Class 9 Claims are entitled to vote to accept or reject the Plan. (c) Treatment. Class 9 Claims shall be discharged and such claimants shall receive no distributions on account of such Claims and shall be deemed to have waived all such claims and agree to look solely to the Litigation Trust Fund for payment of such Claims. In addition, Class 9 claimants shall continue to receive the benefits under the Debtor's former and existing D&O insurance policy, which shall be assumed by the Debtor. 11. Class 10 (Administrative Convenience Claim) (a) Classification. Class 10 consists of all existing Administrative Convenience Claims, each of which is an unsecured claim of $13,000 or less, or such claim that is voluntarily reduced to $13,000 by the holder thereof. (b) Impairment and Voting. Class 10 is impaired by the Plan. Each holder of an Administrative Convenience Claim is entitled to vote to accept or reject the Plan. (c) Treatment. Each holder of an Administrative Convenience Claim shall receive payment in full on the later of the Effective Date or the date on which such claim becomes an Allowed Claim. The Debtor created this class of Claims to ease the administrative burden of issuing and administering the NCOP Unsecured Obligations. Approximately 100 claims fall within this class which represent approximately 70% to 75% in number of all unsecured claims. 12. Class 11 Old Equity Interests (Creditrust Common Stock) 65 (a) Classification. Class 11 consists of all existing Equity Interests. (b) Impairment and Voting. Class 11 is impaired by the Plan. Each holder of Equity Interests is entitled to vote to accept or reject the Plan. (c) Treatment. (i) Each share of Allowed Equity Interests on the Record Date shall receive a pro rata share of approximately 17.5% of the New Common Stock in the Reorganized Creditrust (as adjusted in accordance with the terms of the Plan and the Merger Agreement). Each holder of Old Common Stock shall be entitled to the number of shares of the New Common Stock allocated to the holders of Old Common Stock in accordance with the formula set forth in the Merger Agreement and in the Plan. Subject to Section 4.10 (c)(ii) below and except as provided in Section 4.6 of the Plan, the stock options (hereafter "Employee Stock Options") currently being held by employees of Debtor and the Convertible Securities (as defined in the Merger Agreement) (all of which shall be deemed voided and canceled, and automatically converted on the Effective Date into shares of New Common Stock of Reorganized Creditrust in accordance with the formula set forth in the Merger Agreement,), all other Equity Interests of any nature whatsoever shall be canceled and extinguished (and shall receive no distributions under this Plan) including, without limitation, any and all other outstanding rights, options and warrants to purchase Old Common Stock or any options or warrants not listed on Schedule 3.3 of the Merger Agreement. The Employee Stock Options and/or the Convertible Securities when converted into shares of New Common Stock (in accordance with the formula set forth in the Merger Agreement) shall dilute the holders of Class 11 Equity Interests. The existing employee stock option plan shall, as of the Effective Date, be deemed terminated, null and void and the same shall be replaced by the New Stock Option Plan. (ii) (A) The Debtor shall distribute on the Effective Date pro rata to holders of Allowed Class 11 Interests the Distributable Stock. The remainder of the New Common Stock that may be distributed to holders of Allowed --- Class 11 Interests shall be deposited into the Reserve. (B) If there is Cash remaining in the Reserve after the NCOP Unsecured Obligations are paid in full, then the amount of any remaining Cash in excess of $2,320,000, (excluding the Net Proceeds from the Asset Sales or the Cash provided by Reorganized Creditrust under 4.4(c)(ii)(D)) shall be paid to NCOG and shall reduce the percentage of New Common Stock issued to NCOG and increase the amount of New Common Stock issued to holders of Allowed Class 11 Interests, in accordance with the Merger Agreement. Subject to the Special Adjustment provided in Section 4.13 of the Plan, any remaining New Common Stock in the Reserve after resolution of Allowed Class 4 Claims, plus the New Common Stock issued in accordance with the preceding sentence (if any), shall be distributed pro rata to holders of Class 11 Interests. 66 13. Special Adjustment After all Disputed Claims are resolved and the Cash has been distributed from the Reserve, New Common Stock held in the Reserve (including New Common Stock placed in the Reserve pursuant to Section 4.4(c)(ii)(G) of the Plan) shall be distributed in the following priority: (a) For every $418,000 of NCOP Unsecured Obligations (if any) existing on the Effective Date (and without regard to the reduction thereof from the Net Proceeds of the Asset Sales and without regard to any cash paid by Reorganized Creditrust under 4.4(c)(ii)(D) of the Plan, then 1% of the New Common Stock shall be distributed to the following persons in the stated proportions: NCOG 72.74% SPV99-2 Noteholders 22.42% Michael J. Barrist 3.23% Joseph K. Rensin 1.61% ------- 100% ------- The amounts of New Common Stock issued hereunder shall be proportionally adjusted based upon the exact amount of NCOP Unsecured Obligations. (b) To holders of Allowed Class 11 Interests, pro rata. 14. Releases The Plan contains releases by the Debtor and Reorganized Creditrust of the Debtor's present and former officers and directors, professional advisors to the Debtor and others. This is not intended to be a release of 3rd party independent claims against any of these Releasees, but is a release by the Debtor and Reorganized Creditrust. A substantial amount of time and money has been spent by various parties (i.e., NCOG, various bondholder groups, the Creditors Committee.) To date, no credible claim has been asserted against any of the Releasees. 67 VII. IMPLEMENTATION OF THE PLAN A. Merger Subject to the terms and conditions of the Merger Agreement, on the Effective Date, Creditrust will be merged with and into NCOP in accordance with the provisions of the Merger Agreement and in compliance with the MGCL and the DGCL, and the Merger shall have the effect provided for in the Corporation Laws. NCOP will be the Surviving Corporation of the Merger and will continue to exist and to be governed by the laws of the State of Delaware. The corporate existence and identity of NCOP, with its purposes and powers, will continue unaffected and unimpaired by the Merger. On the Effective Date, NCOP shall succeed to and be fully vested with the corporate existence and identity of Creditrust, and the separate corporate existence and identity of Creditrust shall cease, provided, however, that each and every subsidiary of Creditrust, including all special purpose subsidiaries referred to in Section II.B, shall remain separate corporate entities and will thus become subsidiaries of NCOP. The closing of the Merger and the other transactions contemplated by the Merger Agreement shall take place contemporaneously on the Closing Date and shall be effective at the Effective Date. The name of the Surviving Corporation shall be changed from NCO Portfolio Funding, Inc. to NCO Portfolio Management, Inc. or such other name as the Board of Directors of the Surviving Corporation shall determine. For a more complete description of the Merger, see Section IV, "The --- Merger." B. Asset Sales Pursuant to the Merger Agreement, NCOG shall cause NCOF to (i) purchase all non-leased assets of Creditrust's Call Center for a cash purchase price equal to the net book value of the Call Center assets and liabilities but not less than $1 million, (ii) assume (prior to or on approval of the Plan by the Bankruptcy Court) or enter into a new agreement with the landlord for the lease of Creditrust's 1705 Whitehead Road and/or such other real or personal property leases mutually agreed to by Creditrust and NCOG, and (iii) assume the obligations of Creditrust relating to the Call Center employees as of the Closing. See Section IV.F, "Certain Obligations of the Parties Pending closing." --- The proceeds from the sale of the Call Center will be used to pay down the NCOP Unsecured Obligations in accordance with the Plan. Additionally, NCOP will sell certain "non-performing" assets currently owned by the Debtor 30 days after the Effective Date for a purchase price of no less than $3 million. The proceeds from this sale shall also be used to pay down the NCOP Unsecured Obligations in accordance with the Plan. C. Corporate Action The Board of Directors of Creditrust has approved the Merger Agreement. All requisite corporate actions under the MGCL, including the convening of a shareholders meeting, shall be superseded by the requirements of the Bankruptcy Code. 68 D. Miscellaneous Tax Matters For a description of certain tax consequences of the Plan and the Merger, see Section IV.K, "Tax Considerations Relating to the Merger." - --- E. Regulatory Approval Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the rules promulgated under that Act by the Federal Trade Commission, the Merger may not be consummated until: . The required notifications have been given and information has been furnished to the Antitrust Division of the Department of Justice and the Federal Trade Commission; and . Specified waiting period requirements have been satisfied or early termination of the waiting period is granted. NCOG and Creditrust will file notification and report forms under the Hart- Scott-Rodino Antitrust Improvements Act of 1976 with the Antitrust Division of the Department of Justice and with the Federal Trade Commission. After the waiting period expires, the Antitrust Division of the Department of Justice and the Federal Trade Commission will continue to have the authority to challenge the Merger on antitrust grounds before or after the Merger is completed. 69 VIII. GOING CONCERN VALUATION AND FEASIBILITY A. Feasibility and Projections 1. Feasibility The Bankruptcy Code requires that confirmation of a plan is not likely to be followed by liquidation or the need for further financial reorganization. For purposes of determining whether the Plan meets this requirement, the Debtor has analyzed the Surviving Corporation's ability to meet its obligations under the Plan. As part of this analysis, the Debtor prepared consolidated projections of the Surviving Corporation's financial performance for the each of the five fiscal years through the year ending December 31, 2005 (the "Projection Period"). These projections, and the assumptions on which they are based, are included in Exhibit E. Based upon such --------- projections, the Debtor believes that the Surviving Corporation will be able to make all payments required pursuant to the Plan and, therefore, that confirmation of the Plan is not likely to be followed by liquidation or the need for further reorganization. The Debtor further believes that the Surviving Corporation will be able to repay or refinance any and all of the then-outstanding secured indebtedness under the Plan at or prior to the maturity of such new indebtedness. The Projected Financial Information appended to this Disclosure Statement as Exhibit E are: --------- . Pro Forma combined Consolidated Balance Sheet of the Surviving Corporation as of January 1, 2001; . Projected Consolidated Balance Sheets of the Surviving Corporation for each of the five fiscal years through the year ending December 31, 2005; . Projected Consolidated Income Statements of the Surviving Corporation for each of the five fiscal years through the year ending December 31, 2005; . Projected Consolidated Cash Flow Statements of the Surviving Corporation for each of the five fiscal years through the year ending December 31, 2005. The pro forma financial information and the projections are based on the assumption that the Plan will be confirmed by the Bankruptcy Court and, for projection purposes, that the Effective Date of the Plan and the initial distributions thereunder take place as of January 1, 2001. Although the projections and information are based upon a January 1, 2001, Effective Date, the Debtor believes 70 that an actual Effective Date later then this projected date would not have any material adverse effect on the projections. The Debtor has prepared these financial projections based upon certain assumptions which it believes to be reasonable under the circumstances. Those assumptions considered to be significant are described in the Projected Financial Information, in Section 2. The Projected Financial Information has not been examined or compiled by independent accountants. The Debtor makes no representation as to the accuracy of the projections or the Surviving Corporation's ability to achieve the projected results. Many of the assumptions on which the projections are based are subject to significant uncertainties. See Section IX.A., "Certain Risk Factors to be Considered, Projected Financial Information." Inevitably, some assumptions will not materialize and unanticipated events and circumstances may affect the actual financial results. Therefore, the actual results achieved throughout the Projection Period may vary from the projected results and the variations may be material. All holders of Claims and Interests that are entitled to vote to accept or reject the Plan are urged to examine carefully all of the assumptions on which the Projected Financial Information is based in evaluating the Plan. 2. Projected Financial Information Management has prepared the financial forecasts contained herein with the assistance of its financial advisors. Management has prepared the forecasts using what it considers to be conservative assumptions based upon current market conditions. In preparing these financial forecasts, management has assumed that the Plan will be confirmed in December 2000 and become effective on January 1, 2001. In the event the Plan is not confirmed on that date but is confirmed within 30 days thereafter, management believes there will be no material change in the forecasts presented herein. For purposes of preparing the balance sheets that are shown in the forecasts, management has assumed that the Surviving Corporation will apply "Purchase Accounting", in preparing the actual balance sheet as of the Effective Date of the Plan. Management has estimated the impact of Purchase Accounting in its projections by allocating the consideration paid during the transaction to the Surviving Corporation's assets on a pool-by-pool basis as opposed to a package- by-package basis, which GAAP accounting may require. For purposes of preparing the forecasts, it has been assumed that existing property and equipment will be revalued and depreciated over a five-year period. In addition, forecasted capital expenditures are capitalized and depreciated over a five-year period. The forecasts include sufficient financing to repay the current outstanding obligations to the Surviving Corporation's pre-petition secured lender and 71 unsecured creditor's and to finance the Surviving Corporation's operations for the projected period. The Company expects to obtain a commitment to provide financing in the form of a $50 million revolving credit facility carrying an interest rate of 9%. As of this filing, a commitment has not been obtained. Failure to obtain this facility could be a failure to meet the conditions contained within the Merger Agreement. As such without a waving of these conditions, the Merger would not be consummated and the attached projections would no longer represent management's view of the future financial performance of the Surviving Corporation. Operating expense items for the most part have been assumed to increase at the rate of inflation or 3% per year over the forecast period. Some expense items have been assumed to increase at other growth rates depending upon specific conditions that management was able to identify in preparing the forecasts. The forecasts assume the Surviving Corporation purchases charged-off receivables on a monthly basis. Purchases are assumed to be a total of approximately $6.8 billion in charged-off amount at a cost of $407.5 million over the Projection Period. Price, availability and collections of new purchases are based upon current market conditions and the combined companies' experience. There can be no assurance that the Company will be able to meet its projected level of purchases at the projected cost. The projections also assume that both AGI (Class 7) and the SPV 99-2 Noteholders (Class 6) will be treated as mentioned in section I.C of the Disclosure Statement. The Debtor assumes that the AGI Settlement will be incorporated in the Plan confirmed by the Bankruptcy Court and that the treatment of AGI (Class 6) will be as described in Section VI.A.8 of this Disclosure Statement. The Debtor currently has a Term Sheet agreement with the SPV 99-2 Noteholders; the treatment of the SPV 99-2 Noteholders as described in Section VI.A.7 of this Disclosure Statement is consistent with the Term Sheet. 