-----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, JkHq+VnXR2oD7uI4elKkTL9t07PMJXzS49gwQvM+8tqrTqQ/VqB6gge7bP9l2P/f Pvf1NJ84kqsr56HXI2OZdQ== 0000950116-97-001127.txt : 19970612 0000950116-97-001127.hdr.sgml : 19970612 ACCESSION NUMBER: 0000950116-97-001127 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19970611 SROS: NONE 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-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-28943 FILM NUMBER: 97622170 BUSINESS ADDRESS: STREET 1: 1740 WALTON RD CITY: BLUE BELL STATE: PA ZIP: 19422-0987 BUSINESS PHONE: 6108321440 S-1 1 As filed with the Securities and Exchange Commission on June 11, 1997 Registration No. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 NCO GROUP, INC. (Exact name of Registrant as specified in its charter) Pennsylvania 7322 23-2858652 (State or other jurisdiction of (Primary standard industrial (I.R.S. employer incorporation or organization) classification code number) identification number)
1740 Walton Road Blue Bell, Pennsylvania 19422-0987 Telephone (610) 832-1440 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Michael J. Barrist, President and Chief Executive Officer NCO Group, Inc. 1740 Walton Road Blue Bell, Pennsylvania 19422-0987 Telephone (800) 220-2274 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Francis E. Dehel, Esquire Henry D. Kahn, Esquire Blank Rome Comisky & McCauley Lawrence R. Seidman, Esquire 1200 Four Penn Center Plaza Piper & Marbury L.L.P. Philadelphia, Pennsylvania 19103 36 South Charles Street 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 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 - ------------------------------------------------------------------------------------------------------------------- Common Stock, no par value ...... 2,594,400 $32.375 $83,993,700 $25,453 ===================================================================================================================
(1) Includes 338,400 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. Calculated in accordance with Rule 457(c) based upon the average of the high and low prices for the Common Stock on June 9, 1997, as reported on the Nasdaq National Market System. 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 JUNE , 1997 2,256,000 Shares NCO GROUP, INC. Common Stock Of the 2,256,000 shares of Common Stock offered hereby (the "Offering"), 1,200,000 shares are being sold by NCO Group, Inc. ("NCO" or the "Company") and 1,056,000 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 June 9, 1997, the last sale price of the Common Stock as reported on the Nasdaq National Market was $32.00 per share. See "Price Range of Common Stock." See "Risk Factors" commencing on page 8 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 $900,000. (3) Certain Selling Shareholders have granted to the Underwriters a 30-day option to purchase up to an additional 338,400 shares 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 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 Montgomery Securities on or about , 1997. ---------------- MONTGOMERY SECURITIES JANNEY MONTGOMERY SCOTT INC. THE ROBINSON-HUMPHREY COMPANY, INC. , 1997 [Three pictures depicting: (i) the Company's call center in Blue Bell, Pennsylvania, (ii) the Company's call center in Buffalo, New York and (iii) the Company's computer center in Blue Bell, Pennsylvania. The Company's logo appears in the upper left-hand corner of the page.] Certain persons participating in this Offering may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Such transactions may include stabilizing, the purchase of Common Stock to cover syndicate short positions and the imposition of penalty bids. 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 the context otherwise requires, 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; and (ii) gives effect to the Company's acquisitions of Goodyear & Associates, Inc. ("Goodyear"), Tele-Research Center, Inc. ("TRC") and CMS A/R Services ("CMS A/R") in January 1997 and the Collection Division of CRW Financial, Inc. ("CRWCD") in February 1997 (collectively, the "1997 Acquisitions"). The Company NCO is a leading provider of accounts receivable management and related services utilizing an extensive teleservices infrastructure. The Company develops and implements customized accounts receivable management solutions for clients. The Company provides these services on a national basis from 18 call centers located in 15 states. The Company employs advanced workstations and sophisticated call management systems comprised of predictive dialers, automated call distribution systems, digital switching and customized computer software. Through efficient utilization of technology and intensive management of human resources, the Company has achieved rapid growth in recent years. Since April 1994, the Company has completed eight acquisitions, including four in the first quarter of 1997, which have enabled it to increase its penetration of existing markets, establish a presence in certain new markets and realize significant operating efficiencies. In addition, the Company has leveraged its infrastructure by offering additional services including telemarketing, customer service call centers and other outsourced administrative services. The Company believes that it is currently among the 10 largest accounts receivable management companies in the United States. The Company provides its services principally to clients in the financial services, government, education, healthcare, retail and commercial, telecommunications and utilities sectors. The Company has over 7,000 clients, including Bell Atlantic Corporation, Pennsylvania Higher Education Assistance Agency, First Union Corporation, Medical Center of Delaware, PECO Energy Company, Federal Express Corporation and MCI Communications Corporation. No client accounted for more than 10% of the Company's revenue (no more than 5% on a pro forma basis) in 1996. For its accounts receivable management services, the Company generates substantially all of its revenue on a contingency fee basis. The Company seeks to be a low cost provider, and as such its fees typically range from 15% to 35% of the amount recovered on behalf of the Company's clients, with an average of 23.7% in 1996 on a pro forma basis. According to the 1995 Top Collection Markets Survey published by the American Collectors Association, Inc. ("ACA"), an industry trade group, the average fees realized by the accounts receivable management companies surveyed were in the range of 30% to 43% depending upon the industries served. For many of its other outsourced teleservices, the Company is paid on a fixed fee basis. While NCO's contracts are relatively short-term, the Company seeks to develop long-term relationships with its clients and works closely with them to provide quality, customized solutions. Increasingly, companies are outsourcing many non-core functions to focus on revenue generating activities, reduce costs and improve productivity. In particular, many corporations are recognizing the advantages of outsourcing accounts receivable management and other teleservices as a result of numerous factors including: (i) the increasing complexity of such functions; (ii) changing regulations and increased competition in certain industries; and (iii) the development of sophisticated call management systems requiring substantial capital investment, technical capabilities and human resource commitments. Consequently, receivables referred to third parties for management and recovery in the United States have grown substantially from approximately $43.7 billion in 1990 to approximately $84.3 billion in 1995, according to estimates published by the ACA. While significant economies of scale exist for large accounts receivable management companies, the industry remains highly fragmented. Based on information 3 obtained from the ACA, there are approximately 6,300 accounts receivable management companies in operation, the majority of which are small, local businesses. Given the financial and competitive constraints facing these small companies and the limited number of liquidity options for the owners of such businesses, the Company believes that the industry will experience consolidation in the future. See "Business -- Industry Background." The Company strives to be a cost-effective, client service driven provider of accounts receivable management and other related teleservices to companies with substantial outsourcing needs. The Company's business strategy encompasses a number of key elements which management believes are necessary to ensure quality service and to achieve consistently strong financial performance. First, the Company focuses on the efficient utilization of its technology and infrastructure to constantly improve productivity. The Company's teleservices infrastructure enables it to perform large scale accounts receivable management programs cost effectively and to rapidly and efficiently integrate the Company's acquisitions. A second critical component is NCO's commitment to client service. Management believes that the Company's emphasis on designing and implementing customized accounts receivable management programs for its clients provides it with a significant competitive advantage. Third, the Company seeks to be a low cost provider of accounts receivable management services by centralizing all administrative functions and minimizing overhead at all branch locations. Lastly, the Company is targeting larger clients which offer significant cross-selling opportunities and have greater teleservices outsourcing requirements. 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 teleservices. In addition, 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. Since the Company's initial public offering in November 1996 ("IPO"), the Company has completed four acquisitions. Certain information related to such acquisitions is summarized in the following table.
Fiscal 1996 Acquired Year Acquisition Revenues Company Founded Date (millions) Headquarters Primary Services - ---------- --------- ------------- ------------ ------------------ ------------------------------- CRWCD 1957 Feb. 1997 $ 25.9 Philadelphia, PA Accounts Receivable Management CMS A/R 1972 Jan. 1997 6.8 Jackson, MI Accounts Receivable Management Goodyear 1974 Jan. 1997 5.5 Charlotte, NC Accounts Receivable Management TRC 1992 Jan. 1997 1.9 Philadelphia, PA Market Research/Teleservices
The Company regularly reviews various strategic acquisition opportunities and periodically engages in discussions regarding such possible acquisitions. Currently, the Company is not a party to any agreements, understandings, arrangements or negotiations regarding any material acquisitions; however as the result of the Company's process of regularly reviewing acquisition prospects, negotiations may occur from time to time if appropriate opportunities arise. See "Acquisition History" and the Pro Forma Consolidated Financial Statements. The Company's principal executive offices are located at 1740 Walton Road, Blue Bell, Pennsylvania 19422, and its telephone number is (800) 220-2274. Effective July 7, 1997, the Company's principal executive offices will be relocated to 515 Pennsylvania Avenue, Fort Washington, Pennsylvania 19034. 4 The Offering Common Stock offered by: The Company .......................................... 1,200,000 shares The Selling Shareholders .............................. 1,056,000 shares Common Stock to be outstanding after the Offering ...... 8,535,868 shares (1) Use of proceeds ....................................... For repayment of bank debt incurred to finance the 1997 Acquisitions and for working capital and other general corpo- rate purposes, including possible acquisi- tions. Nasdaq National Market symbol ........................... NCOG
- ------------ (1) Includes an aggregate of 200,320 shares of Common Stock which are being sold by certain Selling Shareholders upon the exercise of outstanding warrants and stock options and 76,923 shares of Common Stock which are being sold by a certain Selling Shareholder upon the conversion of a $1.0 million Convertible Note. Excludes: (i) an aggregate of 749,680 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) 90,591 shares of Common Stock reserved for issuance upon the exercise of warrants granted by the Company to Mellon Bank, N.A.; (iii) 42,503 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 (iv) 250,000 shares of Common Stock reserved for issuance upon the exercise of warrants issued as partial consideration for the CRWCD acquisition. See "Acquisition History," "Management -- Stock Option Plans" and "Description of Capital Stock -- Warrants and Convertible Notes." 5 SUMMARY FINANCIAL AND OPERATING DATA (Dollars in thousands, except per share data)
Years Ended December 31, ------------------------------------------------------ 1992 1993 1994 1995 ---------- ---------- ---------- ------------------ Statement of Income Data: Revenue ........................ $ 5,822 $ 7,445 $ 8,578 $ 12,733 Operating costs and expenses: Payroll and related expenses ..................... 3,058 4,123 4,558 6,797 Selling, general and administrative expenses ...... 2,013 2,391 2,674 4,042 Depreciation and amortization expenses ...... 95 141 215 348 -------- -------- -------- ------------- Income from operations ...... 656 790 1,131 1,546 Other income (expense) ......... 15 11 (45) (180) -------- -------- -------- ------------- Income before provision for income taxes .................. 671 801 1,086 1,366 Pro forma provision for income taxes (5) ............ 268 320 434 546 -------- -------- -------- ------------- Pro forma net income (5) ...... $ 403 $ 481 $ 652 $ 820 ======== ======== ======== ============= Pro forma net income per share (5) ..................... $ 0.17(6) ============= Pro forma weighted average shares outstanding ............ 4,728,906(6) ============= Selected Operating Data: Total value of accounts referred ..................... $150,707 $199,108 $281,387 $ 431,927 Average fee .................. 16.9% 20.2% 22.5% 22.4%
[RESTUBBED FROM TABLE ABOVE]
Years Ended December 31, Three Months Ended March 31, -------------------------------------- --------------------------------------------- 1996 1997 -------------------------------------- --------------------------- Pro Pro Actual Forma(1)(2) 1996 Actual Forma(3)(4) ------------------ ------------------ ------------------ ------------- ------------ Statement of Income Data: Revenue ........................ $ 30,760 $ 79,944 $ 6,044 $ 18,077 $ 20,918 Operating costs and expenses: Payroll and related expenses ..................... 14,651 40,209 2,998 9,046 10,324 Selling, general and administrative expenses ...... 10,032 28,789 1,931 5,932 7,037 Depreciation and amortization expenses ...... 1,254 3,043 200 716 846 ------------- ------------- ------------- --------- --------- Income from operations ...... 4,823 7,903 915 2,383 2,711 Other income (expense) ......... (576) 2 (155) (82) 34 ------------- ------------- ------------- --------- --------- Income before provision for income taxes .................. 4,247 7,905 760 2,301 2,745 Pro forma provision for income taxes (5) ............ 1,706 3,374 304 994 1,115 ------------- ------------- ------------- --------- --------- Pro forma net income (5) ...... $ 2,541 $ 4,531 $ 457 $ 1,307 $ 1,630 ============= ============= ============= ========= ========= Pro forma net income per share (5) ..................... $ 0.50(6) $ 0.64(6) $ 0.10(6) $ 0.18 $ 0.21 ============= ============= ============= ========= ========= Pro forma weighted average shares outstanding ............ 5,086,736(6) 7,045,350(6) 4,733,549(6) 7,371,157 7,886,151 ============= ============= ============= ========= ========= Selected Operating Data: Total value of accounts referred ..................... $ 1,173,342 $ 4,024,658 $ 581,258 $ 974,266 Average fee .................. 25.2% 23.7% 25.2% 23.3%
March 31, 1997 ----------------------- As Actual Adjusted(7) -------- ------------ Balance Sheet Data: Cash and cash equivalents .................. $5,793 $ 33,042 Working capital .............................. 7,996 35,245 Total assets ................................. 61,436 88,685 Long-term debt, net of current portion ...... 10,733 1,383 Shareholders' equity ........................ 41,044 77,644 - ------------ (1) Assumes that the acquisition of Management Adjustment Bureau, Inc. and the 1997 Acquisitions occurred on January 1, 1996. (2) Gives effect to: (i) the reduction of certain redundant operating costs and expenses that were immediately identifiable at the time of the acquisitions; (ii) the increase in amortization expense as if the acquisitions had occurred on January 1, 1996 and the elimination of depreciation and amortization expense related to assets revalued or not acquired by NCO as part of the acquisitions; (iii) the elimination of interest expense associated with acquisition-related debt repaid with proceeds of the Company's IPO and the proceeds of the Offering; (iv) the issuance of 1,604,620 shares of Common Stock at the IPO price of $13.00 per share which, net of the underwriting discount and offering expenses payable by the Company, was sufficient to repay acquisition related debt of $15.0 million and 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; (v) the issuance of 345,178 shares of Common Stock and warrants exercisable for 250,000 shares of Common Stock in connection with the acquisition of CRWCD; and (vi) 6 the issuance of 305,886 shares of Common Stock at an assumed public offering price of $32.00 per share which, net of the estimated underwriting discount and offering expenses payable by the Company, would be sufficient to repay acquisition related debt of $8.4 million. See Pro Forma Consolidated Financial Statements. (3) Assumes that the 1997 Acquisitions occurred on January 1, 1997. (4) Gives effect to: (i) the reduction of certain redundant operating costs and expenses that were immediately identifiable at the time of the acquisitions; (ii) the increase in amortization expense as if the acquisitions had occurred on January 1, 1997 and the elimination of depreciation and amortization expense related to assets revalued or not acquired by NCO as part of the acquisitions; (iii) the elimination of interest expense associated with acquisition related debt to be repaid with proceeds of the Offering; (iv) the issuance of 345,178 shares of Common Stock and warrants exercisable for 250,000 shares of Common Stock in connection with the acquisition of CRWCD; and (v) the issuance of 305,886 shares of Common Stock at an assumed public offering price of $32.00 per share which, net of the estimated underwriting discount and offering expenses payable by the Company, would be sufficient to repay acquisition related debt of $8.4 million. See Pro Forma Consolidated Financial Statements. (5) Prior to September 3, 1996 the Company operated as an S Corporation for income tax purposes and accordingly was not subject to federal or state income taxes prior to such date. Accordingly, the historical financial statements do not include a provision for federal and state income taxes for such periods. Pro forma net income and pro forma net income per share have been computed as if the Company had been fully subject to federal and state income taxes for all periods presented. See Note 8 of Notes to Consolidated Financial Statements. (6) Assumes that the Company issued 249,758 shares of Common Stock at $13.00 per share to fund the distribution of undistributed S Corporation earnings of $3.2 million through September 3, 1996, the termination date of the Company's S Corporation status, to existing shareholders of the Company. (7) Gives effect to: (i) the sale of the 1,200,000 shares of Common Stock offered by the Company hereby (at an assumed public offering price of $32.00 per share) and the application of the net proceeds therefrom as set forth in "Use of Proceeds" and (ii) the exercise of warrants and stock options to purchase an aggregate of 200,320 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 $211,000. 7 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. 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 statements. Accordingly, in addition to the other information contained in "Acquisition History -- Financial Impact of 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 Recent Acquisitions The 1997 Acquisitions were consummated in the first quarter of 1997. The businesses acquired had combined revenues of $40.1 million in 1996 compared to the Company's revenue of $30.8 million in 1996 ($39.9 million on a pro forma basis assuming that the acquisition of Management Adjustment Bureau, Inc. ("MAB") had occurred on January 1, 1996). The Company is currently in the process of integrating the 1997 Acquisitions as well as completing the integration of MAB. Such integration will likely place significant demands on the Company's management and infrastructure. There can be no assurance that businesses acquired in the 1997 Acquisitions or the MAB 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 businesses will continue to do business with the Company or that the Company will be able to retain key employees. Due to the consolidation or closing of certain CRWCD branch offices, and the loss of certain contracts during 1996, revenue for CRWCD for 1997 is anticipated to be 10% to 15% lower than CRWCD's revenue for 1996. Approximately $8.4 million of the proceeds of this Offering will be used to repay indebtedness incurred to finance the 1997 Acquisitions. See "Use of Proceeds." 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." Risks Associated with Future Acquisitions A primary element of the Company's growth strategy is to continue to pursue strategic acquisitions that expand and complement the Company's business. The Company regularly reviews various strategic acquisition opportunities and periodically engages in discussions regarding such possible acquisitions. Currently, the Company is not a party to any agreements, understandings, arrangements or negotiations regarding any material acquisitions; however, as the result of the Company's process of regularly reviewing acquisition prospects, negotiations may occur from time to time if appropriate opportunities arise. There can be no assurance that the 8 Company will be able to identify additional acquisition candidates on terms favorable to the Company or in a timely manner, enter into acceptable agreements or close any such transactions. There can also be no assurance that the Company will be able to continue its acquisition strategy, and any failure to do so could have a materially adverse effect on the Company's business, financial condition, results of operations and ability to sustain growth. In addition, the Company believes that it will compete for attractive acquisition candidates with other larger companies, consolidators or investors in the accounts receivable management industry. Increased competition for such acquisition candidates could have the effect of increasing the cost to the Company of pursuing this growth strategy or could reduce the number of attractive candidates to be acquired. Future acquisitions could divert management's attention from the daily operations of the Company and otherwise require additional management, operational and financial resources. Moreover, there is no assurance that the Company will successfully integrate 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 has experienced and expects to continue to experience quarterly variations in revenue and net income as a result of many factors, including the timing of clients' accounts receivable management programs, the commencement of new contracts, the termination of existing contracts, costs to support growth by acquisition or otherwise, the effect of the change of business mix on margins and the timing of additional selling, general and administrative expenses to support new business. In connection with certain customer contracts, the Company could incur costs in periods prior to recognizing revenue under those contracts which may adversely affect the Company's operating results in a particular quarter. The Company's planned operating expenditures are based on revenue forecasts, and if revenues are below expectations in any given quarter, operating results would likely be materially adversely affected. While the effects of seasonality on the Company's business historically have been obscured by its rapid growth, the Company's business tends to be slower in the third and fourth quarters of the year due to the summer and holiday seasons. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company's quarterly operating results could also be affected by the costs and timing of completion and integration of acquisitions. 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 as compared to the Company's core business. Dependence on Key Personnel The Company is highly dependent upon the continued services and experience of its senior management team, including Michael J. Barrist, President and Chief Executive Officer. The loss of the services of Mr. Barrist or other members of its senior management could have a materially adverse effect on the Company. The Company has five-year employment contracts with Mr. Barrist and certain other key executives. In addition, the Company has a $4.0 million key person life insurance policy on Mr. Barrist. See "Management." 9 Dependence on Certain Sectors; Contract Risks Most of the Company's revenues are derived from clients in the financial services, government, education, healthcare, retail and commercial, telecommunications and utilities 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." Competition The accounts receivable management industry is highly competitive. The Company competes with approximately 6,300 providers, including large national corporations such as First Data Corporation, Equifax Inc., Outsourcing Solutions Inc., The Union Corporation 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 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." 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 10 to recruit and train qualified personnel at an accelerated rate from time to time. There can be no assurance that the Company will be able to continue to hire, train and retain a sufficient number of qualified employees. Additionally, an increase in hourly wages, costs of employee benefits or employment taxes also could materially adversely affect the Company. See "Business -- Personnel and Training." Government Regulation The accounts receivable management and telemarketing industries are regulated under various federal and state statutes. In particular, the Company is subject to the federal Fair Debt Collection Practices Act which establishes specific guidelines and procedures which debt collectors must follow in communicating with consumer debtors, including the time, place and manner of such communications. The Company is also subject to the Fair Credit Reporting Act which regulates the consumer credit reporting industry and which may impose liability on the Company to the extent that the adverse credit information reported on a consumer to a credit bureau is false or inaccurate. The accounts receivable management business is also subject to state regulation, and some states require that the Company be licensed as a debt collection company. With respect to the other teleservices offered by the Company, including telemarketing, the federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 broadly authorizes the Federal Trade Commission (the "FTC") to issue regulations prohibiting misrepresentations in telemarketing sales. The FTC's telemarketing sales rules prohibit misrepresentations of the cost, terms, restrictions, performance or duration of products or services offered by telephone solicitation and specifically address other perceived telemarketing abuses in the offering of prizes and the sale of business opportunities or investments. The federal Telephone Consumer Protection Act of 1991 (the "TCPA") limits the hours during which telemarketers may call consumers and prohibits the use of automated telephone dialing equipment to call certain telephone numbers. A number of states also regulate telemarketing and some states have enacted restrictions similar to the federal TCPA. The failure to comply with applicable statutes and regulations could have a materially adverse effect on the Company. There can be no assurance that additional federal or state legislation, or changes in regulatory implementation, would not limit the activities of the Company in the future or significantly increase the cost of regulatory compliance. Several of the industries served by the Company are also subject to varying degrees of government regulation. Although compliance with these regulations is generally the responsibility of the Company's clients, the Company could be subject to a variety of enforcement or private actions for its failure or the failure of its clients to comply with such regulations. See "Business -- Government Regulation." Control by Principal Shareholders Immediately following this Offering, Michael J. Barrist will beneficially own approximately 24.1% of the Common Stock (approximately 21.5% if the Underwriters' over-allotment option is exercised in full), and together with the other directors and executive officers of the Company will beneficially own approximately 38.7% (approximately 34.8% if the Underwriters' over-allotment option is exercised in full). As a result of such voting concentration, Mr. Barrist, together with the other directors and executive officers of the Company, would likely be able to effectively control most matters requiring approval by the Company's shareholders, including the election of directors. Such voting concentration may have the effect of delaying, deferring or preventing a change in control of the Company. See "Management" and "Principal and Selling Shareholders." 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. 11 Shares Eligible for Future Sale Sales of the Company's Common Stock in the public market could adversely affect the market price of the Company's Common Stock and could impair the Company's future ability to raise capital through the sale of equity securities. Upon completion of the Offering, the Company will have 8,535,868 shares of Common Stock outstanding. Of these shares, all of the 2,256,000 shares sold in the Offering will be, and the 2,875,000 shares sold in the IPO 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 Montgomery Securities. Following the expiration of this 90-day period, such persons will hold an aggregate of 3,406,868 outstanding shares of Common Stock (3,068,468 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 warrants to purchase an aggregate of 90,591 shares of Common Stock exercisable at any time on or before July 31, 2005, a $900,000 Convertible Note convertible into 42,503 shares of Common Stock at any time on or before January 22, 2002 and a warrant to purchase 250,000 shares of Common Stock exercisable at any time on or before January 31, 2002. The holders of the warrants, in their capacity as Selling Shareholders, and the holder of the Convertible Note have agreed, subject to certain limitations, not to offer, sell or otherwise dispose of any shares of Common Stock issuable upon exercise of the warrants or conversion of the Convertible Note for a period of 90 days after the closing of the Offering without the prior written consent of Montgomery Securities. The holders of the warrants and the Convertible Note will continue to be entitled to certain demand and/or piggyback registration rights following the completion of the Offering. In addition, the Company intends to register 749,680 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. Options to purchase an aggregate of 538,651 shares of Common Stock will continue to be outstanding under all such plans upon the completion of the Offering. See "Management -- Stock Option Plans," "Description of Capital Stock - -- Warrants and Convertible Notes" and "Shares Eligible for Future Sale." 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. See "Description of Capital Stock." 12 ACQUISITION HISTORY Since 1994, the Company has completed eight strategic acquisitions, including four in the first quarter of 1997, which have expanded its client base and geographic presence, increased its presence in key industries and substantially increased its revenues and profitability. A key element of the Company's growth strategy is to 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. Currently, the Company is not a party to any agreements, understandings, arrangements or negotiations regarding any material acquisitions; however, as the result of the Company's process of regularly reviewing acquisition prospects, negotiations may occur from time to time if appropriate opportunities arise. A summary of the completed acquisitions follows: Collection Division of CRW Financial, Inc. On February 2, 1997, NCO purchased substantially all of the assets of the CRWCD for $3.8 million in cash, 345,178 shares of Common Stock and warrants to purchase 250,000 shares of Common Stock at an exercise price of $27.625 per share. In connection with the acquisition of CRWCD, NCO granted to CRW Financial, Inc. certain demand and piggyback registration rights to register, under certain conditions, the shares of Common Stock issued to CRW Financial, Inc. and the shares of Common Stock issuable upon the exercise of warrants issued by the Company to CRW Financial, Inc. The purchase price was valued at approximately $12.8 million. CRWCD provided accounts receivable management services principally to the telecommunications, education, financial, government and utility sectors from 10 offices located throughout the United States. In addition, CRWCD had a commercial collections division. CRWCD's clients included California Student Aid Commission, Federal Express Corporation and the Massachusetts Department of Revenue. CRWCD's revenues for the year ended December 31, 1996 were $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 clients included CMS Energy Corporation, Commonwealth Edison Company and PECO Energy Company. CMS A/R's revenues for the year ended December 31, 1996 were $6.8 million. Tele-Research Center, Inc. On January 30, 1997, NCO purchased certain assets of TRC for $1.6 million in cash. The purchase price may be increased by up to $600,000 if the TRC business achieves certain revenue targets during the three-year period following the closing date. At the option of the seller, the purchase price adjustment may be paid in cash or Common Stock, based on the fair market value of the Common Stock as of the date that the purchase price adjustment accrues. TRC, located in Philadelphia, Pennsylvania, provided market research, data collection and other teleservices to market research companies as well as end-users. TRC's clients included Corestates Bank, N.A., Nextel Communications and ATX Telecommunications. TRC's revenues for the year ended December 31, 1996 were $1.9 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 42,503 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. In connection with the acquisition of Goodyear, NCO granted the former majority shareholders of Goodyear certain piggyback registration rights to register the shares of Common Stock issuable upon the conversion of the 13 Convertible Note. Goodyear, based in Charlotte, North Carolina, provided accounts receivable management services principally to the telecommunications, education and utility sectors. Goodyear's clients included BellSouth Corporation. Goodyear's revenues for the year ended December 31, 1996 were $5.5 million. Management Adjustment Bureau, Inc. On September 5, 1996, NCO purchased all of the outstanding stock of MAB for $8.0 million in cash and a $1.0 million Convertible Note. The Note is convertible at any time into 76,923 shares of the Company's Common Stock and bears interest payable monthly at a rate of 8.0% per annum with principal due in September 2001. In connection with the acquisition of MAB, NCO granted the former majority shareholder of MAB certain piggyback registration rights to register the shares of Common Stock issuable upon the conversion of the Convertible Note. MAB, based in Buffalo, New York, provided accounts receivable management services, principally to the education, financial services, telecommunications and utility sectors. MAB's clients included NationsBank Corporation, Fleet Bank, New York State Electric and Gas and St. John's University. Trans Union Corporation Collections Division On January 3, 1996, NCO purchased certain assets of the Trans Union Corporation Collections Division ("TCD") for $4.8 million in cash. TCD provided accounts receivable management services, principally to the telecommunications, utility and healthcare sectors from offices in Pennsylvania, Ohio and Kansas. TCD's clients included Bell Atlantic Corporation, Western Resources Corporation and Hutchinson Hospital Corporation. Eastern Business Services, Inc. In August 1995, NCO purchased certain assets of Eastern Business Services, Inc. ("Eastern") for $1.6 million in cash and the assumption of a non-interest bearing note payable in the amount of $252,000 and certain other accounts payable in the amount of $209,000. Eastern, based in Beltsville, Maryland, provided accounts receivable management services, principally to the utility and healthcare sectors. Eastern's clients included Bell Atlantic Corporation, Potomac Electric Power Company and Washington Gas. B. Richard Miller, Inc. In April 1994, NCO purchased certain assets of B. Richard Miller, Inc. ("BRM") for $1.0 million in cash, the issuance by the Company of a $127,000 promissory note and the issuance of 123,803 shares of Common Stock and an option to acquire 86,881 shares of Common Stock at an exercise price of $2.16 per share (which option was exercised in 1995). In connection with the acquisition, BRM's principal shareholder became an executive officer of the Company. BRM, based in Ardmore, Pennsylvania, provided accounts receivable management services, principally to the education sector. BRM's clients included University of Pennsylvania, Rutgers University and Seton Hall University. Financial Impact of Acquisitions The Company financed the 1997 Acquisitions with borrowings of approximately $8.4 million from its revolving credit facility with Mellon Bank, N.A., the net proceeds from the Company's IPO and funds from operations. The Company financed the MAB, TCD, Eastern and BRM acquisitions with borrowings from Mellon Bank, N.A., which borrowings were repaid with a portion of the proceeds from the Company's IPO. In September 1996, the bank increased the Company's revolving credit facility from $7.0 million to $15.0 million to finance the acquisition of MAB. The bank further increased this facility to $25.0 million at an interest rate of LIBOR plus 2.5% in December 1996. Mellon Bank, N.A. has committed to reduce the interest rate to 1.5% over LIBOR upon the completion of this Offering. The Company granted the bank a warrant to acquire 175,531 shares of Common Stock at a nominal exercise price in consideration for establishing the revolving credit facility for acquisitions, and granted additional warrants to purchase 46,560 shares and 18,500 shares of Common Stock at an exercise price of $13.00 per share in consideration for increasing the revolving credit facility to $15.0 million and to $25.0 million, respectively. 14 All of the acquisitions have been accounted for under the purchase method of accounting for financial reporting purposes. These acquisitions have created goodwill estimated at $38.0 million which is being amortized over a 15- to 25-year period resulting in amortization expense of approximately $1.7 million annually. In each of the acquisitions completed prior to 1997, the Company acquired businesses with higher cost structures than the Company. In the months following the acquisitions, the Company leveraged its existing infrastructure to realize additional operating efficiencies in order to bring the cost structure of the acquired companies in line with NCO's current operating results. These other cost savings included: (i) reductions in payroll and related expenses relating primarily to redundant collections and administrative personnel, (ii) reduction in rent and other facilities costs, and (iii) reduction in certain direct and indirect expenses such as telephone, mailing and data processing costs. The Company has also begun to realize certain operating efficiencies from the 1997 Acquisitions. These result from: (i) reduction of management, operating and administrative personnel, (ii) consolidation and centralization of numerous administrative functions such as cash processing, data entry and client service, (iii) closure of several facilities, and (iv) renegotiation of certain of the remaining facilities' leases. As a result, the Company has reduced the expense structure of the 1997 Acquisitions to levels more consistent with NCO's current operating results. The Company expects to realize further expense reductions as it continues the integration process through the end of 1997, including: (i) migration of acquired companies' computer systems to a single computer platform, (ii) additional staff reductions, and (iii) consolidation and centralization of certain other administrative functions. The Company's ability to achieve such further cost savings is uncertain and there can be no assurance that such businesses will be successfully integrated with that of the Company, or that the Company will be able to realize operating efficiencies or eliminate redundant costs. See "Risk Factors -- Risks Associated with Recent Acquisitions." 15 USE OF PROCEEDS The net proceeds from the sale of the 1,200,000 shares of Common Stock offered by the Company hereby are estimated to be approximately $35.4 million after deducting the estimated underwriting discount and expenses of the Offering and based on an assumed public offering price of $32.00 per share. The Company will not receive any proceeds from the sale of Common Stock by the Selling Shareholders. Approximately $8.4 million of the net proceeds will be used to repay outstanding debt under the Company's Credit Agreement with Mellon Bank, N.A. incurred to finance the 1997 Acquisitions. 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 $25.0 million at an interest rate equal to LIBOR plus 2.5% (8.1875% at May 31, 1997). Mellon Bank, N.A. has committed to reduce the interest rate to 1.5% over LIBOR upon the completion of the Offering. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The Company intends to use the remaining net proceeds of $27.0 million for working capital and other general corporate purposes, including possible future acquisitions. The Company regularly reviews various strategic acquisition opportunities and periodically engages in discussions regarding such possible acquisitions. Currently, the Company is not a party to any agreements, understandings, arrangements or negotiations regarding any material acquisitions; however, as the result of the Company's process of regularly reviewing acquisition prospects, negotiations may occur from time to time if appropriate opportunities arise. Pending the uses described above, the Company intends to invest its net proceeds in short-term, investment-grade securities. DIVIDEND POLICY AND PRIOR S CORPORATION STATUS The Company historically was treated for federal and state income tax purposes as an S Corporation under Subchapter S of the Internal Revenue Code of 1986, as amended (the "Code"), and under Pennsylvania law. As a result of the Company's status as an S Corporation, the Company's shareholders, rather than the Company, were taxed directly on the earnings of the Company for federal and certain state income tax purposes, whether or not such earnings were distributed. The Company made cash distributions to the then current shareholders aggregating $658,000, $813,000, $1.1 million and $876,838 in respect of the Company's S Corporation earnings for 1993, 1994, 1995 and 1996 (through September 3, 1996), respectively. On September 3, 1996 (the "Termination Date"), the Company terminated its status as an S Corporation and thereupon became subject to federal and state income taxes at applicable C Corporation rates. In November 1996, the Company paid to shareholders of record as of the Termination Date a distribution of approximately $3.2 million representing the Company's undistributed S Corporation earnings through the Termination Date. The Company does not anticipate paying cash dividends on its Common Stock in the foreseeable future. In addition, the Company's 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. 16 PRICE RANGE OF COMMON STOCK The Company completed the initial public offering of its Common Stock at $13.00 per share on November 6, 1996. The Common Stock is traded on the Nasdaq National Market under the symbol "NCOG." The following table sets forth, for the periods indicated, the high and low closing sale prices for the Common Stock, as reported by Nasdaq: High Low ---------- -------- 1996 Fourth Quarter (from November 6, 1996) $19 7/16 $16 1/2 1997 First Quarter ........................... 28 3/8 16 3/4 Second Quarter (through June 9, 1997) ... 33 3/4 18 1/4 On June 9, 1997, the last reported sale price of the Common Stock on the Nasdaq National Market was $32.00 per share. As of June 9, 1997, the Company's Common Stock was held by approximately 29 holders of record. Based on information obtained from the Company's transfer agent, the Company believes that the number of beneficial owners of its Common Stock is approximately 1,064. 17 CAPITALIZATION The following table sets forth as of March 31, 1997 the current portion of long-term debt and capitalized lease obligations and the actual capitalization of the Company and the capitalization of the Company as adjusted to give effect to: (i) the exercise of warrants and stock options to purchase an aggregate of 200,320 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 $211,000, (ii) the conversion of a $1.0 million Convertible Note into 76,923 shares of Common Stock which are being sold by a certain Selling Shareholder in the Offering, and (iii) the sale by the Company of 1,200,000 shares of Common Stock in the Offering (at an assumed public offering price of $32.00 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.
