-----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, Va/68mUh13+9Cv4SE4IXVk+dPpuo7F2m5NFWtGcsb6Qp0G0reY8huAmZrZAqYKf7 JpvvgNiBm7yznvuvu85+Gw== 0000950116-98-001043.txt : 19980512 0000950116-98-001043.hdr.sgml : 19980512 ACCESSION NUMBER: 0000950116-98-001043 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19980508 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NCO GROUP INC CENTRAL INDEX KEY: 0001022608 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-CONSUMER CREDIT REPORTING, COLLECTION AGENCIES [7320] IRS NUMBER: 232858652 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-51787 FILM NUMBER: 98614591 BUSINESS ADDRESS: STREET 1: 515 PENNSYLVANIA AVE CITY: FT WASHINGTON STATE: PA ZIP: 19034 BUSINESS PHONE: 2157939300 S-3/A 1 AMENDMENT NO. 1 TO FORM S-3 As filed with the Securities and Exchange Commission on May 8, 1998 Registration No. 333-51787 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 1 TO FORM S-3/A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 NCO GROUP, INC. (Exact name of Registrant as specified in its charter) Pennsylvania 23-2858652 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) 515 Pennsylvania Avenue Fort Washington, Pennsylvania 19034 Telephone (215) 793-9300 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Michael J. Barrist, Chairman of the Board, President and Chief Executive Officer NCO Group, Inc. 515 Pennsylvania Avenue Fort Washington, Pennsylvania 19034 Telephone (215) 793-9300 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Francis E. Dehel, Esquire Lawrence R. Seidman, Esquire Blank Rome Comisky & McCauley LLP Piper & Marbury L.L.P. One Logan Square 36 South Charles Street Philadelphia, Pennsylvania 19103 Baltimore, Maryland 21201
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / / If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / CALCULATION OF REGISTRATION FEE
======================================================================================================== Proposed Proposed maximum maximum Amount of Title of securities Amount to be offering price aggregate registration to be registered registered(1) per share (2) offering price(2) fee(3) - -------------------------------------------------------------------------------------------------------- Common Stock, no par value . 7,667,855 $ 25.44 $195,070,231 $57,546 ========================================================================================================
(1) Includes 1,000,155 shares which the Underwriters have a right to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the registration fee. (3) Includes $56,660 paid in connection with the initial filing of the Registration Statement. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. SUBJECT TO COMPLETION, DATED MAY 8, 1998 6,667,700 Shares [GRAPHIC OMITTED] Common Stock Of the 6,667,700 shares of Common Stock offered hereby (the "Offering"), 5,800,000 shares are being sold by NCO Group, Inc. ("NCO" or the "Company") and 867,700 shares are being sold by certain shareholders of the Company (the "Selling Shareholders"). The Company will not receive any of the proceeds from the sale of the shares by the Selling Shareholders. See "Principal and Selling Shareholders." The Common Stock of the Company is traded on the Nasdaq National Market under the symbol "NCOG." On May 8, 1998, the last sale price of the Common Stock as reported on the Nasdaq National Market was $25-5/8 per share. See "Price Range of Common Stock." See "Risk Factors" commencing on page 9 of this Prospectus for a discussion of certain factors that should be considered by prospective purchasers of the Common Stock offered hereby. ---------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ================================================================================
Price to Underwriting Proceeds to Proceeds to Public Discount (1) Company (2) Selling Shareholders ---------- -------------- ------------- --------------------- Per Share ......... $ $ $ $ - -------------------- ---------- -------------- ------------- --------------------- Total (3) ......... $ $ $ $
================================================================================ (1) See "Underwriting" for information concerning indemnification of the Underwriters and other matters. (2) Before deducting offering expenses payable by the Company, estimated at $600,000. (3) The Company and certain Selling Shareholders have granted to the Underwriters a 30-day option to purchase up to an additional 902,638 and 97,517 shares, respectively, of Common Stock at the Price to Public shown above solely to cover over-allotments, if any. If the Underwriters exercise this option in full, the total Price to Public, Underwriting Discount, Proceeds to Company and Proceeds to Selling Shareholders will be $ , $ , $ , and $ , respectively. See "Principal and Selling Shareholders" and "Underwriting." The shares of Common Stock are offered by the several Underwriters named herein when, as and if delivered to and accepted by the Underwriters and subject to their right to reject any order in whole or in part. It is expected that delivery of the certificates representing the shares will be made against payment therefor at the office of NationsBanc Montgomery Securities LLC on or about , 1998. ---------------- NationsBanc Montgomery Securities LLC BT Alex. Brown Janney Montgomery Scott Inc. The Robinson-Humphrey Company , 1998 [Pictures dipicting certain of the Company's call centers and the Company's Computer Center. The Company's logo also appears on this page.] IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS, IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING." CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE AND PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK MAINTAINED BY THE UNDERWRITERS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, contained elsewhere in this Prospectus. Unless otherwise indicated, all references in this Prospectus to the "Company" or "NCO" mean NCO Group, Inc., a Pennsylvania corporation and its subsidiaries and predecessors. Unless otherwise indicated, all information in this Prospectus: (i) assumes no exercise of the Underwriters' over-allotment option; (ii) gives effect to a 3-for-2 stock split effected in December 1997; but (iii) does not give effect to the acquisition of FCA International Ltd. ("FCA") and the pending acquisition of MedSource, Inc. ("MedSource"). Unless otherwise indicated: (i) 1997 pro forma information assumes that the acquisitions of Goodyear & Associates, Inc. ("Goodyear"), Tele-Research Center, Inc. ("Tele-Research"), CMS A/R Services ("CMS A/R"), the Collections Division of CRW Financial, Inc. ("CRWCD"), Credit Acceptance Corporation ("CAC") and ADVANTAGE Financial Services, Inc. ("AFS") (collectively, the "1997 Acquisitions"), the acquisitions of the Collection Division of American Financial Enterprises, Inc. ("AFECD") and The Response Center ("TRC") (collectively, the "1998 Acquisitions") and the FCA and MedSource acquisitions occurred on January 1, 1997; (ii) 1998 pro forma information assumes that the TRC, FCA and MedSource acquisitions occurred on January 1, 1998; and (iii) information with respect to MedSource gives pro forma effect to acquisitions completed by MedSource in 1997 as if such acquisitions had occurred on January 1, 1997. The Company NCO is a leading provider of accounts receivable management and other outsourced services. The Company develops and implements customized management solutions for clients. The Company provides these services on a national basis from 22 call centers located in 14 states using advanced workstations and sophisticated call management systems comprised of predictive dialers, automated call distribution systems, digital switching and customized computer software. Through extensive utilization of technology and intensive management of human resources, the Company has achieved rapid growth in recent years. As a result of rapid internal growth and selected strategic acquisitions, the Company's revenue has grown from $7.4 million in 1993 to $188.4 million in 1997 on a pro forma basis. Since April 1994, the Company has completed 13 acquisitions (including FCA) which have enabled it to increase its penetration of existing markets, establish a presence in certain new markets and realize significant operating efficiencies. In addition, the Company has leveraged its infrastructure by offering additional services including customer service call centers, market research and other outsourced administrative services. The Company believes that it is currently among the five largest accounts receivable management companies in the United States. The Company provides its services principally to clients in the financial services, healthcare, retail and commercial, education, telecommunications, utilities and government sectors. The Company has over 8,000 clients, including Bell Atlantic Corporation, Mellon Bank Corporation, NationsBank Corporation, Citicorp, MCI Communications Corporation, Federal Express Corporation and Airborne Freight Corporation. No client accounted for more than 3.6% of the Company's revenue (no more than 2.8% on a pro forma basis) in 1997. For its accounts receivable management services, the Company generates substantially all of its revenue on a contingency fee basis. The Company seeks to be a low cost provider, and as such its fees typically range from 15% to 35% of the amount recovered on behalf of the Company's clients. For many of its other outsourced services, the Company is paid on a fixed fee basis. While NCO's contracts are relatively short-term, the Company seeks to develop long-term relationships with its clients and works closely with them to provide quality, customized solutions. Increasingly, companies are outsourcing many non-core functions to focus on revenue generating activities, reduce costs and improve productivity. In particular, many corporations are recognizing the advantages of outsourcing accounts receivable management and other services as a result of numerous factors including: (i) the increasing complexity of such functions; (ii) changing regulations and increased competition in certain industries; and (iii) the development of sophisticated call management systems 3 requiring substantial capital investment, technical capabilities and human resource commitments. Consequently, industry-wide revenues rose 10.7% to $5.5 billion in 1996 from $5.0 billion in 1995, according to estimates published by M. Kaulkin & Associates, Inc. ("MKA"), an industry consultant. While significant economies of scale exist for large accounts receivable management companies, the industry remains highly fragmented. Based on information obtained from the American Collectors Association, Inc. ("ACA"), an industry trade group, there are approximately 6,500 accounts receivable management companies in operation in the United States, the majority of which are small, local businesses. Given the financial and competitive constraints facing these small companies and the limited number of liquidity options for the owners of such businesses, the Company believes that the industry will continue to experience consolidation in the future. See "Business -- Industry Background." The Company strives to be a cost-effective, client service driven provider of accounts receivable management and other outsourced services to companies with substantial outsourcing needs. The Company's business strategy encompasses a number of key elements which management believes are necessary to ensure quality service and to achieve consistently strong financial performance. First, the Company focuses on the efficient utilization of its technology and infrastructure to constantly improve productivity. The Company's infrastructure enables it to perform large scale accounts receivable management programs cost effectively and to rapidly and efficiently integrate the Company's acquisitions. Second, NCO is committed to client service. Management believes that the Company's emphasis on designing and implementing customized accounts receivable management programs for its clients provides it with a significant competitive advantage. Third, the Company seeks to be a low cost provider of accounts receivable management services by centralizing all administrative functions and minimizing overhead at all branch locations. Lastly, the Company is targeting larger clients which offer significant cross-selling opportunities and have greater outsourcing requirements. See "Business -- Business Strategy." The Company seeks to continue its rapid expansion through both internal and external growth. The Company has experienced and expects to continue to experience strong internal growth by continually striving to increase its market share, expand its industry-specific market expertise and develop and offer new value-added outsourced services. In addition, the Company intends to continue to take advantage of the fragmented nature of the accounts receivable management industry by making strategic acquisitions. Through selected acquisitions, the Company will seek to serve new geographic markets, expand its presence in its existing markets and add complementary services. The Company's principal executive offices are located at 515 Pennsylvania Avenue, Fort Washington, Pennsylvania 19034, and its telephone number is (215) 793-9300. FCA and MedSource Acquisitions On May 6, 1998, the Company acquired approximately 98.7% of the outstanding stock of FCA pursuant to a cash tender offer. In addition, on May 4, 1998, the Company entered into a definitive agreement to acquire all of the outstanding stock of MedSource which is expected to close in the second quarter of 1998. There can be no assurance that the Company will close the MedSource acquisition. FCA International Ltd. In March 1998, the Company entered into an agreement with FCA pursuant to which NCO made a cash tender offer (the "FCA Tender Offer") for all of the outstanding common shares of FCA at $9.60 per share, Canadian (equivalent to $6.77 in U.S. dollars based upon the exchange rate as of the date of the agreement). The purchase price of approximately $67.6 million was paid with borrowings under the Company's revolving credit facility. Pursuant to the FCA Tender Offer, the Company acquired approximately 98.7% of the outstanding stock of FCA. The Company intends to exercise its statutory rights to acquire the remaining outstanding shares of FCA not tendered on the same terms as the FCA Tender Offer. However, the remaining holders of FCA shares may have the right to dissent to such transaction and demand payment for the fair value of their FCA shares. Founded in 1926, FCA is the largest accounts receivable management company in Canada with significant operations in the United States and the United Kingdom. FCA provides accounts receivable management services principally to the government, financial, education, telecommunications, utilities, healthcare, retail and commercial sectors. FCA has undergone a major reorganization, consolidating 88 branch 4 offices into 17 branch locations including three new major branches in Mobile, Alabama, Brantford, Ontario and Vancouver, British Columbia. For the fiscal year ended June 30, 1997 and the nine months ended March 31, 1998, FCA's revenues were approximately $62.8 million and $45.0 million, respectively, based upon the applicable exchange rate. Approximately 45% of FCA's consolidated revenues in 1997 was derived from U.S. operations, 40% from Canadian operations and 15% from operations in the United Kingdom. The acquisition of FCA will give the Company the leading market presence in Canada, significantly expand its U.S. operations and provide a platform for further expansion into Europe from the United Kingdom. The Company also expects to realize substantial cost savings from integrating FCA with its operations. MedSource Acquisition. On May 4, 1998, the Company entered into a definitive agreement to acquire all of the outstanding stock of MedSource for approximately $17.9 million in cash. In connection with the acquisition, the Company will repay debt of approximately $17.1 million. The closing is subject to the satisfaction of certain closing conditions, including regulatory approval and other customary conditions. Founded in 1997, MedSource provides traditional accounts receivable management services and pre-delinquency outsourcing services primarily to hospitals located throughout the United States. Pre-delinquency outsourcing services include insurance billing and follow-up, insurance claim resolution, private pay collections, and outsourcing of central business office functions. Since its inception, MedSource has completed four acquisitions of other accounts receivable management companies which specialize in providing services to the healthcare industry. Headquartered in Goodlettsville, Tennessee, MedSource has additional offices located in Phoenix, Arizona; Springfield, Missouri; Chicago Heights, Illinois; Waterford, Michigan; Johnstown, Pennsylvania; and Mount Laurel, New Jersey. For the fiscal year ended December 31, 1997 (on a pro forma basis) and the three months ended March 31, 1998, MedSource's revenues were approximately $22.7 million and $5.3 million, respectively. The acquisition of MedSource significantly enhances NCO's market position as a leading provider of accounts receivable management services to the healthcare sector. The Company regularly reviews various strategic acquisition opportunities and periodically engages in discussions regarding such possible acquisitions. 5 The Offering
Common Stock offered by the Company ....................... 5,800,000 shares Common Stock offered by the Selling Shareholders .......... 867,700 shares (1) Common Stock to be outstanding after the Offering ......... 19,251,834 shares (2) Use of proceeds ........................................... For repayment of bank debt incurred in con- nection with the FCA Tender Offer, to finance the MedSource acquisition, to repay indebtedness of FCA and MedSource fol- lowing the completion of such acquisitions and for working capital and other general corporate purposes, including other future acquisitions. Nasdaq National Market symbol ............................. NCOG
- ------------- (1) Includes an aggregate of 61,058 shares of Common Stock which are being sold by certain Selling Shareholders upon the exercise of outstanding stock options. (2) Excludes: (i) an aggregate of 1,991,601 shares of Common Stock reserved for issuance under the Company's 1995 Stock Option Plan, 1996 Stock Option Plan and 1996 Non-Employee Director Stock Option Plan; (ii) 63,755 shares of Common Stock reserved for issuance upon the conversion of the Company's $900,000 Convertible Note issued as partial consideration for the Goodyear acquisition; and (iii) 375,000 shares of Common Stock reserved for issuance upon the exercise of warrants issued as partial consideration for the CRWCD acquisition. See "Pending and Recent Acquisitions." 6 SUMMARY FINANCIAL DATA (Amounts in thousands, except per share data)
For the Years Ended December 31, ------------------------------------------------------------------------------------ 1993 1994 1995 1996 1997 --------- --------- -------------- -------------- ------------------------------ Pro Forma As Actual Adjusted(1)(2) ------------ ---------------- Statement of Income Data: Revenue ........................... $7,445 $8,578 $ 12,733 $ 30,760 $ 85,284 $ 188,395 Operating costs and expenses: Payroll and related expenses ..... 4,123 4,558 6,797 14,651 42,502 94,315 Selling, general and administrative expenses ......... 2,391 2,674 4,042 10,033 27,947 62,525 Depreciation and amortization expenses ........................ 141 215 348 1,254 3,369 11,540 Reorganization charge ............ -- -- -- -- -- 1,517 ------ ------ --------- --------- -------- --------- Income from operations ............ 790 1,131 1,546 4,822 11,466 18,498 Other income (expense) ............ 11 (45) (180) (575) 388 1,074 ------ ------ --------- --------- -------- --------- Income before provision for income taxes ..................... 801 1,086 1,366 4,247 11,854 19,572 Income tax expense(4) ............. 320 434 546 1,706 4,780 8,642 ------ ------ --------- --------- -------- --------- Net income(4) ..................... $ 481 $ 652 $ 820 $ 2,541 $ 7,074 $ 10,930 ====== ====== ========= ========= ======== ========= Net income per share: Basic(4) ............................................. $ 0.12 $ 0.34 $ 0.59 $ 0.63 ========= ========= ======== ========= Diluted(4) ........................................... $ 0.12 $ 0.34 $ 0.57 $ 0.61 ========= ========= ======== ========= Weighted average shares outstanding: Basic ................................................ 7,093(5) 7,630(5) 11,941 17,281 Diluted .............................................. 7,093(5) 7,658(5) 12,560 17,913 Three Months Ended March 31, ----------------------------------------- 1998 ----------------------------- Pro Forma As 1997 Actual Adjusted(2)(3) ---------- ------------ --------------- Statement of Income Data: Revenue ........................... $18,077 $ 27,609 $ 48,399 Operating costs and expenses: Payroll and related expenses ..... 9,046 14,144 24,832 Selling, general and administrative expenses ......... 5,932 8,568 15,173 Depreciation and amortization expenses ........................ 716 1,155 2,094 Reorganization charge ............ -- -- -- ------- -------- -------- Income from operations ............ 2,383 3,742 6,300 Other income (expense) ............ (82) 153 150 ------- -------- -------- Income before provision for income taxes ..................... 2,301 3,895 6,450 Income tax expense(4) ............. 994 1,579 2,984 ------- -------- -------- Net income(4) ..................... $ 1,307 $ 2,316 $ 3,466 ======= ======== ======== Net income per share: Basic(4) ....................... $ 0.12 $ 0.17 $ 0.19 ======= ======== ======== Diluted(4) ..................... $ 0.12 $ 0.17 $ 0.19 ======= ======== ======== Weighted average shares outstanding: Basic .......................... 10,656 13,240 17,789 Diluted ........................ 11,230 13,801 18,350
March 31, 1998 ------------------------------------- Pro Pro Forma As Actual Forma(6) Adjusted(7) ---------- ---------- ------------- Balance Sheet Data: Cash and cash equivalents ........... $ 16,088 $ 9,148 $ 49,687 Working capital ..................... 22,173 2,199 45,620 Total assets ........................ 105,708 227,420 267,959 Long-term debt, net of current portion 923 94,715 923 Shareholders' equity ................ 91,956 91,956 229,264
7 - ----------- (1) Assumes that the 1997 Acquisitions, the 1998 Acquisitions and the FCA and MedSource acquisitions occurred on January 1, 1997. Gives effect to: (i) the elimination of payroll and related expenses relating to certain redundant collection and administrative personnel costs immediately eliminated at the time of the 1997 Acquisitions and the 1998 Acquisitions and expenses identified during the due diligence process which will be eliminated upon the closing of the FCA and MedSource acquisitions; (ii) the elimination of certain rental expenses and related operating costs attributable to facilities which were closed at the time of the 1997 Acquisitions and the 1998 Acquisitions and facilities identified during the due diligence process which will be closed upon the completion of the FCA and MedSource acquisitions; (iii) the increase in amortization expense resulting from the acquisitions; (iv) the elimination of depreciation and amortization expense related to assets revalued or not acquired; (v) interest expense on borrowings related to the acquisitions; (vi) the estimated income tax expense, after giving consideration to non-deductible goodwill expense; (vii) the elimination of interest expense on debt assumed to be repaid with a portion of the proceeds from the Offering; (viii) the issuance of 517,767 shares of Common Stock and warrants exercisable for 375,000 shares of Common Stock in connection with the acquisition of CRWCD; (ix) the issuance of 1,425,753 shares of Common Stock in the July 1997 Offering at the public offering price of $19.67 per share which, net of the underwriting discount and offering expenses paid by the Company, would be sufficient to repay acquisition related debt of $8.4 million and to fund the acquisitions of AFECD and TRC; (x) the issuance of 46,442 shares of Common Stock issued in connection with the acquisition of AFS; and (xi) the issuance of 4.5 million shares of Common Stock at an assumed public offering price of $25.00 per share, net of the estimated underwriting discount and offering expenses payable by the Company, which would be sufficient to repay acquisition related debt of $75.0 million, repay debt of $21.9 million recognized in connection with the FCA and MedSource acquisitions and pay an additional $10.5 million necessary to fund the FCA and MedSource acquisitions. (2) Includes reorganization charges and other costs of $1.9 million and $90,000 for the year ended December 31, 1997 and the three months ended March 31, 1998, respectively. Net income per share - basic and net income per share - diluted would have been $0.70 and $0.68, respectively, and $0.20 and $0.19, respectively, on a pro forma basis assuming those charges had not been incurred. (3) Assumes that the TRC, FCA and MedSource acquisitions occurred on January 1, 1998. Gives effect to: (i) the elimination of payroll and related expenses relating to certain redundant collection and administrative personnel costs immediately eliminated at the time of the TRC acquisition and expenses identified during the due diligence process which will be eliminated upon the closing of the FCA and MedSource acquisitions; (ii) the elimination of certain rental expenses and related operating costs attributable to facilities which were identified during the due diligence process and will be closed upon the completion of the FCA and MedSource acquisitions; (iii) the increase in amortization expense resulting from the TRC, FCA and MedSource acquisitions; (iv) the elimination of depreciation and amortization expense related to assets revalued or not acquired; (v) interest expense on borrowings related to the FCA and MedSource acquisitions; (vi) the estimated income tax expense, after giving consideration to non-deductible goodwill expense; (vii) the elimination of interest expense on debt assumed to be repaid with a portion of the proceeds from the Offering; and (viii) the issuance of 4.5 million shares of Common Stock at an assumed public offering price of $25.00 per share, net of the estimated underwriting discount and offering expenses payable by the Company, which would be sufficient to repay acquisition related debt of $75.0 million, repay debt of $21.9 million recognized in connection with the FCA and MedSource acquisitions and pay an additional $10.5 million necessary to fund the FCA and MedSource acquisitions. (4) The Company was taxed as an S Corporation prior to September 3, 1996. Accordingly, income tax expense and net income have been provided on a pro forma basis as if the Company had been subject to income taxes in all periods presented. (5) Assumes that the Company issued 374,637 shares of Common Stock at $8.67 per share to fund the distribution of undistributed S Corporation earnings of $3.2 million through September 3, 1996, the termination date of the Company's S Corporation status, to existing shareholders of the Company. (6) Gives effect to: (i) the acquisition of FCA for approximately $67.6 million in cash, which was borrowed against the Company's credit facility, and the recognition of certain acquisition related liabilities; and (ii) the pending acquisition of MedSource for approximately $17.9 million in cash, of which $7.4 million was assumed to be borrowed against the Company's credit facility, and the recognition of certain acquisition related liabilities. The Company expects to recognize goodwill of $56.2 million and $36.3 million for the FCA and MedSource acquisitions, respectively. (7) Gives effect to the issuance of 5.8 million shares of Common Stock at an assumed public offering price of $25.00 per share and the application of the net proceeds therefrom. See "Use of Proceeds." 8 RISK FACTORS Certain statements included in this Prospectus, including, without limitation, statements regarding the anticipated growth in the amount of accounts receivable placed for third-party management, the continuation of trends favoring outsourcing of other administrative functions, the Company's objective to grow through strategic acquisitions, the Company's ability to realize operating efficiencies upon the completion of the recent acquisitions and other acquisitions that may occur in the future, the Company's ability to expand its service offerings, the anticipated changes in revenues from acquired companies and trends in the Company's future operating performance, and statements as to the Company's or management's beliefs, expectations or opinions are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act") which are intended to be covered by safe harbors created thereby. The factors discussed below and elsewhere in this Prospectus could cause actual results and developments to be materially different from those expressed in or implied by such forward-looking statements. Accordingly, in addition to the other information contained in "Pending and Recent Acquisitions," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Prospectus, the following factors should be considered carefully in evaluating an investment in the shares of Common Stock offered by this Prospectus. Risks Associated with Pending and Recent Acquisitions The 1998 Acquisitions and the FCA and MedSource acquisitions had combined revenues of $94.5 million in 1997 compared to the Company's revenue of $85.3 million in 1997. The Company is currently in the process of integrating the acquisitions of AFS, CAC, and the 1998 Acquisitions. The Company acquired approximately 98.7% of the outstanding stock of FCA pursuant to the FCA Tender Offer. There can be no assurance that the Company will successfully consummate the MedSource acquisition. The integration of these companies could divert management's attention from the daily operation of the Company, require additional management, operational and financial resources, and place significant demands on the Company's management and infrastructure. There can be no assurance that the recently acquired businesses and the MedSource acquisition will be successfully integrated with that of the Company, that the Company will be able to realize operating efficiencies or eliminate redundant costs, or that their businesses will be operated profitably. Further, there can be no assurance that clients of the acquired companies will continue to do business with the Company, or that the Company will be able to retain key employees of the acquired companies. In addition, there can be no assurance that the acquired companies will not have additional liabilities or contingencies that were unanticipated by the Company at the time of the acquisitions. Risks Associated with the FCA Acquisition There are several risks associated with the acquisition of FCA including the ability to operate FCA's business profitably and the fact that FCA has significant operations outside of the United States. FCA has had net losses of $4.4 million, and $1.4 million for its fiscal years ended June 30, 1996 and 1997, respectively. There can be no assurance that the Company will be able to operate FCA's business profitably following the acquisition of FCA. To date, all of the Company's operations have been conducted in the United States. FCA is headquartered in Canada and also has offices in the United Kingdom and, as a result of such acquisition, a portion of the Company's operations would be conducted outside the United States. There are a number of risks inherent in international operations including government controls, regulatory requirements that may be more onerous than those imposed in the United States, difficulties in managing international operations and fluctuations in currency exchange rates. See "Pending and Recent Acquisitions -- FCA International Ltd." 9 Risks Associated with Rapid Growth The Company has experienced rapid growth over the past several years which has placed significant demands on its administrative, operational and financial resources. The Company seeks to continue such rapid growth which could place additional demands on its resources. Future internal growth will depend on a number of factors, including the effective and timely initiation and development of client relationships, the Company's ability to maintain the quality of services it provides to its clients and the recruitment, motivation and retention of qualified personnel. Sustaining growth will also require the implementation of enhancements to its operational and financial systems and will require additional management, operational and financial resources. There can be no assurance that the Company will be able to manage its expanding operations effectively or that it will be able to maintain or accelerate its growth, and any failure to do so could have a materially adverse effect on the Company's business, results of operations and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Growth Strategy." Risks Associated with Future Acquisitions A primary element of the Company's growth strategy is to continue to pursue strategic acquisitions that expand and complement the Company's business. The Company regularly reviews various strategic acquisition opportunities and periodically engages in discussions regarding such possible acquisitions. There can be no assurance that the Company will be able to identify additional acquisition candidates on terms favorable to the Company or in a timely manner, enter into acceptable agreements or close any such transactions. There can also be no assurance that the Company will be able to continue to execute its acquisition strategy, and any failure to do so could have a materially adverse effect on the Company's business, financial condition, results of operations and ability to sustain growth. In addition, the Company believes that it will compete for attractive acquisition candidates with other companies, consolidators or investors in the accounts receivable management industry. Increased competition for such acquisition candidates could have the effect of increasing the cost to the Company of pursuing this growth strategy or could reduce the number of attractive candidates to be acquired. Future acquisitions could divert management's attention from the daily operations of the Company and otherwise require additional management, operational and financial resources. Moreover, there is no assurance that the Company will successfully integrate businesses acquired in the future into its business or operate such acquired businesses profitably. Acquisitions also may involve a number of additional risks including: adverse short term effects on the Company's operating results; dependence on retaining key personnel; amortization of acquired intangible assets; and risks associated with unanticipated problems, liabilities or contingencies. See "Business -- Growth Strategy." The Company may require additional debt or equity financing to fund any future acquisitions, which may not be available on terms favorable to the Company, if at all. To the extent the Company uses its capital stock for all or a portion of the consideration to be paid for future acquisitions, dilution may be experienced by existing shareholders, including the purchasers of Common Stock in this Offering. In the event that the Company's capital stock does not maintain sufficient value or potential acquisition candidates are unwilling to accept the Company's capital stock as consideration for the sale of their businesses, the Company may be required to utilize more of its cash resources, if available, in order to continue its acquisition program. If the Company does not have sufficient cash resources or is unable to use its capital stock as consideration for acquisitions, its growth through acquisitions could be limited. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Fluctuations in Quarterly Operating Results The Company may experience quarterly variations in operating results as a result of many factors, including the costs and timing of completion and integration of acquisitions, the timing of clients' accounts receivable management programs, the commencement of new contracts, the termination of existing contracts, costs to support growth by acquisition or otherwise, the effect of the change of business mix on margins and the timing of additional selling, general and administrative expenses to support new business. In connection with certain contracts, the Company could incur costs in periods prior to recognizing revenue under those contracts which may adversely affect the Company's operating results in a particular quarter. The Company's planned operating 10 expenditures are based on revenue forecasts, and if revenues are below expectations in any given quarter, operating results would likely be materially adversely affected. While the effects of seasonality on the Company's business historically have been obscured by its rapid growth, the Company's business tends to be slower in the third and fourth quarters of the year due to the summer and holiday seasons. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Dependence on Key Personnel The Company is highly dependent upon the continued services and experience of its senior management team, including Michael J. Barrist, Chairman of the Board, President and Chief Executive Officer. The loss of the services of Mr. Barrist or other members of its senior management could have a materially adverse effect on the Company. The Company has employment contracts with Mr. Barrist and certain other key executive officers which expire in 2001. In addition, the Company has a $2.0 million key person life insurance policy on Mr. Barrist. See "Management." Dependence on Certain Sectors; Contract Risks Most of the Company's revenues are derived from clients in the financial services, healthcare, retail and commercial, education, telecommunications, utilities and government sectors. A significant downturn in any of these sectors or any trends to reduce or eliminate the use of third-party accounts receivable management services could have a materially adverse impact on the Company's business, results of operations and financial condition. The Company enters into contracts with most of its clients which define, among other things, fee arrangements, scope of services and termination provisions. Clients may usually terminate such contracts on 30 or 60 days notice. Accordingly, there can be no assurance that existing clients will continue to use the Company's services at historical levels, if at all. Under the terms of these contracts, clients are not required to place accounts with the Company but do so on a discretionary basis. In addition, substantially all of the Company's contracts are on a contingent fee basis in which the Company recognizes revenues only as accounts are recovered. See "Business -- Client Relationships." Competition The accounts receivable management industry is highly competitive. The Company competes with approximately 6,500 service providers, including large national corporations such as Outsourcing Solutions Inc., GC Services, Inc. and Equifax Inc. and many regional and local firms. Some of the Company's competitors have substantially greater resources, offer more diversified services and operate in broader geographic areas than the Company. In addition, the accounts receivable management services offered by the Company, in many instances, are performed in-house. Moreover, many larger clients retain multiple accounts receivable management providers which exposes the Company to continuous competition in order to remain a preferred vendor. There can be no assurance that outsourcing of the accounts receivable management function will continue or that the Company's clients which currently outsource such services will not bring them in-house. The Company also competes with other firms, such as SITEL Corporation, APAC Teleservices, Inc. and TeleTech Holdings, Inc., in providing teleservices. As a result of these factors, there can be no assurance that the Company will be able to compete successfully with its existing or future competitors. See "Business -- Competition." Risk of Business Interruption; Reliance on Computer and Telecommunications Infrastructure The Company's success is dependent in large part on its continued investment in sophisticated telecommunications and computer systems, including predictive dialers, automated call distribution systems and digital switching. The Company has invested significantly in technology in an effort to remain competitive and anticipates that it will be necessary to continue to do so in the future. Moreover, computer and telecommunication technologies are evolving rapidly and are characterized by short product life cycles, which require the Company to anticipate technological developments. There can be no assurance that the Company will be successful in anticipating, managing or adopting such technological changes on a timely basis or that the Company will have the capital resources available to invest in new technologies. In addition, the Company's business is highly 11 dependent on its computer and telecommunications equipment and software systems, the temporary or permanent loss of which, through casualty or operating malfunction, could have a materially adverse effect on the Company's business. The Company's business is materially dependent on service provided by various local and long distance telephone companies. A significant increase in the cost of telephone services that is not recoverable through an increase in the price of the Company's services, or any significant interruption in telephone services, could have a materially adverse impact on the Company. See "Business -- Operations." Risks Associated with Year 2000 NCO has implemented a program to evaluate and address the impact of the year 2000 on its information systems in order to ensure that its network, computer systems and software will manage and manipulate data involving the transition of dates from 1999 to 2000 without functional or data abnormality and without inaccurate results related to such data. The Company does not expect year 2000 compliance costs to have a material adverse impact on the Company's business or results of operations. No assurance can be given, however, that unanticipated or undiscovered year 2000 compliance problems will not have a material adverse effect on the Company's business or results of operations. In addition, if the Company's clients or significant suppliers and contractors do not successfully achieve year 2000 compliance, the Company's business and results of operations could be adversely affected, resulting from, among other things, the Company's inability to properly exchange and/or receive data. See "Management's Discussion and Analysis and Results of Operations -- Year 2000 System Modifications." Dependence on Labor Force The accounts receivable management industry is very labor intensive and experiences high personnel turnover. Many of the Company's employees receive modest hourly wages, and a portion of these employees are employed on a part-time basis. A higher turnover rate among the Company's employees would increase the Company's recruiting and training costs and could adversely impact the quality of services the Company provides to its clients. If the Company were unable to recruit and retain a sufficient number of employees, it would be forced to limit its growth or possibly curtail its operations. Growth in the Company's business will require it to recruit and train qualified personnel at an accelerated rate from time to time. There can be no assurance that the Company will be able to continue to hire, train and retain a sufficient number of qualified employees. Additionally, an increase in hourly wages, costs of employee benefits or employment taxes also could materially adversely affect the Company. See "Business -- Personnel and Training." Government Regulation The accounts receivable management and telemarketing industries are regulated under various federal and state statutes. In particular, the Company is subject to the federal Fair Debt Collection Practices Act (the "FDCPA") which establishes specific guidelines and procedures which debt collectors must follow in communicating with consumer debtors, including the time, place and manner of such communications. The Company is also subject to the Fair Credit Reporting Act which regulates the consumer credit reporting industry and which may impose liability on the Company to the extent that the adverse credit information reported on a consumer to a credit bureau is false or inaccurate. The accounts receivable management business is also subject to state regulation, and some states require that the Company be licensed as a debt collection company. With respect to the other teleservices offered by the Company, including telemarketing, the federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 broadly authorizes the Federal Trade Commission (the "FTC") to issue regulations prohibiting misrepresentations in telemarketing sales. The FTC's telemarketing sales rules prohibit misrepresentations of the cost, terms, restrictions, performance or duration of products or services offered by telephone solicitation and specifically address other perceived telemarketing abuses in the offering of prizes and the sale of business opportunities or investments. The federal Telephone Consumer Protection Act of 1991 (the "TCPA") limits the hours during which telemarketers may call consumers and prohibits the use of automated telephone dialing equipment to call certain telephone numbers. A number of states also regulate telemarketing and some states have enacted restrictions similar to the federal TCPA. The failure to comply with applicable statutes and regulations could have a materially adverse effect on the Company. There can be no assurance that additional federal or state legislation, or changes in regulatory implementation, would not limit the activities of the Company in the future or significantly increase the cost of regulatory compliance. 