3. Going Concern Valuation In order to comply with the best interests test as well as to determine the relative distributions to parties in interest under a potential Plan of Reorganization, an estimate of Reorganization Value has been prepared by Seneca Financial Group, Inc., financial advisor to Creditrust Corporation. Seneca Financial Group, Inc. ("Seneca") has made a determination of the Reorganization Value of the Surviving Corporation at the assumed effective date of January 1, 2001, giving effect to the implementation of the Plan of Reorganization. In reaching its conclusions on Reorganization Value, Seneca undertook an analysis of Creditrust's and NCOP's operations and projections as well as the markets in which Creditrust competes. Among others analyses, Seneca: (a) reviewed certain historical financial information of Creditrust, (b) reviewed 72 certain internal operating reports including management prepared financial projections and analyses, (c) discussed historical and projected financial performance with senior management, (d) reviewed industry trends and operating statistics as well as analyzed the effects of certain economic factors on the industry, (e) analyzed the capital structures, financial performance and market valuations of Creditrust's competitors, and (f) prepared such other analyses as Seneca deemed necessary to its valuation determination. Seneca relied on the accuracy and reasonableness of the projections, historical financial information and underlying assumptions as prepared by Creditrust's and NCOP's management. Seneca's valuation assumes that the operating results projected by management will be achieved in all material respects, including revenue growth and improvements in operating margins, earnings and cash flow. To the extent that the valuation is dependent on the Surviving Corporation's achievement of the projections contained in the disclosure statement and therefore subject to significant variations over time, the valuation must be considered speculative. In addition to relying on management's projections, Seneca's valuation analysis makes a number of assumptions, including but not limited to: (a) a successful and timely reorganization of the Surviving Corporation's capital structure, (b) the continuation of current market conditions through the Effective Date as well as the forecast period for the operating projections, (c) the Plan becoming effective in accordance with its proposed terms, and (d) that Allowed Claims are limited so that there are no NCOP Unsecured Obligations. The Reorganization Value reflects the Surviving Corporation's going concern value, which includes the value of Creditrust's operating business. Seneca prepared both discounted cash flow and comparable company analyses to arrive at the going concern value of the Surviving Corporation's business. By using these valuation techniques, Seneca has considered both the market's current valuation of Creditrust and its industry as well as a longer-term view of intrinsic value embedded in the projected cash flows in the Surviving Corporation's operating plan. The discount rates used by Seneca in its analyses were based on the public market data of selected public companies deemed generally comparable ("comparables") to the Surviving Corporation as well as expected growth rates of the Surviving Corporation's cash flow. In selecting comparables and evaluating appropriate multiples and discount rates, Seneca considered factors such as the markets in which the comparables compete, current and projected operating performance relative to the Surviving Corporation and other industry participants, and the comparables' relative capital structures and the associated inherent risks of financial distress. Based on the analysis performed to date, Seneca estimates the Reorganization Value as of December 31, 2000 to be a range from $157 million to $177 million. 73 The Reorganization Value represents the going concern value of the Surviving Corporation giving effect to the implementation of the Plan of Reorganization and Merger Agreement. As such, the Reorganization Value is not a prediction of the future trading prices of securities of the Surviving Corporation. The Reorganization Value does not represent a liquidation value of Creditrust, or its assets; a liquidation analysis has been prepared and provided separately in Section XI. The valuation does not represent an appraisal of the Surviving Corporation's assets. As of the Effective Date, on a pro-forma basis, the Surviving Corporation will have interest bearing debt outstanding, net of cash and equivalents of approximately $89.1 million. Therefore, the range of Reorganization Value of the Surviving Corporation's equity, giving effect to the Plan of Reorganization, is $68 million to $88 million. The Plan provides for incentive stock options for management, however it does not specify the number, nor strike price of these options. The Equity value mentioned above may be reduced by the value of any option granted. The Debtor believes the Equity Value of $75 million ("Equity Value") is fair and within the lower end of the range described above. B. Funding (exit financing) The Merger Agreement calls for NCOP to obtain a $50 million exit finance facility. This financing will be utilized on the Effective Date to pay off Sunrock Capital Corp. and thereafter to fund the purchase of receivables which will be owned by Reorganized Creditrust and serviced by NCOF. The Debtor fully expects that the requisite exit financing will be obtained within the extended time period required by the Merger Agreement. NCOG is committing to provide NCOP, as successor-by-merger to Reorganized Creditrust, with a Fifty Million Dollar ($50,000,000) revolving credit facility (the "Revolving Credit Facility"). The interest rate on advances under the Revolving Credit Facility will be 375 basis points over the applicable LIBOR rate. Advances under the Revolving Credit Facility may be used for all fees, costs and expenses associated with the NCOP/Creditrust merger and other working capital needs of NCOP. The financial projections attached as Exhibit E hereto incorporate the financial terms of the Revolving Credit Facility at current LIBOR rates. NCOG is requiring that Twenty-Five Million Dollars ($25,000,000) of the Revolving Credit Facility be reduced by refinancing or otherwise by December 31, 2003 with periodic reductions commencing March 31, 2002. The Revolving Credit Facility will mature on May 31, 2004. NCOG is providing the Revolving Credit Facility as a sub-facility of NCOG's existing $350,000,000 line of credit with a syndicate of financial institutions. NCOG's lenders are requiring that NCOP (i) provide a guaranty not to exceed amounts outstanding under the Revolving Credit Facility, (ii) grant a security interest in substantially all of its assets in order to secure such guaranty, and (iii) 74 agree that the NCOP Revolving Credit Facility be cross-defaulted with the larger NCOG facility. 75 IX. RISK FACTORS A. Risk Factors and Forward-Looking Statements Holders of Claims and Equity Interests should carefully consider the risks described below in connection with their voting on the Plan. If the Plan is approved and any of the following risks actually occur, the business, financial condition or results of future operations of NCOP, as the surviving corporation of the Merger, could be materially adversely affected. This Disclosure Statement contains forward-looking statements that involve risks and uncertainties. The actual results of the Surviving Corporation could differ materially from those anticipated in the forward-looking statements as a result of many factors, including the risks faced by the Surviving Corporation described below and elsewhere in this Disclosure Statement. Statements made herein and in other written and oral statements of Creditrust and NCOP may include the plans and objectives of management for future operations, including plans and objectives relating to future growth in the number of receivables and availability of adequate third-party financing. Any forward-looking statements are based on current expectations, which involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of Creditrust and NCOP. Although Creditrust and NCOP believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that any of the forward-looking statements will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by Creditrust, NCOG, NCOF and NCOP (or any of their officers and employees) or by any other person that the objectives and plans of the Debtor and NCOP will be achieved. B. Certain Bankruptcy Law Considerations 1. Failure to Satisfy Vote Requirement If votes are not received in number and amount sufficient to enable the Bankruptcy Court to confirm the Plan, Creditrust or the Creditors' Committee may seek to accomplish an alternative restructuring of its capitalization and its obligations to creditors and equity holders. There can be no assurance that the terms of any such alternative restructuring would be similar to or as favorable to the holders of Claims and Equity Interests, as those proposed in the Plan. See Section XI, "Alternatives to the Plan." - --- 2. Risk of Non-Occurrence of the Effective Date Although Creditrust believes that the Effective Date may occur soon after the Confirmation Date, there can be no assurances as to such timing. Moreover, if the conditions precedent to the Effective Date have not occurred or been waived within 60 days after the 76 Confirmation Date, or within 45 days after the date of a Final Order confirming the Plan, the Bankruptcy Court may vacate the order confirming the Plan, in which event the Plan would be deemed null and void, and Creditrust or the Creditors' Committee may propose to solicit votes on an alternative plan of reorganization. C. Risk Factors Affecting the Value of the Surviving Corporation Common Stock to be Issued Under the Plan 1. Ability to Maintain Creditrust's Historic Growth Rate Creditrust rapidly expanded and developed its business during the last two years. This expansion and development placed great demands on Creditrust's management, administrative, operational and financial resources. After the Effective Date, the Surviving Corporation may not be able to finance its continued growth, or to manage it effectively, which would harm its business, results of operations and financial condition, and its ability to meet its expected debt service obligations. Future growth and development will depend on numerous factors, including the Surviving Corporation's ability to: . develop and expand relationships with credit grantors; . recruit, train and retain qualified employees; . maintain quality service to customers and credit grantors; . enhance and maintain information technology, operational and financial systems; and . access sufficient sources of funding to purchase additional receivables. 2. Substantial Debt Upon completion of the Merger, the Surviving Corporation expects to have total assets of approximately $154.3 million, total debt (including certain non- recourse debt and accounts payable) of approximately $98.5 million and stockholders equity value (fair value) of approximately $75 million. This relatively high level of debt could result in a number of adverse effects, including: . increasing the Surviving Corporation's vulnerability to a business downturn; . limiting the Surviving Corporation's ability to obtain necessary financing in the future; . requiring the Surviving Corporation to dedicate a substantial portion of its cash flows from operations to pay debt service obligations rather than for other purposes, such as working capital, purchasing additional portfolios of consumer receivables or capital expenditures; 77 . limiting the Surviving Corporation's flexibility to react to changes in its business and market; and . making the Surviving Corporation more highly leveraged than some of its competitors, which may place the Surviving Corporation at a competitive disadvantage. A portion of the debt on the Surviving Corporation's balance sheet will be non-recourse to the Surviving Corporation. The cash flows on assets associated with some of the non-recourse debt may be restricted to servicing the non- recourse debt and may not be available generally to the Surviving Corporation. 3. Possible Losses on Consumer Receivables The Surviving Corporation will purchase and own consumer receivables generated by consumer credit card and other consumer credit transactions. These are obligations that the individual consumer has failed to pay when due. If the Surviving Corporation does not obtain recoveries on the receivables in amounts in excess of the amount paid for the receivables, the Surviving Corporation could incur significant losses, which could make it difficult to obtain funds to continue operations or repay debts. The Surviving Corporation's future profitability and ability to finance further purchases of receivables will depend significantly on its success in predicting collectability and cash flows on its pools of receivables. However, actual recoveries on the receivables may vary as a result of a variety of factors, including general economic conditions and other factors beyond the Surviving Corporation's control and may be less than the amount of expected recoveries. 4. Use of Reporting Estimates The Surviving Corporation will recognize revenue based on estimates of future collections on the pools of receivables it manages. Although estimates are based on statistical analysis, the actual amount collected on these pools may not correlate with the Surviving Corporation's (or Creditrust's) historical statistical experience. The accounting for securitizations also relies on estimates. If collections on these pools are less than estimated, the Surviving Corporation may be required to take a charge to earnings in an amount that could materially adversely affect its earnings. Similarly, the Surviving Corporation would be required to take a charge to earnings if there was a decline in the fair value of the residual investment in securitizations which was larger than any unrealized gain and was deemed other than temporary. Unanticipated future events, including refinements to the Surviving Corporation's cash flow models, may result in changes in estimates in future periods. Creditrust historically has, and NCOP will, adjust cash flow models with a view toward better predicting both the amount and timing of collections. For the years ended December 31, 1995 and 1996, Creditrust relied largely on the average past performance of its entire portfolio. After extensive statistical analysis of static pool performance data during the year ended December 31, 1997, Creditrust implemented a further refinement in its cash flow models. The refinement included static, pool- 78 specific estimates and had the effect of reducing total future projected cash flows on a portfolio-wide basis. The total effect on the individual static pools of this change in estimates was to decrease Creditrust's net earnings for the year ended December 31, 1997 by approximately $700,000 after taxes from the amount that would have been computed prior to this change. In the fourth quarter of 1999, Creditrust reduced the remaining estimates by 12% to reflect the historical cumulative trend in collections. While the Surviving Corporation believes that its cash flow models will continue to provide reasonably accurate forecasts of future collections, changes in collections due to staffing and systems' capacity, as well as changes in collection patterns within its portfolios, which may result from a variety of factors beyond its control, including changes in general economic conditions and changes in consumer attitudes toward repayment of defaulted obligations, may make previous estimates inaccurate or alter the way the Surviving Corporation makes future estimates. 