March 31, 1997 ------------------------ Actual As Adjusted --------- ------------ (In thousands) Current portion of long-term debt and capitalized lease obligations ... $ 182 $ 182 ======== ======== Long-term debt, net of current portion (1): Revolving credit agreement .......................................... $ 8,429 $ 79 Capitalized lease obligations ....................................... 404 404 Convertible notes payable .......................................... 1,900 900 -------- -------- Total long-term debt and capitalized lease obligations. ............ 10,733 1,383 Shareholders' equity: Preferred Stock, no par value, 5,000,000 shares authorized; no shares issued or outstanding ....................................... Common Stock, no par value, 25,000,000 shares authorized; 7,058,625 shares issued and outstanding, actual, 8,535,868 shares issued and outstanding, as adjusted (2) ........................... 37,577 74,328 Unexercised warrants (3) ............................................. 1,271 1,120 Retained earnings ................................................... 2,196 2,196 -------- -------- Total shareholders' equity .......................................... 41,044 77,644 -------- -------- Total capitalization ................................................ $51,777 $79,027 ======== ========
- ------------ (1) See Notes 7 and 13 of Notes to Consolidated Financial Statements for a description of the terms of the Company's debt. (2) Excludes: (i) an aggregate of 800,000 shares of Common Stock (749,680 shares, 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) 240,591 shares of Common Stock (90,591 shares, as adjusted) reserved for issuance upon the exercise of warrants issued to Mellon Bank, N.A.; (iii) 76,923 shares of Common Stock (0 shares, as adjusted) reserved for issuance upon the conversion of the Company's $1.0 million Convertible Note issued as partial consideration for the MAB acquisition; (iv) 42,503 shares of Common Stock reserved for issuance upon the conversion of the Company $900,000 Convertible Note issued as partial consideration for the Goodyear acquisition; and (v) 250,000 shares of Common Stock reserved for issuance upon the exercise of warrants issued by the Company at an exercise price of $27.625 per share as partial consideration for the CRWCD acquisition. See "Acquisition History," "Management -- Stock Option Plans" and "Description of Capital Stock -- Warrants and Convertible Notes." (3) Reflects: (i) a warrant to purchase 175,531 shares of Common Stock (25,531 shares, as adjusted) at a nominal exercise price issued by the Company to Mellon Bank, N.A.; (ii) a warrant to purchase 46,560 shares of Common Stock at an exercise price of $13.00 per share issued by the Company to Mellon Bank, N.A.; (iii) a warrant to purchase 18,500 shares of Common Stock at an exercise price of $13.00 per share issued by the Company to Mellon Bank, N.A.; and (iv) a warrant to purchase 250,000 shares of Common Stock issued by the Company at an exercise price of $27.625 per share as partial consideration for the CRWCD acquisition. 18 SELECTED FINANCIAL AND OPERATING DATA The selected financial data of the Company for each of the five years in the period ended December 31, 1996 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, 1997 and for the three months ended March 31, 1996 and 1997 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, 1997 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 and 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. 19 SELECTED FINANCIAL AND OPERATING DATA (Dollars in thousands, except per share data)
Years Ended December 31, ---------------------------------------------------------------------------------------------- 1992 1993 1994 1995 1996 ---------- ---------- ---------- ------------------ -------------------------------------- Pro Actual Forma(1)(2) ------------------ ------------------ Statement of Income Data: Revenue ..................... $ 5,822 $ 7,445 $ 8,578 $ 12,733 $ 30,760 $ 79,944 Operating costs and expenses: Payroll and related expenses .................. 3,058 4,123 4,558 6,797 14,651 40,209 Selling, general and administrative expenses .................. 2,013 2,391 2,674 4,042 10,032 28,789 Depreciation and amor- tization expenses 95 141 215 348 1,254 3,043 -------- -------- -------- ------------- ------------- ------------- Income from operations ............... 656 790 1,131 1,546 4,823 7,903 Other income (expense) .................. 15 11 (45) (180) (576) 2 -------- -------- -------- ------------- ------------- ------------- Income before provision for income taxes .............. 671 801 1,086 1,366 4,247 7,905 Pro forma provision for income taxes (5) ...... 268 320 434 546 1,706 3,374 -------- -------- -------- ------------- ------------- ------------- Pro forma net income (5) ...... $ 403 $ 481 $ 652 $ 820 $ 2,541 $ 4,531 ======== ======== ======== ============= ============= ============= Pro forma net income per share (5) .................. $ 0.17(6) $ 0.50(6) $ 0.64(6) ============= ============= ============= Pro forma weighted average shares outstanding ......... 4,728,906(6) 5,086,736(6) 7,045,350(6) ============= ============= ============= Selected Operating Data: Total value of accounts referred ......... $150,707 $199,108 $281,387 $ 431,927 $ 1,173,342 $ 4,024,658 Average fee .................. 16.9% 20.2% 22.5% 22.4% 25.2% 23.7%
[RESTUBBED FROM TABLE ABOVE]
Three Months Ended March 31, ----------------------------------------------- 1996 1997 ------------------ --------------------------- Pro Actual Forma(3)(4) ------------- ------------ Statement of Income Data: Revenue ..................... $ 6,044 $ 18,077 $ 20,918 Operating costs and expenses: Payroll and related expenses .................. 2,998 9,046 10,324 Selling, general and administrative expenses .................. 1,931 5,932 7,037 Depreciation and amor- tization expenses .......... 200 716 846 ------------- --------- --------- Income from operations ............... 915 2,383 2,711 Other income (expense) .................. (155) (82) 34 ------------- --------- --------- Income before provision for income taxes .............. 760 2,301 2,745 Pro forma provision for income taxes (5) ...... 304 994 1,115 ------------- --------- --------- Pro forma net income (5) ..... $ 457 $ 1,307 $ 1,630 ============= ========= ========= Pro forma net income per share (5) .................. $ 0.10(6) $ 0.18 $ 0.21 ============= ========= ========= Pro forma weighted average shares outstanding ........ 4,733,549(6) 7,371,157 7,886,151 ============= ========= ========= Selected Operating Data: Total value of accounts referred ......... $ 581,258 $ 974,266 Average fee .................. 25.2% 23.3%
December 31, --------------------------------------------- 1992 1993 1994 1995 1996 ------- ------- ------- ------- --------- Balance Sheet Data: Cash and cash equivalents .................. $ 421 $ 562 $ 526 $ 805 $12,059 Working capital ........................... 362 445 473 812 13,629 Total assets .............................. 1,794 1,990 3,359 6,644 35,826 Long-term debt, net of current portion ... 144 59 732 2,593 1,092 Shareholders' equity ..................... 686 876 1,423 2,051 30,648
[RESTUBBED FROM TABLE ABOVE]
March 31, 1997 ----------------------- As Actual Adjusted(7) -------- ------------ Balance Sheet Data: Cash and cash equivalents .................. $5,793 $33,042 Working capital ........................... 7,996 35,245 Total assets .............................. 61,436 88,685 Long-term debt, net of current portion ... 10,733 1,383 Shareholders' equity ..................... 41,044 77,644
20 - ------------ (1) Assumes that the acquisition of MAB and the 1997 Acquisitions occurred on January 1, 1996. (2) Gives effect to: (i) the reduction of certain redundant operating costs and expenses that were immediately identifiable at the time of the acquisitions; (ii) the increase in amortization expense as if the acquisitions had occurred on January 1, 1996 and the elimination of depreciation and amortization expense related to assets revalued or not acquired by NCO as part of the acquisitions; (iii) the elimination of interest expense associated with acquisition-related debt repaid with proceeds of the Company's IPO and the proceeds of the Offering; (iv) the issuance of 1,604,620 shares of Common Stock at the IPO price of $13.00 per share which, net of the underwriting discount and offering expenses payable by the Company, was sufficient to repay acquisition related debt of $15.0 million and 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; (v) the issuance of 345,178 shares of Common Stock and warrants exercisable for 250,000 shares of Common Stock in connection with the acquisition of CRWCD; and (vi) the issuance of 305,886 shares of Common Stock at an assumed public offering price of $32.00 per share which, net of the estimated underwriting discount and offering expenses payable by the Company, would be sufficient to repay acquisition related debt of $8.4 million. See Pro Forma Consolidated Financial Statements. (3) Assumes that the 1997 Acquisitions occurred on January 1, 1997. (4) Gives effect to: (i) the reduction of certain redundant operating costs and expenses that were immediately identifiable at the time of the acquisitions; (ii) the increase in amortization expense as if the acquisitions had occurred on January 1, 1997 and the elimination of depreciation and amortization expense related to assets revalued or not acquired by NCO as part of the acquisitions; (iii) the elimination of interest expense associated with acquisition related debt to be repaid with proceeds of the Offering; (iv) the issuance of 345,178 shares of Common Stock and warrants exercisable for 250,000 shares of Common Stock in connection with the acquisition of CRWCD; and (v) the issuance of 305,886 shares of Common Stock at an assumed public offering price of $32.00 per share which, net of the estimated underwriting discount and offering expenses payable by the Company, would be sufficient to repay acquisition related debt of $8.4 million. See Pro Forma Consolidated Financial Statements. (5) Prior to September 3, 1996 the Company operated as an S Corporation for income tax purposes and accordingly was not subject to federal or state income taxes prior to such date. Accordingly, the historical financial statements do not include a provision for federal and state income taxes for such periods. Pro forma net income and pro forma net income per share have been computed as if the Company had been fully subject to federal and state income taxes for all periods presented. See Note 8 of Notes to Consolidated Financial Statements. (6) Assumes that the Company issued 249,758 shares of Common Stock at $13.00 per share to fund the distribution of undistributed S Corporation earnings of $3.2 million through September 3, 1996, the termination date of the Company's S Corporation status, to existing shareholders of the Company. (7) Gives effect to: (i) the sale of the 1,200,000 shares of Common Stock offered by the Company hereby (at an assumed public offering price of $32.00 per share) and the application of the net proceeds therefrom as set forth in "Use of Proceeds" and (ii) the exercise of warrants and stock options to purchase an aggregate of 200,320 shares of Common Stock which are being sold by certain Selling Shareholders in the Offering and the receipt of the Company of the aggregate exercise price of $211,000. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview NCO is a leading provider of accounts receivable management and other related services such as customer service call centers, telemarketing and other outsourced administrative services. In 1996, accounts receivable management services comprised more than 90% of the Company's revenue; however, the Company expects other related services to represent a greater portion of its business in the future. As a result of rapid internal growth and selected strategic acquisitions, the Company's revenue has grown from $7.4 million in 1993 to $79.9 million in 1996 on a pro forma basis, giving effect to the MAB acquisition and the 1997 Acquisitions. NCO operates 18 call centers with 1,337 workstations in 15 states. 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 fees for certain accounts receivable management and other related services. Revenue is earned and recognized upon collection of the accounts receivable for contingency fees and as work is performed for fixed fee services. Although its average accounts receivable management fee has increased from 20.2% in 1993 to 23.7% in 1996 on a pro forma basis, the Company expects to remain among the low cost providers of accounts receivable management services; accordingly, the Company does not expect its average contingency fee to increase materially in the future. 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. Since April 1994, the Company has completed eight acquisitions, including four in the first quarter of 1997, which have had a significant impact on the Company's financial condition and results of operations. As a result of these acquisitions, the Company has: (i) increased its penetration of the utilities, healthcare, financial services and telecommunications markets; (ii) established a presence in the education and insurance markets; (iii) increased its base of national clients; and (iv) expanded NCO's geographic presence by adding 17 call centers in 14 states. With respect to the acquisitions completed prior to 1997, the Company has been able to achieve significant economies of scale by eliminating certain redundant expenses, reducing the workforce of the acquired companies, and in the case of BRM and TCD, closing two offices. Revenues from the 1997 Acquisitions accounted for approximately 50.1% of the Company's 1996 pro forma revenue. The Company is currently integrating the 1997 Acquisitions and is in the process of bringing the cost structures of the acquired companies in line with NCO's current operating results. The Company regularly reviews various strategic acquisition proposals and periodically engages in discussions regarding such possible acquisitions. 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 22 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 MAB acquisition and the 1997 Acquisitions as if the results of each acquired company had been included in the Company's statement of income throughout the year ended December 31, 1996 and which show the effect of the 1997 Acquisitions as if the results of each acquired company had been included in the Company's statement of income throughout the three months ended March 31, 1997. 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 pro forma provision for income taxes assumes that the Company was subject to federal and state income taxes for all prior periods. Pro Forma Compared to Actual Results of Operations Pro forma operating data for the year ended December 31, 1996 and the quarter ended March 31, 1997 assume that the MAB acquisition was consummated on January 1, 1996 and that the 1997 Acquisitions were consummated on January 1, 1996 and January 1, 1997, respectively. Pro forma adjustments have been made to reflect the elimination of certain expenses that were immediately identifiable at the time of the acquisitions. For instance, pro forma adjustments to the MAB acquisition and the 1997 Acquisitions include the elimination of approximately 59 redundant administrative and collection personnel, the reduction of the salaries of the principal shareholders of MAB and Goodyear, respectively, the closing or consolidation of four existing call centers, as well as the downsizing of three call centers into customer service locations. See "Acquisition History -- Financial Impact of Acquisitions" and Notes to Pro Forma Consolidated Financial Statements. At the time of the acquisitions, the acquired companies had a higher cost structure than that of the Company's core business. The Company intends to leverage its infrastructure to realize additional operating efficiencies in order to bring the cost structure of the acquired companies in line with NCO's current operating results. These other costs savings include: (i) further reduction in payroll and related expenses relating primarily to redundant collections and administrative personnel; (ii) further reductions in facilities costs; and (iii) reduction of certain expenses such as telephone, mailing and data processing. Management believes it will realize these cost savings with respect to the acquired companies, although no assurances can be given that such cost savings will be realized. Due to the higher cost structures of the acquired business and the fact that all expected expense savings are not reflected in pro forma adjustments, certain pro forma operating percentages compare unfavorably to actual operating percentages for the periods under consideration. Due to the consolidation or closing of certain CRWCD branch offices, and the loss of certain contracts during 1996, revenue for CRWCD for 1997 is anticipated to be 10% to 15% lower than CRWCD's revenue for 1996. 23 Results of Operations The following tables set forth income statement data on an historical and pro forma basis as a percentage of revenue:
Years Ended December 31, Three Months Ended March 31, ----------------------------------------- -------------------------------- 1994 1995 1996 1996 1997 -------- -------- ------------------- -------- --------------------- Pro Pro Actual Forma Actual Forma -------- -------- -------- ---------- Revenue ........................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Operating costs and expenses: Payroll and related expenses ...... 53.1 53.4 47.6 50.3 49.6 50.0 49.4 Selling, general and administrative expenses ........................... 31.2 31.7 32.6 36.0 32.0 32.8 33.6 Depreciation and amortization expenses ........................ 2.5 2.7 4.1 3.8 3.3 4.0 4.0 ------ ------ ------ ------ ------ ------ ------ Total .............................. 86.8 87.8 84.3 90.1 84.9 86.8 87.0 ------ ------ ------ ------ ------ ------ ------ Income from operations ............... 13.2 12.2 15.7 9.9 15.1 13.2 13.0 Other income (expense) ............... (0.5) (1.4) (1.9) -- (2.6) (0.5) 0.1 ------ ------ ------ ------ ------ ------ ------ Income before income taxes ......... 12.7 10.8 13.8 9.9 12.5 12.7 13.1 Pro forma provision for income taxes. 5.1 4.3 5.5 4.2 5.0 5.5 5.5 ------ ------ ------ ------ ------ ------ ------ Pro forma net income ............... 7.6% 6.5% 8.3% 5.7% 7.5% 7.2% 7.5% ====== ====== ====== ====== ====== ====== ======
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996 Revenue. Revenue increased $12.1 million or 199.1% to $18.1 million for the three months ended March 31, 1997 from $6.0 million for the comparable period in 1996. The addition of new clients and growth in business from existing clients represented $1.3 million of the additional revenue. In addition, $3.4 million of revenue was attributable to the MAB acquisition completed in September 1996, $4.1 million was attributable to the CRWCD acquisition completed in February 1997, and $3.2 million was attributable to the Goodyear, CMS A/R, and TRC acquisitions completed in January 1997. Payroll and related expenses. Payroll and related expenses increased $6.0 million to $9.0 million for the three months ended March 31, 1997 from $3.0 million for the comparable period in 1996, and increased as a percentage of revenue to 50.0% from 49.6%. 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 having a higher cost structure than that of the Company. This increase was partially offset by spreading the cost of management and administrative personnel over a larger revenue base. Selling, general and administrative expenses. Selling, general and administrative expenses increased $4.0 million to $5.9 million for the three months ended March 31, 1997 from $1.9 million for the comparable period in 1996, and increased as a percentage of revenue to 32.8% from 32.0%. Selling, general and administrative expenses increased as a percentage of revenue primarily as a result of the businesses acquired in the CRWCD and CMS A/R acquisitions having a higher cost structure than that of the Company. The Company also 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. Depreciation and amortization. Depreciation and amortization increased to $716,000 for the three months ended March 31, 1997 from $200,000 for the comparable period in 1996. Of this increase, $394,000 was a result of the MAB acquisition and the 1997 Acquisitions. The remaining $122,000 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 $3,000 to $175,000 for the three months ended March 31, 1997 from the comparable period in 1996. Although the Company's revolving credit facility had been repaid 24 with a portion of the net proceeds from the IPO, the Company borrowed $8.4 million to partially finance the 1997 Acquisitions in the three months ended March 31, 1997. Investment income increased $76,000 to $93,000 for the three months ended March 31, 1997 from the comparable period in 1996. This increase was primarily attributable to the investment of funds remaining from the IPO after repayment of outstanding debt as well as an increase in funds held in trust for clients. Income tax expense. Income tax expense for the three months ended March 31, 1997 was $994,000 and was computed using an assumed rate of 43.2% after giving effect to non-deductible goodwill resulting from certain of the acquired companies. The Company was an S Corporation as of March 31, 1996, and accordingly, there was no provision for income taxes. The pro forma provision for income taxes of $304,000 for the three months ended March 31, 1996 was computed utilizing an assumed rate of 40.0% after giving effect to non-deductible goodwill. Net income. Net income increased to $1.3 million for the three months ended March 31, 1997 from $456,000 for the comparable period in 1996, a 186.6% increase. Year Ended December 31, 1996 Compared to Year Ended December 31, 1995 Revenue. Revenue increased $18.0 million or 141.6% to $30.8 million in 1996 from $12.7 million in 1995. Of this increase, $5.0 million was attributable to the MAB acquisition completed in September 1996, $6.8 million was attributable to the TCD acquisition completed in January 1996, and $1.3 million was attributable to a full year of revenue from the Eastern acquisition in 1996 versus three months in 1995. Additionally, $4.8 million of 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 53.5%. The decrease in payroll and related expenses as a percentage of revenue was primarily the result of spreading the relatively fixed costs of management and administrative personnel over a larger revenue base and the increased utilization of "on-line" computer services and other outside services, as well as eliminating redundant administrative staff following the TCD and Eastern acquisitions. These efficiencies were offset in part by higher payroll and related expenses of MAB as a percentage of its revenue. The effect of MAB was 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. Pro forma provision for income taxes. The pro forma provision for income taxes of $1.7 million and $546,000 in 1996 and 1995 respectively, was computed using an assumed tax rate of 40.0% and giving effect to non-deductible goodwill from certain of the acquired companies. 25 Pro forma net income. Pro forma net income increased to $2.5 million in 1996 from $820,000 in 1995, a 210.0% increase. Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 Revenue. Revenue increased $4.2 million or 48.4% to $12.7 million in 1995 from $8.6 million in 1994. In 1995, the Company initiated a marketing program targeted at larger national accounts. As a result, the Company had internal growth of $2.9 million from the addition of new clients and growth in business from existing clients. This growth includes approximately $1.3 million from a contract with a governmental agency awarded in April 1995. In addition to strong internal growth, approximately $808,000 of the increase in revenue was attributable to the Eastern acquisition, and $437,000 was attributable to a full year of operations of BRM in 1995 versus eight months in 1994. This was partially offset by a decrease in revenue from outsourcing projects to $259,000 in 1995 from $357,000 in 1994. Approximately $300,000 of revenue from outsourcing projects in 1994 was from a one-time project completed in the first quarter of 1994. Payroll and related expenses. Payroll and related expenses increased $2.2 million to $6.8 million in 1995 from $4.6 million in 1994, and increased slightly as a percentage of revenue to 53.4% from 53.1%. During the fourth quarter of 1995, the Company hired a Vice President of Collection, as well as 20 additional telephone representatives necessary for two outsourcing projects which did not generate revenue until the first quarter of 1996. In addition, the one-time outsourcing project completed during the first quarter of 1994 had lower payroll and related expenses as a percentage of revenue. The increases in personnel were partially offset by spreading the relatively fixed costs of the Company's management and administrative personnel over a larger revenue base, as well as the elimination of redundant administrative staff related to the Eastern acquisition. Selling, general and administrative expenses. Selling general and administrative expenses increased $1.3 million to $4.0 million in 1995, from $2.7 million in 1994 and increased as a percentage of revenue to 31.7% from 31.2%. These increases were primarily due to higher data processing and facilities costs in anticipation of growth and to allow for the rapid assimilation of the TCD acquisition in the first quarter of 1996 without having to purchase short-term administrative services from the parent company of TCD during the post-acquisition transition. Depreciation and amortization. Depreciation and amortization increased to $348,000 in 1995 from $215,000 in 1994. Of this increase, $90,000 was attributable to the Eastern and BRM acquisitions. The remaining $43,000 consisted of amortization of deferred financing charges and depreciation resulting from capital expenditures incurred in the ordinary course of business. Other income (expense). Interest expense increased to $180,000 in 1995 from $72,000 in 1994, primarily due to increased borrowings associated with the Eastern and BRM acquisitions. The Company recorded a $49,000 loss from the disposal of assets in 1995. Pro forma provision for income taxes. The pro forma provision for income taxes of $546,000 and 434,000 in 1995 and 1994 respectively, was computed using an assumed tax rate of 40.0% and giving effect to non-deductible goodwill from certain of the acquired companies. Pro forma net income. Pro forma net income increased to $820,000 in 1995 from $652,000 in 1994, a 25.7% increase. 26 Quarterly Results The following table sets forth selected actual historical financial data for the calendar quarters of 1995 and 1996, and for the first calendar quarter of 1997. This quarterly information is unaudited but has been prepared on a basis consistent with the Company's audited financial statements presented elsewhere herein and, in the Company's opinion, includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the quarters presented. The operating results for any quarter are not necessarily indicative of results for any future period.
Quarter Ended ------------------------------------------------------------------------------------------------- 1995 1996 1997 ----------------------------------------- ------------------------------------------ -------- Mar. Jun. Sept. Dec. Mar. Jun. Sept. Dec. Mar. 31 30 30 31 31 30 30 31 31 -------- -------- -------- -------- -------- -------- -------- --------- -------- (dollars in thousands) Revenue ......... $2,544 $3,002 $3,480 $3,707 $6,044 $6,499 $7,715 $10,502 $18,076 Income from operations ...... 244 485 496 320 915 1,156 1,183 1,569 2,383 Net income ...... 227 429 460 250 760 1,001 968 906 1,307
Quarter Ended ------------------------------------------------------------------------------------------------- 1995 1996 1997 ------------------------------------------ ------------------------------------------ ------- Mar. Jun. Sept. Dec. Mar. Jun. Sept. Dec. Mar. 31 30 30 31 31 30 30 31 31 -------- -------- --------- -------- -------- -------- --------- -------- ------- (as a percentage of revenue) Revenue ......... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Income from operations ...... 9.6 16.2 14.3 8.6 15.1 17.8 15.3 14.9 13.2 Net income ...... 8.9 14.3 13.2 6.7 12.6 15.4 12.5 8.6 7.2
In the past, the Company has experienced quarterly fluctuations in operating expenses. Due to the low revenue base of the Company at the time these costs were incurred, the impact of these fluctuations was more significant than if they had occurred at the Company's current revenue base. For instance, the fourth quarter of 1995 included additional costs primarily due to increases in data processing and facilities costs in anticipation of growth and to allow for the rapid assimilation of the TCD acquisition. The Company has experienced and expects to continue to experience quarterly variations in revenue and net income as a result of many factors, including the timing of clients' accounts receivable management programs, the commencement of new contracts, the termination of existing contracts, costs to support growth by acquisition or otherwise, the effect of the change of business mix on margins and the timing of additional selling, general and administrative expenses to support new business. In connection with certain contracts, the Company could incur costs in periods prior to recognizing revenue under those contracts. The Company's planned operating expenditures are based on revenue forecasts, and if revenues are below 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. The Company's quarterly operating results could also be affected by the costs and timing of completion and integration of acquisitons. 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 as compared to the Company's core business. Liquidity and Capital Resources In November 1996, the Company completed its IPO of 2,500,000 shares of its Common Stock at a price of $13.00 per share. The net proceeds to the Company were $28.8 million. The Company's primary sources of 27 cash have historically been cash flow from operations, bank borrowings and, in 1996, the net proceeds from the IPO. Cash has been used for acquisitions, distributions to shareholders, purchases of equipment and working capital to support the Company's growth. Cash provided by operating activities was $1.4 million during the three months ended March 31, 1997, and $800,000 for the comparable period in 1996. The increase in cash provided by operations was primarily due to the increase in net income to $1.3 million in the three months ended March 31, 1997 compared to $760,000 in the comparable period in 1996, and the increase in non-cash charges, primarily depreciation and amortization, to $808,000 during the three months ended March 31, 1997 compared to $210,000 for the comparable period in 1996. These increases were offset by a $2.0 million increase in accounts receivable in the three months ended March 31, 1997 compared to a $811,000 increase in the comparable period in 1996 and a $254,000 decrease in accounts payable and accrued expenses in the three months ended March 31, 1997 compared to a $547,000 increase in the comparable period in 1996. Approximately $1.0 million of accounts payable and accrued expenses in acquired companies were reduced in order to bring the balances in line with NCO's payment policies. Cash provided by operating activities was $2.9 million in 1996 and $2.0 million in 1995. The increase in cash provided by operations was primarily due to the increase in net income to $3.6 million in 1996 compared to $1.4 million in 1995, and the increase in non-cash charges, primarily depreciation and amortization, to $1.3 million in 1996 compared to $348,000 in 1995. These increases were offset by a $1.8 million increase in accounts receivable in 1996 compared to a $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 $15.9 million during the first quarter of 1997 compared to $4.8 million for the comparable period in 1996. The increase was primarily due to the 1997 Acquisitions during the first quarter of 1997 versus the acquisition of TCD during the first quarter of 1996. In February 1997, NCO purchased substantially all of the assets of CRWCD for $3.75 million in cash, 345,178 shares of Common Stock and warrants for 250,000 shares of Common Stock. In January 1997, the Company purchased substantially all of the assets of CMS A/R for $5.1 million in cash, certain assets of TRC for $1.6 million in cash and all of the outstanding stock of Goodyear for $4.5 million in cash and a $900,000 Convertible Note. The Note is convertible into an aggregate of 42,503 shares of Common Stock at any time and bears interest payable monthly at a rate of 8.0% per annum with principal due in January 2002. The Company financed the cash portion of the purchase price for the 1997 Acquisitions with borrowings of $7.4 million under its Credit Agreement and financed the balance with proceeds of its IPO and existing working capital. During March 1997, the Company borrowed an additional $1.0 million under the Credit Agreement to pay certain accounts payable assumed as part of the CRWCD acquisition. In addition, the Company has accrued $1.6 million of acquisition related expenses. The 1997 Acquisitions collectively resulted in goodwill of $21.0 million. Cash used in investing activities was $13.5 million in 1996 compared to $2.0 million in 1995. The increase was primarily due to the acquisitions of MAB and TCD in 1996. In September 1996, the Company purchased all the outstanding stock of MAB for $8.0 million in cash and the issuance of a $1.0 million, five-year convertible note to the principal shareholder of MAB. The note is convertible into the Common Stock of the Company at the initial public offering price of $13.00 per share, and bears interest payable monthly at a rate of 8.0% per annum. In January 1996, the Company purchased all the assets of TCD for $4.8 million in cash. In August 1995, the Company purchased certain assets of Eastern for $1.6 million in cash and the assumption of a non-interest bearing note payable of $252,000 and certain other accounts payable in the amount of $209,000. The Company financed the cash portion of these acquisitions with bank borrowings. These acquisitions collectively resulted in goodwill of $14.2 million. In addition to equipment financed under operating leases, capital expenditures were $298,000, $976,000 and $312,000 in 1995, 1996 and the first three months of 1997, respectively. Cash provided by financing activities was $8.2 million during the three months ended March 31, 1997 compared to $4.6 million for the comparable period in 1996. 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 28 distributions to shareholders. The Company raised net proceeds of approximately $28.8 million in the IPO of which $15.0 million was used to repay outstanding indebtedness under the Credit Agreement and approximately $3.2 million was used to pay undistributed S Corporation earnings. Total distributions to shareholders were $4.1 million in 1996 and $1.1 million in 1995. In July 1995, the Company entered into a revolving credit agreement with Mellon Bank, N.A. which provided for borrowings up to $7.0 million at an interest rate equal to prime plus 1.375%, which was subsequently increased to $15.0 million in September 1996, to be utilized for working capital and strategic acquisitions. Subsequent to the IPO, Mellon Bank, N.A. increased the revolving credit facility to $25.0 million and decreased the rate of interest to 2.5% over LIBOR. Mellon Bank, N.A. has committed to reduce the interest rate to 1.5% over LIBOR upon the completion of the Offering. Outstanding borrowings under the Credit Agreement at March 31, 1997 and December 31, 1996 and 1995 were $8.4 million, $0 and $2.4 million, respectively. The revolving credit line is collateralized by substantially all the assets of the Company and includes certain financial covenants such as maintaining minimum working capital and net worth requirements and includes restrictions on, among other things, capital expenditures and distributions to shareholders. In connection with entering into the original Credit Agreement, the Company recorded deferred charges of approximately $135,000 relating primarily to bank and legal fees. The Company also issued a warrant to the bank exercisable for an aggregate of 175,531 shares of the Company's Common Stock. The warrant expires on July 31, 2005 and is exercisable for nominal consideration. In connection with the increase of the line of credit available under the Credit Agreement in September 1996 and December 1996, the Company recorded deferred charges of $261,000 primarily relating to bank charges and legal fees. In addition, the Company issued additional warrants to the bank for an aggregate of 65,060 shares of Common Stock exercisable at $13.00 per share. The warrants have been capitalized on the balance sheet as a deferred charge and are being amortized over the four-year life of the credit facility. All the warrants are currently exercisable. 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 June 30, 1998. In addition, the Company believes it will have sufficient funds to make selected acquisitions. However, the Company could require additional debt or equity financing if it were to make any significant acquisitions for cash. The Company has no current commitments or agreements with respect to any acquisitions. Recently Issued Accounting Standard In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share." This Statement establishes standards for computing and presenting earnings per share ("EPS") and applies to entities with publicly held common stock or potential common stock. This Statement is effective for financial statements issued for periods ending after December 15, 1997; earlier application is not permitted. This Statement requires restatement of all prior-period EPS data presented. The Company is currently evaluating the impact, if any, adoption of SFAS No. 128 will have on its financial statements. 29 BUSINESS NCO is a leading provider of accounts receivable management and related services utilizing an extensive teleservices infrastructure. The Company develops and implements customized accounts receivable management solutions for clients' delinquent and current accounts. The Company provides these services on a national basis from its 18 call centers located in 15 states. The Company employs advanced workstations and sophisticated call management systems comprised of predictive dialers, automated call distribution systems, digital switching and customized computer software. Through efficient utilization of its technology and intensive management of human resources, the Company has achieved rapid growth in recent years. Since April 1994, the Company has completed eight acquisitions, including four in the first quarter of 1997, which have enabled it to increase its penetration of existing markets, establish a presence in certain new markets and realize significant operating efficiencies. In addition, the Company has leveraged its infrastructure by offering additional services including telemarketing, customer service call centers and other outsourced administrative services. The Company believes that it is currently among the 10 largest accounts receivable management companies in the United States. The Company provides its services principally to clients in the financial services, government, education, healthcare, retail and commercial, telecommunications and utilities sectors. The Company has over 7,000 clients, including Bell Atlantic Corporation, Pennsylvania Higher Education Assistance Agency, First Union Corporation, Medical Center of Delaware, PECO Energy Company, Federal Express Corporation and MCI Communications 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 outsource teleservices, the Company is paid on a fixed fee basis. While NCO's contracts are relatively short-term, the Company seeks to develop long-term relationships with its clients and works closely with them to provide quality customized solutions. 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. Based on studies published by the ACA, an industry trade group, it is estimated that receivables referred to third parties for management and recovery in the United States increased from approximately $43.7 billion in 1990 to approximately $84.3 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%, 22%, 12% and 9%, respectively, or an aggregate of 78%, of total industry referrals in 1995. The accounts receivable management industry is highly fragmented. Based on information obtained from the ACA, there are approximately 6,300 accounts receivable management companies in operation, 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 outsource their accounts 30 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 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 teleservices 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 teleservices 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 17%, to date. 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 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 acquisitions of CRWCD, Goodyear and CMS A/R allowed the Company to market its services nationwide and expand its penetration of the commercial collections market. The Company evaluates acquisitions using numerous criteria including size, management strength, service quality, industry focus, diversification of client base, operating characteristics and the ability to integrate the acquired businesses into the Company's operations and eliminate redundant costs. 31 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. In particular, the Company will continue to focus on the education, financial services, healthcare, telecommunications and utilities sectors. These sectors 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 new 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, telemarketing, telephone-based auditing and other administrative services outsourcing. 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 teleservices infrastructure. Although most of the Company's accounts receivable management services to date have focused on recovery of traditional delinquent accounts (which typically average approximately 282 days past due), 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 32 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. Account Notification. The Company initiates the recovery process by forwarding an initial letter which is designed to seek payment of the amount due or open a dialogue with customers who cannot afford to pay at the current time. This letter also serves as an official notification to each customer of their rights as required by the federal Fair Debt Collection Practices Act. The Company continues the recovery process with a series of mail and telephone notifications. Telephone representatives remind the customer of their obligation, inform them that their account has been placed for collection with the Company and begin a dialogue to develop a payment program. Credit Reporting. At a client's request, the Company will electronically report delinquent accounts to one or more of the national credit bureaus where it will remain for a period of up to seven years. The denial of future credit often motivates the payment of all past due accounts. Litigation Management. When account balances are sufficient, the Company will also coordinate litigation undertaken by a nationwide network of attorneys that the Company utilizes on a routine basis. Typically, account balances must be in excess of $1,000 to warrant litigation and the client is asked to advance legal costs such as filing fees and court costs. Attorneys generally are compensated on a contingency fee basis. The Company's collection support staff manages the Company's attorney relationships and facilitates the transfer of all necessary documentation. Payment Process. After the Company receives payment from the customer, it either remits the amount received net of its fee to the client or remits the entire amount received to the client and bills the client for its services. Activity Reports. Clients are provided with a system-generated set of standardized or customized reports that fully describes all account activity and current status. These reports are typically generated monthly, however, the information included in the report and the frequency that the reports are generated can be modified to meet the needs of the client. Quality Tracking. The Company emphasizes quality control throughout all phases of the accounts receivable management process. Some clients may specify an enhanced level of supervisory review and others may request customized quality reports. Large national credit grantors will typically have exacting performance standards which require sophisticated capabilities such as documented complaint tracking and specialized software to track quality metrics to facilitate the comparison of the Company's performance to that of its peers. Other Services The Company selectively provides other related services which complement its traditional accounts receivable management business and which leverage its teleservices infrastructure. The Company believes that the following services will provide additional growth opportunities for the Company. Telemarketing and Market Research. The Company provides telemarketing services for clients, including lead generation and qualification and the actual booking of appointments for a client's sales representatives. As a result of the TRC acquisition, the Company also provides market research and data collection services. Customer Service Call Center. The Company utilizes its communications and information system infrastructure to supplement or replace the customer service function of its clients. For example, the Company is currently engaged by PECO Energy Company, a regional utility, to function as its customer service department to field and respond to calls concerning new services which the utility is beginning to develop and offer. In this manner, the utility can focus on developing these services without investing the resources to build the in-house infrastructure necessary to respond to customer inquiries. 33 Accounts Receivable Outsourcing. The Company complements existing service lines by offering adjunct billing services to clients as an outsourcing option. Additionally, the Company can assist healthcare clients in the billing and management of third party insurance. Custom Designed Business Applications. The Company has the ability to provide outsourced administrative and other back-office responsibilities currently conducted by its clients. For example, the Company was engaged by 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. The Company also was engaged by Independence Blue Cross to audit its base of small business employer accounts to determine if individuals insured through these accounts were, in fact, employees. Operations Technology and Infrastructure. Over the past five years, the Company has made a substantial investment in its call management systems such as predictive dialers, automated call distribution systems, digital switching and customized computer software. As a result, the Company believes it is able to address accounts receivable management activities more reliably and more efficiently than many other accounts receivable management companies. The Company's systems also permit network access to enable clients to electronically communicate with NCO and monitor operational activity on a real-time basis. NCO provides its accounts receivable management services through the operation of 18 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 3455 computers which are linked via network servers to 583 workstations and which provide necessary redundancy (either computer can operate the system in the event of the failure of the other) and excess capacity for future growth. The other system consists of three Unix-based Hewlett-Packard computers which are linked via network servers to 754 workstations. The computers are linked via network servers to the Company's 1,337 workstations, which consist of personal computers and terminals that are linked to the microcomputers but do not have separate processors. The Company utilizes predictive dialers to address its low balance, high volume accounts. These systems scan the Company's database and simultaneously initiate calls on all available telephone lines and determine if a live connection is made. Upon determining that a live connection has been made, the computer immediately switches the call to an available representative and instantaneously displays the associated account record on the representative's workstation. Calls that reach other signals, such as a busy signal, telephone company intercept or no answer, are tagged for statistical analysis and placed in priority recall queues or multiple-pass calling cycles. The system also automates virtually all recordkeeping and follow-up activities including letter and report generation. The Company's automated method of operations dramatically improves the productivity of the Company's collection staff. The Company employs a 15 person MIS staff led by a Vice President - Chief Information Officer. The Company maintains disaster recovery contingency plans and has implemented procedures to protect the loss of data against power loss, fire and other casualty. The Company has implemented a security system to protect the integrity and confidentiality of its computer system and data and maintains comprehensive business interruption and critical systems insurance on its telecommunications and computer systems. Quality Assurance and Client Service. The Company's reputation for quality service is critical to acquiring and retaining clients. Therefore, the Company and its clients monitor the Company's representatives for strict compliance with the clients' specifications and the Company's policies. The Company regularly measures the quality of its services by capturing and reviewing such information as the amount of time spent talking with clients' customers, level of customer complaints and operating performance. In order to provide ongoing improvement to the Company's telephone representatives' performance and to assure compliance with the Company's policies and standards, quality assurance personnel monitor each telephone representative on a frequent basis and provide ongoing training to the representative based on this review. The Company's information systems enable it to provide clients with reports on a real-time basis as to the status of their accounts and clients can choose to network with the Company's computer system to access such information directly. 34 The Company maintains a client service department to promptly address client issues and questions and alert senior executives of potential problems that require their attention. In addition to addressing specific issues, a team of client service representatives will contact accounts on a regular basis in order to establish a close client rapport, determine the client's overall level of satisfaction and identify practical methods of improving the client's satisfaction. Client Relationships The Company's client base currently includes over 7,000 companies in the financial services, government, education, healthcare, retail and commercial, telecommunications and utilities sectors. The Company's 10 largest clients in 1996 accounted for approximately 22.7% of the Company's revenue on a pro forma basis assuming that the MAB acquisition and the 1997 Acquisitions had occurred on January 1, 1996. In 1996, no client accounted for more than 10% of total revenue (no more than 5% on a pro forma basis). In 1996, the Company on a pro forma basis derived 32.2% of its referrals from financial institutions, 19.3% from government entities, 17.1% from educational organizations, 11.8% from healthcare organizations, 8.3% from retail and commercial entities, 6.1% from telecommunications companies and 5.2% from utilities. The following table sets forth a list of certain of the Company's key clients:
Financial Services Education Healthcare - ------------------------------- ------------------------------- -------------------------------- First Union Corporation California Student Aid Catholic Health Initiatives Mellon Bank Corporation Commission Hutchinson Hospital Corporation NationsBank Corporation Penn State University Kaiser Permanente The Progressive Corporation Pennsylvania Higher Education Medical Center of Delaware United Healthcare Corporation Assistance Agency Reimbursement Technologies Inc. Seton Hall University University of Pennsylvania
Government and Utilities Telecommunications Retail and Commercial - ------------------------------- --------------------------- ----------------------------- Commonwealth Edison Company Bell Atlantic Corporation Airborne Freight Corporation Massachusetts Department of BellSouth Corporation Emery Worldwide Revenue Frontier Cellular Federal Express Corporation New York State Electric & Gas MCI Communications The Bon Ton Corporation Corporation PECO Energy Company Sprint Corporation Water Revenue Bureau, 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 44 person direct sales force. Each sales representative is charged with identifying leads, qualifying prospects and closing sales. When appropriate, Company operating personnel will join in the sales effort to provide detailed information and advice regarding the Company's operational capabilities. Sales and operating personnel also work together to take advantage of potential cross-selling opportunities. The Company supplements its direct sales effort with print media and attendance at trade shows. 35 Many of the Company's prospective clients issue requests-for-proposals ("RFPs") as part of the contract award process. The Company retains a technical writer for the purpose of preparing detailed, professional responses to RFPs. In addition, the effect of the Company's direct sales force in maintaining contact with the prospective client often allow them to serve in an informal advisory capacity to the prospective client with respect to the requirements of the RFP which the Company believes gives it a competitive edge in responding to the RFP. Personnel and Training The Company's success in recruiting, hiring and training a large number of employees is critical to its ability to provide high quality accounts receivable management, customer support and teleservices programs to its clients. The Company seeks to hire personnel with previous experience in accounts receivable management or as a telephone representative. NCO generally offers competitive compensation and benefits and offers promotion opportunities within the Company. All Company personnel receive a comprehensive training course that consists of a combination of classroom and practical experience. Prior to customer contact, new employees receive one week of training in the Company's operating systems, procedures and telephone techniques and instruction in applicable federal and state regulatory requirements. Company personnel also receive a wide variety of continuing professional education consisting of both classroom and role playing sessions. As of May 31, 1997, the Company had a total of 1,180 full-time employees and 255 part-time employees, of which 1,094 were telephone representatives. None of the Company's employees is represented by a labor union. The Company believes that its relations with its employees are good. Competition The accounts receivable management industry is highly competitive. The Company competes with approximately 6,300 providers, including large national corporations such as First Data Corporation, Equifax Inc., Outsourcing Solutions Inc., The Union Corporation 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 and price. The Company also competes with other firms, such as SITEL Corporation, APAC TeleServices, Inc. and TeleTech Holdings, Inc., in providing teleservices. Regulation The accounts receivable management industry is regulated both at the federal and state level. The federal Fair Debt Collection Practices Act (the "FDCPA") regulates any person who regularly collects or attempts to collect, directly or indirectly, consumer debts owed or asserted to be owed to another person. The FDCPA establishes specific guidelines and procedures which debt collectors must follow in communicating with consumer debtors, including the time, place and manner of such communications. Further, it prohibits harassment or abuse by debt collectors, including the threat of violence or criminal prosecution, obscene language or repeated telephone calls made with the intent to abuse or harass. The FDCPA also places restrictions on communications with individuals 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 36 is false or inaccurate. The accounts receivable management business is also subject to state regulation. Some states require that the Company be licensed as a debt collection company. Management believes that the Company currently holds applicable licenses from all states where required. With respect to the other teleservices offered by the Company, including telemarketing, the federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 (the "TCFAPA") broadly authorizes the Federal Trade Commission (the "FTC") to issue regulations prohibiting misrepresentations in telemarketing sales. The FTC's telemarketing sales rules prohibit misrepresentations of the cost, terms, restrictions, performance or duration of products or services offered by telephone solicitation and specifically address other perceived telemarketing abuses in the offering of prizes and the sale of business opportunities or investments. The federal Telephone Consumer Protection Act of 1991 (the "TCPA") limits the hours during which telemarketers may call consumers and prohibits the use of automated telephone dialing equipment to call certain telephone numbers. A number of states also regulate telemarketing. For example, some states have enacted restrictions similar to the federal TCPA. From time to time, Congress and the states consider legislation that would further regulate the Company's telemarketing operations and the Company cannot predict whether additional legislation will be enacted and, if enacted, what effect it would have on the telemarketing industry and the Company's business. Several of the industries served by the Company are also subject to varying degrees of government regulation. Although compliance with these regulations is generally the responsibility of the Company's clients, the Company could be subject to a variety of enforcement or private actions for its failure or the failure of its clients to comply with such regulations. The Company devotes significant and continuous efforts, through training of personnel and monitoring of compliance, to ensure that it is in compliance with all federal and state regulatory requirements. The Company believes that it is in material compliance with all such regulatory requirements. Facilities The Company currently operates 19 leased facilities. The Company intends to close or consolidate certain offices acquired in the 1997 Acquisitions. The chart below summarizes the Company's current call center facilities: Approximate Location of Facility Square Footage ------------------------ --------------- Blue Bell, PA(1) 36,500 Fort Washington, PA(1) 82,000 Tucson, AZ 1,400 San Diego, CA 3,200 Aurora, CO 4,800 Honolulu, HI 2,900 Hutchinson, KS 900 Wichita, KS 10,000 Metairie, LA 6,900 Beltsville, MD(2) 4,700 Crofton, MD(2) 12,000 Jackson, MI 12,200 Charlotte, NC 15,000 Buffalo, NY 30,000 Cleveland, OH 7,000 Tulsa, OK 13,900 Philadelphia, PA 5,700 Philadelphia, PA 5,500 Columbia, SC 10,500 Richardson, TX 6,100 - ------------ (1) The Company's headquarters will be relocated from Blue Bell, PA to Fort Washington, PA effective July 7, 1997. (2) Locations will be consolidated and relocated to a new facility during the second half of 1997. 37 The leases of these facilities expire between 1997 and 2009, 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 Birmingham, Alabama; Little Rock, Arkansas; Boston, Massachusetts; Las Vegas, Nevada; Jericho, New York; Houston, McAllen and Waco, Texas. The Company leases its corporate headquarters and processing facility in Blue Bell, Pennsylvania from three limited partnerships of which Messrs. Barrist, Piola and Miller and Mr. Barrist's mother are limited partners and Mr. Barrist is the sole shareholder of the corporate general partners. In July 1997, the Company will terminate its leases of the Blue Bell facilities (without penalty) and will relocate such offices to an 82,000 square foot facility located in Fort Washington, Pennsylvania leased from a limited partnership of which J. Brian O'Neill is a partner. Mr. O'Neill is a principal shareholder, Chairman of the Board and Chief Executive Officer, of CRW Financial, Inc., which owns 8.1% of the Company's Common Stock prior to this Offering as a result of the CRWCD acquisition. See "Management -- Certain Transactions -- Leases and "Principal and Selling Shareholders." 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. 38 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 ......... 36 Chairman of the Board, President and Chief Executive Officer Charles C. Piola, Jr. ...... 50 Executive Vice President and Director Bernard R. Miller ......... 49 Senior Vice President, Development and Director Steven L. Winokur ......... 37 Vice President, Finance, Chief Financial Officer and Treasurer Joseph C. McGowan ......... 43 Co-Chief Operating Officer Michael G. Noah ............ 51 Co-Chief Operating Officer Stephen Elliott ............ 35 Vice President, Technology and Chief Information Officer Steven Leckerman ............ 45 Vice President, Collection Operations Eric S. Siegel ............ 40 Director Allen F. Wise ............... 54 Director