12 The collection of accounts receivable by collection agencies in Canada is regulated at the provincial and territorial level in substantially the same fashion as is accomplished by federal and state laws in the United States. The manner in which the Company carries on the business of collecting accounts is subject, in all provinces and territories, to established rules of common law or civil law and statute. Such laws establish rules and procedures governing the tracing, contacting and dealing with debtors in relation to the collection of outstanding accounts. These rules and procedures prohibit debt collectors from engaging in intimidating, misleading and fraudulent behavior when attempting to recover outstanding debts. In Canada, the Company's collection operations are subject to licensing requirements and periodic audits by government agencies and other regulatory bodies. Generally, such licenses are subject to annual renewal. If the Company engages in other teleservice activities in Canada, including telemarketing, there are several provincial and territorial consumer protection laws of more general application. This legislation defines and prohibits unfair practices by telemarketers, such as, the use of undue pressure and the use of false, misleading or deceptive consumer representations. In addition, accounts receivable management and telemarketing industries are regulated in the United Kingdom, including a licensing requirement. If the Company expands its international operations, it may become subject to additional government controls and regulations in other countries, which may be more onerous than those in the United States. Several of the industries served by the Company are also subject to varying degrees of government regulation. Although compliance with these regulations is generally the responsibility of the Company's clients, the Company could be subject to a variety of enforcement or private actions for its failure or the failure of its clients to comply with such regulations. See "Business -- Regulation." Possible Volatility of Stock Price Numerous factors, including announcements of fluctuations in the Company's or its competitors' operating results, market conditions for accounts receivable management, telemarketing industry or business services stocks in general, the timing and announcement of acquisitions by the Company or its competitors or government regulatory action, could have a significant impact on the future price of the Common Stock. In addition, the stock market in recent years has experienced significant price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of companies. These broad fluctuations may adversely affect the market price of the Common Stock. There can be no assurance that purchasers of Common Stock in this Offering will be able to resell their Common Stock at prices equal to or greater than the offering price hereunder. Shares Eligible for Future Sale Sales of the Company's Common Stock could adversely affect the market price of the Company's Common Stock and could impair the Company's future ability to raise capital through the sale of equity securities. Upon completion of the Offering, the Company will have 19,251,834 shares of Common Stock outstanding. Of these shares, all of the 6,667,700 shares sold in the Offering will be, and the 8,625,000 shares sold in prior public offerings are, available for resale in the public market without restriction, except for any such shares purchased by affiliates of the Company. The Company's directors, executive officers and the Selling Shareholders have agreed, subject to certain limitations, not to offer, sell or otherwise dispose of any shares of Common Stock for a period of 90 days after the closing of the Offering without the prior written consent of NationsBanc Montgomery Securities LLC. Following the expiration of this 90-day period, such persons will hold an aggregate of 3,718,192 outstanding shares of Common Stock (3,620,675 shares if the over-allotment option is exercised in full) which may be resold under Rule 144. Upon completion of the Offering, the Company also will continue to have outstanding a $900,000 Convertible Note convertible into 63,755 shares of Common Stock at any time on or before January 22, 2002 and a warrant to purchase 375,000 shares of Common Stock exercisable at any time on or before January 31, 2002. The holders of the Convertible Note and the warrants will continue to be entitled to certain demand and/or piggy-back registration rights following the completion of the Offering. The earn-out payable in connection with the TRC acquisition provides, among other things, that the seller may elect to be paid the earn-out in the form of a convertible note, convertible into NCO Common Stock at a price equal to $3.00 above NCO's trailing thirty day average closing per share price. In addition, the Company will have 1,991,601 13 shares of Common Stock reserved for issuance to its employees, directors, consultants and advisors under the Company's 1995 Stock Option Plan, 1996 Stock Option Plan and the 1996 Non-Employee Director Stock Option Plan upon the completion of this Offering. Anti-Takeover Provisions The Company's Amended and Restated Articles of Incorporation (the "Articles") and Bylaws (the "Bylaws") contain provisions which may be deemed to be "anti-takeover" in nature in that such provisions may deter, discourage or make more difficult the assumption of control of the Company by another corporation or person through a tender offer, merger, proxy contest or similar transaction. The Articles permit the Board of Directors to establish the rights, preferences, privileges and restrictions of, and to issue, up to 5,000,000 shares of Preferred Stock without shareholder approval. The Company's Bylaws also provide for the staggered election of directors to serve for one-, two- and three-year terms, and for successive three-year terms thereafter, subject to removal only for cause upon the vote of not less than 65% of the shares of Common Stock represented at a shareholders' meeting. Certain provisions of the Articles and Bylaws may not be amended except by a similar 65% vote. In addition, the Company is subject to certain anti-takeover provisions of the Pennsylvania Business Corporation Law. 14 PENDING AND RECENT ACQUISITIONS Since 1994, the Company has completed 13 strategic acquisitions (including FCA) which have expanded its client base and geographic presence, increased its presence in key industries and substantially increased its revenues and profits. A key element of the Company's growth strategy is to continue to pursue selected strategic acquisitions to serve new geographic markets or industries, expand its presence in its existing markets and add complementary service applications. The Company regularly reviews various strategic acquisition opportunities and periodically engages in discussions regarding such possible acquisitions. The following is a summary of the pending MedSource acquisition, the FCA acquisition, the 1998 Acquisitions and the 1997 Acquisitions. MedSource, Inc. The Company has entered into an agreement to acquire all of the outstanding stock of MedSource for approximately $17.9 million in cash. In connection with the acquisition, the Company will repay debt of approximately $17.1 million. The closing is subject to the satisfaction of certain closing conditions, including regulatory approval and other customary conditions. Founded in 1997, MedSource provides traditional accounts receivable management services and pre-delinquency outsourcing services primarily to hospitals located throughout the United States. Pre-delinquency outsourcing services include insurance billing and follow-up, insurance claim resolution, private pay collections, and outsourcing of central business office functions. Since its inception, MedSource has completed four acquisitions of other accounts receivable management companies which specialize in providing services to the healthcare industry. Headquartered in Goodlettsville, Tennessee, MedSource has additional offices located in Phoenix, Arizona; Springfield, Missouri; Chicago Heights, Illinois; Waterford, Michigan; Johnstown, Pennsylvania; and Mount Laurel, New Jersey. For the fiscal year ended December 31, 1997 (on a pro forma basis) and the three months ended March 31, 1998, MedSource's revenues were approximately $22.7 million and $5.3 million, respectively. The acquisition of MedSource significantly enhances NCO's market position as a leading provider of accounts receivable management services to the healthcare sector. FCA International Ltd. In March 1998, the Company entered into an agreement with FCA pursuant to which NCO made a cash tender offer for all of the outstanding common shares of FCA at $9.60 per share, Canadian (equivalent to $6.77 in U.S. dollars based upon the exchange rate as of the date of the agreement). The purchase price of approximately $67.6 million was paid with borrowings under the Company's revolving credit facility. Pursuant to the FCA Tender Offer, the Company acquired approximately 98.7% of the outstanding stock of FCA. The Company intends to exercise its statutory rights to acquire the remaining outstanding shares of FCA not tendered on the same terms as the FCA Tender Offer. However, the remaining holders of FCA shares may have the right to dissent to such transaction and demand payment for the fair value of their FCA shares. Founded in 1926, FCA is the largest accounts receivable management company in Canada with significant operations in the United States and the United Kingdom. FCA provides accounts receivable management services principally to the government, financial, education, telecommunications, utilities, healthcare, retail and commercial sectors. FCA has undergone a major reorganization, consolidating 88 branch offices into 17 branch locations including three new major branches in Mobile, Alabama, Brantford, Ontario and Vancouver, British Columbia. For the fiscal year ended June 30, 1997 and the nine months ended March 31, 1998, FCA's revenues were approximately $62.8 million and $45.0 million, respectively, based upon the applicable exchange rate. Approximately 45% of FCA's consolidated revenue in 1997 was derived from U.S. operations, 40% from Canadian operations and 15% from operations in the United Kingdom. The acquisition of FCA will give the Company the leading market presence in Canada, significantly expand its U.S. operations and provide a platform for further expansion into Europe from the United Kingdom. The Company also expects to realize substantial cost savings from integrating FCA with its operations. 15 The Response Center On February 6, 1998, the Company purchased certain assets of TRC, which was an operating division of TeleSpectrum Worldwide, Inc., for $15.0 million in cash plus a performance based earn-out. TRC provided full-service custom market research services to the telecommunications, financial services, utilities, healthcare, pharmaceutical and consumer products sectors. Its capabilities included problem conceptualization, program design, data gathering (by telephone, mail, and focus groups), as well as data tabulation, results analysis and consulting. TRC, with offices in Upper Darby, Pennsylvania, and Philadelphia, Pennsylvania, had revenues of approximately $8.0 million for the year ended December 31, 1997. Collection Division of American Financial Enterprises, Inc. On January 1, 1998, the Company purchased certain assets of AFECD for $1.7 million in cash. AFECD, an accounts receivable management company, expanded NCO's penetration into the governmental and insurance sectors. AFECD's revenues for the year ended December 31, 1997 were approximately $1.7 million. ADVANTAGE Financial Services, Inc. On October 1, 1997, the Company purchased all of the outstanding stock of AFS for $2.9 million in cash, a $1.0 million Note and 46,442 shares of the Company's Common Stock. The Note bears interest payable monthly at a rate of 8.0% per annum with one-half of the principal paid in April 1998 and the balance due in January 1999. The acquisition was valued at approximately $5.0 million. AFS, an accounts receivable management company with offices in Dayton, Ohio and Bristol, Tennessee, allowed NCO further penetration into the medical, telecommunications and commercial sectors. AFS's revenues for the year ended December 31, 1996 were approximately $5.1 million. Credit Acceptance Corporation On October 1, 1997, the Company purchased all of the outstanding stock of CAC for $1.8 million in cash. CAC, an accounts receivable management company located in Pittsburgh, Pennsylvania, allowed NCO further penetration into the healthcare sector. CAC's revenues for the year ended December 31, 1996 were approximately $2.3 million. Collection Division of CRW Financial, Inc. On February 2, 1997, NCO purchased substantially all of the assets of CRWCD for $3.8 million in cash, 517,767 shares of Common Stock and warrants to purchase 375,000 shares of Common Stock at an exercise price of $18.42 per share. The purchase price was valued at approximately $12.8 million. CRWCD provided accounts receivable management services principally to the telecommunications, education, financial, government and utility sectors throughout the United States. In addition, CRWCD had a commercial collections division. CRWCD's revenues for the year ended December 31, 1996 were approximately $25.9 million. CMS A/R Services On January 31, 1997, NCO purchased substantially all of the assets of CMS A/R for $5.1 million in cash. CMS A/R, located in Jackson, Michigan, specialized in providing a wide range of accounts receivable management and administrative services to the utility sector, including traditional recovery of delinquent accounts, outsourced administrative services, early stage accounts receivable management and database management services. CMS A/R's revenues for the year ended December 31, 1996 were approximately $6.8 million. 16 Tele-Research Center, Inc. On January 30, 1997, NCO purchased certain of the assets of Tele-Research for $2.2 million in cash including contingent consideration paid. Tele-Research located in Philadelphia, Pennsylvania, provided market research, data collection and other teleservices to market research companies as well as end-users. Tele-Research's revenues for the year ended December 31, 1996 were approximately $1.8 million. Goodyear & Associates, Inc. On January 22, 1997, NCO purchased all of the outstanding stock of Goodyear for $4.5 million in cash and a $900,000 Convertible Note. The Note is convertible at any time into 63,755 shares of the Company's Common Stock and bears interest payable monthly at a rate of 8.0% per annum with principal due in January 2002. Goodyear, based in Charlotte, North Carolina, provided accounts receivable management services principally to the telecommunications, education and utility sectors. Goodyear's revenues for the year ended December 31, 1996 were approximately $5.5 million. 17 USE OF PROCEEDS The net proceeds from the sale of the 5,800,000 shares of Common Stock offered by the Company hereby are estimated to be approximately $137.3 million after deducting the estimated underwriting discount and expenses of the Offering and based on an assumed public offering price of $25.00 per share. The Company will not receive any proceeds from the sale of Common Stock by the Selling Shareholders. Approximately $67.6 million of the net proceeds will be used to repay debt under the Company's Credit Agreement with Mellon Bank, N.A. ("Mellon") incurred in connection with the acquisition of FCA. The Company entered into the Credit Agreement in July 1995 to obtain working capital and acquisition financing and to refinance certain existing debt. The Credit Agreement, as amended, provides a revolving line of credit which permits borrowings of up to $75.0 million at an interest rate ranging from LIBOR plus 0.75% to LIBOR plus 2.0% (LIBOR was 5.69% at March 31, 1998). See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Approximately $17.9 million of the net proceeds will be used to pay the cash portion of the MedSource acquisition, or the repayment of borrowings under the Credit Agreement used to finance the MedSource acquisition, which acquisition is expected to close in the second quarter of 1998. The acquisition is subject to the satisfaction of certain closing conditions, including regulatory approval and other customary conditions. The Company intends to use approximately $21.9 million of the net proceeds to repay certain outstanding indebtedness of FCA and of MedSource following the completion of such acquisition. The Company intends to use the remaining net proceeds of $29.9 million for working capital and other general corporate purposes, including other possible future acquisitions. The Company regularly reviews various strategic acquisition opportunities and periodically engages in discussions regarding such possible acquisitions. Pending the uses described above, the Company intends to invest the net proceeds in short-term, investment-grade securities. DIVIDEND POLICY The Company does not anticipate paying cash dividends on its Common Stock in the foreseeable future. In addition, the Company's Credit Agreement prohibits the Company from paying cash dividends without the lender's prior consent. The Company currently intends to retain future earnings to finance its operations and fund the growth of its business. Any payment of future dividends will be at the discretion of the Board of Directors of the Company and will depend upon, among other things, the Company's earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends and other factors that the Company's Board of Directors deems relevant. 18 PRICE RANGE OF COMMON STOCK The following table sets forth the range of high and low closing sale prices for the Common Stock as reported on the Nasdaq National Market since the Company's initial public offering on November 6, 1996. The Common Stock is traded under the symbol "NCOG". The table has been adjusted to reflect the 3-for-2 stock split paid in December 1997. High Low ----------- ----------- 1996 Fourth Quarter (from November 6) ......... $ 12.96 $ 11.00 1997 First Quarter ............................ 18.92 11.17 Second Quarter ........................... 22.50 12.17 Third Quarter ............................ 26.50 20.58 Fourth Quarter ........................... 28.33 21.00 1998 First Quarter ............................ 29.25 21.87 Second Quarter (through May 8) ........... 28.00 23.75 On May 8, 1998, the last reported sale price of the Common Stock on the Nasdaq National Market was $25.63 per share. As of April 30, 1998, the Company's Common Stock was held by approximately 50 holders of record. Based on information obtained from the Company's transfer agent, the Company believes that there are approximately 1,000 beneficial owners of its Common Stock. 19 CAPITALIZATION The following table sets forth as of March 31, 1998: (a) the actual capitalization of the Company; (b) the pro forma capitalization of the Company giving effect to the FCA and MedSource acquisitions; and (c) the pro forma capitalization of the Company as adjusted to give effect to: (i) the exercise of stock options to purchase an aggregate of 61,058 shares of Common Stock which are being sold by certain Selling Shareholders in the Offering and the receipt by the Company of the aggregate exercise price of $157,920; and (ii) the sale by the Company of 5,800,000 shares of Common Stock in the Offering (at an assumed public offering price of $25.00 per share) and the application of the net proceeds therefrom as set forth in "Use of Proceeds." This table should be reviewed in conjunction with the Company's historical and pro forma financial statements and related notes appearing elsewhere in this Prospectus or incorporated herein by reference.
March 31, 1998 --------------------------------------------- Pro Forma Actual Pro Forma(1) As Adjusted(2) ---------- -------------- --------------- (In thousands) Long-term debt, net of current portion ........................ $ 923 $ 94,715 $ 923 Capitalized lease obligations, net of current portion ......... 225 909 814 Deferred taxes and other liabilities .......................... 2,284 2,287 2,287 ------- -------- -------- Total long-term liabilities ............................. 3,432 97,911 4,024 Shareholders' equity: Preferred Stock, no par value, 5,000,000 shares authorized; no shares issued and outstanding .............. -- -- -- Common Stock, no par value, 37,500,000 shares authorized; 13,390,651 shares issued and outstanding, actual, 19,251,709 shares issued and outstanding, as adjusted (3) ........................................... 80,802 80,802 218,110 Unexercised warrants (4) ................................... 875 875 875 Retained earnings .......................................... 10,279 10,279 10,279 ------- -------- -------- Total shareholders' equity .............................. 91,956 91,956 229,264 ------- -------- -------- Total capitalization .................................... $95,388 $189,867 $233,288 ======= ======== ========
- ------------ (1) Gives effect to: (i) the acquisition of FCA for approximately $67.6 million in cash, which was borrowed against the Company's credit facility, and the recognition of certain acquisition related liabilities; and (ii) the pending acquisition of MedSource, for approximately $17.9 million in cash, of which $7.4 million was assumed to be borrowed from the Company's credit facility, and the recognition of certain acquisition related liabilities. The Company expects to recognize goodwill of $56.2 million and $36.3 million for the FCA and MedSource acquisitions, respectively. (2) Gives effect to the issuance of 5.8 million shares of Common Stock at an assumed public offering price of $25.00 per share and the application of the net proceeds therefrom. See "Use of Proceeds." (3) Excludes: (i) an aggregate of 2,052,659 shares of Common Stock (1,991,601 shares, pro forma as adjusted) reserved for issuance under the Company's 1995 Stock Option Plan, 1996 Stock Option Plan and 1996 Non-Employee Director Stock Option Plan; (ii) 63,755 shares of Common Stock reserved for issuance upon the conversion of the Company's $900,000 Convertible Note issued as partial consideration for the Goodyear acquisition; and (iii) 375,000 shares of Common Stock reserved for issuance upon the exercise of warrants at an exercise price of $18.42 per share issued by the Company as partial consideration for the CRWCD acquisition. (4) Reflects 375,000 shares of Common Stock reserved for issuance upon the exercise of warrants at an exercise price of $18.42 per share issued by the Company as partial consideration for the CRWCD acquisition. 20 SELECTED FINANCIAL DATA (Amounts in thousands, except per share data) The selected financial data of the Company for each of the five years in the period ended December 31, 1997 are derived from the financial statements of the Company which have been audited by Coopers & Lybrand L.L.P., independent accountants. The selected financial data as of March 31, 1998 and for the three months ended March 31, 1997 and 1998 are derived from the unaudited financial statements of the Company and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) which are necessary to present fairly the results of operations and financial position for such periods. The results for the three months ended March 31, 1998 are not necessarily indicative of the results to be expected for the full year. The Pro Forma Consolidated Financial Statements do not purport to represent what NCO's actual results of operations or financial position would have been had the acquisitions occurred as of such dates, or to project NCO's results of operations or financial position for any period or date, nor does it give effect to any matters other than those described in the notes thereto. The following data should be read in conjunction with the Company's actual consolidated financial statements incorporated by reference in this Prospectus and the Company's pro forma consolidated financial statements and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus.
For the Years Ended December 31, ------------------------------------------------------ 1993 1994 1995 1996 ---------- ---------- -------------- -------------- Statement of Income Data: Revenue ...................................... $ 7,445 $ 8,578 $ 12,733 $ 30,760 Operating costs and expenses: Payroll and related expenses ................ 4,123 4,558 6,797 14,651 Selling, general and administrative expenses ................................... 2,391 2,674 4,042 10,033 Depreciation and amortization expenses 141 215 348 1,254 Reorganization charge ....................... -- -- -- -- ------- ------- -------- -------- Income from operations ....................... 790 1,131 1,546 4,822 Other income (expense) ....................... 11 (45) (180) (575) ------- ------- -------- -------- Income before provision for income taxes 801 1,086 1,366 4,247 Income tax expense (4) ....................... 320 434 546 1,706 ------- ------- -------- -------- Net income (4) ............................... $ 481 $ 652 $ 820 $ 2,541 ======= ======= ======== ======== Net income per share: Basic (4) ................................... $ 0.12 $ 0.34 ======== ======== Diluted (4) ................................. $ 0.12 $ 0.34 ======== ======== Weighted average shares outstanding: Basic ....................................... 7,093(5) 7,630(5) Diluted ..................................... 7,093(5) 7,658(5) December 31, ------------------------------------------------------ 1993 1994 1995 1996 -------- -------- ---------- ---------- Balance Sheet Data: Cash and cash equivalents ................... $ 562 $ 526 $ 805 $ 12,059 Working capital ............................. 445 473 812 13,629 Total assets ................................ 1,990 3,359 6,644 35,826 Long-term debt, net of current portion ...... 59 732 2,593 1,092 Shareholders' equity ........................ 876 1,423 2,051 30,648 For the Years Ended December 31, Three Months Ended March 31, -------------------------------- --------------------------------------------- 1997 1998 -------------------------------- -------------------------------- Pro Forma As Pro Forma As Actual Adjusted (1)(2) 1997 Actual Adjusted (2) (3) ------------- ----------------- ----------- ------------- ----------------- Statement of Income Data: Revenue ...................................... $ 85,284 $ 188,395 $ 18,077 $27,609 $48,399 Operating costs and expenses: Payroll and related expenses ................ 42,502 94,315 9,046 14,144 24,832 Selling, general and administrative expenses ................................... 27,947 62,525 5,932 8,568 15,173 Depreciation and amortization expenses 3,369 11,540 716 1,155 2,094 Reorganization charge ....................... -- 1,517 -- -- -- --------- --------- -------- -------- ------- Income from operations ....................... 11,466 18,498 2,383 3,742 6,300 Other income (expense) ....................... 388 1,074 (82) 153 150 --------- --------- -------- -------- ------- Income before provision for income taxes 11,854 19,572 2,301 3,895 6,450 Income tax expense (4) ....................... 4,780 8,642 994 1,579 2,984 --------- --------- -------- -------- ------- Net income (4) ............................... $ 7,074 $ 10,930 $ 1,307 $ 2,316 $ 3,466 ========= ========= ======== ======== ======= Net income per share: Basic (4) ................................... $ 0.59 $ 0.63 $ 0.12 $ 0.17 $ 0.19 ========= ========= ======== ======== ======= Diluted (4) ................................. $ 0.57 $ 0.61 $ 0.12 $ 0.17 $ 0.19 ========= ========= ======== ======== ======= Weighted average shares outstanding: Basic ....................................... 11,941 17,281 10,656 13,240 17,789 Diluted ..................................... 12,560 17,913 11,230 13,801 18,350 March 31, 1998 --------------------------------------- Pro Pro Forma As 1997 Actual Forma (6) Adjusted (7) --------- --------- --------- -------------- Balance Sheet Data: Cash and cash equivalents ................... $ 29,539 $ 16,088 $ 9,148 $49,687 Working capital ............................. 36,440 22,173 2,199 45,620 Total assets ................................ 101,636 105,708 227,420 267,959 Long-term debt, net of current portion ...... 1,437 923 94,715 923 Shareholders' equity ........................ 89,334 91,956 91,956 229,264
21 - ------------ (1) Assumes that the 1997 Acquisitions, the 1998 Acquisitions and the FCA and MedSource acquisitions occurred on January 1, 1997. Gives effect to: (i) the elimination of payroll and related expenses relating to certain redundant collection and administrative personnel costs immediately eliminated at the time of the 1997 Acquisitions and the 1998 Acquisitions and expenses identified during the due diligence process which will be eliminated upon the closing of the FCA and MedSource acquisitions; (ii) the elimination of certain rental expenses and related operating costs attributable to facilities which were closed at the time of the 1997 Acquisitions and the 1998 Acquisitions and facilities identified during the due diligence process which will be closed upon the completion of the FCA and MedSource acquisitions; (iii) the increase in amortization expense resulting from the acquisitions; (iv) the elimination of depreciation and amortization expense related to assets revalued or not acquired; (v) interest expense on borrowings related to the acquisitions; (vi) the estimated income tax expense, after giving consideration to non-deductible goodwill expense; (vii) the elimination of interest expense on debt assumed to be repaid with a portion of the proceeds from the Offering; (viii) the issuance of 517,767 shares of Common Stock and warrants exercisable for 375,000 shares of Common Stock in connection with the acquisition of CRWCD; (ix) the issuance of 1,425,753 shares of Common Stock in the July 1997 Offering at the public offering price of $19.67 per share which, net of the underwriting discount and offering expenses paid by the Company, would be sufficient to repay acquisition related debt of $8.4 million and to fund the acquisitions of AFECD and TRC; (x) the issuance of 46,442 shares of Common Stock issued in connection with the acquisition of AFS; and (xi) the issuance of 4.5 million shares of Common Stock at an assumed public offering price of $25.00 per share, net of the estimated underwriting discount and offering expenses payable by the Company, which would be sufficient to repay acquisition related debt of $75.0 million, repay debt of $21.9 million recognized in connection with the FCA and MedSource acquisitions and pay an additional $10.5 million necessary to fund the FCA and MedSource acquisitions. (2) Includes reorganization charges and other costs of $1.9 million and $90,000 for the year ended December 31, 1997 and the three months ended March 31, 1998, respectively. Net income per share -- basic and net income per share -- diluted would have been $0.70 and $0.68, respectively, and $0.20 and $0.19, respectively, on a pro forma basis assuming those charges had not been incurred. (3) Assumes that the TRC, FCA and MedSource acquisitions occurred on January 1, 1998. Gives effect to: (i) the elimination of payroll and related expenses relating to certain redundant collection and administrative personnel costs immediately eliminated at the time of the TRC acquisition and expenses identified during the due diligence process which will be eliminated upon the closing of the FCA and MedSource acquisitions; (ii) the elimination of certain rental expenses and related operating costs attributable to facilities which were identified during the due diligence process and will be closed upon the completion of the FCA and MedSource acquisitions; (iii) the increase in amortization expense resulting from the TRC, FCA and MedSource acquisitions; (iv) the elimination of depreciation and amortization expense related to assets revalued or not acquired; (v) interest expense on borrowings related to the FCA and MedSource acquisitions; (vi) the estimated income tax expense, after giving consideration to non-deductible goodwill expense; (vii) the elimination of interest expense on debt assumed to be repaid with a portion of the proceeds from the Offering; and (viii) the issuance of 4.5 million shares of Common Stock at an assumed public offering price of $25.00 per share, net of the estimated underwriting discount and offering expenses payable by the Company, which would be sufficient to repay acquisition related debt of $75.0 million, repay debt of $21.9 million recognized in connection with the FCA and MedSource acquisitions and an additional $10.5 million necessary to fund the FCA and MedSource acquisitions. (4) The Company was taxed as an S Corporation prior to September 3, 1996. Accordingly, income tax expense and net income have been provided on a pro forma basis as if the Company had been subject to income taxes in all periods presented. (5) Assumes that the Company issued 374,637 shares of Common Stock at $8.67 per share to fund the distribution of undistributed S Corporation earnings of $3.2 million through September 3, 1996, the termination date of the Company's S Corporation status, to existing shareholders of the Company. (6) Gives effect to: (i) the acquisition of FCA for approximately $67.6 million in cash, which was borrowed against the Company's credit facility, and the recognition of certain acquisition related liabilities; and (ii) the pending acquisition of MedSource for approximately $17.9 million in cash, of which $7.4 million was assumed to be borrowed against the Company's credit facility, and the recognition of certain acquisition related liabilities. The Company expects to recognize goodwill of $56.2 million and $36.3 million for the FCA and MedSource acquisitions, respectively. (7) Gives effect to the issuance of 5.8 million shares of Common Stock at an assumed public offering price of $25.00 per share and the application of the net proceeds therefrom. See "Use of Proceeds." 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview NCO is a leading provider of accounts receivable management and other outsourced services such as customer service call centers, market research and other outsourced administrative services. In 1997, accounts receivable management services comprised more than 89.6% of the Company's revenue. As a result of rapid internal growth and selected strategic acquisitions, the Company's revenue has grown from $7.4 million in 1993 to $188.4 million in 1997 on a pro forma basis. The Company has historically generated substantially all of its revenue from the recovery of delinquent accounts receivable on a contingency fee basis. Contingency fees typically range from 15% to 35% of the amount recovered on behalf of the Company's clients, but can range from 6% for the management of accounts placed early in the recovery cycle to 50% for accounts which have been serviced extensively by the client or by other third-party providers. In addition, the Company generates revenue from fixed fee services for certain accounts receivable management and other related services. Revenue is earned and recognized upon collection of accounts receivable for contingency fee services and as work is performed for fixed fee services. The Company enters into contracts with most of its clients which define, among other things, fee arrangements, scope of services and termination provisions. Clients may usually terminate such contracts on 30 or 60 days notice. In the event of termination, however, clients typically do not withdraw accounts referred to the Company prior to the date of termination, thus providing the Company with an ongoing stream of revenue from such accounts which diminishes over time. The Company's costs consist principally of payroll and related costs, selling, general and administrative costs, and depreciation and amortization. Payroll and related expenses consist of wages and salaries, commissions, bonuses and benefits for all employees of the Company, including management and administrative personnel. As the Company has grown, payroll costs as a percentage of revenue have gradually declined. Selling, general and administrative expenses, which include postage, telephone and mailing costs, and other costs of collections as well as expenses which directly support the operations of the business including facilities costs, equipment maintenance, sales and marketing, data processing, professional fees and other management costs, have remained relatively constant as a percentage of revenue since 1993. To date, all of the Company's acquisitions have been accounted for under the purchase method of accounting with the results of the acquired companies included in the Company's statements of income beginning on the date of acquisition. In pursuing acquisitions, the Company typically seeks to serve new geographic markets or industries, expand its presence in its existing markets and add complementary services. Upon completion of an acquisition, the Company immediately focuses on achieving operating efficiencies by eliminating redundant expenses and reducing certain other expenses to levels consistent with the Company's current operating results. Included elsewhere in this prospectus are Pro Forma Consolidated Financial Statements which show the effect of the 1997 Acquisitions, the 1998 Acquisitions, the FCA and MedSource acquisitions as if the results of each acquired company had been included in the Company's statements of income for the periods presented. For the periods shown prior to September 3, 1996, the Company had been treated for federal and state income tax purposes as an S Corporation. As a result, the Company's shareholders, rather than the Company, were taxed directly on the earnings of the Company for federal and certain state income tax purposes. The Company terminated its status as an S Corporation effective September 3, 1996 and is now subject to federal and state income taxes at applicable C Corporation rates. Accordingly, the income tax expense has been calculated as if the Company were subject to federal and state income taxes for all prior periods. 23 Results of Operations The following table sets forth income statement data on an historical and pro forma basis as a percentage of revenue:
Years Ended December 31, -------------------------------------------------- 1995 1996 1997 ----------- ----------- ------------------------ Pro Actual Forma ----------- ----------- Revenue ....................................... 100.0% 100.0% 100.0% 100.0% Operating costs and expenses: Payroll and related expenses ................. 53.4 47.6 49.8 50.1 Selling, general and administrative expenses .................................... 31.7 32.6 32.8 33.2 Depreciation and amortization expenses ....... 2.7 4.1 4.0 6.1 Reorganization charge ........................ -- -- -- 0.8 ------ ------ ------ ------ Total operating costs and expenses. ......... 87.8 84.3 86.6 90.2 ------ ------ ------ ------ Income from operations ........................ 12.2 15.7 13.4 9.8 Other income (expense) ........................ ( 1.4) ( 1.9) 0.5 ( 3.3) ------ ------ ------ ------ Income before income tax expense .............. 10.8 13.8 13.9 6.5 Income tax expense (1) ........................ 4.3 5.5 5.6 3.0 ------ ------ ------ ------ Net income .................................... 6.5% 8.3% 8.3% 3.5% ====== ====== ====== ====== Three Months Ended March 31, ------------------------------------ 1997 1998 ----------- ------------------------ Pro Actual Forma ----------- ----------- Revenue ....................................... 100.0% 100.0% 100.0% Operating costs and expenses: Payroll and related expenses ................. 50.0 51.2 51.3 Selling, general and administrative expenses .................................... 32.8 31.0 31.4 Depreciation and amortization expenses ....... 4.0 4.2 4.3 Reorganization charge ........................ -- -- -- ------ ------ ------ Total operating costs and expenses. ......... 86.8 86.4 87.0 ------ ------ ------ Income from operations ........................ 13.2 13.6 13.0 Other income (expense) ........................ ( 0.5) 0.6 ( 3.7) ------ ------ ------ Income before income tax expense .............. 12.7 14.2 9.3 Income tax expense (1) ........................ 5.5 5.7 4.5 ------ ------ ------ Net income .................................... 7.2% 8.5% 4.8% ====== ====== ======
- ------------ (1) The Company was taxed as an S Corporation prior to September 3, 1996. Accordingly, income tax expense and net income have been provided as if the Company had been subject to income taxes in all periods presented. Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997 Revenue. Revenue increased $9.5 million or 52.7% to $27.6 million for the three months ended March 31, 1998 from $18.1 million for the comparable period in 1997. Of this increase, $3.6 million was attributable to the addition of new clients and growth in business from existing clients. Revenue attributable to the Goodyear, Tele-Research and CMS A/R acquisitions completed in January 1997 represented $908,000 of the increase and $1.2 million of the increase was attributable to the CRWCD acquisition completed in February 1997. In addition, $2.1 million of the increase was attributable to the AFS and CAC acquisitions completed in October 1997 and $1.7 million of the increase was attributable to the AFECD and TRC acquisitions completed in the first quarter of 1998. Payroll and related expenses. Payroll and related expenses increased $5.1 million to $14.1 million for the three months ended March 31, 1998 from $9.0 million for the comparable period in 1997, and increased as a percentage of revenue to 51.2% from 50.0%. Payroll and related expenses increased as a percentage of revenue primarily as a result of the market research division having a higher payroll cost structure than that of the remainder of the Company. In addition, there were additional payroll costs attributable to the start up of a contract with the United States Department of Education (the "DOE Contract") which required the Company to hire and train a certain number of collection personnel prior to realizing any revenue under the contract. These higher costs were partially offset by lower payroll costs in the AFS and CAC acquisitions and by spreading the cost of management and administrative personnel over a larger revenue base. Selling, general and administrative expenses. Selling, general and administrative expenses increased $2.7 million to $8.6 million for the three months ended March 31, 1998 from $5.9 million for the comparable period in 1997, and decreased as a percentage of revenue to 31.0% from 32.8%. A portion of the decrease was attributable to the market research division having a lower selling, general and administrative expense structure than that of the remainder of the business. In addition, additional operating efficiencies were obtained by spreading selling, general and administrative expenses over a larger revenue base. Depreciation and amortization. Depreciation and amortization increased to $1.2 million for the three months ended March 31, 1998 from $716,000 for the comparable period in 1997. Of this increase, $90,000 was 24 attributable to the CAC and AFS acquisitions, and $120,000 was attributable to the AFECD and TRC acquisitions. The remaining $274,000 primarily consisted of depreciation resulting from normal capital expenditures incurred in the ordinary course of business. Other income (expense). Interest and investment income increased $139,000 to $232,000 for the three months ended March 31, 1998 from $93,000 for the comparable period in 1997. This increase was primarily attributable to the investment of funds remaining from the 1997 Offering, as well as an increase in operating funds and funds held in trust for clients. Interest expense decreased to $78,000 for the three months ended March 31, 1998 from $175,000 for the comparable period in 1997. During the first quarter of 1997, the Company borrowed $8.4 million on its revolving credit facility to partially finance the Goodyear, Tele-Research, CMS A/R and CRWCD acquisitions, and issued a $900,000 convertible note payable in connection with the Goodyear acquisition in January 1997. The revolving credit facility was repaid with a portion of the proceeds from the 1997 Offering. In addition, the $1.0 million convertible note payable issued in connection with the Management Adjustment Bureau, Inc. ("MAB") acquisition in September 1996 was converted to Common Stock in connection with the 1997 Offering. Income tax expense. Income tax expense increased to $1.6 million, or 40.5% of income before taxes, for the three months ended March 31, 1998 from $994,000, or 43.2% of income before taxes, for the comparable period in 1997. Income taxes were computed after giving effect to non-deductible goodwill expenses resulting from certain of the acquired companies. Net income. Net income increased $1.0 million or 77.2% to $2.3 million for the three months ended March 31, 1998 from $1.3 million for the comparable period in 1997. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Revenue. Revenue increased $54.5 million or 177.3% to $85.3 million for 1997 from $30.8 million in 1996. Of this increase in revenue, $8.7 million of revenue was attributable to the acquisition of MAB completed in September 1996 and $37.1 million of revenue was attributable to the 1997 Acquisitions. The addition of new clients and growth in business from existing clients represented $8.7 million of the increase in revenue. Payroll and related expenses. Payroll and related expenses increased $27.9 million to $42.5 million for 1997 from $14.7 million in 1996, and increased as a percentage of revenue to 49.8% from 47.6%. Payroll and related expenses increased as a percentage of revenue primarily as a result of the businesses acquired in the MAB acquisition and the 1997 Acquisitions which closed in the first quarter of 1997 having higher cost structures than that of the Company. This increase was partially offset by spreading the cost of management and administrative personnel over a larger revenue base. In addition, in the fourth quarter of 1997 there was $339,000 of additional payroll expense attributable to the start up of the DOE Contract which required the Company to hire and train a certain number of collection personnel prior to realizing any revenue under the contract. Selling, general and administrative expenses. Selling, general and administrative expenses increased $17.9 million to $27.9 million for 1997 from $10.0 million in 1996. Selling, general and administrative expenses increased slightly as a percentage of revenue to 32.8% from 32.6% due to start up costs attributable to the DOE Contract of $274,000. Also, the business acquired in the 1997 Acquisitions had a higher cost structure than that of the Company and the Company has continued to experience increased costs as a result of changes in business mix which require the increased use of national databases and credit reporting services. The increases were offset by realizing operating efficiencies and by spreading selling, general and administrative expenses over a larger revenue base. Depreciation and amortization. Depreciation and amortization increased to $3.4 million for 1997 from $1.3 million in 1996. Of this increase, $1.8 million was a result of the MAB acquisition and the 1997 Acquisitions. The remaining $260,000 consisted of amortization of deferred financing charges and depreciation resulting from capital expenditures incurred in the normal course of business. Other income (expense). Interest and investment income increased $778,000 to $1.0 million for 1997 from the comparable period in 1996. This increase was primarily attributable to the investment of funds remaining from the Company's public offering completed in July 1997 (the "1997 Offering"), as well as an increase in 25 operating funds and funds held in trust for clients. Interest expense decreased to $591,000 for 1997 from $818,000 in 1996. Although the Company's revolving credit facility had been repaid with a portion of the net proceeds from the Company's initial public offering completed in November 1996 (the "IPO"), the Company borrowed $8.4 million on its revolving credit facility to partially finance the 1997 Acquisitions which closed in the first quarter of 1997, and issued a $900,000 convertible note payable in connection with the Goodyear acquisition in January 1997. The revolving credit facility was repaid with a portion of the proceeds from the 1997 Offering. In addition, the $1.0 million convertible note payable issued in connection with the MAB acquisition in September 1996 was converted to Common Stock in connection with the 1997 Offering. As a result of the disposal of certain fixed assets in the move of the Company's corporate headquarters in July 1997, the Company incurred a loss on the disposal of fixed assets in the amount of $41,000. Income tax expense. Income tax expense for 1997 was $4.8 million or 40.3% of income before taxes and was computed after giving effect to non-deductible goodwill expenses resulting from certain of the acquired companies. In 1996, the Company was an S Corporation until September 3, 1996 and, accordingly, there was no income tax expense until that time. The income tax expense of $1.7 million for 1996 (assuming the Company was taxed as a C Corporation for the entire year) was computed utilizing an assumed rate of 40.0% after giving effect to non-deductible goodwill. Net income. Net income in 1997 increased to $7.1 million from net income of $2.5 million in 1996, a 178.4% increase. Year Ended December 31, 1996 Compared to Year Ended December 31, 1995 Revenue. Revenue increased $18.0 million or 141.6% to $30.8 million in 1996 from $12.7 million in 1995. Of this increase, $5.0 million was attributable to the MAB acquisition completed in September 1996, $6.8 million was attributable to the Trans Union Corporation Collections Division ("TCD") acquisition completed in January 1996, and $1.3 million was attributable to a full year of revenue from the Eastern Business Services, Inc. ("Eastern") acquisition in 1996 versus three months in 1995. Additionally, $4.8 million of the increase was due to internal growth from the addition of new clients and a growth in business from existing clients. Of this internal growth, $2.9 million of the increase was due to a full 12 months of revenue in 1996 from a contract awarded to the Company by a government agency in April 1995. Revenue from other related services, which became an area of focus in 1996, increased $1.2 million to $1.5 million in 1996 from $259,000 in 1995. Payroll and related expenses. Payroll and related expenses increased $7.9 million to $14.7 million in 1996 from $6.8 million in 1995, but decreased as a percentage of revenue to 47.6% from 53.4%. The decrease in payroll and related expenses as a percentage of revenue was primarily the result of spreading the relatively fixed costs of management and administrative personnel over a larger revenue base and the increased utilization of "on-line" computer services and other outside services, as well as eliminating redundant administrative staff following the TCD and Eastern acquisitions. These efficiencies were offset in part by higher payroll and related expenses of MAB as a percentage of its revenue. The effect of MAB was minimized due to only four months of the operations of MAB being included in the income statements. Selling, general and administrative expenses. Selling, general and administrative expenses increased $6.0 million to $10.0 million in 1996, from $4.0 million in 1995, and increased as a percentage of revenue to 32.6% from 31.7%. A large percentage of the increase was due to the increased costs associated with litigation management services performed by the Company on behalf of its clients in states where the laws are more conducive to the utilization of the legal process for recovery of delinquent accounts. In addition, the Company experienced increased costs as a result of a change in business mix which required the increased use of national data bases and credit reporting services. These increases were offset in part by operating efficiencies resulting from the TCD acquisition. Depreciation and amortization. Depreciation and amortization increased to $1.3 million in 1996 from $348,000 in 1995. Of this increase, $605,000 was a result of the MAB, TCD and Eastern acquisitions. The remaining $301,000 consisted of amortization of deferred financing charges and depreciation resulting from capital expenditures incurred in the ordinary course of business. Other income (expense). Interest expense increased to $818,000 in 1996 from $180,000 in 1995, primarily due to increased borrowings associated with the acquisitions of MAB, TCD and Eastern. Also included in other income (expense) for 1995 was a loss from the disposal of assets of $49,000. 26 Income tax expense. Income tax expense of $1.7 million and $546,000 in 1996 and 1995, respectively (assuming the Company was taxed as a C Corporation for each of the respective years), was computed using an assumed tax rate of 40.0% after giving effect to non-deductible goodwill from certain of the acquired companies. Net income. Net income increased to $2.5 million in 1996 from $820,000 in 1995, a 210.0% increase. Quarterly Results The following table sets forth selected actual historical financial data for the calendar quarters of 1996 and 1997, and for the first calendar quarter of 1998. This quarterly information is unaudited but has been prepared on a basis consistent with the Company's audited financial statements incorporated by reference herein and, in the Company's opinion, includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the quarters presented. The operating results for any quarter are not necessarily indicative of results for any future period.