5. Possible Shortage of Available Receivables for Purchase The Surviving Corporation's ability to grow and to meet its debt service obligations will depend upon the growth in the level of its operations, which in turn will depend upon continued availability of receivables that meet its requirements. The availability of portfolios of receivables for purchase at favorable prices will depend on a number of factors outside of the Surviving Corporation's control, including the continuation of the current growth trend in consumer debt generally and defaulted consumer debt in particular, and competitive factors affecting potential purchasers and sellers of portfolios of receivables. Any slowing in the growth of consumer debt or defaulted consumer debt could constrain the supply of consumer receivables available at attractive prices. If new competitors enter the business, access to additional consumer receivables may also become limited. In addition, if competing buyers raise the prices they are willing to pay for portfolios of consumer receivables above those we may deem appropriate, the Surviving Corporation may be unable to buy these receivables at prices consistent with return targets that would assure adequate levels of revenues for debt service. 6. Risks of Securitization Transactions Prior to the bankruptcy, Creditrust completed four securitization transactions, two of which resulted in a gain on sale. The Surviving Corporation intends only to pursue securitization transactions that will not result in a gain on sale income. The Surviving Corporation's quarterly financial statements could be materially affected by any possible future write-down associated with changes in the fair value of the residual investment in the two previous securitizations that resulted in gain on sale income. If NCOF were to lose the right to service the receivables included in the securitizations, then such loss could have a material adverse effect on the Surviving Corporation 7. Stock Price Volatility Because of the nature of the Surviving Corporation's business, its quarterly operating results may fluctuate in the future, which may adversely affect the market price of its common stock. The reasons the Surviving Corporation's results may fluctuate include: 79 . The timing and amount of collections on its receivables; . Any charge to earnings resulting from a decline in value of its residual investment in securitization of its portfolios; . Increases in operating expenses associated with the growth of its operations; and . Comparison to prior periods when Creditrust's revenues included significant amount of gain on sale. . Announcements of fluctuations in the Surviving Corporation's or its competitors' operating results; and . Market conditions for stocks in general. 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 Surviving Corporation Common Stock. There can be no assurance as to the prices at which the Surviving Corporation Common Stock may trade in the market following the Effective Date or that holders of Surviving Corporation Common Stock will be able to resell their shares at prices equal to or greater than the price at which they originally purchased shares of Creditrust Common Stock. 8. Control by NCOG Upon closing of the Merger, NCOG will own from 55% to 60% of the outstanding voting securities of the Surviving Corporation. Additional shares may be issued to NCOG after the Effective Date in accordance with the Merger Agreement and/or based on the AGI Settlement Agreement which could cause NCOG to own possibly more than 60% of the Surviving Corporation Common Stock. Accordingly, NCOG will have the ability to elect all of the directors and approve or control other matters presented for approval by the Surviving Corporation stockholders. Under Delaware law and the Surviving Corporation's certificate of incorporation, owners of a majority of its outstanding common stock are able to elect all of its directors and approve significant corporate transactions without the approval of the other stockholders. As a result, NCOG will have the unilateral ability to elect all of the Surviving Corporation's directors and to control the vote on all matters submitted to a vote of the holders of the NCOP common stock, including any going private transaction, merger, consolidation or sale of all or substantially all of assets. There can be no assurance that the interests of NCOG will not conflict with the interests of holders of Claims or Equity Interests. 9. Financial Projections The Financial Projections included as Exhibit E to this Disclosure --------- Statement are dependent upon the successful reorganization of the Surviving Corporation and continued implementation of its business plan and the reliability of the assumptions contained in the Financial Projections. The Financial Projections reflect numerous assumptions, including 80 confirmation and consummation of the Plan in accordance with the terms thereof, the anticipated future performance of the Surviving Corporation, industry performance, general business and economic conditions and other matters, some of which are beyond the control of the Surviving Corporation. (See Section VIII.A. 2 and 3 of Disclosure Statement). In addition, unanticipated events and circumstances occurring subsequent to the preparation of the Financial Projections may affect the actual financial results of the Surviving Corporation. Therefore, the actual results achieved throughout the periods covered by the Financial Projections may vary from the projected results. 10. Dependence upon NCOG; Potential Conflicts with NCOG Upon completion of the Merger, NCOG will beneficially own at least 55.0% of the Surviving Corporation Common Stock and will, in effect, have the power to elect all the directors of the Surviving Corporation and to control the Surviving Corporation's policies. See Section V.B "Ownership of Surviving Corporation Common Stock." In connection with the Plan, NCOF, a subsidiary of NCOG, and the Surviving Corporation will enter into the Servicing Agreement pursuant to which the Surviving Corporation will grant to NCOF the exclusive right to service all of the Surviving Corporation's receivables, subject to minor exceptions, for a period of 10 years. In addition, NCOF will hire substantially all of Creditrust's employees. The Surviving Corporation will be materially dependent upon NCOF' efforts under the Servicing Agreement to collect its receivables and will be able to terminate that agreement only due to NCOF default under the agreement. Any poor performance or breach of, adverse change in or termination of the Servicing Agreement could have a material adverse effect on the Surviving Corporation's business assets, financial condition, results of operations and liquidity. Mr. Barrist, who is the Chairman of the Board, President and Chief Executive Officer of NCOG, will hold the same positions with the Surviving Corporation. In addition, Mr. Gindin, the Executive Vice President, General Counsel and Secretary of NCOG, will also hold the same positions with the Surviving Corporation. These persons may have conflicts of interest with respect to matters concerning the Surviving Corporation and its relationship with NCOG and may not be able to devote their full time and attention to the business of the Surviving Corporation. Although the Surviving Corporation does not currently intend to enter into material transactions with NCOG or its subsidiaries, except as contemplated by the Plan and the Merger Agreement, in the future the Surviving Corporation may enter into other transactions with NCOG or its subsidiaries. The Surviving Corporation has not adopted any formal procedures regarding potential conflicts of interest with NCOG, although it is expected that any such transaction would be subject to review and approval by the independent directors on the Audit Committee of the Surviving Corporation. 11. Dependence on Senior Management 81 The Surviving Corporation will be 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 Surviving Corporation will depend on the services of Mr. Barrist and the other members of its senior management team to, among other things, successfully implement the Surviving Corporation's business plan, manage existing receivable portfolios and find, negotiate and purchase new consumer receivable portfolios. The loss of service of one or more members of the senior management team could have a material adverse effect on the Surviving Corporation. The Surviving Corporation has not entered into any employment agreements with any of its employees. 12. Restrictions on Cash Dividends Since its inception as a public company, Creditrust has not paid any cash dividends. The Surviving Corporation does not anticipate paying any cash dividends in the foreseeable future because it intends to retain its earnings to finance the expansion of its business. Additionally, the loan agreements to which the Surviving Corporation may become a party prior to the Effective Date may restrict or prohibit the payment of cash dividends. 82 X. SECURITIES LAW MATTERS A. Issuance of Surviving Corporation Common Stock Under the Plan Section 1145(a)(1) of the Bankruptcy Code exempts from the registration requirements of the Securities Act and state "blue sky laws" the offer or sale of securities under a chapter 11 plan if such securities are offered or sold in exchange for a claim against, or equity interest in, or a claim for an administrative expense in a case concerning, the debtor in the case. In reliance upon this exemption, the Surviving Corporation Common Stock to be issued on the Effective Date as provided in the Plan generally will be exempt from the registration requirements of the Securities Act and state and local securities laws. Accordingly, such securities may be resold without registration under the Securities Act or other federal securities laws pursuant to the exemption provided by Section 4(l) of the Securities Act, unless the holder is an "underwriter" with respect to such securities, within the meaning of Section 1145(b) of the Bankruptcy Code. In addition, such securities generally may be resold without registration under state securities laws pursuant to various exemptions provided by the respective laws of the several states. However, recipients of securities issued under the Plan are advised to consult with their own counsel as to the availability of any such exemption from registration under state law in any given instance and as to any applicable requirements or conditions to such availability. Section 1145(b) of the Bankruptcy Code defines "underwriter" for purposes of the Securities Act as one who (a) purchases a claim with a view to distribution of any security to be received in exchange for the claim, (b) offers to sell securities issued under a plan for the holders of such securities, (c) offers to buy securities issued under a plan from persons receiving such securities, if the offer to buy is made with a view to distribution, or (d) is a control person of the issuer of the securities. The Securities Act imposes limitations upon the ability of such a statutory underwriter to resell securities issued to them pursuant to a plan of reorganization. Notwithstanding the forgoing, statutory underwriters may be able to sell securities without registration pursuant to the resale limitations of Rule 144 under the Securities Act which, in effect, permits the resale of securities received by statutory underwriters pursuant to a chapter 11 plan, subject to applicable volume limitations, notice and manner of sale requirements, and certain other conditions. Parties which believe they may be statutory underwriters as defined in section 1145 of the Bankruptcy Code are advised to consult with their own counsel as to the availability of the exemption provided by Securities Act Rule 144. B. Registration Rights The Plan contemplates that the Surviving Corporation will enter into, on the Effective Date, the Contractor Agreement with Joseph R. Rensin, as more fully described under Section IV.J, "Independent Contractor Agreement." Pursuant to the Contractor Agreement, Mr. Rensin will be entitled to two demand and unlimited incidental (or "piggyback") registration rights, with respect to shares of Surviving Corporation Common Stock issued to him pursuant to the Merger. The registration rights granted to Mr. Rensin will be subject to customary suspension, "hold back," indemnification/contribution and priority provisions. In addition, the noteholders of SPV99-2 will likewise be given certain demand and piggyback registration rights and tag-along rights 83 and will be the subject of certain lock-up and drag-along rights which may be enforced by NCOG. C. Status of the Surviving Corporation It is anticipated that the surviving Corporation will be a reporting company under the Exchange Act. In addition, it is a condition to the obligations of the parties to consummate the Merger that the Surviving Corporation Common Stock shall have been approved for listing on the Nasdaq National Market system, subject to official notice of issuance. As with other conditions, this listing requirement may be waived by the parties, in which case the Surviving Corporation Common Stock would trade on the "Over the Counter" system. It is expected that the ticker symbol for the Surviving Corporation Common Stock will be "NCOP." 84 XI. LIQUIDATION ANALYSIS Confirmation of the Plan requires that the "Best Interests Test" under Section 1129 (a)(7) of the Bankruptcy Code be satisfied with respect to each impaired Class of Claims or Interests. The "Best Interests Test" is satisfied if the Plan provides each impaired Class of Claims or Interest with a recovery which is at least as great as the recovery which such Class would receive if the Debtor were liquidated under chapter 7 of the Bankruptcy Code. Accordingly, management has prepared a hypothetical liquidation analysis. Management believes the liquidation analysis demonstrates that the Plan meets the "Best Interests Test." A. Liquidation Under Chapter 7 If no plan is confirmed, the Debtor's Chapter 11 Case may be converted to a case under Chapter 7 of the Bankruptcy Code, or dismissed. In a Chapter 7 case, a trustee or trustees would be elected or appointed to liquidate the assets of the Debtor. It is impossible to predict precisely how the proceeds of the liquidation would be distributed to the respective holders of Claims or Interests against the Debtor. The Debtor believes that in a liquidation under Chapter 7, before holders of Claims or Equity Interests received any distribution, additional administrative expenses involved in the appointment of a trustee and attorneys, accountants and other professionals to assist such trustee would cause a substantial diminution in the value of the estate. The assets available for distribution to holders of Claims and Equity Interests would be reduced by such additional expenses and by Claims, some of which would be entitled to priority, that would arise by reason of the liquidation and from the rejection of leases and other executory contracts in connection with the cessation of the Debtor's operations and the failure to realize the greater going concern value of the Debtor's assets. B. Liquidation Valuation We assume that a chapter 7 trustee would not be able to retain the services of collectors over an extended period of time and thus project that the assets are liquidated over a period of three months. All of the Company's static pools were assumed to be sold for a cash price representing a fraction of their remaining charged-off balance. The remaining charged-off balances of the receivables within each pool were stratified according to the number of years since charge-off. A sales price was estimated for each "stratified" group of receivables within each pool based upon the number of years since charge-off, current market pricing for similar receivables and estimated time required to collect on each pool. The sales price for each stratified group of receivables within each pool were combined to obtain an estimate of gross proceeds from the sale of a particular pool. Gross proceeds from the sale of each pool were then applied to the outstanding bond balance associated each particular pool, net of any cash reserves. Any remaining proceeds after repayment of a bond in full are included in Total Distributable Proceeds. Table 1 summarizes the estimated proceeds from liquidation of the Debtor's static pools. 85 Table 1 - Proceeds from Liquidation of Pools - Forced Sale Basis (Dollars in Thousands)