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 BRM, a Philadelphia-based accounts receivable management company owned principally by Mr. Miller. Mr. Miller became a director in 1996. 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. Prior to that, Mr. Winokur acted as a part-time consultant to the Company since 1986. From February 1992 to December 1995, Mr. Winokur was the principal of Winokur & Associates, a certified public accounting firm. From March 1981 to February 1992, Mr. Winokur was a partner with Gross & Company, a certified public accounting firm, where he most recently served as Administrative Partner. Mr. Winokur is a certified public accountant. Joseph C. McGowan joined the Company in 1990 as Vice President, Operations and became Co-Chief Operating Officer in February 1997. Prior to that, Mr. McGowan was Assistant Manager of the Collections Department at Philadelphia Gas Works, a public utility, since 1975. Michael G. Noah has been President of MAB since May 1994. He became Co-Chief Operating Officer of the Company in February 1997. Prior to joining MAB, he was an Executive Vice President of Everest National Bank, a subsidiary of GE Capital, since August 1991. 39 Stephen Elliott joined the Company in May 1996 as 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. Steven Leckerman joined the Company in September 1995 as 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. 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 US Healthcare, Inc. from April 1985 to September 1991. Mr. Wise is also a director of Transition Systems Inc. Board of Directors Following completion of the Company's initial public offering in the fourth quarter of 1996, the Board of Directors was reorganized by increasing the number of directors from three to five, appointing Eric S. Siegel and Allen F. Wise as outside directors to fill the vacancies created by the increase and dividing the Board into three classes. Class I consists of Mr. Michael J. Barrist, whose term will expire at the 1997 Annual Meeting of Shareholders; Class II consists of Messrs. Bernard R. Miller and Allen F. Wise, whose terms will expire at the 1998 Annual Meeting of Shareholders; and Class III consists of Messrs. Charles C. Piola and Eric S. Siegel, whose terms will expire at the 1999 Annual Meeting of Shareholders. Beginning with the 1997 Annual Meeting of Shareholders, directors whose terms are expiring will be elected by the shareholders to serve for three year terms. Audit Committee. The Board of Directors has established an Audit Committee, consisting of Messrs. Siegel and Wise, to make recommendations concerning the engagement of independent public accountants; review with the independent public accountants the plans for and scope of the audit, the audit procedures to be utilized and the results of the audit; approve the professional services provided by the independent public accountants; review the independence of the independent public accountants; and review the adequacy and effectiveness of the Company's internal accounting controls. Compensation Committee. The Board of Directors has established a Compensation Committee, consisting of Messrs. Barrist, Siegel and Wise, to make recommendations to the Board of Directors concerning compensation for the Company's executive officers; review general compensation levels for other employees as a group; and take such other actions as may be required in connection with the Company's compensation and incentive plans. Director Compensation Each director of the Company who is not also an employee receives an annual fee of $5,000 and a fee of $500 for each meeting of the Board or any committee of the Board attended, plus reimbursement of expenses incurred in attending meetings. Non-employee directors receive stock options pursuant to the Company's 1996 Non-Employee Director Stock Option Plan and all directors, including non-employee directors, are eligible to participate in the Company's 1996 Stock Option Plan. See "-- Stock Option Plans." 40 Executive Compensation Summary Compensation Table. The following table sets forth the compensation earned by the Chief Executive Officer and the four next most highly compensated executive officers of the Company whose aggregate salaries and bonuses exceeded $100,000 (collectively, the "Named Executive Officers") for services rendered in all capacities to the Company during 1996. SUMMARY COMPENSATION TABLE
Long-Term Compensation Awards (1) Annual Compensation ------------- ------------------------------- Securities Name and Underlying All Other Principal Position Year Salary ($) Bonus ($) Options (#) Compensation ($)(2) - ------------------------------------- ------ ------------ ---------------- ------------- -------------------- Michael J. Barrist .................. 1996 $208,653 $ 53,862(3) -- $5,957 Chairman of the Board, President and 1995 200,000 242,641 -- 5,993 Chief Executive Officer Charles C. Piola, Jr. ............... 1996 202,884 33,333(3) -- 16,413 Executive Vice President and 1995 200,000 135,714 -- 15,835 Director Bernard R. Miller .................. 1996 136,730 26,448(3) 50,000 7,926 Senior Vice President, Development 1995 130,000 21,645 -- 5,955 and Director Steven L. Winokur .................. 1996 149,422 35,000 31,201 -- Vice President, Finance, Chief 1995 -- -- 33,257 -- Financial Officer and Treasurer Joseph C. McGowan .................. 1996 117,000 18,000 41,600 3,664 Co-Chief Operating Officer (4) 1995 100,000 30,000 44,344 5,088
- ------------ (1) The Company did not grant any restricted stock awards or stock appreciation rights during 1995 or 1996. (2) For 1996, consists of premiums for disability policies paid by the Company of $3,582, $14,038, $6,217, $0, and $1,989 and the Company matching contribution under the 401(k) Profit Sharing Plan of $2,375, $2,375, $1,709, $0 and $1,675 for the benefit of Messrs. Barrist, Piola, Miller, Winokur and McGowan, respectively. (3) These bonus amounts represent the bonuses earned by the respective officers from September 3, 1996, the date of the Company's termination of its status as an S Corporation under the Internal Revenue Code of 1986, as amended, until December 31, 1996 pursuant to bonus arrangements contained in their respective employment agreements. No bonus was paid to these executive officers (who were also shareholders) for the period while the Corporation was an S Corporation in 1996. If the bonus arrangements had been in effect for the entire year, the bonus amounts for 1996 for Messrs. Barrist, Piola and Miller would have been $161,587, $100,000 and $79,343, respectively. (4) Mr. McGowan became Co-Chief Operating Officer in 1997. 41 1996 Option Grants Table. The following table sets forth certain information concerning stock options granted during 1996 to each of the Named Executive Officers. OPTION GRANTS IN 1996
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Individual Grants Option Term (1) ------------------------------------------------------------ ------------------------ Number of Percent of Securities Total Options Underlying Granted to Exercise Options Employees in Price Per Expiration Name Granted Fiscal Year Share Date 5% 10% - ----------------------------- --------------- -------------- ----------- ----------- ---------- ----------- Michael J. Barrist ......... -- -- -- -- -- -- Charles C. Piola, Jr. ...... -- -- -- -- -- -- Bernard R. Miller ......... 50,000(2) 17.1% $ 17.00 12/18/06 $534,560 $1,354,681 Steven L. Winokur ......... 31,201(3) 10.6% 13.00 10/17/06 255,088 646,443 Joseph C. McGowan ......... 41,600(3) 14.2% 13.00 10/17/06 340,106 861,896
- ------------ (1) Represents the difference between the market value of the Common Stock for which the option may be exercised, assuming that the market value of the Common Stock on the date of grant appreciates in value to the end of the 10-year option term at annualized rates of 5% and 10%, respectively, and the exercise price of the option. The rates of appreciation used in this table are prescribed by regulation of the SEC and are not intended to forecast future appreciation of the market value of the Common Stock. (2) These options were granted on 12/18/96 at the fair market value of the Common Stock on the date of grant and become exercisable in three equal annual installments beginning one year after the date of grant. (3) These options were granted on 10/17/96 at the initial public offering price of the Common Stock and become exercisable in three equal annual installments beginning one year after the date of grant. Aggregated Option Exercises in 1996 and 1996 Year-End Option Values Table. No stock options were exercised in 1996. The following table sets forth certain information concerning the number of unexercised options and the value of unexercised options at December 31, 1996 held by each of the Named Executive Officers. AGGREGATED OPTION EXERCISES IN 1996 AND 1996 YEAR-END OPTION VALUES
Number of Securities Underlying Value of Unexercised Shares Unexercised Options at In-the-Money Options at Acquired Value December 31, 1996 December 31, 1996(1) Name on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable - --------------------------- ------------- ---------- --------------------------------- -------------------------- Michael J. Barrist ...... -- -- --/-- --/-- Charles C. Piola, Jr. ... -- -- --/-- --/-- Bernard R. Miller ......... -- -- --/50,000 --/$0 Steven L. Winokur ......... -- -- 11,086/53,373 $156,811/$434,513 Joseph C. McGowan ......... -- -- 14,781/71,163 $209,077/$579,369
- ------------ (1) Represents the difference between the last sale price of the Common Stock on December 31, 1996 ($16.875 per share), as reported on the Nasdaq National Market, and the exercise price of in-the-money options, multiplied by the number of exercisable or unexercisable options held, as the case may be. 42 Employment Agreements In September 1996, the Company entered into five-year employment agreements with Messrs. Barrist, Piola, Miller, Winokur and McGowan pursuant to which they are entitled to receive annual base salaries of $275,000, $225,000, $150,000, $150,000, and $125,000, respectively, adjusted each year in accordance with the Consumer Price Index. Mr. Barrist is entitled to receive an annual bonus of $50,000 if the Company reaches performance goals determined by the Board of Directors. He is also entitled to a bonus of $100,000 if the Company's net income increases by 20% over the prior year and a bonus equal to 5% of any increase in net income in excess of 20%, in each case adjusted for dilution. Mr. Piola is eligible for an annual bonus of $50,000, $75,000, or $100,000 if the Company's annual increase in net income (adjusted for dilution) over the prior year exceeds 20%, 30%, or 40%, respectively. Mr. Miller is entitled to a bonus equal to .00375 of the annualized revenue resulting from companies acquired during the preceding year, subject to a maximum bonus of $100,000. Messrs. Winokur and McGowan receive such annual bonuses as are determined by the Board of Directors. Each of the employment agreements provides that, in the event of the death of the employee or the termination of employment by the Company other than "for cause" (as defined in the agreements), the Company shall continue to pay the employee's full compensation, including bonuses, for the balance of the employment term. In addition to a non-disclosure covenant, each employment agreement also contains a covenant-not-to-compete with the Company for a period of two years following the date that the Company ceases to pay the employee any compensation pursuant to the terms of the agreement. Stock Option Plans In June 1995, the Company adopted, and the shareholders approved, the Company's 1995 Stock Option Plan (the "1995 Plan"). In September 1996, the Company adopted, and the shareholders approved, the 1996 Stock Option Plan (the "1996 Plan") and the 1996 Non-Employee Director Stock Option Plan (the "Director Plan" and collectively with the 1995 Plan and the 1996 Plan, the "Plans"). The 1996 Plan was amended by the Board in January 1997 and the Director Plan was amended by the Board in April 1997, in each case subject to shareholder approval at the 1997 Annual Meeting of Shareholders to be held on June 23, 1997. The purpose of the Plans is to attract and retain employees, non-employee directors, and independent consultants and contractors and to provide additional incentive to them by encouraging them to invest in the Common Stock and acquire an increased personal interest in the Company's business. Payment of the exercise price for options granted under the Plans may be made in cash, shares of Common Stock or a combination of both. All options granted pursuant to the Plans are exercisable in accordance with a vesting schedule which is set at the time of the issuance of the option and, except as indicated below, may not be exercised more than ten years from the date of grant. Options granted under the Plans will become immediately exercisable upon a "change in control" as defined in the Plans. 1995 Plan and 1996 Plan. All officers, directors, key employees, independent contractors and independent consultants of the Company or any of its current or future parents or subsidiaries are eligible to receive options under the 1995 Plan and the 1996 Plan. These Plans are administered by the Compensation Committee of the Board of Directors or, at the option of the Board of Directors, the Board may administer the Plans. The Committee will select the optionees and will determine the nature of the option granted, the number of shares subject to each option, the option vesting schedule and other terms and conditions of each option. The Board of Directors may modify or supplement these Plans and outstanding options and may suspend or terminate these Plans, provided that such action may not adversely affect outstanding options. The Company has reserved 221,719 shares of Common Stock for issuance upon the exercise of options granted under the 1995 Plan and 478,281 shares of Common Stock for issuance upon the exercise of options granted under the 1996 Plan, which includes an increase of 259,868 shares of Common Stock, which increase is subject to shareholder approval in connection with the amendment of the 1996 Plan. Options to purchase an aggregate of 566,971 shares of Common Stock have been issued under the 1995 Plan and the 1996 Plan, including options to purchase 126,839 shares subject to shareholder approval in connection with the amendment of the 1996 Plan. Options granted under these Plans may be incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or options not intended to so qualify. These Plans require the exercise price of incentive stock options to be at least equal to the fair market value of the 43 Common Stock on the date of the grant. In the case of options granted to a shareholder owning, directly or indirectly, in excess of 10% of the Common Stock, the option exercise price must be at least equal to 110% of the fair market value of the Common Stock on the date of grant and such option may not be exercised more than five years from the date of grant. The option price for non-qualified options, at the discretion of the Compensation Committee, may be less than the fair market value of the Common Stock on the date of grant. All unexercised options terminate three months following the date on which an optionee's employment by, or relationship with, the Company or any parent or subsidiary of the Company, terminates other than by reason of disability or death (but not later than the expiration date) whether or not such termination is voluntary. Any option held by an employee who dies or who ceases to be employed because of disability must be exercised by the employee or his representative within one year after the employee dies or ceases to be an employee (but not later than the scheduled termination date). Options are not transferable except to the decedent's estate in the event of death. No additional options may be granted under the 1995 Plan and no option may be granted under the 1996 Plan after August 2006. No individual may receive options under the 1995 Plan or the 1996 Plan for more than 90% of the total number of shares of the Company's Common Stock authorized for issuance under such Plans. Director Plan. All non-employee directors automatically receive options under the Director Plan. The Director Plan is administered by the Board of Directors of the Company, including non-employee directors, who may modify, amend, suspend or terminate the plan, other than the number of shares with respect to which options are to be granted, the option exercise price, the class of persons eligible to participate, or options previously granted. The Company has reserved 100,000 shares of Common Stock for issuance upon the exercise of options under the Director Plan, which includes an increase of 75,742 shares of Common Stock which increase is subject to shareholder approval in connection with the amendment of the Director Plan. Options granted under the Director Plan are not incentive stock options under Section 422 of the Code. Under the Director Plan, as amended, each person who was a non-employee director as of the date of the approval of the amendments by the Board and each person who thereafter is first elected or appointed to serve as a non-employee director of the Company automatically would be granted an option to purchase 10,000 shares of Common Stock and automatically would be granted an option to purchase 2,000 shares of Common Stock at each annual meeting of shareholders thereafter (beginning with the 1997 Annual Meeting of Shareholders) provided that such person is re-elected or continues to serve as a non-employee director. Each of Messrs. Siegel and Wise was granted an option to purchase 1,000 shares of Common Stock at an exercise price of $18.125 per share upon their appointment to the Board of Directors in December 1996. As a result of the amendments to the Director Plan, and subject to shareholder approval, each of Messrs. Siegel and Wise received a grant of an option to purchase 10,000 shares of Common Stock in April 1997 at an exercise price of $25.00 per share and will be granted an option to purchase 2,000 shares immediately following the 1997 Annual Meeting of Shareholders at the fair market value of the Common Stock on the date of grant. Compensation Committee Interlocks and Insider Participation in Compensation Decisions Prior to the completion of the Company's IPO, the Company did not have a Compensation Committee and compensation decisions were made by the Board of Directors, consisting of Messrs. Barrist, Piola and Miller, each of whom is also an executive officer of the Company. In December, the Board appointed Messrs. Siegel and Wise to the Board and established a Compensation Committee consisting of Messrs. Barrist, Siegel and Wise. CERTAIN TRANSACTIONS Real Estate Matters The Company currently leases four facilities in Blue Bell, Pennsylvania. These facilities are leased from limited partnerships, in each case the general partner of which is a corporation with Mr. Barrist as the sole shareholder and the limited partners of which are Messrs. Barrist, Piola, Miller and Mr. Barrist's mother, except that, in certain partnerships, an unaffiliated person is also a limited partner. Under the facilities leases, the Com- 44 pany paid the limited partnerships owned by the persons named above approximately $297,500, $385,217, $489,926 and $151,101 for the years ended December 31, 1994, 1995, 1996 and the three months ended March 31, 1997, respectively. At one of the facilities, the Company has sublet the space to an affiliate of the limited partnership owning the facility for a monthly rent of $1,454, which is equal to the monthly rent paid by the Company. The Company made interest-free advances to the limited partnerships for the purpose of making improvements to these facilities. The largest aggregate amount of indebtedness outstanding during 1994, 1995 and 1996 was $64,000, $100,000 and $249,820, respectively. These amounts were repaid in June 1996. In July 1997, the Company will terminate its leases of the Blue Bell facilities and will relocate such offices to a 82,000 square foot facility located in Fort Washington, Pennsylvania leased from a limited partnership of which J. Brian O'Neill is a partner. Mr. O'Neill is a principal shareholder, and the Chairman of the Board and Chief Executive Officer, of CRW Financial, Inc., which owns 8.1% of the Company's Common Stock as a result of the Company's acquisition of CRWCD. The lease term is 12 years beginning on July 1, 1997. The annual rental for the first five years of the lease is $1.1 million and the Company is responsible for the payment of operating expenses, taxes and insurance. The Company believes that the terms of the leases described above are no less favorable to the Company than would have been obtained from unaffiliated parties. See "Business -- Facilities" and Note 11 of Notes to Consolidated Financial Statements. Any material transactions that may arise in the future with respect to these leases or any other future material transactions between the Company and its directors, executive officers or principal shareholders will be subject to approval by the Company's independent directors and will be on terms no less favorable to the Company than could be obtained from unaffiliated third parties. S Corporation Distributions On the Termination Date, the Company terminated its status as an S Corporation. In connection therewith, the Company declared a distribution to the then existing shareholders in an amount equal to the Company's undistributed S Corporation earnings as of such date, and paid such distributions with a portion of the proceeds of its IPO including distributions of $1,815,042, $1,015,193, $170,508 and $246,108 to Messrs. Barrist, Piola and Miller, and Mrs. Annette Barrist, respectively. Distribution and Tax Indemnification Agreement In 1996, the Company entered into a distribution and tax indemnification agreement with its shareholders as of the Termination Date which provided for: (i) the payment of the estimated S Corporation distribution described above; (ii) the adjustment of the S Corporation distributions based on the final determination of the Company's actual undistributed S Corporation earnings through the Termination Date; (iii) an indemnification by the Company of such shareholders for any losses or liabilities with respect to any additional taxes (including interest, penalties, legal and accounting fees and any additional taxes resulting from any indemnification) resulting from the Company's operations during the period in which it was an S Corporation (the "S Corporation Period"); and (iv) an indemnification by such shareholders of the Company for the amount of any tax refund received by such shareholders due to a reduction in their share of the Company's S Corporation taxable income for the S Corporation Period less any taxes, interest or penalties imposed by any tax authority on any distributions to such shareholders with respect to the S Corporation Period in excess of such shareholder's share of taxable income of the Company for the S Corporation Period. Loan to Bernard R. Miller In 1995, the Company loaned $135,888 to Bernard R. Miller, Senior Vice President of Development and a director of the Company, at an interest rate of 7.0% per year to enable him to exercise an option to purchase 86,881 shares of Common Stock, which option was issued to him in connection with the acquisition of BRM, a company which was principally owned by Mr. Miller. This loan was repaid in May 1996. 45 Professional Services The Company paid consulting fees of $40,000 to Siegel Management Company in 1996. The Company also paid a fee to Siegel Management Company of $240,000 after the consummation of its IPO for various consulting and advisory services rendered to the Company in connection with such public offering. Eric S. Siegel is a director of the Company and is the President and owner of Siegel Management Company. In connection with such consulting services, in 1996 Mr. Siegel also received options to purchase 11,086 shares of Common Stock under the Company's 1995 Stock Option Plan at an exercise price of $13.00 per share. 46 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of June 9, 1997, 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) each of the Named 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 Owned Shares Beneficially Owned Prior to the Offering After the Offering ----------------------- Shares Being -------------------------- Name of Beneficial Owner Number Percent Offered Number Percent - -------------------------------------- ----------- --------- -------------- ----------- -------- APT Holdings Corporation (1) ......... 240,591 3.3% 150,000 90,591 1.1% Annette H. Barrist (2) ............... 231,501 3.3 34,725 196,776 2.3 Joshua Gindin, Esq. and Michael J. Barrist, Trustees, U/A/T dated 10/16/96, Annette H. Barrist, Settlor ........................... 60,192 * 9,029 51,163 * Michael J. Barrist (3)(4) ............ 2,302,650 32.6 246,350 2,056,300 24.1 Joshua Gindin, Esq. and Steven Winokur, CPA, Trustees, U/A/T dated 9/6/96, Michael J. Barrist and Natalie Barrist, Settlors ...... 140,518 2.0 21,078 119,440 1.4 Craig Costanzo (5) .................. 76,923 1.1 76,923 -- -- CRW Financial, Inc. (6) ............ 595,178 8.1 345,178 250,000 2.8 Stephen Elliott (7) .................. 14,781 * 7,196 7,585 * Steven Leckerman (7) ............... 7,390 * 7,196 194 * Mark Macrone (7) ..................... 22,172 * 10,044 12,128 * Joseph C. McGowan (7) ............... 29,563 * 14,392 15,171 * Bernard R. Miller .................. 191,934 2.7 37,790 154,144 1.8 Charles C. Piola, Jr.(3)(8) ......... 1,062,827 15.1 107,283 955,544 11.2 Joshua Gindin, Esq., Trustee U/A/T dated 9/6/96, Charles C. Piola, Jr. and June Piola, Settlors ...... 140,518 2.0 21,078 119,440 1.4 Eric S. Siegel (9) .................. 5,695 * -- 5,695 * Steven L. Winokur (10) ............... 162,689 2.3 32,570 130,119 1.5 Allen F. Wise ........................ -- -- -- -- -- All directors and executive officers as a group (8 persons) (11) ......... 3,755,358 52.8 438,385 3,316,973 38.7
- ------------ * Less than one percent. (1) Represents shares issuable upon the exercise of warrants originally issued to Mellon Bank, N.A. and subsequently assigned to APT Holdings Corporation, an affiliate. (2) Excludes 60,192 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. (3) The address of such person is c/o NCO Group, Inc., 1740 Walton Road, Blue Bell, Pennsylvania 19422-0987; effective July 7, 1997 the address of such person is c/o NCO Group, Inc., 515 Pennsylvania Avenue, Fort Washington, Pennsylvania 19034. (4) Includes: (i) 231,501 shares of Common Stock owned by Mrs. Annette Barrist (including 34,725 shares being sold by her in the Offering) which Mr. Barrist has the sole right to vote pursuant to an irrevocable proxy; and (ii) 60,192 shares held in trust for the benefit of members of Mrs. Annette Barrist's family (including 9,029 shares being sold by such trust) for which Mr. Barrist is a co-trustee. Excludes 140,518 47 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 221,246 shares and would beneficially own 21.5% of the outstanding Common Stock after the Offering. (5) Represents shares issuable upon conversation of a $1.0 million Convertible Note issued as partial consideration in the MAB acquisition. (6) Represents 345,178 outstanding shares and 250,000 shares issuable upon exercise of a warrant issued as partial consideration in the CRWCD acquisition. The address of CRW Financial, Inc. is 443 South Gulph Road, King of Prussia, PA 19406. (7) Represents shares issuable upon the exercise of options which are exercisable within 60 days after June 9, 1997. Such person will exercise options to acquire all of the shares being sold by him in the Offering. (8) Excludes 140,518 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 117,154 shares and would beneficially own 9.8% of the outstanding Common Stock after the Offering. (9) Includes 3,695 shares issuable upon the exercise of options which are exercisable within 60 days after June 9, 1997. (10) Represents: (i) 140,518 shares held in trust for the benefit of Mr. Barrist's child (including 21,078 shares being sold by such trust) for which Mr. Winokur is a co-trustee; and (ii) 22,171 shares issuable upon the exercise of options which are exercisable within 60 days after June 9, 1997. Mr. Winokur will exercise options to acquire all of the shares being sold by him in the Offering. (11) Includes: (i) 231,501 shares of Common Stock owned by Mrs. Annette Barrist (including 34,725 shares being sold by her in the Offering) which Mr. Barrist has the sole right to vote pursuant to an irrevocable proxy; (ii) 60,192 shares held in trust for the benefit of members of Mrs. Annette Barrist's family (including 9,029 shares being sold by such trust) for which Mr. Barrist is a co-trustee; (iii) 140,518 shares held in trust for the benefit of Mr. Barrist's child for which Mr. Winokur is a co-trustee; and (iv) an aggregate of 55,429 shares issuable upon exercise of options which are exercisable within 60 days after June 9, 1997. Excludes 140,518 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 338,400 shares and would beneficially own 34.8% of the outstanding Common Stock after the Offering. 48 DESCRIPTION OF CAPITAL STOCK The Company is authorized to issue 25,000,000 shares of Common Stock, no par value, and 5,000,000 shares of Preferred Stock, no par value, issuable in series, the relative rights, limitations and preferences of which may be designated by the Board of Directors ("Preferred Stock"). As of June 9, 1997, 7,058,625 shares of Common Stock were issued and outstanding and held of record by 29 shareholders and no shares of Preferred Stock were outstanding. Common Stock The holders of Common Stock are entitled to one vote per share on all matters to be voted upon by shareholders. Subject to preferences that may be applicable to any then outstanding Preferred Stock, the holders of Common Stock are entitled, among other things: (i) to share ratably in dividends if, when and as declared by the Board of Directors out of funds legally available therefor; and (ii) in the event of liquidation, dissolution or winding-up of the Company, to share ratably in the distribution of assets legally available therefor, after payment of debts and expenses. The holders of Common Stock do not have cumulative voting rights in the election of directors and have no preemptive rights to subscribe for additional shares of capital stock of the Company. All currently outstanding shares of the Common Stock are, and the shares offered hereby, when sold in the manner contemplated by this Prospectus will be, fully paid and nonassessable. The rights, preferences and privileges of holders of Common Stock are subject to the terms of any series of Preferred Stock which the Company may issue in the future. Preferred Stock The Preferred Stock may be issued from time to time by the Board of Directors as shares of one or more classes or series. Subject to the provisions of the Company's Articles and limitations prescribed by law, the Board of Directors is expressly authorized to adopt resolutions to issue the shares, to fix the number of shares, to change the number of shares constituting any series, and to provide for or change the voting powers, designations, preferences and relative, participating, optional or other special rights, qualifications, limitations or restrictions thereof, including dividend rights (including whether dividends are cumulative), dividend rates, terms of redemption (including sinking fund provisions), redemption prices, conversion rights and liquidation preferences of the shares constituting any class or series of the Preferred Stock, in each case without any further action or vote by the shareholders. The Company has no current plans to issue any shares of Preferred Stock. One of the effects of undesignated Preferred Stock may be to enable the Board of Directors to render more difficult or to discourage an attempt to obtain control of the Company by means of a tender offer, proxy contest, merger or otherwise, and thereby to protect the continuity of the Company's management. The issuance of shares of the Preferred Stock pursuant to the Board of Directors' authority described above may adversely affect the rights of the holders of Common Stock. For example, Preferred Stock issued by the Company may rank prior to the Common Stock as to dividend rights, liquidation preference or both, may have full or limited voting rights and may be convertible into shares of Common Stock. Accordingly, the issuance of shares of Preferred Stock may discourage bids for the Common Stock or may otherwise adversely affect the market price of the Common Stock. Warrants and Convertible Notes The Company issued a warrant (the "First Mellon Warrant") to purchase 175,531 shares of Common Stock to Mellon Bank, N.A. pursuant to the Company's Credit Agreement. The First Mellon Warrant is exercisable at any time prior to July 31, 2005 at a nominal exercise price. The Company issued a warrant (the "Second Mellon Warrant") to purchase an additional 46,560 shares of Common Stock to Mellon Bank, N.A. upon the amendment of the Credit Agreement. The First Mellon Warrant and the Second Mellon Warrant were subsequently assigned to APT Holdings Corporation, an affiliate of Mellon Bank, N.A. The Company issued an additional warrant (the "Third Mellon Warrant") to APT Holdings Corporation to purchase 18,500 shares of Common Stock in consideration of the increase in the revolving credit facility to $25.0 million. The Second Mellon Warrant and the Third Mellon Warrant each have an exercise price of $13.00 per share and expire on July 31, 2005. The number of shares of Common Stock which may be acquired upon exercise of the First Mellon Warrant, Second 49 Mellon Warrant and Third Mellon Warrant (collectively, the "Warrants") and the exercise price are each subject to adjustment in certain circumstances, including the sale by the Company of Common Stock at a price per share less than the then current fair market value of the Common Stock. The holder of the Warrants also has the right to surrender the Warrants in exchange for shares of Common Stock having an aggregate fair market value equal to the amount by which the aggregate fair market value of all of the shares issuable upon exercise of the Warrants exceeds the aggregate exercise price of the Warrants. In connection with the Credit Agreement, the Company entered into a Registration Rights Agreement granting APT Holdings Corporation and its transferees (collectively, "Holders") the right to register the shares received upon exercise of the Warrants under the Securities Act. Whenever the Company proposes to register any shares of Common Stock at any time prior to July 31, 2005, the Company is required to give notice to the Holders of the proposed registration and to include their shares in such registrations, subject to certain conditions including the right of the underwriters of such offering to limit the number of shares sold by the Holders if, in the underwriters' opinion, the number of securities requested to be included in such registration exceeds the number which can be sold without adversely affecting the marketability of the offering. The Holders may also require the Company to file up to two registration statements under the Securities Act with respect to such shares. The Company is required to pay all registration expenses (other than underwriting discounts), including the reasonable fees of one counsel chosen by the Holders. APT Holdings Corporation has elected to exercise the First Mellon Warrant for 150,000 shares of Common Stock and to have the Company register the shares of Common Stock received upon exercise for sale in the Offering. APT Holdings Corporation will continue to have demand and piggyback registration rights with respect to the unexercised Warrants for 90,591 shares of Common Stock upon completion of the Offering. As part of the purchase price for the MAB acquisition, the Company issued a $1.0 million Convertible Note which is convertible into 76,923 shares of Common Stock at any time prior to maturity in September 2001 (the "MAB Convertible Note"). As part of the purchase price for the Goodyear acquisition, the Company issued a $900,000 Convertible Note which is convertible into 42,503 shares of Common Stock at any time prior to maturity in January 2002. Whenever the Company proposes to register any securities under the Securities Act and the form of registration statement to be used permits registration of the shares of Common Stock issuable upon conversion of the Convertible Notes, the Company is required to give prompt notice to the holders of the Convertible Notes who, at their expense, shall have the right to include the shares of Common Stock issuable upon conversion of the Convertible Notes in such registration. The holder of the MAB Convertible Note has elected to convert the principal amount of the Note into 76,923 shares of Common Stock and to have the Company register the shares received upon conversion for sale in the Offering. As part of the purchase price for the CRWCD acquisition, the Company issued a warrant to purchase 250,000 shares of Common Stock at an exercise price of $27.625 per share. In connection with the CRWCD Acquisition, the Company entered into a Registration Rights Agreement granting CRW Financial, Inc. and its transferees, among other things, the right to register the shares received upon exercise of the Warrants under the Securities Act. Whenever the Company proposes to register any shares of Common Stock at any time prior to February 1, 2002, the Company is required to give notice to CRW Financial, Inc. of the proposed registration and to include its shares in such registrations, subject to certain conditions including the right of the underwriters of such offering to limit the number of shares sold by CRW Financial, Inc. if, in the underwriters' opinion, the number of securities requested to be included in such registration exceeds the number which can be sold without adversely affecting the marketability of the offering. CRW Financial, Inc. may also require the Company to file one registration statement under the Securities Act with respect to such shares at any time after November 13, 1997. The Company is required to pay all registration expenses (other than underwriting discounts, the fees and expenses of the CRW Holders' counsel, and a proportionate share of any registration and filing fees with respect to such shares). CRW Financial, Inc. has elected to sell the 345,178 shares received as partial consideration for the CRWCD acquisition in the Offering pursuant to application registration rights under the Registration Rights Agreement. Anti-Takeover Provisions The Company's Articles and Bylaws contain several provisions intended to limit the possibility of, or make more difficult, a takeover of the Company. In addition to providing for a classified Board of Directors and the 50 issuance of Preferred Stock having terms established by the Board of Directors without shareholder approval, the Articles provide that: (i) at least 65% of the votes entitled to be cast by shareholders is required to approve amendments to the Articles and Bylaws, unless at least a majority of the incumbent directors on the Board of Directors has voted in favor of the amendment, in which case only a majority of the votes cast by shareholders is required to approve the amendment; (ii) directors can be removed only for cause and only by a vote of at least 65% of the votes entitled to be cast by shareholders; and (iii) the shareholders of the Company are not entitled to call special meetings of the shareholders. In addition, the Articles provide that actions by shareholders without a meeting must receive the unanimous written consent of all shareholders. The Articles also permit the Board of Directors to oppose, in its sole discretion, a tender offer or other offer for the Company's securities and to take into consideration all pertinent issues. Should the Board of Directors determine to reject such an offer, it may take any lawful action to accomplish its purpose, including, among other things, advising shareholders not to accept the offer and commencing litigation against the offeror. The Company's Bylaws establish procedures for the nomination of directors by shareholders and the proposal by shareholders of matters to be considered at meetings of the shareholders, including the submission of certain information within the times prescribed in the Bylaws. In addition, under the Pennsylvania Business Corporation Law of 1988, as amended (the "BCL"), subject to certain exceptions, a business combination between a Pennsylvania corporation and a person owning 20% or more of such corporation's voting stock (an "interested person") may be accomplished only if: (i) the business combination is approved by the corporation's directors prior to the date on which such person acquired 20% or more of such stock or if the board approved such person's acquisition of 20% or more of such stock prior to such acquisition; (ii) the interested person owns shares entitled to cast at least 80% of the votes all shareholders would be entitled to cast in the election of directors, the business combination is approved by the vote of shareholders entitled to cast a majority of votes that all stockholders would be entitled to cast in an election of directors (excluding shares held by the interested person), which vote may occur no earlier than three months after the interested person acquired its 80% ownership, and the consideration received by shareholders in the business combination satisfies certain minimum conditions; (iii) the business combination is approved by the affirmative vote of all outstanding shares of common stock; or (iv) the business combination is approved by the vote of shareholders entitled to cast a majority of the votes that all shareholders would be entitled to cast in the election of directors (excluding shares held by the interested person), which vote may occur no earlier than five years after the interested person became an interested person. A corporation may exempt itself from this provision by an amendment to its articles of incorporation that requires shareholder approval. The Articles do not provide an exemption from this provision. Pennsylvania has also adopted other anti-takeover legislation from which the Company has elected to exempt itself in the Articles. The BCL also provides that the directors of a corporation, in making decisions concerning takeovers or any other matters, may consider, to the extent that they deem appropriate, among other things: (i) the effects of any proposed transaction upon any or all groups affected by such action, including, among others, shareholders, employees, suppliers, customers and creditors; (ii) the short-term and long-term interests of the corporation; and (iii) the resources, intent and conduct of the person seeking control. The existence of the foregoing provisions of the Articles, Bylaws and BCL may discourage other persons or companies from making a tender offer for, or seeking to acquire, substantial amounts of the Company's Common Stock. Limitations on Directors' Liabilities and Indemnification As permitted by the BCL, the Company's Bylaws provide that a director shall not be personally liable in such capacity for monetary damages for any action taken, or any failure to take any action, unless the director breaches or fails to perform the duties of his or her office under the BCL, and the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. These provisions of the Bylaws, however, do not apply to the responsibility or liability of a director pursuant to any criminal statute, or to the liability of a director for the payment of taxes pursuant to local, Pennsylvania or federal law. These provisions offer persons who serve on the Board of Directors of the Company protection against awards of monetary damages for negligence in the performance of their duties. 51 The Bylaws also provide that every person who is or was a director or executive officer of the Company, or of any corporation which he served as such at the request of the Company, shall be indemnified by the Company to the fullest extent permitted by law against all expenses and liabilities reasonably incurred by or imposed upon him, in connection with any proceeding to which he may be made, or threatened to be made, a party, or in which he may become involved by reason of his being or having been a director or executive officer of the Company, or of such other corporation, whether or not he is a director or executive officer of the Company or such other corporation at the time the expenses or liabilities are incurred. No indemnification shall be provided, however, with respect to: liabilities arising under Section 16(b) of the Securities Exchange Act of 1934, as amended, if a final unappealable judgment or award establishes that such officer or director engaged in self- dealing, willful misconduct or recklessness, for expenses or liabilities which have been paid directly to, or for the benefit of, such person by an insurance carrier or for amounts paid in settlement of actions without the written consent of the Board of Directors. Transfer Agent and Registrar The transfer agent and registrar for the Common Stock is ChaseMellon Shareholder Services, L.L.C., New York, New York. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering the Company will have an aggregate of 8,535,868 shares of Common Stock outstanding. Of these shares, the 2,256,000 shares of Common Stock sold in this Offering will be, and the 2,875,000 shares sold in the IPO are, freely tradeable without restriction or further registration under the Securities Act of 1933 (the "Securities Act") unless purchased by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act. The remaining 3,404,868 shares of outstanding Common Stock will be "restricted securities", as that term is defined in Rule 144 ("Restricted Shares"), and may be sold only in accordance with an exemption from registration, such as the exemption provided by Rule 144. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least one year, including persons who may be deemed "affiliates" of the Company, would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: (i) one percent of the number of shares of Common Stock then outstanding (approximately 85,358 shares immediately after the Offering) or (ii) the average weekly trading volume of the Common Stock in the over-the-counter market during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the Securities and Exchange Commission. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements, and to the availability of current public information about the Company. In addition, a person who is not deemed to have been an affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell such shares under Rule 144(k) without regard to the requirements described above. Rule 144 also provides that affiliates of the Company who are selling shares that are not Restricted Shares must nonetheless comply with the same restrictions applicable to Restricted Shares with the exception of the holding period requirement. 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 Montgomery Securities. Following the expiration of this 90-day period, such directors, executive officers and Selling Shareholders will hold an aggregate of 3,406,868 outstanding shares of Common Stock (3,068,468 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 warrants to purchase an aggregate of 90,591 shares of Common Stock exercisable at any time on or before July 31, 2005, a $900,000 Convertible Note convertible into 42,503 shares of Common Stock at any time on or before January 22, 2002 and a warrant to purchase 250,000 shares of Common Stock exercisable at any time on or before January 31, 2002. The holders of the warrants, in their capacity as Selling Shareholders, and the holder of the Convertible Note, have agreed, subject to certain limitations, not to offer, sell or otherwise dispose of any shares of Common Stock issuable upon exercise of the warrants or conversion of the Con- 52 vertible Note for a period of 90 days after the closing of the Offering without the prior written consent of Montgomery Securities. The holders of the warrants will continue to be entitled to certain demand and piggy- back registration rights and the holder of the Convertible Note will continue to be entitled to certain piggyback registration rights following completion of the Offering. In addition, the Company intends, as soon as practicable after the completion of the Offering, to register approximately 749,680 shares of Common Stock reserved for issuance to its employees, directors, consultants and advisors under the Company's 1995 Plan, 1996 Plan and Director Plan. Options to purchase an aggregate of 538,651 shares of Common Stock will continue to be outstanding under all such Plans upon the completion of the Offering. The Company's Common Stock has been traded on the Nasdaq National Market since November 1996. Sales of substantial amounts of Common Stock in the public market could adversely affect market prices for the Common Stock and make it more difficult for the Company to sell equity securities in the future at a time and price which it deems appropriate. 53 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 ----------- --------- Montgomery Securities .................. Janney Montgomery Scott Inc ............ The Robinson-Humphrey Company, Inc ...... --------- Total ................................. 2,256,000 ========= 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. 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 338,400 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 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 beneficially own an aggregate of 3,406,868 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 Montgomery Securities, 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 Montgomery Securities, subject to limited exceptions and grants and exercises of stock options. The holders of the warrants issued by the Company, in their capacity as Selling Shareholders, and the holder of the $900,000 Convertible Note issued in the Goodyear acquisition, have also agreed not to offer, sell or otherwise dispose of any shares of Common Stock issuable upon exercise of the warrants or conversion of the Convertible Note for a period of 90 days after the closing of the Offering without the prior written consent of Montgomery Securities. 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. See "Shares Eligible for Future Sale." 54 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. LEGAL MATTERS An opinion will be rendered by the law firm of Blank Rome Comisky & McCauley, 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 Company's balance sheets as of December 31, 1995 and 1996, the Company's statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996 and MAB's balance sheets as of December 31, 1994 and 1995 and June 30, 1996 and the statements of income and retained earnings, and cash flows for each of the three years in the period ended December 31, 1995 and the six months ended June 30, 1996 included in this Prospectus, have been included herein in reliance on the report of Coopers & Lybrand, L.L.P., independent certified public accountants, given on the authority of that firm as experts in accounting and auditing. The balance sheet of CRWCD at December 31, 1996 and the related statements of operations, Division equity and cash flows for the two years in the period ended December 31, 1996 included in this Prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said report. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission a Registration Statement on Form S-1 under the Securities Act with respect to the Common Stock offered hereby. This Prospectus, filed as part of 55 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 Securities and Exchange Act of 1934, as amended (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 auditors 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. 56 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS NCO Group, Inc. Pro Forma Consolidated Financial Statements: Basis of Presentation .................................................................. F-2 Pro Forma Consolidated Statement of Income for the year ended December 31, 1996 ......... F-3 Pro Forma Consolidated Statement of Income for the three months ended March 31, 1997 ... F-4 Notes to Pro Forma Consolidated Financial Statements .................................... F-5 Historical Financial Statements: Report of Independent Accountants ...................................................... F-7 Consolidated Balance Sheets as of December 31, 1995 and 1996 and March 31, 1997 (Unaudited) ............................................................................ F-8 Consolidated Statements of Income for each of the three years in the period ended December 31, 1996 and the three months ended March 31, 1996 and 1997 (Unaudited)....... F-9 Consolidated Statements of Shareholders' Equity for each of the three years in the period ended December 31, 1996 and the three months ended March 31, 1996 and 1997 (Unaudited) ...................................................................... F-10 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1996 and the three months ended March 31, 1996 and 1997 (Unaudited)........ F-11 Notes to Consolidated Financial Statements ............................................. F-12 The Collection Division of CRW Financial, Inc. Report of Independent Accountants ...................................................... F-23 Balance Sheet as of December 31, 1996 ................................................... F-24 Statements of Operations for the years ended December 31, 1995 and 1996 ............... F-25 Statements of Division Equity for the years ended December 31, 1995 and 1996 ............ F-26 Statements of Cash Flows for the years ended December 31, 1995 and 1996 ............... F-27 Notes to Financial Statements ......................................................... F-28 Management Adjustment Bureau, Inc. Report of Independent Accountants ...................................................... F-31 Balance Sheets as of December 31, 1994 and 1995 and as of June 30, 1996 ............... F-32 Statements of Income and Retained Earnings for the three year period ending December 31, 1995 and the six months ended June 30, 1996 ......................................... F-33 Statements of Cash Flows for each of the years in the three year period ended December 31, 1995 and the six months ended June 30, 1996 ....................................... F-34 Notes to Financial Statements ......................................................... F-36
F-1 Pro Forma Consolidated Financial Statements Basis of Presentation The Pro Forma Consolidated Statements of Income for the year ended December 31, 1996 and the three months ended March 31, 1997 are based on the historical financial statements of NCO Group, Inc. ("NCO" or the "Company"), Management Adjustment Bureau, Inc. ("MAB"), Goodyear & Associates, Inc. ("Goodyear"), CMS A/R Services ("CMS A/R"), Tele-Research Center, Inc. ("TRC") and the Collection Division of CRW Financial, Inc. ("CRWCD"). The Pro Forma Consolidated Statements of Income for the year ended December 31, 1996 and the three months ended March 31, 1997 have been prepared assuming the MAB acquisition occurred on January 1, 1996, and the Goodyear, CMS A/R, TRC and CRWCD acquisitions occurred on January 1, 1996 and January 1, 1997, respectively. The Pro Forma Consolidated Statement of Income for the year ended December 31, 1996 reflects the issuance of 1,604,620 shares of Common Stock at the initial public offering price of $13.00 per share which, net of the underwriting discount and offering expenses paid by the Company, was sufficient to repay acquisition related debt of $15.0 million, and 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. The Pro Forma Consolidated Statements of Income for the year ended December 31, 1996 and the three months ended March 31, 1997 reflect the issuance of: (i) 345,178 shares of Common Stock and a warrant to purchase 250,000 shares of Common Stock in connection with the acquisition of CRWCD and (ii) 305,886 shares of Common Stock at the assumed public offering price of $32.00 per share which, net of the estimated underwriting discount and offering expenses payable by the Company, would be sufficient to repay acquisition related debt of $8.4 million. The Pro Forma Consolidated Statements of Income 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. In addition, the allocations of purchase price to the assets and liabilities of Goodyear, CMS A/R, TRC and CRWCD are preliminary and the final allocations may differ from the amounts reflected herein. The unaudited Pro Forma Consolidated Statements of Income should be read in conjunction with the other financial statements and notes thereto included elsewhere in this Prospectus. F-2 NCO GROUP, INC. Pro Forma Consolidated Statement of Income for the year ended December 31, 1996 (Unaudited)
Historical -------------------------------------------------------------------------------------- NCO MAB(1) Goodyear(2) CMS A/R(3) TRC(4) CRWCD(5) ------------- ------------ ------------- ------------ ------------ -------------- Revenue .............................. $30,760,452 $9,162,744 $5,454,500 $6,790,849 $1,917,607 $25,857,862 Operating costs and expenses: Payroll and related expenses ......... 14,651,384 5,870,416 3,339,926 2,933,754 1,139,791 14,967,000 Selling, general and administrative expenses ........... 10,032,216 3,255,089 1,619,526 2,927,587 633,426 10,970,256 Depreciation and amortization expense .......................... 1,253,867 337,295 169,322 295,021 11,341 1,305,000 ----------- ---------- ---------- ---------- ---------- ----------- Total operating costs and expenses ......................... 25,937,467 9,462,800 5,128,774 6,156,362 1,784,558 27,242,256 ----------- ---------- ---------- ---------- ---------- ----------- Income (loss) from operations ...... 4,822,985 (300,056) 325,726 634,487 133,049 (1,384,394) Other income (expense): Interest and investment income ..... 242,380 1,636 20,473 Interest expense .................... (817,951) (50,974) (27,253) (66,193) (75) (8,000) ----------- ---------- ---------- ---------- ---------- ----------- (575,571) (50,974) (25,617) (45,720) (75) (8,000) ----------- ---------- ---------- ---------- ---------- ----------- Income (loss) before provision for income taxes ....................... 4,247,414 (351,030) 300,109 588,767 132,974 (1,392,394) Income tax expense .................. 612,748 83,924 117,000 207,104 (509,000) ----------- ---------- ---------- ---------- ---------- ----------- Net income (loss) .................. $ 3,634,666 $ (434,954) $ 183,109 $ 381,663 $ 132,974 $ (883,394) =========== ========== ========== ========== ========== =========== Historical income before income taxes ............................. $ 4,247,414 Pro forma provision for income taxes .............................. 1,706,485 ----------- Pro forma net income ............... $ 2,540,929 =========== Pro forma net income per share ...... $ 0.50 =========== Pro forma weighted average shares outstanding ....................... 5,086,736 ===========