Quarter Ended -------------------------------------------------- 1996 -------------------------------------------------- Mar. 31 Jun. 30 Sept. 30 Dec. 31 ----------- ----------- ---------- ------------ (dollars in thousands) Revenue .................... $ 6,044 $ 6,499 $ 7,715 $ 10,502 Income from operations ..... 915 1,156 1,183 1,569 Net income ................. 760 1,001 968 906 As a percentage of revenue: Income from operations ..... 15.1% 17.8% 15.3% 14.9% Net income ................. 12.6% 15.4% 12.5% 8.6% Quarter Ended -------------------------------------------------------------------- 1997 1998 ------------------------------------------------------ ------------ Mar. 31 Jun. 30 Sept. 30 Dec. 31 Mar. 31 ------------ ------------ ------------ ------------ ------------ (dollars in thousands) Revenue .................... $ 18,077 $ 21,162 $ 21,739 $ 24,306 $ 27,609 Income from operations ..... 2,383 3,039 3,112 2,932 3,742 Net income ................. 1,307 1,717 2,082 1,968 2,316 As a percentage of revenue: Income from operations ..... 13.2% 14.4% 14.3% 12.1% 13.6% Net income ................. 7.2% 8.1% 9.6% 8.1% 8.4%
The Company has experienced and expects to continue to experience quarterly variations in operating results as a result of many factors, including the costs and timing of completion and integration of acquisitions, the timing of clients' accounts receivable management programs, the commencement of new contracts, the termination of existing contracts, costs to support growth by acquisition or otherwise, the effect of the change of business mix on margins and the timing of additional selling, general and administrative expenses to support new business. In the fourth quarter of 1996, income from operations and net income as a percentage of revenue were lower than in prior quarters of 1996 largely as a result of the higher payroll and related expenses of MAB as compared to the Company's core business. Similarly, in the first quarter of 1997, the Company's operating and net margins were adversely affected by the higher cost structures of MAB and the 1997 Acquisitions which closed in the first quarter of 1997 as compared to the Company's core business. In addition, in connection with certain customers, the Company could incur costs in periods prior to recognizing revenue under such contracts. For example, income from operations and net income in the fourth quarter of 1997 were adversely affected by start-up costs attributable to the DOE Contract. Without such costs, the income from operations and net income for the quarter ended December 31, 1997 would have been 14.6% and 9.6%, respectively. Additionally, the Company's planned operating expenditures are based on revenue forecasts, and if revenues are below expectations in any given quarter, operating results would likely be materially adversely affected. While the effects of seasonality on the Company's business historically have been obscured by its rapid growth, the Company's business tends to be slower in the third and fourth quarters of the year due to the summer and holiday seasons. Liquidity and Capital Resources In July 1997, the Company completed the 1997 Offering, selling 2,166,000 shares of Common Stock and receiving net proceeds of approximately $40.4 million. In November 1996, the Company completed its IPO, selling 3,750,000 shares of Common Stock and receiving net proceeds of approximately $28.8 million. The Company's primary sources of cash have historically been cash flow from operations, bank borrowings and, in 1996 and 1997, the net proceeds from the IPO and the 1997 Offering, respectively. Cash has been used for acquisitions, S Corporation distributions to shareholders prior to the IPO, purchases of equipment and working capital to support the Company's growth. 27 Cash provided by operating activities was $4.9 million during the three months ended March 31, 1998, and $1.4 million for the comparable period in 1997. The increase in cash provided by operations was primarily due to the increase in net income to $2.3 million for the three months ended March 31, 1998 compared to $1.3 million for the comparable period in 1997. In addition the increase in cash provided by operations was also attributable to the decrease in other current and long term assets by $728,000 for the three months ended March 31, 1998 compared to $177,000 for the comparable period in 1997, and the increase in non-cash charges, primarily depreciation and amortization, to $1.2 million during the three months ended March 31, 1998 compared to $716,000 for the comparable period in 1997. Cash provided by operating activities was $6.7 million in 1997 and $2.8 million in 1996. The increase in cash provided by operations was primarily due to the increase in net income to $7.0 million in 1997 compared to $3.6 million in 1996, and the increase in non-cash charges, primarily depreciation and amortization, to $3.4 million in 1997 compared to $1.3 million in 1996. These increases were offset by a $3.9 million increase in accounts receivable in 1997 compared to a $1.8 million increase in 1996. Approximately $1.0 million of accounts payable and accrued expenses in acquired companies were reduced in order to bring the balances in line with NCO's payment policies. Cash provided by operating activities was $2.8 million in 1996 and $2.0 million in 1995. The increase in cash provided by operations was primarily due to the increase in net income to $3.6 million in 1996 compared to $1.4 million in 1995, and the increase in non-cash charges, primarily depreciation and amortization, to $1.3 million in 1996 compared to $348,000 in 1995. These increases were offset by a $1.8 million increase in accounts receivable in 1996 compared to a $572,000 increase in 1995 and a $222,000 increase in accounts payable and accrued expenses in 1996 compared to an $858,000 increase in 1995. Cash used in investing activities was $18.2 million during the three months ended March 31, 1998 compared to $15.9 million for the comparable period in 1997. The increase was primarily due to the cash portion of the purchase price paid for the acquisitions of AFECD and TRC in the first quarter of 1998 versus the cash portion of the purchase price paid for the acquisitions of Goodyear, Tele-Research, CMS A/R, and CRWCD during the first quarter of 1997. In addition, during the three months ended March 31, 1998, capital expenditures were $1.1 million compared to $312,000 for the comparable period in 1997. Cash used in investing activities was $29.2 million in 1997 compared to $13.3 million for 1996. The increase was primarily due to the 1997 Acquisitions compared with the acquisitions of TCD and MAB in 1996. The Company financed the 1997 Acquisitions with the proceeds of the 1997 Offering and the IPO, borrowings under the Credit Agreement, seller financing and working capital. The 1997 Acquisitions collectively resulted in goodwill of $37.0 million. Cash used in investing activities was $13.3 million in 1996 compared to $2.1 million in 1995. The increase was primarily due to the acquisitions of MAB and TCD in 1996. The Company financed these acquisitions with borrowings under the Credit Agreement and seller financing. The 1996 acquisitions collectively resulted in goodwill of $14.0 million. In addition to equipment financed under operating leases, capital expenditures were $298,000, $976,000 and $3.4 million in 1995, 1996 and 1997, respectively. Cash used in financing activities was $108,000 during the three months ended March 31, 1998 compared to cash provided by financing activities of $8.2 million for the comparable period in 1997. During the first quarter of 1997, bank borrowings were the Company's primary source of cash from financing activities and were used for acquisitions. The Company raised net proceeds of approximately $40.4 million in the 1997 Offering and used a portion of the proceeds from the IPO and the 1997 Offering to repay $8.4 million of outstanding indebtedness under its revolving credit facility. Cash provided by financing activities was $39.9 million in 1997 compared to $21.8 million in 1996. Net proceeds of $40.4 million from the 1997 Offering was the Company's primary source of cash from financing activities which was used for acquisitions and to repay outstanding indebtedness. Cash provided by financing activities was $21.8 million in 1996 compared to $280,000 in 1995. Bank borrowings had been the Company's primary source of cash from financing activities and were used for acquisitions and, along with cash provided by operations, for distributions to shareholders. The Company raised net 28 proceeds of approximately $28.8 million in the IPO of which $15.0 million was used to repay outstanding indebtedness under the Credit Agreement and approximately $3.2 million was used to pay undistributed S Corporation earnings. Total distributions to shareholders were $4.1 million in 1996 and $1.1 million in 1995. In March 1998, the Credit Agreement was amended to, among other things, increase the Company's revolving credit facility with Mellon to provide for borrowings up to $75.0 million at an interest rate ranging from LIBOR plus 0.75% to LIBOR plus 2.0% (LIBOR was 5.69% at March 31, 1998). The Company has the right to permanently reduce the revolving credit facility by up to $25.0 million. There were no outstanding borrowings at December 31, 1996 or 1997 or March 31, 1998. The revolving credit line is collateralized by substantially all the assets of the Company and includes certain financial covenants such as maintaining minimum working capital and net worth requirements and includes restrictions on, among other things, acquisitions, capital expenditures and distributions to shareholders. In March 1998, the Company entered into an agreement with FCA pursuant to which NCO made a cash tender offer for all of the outstanding common shares of FCA at $9.60 per share, Canadian (equivalent to $6.77 in U.S. dollars based upon the exchange rate as of the date of the agreement). The purchase price of approximately $67.6 million was paid with borrowings under the Credit Agreement, which borrowings will be repaid from the proceeds of this Offering. The Company has entered into an agreement to acquire all of the outstanding stock of MedSource for approximately $17.9 million in cash. The Company expects to finance this acquisition from the proceeds of this Offering or borrowings under the Company's revolving credit facility. The Company intends to use approximately $21.9 million of the net proceeds of this Offering to repay certain outstanding indebtedness of FCA and of MedSource following the completion of such acquisition. The Company believes that funds generated from operations, together with existing cash, the net proceeds from the Offering and available borrowings under its Credit Agreement will be sufficient to finance its current operations and planned capital expenditure requirements and internal growth at least through the next twelve months. However, the Company could require additional debt or equity financing if it were to make any other significant acquisitions for cash. Year 2000 System Modifications NCO has implemented a program to evaluate and address the impact of the year 2000 on its information systems in order to ensure that its network and software will manage and manipulate data involving the transition of dates from 1999 to 2000 without functional or data abnormality and without inaccurate results related to such data. This program includes steps to: (a) identify software that requires date code remediation; (b) establish timelines for availability of corrective software releases; (c) implement the fix to a test environment and test the remediated product; (d) integrate the updated software to NCO's production environment; (e) communicate and work with clients to implement year 2000 compliant data exchange formats; and (f) provide management with assurance of a seamless transition to the year 2000. The identification phase is substantially complete and delivery of the final software updates are scheduled for the third quarter of 1998. Management expects to complete the major portion of testing and acceptance procedures in 1998. The Company will continue to coordinate the year 2000 compliance effort throughout the balance of 1998 and into 1999 to synchronize data exchange formats with clients. For the years 1998 and 1999, the Company expects to incur total pre-tax expenses of approximately $200,000 to $250,000 per year. These costs are associated with both internal and external staffing resources for the necessary planning, coordination, remediation, testing, and other expenses to prepare its systems for the year 2000. However, a portion of these expenses will not be incremental, but rather represent a redeployment of existing information technology resources. Management does not expect substantial additional license fee costs associated directly with year 2000 compliance because the Company's software vendors are incorporating necessary modifications as part of their normal system maintenance. The majority of the costs will be incurred through the modification and testing of electronic data interchange formats with the Company's clients. The cost of planning and initial remediation incurred through 1997 has not been significant. 29 Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for reporting financial information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company is required to disclose this information for the first time it publishes its 1998 annual report. Management is in the process of evaluating the segment disclosures for purposes of reporting under SFAS No. 131. Management has not determined what impact the adoption of SFAS. No. 131 will have on the consolidated results of operations, financial condition or cash flows. Forward Looking Statements Certain statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as elsewhere in this Prospectus or in the Company's Annual Report on Form 10-K incorporated herein by reference, including, without limitation, statements regarding the anticipated growth in the amount of accounts receivable placed for third-party management, the continuation of trends favoring outsourcing of other administrative functions, the Company's objective to grow through strategic acquisitions and its ability to realize operating efficiencies upon the completion of recent acquisitions and other acquisitions that may occur in the future, the Company's ability to expand its service offerings, the anticipated changes in revenues from acquired companies, trends in the Company's future operating performance and statements as to the Company's or management's beliefs, expectations and opinions, are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, which are intended to cover safe harbors created thereby. The actual results and developments may be materially different from those expressed in or implied by such forward-looking statements. 30 BUSINESS NCO is a leading provider of accounts receivable management and other outsourced services. The Company develops and implements customized accounts receivable management solutions for clients' delinquent and current accounts. The Company provides these services on a national basis from 22 call centers located in 14 states using advanced workstations and sophisticated call management systems comprised of predictive dialers, automated call distribution systems, digital switching and customized computer software. Through extensive utilization of its technology and intensive management of human resources, the Company has achieved rapid growth in recent years. As a result of rapid internal growth and selected strategic acquisitions, the Company's revenue has grown from $7.4 million in 1993 to $188.4 million in 1997 on a pro forma basis. Since April 1994, the Company has completed 13 acquisitions (including FCA) which have enabled it to increase its penetration of existing markets, establish a presence in certain new markets, offer additional services and realize significant operating efficiencies. In addition, the Company has leveraged its infrastructure by offering additional services including customer service call centers, market research and other outsourced administrative services. The Company believes that it is currently among the five largest accounts receivable management companies in the United States. The Company provides its services principally to clients in the financial services, healthcare, retail and commercial, education, telecommunications, utilities and government sectors. The Company has over 8,000 clients, including Bell Atlantic Corporation, Mellon Bank Corporation, NationsBank Corporation, Citicorp, MCI Communications Corporation, Federal Express Corporation and Airborne Freight Corporation. For its accounts receivable management services, the Company generates substantially all of its revenue on a contingency fee basis. For many of its other outsourced services, the Company is paid on a fixed fee basis. While NCO's contracts are relatively short-term, the Company seeks to develop long-term relationships with its clients and works closely with them to provide quality customized solutions. Industry Background Increasingly, companies are outsourcing many non-core functions to focus on revenue generating activities, reduce costs and improve productivity. In particular, many large corporations are recognizing the advantages of outsourcing accounts receivable management. This trend is being driven by a number of industry-specific factors. First, the complexity of accounts receivable management functions in certain industries has increased dramatically in recent years. For example, with the increasing popularity of Health Maintenance Organizations ("HMOs") and Preferred Provider Organizations ("PPOs"), healthcare institutions now face the challenge of billing not only large insurance companies but also individuals who are required to pay small, one-time co-payments. Second, changing regulations and increased competition in certain industries such as utilities and telecommunications have created new outsourcing opportunities. Third, the ability to implement cost-effective specialized accounts receivable management, customer support and telemarketing programs has improved dramatically in recent years with the development of sophisticated call and information systems. These programs require substantial capital investment, technical capabilities, human resource commitments and extensive management supervision. The emphasis on cost-effective outsourcing solutions, the increasing sophistication of call center technology and the efficacy of third-party intervention in the recovery process has resulted in the steady growth of the accounts receivable management industry. According to estimates published by MKA, industry-wide revenues rose 10.7% to $5.5 billion in 1996 from $5.0 billion in 1995. The leading market segments within the overall accounts receivable management market are healthcare, financial services, telecommunications and utilities which represented approximately 35%, 21%, 12% and 9%, respectively, or an aggregate of 77%, of total industry referrals in 1996. The accounts receivable management industry is highly fragmented. Based on information obtained from the ACA, there are approximately 6,500 accounts receivable management companies in operation in the United States, the majority of which are small local businesses. The Company believes that many small accounts receivable management companies have insufficient capital to expand and invest in call center technology and sophisticated workstations and are unable to adequately meet the standards demanded by businesses seeking to 31 outsource their accounts receivable recovery function. In addition, there are a limited number of options for owners of such businesses to obtain liquidity or to sell their businesses. As a result, the Company believes that the industry will continue to experience consolidation in the future and that strategic acquisition opportunities will continue to become available. Business Strategy The Company strives to be a cost-effective, client service driven provider of accounts receivable management and other related services to companies with substantial outsourcing needs. To achieve this goal, the Company's business strategy is based on the following key elements: Efficient Utilization of Technology and Management Infrastructure to Improve Productivity. Efficient use of technology and intensive management of human resources enables the Company to provide cost-effective client solutions and perform large scale accounts receivable management programs. The Company has made a substantial investment in its infrastructure and is committed to utilizing the best available technologies to achieve operational efficiencies. This investment enables the Company to rapidly and efficiently integrate acquisitions. For example, in the MAB acquisition, the Company was able to reduce the workforce by approximately 16% while maintaining the same revenue base. In the CRWCD acquisition, the Company has been able to reduce the workforce by approximately 22%. The Company believes that its infrastructure is capable of supporting additional growth internally or through acquisitions without commensurate increases in costs. Commitment to Client Service. NCO is committed to providing superior service to its clients. The Company works closely with its clients to identify particular needs, design appropriate recovery strategies and implement customized accounts receivable management programs. The Company maintains a client service department to promptly address client issues, assigns dedicated field service representatives to assist larger clients and offers clients the ability to electronically communicate with the Company and monitor operational activity. Seek Low Cost Solutions. The Company seeks to be a low cost provider of accounts receivable management services by centralizing all administrative functions and minimizing overhead at all branch locations. Specifically, the Company has centralized such functions as payment processing, information systems, accounting, sales and marketing, payroll and human resources. Target Larger Clients. The Company continues to focus on expanding its base of larger clients while at the same time continuing to pursue mid-size prospects that have traditionally comprised the Company's client base. While the Company's traditional clients have provided a stable revenue base, the Company believes that larger clients offer significant cross-selling opportunities as they continue to outsource more of their accounts receivable management, customer support and telemarketing functions. The Company believes that its size and geographic diversity will help it to obtain larger national clients. Growth Strategy In light of the increasing volume of accounts receivable referred for third party management, the greater emphasis on the outsourcing of non-core competencies by businesses and the fragmented nature of the industry, the Company believes there are significant opportunities to expand its business. The Company's growth strategy includes the following key elements: Actively Pursue Strategic Acquisitions. The Company intends to continue to take advantage of the fragmented nature of the accounts receivable management industry, along with opportunities in related industries, by continuing to make strategic acquisitions. Through selected acquisitions, the Company will seek to serve new geographic markets or industries, expand its presence in its existing vertical markets and add complementary service applications. For example, the acquisition of FCA will allow the Company to market its services in Canada and the United Kingdom and provide it with an opportunity to expand further into the Canadian and European markets. The Company evaluates acquisitions using numerous criteria including size, service quality, industry focus, diversification of client base, management strength, operating characteristics and the ability to integrate the acquired businesses into the Company's operations and eliminate redundant costs. 32 Increase Market Penetration. The Company believes that its long-standing reputation as a quality provider of cost-effective accounts receivable management services is one of its most significant competitive advantages and intends to continue to build upon its reputation. The Company continually strives to increase its share of its clients' accounts receivable management business and to obtain new clients that have outsourced or are seeking to outsource these services. The sectors which the Company focuses on include many large corporations which rely heavily on third-party providers for a substantial portion of their accounts receivable management needs. In addition, the Company believes there is significant opportunity for growth in certain market segments, such as the retail credit card and insurance sectors and commercial accounts receivable management, in which it can leverage its accumulated business expertise and call center infrastructure. Expand Service Offerings. The Company regularly seeks to leverage its infrastructure by expanding the array of services offered to clients by cross-selling existing services and by developing new value-added services that strengthen its long-term relationship with existing clients. For example, the Company has already begun providing other outsourced administrative services such as customer service call centers, market research, and telephone-based auditing. Additionally, through the CMS A/R acquisition, the Company expanded into early stage accounts receivable management services and expanded into telephone-based market research through the acquisition of TRC. Substantially all of these services are presently provided to clients who utilize NCO's accounts receivable management services; however, in the future, the Company plans to continue to market these services to both existing and new clients. Accounts Receivable Management Services The Company provides a wide range of accounts receivable management services to its clients utilizing an extensive technological infrastructure. Although most of the Company's accounts receivable management services to date have focused on recovery of traditional delinquent accounts, the Company does engage in the recovery of current receivables and early stage delinquencies (generally accounts which are 90 days or less past due). The Company generates substantially all of its revenue from the recovery of delinquent accounts receivable on a contingency fee basis. In addition, the Company generates revenue from fixed fees for certain accounts receivable management and other related services. Contingency fees typically range from 15% to 35% of the amount recovered on behalf of the Company's clients, but can range from 6% for the management of accounts placed early in the accounts receivable cycle to 50% for accounts which have been serviced extensively by the client or by third-party providers. Recovery activities typically include the following: Management Planning. The Company's approach to accounts receivable management for each client is determined by a number of factors including account size and demographics, the client's specific requirements and management's estimate of the collectability of the account. The Company has developed a library of standard processes for accounts receivable management which is based upon its accumulated experience. The Company will integrate these processes with its client's requirements to create a customized recovery solution. In many instances, the approach will evolve and change as the relationship with the client develops and both parties evaluate the most effective means of recovering accounts receivable. The Company's standard approach, which may be tailored to the specialized requirements of its clients, defines and controls the steps that will be undertaken by the Company on behalf of the client and the manner in which data will be reported to the client. Through its systemized approach to accounts receivable management, the Company removes most decision making from the recovery staff and ensures uniform, cost-effective performance. Once the approach has been defined, the Company electronically or manually transfers pertinent client data into its information system. Once the client's records have been established in the Company's system, the Company commences the recovery process. Skip Tracing. In cases where the customer's telephone number or address is unknown, the Company systematically searches the United States Post Office National Change of Address service, consumer data bases, electronic telephone directories, credit agency reports, tax assessor and voter registration records, motor vehicle registrations, military records and other sources. The geographic expansion of banks, credit card companies, national and regional telecommunications companies and managed healthcare providers along with the mobility of consumers has increased the demand for locating the client's customers. Once the Company has located the customer, the notification process can begin. 33 Account Notification. The Company initiates the recovery process by forwarding an initial letter which is designed to seek payment of the amount due or open a dialogue with customers who cannot afford to pay at the current time. This letter also serves as an official notification to each customer of their rights as required by the FDCPA. The Company continues the recovery process with a series of mail and telephone notifications. Telephone representatives remind the customer of their obligation, inform them that their account has been placed for collection with the Company and begin a dialogue to develop a payment program. Credit Reporting. At a client's request, the Company will electronically report delinquent accounts to one or more of the national credit bureaus where it will remain for a period of up to seven years. The denial of future credit often motivates the payment of all past due accounts. Litigation Management. When account balances are sufficient, the Company will also coordinate litigation undertaken by a nationwide network of attorneys that the Company utilizes on a routine basis. Typically, account balances must be in excess of $1,000 to warrant litigation and the client is asked to advance legal costs such as filing fees and court costs. Attorneys generally are compensated on a contingency fee basis. The Company's collection support staff manages the Company's attorney relationships and facilitates the transfer of all necessary documentation. Payment Process. After the Company receives payment from the customer, it either remits the amount received net of its fee to the client or remits the entire amount received to the client and bills the client for its services. Activity Reports. Clients are provided with a system-generated set of standardized or customized reports that fully describe all account activity and current status. These reports are typically generated monthly, however, the information included in the report and the frequency that the reports are generated can be modified to meet the needs of the client. Quality Tracking. The Company emphasizes quality control throughout all phases of the accounts receivable management process. Some clients may specify an enhanced level of supervisory review and others may request customized quality reports. Large national credit grantors will typically have exacting performance standards which require sophisticated capabilities such as documented complaint tracking and specialized software to track quality metrics to facilitate the comparison of the Company's performance to that of its peers. Other Services The Company selectively provides other related services which complement its traditional accounts receivable management business and which leverage its teleservices infrastructure. The Company believes that the following services will provide additional growth opportunities for the Company. Market Research. The Company provides full-service custom market research services to the telecommunications, financial services, utilities, healthcare, pharmaceutical and consumer products sectors. Its capabilities include problem conceptualization, program design, data gathering (by telephone, mail, and focus groups), as well as data tabulation, results analysis and consulting. Telemarketing. The Company provides telemarketing services for clients, including lead generation and qualification and the actual booking of appointments for a client's sales representatives. Customer Service Call Center. The Company utilizes its communications and information system infrastructure to supplement or replace the customer service function of its clients. For example, the Company is currently engaged by a large regional utility to provide customer service functions for a segment of the utility's customer base that is delinquent. Accounts Receivable Outsourcing. The Company complements existing service lines by offering adjunct billing services to clients as an outsourcing option. Additionally, the Company can assist healthcare clients in the billing and management of third party insurance. Custom Designed Business Applications. The Company has the ability to provide outsourced administrative and other back-office responsibilities currently conducted by its clients. For example, the Company has a contract with United Healthcare Corporation, a national health insurer, to assume all administrative operations for its COBRA and individual conversion coverage, including all responsibility for premium billing and payment processing, customer service call center and policy fulfillment. 34 Operations Technology and Infrastructure. Over the past five years, the Company has made a substantial investment in its call management systems such as predictive dialers, automated call distribution systems, digital switching and customized computer software. As a result, the Company believes it is able to address accounts receivable management activities more reliably and more efficiently than many other accounts receivable management companies. The Company's systems also permit network access to enable clients to electronically communicate with NCO and monitor operational activity on a real-time basis. NCO provides its accounts receivable management services through the operation of 22 state-of-the-art call centers which are electronically linked through a national, wide area network. The Company utilizes two computer platform systems. One system consists of two Unix-based NCR 4300 computers which are linked via network servers to 873 workstations and which provide necessary redundancy (either computer can operate the system in the event of the failure of the other) and excess capacity for future growth. The other system consists of three Unix-based Hewlett-Packard computers which are linked via network servers to 479 workstations. The computers are linked via network servers to the Company's 1,352 workstations, which consist of personal computers and terminals that are linked to the microcomputers, but do not necessarily have separate processors. The Company utilizes 20 predictive dialer locations with 542 workstations to address its low balance, high volume accounts. These systems scan the Company's database and simultaneously initiate calls on all available telephone lines and determine if a live connection is made. Upon determining that a live connection has been made, the computer immediately switches the call to an available representative and instantaneously displays the associated account record on the representative's workstation. Calls that reach other signals, such as a busy signal, telephone company intercept or no answer, are tagged for statistical analysis and placed in priority recall queues or multiple-pass calling cycles. The system also automates virtually all recordkeeping and follow-up activities including letter and report generation. The Company's automated method of operations dramatically improves the productivity of the Company's collection staff. The Company employs a 20 person MIS staff led by a Vice President, Technology/Chief Information Officer. The Company maintains disaster recovery contingency plans and has implemented procedures to protect the loss of data against power loss, fire and other casualty. The Company has implemented a security system to protect the integrity and confidentiality of its computer system and data and maintains comprehensive business interruption and critical systems insurance on its telecommunications and computer systems. Quality Assurance and Client Service. The Company's reputation for quality service is critical to acquiring and retaining clients. Therefore, the Company and its clients monitor the Company's representatives for strict compliance with the clients' specifications and the Company's policies. The Company regularly measures the quality of its services by capturing and reviewing such information as the amount of time spent talking with clients' customers, level of customer complaints and operating performance. In order to provide ongoing improvement to the Company's telephone representatives' performance and to assure compliance with the Company's policies and standards, quality assurance personnel monitor each telephone representative on a frequent basis and provide ongoing training to the representative based on this review. The Company's information systems enable it to provide clients with reports on a real-time basis as to the status of their accounts and clients can choose to network with the Company's computer system to access such information directly. The Company maintains a client service department to promptly address client issues and questions and alert senior executives of potential problems that require their attention. In addition to addressing specific issues, a team of client service representatives will contact accounts on a regular basis in order to establish a close client rapport, determine the client's overall level of satisfaction and identify practical methods of improving the client's satisfaction. 35 Client Relationships The Company's client base currently includes over 8,000 companies in the financial services, healthcare, retail and commercial, education, telecommunications, utilities and government sectors. The Company's 10 largest clients in 1997 accounted for approximately 21.7% of the Company's revenue on a pro forma basis. In 1997, no client accounted for more than 3.6% of the Company's revenue (no more than 2.8% on a pro forma basis). In 1997, the Company on a pro forma basis derived 32.5% of its placements from financial institutions (which includes banks and insurance companies), 21.6% from healthcare organizations, 15.3% from educational organizations, 13.8% from retail and commercial entities, 5.9% from utilities, 5.6% from government entities, and 5.3% from telecommunications companies. The following table sets forth a list of certain of the Company's key clients:
Financial Services Healthcare Education - ------------------------------- ---------------------------------- ---------------------------------- First Union Corporation Catholic Healthcare Initiatives California Student Aid Commission Mellon Bank Corporation Hutchinson Hospital Corporation Penn State University NationsBank Corporation Kaiser Permanente Pennsylvania Higher Education The Progressive Corporation Medical Center of Delaware Assistance Agency United Healthcare Corporation Reimbursement Technologies, Inc. Rutgers University University of Pennsylvania Retail and Commercial Government and Utilities Telecommunications - ------------------------------- ---------------------------------- ---------------------------------- Airborne Freight Corporation Commonwealth Edison Company Bell Atlantic Corporation Emery Worldwide Massachusetts Department of BellSouth Corporation Federal Express Corporation Revenue Frontier Cellular The Bon Ton Stores, Inc. New York State Electric & Gas MCI Communications Corporation Corporation Sprint Corporation PECO Energy Company City of Philadelphia
The Company enters into contracts with most of its clients which define, among other things, fee arrangements, scope of services and termination provisions. Clients may usually terminate such contracts on 30 or 60 days notice. In the event of termination, however, clients typically do not withdraw accounts referred to the Company prior to the date of termination, thus providing the Company with an ongoing stream of revenue from such accounts which diminish over time. Under the terms of the Company's contracts, clients are not required to place accounts with the Company but do so on a discretionary basis. Sales and Marketing The Company utilizes a focused and highly professional direct selling effort in which sales representatives personally cultivate relationships with prospective and existing clients. The Company's sales effort consists of a 31 person direct sales force. Each sales representative is charged with identifying leads, qualifying prospects and closing sales. When appropriate, Company operating personnel will join in the sales effort to provide detailed information and advice regarding the Company's operational capabilities. Sales and operating personnel also work together to take advantage of potential cross-selling opportunities. The Company supplements its direct sales effort with print media and attendance at trade shows. Many of the Company's prospective clients issue requests-for-proposals ("RFPs") as part of the contract award process. The Company has on staff a technical writer for the purpose of preparing detailed, professional responses to RFPs. Personnel and Training The Company's success in recruiting, hiring and training a large number of employees is critical to its ability to provide high quality accounts receivable management, customer support and teleservices programs to its clients. The Company seeks to hire personnel with previous experience in accounts receivable management or as a telephone representative. NCO generally offers competitive compensation and benefits and offers promotion opportunities within the Company. 36 All Company personnel receive a comprehensive training course that consists of a combination of classroom and practical experience. Prior to customer contact, new employees receive one week of training in the Company's operating systems, procedures and telephone techniques and instruction in applicable federal and state regulatory requirements. Company personnel also receive a wide variety of continuing professional education consisting of both classroom and role playing sessions. As of March 31, 1998, the Company had a total of 1,568 full-time employees and 704 part-time employees, of which 1,769 were telephone representatives. None of the Company's employees is represented by a labor union. The Company believes that its relations with its employees are good. Competition The accounts receivable management industry is highly competitive. The Company competes with approximately 6,500 providers, including large national corporations such as Outsourcing Solutions Inc., GC Services, Inc., Equifax Inc. and many regional and local firms. Some of the Company's competitors have substantially greater resources, offer more diversified services and operate in broader geographic areas than the Company. In addition, the accounts receivable management services offered by the Company, in many instances, are performed in-house. Moreover, many larger clients retain multiple accounts receivable management and recovery providers which exposes the Company to continuous competition in order to remain a preferred vendor. The Company believes that the primary competitive factors in obtaining and retaining clients are the ability to provide customized solutions to a client's requirements, personalized service, sophisticated call and information systems, collection rates and price. The Company also competes with other firms, such as SITEL Corporation, APAC TeleServices, Inc. and TeleTech Holdings, Inc., in providing teleservices. Regulation The accounts receivable management industry is regulated both at the federal and state level. The FDCPA regulates any person who regularly collects or attempts to collect, directly or indirectly, consumer debts owed or asserted to be owed to another person. The FDCPA establishes specific guidelines and procedures which debt collectors must follow in communicating with consumer debtors, including the time, place and manner of such communications. Further, it prohibits harassment or abuse by debt collectors, including the threat of violence or criminal prosecution, obscene language or repeated telephone calls made with the intent to abuse or harass. The FDCPA also places restrictions on communications with individuals other than consumer debtors in connection with the collection of any consumer debt and sets forth specific procedures to be followed when communicating with such third parties for purposes of obtaining location information about the consumer. Additionally, the FDCPA contains various notice and disclosure requirements and prohibits unfair or misleading representations by debt collectors. The Company is also subject to the Fair Credit Reporting Act which regulates the consumer credit reporting industry and which may impose liability on the Company to the extent that the adverse credit information reported on a consumer to a credit bureau is false or inaccurate. The accounts receivable management business is also subject to state regulation. Some states require that the Company be licensed as a debt collection company. Management believes that the Company currently holds applicable licenses from all states where required. With respect to the other teleservices offered by the Company, including telemarketing, the federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 (the "TCFAPA") broadly authorizes the Federal Trade Commission (the "FTC") to issue regulations prohibiting misrepresentations in telemarketing sales. The FTC's telemarketing sales rules prohibit misrepresentations of the cost, terms, restrictions, performance or duration of products or services offered by telephone solicitation and specifically address other perceived telemarketing abuses in the offering of prizes and the sale of business opportunities or investments. The federal Telephone Consumer Protection Act of 1991 (the "TCPA") limits the hours during which telemarketers may call consumers and prohibits the use of automated telephone dialing equipment to call certain telephone numbers. A number of states also regulate telemarketing. For example, some states have enacted restrictions similar to the federal TCPA. From time to time, Congress and the states consider legislation that would further regulate the Company's telemarketing operations and the Company cannot predict whether additional legislation will be enacted and, if enacted, what effect it would have on the telemarketing industry and the Company's business. 37 The collection of accounts receivable by collection agencies in Canada is regulated at the provincial and territorial level in substantially the same fashion as is accomplished by federal and state laws in the United States. The manner in which the Company carries on the business of collecting accounts is subject, in all provinces and territories, to established rules of common law or civil law and statute. Such laws establish rules and procedures governing the tracing, contacting and dealing with debtors in relation to the collection of outstanding accounts. These rules and procedures prohibit debt collectors from engaging in intimidating, misleading and fraudulent behaviour when attempting to recover outstanding debts. In Canada, the Company's collection operations are subject to licensing requirements and periodic audits by government agencies and other regulatory bodies. Generally, such licenses are subject to annual renewal. Management believes that the Company holds all necessary licenses in those provinces and territories that require them. If the Company engages in other teleservice activities in Canada, including telemarketing, there are several provincial and territorial consumer protection laws of more general application. This legislation defines and prohibits unfair practices by telemarketers, such as the use of undue pressure and the use of false, misleading or deceptive consumer representations. In addition, accounts receivable management and telemarketing industries are regulated in the United Kingdom, including a licensing requirement. If the Company expands its international operation, it may become subject to additional government control and regulation in other countries, which may be more onerous than those in the United States. Several of the industries served by the Company are also subject to varying degrees of government regulation. Although compliance with these regulations is generally the responsibility of the Company's clients, the Company could be subject to a variety of enforcement or private actions for its failure or the failure of its clients to comply with such regulations. The Company devotes significant and continuous efforts, through training of personnel and monitoring of compliance, to ensure that it is in compliance with all federal and state regulatory requirements. The Company believes that it is in material compliance with all such regulatory requirements. 38 Facilities The Company currently operates 22 leased facilities. The chart below summarizes the Company's current call center facilities: Approximate Location of Facility Square Footage - ----------------------- --------------- Fort Washington, PA 82,000 San Diego, CA 3,200 Aurora, CO 4,800 Honolulu, HI 2,900 Hutchinson, KS 900 Wichita, KS 10,000 New Orleans, LA 6,900 Odenton, MD 13,400 Jackson, MI 10,800 Charlotte, NC 15,000 Buffalo, NY 30,000 Cleveland, OH 7,000 Dayton, OH 13,100 Tulsa, OK 13,900 Fort Washington, PA 12,300 Pittsburgh, PA 3,600 Philadelphia, PA 4,700 Philadelphia, PA 5,700 Philadelphia, PA 3,200 Upper Darby, PA 11,000 Columbia, SC 10,500 Bristol, TN 4,000 The leases of these facilities expire between 1998 and 2010, and most contain renewal options. The Company believes that these facilities are adequate for its current operations, but additional facilities may be required to support growth. The Company believes that suitable additional or alternative space will be available as needed on commercially reasonable terms. In addition, the Company leases sales offices in Little Rock, Arkansas; Tucson, Arizona; Boston, Massachusetts; Las Vegas, Nevada; Jericho, New York; McAllen and Stafford, Texas. Legal Proceedings The Company is involved in legal proceedings from time to time in the ordinary course of its business. Management believes that none of these legal proceedings will have a materially adverse effect on the financial condition or results of operations of the Company. 39 MANAGEMENT Directors, Executive Officers and Key Employees The following table sets forth certain information concerning the Company's directors, executive officers and key employees:
Name Age Position - ------------------------------- ----- ------------------------------------------------ Michael J. Barrist ............ 37 Chairman of the Board, President and Chief Executive Officer Charles C. Piola, Jr .......... 51 Executive Vice President and Director Bernard R. Miller ............. 50 Executive Vice President, Development and Director Steven L. Winokur ............. 38 Executive Vice President, Finance, Chief Finan- cial Officer and Treasurer Joseph C. McGowan ............. 45 Executive Vice President and Chief Operating Officer Patrick M. Baldasare .......... 42 President and Chief Executive Officer of NCO Teleservices, Inc. (Market Research Division) Steven L. Leckerman ........... 46 Senior Vice President, Collection Operations Stephen W. Elliott ............ 36 Senior Vice President, Technology and Chief Information Officer Eric S. Siegel (1) ............ 41 Director Allen F. Wise (1) ............. 55 Director
- ------------ (1) Member of Audit and Compensation Committees. Michael J. Barrist has served as Chairman of the Board, President and Chief Executive Officer of the Company since purchasing the 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. Charles C. Piola, Jr. joined the Company in 1986 as Executive Vice President, Sales and Marketing and has served as a director since that time. Prior to joining the Company, Mr. Piola was the Regional Sales Manager for Trans World Systems from 1983 to 1986 and IC Systems from 1979 to 1981, both accounts receivable management companies. Bernard R. Miller joined the Company as Senior Vice President of Development in 1994 when NCO acquired certain assets of B. Richard Miller, Inc. ("BRM"), a Philadelphia-based accounts receivable management company owned principally by Mr. Miller. Mr. Miller became a director in 1996 and an Executive Vice President in September 1997. Prior to joining the Company, Mr. Miller served as President and Chief Executive Officer of BRM since founding it in 1980. Steven L. Winokur joined the Company in December 1995 as Vice President, Finance, Chief Financial Officer and Treasurer and became Executive Vice President in September 1997. Prior to joining the Company, Mr. Winokur acted as a part-time consultant to the Company since 1986. From February 1992 to December 1995, Mr. Winokur was the principal of Winokur & Associates, a certified public accounting firm. From March 1981 to February 1992, Mr. Winokur was a partner with Gross & Company, a certified public accounting firm, where he most recently served as Administrative Partner. Mr. Winokur is a certified public accountant. 40 Joseph C. McGowan joined the Company in 1990 as Vice President, Operations and became Executive Vice President and Chief Operating Officer in September 1997. Prior to joining the Company, Mr. McGowan was Assistant Manager of the Collections Department at Philadelphia Gas Works, a public utility, since 1975. Patrick M. Baldasare joined the Company as President and Chief Executive Officer of NCO Teleservices, Inc. (Market Research Division) in February 1996 when the Company acquired certain assets of TRC. Mr. Baldasare has served as Chief Executive Officer and President of TRC since its founding in 1987. From 1983 through 1987, Mr. Baldasare served as President of Valley Forge Information Service, the market research division of Burlington Industries. Steven L. Leckerman joined the Company in September 1995 as Senior Vice President, Collection Operations. From 1982 to September 1995, Mr. Leckerman was employed by Allied Bond Corporation, a division of Union Corporation, an accounts receivable management company, where he served as manager of dialer and special projects. Stephen W. Elliott joined the Company in May 1996 as Senior Vice President, Technology and Chief Information Officer and provided consulting services to the Company since May 1995. Prior to joining NCO, Mr. Elliott was employed by Electronic Data Systems, a computer services company, since 1986, most recently as Senior Account Manager. Eric S. Siegel was appointed to the Board of Directors of the Company in December 1996. Mr. Siegel has been president of Siegel Management Company, a management consulting firm, since 1983. Mr. Siegel also is an adjunct faculty member at the Wharton School of the University of Pennsylvania and is co-author of The Ernst & Young Business Plan Guide. Allen F. Wise was appointed to the Board of Directors of the Company in December 1996. Mr. Wise has been a director and Chief Executive Officer of Coventry Corporation, a managed care company, since October 1996. Prior thereto, he was Executive Vice President of United Healthcare Corporation since October 1994, President of Wise Health Systems, a healthcare management company, from September 1993 to October 1994, Chief Executive Officer of Keystone Health Plan and Chief Operating Officer of Independence Blue Cross from September 1991 to September 1993 and Vice President of U.S. Healthcare, Inc. from April 1985 to September 1991. Mr. Wise is also a director of Transition Systems Inc. 41 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of April 30, 1998, and as adjusted to reflect the sale of the shares of Common Stock offered hereby by: (i) each Selling Shareholder; (ii) each person known by the Company to own beneficially more than 5% of the Company's outstanding Common Stock; (iii) each of the Company's directors; (iv) the Company's chief executive officer and the four most highly compensated executive officers; and (v) the Company's directors and executive officers as a group. Except as otherwise indicated, to the knowledge of the Company, the beneficial owners of the Common Stock listed below have sole investment and voting power with respect to such shares.