- ---------------------------------------------------------------------------------------------------------------------- Less: Excess Proceeds Charged Gross Outstanding Plus: from Liquidation Deficiency -Off Factor Proceeds Bond Balance Reserves of Pools Claim Balance (1) (2) - ---------------------------------------------------------------------------------------------------------------------- Pool 1998-1 $888,738 $0.005 $ 4,444 $ 0 $ 0 $ 4,444 $ 0 - ---------------------------------------------------------------------------------------------------------------------- Pool 1998-2 956,627 0.007 6,882 (10,594) 3,250 - (462) - ---------------------------------------------------------------------------------------------------------------------- Pool 1999-1 918,034 0.023 20,875 (21,486) 2,400 1,790 - - ---------------------------------------------------------------------------------------------------------------------- Pool 1999-2 650,382 0.026 16,912 (32,668) - - (15,756) (Bridge Loan) - ---------------------------------------------------------------------------------------------------------------------- Pool 1999-3A 288,918 0.034 9,889 (19,816) 900 - (9,027) (Warehouse) - ---------------------------------------------------------------------------------------------------------------------- Pool 1999-3S 382,443 0.020 7,476 - - 7,476 - (Sunrock) - ---------------------------------------------------------------------------------------------------------------------- Pool 1999-3C 88,611 0.035 3,073 - - 3,073 - (Owned) - ---------------------------------------------------------------------------------------------------------------------- Total $16,783 ($25,246) Distributable Proceeds - ----------------------------------------------------------------------------------------------------------------------
(1) Charged-Off Balances exclude bankrupt, settled, sold and decreased accounts (2) Outstanding Bond Balances are as of September 30, 2000 Proceeds from the liquidation of all of the Debtor's assets (including the pools) were combined in order to determine the total amount of distributable proceeds, as shown in Table 2. 86 Table 2 - Proceeds Available for Distribution - Forced Sale Basis
- --------------------------------------------------------------------------------------------------- (Dollars in Thousands) - --------------------------------------------------------------------------------------------------- Book Value of assets as Distributable of 7/31/00 Factor Proceeds ----------- ------ -------- - --------------------------------------------------------------------------------------------------- Proceeds from Liquidation of Pools $204,382 See Table 1 $16,783 - --------------------------------------------------------------------------------------------------- Cash and Cash Equivalents 651 100% 651 - --------------------------------------------------------------------------------------------------- Property and Equipment 3,900 50% 1,950 - --------------------------------------------------------------------------------------------------- Other Assets 447 25% 112 - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- Total Distributable Proceeds $19,496 ------- - ---------------------------------------------------------------------------------------------------
Total distributable proceeds were first applied to Administrative Expense Claims, which included estimated outstanding Debtor-In-Possession financing, trustee fees, professional fees, and wind down costs. Proceeds remaining after the Administrative Expense Claims were fully satisfied were then applied to Priority Tax Claims and Holders of Secured Claims according to the nature of the liens associated with the unsecured claims. As can be seen in Table 3, under the liquidation scenario, the assets produce no recovery for Holders of Unsecured Claims or Equity Interests. Table 3 - Distribution of Available Proceeds - Forced Sale Basis - ----------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ---------------------- - ---------------------------------------------------------------------------------------------------- Total Distributable Proceeds $19,496 - ---------------------------- ------- - ---------------------------------------------------------------------------------------------------- Estimated Recovery Recovery Obligation Value Percentage ---------- ----- ---------- - ---------------------------------------------------------------------------------------------------- Administrative Expense Claims: - ---------------------------------------------------------------------------------------------------- Debtor-in-Possession Financing $ 1,671 $ 1,671 100% - ---------------------------------------------------------------------------------------------------- Trustee Fees (1) 195 195 100% - ---------------------------------------------------------------------------------------------------- Professional Fees (2) 975 975 100% - ---------------------------------------------------------------------------------------------------- Wind Down Costs (3) 600 600 100% - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- Priority Tax Claims $322,960.41 $322,960.41 100% - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- Secured Claims:
87 - ---------------------------------------------------------------------------------------------------- Sunrock Capital Loan 15,457 13,986 90% - ---------------------------------------------------------------------------------------------------- Secured Equipment Claims (4) 1,950 1,950 100% ----------- ----------- - ---------------------------------------------------------------------------------------------------- Total Secured Claims $ 17,408 $ 15,936 92% - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- Estimated Unsecured Claims: - ---------------------------------------------------------------------------------------------------- General Unsecured Claims $6-8 million - 0% - ---------------------------------------------------------------------------------------------------- SPV99-2 Noteholders Deficiency Claim (5) 15,756 - 0% ----------- ----------- - ---------------------------------------------------------------------------------------------------- Total Unsecured Claims $21-24 million $ 0 0% - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- Equity Interests N.A. - N.A. - ----------------------------------------------------------------------------------------------------
(1) Approximately one percent of distributable proceeds (2) Approximately five percent of distributable proceeds (includes chapter 11 fees) (3) Operating Expenses and post-petition accounts payable are assumed to exceed sources of cash from collections by $600 thousand (4) Represents security interest in proceeds from sale of equipment. Equipment ------------------------------- Lease Claims in excess of proceeds from the sale of equipment are included in General Unsecured Claims (5) Represents the difference between estimated proceeds from the (forced) sale of pool 1999-2 and the outstanding bond balance for the pool (pool 1999-2 carries a parent guarantee) without regard to NCO becoming the successor servicer 88 XII. REQUIREMENTS FOR CONFIRMATION A. Bankruptcy Code Requirements In order to confirm the Plan, the Bankruptcy Code requires that the Bankruptcy Court make a series of determinations concerning the Plan, including, among others: . that the Plan has classified Claims and Equity Interests in a permissible manner; . that the Plan complies with the technical requirements of Chapter 11 of the Bankruptcy Code, including Best Interests Test described above; . that the proponents have proposed the Plan in good faith; and . that the Plan is feasible and not likely to be followed by a liquidation of the Debtor. The Debtor believes that all of these conditions have been met and will seek a determination of the Bankruptcy Court to this effect at the Confirmation Hearing. B. Acceptances The Bankruptcy Code requires that the Plan be accepted by requisite votes of Classes of holders of Claims or Equity Interests, except to the extent that "cram down" (discussed below) is available under Section 1129(b) of the Bankruptcy Code. The Bankruptcy Code also requires that the Plan be feasible. In addition, the Bankruptcy Code requires that a Plan place each holder's Claim or Equity Interest in a Class with other Claims or Equity Interests which are substantially similar. At the Confirmation Hearing, the Bankruptcy Court must determine, among other things, whether the Plan has been accepted by each Class of holders of Claims or Interests whose Claims or Interests are impaired under the Plan. Under Section 1126 of the Bankruptcy Code, any impaired Class is deemed to accept the Plan if it is accepted by at least two-thirds in amount and more than one-half in number of the Allowed Claims or Interests of Class members that have voted on the Plan. Further, unless there is unanimous acceptance of the Plan by an impaired Class, the Bankruptcy Court must also determine that, under the Plan, Class members will receive property of a value as of the Effective Date that is not less than the amount that such Class members would receive or retain if the Debtor was liquidated under Chapter 7 of the Bankruptcy Code on the Effective Date (Best Interests Test). 89 C. Cramdown The Plan may be confirmed even if it is not accepted by all of the impaired classes, if the Bankruptcy Court finds that the Plan was accepted by at least one impaired class and does not discriminate unfairly against, and is fair and equitable as to, all non-accepting impaired classes under the "cram down" procedure set forth at Section 1129(b) of the Bankruptcy Code. Section 1129(b) requires that, among other things, the holders of Claims or Interests in the impaired classes must either receive the full value of their Claim(s) or Interest(s) or, if they receive less, no Class with junior liquidation priority may receive anything. 90 XIII. FINANCIAL INFORMATION A. General The audited consolidated balance sheets for the fiscal years ended December 31, 1999 and 1998, and the related consolidated statements of operations, and stockholders' equity/(deficit), and cash flows for each of the three years ended December 31, 1999, 1998 and 1997, of Creditrust and its subsidiaries are contained in the Annual Report on Form 10-K of Creditrust for the year ended December 31, 1999, a copy of which is annexed as Exhibit C to --------- this Disclosure Statement, and the full text of which is incorporated herein by reference. This financial information is provided to permit the holders of Claims and Equity Interests to better understand Creditrust's historical business performance and the impact of the Chapter 11 Case on Creditrust's businesses. B. Selected Financial Data See Item 6 "Selected Financial Data" set forth in the Annual Report on Form 10-K of Creditrust for the year ended December 31, 1999 annexed as Exhibit ------- C to Disclosure Statement. - - C. Management's Discussion and Analysis of Financial Condition and Results of Operations. For a detailed discussion by management of Creditrust's financial condition, most recent results of operations, liquidity and capital resources, see Item 7 "Management's Discussion and Analysis of Financial Condition and - --- Results of Operations" in the Annual Report on Form 10-K of Creditrust for the year ended December 31, 1999 annexed as Exhibit C to this Disclosure Statement. --------- D. Recent Performance See the Quarterly Report on Form 10-Q of Creditrust for the fiscal quarter ended March 31, 1999, a copy of which is annexed as Exhibit D to this --------- Disclosure Statement. Also, Creditrust is required to file monthly operating reports with the Bankruptcy Court. Such financial information is on file with the Bankruptcy Court and publicly available for review. Exhibit H sets forth a table summarizing these reports. 91 XIV. RECOMMENDATION The Debtor believes that the Plan affords holders of Claims or Equity Interests the potential for the greatest realization from the assets of the Debtor's Bankruptcy Estate and, therefore, is in the best interests of all holders of Claims or Interests. Accordingly, the Debtor recommends that all holders of Claims and Equity Interests vote to accept the Plan. XV. CONCLUSION The Plan and its implementation are subject to the entry of an order by the Bankruptcy Court confirming the Plan, and such order becoming final. Respectfully submitted, CREDITRUST CORPORATION Dated: December 21, 2000 By: /s/ ------------------------------------- ---------------------------------- JOSEPH K. RENSIN, Chairman and CEO 92 EX-2.3(I) 5 0005.txt EXHIBIT 2.3I Exhibit I to 2.3 FIRST AMENDED AND RESTATED SETTLEMENT AGREEMENT This FIRST AMENDED AND RESTATED SETTLEMENT AGREEMENT (the "RESTATED AGREEMENT") is made this 9/th/ day of January, 2001, by and among CREDITRUST CORPORATION ("CREDITRUST"), ASSET GUARANTY INSURANCE COMPANY ("AGI"), ENHANCE FINANCIAL SERVICES GROUP, INC. ("EFS"), CHARLES HENNEMAN ("HENNEMAN"), JOSEPH K. RENSIN ("RENSIN"), POOL 98-2 - ISSUER: CREDITRUST SPV98-2, LLC ("POOL 98-2 ISSUER"), ------ POOL 99-3A AKA 98-A - WAREHOUSE LINE - ISSUER: CREDITRUST FUNDING I, LLC ("POOL ------ 99-3A ISSUER"), NCO FINANCIAL SYSTEMS, INC. ("NCO") and NCO PORTFOLIO FUNDING, INC. ("NPFI"). WHEREAS, on June 21, 2000, Creditrust filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Maryland ("Bankruptcy Court"), commencing Case No. 00-5- 7812-JS (the "Bankruptcy Case"); and, WHEREAS, Pool 98-2 Issuer and Pool 99-3A Issuer, each a wholly-owned subsidiary of Creditrust, have issued certain asset-backed notes, the payment of which is secured by pools of consumer credit card receivables that the subsidiaries respectively own, known as "Pool 98-2" and "Pool 99-3A;" and, WHEREAS, Pool 98-2 has a cash reserve held by Wells Fargo Bank Minnesota, N.A., as trustee, currently in the amount of approximately $3.25 million, to secure payment of the Pool 98-2 asset-backed notes (the "98-2 Reserve") and Pool 99-3A has a cash reserve held by Wells Fargo Bank Minnesota, N.A. as trustee, currently in an amount in excess of $900,000, to secure payment of the Pool 99- 3A asset-backed notes (the "99-3A Reserve"); and, WHEREAS, AGI has insured the timely payment of interest and the ultimate payment of principal of the asset-backed notes issued by the Pool 98-2 Issuer ("98-2 Insurance Policy") and the Pool 99-3A Issuer ("99-3A Insurance Policy"); and, WHEREAS, in April 2000, Creditrust and Rensin filed a lawsuit known as Creditrust Corporation, et al. v. Enhance Financial Services Group, Inc., et al; United States District Court, District Court of Maryland, Reference No. WNNCV966 against EFS, AGI, and Henneman (the "Litigation"); and, WHEREAS, AGI has filed a motion for the appointment of a trustee and an adversary complaint seeking, among other things, an administrative claim in the Bankruptcy Case relating to amounts allegedly required to be deposited in the 99-3A Reserve (the "Bankruptcy Litigation"); and, WHEREAS, AGI asserts that it has numerous claims against Creditrust including, without limitation, a claim in the amount of $4,550,000.00 as a result of Creditrust's failure to comply with the provisions of that certain Amendment No. 3 to the Indenture and Servicing Agreement to which the Pool 99-3A Issuer is a party ("Third Amendment") dated as of December 21, 1999 ("Reserve Claim") which claim Creditrust disputes; and, WHEREAS, Henneman asserts that he has numerous claims against Creditrust, which claims Creditrust disputes, and Creditrust has asserted numerous claims against Henneman, which claims Henneman disputes; and WHEREAS, the parties intend to definitively resolve their claims against each other and settle the Litigation and the Bankruptcy Litigation; and 2 WHEREAS, the parties previously entered into a settlement agreement dated October 19, 2000 (the "Original Agreement") to give effect to this intention; and WHEREAS, the Bankruptcy Court denied the motion to approve the Original Agreement on November 28, 2000; and WHEREAS, the parties wish to continue to be bound by the terms of the Original Agreement as modified and amended herein in light of the Bankruptcy's Court's ruling and subsequent events; and WHEREAS, NPFI intends to merge with and acquire Creditrust (the merged entity will be referred to as "Reorganized NPFI") pursuant to a Fifth Amended Plan of Reorganization dated December 21, 2000 filed by Creditrust in the Bankruptcy Case, as amended ("the Plan") according to the terms of that certain Agreement and Plan of Merger dated September 20, 2000, as subsequently amended and restated, for the Merger of Creditrust Corporation with and into NCO Portfolio Funding, Inc. ("the Merger Agreement"); NOW THEREFORE, in consideration of the mutual promises, covenants and agreements of the parties contained herein and in the Original Agreement, as applicable, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. ORIGINAL AGREEMENT ----------------------- The parties agree that the terms of the Original Agreement, which are hereby ratified, reaffirmed, and expressly incorporated by reference herein, shall constitute the terms of this Restated Agreement, except as provided for in the following paragraphs. 