Acquisition Pro Forma Offering Adjustments Consolidated Adjustments Pro Forma ----------------------- ------------------- ------------------ -------------------- Revenue .............................. $ 79,944,014 $ 79,944,014 Operating costs and expenses: Payroll and related expenses ......... $ (376,175)(6) 40,208,406 40,208,406 (543,200)(7) (451,400)(9) (84,000)(10) (122,000)(11) (1,117,090)(12) Selling, general and administrative expenses ............ (649,112)(13) 28,788,988(8) 28,788,988 Depreciation and amortization expense ........................... (328,538)(14) 3,043,308 3,043,308 -------------- -------------- ----------- ------------- Total operating costs and expenses ........................... (3,671,515) 72,040,702 72,040,702 -------------- -------------- ------------- Income (loss) from operations ...... 3,671,515 7,903,312 7,903,312 Other income (expense): Interest and investment income ...... 264,489 264,489 Interest expense ..................... 59,470(15) (910,976) 648,692(15) (262,284) -------------- -------------- ----------- ------------- 59,470 (646,487) 648,692 2,205 -------------- -------------- ----------- ------------- Income (loss) before provision for income taxes ........................ 3,730,985 7,256,825 648,692 7,905,517 Income tax expense .................. 511,776 511,776 -------------- ----------- ------------- Net income (loss) .................. $ 3,730,985 $ 6,745,049 $ 648,692 $ 7,393,741 ============== ============== =========== ============= Historical income before income taxes .............................. $ 7,256,825 $ 7,905,517 Pro forma provision for income taxes .............................. 3,114,868 3,374,345(16) -------------- ------------- Pro forma net income ............... $ 4,141,957 $ 4,531,172 ============== ============= Pro forma net income per share ...... $ 0.63 $ 0.64(17) ============== ============= Pro forma weighted average shares outstanding ........................ 6,587,838 7,045,350 ============== =============
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, 1997 (Unaudited)
Historical --------------------------------- 1997 NCO Acquisitions(18) ------------- ------------------ Revenue ........................... $18,076,757 $2,841,578 Operating costs and expenses: Payroll and related expenses ...... 9,046,110 1,381,883 Selling, general and administrative expenses ......... 5,931,574 1,159,470 Depreciation and amortization expense ........................ 716,467 156,915 ----------- ---------- Total operating costs and expenses ..................... 15,694,151 2,698,268 ----------- ---------- Income from operations ............ 2,382,606 143,310 Other income (expense): Interest and investment income ... 93,308 Interest expense ............... (175,150) (273) ----------- ---------- (81,842) (273) ----------- ---------- Income before provision for income taxes ........................... 2,300,764 143,037 Income tax expense ............... 993,974 ----------- ---------- Net income ........................ $ 1,306,790 $ 143,037 =========== ========== Net income per share ............ $ 0.18 =========== Weighted average shares outstanding ..................... 7,371,157 ===========
Acquisition Pro Forma Offering Adjustments Consolidated Adjustments Pro Forma --------------------- ------------- ------------------ ----------------- Revenue ........................... $20,918,335 $20,918,335 Operating costs and expenses: Payroll and related expenses ... $ (103,258)(19) 10,324,735 10,324,735 Selling, general and administrative expenses .......... (54,093)(20) 7,036,951 7,036,951 Depreciation and amortization expense ........................ (27,378)(21) 846,004 846,004 ------------ ----------- ----------- Total operating costs and expenses ..................... (184,729) 18,207,690 18,207,690 ------------ ----------- ----------- Income from operations ............ 184,729 2,710,645 2,710,645 Other income (expense): Interest and investment income ... 93,308 93,308 Interest expense ............... (49,000)(22) (224,423) 165,132(24) (59,291) ------------ ----------- ----------- ----------- (49,000) (131,115) 165,132 34,017 ------------ ----------- ----------- ----------- Income before provision for income taxes ........................... 135,729 2,579,530 165,132 2,744,662 Income tax expense ............... 120,431 1,114,405 1,114,405 ------------ ----------- ----------- ----------- Net income ........................ $ 15,298 $ 1,465,125 $ 165,132 $ 1,630,257 ============ =========== =========== =========== Net income per share ............ $ 0.20 $ 0.21(23) =========== =========== Weighted average shares outstanding ..................... 7,432,522 7,886,151 =========== ===========
The accompanying notes are an integral part of these pro forma consolidated financial statements. F-4 Notes to Consolidated Pro Forma 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. Represents the results of operations of MAB prior to its acquisition by the Company in September 1996. 2. Gives effect to the acquisition of Goodyear, as if it occurred on January 1, 1996, for $4.5 million in cash and the issuance of a $900,000 Convertible Note payable to Goodyear's principal shareholder. In addition, the Company recognized $30,000 of direct closing costs related to the acquisition and accrued $270,000 of costs related to the termination of employees and other items. After allocating the purchase price to the estimated fair market value of the assets acquired and liabilities assumed, the Company recognized $5,223,342 of goodwill. 3. Gives effect to the acquisition of CMS A/R, as if it occurred on January 1, 1996, for $5.1 million in cash of which $2,000,000 was borrowed from the Company's credit facility. In addition, the Company recognized $30,000 of direct closing costs related to the acquisition and accrued $220,000 of costs related to the termination of employees and other items. After allocating the purchase price to the estimated fair market value of the assets acquired and liabilities assumed, the Company recognized $3,486,107 of goodwill. 4. Gives effect to the acquisition of TRC, as if it occurred on January 1, 1996, for $1.6 million in cash which was borrowed from the Company's credit facility. In addition, the Company recognized $8,000 of direct closing costs related to the acquisition and accrued $92,000 of costs related to the acquisition. After allocating the purchase price to the estimated fair market value of the assets acquired and liabilities assumed, the Company recognized $1,680,000 of goodwill. 5. Gives effect to the acquisition of CRWCD, as if it occurred on January 1, 1996, for $3.8 million in cash borrowed from the Company's credit facility, the issuance of 345,178 shares of the Common Stock, and the issuance of a warrant to purchase 250,000 shares of Common Stock at an exercise price of $27.625 per share. The Common Stock and warrant issued were valued at $9,090,000. In addition, the Company recognized $195,000 of direct closing costs related to the acquisition and accrued $1,805,000 of costs related to the termination of employees and other items. After allocating the purchase price to the estimated fair market value of the assets acquired and liabilities assumed, the Company recognized $12,240,000 of goodwill. 6. Reflects the reduction in salary of MAB's principal shareholder (who is no longer active in the day-to-day operations of MAB's business), pursuant to a new employment agreement. 7. Reflects the elimination of payroll and related expenses relating to the elimination of certain redundant collection and administration personnel costs immediately identifiable at the time of the acquisition of MAB. 8. Includes a non-recurring charge of $190,000 recorded by MAB to account for potential losses related to certain repayment guarantees made on behalf of third parties. 9. Reflects the reduction in salary of Goodyear's principal shareholder (who is no longer active in the day-to-day operations of Goodyear's business), pursuant to a new employment agreement. 10. Reflects the elimination of payroll and related expenses relating to the elimination of certain redundant administration personnel costs immediately identifiable at the time of the acquisition of Goodyear. 11. Reflects the elimination of payroll and related expenses relating to the elimination of certain redundant administration personnel costs immediately identifiable at the time of the acquisition of CMS A/R. F-5 Notes to Consolidated Pro Forma Financial Statements (Unaudited) 12. Reflects the elimination of payroll and related expenses relating to the elimination of certain redundant collection and administration personnel costs immediately identifiable at the time of the acquisition of CRWCD. 13. Reflects the elimination of certain rental expenses attributable to facilities which were immediately identified for closure or consolidation into other existing facilities. 14. Reflects amortization expense assuming MAB and the 1997 Acquisitions had been acquired on January 1, 1996. In addition, reflects the elimination of depreciation and amortization expense related to assets revalued or not acquired by NCO as part of the acquisitions. 15. Reflects the elimination of interest expense on current and long-term debt which was not assumed with the acquisitions, or was repaid with the proceeds of the Company's public offerings as if the repayments had occurred on January 1, 1996. 16. Reflects estimated provision for income taxes, at an assumed rate of 40% after giving consideration to non-deductible goodwill expenses, assuming the Company had converted from an S Corporation to a C Corporation on January 1, 1996. 17. Pro forma net income per share was computed by dividing the pro forma net income for the year ended December 31, 1996 by the pro forma weighted average number of shares outstanding. Pro forma weighted average shares outstanding are based on the weighted average number of shares outstanding including common share equivalents giving retroactive effect as of January 1, 1996 to: (i) the 46.56-for-one stock split effected in September 1996; (ii) the issuance of 1,604,620 shares of Common Stock (at $13.00 per share) net of underwriting discount and offering expenses paid by the Company, to result in net proceeds sufficient to pay a $3.2 million S Corporation distribution and repay $15,000,000 of acquisition-related debt; (iii) the issuance of 345,178 shares of Common Stock and a warrant to purchase 250,000 shares of Common Stock in connection with the acquisition of CRWCD; (iv) and the issuance of 305,886 shares of Common Stock at an assumed public offering price of $32.00 per share which, net of estimated underwriting discount and offering expenses payable by the Company, would be sufficient to repay acquisition related debt of $8.4 million. 18. Gives effect to the 1997 Acquisitions as if they had occurred on January 1, 1997. 19. Reflects the elimination of payroll and related expenses relating to the elimination of certain redundant administration personnel costs immediately identifiable at the time of the acquisitions. 20. Reflects the reduction of certain redundant operating costs and expenses that were immediately identifiable at the time of the acquisitions. 21. Reflects the increase in amortization expense as if the 1997 Acquisitions had occurred on January 1, 1997 and the elimination of depreciation and amortization expense related to assets revalued or not acquired by NCO as part of the acquisitions. 22. Reflects the elimination of interest expense on current and long-term debt which was not assumed with the 1997 Acquisitions, or was repaid with the proceeds of the Company's public offerings as if the repayments had occurred on January 1, 1997. 23. Pro forma net income per share was computed by dividing the pro forma net income for the three months ended March 31, 1997 by the pro forma weighted average number of shares outstanding. Pro forma weighted average shares outstanding are based on the weighted average number of shares outstanding including common share equivalents giving retroactive effect as of January 1, 1997 to the issuance of 345,178 shares of Common Stock, and a warrant to purchase 250,000 shares of Common Stock in connection with the acquisition of CRWCD and the issuance of 305,886 shares of Common Stock at an assumed public offering price of $32.00 per share which, net of estimated underwriting discount and offering expenses payable by the Company, would be sufficient to repay acquisition related debt of $8.4 million. F-6 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders of NCO Group, Inc. Blue Bell, Pennsylvania We have audited the accompanying consolidated balance sheets of NCO Group, Inc. as of December 31, 1995 and 1996 and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of NCO Group, Inc. as of December 31, 1995 and 1996 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania March 7, 1997 F-7 NCO GROUP, INC. Consolidated Balance Sheets
December 31, ----------------------------- March 31, ASSETS 1995 1996 1997 ------------ -------------- ------------ (Unaudited) Current assets: Cash and cash equivalents ........................... $ 804,550 $ 12,058,798 $ 5,793,016 Available-for-sale securities ........................ 299,488 Accounts receivable, trade, net of allowance for doubtful accounts of $23,200, $79,000 and $279,000, respectively .............................. 1,402,546 4,701,364 11,122,643 Notes receivable .................................... 100,000 Other current assets ................................. 118,793 499,815 631,284 ---------- ------------- ------------ Total current assets .............................. 2,725,377 17,259,977 17,546,943 ---------- ------------- ------------ Funds held in trust for clients Property and equipment, net ........................... 637,133 2,830,062 5,365,069 Other assets: Intangibles, net of accumulated amortization ......... 2,774,894 14,673,155 37,089,886 Deferred taxes ....................................... 70,760 8,666 Deferred financing costs ........................... 279,014 684,390 653,213 Other assets ....................................... 227,826 308,011 771,766 ---------- ------------- ------------ Total other assets .............................. 3,281,734 15,736,316 38,523,531 ---------- ------------- ------------ Total assets .......................................... $6,644,244 $ 35,826,355 $61,435,543 ========== ============= ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term debt, current portion ..................... $ 46,171 $ 46,946 $ 52,727 Capitalized lease obligations, current portion ...... 62,131 129,048 Corporate taxes payable .............................. 216,709 1,081,382 Accounts payable .................................... 221,562 657,647 2,011,363 Accrued expenses .................................... 565,734 1,044,536 4,104,255 Accrued compensation and related expenses ............ 777,985 1,376,982 2,018,959 Unearned revenue, net of related costs ............... 302,384 225,817 153,450 ---------- ------------- ------------ Total current liabilities ........................ 1,913,836 3,630,768 9,551,184 ---------- ------------- ------------ Funds held in trust for clients Long-term liabilities: Long-term debt, net of current portion ............... 2,592,906 1,091,901 10,328,989 Capitalized lease obligations, net of current portion 385,683 403,691 Unearned revenue, net of related costs ............... 86,155 70,385 107,388 Commitments and contingencies Shareholders' equity: Preferred stock, no par value, 5,000,000 shares authorized, no shares issued and outstanding ...... Common stock, no par value, 25,000,000 shares authorized, 4,213,447, 6,713,447 and 7,058,625 shares issued and outstanding at December 31, 1995 and 1996 and March 31, 1997, respectively ....................................... 537,326 29,362,326 37,577,206 Unexercised warrants ................................. 177,294 396,054 1,271,054 Retained earnings .................................... 1,378,261 889,238 2,196,031 Unrealized gain on securities ........................ 41,339 Notes receivable -- shareholder ..................... (82,873) ---------- ------------- ------------ Total shareholders' equity ........................ 2,051,347 30,647,618 41,044,291 ---------- ------------- ------------ Total liabilities and shareholders' equity ............ $6,644,244 $ 35,826,355 $61,435,543 ========== ============= ============
The accompanying notes are an integral part of these consolidated financial statements. F-8 NCO GROUP, INC. Consolidated Statements of Income
For the Three Months Ended For the Years Ended December 31, March 31, -------------------------------------------- ---------------------------- 1994 1995 1996 1996 1997 ------------ ------------- ------------- ------------- ------------ (Unaudited) (Unaudited) Revenue ........................... $8,577,895 $12,732,597 $30,760,452 $6,043,960 $18,076,757 Operating costs and expenses: Payroll and related expenses ...... 4,558,351 6,797,338 14,651,384 2,997,478 9,046,110 Selling, general and administrative expenses ......... 2,673,521 4,042,342 10,032,216 1,931,278 5,931,574 Depreciation and amortization expense ........................... 215,117 347,503 1,253,867 200,275 716,467 ---------- ----------- ----------- ---------- ----------- Total operating costs and expenses ........................ 7,446,989 11,187,183 25,937,467 5,129,031 15,694,151 ---------- ----------- ----------- ---------- ----------- Income from operations ............ 1,130,906 1,545,414 4,822,985 914,929 2,382,606 Other income (expense): Interest and investment income ... 26,735 49,473 242,380 17,024 93,311 Interest expense .................. (71,588) (180,205) (817,951) (172,123) (175,150) Loss on disposal of property and equipment ........................ (49,082) ---------- ----------- ----------- ---------- ----------- (44,853) (179,814) (575,571) (155,099) (81,839) ---------- ----------- ----------- ---------- ----------- Income before provision for income taxes ........................ 1,086,053 1,365,600 4,247,414 759,830 2,300,767 Income tax expense .................. 612,748 993,974 ---------- ----------- ----------- ---------- ----------- Net income ........................ $1,086,053 $ 1,365,600 $ 3,634,666 $ 759,830 $1,306,793 ========== =========== =========== ========== =========== Pro forma (unaudited): Historical income before income taxes ........................... $1,086,053 $ 1,365,600 $ 4,247,414 $ 759,830 Pro forma provision for income taxes ........................... 434,000 546,000 1,706,485 303,932 ---------- ----------- ----------- ---------- Pro forma net income ............... $ 652,053 $ 819,600 $ 2,540,929 $ 455,898 ========== =========== =========== ========== Pro forma net income per share . $ 0.17 $ 0.50 $ 0.10 $ 0.18 =========== =========== ========== =========== Pro forma weighted average shares outstanding ............... 4,728,906 5,086,736 4,733,549 7,371,157 =========== =========== ========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-9 NCO GROUP, INC. Consolidated Statements of Shareholders' Equity
Common Stock -------------------------- Number of Unexercised Shares Amount Warrants ----------- ------------- ------------- Balance, January 1, 1994 ..................... 4,002,763 $ 49,326 Issuance of common stock ..................... 123,803 300,000 Net income ................................. Distributions to shareholders ............... Change in unrealized gains on securities ... ---------- ----------- ----------- Balance, December 31, 1994 .................. 4,126,566 349,326 Issuance of common stock ..................... 86,881 188,000 Warrants issued .............................. $ 177,294 Note repayments .............................. Net income ................................. Distributions to shareholders ............... Change in unrealized losses on securities ... ---------- ----------- ----------- Balance, December 31, 1995 .................. 4,213,447 537,326 177,294 Issuance of common stock ..................... 2,500,000 28,825,000 Warrants issued .............................. 218,760 Note repayments .............................. Net income ................................. Distributions to shareholders ............... ---------- ----------- ----------- Balance, December 31, 1996 .................. 6,713,447 29,362,326 396,054 Issuance of common stock for acquisitions . 345,178 8,214,880 Warrants issued .............................. 875,000 Net income .................................... ---------- ----------- ----------- Balance, March 31, 1997 (Unaudited) ......... 7,058,625 $37,577,206 $1,271,054 ========== ============ =========== Unrealized Gains Notes Retained (Losses) on Receivable Earnings Securities Shareholder Total --------------- ------------- ------------- ------------- Balance, January 1, 1994 ..................... $ 813,366 $ 13,539 $ 876,231 Issuance of common stock ..................... 300,000 Net income ................................. 1,086,053 1,086,053 Distributions to shareholders ............... (813,366) (813,366) Change in unrealized gains on securities ... (26,234) (26,234) ----------- ----------- ----------- ----------- Balance, December 31, 1994 .................. 1,086,053 (12,695) 1,422,684 Issuance of common stock ..................... $ (135,888) 52,112 Warrants issued .............................. 177,294 Note repayments .............................. 53,015 53,015 Net income ................................. 1,365,600 1,365,600 Distributions to shareholders ............... (1,073,392) (1,073,392) Change in unrealized losses on securities ... 54,034 54,034 ----------- ----------- ----------- ----------- Balance, December 31, 1995 .................. 1,378,261 41,339 (82,873) 2,051,347 Issuance of common stock ..................... 28,825,000 Warrants issued .............................. 218,760 Note repayments .............................. 82,873 82,873 Net income ................................. 3,634,666 3,634,666 Distributions to shareholders ............... (4,123,689) (41,339) (4,165,028) ----------- ----------- ----------- ----------- Balance, December 31, 1996 .................. 889,238 30,647,618 Issuance of common stock for acquisitions . 8,214,880 Warrants issued .............................. 875,000 Net income .................................... 1,306,793 1,306,793 ----------- ----------- ----------- ----------- Balance, March 31, 1997 (Unaudited) ......... $ 2,196,031 $41,044,291 =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-10 NCO GROUP, INC. Consolidated Statements of Cash Flows
Years Ended December 31, ------------------------------------------------ 1994 1995 1996 ------------- --------------- ---------------- Cash flows from operating activities: Net income ............................................. $ 1,086,053 $ 1,365,600 $ 3,634,666 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation .......................................... 171,378 199,123 465,785 Loss on disposal of equipment ........................ 49,082 (Gain) Loss on sale of securities ..................... 4,421 2,877 (70,481) Amortization of intangibles ........................... 43,739 221,813 707,050 Amortization of deferred financing costs ............... 32,443 81,031 Provision for doubtful accounts ........................ 3,903 3,808 55,845 Changes in assets and liabilities, net of acquisitions: Accounts receivable, trade ........................... (41,675) (571,611) (1,825,307) Notes receivable .................................... (64,000) (36,000) 155,856 Accounts receivable, purchased ........................ (44,038) 36,293 (4,755) Other current assets ................................. 31,126 (22,241) (307,988) Deferred taxes ....................................... (154,684) Other assets .......................................... (40,112) (105,037) (8,903) Accounts payable .................................... (123,094) 161,601 422,694 Corporate taxes payable .............................. 216,709 Accrued expenses .................................... (214) 187,353 (788,709) Accrued compensation and related costs ............... 51,755 555,398 598,997 Unearned revenue .................................... 23,950 (46,718) (227,548) ----------- ----------- ------------ Net cash provided by operating activities ......... 1,103,192 2,033,784 2,950,258 Cash flows from investing activities: Purchase of property and equipment ..................... (77,999) (298,076) (976,080) Purchase of securities ................................. (169,785) (107,643) (78,307) Proceeds from sales of securities ........................ 143,613 99,256 406,937 Net cash paid for acquisitions ........................... (1,000,000) (1,729,244) (12,857,223) ----------- ----------- ------------ Net cash used in investing activities ............... (1,104,171) (2,035,707) (13,504,673) Cash flows from financing activities: Repayment of notes payable .............................. (1,067,117) (303,138) Borrowings under credit agreement ........................ 1,000,000 2,450,000 12,550,000 Repayment under credit agreement ........................ (222,084) (15,000,000) Payment of fees to acquire new debt ..................... (134,163) (222,383) Issuance of common stock ................................. 105,127 32,500,000 Costs related to issuance of common stock ............... (3,675,000) Decrease in notes receivable, shareholders ............... 82,873 Distributions to shareholders ........................... (813,366) (1,073,392) (4,123,689) ----------- ----------- ------------ Net cash provided by (used in) financing activities (35,450) 280,455 21,808,663 ----------- ----------- ------------ Net increase (decrease) in cash and cash equivalents ...... (36,429) 278,532 11,254,248 Cash and equivalents at beginning of period ............... 562,447 526,018 804,550 ----------- ----------- ------------ Cash and equivalents at end of period ..................... $ 526,018 $ 804,550 $ 12,058,798 =========== =========== ============
Three Months Ended March 31, ------------------------------ 1996 1997 ------------- --------------- (Unaudited) (Unaudited) Cash flows from operating activities: Net income ............................................. $ 759,830 $ 1,306,793 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation .......................................... 65,582 269,158 Loss on disposal of equipment ........................ (Gain) Loss on sale of securities ..................... Amortization of intangibles ........................... 106,898 403,975 Amortization of deferred financing costs ............... 27,795 43,334 Provision for doubtful accounts ........................ 9,982 91,828 Changes in assets and liabilities, net of acquisitions: Accounts receivable, trade ........................... (810,920) (1,978,519) Notes receivable .................................... 100,000 Accounts receivable, purchased ........................ Other current assets ................................. (33,887) 126,694 Deferred taxes ....................................... 39,644 Other assets .......................................... 4,563 50,568 Accounts payable .................................... 307,539 (1,073,492) Corporate taxes payable .............................. 41,309 822,617 Accrued expenses .................................... 626,278 1,310,644 Accrued compensation and related costs ............... (387,202) 17,017 Unearned revenue .................................... (29,005) (35,364) ----------- ------------ Net cash provided by operating activities ......... 788,762 1,394,897 Cash flows from investing activities: Purchase of property and equipment ..................... (280,391) (311,503) Purchase of securities ................................. (16,063) Proceeds from sales of securities ........................ 24,636 Net cash paid for acquisitions ........................... (4,515,534) (15,556,862) ----------- ------------ Net cash used in investing activities ............... (4,787,352) (15,868,365) Cash flows from financing activities: Repayment of notes payable .............................. (17,067) (130,157) Borrowings under credit agreement ........................ 4,550,000 8,350,000 Repayment under credit agreement ........................ Payment of fees to acquire new debt ..................... (10,916) (12,157) Issuance of common stock ................................. Costs related to issuance of common stock ............... Decrease in notes receivable, shareholders ............... 82,873 Distributions to shareholders ........................... ----------- ------------ Net cash provided by (used in) financing activities 4,604,890 8,207,686 ----------- ------------ Net increase (decrease) in cash and cash equivalents ...... 606,300 (6,265,782) Cash and equivalents at beginning of period ............... 804,550 12,058,798 ----------- ------------ Cash and equivalents at end of period ..................... $ 1,410,850 $ 5,793,016 =========== ============
The accompanying notes are an integral part of these consolidated financial statements. F-11 NCO GROUP, INC. Notes to Consolidated Financial Statements 1. Nature of operations: NCO Group, Inc. (the "Company") is a leading provider of accounts receivable management and related services utilizing an extensive teleservices infrastructure. The Company's client base is comprised of organizations located throughout the United States in the following sectors: financial services, government, education, healthcare, retail and commercial, telecommunications, and utilities. Effective September 3, 1996, the shareholders of NCO Financial Systems, Inc. contributed each of their shares of common stock in exchange for one share of common stock of the Company, a recently formed corporation. In September 1996, the Company also effected a 46.56-for-one stock split and increased the number of authorized shares to 5,000,000 shares of preferred stock and 25,000,000 shares of common stock. All per share and related amounts have been adjusted to reflect the stock exchange and stock split. On November 13, 1996, the Company completed its initial public offering (the "IPO"), selling 2,875,000 shares of common stock including 375,000 over-allotment shares sold by existing shareholders. The Offering raised net proceeds of approximately $28.8 million for the Company. A director of the Company received compensation of $240,000 for services rendered in connection with the IPO. 2. Summary of significant accounting policies: Principles of Consolidation: The consolidated financial statements include the accounts of NCO Group, Inc. and its wholly-owned subsidiaries after elimination of significant intercompany accounts and transactions. Revenue Recognition: The Company generates revenues from contingency fees and contractual services. Contingency fee revenue is recognized upon collection of funds on behalf of clients. Contractual services revenue is deferred and recognized as services are performed. Property and Depreciation: Property and equipment is stated at cost, less accumulated depreciation. Depreciation is provided over the estimated useful life of each class of assets using the straight-line method. Expenditures for maintenance and repairs are charged to expense as incurred. Renewals and betterments are capitalized. When property is sold or retired, the cost and related accumulated depreciation are removed from the balance sheet and any gain or loss on the transaction is included in the statement of income. Income Taxes: The Company had elected to be taxed as an S Corporation under the Internal Revenue Code and the Pennsylvania Tax Code. While this election was in effect, no provision was made for income taxes by the Company since all income was taxed directly to the shareholders of the Company. The Company terminated its S Corporation status on September 3, 1996 and adopted Statement of Financial Accounting Standards SFAS No. 109, "Accounting for Income Taxes." This standard requires an asset and liability approach that takes into account changes in tax rates when valuing the deferred tax amounts to be reported on the balance sheet. Upon termination of the S Corporation status and adoption of SFAS No. 109, the Company recorded an estimated net deferred tax asset. The net deferred tax asset resulted primarily from differences in the treatment of unearned revenue and acquired account inventory. F-12 NCO GROUP, INC. Notes to Consolidated Financial Statements -- (Continued) 2. Summary of significant accounting policies: -- (Continued) Cash and Cash Equivalents: The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. These financial instruments potentially subject the Company to concentrations of credit risk. At December 31, 1995 and 1996 and March 31, 1997, the Company had bank deposits in excess of federally insured limits of approximately $1,276,000, $1,045,605, and $1,052,207, respectively. The Company's cash deposits have been placed with a large national bank to minimize risk. Credit Policy: The Company has two types of arrangements under which it collects its contingency fee revenue. For certain clients the Company remits funds collected on behalf of the client, net of the related contingency fees while, for other clients, the Company remits gross funds collected on behalf of clients, and bills the client separately for its contingency fees. Management carefully monitors its client relationships in order to minimize its credit risk and generally does not require collateral. In the event of collection delays from clients, management may at its discretion change from the gross remittance method to the net remittance method. Investment Securities: The Company adopted Statement of Financial Accounting Standards SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities," for all periods presented. The statement requires management to report their investments as either "held-to-maturity", "trading securities", or "available-for-sale". Deferred Financing Costs: Deferred financing costs relate to debt issuance costs incurred which are capitalized and amortized over the term of the debt. Intangibles: Intangibles consists of goodwill and acquisition costs and non-compete covenants. Goodwill represents the excess of purchase price over the fair market value of the net assets of the acquired businesses based on their respective fair values at the date of acquisition. Goodwill is amortized on a straight-line basis over 15 to 25 years. The recoverability of goodwill is periodically reviewed by the Company. Such allocation has been based on estimates which may be revised at a later date. In making such determination with respect to goodwill, the Company evaluates the operating results of the underlying business which gave rise to such amount. Accumulated amortization at December 31, 1995 and 1996, and March 31, 1997 totaled $159,676, $762,612, and $1,140,733, respectively. Estimates Utilized in the Preparation of Financial Statements: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Earnings Per Share: Earnings per share were computed by dividing the net income (including pro forma income taxes where applicable) for the years ended December 31, 1995 and 1996 and the three months ended March 31, 1996 and 1997 by the pro forma weighted average number of shares outstanding. Pro forma net income amounts are used F-13 NCO GROUP, INC. Notes to Consolidated Financial Statements -- (Continued) 2. Summary of significant accounting policies: -- (Continued) for the years ended December 31, 1995 and 1996 and the three months ended March 31, 1996 because the historical net income does not include the impact of federal and state income taxes as if the Company had been subject to income taxes. Pro forma weighted average shares outstanding are based on the weighted average number of shares outstanding including common equivalent shares. All outstanding options and warrants have been treated as common equivalent shares in calculating pro forma net income per share, using the treasury stock method and the IPO price of $13.00 per share for periods prior to the IPO, only when their effect would be dilutive. For December 31, 1995 and 1996, the pro forma weighted average number of shares outstanding have also been adjusted to include the number of shares of common stock (250,000 shares) that the Company would have needed to issue at the IPO price of $13.00 per share to finance the distribution of undistributed S Corporation earnings through the date on which the Company terminated its S Corporation status. Fully diluted earnings per share are not materially different from primary earnings per share. In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share." This Statement establishes standards for computing and presenting earnings per share ("EPS") and applies to entities with publicly held common stock or potential common stock. This Statement is effective for financial statements issued for periods ending after December 15, 1997; earlier application is not permitted. This Statement requires restatement of all prior-period EPS data presented. The Company is currently evaluating the impact, if any, adoption of SFAS No. 128 will have on its financial statements. Interim Financial Information: The accompanying consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. Reclassifications: Certain amounts for December 31, 1994 and 1995 and the years then ended, and for March 31, 1996 and the three months then ended, have been reclassified for comparative purposes. 3. Acquisitions: On April 29, 1994, the Company purchased certain assets of B. Richard Miller, Inc. ("BRM") at a cost of $1,427,000, which was comprised of $1,000,000 in cash, common stock valued at $300,000, and a note payable to the seller of $127,000. The purchase price was allocated based upon the estimated fair market value of the acquired property, equipment and account inventory and resulted in goodwill of $984,126. On August 1, 1995, the Company purchased certain assets of Eastern Business Services, Inc. ("Eastern") for approximately $2,041,000 comprised of $1,625,000 in cash and $416,000 of liabilities assumed. The purchase price was allocated primarily based upon the estimated fair market values of acquired property, equipment, and accounts receivable less notes payable and funds due to clients which resulted in goodwill of $1,812,000. On January 3, 1996 the Company purchased certain assets of Trans Union Corporation Collections Division ("TCD") for $4,750,000 in cash. The purchase price was allocated based upon the estimated fair market value of acquired property, equipment, accounts receivable and an agreement not to compete which resulted in goodwill of $3,681,000. F-14 NCO GROUP, INC. Notes to Consolidated Financial Statements -- (Continued) 3. Acquisitions: -- (Continued) On September 5, 1996 the Company purchased the outstanding stock of Management Adjustment Bureau, Inc. ("MAB") for $9,000,000 comprised of $8,000,000 in cash and a $1,000,000 convertible note. The purchase price was allocated based upon the estimated fair market value of acquired property, equipment, and accounts receivable which resulted in goodwill of $8,511,000. The following summarizes unaudited pro forma results of operations for the years ended December 31, 1995 and 1996, assuming the above acquisitions occurred as of the beginning of the respective periods. 1995 1996 ------------- ------------ Revenue .................. $34,509,071 $39,923,196 Net income ............... 2,166,501 3,372,491 Earnings per share ...... .36 .54 On January 22, 1997, NCO purchased all of the outstanding stock of Goodyear & Associates, Inc. ("Goodyear") for $4.5 million in cash and a $900,000 convertible note. The note is convertible into the Company's Common Stock, at any time, at $21.175 per share and bears interest payable monthly at a rate of 8.0% per annum with principal due in January 2002. Goodyear, based in Charlotte, North Carolina, provided accounts receivable management services principally to the telecommunications, education, and utility industries. Goodyear's revenues in 1996 were $5.5 million. This acquisition resulted in goodwill of $5.1 million. On January 30, 1997, NCO purchased certain assets of Tele-Research Center, Inc. ("TRC") for $1.6 million in cash. TRC, located in Philadelphia, Pennsylvania, provided market research, data collection, and other teleservices to market research companies as well as end-users. TRC's revenues in 1996 were $1.8 million. This acquisition resulted in goodwill of $1.6 million. On January 31, 1997, NCO purchased substantially all the assets of CMS A/R Services ("CMS A/R"), formerly a division of CMS Energy Corporation, owner of Consumers Energy, one of the nation's largest utility companies, for $5.1 million in cash. Specializing in the utility industry, CMS A/R, located in Jackson, Michigan, provided a wide range of accounts receivable management services in addition to traditional recovery of delinquent accounts including project outsourcing, early intervention, and database management services. CMS A/R's revenues in 1996 were $6.8 million. This acquisition resulted in goodwill of $3.5 million. On February 2, 1997, NCO purchased substantially all the assets of the Collection Division of CRW Financial, Inc. ("CRWCD") for $3.8 million in cash, 345,178 shares of its Common Stock and a warrant to purchase 250,000 shares of common stock. 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 industries from 14 offices located throughout the United States. In addition, CRWCD had a commercial collections division. CRWCD's revenues in 1996 were $25.9 million. Due to the consolidation or closing of certain CRWCD branch offices, and the loss of certain contracts during 1996, revenue for CRWCD for 1997 is anticipated to be 10-15% lower than the revenue shown on their historical financial statements. This acquisition resulted in goodwill of $12.2 million. 4. Marketable securities: The Company has classified all of its securities as "available-for-sale" and has recorded them at fair value and unrealized gains and losses as a separate component of shareholders' equity. Proceeds from the sale of investment securities were $406,937 in 1996. As of December 31, 1996, there were no gross unrealized gains or losses because all available-for-sale securities were distributed as part of the undistributed S Corporation earnings and all gains and losses were recognized accordingly. F-15 NCO GROUP, INC. Notes to Consolidated Financial Statements -- (Continued) 4. Marketable securities: -- (Continued) Proceeds from the sale of investment securities were $99,256 in 1995. Gross unrealized gains and losses as of December 31, 1995 for available-for-sale securities are as follows:
Unrealized Unrealized Holding Holding Fair Cost Gain Loss Value ---------- ------------ ----------- --------- Common stock ......... $167,852 $ 41,475 $ (6,164) $203,163 Corporate bonds ...... 90,297 6,028 96,325 --------- --------- --------- --------- $258,149 $ 47,503 $ (6,164) $299,488 ========= ========= ========= =========
Investment income, included in interest and investment income on the statement of income consisted of:
For the For the Year Ended December 31, Three Months ---------------------------------------- Ended March 1994 1995 1996 31, 1997 ---------- ------------ ------------ ------------- Realized gain on the sales of securities ...... $ 11,749 $ 12,217 $ 86,509 Realized loss on the sales of securities ...... (16,170) (15,094) (12,186) Interest income .............................. 5,142 7,035 33,577 $93,308 Dividend income .............................. 5,211 5,892 6,816 -------- -------- -------- ------- $ 5,932 $ 10,050 $114,716 $93,308 ======== ======== ======== =======
The fair values of marketable securities held as of December 31, 1995 by contractual maturity are as follows: due within one year, $20,425; due after one year but within 5 years, $10,537; due after five years but within 10 years, $65,363. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or repayment penalties. There were no marketable securities held as of December 31, 1996 or March 31, 1997. 5. Funds held in trust for clients: In the course of the Company's regular business activities as an accounts receivable management company, the Company receives clients' funds arising from the collection of accounts placed with the Company. These funds are placed in segregated cash accounts and are generally remitted to clients within 30 days. Funds held in trust for clients of $1,228,889, $3,835,409 and $5,832,231 at December 31, 1995 and 1996 and March 31, 1997, respectively, have been shown net of their offsetting liability for financial statement presentation. 6. Property and equipment: At December 31, 1995 and 1996 and March 31, 1997, property and equipment, at cost, consisted of the following:
December 31, March 31, -------------------------- ----------- 1995 1996 1997 ----------- ------------ ----------- Computer equipment ............... $ 905,732 $2,461,211 $9,542,288 Furniture and fixtures ............ 316,312 1,095,134 1,626,429 Leased assets ..................... 324,414 262,448 --------- ----------- ----------- 1,222,044 3,880,759 11,431,165 Less accumulated depreciation ...... 584,911 1,050,697 6,066,096 ---------- ----------- ----------- $ 637,133 $2,830,062 $5,365,069 ========== =========== ===========
F-16 NCO GROUP, INC. Notes to Consolidated Financial Statements -- (Continued) 6. Property and equipment: -- (Continued) Depreciation charged to operations amounted to $171,378, $199,123, and $465,785 for the years ended 1994, 1995 and 1996, respectively, and $65,582, and $269,158 for the three months ended March 31, 1996 and 1997, respectively. The Company had not entered into any capital lease transactions for the year ended December 31, 1995. 7. Long-term debt:
December 31, --------------------------- March 31, 1995 1996 1997 ------------ ------------ -------------- Revolving credit agreement, LIBOR plus 2.5%, due December 2000 ............................................. $2,450,000 $ 8,350,000 Non-interest bearing note; $157,500 face amount, payable in monthly installments of $5,250 through July 1999 (less unamortized discount based on imputed interest rate of 10%) ............................................. 189,077 $ 138,847 131,716 Subordinated seller note payable, 8.00% due September 2001, convertible to common stock at $13.00 per share 1,000,000 1,000,000 Subordinated seller note payable, 8.00% due January 2002, convertible to common stock at $21.175 per share ................................................... 900,000 Less current portion .................................... (46,171) (46,946) (52,727) ---------- ---------- ----------- $2,592,906 $1,091,901 $10,328,989 ========== ========== ===========
The following summarizes the Company's required debt payments for the next five years: For the period ended December 31: 1997 ..................... $ 46,946 1998 ..................... 56,346 1999 ..................... 35,555 2000 ..................... -0- 2001 and thereafter ...... 1,000,000 ---------- 1,138,847 ========== In July 1995, the Company entered into a $7,000,000 revolving credit agreement. The line of credit is collateralized by substantially all the assets of the Company. The revolving credit agreement contains, among other provisions, requirements for maintaining defined levels of working capital, net worth, capital expenditures, various financial ratios and restrictions of distributions to shareholders. The Company recorded deferred charges of approximately $311,000 in connection with the revolving credit agreement which consisted primarily of bank charges, legal fees and a warrant to purchase 175,531 shares of Common Stock. The warrants expire on July 31, 2005 and are exercisable at a nominal exercise price. The bank had the right to put, and the Company had the ability to call, the warrants during the twelve-month period ending on July 31, 2001. However, these rights were eliminated as part of the increase in the credit agreement in September 1996. In September 1996, the credit agreement was increased to $15,000,000 to provide financing for the acquisition of MAB and the bank received a warrant to purchase 46,560 shares of Common Stock, exercisable at $13.00 per share. In December 1996, the bank increased the credit agreement to $25,000,000 and received a warrant to purchase an additional 18,500 shares of Common Stock, exercisable at $13.00 per share. F-17 NCO GROUP, INC. Notes to Consolidated Financial Statements -- (Continued) 8. Income taxes: A summary of the components of the tax provision is as follows:
Year Ended Three Months December 31, Ended March 1996 31, 1997 -------------- ------------- Currently payable: Federal .............................. $620,133 $737,844 State ................................. 147,299 213,168 Deferred: Federal ................................. 500 33,332 State ................................. 125 9,630 --------- --------- Provision for income taxes ............... 768,057 993,974 (excluding effect of change in tax status) Effect of accounting change: Federal .............................. 124,247 -- State ................................. 31,062 -- --------- --------- Total provision ........................... $612,748 $993,974 ========= =========
Deferred tax assets (liabilities) consist of the following:
December 31, March 31, 1996 1997 -------------- ------------- Amortization ........................... $ 90,083 $ 65,864 Contractual revenue recognition ......... 65,333 51,188 Accrued expenses ........................ 38,878 34,192 --------- --------- Gross deferred tax assets ............ 194,294 151,244 Depreciation ........................... (39,610) (58,654) Accrual basis conversion ............... (83,924) (83,924) --------- --------- Gross deferred tax liabilities ...... (123,534) (142,578) --------- --------- Net deferred tax asset ............... $ 70,760 $ 8,666 ========= =========
A reconciliation of the U.S. statutory income tax rate to the effective rate (excluding the effect of the change in tax status) is as follows:
Year Ended Three Months December 31, Ended March 1996 31, 1997 -------------- ------------- U.S. statutory income tax rate .................. 34% 34% Income allocable to S Corporation ............... (27%) -- Non-deductible goodwill and other expenses ...... 5% 3% State taxes, net of federal ..................... 2% 6% ------- --- Effective tax rate ........................... 14% 43% ======= ===
9. Employee benefit plans: The Company has a savings plan under Section 401(k) of the Internal Revenue Code (the "Plan"). The Plan allows all eligible employees to defer up to 20% of their income on a pretax basis through contributions to the F-18 NCO GROUP, INC. Notes to Consolidated Financial Statements -- (Continued) 9. Employee benefit plans: -- (Continued) Plan. The Company will match 25% of employee contributions for an amount up to 6% of each employee's base salary. The charge to operations for the matching contributions was $23,536, $30,027, $71,800, $7,802 and $33,659 for the year ended December 31, 1994, 1995 and 1996, and the three months ended March 31, 1996 and 1997, respectively. 10. Supplemental cash flow information: The following are supplemental disclosures of cash flow information:
Three Months Ended Year Ended December 31, March 31, ------------------------------------- ----------------------- 1994 1995 1996 1996 1997 --------- ----------- ----------- ---------- ---------- Cash paid for interest ......... $71,588 $ 157,379 $ 817,950 $137,727 Cash paid for income taxes ...... 600,000 $ 181,206 Noncash investing and financing activities: Note receivable, shareholder .................. 135,888 Fair value of assets acquired ..................... 442,874 2,145,578 4,081,005 680,983 Liabilities assumed from acquisitions .................. 127,000 416,334 2,005,749 3,400,271 Warrants issued with debt ....... 177,294 218,760 Warrants issued with acquisitions .................. 875,000 Property acquired under capital leases ............... 348,586 Common stock issued for acquisitions .................. 300,000 8,214,880 Convertible note payable, issued for acquisition ...... 1,000,000 900,000
11. Leases: The Company has entered into various office lease agreements with limited partnerships owned by certain shareholders of the Company. In addition, the Company has made disbursements on behalf of the limited partnerships and recorded a note receivable of $100,000 at December 31, 1995. The notes outstanding at December 31, 1995 were repaid during 1996. The Company leases certain equipment under agreements which are classified as capital leases. The equipment leases have original terms ranging from 36 to 120 months and have purchase options at the end of the original lease term. The Company also leases certain equipment under non-cancelable operating leases. Future minimum payments, by year and in the aggregate, under noncancelable capital leases and operating leases with initial or remaining terms of one year or more consist of the following at December 31, 1996: For the year ended December 31: 1997 ............ $1,686,000 1998 ............ 1,398,000 1999 ............ 1,191,000 2000 ............ 1,088,000 2001 ............ 727,000 Thereafter ...... 476,000 ----------- $6,566,000 =========== F-19 NCO GROUP, INC. Notes to Consolidated Financial Statements -- (Continued) 11. Leases: -- (Continued) Rent expense was $305,308, $463,916, $1,073,914, $228,497 and $561,268 for the years ended December 31, 1994, 1995, and 1996, and the three months ended March 31, 1996 and 1997, respectively. The related party office lease expense was $297,500, $385,217, $489,926, $151,101 and $135,194 for the years ended December 31, 1994, 1995, and 1996, and the three months ended March 31, 1996 and 1997, respectively, and provides for an escalation clause which takes effect in 1998. The total amount of base rent payments is being charged to expense on the straight-line method over the term of the lease. 12. Stock options: In June 1995, the Company adopted the 1995 Stock Option Plan (the "1995 Plan"). In September 1996, the Company adopted the 1996 Stock Option Plan (the "1996 Plan") and the 1996 Non-Employee Director Stock Option Plan (the "Director Plan" and collectively with the 1995 Plan and the 1996 Plan, the "Plans"). Payment of the exercise price for options granted under the Plans may be made in cash, shares of Common Stock or a combination of both. The 1995 plan authorized 221,719 shares of the Company's common stock to be issued as either incentive or non-qualified stock options. The 1996 Plan authorized 218,413 shares of the Company's common stock to be issued as either incentive or non-qualified stock options and the Director Plan authorized 24,258 shares of the Company's common stock to be issued as non-qualified stock options. In January 1997, the Board amended the 1996 Plan, subject to shareholder approval, to increase the number of shares of Common Stock authorized under that Plan by 259,868 shares to a total of 478,281 shares. In April 1997, the Board amended the Director Plan to, among other things, increase the number of shares of Common Stock authorized under that plan by 75,742 shares to a total of 100,000 shares. The maximum exercise period is ten years after the date of grant. A summary of stock option activity since inception of the Plans is as follows:
Weighted Weighted Average Number of Average Number of Option Price Shares Exercise Price Options Per Share Exercisable Per share ----------- -------------- ------------- --------------- Outstanding at January 1, 1995 Granted ..................... 144,057 $ 2.73 48,039 $2.73 -------- ------- ------- ------ Outstanding at December 31, 1995 (all at $2.73).................. 144,057 2.73 48,039 2.73 Granted ..................... 294,914 13.88 -------- ------- ------ ------ Outstanding at December 31, 1996 (at $2.73 to $17.00) ......... 438,971 $10.20 48,039 $2.73 Forfeitures .................. 250 17.00 Granted ........................ 149,600 24.86 -------- ------- ------ ------ Outstanding at March 31, 1997 (at $2.73 to $25.00) ......... 588,321 $10.20 48,039 $2.73 ======== ======= ======= ======
Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards SFAS No. 123, "Accounting for Stock-Based Compensation". In accordance with the provisions of SFAS 123, the Company applies APB Opinion 25 and related interpretations in accounting for its stock option plans and, accordingly, does not recognize compensation cost based on the fair value of the options granted at grant date. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date in accordance with provisions of SFAS 123, net income and earnings per share for 1995 and 1996 would have been reduced to the unaudited pro forma amounts indicated in the following table: F-20 NCO GROUP, INC. Notes to Consolidated Financial Statements -- (Continued) 12. Stock options: -- (Continued) 1995 1996 ---------- ----------- Net income -- as reported .................. $819,600 $2,540,929 Net income -- pro forma .................... $812,022 $2,483,138 Earnings per share -- as reported ............ $ .17 .50 Earnings per share -- pro forma .............. $ .17 .49 The estimated weighted-average grant-date fair value of the options granted during the year ended December 31, 1996 was $4.35, and the weighted-average remaining contractual life of options outstanding at December 31, 1996 was 9.3 years. All options granted were at the market price of the stock on the grant date. For valuation purposes, the Company utilized the Black-Scholes option pricing model and assumed a weighted average risk-free interest rate of 6.32%, a weighted average expected life of 3.25 years, a weighted average 32.16% volatility factor, no expected dividends and a forfeiture rate of 5% over the vesting period. As part of the purchase price for the 1994 acquisition of certain assets of B. Richard Miller, Inc., 123,803 shares of the Company's common stock were issued to BRM's principal shareholder who also received an option to purchase up to an additional 86,881 shares of the Company which was exercised during 1995 at a cost of $188,000. As a result of the purchase of these shares, a receivable of $82,873 was due from the seller as of December 31, 1995 which was subsequently repaid during 1996. 13. Fair value of financial instruments: The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value: Cash and Cash Equivalents: The carrying amount reported in the balance sheet approximates fair value because of the short maturity of these instruments. Marketable Securities: Available-for-sale securities consisted of debt and equity securities. Fair values are based on quoted market prices. Debt: The Company's non-seller-financed debt is primarily variable in nature and based on the prime rate, and accordingly, the carrying amount of debt instruments approximates fair value. Seller-financed debt contains a conversion option which allows the seller to convert the debt into shares of common stock at a price of $13.00 per share. Valuation of the subordinated note assumes a required rate of return of 13.25%. For valuation of the option to convert the note into 76,923 shares of Common Stock, the Company utilized the Black-Scholes option pricing model and assumed a risk-free interest rate of 6.48%, an expected life of three years, a 35.00% volatility factor and no expected dividends. The estimated fair value of the Company's financial instruments are as follows at December 31:
1995 1996 ------------------------- ---------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ----------- ----------- ------------- ------------ Financial Assets: Cash and cash equivalents ............... $ 804,550 $ 804,550 $12,058,798 $12,058,798 Available-for-sale securities ......... 299,488 299,488 Financial Liabilities: Non-interest bearing note payable ...... 189,077 189,077 138,847 138,847 Revolving credit agreement ............ 2,450,000 2,450,000 Subordinated seller note payable ...... 1,000,000 1,491,016
14. Quarterly Financial Information (unaudited): The following table sets forth selected actual unaudited historical financial data for the calendar quarters of 1995, 1996 and the three months ended March 31, 1997. This quarterly information is unaudited but has been F-21 NCO GROUP, INC. Notes to Consolidated Financial Statements -- (Continued) 14. Quarterly Financial Information (unaudited): -- (Continued) prepared on a basis consistent with the Company's audited financial statements presented elsewhere herein and, in the Company's opinion, includes all adjustments (consisting only of normal and recurring adjustments) necessary for a fair presentation of the information for the quarters presented. The operating results for any quarter are not necessarily indicative of results for any future period.