Shares Beneficially Shares Beneficially Owned Owned Prior to the Offering After the Offering ------------------------ Shares Being ----------------------- Name of Beneficial Owner Number Percent Offered Number Percent - ---------------------------------------- ------------ --------- -------------- ------------ -------- Annette H. Barrist (1) ................. 253,288 1.9% 38,000 215,288 1.1% Joshua Gindin, Esq. and Michael J. Barrist, Trustees, U/A/T dated 10/16/96, Annette H. Barrist, Settlor ............................... 76,744 * 11,500 65,244 * Michael J. Barrist (2)(3) .............. 2,632,690 19.6 394,032 2,238,658 11.6 Joshua Gindin, Esq. and Steven Winokur, CPA, Trustees, U/A/T dated 9/6/96, Michael J. Barrist and Natalie Barrist, Settlors ......... 179,160 1.3 27,000 152,160 * The Dayton Foundation .................. 10,384 * 10,384 -- -- Joshua Gindin (4) ...................... 374,949 2.8 56,500 318,449 1.6 Stephen W. Elliott (5) ................. 30,364 * 9,500 20,864 * William C. Fischer (5) ................. 2,500 * 2,500 -- -- Mark Macrone (5) ....................... 44,172 * 7,500 36,672 * Joseph C. McGowan (5) .................. 45,728 * 17,050 28,678 * Bernard R. Miller (6) .................. 231,340 1.7 31,000 200,340 1.0 Michael G. Noah (5) .................... 10,000 * 7,000 3,000 * Charles C. Piola, Jr. (2)(7) ........... 1,193,573 8.9 178,500 1,015,073 5.3 Joshua Gindin, Esq., Trustee U/A/T dated 9/6/96, Charles C. Piola, Jr. and June Piola, Settlors .......... 179,160 1.3 27,000 152,160 * PNC Bancorp, Inc.(8) ................... 1,068,401 8.0 -- 1,068,401 5.5 Provident Investment Counsel, Inc. (9) .............................. 665,796 5.0 -- 665,796 3.5 Eric S. Siegel (10) .................... 19,586 * -- 19,586 * Steven L. Winokur (11) ................. 222,709 1.7 42,008 180,701 * Allen F. Wise (12) ..................... 6,500 * -- 6,500 * Wright State University Foundation 36,058 * 36,058 -- -- APT Holdings Corporation (13) .......... 102,668 * 102,668 -- -- All directors and executive officers as a group (7 persons) (14) ........... 4,352,126 32.1 662,590 3,689,536 19.1
- ------------ *Less than one percent. (1) Excludes 78,619 shares held in trust for the benefit of members of Mrs. Barrist's family, as to which Mrs. Barrist disclaims beneficial ownership. Mrs. Barrist is the mother of Michael J. Barrist. In the event that the Underwriters over-allotment option is exercised in full, Mrs. Barrist would sell an additional 5,700 shares and would beneficially own 1.0% of the outstanding Common Stock. (2) The address of such person is c/o NCO Group, Inc., 515 Pennsylvania Avenue, Fort Washington, Pennsylvania 19034. 42 (3) Includes: (i) 253,288 shares of Common Stock owned by Mrs. Annette Barrist (including 38,000 shares being sold by her in the Offering) which Mr. Barrist has the sole right to vote pursuant to an irrevocable proxy; (ii) 77,119 shares held in trust for the benefit of members of Mrs. Annette Barrist's or Mr. Barrist's family (including 11,500 shares being sold by such trust) for which Mr. Barrist is a co-trustee; and (iii) 7,500 shares issuable upon the exercise of options which are exercisable within 60 days after April 30, 1998. Excludes 179,160 shares held in trust for the benefit of Mr. Barrist's child, as to which Mr. Barrist disclaims beneficial ownership. Mrs. Annette Barrist is the mother of Michael J. Barrist. In the event that the Underwriters' over-allotment option is exercised in full, Mr. Barrist would sell an additional 63,117 shares (including 5,700 shares being sold by Mrs. Barrist) and would beneficially own 10.8% of the outstanding Common Stock after the Offering. (4) Represents: (i) 179,160 shares held in trust for the benefit of Mr. Barrist's child (including 27,000 shares being sold by such trust) for which Mr. Gindin is a co-trustee; (ii) 179,160 shares held in trust for the benefit of Mr. Piola's children (including 27,000 shares being sold by such trust) for which Mr. Gindin is trustee; and (iii) 16,629 shares issuable upon the exercise of options which are exercisable within 60 days after April 30, 1998. (5) Represents shares issuable upon the exercise of options which are exercisable within 60 days after April 30, 1998. Such person will exercise options to acquire all of the shares being sold by him in the Offering. (6) Includes 30,000 shares issuable upon the exercise of options which are exercisable within 60 days after April 30, 1998. In the event that the Underwriters' over-allotment option is exercised in full, Mr. Miller would sell an additional 4,650 shares and would beneficially own less than 1% of the outstanding Common Stock after the Offering. (7) Includes 5,000 shares issuable upon the exercise of options which are exercisable within 60 days after April 30, 1998. Excludes 179,160 shares held in trust for the benefit of Mr. Piola's children, as to which Mr. Piola disclaims beneficial ownership. In the event that the Underwriters' over-allotment option is exercised in full, Mr. Piola would sell an additional 29,750 shares and would beneficially own 4.9% of the outstanding Common Stock after the Offering. (8) Based upon a Schedule 13D, dated February 13, 1998, provided to the Company. The address of PNC Bancorp, Inc. is One PNC Plaza, 249 Fifth Avenue, Pittsburgh, PA 15265. (9) Based upon a Schedule 13D, dated February 10, 1998, provided to the Company. The address of Provident Investment Counsel, Inc. is 300 N. Lake Avenue, Suite 1001, Pasadena, CA 91101. (10) Includes 17,586 shares issuable upon the exercise of options which are exercisable within 60 days after April 30, 1998. (11) Represents: (i) 179,160 shares held in trust for the benefit of Mr. Barrist's child (including 27,000 shares being sold by such trust) for which Mr. Winokur is a co-trustee; (ii) 43,249 shares issuable upon the exercise of options which are exercisable within 60 days after April 30, 1998; and (iii) 300 shares held in custody for the benefit of Mr. Winokur's children for which Mr. Winokur is custodian. Mr. Winokur will exercise options to acquire all of the shares being sold by him in the Offering. (12) Represents shares issuable upon the exercise of options which are exercisable within 60 days after April 30, 1998. (13) Represents shares issued upon the exercise of warrants originally issued to Mellon Bank, N.A. and subsequently assigned to APT Holdings Corporation, an affiliate. (14) Includes: (i) 253,288 shares of Common Stock owned by Mrs. Barrist (including 38,000 shares being sold by her in the Offering) which Mr. Barrist has the sole right to vote pursuant to an irrevocable proxy; (ii) 77,119 shares held in trust for the benefit of members of Mrs. Annette Barrist's or Mr. Barrist's family (including 11,500 shares being sold by such trust) for which Mr. Barrist is a co-trustee; (iii) 179,160 shares held in trust for the benefit of Mr. Barrist's child (including 27,000 shares being sold by such trust in this Offering) for which Mr. Winokur is a co-trustee; (iv) an aggregate of 155,563 shares issuable upon exercise of options which are exercisable within 60 days after April 30, 1998; and (v) 300 shares held in custody for the benefit of Mr. Winokur's minor children for which Mr. Winokur is custodian. Excludes 179,160 shares held in trust for the benefit of Mr. Piola's children. In the event that the Underwriters' over-allotment option is exercised in full, the directors and executive officers as a group would sell an additional 97,517 shares and would beneficially own 17.7% of the outstanding Common Stock after the Offering. 43 UNDERWRITING The Underwriters named below (the "Underwriters") have severally agreed, subject to the terms and conditions in the underwriting agreement (the "Underwriting Agreement"), by and among the Company, the Selling Shareholders and the Underwriters, to purchase from the Company and the Selling Shareholders the number of shares of Common Stock indicated below opposite their respective names, at the public offering price less the underwriting discount set forth on the cover page of this Prospectus. The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters are committed to purchase all of the shares of Common Stock, if they purchase any. Number of Underwriter Shares - ------------------------------------------------- ---------- NationsBanc Montgomery Securities LLC ......... BT Alex. Brown Incorporated ................... Janney Montgomery Scott Inc ................... The Robinson-Humphrey Company, LLC ............ --------- Total ...................................... 6,667,700 ========= The Underwriters have advised the Company and the Selling Shareholders that the Underwriters propose to offer the Common Stock to the public on the terms set forth on the cover page of this Prospectus. The Underwriters may allow selected dealers a concession of not more than $ per share; and the Underwriters may allow, and such dealers may reallow, a concession of not more than $ per share to certain other dealers. After the public offering, the public offering price and other selling terms may be changed by the Underwriters. The Common Stock is offered subject to receipt and acceptance by the Underwriters, and to certain other conditions, including the right to reject orders in whole or in part. The Company and certain of the Selling Shareholders have granted an option to the Underwriters, exercisable during the 30-day period after the date of this Prospectus, to purchase up to a maximum of 1,000,155 additional shares of Common Stock to cover over-allotments, if any, at the same price per share as the initial shares to be purchased by the Underwriters. To the extent that the Underwriters exercise such over-allotment option, the Underwriters will be committed, subject to certain conditions, to purchase such additional shares in approximately the same proportion as set forth in the above table. The Underwriters may purchase such shares only to cover over-allotments made in connection with the Offering. The Underwriting Agreement provides that the Company and the Selling Shareholders will indemnify the Underwriters against certain liabilities, including civil liabilities under the Securities Act, or will contribute to payments the Underwriters may be required to make in respect thereof. The Company, the Selling Shareholders and the Company's executive officers and directors who are also shareholders of the Company and who, immediately following the Offering (assuming no exercise of the Underwriters' over-allotment option) collectively will own an aggregate of 3,718,192 outstanding shares of Common Stock, have agreed that for a period of 90 days after the effective date of the Offering they will not, without the prior written consent of NationsBanc Montgomery Securities LLC, directly or indirectly, offer for sale, sell, solicit an offer to sell, contract or grant an option to sell, pledge, transfer, establish an open put equivalent position or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock or securities exchangeable or exercisable or convertible into shares of Common Stock held by them. The Company has also agreed not to issue, offer, sell, grant options to purchase or otherwise dispose of any of the Company's equity securities or any other securities convertible into or exchangeable with its Common Stock for a period of 90 days after the effective date of the Offering without the prior written consent of NationsBanc Montgomery Securities LLC, subject to limited exceptions and grants and exercises of stock options. In evaluating any request for a waiver of the 90-day lock-up period, the Underwriters will consider, in accordance with their customary practice, all relevant facts and circumstances at the time of the request, including, without limitation, the recent trading market for the Common Stock, the size of the request and, with respect to a request by the Company to issue additional equity securities, the purpose of such an issuance. 44 Until the distribution of the Common Stock is completed, rules of the Securities and Exchange Commission may limit the ability of the Underwriters and certain selling group members to bid for and purchase the Common Stock. As an exception to these rules, the Underwriters are permitted to engage in certain transactions that stabilize the price of the Common Stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock. If the Underwriters create a short position in the Common Stock in connection with the Offering, i.e., if they sell more shares of Common Stock than are set forth on the cover page of this Prospectus, the Underwriters may reduce that short position by purchasing Common Stock in the open market. The Underwriters may also elect to reduce any short position by exercising all or part of the over-allotment option described above. The Underwriters may also impose a penalty bid on certain selling group members. This means that if the Underwriters purchase shares of Common Stock in the open market to reduce the Underwriters' short position or to stabilize the price of the Common Stock, they may reclaim the amount of the selling concession from the selling group members who sold those shares as part of the Offering. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of a security to the extent that it were to discourage resales of the security. Neither the Company nor any of the Underwriters makes any representation or predictions as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that the Underwriters will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. The public offering price of the Common Stock will be determined by negotiations among the Underwriters and the Company, and will be based largely upon the market price for the Common Stock as reported on the Nasdaq National Market. Affiliates of the Underwriters may utilize the Company's accounts receivable management services in the ordinary course of business. LEGAL MATTERS An opinion will be rendered by the law firm of Blank Rome Comisky & McCauley LLP, Philadelphia, Pennsylvania, to the effect that the shares of Common Stock offered by the Company hereby, when issued and paid for as contemplated in this Prospectus, will be, and the shares of Common Stock offered by the Selling Shareholders hereby are, legally issued, fully paid and non-assessable. Certain legal matters will be passed upon for the Underwriters by Piper & Marbury L.L.P., Baltimore, Maryland. EXPERTS The consolidated balance sheets of the Company as of December 31, 1997 and 1996 and the Company's consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997 incorporated by reference in this Prospectus and in the Registration Statement, have been incorporated herein in reliance on the report of Coopers & Lybrand, L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. The consolidated financial statements of FCA at June 30, 1996 and 1997 and FCA's consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended June 30, 1997 incorporated by reference in this Prospectus and in the Registration Statement have been audited by Arthur Andersen & Co., independent accountants, as set forth in their report, and are incorporated by reference herein in reliance upon such report given upon the authority of said firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission a Registration Statement on Form S-3 under the Securities Act with respect to the Common Stock offered hereby. This Prospectus, filed as part of 45 the Registration Statement, does not contain all of the information included in the Registration Statement and the exhibits and schedules thereto, certain portions of which have been omitted in accordance with the rules and regulations of the Securities and Exchange Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is hereby made to the Registration Statement, including the exhibits and schedules filed therewith. Statements contained in this Prospectus as to the contents of any contract, agreement or other document referred to herein are not necessarily complete and in each such instance, reference is made to the copy of such contract, agreement or other document filed as an exhibit to the Registration Statement for a more complete description of the matters involved, and each such statement shall be deemed qualified in its entirety by such reference. The Company is subject to the information requirements of the Exchange Act, and in accordance therewith, files reports and other information with the Securities and Exchange Commission. So long as the Company is subject to periodic reporting requirements of the Exchange Act, it will continue to furnish the reports and other information required thereby to the Securities and Exchange Commission. The Company will furnish to its shareholders annual reports containing financial statements audited by its independent accountants and will make available copies of quarterly reports for the first three quarters of each fiscal year containing unaudited financial information. The Registration Statement, including the exhibits and schedules thereto, and any reports and information filed by the Company may be inspected without charge and copied at the offices of the Securities and Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549; 7 World Trade Center, 13th Floor, New York, New York 10048; and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials may be obtained at the prescribed rates from the Commission's Public Reference Section at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The Commission maintains a Web Site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of such Web Site is http://www.sec.gov. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed by the Company with the Commission are incorporated herein by reference: (i) the Company's Annual Report on Form 10-K for the year ended December 31, 1997, as amended by Form 10-K/A filed April 30, 1998; (ii) the Company's Current Reports on Form 8-K filed February 24, 1998, February 25, 1998, April 22, 1998 and May 4, 1998; (iii) the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998; and (iv) the Company's Registration Statement on Form 8-A filed October 29, 1996 registering the Company's Common Stock under Section 12(g) of the Exchange Act. All documents filed by the Company with the Commission pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date hereof and prior to the termination of the offering of the Common Stock registered hereby shall be deemed to be incorporated by reference into this Prospectus and to be a part hereof from the date of filing such documents. Any statements contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is, or is deemed to be, incorporated by reference herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person to whom this Prospectus is delivered, upon a written request of such person, a copy of any or all of the foregoing documents incorporated by reference into this Prospectus (other than exhibits to such documents, unless such exhibits are specifically incorporated by reference into such documents). Requests for such copies should be delivered to Steven L. Winokur, Executive Vice President, Finance, Chief Financial Officer and Treasurer, 515 Pennsylvania Avenue, Fort Washington, Pennsylvania 19034. 46 INDEX TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS NCO Group, Inc. Pro Forma Consolidated Financial Statements: Basis of Presentation ................................................................ F-2 Pro Forma Consolidated Balance Sheet as of March 31, 1998 ............................ F-3 Pro Forma Consolidated Statement of Income for the three months ended March 31, 1998 . F-4 Pro Forma Consolidated Statement of Income for the year ended December 31, 1997 ...... F-5 Notes to Pro Forma Consolidated Financial Statements ................................. F-6
F-1 Pro Forma Consolidated Financial Statements Basis of Presentation The Pro Forma Consolidated Balance Sheet as of March 31, 1998 and the Pro Forma Consolidated Statements of Income for the three months ended March 31, 1998 and the year ended December 31, 1997 are based on the historical financial statements of NCO Group, Inc. ("NCO" or the "Company"), Tele-Research Center, Inc. ("Tele-Research"), CMS A/R Services ("CMS A/R"), the Collection Division of CRW Financial, Inc. ("CRWCD"), Credit Acceptance Corporation ("CAC"), ADVANTAGE Financial Services, Inc. ("AFS"), the Collection Division of American Financial Enterprises, Inc. ("AFECD"), The Response Center ("TRC"), FCA International Ltd. ("FCA"), and MedSource, Inc. ("MedSource") (collectively, the "Acquisitions"). The Pro Forma Consolidated Balance Sheet as of March 31, 1998 has been prepared assuming the FCA and MedSource acquisitions occurred on March 31, 1998. The Pro Forma Consolidated Statement of Income for the three months ended March 31, 1998 has been prepared assuming the TRC, FCA and MedSource acquisitions occurred on January 1, 1998. The Pro Forma Consolidated Statement of Income for the year ended December 31, 1997 has been prepared assuming the Tele-Research, CMS A/R, CRWCD, CAC, and AFS acquisitions (collectively, the "1997 Acquisitions"), the AFECD and the TRC acquisitions (collectively, the "1998 Acquisitions"), and the FCA and MedSource acquisitions, occurred on January 1, 1997. The Pro Forma Consolidated Balance Sheet and Statements of Income do not purport to represent what NCO's actual financial position or results of operations would have been had the acquisitions occurred as of such dates, or to project NCO's financial position or results of operations for any period or date, nor does it give effect to any matters other than those described in the notes thereto. In addition, the allocations of purchase price to the assets and liabilities of FCA and MedSource are preliminary and the final allocations may differ from the amounts reflected herein. The unaudited Pro Forma Consolidated Balance Sheet and Statements of Income should be read in conjunction with the Company's consolidated financial statements and notes thereto and the historical financial statements of FCA, all of which are incorporated herein by reference. F-2 NCO GROUP, INC. Pro Forma Consolidated Balance Sheet March 31, 1998 (Unaudited) (Dollars in thousands)
Historical ---------------------------------- NCO FCA (1) MedSource ---------- --------- ----------- ASSETS Current assets: Cash and cash equivalents ................... $ 16,088 $ 2,837 $ 732 Accounts receivable, trade, net ............. 14,848 6,322 3,049 Other current assets ........................ 1,557 3,774 1,054 -------- ------- ------- Total current assets ........................ 32,493 12,933 4,835 Funds held in trust for clients Property and equipment, net .................. 8,245 6,901 2,121 Other assets: Intangibles, net of accumulated amortization ............................... 63,130 1,729 16,224 Deferred financing costs .................... 849 -- 1,821 Deferred taxes .............................. -- -- 37 Other assets ................................ 991 5,076 76 -------- ------- ------- Total other assets ......................... 64,970 6,805 18,158 -------- ------- ------- Total assets ................................. $105,708 $26,639 $25,114 ======== ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term debt, current portion ............. $ 1,060 $ 2,542 $ 200 Capitalized lease obligations, current portion .................................... 106 249 140 Corporate taxes payable ..................... 462 -- -- Accounts payable ............................ 2,937 2,854 1,813 Accrued expenses ............................ 2,548 -- 362 Accrued compensation and related expenses ................................... 2,955 -- 531 Unearned revenue, net of related costs ...... 252 -- -- -------- ------- ------- Total current liabilities ................... 10,320 5,645 3,046 Funds held in trust for clients Long-term liabilities: Long term debt, net of current portion ...... 923 2,297 16,495 Capitalized lease obligations, net of current portion ............................ 225 589 95 Deferred taxes .............................. 2,253 3 -- Unearned revenue, net of related costs ...... 31 -- -- Convertible Preferred Stock .................. -- -- 6,003 Commitments and contingencies Shareholders' equity ......................... 91,956 18,105 (525) -------- ------- ------- Total liabilities and shareholders' equity ... $105,708 $26,639 $25,114 ======== ======= ======= Acquisition Offering Pro Forma Adjustments (2) Pro Forma Adjustments (3) As Adjusted ----------------- ----------- ----------------- ------------ ASSETS Current assets: Cash and cash equivalents ................... $ (10,509) $ 9,148 $ 40,539 $ 49,687 Accounts receivable, trade, net ............. -- 24,219 -- 24,219 Other current assets ........................ -- 6,385 -- 6,385 --------- -------- --------- -------- Total current assets ........................ (10,509) 39,752 40,539 80,291 Funds held in trust for clients Property and equipment, net .................. (5,571) 11,696 -- 11,696 Other assets: Intangibles, net of accumulated amortization ............................... 74,499 155,582 -- 155,582 Deferred financing costs .................... (1,821) 849 -- 849 Deferred taxes .............................. 13,361 13,398 -- 13,398 Other assets ................................ -- 6,143 -- 6,143 --------- -------- --------- -------- Total other assets ......................... 86,039 175,972 -- 175,972 --------- -------- --------- -------- Total assets ................................. $ 69,959 $227,420 $ 40,539 $267,959 ========= ======== ========= ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term debt, current portion ............. $ -- $ 3,802 $ (2,742) $ 1,060 Capitalized lease obligations, current portion .................................... -- 495 (140) 355 Corporate taxes payable ..................... -- 462 -- 462 Accounts payable ............................ -- 7,604 -- 7,604 Accrued expenses ............................ 18,542 21,452 -- 21,452 Accrued compensation and related expenses ................................... -- 3,486 -- 3,486 Unearned revenue, net of related costs ...... -- 252 -- 252 --------- -------- --------- -------- Total current liabilities ................... 18,542 37,553 (2,882) 34,671 Funds held in trust for clients Long-term liabilities: Long term debt, net of current portion ...... 75,000 94,715 (93,792) 923 Capitalized lease obligations, net of current portion ............................ -- 909 (95) 814 Deferred taxes .............................. -- 2,256 -- 2,256 Unearned revenue, net of related costs ...... -- 31 -- 31 Convertible Preferred Stock .................. (6,003) -- -- -- Commitments and contingencies Shareholders' equity ......................... (17,580) 91,956 137,308 229,264 --------- -------- --------- -------- Total liabilities and shareholders' equity ... $ 69,959 $227,420 $ 40,539 $267,959 ========= ======== ========= ========
The accompanying notes are an integral part of these pro forma consolidated financial statements. F-3 NCO GROUP, INC. Pro Forma Consolidated Statement of Income For the Three Months Ended March 31, 1998 (Unaudited) (Amounts in thousands, except per share data)
Historical ----------------------------------------------- NCO TRC (4) FCA (5) MedSource ---------- --------- ----------- ----------- Revenue ....................... $27,609 $788 $14,683 $5,319 Operating costs and expenses: Payroll and related expenses .................... 14,144 429 8,641 3,137 Selling, general and administrative expenses 8,568 162 5,001 1,778 Depreciation and amorti- zation expense .............. 1,155 7 599 305 ------- ---- ------- ------ Total operating costs and expenses ............... 23,867 598 14,241 5,220 ------- ---- ------- ------ Income from operations ........ 3,742 190 442 99 Other income (expense): Interest and investment income ...................... 232 -- 79 10 Interest expense ............. (79) -- (102) (602) ------- ---- ------- ------ Total other income (expense) .................. 153 -- (23) (592) ------- ---- ------- ------ Income (loss) before provi- sion for income taxes ........ 3,895 190 419 (493) Income tax expense (benefit) .................... 1,579 -- 99 (155) ------- ---- ------- ------ Net income .................... $ 2,316 $190 $ 320 $ (338) ======= ==== ======= ====== Net income per share: Basic ........................ $ 0.17 ======= Diluted ...................... $ 0.17 ======= Weighted average shares outstanding: Basic ........................ 13,240 Diluted ...................... 13,801 Acquisition Offering Pro Forma Adjustments Pro Forma Adjustments (12) As Adjusted --------------------- ----------- ------------------ ---------------- Revenue ....................... $ -- $ 48,399 $ -- $ 48,399 Operating costs and expenses: Payroll and related expenses .................... (1,519) (6) 24,832 -- 24,832 Selling, general and administrative expenses (336) (7) 15,173 -- 15,173 Depreciation and amorti- zation expense .............. 28 (8) 2,094 -- 2,094 ----------- -------- ------ ---------- Total operating costs and expenses ............... (1,827) 42,099 -- 42,099 ----------- -------- ------ ---------- Income from operations ........ 1,827 6,300 -- 6,300 Other income (expense): Interest and investment income ...................... (69) (9) 252 -- 252 Interest expense ............. (1,264) (10) (2,047) 1,945 (102) ----------- -------- ------ ---------- Total other income (expense) .................. (1,333) (1,795) 1,945 150 ----------- -------- ------ ---------- Income (loss) before provi- sion for income taxes ........ 494 4,505 1,945 6,450 Income tax expense (benefit) .................... 673 (11) 2,196 788 2,984 ----------- -------- ------ ---------- Net income .................... $ (179) $ 2,309 $1,157 $ 3,466 =========== ======== ====== ========== Net income per share: Basic ........................ $ 0.17 $ 0.19(29) ======== ============= Diluted ...................... $ 0.17 $ 0.19(29) ======== ============= Weighted average shares outstanding: Basic ........................ 13,240 17,789(13) Diluted ...................... 13,801 18,350(13)
The accompanying notes are an integral part of these pro forma consolidated financial statements. F-4 NCO GROUP, INC. Pro Forma Consolidated Statement of Income For the Year Ended December 31, 1997 (Unaudited) (Amounts in thousands, except per share data)
Historical ------------------------------------------------------------------- 1997 1998 NCO Acquisitions (14) Acquisitions (15) FCA (16) ----------- ------------------- ------------------- ------------ Revenue .......................... $ 85,284 $ 8,621 $ 9,555 $ 62,224 Operating costs and expenses: Payroll and related expenses ........................ 42,502 5,656 5,789 37,076 Selling, general and administrative expenses.......... 27,947 3,731 2,129 21,494 Depreciation and amortiza- tion expense .................... 3,369 257 91 2,522 Reorganization charge ........... -- -- -- 1,517 -------- --------- ------- -------- Total operating costs and expenses .................... 73,818 9,644 8,009 62,609 -------- --------- ------- -------- Income (loss) from opera- tions ........................... 11,466 (1,023) 1,546 (385) Other income (expense): Interest and investment income .......................... 1,020 14 -- 409 Interest expense ................ (591) (12) -- (423) Other ........................... (41) -- -- -- -------- --------- ------- -------- Total other income (expense) ...................... 388 2 -- (14) -------- --------- ------- -------- Income before provision for income taxes .................... 11,854 (1,021) 1,546 (399) Income tax expense (benefit) 4,780 -- -- 310 -------- --------- ------- -------- Net income (loss) ................ $ 7,074 $ (1,021) $ 1,546 $ (709) ======== ========= ======= ======== Net income per share: Basic ........................... $ 0.59 ======== Diluted ......................... $ 0.57 ======== Weighted average shares out- standing: Basic ........................... 11,941 Diluted ......................... 12,560
MedSource ------------------------------------------------------------------------ Completed Acquisition Acquisition Historical (17) Acquisitions (18) Adjustments Pro Forma Adjustments ----------------- ------------------- ------------------- ----------- ------------------- Revenue .......................... $ 12,458 $10,253 $ -- $ 22,711 $ -- Operating costs and expenses: Payroll and related expenses ........................ 5,665 5,826 -- 11,491 (8,199)(21) Selling, general and administrative expenses.......... 6,148 2,842 -- 8,990 (1,766)(22) Depreciation and amortiza- tion expense .................... 569 132 355(19) 1,056 4,245 (23) Reorganization charge ........... -- -- -- -- -- -------- ------- -------------- -------- ----------- Total operating costs and expenses .................... 12,382 8,800 355 21,537 (5,720) -------- ------- -------------- -------- ----------- Income (loss) from opera- tions ........................... 76 1,453 (355) 1,174 5,720 Other income (expense): Interest and investment income .......................... 30 45 -- 75 Interest expense ................ (616) (53) (1,446)(20) (2,115) (4,644)(24) Other ........................... -- -- -- -- -- -------- ------- -------------- -------- ----------- Total other income (expense) ...................... (586) (8) (1,446) (2,040) (4,644) -------- --------- -------------- -------- ----------- Income before provision for income taxes .................... (510) 1,445 (1,801) (866) 1,076 Income tax expense (benefit) (150) 583 (614) (181) 780 (25) -------- -------- -------------- -------- ----------- Net income (loss) ................ $ (360) $ 862 $ (1,187) $ (685) $ 296 ======== ======== ============== ======== =========== Net income per share: Basic ........................... Diluted ......................... Weighted average shares out- standing: Basic ........................... Diluted .........................