3 2. LOCKUP ----------- Paragraphs 7 (A), (B), and (C) of the Original Agreement are deleted from the Restated Agreement. The parties agree to use their reasonable best efforts to obtain confirmation of the Plan proposed by Creditrust containing, reflecting, and embodying the terms of the Restated Agreement, and AGI and EFS shall not object to, and shall support and vote in favor of, the Plan. In the event confirmation of any competing Plan of Reorganization is sought by the Official Committee of Unsecured Creditors or any other party, nothing herein shall preclude AGI or EFS from voting in favor of any such competing Plan, so long as such Plan provides treatment of the claims of AGI and EFS at least as favorable as that provided for in this Restated Agreement. 3. RELEASES ------------- Paragraph 13(B) of the Original Agreement is hereby amended to eliminate the requirement that the releases formerly executed but not dated or exchanged by and between the parties are deemed null and void due to the disapproval of the Original Agreement by the Bankruptcy Court, and all parties agree that the releases formerly executed shall remain eligible to become operative and to be exchanged on the Effective Date according to the terms of the Restated Agreement. Paragraph 6 of the Original Agreement is also modified to eliminate any requirement that releases be exchanged between Creditrust and Rensin. 4. STAY OF LITIGATION ----------------------- In the event confirmation of any competing Plan of Reorganization is sought by the Official Committee of Unsecured Creditors or any other party, and such competing Plan fails to provide treatment of the claims of AGI and EFS at least as favorable as that provided for in this Restated Agreement, Paragraph 8 of the Original Agreement is modified to permit AGI and 4 EFS to initiate and engage in such litigation as they may deem necessary in their sole discretion to establish or defend any claims, rights, or interests they may have in the Bankruptcy Case (subject to the Debtor's right to oppose the assertion of any such claims, rights, or interests) unless and until the terms of any such competing Plan shall be modified to provide treatment of the claims of AGI and EFS at least as favorable as that provided for in this Restated Agreement. 5. STIPULATION ---------------- Not later than 5 business days following execution of the Restated Agreement, the parties shall prepare and submit for approval by order of the Bankruptcy Court a joint stipulation setting forth and embodying the terms of this Agreement, with a copy of this Agreement attached thereto as an exhibit. The parties shall cooperate with one another to obtain a hearing on, and approval of, such stipulation as expeditiously as possible consistent with the Bankruptcy Court's calendar. 6. PRODUCTION AND EXECUTION OF DOCUMENTS ------------------------------------------ Paragraph 5 of the Original Agreement is hereby amended to refer to the joint stipulation provided for in paragraph 5 of the Restated Agreement, rather than Paragraph 9 of the Original Agreement. Paragraph 5 of the Original Agreement is further amended to provide that the date by which the documents referenced in that Paragraph must be finalized is not three (3) business days prior to the date of the Disclosure Statement on the Plan reflecting the terms of the Original Agreement but rather as soon as practicable, but in no event later than the date of the confirmation hearing on the Plan. 5 7. TERMS OF MERGER -------------------- Within five (5) business days of the execution of this Restated Agreement, NCO and NPFI agree to provide AGI and EFS with updated information concerning the terms of the merger with Creditrust and updated pro forma financial statements reflecting the impact, if any, of changes made to the original Plan filed by Creditrust. AGI and EFS shall evaluate such information and financial statements according to the terms of Paragraph 3(B) of the Original Agreement. 8. NO MODIFICATION OF TRUSTEE RIGHTS AND RESERVATION OF RIGHTS ---------------------------------------------------------------- Nothing in this Restated Agreement shall be binding on Wells Fargo, as trustee, backup servicer, or successor servicer for the series 1998-A and 1998-2 securitizations, nor shall anything herein constitute a waiver, limitation, modification, determination, or in any way adversely affect any rights, interests, or claims which Wells Fargo, as trustee, backup servicer, or successor servicer, or its subservicer, Coldata, Inc, has, have, or may have arising out of or related directly or indirectly to the aformementioned securitizations. All rights, claims, and causes of action of Wells Fargo, as trustee, backup servicer, or successor servicer are reserved and deemed not adversely affected by the provisions hereof. In addition, all rights, claims, and causes of action of Pool 98-2 Issuer, Pool 99-3A Issuer, NCO, NPFI, Rensin, Creditrust, AGI, and EFS against Wells Fargo and Coldata, Inc. are reserved and deemed not adversely affected by the provisions hereof. Lastly, the failure of the parties to fully execute this Restated Agreement shall not affect the parties' rights with respect to the enforceability of the Original Agreement. 6 IN WITNESS WHEREOF, this Agreement has been duly executed by each of the parties hereto as of the date first above written. Creditrust Corporation Asset Guaranty Insurance Company by:___________________________________ by:___________________________ Enhance Financial Services Group, Inc. by:___________________________________ ______________________________ Joseph K. Rensin NCO Financial Systems, Inc. NCO Portfolio Funding, Inc. by:___________________________________ by:___________________________ CREDITRUST SPV98-2, LLC by:___________________________________ CREDITRUST FUNDING I, LLC by:___________________________________ Charles C. Henneman ______________________________________ 7 EX-10.1 6 0006.txt EXHIBIT 10.1 Exhibit 10.1 THIRD AMENDMENT TO CREDIT AGREEMENT ----------------------------------- THIRD AMENDMENT TO CREDIT AGREEMENT (this "Third Amendment"), is dated --------------- as of _______________ ________, 2000, and entered into among CREDITRUST CORPORATION, (the "Borrower"), the several Lenders and other financial -------- institutions parties to the Credit Agreement (as hereinafter defined) (individually a "Lender"; collectively, the "Lenders"), and SUNROCK CAPITAL ------ ------- CORP., as agent (in such capacity, the "Agent"). ----- W I T N E S S E T H: ------------------- WHEREAS, the Borrower, the Lenders and the Agent are parties to a Credit Agreement dated as of October 28, 1998 (as heretofore amended, supplemented or otherwise modified, the "Credit Agreement"); ---------------- WHEREAS, the Borrower has requested a deferral of the March principal payment due under the Credit Agreement and the Lenders have agreed to so amend the Credit Agreement to reflect such deferral on the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing and for other consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Defined Terms. Unless otherwise defined herein, terms defined in ------------- the Credit Agreement are used herein as therein defined. 2. Deferral of Principal Payments. ------------------------------ (a) Upon Borrower's payment to the Lenders of the March 2000 interest payment due under the Loan, the Lenders agree to defer the Borrower's obligation to pay the March 2000 principal payment due under the Loan. The Borrower acknowledges that the Lenders have granted to Joseph K. Rensin, pursuant to that Collection Guaranty Agreement of even date herewith, the right to cause a deferral in the Borrower's obligation to pay all or any portion of the April 2000 principal payment upon Borrower's payment to the Lenders of the April 2000 interest payment due under the Loan. Any amounts of principal so deferred shall, if not sooner paid, be due and payable on the Termination Date. 3. Representations and Warranties. The Borrower hereby represents ------------------------------ and warrants to the Lenders and the Agent that: (a) The representations and warranties made in the Credit Agreement are true and correct in all material respects on and as of the date hereof as if made on and as of the date hereof; and (b) The execution and delivery of this Third Amendment by and on behalf of the Borrower has been duly authorized by all requisite action on behalf of the Borrower and this Third Amendment constitutes the legal, valid and binding obligation of the Borrower, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). 4. Conditions Precedent. The effectiveness of the amendments and waiver -------------------- set forth herein is subject to the fulfillment, to the satisfaction of the Agent and its counsel, of the following conditions precedent: (a) The Borrower shall have executed and delivered to the Agent this Third Amendment. (b) The representations and warranties set forth in the Credit Agreement shall be true and correct in all material respects on and as of the date hereof. 5. Ratification; References; No Waiver. Except as expressly amended by ----------------------------------- this Third Amendment, the Credit Agreement shall continue to be, and shall remain, unaltered and in full force and effect in accordance with its terms. All references in the Credit Agreement and the other Loan Documents to the Credit Agreement shall be to the Credit Agreement as amended by the First Amendment, the Second Amendment and this Third Amendment. Except with respect to the deferral of principal payments set forth herein, this Third Amendment does not and shall not be deemed to constitute a waiver by the Agent or the Lenders of any Default or Event of Default or of any of the Agent's or the Lenders' other rights or remedies in the event of any Default of Event of Default. 6. Release and Indemnity. Recognizing and in consideration of the --------------------- Lenders' and the Agent's agreement to the amendments set forth herein, the Borrower hereby waives and releases the Lenders and the Agent and their officers, attorneys, agents, and employees from any liability, suit, damage, claim, loss or expense of any kind or nature whatsoever and howsoever arising that the Borrower ever had or now has against any of them arising out of or relating to any Lender's or the Agent's acts or omissions with respect to this Third Amendment, the Credit Agreement, the other Loan Documents or any other matters described or referred to herein or therein. The Borrower further hereby agrees to indemnify and hold the Agent and the Lenders and their respective officers, attorneys, agents and employees harmless from any loss, damage, judgment, liability or expense (including counsel fees) suffered by or rendered against the Lenders or the Agent or any of them on account of anything arising out of this Third Amendment, the Credit Agreement, the other Loan Documents or any other document delivered pursuant thereto up to and including the date hereof; provided that, the Borrower shall not have any obligation hereunder to -------- ---- any Lender or the Agent with respect to -2- indemnified liabilities arising from the gross negligence or willful misconduct of such Lender or the Agent. 7. Miscellaneous. ------------- (a) Expenses. The Borrower agrees to pay all of the Agent's -------- reasonable out-of-pocket expenses incurred in connection with the preparation, negotiation and execution of this Third Amendment including, without limitation, the reasonable fees and expenses of Ballard Spahr Andrews & Ingersoll, LLP. (b) Governing Law. This Third Amendment shall be governed by and ------------- construed in accordance with the laws of the Commonwealth of Pennsylvania. (c) Successor and Assigns. The terms and provisions of this Third --------------------- Amendment shall be binding upon and shall inure to the benefit of the Borrower, the Agent and the Lenders and their respective successors and assigns. (d) Counterparts. This Third Amendment may be executed in one or ------------ more counterparts, each of which shall be deemed to be an original, and all of which shall constitute one and the same instrument. (e) Headings. The headings of any paragraph of this Third -------- Amendment are for convenience only and shall not be used to interpret any provision hereof. (f) Modifications. No modification hereof or any agreement ------------- referred to herein shall be binding or enforceable unless in writing and signed on behalf of the party against whom enforcement is sought. IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. CREDITRUST CORPORATION By: ___________________ Name: ___________________ Title: ___________________ SUNROCK CAPITAL CORP., as Agent and as a Lender -3- By: ______________________ Name: ______________________ Title:______________________ -4- EX-10.2 7 0007.txt EXHIBIT 10.2 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Exhibit 10.2 AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF CREDITRUST SPV99-2, LLC _________________________ Dated as of March 1, 2000 _________________________ THE UNITS OF LLC INTEREST DESCRIBED IN THIS AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT") OR UNDER THE SECURITIES LAWS OF THE STATE OF DELAWARE OR ANY OTHER JURISDICTION (THE "STATE ACTS"). CONSEQUENTLY, UNITS IN THE COMPANY MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF THE 1933 ACT, THE STATE ACTS AND THIS AGREEMENT. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================ AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF CREDITRUST SPV99-2, LLC ================================================================================ THIS AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT (this "Agreement"), dated as of March 1, 2000, is made and executed by CREDITRUST CORPORATION, a Maryland corporation ("Creditrust"), and GSS HOLDINGS II, INC., a Delaware corporation ("Global"), as members (the "Members"). PRELIMINARY STATEMENTS: Creditrust has previously caused Creditrust SPV99-2, LLC (the "Company") to be formed as a limited liability company under the laws of the State of Delaware for the purposes set forth herein. Creditrust now desires to amend the Limited Liability Operating Agreement of the Company to permit the admission of Global as an additional Member, and the Members further desire to amend and restate this Agreement in order to establish the manner in which the business and affairs of the Company shall be managed and to determine the respective rights, duties and obligations of the members of the Company. NOW THEREFORE, the parties hereto hereby agree that the Limited Liability Company Agreement of the Company shall be amended and restated to provide in its entirety as follows: ARTICLE I FORMATION; NAME; REGISTERED OFFICE; PURPOSE; TERM Section 1.1 Formation. Creditrust has caused Creditrust SPV99-2, LLC to be formed as a limited liability company under the Delaware Limited Liability Company Act, 6 Del. C. (S) 18-101, et seq. (the "LLC Act"). Section 1.2 Registered Office and Registered Agent; Principal Office and Principal Executive Office. A. The initial address of the registered office of the Company in the State of Delaware and the name and address of the initial resident agent of the Company in the State of Delaware are as set forth in the Certificate of Formation (as defined below). B. The principal office and principal executive office of the Company shall, at all times during the term of the Bridge Loan Agreement (as such term is defined in Section 4.2) be maintained in the State of Maryland. The present address of the principal office and principal executive office of the Company in the State of Maryland is 7000 Security Boulevard, Baltimore, Maryland 21244. Section 1.3 Purpose. The purposes for which the Company is formed and the business and objects to be carried on and promoted by it are limited solely to the following: (1) To acquire, own, hold, sell, transfer, pledge or otherwise dispose of, interests in consumer loan receivables generated on credit card accounts and installment accounts ("Receivables"); (2) To authorize, issue, acquire, hold, retain an interest (including a subordinated or ownership interest) in, sell, deliver or otherwise deal with the notes issued pursuant to the documents listed in Section 4.2 hereof ("Term Loans") and, in connection therewith, to pledge or otherwise grant security interests in the Receivables to secure the Term Loans, and any other assets as determined by the Company's Board of Managers, it being understood that the Company may not borrow funds except pursuant to the Term Loans and the Bridge Loans refinanced thereby; (3) To maintain, enforce, protect and service (or arrange for an agent to so maintain, enforce, protect and service, which agent may be Creditrust or another affiliate of the Company) the Receivables; (4) To loan or otherwise invest, or to distribute to its Members, the proceeds derived from the sale, pledge or ownership of the Receivables as determined by the Company's Board of Managers; and (5) To engage in any lawful act or activity and to exercise any powers permitted to limited liability companies organized under the LLC Act that, in either case, are incidental to and necessary or convenient for the accomplishment of the above mentioned purposes. 2 Section 1.4 Certificate of Formation. Creditrust has caused a certificate of formation of the Company (the "Certificate of Formation") to be executed by an authorized person and filed for record with the Delaware Secretary of State as of the date of this Agreement, a copy of which is attached hereto as Exhibit A. The Officers and Managers shall --------- take all necessary action to maintain the Company in good standing as a limited liability company under the LLC Act, including (without limitation) the filing of any certificates of correction, articles of amendment and such other applications and certificates as may be necessary to protect the limited liability of the Members and to cause the Company to comply with the applicable laws of any jurisdiction in which the Company owns property or does business. Section 1.5 Term. The term of the Company commenced on the date that the Certificate of Formation was filed and received by the Secretary of State of the State of Delaware. The Company shall have perpetual existence; provided, however, that the Company may be dissolved in accordance with Section 6.1 of this Agreement. Section 1.6 Tax Characterization. At all times during which all of the outstanding Units (as defined below) or other equity interests in the Company are held by a single person, the Company shall, for federal and state income tax purposes, be disregarded as a separate entity such that all the assets and liabilities of the Company shall be treated as the assets and liabilities of the holder of all its Units. At all times during which two or more persons hold Units in the Company, the Company shall, for federal and state income tax purposes, be classified as a partnership rather than an association taxable as a corporation. Each Member, by its execution or acceptance of this Agreement, covenants and agrees that it will file its own federal and state income and other tax returns in a manner that its consistent with the Company being classified as a partnership and will not take any action which is inconsistent with the classification of the Company as a partnership. ARTICLE II MEMBERS; INTERESTS IN THE COMPANY; CAPITAL CONTRIBUTIONS Section 2.1 Members and Initial Capital Contributions. A. The Members shall be divided into Class A Members and Class B Members. Unless otherwise expressly provided in this Agreement to the contrary, (i) Creditrust and each subsequent holder of one or more Units who has been admitted to the Company as a Member shall be referred to herein as a "Class A Member" and Global, and any successor thereto, shall be referred to as the "Class B Member" and (ii) any reference to "Members" or a "Member" 3 shall include the Class A Members and the Class B Member. The Members, their respective Class designations, capital contributions, addresses and number of Units (if any) are set forth on Schedule A hereto. Schedule A shall be amended ---------- ---------- from time to time to reflect any changes to the information set forth thereon. B. Creditrust has made an initial capital contribution to the Company of $1,000. In exchange for such transfer and contribution, the Company shall issue to Creditrust 100 Units of ownership interest in the Company, which, as of the date such Units are issued, shall represent all the issued and outstanding Units in the Company. C. The Company shall have at all times one Class B Member. The Class B Member shall be a special class of Member the sole rights of which are limited to voting on certain actions and decisions by the Company as provided herein. The Class B Member (i) shall have no obligation to make any capital contributions to the Company, (ii) will not be issued any Units in the Company, (iii) will not be entitled to receive any distributions from the Company and (iv) will not be entitled to participate in the business and affairs of the Company or vote on any matters requiring the consent or approval of the Members, except as expressly provided herein. The Class B Member shall at all times be a corporation, which shall have at least one Independent Director and shall at all times be an Independent Member. For purposes of this Agreement, the term "Affiliate" shall mean, (i) Creditrust; (ii) any stockholder, partner, director, manager, officer, agent or employee of Creditrust or of a person or entity described in item (iii); or (iii) other person or entity that directly or indirectly controls, is controlled by, or is under common control with Creditrust or the Company, the term "Independent Director" shall mean an individual (a) who is not (i) a stockholder (whether direct, indirect or beneficial, other than indirect stock ownership in Creditrust or any Affiliate by any person through a mutual fund or similar diversified investment pool), customer, advisor or supplier of Creditrust or any Affiliate; (ii) a director, officer or employee of Creditrust or any Affiliate (other than as an Independent Director of any other single purpose vehicle Affiliates) (Creditrust and Affiliates, other than the Company, being hereinafter referred to as the "Parent Group"); (iii) a person related to any person referred to in clauses (i) and (ii); and (iv) a trustee, conservator or receiver for any member of the Parent Group; and (b) who has (i) prior experience as an independent director for a corporation or similar entity whose organic documents require the unanimous written consent of all independent directors or managers thereof before such entity could consent to the institution of bankruptcy or insolvency proceedings against it or could file a petition seeking relief under any applicable federal or state law relating to bankruptcy, and (ii) at least three years of employment experience with one or more entities that provide, in the ordinary course of their respective businesses, advisory, management or placement services to issuers of securitization or structured finance instruments, agreements or securities; and 4 (c) of whose appointment the Lenders have been notified at least ten (10) Business Days in advance and to which appointment the Majority Lenders have not reasonably objected to in writing. and the term "Independent Member" shall mean shall mean any person or entity which (a) is in fact independent, (b) does not have any direct financial interest or any material indirect financial interest in the Company or in the Parent Group and (c) is not connected with the Company or the Parent Group as an officer, employee, promoter, underwriter, trustee, partner, director or person performing similar functions. Notwithstanding anything in this Agreement to the contrary, in addition to any requirements under the charter and by-laws of the Class B Member, the affirmative vote of the Independent Director shall be required for the Class B Member to authorize (i) any of the matters specified in Section 4.1.E hereof, (ii) any amendment of this Agreement for which the consent of the Class B Member is required or (iii) any other actions or decisions under this Agreement for which the consent of the Class B Member is required. In the event that the Independent Director resigns as a director of the Class B Member, or such position is otherwise vacated, or the individual acting as the Independent Director shall cease to qualify as such, no action requiring the affirmative vote of the Class B Member shall be taken until a successor Independent Director is elected to the board of directors of the Class B Member and such Independent Director approves such action and any such action taken in violation of this provision shall be void. No Independent Director shall be a trustee in bankruptcy for the Company or any Affiliate of the Company or any significant customer of or supplier to the Company. Section 2.2 Additional Capital Contributions. A. Other than the initial contribution of Receivables by Creditrust to the Company pursuant to Section 2.1, no Member shall be required to make any capital contributions to the Company or to lend any funds to the Company. B. [Reserved]. C. Subject to the other provisions of this Agreement, the Board of Managers, on behalf of the Company, may from time to time seek and accept from one or more Class A Members selected by the Board of Managers additional capital contributions of cash or in-kind contributions of property on such terms and subject to such conditions as may be determined by the Board of Managers in its sole discretion. Section 2.3 Additional Members. A. Except as provided in Sections 2.1.C, 5.1.B and 5.3.B, no individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof (or any other person) may be admitted to the Company as an additional or substitute Member without the prior approval of the Board of Managers. 5 B. In addition to any other requirements set forth in this Agreement, no person shall be admitted to the Company as an additional or substitute Member unless and until such person has accepted and agreed to all the provisions of this Agreement by executing a counterpart signature page hereto or an amendment to this Agreement. Section 2.4 Issuance and Classification of Units. Each Class A Member's ownership interest in the Company shall be represented by units of membership interest ("Units"). An unlimited number of Units are authorized. Units shall not be certificated. The Units shall be of a single class. Section 2.5 Capital Accounts. An individual capital account (the "Capital Account") shall be maintained for each Class A Member. The Capital Account of a Class A Member shall be increased by (a) the amount of cash or the agreed fair market value of any property contributed by such Class A Member (net of any liabilities assumed by the Company and any liabilities to which such property is subject) and (b) the amount of all Profits (and any item thereof) allocated to such Class A Member, and decreased by (c) the amount of all distributions to such Class A Member and (d) the amount of all Losses (and any item thereof) allocated to such Class A Member. The Capital Accounts shall be determined, maintained and adjusted in accordance with the Internal Revenue Code of 1986, as amended (the "Code") and the Treasury Regulations issued thereunder, including the capital account maintenance rules in Treasury Regulations (S)1.704-(1)(b)(2)(iv). Section 2.6 General Rules Relating to Capital of the Company. A. No Member shall be personally liable for the return of the capital contributions of the Members, or any portion thereof, it being expressly understood that any such return of contributions shall be made solely from the Company assets. B. Except as expressly provided herein, no Member shall have the right to withdraw or receive a return of all or any part of such Member's capital contributions. No Member shall have any right to demand or receive property (other than cash) in return of capital contributions. ARTICLE III ALLOCATIONS AND DISTRIBUTIONS Section 3.1 Distributions to Members. A. Any other sources of cash not required to be retained by the Company under the applicable credit and security agreements to which the Company is a party may be distributed to the Class A Members at such times and in such amounts as may be determined by the Board of 6 Managers in its discretion. Other than such distributions, the Company shall not make any distributions to its Members. B. No distributions shall be made to the Class B Member. Section 3.2 Allocations of Profits and Losses. Profits and Losses for each fiscal year (or other portion thereof) of the Company shall be allocated among the Class A Members in proportion to the number of Units held by each. No Profits or Losses shall be allocated to the Class B Member. Section 3.3 Allocation of Taxable Income and Taxable Loss. A. Except as otherwise provided herein, each item of taxable income, gain, loss, deduction, preference or recapture entering into the computation of Profits or Losses hereunder shall be allocated to each Class A Member in the same proportion as Profits or Losses are allocated and in accordance with the provisions of Section 704(b) of the Code and the Treasury Regulations thereto. B. In accordance with Code Section 704(c) and the Treasury Regulations thereunder, income, gain, loss, and deduction with respect to any property contributed to the capital of the Company or with respect to which the value has been adjusted on the books of the Company shall, for tax purposes (but not for purposes of maintaining the Members' respective Capital Accounts), be allocated among the Members so as to take account of any variation between the adjusted basis of such property to the Company for federal income