Quarter Ended ------------------------------------------------------------------------------------------ 1995 1996 1997 --------------------------------------- --------------------------------------- -------- Mar. Jun. Sept. Dec. Mar. Jun. Sept. Dec. Mar. 31 30 30 31 31 30 30 31 31 -------- --------- -------- -------- -------- -------- -------- --------- -------- (dollars in thousands) Revenue ..................... $2,544 $ 3,002 $3,480 $3,707 $6,044 $6,499 $7,715 $10,502 $18,077 Income from operations ...... 244 485 496 320 915 1,156 1,183 1,569 2,383 Net income .................. 227 429 460 250 760 1,001 968 906 1,307
15. Commitments and Contingencies: The Company is party, from time to time, to various legal proceedings incidental to its business. In the opinion of management none of these items individually or in the aggregate would have a significant effect on the financial position, result of operations or cash flows of the Company. 16. Other Recent Accounting Pronouncements: In March 1995, the FASB issued Statement of Financial Accounting Standards SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of," which was effective for the Company beginning January 1, 1996. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment, based on the estimated future cash flows, whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. SFAS No. 121 had no impact on the financial statements upon adoption. F-22 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To CRW Financial, Inc.: We have audited the accompanying balance sheet of the Collection Division of CRW Financial, Inc. (a Delaware Corporation) as of December 31, 1996, and the related statements of operations, Division equity and cash flows for each of the two years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Collection Division of CRW Financial, Inc. as of December 31, 1996, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Philadelphia, Pa., April 17, 1997 F-23 CRW FINANCIAL, INC. COLLECTION DIVISION OF CRW FINANCIAL, INC. BALANCE SHEET--AS OF DECEMBER 31, 1996 ASSETS Current Assets: Cash ......................................................... $ 1,448,000 Cash held for clients ....................................... 2,729,000 Accounts receivable, net of allowance for doubtful accounts of $127,000 ................................................... 2,527,000 Other current assets ....................................... 153,000 ------------ Total current assets ....................................... 6,857,000 ------------ Property and Equipment, net ................................. 2,591,000 Intangible Assets, net ....................................... 4,392,000 Other Assets ................................................ 475,000 ------------ $14,315,000 ============ LIABILITIES AND DIVISION EQUITY Current Liabilities: Collections due to clients ................................. $ 2,729,000 Current portion of long-term debt ........................... 111,000 Accounts payable ............................................. 1,784,000 Accrued interest ............................................. 1,494,000 Due to CRW Financial, Inc. ................................. 2,927,000 ------------ Total current liabilities ................................. 9,045,000 ------------ Long-Term Debt ................................................ 79,000 ------------ Commitments and Contingencies, (Note 6) Division Equity ............................................. 5,191,000 ------------ $14,315,000 ============
The accompanying notes are an integral part of these statements. F-24 CRW FINANCIAL, INC. COLLECTION DIVISION OF CRW FINANCIAL, INC. STATEMENTS OF OPERATIONS
Year Ended December 31, ------------------------------- 1995 1996 ------------- --------------- NET REVENUES ................................. $28,742,000 $25,858,000 OPERATING EXPENSES: Compensation and payroll taxes ............... 14,933,000 14,967,000 Telephone .................................... 2,528,000 2,745,000 Occupancy .................................... 1,994,000 2,113,000 Postage and printing ........................ 2,019,000 2,052,000 Other operating costs ........................ 5,259,000 4,060,000 Depreciation ................................. 741,000 928,000 Amortization of intangible assets ............ 686,000 377,000 ----------- ----------- Operating income (loss) ..................... 582,000 (1,384,000) INTEREST EXPENSE .............................. (12,000) (8,000) ----------- ----------- INCOME (LOSS) BEFORE INCOME TAX BENEFIT ...... 570,000 (1,392,000) INCOME TAX BENEFIT ........................... -- (509,000) ----------- ----------- NET INCOME (LOSS) ........................... $ 570,000 (883,000) =========== ===========
The accompanying notes are an integral part of these statements. F-25 CRW FINANCIAL, INC. COLLECTION DIVISION OF CRW FINANCIAL, INC. STATEMENTS OF DIVISION EQUITY BALANCE, DECEMBER 31, 1994 ...... $ 5,504,000 Net income ..................... 570,000 ----------- BALANCE, DECEMBER 31, 1995 ...... 6,074,000 Net loss ........................ (883,000) ----------- BALANCE, DECEMBER 31, 1996 ...... $ 5,191,000 =========== The accompanying notes are an integral part of these statements. F-26 CRW FINANCIAL, INC. COLLECTION DIVISION OF CRW FINANCIAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ------------------------------- 1995 1996 --------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ................................................ 570,000 (883,000) Adjustments to reconcile net income (loss) to net cash provided by operating activities- Bad debt provision ............................................. -- 46,000 Depreciation and amortization ................................. 1,427,000 1,305,000 Changes in operating assets and liabilities- Accounts receivable .......................................... 266,000 260,000 Prepaid and other current assets .............................. (65,000) 245,000 Accounts payable ............................................. 306,000 (707,000) Accrued expenses ............................................. (1,282,000) 384,000 Due to CRW Financial, Inc. .................................... 1,436,000 (115,000) Other liabilities ............................................. (308,000) (11,000) ----------- ----------- Net cash provided by operating activities .................. 2,350,000 524,000 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment .............................. (1,447,000) (246,000) ----------- ----------- Net cash used in investing activities ........................ (1,447,000) (246,000) ----------- ----------- CASH FLOWS FROM FINANCIAL ACTIVITIES: Repayment of long-term debt .................................... (129,000) (140,000) ----------- ----------- Net cash used in financing activities ........................ (129,000) (140,000) ----------- ----------- NET INCREASE IN CASH ............................................. 774,000 138,000 CASH, BEGINNING OF PERIOD ....................................... 536,000 1,310,000 ----------- ----------- CASH, END OF PERIOD ............................................. $ 1,310,000 $ 1,448,000 =========== ===========
The accompanying notes are an integral part of these statements. F-27 CRW Financial, Inc. Collection Division of CRW Financial, Inc. Notes to Financial Statements 1. Background: The Collection Division of CRW Financial, Inc. (the "Division") performs receivables management, administration and debt collection services for clients primarily in the health care, student loan, credit card and utility industries, and to commercial clients. CRW Financial, Inc. ("CRW") was a subsidiary of Casino & Credit Services, Inc. ("CCS") prior to May 11, 1995, and its operations were a division of CCS from July 1992 to May 11, 1995 when CCS contributed all of its assets and subsidiaries, other than Central Credit, Inc. ("CCI"), to a newly formed subsidiary, CRW Financial, Inc. CCS then spun-off CRW Financial, Inc. in a distribution of CRW Financial, Inc. stock to CCS Shareholders on May 11, 1995. 2. Sale of Division: On February 2, 1997, CRW sold the assets of the Division to NCO Group, Inc. ("NCO") for $3,750,000 in cash and 345,178 shares of NCO Common stock and a warrant to purchase 250,000 shares of NCO Common stock at $27.625 per share and the assumption of certain liabilities. The NCO Common stock and warrant have been valued at $9,050,000. 3. Summaries of Significant Accounting Policies: Use of Estimates in Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition Collection fees are recorded as revenue upon collection of amounts owed by the debtor on behalf of the client. These fees are either billed to the client upon the Division's remittance of the amount collected to the client or are retained by the Division through a net remittance to the client. Property and Equipment Property and equipment are stated at cost. The Division provides for depreciation on a straight-line basis over estimated useful lives of three to five years. Leasehold improvements are amortized over the lease term. Property and equipment, for continuing operations, consist of the following:
December 31, 1996 ------------- Data processing, telecommunications equipment and software ...... 6,058,000 Machinery and office equipment ................................. 600,000 Furniture and fixtures .......................................... 423,000 Leasehold improvements .......................................... 155,000 ----------- 7,236,000 Less -- Accumulated depreciation ................................. (4,645,000) ----------- $ 2,591,000 ===========
December 31, Intangible Assets Life 1996 - ------------------ ----------- ------------ Goodwill, net of accumulated amortization of $902,000 .................................... 15 years 4,021,000 Noncompete agreements, net of accumulated amortization of $1,869,000 .................. 3-5 years 371,000 ----------- $4,392,000 =========== F-28 CRW Financial, Inc. Collection Division of CRW Financial, Inc. Notes to Financial Statements -- (Continued) 3. Summaries of Significant Accounting Policies: -- (Continued) The Division determines impairments to goodwill and other intangibles based upon management's estimates of undiscounted future cash flows over the remaining useful life of the intangible asset. If the amount of such estimated undiscounted future cash flows is less than the net book value of the related intangible asset, the intangible asset is written down to the amount of the estimated discounted cash flows. No such write-down of intangible assets was made in 1995 or 1996. Income Taxes The Division accounts for income taxes in accordance with Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes" (SFAS No. 109). Under SFAS No. 109, deferred income tax assets and liabilities are determined based on differences between the financial reporting and income tax basis of assets and liabilities measured using enacted income tax rates and laws that are expected to be in effect when the differences reverse. Statement of Cash Flows For the years ended December 31, 1995 and 1996, the Division paid interest expense of $12,000 and $8,000, respectively. The Division did not pay any income taxes for the years ended December 31, 1995 and 1996. Investments in RTC Partnerships In January 1994, CRW entered into two partnerships with the Resolution Trust Corporation ("RTC") in which the Division is a general partner owning approximately 37.5% and the RTC is a limited partner. The Division accounts for these partnerships under the equity method. The Division has contributed approximately $143,000 of capital to the partnerships and has been retained by the partnerships as a collection agent for which it is paid a percentage of collections as a fee. The Division records such contingent fee revenue upon receipt of payment from the partnership. Revenues paid by the partnership to the Division in 1995 and 1996 were approximately $1,018,000, and $1,058,000, respectively. Included in other assets as of December 31, 1996 is the $143,000 of capital contributions made by the Division to the partnerships and the Division's share of the partnership's undistributed earnings of approximately $10,000. 4. Debt: In February 1994, the Division entered into a Note for the purchase of certain computer equipment. The Note is for a term of 60 months and requires monthly payments of principal and interest of $6,260, through January 1999. The Note is collateralized by the equipment underlying the Note. At December 31, 1996, the remaining obligation under this Note was $154,000. In August 1994, the Division entered into a note payable to purchase certain equipment. The Note bears interest at 10.5% and is payable in monthly installments, including principal and interest, of $5,414, through August 1997. The Note is collateralized by the equipment underlying the Note. At December 31, 1996, the remaining obligation under this Note was $36,000. Future obligations under the notes discussed above, are as follows: 1997 $111,000 1998 73,000 1999 6,000 --------- $190,000 ========= 5. Income Taxes: The results of operations of the Division are included in the consolidated Federal and state income tax returns of CRW. Deferred income taxes result from temporary differences between tax and financial accounting recognition of income and expense. The principal temporary differences are depreciation and certain accruals and reserves not deductible for tax purposes. F-29 CRW Financial, Inc. Collection Division of CRW Financial, Inc. Notes to Financial Statements -- (Continued) 5. Income Taxes: -- (Continued) In 1996, the net income tax benefit has been calculated by multiplying CRW's Federal effective income tax rate by the Division's pre-tax loss. CRW's federal effective rate was zero in 1995, therefore, the Division did not record any income taxes. Federal and state income taxes are payable by CRW. Therefore, the Division's portion of these assets have been netted against the due to CRW Financial, Inc. balance on the accompanying balance sheet. At December 31, 1996, the Division's portion of CRW's deferred tax asset amounted to $73,000. 6. Commitments and Contingencies: The Division has noncancellable operating lease, including the related-party leases discussed in Note 7, for its office facilities, automobiles and certain office equipment. Rent expense under leases was $1,299,000 in 1995 and $1,209,000 in 1996. The future minimum lease payments under leases at December 31, 1996 are as follows: 1997 $1,264,000 1998 879,000 1999 671,000 2000 594,000 2001 365,000 ----------- $3,773,000 =========== The Division is party to a number of lawsuits arising in the ordinary course of business. In the opinion of management, the ultimate resolution of these lawsuits will not have a material impact on the Division's financial position, liquidity or results of operations. 7. Related-Party Transactions: CRW leases an aggregate of 13,000 square feet from a partnership controlled by the Chief Executive Officer of CRW. The lease requires CRW to make monthly payments of $23,478 through December 31, 2001. In connection with the sale of the Division to NCO (discussed in Note 3), NCO has subleased this facility through July 31, 1997. In addition, CRW leases an aggregate of 22,000 square feet in King of Prussia from a second partnership which is also controlled by the Chief Executive Officer of CRW. This lease requires monthly base rent payments of $28,875 through April 1, 2005. CRW allocates a portion of the rent expense associated with these facilities to the Division. In addition to rent expense on facilities, certain other costs are allocated by CRW to the Division for overhead, data processing, employee benefits, etc. The net effect of intercompany transactions is reflected in the due to CRW Financial, Inc. balance on the accompanying balance sheet. At December 31, 1996, the obligation to CRW totaled $2,927,000 and is non-interest bearing. This obligation has no defined repayment terms. 8. Major Customers: Net revenues from the California Student Aid Commission were $4,220,000 and $3,619,000 in 1995 and 1996, respectively. F-30 Report of Independent Accountants To the Shareholder of Management Adjustment Bureau, Inc. We have audited the accompanying balance sheets of Management Adjustment Bureau, Inc. as of December 31, 1994, 1995 and June 30, 1996, and the related statements of income and retained earnings, and cash flows for each of the three years in the period ended December 31, 1995 and the six months ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Management Adjustment Bureau, Inc. as of December 31, 1994, 1995 and June 30, 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 and the six months ended June 30, 1996, in conformity with generally accepted accounting principles. Coopers & Lybrand, L.L.P. Rochester, New York August 20, 1996 F-31 Management Adjustment Bureau, Inc. Balance Sheets
December 31, --------------------------- June 30, Assets 1994 1995 1996 ------- ------------ ------------ ----------- Current assets: Cash ............................................. $ 413,088 $ 290,197 $ 475,354 Accounts receivable (less allowance for doubtful accounts of $47,000, $80,420 and $92,808, respectively) .................................... 924,551 1,308,511 1,234,393 Property held for sale ........................... 217,400 Loans receivable ................................. 57,623 56,088 Prepaid expenses ................................. 145,476 162,091 135,888 ----------- ----------- ----------- Total current assets ........................... 1,483,115 2,035,822 1,901,723 ----------- ----------- ----------- Funds held in trust for clients Property and equipment, net ........................ 1,005,664 1,319,614 1,160,130 Other assets: Loan receivable .................................... 50,000 33,811 Cash value - officer's life insurance ............ 6,256 6,673 7,189 Deposits .......................................... 12,000 16,200 26,514 ----------- ----------- ----------- Total other assets .............................. 68,256 22,873 67,514 ----------- ----------- ----------- $2,557,035 $3,378,309 $3,129,367 =========== =========== =========== Liabilities and Retained Earnings Current liabilities: Line-of-credit .................................... $ 446,000 $ 400,000 Long-term debt, current portion .................. $ 252,176 271,456 168,459 Accounts payable ................................. 41,917 92,738 123,756 Accrued distribution .............................. 64,500 Accrued repayment guarantee ........................ 190,000 Accrued compensation .............................. 28,369 192,375 97,044 Accrued expenses ................................. 24,309 28,573 30,983 ----------- ----------- ----------- Total current liabilities ..................... 411,271 1,031,142 1,010,242 ----------- ----------- ----------- Funds held in trust for clients Long-term debt .................................... 173,089 410,077 354,409 Retained earnings: Common stock, no par value; Class A - authorized 200 shares; issued and outstanding 100 shares ......... 19,000 19,000 19,000 Retained earnings ................................. 1,953,675 1,918,090 1,745,716 ----------- ----------- ----------- Total retained earnings ........................ 1,972,675 1,937,090 1,764,716 ----------- ----------- ----------- $2,557,035 $3,378,309 $3,129,367 =========== =========== ===========
The accompanying notes are an integral part of the financial statements. F-32 Management Adjustment Bureau, Inc. Statements of Income and Retained Earnings
For the Years Ended For the December 31, Six Months ---------------------------------------------- Ended June 30, 1993 1994 1995 1996 ------------- -------------- ------------- ------------ Revenues .......................................... $ 9,281,629 $ 11,183,167 $12,975,799 $ 6,776,290 Operating costs and expenses: Payroll and related expenses ..................... 5,303,241 6,556,110 7,909,785 4,254,479 Selling, general and administrative expenses ...... 3,425,653 3,624,489 4,138,523 2,421,714 Depreciation and amortization ..................... 165,006 300,158 457,997 248,921 ----------- ------------ ----------- ----------- 8,893,900 10,480,757 12,506,305 6,925,114 ----------- ------------ ----------- ----------- Income (loss) from operations ..................... 387,729 702,410 469,494 (148,824) ----------- ------------ ----------- ----------- Other income (expense): Interest expense ................................. (28,856) (31,065) (26,802) (30,262) Loss on disposal of assets ........................ (72,389) (96,792) Miscellaneous income .............................. 2,848 1,656 12,115 6,712 Property write-down .............................. (78,600) ----------- ------------ ----------- ----------- Total other expense ........................... (98,397) (29,409) (190,079) (23,550) ----------- ------------ ----------- ----------- Net income (loss) ................................. 289,332 673,001 279,415 (172,374) Retained earnings - beginning of year ............... 1,336,342 1,565,674 1,953,675 1,918,090 Distributions to shareholder ........................ (60,000) (285,000) (315,000) ----------- ------------ ----------- ----------- Retained earnings - end of year ..................... $ 1,565,674 $ 1,953,675 $ 1,918,090 $ 1,745,716 =========== ============ =========== ===========
The accompanying notes are an integral part of the financial statements. F-33 Management Adjustment Bureau, Inc. Statements of Cash Flows
For the Years Ended For the Six December 31, Months Ended --------------------------------------- June 30, 1993 1994 1995 1996 ----------- ----------- ----------- ------------- Cash flows from operating activities: Net income (loss) $ 289,332 $ 673,001 $ 279,415 $ (172,374) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 165,006 300,158 457,997 248,921 Loss on disposal of assets 72,389 96,792 Property write-down 78,600 Provision for doubtful accounts 30,000 17,000 33,420 12,388 Changes in assets and liabilities: Decrease (increase) in accounts receivable (352,768) 130,193 (417,380) 61,730 Decrease (increase) in prepaid expenses 10,558 (109,889) (16,615) 26,203 Decrease (increase) in cash value officer's life insurance 284 6,000 (417) (516) Increase in deposits (12,000) (4,200) (10,314) Increase (decrease) in accounts payable (15,867) (35,367) 50,821 31,018 Increase (decrease) in accrued expenses 123,436 (41,377) 103,770 97,079 Decrease in accrued profit sharing contributions (175,000) --------- --------- --------- ---------- Total adjustments (141,962) 254,718 382,788 466,509 --------- --------- --------- ---------- Net cash provided by operating activities 147,370 927,719 662,203 294,135 --------- --------- --------- ---------- Cash flows from investing activities: Proceeds from sale of equipment 42,695 5,800 Purchases of equipment (488,186) (371,172) (637,419) (89,437) Repayment (issuance) of loans receivable 117 (50,000) (7,623) (32,276) Proceeds from sale of property 217,400 --------- --------- --------- ---------- Net cash provided by (used in) investing activities (445,374) (421,172) (639,242) 95,687 --------- --------- --------- ---------- Cash flows from financing activities: Repayment of loans (100,000) (193,324) (204,695) (561,719) Proceeds from loan agreements 200,000 100,000 300,000 400,000 Payment of stock redemption note (70,007) Proceeds from line-of-credit 150,000 Principal payments on capital leases (18,198) (47,428) (76,157) (42,946) Distributions to shareholders (60,000) (285,000) (315,000) --------- --------- --------- ---------- Net cash used in financing activities (48,205) (425,752) (145,852) (204,665) --------- --------- --------- ---------- Net increase (decrease) in cash (346,209) 80,795 (122,891) 185,157 Cash -- beginning of year 678,502 332,293 413,088 290,197 --------- --------- --------- ---------- Cash -- end of year $ 332,293 $ 413,088 $ 290,197 $ 475,354 ========= ========= ========= ==========
The accompanying notes are an integral part of the financial statements. F-34 Management Adjustment Bureau, Inc. Statements of Cash Flows, continued
For the For the Years Ended Six December 31, Months Ended ------------------------------------ June 30, 1993 1994 1995 1996 ---------- ---------- ---------- ------------- Supplemental disclosures of cash flow information: Cash paid for interest $ 36,975 $ 41,704 $ 43,042 $ 27,762 Cash paid for state income taxes $ 607 $ 15,715 $ 15,246 Noncash activities: Capital lease obligations entered into $ 89,139 $ 61,742 $237,121 Debt assumed for property held for sale $296,000
The accompanying notes are an integral part of the financial statements. F-35 Management Adjustment Bureau, Inc. Notes to Financial Statements 1. Nature of Operations Management Adjustment Bureau, Inc. ("MAB"), specializes in accounts receivable management and liquidation, with a concentration of university, guaranteed student loans, bank credit cards, utility, retail, commercial and health care customers. MAB has principal operations in Buffalo, New York and Denver, Colorado. 2. Summary of Significant Accounting Policies Revenue Recognition MAB generates revenues from contingency fees and contractual services and revenue is recognized upon collection of funds on behalf of clients. Credit Policy MAB has two types of arrangements under which it collects its contingency fee revenue. For certain clients, MAB remits funds collected on behalf of the client, net of the related contingency fees while, for other clients, MAB remits gross funds, collected on behalf of clients, and bills the client separately for its contingency fees. Management carefully monitors its client relationships in order to minimize its credit risk and generally does not require collateral. In the event of collection delays from clients, management may at its discretion change from the gross remittance method to the net remittance method. Estimates Utilized in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Property, Equipment and Depreciation Property and equipment are stated at cost less accumulated depreciation. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed over the estimated useful lives of the assets which range from three to thirty-nine years, using straight-line and accelerated methods. When property is sold or retired, the cost and related accumulated depreciation are removed from the balance sheet and any gain or loss on the transaction is included in the statement of income. Income Taxes MAB has elected to be treated as an S-Corporation for tax purposes. Accordingly, no provision will be made for income taxes by MAB since all income will be taxed directly to the shareholder of MAB. State taxes which are not significant are included in selling, general and administrative expenses. 3. Concentration of Credit Risk At December 31, 1994, 1995 and June 30, 1996, MAB had bank deposits in excess of federally insured limits of approximately $2,322,000, $1,662,000 and $1,614,070, respectively. MAB's cash deposits have been placed with a large national bank to minimize risk. 4. Loans Receivable In 1994, MAB loaned a former shareholder $50,000. Interest is payable in monthly installments of $333 at a fixed annual rate of eight percent. The loan is due in full on or before September 1, 1996. The note is unsecured. In 1995, MAB also extended various miscellaneous loans to employees. In 1996, MAB loaned $33,811 to a related party. The loan was assumed by the shareholder in August 1996. F-36 Management Adjustment Bureau, Inc. Notes to Financial Statements -- (Continued) 5. Funds Held in Trust for Clients In the course of MAB's regular business activities as an accounts receivable management agency, MAB receives clients' funds arising from the collection of accounts placed with MAB. These funds are placed in segregated cash accounts and are generally remitted to clients within 30 days. Funds held in trust for clients and their offsetting liability of $1,778,502 and $1,530,270 as of December 31, 1994 and 1995 and $1,393,938 as of June 30, 1996, have been shown net for financial statement presentation purposes. 6. Demand Loans MAB has a $200,000 unsecured demand line-of-credit with a bank which carries interest at the prime rate less .25%. The demand loan balance at December 31, 1995 was $150,000. The demand loan balance was paid off in January 1996, at which time MAB borrowed $400,000 through an unsecured note from a related party. The related party note is due on demand and accrues interest at nine percent per year. MAB has an outstanding demand line-of-credit of $296,000 with PHH Real Estate Services Corporation at December 31, 1995. The line-of-credit is secured by an investment in real estate and due upon sale of the real estate. In May 1996, the real estate was sold and the line-of-credit was repaid and terminated. 7. Property and Equipment Property and equipment, at cost, are as follows:
December 31, --------------------------- June 30, 1994 1995 1996 ------------ ------------ ----------- Computer equipment .................. $1,059,596 $1,341,432 $1,407,832 Furniture and fixtures ............... 513,633 625,828 648,865 Capitalized leases .................. 150,881 388,002 388,002 ----------- ----------- ----------- 1,724,110 2,355,262 2,444,699 Less: Accumulated depreciation ...... 718,446 1,035,648 1,284,569 ----------- ----------- ----------- $1,005,664 $1,319,614 $1,160,130 =========== =========== ===========
Depreciation charged to operations amounted to approximately $165,006, $300,158 and $457,997 in 1993, 1994 and 1995, respectively and $248,921 for the six months ended June 30, 1996 and included amortization of capital leases of approximately $-0-, $9,984 and $41,567 in 1993, 1994 and 1995, respectively and $29,629 for the six months ended June 30, 1996. F-37 Management Adjustment Bureau, Inc. Notes to Financial Statements -- (Continued) 8. Long-Term Debt Long-term debt is as follows:
December 31, -------------------------- June 30, 1994 1995 1996 ----------- ------------- ------------- Bank debt: Chemical Bank, collateralized by computer equipment. Monthly principal payments of $8,333 plus interest at 8.4% are due through April 1996. . $ 133,333 $ 33,333 Chemical Bank, unsecured term loan. Monthly principal payments of $5,000 plus interest at 8% are due through November 2000. ............... 295,000 $ 265,000 M & T Bank, collateralized by computer equipment payments of $1,195, which include interest at 6.5%, are due through December 1996. ......... 206,676 106,979 54,593 --------- --------- --------- 340,009 435,312 319,593 Capital Leases: AT&T Credit Corporation, telephone leases. Monthly lease payments of $3,084 and $2,039 which include interest and due through October 1998. .................................................................. 30,684 67,079 49,452 Steelcase Financial Services, office furniture lease. Monthly lease pay- ments of $2,000 for the first 20 months; $3,000 for the next 40 months, which include interest and are due through June 2002. .................. 164,394 153,823 Data General Corporation, lease collateralized by computer equipment Monthly lease payments of $794, which include interest at 9.3%, are due through May 1996. ................................................ 12,598 3,878 Data General Corporation, lease collateralized by an optical imaging sys- tem Monthly payments of $2,758, which include interest at 7.1%, are due through April, 1996. ............................................. 41,974 10,870 --------- --------- --------- 85,256 246,221 203,275 --------- --------- --------- Total debt and capital leases .......................................... 425,265 681,533 522,868 Less: Current portion ................................................... (252,176) (271,456) (168,459) --------- --------- --------- $ 173,089 $ 410,077 $ 354,409 ========= ========= =========
The fair value of debt approximates the carrying value. Long-term debt and capital leases maturing during the next five years ending December 31, is approximately as follows:
Debt Capital leases ---------- --------------- 1996 ............................................. $200,750 $ 84,627 1997 ............................................. 60,000 59,757 1998 ............................................. 60,000 40,172 1999 ............................................. 60,000 32,280 2000 ............................................. 54,562 32,280 Thereafter ....................................... -- 48,420 --------- $435,312 297,536 ========= Less amounts representing interest ............... 51,315 --------- Present value of net minimum lease payments ...... $246,221 =========
F-38 Management Adjustment Bureau, Inc. Notes to Financial Statements -- (Continued) The term loan agreement contains, among other provisions, requirements for maintaining defined levels of working capital, net worth and various financial ratios. MAB was in violation of covenants for which waivers were obtained. In May 1996, MAB established two unsecured lines-of-credit with a total availability of $1,000,000. Each line-of-credit carries variable interest based on the prime rate. One line-of-credit is collateralized by MAB's accounts receivables and specific equipment. 9. Commitments and Contingencies MAB has operating leases for a building and automobiles which expire at various dates through 2010 with renewal privileges in some instances. Total rental expense under operating leases was approximately $344,500, $330,000 and $469,400 for 1993, 1994, and 1995, respectively and $227,500 for the six months ended June 30, 1996. Future minimum lease payments under operating leases through 2000 for the years ending December 31, are approximately: 1996 .............................................$ 416,900 1997 ...............................................346,600 1998 ................................................324,900 1999 ................................................305,100 2000 ................................................310,700 MAB is involved in various legal issues. In the opinion of MAB's management, the ultimate cost individually or in the aggregate to resolve these matters will not have a material adverse effect on MAB's financial position, results of operations or cash flows beyond the reserves already established. Included in these reserves is an amount for $190,000 for a potential loss related to a specific contract. Management estimates the range of potential losses is between $-0- and $380,000 for this specific contract. Management is not aware of any other legal proceedings. 10. Profit Sharing Plan MAB has a profit sharing plan with a 401(k) feature covering all qualified employees. MAB's contribution to this plan is a 50% match on the first 4% contributed by employees. MAB contributed $47,732, $50,531, and $50,805 in 1993, 1994, and 1995, respectively, to the Plan. MAB contributed $40,242 to the Plan for the six month period ended June 30, 1996. 11. Major Customer MAB had revenues from a major customer of approximately 9% and 10% for the years ended December 31, 1994 and 1995, respectively and 13% for the six month period ended June 30, 1996. During August 1996, MAB was notified that it will not continue to provide certain services to this customer. 12. Stock Purchase Agreement In July 1996, the shareholder received a letter of intent from NCO Financial Systems to purchase MAB. MAB is currently pursuing the sale. F-39 ================================================================================ 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 .................................... 8 Acquisition History ........................... 13 Use of Proceeds ................................. 16 Dividend Policy and Prior S Corporation Status . 16 Price Range of Common Stock ..................... 17 Capitalization ................................. 18 Selected Financial and Operating Data ............ 19 Management's Discussion and Analysis of Financial Condition and Results of Operations ................................. 22 Business ....................................... 30 Management .................................... 39 Certain Transactions ........................... 44 Principal and Selling Shareholders ............ 47 Description of Capital Stock .................. 49 Shares Eligible for Future Sale ............... 52 Underwriting .................................... 54 Legal Matters ................................. 55 Experts ....................................... 55 Additional Information ........................ 55 Index to Consolidated Financial Statements ...... F-1 ================================================================================ 2,256,000 Shares [GRAPHIC OMITTED] Common Stock ------------- PROSPECTUS ------------ MONTGOMERY SECURITIES JANNEY MONTGOMERY SCOTT INC. THE ROBINSON-HUMPHREY COMPANY, INC. , 1997 ================================================================================ PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. 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 ...... $ 25,453 National Association of Securities Dealers, Inc. Fee ...... 8,900 Nasdaq Listing Fee .......................................... 25,000 Printing and Engraving Expenses ........................... 100,000 Accounting Fees and Expenses .............................. 100,000 Legal Fees and Expenses .................................... 100,000 Blue Sky Qualification Fees and Expenses .................. 10,000 Transfer Agent and Registrar Fees and Expenses ............ 10,000 Miscellaneous ............................................. 520,647 --------- Total ................................................... $900,000 =========
The foregoing, except for the Securities and Exchange Commission registration fee and the National Association of Securities Dealers, Inc. fee, and the Nasdaq Listing fee are estimates. Item 14. 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 temnity 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 15. Recent Sales of Unregistered Securities. In connection with the Company's purchase of certain assets of B. Richard Miller, Inc. in April 1994, the Company issued 123,803 shares of Common Stock to the seller. In addition, Bernard Miller, the principal shareholder of the seller, received an option to purchase up to an additional 86,881 shares of Common Stock, which option was exercised in 1995. These transactions were made in reliance on the exemption from the registration requirements provided by Section 4(2) of the Securities Act. In September 1996, the Company issued one share of Common Stock of the Company in exchange for each outstanding share of common stock of NCO Financial and NCO Financial became a wholly-owned subsidiary of the Company. The stock was issued without registration under the Securities Act in reliance on the exemption from the registration requirements provided by Section 4(2) of the Securities Act. In July 1995, the Company issued a warrant to purchase an aggregate of 175,531 shares of the Company's Common Stock to Mellon Bank, N.A. in connection with its Credit Agreement. The warrant expires on July 31, 2005 and provides for exercise at a nominal price. The Company issued an additional warrant to purchase 46,560 shares of Common Stock to Mellon Bank, N.A. upon the amendment of the Company's Credit Agreement in September 1996. The Company issued an additional warrant to purchase 18,500 shares of Common Stock to Mellon Bank, N.A. in connection with the Bank's commitment to increase the credit facility to $25.0 million. These warrants have an exercise price of $13.00 per share and expire on July 31, 2005. All of the warrants were issued in reliance upon the exemption from the registration requirements provided by Section 4(2) of the Securities Act. Mellon Bank, N.A. subsequently assigned the warrants to APT Holdings Corporation, an affiliate. In September 1996, the Company acquired all of the outstanding stock of MAB. As part of the purchase price, the Company issued a Convertible Note in the aggregate principal amount of $1.0 million. This note is convertible at any time into 76,923 shares of Common Stock at an conversion price of $13.00 per share. The note was issued in reliance on the exemption from the registration requirements provided by Section 4(2) of the Securities Act. II-2 The Company granted options to certain executive officers, key employees and consultants to purchase shares of Common Stock under the 1995 Stock Option Plan and the 1996 Stock Option Plan on the dates and at the exercise prices set forth below. Generally, options will become exercisable in equal one-third installments beginning on the first anniversary of the date of grant. All of the options were issued in connection with such person's employment or engagement with the Company and no cash or other consideration was received by the Company in exchange for such options. The options were issued in reliance upon the exemption from the registration requirements provided by Section 4(2) of the Securities Act and, with respect to options issued prior to November 6, 1997, by Rule 701 under the Securities Act. Date Issued Options Granted Exercise Price - ---------------- ----------------- --------------- June 1995 144,117 $ 2.56 July 1996 33,258 13.00 September 1996 38,801 13.00 October 1996 156,145 13.00 December 1996 64,650 17.00 January 1997 5,900 22.50 January 1997 6,200 24.00 February 1997 9,000 25.00 April 1997 110,000 25.00 In December 1996, the Company issued options pursuant to the 1996 Non-Employee Director Stock Option Plan to purchase 1,000 shares of Common Stock to each of Eric S. Siegel and Alan F. Wise upon their appointment to the Board of Directors. These options were granted at an exercise price of $18.125 per share. As a result of the amendments to the Director Plan, and subject to shareholder approval, each of Messrs. Siegel and Wise received a grant of an option to purchase 10,000 shares of Common Stock in April 1997 at an exercise price of $25.00 per share and will be granted an option to purchase 2,000 shares immediately following the 1997 Annual Meeting of Shareholders at the fair market value of the Common Stock on the date of grant. The options were issued in reliance upon the exemption from the registration requirements provided by Section 4(2) of the Securities Act. 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 into up to 42,503 shares of the Company's Common Stock, at any time, at a conversion price of $21.175 per share and bears interest payable monthly at a rate of 8.0% per annum with principal due in January 2002. These securities were issued in reliance upon the exemption from the registration requirements provided by Section 4(2) of the Securities Act. On January 30, 1997, NCO purchased certain assets of TRC, for $1.6 million in cash. The purchase price may be increased by a maximum of up to $600,000 if the TRC business achieves certain revenue targets during the three year period following the closing date. At the option of the seller, the purchase price adjustment may be paid in cash or Common Stock, based on the fair market value of NCO Common Stock as of the date that the purchase price adjustment accrues. These securities were issued in reliance upon the exemption from the registration requirements provided by Section 4(2) of the Securities Act. On February 2, 1997, NCO purchased certain assets of CRWCD for $3.75 million in cash, 345,178 shares of Common Stock and warrants to purchase 250,000 shares of Common Stock exercisable at any time on or before January 31, 2002 at an exercise price of $27.625 per share. These securities were issued in reliance upon the exemption from the registration requirements provided by Section 4(2) of the Securities Act. II-3 Item 16. Exhibits and Financial Statement Schedules. (a) Exhibits
Exhibit No. Description - ------------- ------------------------------------------------------------------------------------------------ 1.1 Form of Underwriting Agreement 3.1(1) The Company's amended and restated Articles of Incorporation. 3.2(1) The Company's amended and restated Bylaws. 4.1(1) Specimen of Common Stock Certificate. 5.1 Opinion of Blank Rome Comisky & McCauley. 10.1(1) Employment Agreement, dated September 1, 1996, between the Company and Bernard R. Miller. 10.2(1) Employment Agreement, dated September 1, 1996, between the Company and Michael J. Barrist. 10.3(1) Employment Agreement, dated September 1, 1996, between the Company and Charles C. Piola, Jr. 10.4(1) Employment Agreement, dated September 1, 1996, between the Company and Joseph C. McGowan. 10.5(1) Employment Agreement, dated September 1, 1996, between the Company and Steven L. Winokur. 10.6(1) Agreements of Lease dated May 9, 1995, as amended, between the Company and 1710-20 Sentry East Associates, L.P., relating to the offices located at 1710 Walton Road, Blue Bell, Pennsylvania. 10.7(1) Agreements of Lease dated July 1, 1993 between the Company and 1740 Sentry East Associates, L.P., relating to the offices located at 1740 Walton Road, Blue Bell, Pennsylvania. 10.8(1) Lease Agreement by and between The Uniland Partnership, L.P. and Management Adjustment Bureau, Inc., as amended by First Amendment to Lease, dated December 10, 1994, as further amended by Second Amendment to Lease, dated December 10, 1994. 10.9(1) Software License Agreement and Software Purchase Agreement by and between the Company and CRSoftware, Inc., relating to computer software (CRS Credit Bureau Reporting Software) and computer hardware. 10.10(1) Amended and Restated 1995 Stock Option Plan. 10.11(1) 1996 Stock Option Plan. 10.12(1) 1996 Non-Employee Director Stock Option Plan. 10.13(1) Amended and Restated Credit Agreement by and among the Company, its subsidiaries and Mellon Bank, N.A., dated September 5, 1996. 10.14(1) Amended and Restated Security Agreement, dated September 5, 1996, by and among the Company, its subsidiaries and Mellon Bank, N.A. 10.15(1) Warrant Agreement, dated July 28, 1995, by and between the Company and Mellon Bank, N.A. and Amendment dated September 5, 1996. 10.16(1) Warrant Agreement, dated September 5, 1996, by and between the Company and Mellon Bank, N. A. 10.17(5) Second Amended and Restated Registration Rights Agreement, dated December 13, 1996, by and between the Company and Mellon Bank, N.A. 10.18(5) First Amendment dated December 13, 1996 to Amended and Restated Credit Agreement by and among the Company, its subsidiaries and Mellon Bank, N.A., dated September 5, 1996. 10.19(5) Second 1996 Warrant Agreement, dated December 13, 1996, by and between the Company and APT Holdings Corporation, an affiliate of Mellon Bank, N.A. 10.20(1) Stock Pledge Agreement, dated as of September 5, 1996 made by NCO Group, Inc. in favor of Mellon Bank, N.A.
II-4
Exhibit No. Description - ------------- ------------------------------------------------------------------------------------------------- 10.21(1) Convertible Note dated September 1, 1996, made by the Company in the principal amount of $1,000,000, as partial payment of the purchase price for the acquisition of MAB. 10.22(1) Distribution and Tax Indemnification Agreement 10.23(1) Irrevocable Proxy Agreement by and between Michael J. Barrist and Annette H. Barrist. 10.24 Common Stock Purchase Warrant for 175,531 shares issued to APT Holdings Corporation, an affiliate of Mellon Bank, N.A. 10.25 1996 Common Stock Purchase Warrant for 46,560 shares issued to APT Holdings Corporation, an affiliate of Mellon Bank, N.A. 10.26(5) Second 1996 Common Stock Purchase Warrant for 18,500 shares issued to APT Holdings Corporation, an affiliate of Mellon Bank, N.A. 10.27(1) Indemnification Agreement by and between NCO Financial Systems, Inc., Management Adjustment Bureau, Inc. and Craig Costanzo. 10.28(1) Stock Purchase Agreement, by and among the Company, and Craig Costanzo and Andrew J. Boyuka, as Trustee of the Susan E. Costanzo Grantor Trust and Christopher A. Costanzo Grantor Trust, relating to the acquisition of MAB. NCO will furnish to the Securities and Exchange Commission a copy of any omitted schedule upon request. 10.29(1) Asset Purchase Agreement dated December 8, 1995 by and between the Company and Trans Union Corporation. NCO will furnish to the Securities and Exchange Commission a copy of any omitted schedule upon request. 10.30(2) Stock Purchase Agreement, dated January 22, 1997, by and among NCO and the majority sharehold- ers of Goodyear. NCO will furnish to the Securities and Exchange Commission a copy of any omitted schedule upon request. 10.31(2) Stock Purchase Agreement, dated January 22, 1997, by and among NCO and the minority shareholders of Goodyear. NCO will furnish to the Securities and Exchange Commission a copy of any omitted schedule upon request. 10.32(2) Non-negotiable Subordinated Convertible Promissory Note dated January 22, 1997, made by the Company in the principal amount of $900,000, as partial payment of the purchase price for the acquisition of Goodyear. 10.33(3) Asset Purchase Agreement, dated January 30, 1997, by and among NCO, Tele-Research, Strategic Information, Inc. and the Tele-Research shareholders. NCO will furnish to the Securities and Exchange Commission a copy of any omitted schedule upon request. 10.34(4) Asset Purchase Agreement, dated January 21, 1997, by and among NCO, and CMS A/R. NCO will furnish to the Securities and Exchange Commission a copy of any omitted schedule upon request. 10.35(4) Asset Acquisition Agreement, dated February 2, 1997, by and among CRW Financial Systems, Inc. ("CRW"), Kaplan & Kaplan, Inc., NCO, CRWF Acquisition, Inc., and K&K Acquisition, Inc. dated February 2, 1997. NCO will furnish to the Securities and Exchange Commission a copy of any omitted schedule upon request. 10.36(4) Non-Transferable Common Stock Purchase Warrant dated February 2, 1997 issued to CRW. 10.37(4) Registration Rights Agreement dated February 2, 1997 between NCO and CRW. 10.38(4) Nondisclosure, Nonsolicitation, Noncompetition and Standstill Agreement dated February 2, 1997 between Jonathan P. Robinson and NCO. 10.39(4) Nondisclosure, Nonsolicitation, Noncompetition and Standstill Agreement dated February 2, 1997 between J. Brian O'Neill and NCO. 21.1 Subsidiaries of the Registrant.
II-5
Exhibit No. Description - ------------- ----------------------------------------------------------------------------------------------- 23.1 Consent of Coopers & Lybrand L.L.P. 23.2 Consent of Arthur Andersen LLP. 23.3 Consent of Blank Rome Comisky & McCauley (included in the opinion filed as Exhibit 5.1 hereto) 24.1 Power of Attorney of directors and officers (included on Page II-7). 27.1 Financial Data Schedules.
- ------------ 1 Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-11745), as amended, filed with the Securities Exchange Commission on September 11, 1996. 2 Incorporated by reference to the Company's Current Report on Form 8-K (File No. 0-21639) filed with the Securities Exchange Commission on February 6, 1997. 3 Incorporated by reference to the Company's Current Report on Form 8-K/A (File No. 0-21639) filed with the Securities Exchange Commission on February 18, 1997. 4 Incorporated by reference to the Company's Current Report on Form 8-K (File No. 0-21639) filed with the Securities Exchange Commission on February 18, 1997. 5 Incorporated by reference to the Company's Current Report on Form 10-K (File No. 0-21639) filed with the Securities Exchange Commission on March 31, 1997). (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 14 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) 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 (2) 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-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Blue Bell, Pennsylvania, on June 10, 1997. NCO GROUP, INC. By: /s/ Michael J. Barrist ----------------------------------- Michael J. Barrist, Chairman of the Board, President and Chief Executive Officer POWER OF ATTORNEY AND SIGNATURES KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael J. Barrist and Steven L. Winokur, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution or resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Registration Statement, and to file the same, with all exhibits thereto, and other documentation in connection therewith, as well as any related registration statement (or amendment thereto) filed pursuant to Rule 462(b) promulgated under the Securities Act of 1933 with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to enable NCO Group, Inc. to comply with the provisions of the Securities Act of 1933 and all requirements of the Securities and Exchange Commission, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. 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 date indicated.
SIGNATURE TITLE(S) DATE - -------------------------------------- --------------------------------------- -------------- /s/ Michael J. Barrist Chairman of the Board, President and June 10, 1997 -------------------------- Chief Executive Officer (principal Michael J. Barrist executive officer) /s/ Charles C. Piola Executive Vice President and Director June 10, 1997 - -------------------------- Charles C. Piola /s/ Steven L. Winokur Vice President of Finance, Chief June 10, 1997 - -------------------------- Financial Officer and Treasurer Steven L. Winokur (principal financial and accounting officer) /s/ Bernard R. Miller Senior Vice President, Development June 10, 1997 - -------------------------- and Director Bernard R. Miller /s/ Eric S. Siegel Director June 10, 1997 - -------------------------- Eric S. Siegel /s/ Allen F. Wise Director June 10, 1997 - -------------------------- Allen F. Wise
II-7 EXHIBIT INDEX
Exhibit - --------- 1.1 Form of Underwriting Agreement 5.1 Opinion of Blank Rome Comisky & McCauley. 10.24 Common Stock Purchase Warrant for 175,531 shares issued to APT Holdings Corporation, an affiliate of Mellon Bank, N.A. 10.25 1996 Common Stock Purchase Warrant for 46,560 shares issued to APT Holdings Corporation, an affiliate of Mellon Bank, N.A. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Coopers & Lybrand L.L.P. 23.2 Consent of Arthur Andersen LLP. 27.1 Financial Data Schedules.