Offering Pro Forma Pro Forma Adjustments (27) As Adjusted ----------------- ------------------ ---------------- Revenue .......................... $ 188,395 $ -- $ 188,395 Operating costs and expenses: Payroll and related expenses ........................ 94,315 -- 94,315 Selling, general and administrative expenses.......... 62,525 -- 62,525 Depreciation and amortiza- tion expense .................... 11,540 -- 11,540 Reorganization charge ........... 1,517 -- 1,517 ---------- ------ ---------- Total operating costs and expenses .................... 169,897 -- 169,897 ---------- ------ ---------- Income (loss) from opera- tions ........................... 18,498 -- 18,498 Other income (expense): Interest and investment income .......................... 1,518 -- 1,518 Interest expense ................ (7,785) 7,382 (403) Other ........................... (41) -- (41) ---------- ------ ---------- Total other income (expense) ...................... (6,308) 7,382 1,074 ---------- ------ ---------- Income before provision for income taxes .................... 12,190 7,382 19,572 Income tax expense (benefit) 5,689 2,953 8,642 ---------- ------ ---------- Net income (loss) ................ $ 6,501 $4,429 $ 10,930 ========== ====== ========== Net income per share: Basic ........................... $ 0.51 $ 0.63(29) ========== ============= Diluted ......................... $ 0.49 $ 0.61(29) ========== ============= Weighted average shares out- standing: Basic ........................... 12,732(26) 17,281(28) Diluted ......................... 13,364(26) 17,913(28)
The accompanying notes are an integral part of these pro forma consolidated financial statements. F-5 Notes to Pro Forma Consolidated Financial Statements (Unaudited) To date, all of the Company's acquisitions have been accounted for under the purchase method of accounting with the results of the acquired companies included in the Company's statements of income beginning on the date of acquisition. 1. Includes the adjustments required to convert FCA's historical financial statements to U.S. Generally Accepted Accounting Principles ("GAAP") and gives effect to the conversion from Canadian dollars to U.S. dollars, based upon the applicable exchange rate. 2. Gives effect to: (i) the acquisition of FCA for approximately $67.6 million in cash, which was borrowed against the Company's credit facility, and the recognition of certain acquisition related liabilities; and (ii) the pending acquisition of MedSource for approximately $17.9 million in cash, of which $7.4 million was assumed to be borrowed from the Company's credit facility, and the recognition of certain acquisition related liabilities. The Company expects to recognize goodwill of $56.2 million and $36.3 million for the FCA and MedSource acquisitions, respectively. 3. Gives effect to the issuance of 5.8 million shares of Common Stock at an assumed public offering price of $25.00 per share. The estimated net proceeds of $137.3 million from the Offering, net of the estimated underwriting discount and offering expenses payable by the Company, will be used to repay acquisition related debt of $75.0 million, repay FCA's and MedSource's acquired debt of $4.8 million and $17.1 million, respectively, with the balance added to working capital. In addition, estimated net proceeds includes the exercise of 61,058 stock options resulting in proceeds of $157,920 to the Company. 4. Represents the historical results of operations of TRC from January 1, 1998 to February 5, 1998, the period prior to the acquisition. 5. Includes the adjustments required to convert FCA's historical results of operations for the three month period ended March 31, 1998 to U.S. GAAP and gives effect to the conversion from Canadian dollars to U.S. dollars, based on the applicable exchange rate. 6. Reflects the elimination of payroll and related expenses relating to certain redundant collection and administrative personnel costs immediately eliminated at the time of the TRC acquisition and expenses identified during the due diligence process which will be eliminated upon the closing of the FCA and MedSource acquisitions. 7. Reflects the elimination of certain rental expenses and related operating costs attributable to facilities which were identified during the due diligence process and will be closed upon the completion of the FCA and MedSource acquisitions. 8. Gives effect to: (i) the increase in amortization expense assuming the TRC, FCA and MedSource acquisitions had been acquired on January 1, 1998; and (ii) the elimination of depreciation and amortization expense related to assets revalued or not acquired. F-6 Notes to Pro Forma Consolidated Financial Statements -- (Continued) (Unaudited) 9. Reflects the elimination of interest income on funds assumed to be used for the purchase of the TRC, FCA and MedSource acquisitions as if they occurred on January 1, 1998. 10. Reflects interest expense on borrowings related to the FCA and MedSource acquisitions as if they occurred on January 1, 1998. 11. Reflects the estimated income tax expense, after giving consideration to non-deductible goodwill expense, as if the TRC, FCA and MedSource acquisitions occurred on January 1, 1998. 12. Reflects the elimination of interest expense on debt assumed to be repaid with a portion of the proceeds from the Offering as if it had occurred on January 1, 1998. 13. Reflects the issuance of 4.5 million shares of Common Stock at an assumed public offering price of $25.00 per share, net of the estimated underwriting discount and offering expenses payable by the Company, which would be sufficient to repay acquisition related debt of $75.0 million, repay debt of $4.8 million and $17.1 million assumed in connection with the FCA and MedSource acquisitions, respectively, and pay an additional $10.5 million necessary to fund the FCA and MedSource acquisitions. 14. Represents the combined historical results of operations of the 1997 Acquisitions for the periods prior to their acquisition by NCO, as follows (dollars in thousands):
Income (Loss) Net Date of From Income 1997 Acquisitions Acquisition Revenue Operations (Loss) - -------------------------- ------------- --------- -------------- -------------- Tele-Research ......... 1/30/97 $ 296 $ 97 $ 97 CMS A/R ............... 1/31/97 539 53 53 CRWCD ................. 2/2/97 2,006 (7) (8) CAC ................... 10/1/97 1,570 (403) (391) AFS ................... 10/1/97 4,210 (763) (772) ------ --------- --------- $8,621 $(1,023) $(1,021) ====== ========= =========
15. Represents the combined historical results of operations of AFECD and TRC for the year ended December 31, 1997, as follows (dollars in thousands): Income Date of From Net 1998 Acquisitions Acquisition Revenue Operations Income - ------------------- ------------- --------- ------------ --------- AFECD .......... 1/1/98 $1,562 $ 272 $ 272 TRC ............ 2/2/98 7,993 1,274 1,274 ------ ------ ------ $9,555 $1,546 $1,546 ====== ====== ====== 16. Includes the adjustments required to convert FCA's historical results of operations for the twelve month period ended December 31, 1997 to U.S. GAAP and gives effect to the conversion from Canadian dollars to U.S. dollars, based on the applicable exchange rate. 17. Represents the historical results of operations of MedSource for the year ended December 31, 1997. F-7 Notes to Pro Forma Consolidated Financial Statements -- (Continued) (Unaudited) 18. Represents the combined results of operations of the four acquisitions completed by MedSource during 1997 (the "MedSource Acquisitions"), for the periods prior to the acquisitions, as follows (dollars in thousands):
Income (Loss) 1997 MedSource Date of From Net Completed Acquisitions Acquisition Revenue Operations Income (Loss) - -------------------------------------------- ------------- --------- -------------- -------------- Healthcare Business Management, Ltd. and ECC of Pittsburgh, Inc. ............ 7/1/97 $ 975 $ (262) $ (180) World Credit, Inc. ...................... 7/1/97 2,865 285 232 MAC/TCS, Inc. ........................... 8/30/97 4,790 852 483 AllStates Credit Services, Inc. ......... 10/1/97 1,623 578 327 ------- ------ ------ $10,253 $1,453 $ 862 ======= ====== ======
19. Reflects amortization expense assuming the MedSource Acquisitions occurred on January 1, 1997. 20. Reflects interest expense on acquisition related borrowings as if the MedSource Acquisitions had occurred on January 1, 1997. 21. Reflects the elimination of payroll and related expenses relating to certain redundant collection and administrative personnel costs immediately eliminated at the time of the 1997 Acquisitions and the 1998 Acquisitions and expenses identified during the due diligence process which will be eliminated upon the closing of the FCA and MedSource acquisitions. 22. Reflects the elimination of certain rental expenses and related operating costs attributable to facilities which were closed at the time of the 1997 Acquisitions and the 1998 Acquisitions and facilities identified during the due diligence process which will be closed upon the completion of the FCA and MedSource acquisitions. 23. Gives effect to: (i) the increase in amortization expense assuming the Acquisitions had been acquired on January 1, 1997; and (ii) the elimination of depreciation and amortization expense related to assets revalued or not acquired. 24. Reflects interest expense on borrowings related to the Acquisitions as if they occurred on January 1, 1997. 25. Reflects the estimated income tax expense, after giving consideration to non-deductible goodwill expense, as if the Acquisitions occurred on January 1, 1997. 26. Gives effect to: (i) the issuance of 517,767 shares of Common Stock and warrants exercisable for 375,000 shares of Common Stock in connection with the acquisition of CRWCD; (ii) the issuance of 1,425,753 shares of Common Stock in the July 1997 Offering at the public offering price of $19.67 per share which, net of the underwriting discount and offering expenses paid by the Company, would be sufficient to repay acquisition related debt of $8.4 million and to fund the acquisitions of AFECD and TRC; and (iii) the issuance of 46,442 shares of Common Stock issued in connection with the acquisition of AFS. 27. Reflects the elimination of interest expense on current and long-term debt assumed to be repaid with a portion of the proceeds from the Offering as if it had occurred on January 1, 1997. 28. Gives effect to the issuance of 4.5 million shares of Common Stock at an assumed public offering price of $25.00 per share as of January 1, 1997, net of the estimated underwriting discount and offering expenses payable by the Company, which would be sufficient to repay acquisition related debt of $75.0 million, repay debt of $4.8 million and $17.1 million recognized in connection with the FCA and MedSource acquisitions, respectively, and pay an additional $10.5 million necessary to fund the FCA and MedSource acquisitions. 29. Includes reorganization charges and other costs of $1.9 million and $90,000 for the year ended December 31, 1997 and the three months ended March 31, 1998 respectively. Net income per share - basic and net income per share - diluted would have been $0.70 and $0.68, respectively, and $0.20 and $0.19, respectively, on a pro forma basis assuming those charges had not been incurred. F-8 [Map depicting Company's call centers and sales offices in the United States, Canada and the United Kingdom.] ================================================================================ No dealer, sales representative or any other person has been authorized to give any information or to make any representations in connection with the Offering other than those contained in this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or any of the Underwriters. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities other than the shares of Common Stock to which it relates or an offer to, or a solicitation of, any person in any jurisdiction where such offer or solicitation would be unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create an implication that there has been no change in the affairs of the Company, or that information contained herein is correct as of any time subsequent to the date hereof. --------------------------------------------------------- TABLE OF CONTENTS --------------------------------------------------------- Page --------- Prospectus Summary .......................... 3 Risk Factors ................................ 9 Pending and Recent Acquisitions ............. 15 Use of Proceeds ............................. 18 Dividend Policy ............................. 18 Price Range of Common Stock ................. 19 Capitalization .............................. 20 Selected Financial Data ..................... 21 Management's Discussion and Analysis of Financial Condition and Results of Operations ................ 23 Business .................................... 31 Management .................................. 40 Principal and Selling Shareholders .......... 42 Underwriting ................................ 44 Legal Matters ............................... 45 Experts ..................................... 45 Additional Information ...................... 45 Incorporation of Certain Documents by Reference ............................. 46 Index to Pro Forma Consolidated Financial Statements ..................... F-1 ================================================================================ ================================================================================ 6,667,700 Shares [GRAPHIC OMITTED] Common Stock ----------------------------------- PROSPECTUS ----------------------------------- NationsBanc Montgomery Securities LLC BT Alex. Brown Janney Montgomery Scott Inc. The Robinson-Humphrey Company , 1998 ================================================================================ PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 14. Other Expenses of Issuance and Distribution. The following table sets forth the expenses in connection with the issuance and distribution of the securities being registered, all of which are being borne by the Registrant. Securities and Exchange Commission Registration Fee. ......... $ 57,546 National Association of Securities Dealers, Inc. Fee ......... 19,707 Nasdaq Listing Fee ........................................... 17,500 Printing and Engraving Expenses .............................. 100,000 Accounting Fees and Expenses ................................. 125,000 Legal Fees and Expenses ...................................... 100,000 Blue Sky Qualification Fees and Expenses ..................... 10,000 Transfer Agent and Registrar Fees and Expenses ............... 10,000 Miscellaneous ................................................ 160,247 -------- Total ..................................................... $600,000 ======== The foregoing, except for the Securities and Exchange Commission registration fee, the National Association of Securities Dealers, Inc. fee, and the Nasdaq Listing fee are estimates. Item 15. Indemnification of Directors and Officers. Sections 1741 through 1750 of Subchapter D, Chapter 17, of the Pennsylvania Business Corporation Law of 1988, as amended (the "BCL"), contain provisions for mandatory and discretionary indemnification of a corporation's directors, officers and other personnel, and related matters. Under Section 1741, subject to certain limitations, a corporation has the power to indemnify directors and officers under certain prescribed circumstances against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with an action or proceeding, whether civil, criminal, administrative or investigative, to which any of them is a party by reason of his being a representative, director or officer of the corporation or serving at the request of the corporation as a representative of another corporation, partnership, joint venture, trust or other enterprise, if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal proceeding, had no reasonable cause to believe his conduct was unlawful. Under Section 1743, indemnification is mandatory to the extent that the officer or director has been successful on the merits or otherwise in defense of any action or proceeding if the appropriate standards of conduct are met. Section 1742 provides for indemnification in derivative actions except in respect of any claim, issue or matter as to which the person has been adjudged to be liable to the corporation unless and only to the extent that the proper court determines upon application that, despite the adjudication of liability but in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for the expenses that the court deems proper. Section 1744 provides that, unless ordered by a court, any indemnification under Section 1741 or 1742 shall be made by the corporation only as authorized in the specific case upon a determination that the representative met the applicable standard of conduct, and such determination will be made by the board of directors (i) by a majority vote of a quorum of directors not parties to the action or proceeding; (ii) if a quorum is not obtainable, or if obtainable and a majority of disinterested directors so directs, by independent legal counsel; or (iii) by the shareholders. Section 1745 provides that expenses (including attorney's fees) incurred by an officer, director, employee or agent in defending a civil or criminal action or proceeding may be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the corporation. II-1 Section 1746 provides generally that, except in any case where the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness, the indemnification and advancement of expenses provided by Subchapter 17D of the BCL shall not be deemed exclusive of any other rights to which a person seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding that office. Section 1747 grants to a corporation the power to purchase and maintain insurance on behalf of any director or officer against any liability incurred by him or her in his or her capacity as officer or director, whether or not the corporation would have the power to Subchapter 17D of the BCL. Section 1748 and 1749 extend the indemnification and advancement of expenses provisions contained in Subchapter 17D of the BCL to successor corporations in fundamental changes and to representatives serving as fiduciaries of employee benefit plans. Section 1750 provides that the indemnification and advancement of expenses provided by, or granted pursuant to, Subchapter 17D of the BCL, shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs and personal representative of such person. For information regarding provisions under which a director or officer of the Company may be insured or indemnified in any manner against any liability which he or she may incur in his or her capacity as such, reference is made to the Company's Articles of Incorporation and Bylaws, copies of which are filed as Exhibits 3.1 and 3.2, respectively, which provide in general that the Company shall indemnify its officers and directors to the fullest extent authorized by law. Reference is also made to Section 11 of the Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement. Item 16. Exhibits and Financial Statement Schedules. (a) Exhibits
Exhibit No. Description - ----------------------- ------------------------------------------------------------------------------------ *1.1 Form of Underwriting Agreement *2.1(1) Agreement dated March 24, 1998 among the Company, FCA and Fairfax concerning the FCA Tender Offer 2.2 Stock Purchase Agreement dated May 4, 1998 among the Company, MedSource, Whitney Subordinated Debt Fund, L.P., Whitney Equity Partners, L.P., C.B. Hellman, Jr., Mark Gorman, John O'Hara and HealthCare Business Management, Ltd. 4.1(2) Specimen of Common Stock Certificate 5.1 Opinion of Blank Rome Comisky & McCauley LLP *23.1 Consent of Coopers & Lybrand L.L.P. *23.2 Consent of Arthur Andersen & Co. 23.3 Consent of Blank Rome Comisky & McCauley LLP (included in the opinion filed as Exhibit 5.1 hereto) *24.1 Power of Attorney of directors and officers. *27.1 Financial Data Schedules
- ------------ * Previously filed. (1) Incorporated by reference to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 1998. (2) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-11745), as amended, filed with the Securities and Exchange Commission on September 11, 1996. II-2 (b) Financial Statement Schedules None required. Item 17. Undertakings. (a) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 15 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (b) The undersigned hereby undertakes: (1) For purposes of determining any liability under the Securities Act each filing of the Registrant's annual report pursuant to section 13(a) or section 15(d) of the Exchange Act and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Exchange Act) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (2) that for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the Registration Statement as of the time it was declared effective; and (3) that for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Fort Washington, Pennsylvania, on May 7, 1998. NCO GROUP, INC. By: /s/ Michael J. Barrist ------------------------------------- Michael J. Barrist, Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title(s) Date - ---------------------------- ------------------------------------------------ ------------ /s/ Michael J. Barrist Chairman of the Board, President and Chief May 7, 1998 - ---------------------------- Executive Officer (principal executive officer) Michael J. Barrist * Executive Vice President and Director May 7, 1998 - ---------------------------- Charles C. Piola * Executive Vice President, Finance, Chief May 7, 1998 - ---------------------------- Financial Officer and Treasurer (principal Steven L. Winokur financial and accounting officer) * Executive Vice President, Development and May 7, 1998 - ---------------------------- Director Bernard R. Miller * Director May 7, 1998 - ---------------------------- Eric S. Siegel * Director May 7, 1998 - ---------------------------- Allen F. Wise
*By: /s/ Michael J. Barrist - ------------------------------------- Michael J. Barrist, Power-of-Attorney II-4 EXHIBIT INDEX
Exhibit No. Description - ----------------------- ------------------------------------------------------------------------------------ *1.1 Form of Underwriting Agreement *2.1(1) Agreement dated March 24, 1998 among the Company, FCA and Fairfax concerning the FCA Tender Offer 2.2 Stock Purchase Agreement dated May 4, 1998 among the Company, MedSource, Whitney Subordinated Debt Fund, L.P., Whitney Equity Partners, L.P., C.B. Hellman, Jr., Mark Gorman, John O'Hara and HealthCare Business Management, Ltd. 4.1(2) Specimen of Common Stock Certificate 5.1 Opinion of Blank Rome Comisky & McCauley LLP *23.1 Consent of Coopers & Lybrand L.L.P. *23.2 Consent of Arthur Andersen & Co. 23.3 Consent of Blank Rome Comisky & McCauley LLP (included in the opinion filed as Exhibit 5.1 hereto) *24.1 Power of Attorney of directors and officers. *27.1 Financial Data Schedules
- ------------ * Previously filed (1) Incorporated by reference to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 1998. (2) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-11745), as amended, filed with the Securities Exchange Commission on September 11, 1996. EX-2 2 EXHIBIT 2.2 STOCK PURCHASE AGREEMENT among NCO GROUP, INC. MEDSOURCE, INC. WHITNEY SUBORDINATED DEBT FUND, L.P. WHITNEY EQUITY PARTNERS, L.P. C.B. HELLMANN, JR. MARK GORMAN JOHN O'HARA and HEALTHCARE BUSINESS MANAGEMENT, LTD. TABLE OF CONTENTS
Page SECTION 1: DEFINED TERMS...............................................................................1 SECTION 2: SALE AND PURCHASE OF CAPITAL STOCK...........................................................6 2.1 Stock Delivery.........................................................................6 2.2 Closing; Purchase...........................................................................6 2.3 Purchase Price..............................................................................6 2.4 Closing Balance Sheet.......................................................................6 2.5 Post Closing Adjustment.....................................................................7 SECTION 3: REPRESENTATIONS, WARRANTIES AND COVENANTS OF COMPANY..........................................8 3.1 Due Incorporation and Qualification; Subsidiaries..........................................8 3.2 Capital Stock; Options.....................................................................8 3.3 Authority to Execute and Perform Agreement.................................................9 3.4 Financial Statements......................................................................10 3.5 No Adverse Change.........................................................................10 3.6 Tax Matters...............................................................................10 3.7 Compliance with Laws......................................................................10 3.8 Permits...................................................................................11 3.9 No Breach.................................................................................11 3.10 Consents.................................................................................11 3.11 Judgments and Proceedings................................................................11 3.12 Employee Relations.......................................................................12 3.13 Contracts................................................................................13 3.14 Real Property............................................................................13 3.15 Books of Account and Reports.............................................................13 3.16 Accounts Receivable......................................................................14 3.17 Tangible Property........................................................................14 3.18 Intangible Property......................................................................14 3.19 Title....................................................................................14 3.20 Liabilities..............................................................................14 3.21 Suppliers and Customers..................................................................15 3.22 Employee Benefit Plans...................................................................15 3.23 Insurance................................................................................16 3.24 Software.................................................................................17 3.25 Operations Prior to and Including the Closing............................................17 3.26 Questionable Payments....................................................................19 3.27 No Broker................................................................................19 3.28 Full Disclosure...........................................................................19 3.29 Representations and Warranties on Closing Date...........................................19
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SECTION 4: REPRESENTATIONS, WARRANTIES AND COVENANTS OF CMJ.............................................19 4.1 Ownership..................................................................................20 4.2 No Other Agreements........................................................................20 4.3 Actions and Proceedings....................................................................20 4.4 No Breach..................................................................................20 4.5 Consents...................................................................................20 4.6 No Broker..................................................................................20 4.7 Questionable Payments......................................................................20 4.8 Representations and Warranties on Closing Date.............................................21 SECTION 5: REPRESENTATIONS, WARRANTIES AND COVENANTS OF WHITNEY:........................................21 5.1 Ownership..................................................................................21 5.2 No Other Agreements........................................................................21 5.3 Actions and Proceedings....................................................................21 5.4 Authority to Execute and Perform Agreement.................................................21 5.5 No Breach..................................................................................22 5.6 Consents...................................................................................22 5.7 No Broker..................................................................................22 5.8 Representations and Warranties on Closing Date.............................................22 SECTION 6: REPRESENTATION, WARRANTIES AND COVENANTS OF HBM:.............................................22 6.1 Ownership..................................................................................22 6.2 Authority to Execute and Perform Agreement.................................................22 6.3 No Other Agreements........................................................................23 6.4 Actions and Proceedings....................................................................23 6.5 No Breach..................................................................................23 6.6 Consents...................................................................................23 6.7 No Broker..................................................................................23 6.8 Representations and Warranties on Closing Date.............................................23 SECTION 7: REPRESENTATIONS, WARRANTIES AND COVENANTS OF NCO............................................23 7.1 Due Incorporation and Qualification........................................................23 7.2 Authority to Execute and Perform Agreement.................................................24 7.3 No Breach..................................................................................24 7.4 Consents...................................................................................24 7.5 No Broker..................................................................................24 7.6 SEC Reports................................................................................24 7.7 Full Disclosure............................................................................24 7.8 Representations and Warranties on Closing Date.............................................25 SECTION 8: CERTAIN OBLIGATIONS OF THE COMPANY PENDING CLOSING..........................................25 8.1 Conduct of Business........................................................................25
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8.2 Preservation of Business..................................................................26 8.3 Insurance.................................................................................27 8.4 Access to Business........................................................................27 8.5 Proceedings...............................................................................27 8.6 Continued Effectiveness of Representations and Warranties of Corporation..................28 8.7 No Shopping...............................................................................28 8.8 Material Consents.........................................................................28 SECTION 9: CERTAIN OBLIGATIONS OF NCO PENDING CLOSING..................................................28 9.1 Material Consents.........................................................................28 SECTION 10. CONDITIONS TO CLOSING......................................................................29 10.1 Mutual Conditions........................................................................29 10.2 Conditions to Obligations of NCO.........................................................29 10.2.1 Performance of Agreements......................................................29 10.2.2 No Breach of Representations...................................................29 10.2.3 Delivery of Certificate........................................................30 10.2.4 No Material Adverse Change....................................................30 10.2.5 Proceedings...................................................................30 10.2.6 Approval of Counsel to NCO....................................................30 10.2.8 Deliverables..................................................................30 10.2.8.1 Instruments of Transfer......................................................30 10.2.8.2 Receipts...........................................................30 10.2.8.3 Consents...........................................................30 10.2.8.4 Good Standing......................................................30 10.2.8.5 Incumbency Certificate.............................................31 10.2.8.6 Certified Resolutions..............................................31 10.2.8.7 Opinion of Counsel.................................................31 10.2.8.9 Other Documents....................................................31 10.2.9 Employment Agreements..........................................................31 10.2.10 Rights to Acquire MedSource Stock.............................................31 10.3 Conditions to Obligations of the Seller..................................................31 10.3.4 Deliveries....................................................................32 10.3.4.1 Closing Date Payment Amount.........................................32 10.3.4.2 Good Standing......................................................32 10.3.4.3 Certified Resolutions..............................................32 10.3.4.4 Incumbency Certificate.............................................32 10.3.4.5 Opinion of Counsel.................................................32 10.3.4.6 Other Documents.............................................................32 10.3.5 Employment Agreements..........................................................32 10.3.6 Contribution of Certain Funds..................................................32 10.3.7 Availability of Certain Discretionary Funds....................................32
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SECTION 11: RESTRICTIVE COVENANTS OF CMJ AND WHITNEY...................................................32 11.1 Certain Acknowledgments...............................................................32 11.1.1 NCO Business.................................................................32 11.1.2 Competitive Nature of Business...............................................33 11.1.3 Access to Information........................................................33 11.1.4 Basis for Covenants..........................................................33 11.2 Nondisclosure Covenants...............................................................33 11.3 Noncompetition and Noninterference Covenants..........................................33 11.3.1 .............................................................................34 (1) Solicitation Restrictions............................................34 (2) Competing Business Restrictions......................................34 (1) Competing Business Restrictions......................................34 (2) Noninterference......................................................34 11.4 Nonsolicitation.......................................................................34 11.5 Certain Exclusions....................................................................34 11.6 Enforcement of Covenants..............................................................35 11.7 Scope of Covenants....................................................................35 SECTION 12: INDEMNIFICATION...........................................................................35 12.1 The Company's, CMJ's, HBM's and Whitney's Indemnification................................35 12.1.1 Misrepresentations............................................................36 12.1.2 Nonperformance................................................................36 12.1.3 MedSource Name.................................................................36 12.1.4 Proceedings...................................................................36 12.1.5 Office Reorganization.........................................36 12.2 CMJ's Indemnification.....................................................................36 12.3 Whitney's Indemnification.................................................................36 12.4 HBM's Indemnification.....................................................................36 12.5 NCO's Indemnification....................................................................37 12.5.1 Misrepresentations............................................................37 12.5.2 Nonperformance................................................................37 12.6 Indemnification Procedures...............................................................37 12.6.1 Notice........................................................................37 12.6.2 Defense.......................................................................37 12.7 Payments.................................................................................38 12.8 Setoff and Holdback......................................................................38 12.9 Certain Qualifications....................................................................38 12.10 Exclusive Remedy.........................................................................39 SECTION 13: TERMINATION AND WAIVER.....................................................................40 13.1 Termination..............................................................................40 13.2 Effect of Termination....................................................................41 13.3 Extension; Waiver........................................................................41
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SECTION 14: OTHER PROVISIONS...........................................................................41 14.1 Fees and Expenses........................................................................41 14.2 Publicity................................................................................41 14.3 Notice...................................................................................41 14.4 Survival of Representations..............................................................43 14.5 Interpretation of Representations........................................................43 14.6 Reliance by NCO..........................................................................44 14.7 Entire Understanding.....................................................................44 14.8 Parties in Interest......................................................................44 14.9 Waivers..................................................................................44 14.10 Severability............................................................................44 14.11 Counterparts............................................................................44 14.12 Section Headings........................................................................44 14.13 References..............................................................................44 14.14 Controlling Law.........................................................................45 14.15 Jurisdiction and Process................................................................45 14.16 No Third-Party Beneficiaries............................................................45 14.17 Further Assurances.......................................................................45 14.18 Schedules................................................................................45 14.19 Certain Matters Relating to Employees....................................................45 14.20 Covenant Relating to Tax Returns................................................46