tax purposes and its fair market value using such method as may be selected by the Board of Managers. C. Allocations pursuant to this Section 3.3 are for purposes of federal, state, and local taxes and shall not affect, or in any way be taken into account in computing, any Member's Capital Account or share of Profits, Losses, other items, or distributions pursuant to any provision of this Agreement. Section 3.4 Distributions Upon Dissolution and Termination Upon the dissolution and termination of the Company, the assets remaining after satisfaction (whether by payment or by establishment of reserves therefor) of creditors shall be distributed to the Class A Members in accordance with the number of Units held by each. 7 ARTICLE IV MANAGEMENT OF BUSINESS AND AFFAIRS OF THE COMPANY Section 4.1 Management of Business and Affairs of the Company. A. Except as otherwise provided herein, the exclusive authority to manage, control and operate the Company shall be vested in the Board of Managers of the Company, consisting of individuals, who need not be members, elected by the members as Managers in accordance with the Certificate of Formation and this Agreement. The number of Managers of the Company shall be three (3), which number may be increased or decreased in accordance with the By-Laws of the Company and the terms of this Agreement. The names of the Managers who will serve until the first annual meeting and until successor(s) are elected and qualify are as follows: Joseph K. Rensin Richard J. Palmer Thomas A. Henning B. For purposes of carrying out the business of the Company, the Members hereby adopt the By-Laws of the Company attached hereto as Exhibit B and --------- incorporated by this reference as if set forth fully herein (the "By-Laws"). C. The Board of Managers shall appoint Officers of the Company for the purpose of managing the day-to-day operations of the Company, who shall be elected and shall have the powers as set forth in the By-Laws. The names of the Officers initially serving the Company and the capacities in which they serve are as follows: Name Office(s) ---- --------- Joseph K. Rensin President Richard J. Palmer Vice President and Treasurer Thomas A. Henning Secretary D. Notwithstanding the general grant of authority to the Board of Managers under the foregoing provisions of this Section 4.1, the Managers shall cause the Company: (1) To maintain books and records separate from its Affiliates and from any other person or entity; (2) To maintain its bank accounts separate from those of its Affiliates and those of any other person or entity; (3) Not to commingle its assets with those of any other person or entity and to hold all of its assets in its own name; 8 (4) To conduct its own business in its own name; (5) To maintain separate financial statements, showing its assets and liabilities separate and apart from those of its Affiliates and from those of any other person or entity and to cause such financial statements to be prepared in accordance with generally accepted accounting principles; (6) To pay its own liabilities and expenses only out of its own funds; (7) To observe all corporate and other organizational formalities; (8) To maintain an arm's length relationship with its Affiliates and to enter into transactions with Affiliates only on a commercially reasonable basis; (9) Not to assume, guarantee or become obligated for the debts of any other entity or person; (10) To allocate fairly and reasonably any overhead expenses that are shared with any Affiliate, including paying for office space and services performed by any employee of an Affiliate; (11) To use separate stationery, invoices, and checks bearing its own name; (12) To hold itself out as a separate entity; (13) To correct any known misunderstanding regarding its separate identity; (14) Not to guaranty or become obligated for the debts of any other entity or hold out its credit as being available to satisfy the obligations of others; (15) Except in connection with the Term Loans, not to pledge the Receivables or any of its other assets for its benefit or the benefit of any other entity; (16) Not to incur or assume any indebtedness except for such indebtedness that may be incurred by the Company in connection with the issuance of Term Loans; and (17) To cause any of the Company's financial statements which are consolidated with those of Creditrust to contain footnotes or other disclosures which describe the Company's business and otherwise inform Creditrust's creditors that the Company is a separate entity whose creditors have a claim on its assets prior to those assets becoming available to its equity holders and therefore to any creditors of Creditrust or any of its Affiliates. E. Notwithstanding anything to the contrary set forth in the Certificate of Formation or this Agreement, the unanimous consent of all of the Members (including the Class B Member) shall be required for the Company to: 9 (1) (a) File or consent to a voluntary petition or otherwise initiate proceedings for the Company to be adjudicated bankrupt or insolvent or seeking an order for relief as a debtor under the Bankruptcy Code; (b) file or consent to the filing of, or cause the filing of, any petition seeking any composition, bankruptcy, reorganization, readjustment, liquidation, dissolution or similar relief for the Company under any applicable state or federal bankruptcy laws or any other present or future applicable federal, state or other statue or law relative to bankruptcy, insolvency or other relief for debtors; (c) seek or consent to the appointment of a trustee, receiver, conservator, assignee, sequestrator, custodian, liquidator (or other similar official) of the Company or of all or any substantial part of the properties and assets of the Company; (d) make or consent to any general assignment for the benefit of creditors; (e) admit in writing its inability to pay its debts generally as they become due, or declare or effect a moratorium on its debt; or (f) take any action in furtherance of any of the actions set forth in the preceding clauses (a) through (e) of this paragraph; or (2) Dissolve or liquidate, in whole or in part, consolidate or merge with or into any other entity or convey, sell or transfer all or substantially all of its properties or assets substantially as an entirety to any entity; or acquire all or substantially all of the properties, assets or capital stock or other ownership interests of any other entity; provided, that the foregoing shall not be construed as limiting the ability of the Company to make distributions to its members in accordance with this Agreement; or (3) Incur or assume any indebtedness for borrowed money except for the indebtedness that is represented by the Bridge Loan and Term Loans (as defined in the Bridge Loan Agreement). By its signature below, the Class B Member acknowledges that, when voting on whether the Company will take any action described in this Section 4.1.E, the Class B Member shall owe its primary obligation and fiduciary duty to the Company (including, without limitation, the Company's creditors) and not to the Members (except to the extent as may specifically be required by applicable law). Every Member of the Company shall be deemed to have consented to the foregoing provisions of this Section 4.1.E, specifically and without limitation, the waiver of his, her or its right to cause a dissolution of the Company under applicable law by virtue of such Member's acquisition of Units of the Company and admission to the Company as a Member. Notwithstanding the foregoing and so long as any Term Loans remain outstanding, the Managers shall have no authority to take any action enumerated in this Section 4.1.E without the written consent of the Majority Lenders (as such term is defined in the Bridge Loan Agreement). Section 4.2 Approval of Certain Agreements and Transactions A. Each Member, by its execution or acceptance of this Agreement, hereby ratifies and approves the execution and delivery by the Company of, and the performance of the obligations of the Company under, the following documents and agreements that were executed 10 and delivered concurrently with the closing of the transactions contemplated by the Bridge Loan Agreement and Amendment No. 1 thereto: (1) Bridge Loan Agreement dated August 2, 1999 (the "Bridge Loan Agreement"), by and among the Company, Creditrust, CRDT SPV99-2 Capital, Inc. ("Capital"), Norwest Bank Minnesota, National Association (the "Administrative Agent"), and the lenders identified therein (the "Lenders"), and Amendment No. 1 thereto; (2) Guaranty and Collateral Agreement dated August 2, 1999, made by the Company and Capital in favor of the Administrative Agent; (3) Parent Guaranty and Collateral Agreement dated August 2, 1999, made by Creditrust in favor of the Administrative Agent; (4) Amended and Restated Servicing Agreement dated as of March 1, 2000, by and among the Company, Creditrust and the Administrative Agent. B. Each Member, by its execution or acceptance of this Agreement, hereby authorizes and directs the Company to borrow money on the terms set forth in the Bridge Loan Agreement, to issue the Term Loans to evidence such indebtedness and, in connection therewith, grant a security interest in the Receivables to the Administrative Agent in accordance with the terms of the Bridge Loan Agreement. Section 4.3 No Participation of Members in Business and Affairs of the Company. A. No Member, in its capacity as such, shall have any authority or right to act for or bind the Company or to participate in or have any control over Company business, except for such rights to consent to or approve of the actions and decisions of the Board of Managers as are expressly provided for in this Agreement or the Certificate of Formation. B. Except for such right and any other rights to consent to or approve of actions and decisions of the Company expressly provided for in this Agreement, the Class B Member shall not be entitled to vote on the election of Managers of the Company or on any other matter submitted to a vote by the Members. Section 4.4 Other Businesses of Members; Covenants Regarding Noncompetition and Nondisclosure. A. Any Member and any Affiliate of any Member may engage in or possess an interest in other business ventures of any nature or description independently or with others, and neither the Company nor any Member shall have any rights in or to such independent ventures or the income or profits derived therefrom, and such activities shall not be construed as a breach of any duty of loyalty or other duty to the other Members or the Company. 11 B. The Class B Member, by its execution or acceptance of this Agreement, (i) acknowledges that it may obtain information relating to the Company and Creditrust that is of a confidential and proprietary nature ("Proprietary Information"), including, but is not limited to, non-public trade secrets, invention techniques, processes, programs, schematics, software source documents, data, and financial information and (ii) agrees at all times, both during the period in which it is a Member and for a period of three (3) years after the complete termination of its interest in the Company as a Class B Member for any reason (including the dissolution and termination of the Company), keep in trust and confidence all such Proprietary Information, and shall not use such Proprietary Information other than in connection with the exercise of its rights under this Agreement, nor shall any Class B Member disclose any such Proprietary Information of the Company or Creditrust without the written consent of Creditrust unless legally required to disclose such information. Each Class B Member further agrees to immediately return all Proprietary Information of the Company and Creditrust (including copies thereof) in its possession, custody, or control upon the complete termination of its interest in the Company as a Class B Member for any reason. C. The Class B Member acknowledges and agrees that since a remedy at law for any breach or attempted breach of the restrictive covenants of this Section 4.4 shall be inadequate, the non-breaching party shall have the right to enforce the provisions of this Section 4.4 by an action for specific performance and injunctive or other equitable relief, filed in any court of competent jurisdiction in the State of Delaware, without the necessity of proving actual damages, in case of any such breach or attempted breach, in addition to whatever other remedies may exist at law. The parties also waive any requirement for securing or posting any bond in connection with obtaining any such injunctive or other equitable relief. The parties hereto recognize that the laws and public policies of the various states of the United States may differ as to the validity and enforceability of agreements similar to those contained in Section 4.4. It is the intention of the parties that the provisions of this Section 4.4 shall be enforced to the fullest extent permissible under the laws and public policies of the State of Delaware or any other jurisdiction in which enforcement may be sought. In the event that this Section 4.4 shall be determined to be invalid or unenforceable, either in whole or in part, Section 4.4 shall be deemed amended to delete or modify, as necessary, the offending provisions and to alter the balance of this Section 4.4 in order to render the same valid and enforceable to the fullest extent permissible as aforesaid. Section 4.5 Indemnification. A. The Company shall indemnify (i) its Managers and Officers to the fullest extent permitted or authorized by the laws of the State of Delaware now or hereafter in force applied as if the Company were a Delaware corporation, including (without limitation) the advance of expenses under the procedures, (ii) the Class B Member and its directors, officers, employees, representatives and agents to the fullest extent permitted or authorized by the laws of the State of Delaware now or hereafter in force, including (without limitation) the advance of expenses, and (iii) other employees and agents of the Company to such extent as shall be authorized by the Board of Managers and is permitted by law. The foregoing rights of indemnification shall not be exclusive of any other rights to which those seeking indemnification may be entitled. The Board 12 of Managers may take such action as is necessary to carry out these indemnification provisions and is expressly empowered to adopt, approve and amend from time to time such resolutions or contracts implementing such provisions or such further indemnification arrangements as may be permitted by law. No amendment of the Certificate of Formation or this Agreement or repeal of any of the provisions thereof shall limit or eliminate the right to indemnification provided hereunder with respect to acts or omissions occurring prior to such amendment or repeal. The indemnification shall (x) be payable solely from the assets of the Company and no Member shall have any personal or corporate liability therefor and (y) be expressly subordinate to any obligations of the Company on or with respect to the Term Loans. B. To the fullest extent permitted by Delaware statutory or decisional law, as amended or interpreted, no Manager, Officer or Class B Member of the Company shall be personally liable to the Company or any Members for money damages. No amendment of the Certificate of Formation or this Agreement, or repeal of any of their respective provisions shall limit or eliminate the limitation on liability provided to Managers, Officers and Class B Members hereunder with respect to any act or omission occurring prior to such amendment or repeal. ARTICLE V RESTRICTIONS ON TRANSFERS OF UNITS AND WITHDRAWALS BY MEMBERS Section 5.1 Transfer of Units. A. Except as provided in this Section 5.1, (i) no Class A Member shall endorse, sell, give, assign, transfer or otherwise dispose of, voluntarily or involuntarily or by operation of law (hereinafter referred to as "Transfer") all or any part of such Class A Member's Units without the prior written consent of the