EX-1.1 2 UNDERWRITING AGREEMENT EXHIBIT 1.1 2,256,000 Shares NCO GROUP, INC. Common Stock UNDERWRITING AGREEMENT ______________, 1997 MONTGOMERY SECURITIES JANNEY MONTGOMERY SCOTT INC. THE ROBINSON-HUMPHREY COMPANY, INC. c/o MONTGOMERY SECURITIES 600 Montgomery Street San Francisco, California 94111 Dear Sirs: SECTION 1. Introductory. NCO Group, Inc., a Pennsylvania corporation (the "Company"), proposes to issue and sell 1,200,000 shares of its authorized but unissued Common Stock (the "Common Stock") and the shareholders of the Company named in Schedule B (collectively, the "Selling Stockholders") severally propose to sell an aggregate of 1,056,000 shares of Common Stock to the several underwriters named in Schedule A annexed hereto (the "Underwriters"). Said aggregate of 2,256,000 shares are herein called the "Firm Common Shares." In addition, certain stockholders of the Company named in Schedule B annexed hereto (the "Option Selling Stockholders") propose to grant to the Underwriters an option to purchase up to 338,400 additional shares of Common Stock (the "Optional Common Shares"), as provided in Section 5 hereof. The Firm Common Shares and, to the extent such option is exercised, the Optional Common Shares are hereinafter collectively referred to as the "Common Shares." You have advised the Company and the Selling Stockholders that the Underwriters propose to make a public offering of their respective portions of the Common Shares on the effective date of the registration statement hereinafter referred to, or as soon thereafter as in your judgment is advisable. The Company and each of the Selling Stockholders hereby confirm their respective agreements with respect to the purchase of the Common Shares by the Underwriters as follows: SECTION 2. Representations and Warranties of the Company and the Selling Stockholders. The Company and, to the best of their knowledge, each of the Selling Stockholders (with the exception of the Other Selling Stockholders (as defined on Schedule B hereto) severally represent and warrant to the several Underwriters that: (a) A registration statement on Form S-1 (File No. 333-_________) with respect to the Common Shares has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the - 1 - "Commission") thereunder, and has been filed with the Commission. The Company has prepared and has filed or proposes to file prior to the effective date of such registration statement an amendment or amendments to such registration statement, which amendment or amendments have been or will be similarly prepared. There have been delivered to you two copies of such registration statement and amendments, together with two copies of each exhibit filed therewith. Conformed copies of such registration statement and amendments (but without exhibits) and of the related preliminary prospectus have been delivered to you in such reasonable quantities as you have requested for each of the Underwriters. The Company will next file with the Commission one of the following: (i) prior to effectiveness of such registration statement, a further amendment thereto, including the form of final prospectus, (ii) a final prospectus in accordance with Rules 430A and 424(b) of the Rules and Regulations. As filed, such amendment and form of final prospectus, or such final prospectus, shall include all Rule 430A Information and, except to the extent that you shall agree in writing to a modification, shall be in all substantive respects in the form furnished to you prior to the date and time that this Agreement was executed and delivered by the parties hereto, or, to the extent not completed at such date and time, shall contain only such specific additional information and other changes (beyond that contained in the latest form furnished to you) as the Company shall have previously advised you in writing would be included or made therein. The term "Registration Statement" as used in this Agreement shall mean such registration statement at the time such registration statement becomes effective and, in the event any post-effective amendment thereto becomes effective prior to the First Closing Date (as hereinafter defined), shall also mean such registration statement as so amended; provided, however, that such term shall also include (i) all Rule 430A Information deemed to be included in such registration statement at the time such registration statement becomes effective as provided by Rule 430A of the Rules and Regulations and (ii) any registration statement filed pursuant to 462(b) of the Rules and Regulations relating to the Common Shares. The term "Preliminary Prospectus" shall mean any preliminary prospectus referred to in the preceding paragraph and any preliminary prospectus included in the Registration Statement at the time it becomes effective that omits Rule 430A Information. The term "Prospectus" as used in this Agreement shall mean either (i) the prospectus relating to the Common Shares in the form in which it is first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations or (ii) if no filing pursuant to Rule 424(b) of the Rules and Regulations is required, shall mean the form of final prospectus included in the Registration Statement at the time such registration statement becomes effective. The term "Rule 430A Information" means information with respect to the Common Shares and the offering thereof permitted to be omitted from the Registration Statement when it becomes effective pursuant to Rule 430A of the Rules and Regulations. (b) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus, and each Preliminary Prospectus has conformed in all material respects to the requirements of the Act and the Rules and Regulations and, as of its date, has not included any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and at the time the Registration Statement becomes effective, and at all times subsequent thereto up to and including each Closing Date hereinafter mentioned, the Registration Statement and the Prospectus, and any amendments or supplements thereto, will contain all material statements and information required to be included therein by the Act and the Rules and Regulations and will in all material respects conform to the requirements of the Act and the Rules and Regulations, and neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, will include 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; provided, however, no representation or warranty contained in this subsection 2(b) shall be applicable to information contained in or omitted from any Preliminary Prospectus, the Registration Statement, the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriter, directly or through the Underwriters, specifically for use in the preparation thereof. - 2 - (c) The Company does not own more than a majority of the outstanding capital stock or other equity interest in, or control, directly or indirectly, any corporation, association or other entity other than the subsidiaries listed in Exhibit 21 to the Registration Statement. The Company and each of its subsidiaries have been duly incorporated and are validly existing as corporations in good standing under the laws of their respective jurisdictions of incorporation, with full power and authority (corporate and other) to own and lease their properties and conduct their respective businesses as described in the Prospectus; the Company owns all of the outstanding capital stock of its subsidiaries free and clear of all claims, liens, charges and encumbrances except that the stock of its subsidiaries is pledged to Mellon Bank, N.A. to secure the Company's obligations under the Amended and Restated Credit Agreement with Mellon Bank, N.A. dated September 5, 1996, as amended (the "Credit Agreement"); the Company and each of its subsidiaries are in possession of and operating in compliance with all authorizations, licenses, permits, consents, certificates and orders necessary to the conduct of their respective businesses, all of which are valid and in full force and effect, except where the failure to so possess or comply or maintain such authorizations, licenses, permits, consents, certificates or orders in full force and effect would not, singly or in the aggregate, have a material adverse effect on the on the business, financial condition, results of operations or prospects of the Company and its subsidiaries taken as a whole (a "Material Adverse Effect"); the Company and each of its subsidiaries are duly qualified to do business and in good standing as foreign corporations in each jurisdiction in which the ownership or leasing of properties or the conduct of their respective businesses requires such qualification, except for jurisdictions in which the failure to so qualify would not have a Material Adverse Effect; and no proceeding has been instituted in any such jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification. (d) The Company has an authorized and outstanding capital stock as set forth under the heading "Capitalization" in the Prospectus; the issued and outstanding shares of Common Stock have been duly authorized and validly issued, are fully paid and nonassessable, have been issued in compliance, in all material respects, with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities, and conform, in all material respects, to the description thereof contained in the Prospectus. All issued and outstanding shares of capital stock of each subsidiary of the Company have been duly authorized and validly issued and are fully paid and nonassessable. Except as disclosed in or contemplated by the Prospectus and the financial statements of the Company, and the related notes thereto, included in the Prospectus, neither the Company nor any subsidiary has outstanding any options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted and exercised thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights in all material respects. (e) The Common Shares to be sold by the Company have been duly authorized and, when issued, delivered and paid for in the manner set forth in this Agreement, will be validly issued, fully paid and nonassessable, and will conform, in all material respects, to the description thereof contained in the Prospectus. No preemptive rights or other rights to subscribe for or purchase exist with respect to the issuance and sale of the Common Shares by the Company pursuant to this Agreement. No stockholder of the Company has any right which has not been waived to require the Company to register the sale of any shares owned by such stockholder under the Act in the public offering contemplated by this Agreement. No further approval of, or authorization by, the stockholders or the Board of Directors of the Company will be required for the issuance and sale of the Common Shares to be sold by the Company or the transfer and sale of the Common Shares to be sold by the Selling Stockholders as contemplated herein. - 3 - (f) The Company has full legal right, power and authority to enter into this Agreement and perform the transactions contemplated hereby, assuming that the Registration Statement is declared effective by the Commission and assuming compliance with applicable state securities or "blue sky" laws. This Agreement has been duly authorized, executed and delivered by the Company and, assuming due authorization, execution and delivery by the other parties hereto, constitutes a valid and binding obligation of the Company in accordance with its terms except as enforceability may be limited by general equitable principles, bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and, to the extent that this Agreement provides for indemnification or contribution for liabilities arising under federal or state securities laws or under this Agreement, except as rights to indemnification or contribution may be limited by federal or state securities laws and the public policy underlying such laws. The making and performance of this Agreement by the Company and the consummation of the transactions herein contemplated will not violate any provisions of the articles of incorporation or bylaws, or other organizational documents, of the Company or any of its subsidiaries, and will not conflict with, result in the breach or violation of, or constitute, either by itself or upon notice or the passage of time or both, a default under any agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or any of its respective properties may be bound or affected, any statute or any authorization, judgment, decree, order, rule or regulation of any court or any regulatory body, administrative agency or other governmental body applicable to the Company or any of its subsidiaries or any of its respective properties. No consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body is required for the execution and delivery of this Agreement or the consummation of the transactions contemplated by this Agreement, except for compliance with the Act, the Blue Sky laws applicable to the public offering of the Common Shares by the several Underwriters and the clearance of such offering with the National Association of Securities Dealers, Inc. (the "NASD"). (g) Coopers & Lybrand, who have expressed their opinion with respect to the financial statements and schedules of the Company [and Management Adjustment Bureau, Inc. ("MAB")] filed with the Commission as a part of the Registration Statement and included in the Prospectus and in the Registration Statement, are independent accountants as required by the Act and the Rules and Regulations. Arthur Andersen LLP, who have expressed their opinion with respect to the financial statements and schedules of the Collection Division of CRW Financial, Inc. ("CRWCD") filed with the Commission as a part of the Registration Statement and included in the Prospectus and in the Registration Statement, are independent accountants as required by the Act and the Rules and Regulations. (h) The financial statements of the Company, and the related notes thereto, included in the Registration Statement and the Prospectus present fairly the financial position of the Company as of the respective dates of such financial statements, and the results of operations and changes in financial position of the Company for the respective periods covered thereby. The financial statements of CRWCD, and the related notes thereto, included in the Registration Statement and the Prospectus present fairly the financial position of CRWCD as of the respective dates of such financial statements, and the results of operations and changes in financial position of CRWCD for the respective periods covered thereby. The financial statements of MAB, the related notes thereto, included in the Registration Statement and the Prospectus present fairly the financial position of MAB as of the respective dates of such financial statements, and the results of operations and changes in financial position of MAB for the respective periods covered thereby. Such statements and related notes have been prepared in accordance with generally accepted accounting principles applied on a consistent basis as certified by the independent accountants named in subsection 2(g). The selected financial data set forth in the Prospectus under the captions "Capitalization" and "Selected Financial and Operating Data" fairly present the information set forth therein on the basis stated in the Registration Statement. (i) The pro forma consolidated financial statements and other pro forma financial information of the Company included in the Prospectus have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements, have been properly compiled on the pro forma basis described therein, and, in the opinion of the Company, the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions or circumstances referred to therein. - 4 - (j) Except as disclosed in the Prospectus, neither the Company nor any of its subsidiaries is in violation or default of any provision of its articles of incorporation or bylaws, or other organizational documents, or, except as to defaults which individually or in the aggregate would have not a Material Adverse Effect, is in breach of or default with respect to any provision of any agreement, judgment, decree, order, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument to which it is a party or by which it or any of its properties are bound; and there does not exist any state of facts which constitutes an event of default on the part of the Company or any such subsidiary as defined in such documents or which, with notice or lapse of time or both, would constitute such an event of default. (k) There are no contracts or other documents required to be described in the Registration Statement or to be filed as exhibits to the Registration Statement by the Act or by the Rules and Regulations which have not been described or filed as required. The contracts so described in the Prospectus are accurate and complete in all material respects; all such contracts are in full force and effect on the date hereof; and neither the Company nor any of its subsidiaries, nor to the best of the Company's knowledge, any other party is in breach of or default under any of such contracts. (l) There are no legal or governmental actions, suits or proceedings pending to which the Company or any of its subsidiaries is a party or of which property owned or leased by the Company or any of its subsidiaries is subject, or related to environmental or discrimination matters and there are no legal or governmental actions, suits or proceedings, to the best of the Company's knowledge, threatened to which the Company or any of its subsidiaries may be a party or of which property owned or leased by the Company or any of its subsidiaries may be the subject, or related to environmental or discrimination matters, all of which actions, suits or proceedings will, individually or in the aggregate, prevent or adversely affect the transactions contemplated by this Agreement or result in a material adverse change in the condition (financial or otherwise), properties, business, results of operations or prospects of the Company and its subsidiaries taken as a whole; and no labor disturbance by the employees of the Company or any of its subsidiaries exists or, to the knowledge of the Company, is threatened which will materially and adversely affect such condition, properties, business, results of operations or prospects. Neither the Company nor any of its subsidiaries is a party or subject to the provisions of any material injunction, judgment, decree or order of any court, regulatory body, administrative agency or other governmental body. (m) The Company or the applicable subsidiary has good and marketable title to all the properties and assets reflected as owned in the financial statements hereinabove described (or elsewhere in the Prospectus), subject to no lien, mortgage, pledge, charge or encumbrance of any kind except (i) those, if any, reflected in such financial statements (or elsewhere in the Prospectus), or (ii) those which are not material in amount and do not adversely affect the use made and proposed to be made of such property by the Company and its subsidiaries. The Company or the applicable subsidiary holds its leased properties under valid and binding leases, with such exceptions as are not materially significant in relation to the business of the Company. (n) Since the respective dates as of which information is given in the Registration Statement and Prospectus, and except as described in or contemplated by the Prospectus: (i) the Company and its subsidiaries have not incurred any material liabilities or obligations, indirect, direct or contingent, or entered into any material verbal or written agreement or other transaction which is not in the ordinary course of business; (ii) the Company and its subsidiaries have not sustained any material loss or interference with their respective businesses or properties from fire, flood, windstorm, accident or other calamity, whether or not covered by insurance; (iii) the Company has not paid or declared any dividends or other distributions with respect to its capital stock and the Company and its subsidiaries are not in default in the payment of principal or interest on any outstanding debt obligations; (iv) there has not been any change in the capital stock - 5 - (other than upon the sale of the Common Shares hereunder or as a result of the exercise of outstanding options and warrants or the conversion of convertible notes disclosed in the Prospectus) or indebtedness material to the Company and its subsidiaries (other than in the ordinary course of business); and (v) there has not been any material adverse change in the condition (financial or otherwise), business, properties, results of operations or prospects of the Company and its subsidiaries taken as a whole. (o) Except as disclosed in or specifically contemplated by the Prospectus, the Company and its subsidiaries own or have the right to use all material trademarks, trade names, patent rights, mask works, copyrights, licenses, approvals and governmental authorizations to conduct their businesses as now conducted; the expiration of any trademarks, trade names, patent rights, mask works, copyrights, licenses, approvals or governmental authorizations would not have a Material Adverse Effect; and the Company has no knowledge of any material infringement by it or its subsidiaries of trademark, trade name rights, patent rights, mask works, copyrights, licenses, trade secret or other similar rights of others, and there is no claim being made against the Company or its subsidiaries regarding trademark, trade name, patent, mask work, copyright, license, trade secret or other infringement, which, in either case, would have a Material Adverse Effect. (p) The Company has not been advised, and has no reason to believe, that either it or any of its subsidiaries is not conducting business in compliance with all applicable laws, rules and regulations of the jurisdictions in which it is conducting business, including, without limitation, the federal Fair Debt Collection Practices Act, the federal Fair Credit Reporting Act, the federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994, the federal Telephone Consumer Protection Act of 1991, related state and local statutes and regulations and all applicable local, state and federal environmental laws and regulations; except where failure to be so in compliance would not have a Material Adverse Effect. (q) The Company and its subsidiaries have filed all necessary federal, state and foreign income and franchise tax returns and have paid all taxes shown as due thereon to the extent such taxes have become due and are not being contested in good faith; and the Company has no knowledge of any tax deficiency which has been or is reasonably likely to be asserted or threatened against the Company or its subsidiaries which would materially and adversely affect the business, operations or properties of the Company and its subsidiaries. (r) The Company is not, and will not become as a result of the consummation of the transactions contemplated by this Agreement and application of the net proceeds therefrom as described in the Prospectus, an "investment company" within the meaning of the Investment Company Act of 1940, as amended and the rules and regulations of the Commission thereunder. (s) The Company has not distributed and will not distribute prior to the First Closing Date any offering material in connection with the offering and sale of the Common Shares other than the Prospectus, the Registration Statement and the other materials permitted by the Act. (t) Each of the Company and its subsidiaries maintain insurance of the types and in the amounts generally deemed adequate for its business, including, but not limited to, insurance covering real and personal property owned or leased by the Company and its subsidiaries against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect. (u) To the Company's knowledge, neither the Company nor any of its subsidiaries has at any time during the last five years (i) made any unlawful contribution to any candidate for foreign office, or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any federal or state governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof. (v) The Company has not taken and will not take prior to the earlier of (i) the termination of this Agreement or (ii) the Second Closing Date, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Common Shares. - 6 - (w) The transaction pursuant to which the shareholders of NCO Financial Systems, Inc. ("NCO Financial") exchanged each of their shares of NCO Financial for one share of Common Stock of the Company has been consummated. As a result of such transaction, NCO Financial became a wholly-owned subsidiary of the Company and NCO Financial's status as a Subchapter S Corporation terminated. (x) The agreements necessary to effect the acquisition of MAB, CRWCD, and each other company included in the Company's pro forma balance sheet included in the Prospectus and Registration Statement have been duly authorized, executed and delivered by each of the parties thereto and constitute the valid, legal and binding agreements of each such party, and the acquisition of all of the capital stock or assets of the respective acquired company by the Company and the related transactions contemplated thereby have been consummated pursuant to the terms described in the Prospectus. SECTION 3. Representations, Warranties and Covenants of the Selling Stockholders. (a) Each of the Selling Stockholders, severally and not jointly, represents and warrants to, and agrees with, the several Underwriters that: (i) Such Selling Stockholder has, or has the right to acquire, and on the Closing Date hereinafter mentioned will have, good and marketable title to the Common Shares proposed to be sold by such Selling Stockholder hereunder on such Closing Date and full right, power and authority to enter into this Agreement and to sell, assign, transfer and deliver such Common Shares hereunder, free and clear of all voting trust arrangements, liens, encumbrances, equities, security interests, restrictions and claims whatsoever; and upon delivery of and payment for such Common Shares hereunder, the Underwriters will acquire good and marketable title thereto, free and clear of all liens, encumbrances, equities, claims, restrictions, security interests, voting trusts or other defects of title whatsoever. (ii) Such Selling Stockholder has executed and delivered a Power of Attorney and caused to be executed and delivered on his behalf a Custody Agreement (hereinafter collectively referred to as the "Stockholders Agreement") and in connection herewith such Selling Stockholder further represents, warrants and agrees that such Selling Stockholder deposited under the Stockholders Agreement, with the agent named therein (the "Agent" or "Custodian") as custodian, certificates in negotiable form for the Common Shares to be sold hereunder by such Selling Stockholder, for the purpose of further delivery pursuant to this Agreement. Such Selling Stockholder agrees that the Common Shares to be sold by such Selling Stockholder and to be on deposit with the Agent are subject to the interests of the Company and the Underwriters, that the arrangements made for such custody are to that extent irrevocable, and that the obligations of such Selling Stockholder hereunder shall not be terminated, except as provided in this Agreement or in the Stockholders Agreement, by any act of such Selling Stockholder, by operation of law, by the death or incapacity of such Selling Stockholder or by the occurrence of any other event. If the Selling Stockholder should die or become incapacitated, or if any other event should occur, before the delivery of the Common Shares hereunder, the documents evidencing Common Shares then on deposit with the Agent shall be delivered by the Agent in accordance with the terms and conditions of this Agreement as if such death, incapacity or other event had not occurred, regardless of whether or not the Agent shall have received notice thereof. This Agreement and the Stockholders Agreement have been duly executed and delivered by or on behalf of such Selling Stockholder and the form of such Stockholders Agreement has been delivered to you. - 7 - (iii) The performance of this Agreement and the Stockholders Agreement and the consummation of the transactions contemplated hereby and by the Stockholders Agreement will not result in a breach or violation by such Selling Stockholder of any of the terms or provisions of, or constitute a default by such Selling Stockholder under, any material indenture, mortgage, deed of trust, trust (constructive or other), loan agreement, lease, franchise, license or other material agreement or instrument to which such Selling Stockholder is a party or by which such Selling Stockholder or any of its properties is bound, any statute, or any judgment, decree, order, rule or regulation of any court or governmental agency or body applicable to such Selling Stockholder or any of its properties. (iv) Such Selling Stockholder has not taken and will not take prior to the Second Closing Date, directly or indirectly, any action designed to or which has constituted or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Common Shares. (v) Each Preliminary Prospectus and the Prospectus, insofar as it has related to such Selling Stockholder has conformed in all material respects to the requirements of the Act and the Rules and Regulations and has not included any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading in light of the circumstances under which they were made; and neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, as it relates to such Selling Stockholder, will include any untrue statement of a material fact or omit to state any 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. (b) The Other Selling Stockholders, severally and not jointly, represent and warrant to the several Underwriters that such Other Selling Stockholder is not aware that any of the representations or warranties set forth in Section 2 above is untrue or inaccurate in any material respect. (c) Each of the Selling Stockholders agrees with the Company and the Underwriters not to offer to sell, sell or contract to sell or otherwise dispose of any shares of Common Stock or securities convertible into or exchangeable for any shares of Common Stock, for a period of 90 days after the first date that any of the Common Shares are released by you for sale to the public, without the prior written consent of Montgomery Securities, which consent may be withheld at the sole discretion of Montgomery Securities; provided, however that, the provisions of this paragraph shall not preclude the Selling Stockholders from: (a) exercising any warrant or stock option provided, that it is prohibited from selling, offering to sell or otherwise disposing of the securities upon exercise thereof except as provided in this paragraph or (b) transferring shares of Common Stock, warrants, options or other securities of the Company by gift, by will or laws of descent and distribution to any person or entity provided such person or entity agrees in writing to be bound by the provisions of this paragraph or (c) pledging shares of Common Stock to secure bona fide loans provided that the pledgee agrees in writing to be bound by the provisions of this paragraph. SECTION 4. Representations and Warranties of the Underwriters. The Underwriters, represent and warrant to the Company and to the Selling Stockholders that the information set forth (i) on the cover page of the Prospectus with respect to price, underwriting discounts and commissions and terms of offering, (ii) the last paragraph of the inside front cover page of the Prospectus and (iii) under "Underwriting" in the Prospectus was furnished to the Company by and on behalf of the Underwriters for use in connection with the preparation of the Registration Statement and the Prospectus and is correct in all material respects. The Underwriters represent and warrant that they have been authorized to enter into this Agreement on its behalf and to act for it in the manner herein provided. SECTION 5. Purchase, Sale and Delivery of Common Shares. - 8 - Upon the terms herein set forth, (i) the Company agrees to issue and sell to the several Underwriters an aggregate of 1,200,000 Common Shares and (ii) the Selling Stockholders agree to sell to the several Underwriters an aggregate of 1,056,000 Firm Common Shares, each Selling Stockholder selling the number of Firm Common Shares set forth opposite such Selling Stockholder's name on Schedule B. On the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Underwriters agree, severally and not jointly, to purchase from the Company and the Selling Stockholders the respective number of Firm Common Shares set forth opposite their names on Schedule A. The purchase price per Firm Common Share to be paid by the several Underwriters to the Company and the Selling Stockholders shall be $[___] per share. Delivery of certificates for the Firm Common Shares to be purchased by the Underwriters and payment therefor shall be made at the offices of Montgomery Securities, 600 Montgomery Street, San Francisco, California (or such other place as may be agreed to by the Company and the Representative) at 6:00 a.m. San Francisco time, on [___], 1997 or such other time and date not later than 10:30 a.m. San Francisco time, on [___], 1997 as the Representative shall designate by notice to the Company (the time and date of such closing are called the "First Closing Date"). The Company and the Selling Stockholders hereby acknowledge that circumstances under which the Representative may provide notice to postpone the First Closing Date as originally scheduled include, but are in no way limited to, any determination by the Company, the Selling Stockholders or the Representative to recirculate to the public copies of an amended or supplemented Prospectus or a delay as contemplated by the provisions of Section 12. In addition, on the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Option Selling Stockholders hereby grant an option to the several Underwriters to purchase, severally and not jointly, up to an aggregate of 338,400 Optional Common Shares from such Option Selling Stockholders at the purchase price per share to be paid by the Underwriters for the Firm Common Shares. The option granted hereunder is for use by the Underwriters solely in covering any over-allotments in connection with the sale and distribution of the Firm Common Shares. The option granted hereunder may be exercised at any time (but not more than once) upon notice by the Representative to such Option Selling Stockholders (with a copy to the Company), which notice may be given at any time within 30 days from the date of this Agreement. Such notice shall set forth (i) the aggregate number of Optional Common Shares as to which the Underwriters are exercising the option, (ii) the names and denominations in which the certificates for the Optional Common Shares are to be registered and (iii) the time, date and place at which such certificates will be delivered (which time and date may be simultaneous with, but not earlier than, the First Closing Date; and in such case the term "First Closing Date" shall refer to the time and date of delivery of certificates for the Firm Common Shares and the Optional Common Shares). Such time and date of delivery, if subsequent to the First Closing Date, is called the "Second Closing Date" and shall be determined by the Representative and shall not be earlier than three nor later than five full business days after delivery of such notice of exercise. If any Optional Common Shares are to be purchased, (a) each Underwriter agrees, severally and not jointly, to purchase the number of Optional Common Shares (subject to such adjustments to eliminate fractional shares as the Representative may determine) that bears the same proportion to the total number of Optional Common Shares to be purchased as the number of Firm Common Shares set forth on Schedule A opposite the name of such Underwriter bears to the total number of Firm Common Shares and (b) each Option Selling Stockholder agrees, severally and not jointly, to sell the number of Optional Common Shares (subject to such adjustments to eliminate fractional shares as the Representative may determine) that bears the same proportion to the total number of Optional Common Shares to be sold as the number of Optional Common Shares set forth in Schedule B opposite the name of such Selling Stockholder. The Representative may cancel the option at any time prior to its expiration by giving written notice of such cancellation to such Option Selling Stockholders (with a copy to the Company). Payment for the Common Shares to be sold by the Company shall be made at the First Closing Date by wire transfer of immediately available funds to the order of the Company. Payment for the Common Shares to be sold by the Selling Stockholders shall be made at the First Closing Date (and, if applicable, at the Second Closing Date) by wire transfer of immediately available funds to the order of the Custodian. - 9 - It is understood that the Representative has been authorized, for its own account and the accounts of the several Underwriters, to accept delivery of and receipt for, and make payment of the purchase price for, the Firm Common Shares and any Optional Common Shares the Underwriters have agreed to purchase. Montgomery Securities, individually and not as the Representative of the Underwriters, may (but shall not be obligated to) make payment for any Common Shares to be purchased by any Underwriter whose funds shall not have been received by the Representative by the First Closing Date or the Second Closing Date, as the case may be, for the account of such Underwriter, but any such payment shall not relieve such Underwriter from any of its obligations under this Agreement. Each Selling Stockholder hereby agrees that (i) it will pay all stock transfer taxes, stamp duties and other similar taxes, if any, payable upon the sale or delivery of the Common Shares to be sold by such Selling Stockholder to the several Underwriters, or otherwise in connection with the performance of such Selling Stockholder's obligations hereunder and (ii) the Custodian is authorized to deduct for such payment any such amounts from the proceeds to such Selling Stockholder hereunder and to hold such amounts for the account of such Selling Stockholder with the Custodian under the Custody Agreement. The Company and the Selling Stockholders shall deliver, or cause to be delivered, to the Representative for the accounts of the several Underwriters certificates for the Firm Common Shares to be sold by them at the First Closing Date, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefor. The Company and the Selling Stockholders shall also deliver, or cause to be delivered, to the Representative for the accounts of the several Underwriters, certificates for the Optional Common Shares the Underwriters have agreed to purchase from them at the First Closing Date or the Second Closing Date, as the case may be, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefor. The certificates for the Common Shares shall be in definitive form and registered in such names and denominations as the Representative shall have requested at least two full business days prior to the First Closing Date (or the Second Closing Date, as the case may be) and shall be made available for inspection on the business day preceding the First Closing Date (or the Second Closing Date, as the case may be) at a location in New York City as the Representative may designate. Time shall be of the essence, and delivery at the time and place specified in this Agreement is a further condition to the obligations of the Underwriters. Not later than 12:00 p.m. on the second business day following the date the Common Shares of released by the Underwriters for sale to the public, the Company shall delivery or cause to be delivered copies of the Prospectus in such quantities and at such places as the Representative shall request. SECTION 6. Covenants of the Company. The Company covenants and agrees that: (a) The Company will use its best efforts to cause the Registration Statement and any amendment thereof, if not effective at the time and date that this Agreement is executed and delivered by the parties hereto, to become effective. If the Registration Statement has become or becomes effective pursuant to Rule 430A of the Rules and Regulations, or the filing of the Prospectus is otherwise required under Rule 424(b) of the Rules and Regulations, the Company will file the Prospectus, properly completed, pursuant to the applicable paragraph of Rule 424(b) of the Rules and Regulations within the time period prescribed and will provide evidence satisfactory to you of such timely filing. The Company will promptly advise you in writing (i) of the receipt of any comments of the Commission, (ii) of any request of the Commission for amendment of or supplement to the Registration Statement (either before or after it becomes effective), any Preliminary Prospectus or the Prospectus or for additional information, (iii) when the Registration Statement shall have become effective, and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the institution of any proceedings for that purpose. If the Commission shall enter any such stop order at any time, the Company will use its best efforts to obtain the lifting of such order at the earliest possible moment. The Company will not file any amendment or supplement to the Registration Statement (either before or after it becomes effective), any Preliminary Prospectus or the Prospectus of which you have not been furnished with a copy a reasonable time prior to such filing or to which you reasonably object or which is not in compliance with the Act and the Rules and Regulations. - 10 - (b) The Company will prepare and file with the Commission, promptly upon your request, any amendments or supplements to the Registration Statement or the Prospectus which in your judgment may be necessary or advisable to enable the several Underwriters to continue the distribution of the Common Shares and will use its best efforts to cause the same to become effective as promptly as possible. The Company will fully and completely comply with the provisions of Rule 430A of the Rules and Regulations with respect to information omitted from the Registration Statement in reliance upon such Rule. (c) If at any time prior to the final date on which a prospectus relating to the Common Shares is required by law to be delivered by an Underwriter or dealer, any event occurs, as a result of which the Prospectus, including any amendments or supplements, would include an untrue statement of a material fact, or omit to state any 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, or if it is necessary at any time to amend the Prospectus, including any amendments or supplements, to comply with the Act or the Rules and Regulations, the Company will promptly advise you thereof and will promptly prepare and file with the Commission, at its own expense, an amendment or supplement which will correct such statement or omission or an amendment or supplement which will effect such compliance and will use its best efforts to cause the same to become effective as soon as possible; and, in case any Underwriter is required to deliver a prospectus after such nine-month period, the Company upon request, but at the expense of such Underwriter, will promptly prepare such amendment or amendments to the Registration Statement and such Prospectus or Prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Act. (d) As soon as practicable, but not later than 45 days after the end of the first quarter ending after one year following the "effective date of the Registration Statement" (as defined in Rule 158(c) of the Rules and Regulations), the Company will make generally available to its security holders an earnings statement (which need not be audited) covering a period of 12 consecutive months beginning after the effective date of the Registration Statement which will satisfy the provisions of the last paragraph of Section 11(a) of the Act. (e) During such period as a prospectus is required by law to be delivered in connection with sales by an Underwriter or dealer, the Company, at its expense, will furnish to you and the Selling Stockholders or mail to your order copies of the Registration Statement, the Prospectus, the Preliminary Prospectus and all amendments and supplements to any such documents in each case as soon as available and in such quantities as you and the Selling Stockholders may request, for the purposes contemplated by the Act. (f) The Company shall cooperate with you and your counsel in order to qualify or register the Common Shares for sale under (or obtain exemptions from the application of) the Blue Sky laws of such jurisdictions as you designate, will comply with such laws and will continue such qualifications, registrations and exemptions in effect so long as reasonably required for the distribution of the Common Shares. The Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any such jurisdiction where it is not presently qualified or where it would be subject to taxation as a foreign corporation. The Company will advise you promptly of the suspension of the qualification or registration of (or any such exemption relating to) the Common Shares for offering, sale or trading in any jurisdiction or any initiation or threat of any proceeding for any such purpose, and in the event of the issuance of any order suspending such qualification, registration or exemption, the Company, with your cooperation, will use its best efforts to obtain the withdrawal thereof. (g) During the period of five years hereafter, the Company will furnish to the Underwriters: (i) as soon as practicable after the end of each fiscal year, copies of the Annual Report of the Company - 11 - containing the balance sheet of the Company as of the close of such fiscal year and statements of income, stockholders' equity and cash flows for the year then ended and the opinion thereon of the Company's independent public accountants; (ii) as soon as practicable after the filing thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K or other report filed by the Company with the Commission, the NASD or any securities exchange; and (iii) as soon as available, copies of any report or communication of the Company mailed generally to holders of its Common Stock. (h) During the period of 90 days after the first date that any of the Common Shares are released by you for sale to the public, without the prior written consent of Montgomery Securities, which consent may be withheld at the sole discretion of Montgomery Securities, the Company will not 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 or other equity security except for (a) issuances of Common Stock pursuant to this Agreement, (b) grants of options to the Company's employees, directors and consultants under the Company's stock option plans as disclosed in the Prospectus, (c) issuances of Common Stock upon the exercise or conversion of reserved, authorized or outstanding stock options, warrants or convertible notes disclosed in the Prospectus, (d) issuances of the Company's Common Stock or other equity securities or any other securities convertible into or exchangeable for its Common Stock or other equity securities as full or partial consideration for any bona fide loan to the Company or for any bona fide merger or acquisition transaction. (i) The Company will apply the net proceeds of the sale of the Common Shares sold by it substantially in accordance with its statements under the caption "Use of Proceeds" in the Prospectus. (j) The Company will use its best efforts to qualify or register its Common Stock for sale in non-issuer transactions under (or obtain exemptions from the application of) the Blue Sky laws of the State of California (and thereby permit market making transactions and secondary trading in the Company's Common Stock in California), will comply with such Blue Sky laws and will continue such qualifications, registrations and exemptions in effect for a period of five years after the date hereof. (k) The Company will use its best efforts to cause the Common Shares to be listed for quotation as a national market system security on the Nasdaq National Market. You may, in your sole discretion, waive in writing the performance by the Company of any one or more of the foregoing covenants or extend the time for their performance. SECTION 7. Payment of Expenses. Whether or not the transactions contemplated hereunder are consummated or this Agreement becomes effective or is terminated, the Company shall pay all costs, fees and expenses incurred in connection with the performance of the obligations of the Company and of the Selling Stockholders hereunder and in connection with the transactions contemplated hereby, including without limiting the generality of the foregoing, (i) all expenses incident to the issuance and delivery of the Common Shares (including all printing and engraving costs), (ii) all fees and expenses of the registrar and transfer agent of the Common Stock, (iii) all necessary issue, transfer and other stamp taxes in connection with the issuance and sale of the Common Shares to the Underwriters, (iv) all fees and expenses of the Company's counsel and the Company's independent accountants, (v) all costs and expenses incurred in connection with the printing, filing, shipping and distribution of the Registration Statement, each Preliminary Prospectus and the Prospectus (including all exhibits and financial statements) and all amendments and supplements provided for herein, this Agreement, the Agreement Among Underwriters, the Selected Dealers Agreement, the Underwriters' Questionnaire, the Underwriters' Power of Attorney and the Blue Sky memorandum, (vi) all filing fees, attorneys' fees and expenses incurred by the Company or the Underwriters in connection with qualifying or registering (or obtaining exemptions from the qualification or registration of) all or any part of the Common Shares for offer and sale under the Blue Sky laws, (vii) the filing fee of the National - 12 - Association of Securities Dealers, Inc., and (viii) all other fees, costs and expenses referred to in Item 13 of the Registration Statement. Except as provided in this Section 7, Section 9 and Section 11 hereof, the Underwriters shall pay all of their own expenses, including the fees and disbursements of their counsel (excluding those relating to qualification, registration or exemption under the Blue Sky laws and the Blue Sky memorandum referred to above). The Company and the Selling Stockholders shall not in any event be liable to any of the Underwriters for the loss of anticipated profits from the transactions covered by this Agreement. This Section 7 shall not affect any agreements relating to the payment of expenses between the Company and the Selling Stockholders. The Selling Stockholders will pay (directly or by reimbursement) all fees and expenses incident to the performance of their obligations under this Agreement which are not otherwise specifically provided for herein, including but not limited to (i) any fees and expenses of separate counsel for such Selling Stockholders; (ii) any fees and expenses of the Agent; and (iii) any issue, transfer and other stamp taxes incident to the sale and delivery of the Common Shares to be sold by such Selling Stockholders to the Underwriters hereunder. SECTION 8. Conditions of the Obligations of the Underwriters. The obligations of the several Underwriters to purchase and pay for the Firm Common Shares on the First Closing Date and the Optional Common Shares on the Second Closing Date shall be subject to the accuracy of the representations and warranties on the part of the Company and the Selling Stockholders herein set forth as of the date hereof and as of the First Closing Date or the Second Closing Date, as the case may be, to the accuracy of the statements of Company officers and the Selling Stockholders made pursuant to the provisions hereof, to the performance by the Company and the Selling Stockholders of their respective obligations hereunder, and to the following additional conditions: (a) The Registration Statement shall have become effective not later than 5:00 P.M. (or, in the case of a registration statement filed pursuant to Rule 462(b) of the Rules and Regulations relating to the Common Shares, not later than 10 P.M.), Washington, D.C. Time, on the date of this Agreement, or at such later time as shall have been consented to by you; if the filing of the Prospectus, or any supplement thereto, is required pursuant to Rule 424(b) of the Rules and Regulations, the Prospectus shall have been filed in the manner and within the time period required by Rule 424(b) of the Rules and Regulations; and prior to such Closing Date, no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or shall be pending or, to the knowledge of the Company, the Selling Stockholders or you, shall be contemplated by the Commission; and any request of the Commission for inclusion of additional information in the Registration Statement, or otherwise, shall have been complied with to your satisfaction. (b) You shall be reasonably satisfied that since the respective dates as of which information is given in the Registration Statement and Prospectus and except as described in or contemplated by the Prospectus, (i) there shall not have been any change in the capital stock (other than upon the sale of the Common Shares hereunder or as a result of the exercise of outstanding options and warrants or the conversion of convertible notes disclosed in the Prospectus) of the Company or any of its subsidiaries or any material change in the indebtedness (other than in the ordinary course of business) of the Company or any of its subsidiaries, (ii) no material verbal or written agreement or other transaction shall have been entered into by the Company or any of its subsidiaries which is not in the ordinary course of business, (iii) no loss or damage (whether or not insured) to the property of the Company or any of its subsidiaries shall have been sustained which materially and adversely affects the condition (financial or otherwise), business, results of operations or prospects of the Company and its subsidiaries taken as a whole, (iv) no legal or governmental action, suit or proceeding affecting the Company or any of its subsidiaries which will have a Material Adverse Effect or which adversely affects the transactions contemplated by this Agreement shall have been instituted or threatened, and (v) there shall not have been any material adverse change in the condition (financial or otherwise), business, management, results of operations or prospects of the Company and its subsidiaries taken as a whole which makes it impractical or inadvisable in the reasonable judgment of the Underwriters to proceed with the public offering or purchase the Common Shares as contemplated hereby. - 13 - (c) There shall have been furnished to you, as Underwriters, on each Closing Date, in form and substance satisfactory to you, except as otherwise expressly provided below: (i) An opinion of Blank Rome Comisky & McCauley, counsel for the Company and certain of the Selling Stockholders, addressed to the Underwriters and dated the First Closing Date, or the Second Closing Date (in the latter case with respect to the Selling Stockholders only), as the case may be, to the effect that: (1) Each of the Company, NCO Financial Systems, Inc., CRWF Acquisition, Inc. and K&K Acquisition, Inc. is a corporation duly organized and presently subsisting under the laws of the Commonwealth of Pennsylvania. Each of the Company's other subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation. Each of the Company and its subsidiaries is duly qualified to do business as a foreign corporation and is in good standing in all other jurisdictions where the ownership or leasing of properties or the conduct of its business requires such qualification, except for jurisdictions in which the failure to so qualify would not have a Material Adverse Effect and has full corporate power and authority to own its properties and conduct its business as described in the Registration Statement; (2) The authorized, issued and outstanding capital stock of the Company is as set forth under the caption "Capitalization" in the Prospectus; all necessary and proper corporate proceedings have been taken in order to authorize validly such authorized Common Stock; all outstanding shares of Common Stock (including any Optional Common Shares) have been duly and validly issued, are fully paid and nonassessable, have been issued in compliance, in all material respects, with federal and state securities laws, were not issued in violation of or subject to any statutory preemptive rights or, to the knowledge of counsel, other preemptive or other rights to subscribe for or purchase any securities and conform, in all material respects, to the description thereof contained in the Prospectus; without limiting the foregoing, there are no statutory preemptive rights or, to the knowledge of counsel, other preemptive or other rights to subscribe for or purchase any of the Common Shares to be sold by the Company hereunder; (3) All of the issued and outstanding shares of the Company's subsidiaries have been duly and validly authorized and issued, are fully paid and nonassessable and are owned of record and, to such counsel's knowledge, beneficially by the Company or another wholly-owned subsidiary of the Company free and clear of any adverse claims (within the meaning of the Uniform Commercial Code) or voting trusts; (4) The certificates evidencing the Common Shares to be delivered hereunder are in due and proper form under Pennsylvania law, and when duly countersigned by the Company's transfer agent and registrar, and delivered to you or upon your order against payment of the agreed consideration therefor in accordance with the provisions of this Agreement, the Common Shares represented thereby will be duly authorized and validly issued, fully paid and nonassessable, will not have been issued in violation of or subject to any statutory preemptive rights or, to the knowledge of counsel, other preemptive or other rights to subscribe for or purchase such securities and will conform in all material respects to the description thereof contained in the Prospectus; (5) Except as disclosed in or specifically contemplated by the Prospectus, to such counsel's knowledge, there are no outstanding options, warrants or other rights calling for the issuance of, and no legally binding commitments, plans or arrangements to issue, any shares of capital stock of the Company or any security convertible into or exchangeable for capital stock of the Company; (6) (a) The Registration Statement has become effective under the Act, and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement or preventing the use of the Prospectus has been issued and no proceedings for that purpose have been instituted or are pending or - 14 - threatened by the Commission; any required filing of the Prospectus and any supplement thereto pursuant to Rule 424(b) of the Rules and Regulations has been made in the manner and within the time period required by such Rule 424(b); (b) The Registration Statement, the Prospectus and each amendment or supplement thereto (except for the financial statements, schedules and other financial and statistical information included therein as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Act and the Rules and Regulations; (c) To such counsel's knowledge, there are no franchises, leases, contracts, agreements or documents of a character required to be disclosed in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement which are not disclosed or filed, as required; (d) To such counsel's knowledge, there are no legal or governmental actions, suits or proceedings pending or threatened against the Company which are required to be described in the Prospectus which are not described as required; and (7) The Company has full right, power and authority to enter into this Agreement and to sell and deliver the Common Shares to be sold by it to the several Underwriters; this Agreement has been duly and validly authorized by all necessary corporate action by the Company, has been duly and validly executed and delivered by and on behalf of the Company, and, assuming due authorization, execution and delivery by the other parties thereto, is a valid and binding agreement of the Company enforceable in accordance with its terms, except as enforceability may be limited by general equitable principles, bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and except as to those provisions relating to indemnity or contribution for liabilities arising under the Act or under this Agreement as to which no opinion need be expressed; and no approval, authorization, order, consent, registration, filing, qualification, license or permit of or with any court, regulatory, administrative or other governmental body is required for the execution and delivery of this Agreement by the Company or the consummation of the transactions contemplated by this Agreement, except such as have been obtained and are in full force and effect under the Act and such as may be required under applicable Blue Sky laws in connection with the purchase and distribution of the Common Shares by the Underwriters, as to which such counsel need not express an opinion, and the clearance of such offering with the NASD, as to which such counsel need not express an opinion; (8) The execution and performance of this Agreement and the consummation of the transactions herein contemplated will not conflict with, result in the breach of, or constitute, either by itself or upon notice or the passage of time or both, a default under, any agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument known to such counsel to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or any of its or their property may be bound or affected which conflict, breach or default would have a Material Adverse Effect, or violate any of the provisions of the articles of incorporation or bylaws, or other organizational documents, of the