5 STOCK PURCHASE AGREEMENT ------------------------ This Agreement is made this 4th day of May, 1998, by and among NCO Group, Inc., a Pennsylvania corporation ("NCO"), MedSource, Inc., a Delaware corporation (the "Company"), C.B. Hellmann, Jr. ("Chip"), Mark Gorman ("Mark") and John O'Hara ("John") (Chip, Mark and John collectively hereinafter referred to as "CMJ"), Whitney Subordinated Debt Fund L.P., a Delaware limited partnership ("Whitney Fund") and Whitney Equity Partners, L.P., a Delaware limited partnership ("Whitney Partners") (Whitney Fund and Whitney Partners hereinafter together referred to as "Whitney") and HealthCare Business Management, Ltd., a Delaware corporation ("HBM" together with CMJ and Whitney, the "Seller"). RECITALS -------- WHEREAS, Seller owns of record and beneficially all of the issued and outstanding capital stock of the Company; WHEREAS, Seller desires to sell all such issued and outstanding capital stock of the Company, and NCO desires to acquire all of the outstanding capital stock of the Company, pursuant to the terms of this Agreement. NOW, THEREFORE, intending to be legally bound hereby and in consideration of the mutual agreements set forth herein, the parties hereto agree as follows: SECTION 1: DEFINED TERMS As used in this Agreement, unless otherwise defined herein or unless the context otherwise requires, the following terms shall have the following meanings: 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, (b) any note receivable, or (c) any other receivable or right to payment of any nature. 1.2 "Asset" means any real, personal, mixed, tangible or intangible property of any nature, including, but not limited to, (a) Cash Assets, (b) Accounts Receivable, (c) other current assets of any nature including, but not limited to, unbilled revenue, prepayments, deposits and escrows, (d) Tangible Property, (e) Real Property, (f) Software, (g) Intangibles, (h) Contract Rights, (i) claims, causes of action and other legal rights and remedies of any nature, and (j) good will. 1.3 "Business" means the accounts receivable management and collection business conducted by the Company and the Company's Subsidiaries through the date of Closing Date. 1 1.4 "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. 1.5 "Change in Control Payment" means an aggregate amount equal to $800,000 payable $400,000 to Chip and $400,000 to Paul Weitzel. 1.6 "Closing Date Company Obligations" means the aggregate of the following: (i) the amount that would be required to satisfy in full as of the Closing Date all long-term debt (including the current portion of long-term debt) of the Company, including, without limitation, the principal, accrued interest, fees and penalties, if any, that would be due and owing with respect to the satisfaction of such debt; (ii) the Change in Control Payment and (iii) the Dividend Payment. 1.7 "Code" means the Internal Revenue Code of 1986, as amended. 1.8 "Consent" means any consent, approval, order or authorization of, or any declaration, filing or registration with, or any application or report to, or any waiver by, or any other action (whether similar or dissimilar to any of the foregoing) of, by or with, any Person which is necessary in order to take a specified action or actions in a specified manner and/or to achieve a specified result or to avoid the occurrence of a default or breach which if not obtained could reasonably be expected to have a Material Adverse Effect. 1.9 "Contract" means any written or oral contract, agreement, instrument, order, arrangement, commitment or understanding of any nature whatsoever. 1.10 "Contract Right" means, with respect to any Person, any right, power or remedy of any nature of such Person under any Contract including, but not limited to, rights to receive property or services or otherwise derive benefits from the payment, satisfaction or performance of another party's obligations, rights to demand that another party accept property or services or take any other actions, and rights to pursue or exercise remedies or options. 1.11 "Dividend Payment" means an amount equal to the dividends payable on the MedSource Preferred Stock which have accrued but as of the Closing Date have not been paid. 1.12 "Documents" means and includes any document, agreement, instrument, certificate, notice, Consent, affidavit, correspondence (by letter, telegram, telex or otherwise), written statement, schedule or exhibit whatsoever. 1.13 "Employee Benefit Plan" means any employee benefit plan as defined in Section 3(3) of ERISA, or any other plan, trust agreement, program, policy or arrangement for or regarding bonuses, commissions, incentive compensation, severance, hospitalization, vacation, deferred compensation, pensions, profit sharing, retirement, payroll savings, stock options, stock purchases, stock awards, stock ownership, equity compensation, phantom stock, stock appreciation rights, medical/dental expense payment or reimbursement, disability income or protection, sick pay, group 2 insurance, self insurance, death benefits, employee welfare or fringe benefits of any nature, including without limitation, those benefiting retirees or former employees. 1.14 "Encumbrance" means any lien, security interest, pledge, mortgage, judgment, easement, leasehold, assessment, covenant, restriction, reservation, conditional sale, prior assignment, or other encumbrance, claim, burden or charge of any nature. 1.15 "Environmental Laws" means all Laws relating to pollution, protection of the environment, health, safety, or the exposure of persons to Hazardous Substances, including, without limitation, Laws relating to emissions, discharges, releases or threatened releases into the environment (including, without limitation, ambient air, surface water, ground water or land) of any Hazardous Substances identified or regulated under any such Environmental Laws. 1.16 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 1.17 "Escrow Amount" means $250,000; provided, however, such amount shall be increased up to $750,000 on a dollar-for-dollar basis for each dollar in excess of $250,000 that the Tangible Net Worth of the Company as of March 31, 1998 is reported to be less than $4,606,000, in a due diligence report delivered within 30 days after the date of this Agreement to NCO by Coopers and Lybrand based upon its review of the Company's books and records. 1.18 "GAAP" means generally accepted accounting principles under 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 material that has been determined by any Law or any United States federal government authority, or any state or local government authority having jurisdiction over Real Property owned, leased, used or occupied by Company, to be capable of posing a risk of injury or damage to health, safety, property or the environment, including, but not limited to, (a) all substances, wastes, contaminants, pollutants and materials defined or designated as hazardous, dangerous or toxic pursuant to any Law of the state in which such Real Property is located or any United States Law, and (b) urea-formaldehyde, polychlorinated byphenyls, asbestos or asbestos-containing materials, nuclear or radioactive fuel or waste, radon, explosives, known carcinogens, petroleum, petroleum products, or any other waste, material, substance, pollutant or contaminant that might cause any injury to human health or safety or to the environment or might subject the owner, operator, possessor or occupier of such Real Property to any claims, causes of action, costs damages, penalties, expenses, demands or liabilities, however defined, under any applicable Law. 1.20 "Insurance Policy" means any public liability, product liability, general liability, comprehensive, property damage, vehicle, life, hospital, medical, dental, disability, workers' compensation, key man, fidelity bond, theft, forgery, errors and omissions, directors' and officers' liability, owner's title, or other insurance policy or binder of any nature. 3 1.21 "Intangible Property " means any name, corporate name, fictitious name, trademark, trademark application, service mark, service mark application, trade name, brand name, product name, slogan, trade secret (including, without limitation, recipes, formula and ingredients), know-how, patent, patent application, copyright, copyright application, design, logo, formula, invention, product right or other intangible asset of any nature, whether in use, under development or design, or inactive. 1.22 "Judgment" means any order, writ, injunction, fine, 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. 1.23 "Knowledge" or "Know" or the like with reference to the Company means that none of the executive officers, including the Vice President of Operations and General Manager -Nashville Business Unit, or directors of the Company have any actual Knowledge or actual belief that the statement qualified by Knowledge is incorrect, with reference to any other Person that is an entity means that none of the executive officers or directors of such Person have any actual Knowledge or actual belief that the statement qualified by Knowledge is incorrect and with reference to a Person that is a natural person means that such person does not have actual Knowledge or actual belief that the statement qualified by Knowledge is incorrect. 1.24 "Law" means any provision of any foreign, federal, state or local law, statute, ordinance, order, charter, constitution, treaty, rule or regulation, guideline, or consent order, decree or agreement, including without limitation, common law. 1.25 "Liabilities" means any debt, liability or obligation of any nature, whether secured, unsecured, recourse, nonrecourse, liquidated, unliquidated, accrued, absolute, fixed, contingent, ascertained, unascertained, known, unknown or otherwise. 1.26 "Material Adverse Effect" means any change or effect that would be materially adverse to the condition (financial or otherwise), results of operations, Business, Assets of the Business, Liabilities, or business prospects of the Company and its Subsidiaries taken as a whole. 1.27 "MedSource Common Stock" means the common stock of MedSource, par value $.01 per share. 1.28 "MedSource Preferred Stock" means the Company's 8% Series A Cumulative Convertible Preferred Stock, $.01 par value, and the Company's Series C Convertible Preferred Stock, $.01 par value. 1.29 "MedSource Stock" means the MedSource Common Stock and MedSource Preferred Stock. 4 1.30 "Permit" means any license, permit, approval, certificate, consent, waiver, order, authorization, registration, 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 or any Person acting on behalf of any such body, agency or authority. 1.31 "Person" means any individual, sole proprietorship, joint venture, partnership, corporation, limited liability company or partnership, association, cooperative, trust, estate, governmental body, administrative agency, regulatory authority or other entity of any nature. 1.32 "Proceeding" means any claim, demand, suit, action, litigation, investigation, arbitration, audit, hearing or other legal proceeding of any nature, or any formal demand which might lead to any of the foregoing. 1.33 "Real Property" means any real estate, land, building, condominium, town house, structure, improvement or other real property of any nature, all shares of stock or other ownership interests in cooperative or condominium associations or any other corporation owning real estate, partnership interests in partnerships, membership interests in limited liability companies or other forms of ownership interest through which interests in real estate are held, and all appurtenant and ancillary rights thereto, including, but not limited to, easements, covenants, water rights, sewer rights and utility rights. 1.34 "Software" means any computer program, operating system, applications system, firmware or software of any nature, whether operational, under development or inactive, including, but not limited to, 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. 1.35 "Subsidiary" means any Person in which a majority of the total direct or indirect equity or ownership interest is owned, of record or beneficially, by another Person or a direct or indirect Subsidiary of such other Person. 1.36 "Tangible Net Worth" means the tangible net worth of the Company determined by subtracting from the total assets of the Company the following: (i) intangible assets (including goodwill, deferred financing acquisition costs and deferred loan costs); and (ii) current liabilities (including accounts payable, accrued expenses, accrued compensation and trust payable but excluding current portion of long-term debt and any interest to be paid as a Closing Date Company Obligation) and adding to the result any cost or expense of the Company incurred after the date hereof relating to the closure of offices or the termination of employees which closure or termination is consistent with NCO's plan to restructure the Company's operations after the Closing Date as communicated to Company by NCO in writing, provided, however, no cost or expense for which an indemnification obligation exists pursuant to Section 12.1.5 shall be added to the result. 5 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, occupancy, general property, real property, personal property, intangible property, realty transfer, fuel, excise, payroll, withholding, unemployment compensation, social security 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, and (c) any deficiency, interest or penalty imposed with respect to any of the foregoing. SECTION 2: SALE AND PURCHASE OF CAPITAL STOCK. 2.1 Stock Delivery. On the Closing Date (as hereinafter defined), subject to and upon the terms and conditions contained herein, Seller will sell, transfer, convey, assign and deliver to NCO, and NCO will purchase and acquire from the Seller, all right, title and interest in and to the shares of MedSource Stock owned by Seller (including with respect to the shares of MedSource Preferred Stock all shares of the MedSource Common Stock and shares of the Company's 8% Series B Cumulative Redeemable Preferred Stock into which the MedSource Preferred Stock may be converted prior to the Closing Date). Seller shall deliver all certificates representing the MedSource Stock (and any securities into which the MedSource Stock has been converted), duly endorsed for transfer to NCO, on the Closing Date. 2.2 Closing; Purchase. Unless this Agreement shall have been terminated and the transactions herein contemplated shall have been abandoned pursuant to the provisions of Section 13, the closing (the "Closing") of this Agreement shall take place (a) at 10:00 a.m. (local time) on the later of (i) the date on which all conditions to the respective obligations of the parties set forth in Section 10 hereof shall have been satisfied or waived, or (ii) the earlier of the date which is five days after NCO completes the public offering of its common stock with respect to which NCO is currently preparing a registration statement or July 15, 1998 or (b) at such other time and date as NCO, CMJ and Whitney shall agree (such date and time on and at which the Closing occurs being referred to herein as the "Closing Date"). The Closing shall take place at the offices of Blank Rome Comisky & McCauley, Philadelphia, Pennsylvania, or at such other location as NCO, CMJ and Whitney shall agree. 2.3 Purchase Price. In consideration of the sale, transfer, conveyance and delivery of the MedSource Stock, and in reliance upon the representations and warranties made herein by Company, CMJ, Whitney and HBM, NCO shall, in full payment thereof, pay to Seller a total purchase price equal to $35,000,000 (the "Base Purchase Price"), reduced by the amount of the Closing Date Company Obligations (as so reduced, the "Closing Date Payment Amount") and further adjusted by the amount of the Post-Closing Adjustment (as defined in Section 2.5), if any (as so reduced and adjusted, the "Purchase Price".) The Purchase Price shall be allocated among the Seller as set forth 6 in Schedule 2.3. The Closing Date Payment Amount, less the Escrow Amount shall be paid to Seller (as set forth on Schedule 2.3) in cash by bank or certified check or by wire transfer on the Closing Date. On the Closing Date, NCO shall deliver to the Escrow Agent pursuant to, and in accordance with the terms of an Escrow Agreement substantially in the form attached hereto as Exhibit "A" (the "Escrow Agreement") the Escrow Amount. The Escrow Amount shall be held in an escrow account (the "Escrow Account") and distributed in accordance with the terms of the Escrow Agreement. 2.4 Closing Balance Sheet. (a) Seller will deliver to NCO as soon as reasonably practicable but in no event later than forty-five (45) business days after Closing, an unaudited balance sheet of the Company as of the Closing Date (the "Closing Balance Sheet"), together with the related statement of income for the year-to-date period ended on the date of the Closing Balance Sheet. The Closing Balance Sheet and related statement of income shall have been prepared in accordance with GAAP consistently applied by the Company in accordance with past practice for the financial statements described in Section 3.4 hereto. The Closing Balance Sheet shall include accruals for all obligations of the Company and its Subsidiaries including , if applicable, for federal, state and local taxes (including income taxes) as well as accruals, if applicable, for payroll taxes, employee benefits, workers' compensation insurance premiums and deposits, sick pay and "comp" time, fees and expenses of the Company pursuant to Section 14.1 in all cases as if there had been a closing of the books on the date of the Closing Balance Sheet. The Company shall give the representatives of the Seller reasonable access to the Company's books and records for the purpose of preparing the Closing Balance Sheet and shall allow the Company's Chief Financial Officer and appropriate NCO accounting personnel to assist the Seller to prepare the Closing Balance Sheet. (b) NCO shall, within 20 days after delivery to NCO by Seller of the Closing Balance Sheet, notify Seller in writing if it disputes the accuracy of the Closing Balance Sheet. Such notice shall specify in reasonable detail the nature of the dispute. If no such notice is received by Seller, NCO shall be deemed to have accepted the accuracy of the Closing Balance Sheet. If such notice is given to Seller, then during the 20-day period following the receipt of such notice by Seller, Seller and NCO shall attempt to resolve such dispute and to determine the accuracy of the Closing Balance Sheet. If at the end of the 20-day period, Seller and NCO shall have failed to reach a written agreement with respect to such dispute, the matter shall be referred to a Big Six Certified Public Accounting Firm agreeable to both Seller and NCO (the "Arbitrator"), which shall act as an arbitrator and shall issue its report as to the Closing Balance Sheet within forty-five (45) days after such dispute is referred to the Arbitrator. Each of the parties hereto shall bear all costs and expenses incurred by such party in connection with such arbitration, except that the fees and expenses of the Arbitrator hereunder shall be borne equally by Seller and NCO. This provision for arbitration shall be specifically enforceable by the parties and the decision of the Arbitrator in accordance with the provisions hereof shall be final and binding and there shall be no right of appeal therefrom. The Closing Balance Sheet prepared by Seller if not disputed by NCO, or, if disputed by NCO, the Closing Balance Sheet with respect to which a written agreement is reached to settle the dispute or, if no written agreement is reached, the Closing Balance Sheet with respect to which a report is issued by the Arbitrator shall be the Closing Balance Sheet utilized the determine the Post-Closing Adjustment as provided in Section 2.5. 7 2.5 Post Closing Adjustment. If the Tangible Net Worth of the Company as reflected on the Closing Balance Sheet is less than $4,606,000 the amount of such difference shall be the Post Closing Adjustment which shall be payable by Seller (in the proportions set forth on Schedule 2.3) to NCO. If the Tangible Net Worth of the Company as reflected on the Closing Balance Sheet is greater than $4,606,000 the amount of such difference shall be the Post Closing Adjustment which shall be payable by NCO to Seller (in the proportions set forth by Schedule 2.3). If any Post Closing Adjustment is required, the adjustment shall be made on the date on which NCO accepts the accuracy of the Closing Balance Sheet or the date upon which any dispute concerning the closing Balance Sheet is resolved. The amount of any Post Closing Adjustment payable by NCO shall be paid to Sellers (in the proportion set forth on Schedule 2.3 hereto) by wire transfer in immediately available funds to an account or accounts designated by Sellers. The amount of any Post Closing Adjustment payable by Seller shall be paid to NCO by Seller (in the proportions set forth on Schedule 2.3 hereto) by wire transfer in immediately available funds to an account or accounts designated by NCO. The funds in the Escrow Account shall be utilized to pay the Post Closing Adjustment. Seller shall deliver a letter to the Escrow Agent (with a copy to NCO) instructing the Escrow Agent to release to NCO the funds held in the Escrow Account necessary to pay the Post Closing Adjustment and the amount paid by the Escrow Agent shall be credited against the Post-Closing Adjustment payable by Seller to NCO. The balance of any funds held in the Escrow Account after payment of such Post Closing Adjustment shall be distributed to Sellers (in the proportions set forth on Schedule 2.3). If the funds in the Escrow Account are not sufficient to pay the total Post Closing Adjustment payable to NCO, Seller shall pay on the date that the Post Closing Adjustment is determined the difference between the Post Closing Adjustment and the funds in the Escrow Account by wire transfer in immediately available funds to an account designated by NCO (in the proportions set forth on Schedule 2.3). SECTION 3: REPRESENTATIONS, WARRANTIES AND COVENANTS OF COMPANY. Knowing that NCO relies thereon, the Company represents, warrants and covenants to NCO on the date hereof and on and as of the Closing Date as follows: 3.1 Due Incorporation and Qualification; Subsidiaries. The Company and each Subsidiary of the Company is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. The Company and each Subsidiary of the Company has the full power and authority to own, lease and operate the Assets of the Business which it leases and operates and, to carry on its Business as and where such Business is now conducted. The Company has the full power and authority to enter into and perform this Agreement and to consummate the transactions contemplated hereby upon the terms and conditions herein provided. The Company or its Subsidiaries is duly qualified as a foreign corporation in good standing under the Laws of the jurisdictions set forth in Schedule 3.1. There is no other jurisdiction in which the nature of the Business or location of the Assets requires such licensing or qualification, except where the failure to be so qualified would not have, and could not be reasonably expected to have a Material Adverse Effect. Except as set forth on Schedule 3.1, the Company has no Subsidiaries nor owns, directly or indirectly, any equity interest in or has control of, alone or in combination with others, any Person. 8 Schedule 3.1 sets forth the names and titles of the Company's and its Subsidiaries directors and officers, and all names under which and addresses at which the Company and its Subsidiaries have done business at any time since January, 1993. 3.2 Capital Stock; Options. The Company is authorized to issue (i) 10,000,000 shares of MedSource Common Stock, 2,905,000 shares of which are issued and outstanding on the date hereof and are owned of record and beneficially by CMJ and HBM free and clear of any Encumbrance (ii) 150,000 shares of the 8% Series A Cumulative Convertible Preferred Stock, $.01 par value, 138,400 shares of which are issued and outstanding on the date hereof and are owned of record and beneficially by Whitney Partners, (iii) 150,000 shares of 8% Series B Cumulative Redeemable Preferred Stock, $0.01 par value, none of which are issued, and (iv) 50,000 shares of Series C Convertible Preferred Stock, $.01 par value, 46,100 shares of which are owned of record and beneficially by Whitney Fund. No other class of capital stock of the Company is authorized, issued or outstanding. All of the issued and outstanding shares of the MedSource Common Stock and MedSource Preferred Stock are duly authorized and are legally and validly issued, fully paid and nonassessable. Except as set forth on Schedule 3.2, there are no outstanding subscriptions, rights, options, warrants, calls, commitments or agreements to which the Company is a party or by which it is bound or may be bound which relate to the issuance or sale of shares of its capital stock and neither Company nor Seller is a party to or bound by any agreement relating to the sale or other disposition of any shares of the Company's capital stock. Except as set forth on Schedule 3.2, there is no liability for dividends declared or accumulated but unpaid with respect to any of the MedSource Common Stock or MedSource Preferred Stock. Except as set forth in Schedule 3.2, no bonds, debentures, notes or other indebtedness of the Company having the right to vote (or convertible into or exercisable for securities having the right to vote) on any matters on which stockholders may vote is issued or outstanding. Except as set forth in Schedule 3.2, there are no obligations, contingent or otherwise, of the Company to (i) repurchase, redeem or otherwise acquire any shares of the MedSource Common Stock, MedSource Preferred Stock or other capital stock of the Company, or (ii) provide funds to, or make any investment in (in the form of a loan, capital contribution or otherwise), or provide any guarantee with respect to the material obligations of, any Person. Except as set forth on Schedule 3.2, there are no agreements, arrangements or commitments of any character (contingent or otherwise) pursuant to which any person is or may be entitled to receive any payment based on revenues or earnings, or calculated in accordance therewith, of the Company or any Subsidiary of the Company. Except as set forth in Schedule 3.2, there are no voting trusts, proxies or other agreements or understandings to which any of the Company or Seller is a party or by which any of the Company or Seller is bound with respect to the voting of any shares of capital stock or other equity interests of the Company. Schedule 3.2 includes an accurate and complete list of the authorized, issued and outstanding shares of stock of each Subsidiary of the Company and the names of all of the directors and officers of each Subsidiary of the Company. The Company is the legal and beneficial owner of, and has good and valid title to, all of the outstanding capital stock of each Subsidiary of the Company, free and clear of any Encumbrances. Except for the shares of capital stock listed on Schedule 3.2, there are no other issued or outstanding shares of capital stock of any Subsidiary of the Company. All of the issued and outstanding shares of capital stock of each Subsidiary of the Company have been duly authorized and validly issued, and are fully 9 paid and nonassessable, with no liability attaching to the ownership thereof. Except as set forth on Schedule 3.2, 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 in any Subsidiary of the Company. 3.3 Authority to Execute and Perform Agreement. The Company has the full legal right and power and all authority and approvals required to enter into, execute, deliver and perform this Agreement and its obligations hereunder. The execution, delivery and performance of this Agreement (and all other Documents required to effect the transaction contemplated) and the consummation of the transactions contemplated herein have been duly authorized by the Company's Board of Directors and shareholders. This Agreement, and each Document contemplated by this Agreement, is and will be the valid and legally binding obligation of the Company enforceable in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights in general, or by general principles of equity. 3.4 Financial Statements. Schedule 3.4 contains the financial statements and notes thereto of the Company (including balance sheets and related statements of income, retained earnings and cash flows) at and for the fiscal years ended December 31, 1997 and 1996. All such statements, including the footnotes thereto, were audited by Arthur Andersen LLP, independent certified public accountants. Schedule 3.4 also sets forth the Company's financial statements (including unaudited balance sheets and the related statements of income, retained earnings and cash flows) at and for the three months ended March 31, 1998. The foregoing financial statements of the Company are hereinafter collectively referred to as the "Financial Statements". The Financial Statements are true and correct in all material respects, and fairly present the financial position of the Company as at such dates and the results of its operations and the changes in its retained earnings and its financial position for the periods then ended in accordance with generally accepted accounting principles consistently applied throughout the periods indicated. The Financial Statements are not affected by transactions or accounts with affiliated companies, if any. 3.5 No Adverse Change. Since the date of the latest Financial Statements there has occurred no event that, individually or when taken together with all other events, has had or reasonably could be expected to have a Material Adverse Effect. The Company does not know of any such event which is impending. 3.6 Tax Matters. The Company and each Subsidiary of the Company has duly and timely filed with the appropriate governmental agencies all Tax and other returns required to be filed by it, all of which have been accurately prepared in all material respects. All Taxes due, owing and payable, or which may be due, owing and payable, have been fully paid or duly provided for in the Financial Statements or, with respect to tax periods after the date of the Financial Statements are reflected in the books and records of the Company. No claim for Taxes due is being contested by the Company or any Subsidiary of the Company. Adequate provision has been made in the Financial Statements for all liabilities of the Company for Taxes not required to be paid prior to the 10 due dates therefor or if liabilities for Taxes have arisen after the date of the latest Financial Statements such liabilities are reflected in the books and records of the Company. Except as set forth on Schedule 3.6, The Company's federal and state income tax returns have never been audited by the IRS or any state tax authority. The Company has received no notice from the IRS or any state tax authority of any deficiency or other adjustment which has not been satisfied, and the Company has no Knowledge that such a notice may be sent. To the Company's Knowledge, no state of facts exists or has existed which would constitute grounds for the assessment of any further liability for Taxes. There are no agreements, waivers, or other arrangements providing for an extension of time with respect to the assessment of any Tax against the Company or any Subsidiary of the Company, nor are there any actions, suits or claims now pending (or, to the Company's Knowledge, threatened) against the Company in respect of any Tax. Copies of the Company's Subsidiaries' federal and state income tax returns for each of the periods set forth on a schedule previously delivered to NCO have been or will be provided to NCO. 3.7 Compliance with Laws. Except as set forth in Schedule 3.7, the Company and its Subsidiaries have complied with all Laws relating to the Business or operations of the Company and the Company's Subsidiaries, except where the failure to comply with such Laws could not reasonably be expected to have a Material Adverse Effect. Schedule 3.7 sets forth a true, complete and accurate description of all inspections and reports with respect to the Company or its Subsidiaries made by federal, state and local governmental agencies, authorities and other Persons since July 1997 regarding any Laws applicable to the Company's Business or the Assets of the Business, together with a description of all recommendations of, actions taken by, submission of information to, and fines and penalties imposed by, all such governmental agencies and authorities. Except as set forth in Schedule 3.7, neither the Company nor any of its Subsidiaries has received notice of any alleged violation of or claim under any such Laws, and there is no basis for a violation thereof which may occur in the future (either upon notice, lapse of time, or both), and no investigation, charge, claim or other action under any such Laws is pending or threatened. 3.8 Permits. The Company and its Subsidiaries hold as of the date of signing this Agreement all Permits which are necessary and material for the conduct of the Business as heretofore conducted. A true, correct and complete list of all of the Company's and its Subsidiaries' Permits is set forth in Schedule 3.8, and all such Permits are in full force and effect, no violations which have not been remedied have been recorded in respect of any Permit. Except as set forth in Schedule 3.8, neither the Company nor any Subsidiary is in default, nor has received any notice of any claim of default, with respect to any such Permit or of any notice of any other claim or Proceeding (or threatened Proceeding) relating to any such Permit. 3.9 No Breach. Except as set forth in Schedule 3.9, the consummation of the transactions herein contemplated including, without limitation, the execution and delivery of this Agreement and the documents required to effect the transactions herein contemplated, do not and will not (1) constitute a violation of or default under (either immediately or upon notice, lapse of time or both), conflict with or result in a breach of (a) the Certificate of Incorporation or Bylaws of the Company, (b) the terms of any Contract to which the Company or any Subsidiary of the Company 11 is a party or any of the Assets of the Business are or may be bound, (c) any Judgment, or (d) any Laws; or (2) result in the creation or imposition of any Encumbrance on any of the Assets of the Business or give to any Person any interest or right in any of the Assets of the Business; or (3) accelerate the maturity of or otherwise modify any Liability of the Company or any Subsidiary of the Company; or (4) result in the breach of any of the terms and conditions of, constitute a default under or otherwise cause any impairment of, any Contract, or Permits which, if not cured, could reasonably be expected to have a Material Adverse Effect. 3.10 Consents. Except as set forth in Schedule 3.10, no Consent is required in connection with the execution, delivery and performance by the Company of this Agreement or the consummation of the transactions contemplated hereby. 3.11 Judgments and Proceedings. Except as set forth in Schedule 3.11, there is no outstanding Judgment against the Company or any Subsidiary of the Company or against or affecting any of the Assets or operations or prospects of the Business. Except as set forth in Schedule 3.11, there is no Proceeding pending, or to the Company's Knowledge, threatened, against the Company or any Subsidiary of the Company or against or affecting the Business, its Assets or operations, and the Company does not know or have reasonable grounds to know of any basis for any such Proceeding. True and correct copies of all complaints, pleadings, motions and other papers filed in connection with the Proceedings listed in Schedule 3.11 have been or will be within ten days after the date hereof delivered to NCO. Schedule 3.11 also includes a true and correct list of all open workmen's compensation claims. Except as set forth in Schedule 3.11, there are no Proceedings pending or, to the Company's Knowledge, threatened, or any contingent liability, which would give rise to any right of indemnification on the part of any officer, director, employee or agent of the Company or any Subsidiary of the Company, or heirs, executors or administrators thereof against the Company or any Subsidiary of the Company or any successor. Except as set forth in Schedule 3.11, no breach of contract, tort or other claim (whether arising from the operations of the Business or otherwise) has been asserted or, to the Company's Knowledge, no event has occurred which could reasonably be expected to give rise to such a claim. 3.12 Employee Relations. Neither the Company nor any Subsidiary of the Company is a party to any collective bargaining agreement or any other Contract with any union or organization or any other representatives of the Company or any Subsidiary of the Company. Except as set forth in Schedule 3.12, neither the Company nor any Subsidiary of the Company is a party to any written or oral employment agreement with any of its officers, directors, employees, consultants, agents, or other Persons which is not terminable by the Company or its Subsidiaries at will without penalty or cost to the Company or its Subsidiaries. True and correct copies of all agreements disclosed in Schedule 3.12 (or summaries of oral agreements so disclosed) have been or will be delivered to NCO. To the Company's Knowledge, except as set forth in Schedule 3.12, (1) no grievance or claim which could reasonably be expected to have a Material Adverse Effect is pending and no claim therefor has been asserted, (2) no claim has been asserted under any written or oral employment agreement and (3) no collective bargaining agreement is currently being negotiated by the Company or any Subsidiary of the Company. Neither the Company nor any Subsidiary of the Company has 12 any present or, to the Knowledge of the Company, threatened labor disturbances or any pending arbitration, unfair labor practice, grievance, or other Proceeding of any kind with respect to its employees and has had no such labor disturbance, Proceeding or litigation for the past eighteen months or which remains unresolved on the date hereof. The Company does not Know of any present or threatened walkout, strike or any similar occurrence which could reasonably be expected to have a Material Adverse Effect. Except as set forth on Schedule 3.12 during the past five years, no union attempts to organize or represent the employees of the Company or any Subsidiary of the Company have been made, nor are any such attempts to the Knowledge of the Company now threatened, nor has the Company or any Subsidiary of the Company been notified by any labor organization or other entity that it is soliciting or intends to solicit the employees of the Company or its Subsidiaries to select a bargaining agent, nor is any such solicitation being made or, to the Company's Knowledge, contemplated by any labor union. Schedule 3.12 is a true and correct list of all personnel employed by the Company and its Subsidiaries as of the date hereof and their respective salaries, wages and rates of compensation, which Schedule will be updated at Closing. Upon termination of the employment of any said employees, neither the Company nor any Subsidiary of the Company will by reason of anything done prior to the Closing Date be liable to any of said employees for severance pay or any other payments, except as and to the extent set forth in Schedule 3.12. Except as disclosed in Schedule 3.12, no employee of the Company or any Subsidiary of the Company has indicated to the Company an intention to terminate employment with the Company or its Subsidiaries. 3.13 Contracts. Set forth on Schedule 3.13 is an accurate and complete list of all Contracts which involve future obligations of $100,000 or more. Except as set forth on Schedule 4.13, with respect to each of the Contracts, neither the Company nor any Subsidiary of the Company 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 3.13, to the Knowledge of the Company, none of the other parties to any 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 3.13, neither the Company nor any Subsidiary of the Company has given or received any notice of default or notice of termination with respect to any Contract, and each Contract is in full force and effect in accordance with its terms. The Contracts listed on Schedule 3.13 include all the Contracts necessary and sufficient to operate the Business. Except as set forth on Schedule 3.13, there are no currently outstanding proposals or offers submitted by the Company or any Subsidiary of the Company to any customer, prospect, supplier or other Person with respect to the Business which, if accepted, would result in a legally binding Contract involving an amount or commitment exceeding $50,000 in any single case or an aggregate amount or commitment exceeding $250,000 in the aggregate. 3.14 Real Property. Neither the Company nor any Subsidiary of the Company owns any Real Property. Schedule 3.14 is a detailed list of all Real Property leased by the Company or any Subsidiary of the Company showing location, rental cost and landlord. All Real Property under lease to or otherwise used by the Company or any Subsidiary of the Company are sufficient for the current operations of the Business. No Real Property under lease, nor the occupancy, maintenance or use thereof, is in violation of, or breach or default under, any Contract or Law, where such default 13 or breach could reasonably be expected to have a Material Adverse Effect, and no notice from any lessor, governmental body or other Person has been received by the Company or any Subsidiary of the Company claiming any violation of, or breach or default under, any Contract or Law, or requiring or calling attention to the need for any work, repairs, construction, alteration or installations. Except as disclosed in Schedule 3.18, neither the Company nor any Subsidiary of the Company has placed or caused to be placed, and the Company has no Knowledge that there were or are, any Hazardous Substances on or under any of such Real Property under lease. 3.15 Books of Account and Reports. The Company's and its Subsidiaries' books of account accurately reflect in all material respects all of their items of income and expense, and all of their Assets, Liabilities and accruals are and have been prepared and maintained in form and substance adequate for preparing financial statements in accordance with generally accepted accounting principles consistently applied which are capable of being audited. The Company and each Subsidiary of the Company has filed all reports required by all Laws to be filed, and it has duly paid or accrued on its books of account all applicable duties and charges due or assessed against it pursuant to such reports. The Company has delivered to NCO true, correct and complete copies of the Certificate of Incorporation and Bylaws of the Company, and all amendments thereto. The minute books of the Company contain complete and accurate records of all official meetings and other official corporate action of its shareholders and Board of Directors. Schedule 3.15 contains a complete and accurate list showing the name and location of each bank or other institution in which the Company and its Subsidiaries has any account or safe deposit box and the names of all Persons authorized to draw thereon or have access thereto. 3.16 Accounts Receivable. All Accounts Receivable of the Company or any Subsidiary of the Company arose in the ordinary course of business and are proper and valid accounts receivable and are fully collectible through the use of ordinary collection procedures in the full aggregate face amount thereof less any allowances for bad debt loss set forth in the latest Financial Statement or thereafter accrued on the books of the Company consistent with past practice. There are no refunds, discounts, rights of setoff or assignment affecting any such Accounts Receivable. 3.17 Tangible Property. Except as set forth on Schedule 3.17, the Company and its Subsidiaries have good and valid title to all of their Tangible Property free and clear of any Encumbrances. All of such Tangible Property is located at facilities used in the Business, and the Company or its Subsidiaries has the full and unqualified right to require the immediate return of any of its Tangible Property which is not located at the facilities used in the Business. All such Tangible Property is in good condition, ordinary wear and tear excepted, and is sufficient for the operation of the Business as presently conducted. 3.18 Intangible Property. All Intangible Property material to the Business, owned, used, registered in the name of or licensed to the Company or any Subsidiary of the Company are listed on Schedule 3.18. Except as disclosed in Schedule 3.18, the rights of the Company or any Subsidiary of the Company in the Intangible Property set forth in Schedule 3.18 are free and clear of any claims of infringement or Encumbrance. Except as disclosed on Schedule 3.18, neither the 14 Company nor any Subsidiary of the Company has any notice of any adversely held Intangible Property of any other Person or notice of any claim of any other Person relating to any of the Intangible Property set forth in Schedule 3.18, and the Company does not Know of any basis for any such charge or claim. Neither the Company nor any Subsidiary of the Company has misappropriated the trade secrets or property rights of any Person and none of the Intangible Property infringes upon or violates the rights of any Person. Except for the Company's interface with Columbia/HCA, neither the Company nor any Subsidiary of the Company has licensed any Person to use technical know-how or other proprietary rights of the Company or any Subsidiary of the Company, nor is the Company or any Subsidiary of the Company obligated to pay any royalties, licensing fees or similar payments to any Person. 3.19 Title. Except as set forth on Schedule 3.19, each of the Company and the Company's Subsidiaries owns outright and has good, valid and marketable title to all of its Assets, free and clear of all Encumbrances. There are no outstanding options or commitments to which the Company or any Subsidiary of the Company is a party which relate to the Assets used in the Business or the sale by them of such Assets. 3.20 Liabilities. As of the date of the latest Financial Statements, the Company and the Company's Subsidiaries did not have any Liabilities, which were not fully and adequately reflected in such Financial Statements in accordance with GAAP or on a Schedule hereto. Except as set forth in Schedule 3.20, the Company and the Company's Subsidiaries do not have any Liabilities, other than (1) Liabilities fully and adequately reflected in the latest Financial Statements in accordance with GAAP and (2) those incurred since the date of the latest Financial Statements in the ordinary course of business consistent with past practices. The Company does not have any Knowledge of any circumstances, bases (either with notice, lapse of time or both), conditions, events or arrangements which may hereafter give rise to any Liabilities of the Company or any Subsidiary of the Company except in the ordinary course of business consistent with past practices. Except as set forth in Schedule 3.20 and except to the extent specifically reflected or reserved against in the latest Financial Statements or elsewhere in this Agreement, neither the Company nor any Subsidiary of the Company is directly or indirectly liable, by guarantee or otherwise, upon or with respect to, or obligated to guarantee or assume, any Liability of any Person, except endorsements made in the ordinary course of business in connection with the deposit of items for collection. 3.21 Suppliers and Customers. Set forth on Schedule 3.21 is a list of the ten largest customers (measured by volume of placements) of the Business (the "Ten Largest Customers"). Except as set forth on Schedule 3.21, none of the Ten Largest Customers has given notice or otherwise indicated to the Company or any Subsidiary of the Company that it will or intends to terminate its relationship with the Company or any Subsidiary of the Company. To the Knowledge of the Company, the relationship of the Company and the Company's Subsidiaries with customers and suppliers of the Business are currently on a good and normal basis. To the Knowledge of the Company, the purchase of the MedSource Stock contemplated by this Agreement will not adversely affect relations with any of the Ten Largest Customers. All funds collected on behalf of customers 15 by the Company or the Company's Subsidiaries have been properly remitted to customers or are properly reflected on the financial statements of the Company and its Subsidiaries. 3.22 Employee Benefit Plans. Except as set forth in Schedule 3.22, the Company and its Subsidiaries have not established, maintained or contributed to any Employee Benefit Plans and the Company and its Subsidiaries have not proposed any Employee Benefit Plans which the Company will and its Subsidiaries establish, maintain, or to which the Company and its Subsidiaries will contribute, and the Company has not proposed any changes to any Employee Benefit Plans now in effect (all of the preceding referred to collectively hereinafter as "the Company's Employee Benefit Plans"). True and correct copies and descriptions of all of the Company's Employee Benefit Plans, all employees affected or covered by the Company's Employee Benefit Plans and all Liabilities thereunder are attached to Schedule 3.22, which Schedule will be updated on the Closing Date. If permitted and/or required by applicable Law, the Company and its Subsidiaries have properly submitted all of the Company's Employee Benefit Plans in good faith to meet the applicable requirements of ERISA and/or the Code to 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 3.22. With respect to the Company's Employee Benefit Plans, the Company and its Subsidiaries will have made, on or prior to the Closing Date, all payments required to be made by each of them on or prior to the Closing Date and will have accrued (in accordance with generally accepted accounting principles consistently applied) 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. The Company and its Subsidiaries have or will have furnished NCO with a true and correct 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 the Company's Employee Benefit Plans and the most current actuarial report with regard to any of the Company's Employee Benefit Plans. All of the Company's Employee Benefit Plans are, and have been, operated in full compliance with their provisions and with all applicable Laws including, without limitation, ERISA and the Code and the regulations and rulings thereunder. The Company, its Subsidiaries and all fiduciaries of the Company's Employee Benefit Plans have complied with the provisions of the Company's Employee Benefit Plans and with all applicable Laws including, without limitation, 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 this sale) of any of the Company's Employee Benefit Plans. There would be no Liability of the Company or its Subsidiaries under Title IV of ERISA if any of the Company's Employee Benefit Plans were terminated as of the Closing Date. The Company and its Subsidiaries have not incurred, and will not incur, any withdrawal liability, nor does the Company and its Subsidiaries have any contingent withdrawal liability, under ERISA to any Multiemployer Plan (as defined in ERISA or the Code). The Company and its Subsidiaries have not incurred, and will not incur, any Liability to the Pension Benefit Guaranty Corporation (or any successor thereto). Except as set forth in Schedule 3.22, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (i) result in any payment (including, without limitation, 16 severance, unemployment compensation, golden parachute or otherwise) becoming due from the Company or its Subsidiaries under any of the Company's Employee Benefit Plans, (ii) increase any benefits otherwise payable under any of the Company's Employee Benefit Plans, or (iii) result in the acceleration of the time of payment or vesting of any such benefits to any extent. There are no pending actions, claims or lawsuits which have been asserted or instituted against any of the Company's Employee Benefit Plans, the assets of any of the trusts under such plans, the plan sponsor, the plan administrator or against any fiduciary of any of the Company's Employee Benefit Plans (other than routine benefit claims) nor does the Company have Knowledge of facts which could form the basis for any such action, claim or lawsuit. There are no investigations or audits of any of the Company's Employee Benefit Plans, any trusts under such plans, the plan sponsors, the plan administrator or any fiduciary of any of the Company's Employee Benefit Plans which have been threatened or instituted nor does the Company or CMJ have Knowledge of facts which could form the basis for any such investigation or audit. Except as disclosed in Schedule 3.22, no event has occurred which will result in Liability to the Company or its Subsidiaries in connection with any Employee Benefit Plan established, maintained, or contributed to (currently or previously) by the Company, its Subsidiaries or by any other entity which, together with the Company or its Subsidiaries, 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. 