Board of Managers and (ii) prior to the date on which all Term Loans have been satisfied in full, without the prior written consent of the Majority Lenders (as such term is defined in the Bridge Loan Agreement). B. Any Class A Member may sell or assign (for any consideration or no consideration) all of its Units to an Affiliate of the Class A Member that (i) holds 100% of the ownership and effective control over the transferring Class A Member, (ii) 100% of the ownership and effective control over which is held by the transferring Class A Member or (iii) is under common 100% control with the transferring Class A Member. A permitted transferee of a Class A Member under this Section 5.1.B shall be admitted to the Company as a substitute Class A Member with respect to the Units transferred to it upon the satisfaction of all of the following conditions: (i) an executed or authenticated copy of the written instrument of assignment or Transfer is delivered to the Company; 13 (ii) the transferor Class A Member grants to the transferee the right to be admitted to the Company as a substitute Class A Member; (iii) the transferee agrees to be bound by all of the terms of this Agreement by executing a counterpart signature page to this Agreement; and (iv) the Units acquired by the transferee consist of all the Units of the transferor Class A Member in the Company. C. No Class B Member shall have any right to assign or Transfer any of its rights under this Agreement and any purported assignment or Transfer shall be void ab initio, unless consented to by the Majority Lenders and the Class A Member. Section 5.2 Additional Restrictions on Transfers A. The Units described in this Agreement have not been registered under the Securities Act of 1933, as amended (the "1933 Act") or under the securities laws of the State of Delaware or any other jurisdiction (the "State Acts"). Consequently, in addition to any and all other restrictions on transferability set forth herein, the Units may not be sold, assigned, pledged, hypothecated or otherwise disposed of or Transferred, except in accordance with the provisions of the 1933 Act and the State Acts. B. In addition to any and all other restrictions on Transfers set forth herein, no Units may be sold, assigned, pledged, hypothecated or otherwise disposed of if such Transfer would cause or result in an Event of Default under the Bridge Loan Agreement. Section 5.3 Withdrawal or Removal of Members. A. No Class A Member shall have any right to withdraw from the Company as a Member without the prior consent of the Board of Managers. B. At any time after the date that is 100 days following the date on which all Term Loans have been paid in full, the Class B Member may withdraw as a Member by delivery of written notice to the Company, effective immediately upon delivery of such written notice. At any time prior to such date, the Class B Member may only withdraw upon the first to occur of (i) 90 days after the date on which written notice of its withdrawal is delivered to the Company and the Lenders (as defined in the Bridge Loan Agreement) or (ii) the admission of a substitute Class B Member selected by the Board of Managers with the consent of the Majority Lenders (such consent not to be unreasonably withheld, conditioned or delayed). Upon the withdrawal of the Class B Member hereunder, the Class B Member shall, except for the indemnification provisions of Section 4.5 hereof, have no further rights under this Agreement. C. At any time after the date that is 100 days following the date on which all Term Loans have been paid in full, the Board of Managers may remove the Class B Member as a member of the Company by delivery of written notice thereof to the Class B Member. Upon the 14 sending of such notice, the Class B Member shall automatically and without the requirement of any further action by the Company or any other Member, be deemed to have withdrawn from the Company as a Member and, except for the indemnification provisions of Section 4.5 hereof, shall have no further rights under this Agreement. Section 5.4 Effect of Bankruptcy, Dissolution, Liquidation or Termination of a Member. The bankruptcy, dissolution, liquidation or termination of a Member shall not cause a termination or dissolution of the Company, and the business of the Company shall continue. Upon any such occurrence with respect to a Class A Member, the trustee, receiver, executor, administrator, committee or conservator of such Class A Member shall have only the rights of an assignee of the Units of the former Class A Member for the purpose of settling or managing the former Class A Member's estate or property. The Transfer by such trustee, receiver, executor, administrator, committee or conservator of any Unit shall be subject to all of the restrictions hereunder to which such Transfer would have been subject if such Transfer had been made by the bankrupt, dissolved, liquidated or terminated Class A Member. ARTICLE VI DISSOLUTION OF THE COMPANY Section 6.1 Dissolution A. The Company shall not dissolve and terminate prior to the date that is one year and one day after the date on which all Term Loans have been paid in full. At any time thereafter, the Company may be dissolved by action of the Board of Managers. B. The Company shall not be dissolved upon a person ceasing to be a Member, including the occurrence, with respect to any Member, of any of the events specified under Section 18-801(b) of the LLC Act. Section 6.2 Liquidation and Termination. A. Upon the dissolution of the Company, the Officers and Managers of the Company shall cause the Company to liquidate by converting the assets of the Company to cash or its equivalent and arranging for the affairs of the Company to be wound up with reasonable speed but with a view towards obtaining fair value for Company assets, and, after satisfaction (whether by payment or by establishment of reserves therefor) of creditors shall distribute the remaining assets to and among the Class A Members in accordance with the provisions of Section 3.5 hereof. B. Each Member shall look solely to the assets of the Company for all distributions with respect to the Company and such Member's capital contribution thereto and share of profits, 15 gains and Losses thereof and shall have no recourse therefor (upon dissolution or otherwise) against any other Member. ARTICLE VII BOOKS AND RECORDS; ACCOUNTING, TAX ELECTIONS, ETC. Section 7.1 Books, Records and Reports. A. The Company shall keep correct and complete books and records of its accounts and transactions and minutes of the proceedings of its Members and Board of Managers and of any executive or other committee when exercising any of the powers of the Board of Managers. The books and records of the Company may be in written form or in any other form which can be converted within a reasonable time into written form for visual inspection. Minutes shall be recorded in written form, but may be maintained in the form of a reproduction. The original or a certified copy of this Agreement shall be kept at the principal office of the Company. The books and records of the Company shall be maintained by the Secretary of the Company and shall be available for examination by any Member, or its duly authorized representatives, during regular business hours. B. The President or chief financial officer shall prepare or cause to be prepared and shall furnish to the Members within ninety (90) days of the end of each fiscal year (i) a balance sheet and report of the receipts, disbursements, Profits or Loss of the Company, and each Member's share of such items for the fiscal year, and (ii) information sufficient for the Members to report their respective shares of the profits and losses of the Company for income tax purposes. The cost of such financial and tax reports shall be an expense of the Company. Section 7.2 Bank Accounts Checks, Drafts, Etc. The bank accounts of the Company shall be maintained in accounts in the name of and under the tax identification number for the Company in such banking institutions as the Managers shall determine. All checks, drafts and orders for the payment of money, notes and other evidences of indebtedness, issued in the name of the Company, shall be signed by such Officers as may be authorized by the Board of Managers from time to time. Section 7.3 Fiscal Year; Methods of Accounting. The fiscal year of the Company shall be the year ending December 31, unless otherwise determined by the Board of Managers. The method of accounting to be used in keeping the books of the Company shall be determined by the Board of Managers in accordance with applicable law. 16 Section 7.4. Tax Matters Partner. If, at any time, the Company has more than one Member and is required to identify one of the Members as the "Tax Matters Partner" of the Company for federal income tax purposes, Creditrust shall be designated as the Tax Matters Partner. If the Company receives from the Internal Revenue Service a Final Company Administration Adjustment pursuant to Section 6223 of Code, the Tax Matters Partner agrees to notify the Members of such receipt within ten (10) days thereof. If it is determined to seek judicial review of such IRS action pursuant to Section 6226 of Code, then the Tax Matters Partner shall select the judicial forum for such review in accordance with the recommendation of counsel. ARTICLE VIII GENERAL PROVISIONS Section 8.1 Binding Provisions. The covenants and agreements contained herein shall be binding upon and inure to the benefit of the successors and assigns of the respective parties hereto. The Lenders under the Bridge Loan Agreement shall be third party beneficiaries hereof. Section 8.2 Separability of Provisions. Each provision of this Agreement shall be considered separable and if for any reason any provision or provisions herein are determined to be invalid and contrary to any existing or future law, such invalidity shall not impair the operation of or affect any other provisions of this Agreement. Section 8.3 Rules of Construction. Unless the context clearly indicates to the contrary, the following rules apply to the construction of this Agreement: (i) References to the singular include the plural, and references to the plural include the singular. (ii) Words of the masculine gender include correlative words of the feminine and neuter genders. (iii) The headings or captions used in this Agreement are for convenience of reference and do not constitute a part of this Agreement, nor affect its meaning, construction, or effect. 17 (iv) References to a person include any individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust, unincorporated organization or government or agency or political subdivision thereof. (v) Any reference in this Agreement to a particular "Article," "Section" or other subdivision shall be to such Article, Section or subdivision of this Agreement unless the context shall otherwise require. (vi) Any use of the word "including" in this Agreement shall not be construed as limiting the phrase so modified to the particular items or actions enumerated. (vii) When any reference is made in this document or any of the schedules or exhibits attached to the Agreement, it shall mean this Agreement, together with all other schedules and exhibits attached hereto, as though one document. Section 8.4 Applicable Law. This Agreement shall be construed and enforced in accordance with the laws of the State of Delaware, without regard to conflict of law principles. Section 8.5 Entire Agreement; Amendments. A. This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof. B. This Agreement and the Certificate of Formation may be modified, altered, changed, repealed or amended only pursuant to a written amendment adopted by the Board of Managers and approved by Class A Members holding a majority of the Units. Once an amendment to this Agreement and/or the Certificate of Formation has been adopted as provided in this Section 8.5, the proper Officers of the Company shall authorize the preparation and filing, if necessary, of a written amendment to this Agreement and/or the Certificate of Formation, as applicable. C. Notwithstanding the foregoing, so long as any Term Loans are outstanding, neither this Agreement nor the Certificate of Formation may be modified, altered, changed, repealed or amended without the prior consent of (i) the Class B Member and (ii) the Majority Lenders (as such term is defined in the Bridge Loan Agreement). Each Member and Manager agrees that it shall not cause or permit any action to be taken to amend this Agreement or the Certificate of Formation in contravention of this Section 8.5.C. Section 8.6 Covenant of Members Regarding Bankruptcy Petition. Each Member hereby covenants and agrees, for itself and its Affiliates, that prior to the date that is one year and one day after the date on which all Term Loans have been satisfied in full, the Member shall not, directly or indirectly, file or consent to a voluntary petition or 18 otherwise initiate proceedings for the Company to be adjudicated bankrupt or insolvent or seeking an order for relief as a debtor under the Bankruptcy Code or file or consent to the filing of, or cause the filing of, any petition seeking any composition, bankruptcy, reorganization, readjustment, liquidation, dissolution or similar relief for the Company under any applicable state or federal bankruptcy laws or any other present or future applicable federal, state or other statue or law relative to bankruptcy, insolvency or other relief for debtors. Section 8.7 Counterparts. This Agreement may be executed in several counterparts and all so executed shall constitute one agreement binding on all parties hereto, notwithstanding that all the parties have not signed the original or the same counterpart. Any counterpart hereof signed by a party against whom enforcement of this Agreement is sought shall be admissible into evidence as an original hereof to prove the contents hereof. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] [SIGNATURE PAGE FOLLOWS] 19 IN WITNESS WHEREOF, the undersigned have executed or caused this Amended and Restated Limited Liability Company Agreement of Creditrust SPV99-2, LLC, effective as of the day and year first above written. WITNESS: MEMBER: - -------- ------- CLASS A MEMBER: --------------- CREDITRUST CORPORATION _____________________________ By: ______________________________________ Joseph K. Rensin Chairman and Chief Executive Officer CLASS B MEMBER: --------------- GSS HOLDINGS II, INC. _____________________________ By: ______________________________________ Name: Title: _______________________________________________________________________________ IDENTIFICATION OF SCHEDULES AND EXHIBITS - ---------------------------------------- Schedules - --------- A Names, Addresses, Units and Capital Contributions of Members Exhibits - -------- A Certificate of Formation B By-Laws 20 ================================================================================ LIMITED LIABILITY COMPANY AGREEMENT OF CREDITRUST SPV99-2, LLC Names, Addresses, Units and Capital Contributions of Members Schedule A ---------- ================================================================================ ===================================================================== Name and Address of Capital Contributions Units Member --------------------------------------------------------------------- CLASS A MEMBER -------------- Creditrust Corporation $1,000 100 Units 7000 Security Boulevard Baltimore, Maryland 21244 --------------------------------------------------------------------- CLASS B MEMBER NA None -------------- GSS Holdings II, Inc. 25 West 43/rd/ Street, Suite 704 New York, New York 10036 ===================================================================== 21 EX-27.1 8 0008.txt FDS
5 0001043497 CREDITRUST 1,000 USD 3-MOS DEC-31-2000 APR-01-2000 JUN-30-2000 1 7,682 10,081 120,451 0 0 0 3,900 1,295 162,533 3,402 0 0 0 105 49,540 162,533 0 6,845 0 92,787 295 0 3,183 (88,830) (34,644) (54,186) 0 0 0 (54,186) (5.18) (5.18)
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