Company or any of its subsidiaries or, violate any statute, judgment, decree, order, rule or regulation known to such counsel of any court or governmental body having jurisdiction over the Company or any of its subsidiaries or any of its or their property; (9) Neither the Company nor any subsidiary is in violation of its articles of incorporation or bylaws, or other organizational documents, or such counsel's knowledge, in breach of or default with respect to any provision of any agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument known to such counsel to which the Company or any such subsidiary is a party or by which it or any of its properties may be bound or affected, except where such default would not have a Material Adverse Effect; and, to such counsel's knowledge, the Company and its subsidiaries are in compliance with all laws, rules, regulations, judgments, decrees, orders and statutes of any court or jurisdiction to which they are subject, except where noncompliance would not have a Material Adverse Effect; - 15 - (10) To such counsel's knowledge, no holders of securities of the Company have rights which have not been waived to the registration of shares of Common Stock or other securities, because of the filing of the Registration Statement by the Company or the offering contemplated hereby; (11) To such counsel's knowledge, this Agreement and the Stockholders Agreement have been executed and delivered by or on behalf of each of the Selling Stockholders; the Agent has been duly and validly authorized to act as the custodian of the Common Shares to be sold by each such Selling Stockholder; and the performance of this Agreement and the Stockholders Agreement and the consummation of the transactions herein contemplated by the Selling Stockholders will not result in a breach of, or constitute a default under, any indenture, mortgage, deed of trust, trust (constructive or other), loan agreement, lease, franchise, license or other agreement or instrument to which any of the Selling Stockholders is a party or by which any of the Selling Stockholders or any of their properties may be bound which is material to such Selling Stockholder, or violate any statute, judgment, decree, order, rule or regulation known to such counsel of any court or governmental body having jurisdiction over any of the Selling Stockholders or any of their properties; and to such counsel's knowledge, no approval, authorization, order or consent of any court, regulatory body, administrative agency or other governmental body is required for the execution and delivery of this Agreement or the Stockholders Agreement or the consummation by the Selling Stockholders of the transactions contemplated by this Agreement, except such as have been obtained and are in full force and effect under the Act and such as may be required under the rules of the NASD and applicable Blue Sky laws (as to which such counsel need not express an opinion); (12) To such counsel's knowledge, the Selling Stockholders have full right, power and authority to enter into this Agreement and the Stockholders Agreement and to sell, transfer and deliver the Common Shares to be sold on such Closing Date by such Selling Stockholders hereunder and good and marketable title to such Common Shares so sold, free and clear of any adverse claims (within the meaning of the Uniform Commercial Code) or voting trusts, has been transferred to the Underwriters (whom counsel may assume to be bona fide purchasers within the meaning of the Uniform Commercial Code) who have purchased such Common Shares hereunder; (13) To such counsel's knowledge, this Agreement and the Stockholders Agreement are valid and binding agreements of each of the Selling Stockholders in accordance with their terms except as enforceability may be limited by general equitable principles, bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and except with respect to those provisions relating to indemnities or contributions for liabilities under the Act or under this Agreement, as to which no opinion need be expressed; (14) The transaction pursuant to which the shareholders of NCO Financial exchanged each of their shares of NCO Financial for one share of the Company has been consummated. As a result of such transaction, NCO Financial became a wholly-owned subsidiary of the Company and NCO Financial's status as a Subchapter S Corporation terminated; and (15) The agreements necessary to effect the acquisitions of MAB, CRWCD, and each other company included in the Company's Pro Forma Financial Statements contained in the Prospectus have been duly authorized, executed and delivered by each of the parties thereto and constitute the valid, legal and binding agreements of each of such party, and the acquisition of all of the capital stock or assets of each of such companies by the Company and the related transactions contemplated thereby have been consummated as described in the Prospectus. - 16 - In rendering such opinion, such counsel may rely as to matters of local law, on opinions of local counsel, and as to matters of fact or mixed questions of fact and law, on certificates of the Selling Stockholders and of officers of the Company and of governmental officials, in which case their opinion is to state that they are so doing and that the Underwriters are justified in relying on such opinions or certificates and copies of said opinions or certificates are to be attached to the opinion. In rendering an opinion as to the matters set forth in subparagraphs (11), (12) and (13), counsel may rely as to matters of fact and mixed questions of fact and law with respect to each Selling Stockholder, upon the representations of such Selling Stockholder contained in this Agreement, the Stockholders Agreement and/or in certificates of the Selling Stockholder. Such counsel shall also include a statement to the effect that nothing has come to such counsel's attention that would lead such counsel to believe that either at the effective date of the Registration Statement or at the applicable Closing Date the Registration Statement or the Prospectus, or any such amendment or supplement, contains any untrue statement of a material fact or omits 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 (except that said counsel need not express any opinion or make any statement with respect to the financial statements, schedules and other financial and statistical information included therein). With respect to such statement, counsel may state that their belief is based upon the procedures set forth therein, but is without independent check and verification; (ii) Such opinion or opinions of Piper & Marbury L.L.P., counsel for the Underwriters dated the First Closing Date or the Second Closing Date, as the case may be, with respect to the incorporation of the Company, the sufficiency of all corporate proceedings and other legal matters relating to this Agreement, the validity of the Common Shares, the Registration Statement and the Prospectus and other related matters as you may reasonably require, and the Company and the Selling Stockholders shall have furnished to such counsel such documents and shall have exhibited to them such papers and records as they may reasonably request for the purpose of enabling them to pass upon such matters. In connection with such opinions, such counsel may rely on representations or certificates of officers of the Company and governmental officials. (iii) A certificate of the Company executed by the President and the chief financial or accounting officer of the Company (on behalf of the Company and not in an individual capacity), dated the First Closing Date or the Second Closing Date, as the case may be, to the effect that: (1) The representations and warranties of the Company set forth in Section 2 of this Agreement are true and correct as of the date of this Agreement and as of the First Closing Date or the Second Closing Date, as the case may be, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied on or prior to such Closing Date; (2) The Commission has not issued any order preventing or suspending the use of the Prospectus or any Preliminary Prospectus filed as a part of the Registration Statement or any amendment thereto; no stop order suspending the effectiveness of the Registration Statement has been issued; and to the best of the knowledge of the respective signers, no proceedings for that purpose have been instituted or are pending or contemplated under the Act; (3) As of the effective date of the Registration Statement, the statements contained in the Registration Statement and the Prospectus and any amendments or supplements thereto regarding the Company and its subsidiaries were true and correct; and neither the Registration Statement nor the Prospectus nor any amendment or supplement thereto includes any untrue statement of a material fact or omits to state any 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; - 17 - (4) Since the initial date on which the Registration Statement was filed, no agreement, written or oral, transaction or event has occurred which should have been set forth in an amendment to the Registration Statement or in a supplement to or amendment of any prospectus which has not been disclosed in such a supplement or amendment; (5) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as disclosed in or contemplated by the Prospectus: (i) there has not been any material adverse change or a development involving a material adverse change in the condition (financial or otherwise), business, properties, results of operations, management or prospects of the Company and its subsidiaries taken as a whole; (ii) no legal or governmental action, suit or proceeding is pending or, to the knowledge of the respective signers, threatened against the Company or any of its subsidiaries which will have a Material Adverse Effect or which adversely affects the transactions contemplated by this Agreement; (iii) no material verbal or written agreement or other transaction has been entered into by the Company or any of its subsidiaries which is not in the ordinary course of business; (iv) there has not been any change in the capital stock (other than upon the sale of the Common Shares hereunder or as a result of the exercise of outstanding options and warrants or the conversion of convertible notes disclosed in the Prospectus) of the Company or any of its subsidiaries or any change in the indebtedness material to the Company and its subsidiaries (other than in the ordinary course of business); and (v) the Company has not declared or paid any dividend, or made any other distribution, upon its outstanding capital stock payable to stockholders of record on a date prior to the First Closing Date or Second Closing Date; and (6) Since the respective dates as of which information is given in the Registration Statement and the Prospectus and except as disclosed in or contemplated by the Prospectus, the Company and its subsidiaries have not sustained a material loss or material damage by strike, fire, flood, windstorm, accident or other calamity (whether or not insured). (iv) On the Second Closing Date, a certificate, dated such Closing Date and addressed to you, signed by or on behalf of each of the Selling Stockholders to the effect that the representations and warranties of such Selling Stockholder in this Agreement are true and correct, as if made at and as of the Second Closing Date, and such Selling Stockholder has complied with all the agreements and satisfied all the conditions on his part to be performed or satisfied prior to the Second Closing Date. (v) On the date before this Agreement is executed and also on the First Closing Date and the Second Closing Date a letter addressed to you, as Underwriters, from Coopers & Lybrand and Arthur Andersen LLP, independent accountants, the first one to be dated the day before the date of this Agreement (the receipt and satisfactory form of which letter the Underwriters hereby acknowledge), the second one to be dated the First Closing Date and the third one (in the event of a Second Closing) to be dated the Second Closing Date, in form and substance satisfactory to you. (vi) On or before the First Closing Date, letters from each of the Selling Stockholders and each director and executive officer of the Company, in form and substance satisfactory to you, confirming that for a period of 90 days after the first date that any of the Common Shares are released by you for sale to the public, such person will not directly or indirectly sell or offer to sell or otherwise dispose of any shares of Common Stock or any right to acquire such shares without the prior written consent of either Montgomery Securities or each of the Underwriters which consent may be withheld at the sole discretion of Montgomery Securities or each of the Underwriters, as the case may be; provided, however that, the provisions of such agreement shall not preclude such persons from: (a) exercising any warrant or stock option provided that it is prohibited from selling, offering to sell or otherwise disposing of the securities upon exercise thereof except as provided in this paragraph or (b) transferring shares of Common Stock, warrants, options or other securities of the Company by gift, by will or laws of descent and distribution to any person or entity provided that such person or entity agrees in writing to be bound by the provisions of this paragraph or (c) pledging shares of Common Stock to secure bona fide loans provided that the pledgee agrees in writing to be bound by the provisions of this paragraph. -18 - All such opinions, certificates, letters and documents shall be in compliance with the provisions hereof only if they are reasonably satisfactory to you and to Piper & Marbury L.L.P., counsel for the Underwriters. The Company shall furnish you with such manually signed or conformed copies of such opinions, certificates, letters and documents as you request. Any certificate signed by any officer of the Company and delivered to the Underwriters or to counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to the Underwriters as to the statements made therein. If any condition to the Underwriters' obligations hereunder to be satisfied prior to or at the First Closing Date is not so satisfied, this Agreement at your election will terminate upon notification by you as Underwriters to the Company and the Selling Stockholders without liability on the part of any Underwriter, the Company or the Selling Stockholders except for the expenses to be paid or reimbursed by the Company and by the Selling Stockholders pursuant to Sections 7 and 9 hereof and except to the extent provided in Section 11 hereof. SECTION 9. Reimbursement of Underwriters' Expenses. Notwithstanding any other provisions hereof, if this Agreement shall be terminated by you pursuant to Section 8 or if the sale to the Underwriters of the Common Shares at the First Closing is not consummated because of any refusal, inability or failure on the part of the Company or the Selling Stockholders to perform any agreement herein or to comply with any provision hereof, unless such refusal, inability or failure is due to the breach of any material terms or conditions of this Agreement by the Underwriters, the Company agrees to reimburse you as the Underwriters upon demand for all out-of-pocket expenses that shall have been reasonably incurred by you in connection with the proposed purchase and the sale of the Common Shares, including but not limited to fees and disbursements of counsel, printing expenses, travel expenses, postage, telegraph charges and telephone charges relating directly to the offering contemplated by the Prospectus. Any such termination shall be without liability of any party to any other party except that the provisions of this Section, Section 7 and Section 11 shall at all times be effective and shall apply. For purposes of this Agreement, the Company and the Selling Stockholders shall not in any event be liable to any of the Underwriters for the loss of anticipated profits from the transactions covered by this Agreement. SECTION 10. Effectiveness of Registration Statement. You, the Company and the Selling Stockholders will use your, its and their best efforts to cause the Registration Statement to become effective, to prevent the issuance of any stop order suspending the effectiveness of the Registration Statement and, if such stop order be issued, to obtain as soon as possible the lifting thereof. SECTION 11. Indemnification. (a) The Company and each of the Selling Stockholders, severally and not jointly, agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the Act against any losses, claims, damages, liabilities or expenses, joint or several, to which such Underwriter or such controlling person may become subject, under the Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company, which consent will not be unreasonably withheld or delayed), insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof as contemplated below) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, (ii) arise out of or are based upon the omission or alleged omission to state in any of them a material fact required to be stated therein or necessary to make the statements in any of them, in light of the circumstances under which they were made, not misleading, or (iii) arise out of or are based in whole or in part on any inaccuracy in the representations and warranties of the Company or the Selling Stockholders contained herein or any failure of the Company or the Selling Stockholders to perform their - 19 - respective obligations hereunder or under law; and will reimburse each Underwriter and each such controlling person for any legal and other expenses as such expenses are reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending, settling, compromising or paying (if such settlement, compromise or payment is effected with the written consent of the Company, which consent will not be unreasonably withheld or delayed) any such loss, claim, damage, liability, expense or action; provided, however, that (i) neither the Company nor the Selling Stockholders will be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with the information furnished to the Company as described in Section 4 hereof, (ii) with respect to any untrue statement or alleged untrue statement or omission or alleged omission made in any preliminary prospectus, such indemnity in this subsection (a) shall not inure to the benefit of any Underwriter (or to the benefit of any person controlling such Underwriter) if the person asserting any such loss, claim, damage or liability who purchased the Common Shares which are the subject thereof did not receive a copy of an amended preliminary prospectus or the Prospectus (or the Prospectus as amended or supplemented) at or prior to the written confirmation of the sale of such Common Shares to such person and the untrue statement or alleged untrue statement or omission or alleged omission of a material fact made in such preliminary prospectus was corrected in the amended preliminary prospectus or the Prospectus (or the Prospectus as amended and supplemented), and (iii) with respect to clause (iii) above, an Other Selling Stockholder shall not be liable for a breach of a representation, warranty, or covenant of the Company or another Selling Stockholder. The Company and the Selling Stockholders may agree, as among themselves and without limiting the rights of the Underwriters under this Agreement, as to the respective amounts of such liability for which they each shall be responsible. In no event, however, shall the liability of any Selling Stockholder for indemnification or contribution under this Section 11 exceed the proceeds received by such Selling Stockholder from the Underwriters in the offering. Notwithstanding any thing to the contrary in this Section 11(a), each underwriter and each person who controls such Underwriter agrees not to assert its rights to indemnity under this Section 11(a) against the Selling Stockholders unless and until (i) such Underwriter or controlling person has requested indemnification and reimbursement from the Company for such losses, claims, damages or liabilities (including any legal or other expenses reasonably incurred) and (ii) the Company does not within thirty (30) days of such request (A) agree to so indemnify such Underwriter or controlling person and (B) reimburse in full such Underwriter or controlling person for any such losses, damages or liabilities (including legal or other expenses) incurred. In the event that litigation between the parties with respect to the Section 11 results in a joint or several judgment against the Company and the Selling Stockholders, each Underwriter and each person who controls such Underwriter, agrees that it will not attempt to enforce such judgment against the Selling Stockholders unless and until any part of such judgment shall remain unsatisfied by the Company for more than thirty (30) days. (b) Each Underwriter will severally indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement, the Selling Stockholders and each person, if any, who controls the Company or any Selling Stockholder within the meaning of the Act, against any losses, claims, damages, liabilities or expenses to which the Company, or any such director, officer, Selling Stockholder or controlling person may become subject, under the Act, the Exchange Act, or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter), insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof as contemplated below) arise out of or are based upon: (i) any untrue or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein 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, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with the information furnished to the Company as described in Section 4 hereof or (ii) the failure of any Underwriter at or prior to the written confirmation of the sale of shares to send or deliver a copy of an amended Preliminary Prospectus or the Prospectus (or the Prospectus as amended or supplemented) to the person asserting any such losses, claims, damages, liabilities or expenses who purchased the Shares which is the subject thereof and the untrue statement or omission of a material fact - 20 - contained in such Preliminary Prospectus was corrected in the amended Preliminary Prospectus or Prospectus (or the Prospectus as amended or supplemented); and will reimburse the Company, or any such director, officer, Selling Stockholder or controlling person for any legal and other expense reasonably incurred by the Company, or any such director, officer, Selling Stockholder or controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party for contribution or otherwise than under the indemnity agreement contained in this Section or to the extent it is not prejudiced as a result of such failure. In case any such action is brought against any indemnified party and such indemnified party notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with all other indemnifying parties similarly notified, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and the representation of both parties by the same counsel would be inappropriate due to conflicts of interest between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action or because there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of its election so to assume the defense of such action and approval by the indemnified party of counsel appointed to defend such action, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed such counsel in connection with the assumption of legal defenses in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel, approved by the Underwriters in the case of paragraph (a), representing the indemnified parties who are parties to such action) or (ii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action, in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying party. (d) If the indemnification provided for in this Section 11 is required by its terms but is for any reason held to be unavailable to or otherwise insufficient to hold harmless an indemnified party under paragraphs (a), (b) or (c) in respect of any losses, claims, damages, liabilities or expenses referred to herein, except by reason of the exceptions set forth in clauses (i) and (ii) of Section 11(a) or for the failure of the indemnified party to give notice as required in Section 11(c) (provided that the indemnifying party was unaware of the proceeding to which such notice would have related and was prejudiced by the failure to give such notice), then each applicable indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of any losses, claims, damages, liabilities or expenses referred to herein (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, the Selling Stockholders and the Underwriters from the offering of the Common Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, the Selling Stockholders and the Underwriters in connection with the statements or omissions or inaccuracies in the representations and warranties herein which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The respective relative benefits received by the Company, the Selling Stockholders and the Underwriters shall be deemed to be in the same proportion, in the case of the Company and the Selling Stockholders, as the total price paid to the Company and to the Selling Stockholders (in the case of the Selling Stockholders, the proceeds received by such Selling Stockholders from the Underwriters in the Offering for the Common Shares sold by them to the Underwriters (net of underwriting commissions but before deducting expenses) - 21 - bears to the total price to the public set forth on the cover of the Prospectus, and in the case of the Underwriters as the underwriting commissions received by them bears to the total price to the public set forth on the cover of the Prospectus. The relative fault of the Company, the Selling Stockholders and the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact or the inaccurate or the alleged inaccurate representation and/or warranty relates to information supplied by the Company, the Selling Stockholders or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission and any other equitable considerations appropriate in the circumstances. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in subparagraph (c) of this Section 11, any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The provisions set forth in subparagraph (c) of this Section 11 with respect to notice of commencement of any action shall apply if a claim for contribution is to be made under this subparagraph (d); provided, however, that no additional notice shall be required with respect to any action for which notice has been given under subparagraph (c) for purposes of indemnification. The Company, the Selling Stockholders and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 11 were determined solely by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 11(d), (i) no Underwriter shall be required to contribute any amount in excess of the amount of the total underwriting commissions received by such Underwriter in connection with the Common Shares underwritten by it and distributed to the public, (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation and (iii) no Selling Stockholder shall be required to contribute any amount in excess of the proceeds received by such Selling Stockholder from the Underwriters in the offering. The Underwriters' obligations to contribute pursuant to this Section 11(d) are several in proportion to their respective underwriting commitments and not joint. SECTION 12. Default of Underwriters. It shall be a condition to the obligation of the Company and the Selling Stockholders to sell and deliver the Common Shares hereunder, that, except as hereinafter in this paragraph provided, each of the Underwriters shall purchase and pay for all the Common Shares agreed to be purchased by such Underwriter hereunder upon tender to the Underwriters of all such shares in accordance with the terms hereof. If any Underwriter or Underwriters default in their obligations to purchase Common Shares hereunder on either the First or Second Closing Date and the aggregate number of Common Shares which such defaulting Underwriter or Underwriters agreed but failed to purchase on such Closing Date does not exceed 10% of the total number of Common Shares which the Underwriters are obligated to purchase on such Closing Date, the non-defaulting Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Common Shares which such defaulting Underwriters agreed but failed to purchase on such Closing Date. If any Underwriter or Underwriters so default and the aggregate number of Common Shares with respect to which such default occurs is more than the above percentage and arrangements satisfactory to the Underwriters and the Company for the purchase of such Common Shares by other persons are not made within 48 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company or the Selling Stockholders except for the expenses to be paid by the Company and the Selling Stockholders pursuant to Section 7 hereof and except to the extent provided in Section 11 hereof. In the event that Common Shares to which a default relates are to be purchased by the non-defaulting Underwriters or by another party or parties, the Underwriters or the Company shall have the right to postpone the First or Second Closing Date, as the case may be, for not more than five business days in order that the necessary changes in the Registration Statement, Prospectus and any other documents, as well as any other arrangements, may be effected. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section. Nothing herein will relieve a defaulting Underwriter from liability for its default. SECTION 13. Effective Date. This Agreement shall become effective (i) if at the time of execution and delivery of this Agreement the Registration Statement has not become effective, simultaneously with the effectiveness of the - 22 - Registration Statement, or (ii) immediately if at the time of execution and delivery of this Agreement the Registration Statement has been declared effective, but this Agreement shall nevertheless become effective at such earlier time after the Registration Statement becomes effective as you may determine on and by notice to the Company or by release of any of the Common Shares for sale to the public. For the purposes of this Section 13, the Common Shares shall be deemed to have been so released upon the release for publication of any newspaper advertisement relating to the Common Shares or upon the release by you of telegrams (i) advising Underwriters that the Common Shares are released for public offering, or (ii) offering the Common Shares for sale to securities dealers, whichever may occur first. SECTION 14. Termination. Without limiting the right to terminate this Agreement pursuant to any other provision hereof: (a) This Agreement may be terminated by the Company by notice to you and the Selling Stockholders or by you by notice to the Company and the Selling Stockholders at any time prior to the time this Agreement shall become effective and any such termination shall be without liability on the part of the Company or the Selling Stockholders to any Underwriter (except for the expenses to be paid or reimbursed by the Company and the Selling Stockholders pursuant to Sections 7 and 9 hereof and except to the extent provided in Section 11 hereof) or of any Underwriter to the Company or the Selling Stockholders (except to the extent provided in Section 11 hereof). (b) This Agreement may also be terminated by you prior to the First Closing Date by notice to the Company (i) if additional material governmental restrictions, not in force and effect on the date hereof, shall have been imposed upon trading in securities generally (other than general limitations on hours or number of days of trading) or if minimum or maximum prices shall have been generally established on the New York Stock Exchange or on the American Stock Exchange or in the over the counter market by the NASD, or trading in securities generally shall have been suspended on either such Exchange or in the over the counter market by the NASD, or a general banking moratorium shall have been established by federal, New York or California authorities, (ii) if an outbreak of major hostilities or other national or international calamity or any substantial change in political, financial or economic conditions shall have occurred or shall have accelerated or escalated to such an extent, as, in the judgment of the Underwriters, to affect adversely the marketability of the Common Shares, (iii) if any adverse event shall have occurred or shall exist which makes untrue or incorrect in any material respect any statement or information contained in the Registration Statement or Prospectus or which is not reflected in the Registration Statement or Prospectus but should be reflected therein in order to make the statements or information contained therein not misleading in any material respect or (iv) except as described in or contemplated by the Prospectus, if there shall be any pending or threatened action, suit or proceeding affecting the Company or any of its subsidiaries which will have a Material Adverse Effect or which materially and adversely affects the transactions contemplated by this Agreement, or there shall have been any development involving particularly the business or properties or securities of the Company or any of its subsidiaries or the transactions contemplated by this Agreement, which, in the reasonable judgment of the Underwriters, is reasonably likely to materially and adversely affect the Company's business or earnings and makes it impracticable or inadvisable to offer or sell the Common Shares. Any termination pursuant to this subsection (b) shall without liability on the part of any Underwriter to the Company or the Selling Stockholders or on the part of the Company or the Selling Stockholders to any Underwriter (except for expenses to be paid or reimbursed by the Company and the Selling Stockholders pursuant to Sections 7 and 9 hereof and except to the extent provided in Section 11 hereof). (c) This Agreement shall also terminate at 5:00 P.M., California time, on the tenth full business day after the Registration Statement shall have become effective if the public offering price of the Common Shares shall not then as yet have been determined as provided in Section 5 hereof. Any termination pursuant to this subsection (c) shall without liability on the part of any Underwriter to the Company or the Selling Stockholders or on the part of the Company or the Selling Stockholders to any Underwriter (except for expenses to be paid or reimbursed by the Company and the Selling Stockholders pursuant to Sections 7 and 9 hereof and except to the extent provided in Section 11 hereof). - 23 - SECTION 15. Failure of the Selling Stockholders to Sell and Deliver. If one or more of the Selling Stockholders shall fail to sell and deliver to the Underwriters the Common Shares to be sold and delivered by such Selling Stockholders at the Second Closing Date under the terms of this Agreement, then the Underwriters may at their option, by written notice from you to the Company and the Selling Stockholders, either (i) rescind such exercise of the option without any liability on the part of any Underwriter, the Company or the other non-breaching Selling Stockholders except as provided in Sections 7, 9 and 11 hereof, or (ii) purchase the shares which the Company and other Selling Stockholders have agreed to sell and deliver in accordance with the terms hereof. In the event of a failure by one or more of the Selling Stockholders to sell and deliver as referred to in this Section, either you or the Company shall have the right to postpone the Second Closing Date for a period not exceeding seven business days in order that the necessary changes in the Registration Statement, Prospectus and any other documents, as well as any other arrangements, may be effected. SECTION 16. Representations and Indemnities to Survive Delivery. The respective indemnities, agreements, representations, warranties and other statements of the Company, of its officers, of the Selling Stockholders and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or any of its or their partners, officers or directors or any controlling person, or the Selling Stockholders, as the case may be, and will survive delivery of and payment for the Common Shares sold hereunder and any termination of this Agreement. SECTION 17. Notices. All communications hereunder shall be in writing and, if sent to the Underwriters shall be mailed, delivered or telegraphed and confirmed to you at 600 Montgomery Street, San Francisco, California 94111, Attention: Mr. Frank M. Dunlevy, with a copy to Piper & Marbury L.L.P., 36 S. Charles Street, Baltimore, Maryland 21201, Attention, Henry D. Kahn, Esquire; and if sent to the Company or the Selling Stockholders shall be mailed, delivered or telegraphed and confirmed to the Company at 1740 Walton Road, Blue Bell, Pennsylvania 19422-0987, or, effective as of July 7, 1997, 515 Pennsylvania Avenue, Fort Washington, Pennsylvania 19034, Attention: Mr. Michael J. Barrist with a copy to Blank Rome Comisky & McCauley, 1200 Four Penn Center Plaza, Philadelphia, Pennsylvania 19103, Attention: Francis E. Dehel, Esquire. The Company, the Selling Stockholders or you may change the address for receipt of communications hereunder by giving notice to the others. SECTION 18. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto, including any substitute Underwriters pursuant to Section 12 hereof, and to the benefit of the officers and directors and controlling persons referred to in Section 11, and in each case their respective successors, personal representatives and assigns, and no other person will have any right or obligation hereunder. No such assignment shall relieve any party of its obligations hereunder. The term "successors" shall not include any purchaser of the Common Shares as such from any of the Underwriters merely by reason of such purchase. SECTION 19. Representation of Underwriters. You will act as Underwriters in connection with all dealings hereunder, and any action under or in respect of this Agreement taken by you jointly or by Montgomery Securities, will be binding upon all the Underwriters. SECTION 20. Partial Unenforceability. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable. SECTION 21. Applicable Law. This Agreement shall be governed by and construed in accordance with the internal laws (and not the laws pertaining to conflicts of laws) of the State of California. - 24 - SECTION 22. General. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may be executed in several counterparts, each one of which shall be an original, and all of which shall constitute one and the same document. In this Agreement, the masculine, feminine and neuter genders and the singular and the plural include one another. The section headings in this Agreement are for the convenience of the parties only and will not affect the construction or interpretation of this Agreement. This Agreement may be amended or modified, and the observance of any term of this Agreement may be waived, only by a writing signed by the Company, the Selling Stockholders and you. Each Selling Stockholder executing and delivering this Agreement represents by so doing that he or she has duly appointed Michael J. Barrist as Attorney-in-fact for such Selling Stockholder pursuant to a validly existing and binding Power of Attorney. Any action taken under this Agreement by any of the Attorneys-in-fact will be binding on all the Selling Stockholders. - 25 - If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to us the enclosed copies hereof, whereupon it will become a binding agreement among the Company, the Selling Stockholders and the several Underwriters including you, all in accordance with its terms. Very truly yours, NCO GROUP, INC. By: ------------------------------------------- Michael J. Barrist, President SELLING STOCKHOLDERS The foregoing Underwriting Agreement is hereby confirmed and accepted by us in San Francisco, California as of the date first above written. MONTGOMERY SECURITIES JANNEY MONTGOMERY SCOTT INC. THE ROBINSON-HUMPHREY COMPANY, INC. By MONTGOMERY SECURITIES By: - 26 - SCHEDULE A Number of Firm Common Shares Name of Underwriter to be Purchased - ------------------- --------------- Montgomery Securities................................... Janney Montgomery Scott Inc............................. The Robinson-Humphrey Company, Inc...................... ------------------------ TOTAL............... 2,256,000 ======================== - 27 - SCHEDULE B Number of Firm Common Shares to be Sold by Selling Name of Selling Stockholder Stockholders - --------------------------- ------------------ Name of Other Selling Stockholder - --------------------------------- TOTAL Number of Optional Common Shares to be Sold by Option Name of Option Selling Stockholder Selling Stockholders - ----------------------------------- -------------------- - 28 - SCHEDULE C _____________, 1997 PRICE DETERMINATION AGREEMENT Referring to Section 5 of the Underwriting Agreement dated ___________, 1997, among the Company, the Selling Stockholders and the Underwriters as therein defined with respect to the purchase and sale of the Common Shares, we hereby confirm our agreement that the public offering price of the Common Shares shall be $______ per share; that the underwriting discount shall be $_____ per share; and that the purchase price to be paid by the several Underwriters for the Common Shares to be purchased from the Company and the Selling Stockholders shall be $_____ per share. This Agreement may be executed in various counterparts which together shall constitute one and the same Agreement. MONTGOMERY SECURITIES JANNEY MONTGOMERY SCOTT INC. THE ROBINSON-HUMPHREY COMPANY, INC. By Montgomery Securities Acting as the several Underwriters named in Schedule A to the Underwriting Agreement By ------------------------------------------------- NCO GROUP, INC. By Michael J. Barrist, President SELLING STOCKHOLDERS By ------------------------------------------------- [Insert Name] Acting on behalf of the Selling Stockholders - 29 - EX-5.1 3 EXHIBIT 5.1 Blank Rome Comisky & McCauley Counselors at Law Four Penn Center Plaza Philadelphia, Pennsylvania 19103-2599 215-569-5500 Fax 215-569-5555 June 10, 1997 NCO Group, Inc. 1740 Walton Road Blue Bell, PA 19422-0987 Re: NCO Group, Inc. Registration Statement on Form S-1 Gentlemen: We have acted as counsel to NCO Group, Inc. (the "Company") in connection with the Registration Statement on Form S-1 (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 1,200,000 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 1,056,000 shares of Common Stock; and (iii) the offer and sale by certain Selling Shareholders of up to 338,400 shares of Common Stock 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. 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 50,320 shares of Common Stock (the "Stock Options") issued pursuant thereto to employees who are Selling Shareholders; (iii) a Warrant Agreement, dated July 28, 1995, by and between the Company and Mellon Bank, N.A. and Amendment dated September 5, 1996 (the "Warrant Agreement") and a Common Stock Purchase Warrant to purchase 175,531 shares of Common Stock (the "Warrant") issued to APT Holdings Corporation, a Selling Shareholder; (iv) the Company's $1.0 million Convertible Note dated September 1, 1996 convertible into 76,923 shares of Common Stock (the "Convertible Note") issued to Craig Costanzo, a Selling Shreholder; (v) resolutions adopted by the Board of Directors relating to the Stock Options, the Warrant Agreement and the Warrant, the Convertible Note and the Offering; (vi) the Company's minute book and stock records books since the date of incorporation of NCO Group, Inc.; and (vii) the NCO Group, Inc. June 10, 1997 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) 1,200,000 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) 778,757 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, the Warrant and the Convertible Note, are legally issued, fully paid and non-assessable; (iii) 50,320 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; (iv) 150,000 shares of Common Stock which are being offered by APT Holdings Corporation pursuant to the Registration Statement upon the exercise of the Warrant, when acquired by such Selling Shareholder upon exercise of the Warrant in the manner contemplated by the Warrant Agreement and the Warrant, including payment of the applicable exercise price therefor, will be legally issued, fully paid and non-assessable; and (v) 76,923 shares of Common Stock which are being offered and sold by Craig Costanzo pursuant to the Registration Statement upon conversion of the Convertible Note, when acquired by such Selling Shareholder upon conversion of the Convertible Note in the manner contemplated by the Convertible Note, 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, BLANK ROME COMISKY & McCAULEY EX-10.24 4 EXHIBIT 10.24 NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK UNDERLYING THIS WARRANT OF NCO GROUP, INC. ("COMPANY") HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), NOR UNDER ANY STATE SECURITIES LAW AND MAY NOT BE PLEDGED, SOLD, ASSIGNED OR TRANSFERRED UNTIL (A) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND APPLICABLE STATE SECURITIES LAW OR (B) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE COMPANY OR COUNSEL TO THE HOLDER OF SUCH WARRANT (PROVIDED SUCH OTHER COUNSEL IS REASONABLY SATISFACTORY TO THE COMPANY) THAT SUCH WARRANT MAY BE PLEDGED, SOLD, ASSIGNED OR TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR APPLICABLE STATE SECURITIES LAW. Rightto Purchase up to 175,531 Shares of Common Stock of NCO Group, Inc. NCO GROUP, INC. 1995 COMMON STOCK PURCHASE WARRANT NCO Group, Inc., a Pennsylvania corporation (the "Company"), hereby certifies that, for value received, APT Holdings Corporation, a Delaware corporation ("APT"), is entitled, subject to the terms set forth below, to purchase from the Company at any time or from time to time before 5:00 p.m., Philadelphia time, on July 31, 2005 up to 175,531 fully paid and nonassessable shares of Common Stock, without par value, of the Company at a purchase price per share of $.01 (such purchase price per share as further adjusted from time to time as herein provided is referred to herein as the "Purchase Price"). The number and character of such shares of Common Stock and the Purchase Price are subject to further adjustment as provided herein. This 1995 Common Stock Purchase Warrant (individually, the "Warrant" and collectively, the "Warrants") replaces the Common Stock Purchase Warrant evidencing the right to purchase shares of Common Stock of the Company, issued to Mellon Bank, N.A. ("Bank") pursuant to a certain Warrant Agreement (the "Agreement") dated as of July 28, 1995, as amended by Amendment to Warrant Agreement dated September 5, 1996, among the Company and Bank and subject to the Registration Rights Agreement, copies of which agreement are on file at the principal office of the Company, and the Holder of this Warrant shall be entitled to all of the benefits of the Agreement and the Registration Rights Agreement, as provided therein. APT is the assignee of the Warrants from the Bank. If any term of this Warrant conflicts with any term of the Warrant Agreement, the terms of this Warrant shall be controlling. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Common Stock" includes (i) the Company's Common Stock, without par value, as authorized on the date of the Agreement, (ii) any other capital stock of any class or classes -1- (however designated) of the Company, authorized on or after such date, the holders of which shall have the right, without limitation as to amount, either to all or to a share of the balance of current dividend and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference and the holders of which shall ordinarily, in the absence of contingencies, be entitled to vote for the election of a majority of directors of the Company (even though the right so to vote has been suspended by the happening of such a contingency), and (iii) any other securities into which or for which any of the securities described in (i) or (ii) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. (b) The term "Company" shall include any corporation which shall succeed or assume the obligations of the Company hereunder. (c) The term "Convertible Securities" shall mean evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable, with or without payment of additional consideration in cash or property, for additional shares of Common Stock, either immediately or upon the occurrence of a specified date or a specified event. (d) The term "Current Market Price" shall mean, in respect of any share of Common Stock on any date herein specified, the higher of (a) the appraised value per share of Common Stock as at such date, or if there shall then be a public market for the Common Stock, (b) the average of the daily market prices for 15 consecutive trading days commencing 20 days before such date. The daily market price for each such trading days shall be (i) the closing sale price on such date or, if there is no such sale price, the average of the last reported closing bid and asked prices on such day in the over-the-counter market, as furnished by the National Association of Securities Dealers Automatic Quotation System or the National Quotation Bureau, Inc., (ii) if neither such corporation at the time is engaged in the business of reporting such prices, as furnished by a similar firm then engaged in such business, or (iii) if there is no such firm, as furnished by any member of the NASD selected mutually by APT and the Company or, if they cannot agree upon such selection, as selected by two such members of the NASD, one of which shall be selected by APT and one of which shall be selected by the Company. (e) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the Holders of the Warrants at any time shall be entitled to receive, or shall have received, on the exercise of the Warrants, in lieu of or in -2- addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or other Securities pursuant to Section 1 or otherwise. (f) The term "Outstanding" shall mean, when used with reference to Common Stock, at any date as of which the number of shares thereof is to be determined, all issued shares of Common Stock, except shares then owned or held by or for the account of the Company thereof, and shall include all shares issuable in respect of outstanding scrip or any certificates representing fractional interests in shares of Common Stock. (g) The Term "Registration Rights Agreement" shall mean that certain Amended and Restated Registration Rights Agreement dated as of December 13, 1996 among the Company and APT. All capitalized terms used herein without specific definition shall have the meanings assigned to such terms in the Agreement. 1. Exercise of Warrant. 1.1 Full Exercise. This Warrant may be exercised in full by the Holder hereof by surrender of this Warrant, with the form of subscription at the end hereof duly executed by such Holder, to the Company at its principal office, accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying the number of shares of Common Stock for which this Warrant is then exercisable by the Purchase Price then in effect. 1.2 Partial Exercise. This Warrant may be exercised in part (in lots of 1,000 or, if this Warrant is then exercisable for a lesser amount, in such lesser amount) by surrender of this Warrant in the manner and at the place provided in Section 1.1 except that the amount payable by the Holder on such partial exercise shall be the amount obtained by multiplying (a) the number of shares of Common Stock designated by the Holder in the subscription at the end hereof by (b) the Purchase Price then in effect. On any such partial exercise the Company at its expense will forthwith issue and deliver to or upon the order of the Holder hereof a new Warrant or Warrants of like tenor, in the name of the Holder hereof or as such Holder (upon payment by such Holder of any applicable transfer taxes) may request, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock for which such Warrant or Warrants may still be exercised. 1.3 Right to Convert Warrant. (a) In addition to and without limiting the right of the Holder of this Warrant, such Holder shall have the right -3- (the "Conversion Right") to convert this Warrant or any portion thereof into shares of Common Stock as provided in this subsection at any time or from time to time prior to its expiration. Upon exercise of the Conversion Right with respect to a particular number of shares subject to this Warrant (which number and kind of shares for the purposes of this subsection shall mean the shares of Common Stock of the Company and which shares of Common Stock are sometimes referred to in this subsection as the "Converted Warrant Shares"), the Company shall deliver to the registered Holder of this Warrant, without payment by such Holder of any exercise price or any cash or other consideration, that number of shares of Common Stock equal to the number obtained by multiplying the number of shares of Common Stock for which the Conversion Right is being exercised at any time by a fraction, (i) the numerator of which shall be a number equal to the difference, if positive, between (x) the Fair Market Value (as defined below) of a single share of Common Stock and (y) the Purchase Price in effect at such time and (ii) the denominator of which shall be the Fair Market Value of a single share of Common Stock, determined in each case as of the close of business on the Conversion Date (as defined below). No fractional shares shall be issued upon exercise of the Conversion Right, and if the number of shares to be issued in accordance with the foregoing formula is other than a whole number, the Company shall pay to the registered Holder of this Warrant an amount in cash equal to the Fair Market Value of the resulting fractional share. (b) The Conversion Right may be exercised by the Holder of the Warrant by the surrender of this Warrant at the principal office of the Company together with a written statement specifying that such Holder thereby intends to exercise the Conversion Right and indicating the number of shares of Common Stock subject to this Warrant which are being surrendered in exercise of the Conversion Right. Such conversion shall be effective upon receipt by the Company of this Warrant together with the aforesaid written statement, or on such later date as is specified therein (the "Conversion Date"), but not later than the expiration date of this Warrant. Certificates for the shares of Common Stock issuable upon exercise of the Conversion Right, together with a check in payment of any fractional share and, in the case of a partial exercise, a new warrant evidencing the shares remaining subject to this Warrant, shall be issued as of the Conversion Date and shall be delivered to the registered Holder of this Warrant within twenty (20) days following the Conversion Date. (c) For purposes of this Warrant, the "Fair Market Value" of a share of Common Stock as of a particular date (the "Valuation Date") shall mean: (i) Current Market Price; or -4- (ii) if the Company's Common Stock is not quoted as set forth in (i), then as determined in good faith by the Company's Board of Directors upon a review of all relevant factors. If the Company and the Holder of the Warrant disagree as to the determination of Fair Market Value, the Company and the Holder of the Warrant shall engage an independent, third-party investment banking firm or other appraiser to determine the valuation of the Company. The cost of such valuation shall be borne by the Company. 1.4 Company Acknowledgment. The Company will, at the time of the exercise of the Warrant, upon the request of the Holder hereof acknowledge in writing its continuing obligation to afford to such Holder any rights to which such Holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant. If the Holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such Holder any such rights. 1.5 No Rights as Stockholder. This Warrant does not entitle the Holder hereof to any voting rights or other rights as a stockholder of the Company prior to its exercise. 2. Delivery of Stock Certificate, etc. on Exercise. As soon as practicable after the exercise of this Warrant in full or in part and in any event within 10 days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes, but not income taxes of the Holder) will cause to be issued in the name of and delivered to the Holder hereof, or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of fully paid and nonassessable shares of Common Stock (or Other Securities) to which such Holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such Holder would otherwise be entitled, cash value to such fraction multiplied by the then Current Market Value of one full share, together with any other stock or other securities and property (including cash, where applicable) to which such Holder is entitled upon such exercise pursuant to Section 1 or otherwise. 3. Adjustments. The number of shares of Common Stock for which this Warrant is exercisable, or the price at which such shares may be purchased upon exercise of this Warrant, shall be subject to adjustment from time to time as set forth in this Section 3. The Company shall give each Holder notice of any event described below which requires an adjustment pursuant to this Section 3 at the time of such event. -5- 3.1 Stock Dividends, Subdivisions and Combinations. If at any time the Company shall: (a) take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend payable in, or other distribution of, additional shares of Common Stock, (b) subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock, or (c) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, then, (i) the number of shares of Common Stock for which this Warrant is exercisable immediately after the occurrence of any such event shall be adjusted to equal the number of shares of Common Stock which a record Holder of the same number of shares of Common Stock for which this Warrant is exercisable immediately prior to the occurrence of such event would own or be entitled to receive after the happening of such event, and (ii) the Purchase Price shall be adjusted to equal (A) the Purchase Price multiplied by the number of shares of Common Stock for which this Warrant is exercisable immediately prior to the adjustment divided by (B) the number of shares for which this Warrant is exercisable immediately after such adjustment. 3.2 Certain Other Distributions. If at any time the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive any dividend or other distribution of: (a) any shares of its stock or any other securities or property of any nature whatsoever (other than cash, Convertible Securities or additional shares of Common Stock), or (b) any warrants or other rights to subscribe for or purchase any shares of its stock or any other securities or property of any nature whatsoever (other than cash, Convertible Securities or additional shares of Common Stock), the Holder shall be entitled to receive such dividends or distributions as if the Holder has exercised the Warrant. A reclassification of the Common Stock (other than a change in par value, or from par value to no par value or from no par value to par value) into shares of Common Stock and shares of any other class of stock shall be deemed a distribution by the Company to the holders of its Common Stock of such shares of such other class of stock within the meaning of this Section 3.2 and, if the outstanding shares of Common Stock shall be changed into a larger -6- or smaller number of shares of Common Stock as a part of such reclassification, such change shall be deemed a subdivision or combination, as the case may be, of the outstanding shares of Common Stock within the meaning of Section 3.1. 3.3 Issuance of Additional Shares of Common Stock. (a) If at any time the Company shall (except as hereinafter provided) issue or sell any additional shares of Common Stock in exchange for consideration in an amount per additional share of Common Stock less than the Fair Market Value at the time the additional shares of Common Stock are issued, then (i) the Purchase Price as to the number of shares for which this Warrant is exercisable prior to such adjustment shall be reduced to a price determined by dividing (A) an amount equal to the sum of (x) the number of shares of Common Stock Outstanding immediately prior to such issue or sale multiplied by the then existing Purchase Price, plus (y) the consideration, if any, received by the Company upon such issue or sale, by (B) the total number of shares of Common Stock Outstanding immediately after such issue or sale; and (ii) the number of shares of Common Stock for which this Warrant is exercisable shall be adjusted to equal the product obtained by multiplying the Purchase Price in effect immediately prior to such issue or sale by the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such issue or sale and dividing the product thereof by the Purchase Price resulting from the adjustment made pursuant to clause (i) above. (b) If at any time the Company (except as hereinafter provided) shall issue or sell any additional shares of Common Stock in exchange for consideration in an amount per additional share of Common Stock which is less than the Fair Market Value at the time the additional shares of Common Stock are issued, the adjustment required under this Section 3.3 shall be made in accordance with the formula in paragraph (a) above which results in the lower Purchase Price following such adjustment. The provisions of paragraph (a) of Section 3.3 shall not apply to any issuance of additional shares of Common Stock for which an adjustment is provided under Section 3.1 or 3.2. No adjustment of the number of shares of Common Stock for which this Warrant shall be exercisable shall be made under paragraph (a) of Section 3.3 upon the issuance of any additional shares of Common Stock which are issued pursuant to the exercise of any warrants or other subscription or purchase rights or pursuant to the exercise of any conversion or exchange rights in any Convertible Securities, if (i) such warrants or other subscription or purchase rights, including options issued under the Company's stock option plan, or Convertible Securities are outstanding on the date hereof and are disclosed in the Company's prospectus dated October 18, 1996 or (ii) any such adjustment shall previously have been made upon the issuance of such warrants or -7- other rights or upon the issuance of such Convertible Securities (or upon the issuance of any warrant or other rights therefor) pursuant to Section 3.4 or Section 3.5 or if no such adjustment shall have been required pursuant to Section 3.4 or Section 3.5. 