3.23 Insurance. Schedule 3.23 sets forth all Insurance Policies held by or on behalf of the Company and the Company's Subsidiaries, specifying the insurer, the policy number (or covering note number with respect to binders), the risks covered, the premium, the deductibles and the amount of coverage provided and describing each pending claim thereunder of more than $10,000. All such Insurance Policies are enforceable and in full force and effect. Neither the Company nor any subsidiary of the Company is in default with respect to any provision contained in any such Insurance Policy nor has the Company or any Subsidiary of the Company failed to give any notice or present any claim under any such Insurance Policy in due and timely fashion. Except for claims set forth on Schedule 3.23, there are no outstanding unpaid claims under any such Insurance Policy. Neither the Company nor any Subsidiary of the Company has received a notice of cancellation, non-renewal or audit of any such Insurance Policy. The Company does not have Knowledge of any inaccuracy in any application for such Insurance Policies, any failure to pay premiums when due or any similar state of facts which might form the basis for termination of any such insurance. All Insurance Policies (1) are "occurrence" policies with insurance companies which are financially sound and responsible, (2) are sufficient for compliance by the Company with all requirements of the Law and all Contracts to which the Company is a party, (3) insure against risks of the kind customarily insured against and in amounts customarily carried by insureds similarly situated, and (4) provide adequate insurance coverage for the conduct of the Business. The Company will continue to maintain such insurance coverage in full force and effect through the Closing Date, and such coverage will not be affected by the consummation of the transactions contemplated by this Agreement. 17 3.24 Software. Schedule 3.24 is an accurate and complete list and description of all Software owned, used or under development by the Company or any Subsidiary of the Company. Except as set forth in Schedule 3.24, the Company has good and marketable title to all of its Software, free and clear of any Encumbrances. With respect to all of the Company's and its Subsidiaries' Software which has been developed by or for the Company, (1) the Company maintains machine-readable, master-reproducible copies, source code listings, technical documentation and user manuals (as amended from time to time by technical notes) for the most current releases or versions thereof and for all earlier releases or versions thereof currently being used by any customer, (2) in each case, the machine readable copy conforms to the corresponding source code listing, (3) such Software can be maintained and modified by competent programmers familiar with such language, hardware and operating systems, and (4) each version of the Software (excluding pilot and other test releases and Software under development) operates in accordance with the user manual (as amended from time to time by technical notes) therefor without operating defects other than those typically handled by the Company's support personnel. None of such Software, or their respective past or current uses, has violated or infringed upon or is violating or infringing upon any patent, copyright, trade secret or other proprietary right of any Person, and to the Knowledge of the Company, no Person is violating or infringing upon any of such Software. None of such Software is owned by or registered in the name of any shareholder, director, officer, employee, salesman, agent, representative or contractor of the Company or any Subsidiary of the Company, nor does any such Person have any interest therein or right thereto. 3.25 Operations Prior to and Including the Closing. Except as set forth in Schedule 3.25, from the date of the latest Financial Statements, through the date hereof, neither the Company nor any Subsidiary of the Company has, and on the Closing Date neither the Company nor any Subsidiary of the Company will have, without the prior written consent of NCO: (1) amended its Certificate of Incorporation or Bylaws or merged with or into or consolidated with any other Person, or changed or agreed to change in any manner the rights of its outstanding capital stock or the character of its Business; (2) declared, set aside or paid any dividend or other distribution in respect of the capital stock of the Company (except for dividends accrued with respect to the MedSource Preferred Stock); redeemed or acquired any of such stock; issued or sold, or issued options or rights to subscribe to, or entered into any Contracts to issue or sell, any shares of its capital stock; or subdivided or in any way reclassified any shares of its capital stock; (3) entered into or amended any employment agreements, entered into any Contracts with any labor union or association representing any employee, or entered into or amended any Employee Benefit Plans; (4) settled any dispute involving payment of any amount in excess of $10,000 or waived any right of material value to its Business; 18 (5) made any change in its accounting methods, practices, policies or principles; (6) changed any of its business policies, including, without limitation, advertising, marketing, pricing, purchasing, production, personnel, sales, returns, budget or acqui- sition policies; (7) made any wage or salary increase or bonus, or increase in any other direct or indirect compensation, for or to any officer, director, employee, consultant or agent of the Company or any Subsidiary of the Company, or any accrual for or commitment or agreement to make or pay the same, or loaned or advanced any funds to any Person; (8) except in the ordinary course of business, entered into any lease or sublease (as lessor or lessee), abandoned or made any other disposition of any Assets of the Business involving more than $25,000 in the aggregate, granted or suffered any Encumbrances on any of its Assets having a value in excess of $25,000 in the aggregate, or amended any Contracts to which it is a party or by which it is bound or its Assets are bound or pursuant to which it agrees to indemnify any party or to refrain from competing with any party; (9) except in the ordinary course of business consistent with past practices, incurred or assumed any Liabilities; (10) except for Tangible Property acquired in the ordinary course of business, made any acquisition of all or any part of the Assets or capital stock or business of any other Person; (11) entered into any other Contract or transaction which is material to the Business; (12) made any capital expenditure or commitment for any property, plant or equipment in excess of $10,000 individually or $25,000 in the aggregate; (13) disposed of, leased or encumbered, or pledged or granted a security interest in any Assets, or increased any of the indebtedness of the Company or any Subsidiary of the Company, other than in the normal and ordinary course of business consistent with past practices; (14) paid, discharged or satisfied any Liabilities other than by payment, discharge or satisfaction in the ordinary course of business consistent with past practices; (15) incurred any damage, destruction or loss, whether or not covered by insurance, adversely affecting the Company or any Subsidiary of the Company; or (16) made any Contract to do any of the actions referred to in paragraphs (1) through (15) above. 19 3.26 Questionable Payments. Neither the Company or any Subsidiary of the Company, or to the Knowledge of the Company, any directors, officers, consultants, agents, employees or other persons associated with or active on behalf of the Company or its Subsidiaries, has (1) used any corporate funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity, (2) made any direct or indirect unlawful payments to foreign or domestic government officials or employees from corporate funds, (3) violated any provision of the Foreign Corrupt Practices Act of 1977, (4) established or maintained any unlawful or unrecorded fund of corporate monies or other assets, (5) made any false or fictitious entries on the books and records of the Company or its Subsidiaries, (6) made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment of any nature, or (7) made any material favor or gift which is not deductible for Federal income tax purposes. 3.27 No Broker. No broker, finder, agent or similar intermediary has acted for or on behalf of the Company in connection with this Agreement or the transactions contemplated hereby, and no broker, finder, agent or similar intermediary is entitled to any broker's fee, finder's fee, or similar fee or commission in connection therewith based on any agreement, arrangement or understanding with the Company or any action taken by the Company. 3.28 Full Disclosure. All Documents delivered by or on behalf of the Company in connection with this Agreement and the transactions contemplated hereby are true and complete in all material respects; all such Documents are authentic; and all Contracts included hereunder are valid, subsisting and binding on the parties thereto in accordance with their terms. There is no fact which the Company has not disclosed to NCO in writing which had a Material Adverse Effect, or so far as the Company can now foresee, could reasonably be expected to have a Material Adverse Effect or could affect the ability of the Company to perform this Agreement. 3.29 Representations and Warranties on Closing Date. The representations and warranties contained in this Section 3 shall be true and complete on and as of the Closing Date with the same force and effect as though such representations and warranties had been made on and as of the Closing Date. SECTION 4: REPRESENTATIONS, WARRANTIES AND COVENANTS OF CMJ: Knowing that NCO relies thereon, CMJ, jointly and severally, represents, warrants and covenants to NCO on the date hereof and on and as of the Closing Date as follows: 4.1 Ownership. CMJ owns beneficially and of record the number of shares of MedSource Common Stock set forth on Schedule 4.1, and has the unrestricted right, power and authority to sell, transfer and deliver the MedSource Common Stock as provided in this Agreement. Except as set forth on Schedule 4.1, upon delivery and payment for the MedSource Common Stock as provided herein, there shall be vested in NCO good and valid title to the MedSource Common Stock, free and clear of any Encumbrance. 20 4.2 No Other Agreements. Other than pursuant to this Agreement, CMJ has no legal obligation, absolute or contingent, to any other person or firm to sell any of the MedSource Common Stock or to enter into any agreement with respect thereto. This Agreement, and each Document contemplated by this Agreement, is and will be the valid and legally binding obligation of CMJ enforceable in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights in general, or by general principles of equity. 4.3 Actions and Proceedings. There are no outstanding orders, judgments, injunctions, awards or decrees or any court, arbitrator or governmental regulatory body against CMJ with respect to any of the MedSource Common Stock. There are no claims, actions, suits or proceedings, pending or to CMJ's Knowledge, threatened, against CMJ relating to the MedSource Common Stock that if determined adversely to CMJ could reasonably be expected to materially and adversely affect the ability of CMJ to consummate the transactions contemplated hereby. 4.4 No Breach. The consummation of the transactions herein contemplated including, without limitation, the execution and delivery of this Agreement and the documents required to effect the transactions herein contemplated, do not and will not (1) constitute a violation of or default under (either immediately or upon notice, lapse of time or both), conflict with or result in a breach of (a) the terms of any Contract to which CMJ is a party, (b) any Judgment affecting CMJ as a stockholder of the Company, or (c) any Laws affecting CMJ as a stockholder of the Company. 4.5 Consents. No Consent is required in connection with the execution, delivery and performance by CMJ of this Agreement or the consummation by CMJ of the transactions contemplated hereby. 4.6 No Broker. No broker, finder, agent or similar intermediary has acted for or on behalf of CMJ in connection with this Agreement or the transactions contemplated hereby, and no broker, finder, agent or similar intermediary is entitled to any broker's fee, finder's fee, or similar fee or commission in connection therewith based on any agreement, arrangement or understanding with CMJ. 4.7 Questionable Payments. CMJ has not (1) used any corporate funds of the Company or its Subsidiaries for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity, (2) made any direct or indirect unlawful payments to foreign or domestic government officials or employees from corporate funds of the Company or its Subsidiaries, (3) violated any provision of the Foreign Corrupt Practices Act of 1977, (4) established or maintained any unlawful or unrecorded fund of corporate monies or other assets, (5) made any false or fictitious entries on the books and records of the Company or its Subsidiaries, (6) made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment of any nature, or (7) made any material favor or gift with funds of the Company or its Subsidiaries which is not deductible for Federal income tax purposes. 21 4.8 Representations and Warranties on Closing Date. The representations and warranties contained in this Section 4 shall be true and complete on and as of the Closing Date with the same force and effect as though such representations and warranties had been made on and as of the Closing Date. SECTION 5: REPRESENTATIONS, WARRANTIES AND COVENANTS OF WHITNEY: Knowing that NCO relies thereon, Whitney, jointly and severally, represents, warrants and covenants to NCO on the date hereof and on and as of the Closing Date as follows: 5.1 Ownership. Whitney owns beneficially and of record all of the outstanding shares of MedSource Preferred Stock and has the unrestricted right, power and authority to sell, transfer and deliver the MedSource Preferred Stock as provided in this Agreement. Except as set forth on Schedule 5.1, upon delivery and payment for the MedSource Preferred Stock as provided herein, there shall be vested in NCO good and valid title to the MedSource Preferred Stock, free and clear of any Encumbrance. 5.2 No Other Agreements. Other than pursuant to this Agreement, Whitney has no legal obligation, absolute or contingent, to any other person or firm to sell any of the MedSource Preferred Stock or to enter into any agreement with respect thereto. 5.3 Actions and Proceedings. There are no outstanding orders, judgments, injunctions, awards or decrees or any court, arbitrator or governmental regulatory body against Whitney with respect to any of the MedSource Preferred Stock. There are no claims, actions, suits or proceedings, pending or to Whitney's Knowledge, threatened, against Whitney relating to the MedSource Preferred Stock that if determined adversely to Whitney could reasonably be expected to materially and adversely affect the ability of Whitney to consummate the transactions contemplated hereby. 5.4 Authority to Execute and Perform Agreement. Whitney has the full legal right and power and all authority and approvals required to enter into, execute, deliver and perform this Agreement and its obligations hereunder. The execution, delivery and performance of this Agreement (and all other Documents required to effect the transaction contemplated) and the consummation of the transactions contemplated herein have been duly authorized by all required partnership action of Whitney. This Agreement, and each Document contemplated by this Agreement, is and will be the valid and legally binding obligation of Whitney enforceable in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights in general, or by general principles of equity. 5.5 No Breach. The consummation of the transactions herein contemplated including, without limitation, the execution and delivery of this Agreement and the documents required to effect the transactions herein contemplated, do not and will not (1) constitute a violation of or default 22 under (either immediately or upon notice, lapse of time or both), conflict with or result in a breach of (a) the partnership agreements of Whitney, (b) the terms of any Contract to which Whitney is a party, (c) any Judgment affecting Whitney as a stockholder of the Company, or (d) any Laws affecting Whitney as a stockholder of the Company. 5.6 Consents. No Consent is required in connection with the execution, delivery and performance by Whitney of this Agreement or the consummation by Whitney of the transactions contemplated hereby. 5.7 No Broker. No broker, finder, agent or similar intermediary has acted for or on behalf of Whitney in connection with this Agreement or the transactions contemplated hereby, and no broker, finder, agent or similar intermediary is entitled to any broker's fee, finder's fee, or similar fee or commission in connection therewith based on any agreement, arrangement or understanding with Whitney. 5.8 Representations and Warranties on Closing Date. The representations and warranties contained in this Section 4 shall be true and complete on and as of the Closing Date with the same force and effect as though such representations and warranties had been made on and as of the Closing Date. SECTION 6: REPRESENTATION, WARRANTIES AND COVENANTS OF HBM: Knowing that NCO relies thereon, HBM represents, warrants and covenants to NCO on the date hereof and on and as of the Closing Date as follows: 6.1 Ownership. HBM owns beneficially and of record 197,000 shares of MedSource Common Stock and has the unrestricted right, power and authority to sell, transfer and deliver such shares of the MedSource Common Stock as provided in this Agreement. Except as set forth on Schedule 6.1, upon delivery and payment for such shares of MedSource Common Stock as provided herein, there shall be vested in NCO good and valid title to such shares of MedSource Common Stock, free and clear of any Encumbrance. 6.2 Authority to Execute and Perform Agreement. HBM has the full legal right and power and all authority and approvals required to enter into, execute, deliver and perform this Agreement and its obligations hereunder. The execution, delivery and performance of this Agreement (and all other Documents required to effect the transaction contemplated) and the consummation of the transactions contemplated herein have been duly authorized by all required corporate action of HBM. This Agreement, and each Document contemplated by this Agreement, is and will be the valid and legally binding obligation of HBM enforceable in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights in general, or by general principles of equity. 23 6.3 No Other Agreements. Other than pursuant to this Agreement, HBM has no legal obligation, absolute or contingent, to any other person or firm to sell any shares of MedSource Common Stock or to enter into any agreement with respect thereto. 6.4 Actions and Proceedings. There are no outstanding orders, judgments, injunctions, awards or decrees or any court, arbitrator or governmental regulatory body against HBM with respect to any of the MedSource Common Stock. There are no claims, actions, suits or proceedings, pending or to HBM's Knowledge, threatened, against HBM relating to the MedSource Common Stock that if determined adversely to HBM could reasonably be expected to materially and adversely affect the ability of HBM to consummate the transactions contemplated hereby. 6.5 No Breach. The consummation of the transactions herein contemplated including, without limitation, the execution and delivery of this Agreement and the documents required to effect the transactions herein contemplated, do not and will not (1) constitute a violation of or default under (either immediately or upon notice, lapse of time or both), conflict with or result in a breach of (a) the Certificate of Incorporation or Bylaws of HBM, (b) the terms of any Contract to which HBM is a party, (c) any Judgment affecting HBM as a stockholder of the Company, or (d) any Laws affecting HBM as a stockholder of the Company. 6.6 Consents. No Consent is required in connection with the execution, delivery and performance by HBM of this Agreement or the consummation by HBM of the transactions contemplated hereby. 6.7 No Broker. No broker, finder, agent or similar intermediary has acted for or on behalf of HBM in connection with this Agreement or the transactions contemplated hereby, and no broker, finder, agent or similar intermediary is entitled to any broker's fee, finder's fee, or similar fee or commission in connection therewith based on any agreement, arrangement or understanding with HBM. 6.8 Representations and Warranties on Closing Date. The representations and warranties contained in this Section 5 shall be true and complete on and as of the Closing Date with the same force and effect as though such representations and warranties had been made on and as of the Closing Date. SECTION 7: REPRESENTATIONS, WARRANTIES AND COVENANTS OF NCO. Knowing that the Company and Seller rely thereon, NCO represents, warrants and covenants to the Company, and Seller on the date hereof and on and as of the Closing Date as follows: 7.1 Due Incorporation and Qualification. NCO is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. NCO has the full power and authority to own, lease and operate its assets, to carry on its Business as and where 24 such business is now conducted and, to enter into and perform this Agreement and to consummate the transactions contemplated hereby upon the terms and conditions herein provided. 7.2 Authority to Execute and Perform Agreement. NCO has the full legal right and power and all authority and approvals required to enter into, execute, deliver and perform this Agreement and its obligations hereunder. The execution, delivery and performance of this Agreement (and all other Documents required to effect the transaction contemplated) and the consummation of the transactions contemplated herein have been duly authorized by NCO's Board of Directors. This Agreement, and each Document contemplated by this Agreement, is and will be the valid and legally binding obligation of NCO enforceable in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors rights in general or by general principles of equity. 7.3 No Breach. Except as set forth in Schedule 6.3, the consummation of the transactions herein contemplated including, without limitation, the execution and delivery of this Agreement and the documents required to effect the transactions herein contemplated, do not and will not (1) constitute a violation of or default under (either immediately or upon notice, lapse of time or both), conflict with or result in a breach of (a) the Articles of Incorporation or Bylaws of NCO, (b) the terms of any Contract to which NCO is a party or any of the Assets are or may be bound, (c) any Judgment, or (d) any Laws. 7.4 Consents. Except as set forth in Schedule 6.4, no Consent is required in connection with the execution, delivery and performance by NCO of this Agreement or the consummation of the transactions contemplated hereby. 7.5 No Broker. No broker, finder, agent or similar intermediary has acted for or on behalf of NCO in connection with this Agreement or the transactions contemplated hereby, and no broker, finder, agent or similar intermediary is entitled to any broker's fee, finder's fee, or similar fee or commission in connection therewith based on any agreement, arrangement or understanding with NCO or any action taken by NCO. 7.6 SEC Reports. The periodic reports (including reports on Form 10-K, Form 10-Q and Form 8-K) and proxy statements filed by NCO with the Securities and Exchange Commission (the "SEC Reports") do not or did not, on the date of filing or the date as of which information is set forth therein, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. The financial statements of NCO including any related schedules and/or notes) included in the SEC Reports have been prepared in accordance with GAAP consistently applied (except as may be indicated in the notes thereto) throughout the periods involved and fairly present the financial position, results of operations and cash flows as of the dates and for the periods indicated therein. Since the date of the latest financial statement included in the SEC Requests, there has occurred no change of effect that, individually or when taken together with all other changes or effects, would be materially adverse to the condition (financial or otherwise), 25 results of operations, business, assets, liabilities or prospects of NCO and it Subsidiaries taken as a whole. 7.7 Full Disclosure. All Documents delivered by or on behalf of NCO in connection with this Agreement and the transactions contemplated hereby are true and complete in all material respects; all such Documents are authentic. There is no fact which NCO has not disclosed to te Company in writing which materially adversely affects, or so far as NCO can now foresee, will materially adversely affect, NCO's business or condition (financial or other) or the ability of NCO to perform this Agreement. 7.8 Representations and Warranties on Closing Date. The representations and warranties contained in this Section 7 shall be true and complete on and as of the Closing Date with the same force and effect as though such representations and warranties had been made on and as of the Closing Date. SECTION 8: CERTAIN OBLIGATIONS OF THE COMPANY PENDING CLOSING. 8.1 Conduct of Business. From the date hereof through the Closing Date, the Company and its Subsidiaries shall conduct, and Seller shall cause the Company and its Subsidiaries to conduct, the Business in the ordinary course consistent with past practices and, without the prior written consent of NCO, shall not change any business policies (including, without limitation, advertising, marketing, pricing, purchasing, personnel, sales, returns, budget or product acquisition policies). Without limiting in any way the generality of the foregoing, from the date of this Agreement until the Closing Date, neither the Company nor its Subsidiaries will do, and Seller will not cause or permit the Company or its Subsidiaries to do, any of the following: 8.1.1 Issue any additional capital stock or other security; declare, set aside or pay any dividend or make any other distribution in respect to the capital of the Company (except for dividends accrued with respect to the MedSource Preferred Stock); directly or indirectly redeem, purchase or otherwise acquire any shares of its capital stock; or issue to any Person any options, warrants or other rights to acquire any securities of the Company or any Subsidiary of the Company including, but not limited to, any stock options. 8.1.2 Participate in any merger, consolidation, division or reorganization. 8.1.3 Engage in any new type of business. 8.1.4 Acquire the business or any bulk assets of any Person. 8.1.5 Completely or partially liquidate or dissolve. 8.1.6 Amend its Certificate of Incorporation or Bylaws. 26 8.1.7 Except with the express prior written approval of NCO: 8.1.7.1 conduct the Business in any manner other than the usual, regular and ordinary manner consistent with past practices or make any change in its methods of management or operations; 8.1.7.2 enter into any new oral or written employment agreements or commitments to officers, directors, employees or consultants (including, but not limited to, any commitment to pay retirement or other benefits); 8.1.7.3 pay, promise to pay or enter into any Contracts to pay any bonus or special increased compensation (including, but not limited to, fringe benefits) to any officer, director, employee or consultant other than in accordance with its presently existing compensation arrangements; 8.1.7.4 (i) create or incur any Liabilities except in the ordinary course of business consistent with past practices, (ii) enter into or terminate any lease of Real Property, except in the ordinary course of business consistent with past practices, (iii) create any Subsidiary, (iv) make any investment in any Person other than in certificates of deposit and other cash equivalents, (v) release or create or incur any claim, mortgage, lien or other security interest, (vi) lend any money or assets to any Person or (vii) pay, discharge or satisfy any Liability except in the ordinary course of business consistent with past practices; 8.1.7.5 make any capital expenditure in excess of $10,000 for any single item or $20,000 in the aggregate, or enter into any lease, as lessee, of equipment as to which the annual lease charge is at a rate in excess of $10,000; 8.1.7.6 sell, abandon or otherwise dispose of any material Asset (including, without limitation, machinery, equipment, parts, supplies and trademarks), other than in the ordinary course of business consistent with past practices, or cancel or waive any claim or right of substantial value; or 8.1.7.7 enter into any Contracts to do or take any of the actions prohibited by this Section 8.1. 8.1.8 Intentionally take or omit to take any action which would render any representation and/or warranty contained in Section 3 herein inaccurate as of the Closing Date. 8.2 Preservation of Business. From the date hereof through the Closing Date, the Company and each subsidiary of the Company shall, and Seller shall cause the Company and its Subsidiaries to: 8.2.1 use its best efforts to preserve its business organizations intact; 27 8.2.2 maintain its books, accounts and records in the usual, regular and ordinary manner on a basis consistent with prior years and in accordance with generally accepted accounting principles; 8.2.3 use its best efforts to keep available the services of its present officers, employees, consultants and agents, and maintain its present suppliers and customers, and preserve its goodwill; 8.2.4 use its best efforts to cause all of the conditions precedent to Closing that are within its control to be satisfied as soon as practicable after the date hereof; 8.2.5 maintain its corporate existence and good standing in its state of incorporation and its corporate powers and qualification as a foreign corporation in all jurisdictions where it is presently so qualified, except where the failure to qualify would not have a Material Adverse Effect, observe all applicable Laws in the conduct of its Business, duly and timely file all reports and returns to be filed with any governmental entity, promptly pay all Taxes when due, and keep full and accurate records of all transactions entered into and conducted; 8.2.6 promptly, by appropriate notice, keep NCO informed of all material events and occurrences relevant to the Company or its operations occurring other than in the ordinary course of business. The Company will notify NCO of any changes which should be made in any of the information set forth on any of the Schedules hereto. 8.2.7 maintain the Assets of the Business in good working condition, perform all maintenance and repairs, and maintain in full force and effect continuing Contracts for services or facilities necessary to the Business; 8.2.8 perform all obligations under all Contracts and accrue and pay, as applicable and when due, all payments due under such Contracts. 8.3 Insurance. From the date hereof through the Closing Date, the Company and its Subsidiaries shall maintain, and shall cause the Company and its Subsidiaries to maintain, in force (including necessary renewals thereof) the Insurance Policies listed on any Schedule hereto, except to the extent that they may be replaced with substantially equivalent policies appropriate to insure the Business or the Assets used in the Business at the same or lower rates or at rates reasonably approved by NCO. 8.4 Access to Business. From the date hereof through the Closing Date, the Company shall and Seller shall cause the Company to allow, during normal business hours, the employees, attorneys, accountants, and other representatives of NCO free and full access to the files, books and records of the Company and its Subsidiaries, including, without limitation, title documents, leases, insurance policies, minute books, stockholders' lists, accounts, financial statements, auditor's working papers and all other data. The Company shall also furnish to NCO or its authorized 28 representatives additional financial, tax and operating data (including, without limitation, quarterly financial statements) and other information and documents which, in the reasonable opinion of NCO, are required for NCO to make a reasonable investigation of the Business. The employees of NCO may interview and meet with management and other employees of the Company and its Subsidiaries and shall have access to the operating properties of the Company and its Subsidiaries during normal business hours. 8.5 Proceedings. The Company shall promptly notify NCO of any Proceedings which, after the date hereof, are threatened or commenced against the Company or any Subsidiary of the Company, against any officer, director, employee, consultant or agent with respect to the affairs of the Company or any Subsidiary of the Company, which if adversely determined could reasonably be expected to have a Material Adverse Effect. 8.6 Continued Effectiveness of Representations and Warranties of Corporation. From the date hereof through the Closing Date, the Company and its Subsidiaries will conduct, and Seller will cause the Company and its Subsidiaries to conduct, the Business in such a manner so that the representations and warranties contained in Section 3 herein shall continue to be true and correct on and as of the Closing Date as if made on and as of the Closing Date, and NCO shall promptly be given notice of any event, condition or circumstance occurring from the date hereof through the Closing Date which would cause any of such representations and warranties to become untrue in any respect. 8.7 No Shopping. The Company shall not, nor shall any Seller allow the Company to, directly or indirectly, through any director, officer, employee, agent or otherwise, solicit, initiate or encourage submission of proposals or offers from any Person relating, directly or indirectly, to any acquisition of all or substantially all of the assets or capital stock of the Company or any Subsidiary of the Company or participate in any negotiation regarding, or furnish to any other Person any information with respect to, or otherwise cooperate in any way with, or assist or participate in, facilitate or encourage, any effort or attempt by any other Person to or seek, directly or indirectly, to acquire all or substantially all of the assets or capital stock of the Company or any Subsidiary of the Company. The Company and Seller shall promptly notify NCO if any such proposal or offer, or any inquiry or contact with any Person with respect thereto, is made. 8.8 Material Consents. Between the date of this Agreement and the Closing Date, the Company shall in good faith use commercially reasonable efforts to (a) obtain all Consents required to be obtained by the Company from all governmental regulatory authorities (which shall include the filing of all applications and the furnishing of all information as may be required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976 the "HSR Act"), lenders, lessors, vendors, customers, and other Persons necessary to permit the transactions contemplated by this Agreement to be consummated, pursuant to any Law, any Permit held by the Company or any loan agreement, lease or other material Contract to which the Company or any Subsidiary of the Company is a party or by which the Company or any Subsidiary of the Company is bound, (b) give the notices and make 29 the filings described on Schedule 3.10 and (c) request and obtain estoppel certificates from all lenders and lessors as reasonably requested by NCO. SECTION 9: CERTAIN OBLIGATIONS OF NCO PENDING CLOSING 9.1 Material Consents. Between the date of this Agreement and the Closing Date, NCO shall in good faith use commercially reasonable efforts to obtain all Consents required to be obtained by NCO from any governmental regulatory authorities (which shall include the filing of all applications and the furnishing of all information required by the HSR Act), and lenders and NCO shall in good faith cooperate with the Company in its efforts to obtain any required Consent or Permits set forth in Schedule 3.10, provided, however, that NCO shall not (i) be required to assume, guaranty or act as surety for the Liabilities of any Person, (ii) breach or violate any Contract to which NCO or any of its Subsidiaries is a party or by which any of them are bound or (iii) consent to the amendment of any Contract or Permit which NCO determines in its sole discretion would be adverse to the Company, any Subsidiary of the Company or NCO. SECTION 10. CONDITIONS TO CLOSING. 10.1 Mutual Conditions. The respective obligations of each party to complete the transactions contemplated by this Agreement shall be subject to the satisfaction, at or prior to the Closing Date, of the following conditions (any of which may be waived in writing by NCO on one hand and Seller on the other hand): 10.1.1 No Action or Proceeding. No Proceeding shall be pending or threatened by any public authority or person before any court, agency or administrative body which creates a substantial likelihood that the consummation of this Agreement or the transactions contemplated hereby will be restrained, enjoined or otherwise prevented or that any material damages will be recovered or other material relief obtained as a result of the transactions contemplated hereby or as a result of any agreement entered into in connection with, or as a condition precedent to, the consummation of the transactions contemplated hereby. 10.1.2 Compliance with Law. No provision of any applicable Law and no Judgment shall prohibit the Closing. There shall have been obtained any and all Permits and Consents of any governmental body or agency which NCO or Seller may reasonably deem necessary so that consummation of the transactions contemplated by this Agreement will be in compliance in all material respects with Law. 10.1.3 Hart-Scott-Rodino Requirements. The waiting periods (as such may be extended by the governmental agencies involved) applicable to the consummation of the transactions contemplated hereby under the provisions of the HSR Act and the rules thereunder shall have expired or have been terminated by the appropriate governmental agency. 30 10.2 Conditions to Obligations of NCO. The obligations of NCO to consummate the other transactions contemplated hereby shall be subject to the satisfaction, at or prior to the Closing Date, of the following conditions (any of which may be waived by NCO): 10.2.1 Performance of Agreements. Each of the agreements of the Company and Seller to be performed at or prior to the Closing Date pursuant to the terms hereof shall have been duly performed in all material respects. 10.2.2 No Breach of Representations. The representations and warranties of the Company, CMJ, Whitney and HBM set forth in this Agreement shall be true and correct as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date, except to the extent that such representations and warranties expressly relate to an earlier date (in which case such representations and warranties shall be true and correct on and as of such earlier date). 10.2.3 Delivery of Certificate. NCO shall have been furnished with a certificate, executed by the Chief Executive Officer of the Company, dated the Closing Date, certifying in such detail as NCO may reasonably request, as to the fulfillment with respect to the Company of the conditions set forth in the immediately preceding clauses 9.2.1 and 9.2.2. 10.2.4 No Material Adverse Change. There shall have occurred no event , individually or together with all other events, giving rise to a Material Adverse Effect from the date of the latest Financial Statements. 10.2.5 Proceedings. No Proceeding shall have been instituted or threatened to restrain or prevent the carrying out of the transactions contemplated hereby or to seek damages in connection with such transactions which could reasonably be expected to have a Material Adverse Effect. 10.2.6 Approval of Counsel to NCO. All actions and proceedings hereunder and all Documents required to be delivered by the Company or Seller hereunder or in connection with the consummation of the transactions contemplated hereby, and all other related matters, shall have been approved by Blank Rome Comisky & McCauley LLP, counsel to NCO, as to their form and substance. 10.2.7 Licenses. NCO shall have obtained, or obtained the transfer of, any licenses and other regulatory approvals necessary to allow NCO to operate the Business. 10.2.8 Deliverables. The Company and/or Seller shall have delivered to NCO, on or before the Closing Date, the following, which shall be in form and substance reasonably acceptable to NCO's counsel: 31 10.2.8.1 Instruments of Transfer. All documents and instruments of transfer for the shares of MedSource Stock owned by Seller, including, without limitation, original endorsed stock certificates for such MedSource Stock (and any securities into which such MedSource Stock may have been converted) and fully executed originals of any necessary instruments of assignment. 10.2.8.2 Receipts. Receipts acknowledging NCO's payment to Seller of the Base Purchase Price; 10.2.8.3 Consents. The original signed copies of all Consents listed on Schedule 3.10 except for such Consents which the failure to obtain could not reasonably be expected to have a Material Adverse Effect; 10.2.8.4 Good Standing. Good standing certificates for the Company and the Company's Subsidiaries, dated no earlier than ten (10) days before the Closing Date, from the State of incorporation and from each other jurisdiction in which the Company or its Subsidiaries is qualified or registered to do business as a foreign corporation; 10.2.8.5 Incumbency Certificate. A certificate of Secretary of the Company as to the incumbency and signatures of the officers of the Company executing this Agreement; 10.2.8.6 Certified Resolutions. Copies of the resolutions duly adopted by the board of directors of the Company, authorizing the Company to execute, deliver and perform this Agreement and to consummate the transactions contemplated by this Agreement, certified by the secretary the Company as in full force and effect, without modification or rescission, on and as of the Closing Date; 10.2.8.7 Opinion of Counsel. An opinion of counsel to the Company addressed to NCO and dated the Closing Date, in form reasonably acceptable to NCO; 10.2.8.8 Minute Books. All of the original minute books and stock books of the Company; and 10.2.8.9 Other Documents. All other agreements, certificates, instruments, opinions and documents reasonably requested by NCO in order to fully consummate the transactions contemplated by this Agreement. 10.2.9 Employment Agreements. Chip, Mark and John shall each have executed and delivered to NCO an Employment Agreement substantially in the form attached hereto as Exhibit "B". 10.2.10 Rights to Acquire MedSource Stock. All options, warrants, and other rights to acquire MedSource Stock shall have been terminated effective as of the Closing Date without any Liability to the Company. 32 10.3 Conditions to Obligations of the Seller. The obligations of the Seller to consummate the transactions contemplated hereby shall be subject to the satisfaction, at or prior to the Closing Date, of the following conditions (any of which may be waived by the Seller): 10.3.1 Each of the agreements of NCO to be performed at or prior to the Closing Date pursuant to the terms hereof shall have been duly performed, in all material respects. 10.3.2 The representations and warranties of NCO set forth in this Agreement shall be true and correct in all respects as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date, except to the extent that such representations and warranties expressly relate to an earlier date (in which case such representations and warranties shall be true and correct on and as of such earlier date). 10.3.3 The Company shall have been furnished with a certificate, executed by duly authorized officers of NCO, dated the Closing Date, certifying in such detail as the Company may reasonably request as to the fulfillment of the conditions set forth in the immediately preceding clauses 9.3.1 and 9.3.2. 10.3.4 Deliveries. At the Closing, NCO shall have delivered to the Seller, on or before the Closing Date, the following, which shall be in form and substance acceptable to the Seller: 10.3.4.1 Closing Date Payment Amount. The Closing Date Payment Amount, less the Escrow Amount which shall have been delivered to the Escrow Agent. 10.3.4.2 Good Standing. Good standing certificates for NCO dated no earlier than ten (10) days before the Closing Date, from the Commonwealth of Pennsylvania. 10.3.4.3 Certified Resolutions. Copies of the resolutions duly adopted by the board of directors of NCO, authorizing NCO to execute, deliver and perform this Agreement and to consummate the transactions contemplated by this Agreement, certified by the Secretary of NCO as in full force and effect, without modification or rescission, on and as of the Closing Date. 10.3.4.4 Incumbency Certificate. A certificate of the Secretary of NCO as to the incumbency and signatures of the officers of NCO executing this Agreement. 10.3.4.5 Opinion of Counsel. An opinion of counsel to NCO, addressed to the Seller and dated the Closing Date, in form acceptable to the Seller. 10.3.4.6 Other Documents. All other agreements, certificates, instruments, opinions and documents reasonably requested by the Seller in order to fully consummate the transactions contemplated by this Agreement. 33 10.3.5 Employment Agreements. NCO shall have executed and delivered to each of Chip, Mark and John an Employment Agreement substantially in the form attached hereto as Exhibit B. 10.3.6 Contribution of Certain Funds. Simultaneously with the completion of the transactions contemplated by this Agreement, NCO shall contribute to the Company sufficient funds for the Company to pay as of the Closing Date the Closing Date Company Obligations and shall cause the Company to make such payments on the Closing Date. 10.3.7 Availability of Certain Discretionary Funds. NCO shall have contributed to the Company $500,000 for use as a discretionary employee bonus pool to be distributed to the employees of the Company in the discretion of Chip. SECTION 11: RESTRICTIVE COVENANTS OF CMJ AND WHITNEY 11.1 Certain Acknowledgments. Each of CMJ and Whitney expressly acknowledge that: 11.1.1 NCO Business. The accounts receivable collection business conducted by the Company and any of its Subsidiaries (after Closing referred to as the "NCO Companies") involve the provision of accounts receivable collection business services using proprietary and confidential systems and information. 11.1.2 Competitive Nature of Business. The business of the Company and any of its Subsidiaries is highly competitive, is marketed throughout the United States and requires long sales "lead times" often exceeding one year. The NCO Companies expend substantial time and money, on an ongoing basis, to train their employees, maintain and expand their customer base, and improve and develop their products and services. 11.1.3 Access to Information. During the period that CMJ and Whitney were Shareholders of the Company, CMJ and Whitney have had access to proprietary and confidential property, knowledge and information of the Business of the Company and any of its Subsidiaries which, after Closing, shall be proprietary and confidential property, knowledge and information of the NCO Companies; such property, knowledge and information must be kept in strict confidence to protect NCO's Business and maintain the NCO Companies' competitive positions in the marketplace; and such property, knowledge and information would be useful to competitors of the NCO Companies for indefinite periods of time. 11.1.4 Basis for Covenants. The covenants of Sections 11.2, 11.3 and 11.4 (the "Covenants") are a material part of this Agreement and are an integral part of the obligations of the Sellers hereunder; the Covenants are supported by good and adequate consideration; and the Covenants are reasonable and necessary to protect the legitimate business interests of the NCO Companies. 34 11.2 Nondisclosure Covenants. At all times after the Closing Date for the respective periods of time which coincide with the CMJ Noncompetition Term with respect to CMJ and the Whitney Noncompetition Term and Whitney Noninterference Term with respect to Whitney, except with NCO's prior written consent, none of CMJ or Whitney shall, directly or indirectly, in any capacity, communicate, publish or otherwise disclose to any Person, or use for the benefit of any Person, any confidential or proprietary property, knowledge or information of the Company or any of its Subsidiaries, no matter when or how such knowledge or information was obtained, including without limitation (a) any information concerning the conduct and details of the Business; (b) the identity of customers and prospects for which proposals have been submitted as of the Closing Date ("Prospect"), their specific requirements, and the names, addresses and telephone numbers of individual contacts at customers and prospects; (c) prices, renewal dates and other detailed terms of customer and supplier Contracts and proposals; (d) pricing policies, marketing and sales strategies, methods of delivering products and services, and products and service development projects and strategies; (e) employment and payroll records; (f) forecasts, budgets and other nonpublic financial information; and (g) expansion plans, management policies, methods of operation, and other business strategies and policies. 11.3 Noncompetition and Noninterference Covenants. 11.3.1 During the period beginning on the Closing Date and ending on the fifth anniversary (the "CMJ Noncompetition Term") of the Closing Date, except with NCO's prior written consent, CMJ shall not, directly or indirectly, in any capacity, at any location worldwide: (1) Solicitation Restrictions. Solicit any Person who was a customer, Prospect, supplier, employee, salesman, agent or representative of, or a consultant to, the Company or any of its Subsidiaries, in any manner which interferes with such Person's relationship with the NCO Companies, or in an effort to obtain any such Person as a customer, employee, salesman, agent or representative of, or a consultant to, any other Person that conducts a business competitive with the Business. (2) Competing Business Restrictions. Establish, own, manage, operate, finance or control, or participate in the establishment, ownership, management, operation, financing or control of, or be a director, officer, employee, salesman, agent or representative of, or be a consultant to, any Person that conducts a business competitive with all or any part of the Business. 11.3.2 Except with NCO's prior written consent, neither Whitney, nor any person, corporation, firm, partnership or other entity related to them, and over which they exercise voting, operating or management control shall, directly or indirectly, in any capacity, at any location worldwide: (1) Competing Business Restrictions. During the period beginning on the Closing Date of this Agreement and ending on the first anniversary (the "Whitney Noncompetition Term") of the Closing Date, establish, own, manage, operate, finance or control, or participate in the 35 establishment, ownership, management, operation, financing or control of, or be a director, officer, employee, salesman, agent or representative of, or be a consultant to, any Person that conducts a business competitive with all or any part of the Business. (2) Noninterference. For the period of two years following the Whitney Noncompetition Term (the "Whitney Noninterference Term"), solicit for employment as salesman, agent, representative or consultant, any employee of the NCO Companies previously employed by the Company or any of its Subsidiaries in any management or supervisory capacity or direct any of its affiliates to state any disparaging information regarding the NCO Companies to any of the Company's or its Subsidiaries' customers, business prospects or suppliers. 11.4 Nonsolicitation. During the period beginning on the Closing Date and ending at the end of the CMJ Noncompetition Term or the Whitney Noncompetition Term and the Whitney Noninterference Term, as the case may be, neither CMJ nor Whitney shall solicit any employee of the Company or any of its Subsidiaries who becomes an employee of the NCO Companies on the Closing Date to become employees or independent contractors of CMJ or Whitney or any of their affiliates. 11.5 Certain Exclusions. Confidential and proprietary property, knowledge and information of the NCO Companies shall not include any information that is now known by or readily available to the general public, nor shall it include any information that in the future becomes known by or readily available to the general public other than as a result of any breach of the Covenants of this Agreement. The ownership by any of CMJ or Whitney of not more than five percent (5%) of the outstanding securities of any public company shall not, by itself, constitute a breach of the Covenants of Section 11.3, even if such public company competes with the NCO Companies. 11.6 Enforcement of Covenants. Each of CMJ and Whitney expressly acknowledges that it would be extremely difficult to measure the damages that might result from any breach of the Covenants, and that any breach of the Covenants will result in irreparable injury to the NCO Companies for which money damages could not adequately compensate. If a breach of the Covenants occurs, then the NCO Companies shall be entitled, in addition to all other rights and remedies that they may have at law or in equity, to have an injunction issued by any competent court enjoining and restraining CMJ and Whitney and all other Persons involved therein from continuing such breach. The existence of any claim or cause of action that any of CMJ or Whitney or any such other Person may have against any member of the NCO Companies shall not constitute a defense or bar to the enforcement of any of the Covenants. If the NCO Companies must resort to litigation to enforce any of the Covenants that has a fixed term, then such term shall be extended for a period of time equal to the period during which a breach of such Covenant was occurring, beginning on the date of a final court order (without further right of appeal) holding that such a breach occurred or, if later, the last day of the original fixed term of such Covenant. 36 11.7 Scope of Covenants. If any Covenant, or any part thereof, or the application thereof, is construed to be invalid, illegal or unenforceable, then the other Covenants, or the other portions of such Covenant, or the application thereof, shall not be affected thereby and shall be enforceable without regard thereto. If any of the Covenants is determined to be unenforceable because of its scope, duration, geographical area or other factor, then the court making such determination shall have the power to reduce or limit such scope, duration, area or other factor, and such Covenant shall then be enforceable in its reduced or limited form. SECTION 12: INDEMNIFICATION 12.1 The Company's, CMJ's, HBM's and Whitney's Indemnification. Subject to the limitations set forth in Section 12.9, if the transactions contemplated by this Agreement are not consummated, the Company, and Chip, Mark, John and HBM (collectively the "CMJ/HBM Group"), jointly and severally with each other but severally with Whitney Fund and Whitney Partners (collectively the "Whitney Group"), and Whitney Partners and Whitney Fund, jointly and severally with each other but severally with the CMJ/HBM Group, or if the transactions contemplated by this Agreement are consummated, Chip, Mark, John and HBM, jointly and severally with each other but severally with the Whitney Group, and Whitney Fund and Whitney Partners, jointly and severally with each other but severally with the CMJ/HBM Group, shall defend, indemnify and hold harmless NCO and its Subsidiaries and their successors and assigns, and its directors, officers, employees, agents and representatives, from and against any and all actions, suits, claims, demands, debts, liabilities, obligations, losses, damages, costs and expenses, including without limitation reasonable attorney's fees and court costs (collectively "Claims"), arising out of or caused by, directly or indirectly, any or all of the following: 12.1.1 Misrepresentations. Any misrepresentation, breach or failure of any warranty or representation made by the Company in or pursuant to this Agreement. 12.1.2 Nonperformance. Any failure or refusal by the Company to satisfy or perform in all material respects any covenant, term or condition of this Agreement required to be satisfied or performed by the Company. 12.1.3 MedSource Name. The claims by MediRisk, Inc. and its subsidiary MedSource, Inc. relating to the use by the Company or any Subsidiary of the Company of the name "MedSource." 12.1.4 Proceedings. Any Proceeding against NCO or any Subsidiary of NCO by any Person arising out of the foregoing. 12.1.5 Office Reorganization. Any labor and employment related claims of employees or government agencies arising from or relating to the reorganization of the Company's Waterford, Michigan office, including, but not limited to, claims relating to the termination or layoff of any employee, the closure or partial closure of the office, or the termination of any benefits; 37 provided, however, no indemnification obligation shall arise with respect to (i) the cost and expense of severance and other termination benefits consistent with the Company's or NCO's regular practices or programs in connection with severance and termination benefits; (ii) claims for workers' compensation or unemployment insurance compensation; (iii) contract claims arising out of certain employees' employment; (iv) accrued compensation, including vacation; (v) COBRA rights or benefits, (vi) claims under Title VII of the Civil Rights Act of 1964, as amended, (vii) claims under the Age Discrimination in Employment Act of 1967, as amended; (viii) claims under the Americans With Disabilities Act, as amended; (ix) claims under the Family and Medical Leave Act of 1993; (x) claims under the Worker Adjustment Retraining & Notification Act or (xi) claims under the Fair Labor Standards Act, as amended. 12.2 CMJ's Indemnification. CMJ shall indemnify and hold harmless NCO and its successors and assigns, and its directors, officers, employees, agents and representatives from and against any and all actions, suits, claims, demands, debts, liabilities, obligations, losses, damages, costs and expenses, including without limitation reasonable attorney's fees and court costs, arising out of or caused by, directly or indirectly by any misrepresentation, breach or failure of any warranty or representation made by CMJ in or pursuant to this Agreement or any failure or refusal by CMJ to satisfy or perform in all material respects any covenant, term or condition of this Agreement required to be satisfied or performed by CMJ. 12.3 Whitney's Indemnification. Whitney shall indemnify and hold harmless NCO and its successors and assigns, and its directors, officers, employees, agents and representatives from and against any and all actions, suits, claims, demands, debts, liabilities, obligations, losses, damages, costs and expenses, including without limitation reasonable attorney's fees and court costs, arising out of or caused by, directly or indirectly by any misrepresentation, breach or failure of any warranty or representation made by Whitney in or pursuant to this Agreement or any failure or refusal by Whitney to satisfy or perform in all material respects any covenant, term or condition of this Agreement required to be satisfied or performed by Whitney. 12.4 HBM's Indemnification. HBM shall indemnify and hold harmless NCO and its successors and assigns, and its directors, officers, employees, agents and representatives from and against any and all actions, suits, claims, demands, debts, liabilities, obligations, losses, damages, costs and expenses, including without limitation reasonable attorney's fees and court costs, arising out of or caused by, directly or indirectly by any misrepresentation, breach or failure of any warranty or representation made by HBM in or pursuant to this Agreement or any failure or refusal by HBM to satisfy or perform in all material respects any covenant, term or condition of this Agreement required to be satisfied or performed by HBM. 12.5 NCO's Indemnification. NCO shall indemnify and hold harmless the Seller and its successors and assigns, and its directors, officers, employees, agents and representatives from and against any and all actions, suits, claims, demands, debts, liabilities, obligations, losses, damages, costs and expenses, including without limitation reasonable attorney's fees and court costs, arising out of or caused by, directly or indirectly, any or all of the following: 38 12.5.1 Misrepresentations. Any misrepresentation, breach or failure of any warranty or representation made by NCO in or pursuant to this Agreement. 12.5.2 Nonperformance. Any failure or refusal by NCO to satisfy or perform in all material respects any covenant, term or condition of this Agreement required to be satisfied or performed by NCO. 12.6 Indemnification Procedures. With respect to each event, occurrence or matter ("Indemnification Matter") as to which any Person (the "Indemnitee") is entitled to indemnification from any other Person (the "Indemnitor") pursuant to this Section 12: 12.6.1 Notice. Within ten (10) days after the Indemnitee receives written documents underlying the Indemnification Matter or, if the Indemnification Matter does not involve a third-party action, suit, claim or demand, promptly after the Indemnitee first has actual knowledge of the Indemnification Matter, the Indemnitee shall give notice to the Indemnitor of the nature of the Indemnification Matter and the amount demanded or claimed in connection therewith ("Indemnification Notice"), together with copies of any such written documents. 12.6.2 Defense. If a third-party action, suit, claim or demand is involved, then, upon receipt of the Indemnification Notice, the Indemnitor shall, at its expense and through counsel of its choice, promptly assume and have sole control over the litigation, defense or settlement (the "Defense") of the Indemnification Matter, except that (a) the Indemnitee may, at its option and expense and through counsel of its choice, participate in (but not control) the Defense; (b) if the Indemnitee reasonably believes that the handling of the Defense by the Indemnitor may have a material adverse affect on the Indemnitee, its business or financial condition, or its relationship with any customer, prospect, supplier, employee, salesman, consultant, agent or representative, then the Indemnitee may, at its option and expense and through counsel of its choice, assume control of the Defense, provided that the Indemnitor shall be entitled to participate in the Defense at its expense and through counsel of its choice; (c) except with respect to a Judgment or settlement which involve no more than the payment of money damages, the Indemnitor shall not consent to any Judgment, or agree to any settlement, without the Indemnitee's prior written consent; and (d) if the Indemnitor does not promptly assume control over the Defense or, after doing so, does not continue to prosecute the Defense in good faith, the Indemnitee may, at its option and through counsel of its choice, but at the Indemnitor's expense, assume control over the Defense. In any event, the Indemnitor and the Indemnitee shall fully cooperate with each other in connection with the Defense, including without limitation by furnishing all available documentary or other evidence as is reasonably requested by the other. 12.7 Payments. All amounts owed by the Indemnitor to the Indemnitee (if any) shall be paid in full within fifteen (15) business days after a final Judgment (without further right of appeal) determining the amount owed is rendered, or after a final settlement or agreement as to the amount owed is executed; provided, however, if the Indemnitor is the CMJ/HBM Group and the Whitney Group pursuant to Section 12.1, payment of the amount owed to NCO by such Indemnitor may be 39 deferred (i) until such Indemnitor receives a letter from NCO stating that, in its reasonable judgment after review with its counsel, the Indemnification Matter for which the amount is owed is not a matter for which the Company or NCO can obtain a recovery from an insurance carrier or from a third party pursuant to a right of NCO, the Company or a Subsidiary of the Company to indemnification pursuant to the terms of any agreement to which the Company or a Subsidiary of the Company is a party, or (ii) if NCO believes that a right of the Company, a Subsidiary of the Company or NCO to an insurance recovery or to indemnification for such Indemnification Matter does exist pursuant to the terms of an insurance policy or pursuant to such agreement, until 90 days after such Indemnitor receives a letter from NCO stating that NCO, the Company or a Subsidiary of the Company has used reasonable efforts to seek recovery for such Indemnification Matter pursuant to the terms of such insurance policy or such indemnification right (it being understood that NCO or the Company shall not be obligated to institute any Proceeding to effect such recovery) and no payment with respect to such Indemnification Matter has been made within 30 days after NCO, the Company or a Subsidiary of the Company first seeks such recovery. During such 90 day period and thereafter NCO shall cooperate with the Indemnitor and permit the Indemnitor to take all action in the name and on behalf of the Company to pursue such indemnification from a third party or collect under any insurance policy (it being understood that any such recovery shall be for the account of the Indemnitor to the extent the Indemnitor has paid all amounts payable by the Indemnitor to the Indemnitee pursuant to this Section). 12.8 Setoff and Holdback. In addition to all other rights and remedies that the Indemnitee may have, the Indemnitee shall have the right to setoff, against any amounts due to the Indemnitor, whether due under this Agreement, any of the other Contracts contemplated by this Agreement or otherwise, any sums for which the Indemnitee is entitled to payment under Section 12.7. The Indemnitee's rights to indemnification under this Section 12 shall not be in any manner limited by or to this right of setoff. 12.9 Certain Qualifications. Notwithstanding anything to the contrary contained herein, the obligations of Chip, Mark, John, HBM and Whitney Fund and Whitney Partners to indemnify NCO pursuant to Section 12.1 shall be subject to the following: 12.9.1 Except as set forth in Section 12.9.4, unless and until the aggregate amount of Claims by NCO for indemnification under Section 12.1 exceed $100,000, Chip, Mark, John, HBM, Whitney Fund and Whitney Partners shall have no obligation to indemnify NCO under this Section 12.1 and the obligation to indemnify NCO upon the Claims of NCO exceeding $100,000 shall be only with respect to amounts which exceed $100,000. 12.9.2 Except as set forth in Section 12.9.4, Chip, Mark, John, HBM, Whitney Fund and Whitney Partners shall have no obligation to indemnify NCO under Section 12.1 with respect to any Indemnification Matter unless the Indemnification Notice with respect to such Indemnification Matter is given to Chip, Mark, John, HBM, Whitney Fund and Whitney Partners prior to the date which is eighteen months after the Closing Date. 40 12.9.3 Except as set forth in Section 12.9.4, the aggregate maximum liability of Chip, Mark, John, HBM, Whitney Fund and Whitney Partners under Section 12.1 with respect to all Indemnification Matters shall be $1,000,000, of which the maximum liability of the CMJ/HBM Group shall be $610,000 and the maximum liability of the Whitney Group shall be $390,000. 12.9.4 The obligations of Chip, Mark, John, HBM, Whitney Fund and Whitney Partners to indemnify NCO pursuant to Section 12.1 (i) shall not be subject to the limitations set forth in Sections 12.9.2 and 12.9.3 with respect to any Indemnification Matter arising out of or caused by, directly or indirectly, any misrepresentation, breach of failure of any warranty or representation made by the Company in Section 3.6 (relating to Tax Matters), (ii) shall not be subject to the limitation set forth in Section 12.9.1 and Section 12.9.3 with respect to the matter set forth in Section 12.1.5 and (iii) shall not be subject to the limitations set forth in Section 12.9.1, Section 12.9.2 and Section 12.9.3 with respect to the matter set forth in Section 12.1.3. 12.9.5 With respect to each Indemnification Matter for which amounts become payable to NCO pursuant to the indemnification obligations set forth in Section 12.1, 61% of the amount shall be paid by the CMJ/HBM Group and 39% of the amount shall be paid by the Whitney Group. In no event shall the amount payable by the CMJ/HBM Group on the one hand or the Whitney Group on the other hand, for indemnification obligations pursuant to Section 12.1 be greater than the amounts calculable using the foregoing respective percentages whether or not one of such groups shall have paid the amounts payable with respect to the indemnification obligations under Section 12.1. 12.10 Exclusive Remedy. NCO and Seller hereby agree that with respect to any breach, violation or non-fulfillment of or default in the performance of any representation, warranty or covenant of this agreement for which a right to claim indemnification is provided in this Section 12, a claim or an action under and pursuant to the terms, conditions and limitations of this Section 12 shall be the sole and exclusive right and remedy of NCO and Seller, and that neither NCO nor Seller shall have any other claim, cause of action, right, or remedy for such breach, violation, non-fulfillment or default based upon this Agreement, any provision of any federal or state securities or other statute, law, rule or regulation or based upon any other cause of action arising at law or in equity; provided, however, that if for any reason a court of competent jurisdiction shall refuse to enforce this provision, and shall permit NCO or Seller to assert any action based other than upon the right to claim indemnification as provided in this Section 12, NCO and Seller agree that the amount of such other claim shall be subject to and limited by the provisions of this Section 12. The provisions of this Section 12 shall not preclude the prosecution of any action or proceeding based on fraud that if found to exist would be sufficient to give rise to the right of rescission with respect to the transactions contemplated hereby. SECTION 13: TERMINATION AND WAIVER. 13.1 Termination. This Agreement may be terminated at any time prior to the Closing Date: 41 13.1.1 by mutual written consent of NCO, CMJ and Whitney; 13.1.2 by either NCO on the one hand or CMJ and Whitney on the other hand: 13.1.2.1 if the Closing shall not have occurred on or before July 31,1998, unless the failure to consummate the transactions contemplated by this Agreement is the result of a willful and material breach of this Agreement by the party seeking to terminate this Agreement; provided, however, that the passage of such period shall be tolled for any part thereof (but not exceeding 60 days in the aggregate) during which any party shall be subject to a nonfinal order, decree, ruling or action restraining, enjoining or otherwise prohibiting the consummation of the transactions contemplated by this Agreement; 13.1.2.2 if any court of competent jurisdiction or other governmental entity shall have issued an order, decree or ruling or taken any other action permanently enjoining, restraining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and nonappealable; 13.1.2.3 in the event of a breach by the other party of any representation, warranty, covenant or other agreement contained in this Agreement which (A) results in the failure of a condition set forth in Section 10 and (B) cannot be or has not been cured within 30 days after the giving of written notice to the breaching party of such breach (a "Material Breach") (provided that the terminating party is not then in Material Breach of any representation, warranty, covenant or other agreement contained in this Agreement). 13.1.3 by NCO if NCO notifies Seller within 30 days after the date of this Agreement that it has received a report from Coopers and Lybrand which either (i) reflects that the Tangible Net Worth as of March 31,1998 is reasonably expected to be less than $3,856,000, or (ii) reflects that the annualized cash flow of the Company and its Subsidiaries for the three months ended March 31, 1998 on a proforma basis after giving effect to certain cost savings agreed to by NCO and the Seller is reasonably expected to be less than $4,700,000; and 13.1.4 by NCO if within 10 days after Seller and Company deliver to NCO all of the Schedules and other documents required to be delivered by Seller or Company pursuant to this Agreement, NCO notifies Seller that the Schedules set forth information of a material nature affecting the financial condition or operations of the Company and its Subsidiaries taken as a whole, the Business or the Assets used in the Business which if NCO had known such information as of the date hereof NCO would not have entered into this Agreement. 13.1.5 by NCO if NCO has not obtained a consent from its senior lender to the transactions contemplated by this Agreement within 30 days after the date of this Agreement. 13.2 Effect of Termination. In the event of termination of this Agreement as provided in Section 13.1, this Agreement shall forthwith become void and have no effect, without any liability 42 or obligation on the part of any party, other than the provisions of Sections 14.1 and 14.2, and except to the extent that such termination results from the willful and material breach by a party of any of its representations, warranties, covenants or other agreements set forth in this Agreement. 13.3 Extension; Waiver. At any time prior to the Closing Date, the parties may (a) extend the time for the performance of any of the obligations or other acts of the other parties, (b) waive any inaccuracies in the representations and warranties contained in this Agreement or in any document delivered pursuant to this Agreement or (c) waive compliance with any of the agreements or conditions contained in this Agreement. SECTION 14: OTHER PROVISIONS 14.1 Fees and Expenses. NCO shall pay all of the fees and expenses incurred by it (including any fees payable pursuant to the HSR Act) and the Company shall pay all of the fees and expenses incurred by Seller, in negotiating and preparing this Agreement (and all other Contracts executed in connection herewith or therewith) and in consummating the transactions contemplated by this Agreement. 14.2 Publicity. All voluntary public announcements concerning the transactions contemplated by this Agreement shall be mutually acceptable to both NCO and the Company. Unless required by Law, neither the Company or NCO shall make any public announcement or issue any press release concerning the transactions contemplated by this Agreement without the prior written consent of the other party. With respect to any announcement that any of the parties is required by Law to issue, such party shall, to the extent possible under the circumstances, review the necessity for the contents of the announcement with the other party and the other party's counsel before issuing the announcement. 14.3 Notice. All notices, consents or other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given (a) when delivered personally, (b) three business days after being mailed by first class certified mail, return receipt requested, postage prepaid, or (c) one business day after being sent by a reputable overnight delivery service, postage or delivery charges prepaid, to the parties at their respective addresses as follows: If to Whitney Partners: 177 Board Street 15th Floor Stamford, CT 06901 Attention: Jeffrey R. Jay, M.D. and Daniel J. O'Brien 43 With a copy to: David Scherl, Esquire Morrison Cohen Singer & Weinstein, LLP 750 Lexington Avenue New York, NY 10022 If to Whitney Fund: 177 Board Street 15th Floor Stamford, CT 06901 Attention: Jeffrey R. Jay, M.D. and Daniel J. O'Brien With a copy to: David Scherl, Esquire Morrison Cohen Singer & Weinstein, LLP 750 Lexington Avenue New York, NY 10022 If to Chip: C. B. Hellman, Jr. 8301 Glidewell Road Cross Plains, TN 37049 With a copy to: Mark Manner, Esquire Harwell Howard Hyne Gabbert & Manner, P.C. 1800 First American Center 315 Deaderick Street Nashville, TN 37238 If to John: John J. O'Hara, Jr. 7236 Birch Bark Drive Nashville, TN 37221 With a copy to: 44 Mark Manner, Esquire Harwell Howard Hyne Gabbert & Manner, P.C. 1800 First American Center 315 Deaderick Street Nashville, TN 37238 If to Mark: Mark Gorman 2031 Maple Lane Franklin, TN 37067 With a copy to: Mark Manner, Esquire Harwell Howard Hyne Gabbert & Manner, P.C. 1800 First American Center 315 Deaderick Street Nashville, TN 37238 If to NCO: 515 Pennsylvania Avenue Fort Washington, PA 19034 Attn: Michael Barrist With a copy to: Blank Rome Comisky & McCauley LLP One Logan Square Philadelphia, PA 19103 Attn.: Sol Genauer, Esquire Notices may also be given by prepaid telegram or facsimile and shall be effective on the date transmitted if confirmed within 24 hours thereafter by a signed original sent in the manner provided in the preceding sentence. 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 14.3, except that any such change of address notice shall not be effective unless and until received. 14.4 Survival of Representations. All representations and warranties made in this Agreement or pursuant hereto shall survive the date of this Agreement, the Closing Date and the 45 consummation of the transactions contemplated by this Agreement for a period of eighteen months after the Closing Date. 14.5 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. 14.6 Reliance by NCO. Notwithstanding the right of NCO to investigate the Business, the Assets of the Business and financial condition of the Company and its Subsidiaries, and notwithstanding any knowledge determined or determinable by NCO as a result of such investigation, NCO has the unqualified right to rely upon, and has relied upon, each of the representations and warranties made by the Company, CMJ, HBM and Whitney, in this Agreement or pursuant hereto. 14.7 Entire Understanding. This Agreement, together with the Exhibits and Schedules hereto, states the entire understanding among the parties with respect to the subject matter hereof, and supersedes all prior oral and written communications and agreements, and all contemporaneous oral communications and agreements, with respect to the subject matter hereof, except for any confidentiality agreement among the parties which shall remain in full force and effect. No amendment or modification of this Agreement shall be effective unless in writing and signed by the party against whom enforcement is sought. 14.8 Parties in Interest. None of the parties may assign this Agreement or any rights or obligations under this Agreement without the prior written consent of the other parties, except NCO may assign any or all of its rights under Section 11 of this Agreement to any Person who acquires or obtains control of all or substantially all of the Assets of NCO or the Company or any Subsidiary of the Company. This Agreement shall bind, benefit, and be enforceable by and against the parties hereto, and their respective successors and consented-to assigns. 14.9 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. 14.10 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. 46 14.11 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. 14.12 Section Headings. The section and subsection headings in this Agreement are used solely for convenience of reference, do not constitute a part of this Agreement, and shall not affect its interpretation. 14.13 References. All words used in this Agreement shall be construed to be of such number and gender as the context requires or permits. Unless a particular context clearly requires otherwise, the words "hereof" and "hereunder" and similar references refer to this Agreement in its entirety and not to any specific section or subsection of this Agreement. 14.14 Controlling Law. 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. 14.15 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; (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 . 14.16 No Third-Party Beneficiaries. No provision of this Agreement is intended to or shall be construed to grant or confer any right to enforce this Agreement, or any remedy for breach of this Agreement, 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 the Company or Seller. 14.17 Further Assurances. At any time and from time to time after the Closing Date, at NCO's request and without further consideration, but at the expense of NCO, the Seller will promptly execute and deliver all such further Documents or perform such acts as NCO may reasonably request in order to more fully consummate the transactions contemplated herein and in order to more effectively vest, transfer, confirm, protect and defend the right, title and interest of NCO in the MedSource Stock and to assist NCO in exercising its rights and privileges with respect thereto. 47 14.18 Schedules. NCO and Seller acknowledge that all of the Schedules and Exhibits and other information required to be delivered pursuant to this Agreement by the Company or Seller or NCO as of the date of this Agreement have not been delivered. The parties shall deliver such Schedules, Exhibits and other information within 15 days after the date of this Agreement. Any information included in any Schedule to this Agreement in response to the disclosure required or permitted in such Schedule shall be deemed to be included in any other Schedule to this Agreement if (i) it is apparent from the face of the disclosure made in the first Schedule that such disclosure is also responsive to the disclosure required in the other Schedule, and (ii) the disclosure in the first Schedule contains all information which would be required to be disclosed with respect to such matter in the other Schedule. 14.19 Certain Matters Relating to Employees. For a period of eighteen months after the date hereof, NCO shall cause the Company to continue in effect its insurance for employment related matters. NCO shall provide NCO's severance program benefits to each employee of the Company and its Subsidiaries who may be terminated within 180 days after the Closing Date as a result of any reorganization of the Company and its Subsidiaries resulting from NCO's acquisition of the MedSource Stock. In addition, NCO shall afford to the Company's employees at the Company's Michigan office at the time of any closing, consolidation or combination of such office the opportunity to accept employment with NCO's outsource employee provider that staffs NCO's Jackson, Michigan office. NCO shall use its reasonable efforts to effect any closing, consolidation or combination of the Company's Michigan Office in a commercially reasonably manner. 14.20 Covenant Relating to Tax Returns. NCO agrees not to file any amended tax return with respect to a Tax return filed by the Company for any Tax period ending on or before the Closing Date, unless required by an agency or political subdivision of any federal, state, local or foreign government. NCO further agrees not to settle or compromise any Tax arising with respect to a Tax return filed by the Company for any period ending on or before the Closing Date which would have the effect of increasing Seller's liability to NCO under Section 12 without the consent of Seller, which consent shall not be unreasonably withheld or delayed. NCO shall keep Seller duly informed of any proceeding in connection with the foregoing. 48 IN WITNESS WHEREOF, NCO, the Company, Whitney and HBM have caused this Stock Purchase Agreement to be executed by their respective duly authorized officers and CMJ and HBM have executed this Agreement, all as of the day and year first above written. ATTEST: NCO GROUP, INC. By: /s/ Joshua Gindin By: /s/ Michael J. Barrist ------------------- ------------------------------------------ Name: Michael J. Barrist Secretary Title: Chairman and Chief Executive Officer [CORPORATE SEAL] ATTEST: MEDSOURCE, INC. By: By: /s/ Paul E. Weitzel, Jr. ------------------- ------------------------------------------ Name: Paul E. Weitzel, Jr. Secretary Title: Chairman and Chief Executive Officer [CORPORATE SEAL] /s/ C.B. Hellmann, Jr. ------------------------------------------ C.B. Hellmann, Jr. /s/ Mark Gorman ------------------------------------------ Mark Gorman /s/ John O'Hara ----------------------------------------- John O'Hara 49 WHITNEY SUBORDINATED DEBT FUND, L.P. By: /s/ D. J. O'Brien --------------------------------- Name: D.J. O'Brien Title: WHITNEY EQUITY PARTNERS, L.P. By: /s/ D. J. O'Brien --------------------------------- Name: D. J. O'Brien Title: HEALTHCARE BUSINESS MANAGEMENT, LTD. By: /s/ W. Gary Myers By: /s/ W. Gary Myers -------------------------- -------------------------------- [Name] Name: W. Gary Myers Secretary Title: Chief Executive Officer [CORPORATE SEAL] 50 EX-5.1 3 EXHIBIT 5.1 Blank Rome Cominsky & McCauley LLP Counselors at Law One Logan Square Philadelphia, Pennsylvania 19103 215-569-5500 Fax 215-569-5555 May 7, 1998 NCO Group, Inc. 515 Pennsylvania Avenue Fort Washington, PA 19034 Re: NCO Group, Inc. Registration Statement on Form S-3 Gentlemen: We have acted as counsel to NCO Group, Inc. (the "Company") in connection with the Registration Statement on Form S-3 (the "Registration Statement") being filed by the Company with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended, relating to: (i) the offer and sale by the Company of 5,800,000 shares of Common Stock, no par value (the "Common Stock"); (ii) the offer and sale by the Selling Shareholders named in the Registration Statement ("Selling Shareholders") of 867,700 shares of Common Stock; and (iii) the offer and sale by the Company and certain Selling Shareholders of up to 902,638 shares and 97,517 shares of Common Stock, respectively, to be purchased at the option of the Underwriters to cover over-allotments, if any. This opinion is furnished pursuant to the requirements of Item 601(b)(5) of Regulation S-K and replaces our opinion dated May 1, 1998. In rendering this opinion, we have examined only the following documents: (i) the Company's Amended and Restated Articles of Incorporation and Bylaws; (ii) the Company's 1995 Amended and Restated Stock Option Plan and the Company's 1996 Stock Option Plan (collectively, the "Plans") and options to purchase an aggregate of 61,058 shares of Common Stock (the "Stock Options") issued pursuant thereto to employees who are Selling Shareholders; (iii) resolutions adopted by the Board of Directors; (iv) the Company's minute book and stock records books since the date of incorporation of NCO Group, Inc.; and (v) the NCO Group, Inc. May 7, 1998 Page 2 Registration Statement. We have not performed any independent investigation other than the document examination described. We have assumed and relied, as to questions of fact and mixed questions of law and fact, on the truth, completeness, authenticity and due authorization of all certificates, documents and records examined and the genuineness of all signatures. This opinion is limited to the laws of the Commonwealth of Pennsylvania. Based upon and subject to the foregoing, we are of the opinion that: (i) 6,702,638 shares of Common Stock which are being offered by the Company pursuant to the Registration Statement, when sold in the manner and for the consideration contemplated by the Registration Statement, will be legally issued, fully paid and non-assessable; (ii) 904,159 shares of Common Stock which are being offered by certain Selling Shareholders pursuant to the Registration Statement, other than the shares issuable pursuant to the Stock Options, are legally issued, fully paid and non-assessable; and (iii) 61,058 shares of Common Stock which are being offered by certain Selling Shareholders pursuant to the Registration Statement upon the exercise of the Stock Options, when acquired by such Selling Shareholders upon exercise of the Stock Options in the manner contemplated by the Plans and the Stock Options, including payment of the applicable exercise price therefor, will be legally issued, fully paid and non-assessable. We hereby consent to the filing of this opinion as an Exhibit to the Registration Statement and to the reference to our firm under the caption "Legal Matters" in the Prospectus, which is part of the Registration Statement. Sincerely, /s/ Blank Rome Cominsky & McCauley LLP -------------------------------------- BLANK ROME COMINSKY & McCAULEY LLP -----END PRIVACY-ENHANCED MESSAGE-----