3.4 Issuance of Warrants or Other Rights. If at any time the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a distribution of, or shall in any manner (whether directly or by assumption in a merger in which Company is the surviving corporation) issue or sell, any warrants or other rights to subscribe for or purchase any additional shares of Common Stock or any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such Warrants or other right or upon conversion or exchange of such Convertible Securities shall be less than the Fair Market Value immediately prior to the time of such issue or sale, then the number of shares for which this Warrant is exercisable and the Purchase Price shall be adjusted as provided in Section 3.3 on the basis that the maximum number of additional shares of Common Stock issuable pursuant to all such warrants or other rights or necessary to effect the conversion or exchange of all such Convertible Securities shall be deemed to have been issued and outstanding and the Company shall have received all of the consideration payable therefor, if any, as of the date of the actual issuance of such warrants or other rights. No further adjustments of the Purchase Price shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such warrants or other rights or upon the actual issue of such Common Stock upon such conversion or exchange of such Convertible Securities. 3.5 Issuance of Convertible Securities. If at any time the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a distribution of, or shall in any manner (whether directly or by assumption in a merger in which the Company is the surviving corporation) issue or sell, any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange shall be less than the Fair Market Value immediately prior to the time of such issue or sale, then the number of shares for which this Warrant is exercisable and the Purchase Price shall be adjusted as provided in Section 3.3 on the basis that the maximum number of additional shares of Common Stock necessary to effect the conversion or exchange of all such Convertible Securities shall be deemed to have been issued and outstanding and the Company shall have received all of the consideration payable therefor, if any, as of the date of actual issuance of such Convertible Securities. No adjustment of the number of shares for -8- which this Warrant is exercisable and the Purchase Price shall be made under this Section 3.5 upon the issuance of any Convertible Securities which are issued pursuant to the exercise of any warrants or other subscription or purchase rights therefor, if any such adjustment shall previously have been made upon the issuance of such warrants or other rights pursuant to Section 3.4. No further adjustments of the number of shares for which this Warrant is exercisable and the Purchase Price shall be made upon the actual issue of Common Stock upon conversion or exchange of such Convertible Securities and, if any issue or sale of such Convertible Securities is made upon exercise of any warrant or other right to subscribe for or to purchase any such Convertible Securities for which adjustments of the number of shares for which this Warrant is exercisable and the Purchase Price have been or are to be made pursuant to other provisions of this Section 3, no further adjustments of the number of shares for which this Warrant is exercisable and the Purchase Price shall be made by reason of such issue or sale. 3.6 Superseding Adjustment. If, at any time after any adjustment of the number of shares of Common Stock for which this Warrant is exercisable and the Purchase Price shall have been made pursuant to Section 3.4 or Section 3.5 as the result of any issuance of warrants, rights or Convertible Securities, and (a) such warrants or rights, or the right of conversion or exchange in such other Convertible Securities, shall expire, and all or a portion of such warrants or rights, or the right of conversion or exchange with respect to all or a portion of such other Convertible Securities, as the case may be, shall not have been exercised, or (b) the consideration per share for which shares of Common Stock are issuable pursuant to such warrants or rights, or the terms of such other Convertible Securities, shall be increased solely by virtue of provisions therein contained for an automatic increase in such consideration per share upon the occurrence of a specified date or event, then for each outstanding Warrant such previous adjustment shall be rescinded and annulled and the additional shares of Common Stock which were deemed to have been issued by virtue of the computation made in connection with the adjustment so rescinded and annulled shall no longer be deemed to have been issued by virtue of such computation. Thereupon, a recomputation shall be made of the effect of such rights or options or other Convertible Securities on the basis of (c) treating the number of additional shares of Common Stock or other property, if any, theretofore actually issued -9- or issuable pursuant to the previous exercise of any such warrants or rights or any such right of conversion or exchange, as having been issued on the date or dates of any such exercise and for the consideration actually received and receivable therefor, and (d) treating any such warrants or rights or any such other Convertible Securities which then remain outstanding as having been granted or issued immediately after the time of such increase of the consideration per share for which shares of Common Stock or other property are issuable under such warrants or rights or other Convertible Securities; whereupon a new adjustment of the number of shares of Common Stock for which this Warrant is exercisable and the Purchase Price shall be made, which new adjustment shall supersede the previous adjustment so rescinded and annulled. 3.7 Other Provisions Applicable to Adjustments Under this Section. The following provisions shall be applicable to the making of adjustments of the number of shares of Common Stock for which this Warrant is exercisable and the Purchase Price provided for in this Section 3: (a) Computation of Consideration. To the extent that any additional shares of Common Stock or any Convertible Securities or any warrants or other rights to subscribe for or purchase any additional shares of Common Stock or any Convertible Securities shall be issued for cash consideration, the consideration received by Company therefor shall be the amount of the cash received by Company therefor, or, if such additional shares of Common Stock or Convertible Securities are offered by Company for subscription, the subscription price, or, if such additional shares of Common Stock or Convertible Securities are sold to underwriters or dealers for public offering without a subscription offering, the initial public offering price (in any such case subtracting any amounts paid or receivable for accrued interest or accrued dividends and without taking into account any compensation, discounts or expenses paid or incurred by Company for and in the underwriting of, or otherwise in connection with, the issuance thereof). To the extent that such issuance shall be for a consideration other than cash, then, except as herein otherwise expressly provided, the amount of such consideration shall be deemed to be the fair value of such consideration at the time of such issuance as determined in good faith by the Board of Directors of the Company. In case any additional shares of Common Stock or any Convertible Securities or any warrants or other rights to subscribe for or purchase such additional shares of Common Stock or Convertible Securities shall be issued in connection with any merger in which the Company issues any securities, the amount of consideration therefor shall be deemed to be the fair value, as determined in good faith by the Board of Directors of the Company, -10- of such portion of the assets and business of the nonsurviving corporation as such Board in good faith shall determine to be attributable to such additional shares of Common Stock, Convertible Securities, warrants or other rights, as the case may be. The consideration for any additional shares of Common Stock issuable pursuant to any warrants or other rights to subscribe for or purchase the same shall be the consideration received by the Company for issuing such warrants or other rights plus the additional consideration payable to the Company upon exercise of such warrants or other rights. The consideration for any additional shares of Common Stock issuable pursuant to the terms of any Convertible Securities shall be the consideration received by the Company for issuing warrants or other rights to subscribe for or purchase such Convertible Securities, plus the consideration paid or payable to the Company in respect of the subscription for or purchase of such Convertible Securities, plus the additional consideration, if any, payable to the Company upon the exercise of the right of conversion or exchange in such Convertible Securities. In case of the issuance at any time of any additional shares of Common Stock or Convertible Securities in payment or satisfaction of any dividends upon any class of stock other than Common Stock, the Company shall be deemed to have received for such additional shares of Common Stock or Convertible Securities a consideration equal to the amount of such dividend so paid or satisfied. (b) When Adjustments to be Made. The adjustments required by this Section 3 shall be made whenever and as often as any specified event requiring an adjustment shall occur, except that any adjustment of the number of shares of Common Stock for which this Warrant is exercisable that would otherwise be required may be postponed (except in the case of a subdivision or combination of shares of the Common Stock, as provided for in Section 3.1) up to, but not beyond the date of exercise if such adjustment either by itself or with other adjustments not previously made adds to or subtracts less than $.0001 from the Purchase Price of the shares of Common Stock for which this Warrant is exercisable immediately prior to the making of such adjustment. Any adjustment representing a change of less than such minimum amount (except as aforesaid) which is postponed shall be carried forward and made as soon as such adjustment, together with other adjustments required by this Section 3 and not previously made, would result in a minimum adjustment or on the date of exercise. For the purpose of any adjustment, any specified event shall be deemed to have occurred at the close of business on the date of its occurrence. (c) Fractional Interests. In computing adjustments under this Section 3, fractional interests in Common Stock shall be taken into account to the nearest 1000th of a share. -11- (d) When Adjustment Not Required. If the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or distribution or subscription or purchase rights and shall thereafter and before the distribution to stockholders thereof, legally abandon its plan to pay or deliver such dividend, distribution, subscription or purchase rights, then thereafter no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled. 3.8 Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets. (a) In case the Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another corporation (where the Company is not the surviving corporation or where there is a change in or distribution with respect to the Common Stock of the Company), or sell, transfer or otherwise dispose of all or substantially all of its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation ("Other Property"), are to be received by or distributed to the holders of the Common Stock of the Company, then each Holder shall have the right thereafter, to receive, upon exercise of this Warrant, the number of shares of common stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by any holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event. In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined by resolution of the Board of Directors of the Company) in order to provide for adjustments of shares of the Common Stock for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 3. For purposes of this Section 3.8, "common stock of the successor or acquiring corporation" shall include stock of such corporation of any class which is not preferred as to dividends or assets over any -12- other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 3.8 shall similarly apply to successive reorganizations, reclassifications, mergers, consolidations or disposition of assets. (b) In the event of any dissolution of the Company following the transfer of all or substantially all of its properties or assets, the Company, prior to such dissolution, shall at its expense deliver or cause to be delivered the stock and other securities and property (including cash, where applicable) receivable by the Holders of the Warrants after the effective date of such dissolution pursuant to this Section 3 to a bank or trust company, as trustee for the Holder or Holders of the Warrants. 3.9 Certain Limitations. Notwithstanding anything herein to the contrary, after any and all adjustments required by the provisions of this Section 3 are made, the Purchase Price shall not be less than the par value per share of Common Stock. 4. Record Date as Date of Issue or Sale; Treasury Stock. (a) In the event that at any time the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (i) to receive a dividend or other distribution payable in Common Stock or Convertible Securities, or (ii) to subscribe for or purchase Common Stock or Convertible Securities then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (b) The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock for the purposes of Section 3. 5. No Dilution or Impairment. The Company will not by an action, including, without limitation, by amending its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Warrants. Without limiting the generality of the foregoing, the Company (a) will not -13- increase the par value of any stock receivable on the exercise of this Warrant above the amount payable therefor on such exercise, (b) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of stock on the exercise of this Warrant and (c) will use its best efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable Company to perform its obligations under this Warrant. Upon the request of the Holder, the Company will at any time during the period this Warrant is outstanding acknowledge in writing, in form satisfactory to the Holder, the continuing validity of this Warrant and the obligations of the Company hereunder. 6. Certificate as to Adjustments. In each case of any adjustment or readjustment in the shares of Common Stock issuable on the exercise of the Warrants, the Company at its expense will compute such adjustment or readjustment in accordance with the terms of the Warrants and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. If requested by the Holder hereof, the Company will provide an accountant's certificate verifying the accuracy of the adjustments. The Company will forthwith mail a copy of each such certificate to each Holder of a Warrant, and will, on the written request at any time of any Holder of a Warrant, furnish to such Holder a like certificate setting forth the Purchase Price at the time in effect and showing how it was calculated. 7. Notices of Record Date, etc. In the event of: (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all of the assets of the Company to or consolidation or merger of the Company with or into any other person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, -14- then and in each such event the Company will mail or cause to be mailed to each Holder of a Warrant a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property deliverable on such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up, and (iii) the amount and character of any stock or other securities, or rights or options with respect thereto, proposed to be issued or granted, the date of such proposed issue or grant and the persons or class of persons to whom such proposed issue or grant is to be offered or made. Such notice shall be mailed at least 10 days prior to the date specified in such notice on which any such action is to be taken. Notwithstanding the foregoing, failure to give such notice or any defect in such notice shall not effect the validity or legality of any such transaction. 8. Reservation of Stock, etc. Issuable on Exercise of Warrants. The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of the Warrants, all shares of Common Stock from time to time issuable on the exercise of the Warrants. 9. Exchange of Warrants. On surrender for exchange of any Warrant, properly endorsed, to the Company, the Company at its expense will issue and deliver to or on the order of the Holder thereof a new Warrant or Warrants of like tenor, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 10. Replacement of Warrants. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction of any Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of such Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 11. Negotiability, etc. This Warrant is issued upon the following terms, to all of which each Holder or owner hereof by the taking hereof consents and agrees: -15- (a) Title to this Warrant may be transferred by endorsement (by the Holder hereof executing the form of assignment at the end hereof) and delivery in the same manner as in the case of a negotiable instrument transferrable by endorsement and delivery; and (b) subject to (a) above, any person in possession of this Warrant properly endorsed is authorized to represent himself as absolute owner hereof and is empowered to transfer absolute title thereto by endorsement and delivery hereof to a bona fide purchaser hereof for value; each prior taker or owner waives and renounces all of his equities or rights in this Warrant in favor of each such bona fide purchaser, and each such bona fide purchaser shall acquire absolute title hereto and to all rights represented hereby. 12. Notices, etc. All notices and other communications from the Company to the Holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such Holder or, until any such Holder furnishes to the Company an address, then to, and at the address of, the last Holder of this Warrant who has so furnished an address to the Company. 13. Miscellaneous. This Warrant and any term hereof may be changed, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. Any covenant or provision hereof may be omitted or waived with the written consent of the holder or holders of at least fifty percent (50%) of the Common Stock issued and issuable upon exercise of the Warrant. This Warrant shall be construed and enforced in accordance with and governed by the laws of the Commonwealth of Pennsylvania. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. This Warrant is being executed as an instrument under sale. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. -16- 14. Expiration. The right to exercise this Warrant shall expire at 5:00 p.m., Philadelphia time, July 31, 2005. IN WITNESS WHEREOF, the Company has executed this Warrant under seal as of April ___, 1997. NCO GROUP, INC. By: ----------------------- Name: ----------------------- Title: ----------------------- [Corporate Seal] Attest: By: ----------------------- Name: ----------------------- Title: ----------------------- -17- FORM OF SUBSCRIPTION [To be signed only on exercise of Warrant] TO NCO GROUP, INC. The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise this Warrant for, and to purchase thereunder, _____________ shares of Common Stock of NCO GROUP, INC. and herewith makes payment of $ therefor, and requests that the certificates for such shares be issued in the name of _____________, and delivered to ______________, whose address is _______________. Dated: ----------------------------------- (Signature must conform to name of holder as specified on the face of the Warrant) ---------------------------------- (Address) FORM OF ASSIGNMENT [To be signed only on transfer of Warrant] For value received, the undersigned hereby sells, assigns, and transfers unto __________________ the right represented by the within Warrant to purchase ___________________ shares of Common Stock of NCO GROUP, INC. to which the within Warrant relates, and appoints ______________ Attorney to transfer such right on the books of NCO GROUP, INC. with full power of substitution in the premises. Dated: ---------------------------------- (Signature must conform to name of holder as specified on the face of the Warrant) --------------------------------- (Address) -18- EX-10.25 5 EXHIBIT 10.25 NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK UNDERLYING THIS WARRANT OF NCO GROUP, INC. ("COMPANY") HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), NOR UNDER ANY STATE SECURITIES LAW AND MAY NOT BE PLEDGED, SOLD, ASSIGNED OR TRANSFERRED UNTIL (A) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND APPLICABLE STATE SECURITIES LAW OR (B) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE COMPANY OR COUNSEL TO THE HOLDER OF SUCH WARRANT (PROVIDED SUCH OTHER COUNSEL IS REASONABLY SATISFACTORY TO THE COMPANY) THAT SUCH WARRANT MAY BE PLEDGED, SOLD, ASSIGNED OR TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR APPLICABLE STATE SECURITIES LAW. Right to Purchase up to 46,560 Shares of Common Stock of NCO Group, Inc. NCO GROUP, INC. 1996 COMMON STOCK PURCHASE WARRANT NCO Group, Inc., a Pennsylvania corporation (the "Company"), hereby certifies that, for value received, APT Holdings Corporation, a Delaware corporation ("APT"), is entitled, subject to the terms set forth below, to purchase from the Company at any time or from time to time before 5:00 p.m., Philadelphia time, on July 31, 2005 up to 46,560 fully paid and nonassessable shares of Common Stock, without par value, of the Company at a purchase price per share equal to $13.00 (such purchase price per share as further adjusted from time to time as herein provided is referred to herein as the "Purchase Price"). The number and character of such shares of Common Stock and the Purchase Price are subject to further adjustment as provided herein. This 1996 Common Stock Purchase Warrant (individually, the "Warrant" and collectively, the "Warrants") replaces the Common Stock Purchase Warrant evidencing the right to purchase shares of Common Stock of the Company, issued to Mellon Bank, N.A. ("Bank") pursuant to a certain Warrant Agreement (the "Agreement") dated as of September 5, 1996, among the Company and Bank and subject to the Registration Rights Agreement, copies of which agreement are on file at the principal office of the Company, and the Holder of this Warrant shall be entitled to all of the benefits of the Agreement and the Registration Rights Agreement, as provided therein. APT is the assignee of the Warrants from the Bank. If any term of this Warrant conflicts with any term of the Warrant Agreement, the terms of this Warrant shall be controlling. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Common Stock" includes (i) the Company's Common Stock, without par value, as authorized on the date of the Agreement, (ii) any other capital stock of any class or classes (however designated) of the Company, authorized on or after such -1- date, the holders of which shall have the right, without limitation as to amount, either to all or to a share of the balance of current dividend and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference and the holders of which shall ordinarily, in the absence of contingencies, be entitled to vote for the election of a majority of directors of the Company (even though the right so to vote has been suspended by the happening of such a contingency), and (iii) any other securities into which or for which any of the securities described in (i) or (ii) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. (b) The term "Company" shall include any corporation which shall succeed or assume the obligations of the Company hereunder. (c) The term "Convertible Securities" shall mean evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable, with or without payment of additional consideration in cash or property, for additional shares of Common Stock, either immediately or upon the occurrence of a specified date or a specified event. (d) The term "Current Market Price" shall mean, in respect of any share of Common Stock on any date herein specified, the higher of (a) the appraised value per share of Common Stock as at such date, or if there shall then be a public market for the Common Stock, (b) the average of the daily market prices for 15 consecutive trading days commencing 20 days before such date. The daily market price for each such trading days shall be (i) the closing sale price on such date or, if there is no such sale price, the average of the last reported closing bid and asked prices on such day in the over-the-counter market, as furnished by the National Association of Securities Dealers Automatic Quotation System or the National Quotation Bureau, Inc., (ii) if neither such corporation at the time is engaged in the business of reporting such prices, as furnished by a similar firm then engaged in such business, or (iii) if there is no such firm, as furnished by any member of the NASD selected mutually by APT and the Company or, if they cannot agree upon such selection, as selected by two such members of the NASD, one of which shall be selected by APT and one of which shall be selected by the Company. (e) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the Holders of the Warrants at any time shall be entitled to receive, or shall have received, on the exercise of the Warrants, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or other Securities pursuant to Section 1 or otherwise. -2- (f) The term "Outstanding" shall mean, when used with reference to Common Stock, at any date as of which the number of shares thereof is to be determined, all issued shares of Common Stock, except shares then owned or held by or for the account of the Company thereof, and shall include all shares issuable in respect of outstanding scrip or any certificates representing fractional interests in shares of Common Stock. (g) The Term "Registration Rights Agreement" shall mean that certain Amended and Restated Registration Rights Agreement dated as of December 13, 1996 among the Company and APT. All capitalized terms used herein without specific definition shall have the meanings assigned to such terms in the Agreement. 1. Exercise of Warrant. 1.1 Full Exercise. This Warrant may be exercised in full by the Holder hereof by surrender of this Warrant, with the form of subscription at the end hereof duly executed by such Holder, to the Company at its principal office, accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying the number of shares of Common Stock for which this Warrant is then exercisable by the Purchase Price then in effect. 1.2 Partial Exercise. This Warrant may be exercised in part (in lots of 1,000 or, if this Warrant is then exercisable for a lesser amount, in such lesser amount) by surrender of this Warrant in the manner and at the place provided in Section 1.1 except that the amount payable by the Holder on such partial exercise shall be the amount obtained by multiplying (a) the number of shares of Common Stock designated by the Holder in the subscription at the end hereof by (b) the Purchase Price then in effect. On any such partial exercise the Company at its expense will forthwith issue and deliver to or upon the order of the Holder hereof a new Warrant or Warrants of like tenor, in the name of the Holder hereof or as such Holder (upon payment by such Holder of any applicable transfer taxes) may request, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock for which such Warrant or Warrants may still be exercised. 1.3 Right to Convert Warrant. (a) In addition to and without limiting the right of the Holder of this Warrant, such Holder shall have the right (the "Conversion Right") to convert this Warrant or any portion thereof into shares of Common Stock as provided in this subsection at any time or from time to time prior to its expiration. Upon exercise of the Conversion Right with respect to a particular number of shares subject to this Warrant (which number and kind of shares for the purposes of this subsection shall mean the shares of -3- Common Stock of the Company and which shares of Common Stock are sometimes referred to in this subsection as the "Converted Warrant Shares"), the Company shall deliver to the registered Holder of this Warrant, without payment by such Holder of any exercise price or any cash or other consideration, that number of shares of Common Stock equal to the number obtained by multiplying the number of shares of Common Stock for which the Conversion Right is being exercised at any time by a fraction, (i) the numerator of which shall be a number equal to the difference, if positive, between (x) the Fair Market Value (as defined below) of a single share of Common Stock and (y) the Purchase Price in effect at such time and (ii) the denominator of which shall be the Fair Market Value of a single share of Common Stock, determined in each case as of the close of business on the Conversion Date (as defined below). No fractional shares shall be issued upon exercise of the Conversion Right, and if the number of shares to be issued in accordance with the foregoing formula is other than a whole number, the Company shall pay to the registered Holder of this Warrant an amount in cash equal to the Fair Market Value of the resulting fractional share. (b) The Conversion Right may be exercised by the Holder of the Warrant by the surrender of this Warrant at the principal office of the Company together with a written statement specifying that such Holder thereby intends to exercise the Conversion Right and indicating the number of shares of Common Stock subject to this Warrant which are being surrendered in exercise of the Conversion Right. Such conversion shall be effective upon receipt by the Company of this Warrant together with the aforesaid written statement, or on such later date as is specified therein (the "Conversion Date"), but not later than the expiration date of this Warrant. Certificates for the shares of Common Stock issuable upon exercise of the Conversion Right, together with a check in payment of any fractional share and, in the case of a partial exercise, a new warrant evidencing the shares remaining subject to this Warrant, shall be issued as of the Conversion Date and shall be delivered to the registered Holder of this Warrant within twenty (20) days following the Conversion Date. (c) For purposes of this Warrant, the "Fair Market Value" of a share of Common Stock as of a particular date (the "Valuation Date") shall mean: (i) Current Market Price; or (ii) if the Company's Common Stock is not quoted as set forth in (i), then as determined in good faith by the Company's Board of Directors upon a review of all relevant factors. If the Company and the Holder of the Warrant disagree as to the determination of Fair Market Value, the Company and the Holder of the Warrant shall engage an independent, third-party investment banking firm or other appraiser to determine the valuation of the -4- Company. The cost of such valuation shall be borne by the Company. 1.4 Company Acknowledgment. The Company will, at the time of the exercise of the Warrant, upon the request of the Holder hereof acknowledge in writing its continuing obligation to afford to such Holder any rights to which such Holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant. If the Holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such Holder any such rights. 1.5 No Rights as Stockholder. This Warrant does not entitle the Holder hereof to any voting rights or other rights as a stockholder of the Company prior to its exercise. 2. Delivery of Stock Certificate, etc. on Exercise. As soon as practicable after the exercise of this Warrant in full or in part and in any event within 10 days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes, but not income taxes of the Holder) will cause to be issued in the name of and delivered to the Holder hereof, or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of fully paid and nonassessable shares of Common Stock (or Other Securities) to which such Holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such Holder would otherwise be entitled, cash value to such fraction multiplied by the then Current Market Value of one full share, together with any other stock or other securities and property (including cash, where applicable) to which such Holder is entitled upon such exercise pursuant to Section 1 or otherwise. 3. Adjustments. The number of shares of Common Stock for which this Warrant is exercisable, or the price at which such shares may be purchased upon exercise of this Warrant, shall be subject to adjustment from time to time as set forth in this Section 3. The Company shall give each Holder notice of any event described below which requires an adjustment pursuant to this Section 3 at the time of such event. 3.1 Stock Dividends, Subdivisions and Combinations. If at any time the Company shall: (a) take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend payable in, or other distribution of, additional shares of Common Stock, (b) subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock, or (c) combine its outstanding shares of Common Stock -5- into a smaller number of shares of Common Stock, then, (i) the number of shares of Common Stock for which this Warrant is exercisable immediately after the occurrence of any such event shall be adjusted to equal the number of shares of Common Stock which a record holder of the same number of shares of Common Stock for which this Warrant is exercisable immediately prior to the occurrence of such event would own or be entitled to receive after the happening of such event, and (ii) the Purchase Price shall be adjusted to equal (A) the Purchase Price multiplied by the number of shares of Common Stock for which this Warrant is exercisable immediately prior to the adjustment divided by (B) the number of shares for which this Warrant is exercisable immediately after such adjustment. 3.2 Certain Other Distributions. If at any time the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive any dividend or other distribution of: (a) any shares of its stock or any other securities or property of any nature whatsoever (other than cash, Convertible Securities or additional shares of Common Stock), or (b) any warrants or other rights to subscribe for or purchase any shares of its stock or any other securities or property of any nature whatsoever (other than cash, Convertible Securities or additional shares of Common Stock), the Holder shall be entitled to receive such dividends or distributions as if the Holder has exercised the Warrant. A reclassification of the Common Stock (other than a change in par value, or from par value to no par value or from no par value to par value) into shares of Common Stock and shares of any other class of stock shall be deemed a distribution by the Company to the holders of its Common Stock of such shares of such other class of stock within the meaning of this Section 3.2 and, if the outstanding shares of Common Stock shall be changed into a larger or smaller number of shares of Common Stock as a part of such reclassification, such change shall be deemed a subdivision or combination, as the case may be, of the outstanding shares of Common Stock within the meaning of Section 3.1. 3.3 Issuance of Additional Shares of Common Stock. (a) If at any time the Company shall (except as hereinafter provided) issue or sell any additional shares of Common Stock in exchange for consideration in an amount per additional share of Common Stock less than the Fair Market Value at the time the additional shares of Common Stock are issued, then (i) the Purchase Price as to the number of shares for which this Warrant is exercisable prior to such adjustment shall be reduced to a price -6- determined by dividing (A) an amount equal to the sum of (x) the number of shares of Common Stock Outstanding immediately prior to such issue or sale multiplied by the then existing Purchase Price, plus (y) the consideration, if any, received by the Company upon such issue or sale, by (B) the total number of shares of Common Stock Outstanding immediately after such issue or sale; and (ii) the number of shares of Common Stock for which this Warrant is exercisable shall be adjusted to equal the product obtained by multiplying the Purchase Price in effect immediately prior to such issue or sale by the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such issue or sale and dividing the product thereof by the Purchase Price resulting from the adjustment made pursuant to clause (i) above. (b) If at any time the Company (except as hereinafter provided) shall issue or sell any additional shares of Common Stock in exchange for consideration in an amount per additional share of Common Stock which is less than the Fair Market Value at the time the additional shares of Common Stock are issued, the adjustment required under this Section 3.3 shall be made in accordance with the formula in paragraph (a) above which results in the lower Purchase Price following such adjustment. The provisions of paragraph (a) of Section 3.3 shall not apply to any issuance of additional shares of Common Stock for which an adjustment is provided under Section 3.1 or 3.2. No adjustment of the number of shares of Common Stock for which this Warrant shall be exercisable shall be made under paragraph (a) of Section 3.3 upon the issuance of any additional shares of Common Stock which are issued pursuant to the exercise of any warrants or other subscription or purchase rights or pursuant to the exercise of any conversion or exchange rights in any Convertible Securities, if (i) such warrants or other subscription or purchase rights, including options issued under the Company's stock option plan, or Convertible Securities are outstanding on the date hereof and are disclosed in the Company's prospectus dated October 18, 1996 or (ii) any such adjustment shall previously have been made upon the issuance of such warrants or other rights or upon the issuance of such Convertible Securities (or upon the issuance of any warrant or other rights therefor) pursuant to Section 3.4 or Section 3.5 or if no such adjustment shall have been required pursuant to Section 3.4 or Section 3.5. 3.4 Issuance of Warrants or Other Rights. If at any time the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a distribution of, or shall in any manner (whether directly or by assumption in a merger in which Company is the surviving corporation) issue or sell, any warrants or other rights to subscribe for or purchase any additional shares of Common Stock or any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such Warrants or other right or upon conversion or exchange of such Convertible Securities shall -7- be less than the Fair Market Value immediately prior to the time of such issue or sale, then the number of shares for which this Warrant is exercisable and the Purchase Price shall be adjusted as provided in Section 3.3 on the basis that the maximum number of additional shares of Common Stock issuable pursuant to all such warrants or other rights or necessary to effect the conversion or exchange of all such Convertible Securities shall be deemed to have been issued and outstanding and the Company shall have received all of the consideration payable therefor, if any, as of the date of the actual issuance of such warrants or other rights. No further adjustments of the Purchase Price shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such warrants or other rights or upon the actual issue of such Common Stock upon such conversion or exchange of such Convertible Securities. 3.5 Issuance of Convertible Securities. If at any time the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a distribution of, or shall in any manner (whether directly or by assumption in a merger in which the Company is the surviving corporation) issue or sell, any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange shall be less than the Fair Market Value immediately prior to the time of such issue or sale, then the number of shares for which this Warrant is exercisable and the Purchase Price shall be adjusted as provided in Section 3.3 on the basis that the maximum number of additional shares of Common Stock necessary to effect the conversion or exchange of all such Convertible Securities shall be deemed to have been issued and outstanding and the Company shall have received all of the consideration payable therefor, if any, as of the date of actual issuance of such Convertible Securities. No adjustment of the number of shares for which this Warrant is exercisable and the Purchase Price shall be made under this Section 3.5 upon the issuance of any Convertible Securities which are issued pursuant to the exercise of any warrants or other subscription or purchase rights therefor, if any such adjustment shall previously have been made upon the issuance of such warrants or other rights pursuant to Section 3.4. No further adjustments of the number of shares for which this Warrant is exercisable and the Purchase Price shall be made upon the actual issue of Common Stock upon conversion or exchange of such Convertible Securities and, if any issue or sale of such Convertible Securities is made upon exercise of any warrant or other right to subscribe for or to purchase any such Convertible Securities for which adjustments of the number of shares for which this Warrant is exercisable and the Purchase Price have been or are to be made pursuant to other provisions of this Section 3, no further adjustments of the number of shares for which this Warrant is exercisable and the Purchase Price shall be made by reason of such issue or sale. -8- 3.6 Superseding Adjustment. If, at any time after any adjustment of the number of shares of Common Stock for which this Warrant is exercisable and the Purchase Price shall have been made pursuant to Section 3.4 or Section 3.5 as the result of any issuance of warrants, rights or Convertible Securities, and (a) such warrants or rights, or the right of conversion or exchange in such other Convertible Securities, shall expire, and all or a portion of such warrants or rights, or the right of conversion or exchange with respect to all or a portion of such other Convertible Securities, as the case may be, shall not have been exercised, or (b) the consideration per share for which shares of Common Stock are issuable pursuant to such warrants or rights, or the terms of such other Convertible Securities, shall be increased solely by virtue of provisions therein contained for an automatic increase in such consideration per share upon the occurrence of a specified date or event, then for each outstanding Warrant such previous adjustment shall be rescinded and annulled and the additional shares of Common Stock which were deemed to have been issued by virtue of the computation made in connection with the adjustment so rescinded and annulled shall no longer be deemed to have been issued by virtue of such computation. Thereupon, a recomputation shall be made of the effect of such rights or options or other Convertible Securities on the basis of (c) treating the number of additional shares of Common Stock or other property, if any, theretofore actually issued or issuable pursuant to the previous exercise of any such warrants or rights or any such right of conversion or exchange, as having been issued on the date or dates of any such exercise and for the consideration actually received and receivable therefor, and (d) treating any such warrants or rights or any such other Convertible Securities which then remain outstanding as having been granted or issued immediately after the time of such increase of the consideration per share for which shares of Common Stock or other property are issuable under such warrants or rights or other Convertible Securities; whereupon a new adjustment of the number of shares of Common Stock for which this Warrant is exercisable and the Purchase Price shall be made, which new adjustment shall supersede the previous adjustment so rescinded and annulled. 3.7 Other Provisions Applicable to Adjustments Under this Section. The following provisions shall be applicable to the making of adjustments of the number of shares of Common Stock for which this Warrant is exercisable and the Purchase Price provided for in this Section 3: (a) Computation of Consideration. To the extent -9- that any additional shares of Common Stock or any Convertible Securities or any warrants or other rights to subscribe for or purchase any additional shares of Common Stock or any Convertible Securities shall be issued for cash consideration, the consideration received by Company therefor shall be the amount of the cash received by Company therefor, or, if such additional shares of Common Stock or Convertible Securities are offered by Company for subscription, the subscription price, or, if such additional shares of Common Stock or Convertible Securities are sold to underwriters or dealers for public offering without a subscription offering, the initial public offering price (in any such case subtracting any amounts paid or receivable for accrued interest or accrued dividends and without taking into account any compensation, discounts or expenses paid or incurred by Company for and in the underwriting of, or otherwise in connection with, the issuance thereof). To the extent that such issuance shall be for a consideration other than cash, then, except as herein otherwise expressly provided, the amount of such consideration shall be deemed to be the fair value of such consideration at the time of such issuance as determined in good faith by the Board of Directors of the Company. In case any additional shares of Common Stock or any Convertible Securities or any warrants or other rights to subscribe for or purchase such additional shares of Common Stock or Convertible Securities shall be issued in connection with any merger in which the Company issues any securities, the amount of the consideration therefor shall be deemed to be the fair value, as determined in good faith by the Board of Directors of the Company, of such portion of the assets and business of the nonsurviving corporation as such Board in good faith shall determine to be attributable to such additional shares of Common Stock, Convertible Securities, warrants or other rights, as the case may be. The consideration for any additional shares of Common Stock issuable pursuant to any warrants or other rights to subscribe for or purchase the same shall be the consideration received by the Company for issuing such warrants or other rights plus the additional consideration payable to the Company upon exercise of such warrants or other rights. The consideration for any additional shares of Common Stock issuable pursuant to the terms of any Convertible Securities shall be the consideration received by the Company for issuing warrants or other rights to subscribe for or purchase such Convertible Securities, plus the consideration paid or payable to the Company in respect of the subscription for or purchase of such Convertible Securities, plus the additional consideration, if any, payable to the Company upon the exercise of the right of conversion or exchange in such Convertible Securities. In case of the issuance at any time of any additional shares of Common Stock or Convertible Securities in payment or satisfaction of any dividends upon any class of stock other than Common Stock, the Company shall be deemed to have received for such additional shares of Common Stock or Convertible Securities a consideration equal to the amount of such dividend so paid or satisfied. -10- (b) When Adjustments to be Made. The adjustments required by this Section 3 shall be made whenever and as often as any specified event requiring an adjustment shall occur, except that any adjustment of the number of shares of Common Stock for which this Warrant is exercisable that would otherwise be required may be postponed (except in the case of a subdivision or combination of shares of the Common Stock, as provided for in Section 3.1) up to, but not beyond the date of exercise if such adjustment either by itself or with other adjustments not previously made adds to or subtracts less than $.0001 from the Purchase Price of the shares of Common Stock for which this Warrant is exercisable immediately prior to the making of such adjustment. Any adjustment representing a change of less than such minimum amount (except as aforesaid) which is postponed shall be carried forward and made as soon as such adjustment, together with other adjustments required by this Section 3 and not previously made, would result in a minimum adjustment or on the date of exercise. For the purpose of any adjustment, any specified event shall be deemed to have occurred at the close of business on the date of its occurrence. (c) Fractional Interests. In computing adjustments under this Section 3, fractional interests in Common Stock shall be taken into account to the nearest 1000th of a share. (d) When Adjustment Not Required. If the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or distribution or subscription or purchase rights and shall thereafter and before the distribution to stockholders thereof, legally abandon its plan to pay or deliver such dividend, distribution, subscription or purchase rights, then thereafter no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled. 3.8 Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets. (a) In case the Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another corporation (where the Company is not the surviving corporation or where there is a change in or distribution with respect to the Common Stock of the Company), or sell, transfer or otherwise dispose of all or substantially all of its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation ("Other Property"), are to be received by or -11- distributed to the holders of the Common Stock of the Company, then each Holder shall have the right thereafter, to receive, upon exercise of this Warrant, the number of shares of common stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by any holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event. In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined by resolution of the Board of Directors of the Company) in order to provide for adjustments of shares of the Common Stock for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 3. For purposes of this Section 3.8, "common stock of the successor or acquiring corporation" shall include stock of such corporation of any class which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 3.8 shall similarly apply to successive reorganizations, reclassifications, mergers, consolidations or disposition of assets. (b) In the event of any dissolution of the Company following the transfer of all or substantially all of its properties or assets, the Company, prior to such dissolution, shall at its expense deliver or cause to be delivered the stock and other securities and property (including cash, where applicable) receivable by the Holders of the Warrants after the effective date of such dissolution pursuant to this Section 3 to a bank or trust company, as trustee for the Holder or Holders of the Warrants. 3.9 Certain Limitations. Notwithstanding anything herein to the contrary, after any and all adjustments required by the provisions of this Section 3 are made, the Purchase Price shall not be less than the par value per share of Common Stock. 4. Record Date as Date of Issue or Sale; Treasury Stock. (a) In the event that at any time the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (i) to receive a dividend or other distribution -12- payable in Common Stock or Convertible Securities, or (ii) to subscribe for or purchase Common Stock or Convertible Securities then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (b) The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock for the purposes of Section 3. 5. No Dilution or Impairment. The Company will not by an action, including, without limitation, by amending its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Warrants. Without limiting the generality of the foregoing, the Company (a) will not increase the par value of any stock receivable on the exercise of this Warrant above the amount payable therefor on such exercise, (b) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of stock on the exercise of this Warrant and (c) will use its best efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable Company to perform its obligations under this Warrant. Upon the request of the Holder, the Company will at any time during the period this Warrant is outstanding acknowledge in writing, in form satisfactory to the Holder, the continuing validity of this Warrant and the obligations of the Company hereunder. 6. Certificate as to Adjustments. In each case of any adjustment or readjustment in the shares of Common Stock issuable on the exercise of the Warrants, the Company at its expense will compute such adjustment or readjustment in accordance with the terms of the Warrants and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. If requested by the Holder hereof, the Company will provide an accountant's certificate verifying the accuracy of the adjustments. The Company will forthwith mail a copy of each such certificate to each Holder of a Warrant, and will, on the written request at any time of any Holder of a Warrant, furnish to such Holder a like certificate setting forth the Purchase Price at the time in effect and showing how it was calculated. -13- 7. Notices of Record Date, etc. In the event of: (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all of the assets of the Company to or consolidation or merger of the Company with or into any other person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, then and in each such event the Company will mail or cause to be mailed to each Holder of a Warrant a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property deliverable on such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up, and (iii) the amount and character of any stock or other securities, or rights or options with respect thereto, proposed to be issued or granted, the date of such proposed issue or grant and the persons or class of persons to whom such proposed issue or grant is to be offered or made. Such notice shall be mailed at least 10 days prior to the date specified in such notice on which any such action is to be taken. Notwithstanding the foregoing, failure to give such notice or any defect in such notice shall not effect the validity or legality of any such transaction. 8. Reservation of Stock, etc. Issuable on Exercise of Warrants. The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of the Warrants, all shares of Common Stock from time to time issuable on the exercise of the Warrants. 9. Exchange of Warrants. On surrender for exchange of any Warrant, properly endorsed, to the Company, the Company at its expense will issue and deliver to or on the order of the Holder thereof a new Warrant or Warrants of like tenor, calling in the aggregate on the face or faces thereof for the number of shares of -14- Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 10. Replacement of Warrants. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction of any Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of such Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 11. Negotiability, etc. This Warrant is issued upon the following terms, to all of which each Holder or owner hereof by the taking hereof consents and agrees: (a) Title to this Warrant may be transferred by endorsement (by the Holder hereof executing the form of assignment at the end hereof) and delivery in the same manner as in the case of a negotiable instrument transferrable by endorsement and delivery; and (b) subject to (a) above, any person in possession of this Warrant properly endorsed is authorized to represent himself as absolute owner hereof and is empowered to transfer absolute title thereto by endorsement and delivery hereof to a bona fide purchaser hereof for value; each prior taker or owner waives and renounces all of his equities or rights in this Warrant in favor of each such bona fide purchaser, and each such bona fide purchaser shall acquire absolute title hereto and to all rights represented hereby. 12. Notices, etc. All notices and other communications from the Company to the Holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such Holder or, until any such Holder furnishes to the Company an address, then to, and at the address of, the last Holder of this Warrant who has so furnished an address to the Company. 13. Miscellaneous. This Warrant and any term hereof may be changed, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. Any covenant or provision hereof may be omitted or waived with the written consent of the holder or holders of at least fifty percent (50%) of the Common Stock issued and issuable upon exercise of the Warrant. This Warrant shall be construed and enforced in accordance with and governed by the laws of the Commonwealth of Pennsylvania. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. This -15- Warrant is being executed as an instrument under sale. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. 14. Expiration. The right to exercise this Warrant shall expire at 5:00 p.m., Philadelphia time, July 31, 2005. IN WITNESS WHEREOF, the Company has executed this Warrant under seal as of April ___, 1997. NCO GROUP, INC. By: _______________________ Name:__________________ Title:_________________ [Corporate Seal] Attest: By: ________________________ Name: ______________________ Title: _____________________ -16- FORM OF SUBSCRIPTION [To be signed only on exercise of Warrant] TO NCO GROUP, INC. The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise this Warrant for, and to purchase thereunder, _____________ shares of Common Stock of NCO GROUP, INC. and herewith makes payment of $_____________ therefor, and requests that the certificates for such shares be issued in the name of, and delivered to _______________, whose address is ________________________. Dated: ___________________________ (Signature must conform to name of holder as specified on the face of the Warrant) ___________________________ (Address) FORM OF ASSIGNMENT [To be signed only on transfer of Warrant] For value received, the undersigned hereby sells, assigns, and transfers unto ______________ the right represented by the within Warrant to purchase ___________________ shares of Common Stock of NCO GROUP, INC. to which the within Warrant relates, and appoints ________________ Attorney to transfer such right on the books of NCO GROUP, INC. with full power of substitution in the premises. Dated: ___________________________ (Signature must conform to name of holder as specified on the face of the Warrant) ___________________________ (Address) -17- EX-21.1 6 EXHIBIT 21.1 Exhibit 21.1 Corporate Organization of NCO Group, Inc. NCO Group, Inc. Pennsylvania corporation Wholly-Owned Subsidiaries NCO Financial Systems, Inc. Pennsylvania corporation NCO Funding, Inc. Delaware corporation Management Adjustment Bureau, Inc. New York corporation NCO Teleservices, Inc. Pennsylvania corporation NCO Financial Systems of MI, Inc. Michigan corporation CRWF Acquisition, Inc. Pennsylvania corporation K&K Acquisition, Inc. Pennsylvania corporation CC Services, Inc. Pennsylvania corporation NCO Financial Systems of NC, Inc. North Carolina corporation Wholly-Owned Subsidiary of NCO Financial Systems of NC, Inc. Goodyear & Associates, Inc. North Carolina corporation Wholly-Owned Subsidiaries of CRWF Acquisition, Inc. CRW California, Inc. a California corporation CRW Texas, Inc. a Texas corporation EX-23.1 7 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 (File No. 333- ) of our report dated March 7, 1997, on our audits of the financial statements of NCO Group, Inc. as of December 31, 1995 and 1996 and for the three years in the period ended December 31, 1996. We also consent to the inclusion of our report dated August 20, 1996 on our audits of the financial statements of Management Adjustment Bureau, Inc. as of December 31, 1994, 1995 and June 30, 1996 and for the three years in the period ended December 31, 1995 and the six months ended June 30, 1996. We also consent to the reference to our firm under the caption "Experts" and "Selected Financial Data." Coopers & Lybrand L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania June 10, 1997 EX-23.2 8 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report on the Collection Division of CRW Financial, Inc.'s balance sheet at December 31, 1996, and the related statements of operations, Division equity and cash flows for each of the two years in the period ended December 31, 1996, (and to all references to our Firm) included in or made a part of this registration statement. /s/ Arthur Andersen LLP ------------------------- Philadelphia, Pa. June 10, 1997 EX-27.1 9 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 5,793,016 0 11,122,643 279,300 0 17,546,943 11,431,165 6,066,096 61,435,543 9,551,184 0 0 0 37,577,206 3,467,085 61,435,543 18,076,757 18,076,757 0 0 15,575,093 119,058 81,842 2,300,764 993,974 1,306,790 0 0 0 1,306,790 .18 .18
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